DALLAS — A lengthy drought is putting a stranglehold on Texas water utilities that can only be alleviated by significant rainfall this winter, Fitch Ratings said in a new report assessing the economic impact of months of no or below-average rainfall in the Lone Star State.

Utility ratings won’t be immediately affected, said lead author Doug Scott of Fitch’s Austin office, because long-term state and local water planning ensured enough supply going into the drought to meet growing demand without severe mandatory restrictions.

However, that would change if Texas does not receive average to above-average rainfall before spring 2012, Scott said, and the latest long-range forecast does not indicate that will happen.

“This does give us some cause for concern,” he said. “The state is growing and is projected to grow more, and utilities are going to have to issue debt to obtain the supply needed to meet demand for water.”

Texas utilities tend to obtain most of their revenue on rates based on volumes sold, with only a 20% to 25% base component, Scott said. If those volumes drop because of limits based on supply worries, he said, revenues decline significantly.

“As the volumes drop, the utilities have to ratchet up their rates, which causes sales to drop even further,” Scott said. “Municipal utilities will have to issue debt to meet the demand for water by a growing population, and lower revenues will eat into their ability to do that.”

Fitch’s concerns could be alleviated by a wet winter and spring, according to Scott. “As we all know, Texas weather can turn on a dime,” he said. “Negative ratings pressures could emerge if the drought continues into 2012, forcing water utilities to escalate conservation measures and negatively affecting financial performance.” 

John Nielsen-Gammon, the official state climatologist and professor of atmospheric sciences at Texas A&M University, said the 12-month period that ended in July was the most severe one-year drought since statewide record-keeping began in 1895. He said 95% of Texas is in either a “severe” or “exceptional” drought status.

Nielsen-Gammon said the state has a 50% chance of lower-than-normal precipitation this winter. He said if equatorial Pacific Ocean waters cool off in late fall, known as the La Niña effect, odds of a dry winter in Texas go up to 80% probability.

Municipal water utilities had strong finances in fiscal 2011 because consumption restrictions were not put into place in most areas until late in the year, Scott said.

Utilities serving almost 50% of the 25 million Texans have imposed some sort of mandatory restriction, he said. Most of the others have now imposed voluntary curbs in anticipation of shrinking supplies.

Municipal utilities that began voluntary drought restrictions in the spring may show some early weakness, Scott said, but so far none of the utilities rated by Fitch have elevated mandatory restrictions in place. The Texas Water Development Board said more than 900 of the state’s 4,700 water systems have restrictions, double the number in a normal dry year.

Houston moved from voluntary restrictions to mandatory requirements in late August, because of rapidly dropping levels in the city’s reservoirs. At the time, Mayor Annise Parker warned residents that failure to obey the rules could result in a fine.

“While these restrictions are mandatory, we will begin with warnings and an informational campaign because the goal is voluntary compliance,” Parker said. “For those who insist on not being good neighbors, citations will follow.”

The drought problems could extend beyond the municipal water utility level, according to Scott. “It’s affected the entire state,” he said. “People outside Texas don’t understand that the wildfires this spring and summer burned up 127,000 acres and destroyed thousands of homes.”

The drought has cost Texas farmers and ranchers at least $5.2 billion in crops and livestock, the Texas AgriLife Extension Service said last week.

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