Growing Water Scarcity in US is ‘Hidden’ Financial Risk for Investors Owning Utility Bonds

BOSTON – Growing water scarcity in many parts of the United States is a hidden financial risk for investors who buy the water and electric utility bonds that finance much of the country’s vast water and power infrastructure, according to a first-ever report on the issue released today by Ceres and Water Asset Management. 

The report, The Ripple Effect: Water Risk in the Municipal Bond Market, evaluates and ranks water scarcity risks for public water and power utilities in some of the country’s most water-stressed regions, including Los Angeles, Phoenix, Dallas and Atlanta. The report shows that some of the nation’s largest public utilities may face moderate to severe water supply shortfalls in the coming years, yet these risks are not reflected in the pricing or disclosure of bonds that public utilities rely on to finance their infrastructure projects. There are about 50,000 public water utilities in this country serving an estimated 258 million Americans. The electric power sector is enormously water-intensive – it accounts for 41 percent of the nation’s freshwater withdrawals.

“Water scarcity is a growing risk to many public utilities across the country and investors owning utility bonds don’t even know it,” said Mindy Lubber, president of Ceres, which authored the report.  “Utilities rely on water to repay their bond debts. If water supplies run short, utility revenues potentially fall, which means less money to pay off their bonds. Our report makes clear that this risk scenario is a distinct possibility for utilities in water-stressed regions and bond investors should be aware of it.”

The report includes a model, to assess both water and electric utility water risk exposure. It compares, using publicly available information, their available supplies with projected water demand up to 2030, using stress scenarios that incorporate climate change impacts, regional water conflicts, water-saving regulatory actions and other potential external risks on water supplies. 

Eight existing municipal bonds for water and electric power utilities were examined, in water-stressed regions in southern California, Arizona, Alabama, Georgia and Texas. Each of the bonds received water scarcity scores, representing their exposure to potential water related risks.  Los Angeles and Atlanta water utility system bonds received the highest risk scores. 
“The model findings show markedly different water scarcity risks across the different bonds.” Lubber said. “This will provide investors and ratings agencies with further insight into water risks and encourage utilities to disclosure more fully how they are managing them.” (See report executive summary for details.)

The report concludes that current credit rating agencies’ methodologies could do more to address water scarcity risks and provides recommendations for utilities, investors, underwriters and credit rating agencies to manage emerging water risks in utility bonds. 

The report indicates that in order for utility bond ratings to convey a public utility’s true credit risk, it must incorporate the system’s vulnerability to water scarcity risks. “Today’s credit rating agencies fail to incorporate these metrics consistently, leaving investors with insufficient information for managing their potential exposure in holding such bonds,” the report states.

The report includes specific recommendations for utilities, investors, underwriters and credit rating agencies to manage emerging water risks in utility bonds.

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