Amend: Fitch Rates Sonoma County Water Agency's (CA) $11.5MM 2006A Water Revs 'AA'.

SAN FRANCISCO -- (This is an amended version of a press release issued yesterday and lists the Stable Outlook for the Sonoma County Water Agency in the first paragraph.)

Fitch Ratings assigns its 'AA' rating to $11,455,000 of Sonoma County Water Agency, California, water revenue bonds, 2006 series A. Fitch also affirms its 'AA' rating on $15.2 million in outstanding water revenue bonds. The Rating Outlook is Stable. The bonds are scheduled to be sold in a negotiated sale led by Banc of America Securities LLC, on June 14, 2006.

The 'AA' rating on the Sonoma County Water Agency's (the agency) revenue bonds is based on the essentiality of the wholesale water delivery service provided to a growing customer base; the unconditional nature of the wholesale customers' contractual obligation to pay debt service; a healthy financial position with good liquidity and adequate debt service coverage; and a manageable capital program with approximately 50% of the costs funded from operating revenues. Credit concerns include uncertainty surrounding additional water rights the agency is seeking as well as potential costs the agency could incur if required to modify its facilities or operations to meet environmental standards.

The northern California water agency was created by the state legislature in 1949 and operates under the direction of the Sonoma County Board of Supervisors. In addition to flood control, wastewater treatment, and other duties, the agency is the responsible wholesale water supplier to eight primary water contractors, along with several other wholesale water customers with whom the agency delivers water on a subordinated basis. The controlling agreement between the agency and its customers is known as the 11th amended agreement for water supply. This agreement is being revised to, among other things, add a new primary contractor in place of another primary contractor who will become a wholesale customer and to establish new funding mechanisms for environmental mitigation and water conservation programs. The new agreement will be known as the restructured agreement for water supply and is expected to be adopted sometime this summer. Fitch expects that the unconditional obligation of the primary contractors to pay debt service on the bonds will remain unchanged in the restructured agreement.

The water supply system includes two components: the Russian River Project and the Water Transmission System. Water transmission begins from diversion facilities along the Russian River to the agency's primary contractors and wholesale customers who, in turn, supply water to the most heavily populated areas of central and southern Sonoma County and northern Marin County. The agency's combined water rights are limited to 75,000 acre-feet per year, which ultimately serves an estimated 690,000 population; fiscal 2005 transmission system demand totaled 62,638 acre-feet per year.

The bonds are secured by a pledge of net revenues from the water transmission system only and the agency covenants to set water charges sufficient to generate coverage at 1.15 times (x) annual debt service (ADS). Transmission system revenues are generated primarily through water sales with a small portion of revenues coming from installation charges and power sales. Rates are established annually and the agency enjoys good rate-setting flexibility based on the existing and restructured agreement with its primary contractors. Delinquency rates are zero.

Transmission system financial operations in fiscal 2005 (audited) show adequate debt service coverage of ADS of 2.2x. Coverage levels have declined from higher levels in prior years, reflecting additional debt service and higher power costs. Financial projections, based on average water conditions, indicate debt service coverage is expected to remain above 1.75x for the next five years. Parity debt includes $15.2 million in outstanding water revenue bonds, (2003 series A), and $11.4 million outstanding from a state revolving fund loan. The agency's additional bonds test is 1.15x. The system's financials include healthy reserve levels and average debt-to-plant ratios.

The agency's long-term capital program totals a manageable $165 million through 2037, of which $82.1 million will be financed on a pay-as-you-go basis. Proceeds from the 2006 revenue bonds will be used primarily for several water system projects. The agency directly benefits from its high water quality, which significantly limits its ongoing and capital costs related to purification systems.

In 1999, the agency applied to increase its annual allocation of Russian River Watershed water from 75,000 acre-feet to 101,000 acre-feet. Various groups have filed protests or undertaken legal action to protest the agency's application. While these protests are still pending, the agency is conducting a new urban water management study, to be completed by July 2006, and is awaiting the completion of an environmental impact report (EIR), to be completed in the summer of 2008. With these actions, the agency expects to receive final approval for its additional water rights application. While the agency is likely to incur costs associated with environmental mitigation measures needed in order to receive these additional water rights, agency management has budgeted for projected capital costs associated with these measures; however, actual costs remain uncertain.

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.