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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (21519)	6/22/2005 7:07:46 PM
From: E_K_S	Read Replies (2) \| Respond to of 78751

Hi Paul - I also like the water utility sector but am a bit concerned with how they are currently regulated, specifically many of these private water utilities are limited (by the local municipality) on what and how much they can raise prices. Have you seen this constraint in your research of companies in this industry? Many municipalities and local governments control the rate of return these private companies can make on their fixed capital investments. Some municipalities actually own the infrastructure but outsource the maintenance and operation of their facility to private companies like SWWC. Here is the real problem I see in the next ten years. Several of these municipalities are going broke through unfunded pension liabilities, artificially high real estate values which (in the short term) provide extra high property tax revenues that will disappear and potential huge city budget deficits that will force or delay critical capital spending on water infrastructure upgrades. Water quality and capacity will go down and the only solution will be for the municipality to solicit the services of these private water utilities. Private water utilities will be more than willing to spend their own capital and resources to bail out these bankrupt cities but will expect a higher rate of return and a more flexible pricing policy to recover their investments. I believe those private water companies that have the experience and capital will be solicited by these failing (and bankrupt) municipalities to come in and take over their local municipal water services. This will only occur if these old pricing (and ROI) constraints are removed. I believe some of these private water companies are well positioned to provided many of these necessary and needed services. At current prices they are extremely undervalued if a "market ROI" is allowed and they can raise customer prices (w/in reason). It looks like the end-user will ultimately pay the higher rates and it will be a windfall for the well managed private water companies. (http://finance.yahoo.com/q/bc?t=5y&s=SWWC&l=on&z=m&q=l&c=awr&c=%5EGSPC ) I continue to like Southwest Water Co (SWWC) and American States Water Co (AWR) as they are U.S. based companies (pay "qualified" dividends), have operations in areas of the U.S. where water is in high demand and short supply, and (with SWWC) seem to have good management in place that currently have gained a lot of experience providing water treatment outsource services to many municipalities both large and small. EKS