The drought that has suppressed hydro generation levels in the western United States may put more financial pressure on utilities that serve the region, according to a report published Thursday by Standard & Poor’s Ratings Service (S&P).

Utilities heavily dependent on the typically low production costs of hydroelectric resources may be challenged by reduced generation, S&P analysts said in “Western U.S. Hydroelectric Production Takes a Dive, and Utilities Adjust.”

“This year is shaping up to be the fifth consecutive one of below-average hydroelectric generation in the western U.S.,” according to the report. “Every major river basin is experiencing below-average water conditions. For three of these basins, the past five-year period represents the driest on record.”

In the region served by the Western Electric Coordinating Council (WECC), hydroelectric generation averaged 164,000 GWh for the four years ending 2003 — down 27% compared with the previous four years. With the spring run-off season now over, 2004 “appears to be yet another year of below-average stream flow and hydroelectric production for the region.”

Drought conditions in WECC’s Southwest and Rocky Mountain states are the “most severe,” said S&P. “In fact, the drought in the Colorado River Basin, now in its fifth year, is reported to be the worst in more than 400 years.” The report noted that water supply conditions in Las Vegas have deteriorated to the point that the municipal water authority there is spending $30 million to pay residents $1/square foot of lawn they remove from their properties.

In the Pacific Northwest, the report found that drought conditions range from modest to severe, “although one top-level official with the Bonneville Power Administration has characterized the most recent five-year period as the driest on record.”

California’s drought conditions are below average statewide, but “decent storage reserves, helped by last year’s strong precipitation, have mitigated the effects on hydroelectric generation,” said the report.

Overall, S&P found that “several utilities are facing especially challenging production years, which could reduce cash flow coverage and liquidity this year. The cost estimates range from several million to tens of millions of dollars.”

However, the 10-page report noted that in “nearly all cases,” mitigating factors may offset the related costs. As a result, any weakening in a utility’s credit quality is expected to be modest.

The full report is available for S&P’s RatingsDirect service at www.standardandpoors.com.

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