DALLAS -- Citizens Energy Group, which manages central Indiana's water system, heads into the market with a $70 million revenue bond issue accompanied by upgrades from two rating agencies.
The first lien water utility revenue bonds will sell through the Indiana Finance Authority on Thursday.
The 30-year, fixed rate first lien paper is rated AA-minus by S&P Global Ratings and A by Fitch Ratings. The outlook is stable. The bonds are secured by a first lien pledge on the net revenues of CEG's water system.
The ratings reflect an upgrade from A to AA-minus from S&P and an upgrade to A from A-minus from Fitch.
"The rating on the senior lien debt reflects our opinion of CEG water's general creditworthiness, based on its very strong enterprise and financial risk profiles," said S&P.
CEG has $895 million in outstanding first lien bonds and $43 million in outstanding second lien bonds.
S&P also raised its ratings on second lien series 2014 B bonds by one notch, to A-plus. Fitch upgraded the ratings on the outstanding second lien bonds by one notch to A.
"Bonds will repay draws made under a line of credit for capital improvements to the system, fund the cost of additional capital projects as well as the debt service reserve fund," banker Stephen Fortino, an executive director at Morgan Stanley, said in an investor presentation.
Morgan Stanley is the senior manager. JPMorgan, Loop Capital Markets and PNC Capital Markets are co-managers.
CEG plans to increase spending in its water system capital improvement program. The group expects to spend an average of $49 million over a four year period beginning in fiscal year 2017 that will be funded primarily from revenue and supplemented with a combination of $14 million from proceeds from the upcoming sale, interim financing, and possible additional bond issuance.
The group invested between $56 and $62 million in the water system in the fiscal years 2014 and 2015 and will invest approximately $36 million in fiscal year 2016.
"The capital spend in 2016 was reduced due to continued revenue shortfalls, short term credit limitations and a pending Indiana Utility Regulatory Commission rate order," Jeff Willman, vice president of CEG's water operations, said during the presentation. The IURC regulates water utilities in the state.
Regulatory oversight of rate-setting has historically provided uncertainty to CEG's financial profile but CEG chief financial officer John Brehm said two significant developments have occurred over the last three years that provide more timely and consistent rate recovery.
In 2013, the Indiana legislature passed Senate Enrolled Act 560 which establishes a maximum 300-day rate pay cycle time before an automatic rate increase occurs. "The IURC's oversight has hindered timely rate relief in the past, due to a prolonged, two-year period between previous petitions for a permanent rate increase and the IURC's final rate order," said Fitch.
In April 2016, the ratemaking process was further improved 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 water system revenue will fall short of the revenue level authorized in a rate case.
Also in April, the Indiana Utility Regulatory Commission approved a $27.7 million rate increase for the water system and approved the fixed portion of the rate structure from 19% to 30% of the total. According to Brehm, the approved rate structure is intended to result in $42.5 million of revenue funding for pay as you go financing. Debt service of the upcoming issue is included in the new rate structure.
"We believe that on a go forward basis these three developments taken together should serve to sustainably improve the debt service coverage of the water system as compared to its historical performance," said Brehm.
CEG has approximately 317,207 customer accounts, including six wholesale customers with volume purchasing contracts in the Indianapolis area. The group operates independently from the city, maintaining a separate board of directors and management staff. CEG also operates Citizens Thermal and Citizens Gas.
