Initial Assessment Is That No Material Rating Impact Is Likely

S&P Global Ratings rates approximately 70 utility credits in Florida, 31 of which have been affected by Hurricane Ian with main breaks, power outages, and system reliability issues including lack of water and boil notices. As the deadly storm progresses, we will continue to monitor potential impacts in Georgia and the Carolinas.

Since the rebuild and recovery in the hardest hit areas could take months, and some communities may be displaced, substantial liquidity will be necessary to cushion reduced collections and to bridge the period until Federal Emergency Management Agency (FEMA) loans are available. Given the robust liquidity available and sophisticated emergency response, which is assessed in our Operational Management Assessment (OMA), we do not believe near-term rating impact is likely. Our OMA assessment considers the breadth of each credit's resiliency planning, particularly those in coastal or low-lying areas, including whether the utility has prioritized its assets under a range of climate scenarios, and identified or completed potential adaptive measures, such as sea wall construction, pump station hardening, manhole rehabilitation, energy redundancy, and other flood mitigation decisions.

Based on the most recent data available (see table), most of the utilities within the affected portfolio have significant liquidity and prudent OMAs, which includes emergency preparation and response. None of the credits within the affected area have vulnerable OMA scores or cash positions below five months of operations. The average water/sewer credit in Florida maintains more than 700 days of cash on hand, driven by a recognition that the region has heightened exposure to storm-related risks.

Utility damage from storm surge, wind, and flooding is expected to be significant

President Joe Biden declared a major disaster in Florida, providing federal aid to supplement state and local recovery efforts. We expect utilities to rely primarily on FEMA as well as other water infrastructure aid programs, through the Department of Agriculture and the Environmental Protection Agency (EPA).

Short-term drinking water contamination:  Hurricanes can damage water and sewer lines, or flood treatment facilities and storage facilities, increasing risk of water contamination. Past storms suggest that safe drinking water can become a major concern. Hurricane Harvey, for example, caused substantial water quality concerns to southwest Louisiana and southeast Texas when floodwater contaminated reservoirs. Following Hurricane Sandy, nearly 700 wastewater and drinking water utilities in Washington, D.C., and 11 states were damaged. Sewage treatment can be slower to recover given that it is sometimes under the deepest water given the location of many facilities, which are at low points of the area to take advantage of gravity.

Typically, operations resume within days or weeks, though early reports suggest some areas may take months to fully recover. Several Florida utilities were without water and have since resumed service--albeit under multi-day boil notices. EPA reported that following Hurricane Rita more than 85% of drinking water and 95% of wastewater treatment facilities in the region were operational within two weeks. However, those with infrastructure deficiencies may take longer to recover.

Customer Displacement Can Affect Revenue Collections

Given the nature of the flooding, there is risk that some systems may not be fully utilized as many citizens will be displaced and potentially unable to return for an extended period. We expect this will be the case for Fort Myers, given the magnitude of damage. FEMA is reporting thousands will likely be displaced for multiple months or longer. This can influence collections, reducing revenues available to repair systems, as demonstrated by the example below. Further, given construction cost inflation, as well as supply chain and labor challenges, rebuild could be more challenging than it has been historically. For smaller utilities or those with limited liquidity, this can be an even greater risk. Given the prevalence and magnitude of storms in recent years, insurance premiums have increased over time, with this trend expected to continue. Over the long term, this could influence rebuild, which could affect the rate base available to support debt. We believe this risk depends on the level of commerce and overall health and desirability of the service area economy.