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Water utility acquisitions still flowing as sellers are impacted by downturn

The appetite for growth-via-consolidation in the water sector has remained robust despite the current economic slowdown and global health pandemic. Transaction announcements span the country and include a variety of acquirers, pointing to a broader consolidation trend. Historically, it had only been the sector's largest two water utilities that incorporated acquisitions into the companies' growth strategy.

On Essential Utilities Inc.'s Aug. 6 earnings conference call, Matthew Rhodes, Executive Vice President of Strategy & Corporate Development stated that the company "continue[s] to see a strong pipeline of municipal acquisitions, especially given the passage of fair market value legislation. And now with economic pressures, as the COVID-19 crisis continues, we are anticipating more municipalities will be looking for solutions to financial constraints."

Fair market value legislation is meant to facilitate the acquisition of municipal systems by valuing a potential acquired systems on market value rather than on original cost basis. This legislation has been enacted in 13 states and has been most utilized in Illinois and Pennsylvania.

Acquisitions continue to drive an expansion of capital expenditure programs across the water industry, fueling earnings growth. As an example, Essential Utilities anticipates investing approximately $16 million over the next ten years on the distribution system of East Norriton Township, Pa., it acquired in June.

Similarly, on its second quarter conference call, California Water Service Group indicated that it would add an incremental $5 million to its 2020 capital expenditures to be invested it the Rainier View Water Co., which the company recently purchased.

Pending water and wastewater transactions

American Water Works Co. Inc. anticipates adding 43,600 customer connections through signed agreements across nine states, most of which are expect to close in 2020.

Of greatest economic value is Essential Utilities' planned acquisition of the Delaware County Regional Water Quality Control Authority, or DELCORA. The $276.5 million wastewater acquisition was announced in September 2019 and is expected to close in early 2021, pending Pennsylvania Public Utility Commission approval. On last week's second quarter earnings conference call, Essential Utilities' Rhodes stated that they "have not experienced any major delays in the regulatory approval process due to COVID-19." The transaction has met some local resistance and legal challenges, however, Rhodes stressed they "continue to believe we have an enforceable and legally binding contract with DELCORA."

In addition to the DELCORA transaction, Essential has three additional signed agreements pending close, including its first transaction using fair market valuation in the state of Texas. The company has fewer water utility transactions pending compared to recent years, as the company has been focused on integrating the $4.28 billion PNG Cos. LLC transaction, which it acquired in March.

The Arizona Corporation Commission approved EPCOR Water (USA) Inc.'s acquisition of Brooke Water on July 16, but it has not been announced that the transaction has been completed.

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Excluded from the table above is American Water's divestiture of its New York American Water Co. On Nov. 20, 2019, the company announced it had entered into an agreement to sell its regulated New York operations to Liberty Utilities Co., a subsidiary of Algonquin Power & Utilities Corp. for $608 million. The transaction is now anticipated to close in early 2021.

In July, the New York Public Service Commission extended the deadline for intervenors to submit proposals for a public takeover of the system. The municipalities intervening in the case now have until Oct. 15 to submit alternative proposals for the sale.

Transactions completed in 2020

Aside from Essential Utilities' acquisition of East Norriton Township, Pa., recently completed transactions have been modest in size, valued below $10 million when terms were disclosed. The lion's share of acquisitions completed year-to-date have been bought by American Water. As of Aug. 5, the company had completed 13 acquisitions in six states, adding approximately 10,800 new customer connections.

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Regulatory Research Associates is a group within S&P Global Market Intelligence.

For a complete, searchable listing of RRA's in-depth research and analysis, please go to the S&P Global Market Intelligence Energy Research Library.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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