BOSTON – US private water markets are poised for significant growth, according to a new report from Bluefield Research. With an infrastructure investment gap of more than US$500 billion for drinking water and wastewater treatment over the next twenty years, a revised regulatory landscape is shaping new opportunities for private players looking to invest strategically in US water.
A major step forward for the market came on 10 June 2014 when President Obama signed the Water Resources Reform and Development Act (WRRDA) into federal law. WRRDA aims to alleviate investment gridlock, which has plagued US water infrastructure over the past 25 years. A series of private water-friendly proposals accompanies WRRDA, including the creation of a federal water authority, removal of caps on private water bonds, and guidelines for public- private partnership (PPP) legislation to support municipalities’ financing upgrades and optimizing management of their water networks.
Currently, private water suppliers operate in a hyper-fragmented US market that contains more than 100,000 systems. Privately-owned water supply networks serve 15 percent of the US population. This market structure has challenged companies to realize economies of scale and capture synergies across asset portfolios. However, Bluefield analyzes how a diverse set of strategies– ranging from greenfield development by independent water suppliers to pursuing the investor-owned utility (IOU) model through acquisitions– is helping companies enter and grow in the US.
“New legislation and M&A potential are piquing the interest of domestic and international players– particularly those seeking IOU plays,” said Keith Hays, VP of Bluefield Research and lead analyst for U.S Private Water Market: Opportunities & Strategies, 2014. “Large scale IOUs have focused their portfolios in states with larger populations and policies favorable to private participation in municipal water, including California, Texas, New York, New Jersey, Pennsylvania and Florida. In addition, we’ve witnessed an increase in PPP interest on the part of municipalities in or near the service areas of existing large-scale IOUs.”
The field of large-scale IOUs (>50,000 served) has seen several shifts in the past 4 years as competition for longer-term growth opportunities ramps up. These include new entrants acquiring incumbent IOUs or regional assets (e.g., Macquarie Capital, EPCOR, Corix Utilities, Liberty Utilities), as well as a steady flow of tuck-in acquisitions led by larger players seeking to solidify their regional presence (e.g., American Water, Aqua America, United Water).
In addition, dozens of new companies– including several international consortia– are assessing US market entry in light of Detroit Water and Sewage Department (DWSD)’s plans for a PPP, which would be the largest such deal in the history of the industry. DWSD has annual operating revenues of nearly US$800 million.
In U.S Private Water Market: Opportunities & Strategies, 2014, Bluefield Research identifies multiple routes to market that players are pursuing that reflect a wide variance of state attractiveness and openness to private participation.
“Federal legislation may kick start a new phase of water infrastructure spending, but it is not a game-changer in terms of municipal funding options,” said Hays. “Proven financial and operational benefits of private network management remain key drivers for more private water deals. In this context, 2014 and 2015 will be important years for firms to assess these opportunities and implement their strategies for a place in the US market.”
US Private Water Market: Opportunities & Strategies, 2014, a Market Insight provided to clients of Bluefield Research’s Private Water Insight Service, is now available for purchase. The Market Insight provides analysis of federal- and state-level policy affecting infrastructure grants, public- private partnerships, and rate cases. The report also features competitive analysis, including market share of existing private water companies, investment and M&A trends, market entry strategies, and upcoming private water opportunities.