Southwest water supply woes spark credit concerns

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Corpus Christi is experiencing the credit consequences of dwindling water supplies.

Earlier this month, the Texas city was hit with downgrades and negative outlooks by Moody's Ratings, which pointed to accelerated water depletion risk and a narrow timeframe to implement solutions before supply fails to meet demand.

The city's water stress has been exacerbated by its leaders' indecision over whether to build a desalination plant.

In October, Fitch Ratings and S&P Global Ratings revised their outlooks on Corpus Christi's utility system revenue bonds to negative from stable, signaling concerns over the city's ability to boost its water supply. 

The clock is ticking. The area is experiencing stage three drought conditions that triggered water-use restrictions. A water supply dashboard on the city's website indicates two western reservoirs will be depleted during the first half of 2027.

Credit pressures due to water woes particularly in western states will persist, according to S&P Global Ratings.

"Supply uncertainty and unmitigated water scarcity have resulted in negative rating actions throughout the west and southwest, which we expect will continue," the rating agency said in its 2026 outlook for water utilities. "We expect utilities exposed to water stress will require alternative supply to meet population and economic development needs, which is typically magnitudes more expensive."

It added that "failure to maintain sufficient supply can result in acute liquidity risk and threaten the underlying economy, as we have seen in Texas, due in part to Mexico's continued failure to meet its obligations under the Utilization of Waters of the Colorado and Tijuana Rivers and of the Rio Grande Treaty."

In November, Texas Gov. Greg Abbott blasted Mexico for failing to meet minimum water delivery obligations under the 1944 treaty. 

"The significant economic loss from Mexico's failure to supply more than two years' worth of water obligations—almost 2 million acre-feet—has had a severe negative impact on Texas' agricultural industry," he said in a statement. 

The U.S. Department of Agriculture announced Dec.12 Mexico agreed to release 202,000-acre feet of water to the United States, while a plan was being negotiated for Mexico to repay the deficit from the previous water cycle to Texas.

Water worries can also restrict development in fast-growing states like Texas, according to Howard Cure, director of municipal bond research for Evercore Wealth Management.

"Discouraging development in a state like Texas — it's anathema to how they operate," he said, adding that water shortages are becoming an increasing focus for muni investors.

Triple-A-rated Texas, the second-most populous state, had the largest numeric increase in the country between 2023 and 2024, adding nearly 563,000 people for a total population of 31,290,831, the U.S. Census Bureau reported in December 2024. 

Corpus Christi is revisiting the inner harbor seawater desalination project it halted in September as the cost rose to nearly $1.2 billion, and is awaiting proposals in early 2026 from a new design-build team.  Corpus Christi Water, which is the primary water supplier for a seven-county region, expected the plant to produce up to 36 million gallons of potable water daily. 

After the Moody's downgrades, City Manager Peter Zanoni said "the city is fully committed to aggressively addressing the need for water supply diversification."

Recent action taken by the council to boost water supplies includes agreements to procure groundwater and to secure 50 million gallons of water daily from the Nueces River Authority's proposed seawater desalination plant, as well as an $11 million deal to design a major expansion of the city's reclaimed water infrastructure. The city also announced a residential water rate increase effective Jan. 1.

Last week, S&P affirmed a B-minus underlying rating and negative outlook for Clyde, another Texas city impacted by water shortages.

"In our view, the city's budget remains vulnerable and will require favorable conditions to balance it, given historically low nominal cash balances, ongoing risk of unplanned emergency capital repairs, and water acquisition needs," S&P said in a report.

Underlying ratings for the town of less than 4,000 in central Texas were downgraded to junk last year after it failed to make payments on insured debt.  In August, Clyde skipped a payment on a 2024 privately placed loan used to pay back bond insurers, S&P reported, adding the missed payment was rolled into an upcoming February payment.

Clyde's latest annual financial audit raised "substantial doubt about its ability to continue as a going concern."

"The city has struggled to maintain its financial health during the 2024-25 fiscal year with drought restrictions being placed on customers due to extremely dry weather conditions," the audit said. 

Some Southwest states have earmarked money to hunt for water.

In drought-prone Arizona, the state's Water Infrastructure Finance Authority is eyeing an initial bridge financing for its long-term water augmentation fund program, which was created by the state legislature in 2022 with the intention of appropriating $1 billion over three years to help fund new water sources. Insufficient appropriations and cash sweeps due to state budget shortfalls have left the fund with just $379.3 million.

WIFA expects to issue a request for proposals for banks this week for a potential private placement of taxable variable-rate bonds, according to a presentation to the agency's board on Friday. 

The move comes after the board in November advanced four water importation proposals into a study phase and could sign base contracts for proposed water supply projects as soon as mid-January.

Those projects involve desalination facilities on the Gulf of California in Mexico, treated wastewater, and the development of aquifer storage.

Bill Davis, a managing director at Piper Sandler, WIFA's financial advisor, told the board that long-term, fixed-rate bonds, which could be taxable or tax-exempt depending upon factors such as project management contracts and ownership, would take out the variable-rate debt over a five-year period. 

Initial discussions were held with JP Morgan Chase and Bank of America, with more banks to follow, he added. 

"They seem to be very open to the potential bond placement," he said.

The latest U.S. Drought Monitor showed mostly abnormally dry to severe drought conditions in Arizona. 

Back in Texas, voters agreed in recent years to tap some of the state's surplus money to help finance new water sources. A 2023 constitutional amendment created the Texas Water Fund, administered by the triple-A-rated Texas Water Development Board, with at least 25% of the money allocated to a New Water Supply for Texas Fund to finance projects leading to 7 million acre feet of additional water supply by the end of 2033. 

In November, voters approved a constitutional amendment that could raise $1 billion annually over 20 years for water supply projects. The measure's enabling law  expands the scope of the New Water Supply Fund by making water and wastewater reuse projects, out-of-state water rights acquisition, reservoirs meeting specific requirements, and water transportation projects eligible for financial assistance.