8 minute read 19 Feb 2019
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How water and gas convergence may create opportunities for utilities


Miles Huq

EY Global Power & Utilities Transaction Advisory Services Leader

Strategic Ernst & Young LLP partner in power and utility transactions. Trusted advisor to clients, colleagues, friends and family.

8 minute read 19 Feb 2019
Related topics Power and utilities

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The Aqua-Peoples transaction is the first time a publicly traded regulated water utility has acquired a major natural gas local distribution company.

The biggest transaction of the Americas power and utilities (P&U) sector in Q4 was Aqua America’s announced acquisition of Pittsburgh-based Peoples, a regulated natural gas distribution company. The deal – set to complete in mid-2019 – is a game-changer for the sector and demonstrates a new type of sector convergence in the US.

EY Global P&U Transaction Advisory Services Leader Miles Huq spoke to Aqua’s CFO Dan Schuller about how the deal is value-accretive and why he expects cross-sector acquisitions to grow in prevalence in the future.

“The Aqua-Peoples transaction is an industry first – the first time a publicly traded regulated water utility has acquired a major natural gas local distribution company,” says Schuller, on the deal which continues a trends of sector convergence as electric, gas and water utilities look for opportunities outside of their traditional sectors.

The US water sector has been challenged to find transformative growth through M&A, as the industry is highly fragmented – there are more than 52,000 water systems across the country. Water utilities have traditionally looked for tuck-in acquisitions of small regulated utility systems; however, adding a significant number of customers via these deals is difficult. 

“As an industry, we are focused on growth and believe that small and medium-sized systems are generally best run in aggregate by regulated utilities.”

Dan Schuller

Executive VP and CFO, Aqua America


With this in mind, and to stay competitive, under CEO Chris Franklin’s leadership, Aqua America developed a three-pronged growth strategy:

  1. Municipal initiative – growth through the acquisitions of municipal water and wastewater systems
  2. Strategic M&A – the opportunistic pursuit of large, regulated utility infrastructure targets
  3. Market-based activities (MBAs) – the acquisition of businesses that complement Aqua’s regulated business and that capitalize on broader infrastructure renewal programs

The second and third prong of Aqua’s strategy are classified as potential convergence, which Dan Schuller says he sees as playing a bigger role in the US deal environment.

“We’ve certainly seen convergence over the last five years, with many larger electrics acquiring gas companies in order to enhance their earnings growth.  Then, before our transaction, one of the New England electric and gas distribution companies waded in by acquiring a neighboring water utility,” says Schuller.

“Peoples is a great fit for Aqua. Gas and water aren’t as different as they may immediately appear. In both cases, a natural commodity is delivered via a pipe network, through a meter, into homes and businesses. The customer operations, call center, meter reading, billing and collections are all very similar.

“Like Aqua, Peoples is a nearly 100% regulated business operating within constructive regulatory environments, with a strong track record and a long capital expenditure runway. Plus, much like we have been running an accelerated pipe replacement program to improve service, reduce water quality complaints, reduce break rates and lessen water loss, the gas companies have stepped up their capex to improve safety and reliability. So, both the operating model and the capital investment model are very similar.”

Schuller says that while risks in water and gas are different, managing these risks is not dissimilar, and the Peoples transaction brings Aqua the opportunity to deploy its combined operational excellence in mitigating these operating risks.

“Just as we have become adept at managing the water industry’s unique risks 24/7, we believe that Peoples has become expert at managing the risks associated with its industry. Given these different risks, we believed it was vital to make sure an acquisition candidate demonstrated a strong track record of safety and reliability, and had managers responsible for those programs joining along with the acquisition. We are doing precisely that in the Peoples acquisition.”

Peoples expects to grow its rate base at 8%–10%, and its addition to the Aqua portfolio adds about 740,000 customers and increases the overall rate base by nearly 50%.
Dan Schuller
Executive VP and CFO, Aqua America

Aqua classifies the Peoples acquisition as strategic M&A, creating a larger, more diversified regulated infrastructure business. “This is really about adding another platform for growth,” Schuller explains.

Since joining Aqua in 2015, Schuller has led the utility through a strategic program focused on transaction-based growth. His background has given him the experience needed to help engineer the Peoples deal – he previously played a key role in J.P. Morgan Asset Management’s infrastructure investments team, leading its US regulated water and wastewater business and served on the board of the group’s US natural gas local distribution company.

With civil engineering degrees from Purdue University, Schuller also worked as an engineer with a municipal infrastructure-focused firm in the Chicago area and as a management consultant with Paris-based Mars & Co.

Schuller, who became CFO in late 2018, says the utility’s strategic initiatives focus on value-accretive growth opportunities.

“Peoples expects to grow its rate base at 8%–10%, and its addition to the Aqua portfolio adds about 740,000 customers to the merged company and increases the overall rate base by nearly 50%,” he explains.

In addition to rate base growth, Schuller points out that the Peoples deal has some additional attributes that are not immediately visible, including having an enterprise resource planning software system in place. “Peoples already has SAP, ensuring an efficient combination of our systems and adding an extra benefit to the transaction.”

That said, the announcement of the transaction in October 2018 was not immediately welcomed by some investors, with Aqua’s share price dropping 10% in the short term.

Some were concerned about price to earnings multiple degradation. Schuller believes the reaction was mostly due to the nontraditional nature of the deal and announcing in a choppy market.

“It’s one thing for us to tell the market that we’re considering opportunities outside of water, but it’s another to act on it. The announcement probably surprised some, and we saw a reaction to that. Certain funds, with investment mandates prohibiting exposure to fossil fuels, were forced to sell post the transaction announcement.

“But as we’ve had more conversations with the investment community, our stock has rebounded nicely, and we believe that trend will continue. We believe our investors now better understand the rationale for the transaction and see that a pure gas utility, with a 15–20 year capex program, should trade at a price-to-earnings ratio not altogether different than that of a water company.”   

We expect the trend toward consolidation to continue. Within that, we believe that cross-sector combinations will be more prevalent
Dan Schuller
Executive VP and CFO, Aqua America

Schuller expects similar transactions in the market as sector convergence creates new opportunities and challenges in dealmaking. “Companies have discovered that the regulatory expertise, the capital investment expertise, and the similarities in business models trump the differences in commodities.”

As convergence accelerates, the boundaries between sectors become blurred, and consolidation of ownership becomes more concentrated.

“With less than two-thirds the number of publicly traded utilities in the US as existed two decades ago, we expect the trend toward consolidation to continue. Within that, we believe that cross-sector combinations will be more prevalent.”

Despite the recent focus on expanding into new sectors, Aqua is still keenly focused on the water sector and expects changes in regulation to facilitate greater traditional M&A. 

“Peoples is our large strategic acquisition for the foreseeable future, but we’ll continue to pursue municipal transactions,” says Schuller.

He says the merged company is anticipated to result in a strong balance sheet and investment-grade credit ratings, which are expected to fuel future growth.

A number of states have implemented Fair Market Value legislation to promote consolidation of smaller water systems by allowing buyers to recover through rates the full purchase price of the assets rather than the depreciated book value. In addition, there is the potential for new legislation that is meant to hold all utility owners to the same standards with respect to testing, routine maintenance, asset management and cybersecurity.

“The Fair Market Value legislation, which allows us to put purchase price into our rate base, has helped to increase the number of municipalities considering system sales, and we wouldn’t want to be left out of that growth opportunity. We have added US$100m in rate base through these acquisitions in 2018 and have US$100m in deals set to close this year,” explains Schuller.

“Now, as we integrate Peoples and focus our management on capital investments, we’ll continue to pursue more municipal water and wastewater acquisitions across our footprint of Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, Indiana and Virginia.

“We expect to see the water industry pursue other types of legislation that facilitate municipal system sales, because as an industry, we believe we can provide an important solution to many municipal systems that have difficulty addressing the capital needs of the utility or would prefer to allocate proceeds from a sale of the utility to other important community priorities.”

This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. There are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including the factors discussed in Aqua America, Inc.’s Annual Report on Form 10-K and its Quarterly Report on Form 10-Q, which is filed with the Securities and Exchange Commission. For more information regarding risks and uncertainties associated with Aqua America's business, please refer to Aqua America Inc.’s annual, quarterly and other SEC filings. Aqua America, Inc. is not under any obligation – and expressly disclaims any such obligation – to update or alter its forward-looking statements whether as a result of new information, future events or otherwise.


In a tighter US utilities market, expect more companies to seek growth through nontraditional acquisitions across sectors. 

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Miles Huq

EY Global Power & Utilities Transaction Advisory Services Leader

Strategic Ernst & Young LLP partner in power and utility transactions. Trusted advisor to clients, colleagues, friends and family.

Related topics Power and utilities