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MOODY'S ASSIGNS Aa2 RATING TO CITY OF DOVER'S (DE) $12 MILLION ELECTRIC REVENUE REFUNDING BONDS, SERIES 2010

22 Oct 2010

Aa2 RATING APPLIES TO $21.5 MILLION OF OUTSTANDING PARITY DEBT

Electric Utilities
DE

Moody's Rating

ISSUE

RATING

Electric Revenue Refunding Bonds, Series 2010

Aa2

  Sale Amount

$12,000,000

  Expected Sale Date

11/01/10

  Rating Description

Electric Revenue

 

Opinion

NEW YORK, Oct 22, 2010 -- Moody's Investors Service has assigned a Aa2 rating to the City of Dover's (DE) $12 million Electric Revenue Bonds, Series 2010. Concurrently, Moody's has affirmed the Aa2 rating on the electric utility's $21.5 million outstanding parity debt.

RATINGS RATIONALE

The bonds are secured by a pledge of and first lien on the net revenues of the city's electric system, which serves the corporate limits of the city and surrounding territory. The Aa2 rating reflects the system's satisfactory financial position characterized by healthy levels of liquidity and solid coverage ratios. The rating further incorporates the flat to limited growth of the system's mature customer base, anchored by a significant state and federal government presence, and a capital program and debt position that are expected to remain manageable. Bond proceeds will refund all or portions of Series 2004 bonds for a net present value saving of approximately $626,000, or 5.5% of refunded principal, without extension of the overall maturity structure.

SATISFACTORY LEGAL PROVISIONS FOR BONDHOLDERS

The City of Dover has covenanted to charge and collect rates for electric service so that the sum of pledged net revenues will provide at least 1.25 times coverage of debt service for all senior lien bonds outstanding. Importantly, for the purpose of calculating net revenues, the Electric Revenue Bond Resolution, as amended and restated, permits current revenues to include any one-time funds budgeted for the payment of current expenses, including appropriations made from the system's rate stabilization reserve and other accounts. Further, the Bond Resolution requires any transfers to the city's General Fund or other funds to be treated as current expenses for the purpose of calculating debt service coverage. Moody's believes that this requirement provides additional bondholder protection given that the city maintains a policy of transferring 6.5% of the electric system's gross operating revenues to the General Fund, with a 9% transfer budgeted for 2011. The legal provisions also require net revenues to provide at least 1.25 times coverage of maximum annual debt service (MADS) upon the issuance of additional bonds and a reserve requirement equal to MADS, funded with bond proceeds.

FINANCIAL OPERATIONS EXPECTED TO REMAIN STABLE DESPITE RECESSIONARY EFFECT ON REVENUES IN 2010; HISTORICALLY STRONG COVERAGE RATIOS MAINTAINED

Moody's expects the system's financial operations and debt service coverage will remain strong given autonomous rate-setting authority and a demonstrated willingness to regularly increase electric rates and control expenditures. For the four years ending in fiscal 2009, the system's annual senior lien debt service coverage has averaged approximately 4.6 times, ranging from a low of 2.17 times in 2007 to a high of 5.88 times the following year, before transfers out (4.05 times after transfers out). The swing from 2007 to 2008 corresponds to the implementation of an overall rate increase of 31%, which garnered an additional $19.3 million in revenue to offset the increased cost of power stemming from the system's transition to a market-rate environment from a fixed-rate supply and operating contract. Management followed up with an overall electric rate increase of 9.8% and 7% in 2008 and 2009, respectively, to offset power supply and other cost of service increases. Net working capital has been strong over the last several years, ending at 20.5% of O&M in fiscal 2009. Available cash has typically provided a satisfactory 68 days cash on hand, on average, over the past three fiscal years.

Debt service coverage for 2010 is projected be maintained at 2.87 times (inclusive of transfers out), despite the absence of a rate increase for the year; management maintained healthy margins through the expenditure-side adjustments, including the implementation of furloughs for all full-time positions with the cooperation of all collective bargaining units as well as maintained non-contractual operating expenses at 2009 levels. Given the lingering recessionary effect and general conservation efforts, system consumption declined to 708.5 million kWh from a higher 719.9 million kWh in 2009, which reduced system revenues by approximately $1.2 million for the year. Similarly, customer account growth declined by approximately 0.1% over the prior year, evincing a reversal of growth that had remained steady over the prior decade to culminate at 23,223 combined residential, commercial, and industrial accounts in 2009; approximately 70% of the system's revenues are derived from commercial and industrial customers while the remaining 30% are comprised by residential households. In keeping with prior practice, the system transferred out $6.8 million to the General Fund, maintaining close to the policy of transferring 6.5% of gross revenues.

Debt service coverage is projected to remain above an annual average of 3.67 times through fiscal 2015, inclusive of transfers out to the General Fund, and well above the 1.25 times coverage requirement. Revenue performance in these subsequent fiscal years is not based on any additional power cost adjustments beyond a $2 million revenue reduction in fiscal 2011 (or a 1.9% power cost adjustment credit). Importantly, revenue projections are based solely on recurring revenue sources and do not include any one-time appropriations. Projected system operating costs assume an annual 1% increase in customer demand, reflective of historical trends. Annual transfers to the General Fund do not exceed $6.6 million, except for fiscal 2011. Moody's notes that city officials exceeded the policy level for the inter-fund transfer in 2011, budgeting a transfer of $8.9 million, to mitigate the tax rate increase for the General Fund.

Comprehensive reserve policy requirements buttress the system's financial position. City policy requires that the rate stabilization reserve be maintained at a minimum of 3% of purchase power costs, a contingency reserve equal to 1% of annual revenues, and future capacity and depreciation reserves of a minimum of $10 million each, the latter two of which management expects to fully replenish by 2015. Moody's will continue to monitor management's ability to maximize financial flexibility in the face of challenges stemming from fluctuations in power procurement costs and rising fixed operational costs.

SERVICE AREA ANCHORED BY INSTITUTIONAL PRESENCE; SYSTEM MAINTAINS ADEQUATE POWER RESOURCES

The electric system serves a 69 square-mile area that includes the City of Dover (G.O. rated Aa2) and surrounding portions of Kent County. Steady, moderate population growth in both the city and the county had contributed to average customer account growth of 2.3% annually up until fiscal 2006, but the recession dwindled that rate to an annual average of 1.1% from 2007 to 2010. The local economy, which serves as an employment center to the greater region, is anchored by a sizeable government presence that includes the county seat, the State of Delaware (G.O. rated Aaa/stable) capital, and Dover Air Force Base, home to 25% of the nation's airlift capacity. Governmental and tax-exempt facilities account for nearly 20% of the city's total property base and also contribute to the significant concentration of the electric system's customer base. In fiscal 2010, the 10 largest customers of the electric system accounted for a substantial 30% of operating revenues; government and other public institutions account for nearly half of this concentration, including Dover AFB (7.2% of revenues), Kraft Foods (4.9%, senior unsecured rated Baa2/negative outlook) and the State of Delaware (4.2%). The balance of the largest customer group is comprised of large, reportedly stable manufacturing concerns, a regional health care facility, and the Dover Downs Hotel and Casino complex. Moody's believes that while the concentration of the electric system customer base is a vulnerability to long-term operating stability, risk is mitigated by the predominance of large, public institutions and the ability to reduce power procurement in line with customer contraction.

The electric system includes generation, transmission and distribution components. The system interconnects with the Delmarva Power and Light Company (DP&L) at a city-owned substation at 230 kilovolts (kV), which is transformed to 69 kV for distribution through the city's service area. The station is part of DP&L's transmission network and is governed by the rules and regulations of the PJM grid. The city owns four oil- and gas-fired generating units that are operated as peaking plants; together, these plants have a total rated capacity of 175 megawatts (MW). Officials report that the plants are in good condition and produced 2.9% of their combined rated production capacity during fiscal 2007. The city's current energy management agreement with Pace Global Asset Management, LLC is effective through June 2011 and includes asset, energy and risk management programs.

MANAGEABLE DEBT BURDEN WITH NO ADDITIONAL PLANNED BORROWING

The system's fiscal 2009 debt ratio of 34% reflects the 2008 borrowing of approximately $22 million in 2008, and is expected to remain manageable given no additional borrowing plans. Approximately 50.1% of revenue bond principal will be retired within 10 years and all bonds will be repaid by 2033, within the useful life of the financed assets. Moody's expects the system's debt obligations to remain affordable, given the city's historically strong pay-go capital program and the absence of additional borrowing plans through 2015. The system's $23 million, 5-year capital improvements program (CIP) includes various additional upgrades and replacements will be funded from the system's depreciation reserve and future capacity reserve, in addition to annual operating fund contributions.

What could change the rating -- UP

Consistent outperformance of projected debt service coverage ratios and significant strengthening of current liquidity levels.

What could change the rating -- DOWN

A deterioration in overall liquidity levels either in reduction of debt service reserve levels without adequate offsetting balance in unrestricted reserves or continued deterioration in unrestricted reserve levels or both. Additionally, failure to meet targeted debt service coverage projections.

KEY STATISTICS

System: Electric generation, transmission, and distribution

Security: Senior lien on net revenues

Number of customers (FY 2010): 23,195

Annual customer account growth (3-year average, ending 2010): 1.1%

Electric usage revenue growth (3-year average, ending 2010): 6%

City of Dover population (2008, estimate): 36,107

1999 Per Capita Income: $19,445 (83% of state and 90% of nation)

1999 Median Family Income: $48,338 (87% of state and 97% of nation)

Kent County unemployment (August, 2010): 8.8% (8.5% DE and 9.5% US)

FY 2009 debt service coverage (before General Fund transfer): 4.99 times

FY 2009 debt service coverage (after transfer): 3.26 times

FY 2010 debt service coverage (projected, after transfer): 2.87 times

Fiscal 2009 debt ratio: 34%

Principal amortization (within 10 years): 50.1%

Post-sale parity debt outstanding: $32.9 million

PRINCIPAL METHODOLOGY

The principal methodology used in rating the City of Dover Electric Enterprise (DE) was U.S. Public Power Electric Utilities, rating methodology published in April 2008. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Cesar Avila
Analyst
Public Finance Group
Moody's Investors Service

Julie Beglin
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS Aa2 RATING TO CITY OF DOVER'S (DE) $12 MILLION ELECTRIC REVENUE REFUNDING BONDS, SERIES 2010
No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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