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May 17, 2001

WATER: WORLDS MOST COMMON RESOURCE COULD

BECOME ITS MOST PRECIOUS COMMODITY

Much has been written recently about the over-investment in technology. Timelier to
investors, though, may be sectors of the economy, which have endured years or decades of
under-investment.

Spurred by the power shortages in California, the media and investors have begun to focus
on the nations neglect of infrastructure investments in airports, air traffic control, power
plants, electricity distribution lines, and petroleum refineries. Vice President Cheney
believes the U.S. needs to build between 1,300 and 1,900 new power plants over the next
20-years.

This report is the third in a series of under-investment, following our memos about
air traffic and passenger terminal gridlock.

If we knew 100 years ago what we know now, how would we have allocated investment
capital?

Oil probably would have been a sector of choice.

Now, there is growing evidence that water may become as important and valuable a
commodity as oil is today in the global economy.

Consider these facts:

Only 2.5% of the Earths water is fresh and most of it is frozen in polar ice and snow.

Of the available fresh water, only 0.6% of it is usable. Agriculture consumes 70% of
global fresh water. The planet has no more fresh water than it did 1000 years ago.

The worlds population is expected to double in the next 40 years.

Eighty countries already report water shortages.

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More than 1 billion people today do not have safe drinking water.

The northern-half of China, where 500 million people live, is short of water. The
Chinese government has implemented water rationing in 100 cities.

In Beijing, the water table has fallen nearly 200 feet since 1965, and fell 8 feet in 1999
alone. Water is so scarce that government leaders have questioned whether
Beijing should remain Chinas capital.

74 reservoirs have dried up in Guangdong, rivers have been reduced to trickles, and
parts of China are enduring the worst drought in decades.

300 million people in India lack access to safe drinking water.

By 2040, at least 3.5 billion people are expected to run short of water, 10 times as
many as in 1995.

By 2050, two-thirds of the worlds population could be living in regions with chronic,
widespread shortages of water.

The United Nations Intergovernmental Panel on Climate Change recently issued

a 1,000-page report that estimated 50% of the worlds population would live in
nations with water shortages in 20 years.

Thirty percent of the worlds arable land will be salty by 2020, 50% by 2050.
Salinization is already cutting crop yields in India, Pakistan, Egypt, Mexico,
Australia, and parts of the U.S. This is being caused by evaporating irrigation water,
which leaves minerals in the soil.

75% of the drinking water on Continental Europe contains dangerous

concentrations of nitrate pollution. It will take 25-50 years for nitrates to reach
levels considered safe, despite intensive cleaning programs.

80% of all disease is associated with poor water quality.

A child somewhere in the world reportedly dies every 8 seconds from drinking-
contaminated water. This is equivalent to 12 jumbo jets of children dying per day.
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In the U.S., water is taken for granted. Just as businesses and politicians neglected
infrastructure investments for power generation, leading to Californias current power
crisis, and a potential nationwide power crisis, a more serious water crisis is brewing.

Factors setting the stage for a national water crisis are: population growth; lack of
infrastructure investment; and ignorance, which leads to waste of the one resource humans
truly can not survive without. Unchecked growth, more recently in arid regions of the
country, is compounding the problem at an alarming rate.

A person needs 13 gallons of clean water a day for drinking, cooking, and sanitation. A
billion people around the world have no choice but to make do with less. Americans use
an average of about 180 gallons per day.

Some arid regions are much more wasteful. For example, the 250,000 residents of Palm
Springs use 375 gallons of water per day at home, on average, at a cost half that of their
cable TV bill. There are 100 lush golf courses in the area and nearly every home has a
swimming pool. Cooled mist above a caf terrace air-conditions the outdoors at a local
restaurant. Palm Springs is a desert moonscape that receives only 3 inches of rain per
year -- so dry that even imported Arizona cactus needs watering.

To the south of Palm Springs, 400 Imperial Valley farmers receive as much
Colorado River water for irrigation as Arizona and Nevada combined, so they can
grow Alfalfa, a thirsty, low-profit crop used to feed dairy cows and horses.

The Colorado River already feeds the fastest-growing cities in the nation: Los Angeles,
San Diego, Las Vegas, Phoenix and Tucson. Los Angeles and San Diego have negotiated
with the Imperial Valley for more Colorado water by buying the farmers more efficient and
costly irrigation equipment. What little is left of the Colorado irrigates Mexicos richest
farmland. The Colorado River has run dry before reaching the Pacific Ocean for years.

Palm Springs is not isolated.

The Rio Grande River is over-committed too. For the first time in 50 years, the Rio
Grande River failed to reach the Gulf of Mexico, stopping 50 feet short.
Albuquerque, New Mexico recently discovered its underground water reserves were

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vastly overestimated and could completely dry up by 2050. The city is already started
closing wells because of natural arsenic in the soil.

Arizonas population has doubled in the last two decades to 5.13 million. Homes
are built on waterless desert, and golf courses and parking lots climb hillsides.
Phoenix residents use 250 gallons of water per person per day, on average.

El Paso, Texas has soared in population beyond 1 million and some say the city could
run out of water in five years, based on current sources.

Florida is in the midst of the worst drought on record and large portions of the
Everglades marshes are turning to mud flats. Southern Florida gets more rain than
anywhere else in the continental 48-states, but it is 21 inches below normal over the last
three years, making it the driest state in the nation on a relative basis.

Over pumped Tampa Bay wells have sucked nearby lakes and wetlands dry, and
the Salvation Army is storing 70,000 gallons of bottled water to supply 23,000
people with drinking water for a day if too many wells go dry because of
continued drought.

Residents of southwest Florida on low-sodium diets have been warned not to drink tap
water because too much salt has penetrated depleted well fields.

Although recent rains have brought short-term relief in Miami-Dade and Broward
counties, South Floridas backup reserves are critically low.

Lake Okeechobee, a large fresh water lake, is 4.5 feet below normal and reaches a new
all-time low on a daily basis. The lake level is so low and the surrounding areas so dry
that surface weeds protruding above the water have actually caught fire.

The lake is now 9.4 feet above sea level. If it falls to 7 feet, water cant be pumped
to fill vast water conservation areas in the Miami-Dade and Broward areas,
effectively setting the stage for depletion of the Biscayne Aquifer. As a result, salt
from the ocean could contaminate well fields and poison drinking water for the
populous southern Florida counties. Florida water officials recently predicted
that 2002 could be even drier.

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Yet, many Florida residents continue to break the law and water their lawns in the
middle of the day. Indeed, many home residential associations require a lush green
lawn. Boca Raton even has an anti-rust ordinance that results in a fine from the
beautification committee. As a result residents dont use well water that contains iron,
they pump city drinking water to irrigate their lawns.

Many parts of Florida remain under phase II water restrictions, which target a 30%
reduction in water consumption. However, consumption has only declined 12%, on
average. Florida remains one of the fastest growing states in the nation. South
Floridas population is expected to triple by 2050, helping to ensure a tough drought
recovery and a tightening water supply in the future.

Several factors are combining to create a compelling long-term investment

opportunity:

The municipal water utility industry is inefficient and ripe for consolidation. Data
indicates the nations 54,000 municipal-run water services consistently under invest in
infrastructure and operate at a deficit. In 1997 (most recent year available),
expenditures exceeded revenue by $4.2 billion for all local governments.

In contrast, investor- and privately-owned water utilities must support the full cost of
service through rates in order to survive. Globally, only about 360 million people
receive their water from private sources, but this is expected to grow by 10% annually
during the next five years, according to Suez Lyonnaise.

The cost savings from an investor-owned utility are clear. Example: Suez
Lyonnaises United Water subsidiary won a 20-year contract in 1999 to supply 1.5
million people in Atlanta with drinking water, reducing the annual cost to run the
operation by 40% and saving of $20 million per year.

In addition to efficiency improvements, two other factors driving consolidation are:

A 1997 IRS ruling that protected the tax-exempt status of a communitys bonds, if
its waterworks were put under private management.

Increasingly demanding drinking-water standards by the EPA that require

contaminants be reduced to parts per trillion instead of parts per thousand or million.
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Suez Lyonnaise estimates that by 2015 $1 trillion will have to be invested in water
systems worldwide, and that private water management companies will be a $40
billion a year market in the U.S.

The worlds water infrastructure, particularly in the U.S., is antiquated. Two

studies estimate $1 trillion will be needed over the next 20-years to rebuild and
modernize the nations water infrastructure. This will mean a $500 billion shortfall in
needed funds, equivalent to a $23 billion annual infrastructure-funding gap. Roughly
$300 billion will be needed for new water treatment plants, with over $500 billion for
replacing water pipes that are 50-100 years old.

Both of the studies argue that the Federal government should help rescue the municipal
water utilities. Some investor-owned water utility industry observers view the studies
as an effort to perpetuate the inefficient municipal water utility model through a Federal
bailout.

The Water Infrastructure Network, an industry association, completed one study. The
Environmental Protection Agency (EPA) conducted the second study.

The National League of Cities and over two dozen other groups recently began a
lobbying campaign to persuade Congress to approve a 5-year, $57 billion program
to help communities replace old pipes and upgrade treatment plants. The groups
argue that if the Federal Government doesnt help, water utility rates will
double.

Nevertheless, the studies highlight the magnitude of the problem. Many water
treatment facilities built in the 1970s are now at the end of their useful lives. Water
utilities are more capital intensive than electric, natural gas or telecommunications
utilities, as they must invest over $3.50 for every dollar of annual revenue received
from customers.

The longer water utilities wait to upgrade their infrastructure, the more expensive it is.
Pipes installed in the early part of the 20th century probably cost about $5 per foot or
less. Today, it is not uncommon for replacement costs to be $100 per foot more than
double the rate of inflation for the same period. Modern-day pipe materials are usually
expected to last 75 years and serve generations of customers.
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The large water main breaks that plague cities periodically are directly related to the
aging infrastructure. Last year, a water main built in 1895 broke in downtown
Cleveland, flooding some of the downtowns busiest streets for a week.

Population growth is expected to grow world demand for fresh water 70% by
2025.

An example of the impact of population growth on water supply is California, where its
population is expected to grow 38% to 47 million by 2020 from 34 million presently.
Most of the population growth will be in the desert. This will push Californias water
demand from 8.8 million acre-feet per year to 12 million acre-feet per year. As a result,
California is expected to be short of water by 3-7 million acre-feet per year, depending
if it is a wet or dry year.

Growing health concerns about water quality. Initial concern grew out of the well-
publicized 1993 contamination of Milwaukees water system, which resulted in several
deaths and illnesses, and was previously thought to only be able to occur in
undeveloped areas of the world.

More recently, the primary concern has been that permitted arsenic levels are too high
in many cities. Arsenic in drinking water has been linked to skin cancer and at high
levels to bladder and lung cancer. Before leaving office, the Clinton administration had
proposed arsenic levels be reduced to 10 parts per billion (matching the World Health
Organization recommendation) from 50, originally set in 1942.

The National Academy of Sciences recently determined that 50 parts per billion was
too high because people have a 1-in-100 chance of getting cancer from arsenic over a
lifetime exposure at that level.

The Bush administration delayed Clintons rule due to concern of excessive cost for
small communities, but is expected to propose a rule based on arsenic levels of between
3 and 20 parts per billion.

Most towns and cities in the U.S. with high arsenic levels are in the West. For
instance, Fallon, Nevada has levels of more than 100 parts per billion. Albuquerque
New Mexico has arsenic levels of up to 40 parts per billion.
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There is increasing evidence that global warming is real and may be shifting
precipitation patterns, causing more populated areas to receive less rain.

Mount Kilimanjaro has lost 75% of its snow and ice since 1912, and could be bare
within 15 years.

Glacier National Park in Montana will lose all of its glaciers by 2070 at their current
rate of retreat.

Only 2 of 6 glaciers in 1972 remain on Venezuelan mountaintops.

The annual melt season in Antarctica has increased up to three weeks in 20 years.

Sea levels are rising:

A Cape Hatteras lighthouse was 1,500 feet from shoreline when constructed in
1870, but was only 160 feet from the ocean by the late 1980s.

Japanese forts build on Kosrae Island in the southwest Pacific Ocean in World
War II is awash at high tide today.

Florida farmland 1000 feet inland from Biscayne Bay is being inundated by salt
water, making the land too toxic for growing crops.

Brazils shoreline in the Recife region has receded more than 6 feet a year from
1915 to 1950 and over 8 feet a year from 1985 to 1995.

Increasing populations and global warming will only exacerbate the need to upgrade
water infrastructure.

Some models project that central Canada could have a climate like central Illinois and
Georgia like Guatemala within 100 years. This would have a profound impact on
agriculture production and commodity prices, not to mention geopolitical implications.

The Pentagon and State Department already give high priority to preventing violent
conflict over water in the Middle East, Asia, and Africa. Wars could be fought over
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water in the future. Almost half of the worlds land surface consists of river basins
shared by more than one country.

Smart investors are beginning to recognize the potential of water. T. Boone

Pickens is attempting to build a water pipeline for $1-$2 billion from his ranch that sits
above the Mesa Vista (one of the largest under ground aquifers) to pump water to El
Paso, Dallas/Fort Worth, and San Antonio.

Although surface water is considered public in Texas, ground water is private. Under
the rule of capture in Texas, a landowner can pump with little concern for his
neighbors. Pickens has access to 3.3 million-acre feet of water (an acre foot is about
326,000 gallons) and would charge the cities between $545 and $1,000 per acre-foot.

Water is already at a premium in Texas, but its population is expected to double to 40

million by 2050.

VALUATION SUMMARY

We believe water could be a multi-decade investment theme. However, in contrast

to the Internet bubble era, investment returns in water will probably be more gradual
and consistent. But a 10% annual stock return and a 3% reinvested dividend yield
compounded can be significant over a 5-10 year period -- a $10,000 investment that
compounds at 13% for 5-years grows to over $19,000, and over $36,000 in 10-years.

There are several ways to invest in the theme:

Water Utilities: This is probably the safest water sector in which to invest, and may
provide the most consistent returns as well. Water utilities business models are based
on long-term 20-30 year contracts, and will benefit from the rising value of water and
consumption growth as populations grow.

As water becomes more valuable, water utilities will likely employ broader use of
tiered pricing. Sarasota County Florida initiated a tiered system a few years ago when
water restrictions stayed in place in 1992. Water rates are $1.78 per 1,000 gallons and
go as high as $10 per 1,000 gallons for users of more than 18,000 gallons per month.
The result has been a 41% decline in water use, from 148 gallons per person to 86
gallons.
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Consolidation among water utilities is creating a big-fish eat smaller fish environment
where almost no firm is immune to takeover, except perhaps American Water Works
(AWK), the largest investor-owned water utility in the U.S.

The cost of infrastructure upgrades and meeting tightening water quality standards by
the EPA are just too expensive for smaller, inefficiently run, municipal water utilities.
Over eighty percent of the nations 54,000 municipal water utilities service less than
3,300 people.

Often a large water utility operator like American Water Works can upgrade a
municipal water utilitys infrastructure, meet the tighter EPA standards and still
lower overall operating costs creating a win-win opportunity for many
communities.

Water utilities also frequently own valuable land surrounding reservoirs. Although
most of the land around reservoirs still in use needs to be protected, industry
consolidation and change in supply source to wells is beginning to free up some of the
land for real estate development. Since most reservoirs are very old and the land was
purchased or donated a long-time ago, the property is carried on water utilities at a very
low basis.

During the last year, water utility stocks have begun to outperform, but are still
inexpensive relative to the broad market. Over the last 12-months, the S&P SuperCap
Water Utilities index is up 32% and trades at about 2x book value and a 3% dividend
yield. This compares to a 14% decline in the S&P 500, which trades at 3.7x book value
and a 1.2% yield.

In Europe, the Bloomberg European Water index is up 4% and trades at 2.3x book
value, with a 3.8% dividend yield.

There are roughly 20-25 publicly traded water utilities trading at about 10x cash flow,
1.5x-3x book value, with 3%-4% dividend yields. Some of the UK-based water
utilities, such as United Utilities (UU/ LN), Severn Trent Water (SVT LN) and
AWG (AWG LN) boast 7%-8% dividend yields but exhibit zero EPS growth.

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Water utilities are generally trading near the higher end of their 10-year historical
multiple ranges. However, water utilities are traditionally low risk investments. In the
short-term, abnormal weather can impact demand and expenses. Regulation that allows
an adequate return is a longer-term risk.

Below is a valuation summary of U.S. and European water utilities.

Water Utility Valuation Summary

Recent Market Price/ Dividend 2001E

Company Price Cap. Book Value Yield P/E

American Water Works (AWK) $31.8 $3.2 BB 1.9x 2.9% 17.8x

Philadelphia Suburban (PSC) 23.16 1.3 2.9x 2.6% 21.9x
California Water Service (CWT) 25.51 $386 MM 1.9x 4.3% 15.8x
American States Water (AWR) 30.2 304 1.6x 4.3% 15.6x
SJW Corp. (SJW) 82.5 251 1.7x 3.0% 17.7x
Connecticut Water Service (CTWS) 35.25 178 2.6x 3.4% 20.9x
Middlesex Water (MSEX) 31.23 158 2.2x 3.9% 20.9x
Southwest Water (SWWC) 12.7 109 2.3x 1.7% 17.4x

Suez (SZE FP) 35.2 euros 35.8 BB euros 2.7x 2.2% 20.0x
Vivendi Environment (VIE FP) 50.45 euros 17.5 BB euros 2.8x* 1.3% 31.0x
AWG PLC (AWG LN) 560 pence 1.6 BB GBP 0.9x 7.9% 12.2x
Kelda Group PLC (KEL LN) 361 pence 1.4 BB GBP 0.8x 7.5% 10.3x
Severn Trent PLC (SVT LN) 675 pence 2.3 BB GBP 0.9x 7.4% 11.3x
United Utilities PLC (UU/ LN) 605 pence 3.3 BB GBP 1.3x 8.4% 11.5x

*Based on 2001 consensus estimate.

Desalination Plants: As fresh water supplies grow scarcer, the relatively high cost to
turn seawater into fresh water will become more attractive. Desalination plants are
becoming increasingly popular in the Middle East, and Florida is building the largest
desalination facility in the U.S. in Tampa Bay. The plant will process 25 million
gallons per day.

Companies that build desalination plants include Ionics (ION, 26), Sasckura
Engineering (6303 JP, 425 yen) in Japan, and Industrial and Engineering Projects
(INEE EY, 10.96 EGP) in Egypt. Ocean Power Corp. (PWRE, 32) makes and
markets equipment and components, which produce electricity for, and pure water
from, its seawater desalination systems.

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The number of desalination projects in the U.S. is growing 10%-15% per year. The
Bureau of Reclamation, which is responsible for managing water in the western U.S., is
studying the potential use of desalting technologies to treat effluent and municipal
wastewater and hazardous wastes. The semiconductor industry also uses desalting
technology to create ultra pure water for rinsing silicon chips.

Water Pipes: Over $500 billion will have to be spent on replacing antiquated water
pipes in many cities during the next 20 years, according to recent studies. Beneficiaries
include steel, iron, concrete, and plastic pipe manufactures, as well as construction
firms that would install the pipes.

Water Equipment: Companies that supply water filters, pumps etc to run water plants
should also benefit. Examples include: Millipore, (MIL, 55.65); Osmonics (OSM,
8.95); Calgon Carbon (CCC, 8); Covanta Energy Corp (COV, 18.05); Tyco
International (TYC, 53.5), Zenon Environmental (ZEN CN, 11.99), and Trojan
Technologies (TUV CN, 8.8).

Zenon and Trojan rallied 20%-30% recently after a water contamination crisis in
Saskatchewan that made hundreds of people sick.

Bottled Water: Increasing concern by the public about the quality of tap water, could
lead to increasing demand for bottled water. In 1999, bottled water industry sales in
the U.S. rose 12% to $5.2 billion.

However, the only publicly traded pure plays in bottled water have market caps less
than $100 million. Beneficiaries include: Aqua Vie Beverage (AVBC, $0.15);
Glacier Water Services (HOO, 7.7); Vermont Pure Holdings (VPS, 2.7); Hawaiian
Natural Water (HNWC, 0.26); and Eldorado Artesian Springs (ELDO, 1.75).

Perhaps one of the best ways to invest in bottled water is through Vivendi
Environment, which acquired Culligan Water Technologies when it bought U.S. Filter
Corp. last year. Culligan is one of the largest distributors of bottled water in 5-plus
gallon containers.

We believe the catalysts we outlined in the previous pages will drive long-term growth
over the next 3-5 years in all of the above sectors of the water industry. As a rising tide
lifts all boats, we believe the entire water industry will exhibit similar characteristics.
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A primary risk, though, is that to the extent investing in the water industry is defensive, a
change in market sentiment could lead to a reallocation of assets among investors to higher
beta sectors. As a result, we believe investors should accumulate investments in the
sector on any reversals.

We have included research briefs on the three largest water utilities because we think they
will continue to capitalize on their economies of scale and gain market share while
providing investors relatively safe long-term growth.

Recommended Water Stocks

Mkt Price/ Trailing

Company Price Cap. Book P/E Comments
American Water Works (AWK) $31.8 $3.2 BB 1.9x 20.3x Biggest U.S. Water Utility
Vivendi Environment (VIE FP) 50.45 euros 17.5 BB euros 2.8x 22.0x Largest global water co.
Suez Lyonnaise (SZE FP) 35.2 euros 35.8 BB euros 2.7x 17.5x 2nd largest global water co.

Please refer to the attached research briefs for additional information.

American Water Works (AWK, $31.8)

AWK is the largest investor owned water utility in the U.S., serving 10 million people in
over 1,000 communities in 23 states through 25 subsidiaries that operate independently.
AWK produces about 345 billion gallons of potable water annually, pumping its supply
from reservoirs, rivers, wells, and neighboring utilities.

AWK also operates a wastewater treatment service in some of its service areas (2% of
revenue), as well as a contract operations service that manages water and wastewater
utility management and leasing and commercial services (3%).

AWK has capitalized on industry consolidation more than any other water utility, acquiring
more than 100, mostly smaller, water utilities, but which also include large transactions.

American Water Works is in the midst of acquiring the water and wastewater assets of
Citizens Utilities Company for $835 million. Citizens will add over 1 million people to its
service base in Arizona, California, Illinois, Indiana, Ohio, and Pennsylvania. Last year,

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Citizens generated about $100 million in revenue. The transaction is expected to close in
the second-half of 2001.

AWKs acquisition strategy is to either buy smaller water utilities that are adjacent or near
the companys existing operations, or purchase larger water utilities that diversify and
spread AWKs business risk over a broader geographic area. By acquiring small utilities
near its existing water treatment plants, AWK recognizes immediate economies of scale,
improving efficiency and lowering costs.

First quarter EPS declined 11% to $0.24 from $0.27 in the same quarter last year, and was
19.5% below expectations of $0.30. EPS disappointed because significant precipitation in
New Mexico, Arizona, and California resulted in a 9% decrease in the volume of water
sold in those three western states, and helped lead to a 3% overall decrease in revenue. If
precipitation had been near normal levels, EPS would have been about $0.29.

AWK is trading at 1.9x book value, in line with its 5-year average of 1.72x, and 17.8x
consensus 2001 EPS of $1.80, in line with its 5-year average P/E of 17.5x. AWK is
yielding 2.9%, below its 10-year average yield of 3.5%. AWK has increased its dividend
each year for the last 26 years, with an historical 5-year growth rate of 6.6% per year. The
company maintains a relatively conservative payout ratio of about 50%.

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Vivendi Environment (VIE FP, 50.45 Euros)

Suez Lyonnaise des Eaux SA (SZE FP, 35.2 Euros)

Vivendi Environment and Suez are the two largest water companies in the world. Both
companies manage water treatment utilities, build water systems, purification plants and
pumping stations, as well as provide water-engineering services. Vivendi Environment is
ranked number 1, generating 12.9 billion euros of revenue in its Water division, followed
by Suez at 9.1 billion euros.

Vivendi Environment was IPOed from Vivendi Universal in July 2000 in conjunction with
its agreement to acquire The Seagram Company last year. Vivendi Universal continues to
hold 72% of Vivendi Environments shares. Originally, Vivendi was founded in 1853 as
Generale des Eaux to irrigate French farmland and supply water to towns. Its investors
included the Rothschild family and Napoleon IIIs half-brother.

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Suez was formed in 1997 through the merger of Suez Canal builder Compagnie de Suez,
founded in 1858, and Societe Lyonnaise des Eaux et de lEclairage, a major water and
engineering firm founded in 1880.

Both companies are roughly 3x-4x the size of American Water Works, the largest U.S.
water utility. For instance, Suez operates in 130 countries serves 110 million customers
and 60,000 industrial businesses, and has provided water treatment engineering in 10,000
plants built. It estimates 1 billion people worldwide drink water from purification plants
built by Suez.

Vivendi Environment and Suez also lead the industry in R&D. Vivendi has developed a
filtering process that can filter microbes down to 1/10000th the thickness of a human hair.
Suezs R&D budget is equivalent to 10% of the industrys entire R&D budget and the
company has invented a detector that utilizes DNA to identify up to 300 bacteria or other
living contaminants in water.

However, both companies have multi-line businesses and are not pure plays on water,
though water represents 48% of Vivendi Environments revenue and is its largest division.
Vivendi Environment is also the largest waste management (20% of sales) operator in
Europe, and number three in the world.

Vivendi Environments energy division (12%) manages 55,000 heating systems in France
and 10,000 elsewhere in Europe (#1 in Europe) as well as decentralized power production
through cogeneration and peaking plants (#2 industrial utility in Europe). The
transportation division (12%) is the largest private operator of passenger bus and rail
systems in Europe, carrying more than 1 billion people per year. Other businesses account
for 7.9% of revenue. Over 50% of revenue is derived from outside of France.

Water is the second largest division at Suez, representing 26% of revenue versus 57% for
energy, 14.5% for waste services, 2% for communications and other.

Unlike Suez, Vivendi Environment is not involved in technology and communications, or

electricity distribution, giving the two companies different risk profiles.

Both companies also have been aggressive in acquiring U.S. water related companies. In
1999, Vivendi purchased $3 billion revenue per year U.S. Filter for $5.7 billion making
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Vivendi the largest water treatment and distribution outsourcing company in both the U.S.
and the world. U.S. Filter holds over a 50% water treatment market share among U.S.
industrial companies. Vivendi Environment also is the market leader in municipal
privatization in North America with a 40% share.

Last year, Suez closed on the purchase of United Water Resources, the second largest
water utility in the U.S. In 1999, Suez purchased $1.6 billion revenue per year Nalco
Chemical for $3.6 billion. Nalco is a water treatment services provider and water
treatment chemical maker.

Vivendi and Suez also both exhibited strong revenue and EPS gains last year. Vivendis
water division posted 22% overall revenue growth, including 8.8% internal growth.
Organic growth is accelerating, up from 7.5% in 1999, and 4.6% in 1998.

New water contracts and a full-year inclusion of U.S. Filter aided Vivendis growth last
year as only 8-months was included in 1999. The water division operating margin rose to
8% from 7.2%, and driving division operating income 35% higher to 1 billion euros from
763 million euros in 1999. Overall, operating profit increased 27% to 1.9 billion euros
from 1.5 billion a year earlier, and was inline with the consensus.

Vivendi Environments first quarter sales advanced 10%, led by gains at its property and
urban services divisions. Vivendi Environment is aiming for average annual revenue
growth of 10%, EBITDA growth of 12%, and operating profit growth of 14%.

Suezs water operations grew 44%, although most of the growth was due to the
incremental contribution from Nalco Chemical. Overall, Suez operating profit grew 43%
to 1.4 billion euros from 984 million euros in 1999, led by its energy and waste
management divisions while its water division profit was flat, in part due to a rate
reduction in Great Britain and dilution from the Nalco chemical acquisition.

Suez first quarter sales rose 33%, led by growth in all divisions and a 48% jump in its
Tractebel SA energy unit. Excluding acquisitions and currency exchanges, revenue rose
13%. Water division sales rose 11%, driven by water treatment services and water
management. Waste division revenue grew 12%, excluding changes in structure and
exchange rates. and a boost at its hazardous-waste unit. Communications division sales
rose 14%. Revenue outside of France and Belgium grew 55% in the first quarter, led by a
2-fold increase in the UK and a 75% gain in North America.
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Both Vivendi Environment and Suez trade at about 2.75x book value. However, Vivendi
trades at a small premium on a price/cash flow basis (7x vs. 6.2x 01E consensus,
respectively), reflecting higher EPS growth expectations this year of 15% versus about 9%
for Suez. However, Vivendi only boasts a dividend yield of 1.3% versus 2.2% for Suez.
SZE has posted historical 5-year annual dividend growth of 9.8%.

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Woodley B. Preucil, CFA

woody@13d.com

2001 13D Research, Inc. All rights reserved. The Copyright Act of 1976 prohibits the reproduction by photocopy machine or any other means of any
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(208) 726-1565. FAX Number 208-726-2105

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