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Water Report


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Water Report

  1. 1. G AT E WAY R E P O RT S November 15, 2004 a n a ff i l i a t e o f T h e Wa l l St re e t Tr a n s c r i p t Richard Tullo Senior Research Analyst T H E W AT E R E C O N O M Y R E P O R T EXECUTIVE SUMMARY: Gateway Reports is committed to offering the investment community comprehensive research on compelling investment themes and is proud to present our 2004 Water Economy report. Globally, the Water Industry is a dynamic $400 billion business that few investors are focused on. However, for those who have water industry exposure, the investment has been worthwhile. Since 1984 the industry has rewarded its followers with market beating returns and, while past performance is no indication of future returns, there are reasons to be optimistic about the Water Industry going forward. This Water Economy Report will cover: Trends in the Global Water Industry Trends in the Domestic Water Industry The Historical Returns Gained from Investing in the Water Economy Introduce the Gateway Reports’ Water Economy Index Discussions of the Domestic Regulatory Environment The 2004 Water Economy Report will highlight the domestic water industry including equity investment opportunities in: Water Utilities Water Infrastructure Specialty Chemicals Emerging Technologies Bottled Water The table below is a list of just some of the companies that participate in the Water Economy: A B B ** E ld o ra d o A rte s ia n S p r in g s N e s tle ’* A m e r ic a n S ta te s W a te r * E n v ir o -V o ra x e l P a ll C o r p .* A m ero n * * F le x ib le S o lu tio n s P e p s ic o * A q u a A m e ric a * * F lo s e r v P e rk in E lm e r A q u a C e ll F ra n k lin E le c tr ic P IC O A qua D yne G e n e ra l E le c tr ic C o .* * R o b b in s a n d M y e rs A r c h C h e m ic a l* * G la c ie r W a te r S e r v ic e s S o u th W e s te rn W a te r C o . A s h la n d * H y d r o F lo Suez** A r te s ia n R e s o u rc e s C o rp . * I n te g ra te d W a te r R e s o u r c e s S W J C o rp * * B a d g e r M e te r* * I n s titu fo r m T e c h T e n n e s s e e A m e r ic a n W a te r B IW L T D * I n v e n s y s P lc .* * T e tra T e c h C a d iz I o n ic s C o rp . * * T h e rm o E n e rg y C a lg o n C a r b o n C o rp * Isco T ro ja n T e c h n o lo g ie s * C a lifo r n ia W a te r S e rv ic e G rp . * * IT T * * U n d e rg ro u n d S o lu tio n s C a p tiv e D e io n iz a tio n T e c h n o lo g ie s I tro n V a lm o n t I n d u s trie s C la c o r L a y n e C h ris te s e n V erm o n t P u re C le a n W a te r T e c h n o lo g ie s L in d s e y M a n u fa c tu rin g V e o lia * * C o c a C o la * L in se y M F G . W EDCO AG C o n n e c tic u t W a te r M e t P ro W a te r P ik C u n o In c . * M id d le s e x W a te r W a tts W a te r T e c h * * C o n s o lid a te d W a te r C o M illa p o r e Y o rk W a te r C o m p a n y * D io n e x M y k r o lis * Zenon* *Indicates company mentioned in the Water Economy 2004 Report **Indicates company highlighted in the water economy 2004 Report
  2. 2. Water Economy Stock Performance: The Undiscovered Star of 2004 There are many hackneyed expressions regarding water. tors from investing in the Water Industry due to liquidity Every water industry report published seems to incorpo- considerations and/or legal limits placed on managers for rate one of these worn-out expressions, but that is all wa- owning foreign equities in their portfolios. In addition to ter under the bridge. Over the last year or so, the Water the Water Industry’s lack of investor visibility, the Water Industry has started to receive a drop of recognition by the Industry’s capital investment cycle is very long, as it is financial media for its steady flow of returns to investors measured in decades, not quarters. Investors today tend to and also for its growth potential based on the necessity for hold stocks for the short-term and focus on contemporane- increased infrastructure spending. Gateway Reports be- ous data points and often overlook the ultra long-term in- lieves that, until recently, the Water Industry has gone vestment themes that drive the water industry. As a result largely unnoticed by investors for several reasons. of these factors, the Water Industry—when we include capital equipment sales in addition to service revenues—is In the United States, only 10% of American households a clandestine $100 billion dollar industry . are supplied by “Private Water Systems”. It is local mu- nicipalities that supply most of the water needs in the The chart below depicts the Water Utility stock index as United States. As a result, equity investors pay little atten- tracked by Summit Global Management a value invest- tion to the Water Industry, even though municipal water ment manager and a highly regarded authority on invest- systems spend billions of dollars on equipment from Gen- ing in the water sector. Summit’s Water stock index has eral Electric Corp, (NYSE:GE), Tyco International out performed the technology heavy NASDAQ index, the (NYSE:TYC) and ITT Industries (NYSE:ITT). broad S&P 500 index and the blue chip Dow Jones Indus- trial Average over a five and twenty year time frame en- Moreover, since most publicly traded water companies compassing 1983 to 2003. Water stocks have performed are small utilities or foreign companies largely unknown well both in relative terms and in absolute terms. The wa- to U.S. investors, they suffer from limited research and ter stock index was up 1,733% from 1983 to 2003, handily trading coverage. This lack of interest, combined with besting the NASDAQ index by 1,114%, the S&P 500 by foreign ownership has dissuaded some institutional inves- 688% and the Dow Jones Industrial Average by 357%. FIVE & TWENTY-YEAR COMPARATIVE SUMMARIES 5-Year Summary 12/31/1998 to 12/31/2003 Investment Total Return Annual Return Water Utility Stocks* 107.96% 15.77% S&P 500 Index TR -2.81% -0.57% Dow Jones Industrial Average TR 24.97% 4.56% NASDAQ Composite Index -7.04% -1.45% 20-Year Summary 12/31/1983 to 12/31/2003 Investment Total Return Annual Return Water Utility Stocks* 1,733.18% 15.65% S&P 500 Index TR 1,045.68% 12.96% Dow Jones Industrial Average TR 1,375.95% 14.39% NASDAQ Composite Index 619.08% 10.35% Source: Bloomberg Analytics Source: Summit Global Management 2
  3. 3. Water Economy equities hold up as other stocks are washed out. Water Economy Index Due to rising interest rates, We have constructed a Weighted Water Economy Model many investors might have anticipated that the utility Portfolio from stocks mentioned later in this report. This dominated Water Industry would have been in for a model represents water service suppliers, infrastructure rough ride in 2004. However, the stocks have held up vendors, and niche vendors of consumables and technology. well despite their interest rate sensitivity. If Summit’s The Water Economy index should provide investors with a water utility stocks hold on to this year’s gains then baseline measure of Water Economy Growth. The Gateway they should generate approximately 12% to 15% in Water Economy Model Portfolio has performed well in 2004 in combined returns. 2004 as it has outperformed the Dow Jones Industrial Aver- Gateway Research has constructed a Water Economy age and the S&P 500 even though the equities that con- Model Portfolio that not only includes water utility struct the index are in some cases highly correlated to the stocks but also companies that supply infrastructure S&P 500 index. equipment to the water utilities as well as drinking wa- ter bottlers. We believe this diversified model of water The Chart Below depicts the strong relative performance of economy stocks will allow investors to follow the in- the Water Economy: dustry and, with a good investment indicator of the Water Economy Performance Total Returns water economy, make informed investment decisions. As of 11/4/2004 TTM Dow Jones Industrial Average 5.17% The Table Below introduces the Gateway Reports S&P 500 10.02% Water Economy Model Portfolio Gateway Water Economy Index 19.48% Gateway Reports Water Economy Model Portfolio Source: Gateway Reports Stock Portfolio Price Price Dividend TTM Water Investing Overview: Ticker Weight 11/3/2003 11/3/2004 Yield Total Return ARJ 5.0% $22.05 $27.85 2.9% 29% We have segmented the Water Industry into the follow- ing principal five sub groups: (1) The industrial compa- BMI 2.5% $36.60 $49.10 2.8% 37% nies—large and small—that supply infrastructure needs CWT 16.0% $27.30 $30.07 3.7% 14% such as; pumps, valves and pipes. (2) The industrial com- GE 5.0% $28.80 $35.09 2.3% 24% panies that supply measurement and purification process ITRI 5.0% $20.73 $20.22 0.0% -2% technology. (3) The suppliers of specialty chemicals used to purify water. (4) The public and private sector utilities MSEX 16.0% $19.86 $18.63 3.6% -3% that supply water. (5) Lastly, we have chosen to include PLL 2.5% $24.01 $26.81 1.4% 13% the companies that bottle and market water as a beverage SWWC 16.0% $10.96 $12.97 1.6% 20% since people around the world are increasing turning to WTR 16.0% $19.37 $22.14 2.4% 17% bottled water for their hydration needs. Interestingly, bottled water has replaced coffee as the United States’ WTS 16.0% $18.51 $27.60 1.0% 50% number two beverage: Water is second only to carbon- Water Economy Model Portfolio Total Return (TTM): 19.48% ated soft drinks in gallons consumed. Source: Gateway Reports Illustrated Below: The $90 Billion U.S. Water Industry: $60 Billion $21 Billion 8Billion (1) Water Utilities (2,3,4) Industry Suppliers (5) Bottled Water (Public, Private) (Infrastructure, Technology, Chemicals) (Beverage Companies) VE, WTR, CWT GE, TYC, BMI, ARJ, MIL, AMN, ITRN Nestle, KO, PEP 3
  4. 4. The Global Macro Case for Investing in the Water Industry: Supplying clean drinking water has become a signifi- cant global economic and security issue. Once every 15 Water Crisis in the Developing World: years or so, the United Nations holds discussions about the importance of clean water and sanitation as part of an over- all plan to combat world poverty. The 2002 World Summit on Sustainable Development in Johannesburg once gain Four out of every 10 people (worldwide) currently live affirmed the UN’s commitment to provide clean drinking in river basins experiencing water scarcity. water to the world’s poorest nations. Poor drinking water, By 2025, at least 3.5 billion people, nearly 50 percent according to the UN, is the cause of disease and a contribut- of the world’s population, will face water scarcity. ing factor to a host of other problems such as civil war, illit- eracy and human rights violations. Some 6,000 children die every day from diseases asso- ciated with lack of access to safe drinking water, inade- In the past, the UN’s call to fund water projects might quate sanitation and poor hygiene. have fallen on deaf ears but today—in a post September 11, 2001 world—the developed nations just might realize it is At any one time, half of the world’s hospital beds are in their best interest to fund water projects in the undevel- occupied by patients suffering from waterborne dis- oped world. The logic being, if the undeveloped world is eases. falling behind and is not integrated into the global eco- nomic system then there is a greater likelihood that those In China, India and Indonesia, twice as many people “un-integrated” countries will fall into chaos and become are dying from diarrhea-related diseases as from breading grounds for terrorism as was the case in Afghani- HIV/AIDS. stan, Malaysia, Somalia and the Sudan. Over pumping of groundwater by the world’s farmers Throughout Africa and the Middle East “Water Conflict” exceeds natural recharge rates by at least 160 billon has erupted and has led to violent exchange. Frequently, the cubic meters a year. Israeli Army and Lebanese Militia groups have exchanged Nearly 30 per cent of the world’s major watersheds have artillery fire over Hasbani River water rights in the Golan lost more than three-quarters of their original forest Heights. Clean water systems provide more than just drink- cover. ing water: They also provide irrigation to farmland and raise living standards. Water losses in irrigated agriculture amount to 25–40 Today, draught in the Sudan is fueling a Civil War, Geno- percent of water used in agriculture. cide and Islamic Fundamentalism. According to Global Security, a Washington think tank, 4 million Sudanese are unable to grow food due to the draught. We believe that the Source: The United Nations developed world will fund water projects as it becomes clear to the G8 that clean water is a first step in integrating poor nations into the global economy and circumventing civil wars as well as combating terrorism. The Shaded Areas Below Represent Water Poor Regions and the Birthplace of Future Global Security Threats Source: The United States Naval War College 4
  5. 5. Global Water Infrastructure Spending Set to Accelerate: The table below represents three estimates of annual funding required to meet the UN’s Minimal Develop- ment Goals (MDG). Three studies where commissioned by the UN and were conducted by: Price Water- houseCoopers, Vision 21 (a non-governmental organization (NGO) based in the United Kingdom) and the UN’s own economists. According to these studies, $111 billion to $180 billion is needed annually to meet minimum water supply and treatment investment goals. If the minimum goals set in Johannesburg are not met, as much as 52% of the world’s population will not have acceptable drinking water by 2050. Future Funding Requirements by Different Water-Using Sectors (billion dollars per year) Component Pricewaterhouse Vision21* IUCN Coopers Report JPoA** 2000 2002 30 75 20 Water and Sanitation 70 - - Municiple Waste 30 - - Industrial Effluent 40 30 40 Agriculture/Food Security - - - Irrigation and Drainage 10 - 1 Protection - - - Hydropower - 75 25 Enviroment Energy and Industry - - 25 Water Borne Diseases Total: 180 180 111 * a NGO that promotes sustainable development ** UN study produced for the Johannesburg Plan of Action Source: The United Nations We believe new spending on water systems should fuel worldwide water equipment growth for the foresee- able future. According to GE Water Systems, current infrastructure spending may be running at less than 50% of the Johannesburg target. In addition to providing water to developing nations, geologists are in- creasing concerned with ground water depletion resulting from the draining of aquifers. In other words, a leading source of water, well water, is scarcer now then it was just 20 years ago. The chart below depicts the loss of water in the western high plains aquifer, which supplies wa- ter to parts of Nebraska, South Dakota, Kansas, Colorado, Oklahoma, New Mexico and Texas. Source: The US Geological Survey 5
  6. 6. The Illustration Below Depicts the Water Cycle. The Water Cycle The Water Cycle is the natural process by which the envi- ronment recovers and distributes fresh drinking water. The problems are that water is being consumed faster than the water is replenished. Surface water sources are being pol- luted by exploding population growth and by poorly man- aged industrialization. Source: The US Geological Survey 6
  7. 7. The Macro Case for Investing in the Domestic Water Industry As a result of increased ground water scarcity, the The increase in global water infrastructure spending domestic and international Water Industry is intensely should benefit equipment makers GE, TYC and ITT focused on providing sustainable water sources and pro- and also foreign systems operators like Veolia and Suez tecting existing water systems from wastewater con- SA. During the next decade, international water eco- tamination. nomics will be driven by the denationalization of water systems in Europe and Asia (to address government budget deficits) and increased infrastructure investment This necessity for new water sources will trigger in developing nations. government and private sector spending on: • Surface water projects that treat and pump wa- In contrast, U.S. Water Industry growth will be driven ter from reservoirs and rivers to American cities. by regional demographic shifts, consumer preferences and regulatory factors. In America, consumers are de- • Desalination plants, which remove salt from sea- manding better drinking water, the EPA is raising water using state of the art filtration technology. drinking water standards and the baby boomers are re- tiring to regions with limited water resources. • Metering and Measurement equipment to regu- late drinking and wastewater systems. The roughly 9000 water systems serving more than 3,300 citizens in the U.S. will be under a great deal of Water scarcity has already been a source of concern in pressure to meet the challenges created by new home the Western United States. Several dozen Texas munici- construction, retiring baby boomers, revised drinking palities threaten to file claims for $500 million against water standards, aging infrastructure and homeland se- Mexico for missed water payments. The United States curity concerns. According to the EPA, a multi billion- Department of the Interior has developed the “Water dollar spending gap exists between water infrastructure 2025” program. The goal of “Water 2025” is to develop needs and actual investment. In fact. the EPA has pub- new water sources and curtail water disputes between licly stated that the gap will likely persist over the next agricultural and municipal interests. Gateway Reports twenty years. We believe additional government spend- believes that water scarcity in the Western United States ing—which will benefit industry suppliers—will close will likely drive strong water equipment sales through the spending gap. 2015 as the federal and local governments address their constituents thirst for water. The red areas on the map below depict where water conflicts could arise in the United States. Source: The United States Department of Interior 7
  8. 8. Sustainable Drinking Water Sources In Decline There are three regulatory issues that the Water In- The U.S. Water Industry backdrop is exemplified by dustry will have to address within the next five years. increased government regulation and the need to increase the supply of drinking water. Demand and regulation • The Health and Bio-Terrorism Act of 2002 should drive growth for both the companies that supply • New Arsenic Standards technology and consumables to the water industry and • The 1996 Amendment to the Clean Drinking Wa- also companies that are effectively able to consolidate the ter Act thousands of small water systems that are not able to meet the requirements set forth by the EPA. We believe that these new drinking water standards will provide both a catalyst for equipment sales and the adop- In the years ahead, a local and nation political debate tion of new technology. The standards will also stimulate will likely take place over drinking water standards mergers and acquisitions and the outsourcing of Water and the EPA will likely expand the scope of current Services by municipalities as local governments and small regulatory mandates to include: water systems explore avenues of financing the infrastruc- ture investment needed to establish compliance with these • Revising drinking water standards new standards. Moreover, at the state level, regulation is also being stepped up and in some states, such as Califor- • Promoting the sustainable management of drink - nia, standards are more stringent and are being adopted at ing water infrastructure a faster pace than the federal government is mandating its own new standards. • Protecting sources of drinking water from con- tamination The Health and Bio-Terrorism Act of 2002 We believe that these new regulations and mandates will Some Water Industry insiders have stated that The be some of the most significant clean water rules to come Health and Bio-Terrorism Act (HBTA), as it pertains to down the pipe since the original Clean Water Act of 1969. water systems, was an overreaction to the terrorist attacks The EPA will argue that clean water contributes to the of September 11, 2001. When the Act was initially prom- welfare of the economy and the general health of Ameri- ulgated, water utilities were concerned that the added cans and is well worth the cost of new regulations. costs would be detrimental to the industry and not based The industries listed in the chart below were non- on hard science. existent or in decline before the Cuyohoga River Fire, an The industry view was that introducing enough toxins environmental disaster in which a polluted river in Cleve- into a water system as to render it dangerous was beyond land burst into flames. In 1969, in response to the Cuyo- the capabilities of terrorists. Water systems tend to dilute hoga River Disaster, Congress enacted the Clean Water chemical toxins and kill microbes, so according to our Bill and eventually authorized the EPA. Since 1969, The industry contacts, water systems are not as vulnerable to Clean Water Act in the United States has gathered support terrorism as the media would have us believe. In any case, from the entire political spectrum. The EPA, for decades, HBTA has not been a burden on the industry and most has successfully made the argument that the industries water systems are able to maintain compliance with this below benefit from clean water regulations and that these law with little or no additional spending. benefits offset loses incurred by other industries. The Table Below Illustrates the Industries that Benefit from Clean Water Legislation in the United States: Clean Water Contributions 2001(In billions) Beach Recreation 70.0 Sport Fishing 35.6 Hunting 20.0 Fishing and Hunting Accessories 13.4 Household Water Activities 38.4 Commercial Fishing 28.6 Total: $206.0 8
  9. 9. There are three regulatory issues that The Water Industry will have to address within the next five years. and vascular diseases and because the long-term affects of The Health and Bio-Terrorism Act of 2002 (cont.) Arsenic are not known, there is a concern that the most serious consequences of Arsenic exposure are not yet af- However, very small package plant systems may have fecting people today. been affected by HBTA more severely than their large Unlike the Health and Bio-Terrorism Act, the new Ar- metropolitan counterparts. Large water systems that ser- senic standard will likely stimulate capital spending and vice fifty thousand to several hundred thousand custom- impact the entire Water Utility Industry. Largely due to ers are able to absorb the incremental costs of new regula- geography, utilities in the West will be negatively im- tions through tremendous economies of scale. pacted by the regulation. In the Western United States less In contrast, smaller systems, generally operated by one water comes from surface sources and more from aquifers, technician, have limited economic resources and even less which trap and contain more Arsenic from the surround- manpower to maintain compliance. As a result, the pack- ing strata than lakes and rivers. Water systems that have age plant, originally built to service a housing community aquifers as their source will have to spend more money on or a hospital for instance, may need to be shut down or filtration and testing in order to conform to the new arse- sold in order maintain compliance with government regu- nic standards. lations. In addition to the obvious effects of the new Arsenic standard on investment, additional capital spending may New Arsenic Standards take place on projects once thought to be too costly such as conservation related infrastructure spending and desali- New Federal Arsenic standards are set to take affect nation plants. New pipelines built to conserve water and throughout the U.S. in January 2006 and even sooner in desalination plants may become viable in cases where the the Western United States where some state governments cost of removing Arsenic from groundwater becomes pro- are moving faster on mandating new standards. The cur- hibitive. Simply stated, it just might be cheaper for rent standard is set at 50 parts per billion (PPB) or fifty drinking water systems to remove salt from seawater molecules of Arsenic for every billion molecules of water. or to replace miles of leaking pipes deeply buried un- The new standard is much more stringent and is set at 10 derneath city streets than to satisfy the 10 PPB Arsenic PPB. standard. Exposure to Arsenic has been linked to various cancers In the map below, the area shaded in charcoal and black represent groundwater Ar- senic levels that are borderline or failing to meet the EPA’s new Arsenic Standard. The Cost Benefit of High Standards The EPA claims it costs society $800,000 to treat a cancer patient. The EPA believes by spending $400,000 per capita to remove potential carcinogens from the drinking water system, that the United States will benefit in the long Source: USGS run. 9
  10. 10. The 1996 Amendment to the Clean Drinking Water Act In addition to the revised Arsenic Standard, water The table below is a list of 50 contaminants that are likely systems across the country may be forced to comply to be included in the next EPA CCL list. New regulations with new standards governing as many as 50 addi- are likely to trigger hundreds of millions, if not billions of tional contaminants. While its unclear to what extent dollars, in infrastructure spending in the next decade as the EPA will mandate the removal of these contami- both public and private waters systems scramble to re- nants state governments have started to address some move these contaminants from their systems. of the toxins on this list such as MTBE in California Microbiological Contaminant Candidates and Washington State. Adenoviruses Aeromonas hydrophila The drinking water Contaminant Candidate List Caliciviruses (CCL) is the primary source of priority contaminants Coxsackieviruses for evaluation by EPA’s drinking water program. The Cyanobacteria (blue-green algae), other freshwater algae, and their toxins Safe Drinking Water Act (SDWA), as amended in Echoviruses 1996, requires EPA to publish a list of contaminants Helicobacter pylori Microsporidia (Enterocytozoon and Septata) every five years, which, at the time of publication, are Mycobacterium avium intracellulare (MAC) not subject to any proposed or promulgated national TOTAL 9 primary drinking water regulations. Contaminants on Chemical Contaminant Candidates the CCL are known or anticipated to occur in public 1,1,2,2-tetrachloroethane water systems and may require regulations under 1,2,4-trimethylbenzene SDWA. 1,1-dichloroethane The EPA conducts research on health, analytical 1,1-dichloropropene methods, treatment technologies, effectiveness, costs, 1,2-diphenylhydrazine and occurrence for drinking water contaminants on 1,3-dichloropropane the CCL. The Agency also develops drinking water 1,3-dichloropropene 2,4,6-trichlorophenol guidance and health advisories, and makes regulatory 2,2-dichloropropane determinations for priority contaminants on the CCL. 2,4-dichlorophenol (Source: EPA) 2,4-dinitrophenol 2,4-dinitrotoluene In combination with the revised Arsenic Standard, 2,6-dinitrotoluene the CCL list has the potential to trigger capital spend- 2-methyl-Phenol (o-cresol) ing on every drinking and wastewater system in the Acetochlor Alachlor ESA & other acetanilide pesticide degradation United States. The more stringent Arsenic standards Aluminum will affect roughly 180 million Americans living in Boron west of the Mississippi and also Americans serviced Bromobenzene by isolated watersheds in the North East and Great DCPA mono-acid degradate Lakes region. In addition to Arsenic, the microbes DCPA di-acid degradate and chemicals on the CCL list will certainly affect DDE every water system in the country as water systems Diazinon Disulfoton are forced to implement processes that remove newly Diuron targeted containments like Adenoviruses, MTBE and EPTC (s-ethyl-dipropylthiocarbamate) Vanadium. Fonofos p-Isopropyltoluene (p-cymene) Linuron Methyl bromide Methyl-t-butyl ether (MTBE) Metolachlor Molinate Nitrobenzene Organotins Perchlorate Prometon RDX Terbacil Terbufos Triazines and degradation products of triazines Vanadium TOTAL 41 10
  11. 11. Infrastructure: The Water Economy’s Super Highway Long before Al Gore took credit for opening the Inter- As we have demonstrated, the success of modern net to the public, long before Dwight Eisenhower con- economies is in large part attributable to access to structed the interstate highway system, and long before clean drinking water. The Water & Waste Water Equip- Captain Cornelius Vanderbilt built the first railroad net- ment Manufactures Association (WWEMA) has esti- work, Americans were building water systems to supply mated that the Water Industry in the United States spends rapidly growing cities such as New York, Chicago and roughly $8.8 billion on new infrastructure per year. Infra- Los Angeles. structure budgets are spent on water pipes, industrial pumps, valves and supporting subsystems. Many securi- The graphic below depicts the Annual ties analysts largely overlook infrastructure equipment U.S. Expenditure on Water Industry Supplies. but times may be changing. Water Industry Sales New materials, new technology and increased spend- (in $ millions) ing on the part of governments should benefit the in- dustry for decades to come. Estimates produced for Con- gress by the Congressional Budget Office (CBO) state that the Water Industry will have to spend roughly $6.5 to $20.6 billion (2004 dollars) annually on infrastructure 3600 over the next 20 years to address America’s water infra- 8860 structure needs. The wide range of the government’s esti- mates gives water economy investors both grounds for concern and cause to celebrate. The table below depicts the CBO’s broad estimate for 8880 anticipated infrastructure spending U.S. Tre a tm e nt: 8.86 B il U.S . De live ry : 8.89 B il. U.S . S pe c ia lty Che m ic a ls : 3.6 B il Source: Water & Waste Water Equipment Manufactures Association Inc. In fact, Los Angeles, Phoenix and Las Vegas exist as cities today in large part thanks to massive water infra- structure projects. In America, mountains are literally moved to supply our cities with fresh water. In New York, a massive water tunnel is being built a thousand feet below Times Square. Outside of Los Angeles, a mountain range—by building dams across its valleys— was transformed into a gigantic reservoir. Lastly, the wa- ter system in Tampa, Florida removes salt from seawater to meet its water needs. A New York City “Sand Hog” works a1000 feet below NYC’s Central Park in Tunnel #3 The controversy surrounding the estimate is due to as- sumptions that various authorities are making in regards to pipe replacement. Simply stated, some estimates as- sume that just .05% of the nation’s water mains will be replaced over the next 20 years and others estimate that 1.5% will need replacement. Assumptions regarding in- flation, the national inventory of pipes and manufacturing technology also contribute to this wide-ranging estimate. 11
  12. 12. Funding of Infrastructure Spending is Likely to Accelerate As illustrated on the CBO’s chart on the page 11, the 80% Representatives in Congress will vote for increased water confidence interval for 20-year capital investment is esti- infrastructure spending because both parties realize that mated to be $330 billion in 1998 dollars or roughly $420 fighting water infrastructure spending is political suicide. billion in 2004 dollars. In other words, the difference be- Americans are unlikely to vote for any representative that tween the high estimate and the low estimate is approxi- opposes clean drinking water. Besides, billion dollar water mately $21 billion per year. Thus, current industry esti- spending bills provide an opportunity for politicians to mates give investors absolutely no insight as to how much bring home government infrastructure money to their sup- money will be spent on future water infrastructure projects. porters. As Tip O’Neal, the speaker of the House of Repre- We believe this wide-ranging estimate will create an op- sentatives during the 1980s said, “All politics is local” and portunity for early Water Industry investors. local politics is sensitive to drinking water issues. The key to investing in the Water Industry may be found in Investors allocating capital to the water industry this year the actual reason why the CBO commissioned the studies should be rewarded as equity valuations begin to adjust for in the first place. The CBO decided to examine water infra- higher growth rates as spending expands from the $8.8 structure spending for two reasons. First, Congress is dis- billion being spent today to levels that are midway between suaded from passing unfunded federal mandates, which the lowest and highest government infrastructure estimates. require state governments to spend money on federal regu- Practically speaking, water infrastructure spending lations without proper federal funding. As a result, the pro- should reach $11 to $16 billion annually (in 2004 dol- posed EPA rules, which will require the states to spend lars) by 2009. billions of dollars on infrastructure, may amount to an un- funded federal mandate. Gateway Reports believes that this growth will be front- The second reason is that Congress is working on several end loaded because new regulations will provide a catalyst pieces of legislation that will fund water infrastructure for spending that otherwise would have been allocated over spending. On October 7, 2004, Congress approved $395 decades. It is very possible that early investors in the water million for funding a water project in California. Congress economy will benefit as Wall Street begins to incorporate also has created a $1.3 billion revolving loan system for water industry growth into analysts’ earnings models. Now state water authorities called the Clean Water State Re- that the Presidential Election is over, the debate over the volving Fund (SRF). Funds from the SRF are loaned to EPA’s new regulatory agenda should heat up and draw municipalities that cannot afford to make water infrastruc- attention to the group. Thus, investors allocating capital to ture investments on their own. the Water Economy—specifically utility suppliers—over We believe that once it becomes apparent that the infra- the next year should benefit for years to come from strong structure spending is vital and necessary, then the esti- industry growth rates and multiple expansion. mated $11 billion gap between current sub par infrastruc- ture spending and water infrastructure needs will close. The graphic below depicts the range of annual water industry spending estimates: $8.8 $27.0 $6.7 Billion Billion Billion 2003 Industry Low Ball High Ball Estimate? Sales Estimate? 12
  13. 13. Blue Chip Infrastructure Investments US Steel manufactures pipes and Caterpillar builds heavy the company’s revenues giving it more Water Economy equipment used in the water industry. But are these compa- weighting than GE and TYC combined. In addition to Water nies suitable water industry plays? The answer is probably Economy exposure, ITT also has international exposure, as it not; the best plays in infrastructure will be companies that derives 40% of its revenues from foreign sales. are aggressively investing in their Water Industry businesses today. Companies like ITT, GE and TYC are expanding We believe ITT’s foreign sales are a plus and provide ex- their water businesses and water infrastructure sales, as a posure to the massive infrastructure spending that is likely to percentage of their revenues, should expand as infrastructure take place in the underdeveloped world. China recently spending climbs. New water infrastructure will have to be awarded Veolia (the company formerly know as Vivendi more technologically sophisticated than ever before in order Water) a $975 million contract to supply drinking water to meet the purity and efficiency demands of modern econo- to three million Chinese citizens. Some 400 of China's 668 mies. In other words, companies that provide the most value cities are facing water shortages, and of the 400, more than to water providers will continue to dominate the industry 100 are threatened with serious situations, according to China’s People’s Daily. Since ITT already has a strong pres- ence in China, we believe the company has a strong opportu- The chart below depicts Large Cap Water Economy Stocks nity to benefit from similar water infrastructure projects as China supports its expanding economy. Large Cap. Estimated Water Economy Exposure In addition to water industry market share and international Water Water Sales Segment Price to opportunities, we are also attracted to ITT’s cheaper relative Revenues Revenues Growth Margins Earnings valuation. We believe because ITT is cheaper relative to its Ticker ($BIL) % Total Sales 1 yr % % Ratio peers, investors will have more upside as values adjust to ITT $2.20 40% 15% 11.00% 18x reflect stronger water infrastructure investment and ITT’s GE $6.00 4% 15% 10.00% 22x lower relative valuation creates a higher intrinsic valuation for investors today. Also, ITT may be attractive as an acqui- TYC $6.00 17% 16% 13.50% 21x sition candidate because TYC and GE are natural strategic industry partners (SIP), especially at current valuation levels. Source: Gateway Reports We believe, ITT’s takeover valuation is $115 per share based on deal that values ITT at 22x 2005 earnings of $5.13 Gateway Reports views ITT as the closest thing to a Water (First Call Estimate). A deal at $115 would give ITT share- Economy pure play for investors seeking to buy a large cap holders about 30% upside to today’s price. We have no rea- Water Economy stock. ITT segments out its water business son to believe a SIP is preparing to bid for ITT. However, financials and as a result ITT is easier to follow (from a Wa- investors should note that the potential for a merger can pro- ter Economy point of view) than GE or TYC. GE and TYC vide significant upside to ITT’s shares and reduce some of do not break out their water industry numbers to the level of the risk inherent in any stock trading at market valuations. granularity that ITT does. In order to get close to an apples- We have only included this analysis to illustrate to investors to- apples comparison of ITT to GE and TYC, analysts have what ITT may be worth to a corporate buyer and the value of to back out GE and TYC’s water industry results from their its strategic industry position. SEC filings. ITT’s water industry sales account for 40% of ITT Vital Statistics: Dollars in millions (except per share amounts). Applicable items adjusted to exclude the impact of goodwill amortization expense. Revenue Profile Global Profile Segment Sales & Revenues Segment Operating Margin Earnings Per Share Cash Flows From Operations Source: ITT 13
  14. 14. Images of Water Infrastructure Below is a valve manufactured by ITT Industries Below is a new oxidation resistant water pipeline used for reverse osmosis filtering and desalination manufactured by TYCO International Source: ITT Industries Source Tyco Intl. Below GE will Build, Own and Operate and Maintain (BOOM) you town’s water system. Source: GE Water A Watts Water Back Flow Preventer Water Desalination Plant in the United Arab Emirates Source: International Desalination Association Source: Watts Water 14
  15. 15. Water Pure Plays Gateway Reports believes that investment opportunities exist Ameron (AMEX:AMN) is a producer of pipeline infrastruc- across all market capitalization classes. Recent regulatory ac- ture for the Water and Petrochemical industry. We believe tion by U.S. authorities has made it less economical for tradi- AMN is an alternative to TYC for investors that want to invest tional Wall Street Research departments to publish research on in the water pipeline industry. Investors should be willing to companies with market capitalizations under $2 billion. Lack accept the company’s more aggressive valuation which we of coverage creates more work for investors and also opportu- attribute to its exposure to the Oil Pipeline industry. Ameron’s nities for investors that are motivated to perform the research. balance sheet is improving as a result of an on going restruc- Simply stated, it is hard to make 80% to 400% on a stock turing. We believe that increased spending on pipelines— when 30 analysts are covering the same stock. For example, 15 while nice for TYC—will be a boom to AMN shareholders. analysts cover TYC but we are not aware of any analysts who are currently publishing institutional research on Ameron Underground Solutions (OTC: UGSI) is micro cap stock that (NYSE: AMN), a small cap company that also provides ad- designs and sells liners to restore water mains. As of the pub- vanced pipelines to the water industry. A similar statement can lishing of this report, the stock traded at $0.19 per share and is be made for Ionics (NYSE:ION) a company that supplies wa- high risk / high reward stock. UGSI offers a potentially low ter filtration and desalination equipment to the water systems, cost alternative to installing new water mains which is concep- as it currently has only 6 analysts following ION’s shares as tually attractive to municipalities. compared to over 30 that cover GE. Ionics (NYSE:ION) is another interesting infrastructure company with a solution to the water supply problem. ION The chart below depicts Small Cap Water Pure Plays: designs and manufactures desalination systems. Desalination systems remove salt from seawater, thus transforming sea- Small Cap Estimated Water Economy Exposure water into drinking water. Many fresh water starved regions of Water Water Sales Segment Price to the world have access to the world’s oceans. Economic devel- Revenues Revenues Growth Margins Earnings opment agencies for decades have considered using the oceans Ticker ($BIL) % Total Sales 1 yr. % % Ratio to provide drinking water. Towing massive icebergs from the $0.165 28% 15% 16.00% 39x AMN North Pole (90% of the world’s fresh water is trapped in the $0.292 100% 23% 13.89% 17.66 WTS polar icecaps) to Africa has been considered but the economic $0.347 100% 9% NA NA and environmental costs remain prohibitive. ION Another solution that has been historically expensive is de- NA 100% NA NA NA UGSI.PK salination. Recently, the cost of desalination has become eco- Source: Gateway Reports nomically viable, as the technology has evolved and we are Increasingly, as the world is exhausting new fresh water seeing large desalination plants go into production around the sources, water suppliers are turning to conservation and desali- world. Today, desalinated water costs less then 4 cents per nation to meet water demands of the future. As we stated be- gallon: In the 1970s desalinated water cost was measured in fore, the new EPA regulations will increase the variable costs dollars per gallon. associated with filtering and supplying drinking water. In- creasingly, water authorities are going to have abandon some The chart below depicts the increase in gallons water sources and rely on conservation and new sources to produced for the same cost by desalination. provide drinking water that meets the new standards. WWEMA estimates that as much as 50% of all metropolitan drinking water is wasted due to leaking pipeline systems. Until a few years ago most Municipal water systems only repaired water mains after they had ruptured. In the past, water suppliers ignored leaking pipelines because the cost of repairing leaking water mains relative to finding new sources was uneconomical. In addition to the high cost, the technology needed to identify and target leaking water mains did not exist until the recently. The last thing a water company wants is to “dig up a street” and install a new water main. In many cases rebuilding water mains can take weeks or months to complete. The inconvenience of closed streets can destroy small businesses, impair real estate values and is un- popular with the local communities. In the future, water com- panies will have no alternative but to conserve water by in- stalling ‘leak resistant’ composite water mains made of aero- Source: The Environmental Bench Marker and Strategist space materials. 15
  16. 16. Water Pure Plays Cont... ION Continued... California and Florida are aggressively exploring de- can fit in the back of a SUV. Simply stated, WTS prod- salination as an alternative to traditional water sources. ucts control the flow of water and ensure water is at the Several California aquifers have high arsenic levels and right place at the right time and at the right tempera- are likely to require extensive filtration to meet the new ture. Most of the company’s products will be found in EPA standards. For example, after the new EPA regula- small subsections of larger systems and in small water tions take effect in California, it may be cheaper to fil- systems servicing less than 5,000 families. ter salt from the state’s brackish (or semi-salt water) Gateway Reports believes WTS will benefit from the reservoirs than to filter Arsenic and other contaminants growth in infrastructure spending. We see WTS prod- from some of California’s marginal fresh water ucts being deployed as water systems, home owners, sources. landlords and small businesses purchase WTS’ prod- In addition to using desalinated water to meet U.S, ucts to avoid the negative fallout from new infrastruc- demands, Middle Eastern and Far Eastern nations are ture projects and contaminate regulations. Almost al- also currently deploying the technology. On October 8, ways hidden in the basements of the Manhattan’s fa- 2004, The United Arab Emirates and the Singaporean mous brown stones and skyscrapers is a ‘Back Flow governments announced a $400 million water desalina- Preventer’ that most likely was produced by WTS. tion joint venture which entails designing and con- structing a desalination plant in the city of Dubai, a The ‘Back Flow Preventer’ as its name implies pre- major commercial hub in the Middle East. vents sludge and contaminated water from entering ION’s main line of business is designing and con- back into a water system, thus keeping the water sys- structing water desalination plants and systems. We tem free of contaminates. The contaminated back flow believe ION provides significant upside should desali- is the result of low water pressure caused by a ruptured nation develop into a major source of water supply in water main or infrastructure repairs. When water pres- the United States and the Middle East. ION offers ag- sure drops to low levels, dirty water from a sink or gressive Water Economy investors the most attractive boiler can get sucked into the water system and spread desalination opportunity. diseases like E.Coli and Legionnaires disease. Accord- The principal risk associated with ION is timing. De- ing to our sources, more and more municipalities are salination is still expensive to deploy and, should the mandating the instillation of these devices which cost market for desalination equipment be slow in material- anywhere from $50 to $5,000 depending on the appli- izing, equity investors will be subject to large losses. cation. ION has been operating at a loss. While its shares have the potential to provide substantial gains, the stock is We believe that the water pressure devices and risky and can trade down on any sign of weakness or other equipment in WTS’ product line will drive loss of confidence in its desalination technology. strong revenue growth going forward. WTS also has exposure to the water metering business, which we be- lieve represents an exciting opportunity separate from Watts Water Technologies Inc. (NYSE:WTS) is truly a pure play in the Water Economy and is attrac- the infrastructure theme and will be discussed at length tively valued, trading at just 15 times 2005 First Call in the next section. earnings. WTS derives nearly 100% of its revenues We believe WTS is undervalued at $27.50 per share from water and fluid controls. WTS is a unique com- and that WTS’ shares will likely trade higher as more pany and has carved out an interesting niche in the wa- investors are focused on its growth prospects. We see ter business. While ITT, TYC and GE are dueling over WTS being fairly valued at $40.00 based on a modest the large infrastructure projects, WTS is selling devices Price Earnings-to-Growth ration (PEG) of 1 or alterna- that add value to the 90,000 or so small water systems tively a Price to Earnings Ratio of 22 times 2005 first in the United States. Watt’s equipment also saves prop- call earnings of $1.80. While the stock market may ap- erty owners and small businesses money by ensuring ply a small discount to WTS’ fair value, we are very the integrity of their water systems. WTS’ strong reve- confident that an outside LBO buyer or SIP would pay nue growth is testimony to management’s ability to $40.00 for the company and the stock may be consid- execute on the pickup in water infrastructure spending. erably undervalued at current levels. Thus, WTS’ While companies like ITT design water pumps as big shares represent a very attractive small cap play on the as a three-bedroom house most, of WTS’ product line water economy. 16
  17. 17. Water Technology Meeting the Challenges This photo illustrates the impact the draught has had on weather anomaly but the new status quo. The water crisis in Western Rivers and Reservoirs. the West has the potential to undermine the economies of growing cities such as Las Vegas and Phoenix. The water shortage also has the potential to undermine entire industries such as agricultural and livestock that support the Western economy. As the photo of the Rio Grande illustrates better than any statistic, new sources of water are non-existent in many re- gions. Today in the Western United States, if an aquifer is deemed undrinkable either because of draught or EPA regu- lations, then there are few viable surface water resources available to replace the lost fresh water source. In the last century majestic infrastructure projects, like the Hoover Dam, were undertaken to address water needs. In fact they created drinking water sources that supported incredible economic development in California and Nevada. Today there are very few, if any, untapped surface water sources Companies that supply water treatment equipment to the and the rivers and reservoirs that do exist are literally run- Water Economy represent some of the most exciting invest- ning dry. ments in water. According to WWEMA, sales of equipment to the water industry are just slightly lower than infrastruc- Conservation may be one answer to the water crisis. As we ture sales at $8.6 billion. We believe—as water utilities stated before, some industry insiders estimate that 50% or scramble to meet the needs of their customers and comply more of the available drinking water is lost through leaking with new regulations—that water suppliers will increase pipes and wasteful practices. Particularly, in the western their purchases of all types of equipment such as meters, United States a large percentage of the water supply is used testing equipment and filtration equipment. in agricultural irrigation: 39% of available supply compared to 12% for consumers. And much of the water used in agri- Gateway Reports believes that the most exciting invest- culture is wasted or lost through faulty infrastructure. Ac- ments in the Water Economy will be in companies that sup- cording to WWEMA, 60% of the water used in agriculture ply water meters, measurement and filtration technology to is wasted. water systems. The challenges faced by the U.S. Water In- Gateway Reports believes that the water lost through dustry—now more than ever—will have to be addressed wasteful practices and leakage is equivalent to at least with new technology. New drinking water standards elimi- 29.4% of today’s current drinking water supply and likely nate many potential sources of water and the prospects of much more. Gateway Reports has no solid statistics on the finding new natural drinking water sources are bleak. Amer- amount of fresh water wasted by industries such as power ica’s lakes, rivers and ground water aquifers are all being generation and mining but we believe that the water supply exploited to meet consumer demands. In fact, 10 years of lost by those industries exceeds 20% of the total fresh water draught in the Western States has depleted reserves once supply in addition to the 29.4% lost by agriculture and pub- thought by some to be inexhaustible. Today, some scientists lic consumption. believe draught in the Western United States is not a freak The chart below estimates the amount of water lost through faulty infrastructure and waste. Lost Through Waste and Infrastructure Water Supply Wasted % Total Wasted Public* 12% 50% 6.0% Agriculture* 39% 60% 23.4% Power Generation** 39% 40% 16% Mining ** 7% 80% 5.6% Others** 3% 50% 1.5% Total 100% 52.1% Source: *WWEMA ** Gateway Reports Estimate 17
  18. 18. Water Conservation Expected To Drive Water Technology Sales matter how much water is consumed. America’s mu- Two contributing factors to wasteful water prac- nicipalities adopted this flat rate pricing structure tices are flat rate pricing and the lack of water me- when the cost of supplying water was predominately ters in use by local water utilities and the agricul- determined by the fixed cost of building out the water ture industry. A water meter is a mechanical or elec- tronic measurement instrument designed to measure infrastructure. Today, many water sources require the amount of water flowing through a pipe. One prob- more filtration and treatment. As a result less water is lem is that Americans are accustomed to low water available for consumption and the variable costs of prices relative to the rest of the world and resist any supplying that water has also escalated. attempts by local governments to raise prices. More- According to our sources, in some water districts the over, the low price of water has lead to wasted water variable cost of supplying water is greater than the throughout the economy. A major contributing factor fixed cost. In areas where flat rate pricing exists, it is to wasted fresh water is the tradition of flat rate pric- likely that those water systems are in essence subsidiz- ing. ing wasteful water consumption by not passing on the costs on to the end users. The real cost of this subsidy, paid by society, will ultimately be less infrastructure Roughly 40% of American households and almost investment and inescapably higher long-term water all farmers using irrigation equipment pay a flat prices resulting from the inadequate supply. rate for their water and the rate does not change no The chart below depicts the low relative price of water in the United States. 200.0 W ater charges in cents per cubic 180.0 160.0 meter (1999 US$) 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 South Africa Kingdom Netherlands United States Belgium Australia Finland Denmark Germany France Sw eden Spain Italy Canada Ireland United Source: NUS (2000). 18
  19. 19. Water Meters In Action Installing Water Meters light of city planners, Mexico City now has a new weapon—water meters—in its fight to supply fresh water An industry insider explained the link between water me- to its citizens. ters and water conservation this way, “You cannot con- serve what you cannot measure”. The short-term efficacy In the long-term, metering water as part of a multi- of metering water as it relates to conservation can be high- pronged conservation plan can also have tremendous im- lighted by two case studies. pact on water supply, even in the most modern cities. New York City (NYC) during the 1970s and 1980s was faced Mexico City, due its large population of 16 million peo- with two serious water related issues. NYC’s financial cri- ple and also its high growth rate, is constantly testing the sis forced the city to postpone much-needed water infra- limits of its fresh water infrastructure. In the 1990s, the structure projects and secondly NYC was hit by a series of Mexican government decided to install water meters in draughts. During this period, NYC had a serious water cri- several neighborhoods. When the results of installing the sis and several times, as a last resort, pumped water out of meters came in, Mexican officials were shocked to dis- the then polluted Hudson River to supply its residents. cover that the water system was in fact supplying 37% The city’s response to the water crisis was to initiate a se- more water to Mexico City residents than the city’s engi- ries of conservation programs that included the aggressive neers originally estimated the system was capable of dis- monitoring of water meters. The program has been wildly tributing. successful and has reduced water consumption dramati- Mexico City planners came to the conclusion that million cally. Per capita water usage in New York City has de- of gallons of water per day were being consumed but not clined from 189 gallons in 1979 to 136.6 gallons per capita accounted for due to poor water management. Metering the today. NYC is now saving 419 million gallons of water or water immediately ended an enormous cycle of waste in 28% per day, as compared to 1979 usage levels. This dra- Mexico City’s water system that was plagued by vandal- matic savings is in large part due to water meters ism, theft and poorly maintained water pipes. To the de The table below tracks the decline in water usage in New York City. NYC Consumption Per Capita Year (Gallons per person per day)* (Million gallons per day) 2003 1093.7 136.6 2002 1135.6 141.8 2001 1184.0 154.6 2000 1240.4 169.4 1999 1237.2 168.9 1998 1219.5 166.5 1997 1205.5 164.6 1996 1297.9 177.2 1995 1325.7 181.0 1994 1357.7 185.4 1993 1368.5 186.9 1992 1368.6 186.9 1991 1496.3 204.1 1990 1423.8 201.3 1989 1401.7 198.2 1988 1483.9 208.3 1987 1446.5 201.9 1986 1350.7 190.4 1985 1325.8 187.5 1984 1465.0 207.2 1983 1423.8 201.4 1982 1382.4 195.5 1981 1309.3 181.4 1980 1505.9 187.9 1979 1512.4 189.0 19 Source: New York City Department of Environmental Protection
  20. 20. The Water Meter Controversy Unfortunately, consumers of water almost always ob- plant. Merced could save 20% of its water by installing ject to the introduction of water meters by their utilities. meters but a bipartisan effort is being made to force Cali- Most water customers prefer flat rate pricing to volumet- fornia’s Governor to veto the plan. Many Americans ric pricing (or charging by volume consumed). A recur- equate water with air and the view metering water as an ring theme in the water industry is “people world-wide affront to their basic freedom. quot;I'm really not in favor of will always demand high quality drinking water, but at the state mandating this type of thing…. I don't appreci- the same time they don’t want to pay for the service”. ate their meddling,” said Merced City Councilman Jim In the San Diego suburb of Merced, protestors are fight- Sanders on the topic of water meters. When the new EPA ing a plan to install meters in order to begin volumetric water regulations start to take affect and scarcity becomes billing in 2025 Twenty years from now! San Diego is a a real concern, metering water will likely overcome much city that has a water crisis on its hands and is going to of the negative sentiment shared by Americans who have construct the country’s second large-scale desalination grown too accustomed to flat rate pricing. Water Economy meets the New Economy A Badger Meter / ITRON Automatic Meter Reading System (AMR) setup: Information system Hand Held Recorder Transmitter Water Meter Source: Badger Meter The obvious merits of deploying mechanical meters in- Gateway Reports believes that RMS is in its infancy. clude promoting water conservation and enabling volume Although RMS technology has been in the field since the based billing. In addition to these merits, recent advances mid-1990s, there have been social and technological ob- in water meter technology are allowing utilities to trans- stacles that have prevented its widespread deployment form old stupid water meters into smart meters that can be until recently. read from a distance and can supply real time data used in In water systems that have an installed base of water systems monitoring. Remote Metering Systems (RMS) or meters, RMS technology has come under fire from utility Smart Water Meters are similar to smart weapons used by unions that do not want to see their members made redun- the military. dant. When water was abundant and municipalities where Smart water meter technology consists of a standard operating at a financial and water surplus, it was easier for mechanical water meter and a technology module the utilities to postpone RMS deployment than to fight mounted to the meter that transmits—via telecommunica- aggressive unions. Today, when budget gaps need to be tions, satellite or radio frequency technology—water us- closed and water is in scarce supply the technology is be- age data to a nearby meter reader or a remote utility base ing deployed despite union objections. station. Thus, Remote Metering Systems (RMS) are able to transform a 100-year-old technology into a node on a modern information system that is just beginning to moni- tor and regulate the flow of water in America’s cities. 20