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American Water's (AWK) IL Unit Buys Water & Wastewater Assets

American Water Works' (AWK) unit Illinois American Water further expands operation in Illinois through the acquisition of City of Mt. Pulaski water and wastewater systems.

This story originally appeared on Zacks

American Water Works Company AWK recently announced that its subsidiary, Illinois American Water, has acquired the City of Mt. Pulaski water and wastewater systems. This acquisition will add 834 water and 800 wastewater customers to its existing 1.3 million customer base.

Illinois American Water will invest nearly $13.8 million in the City of Mt. Pulaski water and wastewater systems in the first five years of ownership. With this investment, old water mains will be replaced and upgraded, sewer mains and generators will be installed to increase resiliency and for continued service in the event of a power outage. Water and wastewater treatment plants will be upgraded to ensure safe and reliable services for customers.

All small water and wastewater service providers have one thing in common — they are unable to make the necessary investments required to upgrade and maintain the aging infrastructure. As a consequence, it is difficult for them to provide adequate and reliable services to customers. Large service providers like Illinois American Water ensure the necessary investments to maintain and upgrade the aging assets.

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Acquisition Essential for Water Industry

The U.S. water utility industry is fragmented and upgrading the aging assets to provide high-quality quality services is the need of the hour. Per Environmental Protection Agency, at present, more than 53,000 community water systems and 16,000 community wastewater systems in the United States are providing water solutions to customers.

This highly fragmented industry creates operational challenges in meeting the requirement for replacement and upgrading the aging water and wastewater infrastructure. This is resulting in frequent breaks in pipelines. 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. The breaks in the pipeline result in the wastage of 6 billion gallons of potable water each day and add to the loss of water utility operators.

Consolidation of small water utilities will continue to play a very vital role in the water space. Acquisitions enable bigger water companies to ensure the extension of high-quality services to customers and the investments required to upgrade old acquired assets.

Consolidation Will Ensure Better Services

Given the aforesaid condition of the water and wastewater infrastructure of the water industry, consolidation followed by systematic investments will ensure better services. American Water Works continues to actively expand the business through the inorganic route. From the start of the year till Nov 1, 2021, the company expanded the customer base by 7,450 through acquisitions. Its pending acquisitions (as of Nov 1), when completed, will add another 82,700 customers to the customer base.

In addition to American Water Works, other water utilities like Essential Utilities WTRG, The York Water Company YORW and California Water Service Group CWT, among others, have been making acquisitions to expand operations.

California Water Service Group entered into an agreement to acquire four assets, and the deal will close after the necessary approvals. These pending acquisitions, when completed, will add up to 3,400 water connections and 4,700 wastewater connections to California Water Service Group’s customer base. The current dividend yield of CWT is 1.33%.

York Water completed three acquisitions in 2020 and expanded its certificated territory to three more municipalities. York Water further expanded operations in the United States in 2021 with the closing of major acquisitions. The current dividend yield of YORW is 1.51%.

Essential Utilities completed two acquisitions, which added 7,430 new customers. At present, there are seven pending acquisition deals, which, when completed, will add 234,075 new customers to Essential Utilities’ existing customer base. The current dividend yield of WTRG is 2.08%.

The Zacks Consensus Estimate for 2021 earnings for Essential Utilities, California Water Service Group, and York Water has moved up 5.7%, 0.5%, and 1.6%, year over year, respectively.

Price Performance

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

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Zacks Rank

American Water Works 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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