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American Water (AWK) Pennsylvania Arm to Buy Wastewater Assets

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American Water Works Company (AWK - Free Report) announced that its subsidiary, Pennsylvania American Water has decided to acquire wastewater assets of Brentwood Borough in Allegheny County. This acquisition will add 4,100 wastewater customers to the company’s existing customer base in Pennsylvania and 38 miles of sewer mains. The consideration of the buyout is $17.5 million. Pennsylvania American Water and Brentwood Borough will seek approval from different authorities for approval of the same.

Pennsylvania American Water currently provides reliable water and wastewater services to more than 2.4 million residents in Illinois. Through this acquisition, American Water’s unit will extend high-quality wastewater services to new customers in Pennsylvania and per the purchase agreement, it will not increase base wastewater rates any earlier than two calendar years after the closing. So, this acquisition will ensure the continuation of high-quality services to customers at the existing rates.

Aging Infrastructure

The U.S. water and wastewater infrastructure is aging and gradually nearing the end of effective service life. Per the findings of the American Society of Civil Engineers, nearly 300,000 line breaks occur every year in the United States due to aging of the existing water infrastructure. Pipeline breaks result in the wastage of millions of gallons of potable water each day and increase the possibility of contamination of potable water sources.

Per the Water and Wastewater Equipment Manufacturers Association, an estimated $750 billion investment is necessary to maintain and expand the drinking water and wastewater service to meet demand over the next 20 years. Even though water utilities are spending considerably to upgrade the existing infrastructure, the fragmented water industry is acting as a headwind.

Consolidation Can Support Water Industry

The U.S. water utility industry is fragmented and consolidation is the need of the hour to upgrade the existing aging assets for providing quality services. Per an American Water report, more than 53,000 water systems in the United States are presently providing water solutions to customers. This creates operational challenges in meeting requirement for replacement, and adding to aging water and wastewater infrastructure.

American Water is quite active in acquiring small service providers. Till Nov 3, it added 47,100 customers to the existing customer base, out of which 10,900 customers were added through the organic route. The company is planning to invest $8.8-$9.4 billion in the 2020-2024 time period and $20-$22 billion in the next decade to upgrade and maintain its infrastructure.

Another water utility, Essential Utilities (WTRG - Free Report) has not only expanded water and wastewater operations through acquisitions but also ventured into the natural gas distribution business through the acquisition of Peoples. The company aims to invest more than $2.8 billion over the 2020-2022 time period to rehabilitate and strengthen water, as well as gas infrastructure. Other water utilities like California Water Service Group (CWT - Free Report) and Global Water Resources, Inc. (GWRS - Free Report) are also taking the inorganic route to expand operations in the United States, as well as making investments to upgrade infrastructure.

Price Performance

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

Zacks Rank

The company currently 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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