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American Water Unit Files for Rate Hike to Recoup Expenses

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American Water Works (AWK - Free Report) announced that its subsidiary — New Jersey American Water —  has filed an application with the New Jersey Board of Public Utilities (“BPU”) to increase water rates in its services areas. Through this rate filing the company intends to recoup expenses made in its water and wastewater infrastructure since 2015.

The rate approved in 2015 increased annual revenues of the company by $22 million. Since the last rate hike, the company invested in excess of $868 million in infrastructure upgrades, including over 1 million feet of water main.

The rate filing includes investments made by the company in major projects and expenses the company is going to incur to replace more than 200 miles of aging water mains.  New Jersey American Water is seeking a total annual revenue increase of $129.3 million.

Rate Hike is Essential
 
Rate hikes no doubt increase the monthly budgets of household. However, to keep the essential supplies running 24x7 we need to make provisions for the expenses involved in smooth running of the operation.

If the rates are approved by the BPU without any changes, the average residential customer using 6,000 gallons of water a month would increase 36 cents per day or $10.80 per month. For an average customer, the rate will increase $6 per month.

Investment Plans of American Water

American Water Works aims to invest $6.7-$7.3 billion from 2017 through 2021, which will help it boost earnings by 7-10% per year in the aforesaid period from the 2015 base. In the first half of 2017, the company invested $618 million, a majority chunk of which was invested to strengthen operation of its regulated business.

Water Infrastructure is Aging

The U.S. water infrastructure in quite old and massive investment is required to upgrade the existing water and wastewater systems. Some of the water mains are nearly a century old and require immediate replacement. Investment of billions of dollars is required to improve the water infrastructure.  

Aqua America Inc. , a water utility, has plans to make capital investments of more than $450 million in 2017 as part of an ambitious investment target of more than $1.2 billion in the 2017-2019 period. Connecticut Water Service Inc. aims to invest more than $150 million in the 2017-2019 period to strengthen its existing infrastructure.

So the rate hike approval from the commission is quite essential for these water utilities to carry on with their infrastructure strengthening work.

Price Movement

Year to date, American Water Works’ stock has gained 13.6%, outperforming the 11.7% rally of the industry.



The company is well poised to benefit from strategic acquisitions and regulated investments to strengthen the existing infrastructure, which, in turn, is expanding customer base and providing a boost to its top line.

Zacks Rank

American Water Works currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stock to Consider

A better-ranked stock in the same space is SJW Corporation (SJW - Free Report) currently carrying a Zacks Rank #1.

SJW Corporation’s 2017 Zacks Consensus Estimate moved up 15.4% to $2.47 in the last 60 days. The company reported positive earnings surprises in three out of last four quarters with an average surprise of 23.9%.

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