LA utility tops US water bond risk says report

A report published on 21 October 2010 by Ceres and Water Asset Management alleges that few participants in the US water and electricity bond market -- including investors, bond rating agencies and the utilities themselves -- are accounting for growing water scarcity, legal conflicts and other threats in their analyses.

Investment in water reuse is one of a number of recommendations.

Public water utilities deliver more than 80% of US water to residential and industrial consumers and issue billions of dollars' worth of bonds each year to fund infrastructure. Public electric utilities also depend on ample freshwater to generate hydropower and to cool powerplant equipment. The stresses are especially severe in regions experiencing rapid population and economic growth, including the west, southwest and southeast.

The report, The Ripple Effect: Water Risk In The Municipal Bond Market, introduces an innovative quantitative model, developed by PwC (part of PricewaterhouseCoopers), to assess both water and electric utility water risk exposure by comparing their available supplies with projected water demand from 2011 to 2030. Drawing on public information gathered from federal reports, bond statements, and utility planning documents, the model generates a set of water risk scores that can be used by investors and credit rating agencies to better understand relative water risks among utility bonds.

By coupling the water risk scores with other financial information already available in credit rating opinions and bond documents, investors can gain a more complete picture of a bond's total risk profile.

Using this tool, the report found the following risk situations:

  • The Los Angeles Department of Water & Power's water system bond received the highest risk score of all water utilities, based on tight restrictions on local water supplies due to environmental regulations and prolonged drought. The municipal system, the nation's largest, is also highly reliant on vulnerable water imports, including the Colorado River. The utility's water bond was rated "AA+" and "Aa2" by Fitch and Moody's, respectively, earlier this year.

    To reduce its risk, says the report, Los Angeles can focus on boosting local supplies through water recycling and groundwater replenishment, leveraging incentives such as MWD's rebate to utilities of US$ 250 for each acre-foot of water recycled. "While ocean water desalination may seem cost competitive upfront based on construction costs, the energy intensity of this process may be less competitive per acre-foot delivered," the report concludes.

  • Atlanta's Water and Sewer System received the second highest water risk score, a direct result of its reliance on one key local water supply whose future is jeopardized by a judicial order that may require the city to reduce its withdrawals by as much as 40% in 2012. The utility's water bond received "A" and "A1" ratings from Fitch and Moody's, respectively, earlier this year.

  • The Phoenix and Glendale, Arizona, utilities -- systems with high reliance on increasingly expensive and potentially volatile out-of-state water imports from the Colorado River -- also received high water risks scores. The Phoenix bond is rated "AAA" and Glendale bond "AA" by Standard & Poor's.

  • Water risk scores for the Tarrant County, Texas, utility were double those of the neighboring Dallas system. The wide gap is the result of Tarrant County's consistent drawdown on critical storage reservoirs to meet water demand, which makes the system more vulnerable to prolonged drought. Both utilities have identical credit ratings.

  • The report makes the following recommendations for water utilities:

  • Improve disclosure of material water stresses, such as exposure to persistent drought or long-term climatic changes, interstate legal conflicts over shared water resources, and potential and existing regulatory actions related to environmental flows. Disclosure should also include an assessment of potential capital costs, rate adjustments and revenue effects from water supply risks.

  • Implement strategies to manage demand and reduce leakage, such as cost-effective infrastructure improvements to reduce water loss, deployment of conservation incentives and new pricing strategies that reflect water scarcity and reward water- savings.

  • Invest in infrastructure that reduces risk such as "closed loop" alternative supplies (including indirect potable reuse), and green infrastructure that restores natural hydrological systems, promotes rainwater harvesting and natural water capture, thus recharging aquifers and protecting water supplies.

  • Tags

    Arizona | Colorado | Indirect Potable Reuse | Residential | Standard | Texas


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