S
tandard & Poor’s Ratings Services rates water-
sewer revenue debt issued by stand-alone
authorities or special districts whose sole mission is
providing water-sewer services, and debt issued by
local governments that provide these services,
among others.
In cases where a local government pledges addi-
tional security such as a full faith and credit GO
pledge or a lien on sales taxes; the rating will reflect
the stronger of the two individual security pledges.
An issuer’s GO bond rating and the rating based on
a water-sewer revenue pledge will usually be close
given a similar if not identical service area econo-
my, and possibly even similar management and gov-
ernance. The degree to which one rating is higher
than the other will depend on the specific character-
istics of the two credits.
While the full faith and credit pledge may be per-
ceived to be the broadest possible pledge, issuers’
GO ratings are often constrained by general fund
operating and political pressures that outweigh sim-
ilar pressures on the enterprise side. To the extent
that the utility service area is substantially larger
than the taxing area covered by the GO pledge, the
utility may also benefit from a deeper and more
diverse economic base. Even when an issuer’s GO
rating is lowered significantly, its utility rating may
remain stable if the unique aspects of the utility
warrant it.
Of course an issuer’s GO rating is just as likely to
be as high or higher than its utility rating. To the
extent that a utility faces substantial capital pres-
sures, resistance to normal rate increases, high
leveraged positions, lower debt service coverage
margins, or higher customer concentration relative
to the tax base, it would be normal to see the GO
rating higher than the utility rating.
Areas reviewed to reach a rating determination
on water-sewer revenue bonds include:
■Economic considerations;
■Financial data/capital improvement plan;
■Rate criteria;
■Operational characteristics;
■Management; and
■Legal provisions.Economic Considerations
Standard & Poor’s regards the service area econo-
my of a utility as a focal point in the evaluation of
credit risk. The economic analysis is used to meas-
ure the stability of a utility’s customer base, the
potential need for growth-related capital spending,
and the affordability of rates. Income trends are
examined not only in absolute figures, but also
compared with local, state, and national averages.
Income indicators reflect a service area’s capacity
to support current and future rates. Other meas-
ures of wealth and economic vitality may include
housing values, property tax base growth trends,
and retail sales activity. In addition to measuring
wealth, these components help to demonstrate the
prospects for growth.
The job base of the utility service area can sup-
port a higher rating if it is diverse and demonstrates
little susceptibility to cyclical fluctuations in any
single industry or sector. Standard & Poor’s evalu-
ates a list of the service area’s leading employers
and assesses their level of commitment to the local
economy via their past, present, and prospective
levels of employment. Unstable employment pat-
terns can shrink a system’s revenue stream and lead
to increased rate sensitivity. Seasonal employment
usually brings more volatile treatment demands and
revenue patterns.
Other essential statistics include population,
housing starts, building permits, occupancy rates,
and system connections. Trends in these variables
are examined to assess the potential for future cus-
tomer growth, and how this growth will affect the
revenue base, the use of system capacity, and addi-
tional capital needs.Financial Data
Financial analysis focuses first on past performance
to determine the utility’s stability and consistency.
Standard & Poor’s evaluates three or more years of
historical fiscal results and compares them with
planning and budgeting forecasts and policies. These
policies are viewed as successful when management
achieves a stable fiscal performance through all
phases of economic and weather-related cycles.Water And Sewer Ratings
http://www.standardandpoors.com 113General Government Utilities