COVID-19: Drafting a Forward-Looking Assessment of the Water Industry
By Chase Drossos and Fatbardh Veselaj
As Denis Waitley once said, “Life is inherently risky. There is only one big risk you should avoid at all costs, and that is the risk of doing nothing.” Replace the word “life” with “business” and this still rings true. The water industry has long been aware of the disruption that could occur in the globalized business ecosystem from a range of disasters. As such, when COVID-19 reared its head in the first quarter of 2020 and lockdowns were increasingly being implemented around the world, management had to take quick action to identify near and long term risks and initiate emergency and other mitigation measures.
From our discussions with the industry over the past several months, it is evident that management has prioritized workforce production management, financial risk management, sustainable supply chain management and information systems sufficiency/security, not only to address current risks but also in preparation for future business disruptions.
The health and safety of an organization’s workforce is an essential element of its long-term survival and growth. COVID-19 highlighted workforce management risks and reinforced mitigation as a cornerstone of the industry. Maintaining a healthy and productive team of people to do their jobs well, without excess pressure or psychological worry is difficult, however, developing best practices adhering to state and federal health agencies recommendations and mandates are all part of a healthy workforce environment.
In the face of extraordinary challenges such as a pandemic, which has left many people in lockdown scenarios, the water and wastewater industry (and its suppliers) was expected to remain open and maintain quality and compliance as an “essential business.” There are many challenges as an essential business during a pandemic (or other emergency situation), especially the impact on the health and safely of the workforce and the public it serves.
COVID-19 showed us that managing a remote workforce while maintaining an essential operation to standards was possible. Many companies were able to implement emergency plans to keep employees safe, often with a great deal of reliance on web-based communication platforms and information systems not previously utilized. The remote environment changed the cybersecurity risk profile of companies, but also brought about other questions as COVID-19 endured. For example, keeping information secure when employees are off-site and working at multiple locations can be challenging. There is also the question of whether companies can maintain (or even increase) the productivity of their workforce in a remote environment. This will depend on many factors, including companies’ willingness to invest in cybersecurity and readiness to invest in their people so that they are performing optimally.
Training in remote working environments will become more common and a necessary part of business continuity, including onboarding in order to smoothly transition workers to a remote working environment and keep them safe and engaged.
Financial risk management is a broad category with many layers, including market risk, credit risk, liquidity risk, inflation risk, and foreign exchange risk. In the event that cash becomes increasingly scarce or credit is more difficult to obtain, as was the fear during the early onset of the coronavirus pandemic, does the entity have a specific action plan in place to address its cash flow needs (i.e. credit risk)?
Water and wastewater has not been immune to the effects of COVID-19. While first quarter earnings showed that some of the largest publicly traded water utility companies, such as American Water (ticker: AWK) and Essential Utilities (ticker: WTRG), did not suffer a material impact, disclosures regarding the uncertainty of the effects of COVID-19 in the future were abundant. While essential businesses such as water and wastewater were generally exempt from the shutdown, they saw shifts in consumer behavior with commercial/industrial customer volumes decreased and residential increased.
There was also an increased concern around cash flow as days sales outstanding ratios climbed, due to economic strain on customers. As a result of the, “no shut-off rule,” whether voluntary or by state regulated measures, there was an increased risk of delayed or defaulted payments, impacting short-term cash flow and financial ratios. Modeling and developing a strategic approach to financial risk, including access to debt and capital markets, in times of economic turmoil is, and will be, critical, especially within the water and wastewater industry where there is a significant need for capital to support infrastructure investment and overall business plans. Maintaining cash flow will be critical to continue operating a business, including as part of maintaining good relations with regulators, creditors and vendors.
Similarly, the industry’s overall supply chain is being tested. Increased risk of disruption to operations caused by strains within procurement might have been unforeseen, particularly from vendor concentration and individual vendor supply chains. Pressure on industry vendors include a general extension of credit terms as companies work to maintain cash flow. The global supply chain risks associated with borders being closed is a major concern that can be mitigated against by proactively developing relationships with domestic vendors. This allows for overseas or cross-border vendors to temporarily be replaced, even where not currently economical, until transportation hubs return to normal operations and borders are reopened. Performing a case by case review of third parties and independently assessing the risk to the business is critical.
Water and wastewater companies also need to have a range of business continuity plans in place so that they can swiftly adapt to external factors disrupting operations and resume modified production or services during a health crisis, natural disaster, political unrest, etc. Many businesses had emergency plans in place, however they have realized that for events like COVID-19, the plans were not specifically designed to address a global pandemic. A new mindset on what emergency planning should include has evolved, with new perspectives on working in a remote environment, communication and collaboration platforms, capacity and bandwidth for cloud computing, and overall IT infrastructure and security. With an increased reliance on systems and shared data in a remote environment, consideration must also be given to the change in cybersecurity risk.
Our clients have seen the value of the practical and convenient consulting, advisory, and attest services that Mazars can provide to address internal and external risks. COVID-19 has created a new perspective for many, shedding light on areas of vulnerability and highlighting the importance of comprehensive and strategic risk planning. The industry will have to continue to address the ongoing health crisis and its impacts and consider the potential for similar events in the future.
The cost of inaction will certainly be higher than those who make the appropriate investments to protect their organizations. Business strategy must be adapted to the likelihood of a more remote and IT driven environment to stay competitive. And management has an obligation to its stakeholders to be proactive, preparing and managing crisis events, so that they, ideally, feel like a controlled ripple through a pond rather than a tidal wave. As Warren Buffet once said, “Only when the tide goes out do you discover who’s been swimming naked.” The next time a pandemic or similar global event occurs, there won’t be any excuse for not being prepared.