According to Fitch Ratings, the recent legislation lifting a ban on the use of tax-exempt bonds in conjunction with federal loans provided by the Water Infrastructure Finance and Innovation Act (WIFIA) pilot program will result in lower borrowing costs for U.S. water utilities. ?
Utilities are facing significant costs to replace, rehabilitate and improve their aging infrastructure. The American Water Works Association (AWWA) estimated the cost of maintenance of existing systems and expansion at $1 trillion over the next 25 years. Utilities will benefit from an overall lower cost of financing to the extent they are able to use low-cost loans from the five-year WIFIA pilot program in combination with tax-exempt bond proceeds. The legislation could also temper the need of some issuers to obtain rate increases related to capital.
WIFIA allows utilities to borrow up to 49 percent of the project cost at Treasury rates with 35-year amortization periods. However, the original legislation prohibited issuers from using tax-exempt financing for the remaining 51 percent of the cost. This recent legislation lifts that ban.
WIFIA was modelled after the more established Transportation Infrastructure Finance and Innovation Act program and was enacted in 2014 to provide $350 million in loans over five years for water, wastewater, stormwater and water reuse projects, allowing for leverage of at least $3.5 billion. The WIFIA loans, authorized by the Water Resources Reform and Development Act, are the first new federal water finance tool established since the 1996 Drinking Water State Revolving Fund.
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According to Fitch Ratings’ 2016 outlook report, U.S. water and sewer utilities are also facing increased pressure to the bottom line from rising costs and lower sales. 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 percent 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,? says Doug Scott, managing director.
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 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 says borrowings will likely remain modest in 2016.
