TEXT - Fitch revises Dover, Delaware outlook to positive
Jan 10 - Fitch Ratings upgrades Dover, Delaware (the city's) rating as follows: --$2.9 million water and sewer refunding revenue bonds, series 2003 to 'AA' from 'AA-'. The Rating Outlook is revised to Positive from Stable. SECURITY The bonds are secured net revenues of the city's combined water and sewer system (the system) and impact fees. KEY RATING DRIVERS UPGRADE REFLECTS IMPROVING FINANCIAL METRICS: The upgrade reflects a demonstrated trend of solid financial performance following two years of double digit rate increases. Debt service coverage (DSC) is forecast to remain strong at over 2.6x through 2017 and liquidity is a solid 345 days of cash on hand (DCOH). LOW DEBT BURDEN: Debt levels are exceptionally low and likely to remain at a manageable level given the system's limited capital needs and additional issuance plans. RATE FLEXIBILITY: Despite recent increases system rates retain ample flexibility and register well below Fitch's affordability threshold. Only modest additional increases are presently forecasted. CUSTOMER CONCENTRATION: Some concentration among large customers exists, although this concern is largely mitigated by the stability of each of the largest users. STABLE SERVICE TERRITORY: The system provides retail service to a diverse and important service area that functions as both the state capital and county seat. WHAT COULD TRIGGER A RATING ACTION CONTINUED SOLID FINANCIAL FLEXIBILITY: Maintenance of the system's strong financial metrics which accommodate for future debt plans. CREDIT PROFILE RATE INCREASES BOOST FINANCIAL METRICS Financial performance improved significantly following two years of system rate hikes. In fiscal 2010 water rates increased 10.2% followed by another 11% hike in 2011, and wastewater rates were boosted by a sizeable 26% in 2011 resulting in DSC of 6.0x in fiscal 2012. The rate increases also improve liquidity to over $8 million or the equivalent of 345 DCOH in fiscal 2012. Management's current financial forecast through fiscal 2017 shows strong debt service coverage of at least 2.6x. The forecast incorporates reasonable assumptions, including a moderate rate adjustment of 2% in 2015, additional debt issuance already programmed into the current capital plan and little change in current consumption levels and customer count. Fitch would view positively the system's ability to maintain its current cash position and generate actual results through the current planning period consistent with projected financial metrics. USER CHARGES REMAIN VERY AFFORDABLE Despite the recent rate adjustments, user charges are very low and retain ample future flexibility. The average combined residential utility bill (using a 7,000 gallon basis) totals just under $40. This equates to 1% of median household income (MHI), well below Fitch's affordability threshold of 2% of MHI. MANAGEABLE CAPITAL PLAN The system's capital improvement plan (CIP) for fiscal years 2013-2017 projects about $25 million in projects, divided almost evenly between water and wastewater needs. The current CIP is about $6 million more than the 2011 program and focuses on system repair and maintenance of aging infrastructure. The largest allocation, about $5 million, will be used to reduce inflow and infiltration. The CIP also includes $4 million for infrastructure improvements related to the construction of a power station by Calpine within the city. Fitch notes construction of the project remains subject to certain environmental and land use approvals. Funding of the CIP will mostly come from excess revenues and cash balances. Approximately $6 million, or 25% of the entire CIP, will be funded by revenue bonds which are anticipated to be issued in 2013 and 2015. FAVORABLE DEBT PROFILE The system has a very favorable debt profile, with low debt per capita at $293; considerably less than the 'AA' median level of $433. All in debt as a percent of gross revenues is very low at 6%. Fitch projected debt per capita, inclusive of the aforementioned additional issuance plans, will remain comfortably within the 'AA' category median at approximately $420. AMPLE SUPPLY AND CAPACITY The water system relies primarily on local ground water resources. The system serves residents within the city, as well as portions of Kent County adjacent to the city. System operational risk is limited. The city's wastewater system provides collection and transmission service only; wastewater that is collected is conveyed to the Kent County wastewater treatment facility pursuant to a wholesale contract that expires in 2016. The average daily flow totals about 4.5 million gallons daily (mgd) each year and the city passes all county costs of service onto ratepayers. Management believes the county's treatment plant is in full compliance with all federal and state environmental standards. The water system, with about 13,000 accounts, receives its water from 15 deep wells and seven shallow wells and includes one water treatment plant and six elevated storage tanks. Three allocation permits allow for nearly 16.5 mgd of withdrawal, and treatment capacity (10.6 mgd) currently totals more than twice the average demand experienced in 2012. Two of the three outstanding withdrawal permits expire in 2018 and the third is in effect through 2024. Fitch does not consider renewal of the system's withdrawal permits or wastewater contract with Kent County a risk. CONCENTRATION AMONG TOP USERS Some concentration exists among the top 10 users of the water and wastewater systems, although the level of concentration is half of what it was 10 years ago. For fiscal 2012, the top 10 water and wastewater users accounted for 13.9% of total operating revenue. Delaware State University and Proctor Gamble are the largest water users and Dover Downs and Kent General Hospital are the largest wastewater users. Management noted there were no major changes associated with the largest users and all appear stable. SOUND SERVICE AREA ECONOMY As the capital of the State of Delaware and county seat for Kent County, Dover's employment base is heavily influenced by the generally stable government sector. The city is also home to Dover Air Force Base, which employs approximately 6,400 military and civilian personnel. Delaware State University and Bayhealth Medical Center also provide stable sources of employment. The city's favorable tax environment and proximity to major east coast markets also make it a center of commerce and employment for central Delaware. Dover's 7.8% unemployment rate in October 2012 is higher than the state (6.6%) average and only slightly above the national (7.5%) average, and income levels rank below Kent County, the state (78%) and the nation (89%). Fitch rates the city's general obligation bonds 'AA+' with a Stable Outlook.
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