Muni Impact | October 16, 2023

Texas issues $169 million water bond to future-proof the state against drought

Stella Yao

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Guest Author

Stella Yao

Editor’s note: ImpactAlpha has partnered with HIP Investor to highlight upcoming bond issues with social and/or environmental significance. Disclaimer: Nothing in this post or on shall constitute an offer to sell or solicitation of an offer to buy bonds.

  • CUSIP bond identifier: 88285ADS4
  • Issuer: Texas Water Development Board
  • Obligor: Texas Water Development Board
  • Impact entity rated by HIP: Texas State Water
  • Muni sector: Water Utilities
  • Closing date: 10/12/2023
  • Bond amount: $169,465,000 of a series exceeding $1 billion
  • Coupon: 4.875 %
  • HIP Impact Rating: 69.2 of 100, connoting net-positive impact
  • Opportunity Zones located in the issuing entity: 628 Opportunity Zones in the State of Texas, encompassing 2,806,536 of Texas’s 30,029,572 residents
  • Climate Threat Resilience Rating: 14 of 100, connoting “very high climate risk”

This year has been one of Texas’ hottest and driest on record. Across 40% of the state, 80% of the state’s residents are experiencing extreme or exceptional drought. Lingering drought is a contributing cause of wildfires, crops harm, and drying water reservoirs.

To ensure the availability of sufficient water at an affordable rate, the Texas Water Development Board is issuing a $169 million water bond to finance and implement projects in the State Water Plan. The plan encompasses the development, management and conservation of water resources, as well as preparation for and response to drought conditions. The bond is part of a $1 billion issuance from the water agency.

Looming water crisis

Access to sufficient and affordable water is essential for public health, safety and welfare, economic growth, and protection of Texas’ agricultural and natural assets.

Texas’s 2022 State Water Plan addresses critical questions and challenges related to its water resources. Water demand is projected to increase by 9% by 2070, as the state’s population grows. Existing water supplies, however, are expected to decline by approximately 18% during this same period due aquifer depletion and sedimentation in reservoirs.

To address these challenges, the Texas plan details 5,800 water management strategies. These strategies primarily emphasize the reduction of water consumption through conservation, as well as increasing the water supply through the construction of new reservoirs, water recycling, and desalination.

The estimated capital cost of implementing these strategies is $80 billion, with the majority needed by municipal and wholesale water projects. To facilitate the adoption of water management strategies, Texas has established the State Water Implementation Fund for Texas (SWIFT) and other financial assistance programs, which have committed billions of dollars to state water plan projects.

Without these strategies, Texas could face annual economic losses of up to $153 billion because of drought and water shortages.

HIP impact analysis

HIP rates Texas State Water a 69.2 of 100, based on 11 data-driven metrics. One of the key factors contributing to Texas’ high rating is the state’s improvement in residential water consumption efficiency between 2005 and 2015, based on the most up-to-date data from the United States Geological Survey. During that time, Texas reduced 82% of its domestic water consumption per day. The national average was just 7.6%.

Additionally, Texas performs well in water safety. In 2019, Texas reported 18 lead and copper related violations per 1,000,000 people served, compared to 30 violations per 1,000,000 people nationally. Texas received a rating of 99.1 in lead and copper-related violations, surpassing the national average of 96.3.

HIP assessed 4,642 Texas water utilities that serve different regions in the state and computes a population weighted average for the statewide assessment. Utilities serving populous regions, such as Houston, San Antonio, and Dallas, recorded no lead and copper exceedance violations in 2019, earning them a perfect 100 rating. These results significantly contributed to Texas’ overall score of 99.1.

HIP also assessed the physical risks of extreme weather events and climate change facing communities, and their readiness and ability to weather and respond to these threats. The HIP Climate Threat Resilience ratings indicate both future risks and readiness for climate action and provide muni bond investors with valuable insights into future credit risks. Texas receives a rating of only 14 of 100, where higher is more resilient—significantly lower than the national average of 44.3. This places Texas among the states most susceptible to climate threats, with more limited resilience efforts across the state.

Ripple effects

Texas is taking a step forward by issuing a $169 million water bond, part of a $1 billion series, to implement its State Water Plan and responsible water management.

The state, however, is facing additional severe effects of global warming beyond water scarcity. Drought conditions are expected to reduce agricultural yields and pose increased health risks for livestock. The risk of illnesses among humans is also on the rise due to surging extreme weather events, including unprecedented heatwaves, wildfires, floods and hurricanes. Sea level rise, combined with land sinking due to the extraction of oil, gas, and water from the ground, have led to an ongoing retreat of Texas’ coastline.

The primary cause of global warming is the burning of fossil fuels that come from oil and gas drilling and refining, one of the largest industries in the Texas economy.

Climate risks are interconnected. Responsible water management strategies not enough to solve Texas’s water shortage. Although climate response requires holistic, collaborative solutions, climate-related proposals faced significant setbacks in Texas this year. Efforts to enhance energy efficiency fell short. Bills aimed at curbing greenhouse gas emissions in the state were dropped. Legislation was approved to prohibit cities from addressing climate change.

Texas is extremely vulnerable to climate threats with insufficient preparations in the face of climate change. The water bond will support an imperative need for the Texas government to expand its water management efforts to address various climate risks and adopt a holistic approach. The state cannot ignore the reality that climate change is already affecting its citizens, however.

DISCLOSURES: HIP Investor Inc. is a state-registered investment adviser in several jurisdictions, and HIP Investor Ratings LLC is an impact-ratings firm evaluating impact and ESG on 123,000 municipal entities, 260,000 muni-bond issuances, and 12,000 corporates for equities and bonds. HIP Impact Ratings are for your information and education – and are not intended to be investment recommendations. Past performance is not indicative of future results. All investments are risky and could lose value. Please consult your investment professionals to evaluate if any investment is appropriate for you, your goals, and your risk-return-impact profile.

Stella Yao is an ESG impact investing analyst at HIP Investor Ratings.