Combined Municipal Utility Systems

Combining utility systems for the purpose of securing debt provides a larger and more diverse revenue stream for essential municipal infrastructure services. FGIC's review of combined utility systems, which in most cases include a water and sewer system coupled with a retail electric and/or gas system, focuses on a number of analytical areas including the size and growth trends for each pledged enterprise in terms of customers, sales, and revenues, as well as the proportion of revenues and margins contributed by each of the utilities. The credit analysis also focuses on the operational performances, potential capacity additions and rate competitiveness for each utility system. Our analysis of financial performance includes a review of the overall debt service coverage trends and liquidity balances, as well as the ability of each utility to operate financially sound on a self-supporting basis. Legal provisions are examined for satisfactory covenants for rate setting and issuance of parity bonds, and for the presence of a reserve fund.

Gas Systems

FGIC's review of municipal gas systems focuses primarily on the obligor's legal provisions, service area, customer composition, gas supply, transportation availability and pricing, rate structure, and financial position. Flexible gas supply contracts and rate setting schedules are key drivers to maintaining sound cash flow, especially since gas procurement has been deregulated and commodity prices tend to fluctuate significantly over short periods of time. A review of a system's liquidity is also important given that gas sales tend to be highly seasonal in most areas.

Investor Owned Utilities

Investor owned utilities are publicly-held companies that provide electric power, natural gas or water service. The credit factors FGIC evaluates include the service territory, financial performance, diversity and sufficiency of supply, potential competition, sufficiency of rates, the regulatory environment and its effect on rate setting flexibility, and environmental compliance.

Joint Action Power Agencies

Participants in a joint action agency seek economies of scale and efficiency, which is achieved through the creation of an agency or authority that issues debt and manages the facility. FGIC's credit review includes an analysis of the competitiveness of rates, costs and the economic development of the area. In rural areas, Joint Action Power Agencies have a key role in supporting the local economy.

Joint Action Water & Sewer Agencies

Joint action agencies are often formed so that utilities can achieve economies of scale for a larger project. Usually, there is an agency or authority created to issue debt, as well as serve as the manager of a facility. The agency also dictates the rates and charges necessary to ensure a viable operation. FGIC analyzes long-term contracts to determine the agency's flexibility to adjust rates as well as the strength and ultimate repayment obligation of the members. Strength is often derived in contracts with step-up provisions. These provisions ensure that a failure to pay by one party is spread out among the remaining participants.

Municipal Utilities Retail Systems

FGIC's review of municipal retail electric systems focuses on the size and growth trends of the customer base, as well as the composition of energy sales and revenues from all customer classes. Our analysis includes the sources and costs for power supply, as well as the potential need for additional capacity. Rate competitiveness is also reviewed, particularly in states where electric deregulation has already occurred or is going into effect. Our analysis of financial performance includes a review of debt service coverage trends and liquidity balances. For systems with large capital programs, we concentrate on the sources of funding and the impact on the fiscal posture of the utility. Legal provisions are examined for satisfactory covenants regarding rate setting, issuance of parity bonds and reserve fund mechanics.

Municipal Utilities Wholesale Systems

A key credit criteria is the wholesale provider's ability to pass on increased costs to retail systems, which depends on a combination of legal, operational and demographic factors. Emphasis is placed on the security features of a particular wholesale transaction. Often a group of retail systems are purchasing power generated from a wholesaler's project or group of projects. The issues that FGIC evaluates include whether or not the obligation to purchase the power is take-or-pay (i.e., whether the retail participants have to cover the costs of operations and debt service even if the plant doesn't generate or deliver power) and whether these power purchase obligations are off-balance sheet debt obligations. Off-balance sheet debt obligations are considered an operating expense of the individual retail systems and paid before their own debt service payments, which elevates the security for the wholesaler's debt.

Rural Electric Cooperatives

Rural electric cooperatives are non-profit organizations that provide electricity to a geographically diverse rural area comprised of different service territories. Joint ownership of both generation facilities, and transmission and distribution provides members with a cost efficient source of electricity. FGIC's underwriting review includes an analysis of the contracts and the cooperative's ability to pass through costs to members, the customer base, service territory and financial performance.

Water & Sewer

Water and sewer utilities are an essential service. Our credit analysis concentrates on the evaluation of the service area economics and customer base. The ability to raise rates as needed, as well as the demonstration of solid historical and projected debt service coverage trends are important credit factors. Standard legal provisions should provide for a net revenue pledge, at least a sum sufficient rate covenant from operations alone and a solid additional bonds test.