MODELING WATER UTILITY FINANCIAL PERFORMANCE¹

Abstract

The purpose of this paper is to present a theory and model for assessing the financial health of public water systems. Using financial information from 25 water utilities in Georgia, the paper seeks to identify the causal relationships between the financial performance of a water utility and its fiscal position. The need for a theoretical understanding of water utility financial health is the result of the increasingly stringent performance requirements under the Safe Drinking Water Act (SDWA). The issue has become particularly important for small water systems that will be exposed to significant financial demands. A set of financial ratios were developed and tested in a model that was based on liquid asset theory. The model contained five variables designed to account for the size of liquid assets, current debt, cash-flow, and the level of expenses. The variables fit the need of water utilities: to provide an adequate level of operation and maintenance to meet current and future system needs as well as SDWA standards. (KEY TERMS: water management; economics; cash-flow models; ratio analysis.)

Predicting the Probability of Default for Municipal Water Utilities in Indonesia

“…In business failure modeling, there is no theoretical basis for choosing a variable other than the fact that it has been used previously and has been found to be statistically significant (Dreese & Beecher, 1993). Studies in this area usually begin with a large number of financial ratios and then reduce the number to a few key variables using various empirical methods (Jordan et al, 1996). Our study has heavily relied on the PDAM Annual Performance Report, which had been made public by BPPSPAM (www.bppspam.com).…”

“…Studies in this area usually begin with a large number of financial ratios and then reduce the number to a few key variables using various empirical methods (Jordan et al, 1996). Our study has heavily relied on the PDAM Annual Performance Report, which had been made public by BPPSPAM (www.bppspam.com).…”

“…One of the very rare examples on water utilities was done by Jordan, Witt, and Wilson (1996), who estimated water utility financial performance for the U.S. state of Georgia in terms of the debt service coverage ratio; they determined this ratio using five other financial ratios: current ratio, leverage, interest coverage, return on assets, and operating ratio. Of these, the last three ratios were found to be statistically significant.…”