What a difference a year makes.
One year ago, Los Angeles-based water utility and operations firm Southwest Water Co. was reeling as record rainfall in Southern California meant people were using less of its water. The resulting drop in revenues translated into three consecutive losing quarters and the stock dipped beneath $10 a share.
Today, the company is back on a solid earnings footing $3 million in the black as of the third quarter 2005. What’s more, thanks to a surge in investor interest in water utilities, its stock has had a record run-up, breaking through the $15 barrier for the first time in the last five years. Last week, the stock closed above $18 a share.
“The whole group of water utilities is doing exceedingly well. People are growing increasingly aware that water supplies are precarious. Those players who are in a position to provide high quality water at reasonable prices, like Southwest, are very attractive right now,” said Neil Berlant, managing director of the water group with the Seidler Cos.
Berlant said that the group of 20 water company stocks that he tracks has jumped 17 percent since Jan. 1, while the Standard & Poor’s 500 has risen 3.6 percent. Other water companies riding the investment wave include Cal-American Water Co., American States Water Co. and California Water Service Group.
Southwest Water’s stock has shot up even more because of its diversified portfolio of water utilities, wastewater treatment facilities and contract operations, he said.
The company owns and operates a major water utility serving an estimated 300,000 residents in the San Gabriel Valley where the company’s roots were launched a century ago when farmer Abel Garnier drilled a water well. His grandson Anton Garnier is the company’s longtime chairman and chief executive. Southwest also owns several smaller water utilities scattered across several states in the southern U.S., including New Mexico, Texas and Alabama.
About 20 years ago, the company branched out into operations contracts at wastewater and municipal water utility facilities. The strategy was twofold: to diversify the revenue base to free the company from the vagaries of weather and to get a foot in the door to buy out small utilities.
“We can operate the water system and sewer treatment plant, do bill collection, train municipal employees just about anything they’d like us to do,” Garnier told investors at a water conference last December.
Today, Southwest Water has contracts with about 450 municipal water agencies and a contract backlog of $300 million for work not booked in the current year.
But there is a downside to contract operations: they come with high expenses. Garnier said that while 60 percent of the company’s revenues come from contract operations, they only generate about 25 percent of the company’s net income.
“The most profitable way for us to grow is to buy water utilities . But the best way to do this is to have ongoing relationships with these utilities first getting a camel’s nose under the tent and then asking what else can we do for them,” Garnier said.
Through this strategy, Southwest Water has parlayed many of these operations contracts into outright purchases of utilities and wastewater treatment facilities.
But most of the profits still come from the water utility side. Besides dealing with the unpredictability of the weather, the biggest ongoing concern is getting favorable rate case rulings from state regulatory agencies. And Southwest Water now has a major rate case before state regulators for its Suburban Water Systems subsidiary, its largest unit, which serves 300,000 people in Los Angeles and Orange counties.
Southwest Water faces a future withoutGarnier. He announced last fall that he plans to step aside as chief executive now that he has turned 65.
“I’ve spent my life at this,” Garnier said in December. “In talking with the board, it was agreed that I should become a full-time chairman and the board has decided to conduct a search. There is no time set for a transition that will happen whenever the right person is found.”
