Definition
A Utility Revenue Bond is a type of municipal bond issued by local or state governments to finance public utility projects such as electricity, water, or sewage systems. The bond is repaid from the income generated by the specific utility project, rather than from tax revenue. If revenue is insufficient, bondholders may not receive full payment.
Phonetic
The phonetic pronunciation for the keyword “Utility Revenue Bond” is:yoo-til-i-tee rev-uh-noo bond
Key Takeaways
<ol> <li>Utility Revenue Bonds are financial instruments issued by public utilities to finance infrastructure-related projects. These bonds are considered safe investments because their repayment relies on revenue earned from utility services.</li> <li>Unlike general obligation bonds, utility revenue bonds do not rely on taxpayers’ money for repayment. Instead, revenues are generated from users of utility services, such as water, gas, and electricity, making it less risky to investors should the economy fluctuate.</li> <li>These bonds are attractive to investors due to their tax-exempt status. The interest earned on utility revenue bonds is not taxed at the federal and sometimes at state and municipal levels. This feature tends to bring a lower yield compared to taxable bonds but is balanced by its tax benefits.</li></ol>
Importance
The term “Utility Revenue Bond” is significant in business/finance because it offers a way of funding public utilities like water, sewage, or power projects. These bonds are issued by municipalities or utility districts, and their importance stems from the fact that they do not rely on taxes for repayment, but solely on income generated from the specific utility project funded by the bond. This feature makes them attractive to investors looking for tax-free income and can encourage investment in public utility projects. Furthermore, they provide a way for local governments to fund improvements and necessary maintenance to essential infrastructure without imposing or raising taxes, directly benefiting local residents.
Explanation
A Utility Revenue Bond is a specific type of municipal bond primarily used to finance public utility projects such as the construction or upgrade of electric, water or sewage plants. The primary purpose of these bonds is to gather the required capital to fund these infrastructure projects which are high in cost. By issuing revenue bonds, municipalities can undertake projects immediately rather than waiting for the funds to accumulate, facilitating the growth and development of community infrastructure.The funds required for repaying these bonds, including the interest, are generated from the revenue that the utility project produces once it becomes operational. This could be, for example, the income from consumer water or electricity bills. This differentiates a utility revenue bond from a general obligation bond, which is backed by the tax revenue of the issuing municipality. The risk associated with investing in utility revenue bonds will depend on the success of the utility project in generating the required income for repayment.
Examples
1. San Francisco Public Utilities Commission (SFPUC) Revenue Bonds: SFPUC has issued utility revenue bonds to finance the costs of improvements, reparations, and extension of its water and wastewaste enterprises. The revenue generated from the utilities services goes towards the repayment of these bonds. 2. Denver Water Revenue Bonds: Denver Water issued revenue bonds for the financing of capital improvements, including the construction and improvement of water treatment facilities and infrastructure. The bonds are paid back through the revenue collected from water supply charges to the customers.3. Los Angeles Department of Water and Power Revenue Bonds: The Los Angeles Department of Water and Power has used utility revenue bonds to finance various projects related to its power system, such as renewable energy projects, transmission and distribution system improvements etc. The repayment of these bonds come from revenue generated by the department’s operations.
Frequently Asked Questions(FAQ)
What is a Utility Revenue Bond?
A Utility Revenue Bond is a type of municipal bond that is issued to finance the construction or improvement of public utilities such as water systems, electricity, or sewage systems. The bond is serviced by the revenues generated from the operation of these utilities.
How is the revenue generated for Utility Revenue Bonds?
The revenue for utility revenue bonds is typically generated by the charges or rates customers pay for using the infrastructure or services provided by the financed utility.
What happens if the revenue generated isn’t enough to settle the bond debt?
If the utility’s revenues are insufficient to cover the bond’s debt service, additional revenue may be sought through rate increases to users, or in some cases, the issuer may have to dip into reserve funds.
Who typically issues Utility Revenue Bonds?
Utility Revenue Bonds are primarily issued by public entities like municipal governments, utility districts, or public utility commissions.
Are Utility Revenue Bonds a safe investment?
The level of risk in Utility Revenue Bonds depends on the viability and demand of the utility service and its ability to generate sufficient revenue. However, they are usually considered a relatively safe investment as utility services generally have a stable demand.
Are the interest earnings on Utility Revenue Bonds taxable?
The interest earnings from municipal bonds, including Utility Revenue Bonds, are typically exempt from federal taxes and sometimes state and local taxes. However, it’s always best to check with a tax advisor or financial professional to understand specific tax implications.
Is there a secondary market for Utility Revenue Bonds?
Yes, like other types of municipal bonds, Utility Revenue Bonds can be bought or sold on the secondary market after their initial issuance.
Can the issuance of Utility Revenue Bonds impact utility service rates for consumers?
Yes, sometimes. The revenues to repay the bond often come from the rates charged to customers of the utility service. Hence, to service the bond debt, the issuing authority may be compelled to increase service rates.
Related Finance Terms
- Capital Improvement Projects
- Municipal Bonds
- Utility Services
- Debt Service
- Ratepayers
Sources for More Information
