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

General Government Utilitieshowever, utilities may choose to include a debt servicereserve simply for the sake of prudence. Someutilities have taken advantage of “springing” reservecovenants, whereby the utility is obligated to fund areserve from operations once coverage dips below aspecified level. Although such covenants may preventthe utility from spending revenues needed topay debt service in the immediate future, the featuresmay also pose additional risks for the utilityby increasing the amount of revenues required of theutility at the precise time when liquidity is deteriorating.Wholesale Systems’ Legal ProtectionsThe ability of a wholesale provider to pass onincreased costs to retail systems depends on acombination of legal, operational, and demographicfactors, just as retail providers face similarissues in passing costs on to their customers.Accordingly, Standard & Poor’s analysis forDocumentation RequirementsThe following materials should be submitted in conjunctionwith a rating request:Financial Documents■ Three years of audited financial reports■ Current year’s budget■ Bond resolution or trust indenture, including supplementalresolution or indenture, if appropriate■ Service contracts with wholesale customers■ Power purchase agreementsSystem Information■ Engineer’s report, feasibility study, or rate study if available■ Anticipated capital improvement program■ Largest customers by revenues and service■ Three to five years of operating statistics■ Customers by class■ Sales in revenues and service by class■ System capacity and average and peak system demands■ Five years of historic and projected rates, with locallytargeted comparisonsEconomic Information■ Population trends■ Income trends■ Composition of employment by sector■ Unemployment rates■ Largest employers in service area■ Tax base trends■ Building permit activitywholesale utilities is similar to that of retail systems.Because many wholesale-retail relationshipsare governed by long-term contracts, however,such agreements are important to the wholesaleranalysis. Standard & Poor’s will evaluate thewholesaler’s contracts with the retail utilities todetermine the flexibility of the wholesaler toadjust rates as well as the strength and ultimaterepayment obligation of the retailers. Creditstrengths exist in contracts where a step-up provisionensures that the financial impact resultingfrom a failure to pay by one party is spread outamong the remaining retail parties. In contractswhere no make-up provisions exist, the wholesalermay be more vulnerable to individual retailerweaknesses if contract provisions do not allow forsupplemental rate adjustments. While contractprovisions in some cases can result in rating differentiation,the economics of the customer base inaggregate, coupled with the system’s operatingperformance, remain the important rating factors.Drainage Revenue BondsThe criteria for assigning ratings to bonds securedby drainage fees are similar to the criteria forwater and sewer ratings. As is the case with waterand sewer ratings, Standard and Poor’s reviews theeconomic conditions of the service area, the financialand operating history of the enterprise fund,rate setting criteria, system management and thelegal provisions associated with the bonds.Generally, the ratings for bonds secured bydrainage fees are as strong, if not stronger, thanwater and sewer revenue bonds issued by the sameentity. Principal factors that typically differentiatethe credit quality of drainage revenue bonds fromwater and sewer revenue bonds include the lack ofrevenue volatility often experienced by water andsewer system revenue streams, very low rates orfees, a smaller overall capital improvement program,and greater expenditure control.The service area and customer base are usuallycoterminous with the area served by the utility’swater and/or sewer system. As drainage districtshave few operational responsibilities, drainage feesare typically set to generate modest coverage ofannual debt service and perhaps fund ongoing payas-you-gocapital programs. These fees are often aflat, periodic fee paid per equivalent residentialunit, or on a square-footage basis. As such, the revenuestream within a drainage fund is not subject tothe weather-related fluctuations most water andsewer funds experience, so maintaining high coveragelevels becomes less important. Since thedrainage fee is usually added to the water bill, nonpaymentof only the drainage fee is not practical,120 Standard & Poor’s Public Finance Criteria 2007