German Utility Soured on American Water
Just as a planned sale of the largest private water company in the United States moves closer, potentially embarrassing records of high-level corporate meetings have surfaced detailing how the business failed to live up to expectations for the German utility giant RWE.
RWE has been moving forward to get the necessary state approvals so it can spin off American Water in an initial public offering sometime this year, just five years after paying $4.6 billion in cash for the business serving 18 million customers in 29 states. That sum was a 46 percent premium over the stock price, and expectations had been high for expansion and growth.
But according to the minutes of a meeting of the RWE supervisory board (equivalent to a corporate board of directors) on Sept. 16, 2005, the hopes that water would become the company's "most profitable and fastest-growing corporate division" were quickly dashed. Political resistance to privatization proved strong in the United States, where the vast majority of drinking and wastewater services are still run by local governments. And RWE underestimated the huge costs it faced due to outdated infrastructure and mounting U.S. environmental requirements.
In the minutes, RWE Chief Executive Harry Roels is quoted as describing the "difficult" situation in the United States, where the company was losing about 19 percent of its water volume through leaky pipes. There had been insufficient investment in the 10 years leading up to the purchase. At the company's current rate of investment, it would take 200 years to replace all the distribution lines that needed it, he said. Meanwhile, "Public resistance to privatization schemes of companies was growing," the minutes quote Roels as saying. "The regulatory requirements as regards reduction in contamination from the pipe network with the heavy metals arsenic and lead were steadily growing in severity. Here, too, the extra costs incurred could not always be passed on to customers." In fact, customers had responded to the company's rate hikes by cutting back on their use of water, thus reducing revenue.
"While at the turn of the millennium the capital market had still believed in the theory that utilities would have to evolve into global players, it now seemed that, in effect, there could no longer be any talk of globalization of the water market," the minutes quote Roels as saying. "Instead, the development to be observed was toward a regional focus of the water companies."
The business Roels detailed to the board, according to the minutes, bears little resemblance to the American Water that RWE described when it first announced its divestment plans on Nov. 4, 2005. Then, the company handout touted American Water's "strong platform for growth in an attractive market." RWE at that time said it was selling both American Water and its British division, Thames Water, to focus on its core electricity and gas business in Europe. In October 2006, the Australian private-equity firm Maquarie won an auction to buy Thames--the No. 1 British water company, which serves 15 million customers--for $14.9 billion, a 20 percent premium on the company's value. In the minutes, Roels also details difficulties in England, including an "obsolete" pipe system where 30 percent of the system's water is lost to leaks.
Julia Scharlemann, a spokeswoman for RWE, said by E-mail from the company's headquarters in Essen, Germany, that RWE would have no comment on the excerpts. "Any minutes of RWE Supervisory Board meetings are confidential and were provided to public utility commissions in the United States only on that basis," she said.
Excerpts of the RWE minutes were given to U.S. News by the Washington, D.C.-based public interest group Food and Water Watch, which has been fighting water privatization efforts across the country. "These minutes demonstrate that RWE doesn't believe that private water companies in the United States are a good investment," says the group's executive director, Wenonah Hauter. "The company is dumping their bad investment on Wall Street investors and American ratepayers." Various portions of the redacted minutes also have emerged in the course of the legal wrangling that American Water has faced in its effort to obtain state regulatory approval for its IPO.
The company this month won approval for its IPO from the California Public Utilities Commission, but that commission's division of ratepayer advocate, which opposes the sale as placing an undue financial burden on ratepayers, submitted comments to the record including portions of the minutes. In Kentucky, where American Water has had numerous battles over its operation of Lexington's water system, Attorney General Gregory Stumbo has challenged RWE's efforts to keep the minutes confidential.