Fitch Rates Metropolitan St. Louis Sewer District, Missouri's $60MM Wastewater Revs 'AA'.

CHICAGO -- Fitch assigns an 'AA' rating to the Metropolitan St. Louis Sewer District, Missouri's $60 million Wastewater System Revenue Bonds, Series 2006C. Fitch also affirms the 'AA' rating on $173.5 million of outstanding wastewater system revenue bonds. The Rating Outlook is Stable.

The bonds are expected to price on Nov. 15, 2006 through a syndicate led by A.G. Edwards & Sons, Inc. Public Financial Management and Valdes & Moreno, Inc. are serving as financial advisors. Pledged revenues consist of net operating revenues of the wastewater system and certain investment earnings and must equal at least 1.25 times (x) on maximum annual debt service for senior bonds; including subordinate bonds, coverage on all revenue debt must be at least 1.15x. Proceeds will finance a portion of the first phase of the district's capital improvement and replacement program (CIRP).

The 'AA' rating is based on the district's broad and diverse customer base, adequate system capacity to meet its very stable demand profile, a strong record of operating and financial performance and a manageable capital program since the district internally financed the majority of its capital expenditures in the last decade. Although the district anticipates $3.7 billion of sewer facility improvements through 2022, it initially has limited its long-term debt issuance to the $500 million authorized by district voters and maintains competitive user rates. The establishment of a rate commission in 2000 to advise the board of trustees on user rates and the implementation of other organizational changes have strengthened the district's public accountability and facilitated voter-approved bond authorization. While debt issuance in the next few years will necessitate increased user rates, the district will remain competitive with other large wastewater systems and projected debt service coverage is expected to be strong.

Established in 1954 to provide wastewater treatment and stormwater services to both the City of St. Louis and about 90% of St. Louis County, the district has a customer base of 1.4 million and five service areas which conform to the natural watersheds which drain into the Missouri, Mississippi and Meramec rivers. The eight treatment facilities utilized on average 64% of capacity in 2005. Although the largest facilities have impressive operating records and are well-regarded, the smallest facilities which empty into the Meramec River are near capacity and have created environmental compliance issues. The replacement of some facilities and expansion of other capacity will address these deficiencies by the end of 2006 with the completion of the new Lower Meramec River treatment plant and the replacement of two small treatment plants (Baumgartner and Meramec).

The 2007-2011 capital program totals $1.1 billion and concentrates on eliminating sewer system and combined system overflows. The current bond authorization should be sufficient for the district's needs until 2008, when another bond election is anticipated. Internal financing of capital, the primary source of funding before this issue, is expected to represent about two-thirds of total funding. Rate increases are expected in the fiscal year 2008-2011 periods. Including debt service related to state revolving loan borrowings, preliminary combined debt service coverage is estimated to be 4.0x in fiscal 2007 (June 30 year-end) and will average 3.7x from fiscals 2008 through 2011. Additional revenue bond issuance of $300 million is expected in fiscal 2008 and fiscal 2009, but rate increases should sustain the district's strong debt service coverage.

Although the district has used property taxes for meeting stormwater maintenance, capital expenditures and debt service on general obligation debt (now repaid), it intends to finance future projects only with revenue debt. Combined wastewater and stormwater operations in the last two years through fiscal 2006 have produced steady net income before capital contributions. Combined coverage was 6.02x in fiscal 2005 and 4.74x in fiscal 2006. Continued profitability is expected as the district focuses on cost efficiency, better service delivery and improved customer satisfaction.

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