Water and sewer utilities will struggle with financing infrastructure projects in 2012, Standard & Poor’s says.

“The sector needs infrastructure investment due to aging systems, regulatory issues, and migrating populations to the South and West, stressing existing water supplies in those regions,” according to an S&P report.

Despite these difficulties, the report —  “Funding Long-Term Needs Remains the Biggest Risk for U.S. Municipal Water and Sewer Utilities” — projects that the sector’s ratings will be stable in 2012. 

Over the last decade several large systems have violated the U.S. Clean Water Act with sewer overflows into rivers, lakes or oceans. The main overflow culprits have been aging infrastructure, growth-related bottlenecks, and inflow and infiltration into the sewer system.

Among the systems that have recently faced and/or still face large infrastructure projects to address act violations are those for Washington, D.C., Austin, northeast Ohio, Kansas City, Mo., Los Angeles and Honolulu. These systems have been or will be required to spend multiple billions of dollars on fixes. The act legally requires the improvements to be made in a set amount of time.

“Such fixes, however, usually compete with all of the other identified and approved capital projects for the utility’s limited dollars,” the report states.

The report, released on Tuesday, also suggests that all the states contributing to pollution in the Gulf of Mexico may be required to make substantial commitments to reduce pollution in the future. That may affect sewer utilities throughout the Mississippi River watershed, a large swath of the country, one of the report’s authors, Theodore Chapman, said in a phone interview.

The report authors — Chapman, James Breeding and Geoffrey Buswick — say that governments may find it easier to raise utility rates than it is to raise taxes in the coming year.

About a different funding source, the authors state: “We believe the utilities’ essential-service nature will eventually overcome any near-term decisions to defer revenue bond issuance.”

The ratio between declines and upgrades of ratios for the sector was 4.7 to 1 in 2011, an improvement from the ratio of 10.4 to 1 in 2010. The authors project that the ratings should be stable this year.

As of the end of 2011, 0.7% of S&P’s ratings in the sector were below investment grade and 2.4% were in the BBB range. All the rest were above that level.

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