[00:00:00] Speaker A: So overall, we saw an 8% decline in utility m and a last year, there was about 140 acquisitions recorded. At the end of December, I think there were around 120 announced or pending applications, which is 20% fewer than were pending a year ago at that time.
You.
[00:00:24] Speaker B: I am Reese stizzle, 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 88, and I know it's going to be a good one. Well, that's because I'm joined today by Bluefield senior analyst Charlie Seuss to discuss some recent research on investor owned utilities in water. As part of the discussion, we're going to take a step back, talk a little bit about how Bluefield finds private water for listeners. But then also we'll dig into some of the details. This comes in the wake of what I would call a year end report. We look at this segment in particular every quarter, but this time of year, we do the year end analysis and we'll talk about key points, including things like utility M A, market trends. We'll look at companies, what they're paying for, water systems or wastewater systems, who are the movers and shakers, and also where's market heading, whether it be more M a, geographic shifts or policy changes going forward. So lots of good stuff to talk about, Charlie, I know a lot of clients are interested in this, so we thought you would be, too. But before we do that, thought we'd share some news that caught my attention this past week. So I got actually two one is a little self serving, but I can't help myself. Bluefield just released its Europe Capex report, which we're really excited about. Here are some quick takeaways from the analysis. Bluefield has sized and forecasted the 2024 to 2030 market for water and wastewater assets across Europe. Across 31 european countries. Actually, we look at everything from treatment to pipes to lift and pump stations to storage tanks, and the list goes on and on. So some really good detail if you're active or considering to be active in that market. The total cumulative forecast is about 476,000,000,000 over the forecast period. That's for capex only. It scales from about 60 billion in 24 to about 75 billion in 2030. But there, it's marked really, by strong regional differences. Some worth calling out is that maybe it's pretty obvious, but Western Europe makes up the largest share of the investment with a cumulative capex of about 236,000,000,000 over the seven year period grows at about 2%. So pretty mature sector. Western Europe, the nordic region and the UK are primarily investing in things like digitization and transition towards things like green technologies to address things like carbon climate, energy usage, all of which are kind of squeezing the european continent, if not the rest of the world. So something to think about. Conversely, southern and eastern european countries are focusing on infrastructure issues, but also challenges related to things like drought as well as enhancing wastewater treatment efficiencies. So those are two key points. But then lastly, UK and Ireland collectively hold the third largest share of forecasted water and wastewater infrastructure spend. UK in particular has made efforts to spend some real dollars on its infrastructure. This is also amidst some craziness that we've talked about actually on this podcast, I think while back, I talked to Keith Hayes about Tim's water, even a couple of weeks ago, talking about japanese trading houses. I talked to Ethan Edwards and what's the role of some of these japanese trading houses in, in fact, the UK market, which is what I would say is turbulent at best right now given what's happening there, but across the UK as a whole. So if you're interested in any of this analysis that we've just put out, as well as the data originating from our Europe team, reach out to us. You can always contact us at
[email protected]. But here's the fun part. Point number two that I wanted to bring up. So it's Super bowl weekend. And one question that came up, this actually came from Ryan Sullivan on our marketing team, which I thought was really quite fun, honestly. So Super bowl weekend, probably the biggest marketing event of the year in the US, if not the rest of the world, outside of things like the World cup. But question came up is how much water is really flushed during the Super bowl? Well, on average, the amount of water flushed across the country during halftime is equivalent to seven minutes of water flowing over Niagara Falls in New York, according to rotor Reuter. Previous stats have shown that more toilet flush in America between the halftime whistle and the start of the third quarter than any other time of the year, according to New York Post. So kind of amazing. That shows you how many people are around, but you don't want to miss those advertisements, so be fast. But quite honestly, this shouldn't be a concern for sewer systems. According to Naqua, the National association of Clean Water Agencies, municipal sewage Systems, they can handle massive amounts of water usage every day. Traditionally, the peak time for water usage and flushing is in the early morning, between six and 08:00 a.m. On any given day as people prepare for work. So flushing toilets, taking showers and just getting going. So like I said, at halftime during the usher musical performance, which I think goes on for 30 to 45 minutes, at halftime, you can join the party and be part of the great toilet flush during the Super bowl, which I can guarantee you no one else is thinking about except for a couple of others and Bluefield research. So that being said, let's get to Charlie and talk a little bit about investor and utilities and what's happening in that space.
All right, so I'm joined here by Charlie Seuss out of Chicago. Charlie, how goes it going?
[00:06:22] Speaker A: Well, yeah, we got some almost 60 deg days here in Chicago, so it's a nice break from the sub zero temps we had just a month ago.
[00:06:31] Speaker B: Yeah, it's winter. If it's going to be winter, I want it to be winter. I want to be able to go skiing.
But hey, that's where we are. Sorry I'm a little hoarse. I went to the Bruins game last night, so lots of screaming and yelling, so hopefully everybody can hear through my scratchy voice. But Bruins won for nothing against the Canucks. So for those interested in hockey. So, Charlie, as I mentioned in the intro, I said that you were going to come in. We're going to talk a little bit about private water, and we've talked about private water on the podcast before as a follow up to whether it be quarterlies or year end analysis and presentations. But maybe, and this is partly driven by some questions, actually, that came into our email box about sort of broader discussions about the industry. But one thing I thought we'd do is maybe define what is private water to bluefield like we use it. It's on our website. It's a term we use currently. But what do we mean by that when you work in this space? So how do you define private water?
[00:07:43] Speaker A: Yeah, no, I think that's an important mean, really. What we're talking about is regulated utilities. So primarily investor owned utilities or ious.
And there's kind of two main coverage areas there, the first being M A.
That's a big part of the research that we are tracking every week, utility acquisitions and consolidation across all 50 states.
The other aspect being rate cases.
So every six months we go through the dockets and are looking at rate case filings for leading irus and kind of the authorized return on investments for those top 25 or so investor owned utilities in the US.
So I guess to your point, just take a step back. We've estimated that only around 5% of the roughly 183,000,000 connections in the US are owned by leading ious. So that's just around 28 companies with a dedicated strategy that kind of focuses on utility ownership or operations beyond just a single network. Then that kind of leads me into this, I guess, third bucket, which is operations and maintenance, or ONM service providers. So that's where utility or public or private hires a third party to operate and maintain the water and wastewater system. In a handful of cases, there's some overlap with, you know, Veolia being the most obvious example. But we've also seen companies like NW natural being the most recent investron utility to enter that space to kind of grow their water footprint.
[00:09:33] Speaker B: Yeah, I mean, I think there's a wide continuum of, as I put it, from O and M provider. They're just service providers and they're signing contracts. Could be one, two, 3510 years. And then there's full ownership, like the ious, like the american waters of the world. And, yeah, I think it's also interesting is, to your point, I think the broader number, based on EPA data, if you look at it closely, it'll say it's approximately 15% of, I think, connections are actually privately owned. But it's a little bit misleading because what we're really talking about are those companies that actually have dedicated strategies, the Americans, the aquas, the eversources, the cow waters of the world. And that number is much smaller. So that's sort of what you're getting at, just for clarity. And I always thought it was interesting, it's 183 main connections, not population served. Population served is obviously much larger than that because more than one person lives in a house. So hopefully.
All right, so we've laid that out. We've defined it.
Why don't we talk a little bit about key players to watch? When you mentioned violi, you mentioned NW natural. When we think about private water, who are these companies we're talking about?
[00:10:50] Speaker A: Yeah, I guess there's a few different tiers that are constantly shifting just based on M A and all that. But a few different tiers that I would highlight, the first being the kind of larger, publicly owned ious or publicly traded ious, like violia, american water and essential or aqua. Then you have kind of more regionalized growing companies like California Water Service, Epcor, Eversource Aquarium, as well as Liberty in San Jose.
And then there's a third category that is potentially one of the most interesting mix of companies being NW natural, central states water resources and then undean in Texas. So across these different tiers, we definitely see kind of a range of different approaches to utility consolidation. But I think those three buckets are the way I would break it down.
[00:11:53] Speaker B: Yeah, it is interesting. I mean, they do break out. I think, as you cut it, the data, whether it be by geography but also by system sizes, we look at who's buying water versus wastewater. Both are there trends in that area, and they're all kind of doing a little slightly different things.
The last group or the emerging companies, those are what we would call sort of relatively new market entrants into the space. I thought one thing that stands out, I can't help but point out or sort of see behind them, behind their logos is private equity in some cases. Or we talk about sort of outsiders looking into this space.
Fairly often firms come to us because they're interested. They see an opportunity based on needs. So can you elaborate a little bit on sort of the role of private equity in the space?
[00:12:53] Speaker A: Yeah, for mean, I think first, straightforwardly, there's a number of PD firms, whether know science, which backs central states. There's Ridgewood, there's Bernard capital, which is investments in national water infrastructure in Louisiana, as well as know affiliated companies in Indiana and other states.
They've all kind of carved out positions in the water utility or IOU segment. I'd also add on the operations and maintenance side, there's new mountain capital, which acquired Infamark a couple of years ago, and then more recently, h two o innovation, which was acquired by ember Infrastructure. So there's a lot of, certainly these PE firms have played a big role in the utility ownership space as well as the O m side of things. So it's certainly an area we're tracking as.
[00:13:46] Speaker B: And I, you know, they've made inroads, at least a couple of examples you mentioned. What about outsiders? Right. We've seen outsiders come in with mixed success, as one way to put it. What about this group of firms?
[00:14:01] Speaker A: Yeah, definitely a challenging business with a lot of competing interests. So, I mean, next era is kind of the one that really comes to mind. They acquired water and wastewater assets in Texas and Pennsylvania over the last couple years. The previous CEO was a big advocate for the water opportunities that they saw. And then they've been trying to balance that with these massive opportunities for renewables that have kind of followed the inflation Reduction act and ultimately decided to exit the water sector after just a short stint there to kind of pursue those opportunities in renewables. And so to your point, it's certainly a challenging sector to kind of step into.
[00:14:54] Speaker B: Yeah, I think it's not for the meek. That's not to say the next era can't do it or wouldn't be able to do it. Like you said, they did acquire some assets. We've covered that at length in a number of different ways. I think the other aspect is they did have change at CEO and management. And like you said, there was all these dollars going to renewables in the power sector. I mean, that is their core business. They're one of the largest renewable independent power producers in the US, if not the world. So I can understand why they did that.
And that being said, they still do have positions in water through some acquisitions they made for decentralized reuse and treatment, whether it be for commercial facilities or campuses. And I think there's also a play as they move towards other renewables, things like hydrogen. If that scales, maybe there's another window of opportunity for them to step in. But speaking of renewables, one thing that jumped out at me in the quarterly, and actually in discussions with you was about liberty utilities. They're owned by Canada based Algonquin. It sounds like this year, or moving forward, they're going to start doubling down on regulated assets, including your. You brought this to our attention as a team. What's your perspective on that? Or any guidance on what their announcement or plans are?
[00:16:25] Speaker A: Yeah. So I guess it was last August that Algonquin announced its plans to sell off its renewable energy group and really prioritize the growth of its regulated business, and particularly water. So Liberty is one IAU that's been relatively quiet on the M A front, at least since purchasing american waters New York assets a couple years ago.
But I think that said, they're still one of the largest ious in the United States, and they've got a presence in several high growth states like Texas and Arizona. So it'll certainly be interesting to watch them moving forward.
[00:17:05] Speaker B: Yeah, and even uniquely, they have a position in Chile as well that they picked up a couple of years ago. I think we've got some research on.
[00:17:14] Speaker A: Right.
[00:17:14] Speaker B: Well, so that's a little bit of the background. I think that's super helpful and something that I definitely get excited about hearing and learning more about as things evolve. So let's talk a little bit about some of your recent research. You did sort of a year end analysis of the sector and deal flow specifically. So what did the utility deal flow look like in 2023, even relative to other years?
[00:17:39] Speaker A: So overall, we saw an 8% decline in utility m and a last year there was about 140 acquisitions recorded. At the end of December, I think there were around 120 announced or pending applications, which is 20% fewer than were pending a year ago at that time. So we've definitely seen buyers scale back applications in response to some of the economic uncertainty that's unfolded over the past year or two.
So that said, Texas continues to be the epicenter of utility acquisitions. Last year the state saw, I think it was like 38 acquisitions made by 20 different buyers, both public and private. That includes leading ious like central states and undean Southwest water in San Jose Water Group, which accounted for over half of all acquisitions in Texas last year. So we've seen a lot of divestments up among this fragmented set of owners of distress systems in Texas, which are really helping to fuel m a activity in the state. And then I think lastly, with some of the new climate related reporting requirements getting approved in California, and various effects of climate change putting pressure on utilities across the US, we're also seeing a lot of ious and municipalities as well, implementing a range of different climate adaptation strategies, whether that's through climate action plans or reuse and a variety of solutions.
ESG is increasingly popping up, both in utility strategies and M a. And it's certainly an interesting space to, you know, I would guess that's going to be one of the biggest themes for us this year that we'll be watching.
[00:19:33] Speaker B: Yeah, I think you brought up Texas. What comes to mind? Also, they've got fair market value legislation. I guess a follow up question to your points are what role did that play or did it have in any activity over the past year? Is it significant? Slowed down? Where's that heading, as far as we can tell?
[00:19:55] Speaker A: Yeah, I mean, over the last five years, ious have recorded around 80 fair market value deals, which collectively approaching $1.4 billion in announced value and transferring over 220,000 customer connections. So that's a sizable impact there. But I think in the context of the broader m and A, FMV deals still only account for a small share of the total.
And the legislation has only been utilized in around 10% of acquisitions during that same five year time period. So hopefully that kind of puts it in perspective in terms of utilization. But that said, there are still two leading ious, american water and essential, who account for over 80% of all fair market value deals.
And they've really paved the way for a smaller group of other companies that are leveraging these policies. So while fair market value activity definitely cooled off this year, we saw Florida become the 13th state to adopt fair market value. And then in North Carolina, Corex became the first state to complete a fair market value acquisition there. So I think it's relatively, again, small amount of deals that are leveraging this legislation, but it's certainly a driver that we've been watching as these deals have slowly taken up an increasingly larger share of the total deal flow.
[00:21:35] Speaker B: As you look at sort of, it's kind of a nice time of year, like you said, we look at this quarter by quarter, but as you look back across the entire year, I mean, did anything else in the data or policy wise jump out at you that was of note or interesting?
[00:21:52] Speaker A: Yeah, I think a couple of things. We're always talking about different consolidation, utility consolidation strategies in the office with clients. And I think one kind of interesting example that came up in the news, it's been in the works for a couple years, but in Des Moines, Iowa, there's a collection of water utilities that know last year they kind of have been finalizing an agreement to consolidate a lot of those utilities and develop the thing. It's called the central Iowa Waterworks, and that would serve over half a million residents. So this is a pretty significant effort to consolidate a growing metro area. And you compare that with companies like national water infrastructure, which again, backed by Bernhardt Capital, who in Louisiana is building a centralized treatment facility.
Over the past few years, they've been kind of consolidating systems in Ascension Parish, I believe, and we're seeing increasingly cases like that where there's these kind of broader efforts in certain metro areas to really consolidate this kind of very fragmented landscape of utilities and kind of leverage economies of scale in those cities.
[00:23:18] Speaker B: Yeah, no, I think it's super interesting, and there are little things like that that jump out. I mean, we've been looking at this for the better part of a decade, which maybe this leads to my next question.
This is a question that comes up and we look at. I've sort of even lost count. We probably have several thousand on m contracts in our database or data set. I mean, not all that far off or dissimilar from what we have for m and A. I think we have probably 1500 plus m and a transactions. We're looking at 140 ish a year on average. But my point is, like, companies and clients come to us and they ask this question, where do we see the market heading for private water or private investment or participation in water?
[00:24:05] Speaker A: Yeah, I mean, as much as some of the higher profile acquisitions make a lot of noise in the news, it's still important to recognize that the majority of M A is for smaller privately owned systems. And the reason there is that they kind of have the greatest risk of operational and regulatory failure, particularly with combination of aging assets and regulatory pressures like pfas. And then on top of that, you add available capital, or lack thereof, kind of compounding this challenge for underresourced systems and municipalities. So again, it is kind of a tough business to enter, and just having bags of money really isn't the solution. You need a platform from which to build. And I think that can be a little bit frustrating for some of the deeper pocketed outsiders. And some of these big platforms are a bit few and far in between. But I think cities and towns really need to be confident that the one thing that they critically need will be taken care of and managed well. And that is, again, where Onm ties in. So we've seen a growing interest there as well. But that said, acquisitions continue to get approved at a pretty steady pace, and it'll be interesting to see how things shape up in 2024.
[00:25:30] Speaker B: Yeah, I think everybody's looking for some significant inflection, and I think actually, year over year, the number of deals or utility acquisitions has declined since a high of, I think it was about 217 two years ago. And they've kind of come down back to maybe to where they probably should be, or the mean should be is probably not the right way to put it. But this is awesome. So I know how much work goes into all this.
People don't realize going through the dockets, going through the rate cases, and we've got 150 or so rate cases we've evaluated and looked at over time, if not more. And I also know all the m and A and on m, it's ditch digging, folks. So there's a lot more to be said about this, but I think this is super helpful, Charlie. But how about telling us what's next on your agenda before I let you go? What else you got on your docket as far as research and what you're focused on?
[00:26:32] Speaker A: Yeah, a couple of things. First, we've got an investor and utility market share report in development. So people can look for that in the next couple of months, just breaking down some of the leading irus presence in the sector. And then on top of that, we're also working on a report looking at alternative delivery methods and the 50 states, different legislations for which methods have been authorized there. And what are the trends that we're seeing, as well as different case studies about certain interesting utility examples or projects that we've seen. So definitely a lot, even within the private water and municipal water service, my peers are up to a lot of interesting stuff as well, so definitely stay tuned. Nice.
[00:27:22] Speaker B: All right, well, this is awesome. So thanks for pulling it together and sharing some of these insights. This is, like I said, really great and think listeners like this. So even if you're not active in sort of this, what we call the private water space, there's a lot happening. And the way we see it is companies come to us not just to necessarily buy utilities. They also look at it as a market opportunity. Right.
You go talk to, let's say, american water.
They're active in a number of different markets, different systems. So working with them, whether it be hardware, equipment, technology that may be a pathway into multiple geographies and systems as opposed to just one. So it always comes up as an opportunity.
But this is really great. Thanks a million, Charlie, and we will talk again soon.
[00:28:15] Speaker A: Thanks, Reese.
[00:28:18] Speaker B: All right. That was awesome to have Charlie on because like I said, he knows a lot of mean. The other things he was referring to. We've got some really good research coming out pretty soon. I know in production is the role of private equity firms in digital water, sort of what they're up to, what they're looking at. Another one, which is highly anticipated and expected. I'm super excited about it. Been digging into it this morning. Admittedly a bit more complex than I expected, and that is the IIJ, or infrastructure investment and Jobs Act. A lot of concerns about where is that program or where are the dollars on the timeline from appropriations, which was in November to January 2024. And quite honestly, it's pretty small, actually. So everybody's sort of saying it when you go talk to contractors. And actually they're right. We're just talking handful of projects. We're talking 400, 500 projects, if that, and then we're only talking. We're even talking a couple of billion dollars of outlaid funds. So interesting to see that. So we've laid that all out on a timeline, project by project. So hopefully that'll be out pretty soon, in the next week or so. But before we sign off, if you're in Boston, Barcelona, or just anywhere else, we are Chicago, Bay area, Paris, let us know. We'd enjoy the opportunity for a meeting. Always happy to have a conversation. It's harder and harder these days, whether it be because of Zoom, people don't have landlines, hard to pin down. People don't go to the office. I can't tell you how many times over the past week or two, we've reached out to clients to say, hey, let's swing by and maybe have a coffee, have a meeting and talk about what's happening in water. Everybody's remote, so makes it a little tough. But so if you have the opportunity to meet with us in person, do so because we want to do it. Please subscribe to the Future Water podcast, whether it be on Apple or Spotify. I think Google's changing I don't know if I mentioned that last time with Ethan Edwards, but Google's changing its platform, so creating more confusion. But give us a review. It's really helpful to us. So thanks to everyone who has already done it, but look forward to more. Lastly, send us a note to water
[email protected]. One like I said at the start, if you're interested in any Europe capex numbers, data and analysis, but also if you have any thoughts or topic ideas that you'd like us to share, and I appreciate someone doing that last week. And as always, tell a friend about it. I'm all about that. And this podcast and these water industry insights have been brought to you by the one and only Bluefield research. To learn more about us, visit
[email protected]. Until we talk again, be well, be safe, and take care.
