The utilities are projected to remain stable despite drought and profitability challenges
U.S. water and sewer utilities are facing increased pressure to the bottom line from rising costs and lower sales, according to Fitch Ratings' 2016 outlook report. Despite the challenge, Fitch's Ratings and Sector Outlooks for municipal water and sewer utilities are Stable. The sector's strong fundamentals, supported by the essential services it provides, monopolistic business nature and local rate-setting ability, insulate it from potentially challenging operating environments or economic cycles.
Water supply variability will continue to be an issue to watch in 2016, particularly for utilities in far western states like California, which are still contending with a 25% state-wide mandatory conservation requirement. As a result, development of alternative water sources will continue to garner attention and action.
"Drinking water projects like saltwater desalination and recycled water that would have been inconceivable a decade or so ago are starting to become a reality as traditional sources have come under severe pressure," said Doug Scott, managing director for Firch.
Municipal water and sewer utilities also can expect more clarity about upcoming environmental regulations next year, according to the report. In the new year, the U.S. Environmental Protection Agency (EPA) is expected to release the final versions of its regulatory determination on strontium, the contaminant candidate list, and proposed changes to the lead and copper rule. New national drinking water standards are not anticipated until 2017 or later. However, wastewater providers will face additional regulations given the EPA's focus on nutrient pollution as the most significant threat to U.S. surface waters.
Financially, the sector continues to post healthy debt service coverage margins and cash balances are exceptional. But generally the sector has not charged enough for its services to pay for upkeep of its pipes and treatment facilities. Recovering these costs from customers is a growing concern given numerous studies pointing to significant investment needs to maintain existing service levels in the coming years. Recent legislation signed by the president will provide utilities with a new tool to help finance replacement costs, but Fitch believes borrowings will remain modest in 2016.