Private equity funds looking to buy water utilities in order to
quickly resell them at a profit should stay out of the business, a
water industry executive said.
Aqua America Inc. Chairman and CEO Nicholas DeBenedictis said he
believes that business models that are not focused on long-term
ownership of regulated water utility systems will be harmful to
communities and customers. His remarks to the 29th annual National
Conference of Regulatory Attorneys, which met in mid-June in
Scottsdale, Ariz., provided a year-in-review assessment on the
concerns he raised at last year's conference on the topic of certain non-utility
buyers acquiring U.S. water systems.
"While our company has been in the water business for 120 years,
we've seen shifting ownership models over the past decade or so
involving electric companies, European conglomerates and now private
equity financial buyers," DeBenedictis said. "These rapidly changing
business structures have caused considerable turmoil for
communities, consumers and water utility employees.
"Private equity funds have become the dominant players in today's
M&A market, reshaping almost every industry they touch. I believe
that some of these financial buyers might be looking to the
regulated utility market to get above-market returns in a short
amount of time. That's why I'm concerned about turning our precious
water resources over to any private-equity buyers who are highly
leveraged, bring a short-term investment horizon, and have little or
no experience in water quality and utility management."
DeBenedictis urged regulators to clearly define the rules when
evaluating potential acquisitions. For example, the Pennsylvania
Public Utility Commission voted in March to reconsider the sale of a
water and wastewater company to Hydro Star, an affiliate of American
International Group. Commission members raised concerns that the
purpose of transaction might be to realize quick profits by
"flipping" the acquired company. Commissioners also referred to the
investors' lack of utility management experience, which they said
could lead to severe consequences for customers in the short and
long run.
"I applaud the Pennsylvania PUC for its decision to take a closer
look at the potential ramifications of this type of transaction," he
said.
The reason for the long-term horizon is the major investments
needed in the nation's deteriorating water infrastructure. "We need
companies that will be in the water business for the long haul and
are committed to making the capital investments needed to maintain
and upgrade the nation's infrastructure," he said. "Our assets have
long lives of 50 to 100 years. Therefore, short-term financial
gratification is not consistent with the longevity of water assets
and a long-term commitment to customers and the water industry."
He cited the American Society of Civil Engineers assigning a D-minus
grade to the nation's water treatment plants, wells, pumps and pipes
in its 2005 Report Card for America's Infrastructure. In addition,
the U.S. Environmental Protection Agency has recommended that
utilities need to invest $277 billion over the next 20 years to
upgrade and maintain the nation's water systems.
Beginning in the 1990s, DeBenedictis noted that electric
utilities entered the water industry thinking they would capitalize
on synergies between the two businesses.
"When the new model failed to produce the desired financial
results," he said, "the electrics quickly exited the water business,
leaving some troubled water systems in their wake - with
Enron-backed Azurix being the poster child for this failure."
European multi-utility conglomerates were next to jump into the U.S.
water market. As of today, almost all of them have decided to exit.
"The business model of some European firms of paying a premium
for acquisitions and imposing major cost-cutting caused adverse
reactions among some communities, employees and regulators," he
said. "After a few years in the U.S. water business, the end result
of that European model is dissatisfied customers, distressed
employees and some community water systems suffering from reduced
capital investment."
Aqua America is a U.S.-based publicly traded water utility, serving
more than 2.5 million residents in Pennsylvania, Ohio, North
Carolina, Illinois, Texas, Florida, New Jersey, Indiana, Virginia,
Maine, Missouri, New York and South Carolina.