“carryover coverage”, or one-time revenue sources
would likewise have negative rating consequences,
especially if such funds are forecast to be necessary
for coverage compliance.Flow Of Funds
The flow of funds specifies the order and timing in
which system revenues are used to meet the obliga-
tions created by the indenture. Of critical impor-
tance to the rating is the lien position of debtservice payments in relation to other system obliga-
tions created by the indenture. The flow of funds
defines the issuer’s ability to transfer surplus funds
out of the system. Such transfers can drain the utili-
ty’s cash position or restrict capital improvements
otherwise financed from earnings. Transfer pay-
ments that are limited to a reasonable amount and
limited to a specific formula, such as a percentage
of revenues, partially offset this concern. However,
Standard & Poor’s will calculate coverage both
with and without transfers for comparative purpos-
es. Frequency of payments to the debt service fund
range from monthly to semiannual deposits. From a
financial perspective, monthly deposits are pre-
ferred, since this approach allows a smooth buildup
of the debt service fund and an early indication of
any shortfalls.Additional Bonds Test
As with the rate covenant, the additional bonds test
is viewed in conjunction with the financial and debt
profile of the system. The purpose of the additional
bonds test is to protect existing bondholders from
dilution of their security position. Standard &
Poor’s focuses on whether the issuer’s right to and
likelihood of issuing parity bonds at a later time
would result in a decline in coverage. Attributes of
a strong additional bonds test for parity debt
include a test based on historical net revenues that
preserve sound coverage of existing and proposed
obligations. A test that measures historical earnings
is preferred, since it is less speculative than those
based on revenue projections. Often, projected tests
rely on assumptions that might not be realized,
such as future rate increases or revenues generated
by new facilities.
Likewise, adjustments to historical net revenues
to reflect new customers, system acquisitions, rate
increases, or contracts for additional services can
weaken an otherwise strong historical earnings test.Reserves
Standard & Poor’s looks for established reserve
funds, such as debt service reserve accounts main-
tained at specific funding level, to provide addition-
al cushion for debt service payments and system
maintenance within a given budget year. For issuers
with thinner margins, a fully funded debt service
reserve is important, since it provides an additional
layer of protection for bondholders.
Typically, a debt service reserve requirement is
equal to the lesser of 125% of average annual debt
service, 10% of bond proceeds, or maximum annu-
al debt service thresholds, which are derived from
IRS regulations. This restricted reserve is expected
to be funded from bond proceeds, or built up from
pledged revenues, usually over no more than fiveGeneral Government Utilities126 Standard & Poor’s Public Finance Criteria 2007The following materials should be submitted in conjunction with a rating request:
Financial Documents
■Official statement
■Indenture/resolution (including supplemental resolution and indenture)
■Other legal documents
■Debt service schedule (with and without current financing)
■Five years of audited financial information
■Capital improvement plan
■Current year budget
■Pro forma projections
■Contracts for purchased power (including participation agreements)
■Contracts for fuel (if applicable)
■Contracts with leading customers
■Details on power and interest rate swaps.System Information
■Type of unit (base, intermediate, peaking), fuel type, availability, capacity,
loadfactors and installation date for individual generation units
■Peak data (historical)
■Load factors for leading customers
■Leading customers as a % of revenue
■Revenue by customer class (residential, commercial, industrial, other), historical
■Customers by class (residential, commercial, industrial, other) historical
■% power purchased, % power generated, historical & projected
■% of purchased power under contract; % of purchased power brought on
spot market
■Fuel mix, historical and projected (for generators)
■Rates historical, projected
■Fixed charges for off-balance-sheet obligations, historical and projected
■Debt service schedule for off-balance-sheet projects, and
participation percentages.
■Transfers, historical and projected
■Rate stabilization funds (historical/projected) held at the issuer level
■Transfer policy and methodology if available
■Debt and hedge policies if available
■Policies related to entering into non-traditional ventures, if available
■Summary of power supply, transmission, and fuel purchase contracts, including
term price, amounts, fixed and/or capacity payments, and other key facets.Documentation Requirements