Fitch: California Water Agencies Stable in Current Drought

California water utilities should be able to manage the state's drought emergency in the near term, Fitch Ratings says. However, a more severe or longer than typical drought could pressure import and surface water-dependent utilities even as those with significant ground water supplies should maintain their financial stability.

In a prolonged drought, a simultaneous increase in water prices and reduction in usage would put import-dependent utilities under pressure, forcing large and difficult-to-impose rate increases. Water utilities with significant ground water supplies in basins that haven't been over pumped, utilities that have invested heavily in alternate supplies like water recycling, and surface water purveyors with very high priority water rights would have ample supplies to sell, outperforming peers.

Fitch expects revenue reductions in 2014 and 2015 to be less severe than those in the 2007-2009 drought as sales are currently lower than when utilities experienced the dual impact of economic recession and drought conditions. Also, many utilities adopted drought rates following 2007-2009 or will have corresponding expenditure reductions in their purchased water costs.

California just finished the driest calendar year on record, according to the California Department of Water Resources. The current wet season has also been extraordinarily dry, marking a third dry year for the most populous U.S. state. Governor Jerry Brown asked the state's residents to cut water use by 20% while declaring a drought emergency and hinting that mandatory rationing may be required in the months ahead. The California State Water Project, which serves two-thirds of the state's population, late last year announced an initial allocation of water for 2014 at just 5% of contracted amounts. Water rationing is likely to begin in earnest in 2014.

Additional information is available on www.fitchratings.com.

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