Wednesday, August 06, 2003

Water Utilities' Financial Thirst

You don't have to look far to find statistics suggesting the United States' water and sewage systems are in sorry shape. At the homepage of the Environmental Protection Agency's Office of Water, for example, a report suggests the current pace of spending on drinking-water infrastructure falls $263 billion short of what's needed over the next two decades.

Those kinds of numbers haven't been lost on Congress, or, for that matter, stock investors who have taken a strong interest in companies working in the water business. Many of the stocks on the table below trade within a stone's throw of their 52-week highs and carry price-to-earnings ratios above their five-year averages.

Among water sector winners: investor-owned water utilities. These include outfits like Philadelphia Suburban and SJW . The former company, the largest of its kind in the U.S., provides water and wastewater services to two million customers in Pennsylvania, Ohio, Illinois, New Jersey, Maine and North Carolina. SJW owns San Jose Water, a utility supplying drinking water to a million people in Silicon Valley.

So why would Wall Street get so worked up about boring old water utilities? Mergers and acquisitions, for one. Not only has there been heavy consolidation among domestic players, but big foreign companies like France's Veolia Environnement and Germany's RWE AG have also gotten involved, paying significant premiums to buy U.S. utilities.

Another plus: The water utility business could well benefit from the outsourcing trend now evident in other government areas like defense and information technology. "The United States is probably the most attractive market from a privatization point of view," says Phillipe Rohner, who co-manages the Pictet Global Water Fund, a portfolio devoted to companies in the water business.

Rohner notes that U.S. water utilities going private have the advantage of "the most advanced capital markets in the world" when it comes time to raise the funds necessary for infrastructure improvements.

But the National Association of Water Companies (NAWC), the industry group representing investor-owned utilities, complains U.S. policy still gives public utilities an edge. In a position paper, the group says that private water companies still "operate under numerous competitive disadvantages which include payment of federal, state and local taxes, and limited access to tax-exempt financing."

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