American Water's (AWK) Unit Buys Water System For $21.75M

American Water Works Company (NYSE:AWK) announced that its subsidiary, Pennsylvania American Water has completed the acquisition of water assets of the Steelton Borough Authority in Dauphin County. This acquisition will add 2,400 water customers to its existing portfolio in Pennsylvania. The consideration of the buyout of water assets is $21.75 million.

Pennsylvania American Water provides reliable water and wastewater services to nearly 2.4 million customers in the state. The acquisition of water assets from Steelton Borough Authority will ensure extension of high quality and reliable water services to new customers.

In addition, the acquisition will help Steelton Borough to eliminate existing water debt, build up budget reserves, and invest in capital projects.

Acquisitions Aid the Water Industry

At present, 53,000 water systems in the United States provide water and wastewater solutions to customers. The highly fragmented water industry creates operational challenges in meeting increasing requirement for water and sanitary services, 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.

Fragmentation and the lack of regular repair and maintenance of old pipelines from smaller operators are resulting in the wastage of precious water. An American Water Works Association report indicates more than 200,000 water lines breaks per year in the United States with more than 7 billion gallons of water leaking out of aging pipes.

American Water is one of the most active players in the water space, having completed 74 deals from 2015 to date. As of Jun 31, the water utility added 30,700 customers to the existing customer base. The pending acquisitions as of the same date, on completion, are expected to add nearly 38,200 customers to its customer base.

In addition to American Water, another water utility Aqua America (NYSE:WTR) is following the acquisition route to expand operations. During the five-year period ended Dec 31, 2018, the company had expanded utility operations by completing 64 water and wastewater system acquisitions.

Consolidation is essential for this fragmented industry as it is easy for large companies to take up massive upgradation work without substantially increasing the rates, unlike small operators.

Investments From Large Companies

Per the U.S. Environmental Protection Agency, more than $743 billion is needed for U.S. water and wastewater infrastructure improvements. Investments are essential to replace and upgrade the aging water and sewage pipelines.

American Water, which is active in upgrading and expanding the existing water pipelines, also showed interest in acquiring the municipal authority’s wastewater assets. It aims to invest within $8-$8.6 billion from 2019 through 2023.

Another water utility, Middlesex Water Company (NASDAQ:MSEX) is also making strategic acquisitions to expand operations. In addition, the company is planning to invest $295 million in the 2019-2021 time period to strengthen operations.

Price Movement

Shares of American Water have outperformed the industry in the past six months.

Zacks Rank and Key Picks

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.

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