PubFinCriteria_2006_part1_final1.qxp

however, utilities may choose to include a debt serv-

ice reserve simply for the sake of prudence. Some

utilities have taken advantage of “springing” reserve

covenants, whereby the utility is obligated to fund a

reserve from operations once coverage dips below a

specified level. Although such covenants may pre-

vent the utility from spending revenues needed to

pay debt service in the immediate future, the fea-

tures may also pose additional risks for the utility

by increasing the amount of revenues required of the

utility at the precise time when liquidity is deterio-

rating.

Wholesale Systems’ Legal Protections

The ability of a wholesale provider to pass on

increased costs to retail systems depends on a

combination of legal, operational, and demo-

graphic factors, just as retail providers face similar

issues in passing costs on to their customers.

Accordingly, Standard & Poor’s analysis for

wholesale utilities is similar to that of retail sys-

tems. Because many wholesale-retail relationships

are governed by long-term contracts, however,

such agreements are important to the wholesaler

analysis. Standard & Poor’s will evaluate the

wholesaler’s contracts with the retail utilities to

determine the flexibility of the wholesaler to

adjust rates as well as the strength and ultimate

repayment obligation of the retailers. Credit

strengths exist in contracts where a step-up provi-

sion ensures that the financial impact resulting

from a failure to pay by one party is spread out

among the remaining retail parties. In contracts

where no make-up provisions exist, the wholesaler

may be more vulnerable to individual retailer

weaknesses if contract provisions do not allow for

supplemental rate adjustments. While contract

provisions in some cases can result in rating differ-

entiation, the economics of the customer base in

aggregate, coupled with the system’s operating

performance, remain the important rating factors.

Drainage Revenue Bonds

The criteria for assigning ratings to bonds secured

by drainage fees are similar to the criteria for

water and sewer ratings. As is the case with water

and sewer ratings, Standard and Poor’s reviews the

economic conditions of the service area, the finan-

cial and operating history of the enterprise fund,

rate setting criteria, system management and the

legal provisions associated with the bonds.

Generally, the ratings for bonds secured by

drainage fees are as strong, if not stronger, than

water and sewer revenue bonds issued by the same

entity. Principal factors that typically differentiate

the credit quality of drainage revenue bonds from

water and sewer revenue bonds include the lack of

revenue volatility often experienced by water and

sewer system revenue streams, very low rates or

fees, a smaller overall capital improvement pro-

gram, and greater expenditure control.

The service area and customer base are usually

coterminous with the area served by the utility’s

water and/or sewer system. As drainage districts

have few operational responsibilities, drainage fees

are typically set to generate modest coverage of

annual debt service and perhaps fund ongoing pay-

as-you-go capital programs. These fees are often a

flat, periodic fee paid per equivalent residential

unit, or on a square-footage basis. As such, the rev-

enue stream within a drainage fund is not subject to

the weather-related fluctuations most water and

sewer funds experience, so maintaining high cover-

age levels becomes less important. Since the

drainage fee is usually added to the water bill, non-

payment of only the drainage fee is not practical,

General Government Utilities

120 Standard & Poor’s Public Finance Criteria 2007

The following materials should be submitted in conjunction

with a rating request:

Financial Documents

■Three years of audited financial reports

■Current year’s budget

■Bond resolution or trust indenture, including supplemental

resolution or indenture, if appropriate

■Service contracts with wholesale customers

■Power purchase agreements

System Information

■Engineer’s report, feasibility study, or rate study if available

■Anticipated capital improvement program

■Largest customers by revenues and service

■Three to five years of operating statistics

■Customers by class

■Sales in revenues and service by class

■System capacity and average and peak system demands

■Five years of historic and projected rates, with locally

targeted comparisons

Economic Information

■Population trends

■Income trends

■Composition of employment by sector

■Unemployment rates

■Largest employers in service area

■Tax base trends

■Building permit activity

Documentation Requirements