Fitch Ratings has affirmed the 'AA-' rating on the following bonds issued by the Escondido Joint Powers Financing Authority (JPFA or the authority):

--Approximately $27 million revenue bonds (wastewater system financing), series 2012.

The Rating Outlook is Stable.

SECURITY

Bonds are secured by installment payments paid to the JPFA from the city of Escondido, CA (the city). The obligation of the city to make installment payments is secured by a pledge of net revenues of the city's wastewater system (the system); such obligation is absolute and unconditional and is not subject to appropriation.

KEY RATING DRIVERS

ADEQUATE FINANCIAL PERFORMANCE: The system's all-in debt service coverage (DSC) finished fiscal 2015 at 1.6x. The system's DSC falls below Fitch's comparable medians yet is still considered adequate for the assigned rating.

STRONG LIQUIDITY: The system's liquidity has remained strong for several years. Fiscal 2015 finished with $38.9 million in unrestricted cash, which equates to a strong 665 days of operational expenses (days cash).

HIGH RATES: Largely attributable to the water rates, combined water and wastewater rates are very high, though high rates are typical for the region.

SIZEABLE CAPITAL PLAN: The city's capital improvement plan (CIP) has increased in recent years to cover the costs of expanding the city's recycled water infrastructure. Given the system's somewhat low debt metrics, planned new debt associated with the funding of the CIP should be manageable.

RATING SENSITIVITIES

CONTINUED STABILITY: Failure to maintain financial and debt metrics near Fitch's 'AA' medians could put downward pressure on the rating. Future rate increases are likely necessary given rising costs of debt service related to planned state revolving fund (SRF) borrowing.

CREDIT PROFILE

The system provides retail wastewater service to approximately 54,000 customers within the city, which is located approximately 30 miles northeast of San Diego. Treatment is provided by the city's Hale Avenue Resource Recovery Facility, which was originally built in 1959 but has undergone a number of expansions and upgrades over the years.

SOUND FINANCIAL PERFORMANCE, STRONG LIQUIDITY

The system has exhibited sound financial performance over the past several years, although DSC has begun to trend below average. DSC was at its five-year peak in fiscal 2011 (2.4x), but has since decreased in every subsequent year, ending fiscal 2015 at 1.6x. In comparison, Fitch's 'AA' median for all-in DSC is 2.0x. The lower coverage margins realized in 2013-2015 are largely due to increased debt service carrying costs associated with the issuance of the 2012 bonds. Liquidity, measured by days of operational cash held in unrestricted reserves, ended fiscal 2015 at a very high 665 days. The system's strong cash balances serve to somewhat balance the system's currently below-average DSC.

Management's forecasts show DSC rebounding to nearly 2.0x in fiscal 2016 as recently approved rate increases take effect. However, beginning in 2017, new debt service associated with a planned SRF borrowing results in a temporary decrease in DSC before rebounding in 2019-2020 when expected new, yet to be approved rate increases are implemented. Liquidity is expected to remain generally strong throughout the five-year forecast period.

RATES ARE HIGH AND RISING

On a combined basis, monthly water and wastewater charges are about $113, which equates to 2.6% of median household income (MHI). Fitch considers combined bills greater than 2% of MHI to be high and potentially limiting future rate-raising flexibility, but overall costs do not appear to be higher than regional peers. Further annual rate increases of 6.0% are expected through 2017 with additional increases planned through 2020. Management has indicated that it has encountered no strong impediments in raising rates to date.

COSTLY CAPITAL PLAN, MANAGEABLE DEBT BURDEN

The system's five-year CIP totals $62.1 million. Approximately 66% of the projects relate to expansion of the system's recycled water facilities, with the remaining allocated to repair and maintenance projects. Once complete, the added recycled water capacity should result in increased revenue for the wastewater system, as the treated water is expected to be sold to the city's large agricultural customers.

At $1,194, debt levels are low on a per-customer basis and amortization is somewhat quick, with 59% scheduled to pay out in 10 years. As approximately 58% of the CIP is expected to be funded with SRF loans, debt-per-customer is projected to top a still manageable $1,700 by 2017 before amortization-based reductions resume.

MIXED SERVICE AREA

The city's unemployment rate improved to 4.6% in September 2015, besting the state's and nation's averages of 5.5% and 4.9%, respectively. However, at 21.6% in 2014, poverty rates have risen steadily since 2009 and remain above state (16.4%) and national averages (15.5%). Income levels were also below average in 2014, with respective MHI at 85% and 98% of state and national averages.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997714

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997714

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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