Private Equity Should Stay Out of Water Systems: Exec

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.