AUSTIN, Texas - (Business Wire) In the course of routine surveillance, Fitch Ratings affirms the 'A' rating on Schertz-Seguin Local Government Corporation, Texas' (the LGC) $48.9 million of outstanding contract revenue bonds. The Rating Outlook is Stable. The bonds are secured by an irrevocable pledge of the bond payment portion of annual payments received by the LGC from the cities of Schertz and Seguin, pursuant to a water supply contract. The cities' payments are an operations and maintenance expense of their respective utility, payable prior to debt service on the member cities' own bonds. The obligation is several but not joint.
The 'A' rating primarily reflects the credit quality of the participating members, as well as the financial metrics of the LGC. Other rating considerations include the LGC's good operating history, essential nature of water supplied by the LGC, and strong legal protections provided by the water supply contract and bond resolution. Deterioration in the credit quality of Schertz's water and sewer system or erosion in the credit profile of Seguin's utility could adversely affect the rating on the LGC's bonds. Maintenance of the LGC's financial metrics, particularly liquidity, is also key to maintaining the rating.
The LGC, a public, non-profit corporation, was created by the cities of Schertz and Seguin in response to 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-term 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-country pipeline was successfully completed on time and within budget, with water beginning to flow to Seguin in September 2002 and Schertz in February 2003.
Financial operations of both cities' utilities are good. Schertz's utility revenue bond debt service coverage (which is paid after the LGC bonds) was a strong 4.1 times (x) in fiscal 2008. Liquidity was also healthy at 287 days working capital in fiscal 2008. Good financial performance is expected to continue 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 'A-' with a Stable Outlook.
Financial performance of the corporation is also good. Due to the nature of the water supply contract, debt service has been and will continue to be around 1.0x. Liquidity has declined due to increased capital spending in the last three years, though it is still adequate at 266 days cash on hand in fiscal 2008. 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 fiscal 2009-2020 CIP is around $42 million and 50%-75% is projected to be debt funded. Debt financing of the capital plan, which includes construction of the wells and a second water treatment plant, will allow the LGC to rebuild its cash reserves.
Additional information is available at 'www.fitchratings.com'.
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Fitch Ratings, Austin
Julie Seebach, 512-215-3740
Mark Campa, 512-215-3727
or
Media Relations:
Cindy Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com
