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

General Government Utilitiesties, as well as the capacity for those facilities toaccept outside waste will be examined. The assessmentwill also consider the total household costincluding collection and disposal. While the overallsystem or project cost profile is of primary importance,some consideration will be given to fee structuresince risk of waste diversion can be mitigatedthrough the method of cost recovery. However, theoverall system or project cost profile will stillremain as a critical factor.Operational CharacteristicsIn evaluating the operations of a solid waste systemor project, Standard & Poor’s focuses on the serviceprovider’s flexibility in handling changing industryrequirements while efficiently fulfilling its primarypurpose. As mentioned, waste disposal methodsmust address a number of environmental issues.A key consideration in the analysis is bondamortization versus the useful life of the facilities.The expected life of the landfill should at leastmatch the term of the debt, and the legal structuremust provide flexibility to respond to the variabilityin landfill life if waste flow levels change. A system,by its nature, has an advantage over projectfinancings in handling these risks. However, a projectalso can be structured to manage them effectively—forexample, a landfill disposal contractthat provides project back-up disposal capacity.However, contracts also have risk. Contracts generallyallow less control than system-owned capacityand can be subject to legal, regulatory, and performanceconcerns.System or project operations are evaluatedagainst demand for disposal over the term of thebonds. If components of a system or a facility aretemporarily or permanently out of service, the abilityto dispose of waste elsewhere is reviewed. Thecapacity to handle such a situation with a minimumof shock to operations or cost is viewed as a creditstrength. The greater the volume of waste that canbe disposed of at redundant facilities, the better theability of the issuer to generate revenues to repaydebt. This leeway allows time for the developmentof other alternatives that might guard against a suddenincrease in the price of disposal and reliance onan outside source for the service. Such reliance subjectsthe operations to the whims of another entityfor continuance and cost, and the lack of control isviewed as a weakness.Standard & Poor’s assesses the entire waste streamand disposal process to evaluate if changes have beenadequately addressed. For example, growth in theservice area. Afterwards, questions about the propersize of facilities or provisions and plans for expansionare evaluated. An inordinate reliance on onemethod of waste management raises questionsregarding the system’s flexibility to respond to wasteflow changes and facility problems.An assessment of the impact of the external pressuresbrought on by regulation and environmentalmandates, whether at the federal, state, or locallevel. The analysis will consider how complyingwith the regulatory environment will impact a systemor project’s ability to compete. The impact canbe felt through increased costs or changes withinthe business environment. The U.S. SupremeCourt’s decision in the Carbone v. Clarkstown,N.Y. case, which invalidated flow control, drasticallychanged the environment for the solid wasteindustry. This has prompted proposed legislationand other actions at all levels of government. Thissection specifically addresses the impact of anysuch initiatives.Financial Data/Capital Improvement PlanIn evaluating finances, the concern is the level ofcoverage and liquidity. As with Standard & Poor’sfocus on the legal structure, a review of differentoperating and nonoperating scenarios thatdemonstrate sufficient debt service coverage in allcases is required. Costs are viewed relative to thecapacity to pay. As the cost of disposal is generallyrising, the comparison of future costs with historicalcosts has less meaning, but the control andmanagement over future cost increases areweighed against the risks. Also, the effectivenessof the chosen disposal options is measuredagainst the cost of future alternatives. By operatinga solid waste system, a community generallyhas more cost control. It also assumes more riskin ownership and/or operation than if a privateenterprise provides disposal. Landfill closurecosts, for example, can be substantial and shouldbe amortized over the life of the landfill in orderto match revenue generation with costs.Costs are reviewed in terms of tip fees per tonand household costs. The former is a relevantmeasure for systems that rely, for their major cashflow component, on tipping fees paid by franchisedand private haulers. Clearly, the competitiveposition of the tipping fee impacts financialperformance. However, total household costs alsoprovide an important basis for evaluating thecosts of the system. Household costs shouldinclude not only disposal cost, but also the cost ofcollection and transportation to the disposal site;individuals are concerned with their total bill forgarbage service, not the various components.Household cost increases are reviewed for acceptabilityand affordability.Costs under different scenarios are reviewed andmeasured for variance. Large variances may raiseconcerns. How attendant increases and risks are128 Standard & Poor’s Public Finance Criteria 2007