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^ Repair and replacement reserve levels. <br />^ Rate stabilization reserve levels. <br />^ Debt service reserve levels. <br />^ Unrestricted cash and investments. <br />^ Reserves for variable-rate fluctuations if the utility incurs variable-rate debt. <br />• Covenants <br />^ Annual debt service coverage of 1.2 times in rate covenants and/or additional <br />bonds tests are typical. <br />^ Does the system regularly exceed typical covenant requirements? <br />^ If so, does it show strong prospects of continuing this trend? <br />^ Level of minimum credit protection provided if utility is likely to test or breach <br />covenants. <br />• Charges and Rate Affordability <br />^ Do political leaders and utility officials regularly raise rates when needed? Is <br />review by an outside entity required? <br />^ Affordability of rates for residential, commercial, and industrial classes. <br />^ Comparison of rates to those in nearby communities, and whether they affect the <br />ability to raise rates when needed. <br />• "Crew" (Management) <br />^ Important for linking these credit features together. <br />^ Are management and administrative practices institutionalized, recognized by <br />political leaders and management officials, and able to withstand personnel <br />changes? <br />^ Have management and administrative practices withstood prior periods of <br />operating volatility, if any? <br />Similar analysis frameworks are maintained by other credit rating agencies. For example, <br />Standard and Poor's wastewater utility rating methodology incorporates two components: <br />1) The Business Profile (a qualitative analysis that looks at regulation, markets, operations, <br />competitiveness, and management), and <br />2) The Financial Profile (a quantitative analysis that looks at profitability, capital structure, <br />cash flow analysis, and financial flexibility). <br />Moody's (another credit rating agency) states their assessment covers four primary areas; <br />Economy, Debt, Finances, and Administration/Management Strategies. They cite the following <br />list of key rating factors in their August 1999 report Rating Methodology: Analytical Framework <br />for YYater and Sewer System Ratings: <br />• System size and assessment base. Larger systems can achieve economies of scale. Smaller <br />systems may have more trouble raising revenues to meet large fixed costs. <br />• Local economy and customer base. Moody's looks for a diverse customer base to protect <br />against the loss of a large customer. The system's ability to meet the needs of a growing <br />economy and population is also analyzed. <br />• Governance. Operation by an independent board often counters the politicization that can <br />impede efficiency. <br />2005 MWMC Financial Plan - Appendix I Page 22 <br />