California Water Division (CWT) completes buyout of water system assets

California Water Services Group CWT recently announced that its subsidiary, Washington Water Service (Washington Water), has completed its acquisition of the water system assets of Bethel Greenacres Water Association. The transaction was completed upon approval by the Washington Utilities and Transportation Commission (WUTC) in February 2023.

Benefits of redemption

As of September 2022, Washington Water has been serving Bethel Greenacres customers under an operation and maintenance contract. The Bethel Greenacres system includes 200 residential connections adjacent to Washington Water’s East Pierce system.

The acquisition of the Bethel water system assets will give Washington Water access to these 200 connections, which will increase CWT’s customer base. It can be expected that such improvements will translate into an increase in the company’s revenues in the future.

The acquisition is also expected to strengthen CWT’s strategic investment plans to support the delivery of safe and reliable water services for both routine and emergency needs.

Justification for the takeover

According to the American Society of Civil Engineers (“ASCE”), there are currently more than 50,000 municipal water systems and 16,000 municipal sewer systems in operation in the United States.

According to ASCE findings, 6 billion gallons of treated water are wasted every day in the United States due to delays in necessary pipeline repairs and maintenance. Necessary infrastructure upgrades and repairs are sometimes delayed due to lack of adequate funding and the large number of small operators in the industry.

The takeover of small units by larger companies is the need of the hour as it ensures the necessary investments in infrastructure modernization and continued provision of high-quality services to customers. The reason for the mentioned CWT takeover seems to be the same.

Water companies continue to consolidate

California Water Service is expanding through strategic acquisitions to offer customers infrastructure upgrades and reliable service. The latest acquisition is proof of this.

In November 2022, Washington Water Service acquired the Driftwood Valley Association water system assets. The CWT database is expected to add 62 customers. Additionally, in October 2022, Washington Water received approval to acquire the assets of Stroh’s Water Company, which will add another 900 customers when closed by the first quarter of 2023.

Other water companies, e.g American Waterworks AWK, Consolidated Water Co. CWCO i Essential tools WTRG also expands its operations through systematic acquisitions.

American Water Works continues to grow the business through acquisitions and organic means. In 2022, AWK added 70,000 customers through 26 closed acquisitions in seven states. After completing 21 pending acquisitions (as of December 31), AWK will gain another 32,400 customers.

The Zacks Consensus Estimate for AWK’s 2023 earnings is for year-over-year growth of 5.8%. The current dividend yield is 1.9%.

In January 2023, Consolidated Water acquired the remaining 39% equity interest in PERC Water Corporation for $7.8 million. PERC’s strong operating performance, revenue growth and profitability, as well as synergies with CWCO’s other businesses and future growth prospects are expected to enhance CWCO’s performance.

The Zacks Consensus Estimate for the company’s 2023 earnings is for year-over-year growth of 143.5%. The company’s current dividend yield is 2.3%.

In 2022, Essential Utilities acquired three water and wastewater systems, which increased its customer base by 23,000. Essential Utilities recently signed eight purchase agreements to purchase nine additional water and wastewater systems for $380 million. These systems are expected to serve 219,000 retail or residential equivalent customers.

The Zacks Consensus Estimate for WTRG’s 2023 earnings is for year-over-year growth of 5.7%. The company’s current dividend yield is 2.7%.

Price performance

Last month, shares of California Water Service Group lost 5.5% compared with the industry’s decline of 6.2%.

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Zacks Rank

California Water Service Group is currently sporting a Zacks Rank of #4 (Sell).

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