AP NEWS

CT Water tries again for Calif. merger

April 3, 2019

Connecticut Water Service Inc. suffered a rare shock four months ago when state regulators issued a draft decision rejecting the utility’s bid to merge with a larger water provider in California. Now the Clinton-based company is back with what it says is a better deal for customers and the state.

It was a stunner not because of the Dec. 4 proposal by the Public Utilities Regulatory Authority to nix the deal. Such things happen.

Rather, PURA had barely signaled the move. In fact, the agency had rebuked Eversource, an oppoent of the deal, for the way the giant electric utility — which owns Aquarion Water Co. — argued its case.

Connecticut Water wisely pulled its application in January, ahead of a final decision, and returned on Wednesday, determined to meld itself with the parent of San Jose Water Co., which is headed by the former Connecticut Water CEO.

The value of the deal remains the same, $70 a share, for a value of $845 million, plus debt, a total of $1.1 billion. But this time around, Connecticut Water is offering an armload of binding promises — some new, some mentioned in the merger application filed last summer.

“We really used that draft decision as a roadmap,” said David Benoit, the Connecticut Water CEO. “We will have binding commitments to some of the things that were not in the original application...that strengthened the benefits for Connecticut customers and the state of Connecticut.

Those promises include job guarantees for all 221 employees of the publicly traded utility, which operates as Connecticut Water Co. (among two other names for tiny segments) in a sprawling, 59-town footprint with 104,000 household and business customers.

We’ll just have to see how Eversource reacts this time around. It was spurned in its own bid to buy Connecticut Water last year, before opposing the San Jose merger.

Girding its effort in the latest go-around, Connecticut Water also promises — formally, this time, in the application — no base rate hikes until at least January, 2021; doubling its charitable contributions to $120,000 a year; boosting open-space protections; a 2-percent rate credit for customers for 12 months; “ring fencing” protections for the Connecticut business, meaning San Jose can’t raid profits; commitments to maintain a regional headquarters in Clinton and a management team in Connecticut; and a local board of directors.

It’s an interesting saga as utility mergers go, with lessons for everyone, not just Connecticut Water.

For regulators and opponents, the main issue is loss of local control for a company that has grown by acquiring some 75 separate water systems over the decades, including at least one — the Westover School in Middlebury — as recently as last fall.

Utility regulators have long struggled with how to assure some measure of local influence, if not control, when companies merge across state lines. In the long run, there’s no way to do it. But likewise, there’s no ready way to halt a merger that’s set up correctly, as the merging companies need only prove their finances and managements are sound enough to meet state standards.

In this case, Eversource was the foil. The regional utility, with a market value of $22 billion, bought Aquarion, which serves much of Fairfield County, in 2017 — and tried to buy Connecticut Water. The Connecticut Water board turned Eversource away, only to reach a deal with SJW Group after its CEO, Eric Thornburg, took over the top spot at SJW in late 2017.

Eversource cried foul, and countered with an offer of its own. That prompted SJW to up its deal to $70 in cash, from what had been a pooling of stock in a so-called merger of equals.

Eversource never offered more than $63.50, but it filed briefs in October that basically accused Connecticut Water and SJW of collusion — earning a sharp rebuke from PURA. That raised expectations the cross-continental water merger would pass muster.

Credit PURA for wheedling a better deal for Connecticut through its draft rejection.

At some point, and that point is now, Eversource needs to either make a matching offer or go away. The core of its argument seems to be that it’s a local company that already operates a local water business of roughly the same size as Connecticut Water.

Some environmental activists appear to agree. But that argument rankles Benoit and other Connecticut Water executives.

“Water is an afterthought at Eversource,” said Benoit, a finance guy who decades ago worked for Eversource predecessor Northeast Utilities and Yankee Gas. “Would I be surprised if in 10 years Eversource is out of the water business? I would not be surprised at all.”

He added, “The thought process of being part of a pure-play water company that’s been around for 150 years as SJW has…versus an electric company that’s been in the water business for two yeasrs, would at least make you consider the customer benefits that are associated with it.”

Connecticut Water vice president Maureen Westbrook added, “We would both have out-of-state parent companies,” a reference to Eversource’s power base in Boston, even though the conmpany is officially jointly headquarted in Connecticut and Massachusetts.

Connecticut Water pays a nice dividend, $1.18 a share, and that money will now migrate to SJW shareholders, presumably less local. But Connecticut Water is about half-owned by institutional holders, so it’s not like the old days of local payouts.

Eversource, for its part, might try to counter that it’s able to deliver better local service by merging Aquarion and Connecticut Water. That would, in theory, enable it to cut management staff and save money other ways.

Connecticut Water says it can wring savings through, for example, buying power for costly equipment and supplies, rather than by firing staff, as we see after most mergers.

As with every merger in the history of public companies, this one is hailed by both managements as a perfect, can’t fail marriage. Many, perhaps most, do fail, or at least fall short. But at least, with this new application before PURA, SJW and CTW have made it harder for regulators and opponents to fight the deal.

dhaar@hearstmediact.com