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Fitch Upgrades Dover, Delaware's Electric Revs to 'AA-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings upgrades the rating on the following bonds of Dover, DE (the city):

--$30.3 million electric revenue bonds, series 2008 and 2010, to 'AA-' from 'A+'.

The Rating Outlook is Stable.

SECURITY

Outstanding series 2008 and 2010 bonds are secured by net revenues of the city's electric system.

KEY RATING DRIVERS

STABLE SERVICE TERRITORY: The city's utility system provides retail service to a diverse and important service area that functions as both the state capital and county seat. Wealth levels are subpar, but unemployment continues to trend downward and remains below state and national averages.

CONSISTENTLY STRONG FINANCIAL PERFORMANCE: The rating upgrade to 'AA-' reflects the system's consistently strong financial metrics, particularly in comparison to the 'AA-' rating category medians, and Fitch's expectation for similar operating results going forward. Annual debt service coverage (DSC) on average has exceeded 4x over the past five years, and coverage of full obligations, including transfers to the city's general fund and purchased power obligations, is satisfactory for the rating at 1.3x.

DECLINING RATES: Rates have been reduced over the last three fiscal years but still rank slightly higher relative to the statewide and national averages. However, sizeable rate increases in the latter half of the prior decade demonstrate a commitment to maintaining financial strength, and the more recent reductions should preserve some financial flexibility going forward.

SUFFICENT POWER SUPPLY: The electric system's owned and purchased power resources provide the city with a reliable power supply sufficient to meet future needs.

FAVORABLE DEBT PROFILE: Leverage ratios compare well to medians for the rating category and should improve going forward as the system continues to fund its capital needs from excess cash flow and existing reserves. Debt/customer and debt/funds available for debt service (FADS) of about $1,300 and 1.6x, respectively, were equal to roughly half the rating category medians.

CREDIT PROFILE

STABLE SERVICE TERRITORY

The city of Dover, DE's (general obligation bonds rated 'AA+' with a Stable Outlook by Fitch) electric utility provides service to the city and its surrounding areas. The city's role as the state capital and county seat for Kent County provides a stable employment base rooted in the government sector. The city is also anchored by Dover Air Force Base (AFB), which employs approximately 6,400 military and civilian personnel, Delaware State University and Bayhealth Medical Center (revenue bonds rated 'AA-'; Stable Outlook). Income levels are somewhat weak but the city's unemployment rate ranks lower than state and national averages.

The system benefits from a fairly diverse customer base with no meaningful concentration among users and residential and commercial customers accounting for almost two-thirds of annual operating revenues. The largest customer is Dover AFB, which accounted for about 8% of total revenue in fiscal 2011. Collections continue to approximate nearly 100%, and write-offs have remained below 1% over the past several years.

RELIABLE POWER SUPPLY

A majority of the system's power supply is purchased from the Pennsylvania New Jersey Maryland Interconnection (PJM) marketplace through an energy manager. Owned generation consists of two power plants that are dispatched sparingly and operate primarily as peaking units. Each unit burns both natural gas and fuel oil and have a combined capacity of 175 megawatts (MW). North American Energy Services Corporation (NAES Corporation) operates both plants pursuant to an operating agreement between the city and NAES.

Dover is also a member of the Delaware Electric Municipal Corporation (DEMEC; revenue bonds rated 'A-' with a Stable Outlook). DEMEC is a joint action agency providing all-requirements wholesale energy to seven of its nine members in the state of Delaware. The city of Dover is one of the two members not included in all-requirements supply. Instead, DEMEC supplies renewable energy to Dover under a partial requirements contract.

ABOVE-AVERAGE RATES

Electric rates are above state and national averages, despite recent decreases driven by reduced natural gas prices. The average revenue/kWh was 13.26 cents, compared to the 2011 statewide and national averages of 11.90 cents and 9.91 cents, respectively. Fitch believes the above-average prices might ultimately hinder the city's ability to enact further rate increases, although the system's current financial forecast through fiscal 2017 does not rely on rate increases.

STRONG HISTORICAL AND PROJECTED FINANCIAL RESULTS

The system continues to generate sound financial results that are projected to remain consistent with Fitch's 'AA-' rating category medians through fiscal 2017. A nearly 2.5% increase in sales coupled with a continued decline in power supply costs boosted DSC to a robust 4.8x in fiscal 2011, easily exceeding the rating category median of 2.5x. Historical DSC levels have been consistently strong over the prior five years, averaging slightly more than 4x.

Coverage of full obligations, which includes annual transfers to the city's general fund and purchased power costs, is acceptable for the rating despite being slightly weaker at about 1.2x (on average) versus the rating category median of 1.4x. Financial projections through fiscal 2017 include little change in DSC levels based on what Fitch believes are reasonable assumptions. Balance sheet resources, including available reserves in the system's improvement and extension fund, were equal to a sizeable 175 days cash in fiscal 2011, also comfortably above the median for comparably rated utilities.

LOW LEVERAGE

The system's debt levels are low relative to similarly rated systems. Debt per customer of about $1,300 was half the median ratio in fiscal 2011, and equity/capitalization improved to 78.5% compared to the median of 63%. Debt/FADS adjusted for purchased power also improved in fiscal 2011, declining to 1.6x compared with the median ratio of 3.9x. Fitch expects leverage ratios to continue improving given the city's plan to fund capital expenditures from existing resources.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

This action was informed by information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria.

Applicable Criteria and Related Research:

--'U.S. Public Power Rating Criteria', Jan. 11, 2012;

--'Revenue-Supported Rating Criteria', June 12, 2012.

Applicable Criteria and Related Research:

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=665815

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

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Fitch Ratings
Primary Analyst
Christopher Hessenthaler, +1 212-908-0773
Senior Director
Fitch, Inc.
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or
Secondary Analyst
Ryan A. Greene, +1 212-908-0593
Director
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Committee Chairperson
Dennis Pidherny, +1 212-908-0738
Senior Director
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Email: elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings