Fitch Affirms Battle Creek, Michigan Water and Wastewater Revs at 'AA-';
AUSTIN, Texas -- December 19, 2012
Fitch Ratings affirms the ratings on the following revenue bonds of the City
of Battle Creek (the city):
Approximately $8 million water and wastewater revenue refunding bonds, series
2003 at 'AA-'.
The Rating Outlook is Stable.
The bonds are secured by the pledge of the net revenues of the city's water
and wastewater system (the system).
KEY RATING DRIVERS
STRONG COVERAGE, WEAK LIQUIDITY: Coverage on debt service is very good at over
3.0x and has trended up for the past two years. However, liquidity remains
weak at just 66 days of cash on hand.
HIGH CUSTOMER CONCENTRATION: The system supports a large number of industrial
customers which make up almost 30% of annual operating revenues, with one
customer accounting for over 8% of revenues and 12% of consumption.
LOW DEBT BURDEN: Leverage ratios are very low and with minimum debt financing
planned, levels should remain low. The city has a history of cash funding
capital needs which has provided for a favorable debt profile, but made for a
sub-par liquidity position.
ADEQUATE CAPACITY, AGING INFRASTRUCTURE: The system maintains sufficient
capacity and ample water supply. However, system improvements are not keep up
with the aging system as noted by the system's 19% water loss and average
plant age of 22 years, both high compared to the 'AAA'-'A' rating category
AFFORDABLE RATES: Rates remain affordable at $55 for combined water and sewer
bill, or 1.7% of Median Household Income. The city has adopted another round
of five year rate adjustments, that are needed to address both increasing
recurring expenses and deferred maintenance needs.
AVERAGE ECONOMY: City unemployment rates have improved to below state and
national averages after several years of above average unemployment levels.
However, this improvement is largely driven but a reduction in the workforce,
not new job creation.
The city's water and wastewater system has a service area of approximately 50
square miles, serving a population of approximately 52,000 and includes all or
portions of Emmett, Bedford, and Pennfield Townships, and the cities of
Springfield and Battle Creek.
SIGNIFICANT CUSTOMER CONCENTRATION
City of Battle Creek residential accounts make up approximately 83% of system
users but only 31% of system revenues. Further, there is high concentration
among the top commercial customers with the top ten customers accounting for
roughly 29% of revenues. Kellogg Company (rated 'BBB+'; Outlook Negative by
Fitch), is the system's largest customer and accounts for 10% of revenues and
approximately 13% of consumption. The city does not anticipate any significant
growth in customers; in fact, the service area population has on average
declined 0.5% a year over the past four years.
FINANCIAL METRICS MIXED
Combined debt service coverage on revenue bonds and general obligation bonds
supported by system revenues, remained strong at over 3.0x for fiscal years
2011 and unaudited results for fiscal 2012 show similar coverage levels.
Management provided forecasts, which appear reasonable, project a continued
upward trend in coverage levels, growing to over 4.0x through 2016. System
liquidity remains a credit concern with just 66 days of cash on hand (DOCH)
for fiscal 2011, well under the 'A' rating category median of 195 DOCH.
AFFORDABLE RATES, FAVORABLE RATE STRUCTURE
Annual 5% adjustments on both water and sewer rates over the next five years
are expected to help improve the system's liquidity position. The city has a
history of implementing five year rate packages and the rate structure
provides for 30% of the average residential bill in fixed charges, both of
which Fitch notes are credit positives. Rates register at 1.9% of median
household income (MHI) and fall just below Fitch's affordability threshold of
2.0% of MHI.
AMPLE WATER RESOURCES, TREATMENT CAPACITY
The city's wastewater system is aged and expansion of the system has been
continuous. Wastewater is treated at a single plant which has capacity of 30
mgd. Average daily flow for the system is 9.9 mgd and maximum flow is 21.2
mgd, leaving ample capacity. The city presently burns sludge as a means for
disposing of waste material, but is investigating alternatives to this method
of sludge disposal.
The city owns and operates its own water supply, which consists of a wellfield
with 60 mgd capacity, and permitted draws of up to 42 mgd. In fiscal 2011 the
system experienced water loss of 19%, which is higher than the 10%-12% average
of systems that regularly replace aging pipelines.
The system 2011 rate study noted that the system is in need of continued
maintenance and that water and sewer lines will be replaced as roadways are
improved or replaced. Overall, system maintenance lags behind the depreciation
as noted by the system's average age of plant at 22 years, considerably higher
than the AAA'-'A' category median of 13 years. The high age of plant coupled
with the high unaccounted for water loss suggests there will likely be large
long-term capital maintenance and system rehabilitation needs in the future.
VERY LOW DEBT BURDEN
The city's 2013 - 2018 capital improvement plan is manageable at approximately
$34 million, or $936 per customer, with roughly 70% anticipated being cash
financed. Leverage ratios are favorable, with total outstanding long-term debt
per customer at very low at just $407 in fiscal 2011 versus the category 'AA'
rating median of $1,615. Debt amortization is rapid with 100% repaid by 2022.
The city does not maintain a reserve fund or rate stabilization fund, instead
relying on unrestricted cash accounts.
Battle Creek is located in south central Michigan along Interstate 94, which
connects Detroit and Chicago. It is a regional transportation hub with access
to five major highways and expressways; all of which connect to other highways
in the national highway system. The community is mature with a declining
The city's unemployment rate increased to over 10% for the years 2009 - 2011
but recently has improved and declined to 7.1% in October 2012, below state
(8.3%) and national (7.5%) levels. Much of the improvement appears to be due
to labor force losses and modest employment additions. City wealth levels are
below average with MHI levels at 87% of the state and 79% of the nation.
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.
In addition to the sources of information identified in the U.S. Municipal
Revenue-Supported Rating Criteria, this action was additionally informed by
information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Water and Sewer Revenue Bond Rating Guidelines' (Aug. 3, 2012);
--'2013 Water and Sewer Medians' (Dec. 5, 2012);
--'2013 Outlook: Water and Sewer Sector' (Dec. 5, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2013 Water and Sewer Medians
2013 Outlook: Water and Sewer Sector
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Teri Wenck, CPA, +1-512-215-3742
111 Congress Avenue, Suite 2010
Austin, TX 78701
Andrew DeStefano, +1-212-908-0284
Karen Krop, +1-212-908-0661
Elizabeth Fogerty, New York, +1 212-908-0526
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