Topics for Discussion

Transcription

1 Topics for Discussion Introduction. Identify the Characteristics of a Financially Strong Utility System. Multi-Step Approach to Establishing a Financially Strong Utility System. Perform an Internal Assessment of Historical Financial Performance. Develop Peer Comparative and Benchmarking Analyses to Identify Relative Strengths and Weaknesses. Project Future Financial Performance to Achieve Identified Goals. Establish a Series of Policies and Procedures to Memorialize and Institutionalize Best Practices. Implement a Multi-Year Plan. February 10-11, 2015 UNC School of Government Environmental Finance Center 1

2 Credit Quality Since the financial downturn, the credit quality of a utility system has become more important than in previous market environments. Credit rating agencies, banks and investors have increased the level of due diligence performed on transactions. On December 15, 2014 Moody s Investors Service issued a Rating Methodology for US Municipal Utility Revenue Debt and on December 10, 2014 Standard and Poor s released their proposed criteria for US Municipal Utility Systems. Fitch continues to operate under their established criteria. A Utility should not manage itself exclusively for rating agencies; however, often times good planning and rating agency strategies are aligned. Multi-year Financial Planning. Formalized Management Practices / Policies. Comprehensive Approach to System Management (Regulatory Compliance, Capacity Issues, Competitive Rate Structure). Percent (%) Credit Spreads: 30-Year MMD AAA BBB Credit Spreads (%) vs the 30-yr AAA MMD Nov Dec 2008 Rating Min Max Average AA A BBB Dec Jan 2015 Rating Min Max Average AA A BBB Note: credit spreads compared to the 'AAA' equivalent February 10-11, 2015 UNC School of Government Environmental Finance Center 2

3 Characteristics of a Financially Strong Utility System System size and assessment base. Larger systems can achieve economies of scale. Smaller systems may have trouble raising revenues to meet large fixed costs. Economy and customer base. Diverse customer base protects against loss of large customers. Growing economy / population increase can stress a system s ability to meet capital and operating needs. Wealth and income levels provide insight into the economic resources of the service area. Governance / Legal Provisions. An independent Board often counters politicization of a utility. Trust Agreements set minimum operating / financial standards for issuers in a contract with bond holders. Rate Covenant. Additional Bonds Test. Debt Service Reserve Fund. February 10-11, 2015 UNC School of Government Environmental Finance Center 3

4 Characteristics of a Financially Strong Utility System Management. Adaptability to regulatory changes and financial constraints. Sound staffing practices. Established track record of financial management and regulatory compliance. Financial Policy Guidelines. Strategic Focus. Multi-year Capital Improvement Plan ( CIP ) which includes current and projected capital needs for asset maintenance and expansion of user base. Identified funding sources for CIP with a balanced mix of debt and pay-go financing. Long-term financial forecasting minimizes financial uncertainty. Proactive regulatory compliance planning process. Rates, rate structure, and rate-making flexibility. Ability and willingness to set/raise rates to a sufficient level to meet all obligations and maintain reserves for emergencies. Debt Service Coverage. Liquidity. February 10-11, 2015 UNC School of Government Environmental Finance Center 4

5 Characteristics of a Financially Strong Utility System Liquidity. Systems with large, completed, and compliant capital improvement programs can afford narrower margins. Adequate excess revenues (i.e. strong debt service coverage ratio) enable systems to cash-fund more capital needs. System Capacity. Ability of current system capacity to support existing customers and future growth. Additional needs in near-term and long-term to meet customer demand affect size and scope of capital programs. System Condition. Age and repair of existing system facilities. February 10-11, 2015 UNC School of Government Environmental Finance Center 5

6 Multi-Step Approach to Establishing a Financially Strong Utility System February 10-11, 2015 UNC School of Government Environmental Finance Center 6

7 Perform an Internal Assessment of Historical Financial Performance Evaluate Operating Revenues and Expenditures. Diversity of operating revenue sources. Source of revenue growth (e.g. customers, flows, rates). Operating revenues derived from contractual agreements. Nature of expenditure drivers (i.e. fixed contractual obligations vs. variable flow-driven expenses). Structural Operating Balance. Indentify Non-Operating Revenue / Expenditure Cash Flows. Capacity / development / connection fees. Transfers to / from the other funds (e.g. General Fund, Rate Stabilization Fund, etc.). Indirect cost allocations. Debt service costs. Millions Millions Utility Revenues vs. Expenditures Budget Operating Expense Debt Service Revenue Historical System Flows Budget Wastewater Flows Water Flows February 10-11, 2015 UNC School of Government Environmental Finance Center 7

8 Perform an Internal Assessment of Historical Financial Performance Capital Funding Activities. Historical debt issuance. Pay-as-you-go Capital Outlay. 4.0x 3.5x 3.0x Total and Parity Debt Service Coverage 2.5x Liquidity Position. Identify both restricted and unrestricted resources. Measure liquidity relative to System Budget. 2.0x 1.5x 1.0x.5x.0x Budget Total Debt Service Coverage Parity Coverage Cash as a percentage of O&M Expenditures. Days Cash on Hand. Debt Service Coverage. Parity. Subordinate. Total Cash as a % of O&M and Days Cash on Hand Budget 500% 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% Operating Days Cash on Hand Cash as % of Operating Expense February 10-11, 2015 UNC School of Government Environmental Finance Center 8

9 Peer Comparative and Benchmarking Analyses Develop a meaningful peer group to identify relative strengths and weaknesses. Debt Ratios. Fund Balance / Liquidity Ratios. Customer Concentration. Service Area Characteristics. Nat'l 'Aaa' W&S Median Nat'l 'Aa' W&S Median Nat'l 'A' W&S Median NC 'Aaa'' W&S Median NC 'Aa' W&S Median Total Debt Service Coverage Peer Groups may include: Credit Rating Categories. Customer Base Size. Neighboring Utility Systems. NC 'A' W&S Median 0.00x 0.50x 1.00x 1.50x 2.00x 2.50x 3.00x 3.50x Water and Sewer Unrestricted Cash as a % of O&M Nat'l 'Aaa' W&S Median Nat'l 'Aa' W&S Median Resources for benchmarking include: School of Government Dashboard. Credit Rating Agency Publications. Local Government Commission Reports. Nat'l 'A' W&S Median NC 'Aaa'' W&S Median NC 'Aa' W&S Median NC 'A' W&S Median Percent February 10-11, 2015 UNC School of Government Environmental Finance Center 9

10 Forecast Future Financial Performance to Achieve Identified Goals Project Future Operating and Non-Operating Revenues. System flows, customer growth and required Rate Increases. Millions Historical and Projected Revenues Project Future Operating Expenditures. Overhead costs and contractual obligations. Variable costs driven by system demand and cost of materials. - 5 Historical Revenues Projected Revenues Millions Historical and Projected Expenditures 10-5 Historical Expenditures Projected Expenditures February 10-11, 2015 UNC School of Government Environmental Finance Center 10

11 Forecast Future Financial Performance to Achieve Identified Goals Develop a multi-year Capital Improvement Program ( CIP ) including: Identifying realistic capital and maintenance needs (not a wish list). Asset Management. System Enhancement. Regulatory. Capacity/Expansion. Assigning funding sources for all projects with a balanced approach of pay-as-you-go cash, grants, reserves and debt. Regulatory 25% Installment Purchase Contracts 5% Capital Reserve Fund 10% Capacity / Expansion 20% 5-Year CIP: Uses of Funds 5-Year CIP: Sources of Funds Asset Management 40% System Enhancement 15% Pay-As-You- Go Capital 10% Analyzing potential operating budget impacts associated with planned capital projects. Grants 30% Revenue Bonds 45% February 10-11, 2015 UNC School of Government Environmental Finance Center 11

12 Forecast Future Financial Performance to Achieve Identified Goals Analyze the forecasted revenues, expenditures and capital needs relative to financial ratios. Isolate the effect of key variables to stress test the system s financial performance. Model various demand scenarios and the related impacts on revenues. Expenditure inflation. Parity vs. subordinate indebtedness. 4.0x 3.5x 3.0x 2.5x 2.0x 1.5x 1.0x.5x.0x Total and Parity Debt Service Coverage Budget Total Debt Service Coverage Parity Coverage Calculate System capital funding capacity under a series of parameters including debt service coverage levels, liquidity measures and revenue growth. Measure potential Customer Rate Implications. One-time increases vs. multi-year strategy. System Funding Capacity - 5% Revenue Growth Debt Service Coverage Ratio Cash 1.00x 1.25x 1.50x 1.75x 25% 25,500,000 20,500,000 17,500,000 15,000,000 50% 24,500,000 19,500,000 16,500,000 13,500,000 75% 23,500,000 18,000,000 15,000,000 12,500, % 22,500,000 17,000,000 14,000,000 11,500,000 February 10-11, 2015 UNC School of Government Environmental Finance Center 12

13 Establish a Series of Policies and Procedures Financial policies can provide benefits to a number of parties by: Establishing a policy / decision making framework for staff and the governing body. Providing comfort to Rating Agencies, Banks and Investors that a utility system will mange itself in a responsible fashion. Offer transparency to customers. 4.0x 3.0x 2.0x 1.0x.0x Total and Parity Debt Service Coverage Budget Total Debt Service Coverage Parity Coverage Rate Covenant - Total Rate Covenant - Parity Policy - Total A Financial Policy and Procedures Document may include: Cash Management and Investment Policies. Budgeting Policies. Capital Improvement Planning Policies. Debt Policies. Liquidity Policies Cash as a % of O&M and Days Cash on Hand Budget Operating Days Cash on Hand Cash as % of Operating Expense Policy 500% 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% February 10-11, 2015 UNC School of Government Environmental Finance Center 13

14 Implement a Multi-Year Plan Memorialize the Plan through a series of Policy / Planning Documents. Adopted Financial Policies and Guidelines. Formalized Capital Improvement Plan. Approved by the Governing Body. Updated on a regular basis (e.g. annually or bi-annually). Multi-Year Rate Strategy that is implemented by the Governing Body and is assessed annually as part of the budget process. February 10-11, 2015 UNC School of Government Environmental Finance Center 14

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