Aqua America’s pruning policy
- From: Vol 9, Issue 1 (January 2008)
- Category: General
- Region: Americas
- Related Companies: Aqua America, AquaSource and Heater Utilities
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The race to acquire water assets has inevitably left a few underperforming systems on Aqua America’s books. Now CEO Nick DeBenedictis is looking to spruce up his portfolio by pruning off the withered branches.
Since the mid-1990s, the big game for the large investor-owned utilities in the US has been to buy up water systems, sometimes hundreds at a time. Aqua America has been one of the most visible proponents of this practice, but now CEO Nick DeBenedictis has ushered in what he terms a “pruning policy”, to weed out and dispose of underperforming systems.
“We’re going to probably look at $50-100 million worth of sales over the next year”, he told GWI. This is a relatively small part of Aqua’s portfolio, considering that the company has accumulated $2 billion in assets over the last ten years. However, with a number of potentially challenging rate cases coming up, the company felt it was time to look at managing its portfolio more actively.
“I look at it as something of an infrastructure bank,” says DeBenedictis. “If one product line isn’t earning its keep, we have another product line to re-deploy those assets into, and get the return on equity that we need.
He has asked his regional heads to identify those systems which are generating returns significantly below the 10% which Aqua typically looks for, or which have particularly unattractive growth prospects.
Such systems are a drag on the remainder of Aqua’s portfolio in any given state, and impact negatively on the company’s bottom line.
Close to a dozen underperforming systems have been identified so far, all of which were acquired as part of larger acquisitions, in particular the Consumers deal of 1999, the 2003 AquaSource deal, and the Heater Utilities deal of 2004.
The first significant disposal was announced in late December, and came from the AquaSource camp. The 13 systems in Henrico County, VA were sold back to the county for $1.5 million after two years of negotiations, during which time they experienced growth of only 1%. Local environmental issues and the prospect of a challenging rate case to pay for infrastructure upgrades also played a significant role in the decision to sell.
In this case, the buyer was the local authority, and although this is often the most logical entity to approach, DeBenedictis is open-minded about who might take an interest in systems which no longer fit Aqua’s investment criteria: “Private equity might have interest in some if they’re big enough; sometimes there’s a local engineering firm – every story’s different.”
The deal has to make sense for DeBenedictis to give it the go-ahead. “We’re not going to do it unless we can make money on them,” he states categorically, adding: “We’ll probably be able to book gains on most of them.” He sees two alternatives for re-investing the capital: the money can either be used to buy a better-performing system somewhere else, or go towards
Aqua’s capital works programme. Given the provenance of the systems Aqua is looking to offload, the new approach is unlikely to derail the company’s ongoing acquisition strategy. DeBenedictis predicts another 25 or so deals in 2008, and just like the divestitures, there will be no particular geographical bias: “They’ll be all over the map.”