Weekly Preliminary OS Climate Risk Review (1/27/22)

By February 3, 2022 No Comments

This week we’re looking at a water utility provider in Southern California and are asking, “How will they ensure adequate water supply in the face of historic droughts and water supply challenges?” To answer the question, we’re looking closer at West Basin Water District’s current water supply, the relationship (rather reliance on) the Metropolitan Water District of Southern California, and West Basin’s water resource management strategies. 

West Basin Municipal Water District Refunding Revenue Bonds ($24,105,000)

About the Bonds

Bonds are being issued to refund all of the District’s outstanding Series 2012A Refunding Revenue Bonds and pay the cost of issuance of the 2022A Bonds. The Bonds are payable from Net Revenues of the Water System. West Basin Water District is a wholesale water agency that is dependent on imported water supplies from the Metropolitan Water District of Southern California (MWD) — in 2020, 88% of water retail demand in the service area was met with imported water while just 12% was fulfilled by recycled water supply (Urban Water Management Plan, section 7-12). West Basin’s territory covers approximately 185 square miles in western Los Angeles County with a population of approximately 882,000. West Basin distributes to local jurisdictions who are responsible for providing water services to residents, commercial, and industrial customers. 

Drought risQ

West Basin doesn’t raise the red flags we often focus on (e.g. wildfire or flooding risk) — instead we are drawing attention to this utility given the drought risk it faces. In the risQ UI’s Climate Risk – Drought Overview tab, we can see that the West Basin is at high risk for future drought conditions. Under 2030 RCP 8.5 climate conditions—a greenhouse gas emissions scenario where emissions remain business-as-usual—we project 62% of months over a 30-year period will be classified as mild, moderate, severe, or extreme drought conditions; this percentage of months in drought ranks in the 92nd percentile, nationally. We project that 13% of those months would be classified as severe drought and 23% would be extreme drought conditions. Since West Basin’s water supply comes from the Metropolitan Water District of Southern California (MWD), it’s relevant to look at the MWD’s drought risk as well. Under 2030 conditions, we project that 63% of months over a 30 year period would be classified as mild, moderate, severe, or extreme drought, ranking in the 93th percentile nationally. 

West Basin’s drought risk is already material and is only growing more material in future years. In order to gauge the potential impacts of drought on the West Basin’s service area in years to come, it’s worth taking a look in the rearview mirror to see how drought has impacted California over the past decade. One impact of the disruptive drought conditions in California has been increased regulation. “In 2013, much of California experienced one of the driest years on record, and dry conditions continued through January 2014. Due to these sustained record-dry conditions, Governor Edmund G. Brown proclaimed a drought emergency on January 17, 2014… On April 1, 2015, Governor Brown issued an executive order mandating, among other provisions, a 25% reduction in potable urban water usage in California (as compared to potable water usage in 2013)” (pg. A-18). These restrictions were eventually extended through January of 2017, resulting in almost two years of restrictions on water consumption in the State. The year following, water conservation measures garnered more permanence in the State of California: “In May 2018, Senate Bill 606 and Assembly Bill 1668 were signed into law to establish Statewide water efficiency standards. These two pieces of new legislation are intended to increase water conservation (pg. A-19).”

A warming climate threatens to worsen California’s water supply issues. Mountain snowpack provides as much as one-third of California’s water supply by accumulating snow during the winters and releasing it slowly when it is needed during the State’s dry springs and summers. Warmer temperatures will cause snowpack to melt faster and earlier, making it more difficult to store and use water. By the end of this century, the Sierra snowpack (supplying ~30% of California’s water needs) is projected to experience a 48% to 65% loss from the historical average. This loss of snowpack means less water will be available for Californians. Within the past five years, drastic swings in hydrologic conditions proved challenging to urban water suppliers throughout California. In 2015, the dry conditions resulted in the lowest ever snowpack in the Northern Sierra Mountains (West Basin Urban Water Management Plan Section 3-9)

In the face of unprecedented and potentially lifestyle-altering drought conditions, how are California’s water suppliers responding? How can they be more resilient in a changing climate? 

West Basin is taking a multi-faceted approach. One such approach is their Water Shortage Contingency Plan (WSCP) which outlines the District’s response to 6 levels of drought classifications that correspond to water shortages ranging from 10% to >50%. In response to drought conditions, the District pursues varying degrees of the following: voluntary water use reductions, public outreach, and mandatory water reductions: On July 26, 2021, the Board activated Shortage Level 1 of the Contingency Plan, representing a 0-10% water shortage. On November 22, 2021, the Board activated Shortage Level 3 of the Contingency Plan, representing a 20-30% water shortage, pursuant to which the Board resolved to coordinate with various stakeholders to raise drought awareness and the need to reduce water use. The Board also resolved to continue to develop and implement new and expanded water efficiency programs that support long-term water use reductions in the residential, municipal and commercial sectors (pg. A-19).” 

Aside from responding to drought conditions, the District is also seeking to increase the robustness of their local water supply (as opposed to their current reliance on imported water): “In response to increasing challenges to the certainty and reliability of Southern California’s water supply, West Basin has adopted its Water for Tomorrow Program to addressing the service area’s water future (A-27).”

In 2002, with the aim of diversifying the water supply portfolio, an Ocean Water Desalination Plant was proposed which would be capable of producing 20-60 million gallons of drinking water per day and offsetting 20% of the District’s long-term needs. The proposal underwent thorough vetting that included pilot and demonstration testing and environmental reviews. In 2021, West Basin presented a cost-benefit analysis of the proposed plant; the project was estimated to cost over $500 million and ~$20 million a year to operate. Ultimately, the Board voted in a 3-2 decision to terminate the proposal, citing 1) the ability to meet water demand needs over the coming decades through alternative means as well as 2) an unjustifiably high cost burden on consumers. 

West Basin’s Urban Water Management Plan summarizes how the District intends to meet  present and future water supply needs within the service area. It provides water supply planning for a 25-year period in five-year increments, including under normal conditions and single-year and multi-year drought conditions. In their decision to terminate the Desalination Plant, one of the reasons that the Board cited is the District’s ability to meet future water demands by bolstering recycled water capabilities. West Basin has numerous recycled water projects on the docket and intends to fund some projects with debt expected to issue in 2023: “West Basin is in the final design phase of an expansion to West Basin’s recycled water distribution system expansion project that would deliver recycled water to Palos Verdes Golf Club in Palos Verdes Estates, as well as six sites within the City of Torrance… Construction activities are expected to begin in spring 2022… the estimated costs over the next two fiscal years is approximately $10 million…Based on the guidance in the Master Plan regarding the phasing in of projects… West Basin expects to undertake a number of rehabilitation and replacement projects estimated to cost approximately $137 million over the next five year. West Basin expects to finance a portion of the projects described above with proceeds of Commercial Paper Certificates to be issued by West Basin in the amount of $50,000,000 [in calendar year 2023] (pg. A-28).

West Basin has done great work on developing plans for meeting water supply challenges, and an even more impressive job of financing and implementing those plans. Recall that in 2020 less than 15% of the service area’s water needs were met with recycled water supply? The District is seeking to be less reliant on imported water and by 2030 provide 26% of the area’s demand needs with recycled water (Urban Water Management Plan, section 7-12). They are walking-the-walk in this regard: in 2021 they issued finalized construction and design plans for a $21 million recycled water project at their Juanita Millender Plant with construction set to be completed in 2023 (pg. A-27). There’s obviously been a fair amount of critical thinking cycles dedicated to West Basin’s climate action planning, and also substantial consideration towards the reduction of those plans to material actions that will provide notable benefits to the West Basin customer base.

Honorable Mentions

City of San Antonio (CPS Energy), TX (risQ Score 1.9, Hurricane risQ Score 2.0) $347,865,000

CPS Energy is the municipal electric utility owned by San Antonio which serves Bexar County as well as portions of surrounding counties (Social Impact Score 43). Despite being centrally located in Texas, CPS Energy still exhibits sizable hurricane and flood risk (Hurricane risQ Score 2.0 and Flood risQ Score 1.7). Additionally, the Utility faces heat and drought risk. The number of days with a max temperature above 100°F is expected to increase 40 – 50 days by 2050 under RCP 8.5 while the percent of months with extreme drought by 2050 ranks in the 93rd percentile nationally under the same climate scenario. The Utility owns an aquifer to supply water to its power plants; though the amount of water has proven sufficient in past drought events (pg. 64) worsening conditions may stress conditions. Unfortunately there is more: the per capita emissions from electricity production and industry rank in the 94th and 92nd percentile nationally, setting the Utility up for considerable carbon transition risk. The City’s Climate Action Plan attributes the majority of San Antonio’s stationary emissions to electricity and natural gas supplied by CPS Energy.

The most disruptive weather event as of late is the 2021 Winter Weather Event, which the POS discusses in depth. The Storm impacted natural gas delivery to some gas-fired power plants and price volatility (natural gas comprises 46% of the Utility’s generating capability pg. 59); thus the level of generation was below what was needed to meet demand (pg. 2). Following the Storm, the Utility increased rates (pg. 36) which will be partially used for infrastructure resiliency and winterization. However, due to outstanding debt from the storm, the Utility’s credit rating was downgraded by Moody’s (pg. 129).

Nevertheless, CPS Energy and the City of San Antonio appear to be making an earnest effort to build resilience and move towards renewable energy. In addition to winterization initiatives, the Utility is utilizing smart grid technologies to ensure grid resilience and reduce the impact of power outages during hurricane and flood events (pg. 65). The Utility has a Strategic Water Resources Plan and Drought Contingency Plan (pg. 99) and the City of San Antonio also maintains a Water Management Plan. Furthermore, around 18% of CPS Energy’s generation mix is derived from renewable sources— exceeding the Utility’s 2020 goal for wind and solar energy (pg. 54). In 2018, the Utility launched its  Flexible Path Strategy which aims to incorporate more non-emitting resources (pg. 55). Through CPS Energy’s Save for Tomorrow Energy Plan (STEP), an energy efficiency and conservation program, the Utility reduced energy demand by 926 MW since 2009 (pg. 37). Finally, San Antonio’s Climate Action Plan is the City’s pathway to carbon neutrality; the Plan includes several strategies around utility preparedness and energy transition. Despite being a main contributor of emissions, the CAP attributes a decline in GHG emissions (despite population growth) to CPS Energy’s shift away from carbon intensive electricity sources.

Discovery Academy of Science, FL (risQ Score 3.2, Hurricane risQ Score 2.7) $15,370,000

Currently, Discovery Academy of Science (DAS) has two campuses located on Florida’s Gulf Coast in Dunedin, FL. The $15 million in proceeds will be used for acquiring, constructing, and improving a third campus located in Clearwater, FL. Total enrollment between the north and south campuses is ~500 students, with the future campus having an enrollment capacity of 816 (pg. 12). Unfortunately, the POS does not go out of its way to inform those invested in the future of the area in regards to climate vulnerabilities and potential property losses. There is a paragraph that takes climate change into consideration, however, it’s surface-level detail which is considered boilerplate given the geographical location (pg. 61). While the paragraph mentions that neither of the campuses have experienced flooding in the past five years, let us take a look at the future that will potentially impact the issuer.

Within a 6-minute drive time, DAS is ranked 86th percentile nationally for property losses from combined physical perils and 84th percentile for GDP impairment. These metrics are primarily driven by hurricane storm surge (Hurricane risQ Score 2.7), which ranks 79th percentile nationally. Storm surge from a Cat 4 event sees ~28% property losses. Taking these projections into consideration makes the climate change paragraph in the POS seem paltry at addresses real risQ. In Clearwater (risQ Score 2.9), the site of DAS’ third facility, ranks 86th percentile for GDP impairment and hurricane storm surge from a Cat 4 event drives ~15% property losses for the city as a whole.

Additionally, Clearwater is located in Tampa Bay, known for it’s Gulf Coast beaches and tropical storms. In the summer of 2012, Tropical Storm Betty submerged nearly all infrastructure on Clearwater Beach. The storm left multiple cars immobilized and stranded several citizens. In November of 2020, Tropical Storm Eta caused millions in damages and flooding thousands of properties. Some project that if the same storm hits the area 30 years from now, upwards of 40,000 properties could be flooded, five times the amount inundated in 2020. The rate and severity of storms continue to threaten DAS properties and communities (Social Impact Score 25). These issues should be addressed accordingly.

Congregational Homes/Mt. San Antonio Gardens, CA (risQ Score 2.9, Wildfire risQ Score 3.8) $42,990,000

$43 million, with the proceeds used for the finance cost and construction of a 84,700 square foot, three-story structure on the Mt. San Antonio Gardens campus located in both Ponoma and Claremont, California (pg. A-1). The city line bisects The Gardens located on 31 acres. The Gardens provides care to residents 60 years and over in the forms of assisted living, independent living, and skilled nursing. Unfortunately, with only a 3-sentence blurb, the 300-page POS neglects to disclose any significant climate risQ associated with the facility (pg. 50). 

Within a 9-minute radius, which can potentially encompass some residents’ entire community, has a Wildfire risQ Score of 3.8. This area is ranked 90th percentile statewide and 99th percentile nationally for property losses from wildfire. A 100-year event sees ~16%, while a 500-year event drives approximately 32% property losses. During the last two years alone, wildfires have been more frequent due to historical drought in the state. According to RCP 8.5 projections, The Gardens will experience extreme Drought through to 2050. 2020 held California’s largest wildfire season, with ~4.4 million acres burned. It was outpaced by 3 times that number in 2021. Pomona has been susceptible to several climate hazards fueled by wildfire. Smoke and pollutants become trapped in the air and the quality diminishes, threatening the community’s most vulnerable (Nonwhite/Minority Population Score 84) including the elderly. No one wants to live or have loved ones in an area where the sky looks more frequently like this.