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California Water Unit Files for Rate Hike to Recover Outlay

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California Water Service Group’s (CWT - Free Report) subsidiary Washington Water Service (Washington Water) filed a proposal for rate revision with the Washington Utilities and Transportation Commission. The company, which has been investing in its water infrastructure since 2014, seeks to recover the capital put in.

If approved without any changes, the new rate will be put into effect this August. It will also drive Washington Water’s annual revenues by $1.64 million, or 13.8%.

Regular Investments in Utility Sector

The Utility sector is mature and fundamentally strong as demand for utility services barely changes with economic cycles. To maintain an uninterrupted supply of basic services, utilities need to upgrade, strengthen and modernize their infrastructure. Operating in a capital-intensive sector, utilities need to invest regularly to meet the rising customer demand.

Water utilities are frequently required to upgrade and replace old pipelines and water mains through significant investments. To recover the cost of such investments and continue with upgrades to existing infrastructure, the companies file for rate hikes. Notably, Washington Water’s last rate hike was approved in February 2015.

Consolidation in Utility Space

Consolidation is the need of the hour in the fragmented U.S. water utility space. Water utility operation is highly fragmented in the United States and there are very few operators serving a few hundred customers. Aging water infrastructure needs upgrades and expansion to meet the growing demand.

The company is not only investing in its existing assets on a continuous basis but is also planning to expand its service area through acquisitions. Recently, the company proposed to acquire SJW Group (SJW - Free Report) . The plan is viewed as a strategic one as it will help the combined entity be the third-largest publicly traded water utility in the nation.

Other water utilities are also expanding their operations through buyouts. Recently, American Water Works’ (AWK - Free Report) unit Pennsylvania American Water has entered into an agreement to take over a water and wastewater system from Borough of Turbotville in Northumberland County. Another water utility, Aqua America (WTR - Free Report) has entered into an agreement to buy the wastewater assets of Village of Manteno, Illinois.

Price Movement

California Water has outperformed the industry in the last 12 months. The company’s shares have returned 14.3% compared with industry’s gain of 4.9%.

Zacks Rank & Key Picks

California Water currently carries 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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