Energy Diversification

Water Industry Spending Still Up - But Clouds Loom

This commentary was valuable, because it highlights how macro predictions of how many billions of dollars we need to spend on water infrastructure may not materialize in the near term. We have been hearing about water and general infrastructure upgrades for years.

There are a few overseas water plays -- difficult to gather good information and insight on, so this is an opportunity for any analysts with a deeper focus on water.

I would look at Epure (China based, Singapore traded) and Doosan (Korea).

Water ETFs: Commodity or Infrastructure Investments?

There is a big difference between a water utility, and an equipment or chemicals company that sells to utilities. GE may be the largest water sector player, but water is a miniscule portion of its value.

ETFs seem to be a marketing-driven product, tapping investor interest in water while avoiding the discussion of key issues.

Higher infrastructure spending may negatively impact utilities, who are unable to pass higher costs on to customers.

From an environmental standpoint, these funds can be misleading. Utilities are huge users of groundwater. PICO is actually a water hoarding play in the Nevada desert.

Lumping all these companies together in an ETF shows a lack of focus.

Water Infrastructure Attracts Big Spending But Filtration has the Momentum

You highlight all the right issues that will need to be addressed, or will address us over the coming years if we do not improve our water infrastructure.

However, several issues leap out:

1. We have been hearing about the need for water infrastructure spending in this country for years. Every disaster (blackouts, bridge collapse, etc) is positioned as the catalyst for infrastructure spending. Is it fair to say this will be a 10 - 20 year spending ramp, rather than a near term (1-3 year) event?

2. Given that most water systems are government run and financed (through user fees and bond issuance), a recession could reduce tax revenue and push back these improvements? (Note -- As you point out, this could benefit high-tech band aid solutions like INSU.)

3. With respect to China, this needs to be flushed out, so to speak. The Olympics are almost here, so we can't use Beijing as an argument for why the Chinese need to accelerate spending. China just reshuffled its infrastructure leadership. Do you have any specific insight on how exactly China's water upgrades may play out? (What about companies like Epure and Doosan, with a big presence in Asia?)

4. Your water surveys are very interesting to consider. Of course, given the years of infrastructure expectations that have not materialized, have you back-tested these surveys over the years to see if the respondents are good predictors? Or do they suffer from center-of-the-universe syndrome as many bureaucrats do?

Final comment: It will be useful to see how solar energy spending by governments plays out over the next year or two. Will government spending cutbacks reduce the enthusiasm for these subsidies? Or will the focus on infrastructure and energy needs keep them subsidizing solar power? I am not arguing for solar power; rather pointing to it as an indicator of how tough economic times could lead to *reduced* infrastructure spending.