Business Type Enterprises

1
Business Type Enterprises

• Commercial-type activities of a government, such
  as public utilities
• Water and sewer authoritieseither fully
  independent or component units of local
  governments
• Departments within local governmentsblended or
  discrete component units
• Water and sewer rates (fixed and variable) and
  user fees (connection, septage hauling) should be
  sufficient to sustain system over the long-term.

2
Median Ratios for Authority Performance

• Like private sector, ratios have been used by
  public utilities for comparative purposes for
  many years.
• Rating agencies typically use utility-specific
  median ratios as part of the story as they
  evaluate an authority (or local government) for
  their ability to issue revenue bonds.
• Fitch released its 2011 Median Ratios in January.
  They are available for self-evaluation at
  www.fitchratings.com.

3
Virginia Water and Sewer Authorities

• Public utilities in Virginia range from very
  small town systems to very large regional
  systems.
• Draper Aden publishes a rate comparison study
  each year on www.daa.com. It allows public
  utilities to find comparably-sized utilities by
  their customer base.
• Comparisons can also be made between public
  utilities who treat their own water/wastewater or
  those who simply provide a distribution/
  collection system.

4
Augusta County Service Authority

• Comparative group for Augusta County Service
  Authority (ACS Authority)
• Medium-sized utility (8-14,000 connections or 4
  million gallons per day treated/consumed)
• Western part of state (less urban)
• Treat own water and wastewater at multiple
  facilities
• Questions Did the ACS Authority have too much
  liquidity and too much debt?

5
Liquidity for Water and Sewer Authorities

• The immediate ability of an Authority to pay its
  current debts as they come due. One such median
  ratio is
• Current ratio Current Assets
• Current Liabilities
• Fitch reports that median current ratios of
  better than 2.1 (AAA) to 3.7 (A) are national
  benchmarks for retail water and sewer systems.

6
Comparisons for ACS Authority
7
Comparisons for ACS Authority

• ACS Authoritys current ratio was within the
  Fitch range of 2.1 to 3.7.
• ACS Authoritys current ratio was right at the
  average of 2.6 for the comparison group but
  higher than three.
• Recommendation to bring liquidity closer to 2.1
  now that major WWTP ENR upgrades completed.

8
Solvency for Water and Sewer Authorities

• A determinant of an Authoritys ability to meet
  its service delivery and financial commitments
  both now and in the future. One such ratio is
• Debt Ratio Liabilities
• Net Assets
• A ratio of 1.0 or less would generally be desired
• Fitch has a number of more complicated ratios
  that it uses in its evaluation.

9
Comparisons for ACS Authority
10
Comparisons for ACS Authority

• ACS Authoritys debt ratio was the median and
  right at the average of 0.51 for the comparison
  group.
• Debt was driving rates higher but the other
  authorities were experiencing similar needs to
  fund expensive treatment upgrades.
• Fitchs similar ratio of total outstanding debt
  to net capital assets is below a 39 to 44
  benchmark. ACS Authority falls within that range.

11
Conclusions for ACS Authority

• The high liquidity made ACS Authority vulnerable
  this spring to political pressures to fund
  non-core projects even though its five-year CIP
  fully utilized its cash reserves.
• ACS Authority decided to not make final draws on
  its last WWTP upgrade loan. That lowered its
  liquidity, increased its solvency, and reduced
  the amount of bond-covenant-required rate
  increases.
• ACS Authority will continue to use both local and
  national comparisons of key ratios as financial
  performance indicators. These ratios are
  respected by its Board of Directors to assist in
  decision-making.

12
Questions?