800 M&A Moves in a Decade, Yet You’ve Never Heard of this Water Utility!

I got to meet with US’s largest consolidator – in less than a decade; they changed the fate of 800 distressed communities across ten states. Why, how, and for which results? What comes next? Let’s explore:

with 🎙️ Josiah Cox, founder and president of Central States Water Resources

💧 Central States Water Resources transforms how water utilities work by acquiring small, often non-compliant systems and then using expertise, technology, and innovation to quickly assess and turn them into reliable infrastructure.

This episode is part of my Series on the Water Crisis in America

What we covered:

💰 What Utility Consolidation actually is and how it can reshape the destiny of small communities

💸 How the US Water and Wastewater scene is still highly fragmented and the consequences of this fragmentation, especially on the lower end of the infrastructure chain

3️⃣ The regulatory, financial, and technical burdens of consolidating water systems and how to overcome them

🎛️ How with 800 M&A moves and 80 in 2021 alone, Central States Water Resources is 1% through its consolidation mission

⚖️ How CSWR aims to build the appropriate scale between radically decentralized systems and large-scale metropolitan water infrastructure in a distributed fashion

💊 Increased regulations and their consequences, PFAS, Bottled Water, Funding, Solving complex issues with proven technology… and much more!

🔥 … and of course, we concluded with the 𝙧𝙖𝙥𝙞𝙙 𝙛𝙞𝙧𝙚 𝙦𝙪𝙚𝙨𝙩𝙞𝙤𝙣𝙨 🔥

Resources:

➡️ Send your warm regards to Josiah on LinkedIn.

➡️ Check Central States Water Resource’s website 

➡️ A big THANK YOU to Sciens Water for enabling this episode!

is on Linkedin ➡️

Antoine Walter on LinkedIn

Teaser 1 – There are many issues in Small Scale water utilities: solving them can be complex

Teaser 2 – The Story of Central States Water Resources, the Water Utility Consolidator

Teaser 3 – How we have all the technology needed to solve water issues!

Teaser 4 – How CSWR intends to become the US leading Water & Wastewater Utility through consolidation

Teaser 5 – Did the EPA do any good with its PFAS Health Advisory?

Teaser 6 – Decentralized Water and Wastewater Treatment will simply… never happen!

Full Video: My conversation with Josiah Cox

Full Transcript:

These are computer-generated, so expect some typos 🙂

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Antoine Walter: Hi, Josiah, welcome to the show!

Josiah Cox: Thank you. I’m glad to be here. I appreciate you having me.

Antoine Walter: I have tons of questions for you because, actually, you’ve been mentioned several times by the other people, which appeared on the microphone so far today. But I’d like to have your take first on that simple question:

What is it that we have to rethink in water?

Josiah Cox: I think we need to rethink the value of. Societal value, economic value. All of that is, I think, the overarching theme that I think is being processed through by everyone who’s in the water space right now.

Antoine Walter: Let me jump into it. We both heard this number shared by Seth Siegel about the 51 or 52’000 Water Utilities in the US.

The question which comes next is, what do we do to reduce that number? The obvious answer is that you won’t have people just without water. You need to consolidate and find a way to solve all of that. And actually, you are somehow doing exactly that. Am I right?

Josiah Cox: That’s correct! We’re a water consolidator, and I would even jump and say that I think that number’s wrong.

The US Water and Wastewater Utility Sector is highly fragmented

There are 51,000 water utilities, which I agree with that number cause those are public water supply sources. But in the United States, there are about 35,000 sewer utilities. And that’s both point source discharges and non-discharging spray fields, drip irrigation, and all that.

So the number of the fragmentation’s even higher. And that kind of thing is not often mentioned in the popular news.

Antoine Walter: So when you say you’re a consolidator, how do you do that?

Josiah Cox: We focus on small, typically distressed utilities. I started this firm; I’m the founder of Central States Water Resources, and I really founded it because I was dealing with situations just like we’ve seen in Jackson over and over again.

The Water Infrastructure Crisis is not looming – it’s already here!

So it’s interesting. We’re sitting here at a water conference which is great, but the water infrastructure crisis it’s not looming. It’s already here!

Over and over again, I’ve seen lead in the drinking water serving daycares. I’ve seen receiving water bodies that are biologically dead. I’ve seen places with intermittent water service or water service that they can’t even use their laundry because there’s so much iron in the system…

All that is happening right now. After being exposed to that multiple times, I realized there’s gotta be a private solution to this very public problem.

Consolidating the US Water and Wastewater Utility Market

So I drew my trusty dusty business plan and went to capital markets. And it was interesting because very few people believe consolidation could happen because there are regulatory barriers to entry. All water is local because you can only transport it so far, right? So the amount of on-the-ground education and cross-stakeholder engagement that it takes through an individual small system is high.

The regulatory burden for a small system, all in all, is the same as the regulatory burden for New York City.

It is unbelievable how you can’t bifurcate those things. So knowing that, we realized that there’s a market niche here that no one wants to do cause it’s just a bunch of blocking and tackling.

Consolidating small-size utility systems is hard work

It’s really hard work, and it takes a lot of boots on the ground. And so that’s where we started. And so we started buying utilities in Missouri. And then moved to Arkansas. We’re since in 10 states, soon to be 11 states, kinda across the country, we’re probably the largest water consolidator in the United States today.

Last year, there were 208 M&A water utility transactions. We were 80 of those. We’re really focused on rolling up these small systems and the states we’re in.

We’ve gone to states with the highest amount of fragmentation. The most amount of small systems and the highest amount of regulatory non-compliance. So we’re trying to solve a problem that obviously exists in every state we’re in.

Getting small-size water utility systems back on track

Antoine Walter: Does that mean that one of your criteria to consider the utility is that it has to be in a bad shape?

Josiah Cox: In bad shape is relative, right? So it can be compliance related in the sense that it’s failing drinking water standards or wastewater standards.

It can be aging infrastructure with no financial ability or could be operational non-compliance. You know, we talk about the industry, the silver tsunami that’s coming, and this retirement, the skilled workforce. And so oftentimes, we’re finding communities that maybe their pipes are fine, the plants marginally okay, but they can’t find anyone to run.

All of those factors are the kind of communities we go talk to.

The financial equation to consolidating the US Water and Wastewater Utility Sector

Antoine Walter: Isn’t that kind of a risky move in terms of M&A to go after targets, which obviously aren’t in the best possible shape?

Josiah Cox: You know, starting this company, it took me about two years to raise my first round of capital!

And that was because of the associated risk. Environmental risks, public health and safety risks, political headwinds, All of that.

The great thing about the water business is we have technical solutions to fix every problem. It’s not that technology doesn’t exist; it’s about implementing it across all these stakeholders, getting buy-in, and including the environmental health regulators.

The risk is actually clearly defined. If you’re willing to take this amorphous, nebulous system and get it to a rules-based one, here’s what’s gonna happen. Here’s what needs to happen and get an agreement.

How will Central States Water Resources change the shape of US Water Utilities?

Antoine Walter: So what’s your vision? You made 80 M&A moves last year alone. So that means there are 50,920 left on the water side and maybe another 35,000 left on the wastewater side.

So what’s the limit? Is it to have 80,000 in your portfolio?

Josiah Cox: Great question! I would say for us, we want to be a continuous solutions provider, but you know, all-in-all, at the end of this year, we’ll own 800 individual systems. So we think we’ll be the largest single owner and operator of individual wastewater plants in the United States.

Not large wastewater plants, like the American Waters in the world. They run much bigger stuff than we do from a total connection count. But for individual systems, we’ll be the single largest owner.

CSWR is 1% through its Water and Wastewater Utilities Consolidation Vision

When it comes to our goal, at 800, we’re 1% of the entire market size across the country. We just made a de minimis effect in terms of nationwide. There’s so much work to be done! I Really wanna be the number one water and wastewater provider for small communities in the US.

Antoine Walter: And what’s your horizon for that?

Josiah Cox: I’m gonna be in this business a long time, and it takes a long time to do these things. We’ve got consistent year-on-year growth. That’s way beyond the industry average. So sure, it’ll take us years to do this. But we’re a long-term utility provider. We’re not going anywhere!

Antoine Walter: Why do you have to own the utility? Can’t you just operate it?

Josiah Cox: We made that decision early on, especially with these distressed utilities. And you’ve got small governing entities that oftentimes are running these things. Waterboards, sewer boards, small towns, homeowners associations… We’ve seen the whole gamut!

The day of the mom-and-pop utility is over with increasing regulation and aging infrastructure. And so having a partner that’s part of the kind of mom and pop, if you will, of the industry is really detrimental for a community. So we’ve picked our path. I’m not saying it’s the only path, but we believe it’s one solution for the water industry for sure.

The state of the US Water Consolidation

Antoine Walter: If you’re the biggest consolidator, does that mean there are other ones?

Josiah Cox: Yeah! All the big major investor owners are consolidators to some extent, but they do much larger deals because they’re not focused on small distressed guys. Again, the American waters of the world, the essential utilities, the San Joses, they’re buying utilities.

It’s just that they typically do three deals, four deals a year, and one of those deals is 10,000 connections; where we’re doing 80 deals, and our total connection count in those 80 deals is 40 or 50,000 connections. So it’s about the speed of small transactions rather than chasing a fewer amount of larger transactions.

Could new regulations change the consolidation game?

Antoine Walter: Last summer, the EPA changed some of the rules on PFAS, and one of the consequences, which was studied as a consequence of those new rules, was that smaller utilities wouldn’t like to take the responsibility for even delivering water, which might be contaminated with PFAS at the new thresholds to their citizens.

And hence, they wanted to retreat from the business of being a utility, and that was expected to maybe drive some consolidation. I read that on some lawyers’ websites, and I was like, does that hold water? Not that I want to make a pun, but just to understand if that’s really happening and if it does, is it a driver or is it a risk for a company like yours?

The Influence of EPA’s new PFAS Health Guidance

Josiah Cox: First of all, EPA issued health guidance. They haven’t actually issued any formal rule-making yet, and I would also say from being inside the industry, their health guidance was not helpful!

They issued guidance for levels that are below minimum detection. If I can’t detect it in the water, how am I going to treat it?

Antoine Walter: You mean that you don’t have a sensor for parts per quadrillion? (joking)

Josiah Cox: Yeah, right! I think it caused an unnecessary scare for people. Like, “oh my gosh, this is such a huge health concern.”

And now the current administration’s talking about circle regulation for post-treated PFAS materials, which adds a whole nother layer of legal liability and complexity, which will really impact small municipalities across the entire country. I think once we get through irrational rule-making, that will change quite a bit.

And that’s a multi-year process. So in terms of this prompting a wave of consolidation, time will tell. And I think it’ll take some time for that to all work out, but I don’t see the initial push right now where people are jumping up and down: “I need to get out because of this potential pending PFOA PFAS new regulation coming down the pipe.”

Will the future of US Water Utilities be distributed?

Antoine Walter: How would you describe your company? I’ll explain where I’m coming from. Many of the people I had on that microphone mentioned that they see a future in which we go for more distributed treatments and that will fundamentally change the role of the utility. And somehow, if you now have 800 utility assets under your control and you are one company heading that it sounds like a distributed utility in a certain fashion!

So would you see yourself as a new type of utility with distributed small assets left and right? Or is distributed a risk for disruption for your business model? How do you see that?

Josiah Cox: First of all, I think all the people who talk about this distributed treatment in the water and wastewater business, that’s never gonna happen.

The single largest contributor to life expectancy increase over time is a centralized sewer! So the idea that we’re gonna do these decentralized options, and that they’re gonna solve infrastructure problems… It’s not even the realm of possibility.

Decentralized water and wastewater only works at a certain scale

Now, are there applications in certain rural areas that have a lack of density where those solutions make sense?

Absolutely. I totally get that. But in terms of overturning the conventional way we’re doing water and wastewater treatment… No way. I don’t think that’s even in the realm of possibility.

Maybe that’s controversial! You know, I would agree with you, though, that running a ton of small systems we are an aggregator distributed in the term of small systems across the country, so that is very much what we do every day.

Antoine Walter: Interesting. So you are really absolutely sure that distributed doesn’t hold water (again)?

Josiah Cox: No, it doesn’t at all. When you think of it right now, it’s actually turning in the other direction. Right now, we have hundreds of thousands of homes, probably millions across the country, that are on septic systems.

Radically decentralized water systems are being consolidated right now

These are septic systems that were built 20, 30, and 40 years ago. There’s almost no regulation of these septic systems and almost no maintenance by existing homeowners. So basically, you have partially treated water that is dumped out through some drip irrigation system. And we’re realizing, especially in, like, impaired water bodies across the country, that these failing septic systems are contributing way more than point source discharges to environmental degradation.

I actually think we’re gonna see a wave of centralization of these failing septic systems across the country because there’s not enough property associated with the homes, and nor is there a proven technology that you can fix that issue in such a small footprint with soils that are impermeable, that kind of thing.

I think we’re gonna go the other direction in this country.

Antoine Walter: That’s for the wastewater side of things. What about the water side?

Josiah Cox: Water is the same. You know, water actually lends itself to consolidation much easier than waste water does because it’s easier to distribute, it’s easier to transport.

So we’ll actually see more water consolidation rather than less. And I think you’ll see, especially with these small water districts getting taken out by larger water districts, especially as new regulatory mandates come down and the effects of superstorms and people realizing they can’t afford the resiliency investments that are required, they’ll eventually get outta the business.

Is the US Water Infrastructure sufficiently funded on the long run?

Antoine Walter: Are you concerned when you see that next year or this year – It depends on the statistics – the investment in bottled water in the US is gonna be higher than the investment in Utility water? It’s the first time that those two curves are crossing. They already crossed in Mexico a couple of years ago, and worldwide it is estimated they will by 2034.

Is it a concern that more capital gets invested in bottled water than in utility water? Does that mean that utility water is a dying branch?

Josiah Cox: No, it’s the opposite. It shows how much work there is to do on the water side! Do you think the average family of four thinks to spend 80 to hundred dollars a month on bottled water? Those impacts fall disproportionately on disadvantaged communities.

The problem is we’re not valuing water correctly.

When you think of it, water at your tap costs less than a penny a gallon, and there are people that are paying $5 a gallon for water out of a bottle… The economics don’t make sense.

Revamping US Water Infrastructures and Utilities through consolidation is rapidly becoming vital

But where that comes from is the distrust in the infrastructure that exists today. And I think that’s the gap we have to bridge in terms of fixing infrastructure, explaining to people the value there is inside, starting with the water they’re drinking. Those are the two bridges we gotta cross.

Antoine Walter: How do you overcome a distrust?

Josiah Cox: For the distrust part, you gotta deliver. We’re based in Missouri; side joke, we’re the “show-me state.” So we’re gonna come into a community, do the improvements necessary, and show that we’re gonna increase service. When you take brown water, and you turn it clear, that’s obviously a very clear picture of, “hey, this water’s been changed.”

Beyond, that’s educational. Often people don’t understand, especially on the wastewater side; they don’t get that when they flush a toilet, the waste is not in their house anymore, and they don’t think anything about it anymore. But how do you explain them?

“Oh, this is a human health risk.” “There’s potential pathogens in this water.” “It’s lowering your property value.” Never heard of those things. So it’s a lot of customer engagement, public engagement, and stakeholder engagement to bridge that distrust.

Antoine Walter: I would have a ton more questions. So if at some point you have some time to have a long-form, deep dive, I’d be really happy to have that with you! For today, as I have to be cautious of your time, I’ll just round it off with two rapid-fire questions.

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Rapid Fire Questions

The first is, what is the most exciting project you’ve been working on and why?

Josiah Cox: We’re working on a tannin project. We’re removing biological tannins from the deep water well, something we’ve never seen before.

And so the filtration’s not new technology, it’s just the actual constituents, something we’ve never encountered, and we’re gonna be able to completely remove it, radically change this large community’s water quality in fairly short order. So that’s been a pretty fun project to work on!

Antoine Walter: And my last question, what is the trend to watch out for in the water sector?

Josiah Cox: The interesting one that I don’t know where it’s gonna go, is public-private partnership. You know, obviously, we’re a privatization play, so we’re a pure play water and wastewater utility investor on utility. We’ll see if that gets traction because these small municipalities don’t have the cash flows to do the improvements that are necessary. So can there be an reproachment engagement with the private sector? Whether the municipality still owns the assets that’s yet to be determined.

Antoine Walter: Josiah, it’s been a pleasure, and I really mean it. Whenever you have a bit of time, I’d love to do a deep dive on the matter with you. For now. I’ll leave you to the rest of the conference and thanks a lot!

Josiah Cox: Awesome. Thanks for having me.

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