Investing in the Water Industry

I just returned from an investors conference sponsored by The Wall Street Transcript. In attendance were CEOs, COOs and CFOs from the largest investor-owned water companies...

Jul 1st, 2004

by Dawn C. Kristof, WWEMA President

I just returned from an investors conference sponsored by The Wall Street Transcript. In attendance were CEOs, COOs and CFOs from the largest investor-owned water companies, along with industry analysts, trade association executives and a broad spectrum of the investor community. The topic was "Investing in the Water Industry".

You could sense an underlying current of enthusiasm building in the room as these water utility executives spoke about their integral role in providing an essential public health service to their consumers, while offering an excellent investment opportunity to their shareholders. The stocks of investor-owned water companies continue to outperform the Dow Jones Industrial Average and there is good reason to believe that this trend will continue into the future. What makes water utility stocks so unique?

First, they have a demonstrated history of outstanding performance with growth rates in the 8% to 10% range and a consistent dividend track record.

Second, the water industry is the only remaining natural monopoly, making it a low risk alternative for investors.

Third, unlike other utilities that have gone through a disruptive deregulation process, the water utility industry provides a service that is "ingested" and thus is likely to remain a regulated industry.

Finally, there are a number of strong underlying fundamentals that make the water industry an attractive investment for long-term growth. These include population growth, which is placing increasing stresses on this finite resource; infrastructure repair and replacement of aging treatment and distribution systems; more stringent environmental standards; heightened water security measures; and the need for greater efficiency in industrial water treatment.

In my remarks at this event, I addressed the subject of population growth, noting that the world's population is expected to double in the next 40 years and that at least 3.5 billion people will run short of water during that time period - almost 10 times as many as in 1995 - driving the demand for water reuse and recycling technologies.

Peter Cook of the National Association of Water Companies described the unprecedented investment that will have to be made over the next 20 years to replace a large portion of our nation's water infrastructure, primarily the pipes in the ground. He cautioned that the impending infrastructure crisis can be averted if action is taken to educate the consumer on the need to pay full cost of service rates, and for water utilities to charge sufficient rates to cover their operating costs and make the necessary infrastructure investments, instead of relying on federal subsidies.

Alan Roberson of the American Water Works Association spoke about the security challenges facing the nation's water utilities, estimating that $1.5 to $2 billion will need to be invested in physical security equipment alone as part of an initial round of improvements to secure facilities from acts of terrorism. Adding these new costs to that which must be spent to meet more complex drinking water regulations and to rehabilitate the infrastructure will demand greater investments on the part of the water utility sector.

Discussion of investment opportunities was not limited to water utility stock. The equipment manufacturing sector was also a subject of great interest among the analysts at this event.

Jerry Woodhouse, president of ITT Sanitaire, described the $30 - $35 billion global water and wastewater equipment industry and ITT's ambitious plans to be a major player in this market.

Notable industrial giants such as GE, Pentair and Siemens are also investing in water equipment companies at a flurried pace, and for good reason.

There is enormous demand for filtration and disinfection technologies, such as UV and ozone, to reduce disinfection byproducts while maintaining microbial protection. Reverse osmosis and membrane technologies will become increasingly important as communities look toward ways to reuse their water resources or create new supplies through desalination. Zero-liquid-discharge systems will be employed by industrial facilities seeking to avoid costly municipal surcharges. Real-time monitoring technology and telemetry systems will expand with the need for heightened security. In situ repair and replacement of pipelines will be an essential part of infrastructure rehabilitation plans.

These are but a few of the technologies that are attracting the attention of new players to the market, looking for ways to invest in the water industry. The market continues to be ripe for consolidation and the investment community appears to be positioned to take a more active role in being part of shaping this industry's future. Expect exciting times ahead!

About the author:
Dawn Kristof is president of the Water and Wastewater Equipment Manufacturers Association. WWEMA is a Washington-D.C. based, non-profit trade association founded in 1908 to be the national voice for the water and wastewater equipment industry.

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