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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