Fitch: Extreme California Drought Not Likely to Pressure Financial Ratings

Fitch Ratings expects California water and public power utilities to maintain strong operational and financial performance over the next year, despite the effects of the statewide drought. Fitch expects the statewide call for conservation will lead to a drop in water sales, which could impact water utilities in fiscal year 2015. However, most California utilities have mechanisms in place to buffer the financial impacts of lower water sales.

Ratings could eventually be pressured if the severity and duration of this drought were to result in sustained weakness (i.e. more than one year) in utility credit quality.

“Historically, annual snow and rainfall in California fluctuates, so the state is accustomed to recurring droughts and many utilities have made reasonable investments to prepare themselves,” said Kathy Masterson, senior director at Fitch. “With California in its third year of below-average water conditions, utility financial performance will be determined by individual utilities’ investments to date in water supply diversity, rate structure mechanisms, and their ability and willingness to offset lower sales with rate increases when needed.”

In addition, the state will likely see a decrease in low-cost hydropower production due to the drought, although Fitch expects this to be manageable for local public power utilities.
Despite considerable investments already made to prepare for hydrologic cycles, the current drought has increased support for infrastructure investments, particularly water storage projects.

While Southern California utilities have taken measures in the last 20 years to increase storage capacity, making them better prepared, utilities in the Northern California and the Central Valley have fewer storage facilities and are more reliant on non-adjudicated groundwater supplies, which continue to decline.

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