LOS ANGLES -- It has been a good year for California utilities, as their financial metrics have strengthened, and the majority of their credit ratings have remained stable, according to a recent report from Fitch Ratings.

“California water and sewer ratings continued to perform well over the past year, benefiting from a recovering economy and positive near-term supply and demand dynamics,” Fitch analysts wrote in a report released Dec. 3.

The average rating Fitch has given the state’s water and sewer utilities is AA, which matches the national average for the sector.

Downgrades in the past year were limited to three of the total 93 rating actions. Fitch said these downgrades were the result of increased regulatory requirements and rate sensitivity.

The state has imposed some of the nation’s most demanding environmental and drinking water standards, which pose significant costs for utilities.

The rating outlook for 89% of California’s water and utility credits is stable, suggesting a change is unlikely over the next two years. Analysts said they expect the average rating for the sector to remain at AA.

“Credit strengths — strong financial performance, solid rate discipline, responsive rate structures, and experiences, sophisticated management teams — generally offset a challenging operating environment marked by supply uncertainty and elevated regulatory capital needs,” analysts said.

The sector faces increasing drought concerns in 2014, as past two years were very dry, which reduced reservoir storage levels to the lowest since a statewide drought emergency in 2009.

Significantly below-average precipitation this winter could force supply curtailments that may pressure water agency financial results over the near term.

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