Aqua America’s effort to redefine itself as an “infrastructure company” by branching out into the natural gas business cleared a regulatory hurdle this month, bringing its proposed acquisition of Peoples Natural Gas a step closer to reality.
A judge for the Pennsylvania Public Utility Commission has decided that the $4.3 billion deal is in the public interest, setting up the case for a final decision by PUC commissioners in the coming weeks.
Bryn Mawr-based Aqua, which operates water and wastewater utilities in eight states, first announced its intentions to buy North Shore-based Peoples a year ago this month.
The combination was met with a lot of skepticism — consumer groups worried about ratepayers bearing the burden of the price tag, and others concerned about Aqua’s inexperience with natural gas infrastructure.
Even Pittsburgh Mayor Bill Peduto weighed in on the case, sending a letter to the PUC urging it to block Aqua’s rumored plans to buy the Pittsburgh Water and Sewer Authority. The PUC, in turn, said it doesn’t act on rumors. (Peoples’ proposed partnership with PWSA and plans to build a water plant in O’Hara have been abandoned, Peoples spokesman Barry Kukovich said on Monday.)
In the summer, Aqua and Peoples reached a settlement with all but two of the objectors — the Office of Small Business Advocate and the PUC’s own Bureau of Investigations and Enforcement.
Both dissenters say Aqua hasn’t proven itself to be a fit operator of natural gas assets because it has never played in that space before. They questioned the public benefits and worried that the hefty price — three times the value that Peoples’ current owner, SteelRiver Infrastructure Fund, assigns to the same assets on its books — will hamper Aqua financially and trickle down to its customers.
But PUC Judge Mary Long dismissed those concerns. She noted that Aqua has promised in the settlement to keep ratepayers off the hook for the costs of the acquisition. As for the water company’s potentially overpaying, “This matter is one for shareholders, not regulators,” she wrote.
To maintain natural gas experience in the company, Aqua also vowed to put at least one natural gas expert on its board of directors and to keep its water and Peoples’ divisions managed as separate companies. Thus, this is the rare deal not being advertised for its synergies.
Instead, Aqua has promised the deal will result in 100 new jobs in Western Pennsylvania. These will be pipeline workers hired to accelerate Peoples’ current pipeline replacement program by an extra 25 miles per year.
The judge noted that private equity-based SteelRiver Infrastructure Fund also had no experience with natural gas distribution services when it bought Peoples in 2008.
Since then, Peoples has grown through acquisition, including the 2013 deal that brought Equitable Gas into its portfolio and increased its customer base by 50%.
Two rural pipeline systems in Greene and Washington counties that came along with that acquisition were a central sticking point in Aqua’s current case.
The Goodwin and Tombaugh gas gathering systems collect gas from nearby shallow gas wells and, though 368 miles of pipeline, deliver it to 1,695 customers.
Along the way, they lose the majority of that gas — less than 17% of what goes into the Goodwin system actually gets to customers, according to utility data, and less than 60% makes it to customers in the Tombaugh system.
The settlement gives Aqua seven years to replace the dangerous pipelines in those systems, at an estimated cost of $120 million which will be recovered through customer rates.
Fixing and replacing crumbling infrastructure is a way for investors to get a guaranteed return — a calculation that has made utilities, especially older ones, an attractive opportunity for private equity funds like SteelRiver as well as for institutional investors.
From electricity to wastewater, companies are rushing to shed unregulated assets to focus on those where profits are guaranteed by ratepayers.
But the profit motive doesn’t negate the benefits, Judge Long said in response to criticism from PUC staff and the small business advocate.
“This is the essence of the regulatory compact,” she wrote. “The fact that shareholders will earn a return is not nefarious or manipulative. Nor does this dilute the benefits derived from increased safety and reliability of at-risk pipeline.”
Her decision, posted on Monday, kicks off a 20-day period for objections and, if any are filed, a subsequent 10-day period for responses. Then, it will go before the PUC.
Anya Litvak: alitvak@post-gazette.com or 412-263-1455.
First Published: October 29, 2019, 10:26 a.m.