EDMONTON - City of Edmonton-owned Epcor announced Monday a $470-million US deal to acquire two regulated water utilities in Arizona and New Mexico.

The deal follows last year’s announced purchase of another water utility in the U.S. Southwest, its first American water asset.

It’s part of a plan to grow Epcor’s remaining water and transmission-line business, after power generation was spun off to form Capital Power Corp. in 2009. The utility said late last year it is selling $200 million worth of its shares in Capital.

“We’re redeploying the funds that we have from the sell-down of Capital Power, and we are focusing on growing Epcor’s regulated assets in water and in power distribution,” said Epcor president and CEO Don Lowry

Epcor said its Epcor Water (USA) Inc. unit agreed to acquire New Jersey-based American Water Works Co.’s two wholly owned U.S. subsidiaries, Arizona American Water and New Mexico American Water.

Arizona American Water is a regulated utility that provides water service to about 106,000 metered water customers, and waste water services to 51,000 customers, Epcor said. About 90 per cent of its customers are located in the Phoenix area.

New Mexico American Water provides water and waste water services to the city of Clovis, in eastern New Mexico, and in the greater Edgewood area near Albuquerque. It serves more than 17,000 customers.

Monday’s announcement follows Epcor’s $29-million purchase in Arizona of Chaparral, a subsidiary of American States Water Co. — a deal due to be completed early this year. That utility serves 13,000 customers in the town of Fountain Hills, Arizona.

The company also unsuccessfully bid for a water and waste-water system in Pima County southeast of Tucson.

Lowry said Epcor has scoured North America over the last two to three years and found the U.S. Southwest offered assets that are available for sale, regulated and offer high-quality employees and infrastructure.

“You can’t buy these assets in Canada. They never come up for sale. They tend to be owned by governments,” Lowry said.

“The attraction to a regulated asset is that it brings with it discipline, predictability and stability in terms of the amount of capital one would invest as well as the returns would one expect on that as compared to commodities such as copper and oil.”

Epcor can bring back to Alberta technologies and policies developed to deal with water scarcity, he said.

Despite the current economic downturn, the long-term growth prospects of the U.S. Southwest region are promising, he added.

The transaction is subject to approvals by the Arizona Corp. Commission and New Mexico Public Regulation Commission, which may take 12 months, Lowry said.

The latest acquisitions are expected to start contributing to earnings next year.

“If we close within the first quarter of 2012, then obviously we’d be looking to 2012 as being the stub year when we can expect some sort of support from our investment in that going toward the dividends here,” Lowry said.

Under terms of the deal, Epcor USA will assume about $10 million of long-term debt. Last year’s Chaparral acquisition included the assumption of a $6-million debt.

Lowry said the company has no concerns the debt assumptions will put it outside its current debt-to-equity ratios.

The acquisition will be funded from a combination of cash from Capital Power sale funds, Epcor’s own cash flow and debt. The company cannot issue equity.

TD Securities is advising Epcor USA on this transaction.

Arizona American Water employs about 200 people, while New Mexico American Water has 25 staff. Once the transaction closes, Epcor expects to operate the newly acquired utilities under the Epcor umbrella.

Founded in 1886, American Water is the largest investor-owned U.S. water and waste water utility company. The firm has more than 7,000 employees, and provides water and waste water treatment services to more than 15 million people.

American Water had a long-term debt of $5.4 billion as of Sept. 30 and the capital market values it at about $4.5 billion.

“With this transaction, we do not anticipate the need for an equity offering in 2011,” American Water’s CEO Jeff Sterba, said in a statement.

“The decision to sell the units was based on a strategic business review that the company is currently doing,” said American Water spokeswoman Maureen Duffy.

With files from Reuters

bmah@edmontonjournal.com

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