Moody's Seeks Comment on Methodology Changes for Utility Ratings

WASHINGTON — Moody's Investors Service on Wednesday released proposed changes in its rating methodology for 1,100 municipal utilities that it said would only result in rating changes, split between upgrades and downgrades, for less than 10% of them.

The rating agency asked for public comments by Aug. 1 on the proposed changes, which are detailed in a 22-page release and designed to be more prescriptive and organized than the two current methodologies they would replace: Analytical Framework for Water and Sewer Ratings (August 1999), and U.S. Public Power Electric Utilities (April 2008).

The proposed methodology would apply to Moody's ratings of 1,100 essential-service utilities in six categories that operate as departments, boards or independent authorities of state and local governments. More than 80% of these utilities are water and/or sewer systems, such as for water distribution, sanitary sewerage, storm water disposal, and solid waste disposal, Moody's said. The other utilities are for gas distribution and electric distribution.

The new methodology would include a scorecard that assigns weights and values to factors considered most important in a utility revenue bond analysis, as well as a framework for examining the relationship between a local government's general obligation bond credit quality and its utility revenue bond ratings.

"The purpose of the scorecard is to provide a reference tool that market participants can use to approximate most credit profiles in the U.S. municipal utility sector," Moody's said in its release.

The scorecard would provide a composite score of a utility's credit profile based on weighted factors Moody's considers most important, universal and measurable, as well as possible notching factors dependent on individual credit strengths and weaknesses, Moody's said. It is designed to be a starting point for analysis and is not a calculator, the rating agency said. In addition, since the scorecard is built based on historical results, and Moody's ratings are based on forward-looking expectations, the scorecard-indicated rating will not always match the actual rating, it said.

The scorecard factors would be: system characteristics (35%); financial strength (35%); management (20%); and legal provisions (10%). Moody's would also rate sub-factors in each category. For example, system characteristics would include: the remaining useful life of assets (15%); the median area wealth in the service area (12.5%); and system size for operation and maintenance (7.5%).

Moody's said a local government's credit quality may directly affect the strength of its associated utility systems and outlined the board principles that should apply when assessing linkages between the government's GO and utility debt.

One such linkage would be the economy because there may be an overlapping economic base and service area for the two kinds of debt. Another would be finances and debt because of cash can flow between the GO and utility debt. Also GO and utility issuers may be exposed the same pension plan. A third example of a linkage would be management and governance because managers of the city and utility may have close ties. A fourth is capital markets since the GO and utility issuer may need to access the same capital markets for funding, Moody's said.

There are reasons for distinguishing between GO and utility ratings, the rating agency said. For example, the Detroit Water and Sewage Department is rated more than two notches above its parent government, Detroit, because it benefits from a much larger and diverse service area, it has separate accounts, and its bond indenture precludes distributions of excess cash flow to the city's general fund.

"However, Detroit's GO and water and sewerage bonds have become more closely tied due to potential contagion risk that the city's bankruptcy filing would lead to a water and sewerage bonded debt restructuring as part of a plan to restore the city's financial solvency," Moody's said.

Spokespersons at the American Public Power Association could not be reached for comment on the proposal.

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