The last two decades have come with many fad and buzzword investment themes. Many of those themes come and go, some to never be heard from ever again. Water is a theme which has been popular for quite some time. After all, try living a few days without water. The water sector’s only caveats in the United States are that high interest rates are hurting their profitability, and that environmental costs and maintenance/modernization are commanding larger piles of cash than ever before.
Eversource Energy (NYSE: ES) has just announced one of the largest water-related mergers of the last decade. Unfortunately, it’s not the sort of traditional merger agreement. But what if this became the norm for all water utilities that are regional or which are spread over certain areas that may no longer be core to a company’s current operations?
Eversource entered into a definitive agreement to sell its Aquarion Water Company to the Aquarion Water Authority. The AWA (Water Authority) is listed as a quasi-public corporation and political subdivision of the State of Connecticut and a standalone newly created water authority alongside the South Central Connecticut Regional Water Authority.
The aggregate enterprise value of the sale is subject to certain closing adjustments, but the enterprise value of the transaction is listed as approximately $2.4 billion. Of the $2.4 billion listed, approximately $1.6 billion is being received in in cash and the other $800 million is being counted as net debt that will be extinguished (from Eversource’s books) at closing. According to Eversource’s release, the aggregate value is shown to represents 1.7-times the rate base as of December 2024.
Eversource plans to use the proceeds to pay down parent company debt while it also will reinvest capital into its core electric and natural gas businesses. The utility expects to record a loss on the planned sale of Aquarion of approximately $300 million from its Q4-2024 results. The press release indicated that the loss would include approximately $140 million of estimated income tax expense.
Eversource also issued a note that it was reaffirming its long-term EPS growth target of between 5% and 7% through 2028. The utility provider acquired Aquarion in 2017. According to company data, Aquarion serves nearly 250,000 water and wastewater customers (over 775,000 people in all) in 72 cities and towns in the states of Connecticut, Massachusetts, and New Hampshire. It is headquartered in Bridgeport, Connecticut and its predecessor operation of Bridgeport Hydraulic Company has been in the water business since 1857.
This deal’s terms value each water customer (by person) at roughly $2,065.00 and values each account on average at $6,400.00. That then assigns the value of debt transfer on top of the equity/cash value at roughly $1,032 per person under its coverage and $3,555 per account. This per-person/account valuation is one of many ways that water investors evaluate the strength or weakness of certain water utilities.
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Now Eversource will be focused on being an electric and natural gas operations rather than an amalgamated utility that has gas, electricity, water and remnants of wind farms while it also faces continued pressure in the state of Connecticut. Eversource shares have been under pressure after mergers and cessations, and the ability for favorable rate-cases in Connecticut have acted as a load as well. Eversource was last seen closer to $58 with a $21 billion market cap — and this was a $90 stock at the end of 2021 right before the interest rate hike cycle kicked into full gear.
The last large water merger worth over $1 billion in the Northeast was 2020 merger after a $4.3 billion acquisition of Peoples Natural Gas by the water utility company Aqua America in the state of Pennsylvania. That combined utility is now Essential Utilities Inc. (NYSE: WTRG) worth $9.7 billion in market cap. That stock was valued near $50 just before the interest rate hike onslaught ensued at the start of 2022 — and it’s closer to $35.00 now.
