Aqua America Inc. WTR announced that it has received approval from the Pennsylvania Public Utility Commission to complete the acquisition of Peoples Gas, a natural gas distribution utility. In October 2018, the company had entered into a deal with Peoples to acquire the latter in an all-cash transaction that reflects an enterprise value of $4.275 billion.
Aqua America also made an announcement to rename itself to Essential Utilities, Inc. ("Essential") that will take effect on Monday, Feb 3. Peoples will become a subsidiary of Essential. Essential’s common stock will begin trading under the New York Stock Exchange under the ticker symbol WTRG on Feb. 3.
Aqua America’s Gain
The combination will create a utility, which has 99% regulated water and gas distribution. This deal is expected to be accretive to earnings from the first full year after the closing of the same and over the long term. People’s rate base is expected to improve 8-10% annually. Rising usage on natural gas also works in favor of Aqua America.
Utilities Diversify Operation
The above transaction clearly indicates the gradual diversification by utilities from its core business to other lines of utility operation. This acquisition will create a company, which will deliver high quality water and natural gas services to customers. In a way, both the companies have the expertise to manage extensive pipelines, as both water and natural gas are distributed to customers through pipelines. Combination of the expertise of the companies in this field will improve the quality of services.
Similar deals have already taken place in the Utility sector and we expect more to take place in the future as well. In December 2017, electric utility Eversource Energy ES had forayed into the water business through the acquisition of Aquarion Water Company. This will help the company to explore and benefit from the long-term opportunity that the water and wastewater service business presently offers.
Consolidation in Water Space
Consolidation is quite essential for the fragmented water industry, as nearly 50,000 water and 15,000 wastewater operators are providing services in the United States. According to an American Water Works report, more than 2 trillion gallons of treated water is lost per year due to leakage from aging pipes.
The highly fragmented water industry creates operational challenges in meeting increasing water and wastewater service requirement. Hence, water utilities are actively acquiring small water and wastewater service units, and making required investments to upgrade the quality of services.
Aqua America is following the acquisition route to expand operations. During the five-year period ended Dec 31, 2018, the company had expanded utility operations by completing 64 water and wastewater system acquisitions. Another water utility American Water Works AWK is quite active in making acquisitions. From 2015 to Oct 30, 2019, the company had closed 81 deals and added nearly 126,000 customers to the existing customer base.
Shares of Aqua America have outperformed the industry in the past six months.
Zacks Rank & Key Pick
Aqua America currently carries a Zacks Rank #3 (Hold). A better-ranked water utility is AquaVenture Holdings Ltd. WAAS, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
AquaVenture Holdings delivered average positive earnings surprise of 15.6% in the last four quarters. The Zacks Consensus Estimate for 2020 has moved up 1.8% in the past 60 days.
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