Market Opportunity in Water

“In the United States, the American Society of Civil Engineers (ASCE) 2013 report card gave the country’s water and waste water systems a “D”.”

Water is essential, generally underpriced, and less exposed to economic downturns than other assets. In the past 38 years the price and demand for bottled water has only decreased once in the United States (the great “recession” of 2008-2009).Though water is essential to most economic activities such as agriculture, energy, industrial production, mining and population growth, there is no substitute. Despite the growing demand, the fact is that water is a finite. The Earth contains no more water now than it did 5,000 years ago when the population was a small fraction of what it is today and there was little industrial use of water. Only some 2-3% of the world’s water is fresh and 90% of all fresh water is locked in the form of ice in the Polar Regions. Much of the available water for use is located remotely from the households and businesses that need it and must be transported over long distances and stored. Moreover, there continues to be a number of threats to the supply of potable water, including industrial over-use, over development in watershed areas and wetlands, runoff from farms, acid rain, microbial contamination and pollution. Nevertheless, as populations and industrialization increase worldwide, the demand for potable water for drinking, agriculture and industry relentlessly grows. Indeed, in a majority of the world’s water basins, supply and demand curves have crossed. As a consequence, there is an unprecedented upward pressure on water prices. Given these factors, there is a growing realization by many industry experts and analysts that the availability of water and problems with its portability will increasingly become difficult issues in the 21st century and that companies with businesses that focus on water will experience dramatic growth and visibility among investors.

Most people in industrialized countries take water and its availability for granted. However, the worldwide water industry is experiencing revolutionary changes due to rising demand, changing weather patterns and widespread contamination, which have led to increasing scarcity of inexpensive supply alternatives, unprecedented water quality monitoring requirements, deregulation opportunities, industry consolidation and technological change. In the developing world, more than a billion people lack access to a safe and adequate water supply and to satisfactory wastewater disposal systems. Addressing their needs will require hundreds of billions of dollars of investment by governments and private industry. The OECD estimates that by 2025 water will make up the lion’s share of global infrastructure investment. For just the OECD countries and Russia, China, India, and Brazil, water spending will top $1 trillion that year, nearly triple the amounts needed for investments in electricity or transport. For developing countries alone, an estimated $103 billion per year is needed to finance water, sanitation, and wastewater treatment through 2015.

In the United States, the American Society of Civil Engineers (ASCE) 2013 report card gave the country’s water and waste water systems a “D”. A large portion of the nation’s drinking water infrastructure is nearing the end of its useful life and there are an estimated 240,000 water main breaks per year. Some water systems date back to the mid-1800s, but most water infrastructure components only have a useful life between 15 and 95 years. It is estimated that the most urgent investments to restore water infrastructure could be spread over 25 years at a cumulative cost of approximately $1 trillion. Wastewater infrastructure faces the same hurdles. There are between 700,000 and 800,000 miles of public sewer lines in the U.S., many of them installed in the early 1900s. Investments in these pipes accounts for up to 85% of dollars spent in the sector however there is still an estimated 900 billion gallons of untreated sewage discharged each year.

In addition to infrastructure costs, water managers throughout the Country and particularly in the arid Western United States are facing unprecedented uncertainty of their water supplies, and states are now realizing the strategic importance of long-term water supply diversification and are preparing to commit significant funds in the near term to ensure adequate future water supply for housing, energy production and other growth areas. As the marginal cost of new water supplies increases (desalination, reuse, transportation, etc.), so will the value of regional water supplies. Providing dynamic low cost, high volume solutions to Western water scarcity problems requires institutional capital and expertise. More institutional capital and managers entering the space will increase the deal flow and transaction sizes, but potential returns have not yet begun to contract from competition as the knowledge and execution skills needed to succeed in the water space requires years of experience.

Caddo Mountain Spring Water, LLC believes that these factors are producing an unprecedented period of transformation in the industry in which a limited number of water companies will thrive and a select number of water assets will prosper, offering investors the ability to realize substantial capital appreciation as well as sustainable long term income, with relatively low levels of risk and volatility.