Private Firm Makes Bid for Water District : Utilities: Subsidiary of American Water Works Co. would pay more than $300 million for the beleaguered Santa Margarita agency and assume its outstanding debt.

In a surprise announcement, a large private water company said Thursday it has offered to buy the troubled Santa Margarita Water District for a price “in excess of $300 million” if it can win the approval of the state’s Public Utilities Commission.

The California-American Water Co. of Chula Vista, a subsidiary of New Jersey-based American Water Works Co., the largest investor-owned water utility in the country, said it would also assume all of the district’s estimated $370 million in outstanding debt.

If the proposed deal is worked out, the company would provide--without any rate increases for three years--the same water and sewer services offered by the scandal-plagued South County district, which serves Rancho Santa Margarita, Coto de Caza, small parts of San Juan Capistrano and San Clemente, and the 40,000-acre Rancho Mission Viejo.

The announcement came only one day after the Orange County Grand Jury recommended that the district be consolidated with four other county water agencies and three months after its former two top managers were indicted on criminal conflict-of-interest charges.

Two other top district officials remain under investigation by the Orange County district attorney’s office for failing to report gifts from contractors in excess of state limits and then continuing to influence decisions that benefited the gift-giving firms.

The scandal ultimately led to the election of an entirely new five-member board, which in April fired its longtime general counsel.

Ted Jones, the president of California-American Water Co., said he was aware of the grand jury report and the scandal that has embroiled the district for 17 months but pressed forward because of Santa Margarita’s long-term potential. The district now serves a population of about 80,000 residents but is located in one of the county’s fastest-growing areas, which is expected to soon be home to 180,000 residents.

“We are obviously aware that these things had occurred, but it doesn’t have any impact on us,” Jones said. “We certainly have an interest in such a growing area. . . . We think we have something to offer.”

Jones and Nancy Rollins, a company spokeswoman, said their representatives have not talked to any of the five district board members but have discussed the offer with John J. Schatz, the general manager, and officials at the Santa Margarita Co., the large South County developer that is building Rancho Santa Margarita and has major long-range plans to expand in the area.

“We are moving forward with the premise that Mr. Schatz would take this offer to the board and, hopefully, we would be able to meet with them soon,” Rollins said.

In a written statement, however, Schatz said the district has not been provided a copy of the proposal, nor has it been “contacted by the company to provide any information or input.”

“Given the recent elections of the new . . . board of directors (and) the hiring of a new general manager . . . it seems premature to look at the issue,” Schatz said.

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Although the announcement caught district board members and other water industry officials by surprise, at least one director said he would welcome any proposals of help. No purchase could go forward without board approval.

“I just caught wind of this yesterday--that something was going on,” said Director Bob Lay of Mission Viejo, who added that he was sure none of the other members of the board were any better informed. “I think it’s an interesting idea. I’m a believer that if privatization can make this more efficient, let’s talk about it. However, this is very preliminary.”

Lay described the district as financially troubled because of decisions made by the previous board. But he said the district was battling back and would be able to make a large June 30 bond payment--estimated to be $21 million--that some insiders had doubted could be paid.

He added that the directors were seriously considering some tax increases to help pull the agency out of the hole.

“There are definitely some challenges for us . . . but I would not consider we are anywhere near a crisis,” Lay said. “All this can be worked out . . . but it would have been a lot easier if our predecessors had been paying attention.”

John V. Foley, general manager of the neighboring Moulton Niguel Water District and chairman of the board of directors of the powerful Metropolitan Water District of Southern California, said he heard about the offer Thursday morning.

“It could be a windfall for the residents,” Foley said. “The district was apparently planning to raise the tax rates to buy down that debt. . . . The key here is if they have enough cash to pay down the problem.”

The danger would be if the company came in and bled the district’s assets “and then ran,” Foley said.

About 15 years ago, the public El Toro Water District purchased the Rossmoor water and sewer districts in what is now Leisure World, but Foley said he had never heard of a private company buying a public water district.

The purchase would have to be approved by the county’s Local Agency Formation Commission and the Public Utilities Commission. A PUC spokeswoman said these purchases “happen all the time.”

The PUC approval would be based on “what’s best for the district’s customers,” said spokeswoman Kyle Devine.

Rollins said her company had never before purchased a public water agency in California. The company arrived in California in 1966 by purchasing the private California Water and Telephone Co. and is now well-established here, with water companies in Imperial Beach, Coronado, San Marino, Duarte, Thousand Oaks and “all of the Monterey Peninsula.”

Jones said his company is financially sound and “has been doing its own work in evaluating the finances” of the Santa Margarita district. The private company would use its own assets and “use cash that’s available in the (Santa Margarita) operation to pay off the outstanding debt.”

American Water Works Co. serves a population of more than 6 million people in 721 communities in 21 states.