Daily Archives: November 6, 2005

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Why RWE is selling

RWE AG of Germany is selling not only its American Water Works subsidiary, but also its British water company, RWE Thames Water.  But why?
 
Reuters reports the reason is to “allow RWE to focus on its more profitable electricity and gas businesses.”  Specifically (emphasis mine below):
“The concept of a global water player has not really worked,” [RWE Chief Executive Harry] Roels said, pointing to limited synergies between North American, UK water and European energy business.
 
But the firm said Thames Water’s continental European activities, excluding Pridesa in Spain, would be integrated into its energy unit because they offered cost-efficiency synergies.
 
“Scale and synergy effects in the water business are regional not global,” Roels said.
 
He said the sale of its water business would make the company less capital intensive and provide more financial flexibility with substantially improved free cash flows.
 
RWE Thames Water’s operating profit dipped 4.8 percent to 619 million euros in the six months to June. The unit accounted for about 18 percent of RWE’s group operating profit, and about a quarter of RWE’s estimated enterprise value.
 
Thames Water and American Water, its U.S. water unit, face high infrastructure investments in the coming years, but the ability to raise prices to pay for it are limited by regulators.
These statements raise questions for Peoria as its next opportunity to purchase the water company approaches in a few years.  How much of the “high infrastructure investment” is needed in Peoria?  And will water bills be lower under public ownership by a cash-strapped city in such circumstances or under ownership of a large private company that has the leverage to make up for those costs in other, more profitable communities?  Roels said that “scale and synergy effects in the water business are regional not global,” and, we could add, not local either.  For Peoria to afford the purchase price and infrastructure investments, will not rates be prohibitively high?  And will that be one more reason families and businesses will choose not to live or locate in Peoria?

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Water company takeover attempt not unique

The [city] council’s vote to abandon takeover [of the water company] should have settled the issue. [V]oters went to the polls and changed the makeup of the city council. That new council said no to local ownership.  Even so, local ownership advocates continued to push for a city takeover.
The story sounds so familiar, but that quote isn’t from any Peoria publication.  It’s from the Kentucky Kernel in Lexington, Ky.  The water company in Lexington is Kentucky American Water, owned by the same German company that owns Illinois American Water, RWE AG.  A lot of the same arguments are made there as here.  Proponents of public ownership label RWE “as some German army massed to sack Lexington and take away the water entirely,” while opponents point out that “city governments are not subject to [commission] rate checks, and so a city government determined to use water revenue to enrich government coffers for other programs . . . would be unchecked.”
 
The big difference is the way each community is trying to take over the company.  In Peoria, there’s a contract that gives the city the right to repurchase the water company.  In Lexington, they’re trying to take over the utility using eminent domain.  That means they’ll have to condemn the water works in order to take it over.
 
Now that RWE has decided to put its American subsidiaries up for sale, Peoria and Lexington are thinking along similar lines.  “Maybe we can get this at a cheaper price,” third district councilman Bob Manning said in yesterday’s Journal Star article.  According to the Louisville Courier Journal, Lexington Urban County Councilwoman Linda Gorton said, “If they would be willing to sell by pieces, it would be a golden opportunity.”
 
And that is the question: will RWE sell all 83 water systems to a single owner, or will they sell some or all of them separately?  That decision will have a big impact on the next step Peoria and Lexington make.  Reuters reports, “In a statement RWE said options for the water business include an initial public offering and a sale to financial investors.”

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Water Company For Sale (or as they say in Weaver Ridge: “available”)

The Journal Star reports that Illinois American Water Company is for sale.  Bill Dennis, still upset over the city council’s wise decision not to buy the company, is predicting it will sell for more than $220 million.  Unlikely.  Remember, that inflated price was just for public buyers of the water company.  A private buyer will undoubtedly get a better deal.
 
And speaking of private buyers, Merle Widmer has an excellent post on this topic, as usual.  He suggests that the Peoria Area Advancement Group (PAAG), which donated a million dollars to the city to study buyout feasibility, take advantage of this golden opportunity to purchase the company and make all those profits for themselves.  There are so many advantages, as Merle deftly points out:  exorbitant profits, a lapdog ICC to give you all the rate increases you want just for the asking, a guaranteed revenue stream, the opportunity to make enormous profit when the City buys it out in a few years.  Plus, ownership would be local, which should give Chuck Grayeb some temporary relief.  He about pops an artery every time he talks about them dirty Germans owning our water. 
 
Yes sir, when I think of what a financial boon the water company is, I wonder why the Germans would want to sell it off.  I, like Merle, expect to see PAAG and other buyout proponents jumping on the opportunity to purchase this little gem.