Ryan M.

Connors
rconnors@janney.com

215-665-1359 215-665-6601

Christopher J. Purtill
cpurtill@janney.com

Water / Infrastructure

August 17, 2011

Survey of Private Equity Firms Finds Water the #1 Area of Interest Right Now. Janney Infrastructure Journal - August 2011
INVESTMENT CONCLUSION: While private equity has been notably absent on some of the largest water/infrastructure transactions of 2011, including Ecolab's (ECL-NR) pending merger with Nalco (NLC-Neutral), ITT's (JMS analyst Jim Lucas, ITT-BUY) acquisition of YSI, Watts Water's (WTS-BUY) purchase of Danfoss-Socla, and Pentair's (JMS analyst Jim Lucas, PNR-BUY) acquisition of Norit's clean tech unit, this key deal-making constituency looms large on the sidelines as the pace of deal activity continues to accelerate. With this in mind, we surveyed major private equity firms on a range of timely issues such as which areas of the economy are of the most interest, which macro issues are of most concern, appetite for leverage, and whether deal flow is likely to accelerate or decelerate from here. Below are some of the key take-aways from our proprietary survey, while detailed results and further analysis can be found on pages 2-4. KEY POINTS:

Hard asset areas predominate, with Industrials and Water at top of the interest list. Private equity buyers are
famous (some would say infamous) for deploying heavy doses of debt financing, and historically this has influenced the sectors of the economy where private equity plays. Industrials has long been a preferred area, as a tendency toward under-levered balance sheets in the space (a function of generally conservative managements and strong FCF) drive the opportunity to "lever up" and underlying hard assets provide solid collateral to enhance debt financing terms. Not surprisingly, Industrials remains the #1 area of interest for private equity in the current environment, with Water taking the #1 position in terms of interest among the sub-sector of the Industrial space.

Within the water space, Industrial WW & Basic Infrastructure attracting greatest interest. Peeling back the
onion to the specific niches within the water space, private equity players are most interested in Industrial Treatment, Basic Infrastructure, and Metering (in order). Somewhat surprisingly given concerns on municipal budgets, Municipal W/WW Treatment placed a close fourth. Overall, we interpret the results favorably for Mueller Water's (MWA-Neutral) ongoing effort to "explore strategic alternatives" for its troubled U.S. Pipe unit. Coupled with the recent announcement by India's Jindal SAW that it will be undertaking an acquisition program that includes U.S. ductile iron pipe assets, the outlook for a sale of U.S. Pipe looks decidedly better today than just a few weeks ago.

Low rate debt financing, corporate cash hoards likely to put upward pressure on multiples. With the Fed's foot
still on the gas pedal and corporate buyers sitting on massive amounts of cash, the stage is set for a continued brisk pace of M&A activity over the next 12 months. Valuation is a case-by-case phenomenon, but multiples on attractive deals that bring both strategic and financial buyers to the table are likely to trend higher. Indeed, asked what the principal impediments are to getting deals done in the current environment, respondents cited valuation as the #1 obstacle, with competition from strategic buyers #2 and competition from other financial buyers #3.

Logical targets within water space include under-levered and/or beaten down names. No M&A outlook is
complete without the obligatory conjecture on who the likely acquisition candidates are, and in the water space there are plenty (although many have been rumored as targets for years). Manufacturing businesses with under-levered balance sheets and strong FCF are likely targets, and of course a beaten down stock price doesn't hurt. Our universe is heavy on such companies, with Energy Recovery (ERII-Neutral), Badger Meter (BMI-BUY), and Calgon Carbon (CCC-BUY) of particular note. Itron (ITRI-BUY) and Mueller Water fail the "under-levered balance sheet" screen, but are so beaten down as to potentially make sense for a private equity buyer with a longer-term view.

Equity Research Industry Report

Research Analyst Certifications and Important Disclosures are on pages 5 - 6 of this report

Private Equity is Back, and Industrials/Water are Major Focus Areas.

With public equity markets roiling, we conducted a proprietary survey of private equity investors in order to determine which sectors of the economy are of most interest in the current environment and what the outlook is for deal flow, multiples, financing, and more. Our survey included both a quantitative portion (conduced anonymously via the internet to ensure data integrity) as well as qualitative interviews. Overall, private equity remains decidedly interested in economic sectors where hard assets enable strong collateral in the financing process, with industrials ranking #1 among the key economic sectors (see chart below). Water remains an area of particular interest, ranking #1 among the various sub-sectors within the industrial landscape for private equity interest (see chart on page 3). Coupled with strong indications that financing remains relatively easy to come by and that deal flow should remain robust, we expect private equity to be a key player in a continued brisk level of M&A activity in the water space into 2012.

What is your appetite for deals in the following economic sectors?

Industrial Energy Healthcare Consumer N.D. Technology Utility Consumer D. Financials -3 -2 -1.06 -1 0 1 2 3 4 5 -0.46 0.38 0.32
+5 = Very Interested -5 = Not Interested (Avg. Response Shown)

3.68 2.44 2.13 1.29

Asked to comment on the impact of the equities sell-off on private equity, respondents indicate that in the near-term this only reinforces the outlook for an accelerated level of deal flow, as lower comparables valuations serve to bring buyers and sellers closer together (still, 89% of respondents see seller expectations as remaining elevated). If markets fail to recover for an extended period, the picture changes, with raising fresh rounds of equity capital more challenging (major pension funds often have a target weight for private equity, and lower public equity valuations can result in private equity exceeding its target weight) and sellers going into hibernation. Overall, however, our survey suggests the private equity landscape has thawed since the deep freeze that followed the 2008-2009 recession. In particular, while the Feds easy money policy has its detractors, private equity firms are generally not among them, as strong credit availability continues to drive a robust environment for private equity transactions.

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Private Equity Interest in Water High Particularly in Industrial Channel.

Within Industrials, what is your appetite for deals in the following sub-sectors?
Water Chemicals Aerospace/Defense Transportation Ag. Equipment Mining Building Materials -3 -2 -0.88 -1 0 1 2 3 4 5 -0.06 0.79 0.63
+5 = Very Interested -5 = Not Interested (Avg. Response Shown)

3.55 1.87 1.44

Within Water, what is your appetite for deals the following Niches?
Ind. Treatment Basic Infra. Metering Muni. Treatment Irrigation Desalination Eng. & Constr. -1 0 0.28 1 2 3 4 5 1.74 1.72
+5 = Very Interested -5 = Not Interested (Avg. Response Shown)

3.15 2.95 2.74 2.30

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Deal Flow Likely to Accelerate as Low-Cost Debt Financing Persists.

Multiples Seen Stabilizing as Deal Flow Accelerates
Over the next 12 months, do you expect valuation multiples to:
Contract 15% Expand 23%

Over the next 12 months, do you expect the pace of deal flow to:
Accelerate 56%

Remain Stable 41% Remain Stable 62% Decelerate 3%

A notable outcome of our survey is that while private equity players are not surprisingly concerned about high-level headwinds such as the economy, inflation, and government budgets, the ability to obtain financing including both equity and debt is not seen as a concern in the current environment. On the debt side, respondents indicate that lenders are very willing (+3 on a total 5 to +5 scale) to support transactions and that they themselves are very comfortable deploying leverage (+2.5 on a total 5 to +5 scale). On average, respondents are comfortable with a debt-to-capitalization ratio of 55% (range: 15% to 90%), confirming that the availability of low cost debt financing remains decidedly robust.
Macro Concerns Predominate, but Financing Not an Issue for Private Equity Players
What are your most significant high-level concerns in the current environment? What are the most frequently recurring specific hurdles to getting deals done today?
Valuation 3.36

Macro/Econ

3.00

Comp-Strategics Inflation 1.91 Comp-Financials Regulation 1.63 Debt Financing Gov't Budgets 1.00 +5 = Major Concern (Avg. Response Shown) Equity Financing 5 -0.41

3.00

2.64

-0.83 -2 -1 0

+5 = Major Hurdle -5 = Not a Factor (Avg. Response Shown)

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IMPORTANT DISCLOSURES Research Analyst Certification

I, Ryan M. Connors, the Primarily Responsible Analyst for this research report, hereby certify that all of the views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers. No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views I expressed in this research report.

Janney Montgomery Scott LLC ("Janney") Equity Research Disclosure Legend

Individual disclosures for the companies mentioned in this report can be obtained by calling or writing Janney Montgomery Scott LLC as provided on the first page of this report.Disclosure Site

Definition of Ratings
BUY: Janney expects that the subject company will appreciate in value. Additionally, we expect that the subject company will outperform comparable companies within its sector. NEUTRAL: Janney believes that the subject company is fairly valued and will perform in line with comparable companies within its sector. Investors may add to current positions on short-term weakness and sell on strength as the valuations or fundamentals become more or less attractive. SELL: Janney expects that the subject company will likely decline in value and will underperform comparable companies within its sector.

Janney Montgomery Scott Ratings Distribution as of 06/30/11

IB Serv./Past 12 Mos.
Rating Count Percent Count Percent

BUY [B] NEUTRAL [N] SELL [S]

202 151 8

56 42 2

23 8 0

8 6 0

*Percentages of each rating category where Janney has performed Investment Banking services over the past 12 months. Other Disclosures
Investment opinions are based on each stock's 6-12 month return potential. Our ratings are not based on formal price targets, however our analysts will discuss fair value and/or target price ranges in research reports. Decisions to buy or sell a stock should be based on the investor's investment objectives and risk tolerance and should not rely solely on the rating. Investors should read carefully the entire research report, which provides a more complete discussion of the analyst's views. This research report is provided for informational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis.Supporting information related to the recommendation, if any, made in the research report is available upon request.

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INFRASTRUCTURE
(617) 557-2972 (617) 557-2989 Industrials James C. Lucas Managing Director Michael J. Wherley Associate Industrial Services Liam D. Burke Managing Director (215) 665-6485 (646) 840-4604 Infrastructure/Water Ryan M. Connors - Director Christopher J. Purtill Associate Master Limited Partnerships Suzanne Hannigan, CFA Director (215) 665-6196 (215) 665-4476

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TECHNICAL ANALYSIS
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