[00:00:00] Speaker A: So if you take that same congressional Budget Office data and instead split it out by funding source as opposed to expenditure type, you see that the share of federal funding compared to state and local governments has steadily declined since the 1970s as well, meaning that the majority of responsibility has been left to state and local governments.
[00:00:24] Speaker B: You? Um.
I am Reese Dizzo, and this is future water, which we talk about all the ways which companies, utilities and people are addressing the challenges and opportunities in water. This is episode 79, and I think it's going to be a good one. Today I'm joined by Bluefield senior analyst Isabel Kezman. And the reason I invited her to join is because, quite honestly, I was super excited about a presentation she recently gave.
I think it was in Cleveland a couple of weeks ago, if not a month ago, to some water industry executives. And I thought it was really interesting. The topic and title of the presentation, mapping the dollars, regional financial trends and preferences in the US water industry. Really interesting. While providing a financial overview of the water industry, she breaks down the regional footprints of key federal, state, private funding sources, but also key drivers for the spend, which I thought was informative and the feedback was great.
She put an emphasis on financial opportunities, challenges facing utilities. Did a great job of also highlighting some innovative utility funding and financing strategies, such as green bonds, innovative rate structures, p three s, financial technology, et cetera. All really good stuff and worth a listen. So, as is becoming the norm, doesn't have to stay this way. But before we get into it, I wanted to point out that our team just released the last of six quarterly insights to clients. Every quarter, our team of water experts presents key drivers, trends and events impacting the markets. The respective markets, whether it be in US and Canada, to global or Europe, but also m a material prices, all of those things are wrapped up in our quarterly analyses that we put out for us and Canada. Municipal water, wastewater Global municipal, with an emphasis on Europe, industrial digital water, m a and company strategies. That's a kind of partly reformed service that we've been enhancing. And then lastly, private water in the US. Take advantage of that. And also, I had a conversation with Dave McGimpsey this morning. Record his podcast, the Water Values podcast. We talked a little bit about top companies in water. That's hitting the press, actually today for our team and clients. And we look at 50 companies, publicly traded companies across the water industry, globally. And Gayork Fisher is the latest company to be added to the roster. So if you work at Gayork Fisher, or if you're just interested what these companies are talking about from a quarterly basis and how they're doing financially, it might be worth reaching out to us at water
[email protected]. And someone might be able to help you out with that. So rather than dragged us on, as I oftentimes do, let's bring in Isabel and talk a little bit about regional financial trends and what's happening in the water sector.
All right, so I'm joined here by Isabel Kesman. Isabel, how's it going?
[00:03:39] Speaker A: It's going well. What about you?
[00:03:41] Speaker B: Pretty good. It's my second podcast of the day, so I'm excited to do this one. So why don't we jump into it? As I mentioned in the intro, you gave a presentation recently mapping the dollars, regional financial trends and preferences in the US water industry. Did that actually at a conference in Cleveland, I believe so. I thought it was really interesting.
I thought there were some good findings. But I also like the way you laid it out as far as sort of the information you were sharing with the industry executives, and mainly regionally. That's what I like. But why don't you give us a little bit of an idea about what the focus of the presentation was, and then we can jump into more detail.
[00:04:27] Speaker A: From there for sure. So the goal of the presentation was to look at financial trends in the water sector, but from multiple layers of analysis. And so I would say I'm a pretty visual person. So I conceptualized it by trying to think through the intersection of horizontal and vertical trends. So horizontal being, what's the evolution of utility expenditure and federal funding over time? Vertical trends being, how does this drill down from national to regional and local? And so with that in mind, we started off the presentation at a high level, looking at historical expenditure and funding trends over the past 50 or so years to kind of get a basis of how we got to where we stand today, which, as most people are familiar with, is on the heels of some pretty historic and significant federal funding via IijA. And so we then took a deep dive into this historic federal funding, analyzing IIJA and SRF distribution channels to kind of get a sense of how it's actually playing out in the market, where those dollars are, know what types of projects are being prioritized, and then how all of this might point to some key regional market drivers. And then just the last section, we wanted to wrap it all up and really get at that intersection piece I was mentioning earlier. So we then zeroed it in on those regional drivers, trying to pivot the conversation from how they're shaping the flow of federal dollars to how they inform other developments and approaches, such as innovative and alternative financing, maybe procurement and just overall investment strategies.
[00:06:13] Speaker B: All right, so there's a ton to unpack. So just for the listener out there, we're not going to go through the entire deck and presentation, but what we want to do is talk about some of the highlights and takeaways from it all. So maybe to begin, we have an understanding what was about. So why don't you, let's lay the groundwork as far as what does the historical view look like? So everybody kind of knows where we started and maybe where we're going.
[00:06:43] Speaker A: Sure. So the data shows that in the 1970s, and I'm referring to Congressional Budget Office data here, that there's a pretty even split between capital and operating expenditure in the 1970s. But over time, that balance has shifted overwhelmingly towards opex. And so now we're closer to a 30 70 split for capex to opex. And I think what we can glean from this is the story of deferred infrastructure investment, meaning the longer you go without rehabilitating, maybe it's replacing old or deficient assets, the more costly it's going to be to maintain and operate them. And that's often due to something like an inefficiency, maybe an emergency.
[00:07:30] Speaker B: Yeah. So I mean, your point about deferred infrastructure investment, it seems like it's in the news every day. It's a chronic issue. But I know the exhibit you've shown and the data you're talking about really does seem to show that. But within the data, there's this drop off in capex. But why do you think there is the drop off? Is there a story behind that? Lisa? We can sort of fair it out.
[00:07:55] Speaker A: Yeah, I mean, there's definitely a lot of things factoring into the decline in Capex here, but the other side of the equation is funding. So if you take that same Congressional Budget Office data and instead split it out by funding source as opposed to expenditure type, you see that the share of federal funding compared to state and local governments has steadily declined since the 1970s as well, meaning that the majority of responsibility has been left to state and local governments.
[00:08:32] Speaker B: Yeah. And I think especially, I think one of the things you've pointed out is, and we're seeing this actually over, I think the last decade and two recessions have basically shown that we're more reactionary than we ever have been. Right.
I think the early seventy s, it was sort of a post clean water act. There was a lot of dollars going towards infrastructure.
So when we first saw this in 2009, the American Recovery and Reinvestment act, and then also the American Rescue Plan in 2021 from the previous administration, and now most recently with the infrastructure Investment Jobs act, these are all responses to recessions or job losses. And everybody quickly turns around and says, hey, we need to put more dollars into infrastructure, but it's not sustained investment. Let's talk about sort of the channels or the primary sources of funding from the federal and state governments. What's the take from there? Isabel?
[00:09:37] Speaker A: On the state government side of things, capital is typically raised through rates and municipal bonds. On the federal side, there's a couple of programs. There's Watersmart, Wythia, USDA grant and loans. But the vast majority of federal dollars, and this does include most of IIJA appropriations, those are moving through the drinking water and clean water state revolving fund programs, or SRF programs. These are low interest loan and grant programs that are administered by individual states, but they're capitalized by the federal government with partial state matching requirements. And so with the concentration of federal funding moving through SRF channels, we decided to analyze these SRF projects and also the announced IIJA dollars to try and identify priorities and or the regional pain points that are influencing the distribution of funding.
[00:10:40] Speaker B: Yeah, and I think when it comes to funding or financing, depending on the program or the approach, one takeaway is that I know at the beginning of the pandemic, actually we were looking at this specifically for comparing small systems or utilities to large ones. What are their different approaches? And obviously, the smaller the system or utility, the more reliant they are on just rates and revenues from sort of customer bills rather than what we're seeing for the larger utilities, they seem to do a bit more. So why don't we take a look, at least briefly on the story behind IIJA and SRF funding and what that looks like.
[00:11:25] Speaker A: Yeah, I think I'll start off with IIJA and then jump into what we looked at on SRF. But for IJA at a high level, the bill authorized 55 billion specifically for water infrastructure spending as of July. I believe that's when the White House most recently published the data, about 22.8 billion, which is 40% of that 55 or so has been announced. And for the most part, I'd say the distribution is as we expected. I mean, the funding is going to the biggest states, California, Texas, Florida. There were a few standouts, most notably Montana, but also a few other western states, Arizona, New Mexico. And that's because these states are receiving significant dollars through the indian rights settlement and indian services and sewer dollars that were authorized in IIja, 70% of that announced funding sum will move through the SRF programs either to supplement the traditional programs or going towards IIJ carve outs for SRF. So that could be the drinking water SRF lead service line replacement program, or emerging contaminant funding pools for both clean water SRF and drinking water SRF. And just right now, the announced funding is showing a clear priority for the lead service line program.
[00:12:52] Speaker B: Yeah, I mean, one thing that is interesting, that maybe we talked about this internally, but putting Montana high up on any list when it comes to infrastructure spending is a little unique. But I think your point is well taken about indian rights, settlements and services.
So that's IJ. But what about SRF?
[00:13:15] Speaker A: Yes, so since SRF is clearly such an important part about the overall financial picture of the industry, we wanted to get a better understanding of the types of projects slated for SRF funding, and then again in particular how that may vary by region as a result of different needs. And so we selected five key themes that as a company we see defining trends in today's market. And so then we categorized a sample of about 3000 SRF projects across these themes using their project descriptions from the intended use plans. And so the five themes that we were working with were pfas, lead service lines, climate, digital water and stormwater. So when you look at the share each of the regions, Northeast, Midwest, south and west, when you look at the share that each of these regions holds within the themes, we see a few key takeaways. And admittedly these kind of validated our understanding of what regional pain points exist for utilities across different geographies of the US.
[00:14:28] Speaker B: Okay, so before we get into the specific details that really got me excited in looking at the presentation, can you summarize basically to high level the findings, at least across the regions? Are there any sort of common threads to pull?
[00:14:44] Speaker A: Sure thing. So I'll start off with requested funding for pfas and lead service line projects that definitely showed regional ties to the northeast, although the Midwest had its largest holding in lead service line requests to dollars. So the PFAS and lead service lines for northeast midwest.
Let's see, funding for climate related projects, resiliency and green infrastructure projects specifically overwhelmingly requested by southern states, doesn't necessarily come as a surprise because we know that region is very prone to climate disasters. And then lastly, projects in the west, we saw ties to digital and stormwater categories, both of which can address things like drought and enhance conservation measures. Specifically on the digital side, leakage management, advanced metering, that kind of thing. So I'd say those are my three takeaways.
[00:15:41] Speaker B: Okay. All right, so that's the summary. So now let's get into details, sort of specifically, even before this, we're talking about, do you have favorite topics by region, favorite threads to be pulled within each specifically? But I'll just leave it up to you. So why don't we just sort of walk through the regions themselves?
What are the key areas of interest or concern or funding? Should I say where the dollar is going? And are there any other innovative or alternative financing or procurement approaches that you're seeing? So I'll leave it up to you. But when we look at the regions is the start. So why don't we start with the northeast and go from there?
[00:16:26] Speaker A: Okay. So northeast, we identified the most announced projects at the federal level for PFAS and lead service lines. Something that is pretty well known, at least in the water sector about the northeast, is that there's a high concentration of contamination, PFAS specifically due to the presence of military and industrial sites. And there's also the most evolved PFAS policy landscape in the US. Most of the states have their own maximum contaminant levels in place well ahead of the federal legislation moving down the pipeline. And so I think with a stricter PFAS environment, utilities in the regions are seeking solutions.
And so one thing that we're watching is the three m settlement news broke, I think, back in June, that three M has agreed to pay upwards of 13 billion in a phased approach to thousands of utilities in the US. I think about 50% of the 4000 or so in the first phase are all located in the northeast. So that kind of really speaks to that situation.
And then I work on Bluefield's private water service a lot. So one thing that we watch in that thread of things is the role of investor on utilities. And there's certainly a greater penetration of ious in this region. And so we've started to see an intersection between utilities needing to come to terms with the cost of compliance for PFAS and ious. Kind of stepping into that. A good example is the city of Allendale in New Jersey, which actually sold its water system to Violia in 2021 or 2022. And I remember them citing Violia's technical expertise, but most importantly, their willingness to build a $7 million PFAS treatment facility. So I'll pause there. That's my northeast. And then I'll let you give some feedback or we just can keep running through the region.
[00:18:26] Speaker B: Yeah, no, I think it's interesting because it could have been. It was either a mean the ious themselves, to sort of bring that final point home, is that I think it was actually through our top companies in water analysis, Ethan Edwards had raised a point that the investor and utilities, they were all anticipating significant dollars, hundreds of million dollars, if I recall, going towards PFAS remediation over the long term. And it was a big topic, PFAS itself, across all the. So. All right, well, let's jump to another region, because we got three. So let's. Why don't we go Midwest? The nicest people in America, in the Midwest.
[00:19:09] Speaker A: So Midwest had its largest stake in lead service line projects. And there's definitely a couple of interesting touch points around this. I'd say at the core of it is just the sheer number of lead service lines in this region. Illinois, I think it's second right below Florida in terms of the EPA's recently released blood service line count. And so I think Ohio is also a major contributor in that region, but I think the prevalence is pretty widespread. One thing that we've talked about internally is what's the role of something like the legacy of Flint in pushing a narrative and spurring national efforts for lead service lines? I'm sure it resonated particularly strongly within the region. And so that's another touch point for that. In terms of SRF alternative developments in the region, one thing worth noting is innovative procurement strategies that support the progression of these lead service line removal projects earlier this year. And our senior research director, Eric Bindler, is the one who brought this to my attention when I was thinking through the presentation. But Indianapolis based 120 water, they're an end to end digital solutions provider for helping utilities meet the lead and copper rule compliance. And so they announced a framework agreement with the state of Indiana to provide a light version of their lead service line software to all 3000 or so water utilities. One of the fastest growing digital water players. And I think we're expecting that maybe this approach will catch on outside of the Midwest. I know there was a similar framework agreement in Georgia, but that's a good way, I think, to really make sure you're identifying those lead service lines so that you can get this IJ funding that's specifically for lead service lines.
[00:21:07] Speaker B: Yeah, I like what 120 water is doing. Also, they're looking at, I think, primarily targeting smaller, medium sized systems, those that have maybe less resources, and they're taking a bit of a unique approach. They're working not only at the state level, but then they're going deeper down to the utility level, particularly in inventorying the challenges that lay ahead. And I think that's, if anything, that's been where a lot of the dollars are being spent at early stages. All right, so let's go west. What about the western region?
I think everybody could probably guess the first area of focus is. But I'll let you carry that forward. So tell us about it.
[00:21:51] Speaker A: Yeah. So to tie it in, we looked at digital water and stormwater here, and this makes sense in the context of the west's historic drought, its need to improve conservation, develop new sources of water, and really seek those efficiencies for water management. The SRF adjacent developments we spotlighted here is public private partnerships. And I'd say compared to other examples we've discussed, this one is a bit more abstract. I will admit that because P three s are still pretty uncommon in the US water sector, but I think they're starting to gain some traction. We saw the Carlsbad plant, largest desalination facility in the US was a P three, the Realto and Vistaridge projects. I know Lake Oswego is also trying to move forward with a P three, so slow momentum, but it's definitely something we have our eyes on. Admittedly lots of unknowns, but definitely a parallel funding opportunity to srfs.
[00:22:56] Speaker B: Yeah. And I think also some of those that you mentioned, I think all of those above, they're also their design build or some form of. And I know we have a lot of engineering clients who are really interested in that as. So. All right, so lastly, and maybe the best region since that's, I think, where we're both from, the south. So what's going on in the south?
[00:23:21] Speaker A: Yeah, it probably comes as no surprise that we looked at climate when thinking of this region. We know that it is prone to climate disasters. I'm from coastal Virginia, so get hit with all those storms. But we looked at the data and so we used the National center for Environmental Information. They put out a billion dollar climate disaster data set. And since the 1980s, the south has accumulated the most of all the regions. In terms of costs, I think it's about 60% of costs nationwide, specifically in states in this region. And so in light of the need to address climate concerns, something interesting we've seen emerge from utilities in this region is an innovative type of green bond called an environmental impact bond. And so the history of this a little bit. It was introduced in 2016 by a partnership between DC Water and quantified ventures. And so they put out this environmental impact bond, $25 million. So it was sold to a private investment group to fund a green infrastructure project to manage stormwater. And so if the project was successful, then it would save the city millions in gray water infrastructure costs once they were able to implement this green infrastructure project at scale. And so it ultimately was successful. It's a really interesting case study, would definitely encourage people to look up this environmental impact bond, but it was the first in the country to transfer some of the green infrastructure performance risk from the utility to the bond investor. And it's a financing tool that's actually spread in this region specifically. So I believe there's also some sort of environmental impact bond at play in New Orleans, Memphis, Baltimore, and Hampton, Virginia. So really interesting stuff coming out of.
[00:25:27] Speaker B: The, I think, you know, the quantified projects, quantified venture projects. It's pretty interesting what they're doing. It's really performance based. They're demonstrating sort of the value ultimately to the cities themselves. And that's kind of ultimately how the payout is working. So be interesting to see how that works. And then I think also in the, there's, Texas is a big market for privatization as well. Lots of fragmented systems or lots of systems. Fragmented marketplace, should I say so? I like it. This is really interesting. Super helpful. There's a lot more to this. What I like is that you go region by region in your presentation and sort of lay all of this out overall in a clear and concise manner. So for those who are interested, you can always reach out to us. I'm sure Isabelle would help you out as well. But before I let you go, Isabelle, what else you got going on research wise?
[00:26:24] Speaker A: Research wise, I am actually working on a us market sizing and forecast for stormwater. Super exciting. Trying to build out competitive analysis and also looking at just the market from transportation lens and commercial stormwater infrastructure needs. So that's in the works.
[00:26:45] Speaker B: I know that's a bear. The fact that you've gone public with it is interesting. So now you're really on the hook. But I know the transportation piece. I know we've nailed down. The commercial real estate side of the equation is a little tougher. So if anybody's interested in stormwater has experience in that, we're always willing to talk to people in the market.
[00:27:07] Speaker A: Yes, let's chat, please.
[00:27:10] Speaker B: Looking for ideas? So sorry I interrupted. What else?
[00:27:14] Speaker A: I've also been watching some policy developments. The municipal water quarterly went out a few weeks ago and there were some interesting developments there. You mentioned privatization in Texas. Bunch of fragmented systems. I've heard that the EPA in October is supposed to release some sort of rule or perspective on regionalization. So I'd be interesting to see if that happens and what that looks like.
Also on that topic, private water utilities are seeking access to clean water. SRF, I believe it's very state to state dependent, whether they can access the clean water funds.
Build America, buy America, Davis Bacon. I mean, there's so much happening. PFAS. We looked through the comments, the public comments, and put our takeaways in that quarterly, which I thought the comments themselves were pretty interesting. So lots in the works. On the municipal side?
[00:28:15] Speaker B: Yeah, no, the quarterly, I think before you jumped on, I'd mentioned that we had released quarterlies, and I thought the municipal quarterlies, I told you, was one of the best we've done. So lots going on. Really interesting. So once again, if you're interested, you can always call. All right, well, I'll let you go. I've kept you on a Thursday, and thanks a million for doing this and sharing these insights, and we will talk again soon.
[00:28:40] Speaker A: Yeah, thanks for having me.
[00:28:41] Speaker B: All right, cheers. Take care.
All right. So there you have it. I really appreciate Isabel jumping on because like I said, I thought her presentation was really interesting. And if anything, we're working towards in other ways, not only in the US and Canada, but also around the world in the way we approach some of our content. So before we sign off, if you're in Boston, Barcelona, or just anywhere, let us know and maybe we could have a meeting. I've actually got to be in Kansas City in a couple of weeks. I'll be there if you want to meet up, but I'll also be in Los Angeles the following week. I think even Charlote before those.
I'm always around. Want to catch up? But right now I'm in Boston. Most of our team is in Boston and Barcelona. So if you want to meet, let us know. Please subscribe to the Future Water podcast. Give us a review. Send us a note to water
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