Wednesday, April 25, 2007

Water, water.........not everywhere!


Sinkhole Syndrome

By Chris Mayer
"From Hawaii to New York, Alaska to North Carolina and everywhere in between, an epidemic of breaking pipes is causing unprecedented havoc," declared one of the presenters at last month’s Gabelli Water Infrastructure Conference in New York. Replacing and repairing all these breaking pipes, therefore, could produce unprecedented profits for the certain water pipe manufacturers.
Last year was the worst year for sinkholes and sewage spills in U.S. history. "This year is shaping up to be even worse," says Thomas Rooney, president of Insituform Technologies. "Most water and sewer pipes in the United States were built 60 years ago - but were meant to last 50 years. Do the math."
Of all the presenters at the recent Gabelli Conference, Rooney offered the most eye-opening story. He told attendees about the looming crisis arising from our decaying water and wastewater infrastructure - namely, leaking and breaking pipes (See the Rude Awakening edition of June 15, 2006: Parched !)
But more importantly, he gave us some tangible evidence that shows just how bad things are getting. The most important statistic was the record number of sinkholes and sewage spills in the U.S. last year. Leaking or breaking pipes are the biggest causes of these things in our cities.
A water pipe that leaks (or breaks) either allows dirt to get in the pipe or allows sewage to get out. If dirt gets in the pipes, then the pipes carry the dirt away. Eventually - even if the pipes carry only tiny amounts of dirt away each day - this weakens the ground above the pipes. This ground lies below - and supports - our roads and buildings. Sooner or later, the ground gives way, creating the gaping sinkholes that swallow up cars and houses and even lead to people's deaths. One such sinkhole in Los Angeles was 30 feet deep and shut down a stretch of highway.

Last December, a massive sinkhole in Portland swallowed a big-rig truck. Another in Grand Rapids, Mich., cut off the water supply to residents, who then had to live under a "boil water advisory."
That's scenario one. Conversely, sewage may leak out. If sewage leaks out, then you have major health issues in the surrounding environment. Last year alone, more than 3.5 million people became ill from E. coli and other toxins released from over 40,000 sewage spills in the U.S., according to the EPA. Then there are the beaches.
More than 1.5 million people get sick in Southern California every year because of bacterial pollution in the ocean - much of it coming from broken pipes, according to a study by UCLA and Stanford. And in Hawaii last year, Waikiki Beach had to close after 40 million gallons of raw sewage flowed into the water after a water main pipe broke.In many parts of the country, we are at the breaking point…literally.
As Rooney said: "Just because you aren't standing ankle deep in sewage doesn't mean it won't affect you." He used the analogy of the aging power grid before the big blackout in 2003. Before that, no one cared about the aging power grid. Afterward, all kinds of wheels were set in motion to correct the problem (See the Rude Awakening edition of January 25, 2007: Powering Up )
Things could get even worse, Rooney warns, hard as it is to believe. "A little-known secret," he says, is the fact that the large-diameter pipes - those 40-50 inches in diameter, often made of concrete - are starting to leak in Los Angeles, New York and other major cities. When these pipes go, it will be front-page news, disrupting the water supply and affecting the health of millions.
(As faithful Rude Awakening readers may recall, last June I recommended Northwest Pipe (NWPX: Nasdaq ) which specializes in large-diameter water pipes. The stock is up nearly 60% since then. As of the last earnings report, the company had a record backlog of work.)
How did things get this bad? The issue is political will. The social pain involved in digging up a whole street makes it hard to tackle. When you have a harried mayor trying to deal with a budget, guess what gets cut out? It isn't the funding for schools, I can tell you. And no one wants to raise water rates.
One attendee asked, "Why doesn't the EPA mandate these things get fixed?" Rooney scoffed, "The EPA is about spotted owls, frogs and fishes." The EPA's focus is simply elsewhere, even while this huge environmental and health issue hangs over our heads. Once again, you can't depend on the government to protect you.
Investors are starting to take notice of the opportunities in water…
It's endlessly fascinating to me how investment fashions and moods shift over time. One year ago, when Eric Fry and I attended Gabelli's first conference, there was a relatively small audience - maybe a couple of dozen money managers and analysts. This time, the room was full. There must have been over a hundred people at different times. Water is now heating up as a global investment topic. Just in March, the Financial Times ran a 16-page special report on water. "Apocalypse, Now" reads the inside cover. "The world faces a water crisis." And the February edition of CEO magazine featured a front-page story that proclaimed: "Water is now a hot commodity."