Connecticut Water Co. merger tentatively rejected

December 4, 2018

NEW BRITAIN — State utility regulators on Tuesday tentatively rejected the proposed acquisition of Clinton-based Connecticut Water Service by a California-based company.

The tentative rejection of SJW Group’s proposed acquisition of Connecticut Water came in the form a 33-page draft ruling in which commissioners with the state’s Public Utilities Regulatory Authority expressed concern about how the deal would impact local rate payers. Shareholders of Connecticut Water approved the deal in a special meeting held at he company’s headquarters in mid-November.

″ Based on its review of the record, questions remain regarding the general financial and managerial suitability of the proposed combined company based on the proposed corporate structure, the resulting financial risks to the combined company, and the failure of the applicants to consider and protect the public interest in entering into the proposed transaction,” the draft ruling says in part. “The Applicants have not met their burden of proving that the proposed change of control is in the public interest or that it serves the statutory mandate to maintain local control.”

In response to PURA’s tentative rejection of the deal, SJW Group and Connecticut Water officials issued a joint written statement.

“Connecticut Water will provide any comments or related materials in response to the proposed decision to PURA in accordance with the schedule in the proceeding,” the statement reads in part. “SJW Group and Connecticut Water are confident that the combined company will have the financial strength and managerial suitability to provide safe, adequate and reliable service and that the combination is in the public interest. SJW Group and Connecticut Water have committed to protect customers in Connecticut and Maine and provide additional benefits through the combination.”

The draft ruling, as part of its findings of fact section, raises numerous concerns that PURA officials have with the deal as it is currently structured including:

A lack of Connecticut-based representation on SJW Group’s board of directors, which regulators said gives up any local control.

SJW Group’s failure to show how it would protect Connecticut Water ratepayers from potential rate increases to fund acquisitions of other utilities going forward.

The potential for SJW Group not making adequate levels of capital improvements to Connecticut Water’s infrastructure going forward.

SJW Group’s lack of permanent financing to pay for the deal. The California-based company hasarranged with

JP Morgan to provide interim financing for the deal in the form of a bridge loan.

PURA officials also raised concerns regarding the timing of the acquisition and Eric Thornburg’s participation in negotiations on both sides of the transaction. Thornburg was Connecticut Water’s chairman, president and chief executive officer until early October of last year, when he announced that he was resigning to become president and chief executive officer of SJW Group on November 5, 2017.

The proposed deal was announced on March 15, 2018.

PURA officials say that Connecticut Water and SJW Group “engaged in negotiations beginning December 2016 and into the first months of 2017.” Those negotiations fell through, according to testimony given to regulators, but were ultimately revisited later in 2017.

“There is no evidence in the record that adequately explains this sudden change of events,” PURA’s ruling says in part. The regulatory agency has redacted several paragraphs in that portion of its findings, so it is not clear what explination was given to them.

Connecticut Water Service is a holding company that is the corporate parent for Connecticut Water Co., The Maine Water Co., The Avon Water Co. and The Heritage Village Water Co. These subsidiaries provide water service to more than 450,000 people in Connecticut and Maine, and wastewater service to more than 10,000 people in Connecticut.

The utility serves customers in Beacon Falls, Bethany, Clinton, Deep River, Guilford, Killingworth, Madison, Old Saybrook and Westbrook in the New Haven area.

SJW serves more than 1 million customers in Texas and California.

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