Controversy brews over utility's sale in Valencia.

A water war is brewing in the sprawling northern L.A. communities of Valencia, Stevenson Ranch and Saugus as leveraged buyout Firm Cerberus Capital Management LP tries to seal from the public details of its proposed purchase of a local water utility.

New York-based Cerberus is on the cusp of becoming the biggest landowner in the Santa Clarita Valley through its proposed $4.2 billion leveraged buyout of LNR Property Corp.

LNR is half-owner of Newhall Land and Farming Co., the developer that created Valencia from desert and farmlands.

As part of the deal, Cerberus also inherits a 50 percent interest in Valencia Water Co., a 40-year-old local utility that provides water to the 20,855-home Newhall Ranch project and serves 89,000 water customers. (The other half-owner is Newhall Land's former parent, Miami-based Lennar Corp.)

Environmentalists and local water officials who have butted heads with Valencia Water and Newhall Land in the past are concerned that the involvement of Cerberus will make the water company even less responsive to their views--especially since, as a private equity firm, Cerberus' financial makeup is blocked from public view.

A key source of friction is dealing with the presence of the toxin perchiorate in groundwater.

"The concern is that there will be pressure to not properly disclose the perchlorate problem and that's what everyone's worried about," said Lynne Plambeck, president of the Newhall County Water District. "Is it going to be about the public's health concerns coming first, or about new development and the bottom line?"

Mark Neporent, chief operating officer and senior managing director at Cerberus, declined to comment in an e-mail. A lawyer for LNR Property did not return calls.

In a 170-page Public Utilities Commission application seeking permission to take control of the water company, Cerberus and a unit it has formed stated that they "will have little or no involvement in the day-to-day operations of Valencia, (and) there will be no impact on Valencia's ratepayers."

Marlee Lauffee, a spokeswoman for Newhall Land, said she expected no changes at the water company with the Cerberus acquisition because Lennar retains 50 percent control of Valencia Water and is its managing general partner.

"None of the service areas, the mission or the rates will change," she said. "The end result to the consumer is really a non-issue. But because somebody else is buying us, they had to file (the PUC application.)"

The application, filed in late December, asks the commission to approve the transfer of LNR's 50 percent stake in Valencia Water on the grounds that it is "in the public interest."

Cerberus has asked the PUC to keep its financial statements, including pro forma earnings and balance sheet information, confidential and under seal from the public. The companies also are requesting an exemption from environmental review under the California Environmental Quality Act, claiming they are not proposing any changes to the water agency.

John Gibler, a researcher at Public Citizen in Oakland, said the PUC filing has raised a red flag for watchdog groups that are seeing increased interest in public utilities by private investment firms.

"This filing, in particular, looks like a shell game with the investment firm ultimately owning half of the water company," said Gibler. "If you read the filing, Cerberus simply assumes the purchase of Valencia is a done deal."

Water is a particularly contentious issue in semi-rural Santa Clarita, 30 miles north of Los Angeles. Developers have long maintained there's plenty to go around while environmentalists claim water projections are inflated.

Newhall Land also is struggling to control a plume of perchlorate, a toxic chemical used in rocket fuel and explosives, from the former Whittaker-Bermite explosives factory.

Valencia is developing a plan to remove perchlorate from the groundwater and it expects to begin on-site remediation to protect its active wells by 2006.

(A recent study by a panel of the National Academy of Sciences found that the chemical is much safer than previously thought. It is safe for consumption at levels 20 times the standard currently being considered by the Environmental Protection Agency.)

She maintains that Cerberus' PUC filing shows the firm has violated at least one of 18 requirements set by regulators in 2003 when control of Valencia Water was transferred to LNR and Lennar as part of their $990 million purchase of Newhall Land.

That agreement forbids any future merger or acquisition until regulators sign off on the transfer-of-power of the water company.

But in its PUC application, Cerberus acknowledges that the purchase of LNR, slated for late January, will occur before the commission makes a final ruling on Valencia. "A final commission decision will not issue (sic) before the transaction takes place," the filing states.

Terrie Prosper, a spokeswoman for the PUC, said no date has been set for a pre-hearing conference on the Valencia Water transfer. The five-member commission has two vacant seats; Gov. Arnold Schwarzenegger has appointed replacements, but they have not yet been sworn in.

"If they don't wait for the approval from the PUC, then they are not complying with a set rules specified as part of the transfer of power," Plembeck said. "So if they are not going to follow one rule, what makes anyone think they will follow the other rules?"

The companies said in the application that they have no knowledge of environmental claims or hazardous materials involving the water agency that would result in any liabilities to the company--despite issues surrounding perchlorate.

"Frankly, it's hard to see how they won't push Valencia around if they are beholden to produce some massive amount of investment return," Plerubeck said. "If water pollution gets in the way of that, what's going to happen?"

Money targets utilities

Watchdog groups are wary because several large investment funds have targeted utilities as potential money makers.

David Bonderman's $13 billion investment fund Texas Pacific Group is trying to purchase electric utility Portland General Electric from Enron Corp. The Oregon Public Utilities Commission sealed most of the financial records in that case at the request of Texas Pacific. The deal has drawn concern from citizens and Oregon's governor because Texas Pacific developed a plan to increase profits at Portland General Electric through a 50 percent cut in spending and a 26 percent reduction in customer service, according to the Oregon newspaper Wilamette Week.

Last year, New York buyout firm Kohlberg Kravis Roberts & Co. tried unsuccessfully to buy Tucson Electric Power. Arizona regulators struck down the deal, saying it posed a risk to ratepayers who need reliable electricity service and reasonable prices.

Cerberus, with $14 billion in its fund and a reputation for buying distressed companies through a variety of debt instruments, has churned a number of big deals in the past six months.

In addition to LNR Property, it bought retailer Mervyn's with two other partners for $1.65 billion in cash. Pharmaceutical giant Bayer AG sold its plasma products business to Cerberus and Ampersand Ventures for roughly $590 million. It has recently made investments in German TV rental company Boxclever Ltd., GDC Automotive, Cingular Interactive LP and Formica Corp.

The buyout firm--named after the mythical three-headed guard dog of the underworld--has longstanding ties to L.A.'s distressed debt community.

Stephen Feinberg, the managing member of Cerberus Associates LLC., the general partner of Cerberus, managed pools of capital for Gruntai & Co. and began his career at Drexel Burnham Lambert.

Managing Director Steven Mayer joined Cerberus in 2002 from Gores Technology Group, where he was executive managing director overseeing investments in technology. At least two executives at Cerberus California Inc., an affiliate with offices in Brentwood, hailed from investment banking firm Houlihan Lokey Howard & Zukin. Kevin Cross was a former managing director at Houlihan and Michael Grenier was a former senior vice president.