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Mary Tiger is the Chief Operating Officer of the Environmental Finance Center. Christine Boyle was a Post-Doctorate Fellow of the Environmental Finance Center. Thanks also to the direction and analysis provided by Jeff Hughes and Dayne Batten.

Rising costs, declining demand, and variable sales predicate our research into water utility financial resiliency for the Water Research Foundation.  As part of our investigation into revenue, rate, and financial policy trends, we are researching the processes and methods used by rating agencies and their resulting impact on utility operations. Given the amount of capital needed to bring U.S. utilities’ aging infrastructure up to modern standards, the long-term availability of reasonable-priced credit remains a pressing issue, especially as federal and state subsidies decrease. Our research will focus on credit rating agency research and perspectives as a key source of insight regarding access to debt financing. This blog post highlights the importance rating agencies place on rate setting.

S&P Credit Rating Considerations for 18 Drinking Water Utilities

Utilities rely on three primary credit agencies – Standard and Poor’s, Moody’s, and Fitch Ratings – to provide the credit ratings that influence the utilities’ access to, and the cost of, borrowing money. Despite many utilities’ scramble to stay financially sound amidst a number of revenue shocks, Standard and Poor’s and Fitch Ratings each report a stable outlook for municipal water, wastewater and drainage utilities in 2012 (Scott 2011a; Chapman 2012). Of the 1,300 ratings issued in 2012 to municipal water, wastewater and drainage utilities by Standard and Poor’s, the most common rating was “A+” and ratings on utilities’ revenue secured debt remains high (Chapman 2012).

The ratings agencies each use a number of quantitative and qualitative financial health metrics to prepare a utility’s financial profile and associated revenue bond rating. As part of our research we have studied specific ratings of utilities, particularly those partnering with us on the project, as well as recent general guidance and criteria documents.  In 2012, Fitch Ratings updated the explanation of its “10 C’s” of bond rating criteria by providing in-depth explanation for each of the 10 Cs and the four corresponding credit areas (Scott 2011b). This report explains in detail each criterion, and Fitch’s evaluation of stronger, mid-range and weaker financial profiles. In addition to hitting different variations of key debt service coverage ratios, Fitch Ratings and Standard and Poor’s in particular place high value on utilities whose “day-to-day operations are relatively free from political interference” (Scott 2011b) and utilities that display “rate flexibility”; that is, they are willing and able to increase rates as necessary to cover costs (Dyson 2011). Fitch Ratings views favorably a utility whose fixed portion (base charge) of the water and wastewater bill makes up greater than 30% of the total bill (Scott 2011b). (See previous blog post on fixed versus variable rate considerations.)

The word cloud above identifies analyses trends among a group of Standard & Poor’s ratings for 18 of our utility partners prepared between 2010 and 2012. (The larger a word or phrase, the more often it was cited.) In most cases, we’ve stripped the considerations of non-quantified adjectives like strong, steady, and aggressive to draw attention to common themes and considerations. (It’s important to note that each utility received an AA or AAA rating from S&P.)

Some prominent rating concerns like service area (Is the customer base large and diverse, or small and concentrated?) and customer wealth are outside the control of utility officials. But as luck (or stress) may have it, most issues are, at the very least indirectly, within utility charge. Addressing these issues, though, takes prudence, perspective, and persistence. There is no pre-set formula for solid financial footing and a high credit rating. In fact, some of the metrics are in direct conflict of one another. For example, S&P’s rating criteria and our word cloud analysis highlight the importance the rating agency places on a history of rate increases, while at the same time recognizing the need for competitive and affordable rates.

Although there is no prescription for a good credit rating, smart rate setting falls at the heart of the matter. The level, structure, and intent behind the rates utilities charge have emerged as one of the primary levers for utilities in securing financial resiliency. But at what cost? Rating agencies continue to work towards ever more transparent criteria, in effect providing utilities seeking a high ratings “grade” with an open book test. In future research, we’ll look at the costs and benefits of doing what it takes to ace this particular test.


Chapman, T., 2012. U.S. Municipal Water and Sewer Utilities: Funding Long-Term Needs Remains Their Biggest Risk, Standard & Poor’s Report.

Dyson, P., 2011. Global Credit Portal: Metropolitan Water District of Southern California; Water/Sewer, San Francisco. Standard & Poor’s Report.

Scott, D., 2011a. 2012 Outlook: Water and Sewer Sector, Fitch Ratings Report.

Scott, D., 2011b. U.S. Water and Sewer Revenue Bond Rating Criteria, Fitch Ratings Report.



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