August 17, 2016 - 11:17 AM EDT
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Fitch Affirms Schertz-Seguin LGC, TX's Contract Revs at 'AA-'; Outlook Stable

Fitch Ratings has affirmed the following Schertz-Seguin Local Government Corporation (the LGC or the corporation), TX's contract revenue bonds:

--$31.2 million series 2001 and 2010 (Schertz-Seguin Project 1) at 'AA-';

--$41.7 million contract revenues bonds, new series 2015 (Schertz-Seguin Project 1) rated 'AA-';

--$24.8 million series 2012 (San Antonio Water System (SAWS) Expansion Water Treatment Project 2) at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The Schertz-Seguin Project 1 bonds (LGC bonds) are secured by payments from the member cities of Schertz and Seguin to the corporation. Each city is obligated to pay 50% of the annual debt service and operating expenses of the LGC utility on a several, but not joint, basis. The payments are considered an operating expense from their respective utility systems. The bonds are also secured by a pledge of the money in all LGC funds created, established and maintained by the resolution. The payment of the new series 2015 bonds is a junior and inferior lien to that of the previously issued prior lien bonds, secured by the payments from the member cities. A debt service reserve was not funded in association with the series 2015 bonds.

The SAWS Expansion Water Treatment Project 2 bonds are secured by an irrevocable lien on and pledge of the bond payment plus any additional money in all funds created, established, and maintained by the resolution. The bond payment is an unconditional obligation paid by the San Antonio Water System (SAWS) to the corporation, regardless of whether or not SAWS takes water under the Mutual Regional Water Supply Contract (the contract). SAWS must make its payment as an operating expense of its utility system, payable from gross revenues. The bonds do not carry a debt service reserve fund.

KEY RATING DRIVERS

ESSENTIAL SERVICE PROVIDER: The LGC is a public, non-profit corporation which serves as an essential wholesale provider of water to member cities Schertz and Seguin.

LGC RATING TIED TO MEMBERS: The rating reflects the credit quality of its members' utility systems - the cities of Seguin and Schertz (member cities) and the value of the LGC's resources, which provide affordable water in a growing market.

STRONG SAWS CREDIT QUALITY: The credit quality of SAWS drives the rating on the SAWS Expansion Water Treatment Project 2 bonds. SAWS' senior utility bonds are rated 'AA+'/Stable Outlook, reflecting sound financial results, significant rate flexibility, multiyear financial planning, significant capital needs and service area growth.

STRONG CORPORATION CONTRACT PROVISIONS: Contract provisions specify the member cities' debt service payments as operating expenses from their respective utility systems. The intergovernmental contract is in force until the principal of and interest on all bonds has been paid.

LACK OF NOTCHING: No distinction in the ratings between the senior and junior lien is made at this time because the current rating encompasses all corporation debt and the legal covenants on the new series 2015 bonds are essentially unchanged from the prior lien bonds.

SOUND CORPORATION OPERATIONS: The LGC has a good operating history, including the timely and under-budget completion of a major pipeline project.

RATING SENSITIVITIES

CHANGE IN FINANCIAL PROFILES: Changes in the credit quality of the contract members (the cities of Seguin and Schertz and/or the San Antonio Water System) would drive changes in their respective Schertz-Seguin Local Government Corporation bond ratings.

CREDIT PROFILE

The LGC, a public, non-profit corporation, was created by the cities of Schertz and Seguin to secure water from the Carrizo-Wilcox Aquifer in neighboring Gonzales and Guadalupe Counties. Schertz and Seguin are growing communities and required additional water supplies to meet both near- and long-term needs. Due to prohibitive costs, the cities joined forces to construct a well field and collection system and treatment facilities, including a 45-mile pipeline from Gonzales County. Despite the challenges associated with developing and constructing such a project, the cross-county pipeline was successfully completed on time and within budget, with water flowing to Seguin in September 2002 and to Schertz in February 2003.

MEMBER CREDIT QUALITY

The credit analysis of the LGC focuses on the respective water systems of Schertz and Seguin, as they are entirely responsible for the corporation's debt and operating charges. Financial operations of both cities' utilities are good. Schertz has a growing amount of general obligation (GO) debt that is supported by the city's water and sewer system revenues, and capital needs for the city are minimal. Seguin's combined utility system includes electric services, water, and sewer, with the majority of system revenues (80%) derived from its electric customers. Fitch rates Seguin's utility system revenue bonds 'A+' with a Stable Outlook. The rating also takes into consideration the value of the LGC's resources in the growing San Antonio metro area.

SAWS' CREDIT QUALITY

The credit analysis of the SAWS Expansion Water Treatment Project 2 bonds focuses on SAWS credit quality. Payments to the LGC provide primary bondholder security and cover allocable operating charges. SAWS' financial performance historically has been strong. The SAWS service area is growing and is expected to double by the year 2050, requiring it to expand and diversify its water supply portfolio. Capital costs associated with water supply diversification efforts are significant. As such, they will require a sizeable amount of additional leveraging in the future. SAWS annually updates a multiyear financing plan that includes expected operational and capital costs and incorporates its planned rate increases. Fitch rates the SAWS water system revenue bonds 'AA+'/Stable Outlook.

SOUND LGC FINANCIAL PROFILE

Debt service coverage (DSC) for fiscal year 2014 and 2015 has been bolstered by additional revenues from the sale of excess water to SAWS. DSC for fiscal years 2014 and 2015 registered 1.6x, up from 1.1x in fiscal 2013. Corporation liquidity has also seen upward movement, growing to over 780 days of cash on hand in fiscal 2015, an increase from the 379 days reported in fiscal 2010.

The fiscal 2016 - 2018 capital improvement plan (CIP) is around $67 million and will be largely debt financed. The LGC recently received approval for $66 million in loans from the Texas Water Development Board. These loans will assist the LGC in the construction of a new well field and water treatment plant in Guadalupe County. The new well field will allow the LGC to expand and diversify its water supply.

NO NOTCHING OF LIENS AT THIS TIME

Beginning in September 2014 the corporation began issuing new series bonds which carry a junior and inferior lien for the purpose of realizing relief from certain covenants of the prior lien bonds and has closed the prior lien. Legal covenants on the junior lien new series bonds are largely unchanged from the senior lien bonds, with the only exception being the absence of a debt service reserve fund in the junior new series bonds. Due to the sound corporation liquidity, strong contract provisions and lack of material change in legal provisions, there is no rating distinction made between the two liens at this time. There is the potential for future rating distinction between liens as the amount of prior, closed-lien debt decreases and there is notable improvement in lien-specific metrics.

GROWING REGIONAL ECONOMY

The city of Schertz's (GO bonds rated 'AA' with a Stable Outlook by Fitch) is located roughly 15 miles east of downtown San Antonio and is part of the rapidly growing San Antonio metro area. The city's location at the intersection of two major highways has proven advantageous in attracting warehouse and distribution-oriented businesses. The local economy benefits from extensive retail activity along its transportation corridors. Schertz's population has seen rapid growth in recent years with a 2015 estimated population of over 38,000, a 16% jump from 2010 census figures. Local wealth levels are favorable at 31% and 33% above the state and nation, respectively. Unemployment in the city is very favorable at a low 3.2% in May 2016, compared to the state (4.85% - June 2016) and the nation (5.1% - June 2016).

Seguin (GO bonds rated 'AA'/Stable Outlook) is located in Guadalupe County, approximately 35 miles northeast of San Antonio along Interstate Highway 10. The city's 2015 estimated population of 26,636 reflects 6% growth since the 2010 census. The energy boom that occurred in south Texas spurred economic and job growth in the Seguin area. The Eagle Ford shale is a highly profitable natural gas play that stretches to just south of Seguin and has attracted business investment, jobs, and retail sales. Unemployment in both Seguin and the San Antonio metro area were low at roughly 3.3% and 3.4%, respectively as of May 2016.

San Antonio (GO bonds rated 'AAA'/Stable Outlook) is the second largest city in the state and seventh largest in the U.S. Prominent sectors include: military, and government, domestic and international trade, convention and tourism, medical and healthcare, and telecommunications. Area employment has seen gains despite the contraction of the energy sector that services the nearby Eagle Ford Shale. San Antonio's 2014 estimated population totals over 1.4 million and the broader San Antonio-New Braunfels CBSA population is over 2.3 million.

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

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

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=1010472

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010472

Endorsement Policy

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

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Fitch Ratings
Primary Analyst
Teri Wenck, CPA
Director
+1-512-215-3742
Fitch Ratings, Inc.
111 Congress Avenue,
Austin, TX 78701
or
Secondary Analyst
Gabriela Gutierrez, CPA
Director
+1-512-215-3731
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1 212-908-0738
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com


Source: Business Wire (August 17, 2016 - 11:17 AM EDT)

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