Indianapolis Gas Bonds Raised to AA by S&P

Standard & Poor's Ratings Services said it has raised its rating on Indianapolis, Ind.'s gas utility system bonds (senior lien) to AA from AA-minus, and on Indianapolis' Gas utility distribution system (GUDS) bonds (second lien) to AA-minus from A-plus.

At the same time, Standard & Poor's assigned its AA-minus rating to Indianapolis' GUDS bonds, series 2013A. The outlook is stable.

"The upgrade reflects our view of sustained strong financial performance at the utility," said Standard & Poor's credit analyst Peter Murphy. The utility does business as Citizens Energy Group. Due to the senior lien's stronger coverage and limited amount of debt outstanding, a one-notch rating distinction is warranted.

Gas system credit strengths include: a strong market position, with a sizable residential customer base and diverse service area economy; stable operations, with adequate storage and pipeline access to key regional natural gas markets; liquidity levels, including lines of credit, that provide good financial cushion; competitive rates and limited exposure to retail competition; and favorable rate design that includes a monthly reset gas cost adjustment and mechanisms that account for weather variation.

Offsetting considerations include: declining gas usage per customer; and potential time lags with respect to rate cases filed with the Indiana Utility Regulatory Commission, although the regulatory environment has been supportive, and provides for cost recovery.

Bond proceeds will refinance Citizens' 2008A GUDS to produce annual interest savings.

Citizen's is an executive department of the city of Indianapolis and operates its gas utility subject to a public charitable trust. The trust provides retail gas service at cost-based rates through its regulated gas distribution business to about 260,800 residential, commercial, and industrial customers in Indianapolis-Marion County, an annual 1.9% decline over the past six years. Citizens also operates a thermal energy division, which includes regulated steam utility and a nonregulated chilled water utility, and since 2011, separate water and wastewater utilities.

The stable outlook reflects Citizens' stable service area economy and customer base, adequate projected debt service coverage, and high degree of commodity cost recovery certainty afforded by the weather normalization and decoupling mechanisms. The outlook assumes sound management of the utility's gas commodity and price risks and liquidity requirements. S&P does not expect to raise the rating in the next two years. It could lower the rating if debt service coverage levels decline further.

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