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

Electric Utility Ratingstherefore collection rates are as strong as that forthe water and sewer fund.Unlike water and sewer ratings, there is typicallya gross pledge of revenues securing drainagerevenue bonds. Net coverage is often close togross coverage as most drainage funds have littleoperations and maintenance expenses. Sincedrainage systems are usually established for thepurpose of addressing capital-specific items, mostdrainage fund expenditures are capital-related andcan be delayed by management should liquiditybecome a concern.The rate covenant and the ability to raise ratesare important factors, but less so given the overallstability typically experienced by drainage revenues.It is typical, however, to see a ratecovenant set to achieve debt service coverage of atleast 1.10x. The rates or fees charged are typicallyvery low in relation to the overall bill for waterand sewer usage. ■Electric Utility RatingsStandard & Poor’s Ratings Services criteria reflectthe challenges and risks of publicly owned utilitiesoperating in a deregulated wholesale environment,and approaching retail competition. Thecriteria also reflect the dynamics of the energyindustry and the credit implications for bondholdersand lenders, and emphasize the qualitative andquantitative factors that indicate an electric utility’scapacity to operate in a market in which it mustwork to retain, and gain customers.Credit ratings for public power issuers embodythe interplay between eight variables: management,operations, competitive position, markets, regulation,service area economy, finances and legal provisions.Standard & Poor’s also assigns businessprofiles to all rated electric utilities, which includesthe first five factors. These factors are incorporatedin credit ratings, and enhance an investor’s abilityto differentiate between utility systems by complementingthe credit ratings and outlooks.Similarly, business profiles enable utilities tomake comparative analyses and internal assessmentsto benchmark themselves against other utilitieswith which they may compete. Business profilesare ranked on a ten-point scale. A score of “1”reflects the strongest business profile.ManagementA competitive marketplace puts a premium on leadershipskills. Management’s decisions in all facets ofutility rate setting, operations and finances, are criticalto a public power system’s long-term viabilityand strength. Standard & Poor’s assessment ofmanagement includes an evaluation of the extent towhich a utility’s strategic plans are supported bylocal councils or boards of directors, and the extentto which the governing body’s actions are supportiveof credit quality. Management should demonstratean understanding of, and be supportive ofrate structures, customer service initiatives, andfinancial strategies that bolster credit quality. WhileStandard & Poor’s evaluation of management consistsof a qualitative assessment, our analysisemploys specific criteria for measuring the effectivenessof management. The following elements areexhibited by well-run utilities:■ Institutionalized planning processes that arerevised regularly to reflect changing conditions;■ Sound financial and operating policies that aresupported, implemented and achieved;■ A deep and experienced executive team;■ A solid grasp of industry issues that extendsbeyond the local utility;■ Extensive knowledge of customers andtheir needs;■ Extensive knowledge of competitors; and■ A proactive and farsighted managementapproach that has the support of an informedboard or council.Management should also demonstrate an understandingof the risks and rewards associated withentering into contracts with counterparties, andwith entering into new lines of business beyond thescope of its core mission. Additionally, managementwill be assessed on their ability to operate within agiven governance and oversight structure.OperationsStandard & Poor’s examines the full gamut of autility’s operations through a multi-pronged analysisthat explores the following:■ Power and fuel resource mix, capacity, supplyand demand;■ Operating efficiency and reliability; and■ Capital needs.www.standardandpoors.com121