By JASON BOOTH
Staff Reporter
Investors are betting big bucks that Los Angeles will run dry in years to come.
Such thinking, and the news that the Los Angeles Metropolitan Water District is close to a deal that would enlist Santa Monica-based Cadiz Land Co. to store water for the region under the Mojave Desert, has driven up the company’s share price by almost 80 percent in recent weeks.
The MWD already has agreements to tap the groundwater of neighboring water districts, most notably in the San Joaquin Valley. If the deal with Cadiz goes through, the MWD would build a 50-mile pipeline to link the Cadiz facility with the Colorado River Aqueduct. The plan is to store water in underground lakes known as aquifers during wet years for use during dry years.
The agreement is expected to be completed by March 31.
“We are in a new era,” said Bob Gomperz, a spokesman for the MWD. “The concept (of storing water in aquifers) is not foreign, but the possibility of doing a deal with a private entity is new. A study of technical details and due diligence is now being done.”
Cadiz owns the water rights to groundwater aquifers roughly 150 miles east of Los Angeles. It is estimated that the area currently holds 100,000 acre-feet of water with the capacity to store an additional 500,000 acre-feet of water, or enough to supply more than 1 million L.A. households for a year.
Los Angeles already uses more water than it is allotted by the California Department of Water Resources. To make up the difference, the city buys water from neighboring districts in Arizona and Nevada. But as the populations of these regions grow, Los Angeles will likely be forced to find alternative sources.
According to estimates by the California Department of Water, the state could suffer water shortages of up to 5.7 million acre-feet in medium-wet years by 2020, threatening the annual water supply of 2.8 million households.
That’s when Cadiz Land hopes to profit.
“We got involved because we felt it was a good investment. But we also feel we can build and operate an insurance policy for the public sector,” said Keith Brackpool, chief executive at Cadiz.
The wholesale price for treated water in the region is currently $431 per acre-foot; untreated, the price is $349. At those prices Cadiz stands to add $35 million a year to its coffers just by selling the water that naturally gathers under its property. If L.A. were to use Cadiz’s maximum capacity, the company could potentially take in an additional $174 million per year in revenues.
Cadiz’s story has been compelling enough to attract some of the biggest names on Wall Street. Fidelity Investments holds an 8.2 percent equity stake in the company, or more than $22 million at current prices. Morgan Stanley holds a 7.7 percent stake and Capital Research controls more than 5 percent.
Cadiz’s share price has proven treacherously volatile in the past. The stock rocketed above $26 in the late 1980s amid the California real estate boom and the prolonged drought at that time. By 1992, however, Cadiz’s share price had fallen to under $2.
Since August, Cadiz’s shares have risen from the $5 level to around $9, boosted in part by the financial turnaround of its subsidiary, Sun World International, an agricultural operation based in Bakersfield. Increased revenue from Sun World is expected to give Cadiz the cash flow needed to help it develop its water resources.
