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American Water's Unit Acquires Mount Ephraim Sewer System

Zacks Equity Research

American Water Works Company AWK announced that its subsidiary New Jersey American Water has completed the acquisition of wastewater assets of the Borough of Mount Ephraim, NJ, for nearly $1.4 million. The company signed the agreement to acquire the sewer system on Jan 16, 2019. This acquisition will add 1,800 new customers to its existing portfolio. The New Jersey Board of Public Utilities approved the acquisition on Jun 21, 2019.

New Jersey American Water, through its existing network, provides water and wastewater services to nearly 2.7 million people in New Jersey. The acquisition will allow the company to provide affordable high-quality services.

Per the acquisition agreement, New Jersey American Water will invest $4 million in the next four years to make required improvements in the existing sewer systems. The company will also freeze current sewer rates for residents for two years and increase rates no more than 3% annually for the three years after that.

New Jersey American Water keeps on making strategic acquisitions to expand existing operations and the customer base. In January 2019, the company acquired Roxbury Water Company, which added 4,000 customers.

Consolidation is Crucial for Water Industry

Currently, more than 53,000 water systems in the United States provide water and wastewater solutions to customers. Water and wastewater service providers are servicing a few hundred customers. The highly fragmented water industry creates operational challenges in meeting increasing requirement for water, as it becomes difficult for small water suppliers and wastewater service providers to make regular investments for upgrading old and soiled water and wastewater lines.

Per an American Water Works Association report, in excess of 7 billion gallons of water leak out of aging pipes owing to more than 200,000 water line breaks per year in the United States. Plus, old sewer systems increase the possibility of contamination of potable water sources. Hence, consolidation in this highly fragmented industry is crucial and of utmost importance.

American Water — which is one of the most active players in the water space — has already completed 67 acquisitions in the 2015-2019 time period (till Mar 31, 2019) in 10 states to add more than 110,000 customer connections. The pending ones, on completion, are expected to add nearly 61,500 customers to its customer base during the year.

In addition to American Water, water utilities like Global Water Resources, Inc. GWRS and Aqua America WTR are following the acquisition route to expand operations.

Price Movement
In the past six months, shares of American Water have outperformed the industry.

Zacks Rank and Key Pick

Currently, American Water has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A better-ranked water utility in the same space is Middlesex Water Company MSEX, sporting a Zacks Rank #1. It delivered average positive earnings surprise of 19.72% in the last four quarters. The Zacks Consensus Estimate for 2019 and 2020 has moved up 5.8% and 4.7%, respectively, in the past 60 days.

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