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New Report: Growing Water Scarcity in US is 'Hidden' Financial Risk for Investors Owning Utility Bonds

Los Angeles, Atlanta utilities face increasing risks, according to report’s water risk assessment

October 21, 2010 – 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.
New Report: Growing Water Scarcity in US is 'Hidden' Financial Risk for Investors Owning Utility Bonds

The report 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.

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Boston Oct 21, 2010

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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:

Notes to editors:


About the model:

The models have been based on analysis of the key water supply and demand factors impacting the utilities based only on publicly available information including public disclosures, and may not reflect the real risk to each utility if the public information is not accurate. 

The water risk scores do not give an indication of how likely the bond issuer is to default on the bond repayments. It is a score related to risk of water undersupply only. To assess the risk of default, this water risk score needs to be analysed in conjunction with the financial health of the utility.

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

Water utilities:

  • Improve disclosure of material water stresses such as exposure to persistent drought or long-term climatic changes, interstate legal conflicts, and potential and existing regulatory actions related to environmental flows. Disclosure should include potential capital costs, rate adjustments and revenue effects from water supply risks.
  • Implement new pricing strategies and conservation incentives that reflect water scarcity and reward water-savings.
  • Invest in cost-effective infrastructure that reduces leakage and encourages water recharge and reuse.


Electric utilities:

  • Improve disclosure of material water stresses caused by increased competition for water, emerging regulations and changing climatic conditions. Such disclosure should include water intensity of generation, key water sources and the potential capital costs, rate adjustments and revenue impacts from water risks.
  • Invest in measures to reduce risk, such as strategies for reducing energy use and therefore water demand.


Rating agencies:

  • Employ water risk stress tests to understand an issuer's sensitivity to water scarcity risks.
  • Factor water intensity into rating opinions for electric utilities.
  • Reward, via higher ratings, utilities that manage water demand through pricing in anticipation of future supply constraints.


Bond Underwriters:

  • Assist utilities in disclosing their sensitivity to water stress and plans for mitigating their risk.
  • Help to secure competitive cost of capital for utilities managing water risk.


Investors:

  • Engage large utilities on their sensitivity to water stress.
  • Ask asset managers to assess and engage utilities on water risks.
  • Request guidance from financial regulators on municipal disclosure of water and climate risks.


About Ceres

Ceres is a national coalition of investors, environmental groups, and other public interest organizations working with companies to address sustainability challenges such as water scarcity and climate change. Ceres directs the Investor Network on Climate Risk (INCR), a North American network of institutional investors focused on addressing the financial risks and investment opportunities posed by climate change. INCR currently has more than 90 members with collective assets totaling more than $9 trillion.

About Water Asset Management

Water Asset Management is a global equity investor in public and private water related companies and assets. Those include regulated water and wastewater utilities, water infrastructure companies, water test and measurement equipment, water treatment technologies, and water resources including water rights, storage and effluent credits. Water Asset Management combines investment management with industry operating and capital commitment experience.

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