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Changes in the Water Industry

This summary is taken from recent industry reports, the most important of which

is the latest AWWA market status report delivered at the AWWA Trade Show andConference in Atlanta this spring. The full report is available in print and PDF inthe Business Development Department.

Growth Expected to Continue

For the last five years, growth in installed pipe for both potable and waste waterhas increased at about 2% per year. While part of this growth is attributed topopulation growth, most is driven by replacement.

PE Penetration Accelerating

The share of both new and replacement pipeline going to PE has beenincreasing. The best recent estimate has PE at 32% of new water pipelines and37% of replacement. Forecasts are for this to grow to 35% and 41% respectivelyin the next three years.

A Commodity No Longer

As with oil, the days of cheap water are probably gone in the U.S. Demand forwater has clearly outstripped available supply, meaning communities are having

to develop new sources and the price of potable water continues to rise.

Water Quality and Regulation

Part of the increase in the cost of treatable water is new treatment standards.The grace period is about to expire on the last round of regulations and a full40% of U.S. cities still do not meet the requirements and will soon face stiff DEQ(U.S. Department of Environmental Quality) fines. Most of those out ofcompliance are smaller communities ranging in population from 10,000 to75,000. These cities tend to be further from water sources and residents tend tolive on average further from the city centers. AWWA believes that State andFederal funding will be required to help bring these cities into compliance. Ifthose funds do become available, AWWA expects a lot of activity in the sector.Since a significant part of the problem with current pipelines is contamination andloss of water due to corrosion and leaks, if grants become available to cover theextra costs, PE will be the product of choice.

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Transportation and Distribution

Most growth in PE installation over the last decade has been in distribution,mostly in the 4 to 8 pipe with used for connections from the lines toresidences. While there is still considerable demand for molded butt fusionfittings in the distribution market, the trend is moving rapidly to electro-fusion.

The problem with using PE on the transportation end is the need for fittingsranging from 18 up to 60. Pipe lengths are generally butt fused since electro-fusion fittings are so expensive in those larger sizes. So the demand is for largertees and 30 degree and 45 degree elbows and for some specialty configurationsmade to custom order. Again, corrosion and leaks are the fabricators ally in thisbusiness and demand for large size fabricated fittings is expected to grow at a

7% per year pace for the foreseeable future.

Conclusions

Fabricated fittings are not a new product, but the expected increase in demandplaces this product line in the growth stage of its life cycle. Margins should bestrong, perhaps 75 85% until supply can catch up in about three years. Entrywill be tempting but the costs and availability of the equipment should be asignificant deterrent. The industry is attractive and Central is competing from aposition of strength. This line has the potential to become a Star in our productportfolio both because of its potential revenue and profitability AND that this

specialty product could help secure contracts that would include our electro-fusion line. The key to success may be close relationships with utilities, highvisibility at technical presentations, and strong field support for our customers.

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