Fitch affirms Memphis, Tennessee's sewer bonds at `AA+'

Fitch has affirmed its 'AA+' rating on Memphis, Tenn.'s $92.7 million outstanding sanitary sewerage system revenue bonds.

NEW YORK--(BUSINESS WIRE)--Jan. 10, 2001--Fitch affirms its 'AA+' rating on Memphis, Tenn.'s $92.7 million outstanding sanitary sewerage system revenue bonds and assigns the 'AA+' rating to approximately $20.59 million series 2001 issue expected to sell on or after Jan. 11 through a syndicate led by Morgan Keegan & Co.

The Rating Outlook is Stable. The 'AA+' rating, which was upgraded last May in connection with Fitch's default study review, reflects exceedingly strong utility fundamentals. These include the sanitary sewerage system's incredibly low cost operations, impressive system maintenance, minimal mandated capital requirements, and sound overall financial flexibility.

Revenue bond debt service coverage is projected at 1.43-1.75 times (x) annually over the next five years, and total cash and investments, including indenture reserve holdings, exceed one year's operating revenues. While cash flow margins, which have been declining and are somewhat below those expected for most 'AA+' water and sewer utilities, other system characteristics, especially its low rates, are superior to its peer group, providing an important degree of additional operational flexibility for city officials. By most measures, rates are less than in any other U.S. city and far below the norm for every customer class. Fitch attributes this to conservative management and the comparative lack of wet weather-related upgrade issues typically seen in urban sewerage networks.

Most growth-driven capital requirements are funded from developer fees, allowing the maintenance of healthy, although recently declining, financial margins without rate increases. Concerted, ongoing efforts to increase employee efficiency have also kept operating pressures moderate. Rates have not been increased since 1982 and are not expected to go up in the near term. While rate stability will continue to restrain growth in annual debt service coverage, more than adequate liquidity is likely to be maintained. Notably, the already impressive gap between wastewater treatment costs in Memphis and the rest of the nation will grow.

The system serves 670,000 residents of the city, whose general obligations are rated 'AA', and 230,000 suburban residents, primarily in 'AA' rated Shelby County. The depth and diversity of the economy, including its status as a leading distribution center based on the unique character of Memphis International Airport, its FedEx operations, and other transportation facilities, is a prime credit strength. Economic growth in recent years has been notable, including a commercial and residential renaissance downtown. Per capita income figures are above national means and improving. Reflective of the regional economy, industrial customers are a fairly large component of the utility's revenue base, paying 34% of revenues, with some concentration among the largest users.

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