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California Water Service (CWT) Arm to Buy Keauhou Sewer Assets

California Water Service Group CWT recently announced that its subsidiary, Hawaii Water Service, received the necessary approval from the Hawaii Public Utilities Commission to acquire the wastewater system assets of Keauhou Community Services, Inc.  Subject to customary closing conditions, this deal is expected to close by the first quarter of 2023.

This acquisition will add 1,500 customers to Hawaii Water’s existing customer base. Hawaii Water has been providing necessary services to these customers since 2018 under an operation and maintenance contract.

The acquisition entails Hawaii Water to  provide direct services to customers and make necessary investments to upgrade the wastewater infrastructure. It will also help Hawaii Water to take necessary measures to provide reliable services to customers.

California Water Service has been expanding operations through systematic acquisitions. In 2021, its units completed four acquisitions, which added 585 water and 3,000 wastewater connections. Recently, its unit Washington Water Service received approval to acquire the water assets of Stroh’s Water Company.

Consolidation to Aid Water Industry

Per the Environmental Protection Agency, at present, more than 51,000 community water systems and 16,000 community wastewater systems in the United States are providing water solutions to customers. A large number of small operators in the industry do not have the financial ability to make costly repairs to water mains and wastewater lines. As a consequence, essential upgrades and repairs to infrastructure get delayed.

Per the findings of the American Society of Civil Engineers, water main breaks occur every two minutes in the United States due to the aging of the existing water infrastructure. The breaks in the pipeline result in the wastage of 6 billion gallons of potable water each day and add to the loss of water utility operators.

To stop the wastage of priceless resources, consolidation of smaller operators with larger utilities is quite essential. This will lead to more financial capabilities and expertise to provide reliable services to customers.

Utilities Continue to Consolidate

Water utilities like American Water Works AWK, SJW Group SJW and Essential Utilities WTRG, among others in the water utility space, are expanding operations through systematic acquisitions.

American Water Works continues to focus on the acquisition of utilities that provide services to 5,000-50,000 customers. Through nine buyouts, the company added 51,000 customers to its existing customer base. Its pending acquisitions (as of Jun 30, 2022), when completed, will add another 29,200 customers to its base. Its long-term (three to five-year) earnings growth is currently pegged at 8.08%.

The Zacks Consensus Estimate for American Water Works 's 2022 and 2023 earnings implies year-over-year growth of 4.5% and 8.8%, respectively. It currently has a Zacks Rank #3 (Hold).

SJW Group completed more than 25 acquisitions in the 2010-2021 time frame and expanded operations. In January 2022, it closed the acquisition of Texas Country Water in Comal, TX. The deal added more than 1,900 water and wastewater customers to the existing customer base. This has been the fourth Texas acquisition by SJW Group in the past 12 months. In the next five years, the company plans to invest $1.5 billion to further strengthen its infrastructure.

The Zacks Consensus Estimate for SJW Group's 2022 and 2023 earnings implies year-over-year growth of 15.3% and 9%, respectively. It currently has a Zacks Rank #3.

In the six years ended Dec 31, 2021, Essential Utilities expanded utility operations by completing many water and wastewater acquisitions, which, in turn, added 94,000 customers. In the first quarter of 2022, the company completed one buyout, which added 11,000 customers. It plans to invest $3 billion from 2022 through 2024 to fortify operations and efficiently serve its expanding customer base.

Essential Utilities’ long-term earnings growth is currently pegged at 6.2%. The Zacks Consensus Estimate for WTRG's 2022 and 2023 earnings implies year-over-year growth of 6.6% and 6.7%, respectively. It currently has a Zacks Rank #2 (Buy).

Price Performance and Zacks Rank

Shares of CWT have gained 2.2% in the past six months against the industry’s 15.1% decline.

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California Water Service currently has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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