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Utility revenue bond rating: focusing on financial metrics

Bond rating defined

A bond rating is a report card grade given to public utility or other public sector organization by one of the major bond rating agencies (Moody’s, S&P or Fitch) based on the entity’s financial metrics. The better the grade, the happier will be the organization’s checkbook.

What does a good bond rating do?

A good bond rating allows a utility or public sector entity to keep cash for its own uses rather than paying those same funds to bond holders as interest payment.

The difference between a AAA rated bond and an A rated bond is 100 basis points, or one percent. This means a utility could have an additional $10,000 of cash for every $1 million of debt ($1,000,000 x 1%) to be used in operations, capital additions or debt service with the better rating.

For example, if your utility had a $10 million debt issue, that would provide an additional $100,000 annually to make system improvements, increase employee pay, invest in new technology or create the opportunity to address other utility needs.

Working on your bond rating

Constant attention to your utility’s financial structure is a key focus area for your chief financial officer.

Changes in utility financial metrics to improve financial performance take time to implement. The timing of financing needs for construction projects may not always line up with your need for a bond rating for a new issue.

By focusing on financial metrics, your utility can retain more of the funds it generates than paying those funds to bond holders.

For more information on this topic, or to learn how Baker Tilly power and utilities specialists can help, contact our team.

Russell A. Hissom
Partner Emeritus, CPA, CIA, CISA, CRMA
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