Water companies lap up U.S. acquisitions

NEW YORK, May 18 (Reuters) - Consolidation within the U.S.water industry is moving ahead in dribs and drabs as larger companies absorb their smaller brethren in an effort to cut

costs and save money.

"Consolidation is one of the ways that the water profession is addressing the financial and regulatory burdens due to the continuing effort to improve water quality throughout the country," said Doug Marsano, a spokesman for the American Water Works Association, a scientific and educational group that promotes safe water Most of the more than 54,000 water

systems in the U.S. are small, serving fewer than 5,000 customers, or "connections" in water industry parlance. About 60 percent are municipally owned.

"It's extremely fragmented," said A.G. Edwards & Son analyst Tim Winter. "And it's early innings of the ball game."

Economies of scale play a large part in the acquisition of smaller water companies, he added.

Companies must contend not only with the high costs of maintaining underground pipes, but also with the financial burden associated with complying with increasingly stringent

water quality standards. At the moment, every water company has to comply with the 1996 Safe Water Drinking Act.

PHILADELPHIA SUBURBAN LEADS CHARGE At the forefront of the acquisition push is Philadelphia Suburban Co., which is 17 percent owned by Vivendi Universal , the world's largest water company, whose water and wastewater services

serve 100 million customers in 100 countries.

Philadelphia Suburban added 33,000 new customers in the first four months of this year through six acquisitions for a total of $3.5 million dollars in stock and cash.

"It's our bread and butter," said Chairman and President Nicholas DeBenedictis.

"When you make a lot a acquisitions and do a lot of capital improvements," he added, "that's where you get rate increases."

The company now has about 600,000 customers across six states.

Philadelphia Suburban expects to make between 15 and 20 purchases in 2001, in keeping with a plan that calls for 4 percent annual growth, at a cost of between between $1,000

and $2,500 per customer.

DeBenedictis is adept at transforming Philadelphia Suburban's underperforming assets into cash cows. The company recently sold some land in Pennsylvania it was not using for actual water operations for $3.5 million for development of a senior citizen complex.

"It's the flip side of reinvestment," DeBenedictis said. "It saves us from selling more stock and diluting earnings."

The company is now providing the complex with water, he added, so it also increased its customer base and water revenues.

SOME CITIES RESIST SELLING American Water Works, another active buyer, is larger and more sprawling than Philadelphia Suburban, serving more than 2.6 million people in 23 states, including California.

In March, it paid about $48 million for Coatesville, Pennsylvania's water and waste water system, adding about 15,000 new clients.

To serve its growing customer base as well as to cut back-office costs, the company in April opened a nationalcustomer service center in Alton, Illinois. By 2002, it expects

the center to serve all of its customers, consolidating a function now run through a variety of offices.

But it hasn't been all smooth sailing.

American Water Works recently terminated its $390 million purchase of SJW Corp. , parent company of San Jose Water, citing delays from California regulators.

Analysts said some municipalities have resisted selling their water systems despite added costs from increased regulation and the money a sale would generate.

"Municipal education has to be done," said A.G. Edwards' Winter, noting that in Birmingham, Alabama, politics got in the way of the sale of the water system.

"They could have easily raised $400 million toward public schools or other municipal uses," he said.