Overview

The Rio Grande stretches across 1,896 miles and is the fourth-longest river in the U.S. It originates in south-central Colorado, traverses the length of New Mexico, then becomes the border between the U.S. and Mexico--separating Texas and the Mexican states of Chihuahua, Coahuila, Nuevo Leon, and Tamaulipas--before flowing to the gulf.

S&P Global Ratings maintains ratings on six Texas utilities in the Rio Grande Valley. We believe these utilities face increased negative rating pressure and water supply stress due to their reliance on Mexico for their water supply and the unpredictable nature of that supply, which stems from Mexico's ongoing water delivery deficit.

Chart 1

Challenges Facing Supply Reliability And Execution Of The 1944 Treaty

The operating guidelines for the Rio Grande provide less direction than those for the Colorado River

While the treaty has an exception for "periods of extraordinary drought", it does not provide standards or guidelines for defining one. Under the treaty, Mexico must deliver an annual average of at least 350,000 acre-feet (af) of water, equal to 1,750,000 af per each five-year cycle to the U.S. Any deficiencies must be trued-up in the following cycle, regardless of the region's drought status. We believe greater clarity regarding what constitutes a drought and its associated supply reductions, for example, would benefit supply certainty for utilities as persistent drought conditions occur along the Texas/Mexico border.

If one country disputes that a drought has occurred, the resolution is determined by the International Boundary and Water Commission (IBWC), which creates uncertainty

This is less prescriptive relative to the Colorado River's requirements under drought conditions, as well as other operating and transparency guidelines.

The U.S. and Mexico signed an agreement in November 2024 that could improve water reliability and supply predictability between the countries by implementing additional measures (such as conservation) to reduce or prevent shortfalls. Given its hydrological conditions, we believe it is possible that Mexico may use an existing, but unpopular, option that transfers water from other states in Mexico to meet U.S. delivery requirements.  

Chart 2

Mexico's continued delivery deficits could weaken the economic and financial performance of Texas utilities

Mexico's ongoing water delivery deficit has contributed to supply shortages for utilities throughout the Rio Grande Valley, reducing municipal and industrial water availability as well as stressing the region's supply for its agricultural and irrigation needs. These supply challenges could weaken the underlying economy and, in some cases, the financial performance of utilities that rely on these deliveries. These operating pressures underpin four downgrades during the last two years in the region.

In addition to the current water cycle deficit, Mexico has struggled to meet its delivery obligations in three of the past six cycles (chart 2). The annual shortfalls created economic hardship, as demonstrated by business closures, strained crop yields, water supply uncertainty, and increased tensions between offtakers and the governments. Agricultural customers, the primary users in both the U.S. and Mexico, are particularly affected. According to A&M AgriLife, the economic toll of the recent water shortage was estimated at nearly $1 billion in 2023. The federal government has stepped in to support agriculture through a $280 million grant agreement between the U.S. Department of Agriculture and the Texas Department of Agriculture to provide economic relief to eligible Rio Grande Valley farmers and producers. While this will provide some short-term relief, we believe the region requires a longer-term solution for supply reliability along the border.

In addition to the economic strain, ongoing water stress may require costly supply alternatives, increased capital investments, and conservation mandates. Capital investments could include conservation projects, dam mitigation, international reservoir and aqueduct development, and maintenance of existing assets. We expect funding for a significant portion of these projects to be provided by the state, municipalities, and utilities. Several projects will require collaboration between Mexico and the U.S. and may face challenges from the political environment and issues among stakeholders in larger binational organizations, consistent with dynamics we have observed with the Colorado River negotiations. (For more information, see "Summer Deadline Looms Over Colorado River’s Management Renegotiations," published March 10, 2025, on RatingsDirect.)

While investment in supply management is critical, we note that it will be insufficient if it isn't paired with addressing demand. Conservation mandates, for example, are important to address dangerously low reservoir levels but those mandates can currently vary by utility and are operationally and financially challenging to implement, especially without regional guidance or revenue stabilizing surcharges. In southern Texas, municipalities that use the Amistad reservoir (25% full) as their water source have implemented varying degrees of mandatory conservation that range from 15%-40% per customer. While many utilities appreciate the conservation flexibility, we believe it lessens the capacity for broader regional supply management. 

Credit Fundamentals Vary Within The Rio Grande Basin 

We've lowered the ratings or have negative outlooks on four of six utilities we rate in the Rio Grande basin, at least partly due to water supply challenges

The degree of reliance on the Rio Grande is above 90% for five of the six utilities we rate in the Rio Grande basin. The area's lack of supply diversity and ongoing delivery unpredictability has reduced utilities' liquidity (on a days' cash basis) and narrowed all-in debt service coverage in recent years. For example, during the past three years, liquidity for both Edinburg and Laguna Madre Water District has declined by 50%. In addition, rising water costs have resulted in litigation and discord among suppliers and municipalities.

Utilities typically over rely on surface water due to the basin's unique characteristics, limiting supply diversification due to the costs and requirements for imported groundwater

Groundwater within the Rio Grande basin is brackish and has elevated levels of dissolved solids, which require more extensive, and thus expensive, treatment. Because of this, groundwater only represents about 30% of the basin's overall water usage. For the utilities we rate, it is closer to a 20% reliance.

Desalination may be an attractive alternative to meet challenges with water quality, as evidenced by El Paso's success in leveraging its desalination capability to treat its groundwater supply. This strategy has reduced its reliance on surface water to only about 45% of its supply, which in turn improves its supply reliability. Desalination is also an option for treating water from the gulf. Several rated utilities are considering advanced technology water supply projects to improve their supply reliability.  

Chart 3

Desalination can improve reliability, but is an expensive alternative

According to the Texas Water Development Board, the cost of desalinated water ranges from $357-$782 per af, compared to surface water's $60-$113 per af. In addition, desalination may hinder regionalization because the transfer of water from the north or across the region is complex and expensive given the large distances (and miles of pipe) between population centers.

Table 1 shows strong operating margins combined with affordable water bills have historically supported credit stability in the region but this is partly offset by the area's below-average income levels and elevated poverty rates. We believe Texas utilities may face rate affordability issues as costs and leverage increase to meet the Texas legislature's priorities for water firming across the state, particularly regarding the Rio Grande. Additionally, capital plans and strategies to accomplish greater reliability vary, but we believe additional debt will likely be required in the medium- to longer-term for all utilities in the basin. Although local utilities and the state are developing strategies for water diversification and reliability, we believe the rising costs may pressure their financial capacity given the area's relatively lower demographic metrics.

Table 1

That said, state support may help utilities and local governments offset the high costs of developing an alternate water supply. In 2025, the Texas Senate approved State Bill 7 (SB7), which established the New Water Supply for Texas Fund (NWSTF) to help finance water-related projects. In addition, the governor's state of the state address included the announcement of significant funding for new water delivery and rehabilitation projects to lower the state's water losses, suggesting state support may mitigate some of the local ratepayer burden. 

We believe utility management teams are taking steps to improve their supply reliability, including by using conservation, which we believe plays a key role in water demand management and is a cost-effective method for addressing supply shortages. We further believe utility management teams benefit from prudent management practices, including revenue-neutral rate structures. While we believe Texas utilities have broad statutory requirements for drought contingency planning, which supports prudent planning, those requirements could be more clearly defined. Finally, we believe credit stability would benefit from bilateral collaboration to improve management of the Rio Grande through the IBWC, including the clarification and renegotiation of certain operating and reporting parameters.   

Rough Seas Ahead: Growing Tensions And Learning From The Colorado River's Operations 

There are some important credit distinctions between the operating approach to the Colorado relative to the Rio Grande, including how the two countries recognize the obligations. This partly accounts for the greater stability in credit performance of Colorado River offtakers, compared to Rio Grande offtakers. Mexico does not consider the U.S. a priority user of the Rio Grande, which we consider an important credit distinction between the two approaches. This is contrary to the U.S. approach to Colorado River deliveries to Mexico. In the past, there were conflicts associated with agricultural users in Mexico failing to acknowledge the U.S. as a user, which heightened political tensions.

Further, there are concerns regarding reporting, transparency, and infrastructure deficiencies that affect water availability and project monitoring between the two nations. In addition, while the 1944 treaty outlines quantity requirements, it is silent regarding water quality on the Rio Grande, which we believe exposes both countries to the potential for unforeseen treatment costs if low quality water is delivered and has required dispute resolution in the past. Conversely, these potential pitfalls have been addressed for the Colorado River.

Finally, we believe there are several critical infrastructure projects related to the Rio Grande that are necessary to improve supply reliability for both countries, including deferred maintenance investment to reduce water loss, water quality projects, storage, conservation programs, and Amistad Dam mitigation investments.

Moving forward, we believe the IBWC's ability to build and develop consensus around supply and operations as well as capital project execution will be critical to utilities' credit quality.