UPDATE: American Water buys 3 Pa. sewer systems; deal to run Camden's leaky water
"Maneuvering for outright privatization"
Patience has paid off for American Water, the Voorhees company that's been trying since it went public in 2008 to convince more Pennsylvania and New Jersey towns to hand over their water and sewer systems to its for-profit operating group.
The company "closes out 2015 with a flurry of wastewater deals," veteran utilities analyst Ryan M. Connors tells clients of Boenning & Scattergood, the West Conshohocken investment bank, in a report today. American Water has agreed to take over sanitary sewer systems in Scranton and Dunmore (Lackawanna County, Pa.) and Fairview Township (York County, Pa.); and to operate the sewer system covering most of Camden, N.J. (which needs a lot of work): for a total "sticker value of more than $300 million."
UPDATE: In an interview, Connors noted that citizens often worry that private owners who buy public utilities "are simply free to raise rates indiscriminately. Obviously their rate increases are subject to (state) Public Utility Commission oversight." He added that companies believe "investor-owned utilities have more oversight of their rates than municipal systems, not less."
EARLIER: Scranton and Camden are two of the financially most-precarious (and, by the way, Democratic-dominated) towns in our part of the world. Pennsylvania has made it easier for American Water and Bryn Mawr-based rival Aqua Ameirca to buy up systems with a law easing private utility takeover financing, Connors notes. American Water can save money by consolidating local water and sewer management, Connors notes. He is recommending the stock at recent prices.
What's in it for the towns? In Scranton, the American Water deal "helps the city solve its pension issue," according to the Boennin greport. A Dec. 15 Memorandum of Undertaking gives the company 90 day exclusive negotiation rights. The company would pay $195 million, outbidding rival Aqua America, which Connors says offered $193 million. The company agreed to $140 million in capital improvements and 100 local hires to get the deal.
Connors expects the big benefit to the company will be American Water's promised "$96 million net cash inflow (excluding debt paydown)," from the deal, which pays the city "$3,300 per household (or six years' worth of income taxes) and will go a long way toward fixing Scranton's $160 million pension shortfall."
The company, in turn, will collect $24 million in yearly revenues (based on 2014 data) plus property, plant and equipment worth around $69 million. The two sides are still figuring out what to do with Scranton's stormwater system, which isn't supported by revenues; Connors hopes American Water will get paid to run it under a separate contract. (Neighboring Dunmore's sewers are part of the Scranton deal.)
American Water also supplies Fairview Townhip; on Dec. 22 it agreed to buiy the sewers there for $16.8 million plus $13 million in improvements, with a rate cap until 2017.
Unlike aging Scranton, Fairview is a growing suburb (of Harrisburg); the company also runs utilities in nearby Camp Hill. "The sale was prompted by residential growth, with Fairview having trouble finding ways to finance the wastewater treatment plant upgrades required to facilitate new housing development projects (increasing costs to comply with the Chesapeake Bay Initiative watershed management program were also a driver)." The company expects to collect $4.2 million in first-year fees, and pay just $2.9 million/year for operations and maintenance (plus $600,000/year for debt interest.)
The Camden deal brings American Water into murkier waters. The company plans to move its headquarters to Camden (thanks to $164 million in state tax breaks). As both water and sewer operator American Water agreed to a 10-year, $12.6 milllion/year arrangement cheaper than previous operator Suez's United Water (which charged $14 million a year and opted to leave town instead of renewing that deal, Connors writes.) (Updated; original didn't note the deal included water service.)
Can American Water make money in Camden? Connors notes the city has a history of "extreme leakage rates" (half the water is wasted or stolen) -- and needs "massive capital improvements." Even under happier fiscal and pipe conditions, private-operator deals yield only "infamously skinny" profit margins, Connors notes. Does American Water really expect to make money pumping poor poop, at lower fees than the previous company charged?
The analyst suspects there's a deeper story: "The ultimate endgame could be maneuvering for an outright privatization if capital spending needs continue to mount." American already owns the water system in Camden's Cramer Hill section east of the Cooper River, where Connors says the system enjoys a "clean reputation."