LOS ANGELES— Rainfall wasn't enough to alleviate credit pressure on California water utilities, according to rating agencies.

The snowpack in the Sierra Nevada mountains remains below historic averages, which is a credit negative for water utilities, according to a Moody's Investors Service report released Friday.

Fitch Ratings Director Andrew Ward said utilities will continue to grapple with drought pressures.

"The effects of California's drought will linger well beyond the current emergency declaration, even as El Nino rains and snowpack measurements have sated some parts of the state," Ward said.

Conservation has always been prevalent in California, so a partial easing of mandates for water conservation would not lessen the impetus for utilities to plan ahead, Ward said.

When the California Department of Resources conducted its annual snowpack survey on March 30, it found that snowpack is only 87% of the historical average.

"The insufficiency of snowpack to replenish the state's reservoirs and significantly reduce water conservation restrictions will continue to pressure water utilities to raise rates and conserve existing water supplies," wrote Moody's credit analyst Michael Wertz.

Snowpack usually provides one-third of the water used by the state's cities and farms each year. The survey measures the water content of snowfall to date and provides a measure of the spring and summer runoff.

"Although this level is a vast improvement from the 2015 survey, when water content was only 5% of average, it does not sufficiently end the drought conditions in the state, which will continue to compel water agencies to conserve," Wertz wrote.

Continued conservation will delay the return of revenue recovery to normal levels, negatively affecting utilities' financial performance in the absence of additional rate increases, Wertz said.

"Although we expect utilities to raise rates, we also expect debt service coverage levels in the fiscal years ending June 30, 2016 and 2017 to remain below the peak generated during the initial years of the drought," he said.

That said, Moody's said it expects that the financial performance of utilities will remain stable enough for the water sector's credit quality to remain steady as it faces continuing challenges wrought by water availability.

Utilities will need to continue to increase rates to maintain solid operating revenues and debt service coverage, but Wertz said they have demonstrated a willingness to raise rates when necessary.

The state enacted in April 2015 unprecedented water use restrictions that have significantly slowed the depletion of existing water supplies, a long-term credit positive, but more immediately these restrictions would have also had the effect of reducing local agencies' water revenues if it were not for rate increases.

In fiscal 2016 and 2017, the rate of operations and maintenance cost growth will be lower because agencies will be servicing lower water demands as a result of conservation. This will reduce purchased water costs, which combined with expected rate increases, will allow utilities to generate narrower but sufficient debt service coverage to maintain credit quality for the sector.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.