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 |
|---|
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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
