Lastly, Standard & Poor’s studies the utility’s capi-
tal improvement plan to determine what affect it
will have on system operations, rates, and finances.
The overall size of a plan is not necessarily the most
important fact in reviewing CIPs. It is whether the
plan addresses the utility’s needs, and if it is man-
ageable and affordable given budgetary realities.
Large water and sewer systems are usually better
positioned than smaller systems to implement large,
long-term capital programs because they can spread
the costs over a broader, more diverse customer
base. Their economies of scale, greater flexibility to
incur rate increases, generally solid financial per-
formance and long-term financial and operational
planning allow the implementation of such capital
improvement programs (CIPs) without causing a
crushing blow to ratepayers.
A utility’s capital program will necessarily influ-
ence rates for service, and rates will influence the
utility’s financial health, including debt service cov-
erage, liquidity, cash flow, and its overall degree of
indebtedness. Long-term capital plans that have
already associated project costs with funding
sources allow for estimated impacts to rates, oper-
ating costs and overall financial condition to be
incorporated into the analysis.
Water And Sewer Rates
In analyzing the rates charged to customers,
Standard & Poor’s focuses on a number of impor-
tant factors: rates compared with neighboring com-
munities and/or similar systems; rates in relation to
the service area’s economic wealth and income lev-
els; and the rate-setting process.
The competitiveness of rates compared with
neighboring communities can be an important
aspect of users’ willingness to accept further rate
adjustments. Also, high rates can impede economic
development, particularly, if nearby areas with
comparable levels of service charge lower utility
fees. Standard & Poor’s also examines the afford-
ability of rates in the context of local wealth and
income indicators.
Standard & Poor’s closely examines the rate-set-
ting process. The number of required approvals, the
ability to recover current and future costs, the
length of time necessary to implement adjustments,
and the track record of the approving entity are
important credit factors.
Operational Characteristics
Municipal water and wastewater utility systems
face the challenge of meeting state and federal envi-
ronmental regulations, as established by the Safe
Drinking Water Act and the Clean Water Act, and
the need to implement capital improvement pro-
grams designed to satisfy future needs. A system’s
ability to comply with these demands without
diminishing financial integrity, or rate affordability
and competitiveness, is a critical rating factor.
Standard & Poor’s analysis of operations takes
into account the following:
■Customer profile and usage trends;
■Compliance with environmental regulations; and
■The adequacy of system capacity.
Customer profile
Customer data are disaggregated into residential,
commercial, and industrial classes to better discern
the relative importance of one type of user to the
system. Standard & Poor’s studies customer trends
to determine the sensitivity of the system to swings
in the economic cycles. In addition, a historical
usage trend when coupled with demographic trends
enables Standard & Poor’s to assess the potential
future capital needs of a utility. Standard & Poor’s
also examines the customer base to identify major
customers and the percentage of revenues that they
contribute. Care is taken to assess any one customer
responsible for a large share of revenues to deter-
mine that customer’s stability, commitment to the
service area, and contribution to the bottom line.
Concerns regarding concentration can be somewhat
mitigated if the system has long term arrangements
with large users that ensure revenue stability.
Regulations
Prudent management must anticipate the potential
impacts and financial burdens on their systems of
future state and federal environmental regulations.
Failure to comply with permit requirements could
lead to a ban on additional water and/or sewer con-
nections, thereby obstructing a community’s eco-
nomic growth, and result in harsh fines. The credit
quality of a municipal system reflects Standard &
Poor’s assessment of management’s ability to imple-
ment necessary capital improvement programs to
satisfy new and pending regulations while avoiding
“rate shock.” One index of planning capability is
the status of plant and line maintenance; if a system
is properly maintained, it will reduce the need for
major repairs. Some measures are water-line loss
ratios, inflow-infiltration studies, and the presence
or absence of an ongoing maintenance program. To
the extent that compliance issues exist, the dialogue
and relationship with state and federal regulatory
bodies will be examined.
System capacity
Standard & Poor’s studies a water and sewer sys-
tems’ existing infrastructure. The utility’s opera-
tional capacity, in terms of the sizing of it’s
treatment plants and its collection and distribution
systems is analyzed to determine if additional
capacity will be needed and if the utility has plannedWater And Sewer Ratingshttp://www.standardandpoors.com 115