OREANDA-NEWS. Fitch Ratings has assigned a 'AA' rating to the following city of Milwaukee, WI (the city) bonds:

--Approximately $100 million sewerage system revenue bonds, series 2016 S7.

The bonds are expected to sell competitively the week of Aug. 8. Proceeds will be used to finance the costs of improvements to the city's sewerage system and pay issuance costs.

In addition, Fitch affirms the following ratings:

--$44.4 million sewer system revenue bonds, 2011-S1 at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net revenues of the city's sewerage system (the system) and a mortgage lien on the system. Additionally, the city has pledged any legally available funds, subject to annual appropriation, to subsidize any revenue shortfall. However, the city will not be obligated to make such an appropriation over and above the reasonable cost and value of services rendered to the city.

A debt service reserve will not be funded in connection with the series 2016 S7 bonds.

KEY RATING DRIVERS

SOLID FINANCIAL PROFILE: All-in debt service coverage (DSC) was solid at 2.1x in 2015 and is forecast to remain adequate for the rating level over the next five years. Cash balances and free cash flow (FCF) remain ample.

MANAGEABLE CAPITAL NEEDS: Given the system's limited function, capital needs are manageable and largely flexible, focusing on repair and replacement needs.

RISING DEBT: Debt levels are currently moderate but are expected to escalate somewhat over the next several years. Positively, amortization is above average.

LIMITED OPERATIONS: System operations consist of collection and conveyance of sanitary and stormwater flows, with flows conveyed to the Milwaukee Metropolitan Sewerage District (MMSD, general obligation bonds rated 'AAA', Stable Outlook by Fitch) for treatment.

REGIONAL ECONOMIC ENGINE AND EMPLOYMENT CENTER: Milwaukee serves as the economic engine for the surrounding region. While the greater Milwaukee area has seen a measure of economic recovery, the city still exhibits persistent economic stress.

REVENUE PLEDGE SUPPORTS RATING: The 'AA' rating is supported by the strength of the net revenue pledge of the sewerage system and does not rely on the strength of the city's annual appropriation pledge.

RATING SENSITIVITIES

DEBT PRESSURES RATING: The rating on the city of Milwaukee, WI's sewerage system could come under downward pressure if increased leverage pushes all-in debt service coverage below forecast results. The Stable Outlook reflects Fitch's expectation that a sustained decline in coverage is unlikely to occur.

CREDIT PROFILE

STRONG FINANCIAL PERFORMANCE

The system has experienced sustained financial strength over the past five years. Senior lien DSC in fiscal 2015 was a high 5.4x. All-in coverage (annual debt service, ADS, including the senior, state revolving fund [SRF] loans and general obligation debt issued by the city on behalf of the sewer fund) was also high at 2.1x. ADS as a percent of gross revenues is low for the senior lien debt at only 13% but elevated for the all-in debt at 35%, compared to the 'AA' medians of 17% and 20%, respectively.

Fitch-calculated DSC based on the city's financial forecast shows all-in DSC dipping to 1.8x in 2017 before rebounding to 2.0x by 2019. The rating could come under pressure if all-in DSC drops below 1.8x for a sustained period. Fitch believes a prolonged decline is unlikely to occur given all-in DSC has held steady at around 2.0x over the past five years with rates adjusted annually, as necessary, helping to preserve DSC margins. In addition, solid reserves provide an offset to any temporary declines in coverage.

The system's reserves have remained strong over the past five years due to annual rate hikes and cost control measures. In fiscal 2015 the system had $17.8 million in available cash (including $1 million of restricted cash in the surplus account), equating to a solid 377 days of operations. Excess FCF after paying for operations and maintenance and debt service also remained favorable at 222% of annual depreciation expenses.

CONSISTENT, FLEXIBLE CAPITAL NEEDS

The system's five-year, fiscal 2016-2020 capital improvement program (CIP) remains consistent with historical plans and totals approximately $230 million, or around $46 million annually. The majority, at 80% of the plan, will fund the relining and replacement of the system's long-lived sewer pipes. Approximately 11% of the CIP spending will support inflow and infiltration mitigation projects to maintain compliance with the system's Wisconsin Pollution Discharge Elimination System permit requirements.

DEBT CONTINUES TO CLIMB

The bulk of capital funding (64%) is expected to come from annual borrowings of around $37 million. Consistent with historic practices, management expects to seek low-interest SRF loans for the majority of its annual capital needs. Similar to the city's general fund, the utility will utilize extendable municipal commercial paper (EMCP) to meet short-term capital spending needs, and then take-out the EMCP with SRF proceeds upon loan approval. The SRF loans typically amount to about $30 million each year. Management will generally issue senior lien debt every few years to cover any shortfalls in accumulated EMCP not met by SRF loans.

Debt metrics have grown over the past few years but to date are comparable to the 'AA' medians. Debt per customer is currently $1,867 relative to the 'AA' median of $2,050 but is expected to exceed $2,600 by fiscal 2020. Similarly, debt currently equals 54% of the system's net plant, a proportion that has steadily risen over time and will likely increase with the continued addition of new debt through the forecast period.

Management indicates that it retains significant flexibility in the timing and scope of its capital expenditures and can delay projects as needed. Furthermore, management employs a fairly aggressive debt amortization structure, with 100% of the current principal retired within 20 years.

LIMITED OPERATIONS

The system serves the city as a collection and conveyance system, consisting of combined, sanitary and storm sewers and other facilities necessary to collect wastewater flows and stormwater runoff. Sewer flows collected by the system are conveyed to the MMSD for treatment. Given the system's narrow operations and largely built-out service territory, capital needs are focused to a significant extent on repair and replacement of existing pipes and structures.

REGIONAL ECONOMIC ENGINE AND EMPLOYMENT CENTER

Milwaukee, the largest city in Wisconsin, encompasses a 97 square mile area located adjacent to Lake Michigan, 90 miles north of Chicago. The city's population of nearly 600,000 has shown stability or marginal growth since the 2000 census, reversing a multi-decade trend of decline. Milwaukee serves as the economic engine for the surrounding region and has a fairly diverse economic and employment base, but residents exhibit below-average wealth, and a relatively large proportion are below the poverty level. The local economy maintains a reduced but still above-average reliance upon manufacturing that in the past has created vulnerabilities to recessionary employment shifts.

The city's unemployment rate at 5.4% in May 2016 is above state and national rates of 4.4% and 5.1%, respectively. The city's rate represents an improvement from the 6.9% recorded in May 2015, as employment growth has exceeded labor force gains.