The Blue Moat Rod

In Desalination 235 (2009) 33–43, “Technologies for large scale seawater desalination using concentrated solar radiation“, the authors outline the scalability for one solution to the symbotic problem behind shortages of water and energy looming in our future: specifically concentrated solar. I know this isn’t a breakthrough by any means technologically, but I was surprised to read about some of the numbers and how quickly it is approaching scalability.  The authors present some facts and predictions for the outlook of concentrated solar energy production and costs well into 2030.  The article concludes that concentrated solar production (CSP) is the only viable solution to combat both of the growing shortages, as they predict it should be reaching cost parity for the combined water and power equation when compared against a forecast of the price of new capacity per kWh from other conventional means.  Also interesting to note, the first economically competitive (that is, without public support) solar power plant was built in 2007. Which I can point out, the technology got there without oil above ~$60.  The paper focuses on concentrated solar being applied to the two different desalination, reverse osmosis and the more energy intensive multi-stage flash. A good read, indeed.

Photo: Concentrating solar power (CSP) collectors near Boulder City, NV. 3 Jan 2009. By J.N. Stuart.

When/If the world is forced to decide between dollars, watts, and water…which one will it choose?

Trick question.  But I’m investing in the answer.

The answer is we need them all, and companies will be looking to companies selling efficiency. Both technology and services.  Efficiency in terms of watts and water are blurry as they often are often both very symbiotic in many processes.

Quoting an excerpt from one of my investments’ 2008 annual reports;

“We drove 7.8% organic sales growth—matching our best result of the decade—with double-digit growth in the Americas, 6.3 percent growth in Asia Pacific and 1.7 % growth in Europe.  Second-half performance meaningfully improved from first-half results, behind traction on pricing, technology and service growth programmes.

Can you name a company who had better results in the second half, compared to the first half, of 2008?

Want to know what stock it is? Somebody has to guess first, leave a comment.

I just listened to the FY ‘08 conference call on Heckmann.  I also went through the consolidated financials.  Below are my notes from the call.  I haven’t proofed them, so they aren’t guaranteed to be correct.  I’ll just edit this post, as I proofread, but…lets face it, spelling and grammer are really low priority with this market volatility.

Complication = only reporting 2 months.  12 months of interest, corp. expenses, and only 2 months of ops. 

Cost of the SPAC IPO, acquisitions, and closing of the SPAC trust.

Adjusted pro-forma, sales grew 69% to $95.9M.

Adjust pre-tax income, grew 43% to $28.4M.

Adjusted op income was flat due to acquisitions etc.

Notes on escrow settlement, I couldn’t type fast enough, but 3.5M went to Shiu Hong Bin, and Heckmann paid $14M for 13M shares.  Making a claim this week, to recover the remaining.

Shiu = retired, w/ non compete.

10% at 1/3 cash value per share.

6% of public warrants at $1 per share.

Adding strong management, on weak economy.

Added an Executive.

New Controlled for GAAP and S.O.

Skilled IT manager for Oracle System.

Deloitte & Touche to manage transition to new accounting platform.

Jones, Lasal and Solmons, to evaluate assets

New plant to support Coke, exclusively

Expanding OEM facilities. New exclusive product for Coke.

Delayed Harbin acquisition, to be sure Heckmann and Harbin is ready.

Heckmann not sure yet, that acquisitions might not be as cheap as they might be.

Debt free. $3 per share in cash. $300M (rounded?). Profitable. Strong Op Margins.

“I…I…I…Really like the position we’re in today”

Not allot to talk about, since we only have 2 months of operations.

$95M pro-forma revs for ’08.

Q1. Why only 3M warrants?

Bought 13M shares, for $14M.  Out of the market to buy warrants, blocked legally.  If/when we are able to do so, we will.

Q2. Organic Growth? What are targets?

Organic Growth = ~30%.  Organic Growth = Half of Total Growth = 30%.

Q2 and Q3 are the “big quarters”.

Looking to target water related, water treatment, and other bottle water companies.

Q3. State of outstanding shares, clear up # outstanding.

Share count is 110M outstanding, and assumed acquisition of remaining 5M shares.

54M warrants public warrants outstanding, less 6% they have bought back

Mr. Heckmann own 18M w. and 13M shares.

Q4. Expansion?

Flavored waters, other kinds of waters.  Juice & Tea, since the OEMs are already into it. 

Q5. Expand on Agreement w/ Coke.

No. Volume will be significant.

Q5B Capacity?

1.9B small bottles, 21M carboy

Q5C.2008 Revs Pro-forma?

$95.9M 28.4M net income pre-tax.

Q5D. General sense gross profit? SG&A?

Numbers are fairly representative, we’re comfortable going forward. We believe that we will achieve greater operating leverage moving forward.

Q6. Capacity growth?

Harbin will add +330M small bottled, 93.4M carboy.

Aside from Harbin, likely +10%, at least.

Q7. What will hot fill add?

Timing will be Q3. 10% of our capacity will be hot fill.  We will increase as it will add flexibility.

Q8. Relationship, with OEMs, Pepsi?

In this environment, working capital drives reduction in # of vendors, so Coke, Pepsi, and Wahaha gets treated better, and little guys get the shaft.  So, Heckmann trying to get close to the “big boys”. Over the next couple years, a larger % of our biz, will be with the “big boys”.  They don’t have a sense of humor about “not delivering, or quality”, so it forces improvements in each plant. We will probably double our % of OEM biz, this year over last year.

Q9. Plans outside of China?

Not looking at bottled water companies in the US.

Looking to expand into water treatment, technologies to sell to the US.  11 offices.

Can’t drink tap water, anywhere in China.

We have a very strong bottled water platform.  Our teams our having weekly meetings with other platforms.

Q10.  Expected revs from current capacity?

Can’t answer that, but the capacity issues we face are mostly seasonal.  Excess, unused capacity in colder months.

Q11. Valuations on pipeline?

3x – 5x, everybody wants to price off ’07 earnings and say ’08 was an outlier. “We’re the prettiest girl at the dance right now”…we’ve got a great operating company, and allot of cash, and I don’t want to blow it, yet.

Q12. Weak economic pressures on supply chain?

Average prices are stable.  On PET, we used cash to buy some attractive PET buys.  We bought allot of it.  We will have cost advantages as we start to use up PET.

Q13. Lower PET prices?

Prices were down 40%, at end of year.  Since PET is a component of textile biz.  China textiles slowed down, lots of supply, so PET production was shut down…so prices are coming back now.

Q14. OEM would double in ’09…details?

22% of sales in ’08. Unipresident, Coke, Hong Bower…the analyst is following up after.

Q15. Utilization in Q4, SG&A?

Capacity in the 2 months, we were at 50%-60% in the two months detailed.  SG&A shouldn’t be larger as a % of a sales going forward.

Q16. New Coke Plant costs?

$8M - $10M

Q17. Talk about new plants.

6 months to build. Payback = 3 years. So much density in China, that in any city there are lots of bottling plants.  Nobody ships water.

Q18. Acquisitions?

Debt is tough to come by. Our advantage is cash.

Q19 Slowdown?

It’s slower than it was. Psychology is more positive.  More competitive than US.  Country full of entrepreneurs. When you start with a lower per capita consumption, and you have population growth, plus you can’t drink the tap water.

Q20 Escrow settlement impact on earn out?

No.  Settlement has nothing to do with it. There isn’t going to be an earn-out, not in this market.

Jeff McLarty is a CFA candidate, and looking to network with other analysts on Heckmann Corp., in a private forum.  If you’re interested in networking, send an e-mail to Jeffrey dot McLarty at gmail dot com.

I’m on a mission, to learn everything I can about the world’s water industry, and issues facing our planet. So, I wanted to get a look at each country. I started going down a list of countries and googling; “Country A AND Water” or “Country B AND Desalination” or “Country C AND Water Shortages”.  I copied and pasted 50 or so articles I found.  Most of the headlines are from google news, and within the last week.  That’s right, MOST ARE FROM THE LAST WEEK.

And by the way, I also found some international facts interesting.

Some International Facts

Rank	Country / Territory	Population	% of world population	Some News
1	China (including Hong Kong and Macau)[4]	1,335,962,132	19.84%	Water scarcity ‘now bigger threat than financial crisis’Business suffers with world water shortages
2	India	1,160,650,000	17.15%	Conference highlights challenges for water managementSolution to the world’s water woes
3	United States	306,015,000	4.52%	US water bill to cost federal government $10.6 bln
4	Indonesia	229,700,000	3.41%	UN warns of widespread water shortages
5	Brazil	190,826,000	2.8%	A sustainable water supply for Brasilia
6	Pakistan	165,874,000	2.46%	Is Water Getting Out Of Reach?
7	Bangladesh	162,221,000	2.41%	Bangladesh: Power, Gas and Water Crisis
8	Nigeria	154,729,000	2.3%	Nigeria: Water Shortage Worries Yobe Assembly SpeakerNigeria: Water Scarcity - Mairuwas Hold Residents Hostage
9	Russia	141,850,000	2.11%
10	Japan	127,630,000	1.9%	Water row may stop trains / Ministry revokes JR East right to draw from river for power
11	Mexico	109,610,000	1.63%	Fish out of water
12	Philippines	90,457,200	1.34%	Our troubled country: for lack of water, I’m so dry, I can’t spitIn the article “Babies drink coke, instead of water”
13	Vietnam	88,069,000	1.31%	Salty Mekong Delta thirsts for water
14	Germany	82,062,200	1.22%	If the Well Runs Dry
15	Ethiopia	79,221,000	1.18%	Water pipe sparks Ethiopian conflict
16	Egypt	75,965,000	1.13%	Why population still matters (scroll down to paragraph on the Nile)
17	Turkey	71,517,100	1.06%	Controversy surrounds water forum as world’s water woes multiply
18	Iran	70,495,782	1.05%	Wabag project in Iran proves nitrate-removal technologies
19	Dem. Rep. of Congo	66,020,000	0.98%	Democratic Republic of Congo: Cholera outbreak [PDF]
20	France (incl. overseas collectivities)[5]	65,073,482	0.97%	Water losses in France (26%) are high compared to England (19%) and Germany (7%), but are considered universally of good quality - Water Supply and Sanitation in France (Wikipedia)
21	Thailand	63,389,730	0.94%	Thailand: Drought in Buri Ram in the Northeast
22	United Kingdom	61,612,300	0.92%	Evidence Base for Large-scale Water Efficiency in Homes
23	Italy	60,090,400	0.89%	Free Water In Naples about to Dry Up
24	Myanmar (Burma)	50,020,000	0.74%	MYANMAR: Water shortages loom in delta
25	South Africa	48,697,000	0.71%	South Africa: No Crisis in the Security of Water Supply; Water Safety - Minister
26	South Korea	48,333,000	0.72%	Korea not safe from ‘water bankruptcy’
27	Ukraine	46,143,700	0.69%	Drought Kills 400,000 ha in Ukraine, Reduces Crop
28	Spain	45,853,000	0.68%	Barcelona forced to import emergency water
29	Colombia	44,802,500	0.67%
30	Tanzania	43,739,000	0.65%	Water: As demands increase, the world struggles to stay afloat
31	Sudan	42,272,000	0.63%	“Water shortages have been named as a major underlying cause of the conflict in Darfur in western Sudan” - Global forum seeks to avert water crisis
32	Kenya	39,802,000	0.59%	Traders protest over increase of water tariffs
33	Argentina	39,745,613	0.59%	Argentina- The cost of the drought
34	Poland	38,130,300	0.57%
35	Algeria	34,895,000	0.52%	Water Desalination Capacity to Exceed 1.5 Million Cubic Meters per Day in North Africa with ERI PX Technology
36	Canada	33,584,000	0.5%	Should city ban bottled water?: Yes
37	Uganda	32,710,000	0.49%	Fort Collins company helps bring clean water to Uganda
38	Morocco	31,394,044	0.47%	Promoting Rural Sanitation and Hygiene
39	Iraq	30,747,000	0.46%	Clean water often a luxury in Iraq
40	Nepal	29,331,000	0.44%	Nepali girls dropping out of schools due to lack of toilets
41	Peru	29,165,000	0.43%	Peru’s alarming water truth
42	Venezuela	28,685,400	0.43%	Land Reform Conflict in Venezuela’s Strategic Water Source
43	Afghanistan	28,150,000	0.42%	Afghanistan: threat of water shortage through groundwater depletion
44	Malaysia	28,067,000	0.41%	Sustainability of Malaysia’s Water Resources Utilisation
45	Uzbekistan	27,488,000	0.41%	UZBEKISTAN: SENATOR ISSUES WARNING ON LOOMING NATIONWIDE WATER SHORTAGE
46	Saudi Arabia	25,721,000	0.38%	A Problem With Liquidity: The Challenges Of Water in Saudi Arabia
47	North Korea	23,906,000	0.36%	North Korea notifies South Korea of water-level control plans on
48	Ghana	23,837,000	0.35%	Manitowoc native working to clear Guinea worm from Ghana water supply
49	Yemen	23,580,000	0.35%	Yemen’s water crisis
50	Taiwan[6]	23,027,672	0.34%	2nd set of water rationing measures on hold: WRA
51	Mozambique	22,894,000	0.34%	Mozambique: 55 children perish daily from unsafe water
52	Syria	21,906,000	0.33%	Q&A: Plenty of Water in the Desert, if Only…
53	Australia[7]	21,614,658	0.32%	South Australian water at ‘extreme risk’
104	Jordan	6,316,000	0.094%	Jordan left thirsting for rain

I’ve never been to China, but I found this helpful, while I was doing some research about the business Heckmann Corp is in.  The following excerpts are taken from TravelChinaGuide.com.

“the tap water in China is undrinkable, even in the finest of hotels.”

“some hotels have no water dispenser but are instead equipped with a water heater…to boil water”

“bottled mineral water and various beverages are commonly sold in many street shops, supermarkets, restaurants and hotel stores for about CNY3 per bottle.”

“If you are using the drinkable water filled in a plastic barrel, it’s suggested you should use the water within one week.”

Disclosure: I am long HEK.

Over the last 8 months now, I’ve ramped up, learning more and more about the global water situation.  I’ve started learning about some of the figures who have continually popped up in the conversation.  This weekend, I found a short analysis done over at the BBC, written by Dominic Waughray, Senior director, head of environmental initiatives, World Economic Forum, Geneva.  He is one leader in the space, I’m going to follow more.  He has a good handle on things.  Some great coverage of issues has been written recently:

“The Pending Scrable For Water” - a current state analysis by Dominic Waughray himself

“Mapping the Future” - four slides that foreshadow our fate

“Delays Block China’s Giant Water Scheme” - A look at how they can’t divert water fast enough

“How Can Water Be Fairly Distributed” -Nice REALISTIC sentiment by Clare Davidson…she writes:

“It [water] has often been heavily subsidised. Paradoxically, analysts argue, this has meant water has been overused because it has been misleadingly cheap for the end user.”

and in the same piece…

Mr Briscoe says “as supplies become more constrained, there is more and more emphasis on ‘more value per drop of water’ “. John Briscoe is the professor of environmental engineering at Harvard University and until recently the senior water advisor of the World Bank.

and also from Davidson’s piece…

“There has been a lack of investment in water. It only takes priority when it starts becoming unavailable,” says Black & Veatch’s Mr McCarthy.

I wanted to be aware of the challenges that investors in the water sector will face, so I watched a documentary titled “F.L.O.W. - For The Love of Water“.  The film did a great job, of presenting one side, the loud side, the humane side, of a debate they are trying to bring awareness to.

Maude is doing exactly what Al Gore did for global warming, she’s raising awareness, and creating a debate amongst informed people.

There are many problems with how the world’s water systems work.  Ethical ones. There are trade-offs between profit & pollution, efficiency and employment, charity, taxes & shareholders.  Even trade-offs between life and death.  None of it, is a pretty picture.  I’m with Maude here, we do need solutions.

There ARE problems, everywhere, ok.  But attacking the corporations running waste water recycling plants, isn’t the answer. Even attacking the corporations bottling water isn’t the answer.  What that does, is actually push up the expenses, and push up the price of water.  Think about that.  (More legal bills for them = higher revenue to pay the bills)

If you want to drive the bottled water makers out of business, try an IPO, Maude.  Solve the problem. Rather than just talk about it, and hate them, and spending money on lawyers - invest in finding a solution! I promise, if you come up with a feasible solution, people will invest.  And the economic benefit you generate will allow the dollars to flow to your solution, and put the evil Suez & Nestle out of business.

The real problem is, rising population + finite capacity for the world’s natural water recycling systems.  In spite of this, Maude, and others, are pushing for the UN to pass Article 31;

“Everyone has the right to clean and accessible water, adequate for the health and well-being of the individual and family, and no one shall be deprived of such access or quality of water due to individual or economic circumstance.” 

Which, would be great. But who’s going to fund it, who is going to pay for the capacity, when it is impossible since water is finite? Government (taxes come from people)? Charity (that works, but its not scalable nor sustainable)?  Or, Investors (But they all want profit)?

In the film, there are two quotes preceding the discussion on Article 31, in the chapter titled “water shortage becomes corporate opportunity”.  The two quotes are:

“Most people don’t think about where there water comes from, they just turn on the tap and expect it to be there, those days are ending” - Peter Gleick

“This notion that we’ll have water forever is wrong” - Maude Barlow.

Peter, are people going to think about where there water comes from more, if they get it for free?

Maude, if we’re not going to have it forever,  how can we start giving it away, like Article 31 suggests?

The only way to give something away in any form of remotely sustainable way, is have taxes (indirectly the people) pay for it.

How many government organizations operate at maximum efficiency? How many people waste what they don’t pay for?

Good news for investors is, whether the government is paying for solutions, or people are paying for water directly, for the time being, the only challenge will be the ethical dilemmas the film illustrates.

T. Boone Pickens makes a short appearance in the film, and I’m with him, “People say, ‘Water is allot like Air, do you charge for air?’, of course not. But ok, watch what happens”

Other investors like myself, should check out what Terrapin Asset Management is doing, they were quoted in the film.

The credits of the film, had a much more constructive dialogue then say, the commentary on Monsanto or Atrazine. For instance, I do like the “PlayPumps” that are shown, I want to re-iterate, DURING THE CREDITS. I’d invest in that, “a low cost solution, to a hole host of problems”.  See the video below. 

As an investor in Tetra Tech, I am extremely pleased with the new acquisition announced a couple days ago, of Wardrop Engineering.

The acquisition expands TetraTech by 1200 employees who have worked together in over 50 countries operating from there 13 offices in Canada, as well as 6 international offices spanning USA, UK, Ghana, India and China.

They operate in three segments…

1. Energy
2. Infrastructure
3. Resource Management

…offering clients services such as,

BUT, it’s the sectors that they are into that makes me want to buy more TTEK.  It’s the exposure to Canada’s growing nuclear industry, as well as their expertise in power grids, environmental services, water, and rail, that has me most excited. I think it’s also cool to have a little of this exposure too!

I have a long, position in TTEK. 

To date, I know about 8 organizations and one person (me) building a total of 12 water indexes.

So far, I feel Janney Water Indexes are one of the leaders (in terms of creating useful indexes), however every other index does serve a purpose.

They have built 3 indexes, which they display on their homepage and you can get through some professional services, in both USD and EUR.  However, even their own website seems to be mixed up with respect to the symbols for them.

They are:

The Janney Global Water Index (USD: JGI/^JGA ) (EUR: JGIE / ^JGE)

- 60 Constituents including the 30 from each of the two below.

Janney Water Tech (USD: JWT/^JTA) (EUR: JWTE / ^JTE)

 - 30 Technology + Infrastructure

Janney Water Works (USD: JWW/^JWA) (EUR: JWWE / ^JWE)

- 30 Utilities

I’m not sure how much work goes into creating an index, but I think it’d be very cool to work for these guys.  I might just start working for them on my own - because I’d really like some of the simple data like the trailing EPS and forward estimated EPS.  If only I had more time…