On September 29 Amane Advisors co-hosted our online investor event “The Future of Water” with our partners at RBC Capital Markets. After the restrictions from the ongoing COVID-19 pandemic forced us to cancel plans for this year’s in-person event in London, an audience of over 130 participants representing a range of institutional and private equity investors logged in for a half-day of panel discussions covering some of the most pressing issues and challenges facing the water industry. The panels featured CEOs and strategy-makers from some of the leading players in the global water market, including Danaher, DuPont, Evoqua, Mueller, Pentair and Xylem. We also heard from leaders of several of the largest US utilities on both the private and public side of the industry, represented by the CEOs of Essential Utilities, SJW Group and the Philadelphia Water Department.
The tone for the day was set with a keynote address by David Henderson, founder and managing director of XPV Water Partners, and one of the most experienced private equity investors in the sector. David focused on the changes in the sector being driven by COVID-19, especially in terms of the acceleration of adoption of new technologies and business models. In his view, the water industry is undergoing what could be termed an “instantaneous digital transformation”, that will reshape the entire sector in many ways going forward, as many pandemic-driven changes prove to be permanent. One example is the emerging role of utilities in conducting monitoring to identify pandemic outbreaks. This could be a real opportunity in identifiable systems such as universities or housing developments.
Another area of the business that may be permanently altered by the pandemic is deal-making. Henderson joked that he had never expected to be able to close a deal “without ever putting on pants”, but that XPV had both bought and sold a portfolio company fully virtually during the course of their office shutdown. He said he is seeing a surprising amount of deal activity right now, as well, meaning that a great deal of the due diligence and negotiation for these deals is also taking place virtually. Many of these themes of acceleration and transformation would return throughout the program, as moderators Bill Malarkey of Amane Advisors and Deane Dray of RBC Capital Markets spoke with each of the day’s three panels about the trends and opportunities being seen in their own particular segments.
The first panel, “New Opportunities in Smart Water Systems”, featured the leaders of Evoqua, Mueller Water Products, Xylem and Danaher’s Water Quality Platform, some of the players driving the development of this segment. Kevin Klau, Danaher VP & Group Executive, Water Quality, echoed David Henderson’s observations on the ongoing acceleration of digital technology adoption, and the deepening of customer relationships that is being driven by the ongoing shift of technology businesses to a more service-based business model. Ron Keating, Evoqua’s CEO, related how the COVID crisis presented challenges to the company’s supply chain in the early going, but how the resiliency of Evoqua’s business strategy and smart water focus had paid off, as the pent-up demand for these types of solutions should drive orders in the near term. Mueller’s CEO, Scott Hall, said he expected to see some impact to capex funding for utilities on the whole, but that this will also cause the demand for smart asset management solutions to grow. This demand should be particularly pronounced for underground infrastructure, around pressure and flow management, as part of the general move to greater automation post-COVID. Xylem’s CEO, Patrick Decker, discussed the three major challenges that he sees emerging in parallel across the global industry: water scarcity, the need for investment in resilience, and the ability to address each of these challenges in an affordable way. There is a huge role to be played for technology in both sustainability and affordability, and there was broad agreement that the technological disruption of the water industry is not coming soon – it is already well underway.
Another area of unanimity for this panel concerned the growing importance and influence of sustainable and ESG-driven investing. At last February’s investor event, the consensus was that ESG investment had not yet become a big factor in the US market. However, in the space of only 19 months it has become clear that this investor orientation is truly global and as one panelist remarked, “it was about time.” In closing, Patrick Decker stressed that it is not enough for companies in the sector to just present themselves as being “sustainable because we’re in water.” Rather it is imperative that the companies also be managed in a sustainable fashion, so that they will still be around to address the challenges the world will face in 2050.
Our second panel addressed the question of “How Water Utilities Will Meet Today’s Challenges.” While focused on the US market, the panel still offered a range of perspectives, featuring CEOs from two of the largest investor-owned water utilities (Essential Utilities and SJW Group), as well as the CEO of one of the largest US municipal water utilities (The Philadelphia Water Department). Each of these utilities has been through significant transformations in the recent past: Essential Utilities is the successor to Aqua America, resulting from a merger that created one of the nation’s largest energy-water multi-utilities. SJW’s merger with Connecticut Water resulted in a bi-coastal player present in four states, while Philadelphia’s water utility has emerged as an innovator in the sector, becoming one of the leaders in utilizing “green infrastructure” solutions to address the challenges of aging infrastructure. Despite the varied backgrounds of their organizations, the CEOs identified a number of common themes and priorities, the first of which was the need to continue to invest in infrastructure. Chris Franklin, Essential’s CEO, noted that his utility will be investing approximately $1 billion annually in infrastructure replacement, the majority of which will go to distribution systems. Eric Thornburg of SJW outlined his program of replacing 1% of the company’s distribution networks each year, with a special focus on reducing water loss. This is a particular priority in water-stressed California, where SJW has the goal of reducing water losses from the current level of 7.4% to 3.5% by 2050. Randy Hayman, Philadelphia’s CEO and Commissioner, discussed how his organization is more than doubling the pace of its network replacement, ramping up from a rate of 18.6 miles per year to a new annual rate of 42 miles.
This drive to renew and upgrade utilities’ infrastructure is being balanced against the need to ensure access and affordability for all customer groups. In Philadelphia, this is especially important when serving a population with a 25% poverty rate, but Commissioner Hayman stressed that there is no alternative to addressing the city’s long-neglected infrastructure. This means educating the population that a modern, functioning water system is needed both for public health and economic growth, while “providing a lifeline” for access to this human right. Private utilities are also addressing the affordability issue. Eric Thornburg outlined the efforts that have been made to maintain an ongoing dialogue with elected officials, communities and regulators, and his group’s offering of low-income tariffs. Chris Franklin explained that Essential Utilities has a history of offering safety net programs in its gas business, where utilities have long offered such options. For the first time the company will be submitting a “universal services plan” to ensure low income access in Pennsylvania, and the plan is currently in the design stage.
Going forward, our utility panelists agreed with our first group in terms of the trends that will shape their sector post-COVID. The technological transformation has already significantly impacted each of their organizations (for example, AMI implementation for Essential and the PWD, and the introduction of predictive neural networks to identify likely leaks for SJW), and will continue to drive efficiencies that can help ensure affordability and improved customer satisfaction.
Our final panel of the day set out to identify “Next Big Things in Water.” In this last hour the audience enjoyed a wide-ranging discussion led by HP Nanda, Global VP and General Manager at DuPont Water Solutions; Snehal Desai, Chief Growth Officer at Evoqua; Dr. Phil Rolchigo, Chief Technology Officer at Pentair; and Albert Cho, Xylem’s VP and General Manager, Advanced Infrastructure Analytics. HP Nanda set out the vision of a “water-optimized world” (WOW) in which water waste is eliminated and water use is made more efficient, to the benefit of society, business and the environment. He emphasized that minimal liquid discharge (MLD) solutions are seen as an important step along the road to zero liquid discharge (ZLD), though most users still see ZLD solutions as too expensive. Snehal Desai sees very favorable long-term trends for the sector, with most segments of the water business now entering what he called “acceleration mode.” Whereas changes in business models or technical approaches once took 15 years for acceptance, this is no longer the case, with advances in treatment, monitoring and data management all gaining momentum. Dr. Phil Rolchigo touched on the continuing emergence of the Internet of Things (IoT) as a driving force in the industry, especially in the area of water quality sensing. Consumers are looking for greater peace of mind as to what’s in their water, due to concerns about lead, PFAS and pharmaceuticals, while industrial users look for “designer water” that fits the requirements of their particular production processes. Albert Cho said that it is a sign of the maturation of digitization in water that we no longer talk about the technologies themselves, but about the outcomes and benefits they bring. These value propositions can be seen all along the water value chain, whether in reducing non-revenue water or in optimizing energy use and effluent management in wastewater treatment.
There was general agreement that differences in adoption are less dramatic by vertical, and are more visible by geography. While China remains very forward leaning in terms of technology, the panelists are seeing less disruption taking place in Western Europe. China and India are also driving very rapid uptake of residential treatment technologies in those countries, driven by local water quality concerns.
Two trends that are expected to drive growth across geographies are water reuse and the growing concerns regarding emerging contaminants. Regarding reuse, HP Nanda sees China and India as currently far ahead in terms of penetration, driven by national regulation across industries and the desire of multinationals doing business there to adhere to sustainable practices. Al Cho pointed out that reuse is rapidly gaining acceptance in the US, as well, with recent polling showing ~90% acceptance even for potable reuse in California. Dr. Phil Rolchigo and Snehal Desai each saw reuse as already having reached a tipping point, as scarcity, regulation and social pressure have grown, and technology advances have made this approach much more plausible. A push can now be seen from both industrial and municipal clients.
While there has been a great deal of talk about emerging contaminants such as PFAS recently, the panelists agreed that there has been less actual activity so far. While it is a global problem, the contaminants themselves differ by region, and it is a very regulation-driven market. There was broad agreement that it is still early days, but that when the demand arrives it will arrive at full force. And while a number of technologies have emerged that can effectively remove most of these contaminants, two issues will remain for the industry to address: Firstly, how to safely manage the disposal/destruction of the concentrate containing the contaminants once they are removed. Secondly, how to monitor (and prove to concerned consumers) that the removal is working.
In summary, all panelists felt that it is a very positive and exciting time for the water industry. Growing water awareness, the complexity of the challenges and the need for simplified decision-making all present opportunities for players in the sector, helping to balance the competing global needs for economic growth along with improvements in equity and environmental impact. Based on the resilience shown by the industry during the ongoing COVID-19 pandemic, there was great confidence that the players are up to meeting these future challenges, as well.
Along with my co-host Deane Dray, Managing Director at RBC Capital Markets, we would like to express our thanks to all the panelists and participants, as well as our friends at RBC Capital Markets who did all the advance work to make this event a success. We hope to see everyone – perhaps even in person – at next year’s event.