Fitch Rates Sacramento County Sanitation Dist Fin Auth, California's $444.2MM Rfdg Revs 'AA'.

SAN FRANCISCO -- Fitch assigns an 'AA' to the Sacramento County Sanitation Districts Financing Authority, CA (the authority) $444.2 million refunding revenue bonds (Sacramento Regional County Sanitation District), consisting of:

--$90,100,000 series 2007A (fixed rate);

--$354,070,000 series 2007B (index rate).

The series 2007 bonds are scheduled to sell February 22 led by Merrill Lynch & Co., Inc. The Rating Outlook is Stable.

Additionally, Fitch affirms the authority's $1.1 billion in outstanding prior lien revenue bonds at 'AA' and $250 million outstanding series 2004B subordinate lien variable-rate revenue bonds at 'AA-'.

The bonds are secured by a first lien on net system revenues of the Sacramento Regional County Sanitation District (the district). The 2007 bonds are being issued to refinance the callable portion of the district's outstanding series 2004A bonds. Concurrently with the issuance of the bonds, the authority will enter into an index-rate-to-fixed-rate swap with Merrill Lynch & Co. (Fitch rated 'AA-') acting as the counterparty. As with the authority's other interest rate swaps, payments are payable on parity with the bonds while termination payments are subordinate.

The 'AA' ratings reflect the district's sound financial position, experienced management team, and healthy and diversified local economy. Offsetting credit factors include the authority's sizeable debt burden and ongoing capital needs resulting from existing and projected customer growth, as well as the potential capital costs of certain outstanding environmental regulation issues. Furthermore, while the district conservatively projects new connections and related revenues, a slowdown in new development could result in lower than projected revenues. Nonetheless, Fitch considers the anticipated rate and fee increases reasonable and views the projected debt service coverage levels as adequate for the rating category.

The district serves as the wholesale wastewater service provider for the greater Sacramento area. The system includes a regional treatment plant and a network of interceptor lines and pump stations and a bio-solids recycling facility. The district has no employees but contracts administrative functions and the bulk of its operational activities to Sacramento County. The district's service area includes about 98% of the county's population. The city of West Sacramento (Yolo County) is expected to be annexed to the system in fiscal 2008. The cities of Sacramento and Folsom and Sacramento County Sanitation District No. 1 are the local retail wastewater service providers that convey flows to district facilities. The municipalities each have at least one district board member with additional members based on population and the district board has sole authority to set rates and charges.

The district currently charges a monthly fee of $17 per equivalent single family connection, and is planning to increase the fee to $18.50 starting in fiscal 2008. A typical monthly retail wastewater bill in the service area appears affordable, when measured against other major western U.S. cities and against local income levels. Anticipated annual rate increases average 6.7% through fiscal 2011. The district currently charges a connection fee of $7,000 per equivalent connection and recently authorized a 1.4% increase. Connection fees have been an important district revenue source in recent years, climbing to 60% of pledged revenues in fiscal 2004, but declining to about 34% in fiscal 2006 largely as a result of an increase in the service charge rate and a slowing of the growth rate of connections. While Fitch views this level of reliance on connection fee revenue with some concern, the district maintains substantial liquidity, and the district's growth assumptions are adequately conservative. Furthermore, if growth does not materialize as projected, the district has demonstrated that the rate increases required would still be reasonable and affordable.

Operating results have been positive over the past five fiscal years, and the district has increased reserve levels significantly during this period. Combined reserves exceed the district's target of $100 million. Likewise, debt service coverage levels have been healthy, averaging 3 times (x) annual debt service from fiscal years 2000-2006. Prior lien debt service is projected to decline to 1.5x-1.7x over the next five fiscal years as debt levels increase, comfortably above the required threshold of 1.2x debt service. Including subordinate lien bonds, debt service coverage is projected to be about 1.3x, above the required 1.1x for subordinate obligations.

The district's five-year capital improvement plan (CIP) through fiscal 2011 totals $580 million, the majority of which is for construction of new wastewater interceptors to serve areas of new growth. In 2000, the district's 20-year CIP included 120 miles of new interceptor pipelines, most of which has been constructed. The district plans to use pay-as-you-go funding for roughly 20% of total CIP needs; the remainder will be financed with current revenues, capital reserves, a portion of the remaining bond proceeds and a small planned bond issuance in fiscal 2010.

The district's discharge permit expired in August 2005. In conjunction with the permit renewal process, the district is contesting permit provisions related to mercury discharges and has requested increased permitted capacity to provide for build out in 2020. If implementation of the mercury regulatory provision is required, or if the higher daily capacity is not approved, the district could face significant increases in spending on capital and/or programs; it is possible that an additional $580 million in capital funding will be required in to meet the projected 2020 flow rates. The district anticipates receiving a draft permit sometime in 2007 and Fitch will continue to monitor the permit process.

The Sacramento area economy is diversified; leading employment sectors include state government, electronics manufacturing, food processing and health care. Local unemployment rates historically have been below the state average, and local wealth indicators generally are just below state and national averages.

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.