Fitch: Water and Sewer Outlook Stable Despite Uncertain Regulatory Environment
"Despite significant news this year related to lead water service lines in Flint, MI, the municipal water and sewer industry is otherwise stable, owing to sound fundamentals and strong operating results," said Doug Scott, Managing Director, U. S. Public Finance.
The biggest uncertainty for water and sewer utilities in the coming year stems from the policy decisions of the new administration. Pending changes to the Lead and Copper Rule (LCR), which are expected to be announced next year, could be limited or delayed.
The EPA's October 2016 whitepaper outlining potential changes to the LCR suggested potentially mandating the replacement of all lead service lines, which they estimated to cost as much as $80 billion. A mandate of that caliber would affect many municipal water and sewer utilities, so uncertainty surrounding it leaves more questions than answers on what could be a significant investment in water infrastructure.
Outside of the LCR, Fitch believes the EPA will continue to press for reductions in nutrient pollution given its high priority in their current strategic plan. In some cases, the additional related costs can be steep, potentially affecting utility credit quality.
The water and sewer sector should be able to maintain ample cash reserves in 2017. Although Fitch sees stagnant sales and rising costs at some utilities, especially in areas experiencing drought, many utilities have sufficient rate flexibility and cash flows to cover debt service and meet operating and capital pressures.
Fitch expects 2017 will bring a modest increase in planned capital spending, although those figures may rise longer term as utilities confront necessary maintenance that had been deferred. Modest increases next year combined with muted debt issuance means debt profiles will improve relative to 2016. Utilities that do come to market with new debt will likely use proceeds for maintenance and regulatory compliance purposes.