* Will pay $150 mln upfront with United Water
* Commits an additional $157 mln over a 30-year concession
By Greg Roumeliotis
Dec 20 Private equity firm KKR & Co LP
on Thursday kicked off a joint venture with Suez Environment
to run the water and wastewater systems of a New
Jersey city it hopes will become a model for cash-strapped local
authorities in the United States.
KKR and Suez subsidiary United Water will pay $150 million
to the city of Bayonne for the rights to a 40-year concession,
allowing them to collect water and wastewater revenues but also
requiring them to come up with another $157 million over the
life of the contract to manage and upgrade the systems.
The cost of repairing and expanding U.S. drinking water
infrastructure will top $1 trillion in the next 25 years, an
expense that is likely to be met primarily through higher water
bills and local fees, according to the American Water Works
Association, a non-profit think tank.
The Environmental Protection Agency estimated in 2007 that
the U.S. must invest $390 billion over the next 20 years to
update or replace aging wastewater infrastructure.
But the U.S water industry, run for the most part by the
public sector, remains highly fragmented, comprising about
52,000 water systems - over half of which serve a population of
500 or less - and 16,000 wastewater facilities.
Concessions such as the one awarded by Bayonne are rare due
to political opposition or reluctance from local authorities to
give up control of what they see as essential infrastructure,
especially when they can tap the municipal bond market for their
"We are slowly starting to see more cities looking at these
partnerships given all the fiscal pressures they're facing. But
for every three cities that evaluate these options seriously, at
least two ultimately can't get to the finish line," said Brandon
Freiman, a principal at KKR's energy and infrastructure team.
"The one that gets to the finish line generally appreciates
that these are win-win deals that are good for all constituents.
So while we think that there should be more of these deals,
progress has been very slow," Freiman added.
Last week, another private equity firm, Table Rock Capital,
said it had finalized a 30-year concession worth more than $300
million, in partnership with Veolia Water, to run the
water and wastewater systems of the city of Rialto in
Bayonne will pay off over $130 million of its debt with the
money it gets from KKR and United Water, cutting its municipal
debt burden in half. It will see the two firms take over more
than 96 miles of water mains and more than 83 miles of sewers
serving the city's 63,000 residents.
Consumers and businesses in Bayonne will see an initial 8.5
percent bump in their water and sewer charges, translating to an
additional $5 per month for residential users. Rates will then
freeze till January 2015 and then rise annually based on an
"The partnership will invest in our aging infrastructure,
and provide resources that the Bayonne Municipal Utilities
Authority could not otherwise deliver. Simply put, this
transaction will result in a more efficient and reliable water
and sewer system for today and future generations," the
authority's executive director Steve Gallo said.
Infrastructure investments of such kind usually deliver
internal rates of return of a little over 10 percent, lower than
those typically seen in the buyouts of companies but much safer
in their risk profile.
KKR will fund 90 percent of the joint venture with United
Water. Two thirds of the investment will be financed with debt
on an average interest rate of about 5 percent.
KKR, which has $66.3 billion in assets under management, is
making the investment through a dedicated infrastructure fund
pool of $2.4 billion, that includes dedicated accounts with some
of its investors.
Nassau County, located on Long Island just east of New York
City, and among the wealthiest counties in the U.S., is
negotiating a similar water and wastewater concession with
United Water to help address its budget deficits.