AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA+' rating on the Dover, Delaware (the city) bonds as follows:
--$5.79 million water and sewer revenue refunding bonds, series 2013A.
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
STRONG FINANCIAL METRICS: Debt service coverage (DSC) is strong at over 4x and liquidity has almost doubled since 2011, averaging over 400 days of cash on hand (DCOH) for the last three years.
LOW DEBT BURDEN: Debt levels are exceptionally low and likely to remain at a manageable level given the system's capital needs and limited future borrowing.
CUSTOMER CONCENTRATION: Concentration among large customers exists with the top 10 users accounting for over 20% of system revenues; however, the largest users have been stable.
RATE FLEXIBILITY: System rates retain ample flexibility and registers well below Fitch's affordability threshold.
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.
RATING SENSITIVITIES
MAINTENANCE OF FINANCIAL PERFORMANCE: Significant leveraging or swift financial decline could pressure the rating, but given Dover, Delaware's strong financial margins and currently very low debt burden, such a situation is viewed as highly unlikely.
CREDIT PROFILE
SOLID FINANCIAL METRICS
Financial performance improved significantly following back to back years (fiscal 2010 and 2011) of 10% rate hikes on the water system and a hefty 26% sewer rate hike in fiscal 2011. As a result, DSC has been robust averaging 4.4x over the last three years, resulting in the rating upgrade to 'AA+' in 2014. Rate adjustments also boosted the system's liquidity position with cash balances growing to over $14 million in fiscal 2015, up from just $7.3 million in fiscal 2011. The fiscal 2015 cash position is slightly overstated, as the city was holding an additional $2.3 million that was payable to Kent County for wholesale sewer service that was transmitted the day after the close of the fiscal year. Excluding the $2.3 million payable to Kent County, cash was still high at over $11 million, or the equivalent of over 450 DCOH.
Management's financial forecast indicates strong coverage levels of 5x or higher through fiscal 2020. The forecast incorporates reasonable assumptions, including 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 above average 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 $51.30. This equates to 1.3% 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 1.7% MHI. However, actual flows sent to the county are higher due to inflow and infiltration (I&I) issues.
MANAGEABLE CAPITAL PLAN
The system's capital improvement plan (CIP) for fiscal years 2016-2020 includes $19.2 million in projects, divided between water and sewer upgrades, I&I projects, meter replacement, and water quality projects. The current CIP is about $1.6 million less than the 2014 program and continues to focus on system repair and maintenance of aging infrastructure. The city will be investing $5.8 million on projects related to reducing I&I issues. Funding of the CIP will come from excess revenues and a planned $3.8 million state revolving note loan in the next two years.
FAVORABLE DEBT PROFILE
The system has a low debt burden, with $13.6 million in outstanding parity debt in the form of revenues bonds and state revolving loans. Debt ratios are quite favorable with debt to net plant at just 25% and debt per customer of $568 for fiscal 2015, considerably less than Fitch's 'AA' median levels of 47% and $2,050. All-in debt as a percent of gross revenues is also low at 8% in fiscal 2015. Amortization is 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 $591 by fiscal 2020.
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, with a 10 year option for renewal. 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 providing 3.75 million gallons of storage. Three allocation permits allow for nearly 16.5 mgd of withdrawal and current production capacity from available resources totals over 11 mgd, more than twice the average daily demand experienced in fiscal 2015. 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 system. In fiscal 2015, the top 10 customers accounted for about 20% of total operating revenue (Fitch's 'AA' median is 9%). The top three users, which include Proctor and Gamble, Dover Downs and Kraft Foods (rated 'BBB-'/Outlook Stable), account for 10% of system revenues. There has been some movement among the highest users with Proctor and Gamble replacing Dover Downs as the top user, but otherwise most of the top 10 customers have been 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 government sector. Dover is also home to Dover Air Force Base, the city's largest employer. 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.
The city's unemployment was generally unchanged in December 2015 (5.6%) from the year prior (5.9%) and higher than the state and county at 4.3% and the nation at 4.8%. Median income levels rank below Kent County, the state (81%) and the nation (91%).
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223
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Dodd-Frank Rating Information Disclosure Form
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002220
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