“We’re looking at what can be done to open up more capital,” he says, “particularly as private equity comes into this space — not just buying companies but investing in projects, like a massive pipe-replacement plan.” He cautions that the EPA is in the early stages of working with private equity but is hopeful that it can find some new sources of capital.
In fact, some believe that municipally owned waterworks will learn how to finance their systems without turning to new owners. “Public utilities have greater flexibility in the way they can finance infrastructure” than for-profit firms, says Tom Gould, national technical director of finance and rates for HDR, an architectural, engineering, and consulting firm. That’s thanks to their easy access to low-interest state loans, known as state revolving funds, and to the possibility of raising rates or borrowing funds in advance of, rather than in reaction to, a big capital investment. Unfortunately, Gould says, the public utilities “look at [rates] from a political perspective, and that’s why we’re in the hole that we’re in, because locally elected officials are afraid to raise local rates by $1 a month.”
That may change, says Deane. He thinks water rates need to go up across the board to cover the full costs of investments, regardless of a utility’s ownership structure. “As a scarce resource, water should be priced to the markets, so people understand the value of what they’re getting,” says Deane. Highlighting the true value of tap water can only help publicly traded water utilities when it comes to rate boosts and possibly even acquisitions. “The fact that people can’t live without it creates a pretty good economic incentive” to be in the business, says Cook of the NAWC.
As more investors pour money into the sector, look for companies to grow and consolidate even further, with privatized water becoming more common. With a seemingly endless stream of available “tuck-in” acquisitions and investor-friendly regulators, water companies like Aqua America and American Water are riding the crest of a wave that shows no sign of crashing.
Alix Nyberg Stuart is senior writer at CFO.
Water companies have other ways to make money.
The business of tap water, from rates to water quality, is heavily regulated. To help boost revenues, then, most publicly traded companies in the sector rely on related nonregulated lines of business, such as managing waterworks for cities or selling service plans on the water lines that run from the main to peoples’ houses. Water companies can also lease land for cellphone towers, with regulatory approval.
Connecticut Water was able to stave off a rate hike while increasing earnings for 16 years in part through such methods, says CFO David Benoit. Revenues from the relatively new “Linebacker” service and maintenance program (which yields about a 40 percent profit margin) produce $750,000 a year in profit. That’s nearly 10 percent of Connecticut Water’s annual total. Land sales, while usually nonrecurring, have also yielded significant monies for the company. By selling off unused land or donating it to towns for tax breaks, Benoit has helped to net more than $2 million in the past two years.