Thankfully the madness of the last few months is subsiding, with the 2020 hurricane season being in the rearview mirror, and wildfires becoming an exception as opposed to the rule that they had through the summer and fall. Interesting to look at upcoming debt issuers and see if the recency of such events is causing a change in climate risk disclosure in the Preliminary Official Statements. In that spirit, we’re looking at the Jefferson Davis Parish Water and Sewer Commission District No. 1, a jurisdiction that was certainly touched up by this year’s swath of hurricanes. The Preliminary OS for their upcoming Negotiated Sale was published to MuniOS on December 10.
Quick geography first: Jefferson Davis Parish sits one parish inland from the gulf coast, immediately north of Cameron Parish, the state’s highest risk parish overall. More specifically, the vast majority of the WSCD No.1’s service area is right at the Cameron-Jefferson Davis parish line, so climate risk for the WSCD (cumulative Property VaR to 2030 of 31%) is ratcheted up versus Jefferson Davis Parish as a whole (20%). The GDP Impairment risk shows even greater lift when considering the parish (39%) compared to the WSCD (67%). All this places the parish in the 94th percentile for Property VaR and GDP risk versus utilities nationally, and at the 74th percentile within the state of Louisiana. The main risks are inland flood, representing just under half of the aggregate risk, hurricane storm surge accounting for another 40% of the risk, and hurricane flood (from precipitation) contributing 10%. With respect to storm surge, while the WSCD is a little inland from the coast, the topography and water ways of Cameron Parish still leave the district vulnerable to a storm surge event.
In the OS, the sum total of commentary around any climate risk is in four and half lines of text on page 23. This details the damage Hurricane Laura did to the district and to the WSCD’s assets in August of 2020. That’s it. October’s Hurricane Delta is not mentioned in the OS despite the damage it caused across the parish. Perhaps more problematically, there is no discussion of the future climate risk for the district and, as a corollary, no discussion of any efforts to mitigate the impacts of that risk either. Given Delta was a record-tying fourth named storm to impact Louisiana it seems pretty remarkable to not talk about the potential for such events to occur across the 15 year timeframe captured in the maturities of the bonds on offer.
So lets do the math based on risQ’s climate models and the year that Louisiana just went through, including the WSCD. The annual probability of a hurricane impacting Jefferson Davis Parish in 2035 is 47% higher than in 2020 using an RCP8.5 scenario and 21% higher in a (rose-colored glasses) RCP4.5 view of the future. Given hurricane storm surge’s contribution outlined above, the scale of damage by hurricane category is critical. Storm surge from a Cat 1 event has a 13% Property VaR, but even a one notch jump to Category 2 escalates this risk to an expected 67% Property VaR. In parallel, the typical (extreme) precipitation that is becoming a bigger part of hurricane risk carries a 15% Property VaR across all hurricane categories. A 100 year inland flood operates on the same scale at 17% Property VaR. These numbers start to tally up in ways that an issuer such as the Jefferson Davis Parish WSCD No. 1 should be actively disclosing and certainly addressing.
Many parishes in Louisiana have shown evidence of flood awareness and action elsewhere, with 17 of the 64 parishes in the state now being part of the NFIP Community Rating System (CRS). Unfortunately, neither Jefferson Davis nor any town within it, show up on that list so no federally recognized mitigation efforts have started in that regard. This also means no subsidies for flood insurance for the local population. Not surprisingly, the flood insurance uptake rate is also very low, with only an estimate 8% of properties being insured. This means a key backstop for 2020 and in the future is missing. The Louisiana legislature in 2009 passed a law that mandates a single annual hurricane deductible Louisiana homeowners, which means of those carrying insurance, most will not have to pay multiple deductibles for damages from Laura and then for damages caused by Delta. That doesn’t apply if you don’t have insurance at all, so multiple hurricane years like 2020 are problematic for Jefferson Davis residents and the jurisdictions like the WSCD No. 1 that serve them. The parish as a whole, by not engaging in the NFIP CRS, is forgoing a key lever that would make insurance cheaper and potentially drive better uptake rate.
Its hard to imagine this issuer not being aware of physical risk from climate events given 2020’s performance. Its alarming not to see that reflected in an Official Statement.