THE COWEN INSIGHT
This report highlights the results of Cowen’s 2021 Municipal Water Spending Survey, provides context on the Infrastructure Bill from Cowen Washington Research Group, and takeaways from our discussion with an industry insider.
Improved macro and emergency measures have stabilized muni budget outlooks with MSD growth now expected into 2022. Ability to deploy allocated funds is the primary challenge given supply chain and labor bottlenecks. Infrastructure dollars are a likely benefit in 2023 and beyond.
Budget Outlooks Have Solidified Materially, Actual Spend Remains NT Risk Given Delays – Decelerating Growth Into 2022 Is Baseline Outlook
Last September, survey participants expected modest 2021 opex growth and LSD capex declines. These were the first expected declines since the survey’s inception. The current outlook has strengthened significantly, in line with commentary we’ve heard this year. Survey participants now expect MSD/HSD growth in both categories this year and steady MSD growth next year in budgets.
One interesting potential wrinkle, however, is actual funding. The vast majority of respondents expect to spend less than 60% of their 2021 capex budget, likely due to project delays from supply chain constraints. This is consistent with the recent update from a large water technology provider (and others) suggesting that while demand remains strong in terms of orders, conversion timing remains challenged. We will have to monitor how that ability to deploy plays out as we enter 2022 as the budgetary outlook is steady/supportive.
Infrastructure Views from the Trenches
The Bipartisan Infrastructure Plan will likely have to wait for the broader reconciliation bill. The current framework has a total of ~$48-55B for water infrastructure. Roughly $23.5B is ‘normal’ infrastructure funds that will be allocated via state revolving funds (clean water and drinking water) over 5 years.
In addition, we expect ESG investor interest in water (fresh- and wastewater) exposed corporates to remain robust. The water thematic is supported by two interrelated ESG trends, namely (1) an increased demand for ESG fund-level impact metrics, and (2) investor requirements aligning ESG fund holdings to U.N. Sustainable Development Goals (SDGs).
Industry Insider Breaks Down the Details
We spoke with Tee Thomas, Director at Quantified Ventures and former Water Finance Director for the State of Vermont to get her expert takeaways on the infrastructure bill, timeline, and how a utility might view these developments. Ms. Thomas stressed that while the dollars are important (increasing federal funding by ~$4-5B off a ~$2.7B base through 2026), so are the mechanisms. The amount of matching dollars the state needs to post is reduced significantly (and is zero for lead / contaminant work). Grant forgiveness (basically “free” money) is increased substantially – though Ms. Thomas was disappointed the forgiveness level for lead pipe removal wasn’t higher. Asset management projects that rely on connected tech is critical in her mind. 2022 dollars will likely begin to be allocated around October 2022, so actual impact more like 2023 and beyond. For context, annual US municipal spend is over $100B, most of which is from state/local sources.
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