Delaware Municipal Electric Corp.'s 2019 Revenue Bonds Rated 'BBB'; Outlook Stable

CENTENNIAL (S&P Global Ratings) April 5, 2019-- S&P Global Ratings has 
assigned its 'BBB' rating to Delaware Municipal Electric Corp.'s (DEMEC) 
series 2019 electric revenue bonds (Middletown and Seaford Projects). The 
outlook is stable. 

The rating reflects our view of the following strengths:
  • The project participants' service territories generally have good demographics (including sound wealth levels), with limited direct debt and capital needs.
  • There are take-or-pay power sales contracts with the two participating electric utilities.
  • DEMEC's owned generation units provide a hedge against peak power costs in the PJM market, which stabilize costs to its members.
We believe the following risks mitigate these strengths:
  • The project participants have customer bases that lack meaningful customer diversity, potentially limiting rate-setting flexibility.
  • Participants' rates are above the state average, which further limits rate flexibility. The corporation's gradually declining wholesale rates, which have come down over 18% since 2010 as the utility has reduced its power supply costs, offsets this somewhat.
  • The participants have large general fund transfers, which limits their ability to accrue cash reserves and suppresses fixed-charge coverage metrics.
About $10 million of the 2019 bonds will fund transmission and substation 
improvements for Middletown, Del.'s electric system, while the remaining $7 
million will fund an AMI project and distribution upgrades for Seaford, Del.'s 
electric system. "We base our rating on the 2019 bonds on the weaker of the 
two participants' credit quality, which in our view is Middletown," said S&P 
Global Ratings credit analyst Doug Snider.

DEMEC is a joint action agency formed in 1979 to supply electricity to seven 
Delaware municipalities, which have all-requirements contracts.

The stable outlook reflects our expectation of no material variations in the 
participants' financial metrics during our two-year outlook period. The 
outlook also reflects the predictable cash flow under contracts that match the 
project debt's life.

We could raise the rating over the next two years to the extent that 
Middletown's credit quality improves, assuming Seaford's credit quality 
remains at or above current levels.

We could lower the rating over the next two years to the extent that credit 
quality worsens for either member.

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