Corpus Christi water woes spark S&P rating downgrades

Adobe Stock

Corpus Christi's water supply crisis led to rating downgrades on Monday that hit its utility system, as well as debt issued by two river authorities with ties to the system, with all facing the potential of further negative rating actions.

S&P Global Ratings lowered its rating on the Texas city's utility system revenue debt two notches to A, citing "acute drought risk and the potential need to declare a Level 1 water emergency in September, which could result in mandatory water curtailments across its customer base."

"We believe the utility's heightened execution and operational risks will likely weaken its all-in coverage metrics in fiscals 2026 and 2027 to well-below historical levels because of the necessity of securing additional water supply resources in the immediate term combined with its $1.4 billion in additional debt needs during the next three years," S&P said. 

The utility system's A rating was placed on CreditWatch indicating the potential for another downgrade over the next six months "if Corpus Christi's acute drought conditions worsen and result in a prolonged Level 1 emergency that pressures its operations, financial performance, rate-raising practices, and economic activity," according to S&P.

"We could also lower the rating if the utility's management is unable to implement a credible plan to enhance its water supply," it added. 

Corpus Christi, which issued a news release on the downgrade, saying an A rating is considered a medium-grade credit rating, has been scrambling to boost its dwindling water supplies amid a looming Level 1 emergency, which would indicate the water system is 180 days from supply not meeting demand. 

City officials have said $1 billion of projects aimed at producing 76 million gallons of water daily are underway. Long-term projects being explored involve seawater desalination. Corpus Christi Water, the primary water supplier for a seven-county region, is experiencing stage three drought conditions that triggered water-use restrictions.  

The downgrade comes as the city council considers the sale of up to $613 million of new and refunding utility system senior lien revenue bonds and up to $115 million of public improvement general obligation bonds.

Also hit with two-notch downgrades to A and placement on CreditWatch by S&P were certain contract revenue bonds issued by the Nueces River Authority and the Lavaca-Navidad River Authority. The bonds financed projects related to the production and transmission of water from Lake Texana via the Mary Rhodes Pipeline.

The Nueces River Authority was the conduit issuer for bonds secured with contract payments by Corpus Christi's utility system, according to John Byrum, the authority's executive director. 

"Corpus Christi needs to make some decisions on water," he said. "And as soon as they do that and they start construction on other long-term water sources, I think everything will settle back down."

S&P said it correlates the rating on Lavaca-Navidad River Authority's Lake Texana project debt with that of the city's utility system debt "because we view Corpus Christi as the strong link in our wholesale analysis and LNRA retains the right under its water contracts to adjust rates at any time without limit."

An official from that authority did not immediately respond to a request for comment. 

Moody's Ratings, which downgraded Corpus Christi's ratings in December, launched a review last month for another round of potential downgrades.  

Fitch Rating has assigned negative outlooks to the city's issuer and utility system ratings.