Fitch Affirms Seguin, TX's Utility Revs at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A+' rating on the city of Seguin, Texas' approximately $12.4 million of outstanding utility system revenue bonds, series 2006, 2008 and 2010.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien on the net revenues of the city's combined electric, water and wastewater system.

KEY RATING DRIVERS

SMALL, COMBINED UTILITY SYSTEM: The city of Seguin owns and operates a combined electric distribution, water and wastewater system (Seguin Utilities) serving approximately 8,300 customers in the growing San Antonio-New Braunfels region. Electric revenues compose approximately two-thirds of total operating revenues.

LIMITED RISK POWER SUPPLY: Seguin Utilities has entered into two consecutive all-requirements wholesale power supply contracts with San Antonio's City Public Service (CPS; rated 'AA+' with a Stable Outlook by Fitch), securing its power supply through Dec. 31, 2026. The utility has maintained its limited risk, distribution only profile following the early termination of its wholesale power contract with the Lower Colorado River Authority (LCRA; revenue bonds rated 'A+') on Sept. 13, 2012. The termination of the LCRA contract remains subject to litigation.

SOLID FINANCIAL METRICS: Strong operating cash flow, minimal debt and ample liquidity supports Seguin Utilities' solid financial position. While Fitch-calculated debt service coverage (DSC) has been softening in recent years, it is still very strong for the rating category.

GROWING SERVICE AREA: The local economy has seen consistent growth, even through the economic recession. Electric load growth has been healthy, averaging almost 1% per annum since 2007. Somewhat mitigating the service area's growth is its below-average demographics, with income levels only 75% of state averages and above-average customer concentration.

ADDITIONAL DEBT ANTICIPATED: The utility anticipates debt funding a portion of its capital plan, in order to upgrade its water and wastewater treatment systems and for other capital improvements. Given Seguin Utilities' low leverage position, the additional debt should be manageable.

RATING SENSITIVITIES

MATERIAL NEGATIVE OUTCOME IN LCRA DISPUTE: Unanticipated pressure resulting from a material adverse decision in the LCRA contract dispute could lead to negative rating action. The utility's strong financial position and reserves provide some cushion against unexpected costs arising from the dispute.

CREDIT PROFILE

CONTRACT DISPUTE

The city of Seguin's combined utility is a municipally owned, city council-governed system that provides electric, water and wastewater services to a population of approximately 26,000. The electric distribution system, the largest of the combined utilities, services 8,288 customers and contributes approximately 60% of operating revenues.

The utility's wholesale power was previously supplied through an all-requirements contract with LCRA that was scheduled to expire in June 2016. However, Seguin terminated the contract early on Sept. 13, 2012 (along with six other LCRA customers) due to an ongoing contract dispute over pricing and accelerated debt amortization. The utility entered into a nine-month interim contract with AEP after the LCRA termination and has since transitioned to an all-requirements contract with CPS. The current contract with CPS expires June 24, 2016, at which time Seguin will transition to a different, but similar contract with CPS that extends through Dec. 31, 2026.

The all-requirement contracts with CPS retain the utility's low-risk distribution profile and favorably provide a cost savings as compared to the previous supply contract. However, the consequences of terminating the LCRA contract early are unclear. A partial summary judgment against Seguin (and other LCRA defectors) found that LCRA didn't breach its Uniform Rate Clause and therefore the customers didn't have the right to terminate their agreements. Seguin has appealed the decision and is claiming governmental immunity. While any resulting pressure would be a rating factor in Fitch's future reviews, Seguin's strong financial position would provide some cushion against a material adverse outcome.

STRONG FINANCIAL METRICS

Financial performance of the combined utility is strong and compares favorably to the 'A+' medians. Fitch-calculated DSC has historically been above 4.0x since 2007, but decreased to a still strong 3.1x in 2013. City council approved a rate change in August 2014 (expected effective October 2014), which should strengthen the utility's margins in fiscal years 2015 and 2016.

Liquidity has increased in recent years, due to the creation of a reserve related to the LCRA dispute, in which Seguin Utilities is accruing its power supply cost savings. Unrestricted funds are strong at 279 days compared to the rating category median of 181 days.

Leverage is low as calculated by debt to funds available for debt service of 3.9x. The current 10-year capital plan anticipates a bond issuance later this year. The debt will provide funds for upgrades and expansion to the water and wastewater treatment facilities, while also funding the construction of a utility operation center.

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

Applicable Criteria and Related Research:

--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);

--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);

--'U.S. Public Power Rating Criteria' (March 18, 2014);

--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013).

Applicable Criteria and Related Research:

U.S. Public Power Peer Study -- June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789

U.S. Public Power Peer Study Addendum - June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750283

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725447

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=869135

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Contacts

Fitch Ratings
Primary Analyst
Stacey Mawson, +1 212-908-0678
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, New York
or
Secondary Analyst
Ryan Greene, +1 212-908-0593
Director
or
Committee Chairperson
Dennis Pidherny, +1 212-908-0738
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Stacey Mawson, +1 212-908-0678
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, New York
or
Secondary Analyst
Ryan Greene, +1 212-908-0593
Director
or
Committee Chairperson
Dennis Pidherny, +1 212-908-0738
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com