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A new era for PFAS and water infrastructure investments

ESG and Investment Director, Global Listed Infrastructure

by Georgia Hall

ESG and Investment Director, Global Listed Infrastructure

Anna Pohjonen, ESG Associate, Global Listed Infrastructure

by Anna Pohjonen

ESG Associate, Global Listed Infrastructure

Article 17 Nov 2024
Water treament plant and solar panels

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Until recently, cross-sectoral fragmentation and a lack of regulatory clarity over the management of PFAS has stalled progress on managing and investing in this ubiquitous issue. This is amplified by the cost and limited options of PFAS monitoring and treatment solutions. Combined with a stringent focus on managing customer bill increases to a minimum, these factors have weakened the extent to which water utilities could implement and justify PFAS solutions in their regulatory filings.

As detailed in our recently released white paper, regulatory developments in the US and UK have instigated a step change in water sector investment needs for PFAS monitoring and reduction technologies over the next 4-5 years. US and UK water utilities must manage PFAS levels below certain thresholds, thereby requiring new capital investments and ongoing maintenance and operating costs. We believe these additional capital expenditures will modestly increase utilities’ rate base on which they are able to earn a return. Overall, we see this regulatory pivot to minimising PFAS as a net positive for the water sector, customers and investors alike.

What is PFAS?

PFAS chemicals are a group of virtually indestructible chemicals that are used in a range of manufacturing processes, beauty and homecare products and have entered most water systems around the world. PFAS chemicals are known to be dangerous to human and environmental health. Estimates suggest at least 45% of tap water in the US contains one or more types of PFAS, while 14.3% of European teenagers have PFAS in their blood at levels exceeding the health limits.1 Drinking water is one of the main sources of PFAS contamination for humans.

Known contamination PFAS sites across the UK, Europe and the US

Though there has been some clarity, we find the pace and scale of recent regulatory action on PFAS varies across regions; with the US EPA’s stringent stance translating to more meaningful capital expenditure opportunities for listed US water utilities, and the UK DWI’s precautionary approach translating to more modest rate base growth for UK companies. Beyond the US and the UK, we are seeing similar regulatory developments playing out in other markets such as the EU, Canada, Australia and New Zealand.

The investment case

We see new PFAS regulatory developments as a net positive for the water sector in both the UK and the US. Like other investment programs for water infrastructure and the infrastructure sector more generally, solving the PFAS problem will require large investments and long timelines, which at this stage are not well defined. We believe traditional infrastructure replacement and water quality improvement are the dominant growth drivers for the water sector, thereby requiring frequent regulatory rate case filings and a possible step up in capital requirements for the foreseeable future.

In saying this, increased regulation also comes with potential downside risk. To the extent incremental regulations are enforced and water utilities are non-compliant, then penalties and/or disallowed operating and management costs could negatively impact earnings. Equally, operational failures to ensure safe drinking water and/or compliance with wastewater treatment PFAS standards could also lead to financial risks for companies.

Examples of listed water utility PFAS investments
Country Water utility No. of customers Anticipated capex investments Anticipated operating & maintenance costs
US

American Water Company4

14 million US$1 billion (2024–2028) US$50 million
US

SJW Group5

1.5 million US$230 million (California and Connecticut, 2025–30) Not disclosed
US

Essential Utilities6

5 million US$450 million (2024–2028) US$22.5 million
UK

Severn Trent7

8 million £56.2 million (2025–2030) Not disclosed
UK

United Utilities8

7 million £48-49 million (2025–2030) £1-1.5 million (2030–)
UK

Pennon9

3.5 million £61-76 million (2025–2030) £1-1.5 million (2030–)
1 United States Geological Survey (“USGS”), ‘Tap Water Study Detects PFAS ‘Forever Chemicals’ Across the US’ (5 July 2023). European Environment Agency (“EEA”), ‘Risks of PFAS for Human Health in Europe’ (16 April 2024).
2 The Forever Pollution Project (2023).
3 Environmental Working Group, ‘PFAS Contamination in the US’ (August 2024).
4 American Water Works Company, Investor Presentations from June 2024 & September 2024. Number of customers relates to the regulated customer count.
5 SJW Group, ’Investor Presentation‘ (October 2024) and SJW Group, ’Q1 2024 Earnings Call‘ (26 April 2024).
6 Essential Utilities, ’Q2 2024 Financial Results and Investor Presentation‘  (Q3 2024). Essential Utilities estimates around $22.5 million of O&M costs annually, with guidance that annual O&M costs will increase by 5% of capital invested in PFAS.
7 Severn Trent, ’PR24 Draft Determination: Raw Water Deterioration’ (August 2024). Subject to final decision from Ofwat.
8 United Utilities, ‘PR24 Draft Determination: PFAS Enhancement Case’ (August 2024). Subject to final decision from Ofwat.
9 Pennon Group, ‘Enhancement Business Case: Water Quality Upgrades at our Water Treatment Works’ (August 2024).

 

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Georgia Hall
ESG and Investment Director, Global Listed Infrastructure

ESG and Investment Director, Global Listed Infrastructure
ESG and Investment Director, Global Listed Infrastructure

Georgia Hall

BSc (Hons), LLM (Hons)
Georgia joined Maple-Brown Abbott in June 2020 as a dedicated ESG Analyst on the Global Listed Infrastructure team. Prior to joining Maple-Brown Abbott, Georgia worked as a Senior Manager for two years, ESG and Corporate Responsibility at the Commonwealth Bank of Australia, where she was responsible for the Group’s Environmental and Social Policy, climate change risk analysis and modern slavery program. Before the Commonwealth Bank, Georgia led the Investment Communications team at AMP Capital and worked on the project team to divest $600 million of "unethical" holdings, the launch of a Sustainable Australian Share fund, and oversaw UNPRI reporting. She has held other roles at Ironbark Asset Management in Australia, and Wellington Management and Schroders in the UK.

Georgia

Georgia Hall
ESG and Investment Director, Global Listed Infrastructure

Anna Pohjonen, ESG Associate, Global Listed Infrastructure
ESG Associate, Global Listed Infrastructure

Anna Pohjonen

BBA
Anna joined Maple-Brown Abbott in August 2023 as a Risk and Compliance Analyst. Since August 2024 Anna has worked as an ESG associate where she provides support for ESG research and client reporting.

Prior to joining Maple-Brown Abbott, Anna worked as Senior Consultant at EY. Anna has diverse experience working in various roles across financial services encompassing risk management, compliance, independence and financial crime management in Europe and Australia.

 

Anna

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Maple-Brown Abbott Global Listed Infrastructure (MBA GLI) is a highly specialised investment manager focused on infrastructure assets. Since our inception in 2012, we have built a strong track record of delivering stable, long-term returns by investing in infrastructure. Features of the infrastructure asset class include defensive business models, diversification, inflation protection and low volatility cash flows. Our expertise, independence, and alignment with investors have made us a leader in the sector.

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