Drought To Have Drastic Financial Impact For Utilities In 2016

Water and sewer utilities in drought-afflicted regions are facing special financial challenges this year, experts say.

Months of rain and flooding ended the drought in Texas last year, but the effects of the dry spell did not dissolve in the wet weather, according to analysts at Fitch Ratings, a financial research and ratings firm.

Here’s the outlook going forward:

Recent wet weather from El Nino combined with a continued focus on conservation is likely to curb water consumption. As a result, retailers are likely to see a pull-back in revenues, which may result in modest declines in financial metrics. Fitch believes the base cost of water will inevitably rise as Texas utilities look to stabilize revenues while continuing the substantial investments required to ensure adequate water supplies.

Gabriela Gutierrez, a director at Fitch, weighed in on the ongoing impact of the drought.

"The lessons and momentum that the dry spell left on political leaders, water suppliers and consumers will have lasting effects on the sector," she said in an analyst note. "While Texas typically experiences dry spells, the most recent drought stretched for four long years and heightened the urgency to ensure adequate water supplies are available to sustain a prosperous economy."

About 88 percent of Texas is free of abnormally dry conditions, according to the U.S. Drought Monitor. At this point last year, only a third of the state met that standard.

Water and sewer utilities in California are also facing financial complications due to drought.

Mandatory water usage cuts imposed by the state are weakening demand and chipping away at revenue for water utilities, according to Fitch analysts. Water and sewer utilities will see “weaker financial margins” in 2016 as a result. The circumstances could push more utilities toward rate increases and alternative rate structures, the analysts said.

The outlook, per Fitch analysts:

Utilities that already have flat rate structures in place or are quick to adopt them will be better positioned to adjust to lower demand, especially given uncertainty around the drought's length. Fitch believes many utilities will implement rate changes by Fiscal 2017, which will help their financial metrics recover from the expected dips in Fiscals 2015 and 2016.

Shannon Groff, director of Fitch's U.S. public finance group, weighed in on the challenging circumstances.

"Capital-intensive issues like infrastructure investments and regulatory mandates don't dissolve in a drought, so even if mandated conservation ends tomorrow, many of California's water utilities still have important questions to answer regarding how they generate revenue," she said in an analyst note.

In February, California officials decided to extend mandatory water cuts until the end of October.

“The new regulations adopted by the State Water Resources Control Board mean urban Californians will have to reduce their water usage between March and October by about 23.4 percent compared with the baseline year of 2013,” The Sacramento Bee reported.

To read more about the far-reaching effects that drought is having on utilities, visit Water Online’s Water Scarcity Solutions Center.