Thursday, October 21, 2010

Muni's: "Water Scarcity a Bond Risk, Study Warns"

CERES is made up of the behemoth public employee pension funds, CalPERS, CALSTRS, the New York Common Fund (via the Office of the Comptroller) New York State Teachers Retirement System, New York City Teachers Retirement System, Illinois State Board of Retirement and a half dozen others. Other investor members include the SEIU and AFSCME.
The Environmental and Public Interest members number over 60 organizations.

A few years ago CERES decided to use regulatory pressure on publicly traded companies to press their climate change thinking. They petitioned the SEC to require climate change disclosure in corporate filings.
In January of this year the SEC issued  interpretive guidance. The SEC focused on the impact of regulations, legislation and international accords.
There was one sentence on the physical impacts of climate change:
...Specifically, the SEC's interpretative guidance highlights the following areas as examples of where climate change may trigger disclosure requirements:
  • Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.
  • Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.
  • Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.
  • Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.
* * *
This wasn't at all what CERES wanted.
Ya win some, lose some.
From the New York Times:
The municipal bonds that help finance a major portion of the nation’s water supply may be riskier than investors realize because their credit ratings do not adequately reflect the growing risks of water shortages and legal battles over water supplies, according to a new study.

As a result, investors may see their bonds drop in value when these risks become apparent, and water and electric utilities may find it more expensive to raise money to cope with supply problems, the study warned.
Looking at significant water bond issuers across the southern part of the country, the report concluded that Wall Street’s rating agencies had given similar ratings to utilities with secure sources of water and to those whose water sources were dwindling or were threatened by legal battles with neighboring utilities.
Among the seven cities and agencies examined in the report, Los Angeles and Atlanta were identified as the ones whose water systems faced the greatest risk in the years ahead.

“Municipal bonds are bought and sold on the basis of their credit ratings,” the report said. “Yet today these ratings take little account of utilities’ vulnerability to increased water competition, nor do they account for climate change, which is rendering utility assets obsolete.”
Consequently, the study warned, “investors are blindly placing bets on which utilities are positioned to manage these growing risks.”
The report, one of the first to assess the potential impact of water shortages on the municipal bond market, was jointly produced by Ceres, a national coalition of investors, environmentalists and public interest groups, and Water Asset Management, an investor in water-related businesses. Its analysis relied on a new measure of risk developed exclusively for the study by a unit of PricewaterhouseCoopers.

The report implicitly echoed criticisms leveled at the ratings agencies after the collapse of the subprime mortgage market in 2008, and for similar reasons. Just as mortgage ratings reflected historical patterns but didn’t capture recent market changes, water bond ratings tend to reflect a past when water was plentiful, and not a future when supplies of fresh water may be less abundant, the study noted.
The major bond rating agencies — Moody’s, Standard & Poor’s and Fitch Ratings — all disputed the study’s general conclusion that they did not give enough weight to water supply trends in establishing their municipal water bond ratings. “Water has been scarce in the West since the area was first settled, and Moody’s has long incorporated an analysis of the adequacy of water supplies into our ratings,” said Eric Hoffmann, a senior vice president and municipal ratings analyst at Moody’s Investors Service.

While the ratings agencies all noted that an issuer’s future financial health would be shaped by more than just its sources of water supply, they insisted that the cost and availability of water supplies was already an important element in their analysis.

Standard & Poor’s rating analysis “explicitly addresses how water sufficiency and quality issues are likely to affect business and financial risk,” said Ana Sandoval, a spokeswoman for that rating agency. And at Fitch Ratings, “water supply risk has consistently and transparently factored into Fitch’s ratings and analysis of municipal bonds,” said Eric Friedland, group credit officer and managing director of its United States public finance group.

The utilities examined in the report said the analysis was flawed by basic misunderstandings about demand and supply. A response from the Los Angeles Department of Water and Power called the study’s conclusions “uninformed and miscalculated.” ...MORE 
There is some humor in the LADWP disputing CERES, it's all in the politics.