This winter's epic snowfall in California's mountains has been a bonanza for skiers, but it doesn't mean the state can call an end to an even more epic drought.
Roughly 34 trillion gallons of water have fallen on California since October 1, according to the
As the state — and most of the West — suffers under a drought extending into its third year, it places pressure on water suppliers and the water districts to which they provide water.
“To date, there haven’t been any rating actions taken as a result of the drought,” Audra Dickinson, a director in Fitch Ratings’ water and sewer practice, said during Fitch’s Jan. 12 online outlook event for the sector. “But it could pressure issuers acutely. The State Water Project set water allocations at zero percent. Supply constraints could result in ESG score changes or it could result in asymmetric risk to ratings.”
Fitch analysts highlighted some of the problems faced by Western states as much of the West has suffered under drought conditions over the past three years. Over the past two years as the country wrestled with challenges wrought by the pandemic, utilities kept rates flat even though demand for water has fallen as state and local lawmakers urged residents and businesses to reduce water use.
“Susceptibility to weather events have always been factors in Fitch’s rating criteria,” said Dennis Pidherny, managing director of public power for Fitch. “The systems we rate have a long history of preparing for and adapting to these events. We don’t expect that to change in the near term.”
While that may be the case, Pidherny said, what is new is that since 2019, Fitch has been “trying to do a better job through the ESG scores to show how they drive the ratings.”
Given the “unpredictability, and localized nature of these events, they don’t figure prominently in our outlooks,” Dennis said.
Instead, Fitch releases information through reports on individual credits and through special reports on severe weather events, he said.
The
The Los Angeles Department of Water and Power struck an agreement with wholesale regional water supplier, the Metropolitan Water District of Southern California, to
California’s Department of Water Resources recorded 78.5 inches of snow depth and a snow water equivalent of 20 inches, which is 202% of average, at Phillips Station near South Lake Tahoe on Dec. 30, when it conducted its
Early winter storms this month provided a strong start to the season and some drought relief, but California remains in a drought, according to DWR.
“We could not have asked for a better December in terms of Sierra snow and rain,” said DWR Director Karla Nemeth during the snow measuring press conference. “But Californians need to be aware that even these big storms may not refill our major reservoirs during the next few months.”
DWR officials blamed climate change for hotter spring conditions that resulted in evaporation of last year’s snow pack and dry soil.
“California continues to experience evidence of climate change with bigger swings between wet and dry years and even extreme variability within a season,” said Sean de Guzman, manager of DWR’s Snow Surveys and Water Supply Forecasting Unit.
California will need to see significant precipitation in January and February to generate enough runoff to make up for the previous two winters, the state's fifth- and second-driest water years on record, according to DWR.
The Sierra snowpack supplies about 30% of California’s water needs and the snowpack is an important factor in determining how DWR manages the state’s water resources. Its natural ability to store water is why the Sierra snowpack is often referred to as California’s “frozen reservoir,” according to DWR.
“We are also seeing the decades-long drought affect the Colorado River,” Dickinson said. “Arizona and Nevada were affected by cutbacks there. Arizona, California and Nevada agreed to target further reductions.”
Those state’s water leaders signed an agreement in mid-December at the
The latest agreement, known as the “500+ Plan,”
The states also agreed to invest money in water efficiency projects and programs to reduce usage with Arizona committing to $40 million, and $20 million each from Nevada, California and the Central Arizona Project, which operates a canal system that delivers Colorado River water in Arizona. The federal government would match the funding, for a total of $200 million.
“We don’t anticipate any near term actions or reduced ESG scores, because most issuers in the West have solid balance sheets,” Dickinson said.
Fitch has a neutral outlook for its water and sewer credits.
“We expect revenue growth to improve in 2022,” Dickinson said. “We had many water and sewer utilities that held off on raising rates during the pandemic.”
Revenue growth is expected to rebound in 2022 as many utilities move ahead on rate increases, she said. Many will need to ramp up rate increases in 2023 to make up not making rate increases at the height of the pandemic.
Rising operating expenses without rate increases resulted in expenses outpacing revenues for the past few years, she said.
“Our issuers expect operating expenses to increase about 3%, but depending on inflation that could go higher,” she said. “That hasn’t been a concern in previous years, but inflation is expected to hit 6% by 2022 and 3% in 2023.”
Water consumption patterns and sewer have been flat, growing at a half percent annually, she said.
“Conservation changes have led to an overall decline per capita,” she said. “All the revenue growth has resulted from rate increases.”
Fitch had expected that delinquent accounts would be an issue for power, water and sewer utilities, but non-payments were not an issue in 2021, Pidherny said. The federal aid also helped as it made its way down to utilities, he said.
Another pressure for issuers is capital spending that could be influenced by prospective or current environmental mandates.
“We continue to see strong capital expenditures to deal with aging infrastructure,” said Kathy Masterson, a Fitch senior director. “Inflation could push capital expenditure costs higher in 2022, in addition to rising costs for materials and labor.”
The U.S. Environmental Protection Agency estimated in last year’s report that
“We expect half of capital expenditures to be debt funded,” Masterson said. “It will likely result in a moderate draw down on cash.”
Those anticipated costs aren’t anticipated to result in downgrades or rating pressures, according to Fitch analysts.
“Even with modestly increased leverage going forward, there is still headroom,” said Allison Clark, a Fitch director in the water and sewer sector. “The positive outlooks still outweigh the negatives, despite the challenges in recent years. Liquidity remains solid and it isn’t a ratings concern.”
Access to new sources of capital such as funding from the American Rescue Plan Act and the Infrastructure Investment and Jobs Act could result in the ability to tap revolving fund loans and grants, Clark said.
The $55 billion available to water utilities through the
