The following are some of the highlights from our Profiting in the Water Industry Conference that was held in San Francisco on December 1, 2005.
According to David Schanzer from Janney Montgomery:
- The entire market capitalization of publicly-traded water utilities is $6.5 billion. The total trading volume of the sector is between 600,000 and 700,000 shares per day, about the same level of volume that Cisco trades during the first half hour of trading.
- This year two Unit Investment Trusts were formed and the American Stock Exchange formed an exchange traded fund - all of which were formed to invest in the Water stocks.
- Despite a great deal of consolidation among the publicly-traded water utilities, there remains a tremendous potential for further acquisitions by these companies. There are an estimated 55,000 potential acquisition opportunities for these companies. In Pennsylvania alone, there are roughly 450 potential acquisition opportunities for water utilities.
- The management teams of water utilities should be saluted for not making tempting mistakes such as diversifying by going into the bottled water business and not going into the heating and ventilation business.
According to Zane O. Gresham of Morrison Foerster LLP and Francesca McCann of Stanford Washington Research Group:
- One of the drivers for growing demand for water will simply be population growth. According to the U.S. Census Bureau, the American population is expected to grow 29.2% from 2000 to 2030. The Southwestern U.S., were water is particularly scarce, is expected to experience population growth of nearly 50% during the same period of time.
- Regulators in states such as California are requiring real estate developers to demonstrate that there will be sufficient water availability to service the communities that they wish to develop as a condition for receiving necessary zoning approvals.
- There is tremendous potential for desalinization. Estimates hold that desalinization will be a $95 billion market by 2015. In California, there are 19 proposed desalinization plants on the docket which would yield a projected 240,000 acre-feet per year. However, regulators in California do not want any new desalinization plants to be established along California's coasts.
- Water re-use is the most cost-effective method of generating new water since it is water that has already been extracted and collected and therefore transportation costs are not borne. However, water re-use has been ill-marketed under the banner of "Toilet to Tap" to promote water re-use. Also, health authorities often impose highly stringent requirements on the quality of recycled water.
- Water transfers are becoming a growing issue. For instance, there is expected to be 36% increase in urban water use in California by 2020 and a 7% drop in agriculture water use during the same period of time. Also, environmental regulations, such as those under the federal and California Endangered Species Acts, have resulted in the set aside of water for environmental protection purposes.
- According to the EPA, $151 billion in investment in infrastructure is required to meet legal environmental standards. Also, California public water systems are required to meet standards for 59 organic contaminants; 17 inorganic contaminants; 6 radionuclide contaminants; and, 8 disinfection byproduct contaminants. Further, new EPA drinking water regulations will be released on December 15.
- There are several problems in connection with upgrading or replacing water infrastructure. First, local water services will be responsible for such replacements. However, the projects are so large that state-wide or regional coordination is recommended since they are beyond the ability of local municipalities to finance. In California there is a $40 billion backlog of such upgrades. There is often community opposition and union opposition to such projects. This combination makes getting approval for municipal financing very difficult.
- Water systems are vulnerable to earthquakes and flooding. For example, during the Loma Prieta earthquake, 20 million gallons of raw sewage was dumped into the Oakland Estuary. Also, a flood in that breaks the levees around Sacramento could cause $47 billion in damage, partly because salt water could infiltrate the delta area.
Our next Profiting in the Water Industry Conference will take place in New York City on June 6, 2007. For further information, please visit www.incrementaladvantage.com/conferences or contact Neomi Barazani at neomi@incrementaladvantage.com.
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