February 22, 2002

Art Morales
Morgan Stanley
Chase Tower
600 Travis, Suite 3700
Houston, Texas 77002

RE: San Antonio Water System

Approximately $138,925,000 Water System Revenue Bonds, Series 2002 A

The following are the policies for the underwriting of the Series 2002 A bonds.

1. Allocation of underwriter liabilities:

Senior manager: 45%

Co-Senior manager: 20%
Co-Managers (4): 8.75%

2. Priority of Orders:

♦ Texas Retail Orders

- Individuals in State of Texas – no limit
- Trust Departments on behalf of Individuals - $250,000
limit
♦ Net Designated Orders

♦ Member Orders

3. Designation Policy:

On designated orders, at least 3 firms must be designated, with no firm receiving

more than 45%. Small and Minority firms (SMBE) must be designated at least
20% on all Net Designated orders. SAWS will provide a list of SMBE firms.
Art Morales Page 2
Morgan Stanley
February 21, 2002

4. Retention Policy:

In the final term (based on 2 terms in the current structure; if additional terms are
added, this will apply to no more than 2 terms) retention will be as follows:

♦ Senior Manager - $1,000,000

♦ Co-Senior Manager - $750,000
♦ Co-Manager - $500,000

Term in 28 and 32. For a total of $__ million.

4. Takedown:

$3.75 per maturity 2006 - 2008

$5.00 per maturity from 2013-2028.

5. Underwriters Discount:

Underwriters Discount:

Average Takedown $ 5.00

Management Fee 0.50 (1)
Underwriter's Risk -
Expenses .59
Total $ 6.09

(1) Management fee will range

Breakdown of Expenses: $ 138,925,000

$/Bond Cost
Underwriter's Counsel 0.252 $35,000 (1)
Travel/Communication 0.130 18,000 (2)
CUSIP 0.002 307
Day Loan 0.028 3,859
MSRB Filing Fee 0.000 12
BMA 0.030 4167.75
Dalnet 0.060 8,335
Dalnet EOE 0.002 210
Closing Costs 0.014 2,000.00
DTC 0.002 339 (3)
Art Morales Page 3
Morgan Stanley
February 21, 2002
Texas MAC 0.072 10,000
Total 0.592 245,047.16

(1) Fee is set and not based on a per bond basis.

(2) Will be paid based on verified and actual expenses that commenced after
the selection of MS as senior manager.
(3) Will be based on actual, and is to be utilized only for mementos.

Alex Hinojosa
Director of Financial Services

Cc: Eugene Habiger, General, USAF (Ret.)

President/Chief Executive Officer

Raul Villaseñor, First Southwest Company

Anne Berger, First Southwest Company
Don Gonzales, Estrada Hinojosa
Art Morales Page 4
Morgan Stanley
February 21, 2002

Friday
Morning call to finalize policies and terms
Afternoon call to to communicate with Underwriters – policies

Monday
8:00 Request for price views , insured and non insured
3:00 Price – consensus scale
official pre-pricing 3:00 -
Check to make sure that on DALCOMP-

Tuesday
8:30 Check in to make sure nothing has happened in mkt
9:30 EST Start pricing
12:00 EST
1:00 Verbal award

Will have monitor to view transactions on line.