DALLAS - Water and sewer utilities bear a financial risk if hydraulic fracturing processes used in oil and gas production lead to contamination, according to a Fitch Ratings report Friday.
"As water utilities are ultimately responsible for complying with EPA regulations for monitoring, treating and delivering water that is safe for public consumption, they would bear much of the financial, operational and regulatory burden of safeguarding water that could potentially be contaminated by fracking operations," according to the report from Doug Scott, managing director, and Rob Rowan, senior director for Fitch.
"In this scenario, Fitch would expect a serious blow to a utility's revenues, with losses concurrent with other growing direct and indirect costs," the analysts wrote. "This would lead to debt service coverage reductions, liquidity strains and possibly the need for additional leverage."
The analysts said they plan to issue a more detailed report entitled "Fracking: Possible Implications to Water & Sewer Credits" that will provide more detail and outline the risks for bondholders.
Michigan this week joined a growing list of states that require disclosure of the chemicals injected into the ground during fracking processes. While Ohio and Pennsylvania have also taken steps to reduce the threat of pollution, North Dakota, Texas, Oklahoma and Louisiana lightly regulate hydraulic fracturing processes.
State regulations require oil and gas companies to disclose the chemicals used for fracking, but the utilities are subject to federal disclosure laws that allow companies to claim trade-secrets exemption, the Fitch analysts noted.
Even if the chemicals used for fracking are disclosed, they may not be on the EPA's list of regulated contaminants.
"As water utilities are ultimately responsible for complying with EPA regulations for monitoring, treating and delivering water that is safe for public consumption, they would bear much of the financial, operational and regulatory burden of safeguarding water that could potentially be contaminated by fracking operations," the analysts said.
Kroll Ratings has published reports on the fracking issue and potential impact on state and local credits for the past two years.
"Although estimates surrounding many key factors are in flux, and concerns over health and environmental issues have still not been adequately addressed, we believe investors need to be cognizant of the potential credit impact shale gas development could have on securities issued on behalf of states, localities, and utilities," Kroll analysts Gary Krellenstein and Brittni Smith wrote in a 2013 report.
Industry officials say the risk of contamination is minimal because of the oil and gas companies' safety procedures.
However, incidents of leaking from wells have been reported. After a Pennsylvania water well exploded on New Year's Day in 2009, the state reported that the oil and gas operator "had allowed combustible gas to escape into the region's groundwater supplies." Arsenic, barium, DEHP, glycol compounds, manganese, phenol, methane, and sodium were found in unacceptable levels in the wells, according to the state, which banned the operator until it plugged wells suspected of contaminating the water supply.
According to the public-interest reporting organization Pro Publica, there are more than 680,000 underground waste and injection wells nationwide.
Over several decades, U.S. industries have injected more than 30 trillion gallons of toxic liquid deep into the earth, ProPublica reported in 2012.
