Water Crisis Calls for Water Rights

Cities across the West were built from deserts and have been able to thrive due to human ingenuity. But with communities now growing at an exponential rate, desert-like qualities are starting to return. Nevada, one of the fastest-growing regions in the nation, is now finding itself beset by a multiyear drought.

After two decades of converting desert into a sprawling metropolis, cracks in the water supply are surfacing. Urban development, agricultural uses and population growth have collided with a multiyear drought. And, it’s not just gleaming desert cities Las Vegas. Even coastal cities like San Diego are struggling to meet their water needs.

As baby boomers reach retirement age, the population in these areas will swell even more. While we think of water in terms of laundry, bathing and other daily necessities, water is essential for electricity. Demand for air conditioning and other uses will add to the already tight situation.

According to the Department of Energy’s National Energy Technology Laboratory, the average thermoelectric plant uses 25 gallons of water to produce one kilowatt-hour of power. All of this is putting heavy demands on a depleting resource.

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Water Crisis Calls for Water Rights: Rivers and Lakes at Low Levels

Communities across the West depend upon rivers for direct use and as a source of energy. But recently, many rivers throughout the western U.S. have lower levels of water due to a shortage of snowfall in the mountains. Water supplies for much of the West come from winter snowfall that accumulates in mountainous regions and melts throughout the spring and early summer. But, due to rising temperatures, less snow is being accumulated on the mountains throughout the winter months. Water that winds its way down from the mountaintops to the rivers is on the decline. Rivers are drying up.

In California, a key source of the state’s water supply, called the Sierra Nevada snow pack, has fallen about one-third below normal levels. This provides most of the water for Northern California, and it’s at its lowest levels in 20 years.

Two of the most important lakes in the West have water levels falling to dangerously low levels: Lake Mead, which borders on Arizona and Nevada, and Lake Powell, on the Arizona-Utah border, provide water for about 27 million people in seven states. The supply/demand equation is catching up, and San Diego’s Scripps Institute of Oceanography reports that these two lakes have a 50% chance of running dry by 2013.

Once a mighty river, the Colorado River has been reduced to a shadow of its former self. Ravaged by thirsty cities and southwestern farmers, it is among the world’s rivers that run dry for at least part of the year. Changing climate conditions and drought are adding to the water crisis.

Water Crisis Calls for Water Rights: Farmers Can’t Plant

Groundwater reserves also are becoming increasingly depleted, due in large part to the rise in irrigated area and the growing use of water for industrial purposes. Aquifers that supply irrigation water to some of the world’s major grain producers are of particular concern because they cannot be replenished.

We are seeing the heavy toll this takes on farmland. Farmers in Central Valley and cities from the San Francisco Bay Area to San Diego are already coping with significant cutbacks in water deliveries. In Fresno and King counties, the water situation has deteriorated to the point where farmers are unable to plant over 200,000 acres of crops.

Water Crisis Calls for Water Rights: Desperate Measures

San Diego currently imports 90% of its water from places like the highly sought-after Colorado River and the Sacramento-San Joaquin River Delta in Northern California. The city council compares its dependence on imported water to the nation’s dependence on imported oil.

Things have become so bad that San Diego launched a program called “toilet-to-tap,” a reclamation project that recycles sewage water into drinking water.

The city is trying desperately to slash its water dependence by 50%. Collecting rainwater, combining the sewage reclamation project with conservation, installing pressurized showerheads and low-flow toilets are all measures to help provide clean, drinkable water for its 3.1 million citizens.

Water Crisis Calls for Water Rights: No Easy Solutions

A typical American uses 80–100 gallons of water a day, according to the U.S. Geological Survey. The entire country consumes about 323 billion gallons per day. All the while, water is becoming scarcer. There are a limited number of options to deal with the water shortage.

One solution is desalinization, a process of turning seawater into potable water. But this is expensive because it takes large amounts of energy to generate the high pressure that forces water through a filter. If 50% of our water came from desalination, the United States would need more than 100 extra electric power plants, each with a gigawatt of capacity.

Another answer is for private companies to own water rights. This would be beneficial for companies holding water rights that would finance and develop projects to get the water to where it is needed.

Water Crisis Calls for Water Rights: The Next Gold Rush

Think of owning large mining rights in an area rich with gold — when gold was trading $200 an ounce. How about sitting on land in Texas that finds oil like the Hunt family when oil was in single digits? Owning the rights to a precious commodity can become a highly lucra­tive business, especially when it is owned as prices are going up.

Today, water is the most under priced commodity, and it’s in huge demand. When you think of it, water is about the only commodity that has not skyrocketed the way oil and food prices have. But with weather problems here to stay and demand on the rise, the cost of water is going much higher. As a result, companies owning water rights are set to soar.

The legendary T. Boone Pickens sees the writing on the wall. This 79-year-old made billions with his company, Mesa Petroleum, and is now shifting to water. With a group of Texas landowners, Pickens formed the Mesa Water Compay and is moving fast to secure water rights throughout Texas. They see the Texas population booming and water supplies dwindling. By owning the rights to water, they stand to make a killing.

Water Crisis Calls for Water Rights: PICO Holdings

PICO Holdings (PICO: NASDAQ) is sitting in the sweet spot. This company owns strategic high-quality assets that return profits and cash over the long term. The crown jewel of PICO’s holdings is a water asset called Vidler Water Company. Through Vidler, PICO owns a huge amount of water rights all across the West.

What many people don’t know is that Vidler controls more land than any casino or developer in Nevada, but it is not in the land business. It is the water Vidler is after, and it’s become a major player in Nevada’s water struggles. Its strategy is to own as much water as possible, sit back, and see how high the price will go.

Other aspects of Vidler’s strategy include acquiring strategic water resources like water storage facilities and converting agricultural water sources to higher valued municipal uses.

Water Crisis Calls for Water Rights: How Much Are PICO’s Water Rights Worth?

First we need to understand how to measure water. Water rights are measured in “acre-foot.” Fifty years ago, an acre-foot of water cost about a dollar. Today it’s worth about $10,000. (An acre-foot is 43,560 cubic feet, or the amount of water needed to cover an acre one foot deep.)

Through Vidler, PICO has ownership or acquisition rights to more than 62,000 acre-feet of salable water rights in Arizona and Nevada.

The company plans to establish a long-term income stream through the sale or lease of water resources and underground storage facilities to both public and private end-users.

Prices paid for groundwater rights have skyrocketed in recent years. It has been reported that developers in Nevada have paid upwards of $25,000 an acre-foot for groundwater rights — when they can find any.

North of Reno, a sum of $50,000 (and more) an acre-foot has been paid for water rights. It is hard to believe these same water rights were worth about $50 an acre-foot in the 1980s, but we are starting to see a trend here that is similar to oil and food prices.

What’s more, we really can’t know how much further the value of these water rights will skyrocket as the West’s water crisis intensifies. This means the value of PICO’s water holding could very well increase by billions in the next few years.

Water Crisis Calls for Water Rights: The Fish Springs Pipeline

Vidler has put together a huge operation in the western states, including Nevada, which has come to rival entire governments, both in expertise and resources.

Stephen Hartman, with Vidler Water Company, said, “We are able to do things faster, usually cheaper, and we think, often better.” Vidler’s new 28-mile water pipeline project is a good example of this.

Vidler has spent about $100 million to build a pipeline just north of Reno. It bought a large ranch in Fish Springs, drilled wells, and is now preparing to pipe groundwater to the Lemmon Valley/Stead area.

This is north of Reno, and the land is primed for development but needs water. (Local government spent 15 years trying to tap the water under Fish Springs and failed.)

Water Crisis Calls for Water Rights: Book Value Increases

Most of PICO’s assets do not produce regular income, so the best way to value the company is on a book-value basis. PICO’s strategy is to sit on extremely valuable assets and wait for them to pay off, so it does not have normal earnings like other companies.

This means that rather than looking at a price-to-earning ratio, PICO is better assessed by way of book value and how much assets are worth. Using this measure, management has done a good job growing book value per share, which has increased by 56% in less than five years.

And yet, this number does not tell the whole story, as the numbers on the balance sheet do not reflect the holding. We don’t know how high the water holding can actually rise.

Water Crisis Calls for Water Rights: An Added Bonus

While the water business is what we have focused on, PICO has three other operations that add to its bottom line.

PICO holds a major stake in Nevada Land and Resource Company, which is essentially an investment in land — rich land. It has natural resource rights that include minerals, geothermal energy and water on over 1 million acres of land in Nevada. Through this holding, PICO is one of the biggest landowners in Nevada.

PICO also has two holdings in the insurance business as well as financing operations that enable PICO to acquire private companies and purchase shares in public companies.

These holdings all help to add to PICO’s value, but its water rights are what will set this company soaring. The bottom line is PICO’s savvy management could steer it to gain 300-500% returns over the long term. Consider PICO Holding for your portfolio.

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Originally published September 11, 2008.

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