Fitch Rates East Bay Muni Utility District, California $895MM Sub Water Revs 'AA'.

AUSTIN, Texas -- Fitch Ratings has assigned an 'AA' rating to the following water system subordinated revenue bonds for the East Bay Municipal Utility District, California's (EBMUD):

--$450 million series 2007A;

--$57.9 million series 2007B;

--$387.5 million series 2007C.

The bonds are payable from net revenues of EBMUD's water system (the system) after payment of operations and maintenance expenditures and debt service on any senior lien bonds; there are currently no senior lien bonds outstanding or contemplated. Fitch also assigns an initial 'AA' rating to EBMUD's $1.1 billion of outstanding parity water revenue bonds (net of refunding). The Rating Outlook is Stable.

The 2007A and 2007B bonds are fixed-rate bonds and are scheduled to price the week of May 7 through a syndicate managed by Citigroup Global Markets Inc. The 2007C bonds will be sold as auction-rate securities the week of May 21 and will be placed by five broker dealers (Bear Stearns, Citigroup, De La Rosa & Co., Lehman Brothers, and Merrill Lynch) Proceeds from the 2007A bonds will be used to pay for capital improvements related to the system, while the 2007B and 2007C bonds will used to refund a portion of EBMUD's outstanding parity water debt for interest savings without extension of the maturities.

The 'AA' rating reflects EBMUD's sound financial profile, broad service area economy, and extensive planning efforts and formalized policies. Other credit drivers include the district's large capital improvement program (CIP) and slow principal amortization, which will keep customer debt levels high for some time. EBMUD is in the midst of a major construction cycle designed to drought-harden water supplies, enhance seismic preparedness, and improve overall system reliability. Yet despite the capital costs involved, operating performance is expected to remain stable and have little impact on user affordability.

EBMUD provides retail water service to around 1.3 million people in all or part of 20 cities and 11 unincorporated communities in Alameda and Contra Costa Counties along the eastern portion of San Francisco Bay. Water supplies are derived primarily from the Mokelumne River watershed that originates in the Sierra Nevada mountains, although a minor portion also comes from streams within the district. These supplies traditionally have well-exceeded customer demands and are expected to continue to be adequate through at least 2020, but during extreme droughts or emergency situations (seismic events) supplies could face some disruption.

The current $1.3 billion five-year CIP substantially addresses these issues, and, upon completion of the major projects, will provide a greater degree of flexibility in meeting customer demands for the long-term. The largest CIP item at $461 million in outlays is the Freeport Regional Water Project (FRWP). FRWP, a joint-funded water treatment facility with Sacramento County Water Agency, will be capable of providing up to 100 million gallons per day to the district (roughly one-half of current consumptive demands) during drought years when completed in the fall 2009.

Given the scope of the CIP, customer debt levels, which are already high due to prior borrowings, are expected to increase further as the CIP progresses. However, EBMUD has limited the impact to end users by extending the repayment schedule of its debt, allowing for financing of the CIP and ongoing operations with only modest annual increases through fiscal 2012. While Fitch acknowledges the credit risk of the district's high debt levels and slow amortization, Fitch believes the CIP positions the district to meet perpetual supply demands and that debt levels will not be uncharacteristic of other Bay area utilities over the medium-term that are facing similar issues. Furthermore, the district retains a great deal of revenue-raising flexibility if higher than forecasted adjustments to user rates are needed given current charges compare favorably to other regional providers and are well-below Fitch's affordability threshold.

Financially, district operations are sound, reflecting extensive policies and planning practices. EBMUD annually budgets for 1.6 times (x) debt service coverage on its subordinated revenue bonds, but has exceeded this level over the last five years, averaging over 1.9x. By policy, EBMUD also maintains several dedicated reserves, including a fully-funded 90-day operating reserve and contingency/rate stabilization fund, which has never been drawn upon. Consequently, EBMUD's liquidity is favorable, with unrestricted cash equaling a solid 280 days of operating expenditures for fiscal 2006. EBMUD's proforma of operations through fiscal 2012 reflects similar results, despite the large increases in annual debt service costs expected to occur through the period from additional borrowings.

EBMUD serves approximately 55% of the combined population of Alameda and Contra Costa Counties, with around two-thirds of district customers residing in Alameda, Berkeley, Oakland, San Leandro, Richmond, and Walnut Creek. The regional economy includes a sizeable industrial base, which benefits from the area's extensive port, rail, trucking, and airport facilities. The area experienced numerous job losses during the last recession (8,000 tech-related jobs alone were lost), but has made steady gains in most sectors during recent years. Reflecting this contraction, unemployment spiked at 7% and 6.1% in 2003 in Alameda and Contra Costa Counties, respectively, but has since receded and is now below both the state and U.S. averages. The recent decline in the housing sector is expected to have some effect on the region, but other economic drivers are forecasted to keep job growth positive over the near-term. Wealth levels within the counties are notably higher than the state and U.S. averages both in terms of per capita income and median household income.

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.