Episode Transcript
[00:00:00] Speaker A: 502 Private equity deals in water tracked by Bluefield Research.
The average holding period of the active positions is just 3.4 years.
To put those two numbers together, you get a simple takeaway. A next wave of exits in the water sector isn't theoretical, it's probably already in motion.
I am Rhys Tisdall and this is the Future of Water.
Water is at the center of some of the biggest decisions facing businesses, utilities and governments today. And you've got questions. So we're mixing it up this week for episode number 141, which I think is going to be a pretty good one. That's because we're including you directly in today's episode.
Today we're diving into some of the most compelling questions you've shared with us on LinkedIn. So we're going to bring in some data, new perspectives and hopefully a bit of straight talk into the conversation.
But most importantly, many thanks to all of you who have provided the questions which we asked for on LinkedIn through direct messages or across the group. So thanks a million for that. We couldn't have done this one without you. So this will be good to see if we can give you some our perspectives from Bluefield research.
And after that we're going to get into what caught Maya this past week. So let's just jump into the questions. Let's make it easy. So first question, what's the investment side of water in a climate context? And what's the current status of green and blue bonds?
All right, well let's think about this. Globally, water still only gets a small slice of climate finance, probably less than 5%. So I would think we're looking about 3 to 5% of total climate spending is really going into water specific adaptation.
Even though as I've said before, climate change mostly hits us through droughts, floods and water related issues.
By contrast, labeled sustainable bonds are really now a major pool of capital. In 2024, $1.1 trillion of green, social sustainability and related bonds were issued, with the green bonds being the dominant format and really the preferred instrument for infrastructure and utility borrowers. As far as water is concerned, blue bonds really are just a niche but growing piece of the puzzle. Over the past five years, the cumulative blue issuances, I think they've roughly tripled reaching at about 10 to 15 billion dollars with nearly 2 billion in a single recent year in the Americas alone.
So when we talk about green and blue bonds as the workhorse tools for climate conscious capital investors, what do we really mean?
They're one of the few proven ways to tap a trillion dollar sustainable debt market and redirect bigger share of that towards pipes, treatment plants, coastal and ocean resilience that are still underfunded today. So they are a growing tool.
The water side of it is a little bit indirect and just for examples, I mean what I've seen is really outside of the U.S. so Seychelles islands, the Republic of the Seychelles, they issued the world's first sovereign Blue bond in 2018, raised about $15 million to support sustainable fisheries and marine conservation as part of its blue economy strategy. We've seen other ones in Belize in 2021 doing some debt for nature swap refinancing.
Colombia for $50 million blue bond arranged with the IFC and then Peru's first blue bond for about $26 million which channels the proceeds through local savings and credit banks to fund household level water and sanitation loans.
So that's sort of where we are, I think the expectation this will continue to grow, not as fast and furious as everybody likes or what the water sector needs, but beginning to grow.
All right, let's get to question two.
Here's another one that came in. Could distributed energy resources and storage change how irrigation districts fund capital projects? And is there an investment case?
All right, I assume this stemmed from recent post or a recent release of our water for agriculture report looking at irrigation in the US and which is one, a great report, super interesting. Just sizing the market and figuring out where the dollars are going when it comes to water management across the agriculture space. So thinking about this distributed energy and storage, it can change how irrigation districts pay for pipes and canals, but it's, it's pretty specific western US story rather than a broader agriculture trend.
We may see some other forms of this in other markets, but I'm thinking just the US So let's start with I guess the pain point. You know, energy is the single biggest operating cost in irrigation and most of that is grid electricity for pumps. I think our numbers show that about over 75% pumps are connected to electricity.
So districts and large farms are exposed to power price volatility with really no real hedge. I think the other maybe worse issue is if they're not relying on electricity, they're relying on diesel, diesel pumps or generators.
And in today's climate that's a whole nother problem, which I think we'll get to that in a minute for one of the questions.
So you layer in groundwater rules. So as states start limiting when you can pump, not just how much the ability to over pump in cheap or Allowed windows and store water backed by solar or storage becomes really operationally valuable, not just cross green or maybe blue in this case.
So I think there's something there that the funding angle. Big districts are really sitting although on 5 to 10 year capex plans for aging canals and control systems. But their revenues do also swing with water sales. Right. So a solar plus storage project with long term contracted savings could give them a more stable cash flow or flow stream they can actually finance against.
But policy is the kicker. With IRA incentives and grant stacking, things like Water Smart and eqip other state programs, these projects can pencil with single digit year paybacks, which is pretty fast in an irrigation district timeline.
At least that's our understanding. I mean the investment case is still pretty niche. Think of portfolio of solar plus storage assets in large western irrigation districts in places like California and Texas.
So it's pretty narrow place where it's going to be.
I mean the other part of this is just the practicality of solar and other capital investments for irrigation in a market that runs on pretty thin margins. So making capital investments in a space like this is pretty tough as it, as it is.
And so like I said, we're thinking long timelines as far as planning budgets go, which complicates it. So it's a really good question. It'll be interesting to see how it unfolds. One would think that would happen at greater scale and that greater velocity. But there's something to be said for a very mature ag market that is not going to change really quickly at any given time.
All right, for question three, what I've done is I have invited my colleague Keith Hayes to jump in, talk a little bit about water technology because that's what the next question is about. So this will be a good one and have Keith's perspective and he and I can maybe go back and forth on this a little bit.
All right, so I'm joined here by Keith Hayes. I brought him in to shed some light on water technology, which is one of the questions we received as part of this mailbag edition. So Keith, the question is what emerging tech inspires Bluefield the most? What do you think? Anything out there at least that comes to mind, whether it be Europe, us or global.
[00:09:04] Speaker B: Yeah, interesting question. I think we've said in the past, I mean it's hard to be super disruptive in water. It's a, it's a sector that is very careful about implementing new technology. That said, I think what gets us excited are technologies that involve tweaking that can be easily implemented.
And I think there are, there are a few out there that come to mind. One of them is I think obviously AI and AI in multiple manifestations. One of them is helping detect leaks. So you've got companies like Fidotech that are processing a lot of leakage data, also trying to insert into the workflow and make it easy to act on some of these leaks that have been identified and track how well network operators are responding to that.
Another use of AI that we've seen, we did a white paper actually with Kwater about a year ago looking at AI enabled water treatment plants and there you're seeing AI being used for monitoring safety footage inside of treatment plants, chemical dosing, energy optimization. So there's a lot of small process oriented aspects of a treatment plant that AI and particularly the early stage machine learning aspect of AI can help to manage.
And what else? Reece, what are you thinking about this?
[00:10:40] Speaker A: Yeah, I think, I mean it's easy to get dazzled by a lot of this stuff, whether it be AI or other tech, because we hear a lot about it and I think that's just sort of the way Silicon Valley helps us think about things.
I'm just going to throw a couple things out there. One, you know, I think it's really interesting that I don't know if anybody thinks about like the sidewalk solution with Subca and Amazon. I think that's really interesting. Leveraging echo devices and ring doorbells, as I've said before, even on this podcast, using that as a communications backbone to move data and information from meters, water meters in this case to a centralized location. I think it's really smart and it's not always necessary. It's sometimes in hard to reach places or geographies where that's applicable. I really, you know, I don't know, some people, you know, think that they don't even realize that that's even applicable. That tying their everyday devices that they're in their house and they're being leveraged in some cases for the water sector. I think that's one that's really interesting.
[00:11:49] Speaker B: Yeah, and I think we, we've said in the past as well that being able to leverage digital tools particularly we tend to always be talking about digital when we're thinking about new tech.
But the operation and maintenance aspects of water infrastructure that can be improved with digital tools comes up a lot as well. And I know even on the industrial water side, being able to use AI to process water quality data coming through quality sensors inside an industrial facility is a huge deal as well, and I think we're going to be seeing more of that. Again, you've got basically a water quality monitor with a sensor and some software, not necessarily totally groundbreaking, but the way it's combined, how it's applied to the process water in a water cycle, how it could maybe potentially identify the. If they're scaling on a membrane, if an RO module is not working properly, those types of incremental monitoring, sensing type tools could have a big impact in the longer term.
[00:13:03] Speaker A: Yeah, I think another. No, I agree. And speaking of monitoring, another one that I would throw out there. And like I said, these things happen and people respond, but I think they are real and I think there's a greater opportunity for it and that is, let's say, the biobot technology, you know, for wastewater based epidemiology. We've talked, I think the two of us have talked about this on this podcast. There's a lot of value in wastewater. Understanding what's happening within, like what made me think of it as you were talking about industry.
Understanding what's happening within an industrial facility could be a meat packing plant, it could be a community, it could be a school, you know, understanding what, what are eating habits, dietary habits, you know, is there drug use, is there some other bacteria happening within an industrial facility or public facility? I think there's a lot of information and data there. And we are, particularly with AI, we're in this world where this data is really valuable. And one would think that big tech, broadly speaking, would be interested in that because that data can then be used for, you know, it can be used understanding the communities. And I hate, I'll say commercially. Right. I mean, you know, hey, if, if Cambridge, Massachusetts is eating a lot of beets, well, maybe we should be marketing beets to that community or whatever. It might be beet chips.
So.
Yeah, and that's aside from where really caught notoriety. And that was during COVID Right. And one of the challenges still remains. How do you commercialize something like that? Is the real market opportunity public health departments or cities and towns, or is it more than that? I think it could or can be, can and probably will be more than that. It's just going to take time.
[00:15:02] Speaker B: Yeah, yeah. And I mean, I think, you know, we've looked at a lot of technologies, particularly on the treatment side.
Always kind of coming back to ro, activated carbon, UV treatment, maybe ozone, maybe ion exchange.
And then maybe within that we're looking at pore size of membranes or ceramic membranes. We haven't seen necessarily anything revolutionary. And I think we do end up finding there are gaps out there as well, like how do you make membranes last longer? What is the solution to.
I would say PFAs for instance. I mean, I think there's, there's a gap there in terms of what is going to be the, the, the winner in terms of both removal but also destruction in a sustainable, cost effective way.
I'd say, you know, we were talking a bit before about sensors and hardware and digital tools, batteries. Right. I mean, we haven't necessarily seen a massive breakthrough yet there so that, you know, a lot of deployments of these devices can get over that replacement cycle and have more durable instrumentation on their networks.
[00:16:22] Speaker A: Yeah, I think that's super interesting. And to that point though, I'll throw this back at you. I know the question was really what emerging tech inspires us?
There's a lot of basic tech out there. Is there anything that's really basic or traditional? That kind of is what it is and that's where the focus should be.
[00:16:41] Speaker B: Well, I mean, I'd say a lot there is basic tech just around data management and structuring workflows around the data management. What I mean by that is I think we've mentioned putting sensors and hardware everywhere and it generates more and more data.
But there are a lot of utilities that once they've got smart meters, once they've got flow meters, once they have data loggers out there, they don't necessarily know what to do with all the data.
So I would say having the human aspect of implementing these technologies, but thinking through the workflow and using maybe even some relatively simple data management software to make sure that everything is flowing into a place that promotes gaining insight from that data, not just accumulating it in the organizational silos that you hear about time and again.
[00:17:39] Speaker A: Yeah. And I was even thinking, I'll even go further into basic tech because we're talking about this.
[00:17:45] Speaker B: You can talk about dogs.
[00:17:46] Speaker A: I am going to talk about dogs. I love leak sniffing dogs. Truth be told, you knew where I was going with this, that you know, there's a lot of tech out there. Sometimes tech is not the problem. I mean, at the end of the day, you know, I've said that plenty of times, I've presented a million times. And tech is not the problem in the water sector. And to your point, it can be overwhelming for the utility or the industrial facility operator and you know, in some cases, and there are utilities out there that are using dogs really to literally walk up and down the street and smell leaks and they're convinced that in the US and Europe and the UK they're doing this, they're convinced that this works and it sounds like it does. And all they have to do is buy a bag of dog food.
I think that's super interesting and practical.
Another one that I really like, and I mentioned this to you earlier, and that is ice picking, right. To clean out pipes. It's super simple. Sending an ice slurry down pipes to clean them out.
It's abrasive, get out the fatbergs and, or prevent them. And it's super basic. It's just literally, you know, a slurry of ice and it cleans out pipes. So dogs and ice, pigs to clean pipes and for leak detection. Count me in. I'm on board.
[00:19:12] Speaker B: I mean, also, we've coming back to this again and again. It's activated carbon and I don't think we're activated carbon's been around for a long time, but it is effective in removing most contaminants. It does work with a lot of long chain pfas. The issue we have now is how do you reactivate that carbon? We've got a, we've got a capacity shortage in Europe actually to reactivate these, these carbon filters, but they do work.
[00:19:39] Speaker A: Yeah. We see companies like Chimera, they've just bought a facility, they're entering into the space of reactivating carbon.
Yeah. And that's going to happen because of these other contaminants. And that's really, if you want to call that a business model approach or shift. They see the opportunity, they see the challenge. And therefore these activated carbon companies are kind of having to add some additional capabilities to their, to their stack.
[00:20:06] Speaker B: So what about drones?
[00:20:08] Speaker A: You know, I don't, I don't use or use. I.
[00:20:12] Speaker B: You don't use drones?
[00:20:13] Speaker A: My kids use drones. I'm not sure for what, but they're just Christmas presents, but not big.
And yeah, I'm not. I don't come across them a lot. I hear people talking about them a lot. I don't know how useful they are.
[00:20:26] Speaker B: Yeah, we're starting to see them used over here in Europe. I think there are some drones.
We did a project for a major North American utility a few months ago.
They were asking about, about drones with infrared cameras that could detect certain pipe failures.
And so you're starting to see it partly there. So it's helping to pinpoint some leaks and then maybe you can send in the sniffer dog so they complement each other. And then there's also the drones that they're Putting into sewers now more and often because it's, it's safer to send one, one of these things. And it doesn't look like, you know, it's not a copter drone necessarily. It's a, it's basically a ball that can roll itself through a sewer pipe. And it's safer than sending somebody down there. So it's, it's finding its way. But I don't, I wouldn't say that every major utility is going to have a fleet of drones in the, in the near future.
[00:21:24] Speaker A: No. If anything, that's kind of part of the frustration, I think, for the, for the innovators and the tech sector is the, the, the pace of adoption of these, you know, emerging tech. Right. If, if what they think is not broken, they're not going to fix it.
And, yeah, that's a challenge. All right, well, let's leave it at that.
That's a lot to unpack there and appreciate the question that came in. So thanks for jumping on for this one and we'll talk again soon.
[00:21:55] Speaker B: Thanks. And thanks to our listener for posing that question.
[00:21:59] Speaker A: Yeah, absolutely. All right, you heard it here. That's fantastic having Keith on to answer that question, because one, it just breaks up things and he and I get to catch up and chew the f fat on technology, which I like.
All right, question four, and I think this is the last one I've got for you. So with everything happening in energy markets right now, assume we're talking about Iran and what's happening in the Middle East. What's the real impact on the water sector?
Well, one, I don't, I don't think we've seen the final results yet, quite honestly, because there's still a lot up in the air. But the longer the events in the Middle east go on, such as the closing of the Strait of Hormuz, the more real the impacts are going to be. So energy market volatility is really now a water sector problem, and it's going to hit pretty fast.
And how are we going to see that? Well, here's what the data shows. Oil prices, they went up. Brent crude went up by as much as 37%.
So what does that mean that is going to transition into higher diesel prices, higher transportation costs, and that's ultimately going to have to be picked up by someone. So the utilities and the vendors are not going to pick up the tab. They're ultimately going to pass it off. And in fact, we've already seen some vendors that have already implemented fuel surcharges on any delivery of their products.
I think Ecolab was one that comes to mind. But even I saw the US Postal Service or at least through a vendor the other day saying the US Postal Service on certain products or mailings was adding a surcharge.
Why is that? Well, diesel and diesel prices in the US are I think as we speak at around $5.40 a gallon. So that's nationally, on the west coast or it's, it's closer to $6.50, which is really pretty tough.
So if that sustains for a while, that is going to be a problem and it's going to directly drive up construction bid prices and worse because these are all operational costs in many cases, at least for some of these chemical deliveries and such.
Will those operating costs squeeze out or force utilities and industrial facilities to defer capital investments until the market stabilizes and they can get a better bead on what the market's going to look like?
So that's one challenge. Another thing that we think about this sort of comes to mind is, and I don't know if a lot of people do, but remote island nations running on diesel power, they don't have pipelines running up to the islands, you know, subsea. And so they rely heavily on diesel power and in some cases they rely on desalination as well. So some of these islands, whether they be in the Caribbean, maybe Hawaii, South Pacific, they're going to be hit especially hard.
And I'm kind of, I'm keen to see what happens in the financials of some of these companies, whether they be independent water providers for things like desalination and water management in some of these, some of these island countries and states.
So that'll be, you know that, so that's one aspect. Another is just Europe. I think maybe this is probably the most obvious and, or pressing impact is natural gas prices being up. You know, the Dutch TTF price is up 62% since the beginning of operation Epic Fury. So this is definitely going to force some utilities to think about and probably reallocate some of their planned spending towards operations and away from infrastructure upgrades just to cover the operating costs. When you're looking at energy making up 40 to 50% of wastewater treatment costs, you know, for blowers, aeration, etc.
It's, it's going to get, it's gotten expensive really fast. And if they're relying on electric power but also fossil fuel natural gas fired generation, then that's going to make it definitely worse, you know, and when you compare that to the U.S.
i think we're definitely spoiled when it comes to particularly natural gas markets, we're definitely still insulated. Natural gas is not a global commodity like oil is. And so in oil, while we are energy independent, we're not necessarily price independent. So that's why we're seeing higher gasoline and diesel prices, whereas natural gas were somewhat insulated.
But at the end of the day, here's the real, probably most important point and that is volatility is a real disruptor. This is something we sort of experienced through Covid and then we sort of hit the wave of tariffs that came about as people tried to figure out were they going to stay in place, were they not. It's really the rapid, unpredictable swings such as energy prices that make capital capital planning extraordinarily difficult. And when it comes to capital budgets, utilities are likely going to kind of drop their pencil until things stabilize as long as they can. Because one thing is they can take in RFPs and bids for certain things, but by the time the project comes around, they may get a 20% change order.
So if they don't have to do it, they're going to push back as far as they can. So the investment implication is clear though that next quarter's financial results across the top companies in water. We just released Q1, so it was really a look at the year end results for many of the top 50 companies in water, publicly traded, that is.
And they weren't really or haven't really talked about the impacts of Iran and energy markets in the Strait of Hormuz, but because by the time of their financial release they didn't know at that point. But the next quarter is really going to be an interesting tell and we'll be on the lookout for that.
So with that being said, that's four questions that you sent to us. Hopefully we gave you good answers that are useful. I really appreciate it. We couldn't have done this episode without you and this is something we we'd like to get listeners more involved in. So with some success we will do this maybe on a more regular basis.
Not to supersede what we already do on the future of water, but we like this because we want more interaction and LinkedIn has been the channel to collect those questions, whether they be through the group, like I said, or direct mail to me or to Bluefield itself. So thanks again to everybody who submitted questions. And like anything else, if you have questions going forward, you can always reach out to us@water expertsluefieldresearch.com so as we transition, what caught my eye this past week. Well, there's some deals happening that I thought were interesting. One's a little bit delayed but it sort of sparked a number of different things. So eqt, the Swedish private equity firm is making two moves in water at once. It sounds like one, it's preparing to launch the sale of SARS municipal water business, the French and international concessions generating the majority of the company's revenue.
So that has been in the news over the past couple weeks. And then secondly it is simultaneously closing a 42% stake in Calda holdings which is the parent of Yorkshire Water, the UK water utility.
So it's kind of going two ways at the same time. So it's interesting to see that it's selling off one heavily utility business and bringing on a stake in another.
But to understand why, you can also look at one, the timing of its positions, but also understand what the company really is because it's really two businesses living under one roof. First is a classic sort of utility, long term municipal water and wastewater concessions in France and internationally. Like I said, stable service, free revenue, predictable cash flows and that's what it's selling off. What it is retaining however, is this other part of the business, that's the, the industrial water treatment management side of the business, Nihausar Industries, which really has built out since 2020 when it's made, when it made its acquisition of the Dutch company Niehaus to build out really an industrial water platform. And they design, build, operate, you know, water reuse, zero liquid discharge, resource recovery, PFAS treatment systems. And so they're serving industrial companies globally.
And you know, one looks like infrastructure, the looks, the other looks more like a growth and, or technology bet.
So the other thing that you know, when I see this deal, what are some of the things that we think about and that is one, I think the industrial business, I think it's got room to grow. I think there's a lot of focus on that space. I don't get a sense that at least the numbers that I've seen, it's not the industrial side of the business is not growing as much as they want or as well as they would like it to. So that's one aspect of it and that's super interesting.
I think the other is its acquisition of the position in Yorkshire Water. The UK water market is definitely fairly charged right now. So as a new owner they're going to face intense scrutiny on things like leakage, service delivery to justify the prices that they've spent. There are all sorts of violation issues in the UK that the public is really upset about. And Yorkshire Water arrives with real baggage, like I said, sewage penalties, executive pay controversy.
So EQT's credibility could get built or broken on operational improvements at the utility, Yorkshire Water. Now, granted, it's a 42% position, not the majority.
Another thing that I think lastly that is interesting is EQT is not alone. I think it's worth mentioning. When I saw these deals happening, it made me also think of my colleague Antonio Del Alma, who he's been looking at Anton's launch sale of Indagua, the Portuguese water and wastewater concession. It's an operator serving 1.5 million people and I think they're targeting a deal worth about 1.2 billion, which is about 16 times EBITDA. So it's a pretty big deal. The multiple is definitely a number to remember if this is what exactly it's going to be.
And Antonio is all over this. If you're interested in learning more about this deal or also what else is happening in Europe, he's definitely worth a reach out.
And you can either you've heard him on this podcast, you can reach out to him@water expertsluefieldresearch.com or you can just reach out to me directly and I can make the introduction. So yeah, that's what caught my eye this past week. Eqt, private equity, what's happening with the ndagua deal, A lot happening in Europe. Water, a lot of moving and shaking. So it'll be interesting to see how this plays out over the next couple quarters.
So with that being said, that's our mailbag edition of the Future Water podcast for this episode. Number 141. Thanks for the questions. Once again, thanks for listening. If you have ideas for topics that we should tackle, you can always reach out to us@water expertsluefieldresearch.com if you need to learn more about some of the topics we've discussed today. Bluefieldresearch.com Pretty straightforward, but in any case, this is the future of water from Bluefield Research. Until we talk again, be well, be safe and take care.
