NEW YORK--(BUSINESS WIRE)--Fitch Ratings takes the following rating action on the bonds of the City of Dover, Delaware (the city) as part of its continuous surveillance effort:
--Approximately $3.2 million water and sewer revenue bonds, series 2003 affirmed at 'AA-'.
The Rating Outlook is Stable.
RATING RATIONALE:
--While financial margins have diminished in recent years due to declining demand and management's decision to hold rates constant, financial performance is still adequate and largely consistent with the current rating category.
--Debt levels are exceptionally low, and despite planned borrowings included in the current capital improvement plan (CIP), are likely to remain at a manageable level over the long term given the combined system's limited capital needs.
--The system benefits from an abundant water supply and ample water and treatment capacity.
--Some concentration among large customers exists, although this concern is largely mitigated by the stability of each of the biggest users.
--Legal provisions are average.
KEY RATING DRIVERS:
--Despite additional borrowings planned over the next three years, Fitch expects future operating performance to be consistent with historical results.
--Maintenance of current liquidity levels is needed to mitigate the risk associated with above-average customer concentration.
SECURITY:
The bonds are secured by the net revenues of the combined water and sewer system, including the collection of wastewater impact fees.
CREDIT SUMMARY:
The system serves residents within the city, as well as portions of Kent County adjacent to the city. 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 million gallons daily (mgd) of withdrawal, and treatment capacity currently totals more than twice the average demand experienced in 2010. Two of the three outstanding withdrawal permits expire in 2018 and the third is in effect through 2024.
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 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 system's financial profile is adequate for the given rating category, although operating margins have weakened in recent years due to declining consumption and management's decision to hold rates constant for multiple years leading up to fiscal 2010. A cumulative 13.5% decline in consumption that occurred between fiscals 2008-2010 prompted annual declines in operating revenues while pay-go for capital projects and transfers to the city's general fund reduced liquidity over the last two years to nearly 150 days of cash. Coverage of senior-lien annual debt service (ADS) declined from nearly 5.0 times (x) in fiscal 2008 to 1.8x in fiscal 2010. Coverage of all-in ADS, including state revolving fund loans (SRF), dropped to 1.6x.
Transfers to the city's general fund are budgeted not to exceed 5% of projected operating revenues, which Fitch believes is manageable. Combined water and sewer rates are still very low (equal to about 1% of median household income) and offer significant flexibility. Following a 4% increase in fiscal 2006, water rates were unchanged until a 10.2% hike was imposed in fiscal 2010. For fiscal 2011, water rates went up again by 11%, and wastewater rates were boosted by a sizeable 26%. Fitch believes that the city's capacity and willingness to raise rates positively offsets the recent decline in financial performance.
The current capital plan for fiscal years 2011-2015 projects about $19 million in spending, mostly for wastewater needs. The largest allocation, about $5 million, will be used to reduce inflow and infiltration, which has reportedly become problematic for the city in recent years. Capital funding is expected to come from multiple SRF loans totaling about $11 million, excess operating revenues and cash balances totaling about $1 million annually and a small amount of impact fees. Pay-out of existing debt is rapid and debt levels are exceptionally low, leaving significant capacity to comfortably absorb the additional leveraging included in the CIP.
As the capital of the State of Delaware and county seat for Kent County, Dover's employment base is heavily influenced by the stable government sector. The city is also home to Dover Air Force Base, which employs approximately 6,500 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. Nevertheless, Dover's 10.1% unemployment rate in October 2010 remains above the state and national averages, and income levels rank below Kent County, the state and the nation. Fitch rates the city's general obligation bonds 'AA+' with a Stable Outlook.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated Oct. 8, 2010;
--'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 6, 2008.
--'2011 Water and Sewer Medians', dated Jan. 18, 2011.
--'2011 Water and Sewer Sector Outlook', dated Jan. 18, 2011.
Applicable Criteria and Related Research:
2011 Water and Wastewater Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593285
2011 Outlook: Water and Wastewater Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593286
Water and Sewer Revenue Bond Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
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