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TEXT-Fitch on updated U.S. utility tariff rating criteria
December 20, 2012 / 8:26 PM / in 5 years

TEXT-Fitch on updated U.S. utility tariff rating criteria

Dec 20 - Fitch Ratings today published an updated Asset-Backed sector
specific criteria report for rating U.S. Utility Tariff Bonds. This report
updates and replaces the prior criteria report with the same name, dated Jan. 6,
2012. There have been no material changes to the previous version, therefore,
Fitch expects no impact on existing ratings.

The report presents Fitch's analytical approach to rating U.S. utility tariff
bonds. It outlines the unique features and key risks of a tariff bond relative
to a traditional asset-backed security (ABS), notably, the bond's
characteristics as an intangible, future-flow regulatory asset and the special
protections available to holders of tariff bonds that qualify achievement of
'AAAsf' ratings. Additionally, the report details key rating drivers associated
with utility tariff ABS as detailed below.

Key Rating Drivers

Regulatory Framework: Unlike that of other ABS transactions, the cash flow
stream supporting tariff bonds is a special tariff established under legislative
or regulatory authority. Thus, the first and most significant component in
Fitch's rating analysis is a thorough understanding of the statute and order.

Legal Analysis: Fitch's legal analysis of tariff transactions includes a review
of the legal structure and the opinions furnished to confirm that the cash flow
derived from the special tariff will not be impaired (whether as a result of
counterparty risk or the trustee's lack of a perfected first-priority security
interest in the assets) or diminished (as a result of taxation).

Credit Analysis: The cash flow supporting tariff bonds is generated by payments
from all or designated categories of customers in the utility's service
territory. As such, Fitch reviews the composition of the service territory.
Fitch also reviews the size of the tariff relative to the total customer bill to
determine its viability, as, in Fitch's view, excessive charges may present
additional risk of political or regulatory challenge.

Economic Outlook: The economic environment can have a material impact on U.S.
utility tariff ABS. As such, Fitch takes into consideration the strength of the
U.S. economy, as well as future expectations. To account for the potential weak
U.S. economy, Fitch's analysis stresses the peak absolute variance and highest
annual writeoffs by a 5.0x multiple.

Structural and Cash Flow Analysis: Fitch uses a proprietary internal cash flow
model, which is customized to reflect the payment structure of the transaction,
and tests the impact of stressing various assumptions, including historical
charge-off and variance patterns. The output of the cash flow model is reviewed
to verify that the rated bonds are fully paid in accordance with the transaction
documents in each stress scenario associated with a particular bond's rating.

Counterparty Analysis: This portion of the analysis is largely qualitative and
includes a review of the utility's servicing operations. The review of other
counterparty-related issues, such as commingling of remittance collections and
segregation of bank accounts, is consistent with Fitch's counterparty criteria
for structured finance transactions.

The full report 'Rating Criteria for U.S. Utility Tariff Bonds' is available on
the Fitch web site at '' under the sectors: Structured
Finance >> Asset-Backed Securities.

Additional information is available at ''

Applicable Criteria and Related Research: Rating Criteria for U.S. Utility
Tariff Bonds

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