LOS ANGELES — Most California water agencies are well-positioned to withstand a typical drought, but a more severe, or longer-than-usual drought, could put pressure on ratings, according to two rating agencies.
California Gov. Jerry Brown declared a drought state of emergency on Friday giving state water officials more flexibility to manage supply throughout California under drought conditions.
"We can't make it rain, but we can be much better prepared for the terrible consequences that California's drought now threatens," Brown said Friday.
Based on current conditions, officials say, 2014 is anticipated to be the driest year in 100 years.
Brown directed state agencies to use less water and initiated a greatly expanded water conservation public awareness campaign.
The most significant impact of the governor's drought declaration is that it will likely serve as an effective public awareness tool encouraging residents to decrease usage, said Andrew Ward, a Fitch Ratings analyst.
"If dry conditions persist, water use conditions could tighten and constrain sales, which could impact debt service coverage and liquidity metrics," Standard & Poor's analysts said in a report released Tuesday.
The agency said most water utilities it rates have adequate cash reserves.
"The most direct and tangible impacts of the drought declaration are that it facilitates water transfers throughout the state and eases certain restrictions on water diversions from the Sacramento-San Joaquin River Delta," S&P analysts wrote.
California water agencies live in a world where droughts are a regular occurrence and they plan accordingly, Ward said.
"I would say the average credit could withstand an even more severe than normal drought," Ward said. "Credit deterioration is only likely to occur on the periphery and to agencies that are dependent on surface water; or to those where rate flexibility is less than adequate to allow them to adjust rates."
For instance, a wealthy place like Beverly Hills could just raise rates to the point they could cover debt service, but Ward said areas where ratepayers have higher bills relative to income level, will be hit harder.
"Agencies who have invested in storage supply will do better, because they are poised to capitalize on the additional demand," he said.
Tactics employed by management teams will determine how water agencies fare.
"Management teams that are willing and able to build a community consensus around raising rates to maintain the health of the water utility during a period of reduced water deliveries will come through it with their credit ratings intact," Ward said. "The management teams that fail to adjust rates to maintain solid financial performance could see downgrades."
