Headwaters MB Markets Insight

March 2015 Industrial Technologies and CleanTech

OPPORTUNITIES IN WATER TECHNOLOGIES

Macro Review

Introduction and Executive Summary This water sector review focuses on the opportunities within the water technologies / solutions sectors

The key themes developed in the following pages are as follows:

- Price of water will be an enabler: Price will continue to migrate towards true cost of delivery and help investment

- All water sub-sectors are not equal: Demand dynamics, customer pain points, and mode of delivery carry greater weight

- Industrial and agriculture markets preferred longer term: Expect better growth, absorption of new technologies and profit margins

- Fundamentals are strong: EBITDA margins are at record levels and revenue growth expected to line up with to long-term averages

- Innovation expected to be robust: Focus will be on water reuse, desalination, “smart water” and nutrient recovery

- Institutional capital will play a role: While VC firms have severely dialed back investing, dedicated water growth equity funds, private equity funds and individuals with interest in water will continue to play a role with firms such as Excellere Partners posting big successes

- M&A to play a key role in corporate growth: Development of new technologies by emerging companies, need to expand geographic footprints and / or expand product / solution portfolio to offer total solutions to customers, and the need to consolidate fragmented sub-sectors will be key drivers for M&A activity

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Market Overview Analysts and industry experts anticipate long-term growth of 4-6%, which is above global GDP growth, but with substantial variations between sub-sectors.

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US Market $ Bln.

US 5 Year Growth %

Global Market $ Bln.

Global Growth %

Overall Water Market $160.0 2 – 3% $450.0 4 – 6 %

Water Treatment Equipment 20.0 3 – 5% 65.0 5 – 10%

Transport (Pipes, Pumps & Valves) 13.0 2 – 3% 70.0 3 – 5%

Chemicals 6.0 1 – 2% 25.0 2 – 4%

Instruments & Testing 3.0 2 – 5% 7.0 5 – 10%

Residential water treatment 5.0 2 – 4% 13.0 4 – 7%

Engineering & Construction 13.0 1 – 2% 50.0 4 – 6%

Drinking and WW Utilities 100.0 1 – 2% 220.0 2 – 3%

$1.3

$2.0

$2.8

$2.9

$3.6

$6.9

$10.6

$11.7

Membranes

Meters

Diversions and Screens

Disinfection

Filtration System & Media

Mud Treatment

Primary Process Equipment

Other

Annual Global Capital Expenditure in Water Equipment ($Bln)

Key Water Industry Growth Drivers It is conceivable that the c. $150 billion global market for water technologies and solutions could grow at over 5.0% CAGR over the next couple of decades given baseline volume growth of 3.0% supplemented by gradual transition to market price, regulation, and stress on efficiency to reduce energy and O&M costs.

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$150

Bln

. Es

t. M

rkt.

for W

ater

Te

chno

logy

3.0x

to 4

.0x

Incr

ease

In W

ater

Tech

nolo

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nd

Solu

tions

Mar

ket?

2013 2030 Source: Global water intelligence; EBJ.

Investment Heat Map for Water Technology Companies

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Engineering Transport & Storage Treatment Test, Monitoring & Control

Design

Engineer

Build

Own

Operate

Transport

Storage

Pumps

Valves

Screens

Pipes

Absorbents

Tanks

Drinking Water

Waste water

Applied Water

Primary

Membranes

UV & Ozone

Chemicals

RO / Barrier

Desalination

Recovery

Oil & Gas

Industrial

Bld. / HVAC

Field Sampling

Online

Laboratory

Automation / Control

Asset Inspection

Remote Monitoring

SaaS Harvesting

Irrigation

Bio-mimicry

Growth companies

Legend On Investment Types

In-line; mature companies

Flat or at risk segments

High growth / emerging

Based on our conversations with industry owners, operators and investors, we believe the sub-sectors listed below are attractive for innovation and investment

Key Non-Municipal Growth End-Markets

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~ 40% of water consumption for industrial applications in OECD countries is for energy generation (it is the second largest user after ag)

In contrast, in developing countries, only 8.0% is used in power production

Sets the stage for large demand growth

Regulation driven: Significant focus on curtailing use and improving the quality of returned water

Increased regulations with three rules being proposed by the EPA

70% to 80% use gravity feeding, which is highly inefficient and results in excess water, fertilizer use, and lower crop yield

In Asia, only 4% land is micro- or drip- irrigated vs. nearly 40% in the US and 14% on a global basis

Immense opportunity as farms convert

Countries like India showing success

Focus on curtailing use and pollutants

However, some products have been commoditized

Opportunity created by regulation to protect marine life

If fully put into effect, potential $34 Bln dollar opportunity from 2010 to 2020 (over 57,000 vessels) to convert all ships

Proposed IMO requires ships to treat ballast water before returning it to the ocean

Produced Water

Water to oil ratio (WOR) expected to increase from 2.5x to 5.0x on the back of unconventional oil & gas production

Equipment portion expected to grow from $0.7 Bln to $2.9 Bln. by 2025, as part of a $10 billion market

More legislation on water use and treatment expected (Prop 6 in TX)

Largely a logistics business opportunity

Select opportunities for technology, solutions and service providers

Despite near-term production risk-down turn due to oil prices we expect this to be an attractive market long-term

Agriculture Marine – Ballast H20 Power Generation

Water Sector Performance

Water Solutions Index(a) – Fundamentals 2013 and 2014 have not been strong growth years for the

industry overall due to weak municipal spending, and weak Eurozone economy

Revenue growth expected to pick-up in 2015 / 16

- Expectation based on recovery in the US municipal market and strength in the industrial markets

- Impact of downturn in Oil & Gas is unknown

- Some of the growth expectations might be overly optimistic

Profitability on the other hand is at record level

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Median EBITDA Margins

Median EBITDA Growth Median Revenue Growth

(a) Water Solutions Index Includes: Ageion, Badger Meter, Beijing Origin Water Technology, BWT, Calgon, Ovivo, Hyflux, Jain, Jiangxi Sanchuan Water Meter, KSB, Kurita, Layne, Lindsay, Mueller, Pentair, Pure Technologies, Suez, Va Tech Wabag, Veolia, and Xylem. Projections are a consensus mean of analyst estimates.

Water Solutions Index(a) – Valuation Performance The S&P Global Water Index has by and large kept pace

with the industrial and S&P 500 benchmarks

Valuation on both revenue and EBITDA basis are either at or above pre-recession levels

- This is aided in part due to general market bullishness seen in 2013 and 2014; and

- In part due to a persistent sense of optimism in the investor community about the growth potential of the water sector (despite near-term earnings issues)

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3 Year Water Index Price Performance

Median EV / EBITDA Median EV / Revenue

(a) Water Solutions Index Includes: Ageion, Badger Meter, Beijing Origin Water Technology, BWT, Calgon, Ovivo, Hyflux, Jain, Jiangxi Sanchuan Water Meter, KSB, Kurita, Layne, Lindsay, Mueller, Pentair, Pure Technologies, Suez, Va Tech Wabag, Veolia, and Xylem. Projections are a consensus mean of analyst estimates.

Water Technology Valuation Continuum

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LOW < --- Technology Differentiation, Cost of Failure, ROI and Expected Growth --- > HIGH

Tank

s

5 x

10 x

15 x

Pipe

s

Prim

ary

Equi

p. Pu

mps

Auto

mat

ion

Test

/ In

stru

men

ts

Desa

linat

ion

Mem

bran

es /

RO

Disin

fect

ion

While this graphic provides a directional sense, company specific factors such as size, IP, end-markets, growth expectations, profitability, and management are overriding factors

Valv

es

Chem

ical

s

EV /

EBIT

DA

Smar

t Wat

er

Investment Activity

Key Innovation Areas for Water Extensive focus on reducing energy consumption of the process, which is the largest cost Two traditional technologies (evaporation and RO) reaching theoretical maximum Expect innovations from inside and outside the industry (i.e. Lockheed), and use of renewable energy

Desalination and Brackish Water

Urban density will require plants to handle greater flow rates with ever smaller footprints Large market opportunities in densely packed Asian cities where growth is the strongest An example is SBR technology developed for the Indian market

Intensification of Treatment

One of the best options to reduce compliance costs and increase asset ROIs Recovery of nutrients and / or gas are the two areas most advanced New delivery / service models similar to the solid waste or power industry emerging

Resource and Nutrient Recovery

For both compliance and cost purposes Primarily for municipal and in applied water Focus mainly on OECD countries

Reduced Chemical Use

Enabling technology to manage demand, reduce energy consumption, increase supply, curtail O&M costs, prevent system failures and reduce asset intensity

Investment and adoption necessary to improve ROI and prevent system failure Most likely to fundamentally alter how water infrastructure is managed

Smart Water

Regulatory mandates on contaminants and level of use to drive treatment and re-use Companies focused on applying desalination for brackish water and / or water reuse

Water for Unconventional

Oil & Gas

New models evolving that help reduce use, lower capital costs, and manage risks Areas where new business models are most likely to emerge are in (i) nutrient recovery, (ii) energy

recovery, (iii) monitoring / remote data collection, and (iv) risk mitigation / management

New Business Models and Partnerships

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Water Sector M&A Activity

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10 Year Water Solutions M&A Activity (excludes Water Utilities)

CY 2014 witnessed modest water sector M&A activity with eight transactions for roughly $566 million in enterprise value

Some of the notable transactions were:

- Kurita Water’s acquisition of B.K. Giulini’s Performance Products business for c. $300 million:

- The acquisition enables Kurita to strengthen its overseas business platform mainly in Europe - Kurita expects to generate synergy, with its technologies and products and those of the acquired businesses

- LG Chem’s acquisition of NanoH2O for $200 million:

- Accelerates the delivery of innovative and energy-efficient membrane technologies to the desalination industry by benefiting from LG Chem’s distribution and capital resources

- Strengthens LG Chem’s IP for desalination and RO membranes

Source: CleanTech Group.

Private Capital (VC and PE) Success Stories

NanoH2O (VC)

• Date: March 14, 2014

• Transaction Value: $200 million; estimated at over 10.0x actual revenue

• Buyer Description: LG Chem is a diversified chemical company

• Seller Description: NanoH20 provides worlds advanced reverse osmosis (RO) membranes that lower the cost of desalination

• Rationale

• Strengthened LG Chem’s IP for desalination and RO membranes

• Provides LG an immediately strengthened position in the high-growth desalination market through ownership of a leading, emerging technology company

• Provided a 2.0x return on total invested VC capital; not the greatest in the land of venture capital investments by a far stretch, but a rare example of a successful exit for a VC investment in the water sector

U.S. Water Service (PE)

• Date: January 27, 2015

• Transaction Value: $190 million, estimated at over 10x EBITDA

• Buyer description: Allete is an American utility and an energy company

• Seller description: US Water Service provides integrated water management for industrial processes / applications

• Under Excellere’s ownership, the company grew EBITDA 4.0x through seven acquisitions and 20% year-on-year organic growth

• Rationale:

• Allete wanted to diversify into unregulated businesses to increase shareholder returns

• Viewed US Water Services as a service centric, stable cash flow, growth platform; and

• Cultural fit with management and financial wherewithal to allow management to continue to grow the business through acquisitions

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Appendix

Headwaters Select Water Technology Transaction Experience

Client OptiRTC JWC Environmental Marsh McBirney(a) Trojan Technologies(a)

Buyer Type Financial Financial Strategic Strategic

Business Delivers intelligent control and decision support solutions for

waste water Treatment through its cloud-based

platform

Specializes in design and supply of wastewater solids

reduction equipment

Provides flow and level water monitoring

instruments

Leading provider of UV disinfection systems for

water treatment

Process Type Capital Raise

Buy-side Transaction Targeted Auction Targeted Auction

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(a) Transaction executed by Headwaters’ banker on prior platform.

Samrat P. Karnik, Managing Director

Mr. Karnik has extensive middle-market corporate finance advisory experience across the full spectrum of advisory assignments such as mergers & acquisitions, private financing of debt and growth equity, joint ventures and strategic alternatives assessments. He has completed over 25 M&A, LBO, shareholder defense and general corporate advisory mandates for entrepreneur-owned, private and public companies. He joined HeadwatersMB in 2014 with a focus on working with industrial technology companies, in particular those in instrumentation & sensors, automation & control, energy efficiency and water technology sectors where he has considerable legacy experience.

Prior to joining HeadwatersMB, Mr. Karnik was a senior banker in the M&A and Industrial groups of both Duff & Phelps and Houlihan Lokey where he was responsible for covering and providing investment banking advisory services to companies in the Industrial and Environmental Technologies sectors. Prior to Houlihan Lokey, he was an Associate at The Nassau Group, and began his investment banking career at Berenson Minella & Co. a premier M&A and restructuring advisory firm.

Mr. Karnik’s significant clients have included companies such as Babcock & Wilcox, CIRCOR, Crest Ultrasonic, Flow International, Mitsui & Co., Robbins & Myers, Standex Corporation, and Trojan Technologies and sponsors such as ACAS, Carlyle Group, and Littlejohn among other public and private corporations and private equity firms. In addition, his extensive work with entrepreneur led and family-owned companies has established a robust appreciation for understanding, anticipating and handling issues that need to be navigated successfully to lead these companies through their milestone transactions.

Mr. Karnik graduated from New York University’s Leonard N. Stern School of Business where he was on the Dean’s Honors List and Beta Gamma Sigma Honor Society. Mr. Karnik is also a co-founder and Chief Strategy Officer for Dreambox Emergence Benefit, LLC, a social enterprise focused on deploying 3D printing / additive manufacturing technologies for the benefit of rural, underdeveloped communities.

Managing Director P: 203.813.3880 x 208 E: skarnik@headwatersmb.com

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