Overview

S&P Global Ratings took 36 rating actions, made 12 outlook revisions, and made 74 CreditWatch actions within the U.S. municipal water and sewer utilities sector in first-quarter 2024. Seventy-two ratings were maintained with no outlook revisions. One rating was removed from CreditWatch and 73 were placed on CreditWatch with negative implications.

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Negative rating actions exceeded positive ones by eleven to eight. Favorable outlook revisions exceeded unfavorable ones by seven to five.

Bond issuance in the sector increased in the first quarter of 2024 to a greater extent than in any quarter in 2023. Ten more new ratings were assigned than in first-quarter 2023. Rating movement also increased, with ten more changes in the first quarter than in first-quarter 2023. Rating pressure was similar to that of first-quarter 2023, with more negative rating actions than positive ones.

First-Quarter Rating Actions

In first-quarter 2024, we lowered eleven ratings and raised eight.

Negative rating actions were primarily due to deteriorating all-in debt service coverage (DSC) and liquidity reserves or to environmental, social, and governance (ESG) factors such as limited transparency, poor risk management, and exposure to climate risks. This is consistent with trends forecast by our outlook, which cited a rising likelihood of narrowing margins and a more complex operating environment, as discussed below.

Positive rating actions were primarily driven by improving financial metrics that were usually the result of strong management policies and practices, often related to rate-setting.

First-Quarter Outlook Revisions And CreditWatch Actions

In the first quarter, we revised one outlook to negative, one to positive, one to developing, and six to stable.

The negative outlook revision was driven by declining DSC metrics due to rising operating expenses. The positive outlook revision reflected strong financial performance that we believe is sustainable given sound financial management practices. Of the six outlooks revised to stable, most were due to proactive management policies and practices that addressed concerns with future financial and operational stability. The developing outlook revision reflected our view on the uncertainty regarding proposed acquisition of a wastewater system by a private operator.

We placed 73 ratings on CreditWatch with negative implications. Thirty-nine were for utilities that had yet to provide S&P Global Ratings with fiscal 2022 financial statements, which we require to maintain timely ratings. Thirty-three followed an analytical error identified in our economic fundamentals assessment (for more, see below). Elevated governance risk related to transparency and reporting drove the remaining CreditWatch action, whereas risk management, culture and oversight, also governance risks, drove the entity's subsequent downgrade.

First-Quarter Lookback

During the first quarter, S&P Global Ratings published its outlook for U.S. municipal utilities. Our view on the sector is stable, supported by proven cost recovery, substantial financial cushion, and prudent planning. Rising costs will likely compound rate pressures, especially as American Rescue Plan Act (APRA) funds are depleted and disposable personal income shrinks. For more information, see "U.S. Water Utilities 2024 Outlook: Managers Navigate Rising Risks From A Position Of Strength," published Jan. 18, 2024, on RatingsDirect.

Common features of our 'AAA' rated utilities include above-average median household effective buying incomes, superior operational and financial management policies, and larger economies of scale. A high proportion of our 'AAA' rated utilities are in states with higher climate-related risks, but we believe this risk is offset by strong management policies and practices. For more information, see "'AAA' Rated U.S. Water/Sewer/Drainage Utilities: Current List," published Feb. 13, 2024.

During the first quarter, S&P Global Ratings identified an analytical error related to our economic fundamentals assessment of municipal water, sewer, and solid-waste utilities. Following an initial review of the approximately 1,900 ratings affected by this error, we have determined that we could change the rating or revise the outlook on approximately 2% based on our resolution of the error and the utility's current credit fundamentals, which were a leading factor in our placement of ratings on CreditWatch this quarter. For more information, see "Error In Our Economic Fundamentals Assessment Triggers Review Of Public Municipal Utility Sector Ratings," published Feb. 23, 2024.

Lastly, various U.S. utility ratings were placed on CreditWatch Negative due to their failure to provide fiscal 2022 financial statements, which we consider necessary to maintain and assess our ratings on these issuers. For more information, see "Various U.S. Local Government, Public Power, Utility, And Transportation Ratings Placed On CreditWatch Negative," published March 6, 2024.

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