U.S. Water News Online
NEW YORK -- The current trend towards private-public partnerships seen among U.S. water utilities should lead to continued industry-wide consolidation, according to Moody's Investors Service in a new report. Moody's says the debt ratings for large investor-owned water utilities are likely to come under pressure as they pursue acquisitions while capital expenditures also expand.
"We've already seen a slow increase in leverage and erosion of common equity over the last several years among investor-owned utilities," says Moody's Senior Vice President Mo Ying W. Seto, author of the new ratings methodology report. "This could accelerate because of debt-financed acquisitions."
Moody's says that within the next decade the water utility industry will likely be transformed into a few large water companies or systems on the national level.
"The larger, investor-owned utilities will mitigate rate hikes," Seto explains, "by applying significant capital costs over a broader customer base."
She adds that because these utilities are regulated corporations, their earnings and returns will remain relatively stable. But as domestic and foreign water utilities expand their water and water-related investments, their leverage will grow, pressuring their credit quality and debt ratings.
Moody's says the 180,000 water systems in the U.S., mostly municipal or small private companies, are increasingly hard pressed to meet higher demand and water standards. Utilities must build new treatment plants to comply with the 1974 Safe Drinking Water Act and its subsequent 1986 and 1996 reauthorizations while they also repair aging infrastructures. Moody's says industry experts generally characterize Environmental Protection Agency (EPA) estimates of these costs -- $136 billion -- as very conservative.
Without capital resources to meet these pressures, both municipal water systems and small private water corporations have been turning to the private sector for financial and operating assistance. Private-public partnerships, Moody's says, allow public systems to keep their assets while achieving greater operating efficiency. The investor-owned utilities that participate, in turn, expand their customer base and also, potentially, their earnings and revenues.
"Moody's believes that U.S. investor-owned water utilities will continue to search for opportunities for higher earnings and returns among municipal and privately held water systems by entering into operating service contracts with them or by acquiring them outright," Seto explains.
The seven U.S. investor-owned water utility companies that Moody's rates have about $2.1 billion in long-term and short-term debt outstanding and an average debt rating of A2.
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