Fitch: Arizona water rates rise as Colorado River shortage declared

According to Fitch Ratings, mandatory water cuts from the Colorado River for the 2022 water year were recently announced by the U.S. Bureau of Reclamation (USBR) in its Colorado Basin August 2021 24-month study. Per the study, Lake Mead will operate under a tier 1 shortage for the 2022 water year as required by the 2019 Drought Contingency Plan (DCP), the Congressionally approved water management plan for the Colorado River basin between the Department of Interior, USBR and all seven affected states. The cuts primarily impact Arizona and Nevada, which will experience reduced water allocations from Lake Mead by 18 percent and 7 percent, respectively.

Historic water shortage declared for Colorado River

For Arizona, cuts will primarily be felt by the Central Arizona Project (CAP), managed by the Central Arizona Water Conservation District (CAWCD, AA/Stable). CAP transports water to three counties in central and southern Arizona under long-term contracts with purchasers having strong credit quality. CAP will see its allocations of Colorado River water cut by 30 percent of its normal supply, with these cuts borne by the agricultural community. Municipalities and tribes will not experience cuts to their water deliveries under the tier 1 DCP declaration. However, CAWCD will increase delivery rates to municipal and industrial subcontracting parties by 20 percent for fiscal 2022 to offset lost agricultural sales revenues. CAP’s largest municipal purchasers include: Tucson (water revenue bonds AA/Stable), Phoenix, Scottsdale (water and sewer revenue bonds AAA/Stable), Gilbert (water and sewer revenue bonds AAA/Stable), Mesa and Peoria (water and sewer revenue bonds AA/Positive).

Fitch does not expect any immediate credit effects from the tier 1 DCP declaration for either CAWCD or rated CAP purchasers, but the resulting increased water costs could eventually pressure rate affordability for the CAP purchasers. Further, due to the ongoing drought in the Lower Colorado River Basin and CAWCD’s participation in the DCP, which could ultimately have a negative impact on CAWCD’s financial performance, CAWCD has an elevated Environmental, Social and Governance (ESG) Relevance Score of ‘4’ for Exposure to Environmental Impacts.

For Nevada, the 7 percent cut is not expected to have a near-term effect as the state had already reduced its deliveries, according to the Southern Nevada Water Authority.

For California, a tier 1 DCP declaration does not immediately impact Colorado River water deliveries. California would not be required to take cuts until Lake Mead levels are less than 1,045 ft (tier 2b). Lake Mead levels are 1,067 ft as of Aug. 16, 2021, equal to about 36 percent of capacity. Projections from the study point to Lake Mead levels falling below 1,045 by mid-2023, which would reduce the state’s 2024 allocation. Despite cuts that would be triggered at the tier 2b, Fitch does not expect the reductions to substantially impact California’s supplies due to the diversity of its water sources, manageable demand and considerable water storage levels in Southern California. However, continued drought paired with variable state water project supplies could ultimately pressure water rate affordability.

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