DALLAS — After suffering severe drought, Texas' largest water utilities are developing new technologies and financing to provide future supplies, according to a report from Fitch Ratings.
"The continuing drought has not left credits unscathed," the report said.
In May, Fitch revised the outlook on its AA-minus rating for Austin's combined utility system revenue bonds to negative due to the drought's impact on revenues.
"Fitch noted that while the city's administration proactively worked towards improving the softening financial results with ongoing annual rate hikes, improvement in financial results has been slow to materialize due to declines in water consumption," Fitch analysts led by Teri Wenck wrote.
Austin was the second large city to see negative rating action as a result of the drought.
Fort Worth's water and sewer revenue bonds were downgraded to AA from AA-plus in April 2013. The Dallas suburb of Garland's water and sewer revenue bonds remain on negative outlook with a rating of AA-plus.
The drought has prompted large investments in water pipelines to bring more water to the most densely populated areas. The utilities have also developed innovative recycling and desalination plants.
"As water utilities around the state deal with the tug-of-war between growth and drought, their choice to innovate is more than sensible," Wenck said. "Finding creative ways to recycle, reuse or share water may be the future for drought-stricken communities."
In Texas, two utilities, Colorado River Municipal Water District and Wichita Falls, have implemented direct potable reuse, which provides about 7 million gallons of water per day between the two entities, or between 30%-40% of daily demand. Direct potable reuse is the process of treating wastewater effluent to drinkable standards, then mixing the treated water with raw water supplies without the use of an environmental buffer like an aquifer or reservoir.
Despite the benefits, direct potable reuse can face significant hurdles in public perception and often comes with a high price tag. The cost of Colorado River Municipal Water District's water plant for direct potable reuse totaled $12 million; at Wichita Falls it was $13 million.
Desalinization, while not new in Texas, has also resurfaced as a solution, with the San Antonio Water System breaking ground on a three-phase, $411 million project that will eventually yield up to 30 million gallons of water per day.
San Antonio Water System is backing a $3 billion private pipeline that will bring water from Burleson County, 142 miles away.
"San Antonio is really leading the charge in terms of water innovation and diversity of supply," said Wenck. "But as one of the fastest growing cities, there's really no other city in Texas that exemplifies the state's challenges."
The privately owned Vista Ridge Consortium, headed by the international infrastructure finance company Abengoa, will bear the financial risks of building the pipeline and the political risks of dealing with groundwater districts in Central Texas, while SAWS agrees to purchase the water.
Fitch noted that the cost of the water will be about seven times higher than water from the Edwards Aquifer that supplies much of the SAWS water. At $2,200 per acre foot, the Vista Ridge water will be higher than the water produced by a desalination project in San Diego, Calif., analysts said.
"While the high price of the desalination project water is driven by treatment requirements, SAWS cost is driven primarily by the capital expense of transporting the water," the report said. "SAWS is currently undertaking a comprehensive rate structure study which will address the rising water supply costs."
Another pipeline project is under construction by the Tarrant Regional Water Authority that serves Fort Worth and Tarrant County. The authority is sharing development costs with the City of Dallas Water Utility.
The $2.3 billion Integrated Pipeline project requires 149 miles of new pipeline and related infrastructure from Lake Palestine in East Texas to Benbrook Lake in Tarrant County, with connections to the TRWD's Richland-Chambers and Cedar Creek reservoirs, the district's two biggest water sources.
The TRWD issued contract revenue bonds in 2014 on behalf of Dallas with ratings of Aa1 from Moody's Investors Service. Fitch rates the bonds AA, with a stable outlook.
"TRWD's large capital improvement plan totals an estimated $968 million through fiscal 2020 that will increase TRWD's debt burden by an estimated 76% over the next five fiscal years," Fitch analyst Gabriela Gutierrez wrote.
"Fitch believes the resulting cost increases will be manageable for member agencies but will monitor the impact, if any, on member agencies' capacity to meet their debt service obligations to the TRWD," she added.
Elsewhere in Texas, ratings have proven buoyant in a strong economy.
Fitch upgraded Houston's junior lien water and sewer bond rating to AA-plus from AA at the end of 2013 after a series of rate increases.
The outlook on the city of Laredo's AA-rated water and sewer revenue bonds was revised to stable from negative that year.
"Total debt for Texas utilities continued to grow in fiscal 2013, largely driven by the state's expanding economy as systems issued debt to keep up with growing capital needs," the Fitch analysts said. "However, other debt metrics such as debt-to-net plant and debt per customer trended down due to increasing plant assets and customer base."
