WASHINGTON — Water and electric power utilities face growing financial risks from water scarcity, but the credit rating agencies that rate municipal bonds largely ignore the problem, leaving bond buyers missing some important information, says a new report by Ceres and PricewaterhouseCoopers.
Water scarcity — especially in the Southeast, the Southwest and the West — will create risks for thousands of utilities that are managed by municipalities and counties, the report says. It looked at water scarcity risks in Dallas-Fort Worth, Los Angeles, Atlanta and Phoenix.
Investors who buy municipal bonds are "blindly placing bets on which utilities are positioned to manage these growing risks," the report said.
Water risks, it concluded, are a key factor in utilities' financial health. The water and power utilities depend on adequate water supplies to earn revenues and pay off their bonds.
Many analysts assume that future water availability will closely follow what it's been in the past, even though trends around the country show that it's likely to be quite different, said Sharlene Leurig, the lead author of the report. Leurig works at Ceres, a coalition of environmental groups and investors, on environmental risks for insurers. Some, such as life insurance companies, buy 30-year bonds.
"Many of the risks become more stark the longer the time frame," Leurig said.
The risks related to water scarcity are based on droughts, increased demand for water, climate change, legal challenges over disputed water supplies and the rules in some states for reducing cooling water at power plants.
"Many utilities are planning for drought or increased competition and climate change in some cases," Leurig said. "But often that's not making its way into the bond offering documents, and consequently it might not be making its way into rating opinions or investment decisions."
PricewaterhouseCoopers developed a model to assess water risks through 2030. It examined eight investment-grade bonds that utilities in water-stressed parts of Texas, California, Georgia, Alabama and Arizona issued.
The company put out a statement on Friday to clarify its role in the report. "PwC was commissioned by Ceres to build a water risk model showing the impact of key water supply and demand factors on selected utilities. PwC was not retained to provide nor does the model include any financial risk assessment or address any potential relevance of the study to credit ratings. Any findings or conclusions included in the Ceres report are the conclusions of Ceres alone."
The study found that the water risk score for the Tarrant Regional Water District, which serves Fort Worth, was nearly double that of the utility in neighboring Dallas, largely because of differences in storage. However, the credit ratings were identical.
Wayne Owen, Tarrant Regional's planning director, said he disagreed with the report's emphasis on scarcity and questioned its methods. Supplies are adequate to meet the utility's projected needs through 2030, he said.
He said Tarrant Regional's bond ratings were strong because the district was a wholesale water provider whose customers were under contract.
Owen acknowledged that climate change and other environmental issues are significant factors, along with population growth, in meeting future water needs.
"It's a very expensive and time-consuming component to address these issues, and that's why it takes so many years to develop surface water supply reservoirs," he said.
Fort Worth and Dallas had the lowest risk scores of the water utilities that were studied for the report. Los Angeles had the highest, a result of drought, environmental regulations and reliance on water imports. Still, Los Angeles got AA-plus from Fitch Ratings and Aa2 from Moody's, both ratings that reflect very high credit quality and very low risk.
The risks at the eight utilities differed widely, but they all received generally favorable ratings in the last 18 months.
A credit ratings agency official who's familiar with the report didn't accept its criticism.
"Water supply risk has consistently and transparently factored into Fitch's ratings and analysis of municipal bonds," said Eric Friedland, group credit officer and managing director in Fitch Ratings' U.S. public finance group.
Fitch's rating guidelines say that the company looks to see whether utilities have sustainable supplies of water to accommodate future growth. Encouraging conservation also is a positive rating factor.
Scientists say climate changes resulting from the buildup of heat-trapping gases from burning fossil fuels have raised temperatures in the past 50 years and have started to alter the water cycle in the United States. Among other changes, droughts will become more common, precipitation patterns will change and snowpack runoff will decline.
A study supported by the National Science Foundation that was released this week concluded that warming would create drier conditions in the Western two-thirds of the United States and in much of the most densely populated parts of world in the next 30 years.
The study by Aiguo Dai, a scientist at the National Center for Atmospheric Research, found that based on current projections of greenhouse gas emissions, Alaska and other high-latitude places will get more moist over the next century, but a much bigger part of the world could face widespread drought.
ON THE WEB
The Ceres and PricewaterhouseCoopers report
U.S. Global Change Research Program report on climate change impacts in the United States
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