American Water Works Company, Inc. AWK unit Pennsylvania American Water has agreed to purchase the waste water assets of the Scranton Sewer Authority (“SSA”) for $195 million. The transaction is expected to be complete by Sep 30, 2016, subject to regulatory approvals.
Details of the Project
The company aims at providing the expertise and financial resources required to meet the significant environmental compliance challenges facing the sewer system. After the transaction closes, American Water will ensure the completion of all the mandated upgrades to the sewer system totaling $140 million within the stipulated timeframe.
Customer Benefits
The transaction, once closed, is likely to ensure long-term rate stabilization for customers. This can lead to cumulative savings in sewer bills of more than $350 million for the customers, over the next 30 years, which translates to nearly $7,600 per residential customer.
Advantage for SSA
The SSA is already reeling under a debt of $70 million. This deal will give it the flexibility to pay off the debt while abiding by federal regulations.
Upon closing the acquisition, all active SSA employees will be hired for Pennsylvania American Water, subject to standard pre-employment screening. The employees will be provided the necessary training, development and career opportunities in any of the operations of Pennsylvania American Water or its parent company, American Water.
As per the purchase agreement, American Water has committed to offer 100 new jobs to Scranton by 2020. These new jobs are expected to boost the economy as well as stimulate the additional business activity in Scranton.
Consolidation Among Water Utilities
Rising urbanization and an ever-increasing global population are constantly raising demand for fresh water. The growing scarcity of water translates into greater opportunity for the water utilities to perform vigorously toward supplying fresh water to meet everyday needs.
The U.S. water utility space is highly fragmented as there are a number of water utilities operating on various scales. The fragmented water industry has raised concerns about the sustainability of the smaller systems. A plausible solution for this is the consolidation and integration of local and regional systems into large-scale structures. Consolidation allows larger operators with financial strength and the ability to upgrade the systems of smaller service providers to render quality water services across all customer classes. This also explains the frequent acquisitions underway in this space right now. American Water too has made acquisitions of various sizes of water systems close to its service territories.
Zacks Rank & Key Picks
American Water Works currently carries a Zacks Rank #3 (Hold).
A top-ranked peer in the same space is SJW Corporation SJW, sporting a Zacks Rank #1 (Strong Buy). A couple of other well-ranked stocks include Connecticut Water Service Inc. CTWS and Middlesex Water Company MSEX, both carrying a Zacks Rank #2 (Buy).
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