Structuring Key Credit Risk Parameters for Regulated Electric and Gas Utilities under Alternative Moody’s Rating Methodologies: A Case Study for a Natural Gas Distribution Utility

This paper elaborates the relevancy issue of a rating model in the context of credit rating analysis process of a natural gas distribution company. Against this background, we have analysed the Moody’s Analytics Risk Calc™ v3.1 Emerging Markets and the Regulated Electric and Gas Rating Methodology of Moody’s Investor Services dated from March the 16th, 2017. Methodologically, the article relies on case studies namely the Enron case and a case from regulated natural gas distribution company in Turkey. In terms of findings, Enron case highlights the importance of point-in-time rating models over agency based rating models in terms of default prediction. The EDF model provided a PD value of 0.65%, which corresponds to Baa3 level in Moody’s rating agency terms. On the other hand, the REGU Model indicates the Company with “Ba” rating, which is a “Speculative Grade”. This result indicates us a severe difference in default probabilities for the same entity. This is consequent and in line with the informational needs of different users and if different models are used respective to their needs. In summary, each rating model is developed by rating agencies for different purposes and we need to choose the appropriate rating model to make accurate analysis.