Both series of bonds are limited obligations of the authority, payable from revenues received from the Sacramento Regional County Sanitation District (the district) pursuant to installment purchase contracts entered into by the authority and the district. District payments on the series 2004A bonds are payable from and secured by a first lien on the net revenues of the district. District payments on the series 2004B bonds are payable from and secured by a subordinate lien on net revenues of the district. Proceeds from both series will be used to finance construction of improvements to the district's wastewater interceptor system and to pay issuance costs.

The ratings reflect the district's sound financial condition, experienced management team, and healthy and diversified local economy. Recent operating results have been characterized by positive margins and healthy and increasing reserves. The ratings also incorporate a very large five-year capital plan and the potential impact of pending discharge regulations on the district's financial condition. Despite an acceleration of the district's capital program, Fitch considers the anticipated rate and fee increases reasonable and views the projected debt service coverage levels as more than adequate.

The district serves as the wholesale wastewater provider for the greater Sacramento area. Formed in 1973, the district owns a regional treatment plant and a network of interceptor lines and lift stations; it also recently opened a biosolids recycling facility. The district has no employees but contracts administrative functions and the bulk of its operations activities to Sacramento County. The district's service area includes the City of Sacramento and four smaller communities, as well as the unincorporated areas of the county. 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 district's five-year capital improvement plan (CIP) totals $1.3 billion, the majority of which is for construction of new wastewater interceptors. In 2000, the 20-year CIP totaled $1.3 billion; district officials attribute the accelerated timeframe to increasing development in the service area, acceleration of permit requirements, and sharply higher cost estimates for CIP projects. Financial forecasts include pay-as-you-go funding of roughly 20% of total CIP needs through fiscal 2009; the remainder will be financed with bonds. Projected capital needs beyond the five-year planning horizon currently total more than $400 million.

The district currently charges a monthly fee of $15.40 per equivalent single family connection. 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 rate increases are expected to produce a monthly fee of $22.50 by fiscal 2008. The district also charges a connection fee of $6,000 per equivalent connection. Connection fees have become an important district revenue source, climbing from less than 30% of operating revenues in fiscal 1999 to nearly 70% in fiscal 2003. While Fitch views this reliance on fee revenue negatively, the expectation of continued steady growth in the county appears reasonable.

Operating results have been positive over the past five fiscal years, and the district has increased reserve levels significantly during this period. Combined reserves comfortably exceed the district's target of $100 million. Likewise, debt service coverage levels have been healthy, averaging roughly 3.0x annual debt service from fiscal years 1999-2003. Prior lien debt service is projected to decline to below 2.0x over the next five fiscal years as debt levels increase. However, they are expected to remain well above the required threshold of 1.20x debt service. The district has entered into two swap agreements, with a combined total notional amount of roughly $313 million, with Bear Stearns Financial Products. Fitch rates the Bear Stearns Securities Corp. 'A+/F1+'.

The district's discharge permit expires in August 2005. In conjunction with the permit renewal process, the district is contesting permit provisions related to mercury and lindane discharges. The current CIP includes $10 million for a mercury offset program. If implementation of either or both of the regulatory provisions is required, the district could face significant increases in spending on capital and/or programs.

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.