OREANDA-NEWS. Fitch Ratings has assigned an 'AA+' rating to the approximately \$765 million power supply revenue bonds, series 2015O to be issued by the California Department of Water Resources (DWR; Electric Fund).

The bonds are scheduled to price March 31, 2015 via negotiation. Proceeds will be used to advance refund all or a portion of the outstanding 2008H and 2010L power supply revenue bonds for economic savings.

In addition, Fitch has upgraded to 'AA+' from 'AA', DWR's outstanding \$5.943 billion in power supply revenue bonds. As DWR's power supply program terminates in 2015, associated power supply risks are eliminated. Collection of the remaining revenue bond charges is supported by strong state legislation and regulatory order.

The Rating Outlook is Stable.

SECURITY

The power supply revenue bonds are secured by DWR's Electric Power Fund bond charge revenues, imposed by the California Public Utilities Commission (CPUC) on approximately 11.5 million electric customers served by the state's largest investor-owned utilities (IOUs): Pacific Gas & Electric Co. (PG&E; Fitch Issuer Default Rating [IDR] of 'BBB+'), Southern California Edison Co. (SCE; IDR of 'A-'), and San Diego Gas & Electric Co. (SDG&E; IDR of 'A'). The bonds are separately secured from any other obligations of DWR and are not obligations of the state.

KEY RATING DRIVERS

IRREVOCABILITY OF BOND CHARGE: California legislation AB1X (enacted 2001) established the irrevocability and enforceability of DWR's bond charges. Pursuant to this legislation, the bond charges are adjusted as needed to ensure full recovery of DWR's power supply revenue bond debt service costs. The bonds' final maturity is in 2022.

EXPIRATION OF PRIORITY POWER SUPPLY CONTRACTS: The rating upgrade is supported by the expiration of the priority power contracts and impending expiration of the final non-priority power contract in 2015. Power supply expenses continue to fall precipitously as the purchased power contracts expire. The power supply portion of DWR's charges has historically been the more volatile component (i.e. natural gas commodity exposure and kwh volume risk). Expiration of the priority contracts further eliminates the risk of tapping into bond-charge revenues in the event of a power-charge revenue shortfall.

TIMELY REGULATORY APPROVAL: The CPUC has a solid 13-year track record of timely processing of DWR's annual revenue requirement.

STATEWIDE CUSTOMER BASE: DWR's revenues are supported by a very large (11.5 million) and diverse customer base, spread throughout the state and collected by the three IOUs as servicing agents of the state.

STRONG RESERVES: DWR's upgrade is supported by continued ample operating and debt service reserves, totaling more than \$1.8 billion as of Dec. 31, 2014. Despite the return of surplus power-charge operating reserves to customers since 2012, remaining reserves exceed final purchased power costs through the end of the contract term. Debt service reserves in place equal 16 months of debt service costs. All variable-rate debt has been refunded with fixed-rate debt eliminating associated interest rate exposure and liquidity requirements.

RATING SENSITIVITIES

RISKS TO REPAYMENT: Risks to bondholders include potential for delays in IOUs' servicing of DWR revenues, the CPUC's timely adoption of Bond Charges to meet DWR's revenue requirement, and legal challenges to remaining power contracts and/or CPUC's rate determination. The Stable Outlook reflects Fitch's expectation that these events are not expected to occur and result in delays to bond repayment.

CREDIT PROFILE

DWR's Electric Power Fund was created by state legislation in 2001 when soaring energy prices outpaced the capped retail electric rates charged by the state's three IOUs). PG&E and SCE were unable to pay their full power expenses, and the ability of all three of the state's largest IOUs to reliably deliver power was severely compromised. Governor Davis at the time declared a state emergency in California and directed DWR to take over the responsibility to procure the net short power needs for the state's IOUs. Toward this endeavor, DWR issued over \$11.3 billion in power supply revenue bonds in 2002 with final maturity in 2022.

In 2001 and 2002, DWR entered into more than 50 power supply contracts to meet the IOUs' residual net short position. DWR's authority to enter into power supply contracts ended at the end of 2002. DWR has favorably utilized very conservative financial stress scenarios and regularly updated kwh sales and natural gas price forecasts in order to maintain adequate power cost recovery from customers. Since 2008, the power supply contracts, which are subject to greater cost volatility than bond charges, have begun to expire, reducing DWR's power supply exposure as each contract expires. Contractual power purchases have fallen from 3,920 GWHs in 2012, to 483 GWHs in 2013, and will ultimately fall to zero no later than Sept. 30, 2015.

Once all the power supply contracts expire, only DWR's bond charges remain to be collected through 2022, at an average cost of 1/2-cent per kwh. Additionally, the risk of DWR having to use funds from the bond charge accounts to meet under-funded power costs (as provided in the Indenture) is eliminated. To date, DWR has more than sufficiently covered power supply costs through collected power charges.

DWR's financial metrics are mixed but stable, with very strong liquidity measures resulting from their maintenance of substantial reserves. Debt service coverage approximates just 1x, as provided by the Indenture. While coverage is below the 'AA+' rating category median (1.23x), DWR's credit quality is more than bolstered by the state legislation and CPUC regulatory order - which provide irrevocability and adequacy in its power bond charge recovery.