for necessary expansions. Standard & Poor’s ana-
lyzes the following factors for water systems:
■The water system’s source and available supply
of dependable water;
■If that supply affected by water rights, aquifer
depletion and/or saltwater intrusion; and
■If there are and long term commitments for
wholesale delivery.
Standard & Poor’s will assesses the aforemen-
tioned factors in the context of service-area growth
and the cost of providing additional water to sus-
tain growth.
The available safe yield of water and the capacity
of pumping systems and treatment plants are com-
pared with the aggregate customer average and
peak daily demand. The amount of storage is
assessed as an important component in meeting
peak demand and providing reliability. Again,
Standard & Poor’s evaluates these figures in con-
junction with an assessment of demographic and
use trends. Significant excess capacity may indicate
overbuilding and heavy carrying costs for the cur-
rent user base. Alternatively, the need for capital
spending is apparent if a system experiences, or is
forecast to experience, a shortfall in supply or treat-
ment and distribution capacity.
Standard & Poor’s applies similar criteria to eval-
uating wastewater systems: peak and average cus-
tomer flows as compared with the collection and
treatment plant capacity. Additional questions are
asked of managers of sewer facilities, such as the
method for disposing of sludge and other issues
related to effluent discharge.Management
Standard & Poor’s assesses management’s ability to
implement measures on a timely basis to proactive-
ly shape a utility’s financial and operating condi-
tion, as opposed to reacting to external events.
While this aspect of a credit evaluation is somewhat
subjective, standard yardsticks are available to
measure management’s performance in setting and
achieving stipulated objectives. To determine man-
agement’s control, Standard & Poor’s looks at the
quality of planning techniques, such as demograph-
ic and rate studies, financial forecasts, and capital
improvement programs. The extent to which these
documents are factored into current budgets and
long-term plans also is evaluated. To determine the
effectiveness of management’s actions, the plans are
examined against the actual results.
In assessing management, Standard & Poor’s will
analyze the environment in which decisions affect-
ing the utility occur. Generally, higher rated entities
will, over time, develop “best practices” that not
only serve as guiding rules of thumb (or actual cod-ified policies) to ensure continuity, but also that
there is logical rhyme and reason to those rules.
While an absence of decision-making organizational
guidelines will not necessarily constrain the rating,
reactive or inactive implementation of financial and
operating measures considered crucial to perform-
ance will be viewed negatively.
To assess the management environment,
Standard & Poor’s will examine the following:
■Asset management and long-term capital plan-
ning—with many utilities this is the most impor-
tant piece to the puzzle. Larger systems may have
more sophisticated asset inventory systems that
smaller utilities may not be able to afford.
However, all well-managed systems should have a
basic idea of the useful life of at least the key
components to their infrastructure, as well as the
financial and operational costs associated with
maintenance of efforts, staying in compliance
with relevant regulatory bodies and potential
implications from non-action. Incorporating this
knowledge into a long-term capital improvement
plan helps a utility determine when rate increases
will be necessary and plan for them in advance.
■Long-term financial planning—recurring costs
such as personnel and debt service (on-or off-bal-
ance sheet) are stable and predictable. Other
large expenses such as fuel, electricity and chemi-
cals may vary greatly from year to year. Changes
in operations, such as newly constructed pump-
ing facilities or expanded treatment plants may
also significantly affect the operating and mainte-
nance budget. Pro forma financial projections
three to five years into the future allow
Standard & Poor’s to assess how such changes
will impact the utility. A crucial component to
this analysis will be not only whether or not such
a pro forma document exists, but also the under-
lying revenue and expense assumptions support-
ing the document.
■Rate-setting practices-Standard & Poor’s pays par-
ticular attention to the utility administrators’
capacity to implement rate increases and capital
improvement programs independently. Autonomy
in rate setting is viewed as a decidedly positive fac-
tor, given that it insulates the utility from exposure
to political interference that might deter a timely
and adequate adjustment. If favorable action by a
public board, city council, or state public service
commission is required, Standard & Poor’s weighs
management’s ability to work with these entities to
attain approval of its requests. Management’s
record of raising rates consistently and promptly isGeneral Government Utilities116 Standard & Poor’s Public Finance Criteria 2007