American Water's Unit to Buy Wastewater System for $96M

American Water Works Company Inc.AWK continues its tradition of expanding services throughout the United States via acquisitions. The company announced that its subsidiary, Pennsylvania American Water entered into an agreement to acquire Exeter Township's wastewater system for $96 million. This acquisition will increase American Water Works' customer volume by 9,000.

Pennsylvania American Water has been providing wastewater services to nearly 70% residents of Exeter Township. Courtesy of this deal, the company will be able to provide wastewater services to all the residents of Exeter Township. The company will invest nearly $3 million to upgrade the aging wastewater systems of the township. The company expects to close the acquisition by the end of first-quarter 2019, subject to regulatory approvals.

Exeter Township decided to sell its systems to American Water Works' unit, as it needed substantial capital investments to upgrade and was unbale to do so on its own.

Consolidation in the Fragmented Water 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 a very small number of operators serving only a few hundred customers. It becomes very difficult for these small operators or municipalities to make large investments to upgrade and expand their water and wastewater infrastructure.

It is easier for large companies to make arrangement for funds to carry out these major overhauls. Consolidation would therefore drive the necessary infrastructure overhauls that have become imperative for the industry at large.

American Water Works continues to widen its market footprint through strategic acquisitions. During the first four months of 2018, the company added 3,689 customers through five completed acquisitions and nearly 1,500 via organic initiatives. The company is already in discussion to acquire 15 more companies, which will add another 47,186 customers.

Another water utility, Connecticut Water Service CTWS announced that it has entered into a definite agreement to merge with SJW Group SJW in an all-stock transaction. The combined company will become one of the largest water and wastewater service providers in the United States and serve more than 1.5 million customers in multiple states.

Rising Interest in the Water Space

The water utility industry offers excellent growth opportunities and as a consequence, we are noticing a rising interest in this space, shown by companies that were earlier focused primarily on other businesses.

Eversource Energy ES was primarily focused on energy business but forayed into water business via acquisition of Aquarion Water Company in December 2017. It had the intention to expand its water operations through more strategic acquisitions. The company made an unsuccessful bid to acquire Connecticut Water Service. (Read more: Connecticut Water Loyal to SJW Group, Rejects Eversource Bid)

Price Movement

In a year's time, shares of American Water Works have outperformed its industry. The stock has gained 6.8% compared with the industry 's growth of 3.7%.

Zacks Rank

Currently, American Water Works 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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Connecticut Water Service, Inc. (CTWS): 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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