Fitch Rates Muskegon Heights, MI's $16.5MM Water Rfdg Bonds 'A-'.

CHICAGO -- Fitch Ratings assigns an 'A-' rating to two series of Muskegon Heights, Michigan's water supply system revenue refunding bonds:

--$6,820,000 series 2005;

--$9,720,000 series 2006.

The Rating Outlook is Stable. The bonds are scheduled for negotiated sale on Dec. 1 through a syndicate led by Robert W. Baird & Co. Both bond series are secured by net revenues of the water supply system, including contractual payments from the City of Norton Shores and the Charter Township of Fruitport pursuant to a water service agreement. Proceeds of both series will refinance outstanding water supply system revenue bonds for debt service savings. Fitch also affirms the 'A-' rating on Muskegon Heights' outstanding water revenue debt.

The 'A-' rating reflects the stable financial condition of Muskegon Heights' retail and wholesale water supply system, strong long-term wholesale water supply contracts with neighboring communities that composed about 64% of 2004 total water system consumption, the financial stability of those communities' systems, and slow but steady economic growth in the overall system service area. The system is in compliance with all regulatory water quality standards and has adequate treatment capacity to accommodate customer growth.

Muskegon Heights is a city of 12,000 located 40 miles west of Grand Rapids on the west side of Michigan's lower peninsula along Lake Michigan. In 2000, the system increased its treatment capacity by 43% and improved its Lake Michigan intake; these improvements ensured both the availability and quality of long-term water supplies. Average daily demand utilizes just 36% of maximum design capacity, allowing for continued customer growth as well as flow variability due to weather conditions.

The city of Norton Shores and Fruitport Township's 33-year water services agreement with Muskegon Heights provides financial stability for the water supply system. By entering into the water services agreement, the two neighboring municipalities benefit from a reliable source of water at an affordable rate. They agree to pay 125% of production and delivery costs annually and debt service requirements allocated to each party based on their annual use of water from Muskegon Heights, which is established as the sole provider. Norton Shores and Fruitport Township each preserve the right to terminate the agreement with four years notice, provided they pay termination payments equal to their proportionate present value share of outstanding bonds based on water flow. This payment provision creates a strong incentive to remain in the relationship and protects bondholders should the agreement be dissolved.

The security structure backing debt service payments of this combined retail and wholesale system promotes clear financial accounting and reporting and represents a tangible credit strength. Muskegon Heights pledges a statutory first lien on its water system's net revenues. The system's finances are broken into two separate enterprise funds to promote transparency in accounting of the other communities' debt service and operational payments. The city's water fund accounts for costs associated with retail distribution of treated water to customers in the city; into it, the other cities' 25% premiums over cost are transferred. The water supply fund receives each community's debt service payments. Out of either of the funds, a monthly set aside will occur to cover payment of current debt service costs. A sum sufficient rate covenant is strengthened by the city's stated plans to budget a 1.1 times (x) annual debt service coverage cushion.

Existing rates in Muskegon Heights, Norton Shores, and Fruitport should cover projected near-term operational and debt costs. In the past three years, debt service coverage averaged 1.15x; projected coverage through 2007 equals 1.38x. Overall coverage levels are likely to remain slim -- around 1.1x-1.3x annually from the Muskegon Heights enterprise funds -- typical of wholesale water supply systems. The system maintains adequate financial liquidity, including that in a rate stabilization fund.

The service area is characterized by a relatively stable residential population base and an industrial profile reflecting durable goods manufacturing and service sector employment. Unemployment in Muskegon County equaled 6.0% in September 2005, compared to 5.9% for the state and 4.8% for the U.S., and represents a significant decline compared to the 2003 annual rate of 9.0%. County overall personal income grew 4.6% annually from 1993-2003, compared to 4.5% for the state and 5.1% for the U.S.

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