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American Water's (AWK) Iowa Unit Gets Nod for Rate Revision

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American Water Works (AWK - Free Report) announced that its subsidiary Iowa American Water has received approval from the Iowa Utilities Board (“IUB”) to increase water rates in its service territories. In August 2020, Iowa American Water filed for an annual rate increase of $3.9 million, but IUB approved an annual revenue increase of $2.3 million.

The rate hike was quite necessary for the company to continue with the ongoing infrastructure upgrade work. Iowa American Water’s last rate hike was in 2017 and since then, it has already invested $87 million to upgrade the water infrastructure in the region.

The Environmental Protection Agency’s 2015 Drinking Water Needs Assessment reported to Congress that Iowa drinking water systems have an estimated capital need of more than $7.8 billion over the next 20 years. Repair and upgrade of the aging water and wastewater infrastructure is a national issue and Iowa American Water is taking steps to maintain more than 900 miles of pipeline in the state for providing proper services to customers.

Aging Pipelines a Woe for Water Industry

Managing 2.2 million water pipelines, which are utilized to provide water services to Americans, is not an easy task. Per the findings of the American Society of Civil Engineers, water main breaks occur every two minutes in the United States. Pipeline breaks result in the wastage of 6 billion gallons of potable water each day and add to the loss of water utility operators. The pipeline breaks not only increase the cost of water services but also expose it to the possibility of contamination.

Hence, to stop the wastage of potable water and prevent the failure of pipelines and essential infrastructure, regular investment and upgrade of the pipelines is quite essential. Per Water and Wastewater Equipment Manufacturers Association, an estimated $750 billion investment is necessary to maintain and expand drinking water as well as wastewater services to meet demand over the next 20 years.

Utilities Making Investments

Large water utilities operating in the United States are making regular investments and plans to improve their infrastructure. American Water Works makes regular investments in its infrastructure to upgrade, enhance and maintain the same. The company has plans to invest $10.4 billion between 2021 and 2025 and $22-$25 billion in the next decade.

Essential Utilities (WTRG - Free Report) is also making regular investments to upgrade the existing water and wastewater systems. Its long-term plan is to invest nearly $3 billion through 2023 to rehabilitate and strengthen water as well as natural gas pipeline systems. California Water Service (CWT - Free Report) plans to invest in the range of $270-$300 million in 2021 to strengthen its water and wastewater infrastructure. Middlesex Water (MSEX - Free Report) — under the Water for Tomorrow program — is making regular capital investments to enhance system reliability, resiliency and overall service quality.

Price Performance

Shares of American Water have outperformed the industry in the past year.

Zacks Investment ResearchImage Source: Zacks Investment Research

Zacks Rank

American Water 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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