American Water Unit to Acquire Kentucky Assets - Analyst Blog

American Water Works Company, Inc. AWK continues with its strategic acquisition program. The company's unit Kentucky American Water has inked a deal to acquire the water and wastewater assets of the City of Millersburg, KY. The transaction is expected to be completed by 2014.

Post transaction, Kentucky American Water will provide water and wastewater services to the Millersburg community.

American Water Works has a low customer base in the state of Kentucky compared with its operations in Pennsylvania, New Jersey, Missouri and several other states. The acquisition will enable Kentucky American Water to enhance its customer base by around 800. We believe Kentucky American Water's decision to include the City of Millersburg's assets will not only reap synergies from economies of scale but also reduce competition.

Past records show that American Water Works has a systematic inorganic growth strategy. The company generally acquires assets having similar lines of business, which are instantly accretive. American Water Works' previous acquisitions have helped it to expand its core offerings.

Year to date, American Water Works completed several significant acquisitions, including the Yankeetown Water System in southwestern Indiana and Lucas Estates Water Company in Ulster County, NY.

We note that many utility providers follow acquisitions and joint-venture initiatives to strengthen their presence in respective territories. Apart from American Water Works, its peers Consolidated Water Co. Ltd. CWCO, Connecticut Water Service Inc. CTWS and Aqua America Inc. WTR utilized inorganic strategies to enhance their scale of operations.

American Water Works has a stable liquidity position. As of Mar 31, 2014, the company had cash balance of $30.8 million and available fund of $1,200 million under the credit facility through its unit American Water Capital Corp. In addition, the company had a strong cash generation capacity. In first-quarter 2014, cash flow from operating activities increased to $244.9 million from $149.6 million in the year-ago comparable period. A favorable financial position enables American Water Works to pursue a steady expansion program.

American Water Works' acquisition program and upgrading of aging infrastructure will enable it to deliver reliable services to its customers, while maintaining government regulations and public safety.

Voorhees, N.J.-based American Water Works serves around 14 million people in the U.S. and Canada, offering drinking water, wastewater and other allied services. The company currently has a Zacks Rank #2 (Buy).