Troubled utilities can be profitable

Successful business model adaptable

Pittsburgh Post-Gazette

Why would anyone want to buy a troubled water utility with rotting pipes, angry customers and $1 billion of debt?

Because if you’ve got the time and the money, you’ve got a pretty solid formula for profit.

“What makes a utility that is struggling attractive is that you have well-established needs to make necessary infrastructure investments that are recoverable through customer rates,” said Heike Doerr, principal analyst with S&P Global Market Intelligence.

In other words, the more that needs to be fixed, the more a utility can invest and recover at a rate of return that hovers around 10 percent on average.

That’s why private equitybacked infrastructure funds don’t shy away from aging utility systems like the Pittsburgh Water and Sewer Authority. They flock to them.

Peoples Natural Gas, the North Shore-based utility that has been vying for a deal to invest in the PWSA, wasn’t all that different from the water system when it was acquired by the SteelRiver Infrastructure Fund in 2008, said Peoples CEO Morgan O’Brien.

That’s why it would be a neat fit for the private equity fund, he said this week. While his proposal hasn’t gotten off the ground, he thinks it’s instructive to look at SteelRiver’s purchase of Peoples, T.W. Phillips in 2010 and Equitable Gas in 2013.

All were underfunded utilities with aging infrastructure that have been turned around with aggressive pipeline replacement programs and better management.

“It’s the same model,” he said. “It’s water, not gas, but it’s replacing old pipes with new pipes.”

San Francisco-based SteelRiver, which formed a decade ago, also owns electric transmission lines in California, a set of port terminals in the South, and a railroad company that operates in 13 states. It specifically targets infrastructure