Summary
- Aqua America is getting close to securing a relatively big acquisition of a regulated wastewater utility in Pennsylvania.
- Its rival, American Water Works Company Inc., is also competing with Aqua America for DELCORA.
- What makes this potential acquisition unique is its size, given how most of Aqua America's water and wastewater utility acquisitions have historically been rather small.
- It appears Aqua America will beat out American Water Works Company for DELCORA.
- We still aren't interested in shares of Aqua America at this time, and continue to monitor its pending acquisition of the regulated natural gas utility Peoples.
Image Source: Aqua America Inc – IR Presentation
By Callum Turcan
We are following up on our June 18 article (link here) covering Aqua America Inc (WTR), which yields 2.2% on a forward looking basis as of this writing, as the regulated water and wastewater utility gets closer to closing its ~$4.3 billion acquisition (when including debt) of the regulated natural gas utility Peoples. Aqua America needs exposure to rate-regulated utilities with longer growth runways as its management team has run into hurdles growing the firm’s regulated water and wastewater utility business given the highly fragmented nature of the space. The Peoples acquisition is expected to close in the fall of 2019. We still aren’t interest in going long shares of Aqua America here given the problems it has had growing its core business, and we want to see how the integration process with Peoples goes before making any changes to our thoughts on the name. That said, recent news out of the Keystone State (Pennsylvania, the source of the vast majority of Aqua America’s pro forma asset base) indicates the regulated utility’s wastewater growth runway might be a bit larger than previously thought.
A Whale in a Sea of Minnows
Aqua America owns Aqua Pennsylvania, which is actively seeking to acquire the Delaware County Regional Water Quality Control Authority (“DELCORA”). Please note DELCORA provides wastewater services to customers in Pennsylvania and represents a whale of an opportunity for Aqua America in a sea of minnows. DELCORA has roughly 500,000 customers across 42 municipalities in Delaware and Chester counties that are situated along the southeastern corner of Pennsylvania, servicing the areas surrounding nearby Philadelphia (the city is located in the adjacent namesake county of Philadelphia).
On the other hand, American Water Works Company Inc (AWK) is also competing for DELCORA, which we will cover in a comment. Aqua America's market capitalization stands at $9.4 billion and American Water Works' stands at $22.1 billion as of this writing. Both of these regulated water and wastewater utilities are considered to be the big players in this space.
For reference, note how most of Aqua America’s municipal water and wastewater utility acquisitions have been fairly small of late, which is highlighted in the graphic below. This is a product of the highly fragmented state of America’s water and wastewater utility landscape. Columbia University noted America has approximately 53,000 community water systems, which creates a lot of problems when it comes to making key infrastructure upgrades. Simply put, most of these community water systems lack the access to funds needed to replace old pipes and upgrade pump, wastewater, and other relevant systems.
In order to upgrade the nation’s aging infrastructure, many water and wastewater utilities would likely need to merge together to generate the kinds of scale required to tap capital markets at attractive rates. Creditors would be reluctant to lend money to relatively small utilities (with large amounts of concentration and operational risks) at rates that larger publicly traded utilities have been able to raise funds at. Furthermore, community water systems can't readily raise funds via equity offerings.
