DALLAS-- The nonprofit wastewater utility for the city of Indianapolis and Marion County is headed into the market with $234 million of wastewater revenue bonds -- including debt it will designate as green bonds.
The $193.5 million 30-year, fixed-rate Series 2016 A first lien wastewater utility revenue bonds and the $40.7 million, series 2016B, second lien bonds will sell through the Indiana Finance Authority Thursday.
The IFA will sell them on behalf of CWA Authority, which is operated by Citizen's Energy Group, the regional utility.
Bank of America Merrill Lynch and Goldman Sachs are the lead managers and Public Financial Management Inc. is advising the authority. JP Morgan is the lead manager and Ice Miller LLP is bond counsel for CEG.
The Series 2016 A will be CEG's first bonds with a green bond designation.
"We are trying to reach out to a new investor base," said Sara Mamuska-Morris, director of treasury at CEG.
Proceeds from the 2016A green bonds will be used to finance capital costs and repay draws made under CWA's $145 million line of credit -- the full amount of which will be available after the bonds are issued. "It's a new money issuance to fund the consent decree projects," said Mamuska-Morris.
The projects are part of a $1.8 billion long term infrastructure program that is required to be completed by 2025 under a consent decree with the U.S. Environmental Protection Agency and the Indiana Department of Environmental Management.
CWA has completed 53 of the 64 milestones within the consent agreement on or ahead of schedule. It is also under budget by $400 million.
"Being ahead of schedule allows us to not react to conditions that may worry us about bids and negotiate those bids more appropriately," said Marc Jacob, CEG's vice president for capital programs and engineering.
The Series 2016 B bond will provide new money to fund capital projects as well as refund $46 million of 2011 C, second-lien bonds that mature Oct. 1.
The first-lien bonds are rated AA by S&P Global Ratings and A by Fitch Ratings.
The second-lien paper is rated AA-minus by S&P, while Fitch assigned the second lien the same A rating as the first lien primarily because of the size of the debt issuance.
"It's more of a case of not notching down the second-line debt rather than not giving more credit to the first lien bonds," said Mamuska-Morris. "The reason Fitch gives is that it's a very small amount of debt when you look at the overall debt portfolio of the utility and we aren't anticipating adding second lien debt."
Fitch also revised its outlook on the utility's wastewater debt downward to stable from positive as it affirmed the A rating.
CWA has about $1.1 billion in long-term first-lien debt outstanding and approximately $314 million in second-lien debt.
Fitch analysts said the agency believes material improvement in financial results, including liquidity and surplus cash flows, is unlikely given pressures associated with the sizeable capital program and increasing payment-in-lieu-of-taxes payments. PILOT payments equaled $17 million in fiscal 2015 (8% of operating revenues) and are scheduled to increase annually through the forecast to over $28 million by fiscal 2020.
Fitch noted that financial projections point to a continuation of existing performance.
Regulatory oversight of rate-setting has historically provided uncertainty to CEG's financial profile but two significant developments in last three years to provide more timely and consistent rate recovery.
In 2013, the Indiana legislature passed a bill establishing a maximum 300-day rate pay cycle time before an automatic rate increase occurs.
In April 2016, the ratemaking process was further improved from the utility's point of view with the passage of SEA 383, in which CEG is authorized to add a rider to each residential customer's monthly bill when previous year's collections are less than 98% of total revenue requirements for the year. The law reduces the risk that actual wastewater system revenue will fall short of the revenue level authorized in a rate case.
In July the Indiana Utility Regulatory Commission approved a two-step implementation rate increase that increased rates 21.5% in July and an additional 5% next July. Debt service on the planned new debt issued through June 30, 2018 was fully included in the authorized rates.
CEG provides sewer and wastewater services to approximately 236,000 customer accounts, including seven wholesale customers.
