Aqua America Inc. of Bryn Mawr, the nation's second-largest water utility, on Tuesday unveiled an ambitious expansion into the energy distribution business with a deal to buy a group of Pittsburgh gas utilities for $4.3 billion.
Aqua will acquire Peoples, which operates Peoples Gas Co. LLC, Peoples Natural Gas Co. LLC, and Delta Natural Gas Co. Inc. The utilities are now privately owned by investment firm SteelRiver Infrastructure Partners of Sausalito, Calif.
"The deal creates a major regulated utility force in Pennsylvania, which we believe is the nation's most attractive regulatory jurisdiction," Ryan M. Connors, a utilities analyst for Boenning & Scattergood Inc. in West Conshohocken, told investors Tuesday.
Aqua, a 132-year-old utility known previously as Philadelphia Suburban Water, will pay about $3 billion in cash for Peoples, which it will finance by selling new stock and issuing about $600 million in debt. It also will assume about $1.3 billion in Peoples' debt, bringing the total value to $4.275 billion.
Wall Street was not enamored of the deal. Aqua's shares fell 7.6 percent in trading Tuesday on the New York Stock Exchange, closing at $35.01, down $2.87.
Christopher Franklin, Aqua's chief executive who will remain as head of the yet-to-be-renamed parent company, said in an interview Tuesday that the combined companies each are replacing about 150 miles of pipe a year, upon which state regulators allow it to recover a steady income from customers.
"This is almost a perfect fit for us," he said. "It's in Pennsylvania, a state where we're already a pretty big company. It's a great regulatory climate, and it's in a business that's very close to what we do, installing and replacing water mains or gas mains."
The combined company would have 1.7 million customers, including about one million water or wastewater customers. Nearly all its $7.2 billion in revenue would come from regulated utility operations, with about 70 percent in water and wastewater and 30 percent in natural gas.
The new company will keep its headquarters in Bryn Mawr, where water and wastewater operations will remain based. Aqua has 1,600 employees and serves customers in Pennsylvania, New Jersey, Ohio, North Carolina, Illinois, Texas, Indiana, and Virginia.
Morgan O'Brien, Peoples' chief executive, will lead the natural gas company, which has about 1,500 employees and will remain headquartered in Pittsburgh. Its gas distribution systems are in Western Pennsylvania, West Virginia, and Kentucky.
For utility customers, the merger is likely to go unnoticed: The operating companies will continue to operate under their established brand names. The merger is not expected to result in workforce reductions or to impact rates, Aqua said.
Although the merger of gas and water utilities might seem to be an unorthodox mix, Aqua's leadership presented the deal as strategic alignment of growth companies that build and reconstruct infrastructure.
Franklin said the company expects to continue growing its dividend annually by about 7 percent from regulated utilities, where states incentivize private operators to invest by allowing them to earn a guaranteed profit on their investments.
Franklin was unconcerned about the stock market's negative reception Tuesday. "We would expect to go out and tell the story: It's something new, and we'd expect that stock price will rebound nicely," he said.
"Our view is pretty positive," said Connors, of Boenning & Scattergood. While Aqua's core strength is the operation and maintenance of water and wastewater infrastructure, he said, "in reality, we believe the core competency is in regulatory management and infrastructure development."
Aqua's effort to reinvent itself as a player on a bigger stage began in 2016, a year after Franklin took over for his longtime mentor, Nick DeBenedictis, who is now Aqua's chairman emeritus.
The company has accelerated its acquisition of municipal water and wastewater systems, aided by new state laws that encourage the privatization of government systems. But it also began looking for new opportunities to acquire regulated utilities beyond the water and wastewater world.
"We see ourselves as part of a broader solution for declining infrastructure in the country, at least in the 10 states where we operate," said Franklin.
The Peoples merger might put Aqua in a stronger position to expand into Western Pennsylvania, where Peoples earlier this year offered to take over the financially troubled Pittsburgh Water and Sewer Authority in a public-private partnership. Pittsburgh officials have resisted selling the PWSA, and it remains in public ownership.
"Aqua's endgame is to wrest control of PWSA," Food and Water Watch, an advocacy group that opposes utility privatization, said in a statement Tuesday that urged regulators to reject the merger.
Franklin acknowledged the Pittsburgh water utility might present a growth opportunity, but deflected a suggestion that the new company might also have its eye on the city-owned Philadelphia Gas Works, which underwent a contentious privatization process in 2014 that was killed off by Philadelphia City Council.
"I can't even begin to talk about Philly gas," Franklin told analysts. "There's a lot of history there, and it's not even on our radar screen."