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MWMC FINANCIAL SOUNDNESS AND FUTURE <br />FINANCING CAPABILITY <br />Introduction <br />MWMC needs to use some form of debt financing in the near future to fund capital <br />improvements included in the 2004 Facilities Plan. It is essential for the utility to have ready <br />access to the capital financing markets in order to keep open various options for securing debt <br />funding. Appendix I provides an overview and assessment of both qualitative and quantitative <br />credit worthiness indicators used in the wastewater industry. For five of the primary quantitative <br />measurements, the Appendix develops a 20-year future financial scenario for MWMC and then <br />assesses MWMC's resulting fmancial ratios compared to national medians and credit rating <br />industry guidelines. <br />Financial Soundness and Financing Capability <br />The fmancial industry uses a variety of fmancial ratios to quantify a utility's fmancial soundness. <br />Examples of these financial ratios are: <br />• Operating ratio: Operating and maintenance expenses, divided by the total operating <br />expenses, <br />• Net take-down ratio: Net revenues, divided by gross revenue and income, <br />• Interest coverage ratio: Net revenues, divided by interest requirements for the period, <br />• Debt service coverage ratio: Net revenues, divided by principal and interest requirements <br />for the period, and <br />• Debt service safety margin ratio: Net revenues, less principal and interest requirements <br />for the period, divided by gross revenue and income. <br />Appendix I describes a number of the most common fmancial ratios used. It is clear from the <br />quantitative analysis in Appendix I that MWMC is positioned well financially. Both MVVMC's <br />current financial situation, with zero long-term debt, and the 20-year future debt-financing <br />scenario result in performance on the quantitative measures that exceeds (in a good sense) the <br />national medians and the financing industry's guidelines. MWMC's fmancial ratios perform <br />very well under the scenarios analyzed. The future scenario evaluated in Appendix I assumes a <br />level of debt that will allow fulfillment of MVJMC's 20-year Project List. Even given that level <br />of debt, the quantitative fmancial measures indicate that IvIWMC will have substantial remaining <br />capacity to assume additional debt should that be necessary. <br />The qualitative measures assessed in Appendix I also indicate that MWMC is in a strong position <br />with respect to its credit worthiness. MWMC's sound financial management, long-term fmancial <br />forecasting and planning, stable operations and a host of other qualitative indicators all indicate <br />that MWMC would perform extremely well in any assessment by a credit rating agency or other <br />financial body. <br />2005 MWMC Financial Plan Page 10 <br />