2005 MWMC Financial Plan - Laserfiche WebLink

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APPENDIX I CREDIT WORTHINESS IN THE U.S. PUBLIC WASTEWATER SECTOR Background The wastewater utility industry in the United States is very capital intensive. In addition to adding capacity necessary to accommodate population growth, sewer utilities must also reinvest in capital assets to extend the life of the facilities, and to maintain compliance with environmental and other regulatory requirements. Even the smallest wastewater utilities must spend millions to preserve, upgrade and expand their plant facilities. In order to meet new and ongoing capital needs, it is essential for the wastewater utility industry to have access to capital financing markets. In the 1970s and 1980s, Federal grants were available to build and upgrade facilities. For example, MWMC was awarded more than $80 million in Federal grants to construct the Eugene/Springfield wastewater facilities. In the years since, a significant portion of the wastewater industry's capital needs have been met using current revenues (also known as pay-as- you-go). However, recent data indicates bond financing is used extensively and may be growing. Ina 1999 study, Moody's Investor Services reported that the median debt-to-fixed- assets ratio was roughly 33 percent. Simply put, the median wastewater utility had one third of all its assets carried as bonded debt. Other national gauges indicate that more than one half of new capital investment in the industry is funded through bond financing. Demonstrating and maintaining credit worthiness in the eyes of the capital financing markets is critical to obtaining bond financing at the lowest possible interest rate. Establishing policies, practices and other terms of operation that confirm and enhance credit worthiness should be a primary goal of the MWMC Financial Plan, and guide the management of the utility. Measuring Credit Quality While capital debt may be structured in numerous ways, revenue bonds and general obligation bonds are the most common instruments used by the public sewer industry in the United States. For example, MWMC matched the Federal grant funds with $29.5 million in general obligation bonds to fully finance construction of the regional wastewater facilities. When assessing the credit quality of a wastewater utility, there are numerous financial measures and other factors that are evaluated by the capital market. Public sewer utilities are generally viewed favorably by bond rating agencies and creditors, because they tend to be very stable with minimal risk of default. They are highly regulated, essential to the public good, and often operate with a natural monopoly. The regulatory bodies for wastewater utilities typically have the authority to establish user fees and charges necessary to cover debt obligations. The industry, as a whole, has an extremely good credit history. However, individual wastewater utilities are still subject to close scrutiny when requesting large issues of capital debt. When assessing the credit quality of a wastewater utility, a bond rating agency will generally examine several specific areas, including: • Financial ratios and other indicators of fiscal health, 2005 MWMC Financial Plan - Appendix I Page 20