Distributed water firm banks on ‘build-and-buy’ strategy
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Natural Systems Utilities’ recent purchase of Applied Water Management significantly grew its contract ops business. Founder Dominic Kulik says more buying will help fuel 50-percent growth in the next year.
Water and energy utility company Natural Systems Utilities (NSU) is banking on a fertile municipal retrofit market for sustainable solutions and an aggressive acquisition strategy to grow its approximately $15 million in annual revenues by more than 50 percent next year.
“We have a very robust agenda,” NSU founder and chairman Dominic Kulik told AWI. “We’re matching our long-standing prowess for engineering with finance to serve an aggressive build and aggressive buy strategy.”
Established in Delaware in 2007, NSU applies the design-buildoperate- finance model to the development of distributed water systems, which can include water supply systems, wetlands treatment systems, reuse applications and biogas facilities that are engineered, designed and operated on a turnkey basis. Those systems are frequently integrated as complementary infrastructure into existing water and wastewater systems in the municipal, residential, commercial and industrial markets. In total, NSU has an installed base of nearly 200 systems across the Northeast, Midwest and Southeast United States, one quarter of which the company owns.
NSU took a big step toward bolstering its contract operations business when it purchased Hillsborough, N.J.-based Applied Water Management (AWM) from American Water in December for $3 million. AWM, which posted revenues of $21.6 million and a net loss of $600,000 in 2011, serves real estate developers, industrial clients and small- to medium-sized communities. NSU and AWM have a combined design, build, operation and engineering services portfolio of more than 150 systems in seven states in the Northeast.
AWM was founded in 1984 by Ed Clerico, a former VP for American Water who is now CEO of NSU. Originally founded as a DBO firm serving the wastewater treatment market, Clerico told AWI that AWM had fallen into primarily serving the residential development market.
“American Water decided it didn’t fit their profile any longer given the small-scale design-build-operate characteristic of AWM,” Clerico said. “I was very glad to be in a position here with Natural Systems Utilities to acquire it back because it absolutely contained the core DBO skills and high profile reference projects that were perfect for the distributed water infrastructure model offered by NSU.”
When the acquisition was announced, Clerico said in a statement that the purchase gave NSU “the largest operating base of decentralized water and wastewater utility assets in the United States.” Kulik defined the decentralized approach as being a means of providing resource conservation and reuse as standalone assets in areas that lacked infrastructure or as enhancements to existing systems. He added that this approach allows NSU to solve environmental and water supply problems that are consistent with environmental patterns and needs while complimenting existing regional infrastructure.
NSU continued its acquisitive ways in June when it purchased 11 decentralized wastewater systems in Minnesota from Connexus Energy. The company is thought to be eyeing more growth by acquisition in the Midwest, and Kulik made no bones about NSU’s ambitions with regard to buying up more systems.NSU’s growth-by-acquisition strategy has been funded in cooperation with a stable of value-added equity partners. NSU received seed capital from Industrial Ecology Capital Management, an investment firm founded by Kulik in 2008. On the same day it announced the acquisition of Applied Water Management, NSU revealed it had closed a Series C financing led by XPV Capital and American Refining and Biochemical Inc., a private investment firm focused on the renewables sector and led by American Refining Group CEO Harry Halloran. The Series C financing amounted to approximately $9.6 million, according to an SEC filing.
Much of NSU’s organic growth going forward will be driven by opportunities to add sustainable technology to existing infrastructure, including DBOF contracts for biogas facilities at municipal wastewater treatment plants.
“Optimizing incumbent infrastructure is a very exciting market frontier for us,” Kulik said. “In the U.S., that has some of the fastest growth characteristics.”
In January, NSU entered a 20-year joint venture with Middlesex Water to design, build, own and operate facilities that will optimize electricity production at the municipal wastewater treatment plant in Ridgewood, N.J. The joint venture, known as Ridgewood Green RME, will create biogas through anaerobic digestion and use solar arrays for additional electricity. Kulik said the Ridgewood facility will be one of the first municipal wastewater treatment plants with a capacity of over 5MGD to go off the grid for its energy production.
“That was done with zero municipal risk or debt,” Clerico said. “It’s a shared savings agreement. That’s a great example of how these new models can be implemented quickly even if a town is faced with budgetary challenges.”
While the U.S. represents a prime opportunity in the municipal retrofit market, Latin America is fertile ground for the construction of new infrastructure. Kulik indicated that Latin America will be a significant part of NSU’s growth strategy going forward. “In Latin America you’ve got very little existing functional infrastructure for retrofit but you’ve got enormous greenfield dynamics,” Kulik said. “We’re entering those markets with much more robust greenfield solution sets.”
Although NSU is less than five years removed from its founding, the skill-set Kulik has amassed gives the company the look of an operation that’s been running for decades. Kulik and Clerico characterized the make-up of their company’s personnel as something of an all-star team of water industry veterans, corporate world overachievers and finance gurus. That team includes professionals with expertise in the technical aspects of water and wastewater system planning, construction, operation and management. Kulik noted that several of the company’s managers were a part of USFilter during its heyday and others were instrumental to the launch of Veolia Water’s design-buildoperate- finance division. At least one of those managers is part of NSU’s upper echelon – Donald Rodgers, the company’s chief operating officer, headed up USFilter’s operations division as a vice president before it was acquired by Vivendi.
Kulik himself is something of an entrepreneurial adventurer in the clean-tech sphere – his resume includes founding an educational service firm focused on alternative energy programs and an organic cotton clothing company funded in part by ice cream magnates Ben Cohen and Jerry Greenfield. It remains to be seen how effectively this particular merger of clean-tech visionaries and experienced water industry hands will achieve its lofty goals, but NSU seems to have the ambition and boldness needed to compete in such a fragmented industry.
“Most of the solution providers in the class of distributed water infrastructure are largely front-end service-focused,” Kulik said. “We not only differentiate by being arguably peerless with respect to the development and investment platform we’ve built, but also for this specialization position, which we do not define as a niche. All of our strategy is driving into a mainstream market with high scaling for transaction and for project footprint. We see nothing less than 50 percent growth next year and that’s all within carrying capacity.”