The Indiana Finance Authority will head into the market as soon as Tuesday with Indianapolis-based water and wastewater utility refundings using a tender and forward delivery structure popular in the current market to achieve savings.
The Indiana Finance Authority serves as conduit the CWA Authority Inc. in an offering of an $80.7 million first-lien wastewater refunding series and a $175 million forward first-lien wastewater refunding series. The IFA on behalf of Citizens Energy Group will sell $81 million of first-lien water utility refunding bonds and $13.4 million of first-lien water utility forward refunding bonds.
Both are aimed at refunding higher coupon bonds.
Citizens Energy Group is the trade name of the Department of Public Utilities of the City of Indianapolis, which is the successor trustee of a public charitable trust that manages natural gas utility services in the city and owns and operates other utility systems. CWA is a not-for-profit formed to own and operate the wastewater system, while Citizens Energy Group manages it through an agreement with CWA.
Each system issues debt independently secured by pledged revenues of each system to a separate dedicated trust. Both transactions are slated to price Tuesday with Citigroup acting as senior manager.
CWA and Citizens stress the credit strengths of the governance structure that insulates the system from political influence. The “structure depoliticizes the decision-making process and enables Citizens and CWA to implement private-sector practices for the public good,” reads an investor presentation.
The IFA and CWA launched a tender offer June 23 on various bonds from deals in 2014 and 2016 as part of the wastewater transaction. It closed Friday. Citigroup is serving as the dealer manager for the tender and Globic Advisors Inc. is the tender agent. The IFA and Citizens’ tender invited holders of some bonds sold in 2014, 2016, and 2018 to tender their bonds as part of the water refunding.
Ahead of the sale, Moody’s Investors Service affirmed its Aa3 and stable outlook on the first water lien bonds and S&P Global Ratings affirmed its AA and stable outlook.
“The Aa3 rating recognizes Citizens Energy Group Water’s position as monopoly provider of essential water services to approximately 350,000 customers in the city of Indianapolis and surrounding areas and a sound financial profile,” Moody’s said.
State regulation of water rates by the Indiana Utility Regulatory Commission — a unique characteristic among U.S. municipally owned water utilities — is factored in the rating as is state legislation that provides cost recovery mechanisms allowing for the recovery of infrastructure expenses outside of a rate setting case.
Citizens Water’s financial performance has been sound, with annual debt service coverage of 1.7 times to 1.8 times over the last three years.
The utility has $757.4 million of outstanding first-lien bonds and no second-lien debt.
S&P said it while the ownership and governance structure are unique among municipalities, it “ultimately views Citizens’ as in scope for our municipal utility revenue bond criteria given that the management and governance structure is ultimately a not-for-profit trust providing service to a single municipality.”
Moody’s affirmed the first wastewater Aa3 rating and stable outlook which “recognizes CWA’s monopolistic position as provider of essential sewer services to a large customer base primarily within the city of Indianapolis and a sound financial profile driven by credit accretive rate treatment,” Moody’s said.
The rating is “constrained at the current rating level by substantial capital spending requirements relating to a federally mandated consent decree designed to reduce combined sewer overflows — or CSOs — that has increased leverage,” Moody’s added.
Completion of the $2.4 billion program is expected in 2025 at which time an estimated 210 billion gallons of CSO will be prevented from entering Indianapolis waterways.
Pledged revenue provided 2.14 times coverage in 2022 — over the 1.2 times requirement — and 1.88 times when counting both senior- and second-lien debt while the system enjoys a strong track record on rate increases with the Utility Regulatory Commission.
S&P affirmed its AA rating and stable outlook on the water bonds and raised the second lien rating to AA from AA-minus because less than 12% of the authority’s total debt remains on the second lien and analysts “no longer believe junior-lien bondholders are materially disadvantaged relative to senior-lien bondholders given the de minimis amount of debt on the second lien and very strong pro forma financial metrics.
The system has $1.8 billion of outstanding first-lien revenue bonds and $214 million under the second lien.