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5 ways to improve your utility’s bond credit rating, lower interest payments, and use the savings for operations instead of paying bondholders

Russ Hissom's picture
Owner Utility Accounting Education Specialists

Russ is the owner of Utility Accounting Education Specialists (UAES) a firm that provides online and in-person courses on power and utilities finance, accounting, and business process...

  • Member since 2021
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  • Apr 27, 2021 10:18 am GMT
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Debt in an electric utility/coop is a good thing?

Debt is part of the utility business. Utilities build long-term infrastructure, with a useful life of 30-40 years to serve customers and finance that infrastructure with long term debt. Customers pay for debt service on that debt thought their rates, charged for current use of the system.

As of the date of this article (early 2021), it is a good time to borrow for utility projects as rates are near historical lows and the longer term bond yield curve is pointing to future higher rates and inflation.

Bond ratings from the major ratings agencies (S&P, Moody’s, Fitch) are the report card that determines the interest rate paid by a utility when issuing long-term debt. 

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The higher the bond rating the lower the interest rate that is required to be paid on the debt issue. The interest rate spread between the highest rating (AAA) and a rating a few notches lower (A) is up to 100 basis point, or 1%. So, a $10 million bond issue at the higher rating will pay $100,000 less in interest payments annually, freeing funds for use in utility operations or funding capital improvements, rather than paying that amount to bondholders.

 

The top 5 ways to maintain a great bond rating

Here are 5 top ways to keep your utility’s bond rating steady or improving.

1. Rate stabilization reserves - setting aside a “rainy day fund” gives comfort to the ratings agency that funds are available to finance leaner earning years and pay bondholders.

2. Long range forecasting and financing plan over a 15-30 year period - long-term planning shows management’s commitment to implementing and financing long-term strategies.

3. Regular rate increases and the political will of the oversight body to pass needed increases - this show the understanding of oversight Boards that strategy needs financing and customer rates must cover financing costs.

4. Fallback strategy and mitigation plans for budgets that are missed - a fallback/mitigation plan is needed when things do not go as planned.

5. Having a defined plan for funding long-term obligations - the aging workforce is driving long-term obligations for pension and post-employment benefits, customer rates need to fund these obligations.

Excellent sources of information and further insights can be found at the website of each rating agency. They provide the playbook. of the biggest jobs of the utility Chief Financial Officer is to manage the utility bond rating. The steps are not hard, but systematic.

Russ Hissom is the owner of Utility Accounting Education Specialists (UAES), a company that offers online, on-demand, and custom utility accounting and finance business process courses; and thought leadership. You can reach him at russ.hissom@puaes.com. The puaes.com website has a wealth of classes, articles and other online resources that will benefit your utility’s accounting and customer ratemaking strategies.

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