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

General Government Utilitiestrends, regulatory outcomes, and the long-term patternsof various cost pressures. As such, they claimthat trying to measure them actually represents apoor use of limited resources, especially for smallersystems that lack the staff or funds for consultantsto devote to such studies. While most of these driversare indeed highly uncertain, Standard & Poor’sviews a refusal to consider the potential burden ofpressures beyond the short-to medium-term as acredit risk. Accordingly, even small utilities thathave attempted to examine long-term risks and possibilitiesin limited ways consistent with theirresources and capabilities will likely find their rateprojections and capital plans more accepted byStandard & Poor’s.Legal ProvisionsLegal provisions are defined through the bondindenture and other documents, which outline thebasic structure of the financing. Whether the structureprovides for an integrated solid waste system, astand-alone project or a subsidized financing offacilities, the analysis focuses on what is the securityfor the bonds and the identification of the supportingrevenue stream.Standard & Poor’s Ratings Services reviews allcontracts concerning service, operation, construction,and energy sales for possible credit implications.The revenue stream pledged under thesedocuments can vary considerably. A mixture of specialtaxes, disposal fees, and a municipal entity’scredit can be pledged in addition to other revenues,such as those from the sale of by-products. Thenature and diversity of the revenue stream is animportant factor, given the transportability of solidwaste. A system or facility that receives all or mostof its revenues from tipping fees paid by privatehaulers is likely to be more vulnerable to competitionthan a system that can use alternative revenuestreams, such as household disposal feesA detailed analysis begins with identification ofthe source of revenues for debt service payments.The ultimate credit strength depends upon the primaryrevenue stream, such as revenues influencedby market events (i.e. tipping fees) or the generalfund pledge of the community. Through a serviceagreement, a municipality might covenant to makepayments from general fund by the use of annualappropriations. In these circumstances, Standard &Poor’s establishes a GO assessment that generally iscritical to the rating determination. A general fundpledge is assessed at less than the full faith andcredit pledge of the municipality; factors consideredare the presence or lack of, appropriations risk, thelevel of financial flexibility available to the generalfund, and the economics of the project.When a user fee is pledged to debt repayment,Standard & Poor’s focuses on the history of theuser fee and how it is collected and assessed. Caseswhere the user fee is formulated, but has yet to beimplemented, generally provide weaker credit support.If a method of billing and collection exists,and such a fee only needs to be levied, the creditgenerally is considered stronger.Under different operating scenarios, the legalstructure must provide a sufficient revenue streamto cover operating costs and debt service payments.The legal structure should provide a revenue streamthat can be maintained, despite additional maintenancecost, lower throughput, reduced energy outputor price, and outages caused by system failureor environmental requirements. For example, recoveredmaterial sales from a recycling program arelikely to vary, depending on product quality andmarket price. The ultimate or primary revenuestream must have the flexibility to make up for anydeclines in revenue flow from a more unpredictablesecondary stream. Here, reserve funds may berequired to provide a bridge from one budget yearto the next, depending on the flexibility of the primaryrevenue stream.One unique concern that must be addressed bysolid waste issuers is the transportability of solidwaste. Since there is usually no direct link betweenthe solid waste utility and the customer, the haulerscollecting the waste can choose the disposal site.The ability to direct waste to the project or system’sfacilities provides an important link between thewaste generator and the disposal system. Wasteflowcontrol can be provided by municipal ownershipof collection vehicles, some form ofcontractual arrangements, or through economicmeans. Waste flow control ordinances are not factoredinto the analysis and should not be relied onin light of the U.S. Supreme Court’s Carbone decision.Based on the competitive nature of the solidwaste industry, a system that cannot effectivelyretain the waste flow is generally not investmentgrade, unless alternative revenue sources are availableand pledged for debt repayment. ■130 Standard & Poor’s Public Finance Criteria 2007