EXPANDING RISKS FOR U.S. WATER PROVIDERS

Transcription

1 Water Ripples: EXPANDNG RSKS FOR U.S. WATER PROVDERS A Ceres Report December 2012 Authored by Sharlene Leurig, Ceres

2 ABOUT CERES Ceres isanonprofitorganizationadvocatingforsustainabilityleadership.tmobilizes apowerfulnetworkofinvestors,companiesandpublicinterestgroupstoaccelerate andexpandtheadoptionofsustainablebusinesspracticesandsolutionstobuild ahealthyglobaleconomy.ceresalsodirectsthenvestornetworkonclimaterisk (NCR),anetworkof100institutionalinvestorswithcollectiveassetstotalingmore than$10trillion. ACKNOWLEDGEMENTS TheauthorwishestothankthemembersoftheCeresteamwhoprovidedvaluable insightandcontributedtothewritingofthisreportincludingjeanneeckhart, PeytonFlemingandBrookeBarton.WewouldalsoliketothanktheWaltonFamily Foundationfortheirongoingsupportofthiswork. GraphicdesignbyPatriciaRobinsonDesign. Copyright2012byCeres. FOR MORE NFORMATON, CONTACT: Sharlene Leurig SeniorManager WaterProgram Ceres 99ChauncyStreet Boston,MA

3 Executive Summary Thisreportisafollow-uptoThe Ripple Effect: Water Risk in the Municipal Bond Market,publishedbyCeresandWaterAssetManagementtwoyearsago.The Ripple Effect examinedhiddenrisksfacinginvestorswhobuythemunicipalbondsthat financemuchofthecountry svastwaterinfrastructure. Fordecadeswaterutilitybondshavebeenconsideredamongthesafestpossible investments,anassessmentthatrestedontwoflawedassumptions:thatfreshwater supplieswouldalwaysbeplentifulandthatdemandforwaterwouldalwaysincrease. Neitherinvestors,creditratingagenciesnortheutilitiesthemselvesfullyquestioned theseassumptions. The Ripple Effect provedcontroversialatthetime,butinthetwoyearssinceitwas publishedwehaveseenmountingevidenceoftherisksfacingwaterutilitiesand theirinvestors,aswellassomeencouragingactionsbybondmarketparticipants. Water stress has continued to intensify. Back-to-backdroughtsin2011and 2012broughtincreasedattentiontothevulnerabilityofthenation swater supplies,especiallyastheimpactsofclimatechangegrow.thoughthedroughts causedbillionsineconomiclosses,mostwaterproviderswereabletomeet demand.hard-hittexaswasadifferentstory:citieswithstrongwaterefficiency programsalreadyinplacesawsuppliesandrevenuesfromwatersalesremain stable;thosethatdidnot,suchasmidland,texas,sawboththeirreservoirsand andtheircreditratingsdrop.watersupplysecuritycontinuestochallengemuch ofthewest,andisforcingstatessuchasnevada,utahandcoloradotoconsider hugelyexpensivepipelineprojectstotapnewwatersources. The market is beginning to change the way it prices water risks. Foryears, investorsfinancingpublicwatersystemsviewedthesectoraslowriskan investmentasyoucouldfind.butthatperspectiveischanging.sincethemarket crash,morewatersystemshavehadtheircreditratingsdowngradedthanever before.theeconomicdownturnbroughtwithitasignificantdropinwater demandasforeclosedhomeswentvacantandconnectionsfornewhomes plummeted.waterrevenueswentdown,buttheobligationtorepaytheinvestors whoboughtbondstofinancenewwaterprojectsdidnot.consequently,credit ratingagencieshavebegunboostingtheirfocusonthesegrowingrisks.fitch RatingsandStandard&Poor sreleasedanumberofspecialreportshighlighting wateravailabilityconstraints.ncontrast,thelargestofthecreditratingagencies, Moody s,hasneitherupgradeditscreditratingmethodologyforthewatersector since1999norissuedspecialreportsofrelevancetothewatersector. 1 WATER RPPLES: Expanding Risks for U.S. Water Providers

4 Declining revenue and rising costs are exacerbating water supply challenges. Creditrisksassociatedwithwaterprovidersarebeingheightenedbyfourfactors: growingneedsfornewinvestmenttoshoreupoldorfailinginfrastructure;a dearthoffederalfundingtosupportsuchprojects;sloweconomicgrowth;and mostsurprisingly apervasivetrendofdecliningmunicipalwaterdemandacross theu.s.together,thesefourfactorshavecreatedawideningimbalancebetween borrowingcostsforutilitiesandtherevenueneededtocoverthosecosts. Reducedwaterdemandisdesirable,butforutilitiesdependentonvolume-based salesitoftenleadstorateincreases,whichinturncanfurtherdepressdemand aviciouscyclethatisneitherfinanciallynorpoliticallytenableforutilities. Projecting future water demand is a highly uncertain proposition. Building costlyinfrastructure suchaswaterpipelineslikethosecurrentlyproposedin Nevada,UtahandColorado tomeetfuturedemandthatdoesn tmaterialize couldcostratepayersandinvestorsbillions.andwhileinvestmentsinwater efficiencyanddemandmanagementmayreducetheneedforcostlyinvestments innewinfrastructure,theurgentneedtomaintainandrepairexisting infrastructurewilllikelydrivehigherratesforcustomersregardless.nshort,water isgoingtocostmore:theonlyquestionis,how much more? SincethepublicationofThe Ripple Effect wehaveseenencouragingprogressby investors,creditratingagenciesandwaterutilitiestoaddresstheseissues,butmuch moreremainstobedone.keyfocusareasshouldinclude: Not waiting for a dry spell to manage water demand. Conservationmeasures, suchaslawnwateringlimitsandtieredpricingmustbedoneonanongoingbasis, notsimplywhendroughthits,ifwaterutilitiesaretoprotecttheirfinancialviability andkeepcoststoconsumersstableoverthelong-term. Questioning water demand projections. Wateruseischangingandinvestors, creditratingagenciesandpolicymakersshouldapproachwatersystems demand projectionswithahealthydoseofskepticism. Boosting understanding of how water rate structures influence demand. nvestorsandcreditratingagenciesshouldseekmoreinformationontheways waterratestructuresinfluencedemandandaffectthestabilityoflong-term revenuestreams. Building political support for sustainable water rates. Environmentaland consumeradvocatesshouldtakeafarmoreactiveroleinbuildingpolitical supportforsustainablewaterratesbymakingthecasethatithelpsconsumers ensurelong-termfuturewatersecurityandaffordability. Cereswillcontinuetoworkcloselywithwaterutilitiesandbondmarketparticipants toelevatetheseissues.ourworkwillcontinuetoevolvearoundthreekeypillars:1) increasingmarkettransparencyandachievingbetterdisclosurebywaterutilities abouthowtheyassessandmanagetheserisks;2)helpingwaterutilitiesand investorsbettervalueandpricewatersothatwatersuppliesandrequiredrevenue streamsaresustainable;and3)leveragingthecapitalmarketstofinancewater efficiencyacrossmunicipal,industrialandagriculturalsectors. 2 WATER RPPLES: Expanding Risks for U.S. Water Providers

5 ntroduction The Ripple Effect: WATER RSK N THE MUNCPAL BOND MARKET ACeresReport October 2010 Authored by Sharlene Leurig, Ceres Analysis by WATER ASSET MANAGEMENT AFRAMEWORKFORASSESSNGWATER&ELECTRCUTLTES TwoyearsagoCerespublishedThe Ripple Effect: Water Risk in the Municipal Bond Market,alookathowwater stressintheunitedstatescreateshiddenfinancialrisk forinvestorswhobuythewaterutilitybondsthatfinance muchofthecountry svastwaterinfrastructure. Publicwaterutilitiesdelivermorethan80percentofthe nation swatertoresidentialandindustrialconsumers andissuebillionsofdollarsworthofbondseachyearto fundwaterinfrastructureprojectsandensurecontinued waterdelivery. Wefoundthatfewparticipantsinthebondmarket includinginvestors,creditrating agencies,andtheutilitiesthemselves wereaccountingforgrowingwaterscarcity, legalconflictsandotherthreatsintheiranalyses.somewereeveninadvertently encouragingriskbyrewardingpricingandinfrastructureplansthatincreasedwater usedespitenear-termsupplyconstraints.nshort,byoverlookingthesefactors,market participantswereallowingwaterriskstogrow andremainhidden inthebondmarket. Theimplicationsofwaterriskforwaterprovidersextendfarbeyondthebond market waterisoneofthemostfundamentalinputstooureconomy.andsoit sno surprisethatthereportreceivedsignificantattentionfromthewatersystemswhose risksweevaluated,orbyinvestorsandpolicymakersconcernedabouttheways waterstresscouldtranslateintoinvestmentandeconomiclosses. NotalloftheattentionThe Ripple Effect receivedwaspositive,andtherewasafair degreeofskepticismfromtheutilitiesandcreditratingagencieshighlightedinthe report.butbehindcloseddoors,inconversationswithbondissuers,underwriters, bondcounsel,ratingagenciesandbondbuyers,weheardwasthatthequestions we raisedwereonthemindsofmanypeopleinthewatersector,andthatitwashigh timeforeveryoneinvolvedinfinancingwatersystemstoanswerthem. Sowhathashappenedsincethereportwasreleasedinfall2010? 3 WATER RPPLES: Expanding Risks for U.S. Water Providers

6 The market is changing the way it prices water risks Foryears,investorsfinancingpublicwatersystemsviewedthesectoraslowriskan investmentasyoucouldfind.waterisan essentialservice andwatersystemsare nearlyalwaysmonopolies.shortofthecostsofregulatorycompliance,investorsassumed therewaslittlerisk.buttheeconomicdownturnleftnoassetuntouched,includingthe watersector.sincethemarketcrash,morewatersystemshavehadtheircreditratings downgradedthaneverbeforeasindustrialcustomersclosedupshop,housingdeclines ateintolucrativeconnectionfeesandforeclosedhomeswentwithlawnsunwatered. Watersalesandconnectionfundsdeclined,buttheobligationtorepaytheinvestors whohadfinancedinfrastructureimprovementsdidnot.nvestorstooknote.overthe lasttwoyears: Demand management and revenue stability are two of the most important factors shaping credit health in the sector. Credit rating agencies have started building water conservation, pricing and supply risks into their sector analyses more transparently. Fitch RatingsandStandard&Poor sinparticularhavereleasedanumberofspecial reportsonthewatersectoroverthepasttwoyears,highlightingsupplytrends, waterconservation,andchallengestoinfrastructurefinancing.thesespecial reportshelpinvestorsgainabroaderviewoftrendsthatarelikelytoshapecredit healthinthecomingyears.ncontrast,thelargestofthecreditratingagencies, Moody s,hasneitherupdateditscreditratingmethodologyforthewatersector since1999norissuedspecialreportsofrelevancetothewatersector. S&PandFitchhavetakencaretosharetheirviewonsupplyvulnerability, andare evencommentingincreasinglyontheroleofwaterconservationindroughtplanning. However, theydonotyethelptodifferentiatesystemsthathaveinvestedmeaningfully inmanagingwaterdemandorthathavedesignedratestructuresthataremore resilienttodeclinesinwateruse.yetdemandmanagementandrevenuestability aretwoofthemostimportantfactorsshapingcredithealthinthesector. Butintheend,acreditopinionisonlymeanttosurveythelandscapeforthenextfew years astheaverageholdingperiodofawater-relatedbondforinstitutionalinvestors isaroundeightyears,theimportanceoffreestandingcreditanalysisisevident. nvestors have started to question whether all water is really essential. Onaverage,nearlyathirdofthewaterusedbyAmericanhouseholdsgoesto outdoorirrigation,otherwiseknownaswateringlawns. 1 nsomeplaces,that percentageoftotalwateruseisashighas50-80percent. 2 AsnotedbybothFitch RatingsandStandard&Poor s,watersystems dependenceonsalesfordiscretionary purposesisavulnerabilitywhencustomersdecidetocutbackorareforcedtoby severedroughtrestrictions. nvestors are supplementing credit opinions with their own analysis of water sufficiency. FixedincomeinvestmentmanagerslikeBreckinridgeCapital Advisorsareamongtheinvestorsdevelopingtheirownapproachestoassessing thesustainabilityofwaterutilitysystems.developmentofproprietarywaterrisk frameworkscanbeexpectedtoproliferateasproductslikebloombergnewenergy 1S&PCreditResearch, DryAsABone:TheDroughtSpursMunicipally-OwnedUtilitiesToRethinkTheirLong-TermPlansAndFunding, Alcra Store,August29,2012, Dry_As_A_Bone_The_Drought_Spurs_Municipally_Owned_Utilities_To_Rethink_Their_Long_Term_Plans_And_Funding FitchResearch, TheTexasDrought:QuenchingtheThirst, Alcra Store,July11,2012, 4 WATER RPPLES: Expanding Risks for U.S. Water Providers

7 Finance swaternsightservicegiveinvestorsaccesstodatathatwillshapefuture sectorperformance,includingwatersupply,pricingandregulation.waterproviders cannotignorethistrend,asinvestoropinioncanleadthecostofgoingtomarketto divergesignificantlyfromthecostofcapitalthatacreditratingmayimply. Theabilityofinvestorstoshapetheirownviewofwaterrisksisanimportant factorinamarketthatefficientlycommunicatesriskthroughpricing.butfor systemsseenashavingoutsizedrisk,theoutcomecanbesobering.already, someinvestorspredicatebuydecisionsonwateravailability,andinsomecases simplydonotbuyinregionswheretheriskisviewedasbeingexcessiveor uncompensated.recentregulatoryfilingsbyinsurancecompanies large investorsinmunicipalbonds describesuchgeographicscreens: For municipal bond investments, the ability of the bond issuer (i.e. municipality) to repay debt is largely influenced by the health of its local economy and stability of its population (tax) base. Climate-change issues ranging from water scarcity in the Southwest to coastal migration in Florida are considered when evaluating potential investments. Nationwide Mutual nsurance Company 3 Since we assume catastrophe risks such as earthquake and windstorms in our capacity as an insurer, we also seek to manage our portfolio s credit risk to such events by assessing our investment exposures in impacted geographic areas. n addition, for municipal bond issuers in the Southwestern U.S and other areas of the country susceptible to drought, all investment analyses include an assessment of water supply adequacy. The Travelers Group 4 nthisenvironment,itisallthemoreimportantthatriskassessmentsaredesigned tomeasurethemetricsthatmatter,andrewardsustainablewatermanagementno matterwherethewaterisbeingused. Water stress continues to intensify THOUGH THE DROUGHTS OF DEALT A HARSH BLOW TO THE U.S. ECONOMY, MOST WATER PROVDERS ESCAPED UNSCATHED. Overthepasttwoyears,droughthittheUnitedStateshard,causingtensofbillions ofdollarsineconomicdamagesintheformoffailedcrops,damagedinfrastructure, crippledtaxrevenuesandlostelectricpowerandwatersales.asofaugust2012,much ofcalifornia,allofllinoisandnearlyallthelandstretchingfromtherockymountainsto themississippiriverbasinwereinextremedroughtcondition. 5 FewAmericanshave beenleftuntouchedbythecountry swatershortages,whichelevatedpricesforbothfood andgasoline, 6 intowhichhalfofthenation scorncropnowgoesintheformofethanol. 7 Althoughimagesofparchedanddesiccatedcropshaveblanketedthenationalmedia, droughthasnotdevastatedwaterproviders,mostofwhichenteredthedroughtwith 3NationwideMutualnsuranceCompany. nsurerclimateriskdisclosuresurveyquestions. Nationwide General nsurance Company CaliforniaDept.ofnsurance,ClimateRiskSurveySearchDatabase(23760.NY.AN pdf). 4TheTravelersGroup. nsurerclimaterisksurveyforreportingyear2011. The Travelers nstitute.february2012.californiadept.of nsurance,climaterisksurveysearchdatabase(36137.ca.an pdf). 5S&PCreditResearch, DryAsABone:TheDroughtSpursMunicipally-OwnedUtilitiesToRethinkTheirLong-TermPlansAndFunding, Alcra Store,August29,2012, Dry_As_A_Bone_The_Drought_Spurs_Municipally_Owned_Utilities_To_Rethink_Their_Long_Term_Plans_And_Funding StevenC.Johnson, EthanolProductionSlowsFromDrought,PushesGasPricesHigher, Huffington Post,August13,2012, 7JohnH.Cushman,Jr, ndrought,adebateoverquotaforethanol, New York Times,August16,2012, 5 WATER RPPLES: Expanding Risks for U.S. Water Providers

8 enoughwatersuppliestomeetcustomerdemand.thenotableexceptionistexas,where the droughtplungedmorethan90percentofthestateinto extreme or exceptional drought.worsthitweresmallcommunitieswithlimitedwatersupplies thetexas Tribune recentlyestimatedthatmorethan20communitieswere180daysor lessfromrunningoutofwater 8 thoughlargercitiesinthepanhandleandfarwesttexas werefarfromspared.thoughtheworstdaysofthedroughthavepassed,thecityof Lubbock svulnerabilityisstillstarklyapparent.twoofthelakesfeedinglubbockarebelow 30percentcapacityanditshistoricprimaryreservoirisnowatzeropercentcapacity. 9 Demand management is a strategy robust to both shortterm drought pressures and long-term supply shortages, as borne out by the 2011 drought. When the dust settled, it was the cities with the strongest conservation programs that emerged none the worse for wear. 11 Butwhilemostsystemsinthestatehadtocurtailwaterdeliveriestocustomerstoprotect criticalwatersupplies,fewsawtheirsalesreductionstranslateintocreditdeterioration. 10 Thereasonswhyvary:forsystemsthatbeganthedroughtwithexcesssupply,emergency conservationrationingwaslimitedenoughtopreventsignificantrevenueshortfalls,while inareaswithgroundwatersupplies,increasedpumpingofthoseresourceswereenough tomeetcustomerdemand.nthelong-termthesestrategiesarenotadaptivetomore persistentdroughtsorsupplyshortages.demandmanagement,ontheotherhand,isa strategyrobusttobothshort-termdroughtpressuresandlong-termsupplyshortages,as borneoutbythe2011drought.whenthedustsettled,itwasthecitieswiththestrongest conservationprogramsthatemergednonetheworseforwear. 11 AsnotedbyStandard &Poor s,thecreditimpactofdroughtdependsagooddealonhowcentraldemand managementistoawatersystembeforethedroughteverstarts. nitsreportdry as a Bone,S&PoffersincounterpointtwoTexascities:Midlandand SanAntonio.SanAntonioWaterSystemhasbeeninvestinginwaterefficiency programsforyearsandhascutwaterusecitywidebyabilliongallonsayear.during therecentdrought,sanantonio ssuppliesandrevenueremainedrelativelystable. ncontrast,midland,whichhadvirtuallynoconservationprogramsinplace,sawtwo ofitsthreereservoirsdeclinetobelowonepercentcapacity.tsthirdisontrackto reachthatlevelbyearly2013.midlandwillsoonbeginconstructionofatreatment plantthatwillturnwastewaterintodrinkingwatersupplies,aprojectthatwillbecostlier forcityresidentsnowthatmoody shasdowngradedthecity swaterenterprisetoaa2, citingreducedrevenuefromwatersalesanduncertainsupplyrecovery. 12 DROUGHT ASDE, SUPPLY SECURTY REMANS A MAJOR SOURCE OF RSK FOR SYSTEMS SERVNG SOME OF THE MOST POPULOUS AREAS OF THE UNTED STATES. Whilethereasonsdependontheplace,thebottomlineisthatsomeofthemost importantwatersuppliesinthecountryare: Over-allocated: ThemostnotableexampleistheColoradoRiver,whichsupplies watertomorethan35millionamericans.recentstudiesindicatethetypicalamount ofwateravailableinthebasinmaybenearly20percentlessthanwhenwaterrights 8RyanMurphyandKateGalbraith, nteractivemap:publicwatersystemshortages, Texas Tribune,September6,2012, 9AdamD.Young, Droughttaxingarealakes,WaterAdvisoryCommissiontodiscussstrategicsupplyplan, Lubbock Avalanche Journal, August15,2012, 10FitchResearch, TheTexasDrought:QuenchingtheThirst, Alcra Store,July11,2012, 11S&PCreditResearch, DryAsABone:TheDroughtSpursMunicipally-OwnedUtilitiesToRethinkTheirLong-TermPlansAndFunding, Alcra Store,August29,2012, Dry_As_A_Bone_The_Drought_Spurs_Municipally_Owned_Utilities_To_Rethink_Their_Long_Term_Plans_And_Funding GlobalCreditResearch, DowngradetoAa3andassignmentofnegativeoutlookaffects$10.9millioninoutstandingrevenuebonddebt, Moody s nvestors Service,August31,2012, PR_ WATER RPPLES: Expanding Risks for U.S. Water Providers

9 Recent studies indicate the typical amount of water available in the basin may be nearly 20 percent less than when water rights were allocated in 1922 among the seven states entitled to Colorado River water. wereallocatedin1922amongthesevenstatesentitledtocoloradoriverwater.to makemattersmorecomplicated,themostseniorwaterrightsinthesystemtendto beheldbyagriculturalusers,leavingfast-growingcitiesreachingforextraordinarily expensivesupplies.whilepressureontheriverfromfast-growingpopulationsmay haveeasedsomewhatduringthehousingdownturn,thelong-termdivergence betweenreliablesupplyanddemandremainsacriticaleconomicchallengeforthe region.andtheescalatingcostoftappingnewsuppliesbringsitsowneconomic repercussions:coloradosprings waterproviderwasplacedonwatchforapossible downgradebymoody sinmarch2012inlightofsloweconomicrecoveryandanearly $1.5billioncapitalprogramtobuildtheSouthernDeliverySystem,whichwillpipe waterfromthearkansasriver,atributaryofthemississippiriver,whenitiscompleted in Similarly,theLasVegasValleyWaterDistrictsawnearly$2billionofdebt downgradedasdecliningwatersalesfollowedontheheelsofemergencysupply expenditurestoconstructanewwaterintakepipefromlakemead. 14 Contested: Manywatersystemshavenotbeenformallyadjudicated,meaning thatalthoughusersmaydependonthemtheyhaveill-definedlegalstandingto protecttheiruse.onesuchsystemistheapalachicola-chattahoochee-flint(acf) RiverBasin,overwhichAlabama,FloridaandGeorgiahavebeenlockedinlegal battlefortwodecades.atthecenterofthedisputeislakelanier,thecityof Atlanta sprimarydrinkingwatersupply.untilafederalrulinglastspring,the citywasatriskoflosingupto40percentofitssupplytodownstreamusers. 15 MetropolitanAtlantahassecureditswaterforthetimebeing,butaspopulations growdownstreaminflorida,andasoystergrowersseektoshoreuptheirsupply attheriver smouth,thethreatoflosinglakelanierlooms. Over-abstracted: Groundwateraccountsfor20percentofwaterusedintheU.S. Unlikesurfacewater,somegroundwaterresourcescantakehundredstothousands ofyearstorechargethroughnaturalrainfall.whenwaterremovedfromthesystem exceedsthewaterthatfiltersintothesystem,groundwatersuppliescandecline precipitously.becausegroundwaterisoftenthecheapestsourceofsupplyandits useisvirtuallyunregulated,someoftheplacesthatrelymostongroundwaterare onapathtoexhaustingtheirsupplies.a2012studybytheuniversityoftexas showedthatatpresentratesofwithdrawal,someofthecountry smostimportant watersourcesforfoodproductionarelikelytobeexhaustedwithindecades(see Figure 1).California scentralvalleyandthehighplains,whichin2007produced acombined$56billionofcrops,aretheareasmostatriskoflosingagricultural economiesandgroundwaterdrinkingsupplies.becausewateruserswiththe choiceoftenincreasegroundwaterwithdrawalswhenrainfalldropsbelowaverage oralternativesuppliesbecomemoreexpensive,choicesthatseemfinancially prudentintheshort-termmaycomeattheexpenseoflong-termsupplysecurity. ThecityofLubbockisoneexample,whereemergencydroughtreinforcements cameintheformofawellfielddrilledintotheogallalaaquifer 16 thepanhandle groundwatersourceontracktobedepletedwithinageneration GlobalCreditResearch, Long-termratingunderreviewforpossibledowngrade, Moody s nvestors Service,March8,2012, PR_ GlobalCreditResearch, $1.8billionofdouble-barreledlimitedtaxgeneralobligationdebtaffected,postrefunding, Moody s nvestors Service,May9,2011, GENERAL-OBLGATON-New-ssue NR_ ChristopherHessenthalerandJulieSeebach, TristateWaterWars:MetropolitanAtlanta sfightforwatersupply, Public Finance, Fitch Ratings,June2, AdamD.Young, Droughttaxingarealakes,WaterAdvisoryCommissiontodiscussstrategicsupplyplan, Lubbock Avalanche Journal, August15,2012, 17 UniversityofTexasatAustin, GroundwaterDepletioninSemiaridRegionsofTexasandCaliforniaThreatensU.S.FoodSecurity, Newswise, May24,2012, 7 WATER RPPLES: Expanding Risks for U.S. Water Providers

10 Figure 1: Declines n Groundwater Volume in the High Plains & California California s Central Valley and the High Plains, which in 2007 produced a combined $56 billion of crops, are the areas most at risk of losing agricultural economies and groundwater drinking supplies. Source:BobMorris. GroundwaterDepletion:TheEndofAgricultureasweknowit. VN.June14, mperiled: Groundwatersuppliescanalsobeimperiledfrommanmade pollutantsorintrusionofnaturalcontaminantsthatmakewaterunfitforhuman consumption.nlow-lyingcoastalareaslikefloridaandcapecod,risingsea levelsaretaintingfreshwateraquiferswithsalineoceanwater inmiamidade Countyalone,anestimated$2billionwillbeneededtomanagethisintrusion overthenextfifteenyears. 18 ntheshalebasinsoftheu.s.northeastandwest, waterdemandforhydraulicfracturingcanremovelargevolumesoffreshwater fromuse 19 andpotentiallycontaminatedrinkingwatersupplies.withoutproper management,energypoliciesthatfavorunconventionaloilandgassuppliesmay exacerbategroundwaterscarcities. Formanyreasons,thecostofsecuringadditionalwatersupplieshasincreased dramaticallyfromtheheydaysofwaterprojectsinthemid-tolate-twentiethcentury. Gainingaccesstonewwatersuppliesoncecostsystemslittlemorethanthecostsof transmission,thankstogenerousfederalgrantsandloansthatfinancedageneration ofreservoirs,pipelinesandtreatmentplants.buttoday sfiscalrealitiesmeanthat newwaterprojectsmorelikelythannotmustbebuiltwithinratepayers budgets, atrickypropositionwhenthecostofnewwatersuppliesisseveralordersofmagnitude moreexpensivethanintheboomyears. 18MichaelMiller, Goodandbadnewsahead OntheWaterfront, Miami s Community Newspapers,December22, JackHealy, ForFarmsintheWest,OilWellsareThirstyRivals, New York Times,September5,2012, 8 WATER RPPLES: Expanding Risks for U.S. Water Providers

11 Declining revenue and rising costs exacerbate supply challenges ALTHOUGH SUPPLY CONSTRANTS ARE CHANGNG THE ECONOMCS OF PROVDNG WATER, THERE ARE THREE OTHER TRENDS NFLUENCNG CREDT RSK FOR DRNKNG WATER PROVDERS: Growing infrastructure investment needs Curtailment of growth Declining water demand Altogether,thesetrendshaveconspiredwithrisingsupplycoststocreateaprecarious imbalancebetweenborrowingandrevenuesneededtopayforthatborrowing. GROWNG NFRASTRUCTURE NVESTMENT NEEDS Formanysystems,risingexpenseshaveoutpacedincreasesinrevenuesfordecades. nmanyplaces,whatrevenuecameinwenttowardsystemexpansionorcompliance withregulatorymandates,withnotenoughmoneyleftovertoreplaceagingtransmission linesortoupdateconnectionswithmoreaccuratemeters.andinrecentyears,whether itwasthedroughtorstutteringeconomicgrowth,mostwatersystemshavemadefew gainsagainstthesedecadesofunderinvestment(see Figure 2). Figure 2: Water ndustry Capital Expenditures Compliance 10.3% n recent years, use of capital has primarily gone to water system expansion. Replacement 37.1% Expansion 52.6% Source:U.S.EnvironmentalProtectionAgency, 2006CommunityWaterSystemSurveyReport,Vol.1Overview, Office of Water,February2009, 9 WATER RPPLES: Expanding Risks for U.S. Water Providers

12 Since 2010, by far the most common cause of credit downgrades in the water sector has been failure to increase rates sufficiently to keep pace with expenditures on system maintenance or debt service coverage. Since2010,byfarthemostcommoncauseofcreditdowngradesinthewatersector hasbeenfailuretoincreaseratessufficientlytokeeppacewithexpendituresonsystem maintenanceordebtservicecoverage.leftunaddressedtoolong,thelackofcost recoverycanleadtosystemdecay,asisthecaseforcitieslikealtoona,pennsylvania 20 andbowlinggreen,kentucky, 21 whereyearsofdeferredmaintenancehaveledto massivewaterlossrates,triggeringnegativeratingsactions.acrosstheu.s.,an estimated18billiongallonsoftreatedwaterarelosteachdayinleakypipesand unmeteredaccounts,anannualcosttocustomersofnearly$3billion. 22 Themismatchbetweenspendingandincomeispartlyresponsibleforthestaggering spendingestimatesprojectedformaintainingandupgradingwaterinfrastructure aneedestimatedatmorethan$300billiondollarsbytheenvironmentalprotection Agency 23 andawhopping$1trillionbytheamericanwaterworksassociation. 24 CURTALMENT OF GROWTH Withwaterratesfailingtokeeppacewiththecostofdeliveringwater,manywatersystems developedanunfortunatedependenceonconnectionfeesfromnewhousingdevelopment duringtheeconomicboom.nlasvegas,atthepeakofnewhousingstarts,connection feesaccountedfor$188millioninrevenueforthesouthernnevadawaterauthority by2010theyaccountedforlittlemorethan$3million. 25 Forsuchsystems,thehousing downturnledtoasuddenreductioninrevenue,andsubsequentcreditdegradation. Dependenceonconnectionfeeshaspropagatedacrossthecountry,andisresponsible fornegativeratingsactionsinsouthvalleysewerdistrictinutah,portst.lucie, Florida, 26 HernandoCounty,Florida, 27 Erie,Colorado, 28 Clovis,California, 29 Contra Costa,California 30 andyuma,arizona. 31 AndforColoradoSprings,whichhadjust financedthemassivesoutherndeliverysystem,thedownturninhousing developmentcameatjustthewrongtime. Evenduringboomtimes,investorsandratepayersshouldbewaryofhowmuchwater systemsrelyonfeesfromnewconnectiontogeneraterevenue theboomtimeswill onlylastsolongandrateadjustmentsneededtooffsetrevenuelossaresuretocause watercustomersstickershock. 20GlobalCreditResearch, Ratingnolongeronreviewfordowngrade, Moody s nvestors Service,June21,2012, PR_ GlobalCreditResearch, Aa3ratingandnegativeoutlookaffects$18.1millioninoutstandingseniorliendebt,inclusiveofcurrent sales, Moody s nvestors Service,Dec.12,2011, CTY-OF-BOWLNG PR_ U.S.EnvionmentalProtectionAgency, AddressingtheChallengethroughnnovation, Aging Water nfrastructure, Research Program, 2007, 23U.S.EnvironmentalProtectionAgency, DrinkingWaternfrastructureneedsSurveyandAssessment:FourthReporttoCongress, Office of Water,2007, 24AmericanWaterWorksAssociationPublicAffairs, AWWAReportfindsinfrastructurebilltotop$1trillion, AWWA News/Announcements,February27,2012, 25SouthernNevadaWaterAuthorityBoardofDirectors, SNWABoardrevisitsinfrastructurecharge, Southern Nevada Water Authority, 26GlobalCreditResearch, AssignsA1ratingtoPortSt.Lucie s(fl)$30millionofutilitysystemrefundingrevenuebonds,series2012; outlookisstable, Moody s nvestors Service,June4,2012, St-Lucies-FL-4416 PR_ GlobalCreditResearch, Downgradeapproximatelyaffects$35.2millioninrateddebt, Moody s nvestors Service,May24,2012, PR_ GlobalCreditResearch, $24.1millioninoutstandingdebtaffected, Moody s nvestors Service,December13,2011, PR_ GlobalCreditResearch, Baa2ratingappliesto$94.2millionofdebtoutstanding, Moody s nvestors Service,Aug.9,2011, RU_ FitchResearch, FitchRatesContraCostaWaterDistrict(CA)&WaterAuthorityRevs AA+, Fitch Ratings,June19,2012, 31FitchResearch, FitchAffirmsYumaMunicipalPropertyCorp.,AZ swater&sewerrevsat AA- ;OutlookNegative, Fitch Ratings,May 29,2012, 10 WATER RPPLES: Expanding Risks for U.S. Water Providers

13 DECLNNG WATER DEMAND Assurprisingasitmightseem,waterprovidershavebeenmoredamagedinrecent yearsbydeclinesinwaterdemandthanbyalackofwater. When drought eats deeply enough into supplies and emergency measures are taken to limit discretionary use like outdoor watering, the result can be a precipitous decline in revenue. Duringadrought,thereasoniseasyenoughtounderstand:whendroughteatsdeeply enoughintosuppliesandemergencymeasuresaretakentolimitdiscretionaryuse likeoutdoorwatering,theresultcanbeaprecipitousdeclineinrevenue. Butdroughtaside,demandmanagementandrevenuestabilizationaretwoofthe mostfundamentalcreditfactorsshapingthesector.therearetworeasonsforthis. First,thevastmajorityofutilitiesstillgetthepreponderanceoftheirrevenuefrom volumetricsales. 32 Dependingontheplace,asmuchas80percentofasystem s revenuecanbevolumedependent. Second,acrossthecountry,demandisdeclining.AllovertheU.S.,thestoryisthe same peopleareusinglesswater.betweenthe1970sandthelate2000s,the amountofwaterusedbyhouseholdsfelleverywhere:bytensofthousandsofgallons eachyearinlouisville,kentuckytonearly100,000gallonsayearperhouseholdin LasVegas(see Figure 3). 33 Thatisaremarkabledecline,andanunsungsuccess story.tistheoutcomeofmanyfactors,mostsignificantlysmallerhouseholdsizes andtheinfusionofhigh-efficiencyindoorfixtureslikelow-flowtoilets,dishwashers andwashingmachines.nsomeplaces,itwastheresultofconservationoutreach bywatersystems.andinotherplacesitwastheproductofpricingtocommunicate tocustomerstherealcostofdeliveringthatextrathousandgallonsofwater. 300,000 - Figure 3: North American Water Use Per Household Across the U.S., water use per household has declined on average 13 percent since 1975 by far more in some places. Annual Household Water Use Gallons 250, , , ,000 - Las Vegas, NV Phoenix, AZ Dallas, TX New Haven, CT Cleveland, OH St. Paul, MN Calgary, AB, Canada Philadelphia, PA Cincinnatti, OH Seattle, WA Louisville, KY 50, Year Source:P.Comes,T.Rockaway,J.Rivard,andB.Kornstein, NorthAmericanWaterUsageTrendsSince1992, Water Research Foundation,2010.Reprintedwithpermission JeffHughes, PricingandRevenues:AChallengingRelationship, University of North Carolina Environmental Finance,August23rd, 2012, 33PaulA.Comes,ThomasD.Rockaway,JoshuaRivard,andBarryKornstein, ResidentialwaterusetrendsinNorthAmerica, Journal American Water Works Association,103(2): WATER RPPLES: Expanding Risks for U.S. Water Providers

14 Butwhateverthereason,theshort-termfinancialoutcomecanbeperilousforwater systems.nrecentyears,thenorthbranchwaterandlightcommissioninminnesota, 34 thesanfranciscopublicutilitycommission, 35 Charlotte,NorthCarolina 36 andthewest SlopeWaterDistrictinOregon 37 haveallexperiencednegativeratingsactionsrelatedin parttodecliningcustomerusage. Dependingonpopulationdynamics,declininghouseholddemandcanmeandifferent thingsforoverallwaterdemand.nareaswithstableordecliningpopulation,theresult islikelyoveralldeclineinsales.buteveninareaswithgrowingpopulation,theeffect canbeamuchmoremodestincreaseinwatersalesthanwouldbeprojectedbased onhistoricalwateruse. Becausethemajorityofsystems costsarefixed,declinesincustomerusetypically requiresystemstoincreasetheratestheycharge.yetassystemsincreasetheprice theychargeperunitofwater,theircustomersuseless.tomakeupforlostrevenue, thewatersystemhastoincreasethecostofservice.buttheamountawatersystem increasesitsratesisnotatallproportionatetotherevenueincreaseitexperiences. 38 Thiscancreateagreatdealofdiscomfortforwatermanagers:theyfightthepolitical battletoraiserates,onlytoseerevenueincreasebylessthanthatneededtocover costs.andinthemeantime,customersareirkedthattheyhavetopaymoreforusing lesswater. nanerawhenwaterprovidersareconsideringinvestmentsinsomeofthemost expensivewaterprojectsratepayershaveeverseen amongthemtheflaminggorge PipelinetofeedtheFrontRangeofColorado,theSacramento-SanJoaquinRiver DeltatunnelsystemforsouthernCalifornia,theSouthernNevadaWaterAuthority s groundwaterimportationpipeline,thest.george,utahlakepowellpipeline these trendsshouldnotbeignored. Known unknowns Knowingthis,howaremostwatersystemsprojectingfuturedemand?According toasurveybythepacificnstitute,approximately15percentofwatersystems incaliforniadon tforecastdemandatall(see Figure 4).Ofthosethatdo,morethan 40percentusetheircustomers currentorpastwateruse.andonlyslightlymore thanaquarterincorporatepotentialchangesindemand. 39 tislikelythissurvey ofcaliforniawatersystemsmirrorspracticesacrossthecountry,whichbegstwo questions:dowereallyknowhowmuchwatercustomerswilluseinthefuture? Anddoesthetrillion-dollarshortfallreallyexist? 34GlobalCreditResearch, Baa1ratingappliesto$11.8millionofoutstandingrevenuedebt, Moody s nvestors Service,May3,2012, PR_ GlobalCreditResearch, Approximately$3.7billionindebtaffectedincludingthecurrentissue, Moody s nvestors Service,July18,2011, NR_ GlobalCreditResearch, Aaaratingandnegativeoutlookappliesto$1.52billioninseniorlienrevenuedebt,includingcurrentissue, Moody s nvestors Service,July7,2011, NC-913-New-ssue NR_ GlobalCreditResearch, $4.5millionofdebtaffected, Moody s nvestors Service,Jan.21,2011, Update RU_ JeffHughes, PricingandRevenues,aChallengingRelationship, UNC Environmental Finance Center,August23,2012, 39JulietChristan-Smith, ToolsforSuccess:ForecastingWaterDemand, Presentation,Water Rates Workshop,September13,2012, 12 WATER RPPLES: Expanding Risks for U.S. Water Providers

15 Figure 4: How are California Water Systems Forecasting Demand? To estimate future demand many water systems simply look to the past, a risky proposition if per capita water use continues to decline. Do not forecast demand Based on reports from other water suppliers Using future land use estimates Using future populations projections ncorporating potential changes in demand Using current or past customer demand Responses Source:JulietChristian-Smith. ToolsforSuccess:ForecastingWaterDemand. Presentation,Water Rates Workshop.September13, Thedifferencebetweenthefuturedemandprojectedbywatersystemsand thedemandthatactuallydevelopscanbesignificant,andthedeferredcapital expendituresenormous.seattlepublicutilitieshasbeenvocalincommunicating howwrongtheywereinprojectingfuturewaterdemand,asdemonstratedbythe 100milliongallonadaydifferencebetweenthedemandprojectedfor2030in planningexercisesdonein1990and2007(see Figure 5). Figure 5: Seattle Public Utilities Demand Forecasts With and Without Conservation Unattributed Savings Transitory Savings Conservation Programs Plumbing Code Rate mpacts System Operation mprovements Forecasted demand can overshoot actual demand substantially. Annual Demand mgd Forecast With No Conservation Actual Demand Year 2007 Forecast With Conservation Source:TheJohnsonFoundationatWingspread, ChartingNewWaters:FinancingSustainableWaternfrastructure, Convening Meeting by American Rivers, Ceres, and The Johnson Foundation at Wingspread,January2012, Buildingforahighdemandfuturecommitsratepayerfundstocapitalexpendituresbuilt forpeakcapacity,compromisingtheabilityofsystemstomakegainsagainstthedecades ofunderinvestmentforbasicmaintenanceandqualityupgrades.whatevertheactual sizeofthefundinggap,itisanuncontestedtruththatdegradedinfrastructurewillbea keydriverofincreasingcostsforcustomers,andacreditriskforsystemsstrugglingto increaserevenuetothelevelsnecessarytoovercometheirdecadeslongspendingdeficit. ncontrast,moneyspentonefficiencystabilizesthelong-termratescustomerspayby limitingcapitalexpendituresfornewtreatmentfacilities,waterstorageandtransmission capacity(see Figure 6).Buttopayforneededinfrastructureimprovementsandto effectivelyusepricingasatoolfordrivingefficientwateruse,inmostplacesthe short-termresultwillbewaterbillsthatarehigherthancustomershaveeverpaid. 13 WATER RPPLES: Expanding Risks for U.S. Water Providers

16 Figure 6: Projected Water Demand & Expansion Effective demand management shifts the demand curve, defers capital expenditures and in the longterm saves ratepayers money. The challenge is getting ratepayers and policymakers to see the long-term cost savings in the face of shortterm rate increases. Projected Water Demand (million gallons per day) Projected Demand, Without ncorporating Declining-Use Trend Projected Demand Based on Declining-Use Trend Supply Delayed Expansion Smaller Expansion Years Source:Hunter,etal, DecliningResidentialWaterUsePresentsChallenges,Opportunities, Opflow,American Water Works Association,May2011, Fortaxpayersandratepayers,investmentinwaterefficiencytranslatestolessmoney thatwillhavetobespentonwatersystemsoverthelong-term. Lestthatlaststatementbemisinterpreted,let sbeclear:americanswillpaymorefor waterservicesthantheyhaveinrecentgenerations.thatistheinevitableresultof decadesofunderfunding,andthatstoryisnodifferentfromanyotherunderfunded obligation Medicare,SocialSecurityorfloodinsurance,forexample.Butdesigning watersystemstoreflectdecliningwaterdemandwillultimatelysaveconsumers hundredsofbillionsofdollarsthatwouldotherwisebespentonunnecessarywater diversionprojects,reservoirs,treatmentplantsandpipelinesbuiltforapeakdemand thatisveryunlikelytoevermanifest. Politics, rates and affordability Decisionsmadetodayonspendingratepayerfundsfordemandmanagementorsupply expansioncouldnotbemoreimportanttoamericans qualityoflife,nowandinfuture generations.whilewaterintheunitedstatesisdirt-cheap(andmaybeevencheaper thandirt),forthefirsttimeever,ithassurpassedevencabletelevisionasthemost rapidlyescalatingbasicservicepaidforbyamericanhouseholds(see Figures 7 & 8).n partthisreflectstheinsufficientratesthatwatersystemshavechargedinthepast.but regardlessofthehistoriccauses,therealityisthatsecuringtheinvestmentneededfor waterinfrastructureisapoliticalendeavor.andinpolitics,perceptioniseverything. Unlikeelectricityprices,whichtypicallyaresetbystate-levelpublicutilitycommissions, mostwatersystemsdependoncitycouncilsorlocalwaterboardstosetprices.the processofwaterratesettingishighlypoliticized.forwatersystems,thisrealityrequires cooperationwithpoliticalactorsandinvestmentincommunicationswiththeamerican publictocommunicatethevalueofwaterservices.forahighlydecentralizedmarket withtensofthousandsofoperators,suchcoordinationwillbeanunprecedentedand extraordinarychallenge. Maintainingaffordabilityofwaterservicesinaneraofescalatingcostsandhistoric disinvestmentshouldbeofprimaryimportancetoratepayers,investorsand 14 WATER RPPLES: Expanding Risks for U.S. Water Providers

17 policymakers.lackofaffordabilityisalreadyhittingcommunitiesandtheinvestors whofinancetheirwatersystems,especiallyincalifornia,whereaspateofrecent creditactionshavebeenlinkedtothelackofaffordabilityofwater.forsuchwater systems,thechallengeisthatcreditdegradationdrivenbyaffordabilitymakes borrowingmoreexpensive,furtherraisingcostsofserviceforcustomers. Figure 7: Annual Consumer Expenditures on Utilities for a Four-Person Household $5,000 - Water services have been increasing as a proportion of total household utility spending, creating challenges to affordability in some areas and political opposition to rate increases even in areas without affordability challenges. $4,500 - $4,000 - $3,500 - $3,000 - $2,500 - $2,000 - $1,500 - $1, $500 - Water & Other Public Services $630 Fuel Oil & Other Fuels $143 Natural Gas $586 Telephone $1,515 Electricity $1,796 $ Annual Household Expenditure Year Source:JaniceA.Beecher,Ph.D., ConsumerExpendituresonUtilitiesin2010, nstitute of Public Utilities Regulatory Research and Education,MichiganStateUniversity,March2012, Figure 8: Trends in Consumer Price ndex (CP) for Utilities Water and sewer utilities have seized the unenviable title of most rapidly escalating cost of service, even in comparison to cable television. CP Water & Sewer (1953) Garbage (1985) Cable/Sat. Television (1984) Fuels (1935) Local Phone (1978) Postage (1935) CP (1913, 1983) Electricity (1913) Natural Gas (1935) CP (1997) Tel. Services (1997) Landlino ntrastato (1978) nternet (1997) Wireless (1997) Landline nterstate (1978) Year Source:JaniceA.Beecher,Ph.D., TrendsinConsumerPrices(CP)forUtilitiesThrough2011, nstitute of Public Utilities Regulatory Research and Education,MichiganStateUniversity,March2012, 15 WATER RPPLES: Expanding Risks for U.S. Water Providers

18 So where do we go from here? Solvingthischallengedoesnotrequirehugeinfusionsoffederalorstatedollars.t doesnecessitategettingsmarteraboutthewaterinvestmentswemakebyprioritizing waterefficiency,thelowest-costsolutionforcustomersoverthelong-term.tmeans askingbetterquestionsaboutdemandestimatesthatneglecttherealtrendsof decliningwateruse.tnecessitateseducatingcustomersaboutthetruecostsof deliveringwaterservices,andunderstandingwhatcustomersvalue.anditrequires policiesthatprotectaffordabilityofwaterforessential usetoensurethatwehonor thehumanrighttowater. SincereleasingThe Ripple Effect,Cereshasmetwithcreditratingagencies, institutionalinvestors,watersystemsandadvocatestotalkaboutwhatthesetrends meanforthem.andwithinthattimewe veseenthebeginningsofmeaningful change.yetmoreremainstobedone: Managing demand is not something to be saved for a dry spell. Emergencyconservationmeasuresduringdroughtsorlegally-inducedwater shortagesmaybenecessary,butitisthedemandmanagementthrough conservationoutreach,efficiencyinvestmentsandpricingthatprotectsasystem s financialsduringtimesofshortageandthatenablessystemstodeliverthelowestcostwatertocustomersoverthelong-term. nvestors, credit rating agencies and policymakers should not take water systems demand projections as a given. Wateruseischanging,butthat changeisnotreflectedinhowmostsystemsprojectdemand.asthecostsof suppliesincreases,buildingforphantomdemandcanputratepayersand investorsinbigfinancialtrouble. nvestors and credit rating agencies should seek out better information on how water rate structures influence demand, and in turn shape the stability of water systems revenues. Notallratestructuresarebuiltalike, yetresearchontherelationshipbetweenthesefactorsisnotmakingitswayfrom academicsandrateconsultantstocreditratingagenciesandinvestors,forwhom thisshouldbeanabsolutelycentralpartofcreditanalysis. As investor water risk awareness grows, water systems that provide the best information to the market will benefit. nvestoropiniondeterminesthe costsystemspaytofinancecriticalinfrastructure,whethertheopinionisbased onbiasorharddata.transparentandaccuratedisclosureshouldbevalued positivelybythemarket. Environmental advocates and consumer advocates should assume a far more active role in building political support for sustainable water rates. Educatingcustomersandelevatingwatersecurityandlong-termaffordability withinpoliticalconstituenciesisintheinterestofthoseadvocatingonbehalfof theenvironmentandthelow-income. Overthenexttwoyears,Cereswillbeworkinghand-in-handwithwaterutilitiesandthe bondmarkettoputsustainabilityatthecenteroffinancingdecisionsinthewatersector. Ourworkrestsonthreepillars:Transparency, Valuing Water andmarket Formation. 16 WATER RPPLES: Expanding Risks for U.S. Water Providers

19 Ceres Three Pillars TRANSPARENCY n early 2013, Ceres will release a disclosure guidance framework for the water sector crafted in cooperation with water systems and investors. The framework will help investors and credit rating agencies to access better information on how water systems assess and manage risk. Over the next year, we will work with leadership water systems to build their financial reporting around this framework, and with investors and rating agencies to translate this framework into credit analysis that will allow the markets to more effectively price. VALUNG WATER Water providers must be able to secure sustainable revenues to ensure safe, reliable drinking water while also more effectively communicating the costs of water services to customers. Working with water systems, rate consultants and academics, Ceres will help water managers, investors and credit rating agencies to identify the rate structures that optimize revenue stability and water efficiency, protecting the long-term affordability of water while delivering reasonable returns to investors. Transitioning to sustainable revenue models is as much a political challenge as a technical one. n the next two years, Ceres will work with water conservation advocates to build the political will to transition to sustainable revenue models for water systems. MARKET FORMATON Over the next two years, Ceres will help to educate policymakers, investors, advocates and water systems on the approaches to leverage the capital markets to finance water efficiency the least expensive source of supply among municipal water users and agricultural water rights holders. We believe the markets can be an effective force for protecting food security, industrial productivity, safe drinking water and environmental flows. Theonce-sleepyU.S.watersectorisbeingtransformedintooneofthemostdynamic fieldsofinnovation intechnology,environmentalmanagementandpricing.andyet thechallenges,bothtechnicalandeconomic,aresovast,thesectormustlook beyonditsownwallsforsolutions.thisneedforcross-sectorpartnershipsisnotonly criticalforwaterserviceprovidersthemselves,butforallaspectsofthevaluechain, fromwatertechnologyproviderstobondunderwriterstoinvestors.workingtogether, wecanensurethataccesstowaterisnoobstacletosustainableprosperity,nowor forfuturegenerations. 17 WATER RPPLES: Expanding Risks for U.S. Water Providers

20 Ceres 99 Chauncy Street Boston, MA T: F: Ceres