American Water Unit Acquires Scranton Wastewater System

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A subsidiary of water utility American Water Works Company Inc . AWK , Pennsylvania American Water, has completed the acquisition of wastewater system from the Scranton Sewer Authority (SSA) for $195 million.

American Water Works' unit was providing water service to the Scranton and Dunmore communities for a long time and this acquisition will give them the opportunity to take care of the wastewater services to these communities.

The company received approval for the acquisition of the wastewater system after a lengthy process. As per the approval, American Water Works will invest $140 million to upgrade the acquired wastewater assets.

The purchase will add nearly 31,000 customers to American Water Work's existing 15 million customer base, across 47 states in the U.S. and in Ontario, Canada.

Recent Acquisition

During September, another American Water Works' subsidiary, Kentucky American Water, received the necessary approval from the Kentucky Public Service Commission to purchase Classic Construction, Inc.'s wastewater system.( read more: American Water Unit's Wastewater System Buyout Gets Nod )

Long term Plans

In addition of completing strategic acquisition of water and wastewater assets to expand its market reach, on a regular basis American Water Works is investing further on strengthen its existing assets.

The company aims to invest between $6.7 billion to $7.3 billion from 2017 to 2021, with $5.9 billion earmarked for its regulated assets. Nearly 90% of its earnings in 2016 are expected to come from the regulated assets.

Consolidation - The Way to Go

We all need 24x7 reliable water and wastewater services at reasonable costs. However, the cost of maintaining and upgrading aged wastewater systems is growing. This makes it an uphill task for small local operators to keep up with the rising expenses of upgrading the existing water infrastructure. So, consolidation is the need of the hour in the fragmented U.S. water utility space. The old water utility infrastructure needs ample investments, which are easier to make for the bigger players.

During the first half of 2016, American Water Works closed 10 acquisitions, adding 7,556 customers to its existing customer base. Scranton Wastewater system's acquisition is one of the largest in the company's history.

Another water utility, Aqua America Inc. WTR , is equally active in expanding its market reach through acquisitions. Year to date (as of Nov 1, 2016), the company has completed a number of acquisitions in its service territories, adding 5,700 customers to its existing base.

Acquisitions and organic growth have boosted Aqua America's customer base by more than 1.3% so far this year. Thanks to strategic acquisitions and organic growth that the company can expect its customer base to expand in the range of 1.5-2% this year. The pending acquisitions are projected to increase 4,700 customers.

Price Movement

Over the last one year, American Water Works has been underperforming the Zacks categorized Utility-Water Supply industry. During this period, the company's shares have gained 21.7%, compared with the industry's return of 26.1%.

However, return from The York Water Company YORW , another water utility operator was higher than the industry in the last twelve months.

Zacks Rank & Key Pick

American Water Works currently has a Zacks Rank #3 (Hold). A better-ranked water stock in the same space is Global Water Resources, Inc. GWRS

Global Water Resources' 2016 estimates narrowed to a loss of 13 cents from 15 cents over the last 60 days. The company holds a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here

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YORK WATER CO (YORW): Free Stock Analysis Report

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GLOBL WATER RES (GWRS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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