U.S. Water Industry Outlook
By Chase Drossos
Seven years ago, we launched the Mazars Water Industry Outlook with the aim of playing our part in leading the education and research needed to support sustainable solutions for all forms of water services. Water is essential to the U.S. population and economy, and the way America addresses its water challenges will be looked at as a global role model for sustainability.
This year, we continue to provide our perspective on key topics surrounding operations, finance, and future trends. In a continuous effort to improve this publication and increase its value, we have focused the operations section on big data and data analytics. The section also offers follow-ups on topics discussed as major priorities for the industry in previous surveys, i.e. energy efficiency and cybersecurity. The future of the industry section is largely focused on water stewardship and sustainability reporting.
The Outlook is based on a 26-question survey, conducted in 2018, through which we captured the perspectives of different stakeholders, including water and wastewater systems and operations management, procurement and other support for water and wastewater companies, government regulators, and the investment community.
Industry experts also provided interviews on innovation and contract services.
Key Findings From 2019
In 2018, the move towards leveraging technology to improve operations continued, with respondents stating that smart metering and data analytics will have the most impact in terms of increasing efficiency and operational cycles.
“Big data” is a hot buzzword across industries, many companies are seeing substantial benefits from it, and its use is practically ubiquitous in telecom and finance. However, water and wastewater lag behind in the areas of big data and data management.
While the need for tapping these future resources has been recognized, the actual implementation is in the early stages. Before being able to use the large volume of data that utilities already have available to them, water utilities need to implement systems and processes that will allow them to extract, collect, sort by relevance and otherwise interpret this information. Only then can they apply it to their day-to-day operations.
Unfortunately, the primary obstacle to introducing such technology is the difficulty of integrating it into existing systems, a challenge that the sector must collectively address to best move forward.
The big trends in finance have gone unchanged. Capital remains available, with an increasing number of investors evaluating and seeing opportunities in the water sector. There is, however, mounting impatience from some investors that see financial potential and rewards coming too slowly and at a high risk.
A lot of this capital is committed capital that must be assigned to viable projects by a certain date or the funding is lost. This is potentially of concern for both highly capital-intensive projects and the very small projects required to maintain the standards of water and wastewater systems.
We note two interesting trends as part of this year’s survey results: (1) the perception of availability of capital has slightly shifted to an overall gloomier picture since we started performing the survey in 2012 (see Figure 14); and (2) M&A seems to be taking the driver’s seat when it comes to growth, while capital investments and climate events lost ground. The first survey we conducted seven years ago highlighted the ease of access to capital in the wake of the financial crisis. Ten years after the crisis, access to capital may not be perceived as so easy, particularly in an environment of significant stock market valuation appreciation and rising interest rates.
Finally, the role of government on the financing of the industry seems to be perceived as positive and impactful. The underwriting of WIFIA’s first loan has clearly raised confidence in the ability of this program to start benefiting the industry. The effects of the Tax Cuts and Jobs Act of 2017 (TCJA) is still heavily debated, but it received positive responses in our survey.
While these are federal initiatives, there is consensus in the industry that solutions must be local to be effective. We expect that in the coming years, there will be more locally-driven initiatives and legislation such as state infra-banks, fair-value legislation and water quality/infrastructure regulation.
Future of the Industry
The water and wastewater industries continue to face many of the same challenges around infrastructure, sustainability and financing that we have seen in previous years. However, we are also seeing an effective response to those obstacles through the leveraging of technology and broader sustainability initiatives.
Capital expenditure programs and addressing environmental and compliance risk were key areas where respondents believed that standardized reporting could be enhanced to provide more insight to stakeholders and increase value. Moving forward, we expect there to be continued discussion around enhanced reporting on previously undisclosed key metrics such as asset replacement rates, future capex commitments, water main breaks and other infrastructure failures, and non-revenue water loss. However, these enhancements are not expected to advance quickly, due to opposing views on their disclosure.
As environmental regulations are increasingly enforced, participants expected compliance to be a key factor to an increase in water projects and investments. A regulated entity’s ownership could impact the direction of future projects, and the capital sources used to fund these projects may shift in order to incentivize investors (such as the use of green bonds).
At the same time, more than half of respondents have not taken any action on risks related to sustainability, and more than 60% of respondents have either no clearly measurable sustainability objectives or the objectives need improvement. We are already seeing lender and investor pressure impacting this stance. In the future, we expect to see a significant increase in the adoption of sustainability mindsets, goals and risk orientations with integration into company reporting. Similarly, we expect the national expansion of fair value legislation not only to potentially increase acquisition/merger activity but also to increase companies’ awareness of sustainability risks, whether in preparation for an acquisition (post-acquisition), divestiture, or capital raise.
Recap and Reference
We look forward to the discussions that will stem from the key topics presented in the 2019 Outlook and seeing how these results benchmark against industry trends.
We hope you will download the full version of the Outlook, complete with graphical survey results, industry interviews, and expert opinions.