Water transactions trickle in, but stream remains steady

Introduction

Regulatory Research Associates is tracking 13 pending large water utility merger and acquisition transactions, with a combined transaction value of $796 million.

Executives of investor-owned water utilities continue to express confidence in the long-term growth opportunities in the fragmented segment.

* After a quiet January, transaction announcements picked up in February when seven acquisitions spanning six states and six distinct buyers were announced.

* Over the past two years, transaction activity has been steady, with a similar number of transactions valued at or above $10 million completed each year, with an annual combined value of around $200 million. The largest change to prior years is the geographic spread and diversity in acquirers of water and wastewater systems.

* Over 50,000 water utility systems exist nationwide, and approximately 85% are municipally owned, while the remaining 15% are investor-owned or privately held. Financially, municipal systems are challenged by limited government funding, competing financial needs for other municipal services and the general unwillingness of elected officials to raise taxes. Operationally, smaller systems lack the expertise to keep up with increasingly stringent water quality standards. With large capital spending projects looming and insufficient federal funding, municipal owners have been more agreeable to considering divesting water and wastewater systems.

* State-level legislation that enables the acquisition of municipal systems has served as the necessary catalyst to consolidate this fragmented sector and inject needed investment into the country's deteriorating water infrastructure.

Recent M&A activity

After a quiet January, in which no new water utility transactions were announced, transactions spanning six different states were publicized in February. The largest of these transactions, the acquisition of the water and wastewater system from the Town of New Hartford by Eversource Energy's Aquarion Water Co. Inc., highlights the long lead time many transactions can experience. Aquarion Water has been operating the town's wastewater system since 2016. The transaction to purchase the water and wastewater system required a voter referendum, which passed in March 2021. An asset purchase agreement was just recently signed between Aquarion and the town. The transaction requires the approval of the Connecticut Department of Environmental Protection and the Department of Public Health, in addition to the Connecticut Public Utilities Regulatory Authority.

Update on pending transactions

RRA is tracking 14 pending large transactions, with a combined transaction value of $796 million. Two of these transactions, both in Pennsylvania, comprise more than $500 million of the total.

Historically, there has always been inherent lumpiness in the timing of transaction announcements and completions, as it may take years for a deal to be solidified and, in limited instances, more than two years to secure regulatory approval.

As of Dec. 31, 2021, American Water had 26 transactions under agreement totaling approximately 74,000 customers in seven states.

Completed transactions

The table below includes details on the larger, more meaningful transactions, defined by RRA as transactions with a value of $10 million or greater, over recent years. In 2021, there were transactions completed with a combined value of $194.7 million, which is similar to the eight transactions valued at $200 million in 2020. In 2019, six transactions valued at $253 million were completed.

After two relatively quiet years, American Water confident in long-term growth outlook

During its fourth-quarter earnings call, American Water acknowledged that the 20,000 customers added in 2021 via 23 acquisitions across six states for a combined transaction value of $135 million was below the company's annual target.

Executive Vice President and Chief Operating Officer Cheryl Norton explained the recent quiet activity, noting that "Some of this was due to COVID as municipalities maintained a cautious approach to evaluating possible solutions for their systems needs in light of potential federal assistance."

American Water includes 1.5% to 2.5% customer growth via regulated acquisitions to reach its 7% to 9% long-term earnings growth rate. For the nation's largest water utility, this translates to an additional 55,000 to 85,000 customers annually. In 2020, the company increased its customer count by approximately 38,000 customers for a similar combined transaction value. In comparison, the company completed $235 million worth of regulated transactions in 2019, adding approximately 53,000 water and wastewater customers.

President, Chief Executive Officer and Chief Financial Officer Susan Hardwick mentioned that "acquisition totals fluctuate year-to-year, but we are encouraged ... that we currently have acquisitions under agreement covering about 77,000 customer connections to start the new year." The largest of these transactions is the acquisition of York City Sewer Authority in Pennsylvania for $235 million, which will add 45,000 customers once the transaction closes.

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