FINANCE GROUP

Marketing 606

Baha, Chris, Guillermo, Katie, Tim, Vincent

CURRENT FINANCE

HO

W D

O I IN

VEST IN W

ATER?•Seed (Angel) Investors—Financing

– Startup of Private Companies– Business Loans

•Municipal Bonds– Funding for Government Water Districts– Wall Street Bond Investors

• Managed Municipal Bond Portfolios• Tax Free Income, Highest Paying• $1.26 billion nationally• Ballot Measures

MO

RE INVESTO

R OPTIO

NS

•Mutual Funds• Bond Funds• Natural Resources Fund (increasing

exposure)•Stocks

• Private Water Companies, IPO’s

STEPS OF H

OW

TO IN

VEST IN W

ATER1. Identify companies that have strong connections to various

regions of the world where water is most scarce.2. Invest in several different kinds of water companies. Water

companies involved in purification and distribution each play different roles.

3. Look for the formation of new mutual funds, ETFs such as the PFW Water Fund, which trades under the ticker symbol.

4. Watch for large companies that are beginning to focus on desalination (e.g. General Electric and Hyflux).

WATER STO

CKS•Investing in water stocks is simply the investment of a lifetime

• Put $10,000 in Consolidated Water in 2000• Gained $81,061 by February of 2007

FEATURES O

F WATER STO

CKS•No substitute for water•Demand unaffected by inflation, recession, interest rates•Strong and consistent growth •Price does not yet reflect real economic value•The outlook for water stocks much better than 25 years ago

20 YEAR RETURN

S - FROM

1983 TO 2003

Name Total Return Ann. Return

Home Depot 6467.55% 23.25%

Walmart Stores 4753.67% 21.40%

Gillette Co. 3522.84% 19.64%

Coca-Cola Co. 3265.47% 19.20%

Merck & Co. 2992.14% 18.70%

Johnson & Johnson 2861.74% 18.45%

Disney Co. 2367.34% 17.37%

Procter & Gamble 2233.16% 17.04%Philadelphia Suburban Corp*  (Aqua America)

2033.07% 16.52%

Gen Electric 2016.91% 16.47%

Exxon Mobil Corp 1918.39% 16.20%

Kellogg Co. 1531.82% 14.97%

American Express 1501.94% 14.86%

SJW Corp. 1433.28% 14.61%

BLUE CH

IPS OR W

ATER UTILITIES - FRO

M 96 TO

06NAME TOTAL RETURN ANN. RETURN

SJW Corp. 576.84% 21.07%

Aqua America Inc. 417.77% 17.87%

Pennichuck Corp. 376.63% 16.90%Southwest Water Co. 374.23% 16.84%

York Water Co. 351.39% 16.27%

Walmart Stores 337.88% 15.91%

American Express 300.39% 14.88%

American States Water 294.44% 14.71%Exxon Mobil Corp. 294.15% 14.70%

Artesian Resources 291.83% 14.63%Home Depot 285.87% 14.46%

Middlesex Water Co. 233.71% 12.81%

Johnson & Johnson 211.59% 12.04%

California Water Services 187.44% 11.14%

Procter & Gamble 187.39% 11.13%

General Electric 176.69% 10.71%

IBM 176.38% 10.70%

WATER ETFS

•Water ETFs invest in a basket of different water companies•Benefit of owning water ETFs vs. a stock-ETFs reduce risk•ETF investment•Water ETFs provide 2 perspectives

• Infrastructure investment• A commodities play

•ETF with a water focus can be opportunity • Fresh water supplies exhausted• World’s population growing at a 2% rate• US water supplies under pressure in CA, Hawaii and parts

of the Southwest

MAJO

R WATER ETFS

1. PowerShares Water Resources Portfolio (PHO)• Investment in infrastructure• Portable water, water treatment• Tracks the Palisades Water Index (PWI)

2. Claymore S&P Global Water Index (CGW)• Tracks S&P global water index• Capture demand for the precious natural resource

3. First Trust ISE Water Index( FIW)• ISE Water Index

4. PowerShares Global Water Portfolio (PIO)• Tracks the PWI• Investments in Britain, Japan, and the U.S.

WH

Y ETFS ARE ATTRACTIVE?•Acc. to UN, 2 billion people will face severe water shortages by 2025

•$660 billion over the next 20 years to develop water infrastructure

•Acc. To EPA, at least %25 of the nation’s pipes are in poor condition and by 2020 , this will be %45.

•These situations could be another major boost to water ETFs.

REASON

S TO IN

VEST IN W

ATER BOTTLIN

G

COM

PANIES

• Clean drinking water is a far more precious commodity than oil.

• Bottled water is a 50-billion dollar industry worldwide with bottling companies like Arrowhead, Poland Springs, Crystal Geyser, and Saratoga Springs

• Invest in California. It is home to an estimated 40 percent of the nation’s 300 water bottling operations

• More water bottling companies in California will lead to more jobs and more revenue coming into the state.

• Also invest overseas. The United States only contributes 15 billion dollars to the water bottle industry.

IF I WAS A CFO

OF A BAN

K• I would look into investing in water bottling

companies.

• Since only 3 percent of the world has fresh water to bottle then in time the world will struggle to keep up with the demand. The result will be high prices for bottled water and also high stock prices.

AVERAGE W

ATER BILLS• San Francisco- $34.33 a month• Sacramento- $30.17• Bakersfield- $26.75• Santa Barbara- $55.08• San Diego- $72.44

• The more south you go the more expensive your water bill will be.

PROPERTY VALU

ES WITH

WATER VS PRO

PERTY VALUES

WITH

OU

T WATER

• Land is much more valuable if you have water.

• Milwaukee example

• Comparison Between the Value of Irrigated and Non-Irrigated Pasture Land

in the San Joaquin Valley(1985 dollars)

• Year Irrigated Pasture Non-Irrigated Pasture Difference in Value

• 1982 $2,725 $1,475 $1,250• 1983 2,738 1,310 1,429• 1984 2,490 1,251 1,239• 1985 2,300 1,050 1,250• 1986 1,949 877 1,072• 1987 1,936 803 1,133• 1988 2,089 817 1,272• 1989 2,045 914 1,131• 1990 2,083 875 1,208• 1991 2,167 883 1,284

FUTURE FINANCE

PRIVATIZATION

•What is privatization?•Covers wide spectrum of water utility operations including operations, management and ownership arrangements •At a high level, three categories

•Outsourcing•Design, build and operate•Asset sale

•In US contracting of Operations & Maintenance is more common than sale

PRIVATIZATION

•History of Privatization•Historically, 50% of water systems were privately owned (dominated in 19th century)•Public health concerns caused government to take over water•Water quality issues have been primarily driven by deteriorating infrastructure during our most recent years

•A huge investment is required!•Shortfall of approximately $11b/yr in funding after Government contribution•CAPEX cost of $331-$450billion through 2019 required

•In 2002 the U.N. recognized water as a human right•About 90% of the US population gets it water from public-supply systems and the US is identified as one of the largest public water markets in the world (7% or better growth)

PRIVATIZATION

•History of Privatization•World Context

•World Bank estimated global water services $800b market in late 90s•Private companies saw opportunity and lobbied•Latin America and East Asia started in mid 80s•South Asia and Africa followed in late 90s•We began to see water quality issues thereafter•RWE (German owned) purchased American Water Works in 2003 and then divested in 2006

PRIVATIZATION

•Reasons to Privatize•Defer investment cost to private organizations •Private organizations should be more efficient at operating

•Economies of scale•Public organizations will have to meet stakeholder demands

•Improvement of quality•Access to technical expertise in the “corporate” market

PRIVATIZATION

•Reasons against Privatizing•Rate increases •Privatization undermines water quality•Companies are accountable to shareholders, not consumers•Reduces local control•Private financing costs more than government•Can result in job losses •Can be difficult to reverse•Could leave poor with no access to clean water (unlikely in US)•Could lead to bulk water exports

•Ecologists suggest it severely disrupts environment

FACTORS AFFECTIN

G W

ATER UTILITY FU

TURE

•The degree at which municipal gvmts. will privatize water systems would depend may govern the pace at which industry transforms.•Globalization of the water business.•Population increases•Demographic shifts

BUILD

OW

N TRAN

SFER (BOT) &

BUILD

OW

N

OPERATE (BO

O) PRO

JECTS•Shift Responsibility•Attractive for countries with urgent needs and little capital.•Mechanism for rapidly organizing private capital

PRIVATIZATION

PROCESS

Management Contract

Lease Contract

BOT/BOO Concession

Full-Utility Concession

Asset Sale

Ownership Public Public Public Public Private

Investment Public Public Private Private Private

Operation Private Private Private Private Private

Tariff Collection

Public Private Public Private Private

Adapted from: Private Capital in Water and Sanitation, World Bank

CASH FLO

W AN

D RISK

Management Contract

Lease Contract

BOT/BOO Concession

Full-Utility Concessio

n

Asset Sale

Time Horizon (years)

2-5 10 10-20 20-30 Perpetuity

Client Government Retail Customer

Government Retail Customer

Retail Customer

Cash Flow Fixed-fee for service

Market Risk

Contracted pmts due after construction

Market Risk

Market Risk

Construction Risk

None None High Low Low

Risk None Medium Low High Very High

Adapted from: Private Capital in Water and Sanitation, World Bank

RISKS•Water projects rarely generates foreign exchange.

•Projects financed with foreign exchange debt are more exposed to foreign exchange risk

•Difficult to obtain debt at reasonable interest rates

PRIVATE/PUBLIC O

WN

ED W

ATER SYSTEMS

REVENU

ES

Ownership Amount (Billion $’s) Percentage

Public 22.2 85.7%

Private 3.7 14.3%

Total 25.9 100%

Source: Privatization of Water Services in the United States: An Assessment of Issues and Experience (2002)

PRIVATE/PUBLIC PRESEN

CE IN W

ATER SYSTEMS

System Size ( # of households served)

<100 101-500 501-3,300 3,300-10,000

>10,000

Public 7.7% 34.8% 68.6% 78.1% 87.7%

Private 39.5% 34.6% 26.6% 21.4% 12.2%

Ancillary* 52.8% 30.6% 4.8% 0.5% 0.1%

*Ancillary systems deliver drinking water as an adjunct to theirprimary business (e.g., mobile home parks, retirement homes).

Adapted from: Privatization of Water Services in the United States: An Assessment of Issues and Experience (2002)

ICEBERG

S• Icebergs are blocks of fresh-water ice that break off from glaciers and float out to sea.

• Glaciers are formed in polar regions where snowfall lasts for centuries, or even millennia, without entirely melting, and is eventually compressed into ice

• Iceberg Web Resources for Students

BOTTLED

ICEBERGS

•Qikiqtaaluk Corp. and Pure Berg of Canada

•Plan to harvest icebergs that have calved off nearby glaciers, melt them, bottle the water, and market it as clean drinking water to those who crave a taste of the Arctic.

•Matthew Spence, the development manager

PROC

ESS

•Pay $200 a ton for icebergs

•These icebergs break off the glaciers by the thousands during the summer and float into Cumberland Sound and Davis Strait.

•Haul onto ships and store in waterproof containers

•Transport to bottling plants

Cumberland Sound

Ice bergs $0.8 per gallon

Bottle water : Home delivery $1.5 to $ 1.75 per gallon

Bottle water : Food store $ 0.85 to $1 per gallon

Bottle water: water store $0.25 to $0.75 per gallon

PUR water filters: select $ 0.23 per gallon

PUR water filters : Plus $ 0.24 per gallon

PUR water filters: Ultimate $ 0.26 per gallon

•Chinese scientists have developed solid water, which can be use for planting trees in deserts

•97 % actual water , 3% is a kind of macromolecular polymer extracted from animals and plants

•packed in degradable paper, is not pollutive and can be placed deep in the earth together with the root of plant.

FACT•A real advantage to China

•It has currently 2.67 million square kilometers of desert land (27.9% of China´s total territory)

•with an average expansion of desert areas of about 10,400 square kilometers per year

•Find angel investor

•It is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.

•Angle groups or Angle networks

•Issue corporate bond

•The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date `

•Trade like commodities•Purchase water commodities in CME•Chicago Mercantile Exchange Holdings, Inc.

•Water trade – e.g Queensland water trade

•water trading is the voluntary buying and selling of a water entitlement or the water that is available under a water entitlement, with price determined by market conditions

•Water users can buy water to expand their operation and sell any they do not need.