Water marketer benefits as sector, firm gain attention. (Corporate Focus).

WHERE'S a risk-averse investor to hide from a market that's grown increasingly unpredictable?

Since mid-March, a growing number have discovered Southwest Water Co. a West Covina company that matches the reliability of a regulated utility with growth from non-regulated operations.

While the rest of the market churned after Sept. 11, Southwest Water held steady, trading in a tight range near $14 for months.

Then, as if by magic, Southwest Water has broken out in the past month, setting numerous 52-week highs on heavy volume. The company has issued virtually no news, but last week it was trading at $18, ahead of its first quarter earnings report.

"I don't know of anything that's created the stir, other than obviously our track record," said Anton Garnier, Southwest Water's chairman and chief executive.

Others offer their own explanations. They point to no single item, but a confluence of factors affecting both Southwest Water and its industry.

Some income-seeking investors, for instance, have switched over to water utility stocks because they're viewed as more reliable providers of dividends than deregulated power utilities.

"Many investors are frightened, they know that electric companies can no longer deliver, and some of them were the Enrons," said Joan T. Goodman, an analyst with the Pershing division of Credit Suisse First Boston.

True enough, but Southwest's dividend yield isn't real high, only 1.2 percent. A drought on the East Coast may have brought visibility to water companies, although it won't benefit Southwest directly. Southwest, by the way, is the only U.S. pure-play.

There has been consolidation in the industry, but it's slowed down recently. Garnier said he's talked with virtually every important player over the past few years, either as a potential buyer or seller, but there's nothing brewing in that department.

"I can tell you that the board's position is that we're not for sale. We've been doing very well, and there are very few companies that are making money and growing the same way we are. Why associate with a company that's going to take us into a lesser position."

Which brings us full circle. Simply put, Southwest Water has delivered, and people are beginning to notice. "It has benefited from its previous relative obscurity," said Neil D. Berlant, a senior vice president at Wells Fargo Investments.

Within the water industry, Southwest Water is considered an innovator. The company was founded in 1946 by Garnier's father, Camille.

"We were farmers, we had a thousand acres of truck farming in the eastern San Gabriel Valley," Garnier said. "When developers began building tract homes near La Puente, my dad hooked them up to the ranch water system. It took him about six months to figure out he could make more money selling water than selling beans."

The elder Garnier continued to buy water rights and pumping equipment from farmers and developers. He used convertible preferred stock to pay the developers, and eventually Southwest Water reached the reporting threshold for publicly held companies.

Anton Garnier, who owns about 2.4 percent of the stock, took over at the age of 28, after his father died in 1968.

The company still owns the regulated utility that the elder Garnier built, now called Suburban Water Systems, which serves 250,000 people in L.A. and Orange counties. It also owns utilities in Albuquerque, N.M. and Austin, Texas. These utilities account for about 40 percent of the company's revenue, and have increased it at a rate of about 3 percent per year.

Operator of systems

Where the real excitement lies, however, is in Southwest Water's non-regulated businesses. The company has concentrated on small- to medium-size cities, providing operating and maintenance services to more than 200 water and sewer utilities throughout the U.S.

The unregulated parts of its business are increasing its revenues by 10 to 20 percent a year, Garnier said. Overall, the company reported net income of $6.2 million, or 65 cents per diluted share, in 2001, vs. $5.4 million (59 cents) in 2000. Revenues rose to $115.5 million from $104.7 million. First quarter earnings hadn't been released last week.

Municipalities are reluctant to sell utilities that they own, yet running them is becoming more difficult and provides an incentive to hire an outside contractor such as Southwest Water.

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In addition to cash dividends, Southwest Water has shared the wealth with its investors by issuing stock dividends as well. These have increased the number of shares outstanding to 9.5 million from 2.1 million in 1996. "I would assume that we're going to continue to do that also," Garnier said.

YEAR (Dec. 31)                    2001     2000

Revenue (millions)             $115.5   $104.7
Operating Expenses (millions)   103       93.1
Operating Income (millions)      12.5     11.6
Net Income (millions)             6.2      5.4
Earnings Per Share               $0.65    $0.59

SUMMARY

Business: Water utility operator

Headquarters: West Covina

CEO: Anton C. Garnier

Market Cap: $167.2 million Dividend Yield: 1.2%

Total Liabilities: $170.2 million P/E Ratio: 28.3

Long-Term Debt: $58 million

Financial Editor Anthony Palazzo can be reached at 323-549-5225, ext. 224, or at [e-mail].