Fitch Downgrades Alpena, Michigan's Revs to 'A'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings downgrades the following Alpena, MI (the city) outstanding revenue bonds:

--$2.3 million water supply and disposal system (the system) revenue bonds, series 1998 to 'A' from 'A+'.

The Rating Outlook is Stable.

RATING RATIONALE:

--A combination of increased debt service, additional expenditures, and stagnant to declining revenue has led to marked deterioration in financial performance and debt service coverage (DSC) from historically sound levels.

--Capital needs appear high but are somewhat flexible, and the city has no planned future debt issuances.

--Debt amortization is rapid.

--Rate flexibility is ample.

--The service area is fairly limited, characterized by below-average wealth levels and high unemployment.

KEY RATING DRIVERS

--Improvement in debt service coverage and financial flexibility.

--Ability to raise rates in a timely manner.

SECURITY:

The bonds are secured by net system revenues.

CREDIT SUMMARY:

System financial performance has been steady, benefiting from annual rate increases at least enough to accommodate growth in expenses. For fiscal 2010, net revenues provided senior lien DSC of 2.9 times (x) and all-in DSC of 1.2x, still adequate but a significant drop from the prior year due primarily to an increase in subordinate lien debt. Liquidity was also favorable at 580 days cash on hand. Given a lack of rate increases enacted for fiscal 2011, coupled with increased conservation and vacancies due to home foreclosures, operating revenues are projected to drop by 3% in fiscal 2011. Furthermore, administrative expenses related to new capital projects, an administrative expense adjustment and increased chemical costs have driven operating expenses up, resulting in insufficient net revenues available for debt service, requiring the city to use some of its cash reserves to make up the difference. By fiscal 2012, operations are budgeted to generate sum-sufficient cash flow to cover debt service and operating costs. Senior lien DSC is projected to drop to 0.95x in fiscal 2011 but rebound to 2.59x, with 1.0x on an all-in basis, by fiscal 2012. A 10% rate increase will become effective on July 1, 2011 and another 10% rate hike is preliminarily planned for fiscal 2013. Rates are very affordable at 0.7% of median household income, providing ample rate flexibility. In addition, city projections have historically exceeded budget, so results could come in better than forecast for fiscal 2012.

The city has no future debt plans. Capital needs are high according to the capital improvement plan (CIP), at an average annual $335 per customer. However, the CIP reflects more of a wish list than an indication of required spending.

The city serves as the county seat of Alpena County. It has an estimated population of 10,500 and is located on the west shore of Lake Huron. The economy is fairly limited with the top 12 employers accounting for approximately 60% of the labor force. County wealth levels are below average accounting for 73% and 69% of state and national averages, respectively, as of 2009. The county unemployment rate at 12.4% as of February 2011 is high, above both state (11.0%) and national (9.5%) levels.

Additional information is available at 'www.fitchratings.com'

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', dated Oct. 8, 2010;

--'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 6, 2008.

--'2010 Water and Sewer Medians', dated Jan. 18, 2011.

--'2010 Water and Sewer Sector Outlook', dated Jan. 18, 2011.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565

Water and Sewer Revenue Bond Rating Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918

2010 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=509146

2010 Water and Sewer Sector Outlook

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=499482

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