S&P - Public Finance Criteria (2007). - The Global Clearinghouse

General Government UtilitiesWater And Sewer RatingsStandard & Poor’s Ratings Services rates watersewerrevenue debt issued by stand-aloneauthorities or special districts whose sole mission isproviding water-sewer services, and debt issued bylocal governments that provide these services,among others.In cases where a local government pledges additionalsecurity such as a full faith and credit GOpledge or a lien on sales taxes; the rating will reflectthe stronger of the two individual security pledges.An issuer’s GO bond rating and the rating based ona water-sewer revenue pledge will usually be closegiven a similar if not identical service area economy,and possibly even similar management and governance.The degree to which one rating is higherthan the other will depend on the specific characteristicsof the two credits.While the full faith and credit pledge may be perceivedto be the broadest possible pledge, issuers’GO ratings are often constrained by general fundoperating and political pressures that outweigh similarpressures on the enterprise side. To the extentthat the utility service area is substantially largerthan the taxing area covered by the GO pledge, theutility may also benefit from a deeper and morediverse economic base. Even when an issuer’s GOrating is lowered significantly, its utility rating mayremain stable if the unique aspects of the utilitywarrant it.Of course an issuer’s GO rating is just as likely tobe as high or higher than its utility rating. To theextent that a utility faces substantial capital pressures,resistance to normal rate increases, highleveraged positions, lower debt service coveragemargins, or higher customer concentration relativeto the tax base, it would be normal to see the GOrating higher than the utility rating.Areas reviewed to reach a rating determinationon water-sewer revenue bonds include:■ Economic considerations;■ Financial data/capital improvement plan;■ Rate criteria;■ Operational characteristics;■ Management; and■ Legal provisions.Economic ConsiderationsStandard & Poor’s regards the service area economyof a utility as a focal point in the evaluation ofcredit risk. The economic analysis is used to measurethe stability of a utility’s customer base, thepotential need for growth-related capital spending,and the affordability of rates. Income trends areexamined not only in absolute figures, but alsocompared with local, state, and national averages.Income indicators reflect a service area’s capacityto support current and future rates. Other measuresof wealth and economic vitality may includehousing values, property tax base growth trends,and retail sales activity. In addition to measuringwealth, these components help to demonstrate theprospects for growth.The job base of the utility service area can supporta higher rating if it is diverse and demonstrateslittle susceptibility to cyclical fluctuations in anysingle industry or sector. Standard & Poor’s evaluatesa list of the service area’s leading employersand assesses their level of commitment to the localeconomy via their past, present, and prospectivelevels of employment. Unstable employment patternscan shrink a system’s revenue stream and leadto increased rate sensitivity. Seasonal employmentusually brings more volatile treatment demands andrevenue patterns.Other essential statistics include population,housing starts, building permits, occupancy rates,and system connections. Trends in these variablesare examined to assess the potential for future customergrowth, and how this growth will affect therevenue base, the use of system capacity, and additionalcapital needs.Financial DataFinancial analysis focuses first on past performanceto determine the utility’s stability and consistency.Standard & Poor’s evaluates three or more years ofhistorical fiscal results and compares them withplanning and budgeting forecasts and policies. Thesepolicies are viewed as successful when managementachieves a stable fiscal performance through allphases of economic and weather-related cycles.www.standardandpoors.com113