Suez sees growth opportunities in Pennsylvania
The big regulated water utilities in Pennsylvania regularly grab headlines for buying or taking over management of government-owned systems.
Don’t expect the trends to change, said Eric Gernath, CEO of New Jersey-based Suez North America, a company with significant water operations in the Harrisburg area.
In fact, they will likely accelerate in the years ahead, he said, as municipalities struggle to balance aging infrastructure needs with employee pensions, benefit costs and long-term debt obligations.
At some point, the burden of making repairs to old water and wastewater systems becomes too big for many local governments, which leads them to strike deals with for-profit operators such as Suez.
Three years ago, Suez inked a 50-year leasing deal with Middletown to manage the borough’s water and wastewater operations. Suez brought in a private-equity partner to provide upfront funds to help the Dauphin County borough cover its debts, plus additional resources to pay for annual capital investments
The goal of private deals, whether they involve a lease or a purchase, is to keep the systems in better shape than they might have been under local management, while stabilizing long-term rates for customers.
The needed improvements put upward pressure on rates. However, new customers often are promised temporary rate freezes, for maybe a year or two, as systems transition to new ownership. As a result, the rate pressure may fall on customers of the company’s other systems.
How companies strike a balance among all its customers is an issue closely watched by people like Tanya McCloskey, acting consumer advocate for the Pennsylvania Office of Consumer Advocate. Watchdogs often perk up when companies file requests for rate increases with the Pennsylvania Public Utility Commission.
However, she added that acquisitions of municipal authorities by private-sector utilities are just beginning in Pennsylvania. So it’s too early to say how the trend might play out.
Change in the law
With the passage of Act 11 of 2012, the commonwealth adopted the view that private deals are positive for ratepayers. Act 11 made it more appealing for private-sector water companies to buy wastewater assets, even those in need of major repairs. The law allows these companies, which have the capital and expertise, to spread investments at a newly acquired sewer plant over all customers in their system. They can do the same with water-system deals.
Meanwhile, the companies continue to invest in routine maintenance of service lines that justify periodic rate increases before the PUC.
“The more proactive you are, the better it is from an economic standpoint,” said Gernath, who visited the Pennsylvania subsidiary’s headquarters in Lower Paxton Township for the first time this month.
He hopes long-term lease deals, or public-private partnerships, will catch on in Pennsylvania. They might under the Trump administration. The president has pushed to tap private money as the best way to leverage federal funds and rebuild America’s aging infrastructure.
Business leaders such as Gene Barr, president and CEO of the Pennsylvania Chamber of Business and Industry, support the move to more privately run systems. The reality is that infrastructure is not cheap and government can’t fund all needs. It may take a mix of public and private funds to accelerate the pace of improvements.
“We have a lot of aging infrastructure in this country, and one way or another we’ll have to put money into it,” Barr said.
The American Society of Civil Engineers in a recent infrastructure report card gave the country a cumulative grade of a D+ . That included a D for drinking water and D+ for wastewater.
Trump has proposed using $200 billion in federal funds to leverage an additional $800 billion in spending by the private sector.
“It’s still early, but there has been a clear message that P3s are encouraged,” Gernath said. “No one is saying it will be a quick process, but it’s the momentum which matters.”
Suez North America, part of global waste and water group Suez, based in France, already manages systems for about 75 local governments across the country. Those systems serve about 5 million people in the U.S. The company also owns and operates treatment facilities in six states with regulated water utilities. The six states, which include Pennsylvania, account for another 2.5 million people.
Like Pennsylvania American Water, the state’s largest water utility, Suez should also see more opportunities to expand its footprint through acquisitions of smaller systems, Gernath said.
Pennsylvania American, which provides water and wastewater services to about 2.3 million people in Pennsylvania, has grown primarily through acquisitions. The Derry Township-based company acquired the Scranton Sewer Authority at the end of 2016. Parent company American Water, based in New Jersey, also announced recent water system acquisitions in New Jersey and California.
Suez, by comparison, serves about 168,000 people in Pennsylvania. Most of its customers are concentrated in Cumberland, Dauphin, Perry and York counties, including about 100,000 in Dauphin County. The rest are spread between Columbia, Luzerne, Schuylkill and Wyoming counties.
Suez’s Pennsylvania operations finished 2016 with $44.2 million in revenue. Pennsylvania American Water did $639 million last year.
In Pennsylvania, Suez has continued to boost its investment in infrastructure improvements, with much of the work representing water main and service line replacements.
Over the past decade, the company has spent about $150 million in Pennsylvania operations. About $32 million of the total went toward a new water treatment plant in Bloomsburg, Columbia County, which opened at the end of 2016. The rest has been spent on annual maintenance.
In the previous decade, the company built a new treatment plant in Hummelstown, which cost about $17 million.
This year Suez plans to spend $23 million in Pennsylvania, substantially more than the 10-year average. Gernath said the higher amount, which he expects the company to continue spending year after year, is needed because there are still a lot of old pipes in the ground in areas that weren’t projected to grow as fast as they have. And most of the old lines, which are about half the size of new pipes, are quickly deteriorating and need to be replaced.
“Some of the choices made decades ago didn’t last as long as they were supposed to,” Gernath said.
Through its regulated water business, Suez is replacing pipes in several municipalities across the Harrisburg area this year, including Mechanicsburg in Cumberland County; Lower Paxton, Susquehanna and Swatara townships in Dauphin County; and Newberry Township in York County. The projects in Mechanicsburg and Newberry Township are among the company’s biggest in Central Pennsylvania. Most of the projects overall are in residential areas.
Utilities also are spending more on technology, including smart meters and digital tools to better zoom in on problem areas in their systems. To improve the efficiency of its systems, Suez recently hired data analysts in Pennsylvania to sift through the massive amounts of information that are being collected around the clock.
And Suez is about to get bigger. In March, the parent company announced the planned acquisition of GE Water, an industrial water treatment business owned by General Electric, for $3.4 billion. Suez expects to close on that deal this summer and merge GE with its global industrial services. About half of that industrial business is in North America.