A Utility’s Guide to the New Rules in Credit Ratings

Why Water Agencies Must Rethink Capital Planning in a Risk-Filled Era 

Credit rating agencies are rewriting the playbook, and financial and infrastructure resilience of water utilities is under scrutiny. Climate risk, affordability and financial resilience are no longer peripheral concerns; they’re front and center in determining your credit rating. 

From intensifying natural disasters to economic disruptions and shifting demographics, today’s financial pressures are reshaping how utilities must plan, invest and communicate. 

At HDR, we work directly with utilities to navigate this new reality, integrating financial planning, funding strategies and value-based decision-making. Our Value of Water approach helps utilities align long-term capital planning with the evolving expectations of credit agencies, regulators and communities. 

Here’s what you need to know, and do, to protect your rating and your utility’s future. 

Realized Risks Are Reshaping Financial Assumptions 

Credit rating agencies are increasingly attuned to the reality that extreme events are no longer hypothetical. Whether it’s due to a flood, wildfire, drought or some other event, the potential damages to infrastructure, losses in revenue and even long-term population shifts can all have a bearing on a utility’s financial health — and nowadays, credit rating agencies take notice. 

For instance, we’ve seen small towns lose half their customer base overnight due to FEMA buyouts after major storms. In California, wildfires wiped out entire communities, leaving utilities without customers and revenue for extended periods. Such events create compounding financial pressures: high costs of rebuilding infrastructure and reduced or lost ratepayer revenues, which are the basis for covering costs.

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Rating agencies are responding by asking utilities to demonstrate how they’ve prepared for these risks and what documents are available to assess vulnerabilities, mitigation strategies and impacts on short- and long-term financial plans. 

Takeaway: Utilities must plan for extreme event risks. Even if utilities don’t disclose them proactively, be prepared to answer questions from rating agencies with an evidence-based response. 

Capital Planning Must Account for Risk and Resilience 

Long-range capital planning is no longer just about fixing what’s broken. It must reflect a strategic vision that includes risk mitigation, adaptation and resilience. 

We’re seeing more utilities include projects in their capital improvement plans (CIPs) that anticipate exposure to extreme event risks. For instance, such projects include redundant water supplies and flood protection measures. Such investments may not have been prioritized a decade ago, but they’re now essential to maintaining service and financial stability. What is necessary in such cases is a formal evaluation of the likelihood and consequences of service failures so that mitigation measures can be fully justified in CIPs. 

Scenario planning plays a key role here. By modeling different exposures to risk and mitigation investment pathways and their financial impacts, utilities can make informed decisions and demonstrate to rating agencies that they’ve prepared for a range of outcomes. In short, utilities need to demonstrate best practices in risk mitigation. 

Takeaway: Build resilience into your capital planning. Use scenario analysis to quantify financial and service impacts to justify investments. 

Outdated Assumptions in Financial Planning Can Hurt Your Rating 

Many utilities still rely on financial planning assumptions that don’t reflect today’s realities. For example, asset management plans developed decades ago may not account for accelerated infrastructure degradation.  

Similarly, demand forecasts can be overly optimistic or fail to account for economic shifts. We’ve seen towns lose major industrial users, leaving oversized infrastructure and insufficient revenue. On the flip side, underestimating growth can lead to capacity shortfalls and legal challenges. 

Johnson County Wastewater partnered with us to develop an Integrated Plan that identified near- and long-term programmatic and capital improvement projects. As a result, JCW prioritized approximately $2.9 billion in investments over 25 years through a phased, adaptive strategy that balances regulatory compliance, asset renewal and growth management aligned with community priorities. 

Rating agencies are asking for more robust documentation: strategic plans, renewal and replacement analyses and climate risk assessments. Utilities that lack these materials may struggle to justify their financial strategies. 

Takeaway: Update your planning assumptions. Use dynamic, data-driven models that reflect current risks and realities. 

Affordability Isn’t Optional 

When customers can’t afford their bills, utilities face revenue instability, political resistance to rate increases and potential credit downgrades. 

We’ve worked with utilities that are navigating this challenge by enhancing customer assistance programs, targeting infrastructure upgrades in vulnerable areas and exploring alternative funding sources. For example, some agencies use interest income or late fees to fund assistance programs, especially in states like California, where rate revenue cannot legally subsidize low-income programs. Evaluating an agency’s policies and goals for customer assistance is critical to providing support that reaches those who need it most. 

At the same time, integrating equity into rate and capital strategies is becoming increasingly important. Utilities are working to protect vulnerable populations so they aren’t overlooked in infrastructure investments. Equity-focused efforts such as affordability implications, targeted capital investments, and customer assistance programs often rely on legal authority or alternative revenue streams. Ultimately, these strategies must be financially sustainable and aligned with the utility’s overall financial strategy. 

Takeaway: Address affordability and equity through proactive programs, transparent rate design and integrated financial planning.

Communication Is Critical to Creditworthiness 

Utilities that communicate clearly and proactively are better positioned to maintain strong credit ratings. Rating agencies want to see not just the numbers, but the narrative of how you manage risk, plan strategically and deliver value to your community. 

Water agencies have a powerful opportunity to demonstrate and communicate the long-term value of their investments. Whether the benefits are public health, economic development, or environmental protection, success often hinges on setting rates that support proper system operation, maintenance and reinvestment.  

We’ve helped utilities develop financial resilience plans, rate communication strategies and public dashboards that show how funds are being used. These tools build trust with both customers and rating agencies. 

Takeaway: Tell your story. Use data, visuals and plain language to explain your strategy and build confidence. 

Regionalization and Interconnection Are Emerging Strategies 

As risks grow more complex, utilities are increasingly exploring regional partnerships and interconnections. These arrangements can improve resilience, reduce costs, and if done right, lead to better managed risk from a rating agency perspective. 

In North Carolina, for example, interconnectivity between systems has grown significantly, allowing utilities to share resources and respond to emergencies more effectively. Mutual aid agreements and shared infrastructure are becoming more common, especially in areas facing climate-related threats. 

While regionalization can be politically sensitive, it offers economies of scale and a broader customer base, both of which can strengthen a utility’s credit profile. 

Takeaway: Consider regional strategies where feasible. They can enhance resilience and improve financial stability. 

Best Practices for Long-Term Financial Resilience 

Utilities that maintain strong credit ratings tend to share several best practices: 

• Proactive rate setting: Even modest annual increases can prevent large spikes and support long-term investment.
• Integrated planning: Align financial, capital and strategic plans to create a cohesive roadmap.
• Scenario modeling: Evaluate multiple investment paths and their financial impacts.
• Transparent communication: Engage governing bodies and the public with clear, consistent messaging.
• Risk documentation: Show that you’ve identified, assessed and planned for key risks. 

These practices aren’t just good management; they’re essential to maintaining access to capital and favorable borrowing terms. 

Final Thoughts: Planning for the New Financial Reality 

Credit rating agencies are evolving, and utilities must evolve with them. With the right strategies, utilities can not only protect their ratings, but they can also build stronger, more resilient communities. 

Our Value of Water framework helps utilities do just that. By prioritizing long-term investments, aligning community priorities and communicating clearly, utilities can demonstrate their value, not just to rating agencies but to the people they serve. 

At HDR, we take a data-driven approach to funding and finance. We help water agencies of all kinds make informed financial decisions in a constantly evolving economic and regulatory landscape. If you’re ready to strengthen your utility’s financial foundation, please email us at water [at] hdrinc.com (water[at]hdrinc[dot]com).