Report: Capital Needs May Trigger Credit Decline

The U.S. water distribution industry is entering a large capital expenditure cycle to repair aging infrastructure and address environmental issues, according to a Fitch Ratings report.

Water infrastructure in the U.S. is aging and in need of replacement or repairs, with some water systems in urban areas 100 years old or more. Accordingly, the industry will increasingly need capital to address infrastructure investments as the operating level, and total estimated costs vary significantly. At the corporate level, Fitch expects that capital will come from recent strategic players that have been consolidators, as well as financial players such as private equity and infrastructure funds.

"The industry is ripe for consolidation and there is strong investor appetite for water distribution assets," said Joseph Sorce, director of Fitch Ratings of New York. The water business is low-risk with stable and predictable cash flows."

Water investor-owned utilities have strong credit profiles, enhanced by generally stable cash flow. While there is some time delay in recovering costs and return from rates, typically the regulatory process allows the utility to recover fair costs from rate payers over time. The industry's overall need for capital -- while a long-term credit positive due to increasing recoverable asset bases -- in the near-term may cause a decline in the overall credit quality of the industry.

The full report 'Rising Tides: The State of the Investor-Owned Water Utilities' can be found on the Fitch Ratings' web site. Additional topics covered in the report include an overview of the industry's structure, history, regulatory trends and concerns about privatization of municipal water systems.

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