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American Water's (AWK) New Jersey Unit Files for Rate Hike

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American Water Works (AWK - Free Report) announced that its unit New Jersey American Water has filed an application to the New Jersey Board of Public Utilities to set new rates for water and wastewater customers in New Jersey. Since the last rate approval, New Jersey American Water has invested $985 million to upgrade and expand its infrastructure.

Through the rate filing, American Water’s unit will try to recoup the investment made to upgrade the aging infrastructure, which was essential to provide quality services to nearly 2.8 million in New Jersey.  If the application is approved by the board, the monthly water bill for the average residential customer using 5,520 gallons per month will increase $6.78 per month or 23 cents per day. The average monthly residential sewer bill would increase between 26 cents and $16.69, depending on the service area.

Aging Infrastructure Needs Funding

The U.S. water and wastewater infrastructure is aging and gradually nearing the end of its effective service life. 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. Pipeline breaks result in the wastage of 6 billion gallons of potable water each day and add to the loss of water utility operators.

Per the U.S. Environmental Protection Agency, a $473 billion investment is necessary to maintain and expand drinking water pipelines and $271 billion for wastewater pipelines to meet the demand over the next 20 years.

The U.S. government has plans to invest billions to upgrade water and wastewater infrastructure. Investor-owned regulated water utilities are also making investments to upgrade the facilities and infrastructure.

Water utilities like Essential Utilities (WTRG - Free Report) and California Water Service Group (CWT - Free Report) , among others, have well-chalked-out capital investment plans to strengthen their infrastructure. Essential Utilities aims to invest $3 billion through 2023 to strengthen water and natural gas operations. The Zacks Consensus Estimate for WTRG’s 2022 estimates indicates year-over-year growth of 4.4%. WTRG delivered an average surprise of 1.45% in the last four quarters.

The Zacks Consensus Estimate for CWT’s 2022 earnings has moved up 3.2% in the past 90 days. The midpoint of CWT’s capital expenditure planned for 2022, 2023 and 2024 is $355 million, $360 million and $365 million, respectively.

Rate Hikes Help in Fund Generation

The increase in utility rates might cause financial difficulties to customers. Still, rate hikes at regular intervals are quite essential for regulated water utilities and aid utility service providers to generate funds so that they can carry on with long-term infrastructure upgrade work.

American Water Works plans to invest $13-$14 billion in the 2022-2026 period and $28-$32 billion between 2022 and 2031 to upgrade and strengthen the existing water and wastewater infrastructure. Hence, the rates hikes will ensure a continuous increase in funds and allow American Water to continue with infrastructure upgrades.

Price Performance

Shares of American Water have gained 2.4% in the past one year compared with the industry’s 3.8% rally.

Zacks Investment ResearchImage Source: Zacks Investment Research

Zacks Rank and Key Pick

American Water Works currently has a Zacks Rank #4 (Sell).

A better-ranked stock in the same industry is American States Water (AWR - Free Report) , currently having a Zacks Rank#2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The current dividend yield of AWR is 1.47%. AWR pulled off an earnings surprise of 1.56% in the last four quarters, on average. The Zacks Consensus Estimate for AWR’s 2022 earnings indicates year-over-year growth of 4.8%.