The wettest May on record, in which the state of Texas averaged nearly 9 in. of rain for the month, has brought an end to the state's four-year drought, according to Fitch Ratings. Consequently, water restrictions around the state are easing as the reins around water supplies are loosening. This could have a positive impact on Texas water and sewer utilities' financial margins should customers return to normalized usage patterns and water consumption increases.
Fitch believes that, to date, the long-term and local planning efforts taken by municipal utilities have contributed to the relatively minimal number of negative rating actions despite the financial and operating pressures driven by the drought. Where rating declines have occurred, these were largely attributed to governing bodies' lack of action to raise rates to offset drought triggered usage declines.
Influencing May's heavy rain pattern was the late arrival of El Nino. Texas reservoirs increased 17% since January 2015, with over 70% of Texas' 119 monitored reservoirs now reporting to be 70% to 100% full, resulting in a statewide average of 83.7% full as of June 11, 2015. For the first time since October 2011, no portion of the state is experiencing extreme or exceptional drought. As of June 9, 2015, the Texas drought monitor map indicates only small portions of the state are considered abnormally dry and a small section of the Texas panhandle is experiencing moderate drought. While the El Nino is relatively weak, forecasters predict a 50% to 60% chance it will continue through the summer bringing additional rain.
The tremendous rains experienced in May, which brought an end to the drought, also have resulted in major flooding events around the state, with 94 counties declared as disasters by Gov. Greg Abbott. Despite flood events, most of the Fitch-rated water and sewer utilities should be able to absorb needed system repairs without such costs having a material impact on the underlying credit quality.
The city of Austin (senior lien water and sewer revenue bonds rated 'AA-', Negative Outlook) experienced localized street flooding and the city's water utility reported numerous wastewater overflows as a result of the downpours. The city of Austin noted there were no material interruptions to service or asset destruction.
The city of Houston (combined utility system first-lien revenue bonds rated 'AA', Stable Outlook) also saw significant area flooding. Houston estimates approximately $25 million in damages to one of its treatment plants resulting from the flooding, but does not anticipate additional pressures related to its U.S. Environmental Protection Agency (EPA) consent decree in regards to sanitary sewer overflows (SSOs).
San Antonio Water System's (senior lien water and sewer revenue bonds rated 'AA+', Stable Outlook), also under EPA consent decree relating to SSOs, experienced an increase in SSOs in May as a result of the heavy rainfalls. Despite this increase, the level of SSOs in May is lower compared to other wet periods experienced between 2009 and 2014. Moreover, management reports that the rainfall actually assisted its efforts of flow monitoring and evaluation of hydraulic capacity constraints to help reduce future SSO occurrences, and its cost forecast with regard to the consent decree capital plan remains on track with the original budget. Further, San Antonio effectively lifted its drought restrictions for the first time since April 2011 on June 10, 2015.
Source: Fitch Ratings
