Fitch Affirms SSLGC’s AA- Rating
Fitch Ratings takes the following rating action on Schertz-Seguin Local Government Corporation (the LGC), TX’s contract revenue bonds:
–$69.8 million in outstanding series 2001, 2007 and 2010 bonds affirmed at ‘AA-’.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by payments from the 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 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.
KEY RATING DRIVERS
SEGUIN UTILITY DRIVES CREDIT QUALITY: The obligation of Seguin and Schertz to pay 50% of the operating and debt service costs results in a rating that is based on Fitch’s assessment of the utility with the weaker credit quality, in this case Seguin. Seguin’s utility bonds are rated ‘A+’ with a Stable Outlook by Fitch, reflecting strong financial metrics, high debt service coverage, modest debt burden and adequate cash on hand. The ‘AA-’ rating on the LCG bonds additionally reflects the strong contract provisions and above average liquidity.
SOUND OPERATIONS: The LGC has a good operating history with the timely and under-budget completion of a major pipeline project.
STRONG CONTRACT PROVISIONS: Contract provisions include the 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.
ESSENTIAL SERVICE PROVIDER: The LGC provides an essential service to the cities of Schertz and Seguin.
CREDIT PROFILE
The LGC, a public, non-profit corporation, was created by the cities of Schertz and Seguin in connection with securing 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 beginning to flow to Seguin in September 2002 and Schertz in February 2003.
MEMBER CREDIT QUALITY
The credit analysis of the LGC focuses on the 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 no outstanding utility debt and capital needs for the city are minimal as major capital projects have been completed. 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 the city’s utility system revenue bonds ‘A+’ with a Stable Outlook.
SOUND LGC FINANCIAL PROFILE
The rating is enhanced by the financial performance of the corporation. Due to the nature of the water supply contract, debt service coverage has been and will continue to be around 1.0x. Liquidity was a good 480 days cash on hand in fiscal 2011, which is above Fitch’s category ‘AA’ rating median of 309. The LGC has obtained permits for five wells from the Guadalupe District. It has purchased well sites in Gonzales and Guadalupe Counties and is in the design phase of the Guadalupe project. The preliminary fiscal 2012-2016 capital improvement plan (CIP) is around $40 million; a $23 million debt issuance planned for next month will fund 58% of the plan. Debt financing of the CIP, which includes infrastructure improvements to the corporation’s water system to accommodate water delivered by the San Antonio Water System and construction of wells in Guadalupe county, will allow the LGC to maintain its healthy cash balance reserves.
Fitch expects to assign a rating to a $23 million new money sale currently scheduled for June 2012. The upcoming issuance will provide financing for the design and construction of infrastructure improvements to the corporation’s water system to accommodate water delivered by the San Antonio Water System (SAWS), three years’ capitalized interest on the bonds, and costs of issuance. The bonds will be separately secured by payments from SAWS to the corporation.
Additional information is available at ‘www.fitchratings.com’. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch’s Revenue-Supported Rating Criteria, this action was informed by information from CreditScope and the Municipal Advisory Council of Texas.