According to Moody’s Investors Service, California’s drought will not have a significant impact on water and sewer utilities’ finances since utilities have increased their rates due to expected decreases in volume demand. The rate increases will offset the sale lost as people heeded the call to conserve water and maintain gross revenues.
Despite the rate increases, Moody expects utilities to see reductions in net revenues and debt service coverage. But because sales were higher at the beginning of the drought, this downward pressure is expected to bring the water and sewer utilities’ financial performance back to normal.
“In the early years of the three-year drought, sales volumes and gross margins have actually increased; therefore, the utilities’ projected sales volume decline will typically lead to a return to normal financial performance, not the below-average performance the unusual severity of the drought might suggest,” said Michael Wertz, a Moody’s assistant vice president and analyst.
Based on Moody’s survey of water and sewer utilties, rates will increase in fiscal year 2015 by 5.3% and in 2016 by 4.1%, in order to offset the anticipated decline in sales.
“Regardless of volumes, a key credit strength for the utilities is the fact they have unlimited authority to adjust rates without outside regulatory approval,” Moody’s said.
Written by Stratecon Staff