LOS ANGELES — New California State Water Resources Board restrictions released on March 26 are a credit positive, because they increase the likelihood of political support for higher water rates, said Moody's Investors Service.
Most water enterprises remain in relatively strong fiscal shape; but the need to raise rates will become increasingly acute as the drought continues and conservation measures take place, according to the report.
"The new restrictions, while modest, highlight the severity of the California drought and the need for increased water conservation," analysts said. "Under California law, water systems have a fairly easy rate-raising process, but political headwinds can make it difficult."
Gov. Jerry Brown declared a state of emergency last year seeking a voluntary 20% statewide reduction in water use. Usage has only fallen by about half of that target, but Moody's cautions that a further decline in water use, prompted by the new restrictions, could amplify the need to raise rates.
The low level of mountain runoff water resulting from the fourth year of drought will, at current water rates, increase credit pressure on water enterprises by straining revenues as sales decline, analysts said.
In the near term, water enterprises are relatively well-prepared to maintain credit quality, in part because water sales in recent years have remained strong despite the drought.
For instance, Los Angeles Department of Water & Power, Metropolitan Water District of Southern California and San Diego County Water Authority all experienced a significant increase in water sales from fiscal 2011 to fiscal 2014. Debt service coverage for each of the three has improved during that period. The state Department of Water Resources reported that water storage levels for March are better than last year, though still significantly below historical levels for this time of year.
The water enterprises can make capital investments to generate new water, such as investing in wastewater reuse and ocean/brackish groundwater desalination. But, according to Moody's, the time frame for realizing a return on those investments is very long, and beyond the time frame of fiscal stress that could result from the current drought in the absence of offsetting rate increases.
Moody's declaration of "credit positive" or "credit negative" does not connote a rating or outlook change. It is indicative of the impact of a distinct event or development as one of many credit factors affecting the issuer.
