Erosion risks

• Condemnation/municipalization (eminent domain) of utility assets
• Adverse rate case outcomes or regulatory lag
• Political backlash on affordability leading to tighter allowed returns

Leading indicators

• Allowed ROE and rate case outcomes
• Rate base growth and capital recovery mechanisms
• Customer additions via acquisitions in authorized service areas

Counterarguments

• Municipalities can pursue condemnation or repurchase rights in some jurisdictions
• Regulators can disallow certain costs or lower authorized returns

Erosion risks

• Aging infrastructure leading to service disruptions and higher capex
• Extreme weather/natural events damaging infrastructure
• Non-recovery of certain costs through rates in adverse regulatory rulings

Leading indicators

• Main break rate and unplanned outage frequency
• Capex execution vs plan and regulatory recovery timelines
• Non-revenue water (leakage) trend

Counterarguments

• Infrastructure can be taken via municipalization/condemnation rather than competed away
• Greenfield developments can be served by alternative providers before networks exist

Erosion risks

• Drought and governmental restrictions limiting withdrawals
• Source-water contamination requiring new supplies/treatment
• Policy changes affecting allocations or water rights

Leading indicators

• Drought restrictions and water supply curtailments in key states
• Purchased water percentage and costs
• Regulatory approvals for new sources (e.g., wells, interconnects, desalination)

Counterarguments

• Water rights/permits can be modified by policy or litigation over time
• Alternative supplies can be developed, but typically at higher cost

Erosion risks

• New standards (e.g., PFAS/lead) creating step-change capex and O&M
• Regulators disallowing portions of compliance costs
• Reputational harm from water quality incidents

Leading indicators

• Notices of violation and remediation timelines
• Water quality capex levels and regulatory recovery
• PFAS/lead regulatory deadlines and litigation developments

Counterarguments

• Compliance is not optional; most costs are designed to be recovered via rates
• Smaller utilities can outsource compliance expertise

Erosion risks

• Regulatory fragmentation limiting cross-state standardization
• Integration complexity from acquisition-driven growth
• Labor and materials inflation offsetting scale benefits

Leading indicators

• O&M expense per customer over time
• Corporate overhead as a percent of regulated revenue
• Credit metrics and refinancing spreads

Counterarguments

• Regulated returns can limit the capture of cost advantages vs customers
• Scale does not prevent municipalization or unfavorable regulatory outcomes

Erosion risks

• Termination for convenience or default/non-performance
• Unfavorable economic price adjustments or price redeterminations
• Suspension/debarment risk in U.S. government procurement

Leading indicators

• MSG contract backlog and average remaining term
• New DoD utilities privatization solicitations and win rate
• Contract margin stability vs price adjustment outcomes

Counterarguments

• The U.S. government can terminate contracts before term end
• Periodic price resets can cap economic upside

Erosion risks

• Procurement and security regulation changes increasing compliance burden
• Investigations/audit findings leading to penalties or debarment
• Loss of incumbency advantage as contracts are recompeted

Leading indicators

• DoD bid pipeline and award announcements
• Compliance/audit outcomes (e.g., cybersecurity and procurement)
• Recompete outcomes for expiring contracts

Counterarguments

• Government customers are sophisticated and price-sensitive buyers
• A small set of rivals can still bid aggressively (especially at recompete)

Erosion risks

• Service failures leading to default/non-performance
• Skilled labor shortages and wage inflation
• Cybersecurity and physical security incidents at critical infrastructure

Leading indicators

• Performance metrics and customer satisfaction on installations
• Safety and compliance incident frequency
• Capital project delivery timeliness and cost performance

Counterarguments

• O&M capabilities can be replicated by other utilities/contractors
• Government can rebid contracts and switch suppliers