[00:00:00] Speaker A: I think there's an argument to be made that a lot of these midsize systems are in the best position to adopt different modular and scalable technologies, offering a lower friction for suppliers targeting faster procurement and deployment cycles.
[00:00:19] Speaker B: I am Reece Tisdall and this is the Future of Water, which we talk about all the ways which companies, utilities and people are addressing the challenges and opportunities in water. This is episode 118, and I keep telling myself again and again it's going to be a great one. That's because today I'm joined by Bluefield Research's senior analyst, Charlie Seuss.
Charlie, who I think you've heard from before, has been tackling some of Bluefield's biggest challenges. And in this case, it's our municipal capital expenditure forecast for the US And Canada specifically. The numbers have just been posted to clients. One thing we've done a little bit differently, which Charlie and I will get into, is we've broken out the treatment Capex forecast, which breaks out everything from treatment systems, electrical and controls, piping, pump storage. So that's the treatment side of the equation. We separate that in different analysis, different data sets from our pipe analysis. We just did a pipe forecast that's hitting the street as we speak and that's a different, I guess, focus area. But Charlie and I are going to talk a little bit about both, just to give you and the listeners some context about what we see as far as size of the markets, what are key factors shaping those markets, their growth, but also accounting for things like ija, climate, housing starts, as well as regional differences. So keep that in mind when you listen. And I look forward to having Charlie talk a little bit about this. But before we do that, you're gonna have to bear with me just a little bit because I got some news that caught my eye this past week. Korean company LG Chem has agreed to sell its water filter business, which was built or really started around its 2014 acquisition of Nanu. Nano is H2O. Apologies. I remember when this deal happened, Bluefield was about a year old at the time and it acquired Nano H2O to get into the RO business. And it was really exciting and now they seem to be getting out of it, so they're selling it to private equity firm Glenwood Private equity for about $692 billion, which is not a small sum, particularly in terms of the water business. And as far as big deals go, the carve out includes everything from the assets, the intellectual property, as well as the staff tied to the company's reverse osmosis membrane business, which I think according to the numbers at least applied by LG is that LG makes up about 21% global market share, second only to Japanese firm Toray. So it's not an insignificant player when you look at this segment of the water industry. LG's decision to offload its RO business, you know, once touted as a growth engine as recently as 2023, when if I recall, it actually had invested significant dollars into manufacturing capacity in China. So this does mark what I would call a sharp pivot towards liquidity or portfolio simplification to focus on other areas.
I think, you know, I wouldn't. I suspect that also the broader macroeconomic environment is playing a role as well. Another reason why I thought this was interesting was that, you know, Glenwood's acquisition of LG's Water Solutions does indicate it's. It's looking for a big splash and it has done exactly that. The firm seems to be assembling an integrated platform of water and environmental services through. But I think it's specialty targeted corporate carve outs, which is a model we've seen in other places in terms of consolidation trends globally. But Glenwood has also developed. It's not their first time talking to lg. They've seemingly developed, I think, let me step back. Glenwood is, I think Korea based as well. And they've developed a close relationship with LG having acquired its diagnostic business, now renamed Invitros, in 2020.
So, you know, hey, I know you friends and family. Let's work this out. Sometimes that's what happens. But also, you know, another point to be brought up is that the reverse osmosis business, it's a highly competitive segment that once someone told, someone told me that it felt like the Hunger Games. You know, top five vendors account for about 80% of global reverse osmosis supply with tailwinds from things like industrial and municipal water reuse. Desalination is a big area of focus in places like the Middle East. Also, just regulatory water quality standards are driving adoption or utilization of a more advanced treatment such as ro. You can include things like PFAS in that space as well. So this is interesting. Got a new player coming into the market, private equity at that. There's been a lot of private equity activity at Bluefield. We track M and A in an ongoing business or ongoing process. Should I say quarter to quarter? We're looking at this. And private equity does play not an insignificant role in what's happening. But that's not any different. Than the rest of M and A. I think private equity is where the money is these days. And we do see a fewer and fewer IPOs. And you could put Dupont's water business. Dupont had pulled back from ipoing its water business, which it had announced last May 2024. And then I think more recently they came out and said actually we're going to sit on this for a little while. Whether that's because of market conditions or they just see opportunity and maybe they have a bigger appetite for margins that it's providing. So that being said, that's what caught my news this past week. Really interesting.
Be on the lookout for any research, particularly out of our global company Strategy water company strategy service that covers things such as this. So with that being said, let's get to Charlie and talk a little bit about municipal capex in the U.S.
[00:06:53] Speaker A: All.
[00:06:53] Speaker B: Right, so I'm joined here by Charlie Seuss. Charlie, how goes it going? Pretty well.
[00:06:58] Speaker A: Finally. I feel like spring is officially here in Chicago, so that's always a good sign.
[00:07:04] Speaker B: Wondering if for these podcast episodes maybe I can use AI to do it. I can go back and have them scan. You could probably track the weather patterns based on the podcast because I feel like it's a common occurrence that we always talk about the weather at the beginning, which is fine. I do it with Dave McGimcie on the water Values podcast as well. So. Well, look, I mean, let's sort of cut to the chase here. The reason I asked you to jump on with me is because we've been doing a lot of forecasts, not just one, but a couple, and on the municipal side of the equation. So we're looking at, you know, capital expenditures for water plants, treatment and so on. And then we can talk about this a little bit later. We've been doing some wrapping up our pipe forecasts as well. But let's talk about sort of the, you know, what we would call vertical forecasts or the plant treatment forecasts you put together and talk about kind of really the exercise we've gone through, the methodology, but also our approach to the analysis that we've just released. So can you kind of give us a little bit of an idea, you know, elevator pitch, so to speak, about what have we been looking at, how have we done it and so on.
[00:08:22] Speaker A: Yeah, absolutely. So our US Municipal Treatment infrastructure forecast is ultimately, it's kind of grounded in this kind of bottom up market model using capital budgets, asset inventories and various EPA data across all 50 states.
And then that's been segmented across different utility sizes, asset types in different regions of the U.S. so in a nutshell, our CapEx projections span six different asset types from treatment plants to, you know, pumps and lift stations and storage facilities, as well as five different equipment categories. And we've also kind of categorized the spending by project type as well.
So looking at new build, upgrades, replacement and rehabilitation projects, as well as what share has been allocated for engineering and design versus construction versus equipment.
[00:09:21] Speaker B: But we've purposefully focus on the plant treatment side of the equation. Right, so pipes and the pipe network, distribution for drinking water and collection for wastewater, that's a separate piece of the puzzle, right?
[00:09:38] Speaker A: Yeah, I think that's an important distinction.
[00:09:40] Speaker B: All right, so I mean people can see this if you can go to our website. And I think the number is probably out there, but the number that we're looking at over the next decade is about US$515 billion for municipal treatment infrastructure. And that's capex. Just to reiterate that. What's driving it? What's behind all of this?
[00:10:02] Speaker A: Yeah. So the kind of annual capex, just to throw a couple of numbers at you, annual CAPEX is over this kind of 10 year time period is forecast to grow from about 37 billion in 2025 to over 57 billion in 2035.
So we're looking at about a 4.4% CAGR. And this is all driven by predominantly aging assets, stricter regulatory standards, as well as increasing service demands. In a lot of states, about 80% of total spend, or roughly 406 billion I think is targeting or is expected to target upgrades and rehabilitation projects.
So we see that as underscoring a lot of utilities, this kind of gradual strategic pivot from new build to more kind of a life cycle extension and risk mitigation approach.
[00:10:57] Speaker B: Yeah, I think that's an interesting number. The 80% on upgrades and rehab. I mean that's the, if you want to call it the benefits of living in a place or a market that has well established infrastructure, high connectivity rates for water, wastewater, that's a big part of it. But then again it says it's an old system in the case of the U.S. yeah. So I mean you could even go further. When we think about developing markets versus developed, you know, developing, we'd see probably a lot more greenfield development, meaning new asset build out. Whereas in the US once again, a lot of upgrade and rehab. So one of the, I think key differentiator, or maybe it's bifurcated these forecasts really between water and wastewater. Is there a Big difference between the two or are we looking at like 50, 50 split?
[00:11:52] Speaker A: Yes. So it is, you know, when we look at kind of total spend across water and wastewater, wastewater infrastructure is expected to make up about 58% of the total at around 300 billion, growing at around I think 4.2% CAGR, which is a little bit slower I think than we're seeing in the water side. But on the wastewater side this is again kind of largely attributable to expanding centralized sewer systems, adopting advanced treatment technologies, as well as mitigating in many cities kind of combined sewer overflows that are driving growth.
And again, one thing I meant to mention in the previous question I guess is so much of this is ultimately kind of based in the kind of bottom up data that we are looking at through reviewing municipalities capital improvement plans and kind of combing through that data to inform our forecasts.
[00:12:49] Speaker B: Yeah, I think that's a really important point to bring out is you mentioned using EPA data but then we have gone utility by utility. We look at about 850 capital improvement plans every year, project by project and use that to help inform a lot of our assumptions that go into this. So I think that's. Thanks for bringing that up. One thing that sort of calls out or you've called out in the team is, has to do with the sort of the size of the utilities where, you know, where a lot of the investment is going. And maybe I can frame this. I think everybody knows this, but if you're new to the water sector, you know there are, I don't know if you mentioned this or not or not, but we're looking at about 75,000 water and wastewater treatment systems or facilities. Right. So it's, it's highly fragmented.
But you know, to put things even demonstrate how truly fragmented it is is that I think there are about 400, 420 utilities that serve more on the water side at least that serve more than, what is it, 100, 100,000 people.
So very small number serve the large cities obviously and then the rest are really small systems. So one of the things that now to my real question is you've called out mid sized utilities represent a core investment battleground is the right word or opportunity. Can you help frame that? What's the take that you guys came across from going through the forecasting exercise?
[00:14:26] Speaker A: Yeah, absolutely. So mid sized utilities, which in this context we're defining as those serving populations of 25,000 to 100,000 people, are expected to account for about 28% of the total spend during the forecast period, roughly 143 or so $45 billion, which far exceeds what we've forecast for the largest system serving over a million people, which accounts for about $43 billion. I think there's an argument to be made that a lot of these midsize systems are in the best position to adopt different modular and scalable technologies, offering a lower friction for suppliers, targeting faster procurement and deployment cycles.
Again, a lot of this is fed by what clients are asking for. And segmenting the forecast by kind of different population tiers is kind of one way that we've addressed that.
[00:15:23] Speaker B: Yeah, I think that's interesting because we have clients and companies coming to us saying hey, we just want to look at the large utilities. And the large utilities, like an ladWP or a DC water on the wastewater side, they're pretty sophisticated, right? They have in house capabilities, they know technology or deploy technologies. And then on the other far end of the spectrum, so the much smaller, let's say municipal utility districts in Texas or other small private systems, they don't have access to, you know, financial resources. They're not going to bond markets. They may only have several people working at the utility itself. So do they have the capabilities or the wants to, to address some, you know, or deploy maybe smarter technologies like digital systems and so forth. But what you're getting at is right in the middle. These mid sized, medium sized utilities serving, you know, 25 to 100,000 people is kind of a sweet spot, Right. They may have access to enough capital that may be sophisticated enough, but they not. But yet they're not so large that they're going to do it all themselves. Right. Internally. So I think that is really interesting. And they have real needs, right? They have enough, their customer bases are large enough that they really. Not that all of it doesn't need to be addressed, but they're more likely to address it proactively if possible. So I think that's super interesting. Well, when we look at it, you know, we break the, the US up, I mean the forecast, we've looked at it state by state, water, wastewater, state by state, I think across the categories you already mentioned. But the, the U.S. south, which is where I'm from, proudly so shaping up to be what is the hottest and maybe riskiest regional market for, for all of this. What's the, what's your thinking on that?
[00:17:26] Speaker A: Yeah, so the southern US as we've defined it kind of according to the US Census data are consistent with that definition. That region of the US is projected to account for about 44% of total municipal capex, again for the treatment segment through 2035, with Texas and Florida kind of unsurprisingly leading all states at 74 billion and 49 billion respectively.
New housing development is certainly a key driver here, but I think this really comes down to the upgrade needs for what are the country's largest asset bases. Greenfield development, which often linked to population growth, is forecast to grow actually faster than some of these other project types, like upgrade at 8.1%, at an 8.1% CAGR, but ultimately just accounts for about 4% of total spend on treatment infrastructure. Much of this growth again is kind of concentrated in the south where you have suburban and exurban expansion, reshaping demand for new treatment plants and system buildouts. I also think it's important to recognize that much of this region faces growing challenges from climate disasters and water stress to funding uncertainty, which make it both an investment magnet as well as a high risk zone for utilities and suppliers.
[00:18:48] Speaker B: It makes sense, right? When you step back and think about where's population growth happening then also you include Florida and Texas. You know, whenever we talk about anything, it feels like what are the biggest markets? You know, it's going to be Texas, Florida, California, New York. You know, they're the big states. That's where all the people are. But Florida and Texas are growing. But I think your last point is really interesting. When we look at climate data, where are large storm events happening or even small storm events? Most of the property damage according to NOAA is taking place in the South. Like I think over 40% if I recall. Like, don't beat me up if I'm wrong, but it's, it's a significant share of the overall market and it's interesting to sort of see how utilities in the market is starting to address that, like managing stormwater, you know, managing networks that are being overwhelmed by these, by these large storm events. So super interesting though. Well, one question I know that comes up a lot is about infrastructure investment, Jobs act, and maybe starting with what's the current status? And maybe we can get to is there any impact in our forecast when it comes to IIJA or other federal funding that came out of the last administration?
[00:20:13] Speaker A: Yeah, that's a great question and certainly something that we're hearing, you know, every week, if not more frequent and having conversations about. But just to kind of paint the picture, as of April of this year, only 6.3 billion or 14% of the 43.6 billion or so in appropriated IJ SRF funding has been distributed to projects and around half of these SRF civil wards are concentrated in just seven states. So there's been not only kind of a slow rollout of funding, but also highly uneven and highly concentrated in just these kind of handful of states.
Now there's been the recent kind of executive orders freezing unspent federal funds and tariff announcements adding to a lot of financial uncertainty for utilities as they address capital planning needs.
But you know, when we look again, kind of back at the data, which we're tracking on a quarterly basis, if, you know, if not More frequently sometimes Q1 did see a pretty significant dip in project activity across all IJ water programs. It will take kind of a couple more months, I think, for the dust to settle there. But it's clear, you know, even just from the first few years of IHA that those states that have been more proactive in actually mobilizing to access funds are really going to be better positioned in the short term as these projects continue to kind of break ground.
[00:21:46] Speaker B: Yeah, and I've brought this up before. I think, you know, while there was a freezing of federal funds, I think we're still pretty confident that the funds will ultimately make it to the states.
There's obviously back and forth. I think it's, they've, they've held up. I think the other part of the, I mean, you've mentioned these seven, you know, concentration among seven states that are sort of out front in, in capturing their respective dollars that they can get. One part of that is also on the states themselves. Every state is a little bit different. Some are more, are better organized, some are more proactive and capturing these dollars. So from not just iija but just SRF as a whole. And so every state's a little bit different. I think the other thing to point out and that is when it comes to does it have any impact on our forecast though really it has pretty limited impact if I, if I'm reading this correctly. And that is there are a couple of reasons. But I think if you sort of kind of do the math, we're looking at IIJ specifically if we're looking at $55 billion in new funding and you spread that across five years. Right. So that spreads it out across each year. But then of those dollars, 25 billion are going to lead and PFAs. Right. And that gets is complicated. First further by part of that spend is for inventorying the problem, whether it be for where are the lead problems where, you know, LSL or lead service line issues but on the PFAS side, how much PFAS do you have? So a lot of dollars are going towards that as well. So that has to happen. So when you start chipping away at it, mathematically, the ultimate dollars are not huge in their impact, at least definitely in our forecast. But I think if anything, I mean, if you're Talking about a 4 plus percent, 4% compound annual growth rate in our forecast, I would also argue though that there are tailwinds that have been provided by the federal government's discussion or focus on infrastructure. Whether you agree with it or not, the bottom line is people are talking about it, they recognize the value of infrastructure. And also I mentioned that $55 billion going to the water sector. But in our initial analysis of the federal funds during the Biden administration, even when you're building roads, you still need culverts, you still need pipes, you still need catchment basin, you need a number of pieces that also benefit water equipment or hardware vendors as well.
[00:24:40] Speaker A: Absolutely, yeah. And again, I think I would highlight that, you know, even once these awards make it to the state level, it's a very slow, you know, there are a number of steps in the process for SRF programs to actually get these funds to the project level.
So I think we, you know, wouldn't expect the kind of full amount to be, you know, really reached utilities until, you know, the end of the decade.
[00:25:09] Speaker B: Yeah, I think. No, I think that's a really good point as well as I was talking about process. And every state's a little bit different. In fact, you know, we've seen historically, some states don't even use their full allotment of state revolving fund dollars. Right. Which while that sounds crazy, that seems to be the case. So. All right, well, let's change gears a little bit. And I don't, hopefully I'm not ambushing you here, but we've talked a lot about treatment. That's this forecast we released, I think it was last week, released the data and a report to our clients and I guess to anybody interested. But the other thing that we've been working on in parallel to treatment is pipe networks. Like specifically pipes. We've worked with a number of pipe companies. They've been asking about the size of the market, what's happening there. And so we've sort of built that out. And actually, I mean, as of today or tomorrow, we need to finalize a couple little details as far as the data and the numbers go. But you know, the forecast for the pipes, can you give us a little bit of A sneak peek about what we've been doing when it comes to the pipe network.
[00:26:27] Speaker A: Yeah, absolutely. So, you know, separate from our treatment forecast, we have been updating our pipe equipment forecast for both the US and Canada.
And this is covering the, you know, roughly 4 million plus miles of water distribution and wastewater collection pipes across the two countries.
Our forecast is broken out by material type. So we look at ductile iron and steel and concrete, pvc, ATP, FRP and others, while also accounting for different pipe diameters from you know, smaller diameter, you know, three 8 inch pipes to kind of larger diameter projects over 48 inches and above. Our model also accounts for different state level trends in new housing growth. That's really kind of core to, to the, the forecast while also looking at kind of projected spend for pipe rehabilitation and replacement projects as well.
[00:27:21] Speaker B: Yeah, this is, it's a really interesting one because it's, I think, you know, when we look at it, it's where's it happening geographically? Like you pointed out, we do it state by state.
We also take into account things like urban versus rural, which look at material prices. I mean, I think that's one of the things that has come out of this big. Part of the discussions that we've had internally is what's been the impact of inflation on pipe materials and what's the impact on the overall size of the market.
So I mean, maybe in brief, and I don't want to get ahead of ourselves or I would say put the card ahead of the horse, but what is the size of the market as a whole just for comparison to what we're looking at for treatment?
[00:28:09] Speaker A: Yeah, absolutely. So, you know, again, just accounting for pipe equipment spend across the US and Canada, we're looking at an overall market size of $116 billion for pipe capex from 2025 through 2035. This is largely shaped by shifting material preferences, inflation as we've seen higher costs for certain materials in recent years. And then as you can imagine, the new build and warehousing development is happening, particularly the Sun Belt.
That's really driving a lot of the spend as well as to a lesser extent rehab and repair projects in municipalities where assets are a bit older.
And our report will break down a lot of that from age of existing assets by geographies to where we see the new build and rehab projects and repair kind of at the state level driving growth.
[00:29:10] Speaker B: Yeah, and I think, you know, overall what I like about the two forecasts, the, the treatment, also known as vertical, if that's confusing to people. And then on the pipe side, we call it the linear, at least have internally. What I do like about it is they basically represent the. The foundation of a number of other forecasts, everything from trenchless, but then also what about how many valves, how many hydrants, and so on and so forth. That we'll do separately. But, you know, in this case, we just really wanted to nail down the pipe market for a number of clients. That's what they've been looking for, and then the rest will come in due time. So I think they're really interesting, really valuable.
There has obviously been a lot of change and a lot of questions about where's the market heading, whether it be because of what's happening in Washington, whether it be because of the microeconomic climate, you know, including things like inflation, material prices. I mean, that obviously, you know, and then I think you raised a good point. It's like back to your point about geographic growth, where, where the house is being built, because with every house that's built, there's got to be some pipe. If they're going to be connected. I think that's probably a good assumption to be made, that they're going to require some hookup for water and possibly wastewater, depending on where they are.
All right, Charlie. Well, so lot to unpack. I think you and the team have done an incredible job. I don't think anybody will truly understand the depth and detail that's gone into these forecasts, just from a basic data management and assumption exercise. It's really incredible. So I would say shout out, obviously to you, because you've played a leading role on this, but Akshay Deshmukh as well, Megan Bondar has played a role and others just in discussion. You know, Greg Goodwin has also provided some insights along the way.
So really, really helpful.
Is there anything before I let you go? What else is either on the agenda? What else has caught your eye when it comes to the water sector, whether it be fun or dreadful? I'll leave it up to you.
[00:31:37] Speaker A: Yeah, no, I mean, I think again, we've been largely focused on kind of the capex side of things in recent months. And we've got some interesting research, I think, in the Q around the kind of operational sides of things, both in terms of kind of forecasting OPEX as well as looking at different utility strategies to manage, whether it's rising costs for energy and chemicals or workforce challenges, that kind of thing.
So a lot of really interesting things happening, I think even just within the kind of US municipal space. Definitely things to look out for. This Spring.
[00:32:17] Speaker B: Yeah, I think that's a good point. I know everybody be looking forward to that. I think the OPEX side of the equation is really dynamic. Right. You know, when you talk about exactly those things, chemicals, workforce, energy, it seems to be that there's disruption across the board. And so what does that mean, whether it be near term or long term?
So I think that'll be really valuable in updating our OPEX forecast, but also providing additional sort of up to date color on what's happening. So. All right, Charlie, so with that, I'm gonna set you free to enjoy spring. As we started the conversation. You're in Chicago, I'm in Boston. If, if Chicago today is anything like it is here in Boston, you're a lucky guy because it's beautiful here now. So if you can get out, take a walk and enjoy it while you can because it'll be winter before you know it.
[00:33:16] Speaker A: Appreciate it. Thanks, Larys.
[00:33:19] Speaker B: All right, so that's it for today's breakdown of municipal water with Charlie Seuss. So super helpful. I think we could probably go on and on about it. But if you want to learn more about our forecast, what we've been doing, you can one, head over to bluefieldresearch.com and dig around. You can always reach out to
[email protected] which is where we are. And we respond to every email. We don't use bots, we don't use any outsourced resources. We see every email that comes in, every contact form and someone will get back to you with an answer one way or another. I'm not going to lie, we like to have discussions, figure out exactly what you're looking for. But yeah, we want to hear from you and thanks for being part of the journey and what's turning out to be an interesting, to say the least, 2025. And it'll be interesting to see how the next three quarters unfold not only just in the markets as a whole, but also in our research. We got a lot of good, great research coming out.
As you can imagine, there's increasing focus on things like the impact of tariffs. Ethan Edwards, colleague, just put out a research note on the impact of recessions past and potentially current on about 15 industrial verticals on what that might mean. We've got metering forecasts coming out for the US We've got a Europe industrial forecast coming out and then we're doing some pump company analysis right now, among other things, also investor owned utility market share. So just throwing it all out your kitchen sink, but be on the lookout if you have questions about any of those or anything else when it comes to water and how to advance your water strategy, let us know before we sign off. If you're in Boston, Barcelona, New York, Chicago, San Francisco, Paris, let bluefield research know www.bluefieldresearch.com and we'd enjoy the opportunity for a meeting. We want to meet with you. That's where the best insights not only start, but where they hopefully end that we can share in person what we're thinking. Send us the notes to that same email address at Water Experts with any topic ideas you'd like us to discuss on the Future Water podcast. We're doing this for you, as I always say. And lastly, tell a friend about it. I like people. I want to share things. I think you should too. But don't let me make you do something you don't want to do. But I'm not going to lie, it does help us. This podcast and these water industry insights been brought to you by the one and only Bluefield Research. To learn more about us, visit us at that same place, bluefieldresearch.com until we talk again. Be well, be safe and take care.
