AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings takes the following rating action on Schertz-Seguin Local Government Corporation (the LGC or the corporation), TX's contract revenue bonds:

--$41.45 million contract revenues bonds, new series 2015 rated 'AA-'.

The bonds are scheduled to sell via negotiation the week of Dec. 1, 2014. Proceeds will be used to refund the series 2007 contract revenue bonds, purchase land in Guadalupe County and pay issuance costs.

Fitch also affirms the 'AA-' rating on the following bonds:

--$67.82 million in outstanding contract revenue bonds, series 2001, 2007 and 2010.

The Rating Outlook is Stable.

SECURITIES

The new series 2015 bonds are special obligation bonds payable 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 outstanding prior lien bonds (series 2001, series 2007 and 2010 bonds), are payable from the same sources as the new series 2015 bonds, but are senior to the new series 2015 bonds. With the issuance of the corporation's new series 2015 bonds, the senior lien is now closed. The payment of the new series 2015 bonds is a junior and inferior lien to that of the previously issued prior lien bonds. A debt service reserve will not be funded in association with the series 2015 bonds.

KEY RATING DRIVERS

LGC RATING TIED TO MEMBERS: The rating on the LCG bonds, both senior and junior lien, is linked to the credit quality of its members' water and sewer systems - the cities of Seguin and Schertz (member cities). The 'AA-' rating on the LCG contract bonds additionally reflects the strong contract provisions and above average corporation liquidity.

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 lien 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 with the exception of the lack of a debt service reserve on the new series 2015 bonds.

ESSENTIAL SERVICE PROVIDER: The LGC provides an essential service to the cities of Schertz and Seguin.

RATING SENSITIVITIES

CHANGE IN FINANCIAL PROFILES: Changes in the credit quality of the contract members (Seguin and Schertz) would affect the LGC bond ratings. The Stable Outlook reflects Fitch's belief that this is unlikely.

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 low 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.

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. Corporation liquidity was strong at over 500 days' cash on hand in fiscal 2013, which is above Fitch's category 'AA' rating median of 398. Preliminary unaudited fiscal year 2014 corporation results point to continued healthy financial operations.

The fiscal 2014-2018 capital improvement plan (CIP) is around $34 million and will be largely debt financed. The CIP includes construction of a new well field and water treatment plant in Guadalupe County, which will allow the LGC to expand and diversify its water supply. A portion of this issuance will be used to purchase land in Guadalupe County as outlined in the CIP. The LGC has obtained permits for five wells from the Guadalupe County Groundwater Conservation District, has purchased well sites in Gonzales and Guadalupe Counties, and is in the design phase of the Guadalupe project.

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 for 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 2013 estimated population of 35,929, a 14% jump from 2010 census figures. Local wealth levels are favorable at 36% and 34% above the state and nation, respectively. Unemployment in the city is very favorable at a low 4% in September 2014, compared to the state (5%) and the nation (5.7%).

Seguin (GO bonds rated 'AA' with a Stable Outlook by Fitch) is located in Guadalupe County, approximately 35 miles northeast of San Antonio along Interstate Highway 10. The city's 2013 estimated population of 26,660 reflects 6% growth since the 2010 census. The natural gas boom occurring in south Texas has also spurred recent 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 4.8% and 4.7%, respectively as of September 2014.

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 and the Municipal Advisory Council of Texas.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2014);

--'2014 Water and Sewer Medians' (December 2013);

--'2014 Sector Outlook: Water and Sewer' (December 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

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

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=929695

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