25 Jul 2013

Financial non-sequiturs

I asked a guy who financed water infrastructure (he worked for the German equivalent of the International Finance Corporation) if they would consider funding techniques (e.g., reducing non-revenue water) in addition to their typical method of financing technology (e.g., water treatment plants).

He said no, since they always require "security" for their loans.

But when's the last time an international lender seized and sold water infrastructure from a municipal or institutional borrower? He said they never had, and I certainly know of examples of where default did not result in repossession, or even repercussions.

Sounds to me like some of these bankers live in fantasy. Thoughts?


The Pasadena Pundit said...


The Ripple Effect: Water Risk in Municipal Bond Market
October 2010
By CERES and Water Asset Management
Link: http://www.ceres.org/resources/reports/water-bonds

The most immediate threats:

• The City of Atlanta’s water supply could be cut by nearly 40 percent as early as 2012 due to the ruling of a Federal judge;
• Lake Mead, the vast reservoir for the Colorado River, is quickly approaching a first ever water shortage declaration that would reduce deliveries to fast growing Arizona and Nevada;
• Hoover Dam, which provides hydropower to major urban centers in California, Arizona and Nevada, may stop generating electricity as soon as 2013 if water levels in Lake Mead don’t recover;
• More regular droughts and heat waves are likely to increase operating costs of power generators in the Southeast, among them the Tennessee Valley Authority, which was forced to slash power generation for two weeks at three of its facilities in Alabama and Tennessee because of heightened water temperatures, costing the utility an estimated $10 million in power production

The six water utility bonds that were modeled received wide-ranging water risk scores. Highest risk water scores by rank:

Los Angeles Dept. of Water and Power
Atlanta’s Water and Sewer System
The Phoenix and Glendale AZ utilities
Terrant County, TX and Dallas system


The Inspector General for the U.S. Department of Interior in an audit report titled “Central Valley Project California Repayment and Payoff” (2013) found that farmer’s repayments to payoff the $1.3 billion in bonds for the CVP are lagging behind schedule because of water reductions to large farms. According to the IG, over the 3-year period from 2008 to 2010, actual water deliveries to large CVP farm water contractors were only 41% of their allocation causing a $45 million shortfall in CVP bond repayments. The IG estimated that by 2030 one large farm operator would have to double their bond payments because of less water.

An April 9, 2013 Board Letter of the Tuolumne Utilities District explains why the New Melones Dam that releases water for California Central Valley farms sits half empty except in very wet years:

“The Bureau (of Reclamation) has not been delivering the water because the water for delivery to a contractor hasn’t been available from Melones, except in above normal years. The shortage results, not from drought conditions, but from Congress’ enactment of the Endangered Species Act in 1972, from Congress’ enactment of the Central Valley Project Improvement Act in 1991, and the SWRCB’s (State Water Quality Control Board’s) adoption of the Bay Delta Water Quality Control Plan in 1995 and its implementation decision D 1641 in 2001. All of these resulted in required increases in bypass flow from Melones. All of these actions combined have resulted in the Bureau saying that except in very wet years, all of the yield of New Melones is now required for water quality and fishery flows in the lower Stanislaus and in the Delta and there is no water available for the Project (irrigation). “

Chris Brooks said...

Seems to me that taking a security interest in future water revenues generated by a decrease in non-revenue water is a much better investment than infrastructure. Most utilities I'm familiar with issue lots of revenue obligation bonds to fund both capital improvement (pipes and pumps) and process improvement (SCADA and AMR). Maybe it's more the size of the investment than the type that matters, because fixed capital projects have bigger price tags than process improvement.

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