One of the biggest risks facing the water sector in the coming year “is the financial, human, and technical resource gap between smaller and rural utilities versus urban and larger ones,” according to Standard and Poors report, “U.S. Municipal Utilities Sector 2018 Outlook: Being Bigger Has Its Advantages.” The gap between larger utilities (serving populations over 10,000) and smaller ones is increasingly profound, the report noted. Smaller utilities serve less than 20 percent of the U.S. population but report more than 80 percent of deficiencies. “We anticipate that 2018 will continue the trend of large (10,001 to 100,000) and very large (more than 100,000) utilities finding a way — somehow — to generate crucial capital dollars while smaller systems, most of which serve low-density rural areas, get left further behind,” the report predicted.
Other factors to watch in 2018 included regionalization and utility mergers and acquisitions (M&A). While M&A are uncommon in the U.S., what does occur “mainly follows small or failing systems looking (or mandated by a state agency) to be scooped up by an entity with deeper pockets and a promise of improved public health and safety,” the report said. Sometimes the acquirer is an existing public entity and other times, an investor-owned utility acquires a municipal system. According to the report, consolidation is occasionally undertaken to unify disparate systems under common management and governance. Increasingly, however, small utilities are getting snapped up by investors, a trend S&P observed in the Midwest and Mid-Atlantic regions in particular.
Regionalization of operations often isn’t practical, but S&P believes that “bundling” will continue to become more of a trend to attract capital. This approach is somewhat established in other infrastructure sectors, such as Pennsylvania’s Rapid Bridge Replacement Project or Kentucky’s statewide open-access fiber optic network. But S&P has not seen large-scale bundling of municipally owned community water systems driven by a state government to attract capital expenditures. Only 16 states have enabling legislation that permits infrastructure surcharges, so S&P suggests that, for now, “individual utilities might securitize the surcharge rather than a state agency collectively bundling water multiple utilities to attract capital expenditure money.”
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Find the S&P report at www.spratings.com under Sectors: U.S. Public Finance, Sub-sectors: Utilities.