Affordability and Utility Revenue Bond Rating Criteria

Transcription

1 Affordability and Utility Revenue Bond Rating Criteria Ted Chapman Senior Director Standard & Poor s Ratings Services (214) Theodore.Chapman@standardandpoors.com Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor s. Copyright 2013 by Standard & Poor s Financial Services LLC. All rights reserved.

2 Today s Agenda Summary of the Proposed Criteria What s New What s Staying the Same Market Position and Management Assessments

3 Summary

4 Holders of Municipal Debt Insurance Companies 12% Banks and Credit Unions 10% Everything Else 15% Closed-End Funds and ETFs 3% Mutual Funds 16% State & Local Gov't and GSEs 1% Corporate and Small Businesses 1% Source: Bond Buyer Households 42%

5 Why? We want to make sure that the framework that supports the methodology and assumptions in our criteria for assigning ratings is clear and transparent The criteria continues to reflect a current and accurate picture of the risks associated with the sector, today and into the future In our opinion, the industry risk is very low 5

6 What s New?

7 Proposed Municipal Water Utility criteria

8 Existing Municipal Pools criteria

9 The Matrix

10 The RATING Matrix Enterprise Risk Profile Financial Risk Profile Extremely Strong Very Strong Strong Adequate Vulnerable Highly Vulnerable 1 Extremely aaa aa+ aa- a bbb+/bbb bb+/bb Strong 2 Very aa+ aa/aa- a+ a- bbb/bbb- bb/bb- Strong 3 aa- a+ a bbb+/bbb bbb-/bb+ bb- Strong 4 a a/a- a-/bbb+ bbb/bbb- bb b+ Adequate 5 bbb+ bbb/bbb- bbb-/bb+ bb bb- b Vulnerable 6 Highly bbb- bb bb- b+ b b- Vulnerable

11 Market Position Bill Affordability Assesses the burden of the utility bill against median household effective buying income Because median income represents an average customer, true affordability assessment would be incomplete The proposed criteria therefore also incorporates the local poverty rate of the utility s service area 11

12 All-In Coverage is the Best Assessment of True Financial Capacity and Use of All Utility Revenues Operating Expenses Operating Revenues Debt Service General Fund and Other Transfers Out Self-Support of Tax- Backed Debt Other 12

13 All-In Coverage Defined (Revenues Expenses Net Transfers Out) + Fixed Costs All Revenue Bond Debt Service + Fixed Costs + Self Supporting Debt 13

14 What s Staying the Same?

15 Rating Factors Economic fundamentals Customer base, demographics, major employers, unemployment rate, trends in local economy Remains the most heavily weighted factor Liquidity and reserves Not just days cash, but also how much actual cash (in dollars) Total debt How is it allocated by lien? How quickly does it roll off? Has management been what we would view as aggressive in the type of debt instruments used, so much so that contingent risks have been introduced? 15

16 Market Position

17 The Delicate Balance 180 Selected Inflation Rates Since Source: U.S. Bureau of Labor Statistics Consumer Price Index for All Urban Consumers (CPI-U) adjusted to base year 2000 = CPI, All Items Real Disposable Income All Utilities + Public Transportation Water, Sewer & Trash Electricity Public Transportation Cable TV and Satellite Service 90

18 Market Position Assessment (1-6, lowest score is most favorable) Annualized Utility Bill as a Percent of Median Household Effective Buying Income (i.e. takehome pay) Less than 2.25% 2.25% to 4.50% 4.50% or More 10% or less Percent of the County s Population Living in Poverty 10% to 20% % to 30% % or more 4 5 6

19 Operational Management Assessment

20 The OMA 40% 40% Asset Adequacy & Identification of Operational Risks Organizational Effectiveness, Management Expertise & Drought Mgmt Planning Rate Setting Practices 20%

21 Asset Adequacy Raw Water Supply Quantity Quality Regulatory Compliance Treatment Capacity T&D, Collection System NRW Climate Risk Other Vulnerabilities

22 Organizational Effectiveness, Management Expertise and Drought Management Planning Organizational Effectiveness How proactive does management seem in its communication and public education? How open is the process? Ex. Town halls, social media Do the political officials have reasonable discretion and autonomy? Does staff? Votes on rates, budgets, debt, etc.? Management Expertise Who is answering your questions? Do they know what they don t know? Greying of the workforce and succession planning? Ask how they balance the triple bottom line Social Environmental Financial 22

23 Organizational Effectiveness, Management Expertise and Drought Management Planning Drought Contingencies Water conservation is an unusual business model Voluntary Mandatory Mainly targets outdoor watering: time of day, day(s) of the week Generally, a drought management plan either supplements the water conservation program, or supersedes it Most drought plans focus only on the resource management, not on the revenue requirements Some states or regional / wholesale providers require retail systems to have drought plans that we would probably view as strong. For the local utility to achieve that, they must have their own ordinance or policy that at least mimics if not exceeds the state s or wholesaler s or else it is a good Ex. the state of Georgia has very robust drought management planning with well-delineated contingencies depending on the severity of the drought. If we were to view this as strong then the city of Atlanta would at least be good by default. If Atlanta had equivalent or even stronger policies of its own, it could be viewed as a strong 23

24 Rate Setting Practices Evidence-Based Anecdote Strong Good When rate increases have been needed, the decision-making body has been supportive and timely; even to the extent that multi-year pre-approved rate increases are common if not standard. What we view as financially prudent decisions are made rather than decisions that are politically expedient that could possibly be to the detriment of the utility s near-term financial health. Periodic rate studies (internal or external) are common. Rate considerations are done on a year-to-year planning horizon rather than over a long-term time frame, but generally are apolitically approved if and when necessary. Standard The rate covenant and/or additional bonds test are the de facto guide as to when rate adjustments are necessary, but that is still enough for the political decision-makers to agree to a rate increase. Vulnerable Rate increases are often in reaction to a weakened financial position, including a technical default or some other legal covenant violation, even if the recent debt service payments were made on time and in full. There is clear evidence of recent political decisions to defer or downsize needed rate increases. 24

25 Questions?

26 For More Information Geoff Buswick, Managing Director and Lead Analytical Manager Boston, 1 (617) ; geoffrey.buswick@standardandpoors.com James Breeding, Senior Director and Analytical Manager Dallas, 1 (214) ; james.breeding@standardandpoors.com Scott Garrigan, Director and SRF Sector Leader Chicago, 1 (312) ; scott.garrigan@standardandpoors.com 26

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