Camden-based American Water Works Company announced Monday morning that its board of directors has approved a definitive agreement to combine in an all-stock, tax-free merger with Pennsylvania-based Essential Utilities, creating a leading regulated U.S. water and wastewater public utility with a pro forma market capitalization of approximately $40 billion and a combined enterprise value of approximately $63 billion.

The transaction is expected to close by the end of the first quarter of 2027, subject to customary closing conditions, including, among others, approval from each company’s shareholders, clearance under the Hart-Scott-Rodino Act, and regulatory approvals, including approval from the applicable public utility commissions.

The combined company will be headquartered in Camden and continue to use the ‘American Water’ name. Essential’s Bryn Mawr and Pittsburgh offices will each continue to maintain a strong operational presence long term.

American Water CEO John Griffith will continue in that role in the combined company.

The combined company would have a water and wastewater rate base of approximately $29.3 billion as of the end of 2024, with approximately 4.7 million water/wastewater connections across 17 states and on 18 military installations. With a larger footprint and customer base as well as increased geographic diversity, the combined company will be well positioned to deliver operational leverage, better customer service and broader customer reach.

The merger also supports long-term EPS and DPS growth of 7-9% for combined company. The transaction is expected to be accretive to American Water’s earnings per share in the first year following close, and the combined company expects to maintain American Water’s 7-9% earnings per share and dividend growth targets post close. Subject to market conditions and board approval, the parties expect the combined company to adopt American Water’s current dividend policy and payout target range. Both companies expect to maintain their existing dividend policies until the transaction is completed.

The combined company’s 15-member board of directors will include the 10 directors serving on American Water’s board of directors prior to the closing of the transaction, including Griffith, and five directors designated by Essential, including current CEO Christopher Franklin.

Karl Kurz, independent chair of the American Water board of directors, will continue to serve in such role after the closing of the transaction.

Franklin also will serve as executive sponsor of the integration task force.

American Water Chief Financial Officer David Bowler will serve as EVP and CFO of the new company. All existing executive team members of American Water who report to the CEO will continue to do so post-close.

Additionally, Daniel Schuller, Essential executive vice president and CFO, will serve as executive vice president and chief strategy officer; Colleen Arnold, president of Essential Aqua Water, will serve as president, Regulated Operations; and Michael Huwar, president of Peoples Natural Gas, will remain president and continue to lead the natural gas business. Griffith said the merger has great synergy.

“This combination brings together two industry leaders united by our shared mission to provide safe, clean, reliable and affordable water and wastewater services to our customers,” he said. “By joining forces with Essential, the combined company’s enhanced scale and operational efficiency will support continued investment in our critical infrastructure, enabling us to continue providing superior customer service at affordable rates.

“We look forward to bringing together the talented teams of both companies to help solve the many water and wastewater challenges across the country and expand our customer base.”

Griffith, in his first interview after being named CEO, told BINJE that the company was looking to grow. Earlier this year, American Water completed deals with water systems based in Essex and Monmouth counties.

This is a much bigger deal. One Franklin said Essential Utilities was thrilled to be a part of.

“Throughout Essential’s nearly 140-year history, we have consistently led with purpose to shape a future rooted in sustainability, innovation, resilience and best-in-class service for our customers,” he said. “We are confident that the combined company will build upon our longstanding track record of delivering safe and reliable services and be better positioned to solve today’s challenges while creating a sustainable future.

“Together, we will have expertise, financial strength and regulatory credibility to continuously improve our infrastructure and meet the evolving needs of our customers. American Water and Essential will continue to enable our communities to thrive.”

Under the terms of the agreement, Essential shareholders will receive 0.305 shares of American Water for each share of Essential they own at the closing of the transaction. This exchange ratio implies a premium of approximately 10% to Essential shareholders based on the average of the daily volume weighted average price of each company’s common stock over the 60-trading-day period ending Oct. 24.

Upon completion of the merger, American Water shareholders will own approximately 69% and Essential shareholders will own approximately 31% of the combined company on a fully diluted basis.

The group said the combination will provide expansive benefits to key stakeholders.

Advancing shared mission of delivering essential utility services: Providing safe, clean, reliable and affordable water and wastewater services will be of the utmost importance to the combined company. Management will continue to work closely with the EPA and federal, state and local officials to deliver the quality of water that customers have come to expect from American Water and Essential, while also adhering to safety and sustainability best practices.

Delivering attractive, long-term capital investment profile with ability to provide increased solutions to water and wastewater challenges across an expanded footprint: American Water expects to maintain its long-term rate base growth target of 8-9% upon the closing of the merger, positioning the company to continue to provide high quality service to customers. The combined company will continue to allocate capital to infrastructure renewal, resiliency, water quality, technology and growth projects.

Upholding commitments to employees and provides greater long-term opportunities: The combined company unites two highly skilled and experienced teams in the regulated utility space, with a greater ability to attract, develop and retain employees and create long-term opportunities for career growth. The combined company does not anticipate material changes to employee compensation or benefits as a result of the transaction. Both companies value their union partnerships, and all union contracts will continue to be honored in accordance with their current terms.

Strengthening commitment to communities, including water affordability: The combined company will remain an active member in the communities it serves, supporting customers and stakeholders with a dedicated workforce and passionate employee base. American Water and Essential each have a strong history of charitable giving, which will remain central to the combined organization. There will be no change in customer rates as a result of the merger, and American Water and Essential will be better able to maintain an average customer water bill that is affordable, supporting the economic prosperity of the more than 2,000 communities in which the combined company will operate.