DALLAS - Of the seven states taking water from the Colorado River, Arizona would face the greatest hardship in the event of a shortage allocation, according to a report from Moody's Investor's Service.

"Should drought conditions persist into 2016 or become more severe, reduced water allocations from the Colorado River to Arizona and Nevada are probable," analysts William Oh and Michael Wertz noted in the Feb. 25 report. "A material reduction in water supply would create negative credit pressures for the water enterprises such as increased capital expenses and operating costs and reduced revenues."

A 14-year drought in the Colorado River basin affects seven western US states, including California, where Gov. Jerry Brown and the legislature are seeking measures to deal with the crisis.

Brown and other legislative leaders unveiled legislation Feb. 19 to provide $687.4 million to support drought relief, including bond funds for projects to help local communities more efficiently capture and manage water and funds to secure emergency drinking water supplies.

If legal limitations under federal law were imposed on the Colorado River, California would not lose any of its allocation, according to Moody's.

In a series of cases known as Arizona v. California, the U.S. Supreme Court limited California's apportionment to 4.4 million acre feet of water annually, plus half of any surplus, assuming at least 7.5 million acre feet of water was made available to the Lower Basin states, according to Moody's.

The original 1922 Colorado Compact divides the river into the Upper Division (Colorado, New Mexico, Utah and Wyoming) and Lower Division (Nevada, Arizona, and California).

The compact requires that the Upper Division not deplete the flow of the river below 7.5 million acre feet during any 10-year period.

A 2007 agreement sets guidelines on how to allocate Colorado River water in the event of shortages.

"In the event of a shortage allocation, Arizona would face the most significant challenge," the analysts noted. Arizona's normal water allocation of 2.8 million acre feet could be reduced by as much as 480,000 acre feet in the most drastic shortage scenario. This reduction would represent a still manageable loss of approximately 15% of the state's stored water supply.

Moody's rates 48 utilities that depend on the river, representing outstanding debt of $21.5 billion.

Reductions in water allocations would have negative credit implications for utilities in Nevada and Arizona, where water supplies would be reduced under current allocation plans, the analysts said.

"However, given current governmental projections of water availability, including stored water, we do not expect the drought to have a material credit impact on municipal water enterprises dependent upon the Colorado River before 2016," they wrote.

The Central Arizona Project delivers Arizona's share of the water through a chain of canals. The state estimates that about half of the supply is "excess water," with 400,000 acre feet per year typically used for groundwater recharge and storage.

At the end of 2012, more than 3.2 million acre feet of stored water for use Arizona in lakes Powell and Mead, with another 600,000 acre-feet of water stored for Nevada.

The stored water is nearly seven times the amount of reduction the state would absorb in the most extreme shortage, the analysts said.

"However, the reduction of Arizona's water to this level likely would reduce excess water deliveries and force the cessation of recharge operations," they pointed out. "Further reductions likely would result in CAP reducing water deliveries to agricultural customers."

Nevada's actual usage is well below its entitlement and is currently lower than even the amount it would receive in shortage, the analysts said.

The Colorado River system is a water source for every major metropolitan area in the region, including Denver, Las Vegas, Phoenix and Los Angeles. "Strong water management approaches in these states likely will offset immediate downward credit pressure in the early stages of any reduced water supply scenarios," the Moody's analysts wrote.

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