Water merger brings turf war
Scarcity guides the business and politics of water in the western United States. In the East, it’s about the customer base.
Quietly over the last year, a coast-to-coast battle has unfolded over control of Clinton-based Connecticut Water Co. and its parent, Connecticut Water Service Inc. It comes to a head on Friday, as shareholders of CTWS (its ticker symbol and moniker) vote on a merger with the parent of the San Jose Water Co. in California.
This $845 million deal is billed as a groundbreaking combination that works for shareholders and customers, creating one of the first, and one of the largest, national water utility holding companies. Or, it’s a cross-continental corporate grab, fixed by the companies’ managements — and by a man at the center, who runs the parent of San Jose Water, and previously headed Connecticut Water.
Eversource is advancing the more sinister view. The utility giant has more than a passing interest as a spurned bidder, and as parent of Aquarion, the dominant water company in Fairfield County, which Eversource bought in 2017.
Together, the merged SJW Group and CTWS would deliver water to well more than 1 million people in four states: California; Connecticut, where CTWS has 104,000 household connections and 360,000 customers in a wide swath of towns; Texas, where SJW has a small operation of 43,000 customers, and Maine, where CTWS has about 30,000 connections serving 90,000 people.
Those are small numbers compared with gas and especially electric utilities, which can and do number well into the millions. But water is inherently local for the simply reason that it doesn’t move across the country and we can’t build plants that make it — not easily, anyway.
That makes consolidation a less obvious route, although we seem headed that way regardless.
It appears likely the CTWS shareholders will approve the deal at the in Clinton on Friday, although the deal faces a two-thirds vote requirement with very little insider ownership. Whether the three affected states approve the deal remains to be seen.
Eversource made a strong argument in an Oct. 26 filing for Connecticut regulators to reject the deal, which Eversource said was riddled with conflicts of interest, management incompetence and risk for customers. The language was unusually blunt as these things go, basically accusing the companies of colluding to benefit management.
This past Friday, the Connecticut Public Utilities Regulatory Authority issued a rebuke to Eversource with a warning: “When assessing whether Eversource should be granted intervenor status in future dockets, the Authority will bear in mind the myriad ways in which Eversource ignored the Authority’s admonitions in the present docket and increased the workload for a proceeding with a short statutory deadline.”
Is that worth a wow? Yeah, for a utility motion decision. Wow.
PURA wasn’t ruling on the merits of Eversource’s claims, only saying the charges weren’t relevant to the narrow question of whether SJW has the financial and management capacity to run Connecticut Water. A PURA decision on that is due in mid-December.
Whatever happens from here, the story of how the deal unfolded could become a good illustration of where the highly fractured water industry is headed.
In October 2017, Eric Thornburg left as CEO of Connecticut Water Service Inc. to take the the top job at San Jose Water and SJW, the parent company. Eversource had just closed on the purchase of Aquarion, and approached Connecticut Water with an offer for a takeover.
That would give Eversource a huge hold over water systems around the state, although the quasi-public Metropolitan District Commission, in greater Hartford, is still bigger than either Aquarion or Connecticut Water.
CTWS said no thanks, Eversource, we’re good. Again in February, no thanks.
Then on March 15, CTWS announced a “merger of equals” with SJW, now headed by Thornburg. It would be a tax-free stock swap, with SJW the larger, 60-40 partner.
All sorts of chaos ensued. To condense, Eversource offered $63.50 a share in either stock or cash, about what the SJW deal was worth. A larger California company then offered to buy SJW, but not with the Connecticut deal.
CTWS agreed to hold a “go-shop” period, basically where any buyer can come in, examine the books and make an offer. No one did — including Eversource, which claimed the process was fixed for SJW.
The California-only offer went away, Eversource upped its offer slightly to $64 and then, over the summer, SJW and CTWS agreed to a new deal: No more equals, SJW would buy CTWS for $70 a share, period.
Since then, Eversource has cried foul, saying the customers — its customers in electricity and natural gas — are not protected. It says local control is better, and it offered a rate freeze until 2022.
That’s not a great offer, said Maureen Westbrook, vice president of customer and regulatory affairs for CTWS. “The only way you can accomplish a rate freeze is by laying off people,” she said, “or by cutting off your investments in pipes and plant.”
SJW and CTWS say a pure-play water company is better than a giant, regional utility with water as a sideline. They promise no layoffs resulting from the merger. Rates must be approved by regulators anyway, not that that’s much protection, as we’ve seen with electricity prices
Eversource, meanwhile, has not upped its bid since the summer and did not mount a shareholder battle — so shareholders don’t have a bidding war and they don’t have a third option.
The state Office of Consumer Counsel recommends approval of the SJW merger. The guessing is that this deal will happen in early 2019, as planned — breaking new ground in the water business.
Here’s what we know for sure: No matter how badly California needs water, and the crisis is severe, it can’t buy supply with a Connecticut acquisition. This is strictly about running a utility.