Fitch Upgrades Dover, DE's, Water and Sewer Revs to 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings upgrades the rating on Dover, Delaware (the city), as follows:

--$6.22 million water and sewer revenue refunding bonds, series 2013A to 'AA+' from 'AA'.

The Rating Outlook is 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 DUE TO STRONG FINANCIAL METRICS: The upgrade reflects the system's continued strong financial characteristics, coupled with its low debt profile and stable economic underpinnings. The system has demonstrated a trend of solid financial performance following recent double digit rate increases. Debt service coverage (DSC) is healthy at over 4x and liquidity has doubled since 2009, registering a robust 399 days of cash on hand (DCOH) at fiscal year (FY) 2013 year-end.

LOW DEBT BURDEN: Debt levels are exceptionally low and likely to remain at a manageable level given the system's modest capital needs and no plans for future borrowing.

CUSTOMER CONCENTRATION: Concentration among the largest customers exists, with the top 10 users accounting for more than 20% of system revenues; however, this concern is largely mitigated by the stability of the largest users.

RATE FLEXIBILITY: Despite recent increases system rates register well below Fitch's affordability threshold, providing ample rate flexibility. Only modest additional increases are planned within the next five years.

STABLE SERVICE TERRITORY: The system provides retail service to a diverse service area that functions as both the state capital and county seat.

RATING SENSITIVITIES

RATING STABILITY EXPECTED: The rating is sensitive to shifts in various credit characteristics, including financial performance, operating profile, and capital and debt management. The Stable Rating Outlook reflects Fitch's opinion that such changes are unlikely.

CREDIT PROFILE

SOLID FINANCIAL METRICS

Financial performance improved significantly following two years of system rate hikes. In fiscal year 2010 and 2011, water rates were increase by 10% and 11%, respectively. Wastewater rates also saw a hefty 26% increase in fiscal 2011. As a result, DSC was a strong 4.63x in fiscal 2013. The rate increases also improved liquidity to more than $9.6 million or the equivalent of 399 DCOH in fiscal 2013, almost doubling the 146 DCOH reported in fiscal 2010.

Management's financial forecast indicates strong coverage levels of 4x or higher through fiscal 2018. These revised forecasts show improvement from early projections which indicated DCS of 2.5x to 2.8x. The forecast incorporates reasonable assumptions, including an 8% sewer rate increase in fiscal 2016, additional revenues related to the completion of a technical park in fiscal 2016, and little change in current consumption levels and customer count. Fitch believes the system's strong financial performance and demonstrated ability to achieve forecasted results is a key aspect of the system's high credit rating.

USER CHARGES REMAIN VERY AFFORDABLE

Despite the recent rate adjustments, user charges are very low and suggest ample future flexibility. The average combined residential utility bill (using a 7,500 gallon basis) totals just less than $48. This equates to 1.2% of median household income (MHI), well below Fitch's affordability threshold of 2% of MHI. The city bills sewer customers for the flows sent to Kent County at a rate of $2.34 per 1,000 gallons, the rate the county charges the city. When taking into account wastewater charges to Kent County the average residential bill registers a still affordable 1.6% MHI. However, actual flows sent to the county are higher due to inflow and infiltration (I&I) issues, resulting in the city making up the additional costs.

MANAGEABLE CAPITAL PLAN

The system's capital improvement plan (CIP) for fiscal years 2014-2018 includes $20.8 million in projects, divided between water and sewer upgrades, I&I projects, and improvements to the technical park. The current CIP is about $4 million less than the 2013 program and continues to focus on system repair and maintenance of aging infrastructure. Funding of the CIP will come from excess revenues and cash balances. The CIP includes $3.5 million for infrastructure improvements related to the expansion of the city's technical park which will include a Calpine power station within the city. The water and wastewater demand from the Calpine facility is expected to generate an additional $1.6 million in water revenue and over $250,000 in wastewater revenues annually for the system when the facility comes on line around 2016.

FAVORABLE DEBT PROFILE

The system has a very low debt burden, with $14.7 million in outstanding parity debt in the form of revenues bonds and state revolving loans. Debt ratios are very favorable with debt to net plant at just 23% and debt per customer of $454 for fiscal 2013, considerably less than the 'AA' median levels of 47% and $1,812. All-in debt as a percent of gross revenues also is very low at 8% in fiscal 2013. Amortization is very rapid with all debt paid off in 20 years. Fitch projected debt per customer is expected to remain well within the 'AA' category median at approximately $503 by fiscal 2018.

AMPLE SUPPLY

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; collected wastewater is conveyed to the Kent County wastewater treatment facility pursuant to a wholesale contract that expires in 2016. The average daily flow totals 4.3 million gallons daily (mgd) each year. Management believes the county's treatment plant is in full compliance with all federal and state environmental standards.

The water system, with about 12,000 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 daily demand experienced in fiscal 2013. 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 largest users of the water and wastewater systems. For fiscal 2013, the top 10 customers accounted for 21% of total operating revenue (the 'AA' median is 9%). The top three users, which include Delaware State University, Bayhealth Medical Center and Dover Downs, account for 10% of system revenues. There has been little change in the top users of the last three years and all appear stable.

SOUND SERVICE AREA ECONOMY

As the capital 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 7.1% unemployment rate in December 2013 is down more than 1% from the prior year but is higher than the state (5.9%) and national (6.5%) averages. City income levels rank below Kent County, the state (81%) and the nation (91%). Fitch rates the city's general obligation bonds 'AA+' with a Stable Outlook.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2014 Water and Sewer Medians' (December 2013);

--'2014 Sector Outlook: Water and Sewer' (December 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827018

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Contacts

Fitch Ratings
Primary Analyst:
Teri Wenck, CPA, +1-512-215-3742
Associate Director
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Christopher Hessenthaler, +1-212-908-0773
Senior Director
or
Committee Chairperson:
Steve Murray, +1-512-215-3729
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Teri Wenck, CPA, +1-512-215-3742
Associate Director
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Christopher Hessenthaler, +1-212-908-0773
Senior Director
or
Committee Chairperson:
Steve Murray, +1-512-215-3729
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com