Tacoma Power and Tacoma Water announced this week that Standard and Poor’s has upgraded the utilties’ bond ratings. Tacoma Power’s rating increased to AA- from A+ on Nov. 27. Standard and Poor’s noted several reasons for the upgrade, including:

— Favorable power supply position

— Responsive rate setting by board officials and management, as well as competitive regional rates

— Proactive management

— Average operating risk of the power supply, distribution and telecommunications operations

Tacoma Water’s bond rating increased to AA+ from AA- on Nov. 17 as a result of changes to the rating criteria. Standard and Poor’s upgraded 130 water and sewer agencies’ ratings based on:

— Good economic fundamentals

— Solid management, which includes willingness to adjust rates, long-term planning and ability to serve the needs of a growing community

— Bond ratings and their effect on utilities

Ratings by agencies such as Standard & Poor’s describe the riskiness of the bonds issued by a particular organization and directly determine the interest rate that the organization must pay when borrowing money.

Bond ratings are particularly important to utilities because of the large amounts of money they must invest in capital projects and the long-term nature of their assets. For example, Tacoma Power invests about $3 of capital for every $1 of revenue.

Utilities borrow money by issuing long-term bonds to finance their investments in assets such as dams, power lines, reservoirs, water pipes, etc. For most utilities, the interest on this long-term debt represents a significant fraction of their annual operating costs. The annual cost of repaying debt for Tacoma Power is about $50 million; for Tacoma Water, it’s about $15 million. Reduced interest payments ultimately benefit utility customers in the form of lower rates.

Credit rating services such as Standard & Poor’s take into account many factors when rating debt obligations. In addition to various financial ratios, the primary factors considered include the quality and stability of the management team and the history and willingness of the governing body to adjust rates as necessary to ensure the utility’s ability to repay its debt.