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

General Government Utilitiesfor necessary expansions. Standard & Poor’s analyzesthe following factors for water systems:■ The water system’s source and available supplyof dependable water;■ If that supply affected by water rights, aquiferdepletion and/or saltwater intrusion; and■ If there are and long term commitments forwholesale delivery.Standard & Poor’s will assesses the aforementionedfactors in the context of service-area growthand the cost of providing additional water to sustaingrowth.The available safe yield of water and the capacityof pumping systems and treatment plants are comparedwith the aggregate customer average andpeak daily demand. The amount of storage isassessed as an important component in meetingpeak demand and providing reliability. Again,Standard & Poor’s evaluates these figures in conjunctionwith an assessment of demographic anduse trends. Significant excess capacity may indicateoverbuilding and heavy carrying costs for the currentuser base. Alternatively, the need for capitalspending is apparent if a system experiences, or isforecast to experience, a shortfall in supply or treatmentand distribution capacity.Standard & Poor’s applies similar criteria to evaluatingwastewater systems: peak and average customerflows as compared with the collection andtreatment plant capacity. Additional questions areasked of managers of sewer facilities, such as themethod for disposing of sludge and other issuesrelated to effluent discharge.ManagementStandard & Poor’s assesses management’s ability toimplement measures on a timely basis to proactivelyshape a utility’s financial and operating condition,as opposed to reacting to external events.While this aspect of a credit evaluation is somewhatsubjective, standard yardsticks are available tomeasure management’s performance in setting andachieving stipulated objectives. To determine management’scontrol, Standard & Poor’s looks at thequality of planning techniques, such as demographicand rate studies, financial forecasts, and capitalimprovement programs. The extent to which thesedocuments are factored into current budgets andlong-term plans also is evaluated. To determine theeffectiveness of management’s actions, the plans areexamined against the actual results.In assessing management, Standard & Poor’s willanalyze the environment in which decisions affectingthe utility occur. Generally, higher rated entitieswill, over time, develop “best practices” that notonly serve as guiding rules of thumb (or actual codifiedpolicies) to ensure continuity, but also thatthere is logical rhyme and reason to those rules.While an absence of decision-making organizationalguidelines will not necessarily constrain the rating,reactive or inactive implementation of financial andoperating measures considered crucial to performancewill be viewed negatively.To assess the management environment,Standard & Poor’s will examine the following:■ Asset management and long-term capital planning—withmany utilities this is the most importantpiece to the puzzle. Larger systems may havemore sophisticated asset inventory systems thatsmaller utilities may not be able to afford.However, all well-managed systems should have abasic idea of the useful life of at least the keycomponents to their infrastructure, as well as thefinancial and operational costs associated withmaintenance of efforts, staying in compliancewith relevant regulatory bodies and potentialimplications from non-action. Incorporating thisknowledge into a long-term capital improvementplan helps a utility determine when rate increaseswill be necessary and plan for them in advance.■ Long-term financial planning—recurring costssuch as personnel and debt service (on-or off-balancesheet) are stable and predictable. Otherlarge expenses such as fuel, electricity and chemicalsmay vary greatly from year to year. Changesin operations, such as newly constructed pumpingfacilities or expanded treatment plants mayalso significantly affect the operating and maintenancebudget. Pro forma financial projectionsthree to five years into the future allowStandard & Poor’s to assess how such changeswill impact the utility. A crucial component tothis analysis will be not only whether or not sucha pro forma document exists, but also the underlyingrevenue and expense assumptions supportingthe document.■ Rate-setting practices-Standard & Poor’s pays particularattention to the utility administrators’capacity to implement rate increases and capitalimprovement programs independently. Autonomyin rate setting is viewed as a decidedly positive factor,given that it insulates the utility from exposureto political interference that might deter a timelyand adequate adjustment. If favorable action by apublic board, city council, or state public servicecommission is required, Standard & Poor’s weighsmanagement’s ability to work with these entities toattain approval of its requests. Management’srecord of raising rates consistently and promptly is116 Standard & Poor’s Public Finance Criteria 2007