Scoring Well With Credit Rating Agencies

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1 Scoring Well With Credit Rating Agencies GAWP 2016 Annual Conference Savannah, GA 07/11/16 Stacey Isaac Berahzer Environmental Finance Center at UNC

2 Dedicated to enhancing the ability of governments and other organizations to provide environmental programs and services in fair, effective, and financially sustainable ways through: Applied Research Teaching and Outreach Program Design and Evaluation How you pay for it matters 2

3 Objectives Identify some of the benchmarks used by credit rating agencies Learn about tools to calculate some of these benchmarks Learn the importance of translating these benchmarks into (internal) utility policy

4 Background

5 Three Rating Agencies Fitch Ratings Moody s Research and Ratings Standard and Poor s (S&P)

6 Whiteboard Video: Credit Rating Agency Considerations

7 2016 Updates from S&P Chapman, T. and J. Breeding. January Dallas, TX; U.S. Public Finance Waterworks, Sanitary Sewer, And Drainage Utility Systems: Rating Methodology And Assumptions; Standard and Poor s Ratings Services, McGraw Hill Financial.

8 Analytical Framework for S&P Rating of Municipal Water and Sewer Enterprise Risk Profile Financial Risk Profile Initial Indicative Rating Application of Rating Caps etc. Adapted from: Chapman, T. and J. Breeding. January Dallas, TX; U.S. Public Finance Waterworks, Sanitary Sewer, And Drainage Utility Systems: Rating Methodology And Assumptions; Standard and Poor s Ratings Services, McGraw Hill Financial. FINAL RATING

Source: Chapman, T. and J. Breeding. January 2016. Dallas, TX; U.S. Public Finance Waterworks, Sanitary Sewer, And

9 Source: Chapman, T. and J. Breeding. January Dallas, TX; U.S. Public Finance Waterworks, Sanitary Sewer, And Drainage Utility Systems: Rating Methodology And Assumptions; Standard and Poor s Ratings Services, McGraw Hill Financial.

10 Rating Caps and Overriding Factors Weak Management Emergence from bankruptcy or receivership Negative extraordinary intervention (e.g. cash-stripping by the parent government) Weak total liquidity combined with weak all-in coverage Weak willingness or capacity to support financial obligations Source: Chapman, T. and J. Breeding. January Dallas, TX; U.S. Public Finance Waterworks, Sanitary Sewer, And Drainage Utility Systems: Rating Methodology And Assumptions; Standard and Poor s Ratings Services, McGraw Hill Financial.

11 Enterprise Risk Profile Industry Risk (20%) external environment of the utility Market Position (25%) affordability of rates, esp. compared to peer utilities Operational Management Assessment (10%) effectiveness of utility management Much of this is NOT within the utility s direct control Source: Chapman, T. and J. Breeding. January Dallas, TX; U.S. Public Finance Waterworks, Sanitary Sewer, And Drainage Utility Systems: Rating Methodology And Assumptions; Standard and Poor s Ratings Services, McGraw Hill Financial.

12 Financial Risk Profile All-in coverage a tweaked Debt Service Coverage Ratio (40% of the financial risk profile assessment); Liquidity and reserves (40%); Debt and liabilities (10%); and Financial management assessment (10%) Much of this IS within the utility s direct control

13 Benchmarks

14 Quick Review of Key Financial Indicators Operating Ratio Debt Service Coverage Ratio Current Ratio Days of Cash on Hand Asset Depreciation

15 Is your system self-sufficient?

16 Read more:

17 Are you able to cover your debt service after paying for your day to day operations?

18 Read more:

19 Read more:

20 Can your system meet its short term obligations?

21 Read more:

22 If your customers stop paying their bills, how long can you maintain operations?

23 Read more:

24 How much of your system s expected life has already run out?

25 Caveat: this indicator is only as accurate as your depreciation schedule, and even then historic pricing is likely to distort the results.

26 Where Do We Get Started? Local governments: audited financial statements Non-governments: balance sheets, shareholder reports, annual reports, etc. GA Rates Dashboard

27 Currently Producing the 2016 Version 27

Financial Health Checkup for Water Utilities http://efc.sog.unc.edu or http://efcnetwork.

Environmental Finance Center at the University of North Carolina, Chapel Hill s School of Government A resource

28 Financial Health Checkup for Water Utilities or Find the most up-to-date version in Resources / Tools Excel - based tool Free to use Created by the Environmental Finance Center at the University of North Carolina, Chapel Hill s School of Government A resource for water systems from the EFCN s Smart Management for Small Water Systems project funded under a cooperative agreement with the U.S. E.P.A.

29 Tip: when you first use this file after downloading from our website, click on Enable Editing at the top

30 Direct link to the tool: financial-health-checkup-water-utilities

31 Why Care About This? We just saw that funders and ratings agencies care about this, but also Money is not likely coming from the federal government

32 Money is not likely coming from the federal government

33 Develop (and get approval) on Policies Related to these Benchmarks Examples: A quantified amount in a Rate Stabilization Reserve City of Minneapolis, minimum of 15% of the revenue budget for the next year be put into an unallocated general fund for cash flow, unexpected expenses etc. to maintain a AAA bond rating (GFOA 2013) Baltimore Department of Public Works dictates a minimum of 90 days cash on hand be in their operating reserves Other policies could relate to Debt Service Coverage Ratio targets etc.

34 Acknowledgements Ø Funders: Ø GEFA (Dashboard) Ø Water Research Foundation WaterClips Video) Ø EPA (Blog and Financial Health Checkup for Water UtilitiesTool) 34

35 Continue the Discussion Subscribe to our Environmental Finance Blog efc.web.unc.edu Follow us on

36 Stacey Isaac Berahzer Environmental Finance Center at the University of North Carolina School of Government, Knapp-Sanders Building CB #3330 Chapel Hill, NC USA

Benchmarking and Rate Setting in Water and Wastewater Management

Benchmarking and Rate Setting in Water and Wastewater Management Stacey Isaac Berahzer Senior Project Director Environmental Finance Center at the University of North Carolina Georgia Association of Water