Pennsylvania regulators on Thursday approved Aqua America Inc.'s $4.3 billion acquisition of one of the state’s largest gas utilities, completing the Bryn Mawr firm’s transformation from a water utility into an “infrastructure company” that will be rebranded Essential Utilities Inc.
The Pennsylvania Public Utility Commission, in a 4-1 vote, endorsed Aqua’s acquisition of Peoples Natural Gas, owned by SteelRiver Infrastructure Partners, a California private equity company.
Peoples Gas has 662,000 customers in Pittsburgh and Western Pennsylvania. It also operates smaller systems in West Virginia and Kentucky.
Aqua, which trades on the New York Stock Exchange under the WTR symbol, announced Thursday that it would formally rename itself in February to reflect its new mission. The new company, Essential Utilities, will trade under the ticker symbol WTRG. Its logo combines images of water and flame, reflecting its aim to provide water and gas service.
The operating companies will continue to function under their well-known Aqua and Peoples’ brand names, said chief executive Christopher Franklin.
"Essential captured the essence of what we aim to be for our stakeholders,” said Franklin, who has been chief executive for about the last five years. Under Franklin, Aqua’s Pennsylvania subsidiary has also stepped up efforts to acquire water and wastewater systems — it closed a $50 million acquisition of the Cheltenham wastewater system in December, and is advancing plans to acquire the Chester Water Authority and the Delaware County Regional Water Quality Control Authority, or Delcora.
Aqua’s purchase of Peoples, first announced in October 2018, was not without controversy.
The PUC’s Bureau of Investigation & Enforcement and the state’s Office of Small Business Advocate did not sign on to a joint settlement announced in June, and those critics continued to raise objections after the settlement was endorsed by Administrative Law Judge Mary D. Long in an October recommended decision.
The critics objected that Aqua, though it operates water utilities in eight states, has no experience operating a gas utility. “This transaction should not be used to test Aqua’s technical fitness in the natural gas realm,” the PUC’s investigative bureau said.
The bureau also worried that Aqua was taking on too much debt to acquire Peoples at a price far above the book value of its assets. The $4.3 billion purchase price includes $1.3 billion in assumed debt, and a $2 billion premium that will be carried on Aqua’s books as “goodwill.”
Commissioner Andrew G. Place, the lone dissenter on Thursday, echoed concerns that the merger did not provide public benefits. Though the deal protects Aqua’s and Peoples’ customers from getting charged higher rates to pay for the acquisition costs, Place said that customers might be harmed indirectly by Aqua’s higher borrowing costs from taking on so much debt.
Long, the administrative law judge, said that Aqua had demonstrated no difficulty raising additional capital to pay for the acquisition from $2.7 billion in new stock issues and $436 million in a new debt issue.
Aqua promised the acquisition will create 100 new jobs in Western Pennsylvania by accelerating replacement rates of the system’s distribution lines.
Aqua also agreed to upgrade two aging rural rural pipeline systems that Peoples inherited from a previous owner, a sticking point in the transaction. The 368-mile Goodwin and Tombaugh gathering systems collect gas from shallow wells and deliver it to about 1,700 customers. But the pipelines are old and leaky — the Goodwin system loses 82% of its gas, and the Tombaugh system can’t account for 44 percent of the gas it collects.
The settlement gives Aqua seven years to fix up the systems at an estimated cost of $120 million, much of which can be recovered through customer rates.
Critics suggested it would be more cost-effective to abandon the pipes and force the customers to switch fuel sources. But Gladys Brown Dutrieuille, the commission’s chair, said there was value in repairing the leaky infrastructure. "Rehabilitating these systems will have a substantive environmental benefit and should reduce the potential of a catastrophic natural gas explosion,” she said.
The merger settlement was endorsed by the Office of Consumer Advocate, low-income consumer advocates, labor unions representing utility workers and pipeline workers, and gas producers, who would benefit from the investments in the rural system that connects their wells to consumers.