OREANDA-NEWS.  Fitch Ratings has assigned its 'A+' rating to the city of Seguin, Texas' approximately $4.5 million utility system revenue bonds, series 2016.

The bonds are expected to price during the week of Jan. 18, 2016. Proceeds will be used to fund a portion of the utility's capital plan and pay costs of issuance.

In addition, Fitch affirms the 'A+' rating on the following bonds:

--$29.4 million utility system revenue bonds, series 2006, 2008, 2010 and 2014.

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 serving 8,500 electric customers and 7,257 water customers in the growing San Antonio-New Braunfels region. Electric revenues make up approximately two-thirds of total operating revenues.

LIMITED RISK POWER CONTRACT: Seguin is a distribution electric utility. Customer load demands are met with an all-requirements contract with San Antonio's City Public Service (CPS; rated 'AA+' with a Stable Outlook by Fitch) through 2026. The embedded power cost is tied to the diversified and competitive power supply portfolio of CPS.

AMPLE WATER AND WASTEWATER CAPACITY: Supplies and treatment capacity for the water and wastewater systems are robust and position the utility to meet future growth, including a new water bottling plant scheduled to open in 2016.

INCREASED LEVERAGE POSITION: The addition of new debt in 2014 ($21.4 million) and 2016 increased Seguin's debt profile significantly, although prior to these issuances, the debt burden was low. Future capital needs are manageable and relate almost entirely to rehabilitation of water and wastewater infrastructure.

ADEQUATE FINANCIAL METRICS: Very strong historical financial margins will decline with additional debt costs but are expected to remain adequate for the rating with planned water and wastewater rate increases.

RATING SENSITIVITIES

FINANCIAL PERFORMANCE IN LINE WITH PROJECTIONS: The rating reflects Fitch's expectation that Seguin's utility system financial margins, bolstered by the approved water and wastewater rate increase in fiscal 2016 and future year planned rate increases, should support the increasing debt costs while maintaining adequate debt service coverage and liquidity levels.

CREDIT PROFILE

The city of Seguin's combined utlity is a municipally owned, city council-governement system that provides electric, water and wastewater services to a population of approximately 26,700. The city is located in Guadalupe County, approximately 35 miles northeast of San Antonio and 50 miles directly south of Austin.

Growth in utility demand has been steady but modest over the past five years. A new water bottling facility being built by Niagara Bottling, LLC is expected to open in 2016 and increase both electric and water demand. Facilities and capacity for each of the utilities is in place to serve the new demand.

TEN-YEAR POWER SUPPLY CONTRACT IN PLACE

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 due to an ongoing contract dispute over pricing and accelerated debt amortization. The utility entered into a nine-month interim contract with American Electric Power 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.

DECLINING BUT HEALTHY FINANCIAL METRICS

Financial margins are projected to decline with the additional debt service costs in upcoming years. Fitch-calculated debt service coverage (DSC) has historically been very strong, above 3.0x over the past five years, but is expected to decline with the additional debt service related to the series 2014 and 2016 bond issuances. DSC debt is projected to remain over 1.4x, assuming the additional water and wastewater rate increases are adopted as outlined in the September 2015 cost of service study. Future proposed rate increases are lower than the initial 8.4% average increase adopted in fiscal 2016 for water and wastewater customers. No additional electric rate increases are anticipated following the increase implemented in fiscal 2015.

Liquidity increased in recent years, due to the creation of a reserve related to the LCRA dispute, in which Seguin Utilities prudently accrued its power supply cost savings. Unrestricted funds were strong at 280 days cash on hand (DCOH) at the end of fiscal 2014 but declined to a still healthy level of 159 days cash at the end of fiscal 2015 (unaudited). Fitch's 'A' category median is 127 DCOH.

Leverage was low at the end of fiscal 2014 with debt-to-funds available for debt service (debt to FADS) of 2.2x but the 2014 (not included in end of year 2014 numbers) and 2016 bond issuances have increased the leverage position to above-average levels. The debt to FADS ratio is estimated by Fitch at approximately 11.0x as compared to Fitch's 'A' category median of 5.3x.