Fitch Rates Austin, Texas $135MM 2006A Wtr Util Rev Rfdg Bonds 'AA-'; Stable Outlook.

NEW YORK -- The City of Austin's (TX) $135 million of water and wastewater system (Austin Water Utility) revenue refunding bonds, series 2006A are rated 'AA-' by Fitch. Fitch also affirms the following outstanding bonds at 'AA-':

--Austin Water Utility (AWU) separate lien bonds;

--Austin Combined Utility System (ACU) prior first lien and prior subordinate lien bonds;

--Austin Energy (AE) separate lien bonds.

All of the Rating Outlooks are Stable. For additional information on AE and ACU, please see the Fitch Ratings report dated May 23, 2006 available at www.fitchratings.com.

Bond proceeds will be used to refund approximately $135 million of the city's outstanding tax-exempt commercial paper (CP) notes issued for AWU to finance system expansion, rehabilitation and infrastructure improvements to the water and wastewater system. The bonds are expected to be insured and are scheduled to price competitively the week of Nov. 13, 2006.

AWU's 'AA-' rating takes into account:

--Continued strong financial performance of ACU and the stand alone financial position of AWU;

--AWU's ownership of sufficient water rights secured through an agreement with the Lower Colorado River Authority (LCRA) through 2050, with an option to extend an additional 50 years;

--The very strong economic and demographic characteristics of the service territory (Fitch rates the city of Austin general obligation bonds 'AA+' with a Stable Outlook);

--AWU's large capital improvement plan (CIP) and needed rate increases to maintain targeted financial metrics.

Additional support for the rating is provided by a well-diversified customer base, rates that are competitive for the region (an average bill of 0.93% of median family income - Fitch views anything below 1% as very favorable), and infrastructure (both water and wastewater treatment plants), which will be sufficient to meet projected capacity demands through at least 2025 after a new water treatment plant (Water Treatment Plant #4) comes online in 2013.

In order to accommodate growth and meet basic infrastructure maintenance needs and the requirements of the Environmental Protection Agency's (EPA) Sanitary Sewer Overflow (SSO) order, AWU's CIP calls for total expenditures of approximately $1 billion through fiscal year 2011. While the scope of the CIP is large, it is viewed by Fitch as acceptable relative to the size of the system. The five-year CIP includes funds for a portion of Water Treatment Plant #4, as well as for the Austin Clean Water Program, a $400 million plan which will result in compliance with the EPA's SSO order. Approximately 65%-70% of the CIP is expected to be funded with debt, with the remainder funded through a mix of internally generated funds and capital recovery fees (impact fees for new connections). While current and projected debt levels on a per customer basis are high, Fitch views AWU's overall debt burden as acceptable given the strength of the system's revenue base.

AWU implemented water (5.2%) and wastewater (9.2%) rate increases effective Nov. 1, 2006 and expects combined increases of 6%-7.2% each of the next three years in order to meet the requirements of its CIP and to maintain its financial profile. Presentation of this plan by AWU management to city council has been well received. Additionally, rates are expected to remain competitive for the region.

Debt service coverage for AWU was 1.49 times (x) in 2005 and 1.68x for the 12 months ended Aug. 31, 2006. Fitch recognizes that AWU's debt service coverage and liquidity levels have been below their historical averages over the last two years and expects to see improvements in both areas.

Recent and planned rate increases and annual capital expenditures, which are expected to stabilize at a level below $200 million per year following completion of Water Treatment Plant #4 in 2013, should result in AWU's ability to maintain debt service coverage levels in its targeted range of the 1.5x-1.7x.

The 2006A bonds will be issued as parity water and wastewater system obligations under Austin's master ordinance, which since being adopted in 2000 allows AWU and AE to issue bonds separately. However, the now closed prior lien ordinance (under which AWU and AE issued combined utility system bonds prior to adoption of the master ordinance) remains in effect as long as combined utility system bonds are outstanding. Therefore, while combined utility system bonds remain outstanding (the final remaining combined utility system bonds mature in 2020), the 'AA-' rating reflects the credit profile and the operating performance of both AE (78% of 2005 combined operating revenues) and AWU (22% of 2005 combined operating revenues) and the senior claim of the prior lien obligations.

The Austin Combined Utility System consists of AE and AWU. The system provides electric services to over 389,000 customers and treated water and wastewater services to approximately 198,000 and 184,000 customers, respectively. ACU serves both residential and commercial customers within a 450-square mile territory that includes the City of Austin and portions of Travis and Williamson Counties.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.