Fitch analyst Shannon Groff
California water utilities are anticipating a new normal of reduced water usage as a result of the state’s ongoing four year drought, Fitch analyst Shannon Groff said.

LOS ANGELES — Fitch Ratings expects most of the water utilities it tracks to maintain their ratings despite challenges from the state's four-year drought.

The average rating for the California utilities that Fitch covers is double-A, which matches the national average, according to a report that Fitch released Thursday.

Fitch rates 47 of the state's 401 water suppliers.

California's State Water Board extended the state's emergency conservation measures through October 2016 on Tuesday.

The restrictions on water usage also result in reduced revenues for the state's water districts.

Fitch analyst Shannon Groff said most of the water suppliers it tracks have enough of a margin that they aren't likely to face debt coverage issues.

"The majority of the water utilities have either already raised rates or are in the process of raising rates to maintain financial margins," Groff said.

She doesn't anticipate utilities that have not yet raised rates to have problems meeting debt coverage levels required in bond indentures.

If a utility, as was the case with North Coast County Water District in January, experiences a covenant breach because revenues fall below the level required in its bond indenture, typically a consultant is hired to do a rate restructuring. North Coast had a covenant breach, but has not missed any debt payments.

"The remedy under the covenant is usually to undertake a rate study and go through a rate adjustment process, which most are doing already, so I don't see that being a big issue," Groff said.

Most of the water districts that Fitch rates are highly-rated and well-managed, though they might not represent a good cross-section of the state's water utilities, she said.

Water utilities are basing their new rate structures on continued lowered usage anticipating that usage will not return to previous levels after the drought ends.

"What I have heard from a lot of issuers is that after the drought is over they expect that usage will rise, but there will be a new normal," Groff said.

Over the past two years, Fitch has upgraded seven credits, downgraded three, and affirmed the rest. Reduced water sales and large capital programs, coupled with reduced rate flexibility resulted in negative rating actions for Milbrae's sewer utility, Fresno's water utility and Contra Costa Water District.

Six of the upgrades were one notch, resulting from improved finances. Stockton was upgraded two notches to A-minus in September 2014 after concerns were assuaged about the impact of the city's bankruptcy on pledged revenues and utility system performance.

Fitch deemed the rigorous process involved in implementing rate increases in California a credit neutral given the success most utilities have experienced in adopting rate increases.

The anticipated outcry from ratepayers, who have seen their water bills increase even as they reduce usage, has not materialized.

"There has been surprisingly little pushback from ratepayers, because a lot of utilities have stepped up education about conservation and rate increases," Groff said.

One exception was in San Juan Capistrano, a coastal Orange County city, where ratepayers sued and won in court based on the premise that the tiered rate structure did not match the cost of providing water. California water regulations require that rates match the cost of providing water.

The lawsuit "sparked a fire under all California water districts to show the cost of water and how it is allocated by tier," Groff said.

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