Moody’s Investors Service downgraded the San Francisco Public Utilities Commission’s water revenue bonds Monday to Aa3 from Aa2.

The rating agency said last week it made the move because of the SFPUC’s narrow debt-service coverage, high debt load and its need to significantly raise rates.

The downgrade preceded the utility’s scheduled sale this week of $711 million of water revenue bonds.

“Despite management’s response to raise rates, debt service coverage has continued in a downward trajectory,” Moody’s said in its report.

Analyst said the combination of conservation, the economic downturn and substantial rainfall have eroded water consumption by customers.

Fiscal 2010 coverage by net water revenues was 1.12 times debt service, a level particularly weak for a water enterprise, the ratings agency said.

SFPUC officials project that net revenues will be sufficient to provide an average of 1.26 times coverage through 2016.

The forecast includes another 4% decline in water revenue and an already approved 12.5% retail water-rate hike and a 38% increase for wholesale customers, according to Moody’s.

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