Fitch Rates New York Water Auth's $320MM Rev Bonds 'AA'.

NEW YORK -- Fitch has assigned an 'AA' rating to the following New York City Municipal Water Finance Authority's (NYW) water and sewer system second general resolution (SGR) revenue bonds:

-- approximately $190.1 million fiscal 2007 series AA;

-- $130.4 million fiscal 2007 series BB.

The bonds are secured by a lien on gross system revenues subordinate only to debt service on the first general resolution (FGR) bonds and are scheduled for negotiated sale on Oct. 18 through a syndicate led by UBS Investment Bank. Proceeds of the series AA bonds will be used to refund a portion of the Authority's outstanding commercial paper notes, and the proceeds of the series BB bonds will be used to refund outstanding FGR bonds for savings equal to an estimated 10.3% of the refunded par. In addition, Fitch affirms the 'AA' rating on NYW's $10.5 billion outstanding FGR water and sewer system bonds, and $5.0 billion SGR water and sewer system bonds. The Rating Outlook is Stable.

The underlying 'AA' rating on NYW's FGR and SGR water and sewer system revenue bonds reflects unique structural protections for bondholders, the system's sound financial operations, adequate water supply, and moderate rates. The rating also considers the enormous capital improvement program (CIP) involved in addressing the water, wastewater treatment, and infrastructure replacement needs of New York City's water and sewer system. Annual rate hikes are likely, but rates should remain competitive with other urban systems, and affordable for the broad customer base with its above-average income characteristics.

NYW bondholders benefit from legal protections provided by a debt structure similar to those within structured finance. The legal framework is believed to be stronger than that of other U.S. municipal water/sewer bonds. The rating reflects the bankruptcy remote, statutorily defined nature of the issuer; ownership of system revenues by the bankruptcy remote New York City Water Board; annual required adjustment of water rates to a level to provide 1.15 times (x) coverage of FGR bond annual debt service and 1x coverage on SGR bonds and operating expenses; the gross lien on revenues provided to bondholders; and a detailed review of relevant legal precedents and opinions. Revenues are collected in a lock box controlled by the trustee and are used to pay debt service of FGR and SGR bonds before operations and maintenance (O&M), which differs from the practice for most U.S. water and sewer debt. These layers of protection serve to shield bondholders significantly, but not entirely, from the operational risks of the city's massive water and sewer enterprise, as well as other city government operations.

NYW SGR bondholders benefit from similar legal protections afforded FGR bondholders. SGR bondholders' claim on gross revenues is subordinate only to FGR debt service deposits, authority administrative costs, and the FGR debt service reserve fund (DSRF). Following such deposits, revenues flow from the subordinated indebtedness account of the FGR directly to the SGR revenue account to pay SGR debt service. Only after required deposits under the SGR are satisfied are funds released from the trustee-controlled lock box to pay operations and maintenance.

Gross annual coverage of FGR bonded debt service equaled 3.9x based on fiscal 2005 audited results, and coverage of all debt equaled 3.6x. Unaudited results for fiscal 2006 show coverage declining slightly to 3.8x on FGR debt and 3.0x on all debt. Revenues exceeded projections in fiscal 2005, and audited operating revenues increased 6.3% over fiscal 2004 results, reflective of a 5.5% rate increase for fiscal 2005. Operating revenues for fiscal 2006 increased 6.3% over fiscal 2005, reflective of a 3% rate increase as well as improved collections. The fiscal 2007 adopted rate increase of 9.4% was above the 5.6% projected, mainly due to greater than expected growth in operating expenses related to fuel, chemicals and employee health care costs.

Forecasts for cash flows show gross coverage on FGR debt declining to 3x in fiscal 2010, the result of rising debt service costs outpacing projected user charge growth despite sizable rate increases.

NYW's aggressive use of surplus revenues for debt defeasance has helped reduce fixed costs in the out years, although the CIP continues to grow incrementally. The adopted CIP for fiscal 2006-2015 includes an estimated $16.3 billion in water and sewer projects, to be funded almost entirely by revenue bond issuance.

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.