Fitch Ratings has assigned a 'AA+' rating to the following bonds being issued by the East Bay Municipal Utility District, CA (EBMUD or the district):

--Approximately $413 million, water system revenue refunding bonds series 2015A.

Proceeds for the series 2015A bonds will advance refund fixed rate bonds for back-loaded savings and pay costs of issuance. Depending on market conditions, EBMUD may increase the series 2015A issuance to refund series 2010A fixed rate bonds or series 2009A SIFMA bonds. The bonds will not have debt service reserve funds. The 2015A bonds are expected to price on Jan. 22, 2015.

Fitch also affirms the following outstanding EBMUD ratings:

--$2.05 billion water system revenue bonds series 2005A, 2007A&B, 2010A&B, 2012A&B, 2013A and 2014A B&C at 'AA+';

--$82.08 million water system SIFMA bonds series 2009A-1 and 2009A-2 at 'AA+/F1+';

--$359.8 million outstanding subordinate lien extendible commercial paper (CP) notes at 'F1+'.

The Rating Outlook is Stable.

SECURITY

Bonds are payable from net revenues of the water system. Tax receipts are not pledged to bondholders but must be used to pay operating expenditures. The CP notes have a subordinate lien on net water revenues.

KEY RATING DRIVERS

STRONG SERVICE AREA: EBMUD provides retail water supply to a service area with strong economic diversity and a population of approximately 1.3 million in Alameda and Contra Costa counties. Growth in population is anticipated to be served though increased water conservation and efficiency with modest net growth in water demand.

LOWER WATER SALES: Debt service coverage declined between 2008 and 2012 due to lower water sales, the economic recession and escalating debt service. While water sales have remained at lower levels, financial recovery has occurred as a result of cost containment and adopted rate increases.

RATE FLEXIBILITY: EBMUD rates are competitive for the region. Rate flexibility and the EBMUD Board of Directors' willingness to raise rate rates to recover costs was demonstrated by the Board's adoption of rate increases of 9.75% and 9.5% in fiscals 2014 and 2015, respectively.

WATER SUPPLY DIVERSITY AND REDUNDANCY: Water supply reliability was improved by completion of the Freeport Regional Water Project (Freeport) in 2011. Investment in the project increased debt but is providing valuable dry water year supply in the current statewide drought.

HIGH DEBT LEVELS: Debt levels will likely remain high for some time, even with the district's planned shift to a higher use of pay-as-you-go capital funding.

LONG-TERM PLANNING PRACTICES: Long-term financial, capital and water supply planning practices at the district provide a strong enhancement to credit quality.

SHORT-TERM RATINGS: The 'F1+' ratings on the series 2009A index bonds and extendable CP are based on EBMUD's long-term credit quality.

RATING SENSITIVITIES

PRESSURE FROM STATEWIDE DROUGHT: Pressure on financial margins could occur if water sales fall below assumed levels if severe multi-year water rationing were to be implemented. However, the Stable Outlook reflects the expectation that EBMUD's adopted a drought rate structure will prevent financial deterioration during a sustained drought.

CREDIT PROFILE

EBMUD provides retail water service to approximately 1.3 million people residing in Alameda and Contra Costa counties, with around two-thirds of district customers residing in the cities of Alameda, Berkeley, Oakland, San Leandro, Richmond, and Walnut Creek. The customer base of around 390,000 has been relatively stable. However, water sales declined around 15% between the years 2008-2012, which is consistent with other regional utilities as a result of the economic recession, conservation efforts, and variable weather conditions. Water demand recovered modestly in 2013 with an uptick of 4% to 168.4 million gallons per day (mgd) and remained flat in 2014. Customer concentration is modest with the largest five customers accounting for 6.2% of revenues.

EBMUD WELL POSITIONED TO HANDLE CURRENT DROUGHT

The district's primary water supply is provided by its water rights in the Mokelumne River watershed (90%), although a small portion also comes from streams within the district. Historically, these supplies (around 364,000 acre feet [af]) exceeded customer demand in normal hydrological conditions but could be strained in drought conditions. Following California's drought in the 1980s, EBMUD embarked on an extensive program to diversify and harden its water-supply delivery system, including construction of the Freeport Regional Water Project. EMBUD spent more than $2 billion on the various water system improvements over the past two decades, which significantly increased debt levels. EBMUD's completion of the Freeport project just prior to the current drought proved to be fortunate timing and demonstrates the value of long-term planning and investments for California's cyclical climate conditions.

Freeport allows for the delivery of a dry-year water supply of up to 112,000 af per year. Freeport came on line in November 2011 and includes the infrastructure and dedicated pumping capacity to withdraw water from the Sacramento River in accordance with EBMUD's contract with the federal Central Valley Project (CVP). The CVP contract allows the district to purchase up to 133,000 af in a dry year and extends through 2046 with a subsequent 40 year option to renew by EBMUD. Given the current drought, the allocation for EBMUD (as a north-of-the-San Joaquin Delta municipal contractor) was cut by 50%, so it had access to 66,500 af in the 2014 water year. The magnitude of this cut is not viewed as a credit concern, as EMBUD's planning parameters take into account the likelihood of a curtailment to their allocation from CVP in dry years, given the lower availability of water in the CVP.

The district's storage capacity provides additional security through stored water reserves of 400,090 af as of Dec. 8, 2014. This is down from 647,000 af in storage in April 2013 but still compares favorably to annual water demand of around 200,000 af (168 million gallons per day). The district may use additional storage if 2015 is also very dry.

HIGH DEBT LEVELS SHOULD BE MANAGEABLE

Capital investment over the past decade has been significant. The district invested over $2 billion in capital in the water system, including seismic improvements to various district assets, and the structural hardening of the 90 miles of tunnels and aqueducts. The district's capital needs remain sizable but now largely consist of infrastructure reinvestment. The district expects capital spending to stabilize at around $200 million annually. The majority of the district's $1.04 billion in projected capital spending over the fiscal 2014-2018 period consists of maintenance and reinvestment into existing infrastructure (60%). EBMUD estimates it will fund around 43% of its capital plan from debt.

EBMUD's debt profile is high, with $7,151 debt per customer in fiscal 2014. Over the next five years, debt levels are projected to increase with $450 million new debt issuance planned and the district's slow principal payout. Consequently, EBMUD's large debt burden will remain a long-term credit issue, and it will be important for the district to continue maximizing financial flexibility on the revenue side, given the high fixed costs (debt service accounts for between 35% - 40% of revenues).

However, given the level of supply diversification and overall improvements that have been made in recent years and management's stated intent to pursue greater capital funding from current revenues, Fitch believes future borrowing pressures should be manageable.

RATE INCREASES DESIGNED TO IMPROVE FINANCIAL MARGINS

EBMUD adopts rates for a two-year period concurrently with the adoption of the district's biennial budget. EBMUD's board adopted the fiscal years 2014 and 2015 budget in spring 2013 with 9.75% and 9.5% residential rate increases, respectively. The rate increases were larger than normal increases designed to restore the district's financial margins, fund higher staffing levels, and provide revenues to fund a higher percentage of pay-as-you-go capital. The district assumes rate increases in fiscals 2016-2018 will be more modest, between 5-8%. The monthly average residential bill is $48.60 per month or 0.9% of median household income.

FINANCIAL METRICS STABLE FOLLOWING RATE INCREASES

Financial performance declined between fiscal years 2008 and 2012 as a result of lower water sales, increasing debt service, and a reduction in growth-related connection fees. In response to these factors, the district raised rates, restructured debt payments from 2012 - 2015 into later years, and cut operating costs.

Fitch-calculated debt service coverage improved in fiscals 2013 and 2014 with coverage of revenue bonds at 1.7x and 1.9x, respectively. Stronger performance in both years reflects lower debt costs resulting from the debt restructuring done in 2012. Fiscal 2016 will be the first year debt service costs reflect the long-term debt burden; revenue bond debt service will increase from $126 million in fiscal 2014 to $173 million in fiscal 2016.

With strong financial margins in fiscal 2014, EMBUD allocated $35 million of revenues to increase the rate stabilization fund to a total of $85 million. Additionally, a 5-stage drought rate structure was adopted in December 2014 that will replace the current supplemental supply surcharge. The drought rate structure is expected to proceed through the California Proposition 218 process in spring 2015 and be adopted for fiscals 2016-2017. The drought rates would then be implemented automatically upon the Board's declaration of a Stage 3 or Stage 4 drought phase (the district is currently in Stage 2). The drought rates will recover costs associated with supplemental water supply should the drought severity persist beyond fiscal 2015.

Financial performance is forecast to exceed management's 1.6x revenue bond debt service coverage target even with increasing debt service. Cash levels have remained strong. The district has $303 million in unrestricted cash or 568 days of operating cash.

WEAK LEGAL COVENANTS

EBMUD's outstanding revenue bonds have been issued as subordinate lien but there is no debt outstanding on the senior lien indenture, which was closed in 2010. The pledge on commercial paper notes is junior to the outstanding revenue bonds. Legal covenants for bondholders are weak, including a 1.10x rate covenant and no reserve funds for the series of bonds issued in 2012 and thereafter.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'Rating U.S. Public Finance Short-Term Debt' (December 2013).

Applicable Criteria and Related Research:

U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

Rating U.S. Public Finance Short-Term Debt
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=964155

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