In May 2007, Standard & Poor's Ratings Services invited interested parties to provide comments on our proposal to modify our criteria related to assigning ratings on first mortgage bonds (FMB) that are higher than a company's corporate credit rating (CCR). (See "
Request For Comment: Proposed Update To U.S. Utility First Mortgage Bond Issue Ratings Criteria," published May 30, 2007 on RatingsDirect.) The last update to this methodology was in June 2004.
There are two modest changes to the rating criteria:
Additional clarity regarding the number of notches that an instrument with a recovery rating of '1' or '1+' can be assigned above the CCR for a given rating category; and
A reduction of the collateral coverage required to achieve a '1+' recovery rating to 1.5x from 2x.
We reviewed all of the rated outstanding FMB issues in conjunction with the methodology change. As expected with the lowering of the threshold for achieving the '1+' recovery rating, substantially all of the FMB ratings were either affirmed or raised. See the table in the Rating Changes section below for a list.
Based on responses to the Request For Comment and subsequent discussions with utilities and interested parties, we believe the recommended changes simplify the criteria, enhance rating-process transparency for FMBs, and reduce the potential for inconsistent results.
During this process, Standard & Poor's has also assigned recovery ratings to all rated FMBs issued by U.S. utilities and the two Canadian utilities with outstanding FMBs.
Assigning Recovery Ratings To FMBs
The decision whether to assign a utility's FMB rating above that of the CCR is a function of the issue recovery rating. We base the recovery rating on the ratio of collateral value relative to the maximum amount of FMBs that may be outstanding under the terms of the company's indenture. Standard & Poor's uses net utility assets as representative of the fair value for the assets pledged to the FMBs. We also consider other legally binding limitations on the issuance or outstanding amount of FMBs:
Management's statement that it will not issue additional FMBs, perhaps because they are no longer considered the most effective source of funds, may lead Standard & Poor's to consider using only the current level of outstanding bonds for the recovery rating calculation.
To the extent that a utility's regulators have placed stricter limitations than the FMB indenture, Standard & Poor's will incorporate these restrictions in our analysis.
An issuer's indenture might allow for the issuance of a specific dollar amount of FMBs, but certain covenants unrelated to the indenture, such as a bank loan, could limit the company's issuance to a lesser amount.
Standard & Poor's does not believe a requirement to notify the regulatory commission when leverage deviates above a specified level (as required by the California Public Utilities Commission, for instance) alone provides additional creditor protection. Similarly, we do not consider a requirement for regulators to approve additional issues of FMBs, as a meaningful limitation on the maximum amount that could ultimately be issued. We would expect utilities to request, and for the regulators to approve, additional FMBs if FMBs were the lowest-cost debt available.
Our analysis does not attempt to predict the ultimate outcome of any bankruptcy proceeding, but it does compare the current level of collateral to the potential total amount of issuable FMB debt. With the extraordinary exception of Entergy New Orleans Inc. (which went bankrupt after Hurricane Katrina), all utilities that have filed for bankruptcy protection fulfilled their debt-service obligations on FMBs on a current basis. The prospect for recovery by secured creditors is supported by the utility's asset value when it emerges from bankruptcy, which is determined by the stream of future revenues that the utility's regulators approve. Regulators, or the bankruptcy court, have tended to set rates high enough for the utility to recover prudently incurred fixed and operating costs. As a result, there is a very high correlation between rate base and the assets' book value. In a payment default or stressed scenario, we believe the utility's valuation will be about equal to its book value, regardless of today's market value.
If the ratio of collateral relative to the maximum amount of FMBs that may be outstanding under the company's indenture is at least 1.5x, we assign a recovery rating of '1+'. For entities that do not have at least 1.5x collateral coverage, we assign a recovery rating of '1'. A lower recovery rating could be assigned if the expected recovery for a speculative-grade issuer is materially less than 100%. However, such a scenario would not cause us to lower the default rating below the CCR. No utilities currently fall into this latter category.
Assigning An FMB Issue Rating Above The CCR
The guidelines for assigning ratings for U.S. utility FMBs above the CCR are shown in table 1. (See "
Recovery: Results Of Revisions To Recovery Rating Scale And Issue Level Rating Framework," published June 12, 2007 on RatingsDirect for the criteria related to assigning ratings that are higher than the CCR for secured debt other than FMBs.)
Table 1
Issue Rating Criteria For U.S. Utility First-Mortgage Bonds
Assets/potential secured debt (x)
>1.5
<1.5
Recovery rating
1+
1
Notches above corporate credit rating
'AA' category and higher
0 notches
0 notches
'A' category
+1 notch
0 notches
'BBB' category
+2 notches
+1 notch
Speculative grade
+3 notches
+2 notches
Raising a rating above the CCR is supported by the first-priority lien on substantially all of the utility's property and franchises owned or thereafter acquired. Because of their essential nature, the value of utility assets is largely independent of the owner's financial condition. In addition to the asset protection, the mortgage indenture typically contains fairly restrictive covenants, including a limitation on the issuance of additional secured bonds based on asset coverage, interest coverage, and leverage tests.
We don't assign ratings higher than the CCR for the FMBs of issuers in the 'AA' category and 'A' category with a recovery rating of '1' because we expect that the security provided under the FMB indenture is already reflected in the probability-of-default rating assigned to the issuer.
Illustration Of Assigning Issue And Recovery Ratings To An FMB
For this example, assume we are assigning issue and recovery ratings to a utility that has been assigned a CCR of 'A' and has the following capital structure:
Net utility assets securing FMBs equal $1.6 billion,
Total assets equal $3.1 billion,
FMBs authorized under the company's indenture equal $1.5 billion,
FMBs available to be issued, including retired bond credits, given covenant limitations equal $960 million (This would be consistent with a covenant that allows the FMBs outstanding to equal only 60% of the assets pledged under the indenture.), and
FMBs outstanding equal $750 million.
Based on the ratio of assets pledged to the FMBs to the authorized amount of FMBs that could be issued, overcollateralization is 1.67x ($1.6 billion divided by $960 million). Given this coverage, we would assign our '1+' recovery rating and a secured debt rating of 'A+' to the FMBs.
List Of Issuers With First Mortgage Bonds Outstanding
FMB rating/recovery rating revised
Issuer
Corporate credit rating as of Sep. 4, 2007
No change to issue rating
To
From
Primary analyst*
ALLETE Inc.
BBB+/Stable/A-2
X
A-/Rec Rtg 1
A-/Rec Rtg 1
Jepsen
Aqua Pennsylvania Inc.
A+/Stable/--
X
AA-/Rec Rtg 1+
AA-/Rec Rtg --
Farer
Atlantic City Electric Co.
BBB/Stable/A-2
X
BBB+/Rec Rtg 1
BBB+/Rec Rtg 1
Jepsen
Atmos Energy Corp.
BBB/Positive/A-2
X
A-/Rec Rtg 1+
A-/Rec Rtg 1+
Farer
Avista Corp.
BB+/Positive/B-1
BBB+/Rec Rtg 1+
BBB-/Rec Rtg 1
Selting
Baltimore Gas & Electric Co.
BBB+/Negative/A-2
X
A/Rec Rtg 1+
A/Rec Rtg 1+
Shipman
Black Hills Power Inc.
BBB-/Stable/--
X
BBB/Rec Rtg 1
BBB/Rec Rtg 1
Carrillo
Carolina Power & Light Co d/b/a Progress Energy Carolinas Inc
BBB+/Stable/A-2
A-/Rec Rtg 1
BBB+/Rec Rtg 1
Nikas
CenterPoint Energy Houston Electric LLC
BBB/Positive/--
BBB+/Rec Rtg 1
BBB/Rec Rtg 1
Nikas
Central Illinois Public Service Co.
BB/Positive/--
BBB/Rec Rtg 1+
BBB-/Rec Rtg 1+
Eiseman
Central Vermont Public Service Corp.
BB+/Stable/--
BBB+/Rec Rtg 1+
BBB/Rec Rtg 1
Eiseman
Cleveland Electric Illuminating Co.
BBB/Stable/--
BBB+/Rec Rtg 1
BBB/Rec Rtg 1
Shipman
Colonial Gas Co.
A-/Stable/--
X
A/Rec Rtg 1+
A/Rec Rtg --
Kennedy
Commonwealth Edison Co.
BB/Positive/B
BBB/Rec Rtg 1+
BBB-/Rec Rtg 1
Shipman
Connecticut Light & Power Co.
BBB/Stable/--
X
BBB+/Rec Rtg 1
BBB+/Rec Rtg 1+
Kennedy
Consumers Energy Co.
BBB-/Stable/--
X
BBB/Rec Rtg 1
BBB/Rec Rtg 1
Kennedy
Dayton Power & Light Co.
BBB/Stable/--
A-/Rec Rtg 1+
BBB+/Rec Rtg --
Shipman
Delmarva Power & Light Co.
BBB/Stable/A-2
A-/Rec Rtg 1+
BBB+/Rec Rtg 1
Jepsen
Detroit Edison Co.
BBB/Stable/A-2
A-/Rec Rtg 1+
BBB+/Rec Rtg 1
Kennedy
Duke Energy Carolinas LLC
A-/Stable/A-2
X
A/Rec Rtg 1+
A/Rec Rtg 1
Nikas
Duke Energy Indiana Inc.
A-/Stable/A-2
X
A/Rec Rtg 1+
A/Rec Rtg --
Nikas
Duke Energy Ohio Inc.
A-/Stable/A-2
X
A/Rec Rtg 1+
A/Rec Rtg --
Nikas
Empire District Electric Co.
BBB-/Stable/A-3
X
BBB+/Rec Rtg 1+
BBB+/Rec Rtg 1+
Eiseman
Entergy Arkansas Inc.
BBB/Stable/--
X
A-/Rec Rtg 1+
A-/Rec Rtg 1+
Nikas
Entergy Gulf States Inc.
BBB/Stable/--
X
BBB+/Rec Rtg 1
BBB+/Rec Rtg 1
Nikas
Entergy Louisiana LLC
BBB/Stable/--
X
A-/Rec Rtg 1+
A-/Rec Rtg 1+
Nikas
Entergy Mississippi Inc.
BBB/Stable/--
X
A-/Rec Rtg 1+
A-/Rec Rtg 1+
Nikas
Entergy New Orleans Inc.
BBB-/Stable/--
BBB+/Rec Rtg 1+
BBB-/Rec Rtg 1+
Nikas
Florida Power & Light Co.
A/Stable/A-1
X
A/Rec Rtg 1
A/Rec Rtg 1
Shipman
Florida Power Corp d/b/a Progress Energy Florida Inc
BBB+/Stable/A-2
A-/Rec Rtg 1
BBB+/Rec Rtg 1
Nikas
Gaz Metro Inc.
A-/Negative/--
X
A/Rec Rtg 1+
A/Rec Rtg 1
Martin
Green Mountain Power Corp.
BBB/Stable/--
A-/Rec Rtg 1+
BBB/Rec Rtg --
Eiseman
Idaho Power Co.
BBB+/Negative/A-2
A/Rec Rtg 1+
A-/Rec Rtg 1
Bettinelli
Illinois Power Co.
BB/Positive/--
X
BBB-/Rec Rtg 1
BBB-/Rec Rtg 1+
Eiseman
Indianapolis Power & Light Co.
BB+/Positive/--
BBB/Rec Rtg 1
BBB-/Rec Rtg 1
Eiseman
International Transmission Co.
BBB/Positive/--
X
BBB+/Rec Rtg 1
BBB+/Rec Rtg --
Jepsen
Laclede Gas Co.
A/Stable/A-1
X
A/Rec Rtg 1
A/Rec Rtg 1
Farer
Madison Gas & Electric Co.
AA-/Stable/A-1+
AA-/Rec Rtg 1+
AA/Rec Rtg 1+
Jepsen
Maritime Electric Co. Ltd.
BBB+/Stable/--
A/Rec Rtg 1+
A-/Rec Rtg 1+
Freitag
MDU Resources Group Inc.
BBB+/Stable/A-2
X
A-/Rec Rtg 1
A-/Rec Rtg 1
Harvey
Michigan Consolidated Gas Co.
BBB/Stable/A-2
BBB+/Rec Rtg 1
BBB/Rec Rtg --
Kennedy
Monongahela Power Co.
BBB-/Stable/--
BBB+/Rec Rtg 1+
BBB/Rec Rtg 1
Jepsen
Nicor Gas Co.
AA/Negative/A-1+
X
AA/Rec Rtg 1+
AA/Rec Rtg 1
DeCesare
North Shore Gas Co.
A-/Negative/--
A/Rec Rtg 1+
A-/Rec Rtg 1
Kennedy
Northern States Power Co.
BBB/Stable/A-2
X
A-/Rec Rtg 1+
A-/Rec Rtg 1+
Jepsen
Northern States Power Wisconsin
BBB+/Stable/--
A/Rec Rtg 1+
A-/Rec Rtg 1+
Jepsen
Northwest Natural Gas Co.
AA-/Stable/A-1+
X
AA-/Rec Rtg 1+
AA-/Rec Rtg --
DeCesare
NorthWestern Corp.
BB+/Stable/--
BBB/Rec Rtg 1
BBB-/Rec Rtg 1
Bettinelli
NSTAR Gas Co.
A+/Stable/--
AA-/Rec Rtg 1+
A+/Rec Rtg 1
Eiseman
PacifiCorp
A-/Stable/A-1
X
A-/Rec Rtg 1
A-/Rec Rtg 1
Selting
PECO Energy Co.
BBB+/Stable/A-2
A/Rec Rtg 1+
A-/Rec Rtg 1
Shipman
Pennsylvania Power Co.
BBB/Stable/--
A-/Rec Rtg 1+
BBB+/Rec Rtg 1
Shipman
Peoples Gas Light & Coke Co. (The)
A-/Negative/A-2
X
A-/Rec Rtg 1
A-/Rec Rtg 1
Kennedy
Portland General Electric Co.
BBB+/Negative/A-2
A/Rec Rtg 1+
BBB+/Rec Rtg 1+
Selting
Potomac Edison Co.
BBB-/Stable/--
BBB+/Rec Rtg 1+
BBB/Rec Rtg --
Jepsen
Potomac Electric Power Co.
BBB/Stable/A-2
X
BBB+/Rec Rtg 1
BBB+/Rec Rtg 1
Jepsen
PPL Electric Utilities Corp.
A-/Stable/A-2
X
A-/Rec Rtg 1
A-/Rec Rtg 1
Jepsen
Providence Gas Co.¶
NR/--/--
X
A/Rec Rtg 1+
A/Rec Rtg --
Kennedy
Public Service Co. of Colorado
BBB/Stable/A-2
X
A-/Rec Rtg 1+
A-/Rec Rtg 1+
Jepsen
Public Service Co. of New Hampshire
BBB/Stable/--
BBB+/Rec Rtg 1
BBB/Rec Rtg 1
Kennedy
Public Service Electric & Gas Co.
BBB/Stable/A-2
X
A-/Rec Rtg 1+
A-/Rec Rtg 1
Shipman
Puget Sound Energy Inc.
BBB-/Stable/A-3
BBB+/Rec Rtg 1+
BBB/Rec Rtg --
Bettinelli
Rochester Gas & Electric Corp.
BBB+/Negative/--
A/Rec Rtg 1+
BBB+/Rec Rtg --
Kennedy
San Diego Gas & Electric Co.
A/Stable/A-1
X
A+/Rec Rtg 1+
A+/Rec Rtg 1
Messer
Sierra Pacific Power Co.
BB-/Positive/--
X
BB+/Rec Rtg 1
BB+/Rec Rtg 1
Selting
South Carolina Electric & Gas Co.
A-/Stable/A-2
X
A-/Rec Rtg 1
A-/Rec Rtg 1
Nikas
South Jersey Gas Co.
BBB+/Stable/--
X
A/Rec Rtg 1+
A/Rec Rtg --
Farer
Southern California Edison Co.
BBB+/Stable/A-2
A/Rec Rtg 1+
BBB+/Rec Rtg 1
Selting
Southern California Gas Co.
A/Stable/A-1
X
A+/Rec Rtg 1+
A+/Rec Rtg 1+
Messer
Southern Connecticut Gas Co.
BBB+/Negative/--
A/Rec Rtg 1+
BBB+/Rec Rtg --
Kennedy
Southern Indiana Gas & Electric Co.
A-/Stable/--
X
A/Rec Rtg 1+
A/Rec Rtg 1
DeCesare
Southwestern Electric Power Co.
BBB/Stable/--
X
A-/Rec Rtg 1+
A-/Rec Rtg 1
Shipman
System Energy Resources Inc.
BBB/Stable/--
X
BBB+/Rec Rtg 1
BBB+/Rec Rtg 1
Nikas
Union Electric Co. d/b/a AmerenUE
BBB-/Stable/A-3
BBB/Rec Rtg 1
BBB-/Rec Rtg 1
Eiseman
Virginia Electric & Power Co.
BBB/Positive/A-2
X
A-/Rec Rtg 1+
A-/Rec Rtg 1+
Shipman
West Penn Power Co.
BBB-/Stable/--
BBB+/Rec Rtg 1+
BBB/Rec Rtg 1
Jepsen
Westar Energy Inc.
BBB-/Stable/--
BBB/Rec Rtg 1
BBB-/Rec Rtg 1
Eiseman
Wisconsin Public Service Corp.
A/Negative/A-2
X
A+/Rec Rtg 1+
A+/Rec Rtg 1+
Kennedy
*See Key Contact section of the report. ¶Subsidiary of Narragansett Electric Co. (A-/Stable/A-2)
Key Contacts
Table 3
Contact Information
Credit analyst
Location
Phone
E-mail
Richard Cortright, Jr., Managing Director
New York
(1) 212-438-7665
richard_cortright@standardandpoors.com
John W. Whitlock, Managing Director
New York
(1) 212-438-7678
john_whitlock@standardandpoors.com
Michael Messer, Director
New York
(1) 212-438-1618
michael_messer@standardandpoors.com
Todd Shipman, CFA, Director
New York
(1) 212-438-7676
todd_shipman@standardandpoors.com
Kenneth L. Farer, Director
New York
(1) 212-438-1679
kenneth_farer@standardandpoors.com
John Kennedy, Director
New York
(1) 212-438-7670
john_kennedy@standardandpoors.com
Barbara Eiseman, Director
New York
(1) 212-438-7666
barbara_eiseman@standardandpoors.com
Dimitri Nikas, Director
New York
(1) 212-438-7807
dimitri_nikas@standardandpoors.com
Anne Selting, Director
San Francisco
(1) 415-371-5009
anne_selting@standardandpoors.com
Ralph DeCesare, Director
New York
(1) 212-438-4682
ralph_decesare@standardandpoors.com
Kenton Freitag, Director
Toronto
(1) 416-507-2545
kenton_freitag@standardandpoors.com
Nicole Martin, Director
Toronto
(1) 416-507-2560
nicole_martin@standardandpoors.com
Gerrit Jepsen, Associate Director
New York
(1) 212-438-2529
gerrit_jepsen@standardandpoors.com
Leo Carrillo, Associate Director
San Francisco
(1) 415-371-5077
leo_carrillo@standardandpoors.com
Paul Harvey, Associate Director
New York
(1) 212-438-7676
paul_harvey@standardandpoors.com
Antonio Bettinelli, Ratings Specialist
San Francisco
(1) 415-371-5067
antonio_bettinelli@standardandpoors.com
Analytic services provided by Standard & Poor's Ratings Services (Ratings Services) are the result of separate activities designed to preserve the independence and objectivity of ratings opinions. The credit ratings and observations contained herein are solely statements of opinion and not statements of fact or recommendations to purchase, hold, or sell any securities or make any other investment decisions. Accordingly, any user of the information contained herein should not rely on any credit rating or other opinion contained herein in making any investment decision. Ratings are based on information received by Ratings Services. Other divisions of Standard & Poor's may have information that is not available to Ratings Services. Standard & Poor's has established policies and procedures to maintain the confidentiality of non-public information received during the ratings process.
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