Feds signal more water reductions from Colorado River amid drought

BY SourceMedia | MUNICIPAL | 06/16/22 01:45 PM EDT By Keeley Webster

More cuts are coming for users of the Colorado River's increasingly scarce water, a federal official said this week.

A warmer, drier West is resulting in challenges that ?are unlike anything we have seen in our history,? Bureau of Reclamation Commissioner Camille Calimlim Touton said during a Senate hearing in Washington Tuesday.

The bureau built and operates the two major water projects on the Colorado River, Hoover Dam and Lake Mead behind it, and Glen Canyon Dam and Lake Powell behind it.
Various water users from the seven states that receive allotments from Lake Mead and Lake Powell have already cut their usage in agreements struck over the past few years.

The water levels at the reservoirs have declined so much that more major water cuts will be necessary to reduce the risk of supplies reaching perilously low levels, Touton told the Senate Energy and Natural Resources Committee.

The agencies have until August to craft plans for further reductions or the federal government will do it for them.

The river provides water to 40 million people in seven states in the U.S. and two states in Mexico.

California, Arizona and Nevada signed an agreement called the 500+ plan in December to take 1 million acre-feet less water from Nevada?s Lake Mead as it reached critically low levels. That deal doubled the water reductions that had been agreed to in 2019 under the drought contingency plan. An average California household uses between one-half and one acre-foot of water per year for indoor and outdoor use, according to the Water Education Foundation.

?The worsening conditions on the Colorado River represent the extraordinary strain the historically dry conditions are having on water resources across the state and the southwest,? Adel Hadekhalil, general manager of the Metropolitan Water District of Southern California, said in a statement. MWD provides water to 26 agencies in southern California.

?We must do more to respond to the decades-long drought that continues to stress our infrastructure, causing storage levels in Lake Mead and Lake Powell to plummet, reducing the river?s water supply reliability and threatening the loss of power generation,? he said.

Touton?s announcement about potential water reductions isn?t expected to affect lead manager Morgan Stanley?s pricing of $273.7 million in water revenue refunding bonds for MWD on Wednesday, Hadekhalil said in an emailed response.

?Metropolitan has strong financial fundamentals and bond ratings and is leading the way in developing a resilient water future that adapts to the changing climate and the strained imported water supplies through integration, innovation and inclusion,? he said.

Los Angeles-based Bel Air Investments wouldn?t be dissuaded from purchasing Met?s bonds, or for that matter the Los Angeles Department of Water and Power?s bonds, despite decreasing Colorado River allotments, Craig Brothers, portfolio manager for Los Angeles-based Bel Air Investments Fixed Income Strategy, said.

?They are both battle-tested credits that have drought mitigation plans that span a couple of decades,? Brothers said.

The bond ratings for LADWP, Met and Met?s member agencies are showing resilience.

?They largely benefit from fixed or automatic pass-through rate components that promote stability and cost recovery during periods of lower usage (such as drought restrictions) and on average, they maintain exceptional financial metrics,? said analyst Jenny Poree of S&P Global Ratings, which rates MWD senior water revenue bonds AAA and LADWP water revenue bonds AA-plus with a stable outlook that was revised upward from negative in May.

The rating agency believes that more highly-rated agencies also entered the drought with significant reserves that are providing a cushion.

?I don?t think the comments from the hearing yesterday changed our view,? Poree said.

?We expect climate change to increase the frequency and severity of drought and water managers must recognize this ?new normal? with respect to supply and demand planning,? she said.

The ratings agency continues ?to believe water providers are well-positioned to manage through these challenges;? Poree said, and Western issuers have ?a history of managing through hydrological volatility ? this has been the case for decades.?

Over the last decade, MWD spent $3 billion to bolster local storage and conveyance capacity and $1 billion on conservation improvements, which have generally been successful at lowering demand across its service area, she said.

MWD currently holds in reservoirs roughly double the amount of water it had during the last drought; and has banked 2.6 million acre-feet, equivalent to almost two years of demand, as of Jan. 1, 2022, Poree said.

LADWP, a MWD member agency, will likely be relying heavily on the regional water agency over the next few years and will benefit from its strong management, she said.

MWD doesn?t have plans to cut the amount of water it uses from the Colorado River this year, said Shannon Groff, a Fitch director.

?In talking to them, there aren?t big cuts coming imminently,? Groff said. ?They are working on the 2026 deadline for the Colorado River compact and the 500+ plan, in which they would not touch the intentionally created surplus, but leave it in the lake as their contribution.?

Many agencies took a rate increase holiday for a year after the COVID-19 pandemic struck, but have since raised rates, and in some cases, larger increases than planned, to make up for the lost year of revenue, Groff said.

What could be a problem is that many agencies already steeply raised rates during the five-year drought in the last decade, so there might not be as much room to raise them now, she said.

Cash reserve levels at water and sewer agencies nationally are expected to be 20% more leveraged by 2023 as the agencies take on more debt, Fitch analysts said in a September report.

Leverage metrics among water agencies Fitch rates declined in the years leading up to the COVID-19 pandemic as utilities limited the rate of debt growth, posted robust operating margins and built cash reserves to historically high levels, according to Fitch. That enabled the sector to fare well during the pandemic, according to the rating agency, but Fitch expects that cash reserves will decline and leverage for water-related utilities will rise by over 20% by fiscal 2023.

Double-A rated agencies are more likely to be able to overcome the challenges better than lower-rated agencies, which might have lower reserves, Groff said.

Fitch isn?t likely to place a negative outlook on the entire industry, because they discovered during the last drought that too much variability exists between the water agencies, Groff said.

A utilities? ability to ?absorb lower revenues is highly dependent on an individual utility?s supply portfolio, its financial picture going into a drought and rate affordability in the service area,? she said.

The San Diego County Water Authority has continued to receive its full deliveries from the Colorado River, because its allotment is tied to the high-priority rights held by the Imperial Irrigation District, Darren Simon, QSA outreach coordinator for the authority?s Colorado River Program, said. But the water authority ?can?t speculate about potential impacts from newly proposed conservation, because it?s not clear how or when that will take place.?

The water authority is ?engaged with multiple parties in collaborative basin-wide discussions to address this evolving situation,? Simon said.

Water conservation efforts such as lining canals with concrete to capture water previously lost to seepage and the water authority?s own investment in conservation have positioned it well, he said. It also receives 10% of its water supply from a Carlsbad desalination plant.

SDCWA, which has 24 member agencies and also receives water from MWD, sets rates one year at a time to ensure the ability to respond to changing circumstance, according to the authority. The rate proposal for 2023, an increase of 5.2% for treated water and 3.7% for untreated water, is expected to be voted on by the water authority?s board on June 23. The Water Authority plans to draw $14 million from the rate stabilization fund created in 1990 to reduce the rate increase needed.

?Despite the current inflationary environment and the challenges of the pandemic, our strategic financial planning and management of debt allows us to keep the proposed rates at the low end of our projections,? SDCWA Finance Director Lisa Marie Harris said.

The $130 million in net present value savings achieved through several refundings will help reduce the amount needed through the rate increase, according to the authority?s release on the proposal.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

fir_news_article