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

Year 2021, Volume: 15 Issue: 2, 227 - 259, 31.08.2021

Vahit Ferhan Benli Feyzullah Yetgin

https://doi.org/10.46520/bddkdergisi.987435

Abstract

Keywords

Rating, Credit risk modeling

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

Abstract

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.

Keywords

Rating, Credit risk modeling, Moody's

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