Fitch Affirms Milwaukee, WI Sewer Revs at 'AA'; Outlook to Stable

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings affirms the following ratings on bonds issued by Milwaukee, Wisconsin (the city):

--$59.1 million sewer system revenue bonds, series 2001, 2003-S4 and 2011-S1 at 'AA'.

The Rating Outlook is revised to Stable from Negative.

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.

KEY RATING DRIVERS

IMPROVED FINANCES DRIVE STABLE OUTLOOK: System financial performance has improved in the last couple of years. Most notably, balance sheet resources rose to 370 days cash in 2011 compared to $0 as recently as 2009. Historically, the sewer rating was supported by the city's pledge, subject to annual appropriation, to fund any debt service shortfall. With the system's improved financial profile, the rating and Stable Outlook principally reflect system operations.

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

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 moderate but are expected to escalate somewhat over the next several years. Positively, amortization is above average.

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 center exhibits persistent economic stress.

WHAT COULD TRIGGER A RATING CHANGE

CONTINUED FINANCIAL GAINS: Ongoing improvement of the system's financial profile coupled with a greater use of pay-go capital financing would be viewed favorably.

CREDIT PROFILE

IMPROVED FINANCES DRIVE OUTLOOK CHANGE

As late as 2009, the system maintained no liquidity despite solid debt service coverage (DSC) and annual cash flows. The weak balance sheet limited the rating level and as a result, the rating has been based on the annual appropriation pledge of the city to ensure 1.0x DSC. However, over the last couple of years the system's financial profile has improved overall as annual rate hikes and cost control measures have generally outpaced escalation in debt service costs.

Of significant improvement, beginning in 2010 days cash jumped to a solid 388 days and remained strong for 2011 at 370 days. For 2011, total DSC and excess cash flow performance also remained favorable at 1.7x and 151% of annual depreciation expenses, respectively. While no financial projections were provided with Fitch's current review, Fitch expects that financial metrics will remain relatively similar over the next several years or possibly even improve, based on planned capital expenditures, limited escalation in operating costs, and assuming the city moves forward with planned 8% annual rate hikes. With the improvement in system financial metrics, the rating will now be based on system fundamentals as opposed to the city's DSC appropriation backstop.

LIMITED OPERATIONS WITH MANAGEABLE CAPITAL DEMANDS

The system serves the city and is generally 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.

The capital program for 2012-2017 totals a manageable $255 million, or around $42 million annually. The bulk of capital financing is expected to come from annual borrowings of around $37 million (87% of all capital sources), which will lead to an escalation in debt ratios through the forecast period. Currently, system debt ratios are generally below comparably rated credits but are expected to rise to above average by 2017. However, the city maintains flexibility in the timing and scope of its capital expenditures, has fairly rapid debt amortization compared to utilities nationwide (100% of principal matures within 20 years), and existing cash flows exceed annual depreciation expenses, which could possibly allow for a ramp-up of pay-go spending in the future.

REGIONAL ECONOMIC ENGINE AND EMPLOYMENT CENTER

Milwaukee, the largest city in the state of Wisconsin, encompasses a 97 square mile area located adjacent to Lake Michigan, 90 miles north of Chicago. The city serves as the economic engine for the surrounding region and has a fairly diverse economic and employment base, despite lingering economic stress. The local economy maintains an above-average reliance upon manufacturing, although the sector's share of total employment has declined markedly from pre-recession levels.

The city's unemployment rate remains elevated at a seasonally unadjusted rate of 11.4% in July, well in excess of the state and national rates of 7.4% and 8.6%, respectively. The rate of 11.4% represents an improvement from the 11.7% recorded in July 2011, but this is largely due to the losses in the labor force exceeding the losses in employment. In contrast, the unemployment profile for the combined statistical area, representing Milwaukee-Waukesha-West Allis, is materially stronger with a July 2012 unemployment rate of 8.3%.

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.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', June 12, 2012;

--'U.S. Water and Sewer Revenue Bond Rating Criteria', August 3, 2012.

For information on Build America Bonds, visit 'www.fitchratings.com/BABs.'

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901

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Fitch Ratings
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Source: Fitch Ratings