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Is there any way to make a water utility into a glamour stock? Nick DeBenedictis is doing the best he can.

The water utility industry, with $64 billion of revenue divided among 53,000 systems, is fragmented for a reason. There are no national interconnecting grid systems like those found in electric utilities and not much in the way of economies of scale. It's no way to get rich quick, either. A small water utility has to move a mountain of paperwork to get a raise from a state utility commission, and by the time it gets permission for new rates they're sometimes obsolete.

Nicholas DeBenedictis, chief executive of water utility Aqua America in Bryn Mawr, Pa., is making the most of the situation. Starting with a base that used to be known as Philadelphia Suburban Corp., he has built up a patchwork company serving 2.5 million customers in 13 states. It made $80 million last year on revenue of $442 million. Since 1992 Aqua has bought 175 small and medium-size systems. Reflecting the mediocre economics of regulated utilities, Aqua was able to buy these properties at rate base--or plant, property and equipment less contributions by builders and customers to construction--or below.

Despite the evidently high return on sales, that $80 million is in fact rather meager, given that the business is an intense consumer of capital. For every $1 Aqua's operations generated over the last five years, the company spent $1.19 upgrading the equipment. It adds up: Remotely readable meters save manpower but cost $60 apiece; an ultraviolet disinfecting system that can handle 10 million gallons a day runs $2 million.

How did Aqua cover the negative free cash flow, to say nothing of its dividends ($46 million last year)? By going into hock. Aqua owes (counting only interest- bearing debt) $920 million to bondholders and other creditors, a sum that has climbed 212% since DeBenedictis took over. "They do these deals with the precision of a GE assembly line," says Michael Gaugler, an analyst at investment firm Boenning & Scattergood outside Philadelphia .

Helping Aqua's top line are rate increases. Last year they averaged 4%, but then the rate petitions are spaced two years apart. The result was average revenue of $529 per customer in 2004--which includes fees for both drinking water and wastewater--up 8% from the year before.

DeBenedictis, 59, has a sharp eye for a bargain. After getting a B.A. in business administration and an M.S. in environmental engineering and science from Philadelphia 's Drexel University , he ran his family's insurance business following the death of his father. He learned to deal with bureaucracies by holding two cabinet jobs in the 1980s under Pennsylvania Governor Richard Thornburgh . He then served as a vice president of what used to be called Philadelphia Electric Co. (a utility now part of Exelon) before joining Aqua, as its chief, in 1992.

Eighty-six percent of the market is served by municipal governments, but occasionally utilities come up for sale in privatizations. Typically, a small city that wants to outsource the water utility--and pick up some cash in the bargain--will sell the assets outright; larger cities tend to offer long-term management contracts to a for-profit utility company. Competing with Aqua on the smaller transactions are some European firms with bigger purses and even bigger ambitions.

In the late 1990s companies like Germany's RWE and France's Suez spent billions of dollars buying U.S. water assets, including American Water Works and United Water. (At one point Vivendi owned 20% of Aqua, before selling it off in 2002.) Such deals were spurred, in part, by a 1997 change in the federal tax code that allowed cities to finance water pipes with tax-exempt bonds while allowing a profitmaking firm a management contract for up to 20 years. Foreign-owned companies now serve an estimated 40 million U.S. customers, raking in annual revenues of $3.5 billion or so.

Suez and RWE seem mainly interested in pursuing management contracts with large cities, a business Aqua wants no part of. Sometimes those deals turn sour-- as when Atlanta broke a 20-year contract with Suez over who was responsible for $80 million worth of infrastructure repairs. The critical effect of competition has been to drive up the price of large water systems, but it is starting to affect medium-size ones as well. Last fall, for example, DeBenedictis walked away from Tecon Water Holdings, in eastern Texas , with 26,000 customers, refusing to pay $63 million for the assets, or 11% above the rate base.

Aqua manages $1.9 billion worth of plants and equipment, and it's going to need more capital. (Good thing its stock trades at 30 times trailing earnings, rich for a regulated utility.) The Environmental Protection Agency estimates that $500 billion in repairs and upgrades around the country will be needed over the next two decades. Congress may ease some of the pressure; a bill, not yet introduced in the House, would lift the federally mandated state volume cap on private-activity bonds for water and sewer improvements, relieving private owners of some expenses for upkeep and repairs. Downside: The law would probably bring Aqua face-to-face with its more formidable foreign rivals. For now, DeBenedictis just plans to keep buying. "All I can do," he says, "is make my sandbox as large as I can."