Utility revenue bonds are municipal bonds issued by a municipality on behalf of a public utility for the purpose of financing a public utility project. Public utilities typically provide essential services such as electricity, gas, water, and sewerage. The municipal bond issuer will raise money from investors in exchange for interest payments from the interest and principal payments from the repayment of the bonds over the course of their life. Repayment of the bonds is secured by revenues generated directly from the public utility’s service, or a “net revenue pledge.” A utility’s revenues must exceed its operating costs to produce a net revenue with which to pay bondholders.

Utility revenue bonds offer many advantages to both the municipality and the public utility. The bonds allow the municipality to receive the necessary funds to finance projects quickly, and to benefit from lower interest rates than financing through other methods. The public utility benefits with an assurance of its debt coverage ratio, and the funds necessary to offer its services to the public.

To evaluate the risk associated with utility revenue bonds, the coverage ratio is used. This ratio indicates the degree to which a utility’s revenues cover its debt service costs. A higher coverage ratio indicates that a utility can generate more revenues than required to pay off its debts. A coverage ratio below 1 indicates that a project may be unable to generate enough revenues to meet its obligations and that other mitigating strategies need to be considered.

In conclusion, utility revenue bonds are important to municipalities as a source of financing for public utility projects and to public utility customers to ensure that their services remain reliable and affordable. The coverage ratio is a key metric used to evaluate utility revenue bonds and the projects they finance, and should be monitored to ensure the ability of a project to generate the necessary revenues to pay off debt service.