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S&P Outlook for Water and Sewer Utilities Stable for 2013

LOS ANGELES -- The outlook on municipal water, sewer, and drainage utility revenue-secured debt is mostly stable, but the sector will continue to face rate and drought pressures in 2013, according to a recent report from Standard & Poor’s.

The volume of bond issuance in the sector rose more than 40% last year from 2011, even with the prospect of a federal budget impasse. Issuers were taking advantage of low interest rates to refinance their debt or fund new projects, which Standard & Poor’s expects to continue this year.

“While capital market conditions remain favorable and should spur more borrowing this year, 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,” analysts wrote in a recent report.

Analysts said they believe the federal government’s regulatory initiatives will focus on air quality in the short term, not water. However, given the drought of 2012 and little improvement in conditions in much of the U.S., Standard & Poor’s expects raw water supply to remain at the forefront of headlines.

“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,” analysts said.

The report also noted that 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, including for rehabilitation and regulatory compliance.

Analysts said the sector, which is 85% municipally owned, will be tested in ensuring that rates are periodically raised to generate sufficient revenue to cover debt service without overburdening the customer base.

The sector’s key issues this year will include meeting annual revenue requirements amid a still-sluggish economy, as well as annual climatology and hydrology trends, and ensuring utilities address other ongoing issues, such as maintaining regulatory compliance and funding employee-related obligations.

Standard & Poor’s maintains revenue bond ratings on around 1,400 municipal or quasi-public utilities that provide some combination of water, sewer, and drainage services, not including tax-backed or other non-utility revenue debt that might be issued on behalf of a utility.

The sector’s most common rating from Standard & Poor’s is A-plus and nearly all of the ratings have a stable outlook. Out of the 1,406 ratings in 2012, only 48 had non-stable outlooks.

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