A Standard & Poor’s (S&P) report on water and wastewater utilities’ financing prospects indicates that capital market conditions remain favorable and should spur more borrowing in 2013. The volume of bond issuance in the sector rose more than 40 percent in 2012 over the previous year as many issuers took advantage of low interest rates to refinance their debt or fund new projects.
S&P Rating Services warned, however, that “a persistent drought in much of the country, the possibility of new regulations and federal spending cuts, and the pressure of keeping rates affordable while balancing substantial debt needs will keep the sector on its toes . . . given the crushing drought of 2012 and little improvement in conditions in much of the continental U.S., raw-water supply will remain at the forefront of headlines, federal and state environmental permitting, and rated utilities’ operational risk profiles. Should the drought cause local utilities to reprioritize plans and accelerate long-term water supply projects, it is also possible state and federal lawmakers could introduce legislation that could affect credit quality.”
The report’s overview of the water and wastewater sector noted:
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Water and sewer utility bills have been increasing at a rate faster than inflation since 2000, and are likely to continue to rise given the sector’s substantial investment needs. The main needs are for rehabilitation and regulatory compliance. Municipally owned water utilities will be tested in ensuring that rates are periodically raised to generate sufficient revenue to cover debt service without overburdening the customer base.
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While no new major federal environmental regulations are expected, policy decisions regarding municipal finance and federal funding options could influence debt issuance for new projects.
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In 2012, the trend of more downgrades to upgrades continued, with a ratio of 3 to 1, compared with 5 to 1 in 2011.
S&P’s 2013 outlook is mostly stable for the roughly 1,400 ratings on U.S. municipal water, sewer and drainage utility revenue-secured debt.
S&P’s full report can be downloaded at http://ow.ly/d/14qJ.