Indiana-based Citizens Energy Group’s work to lower its debt and improve cash flow has earned the utility's water enterprise one-notch upgrades from all three major rating services.

S&P Global Ratings upgraded CEG’s first lien water revenue bonds to AA from AA-minus and the second lien revenue bonds to AA- from A-plus. Fitch Ratings upgraded the first and second lien bonds to A-plus from A. Moody’s Investors Service upgrade the first lien bonds to Aa3 from A1. The outlook is stable for all three.

Sara Mamuska-Morris, Director of Treasury at CEG said the upgrades can be attributed to strong management and financial performance. “The goal of Citizens has been to reduce the cost of borrowing and hopefully this is reflected in the market,” Mamuska-Morris said in an e-mail.

Moody's has upgraded Citizens Energy Group's water, gas and wastewater enterprises. Bloomberg

“We base the upgrade on the water system's steadily improving financial profile, which we believe is sustainable when considering a history of good regulatory support and no plans for additional debt,” S&P said.

The upgrades comes before of a $358 million water revenue bond refunding of all eligible maturities of the system's series 2011F revenue bonds outstanding. The bonds are expected to sell via negotiation the week of Sept. 10. JPMorgan is senior manager.

CEG's water enterprise serves the city of Indianapolis and parts of Marion County. The group has $890 million in first-lien water revenue bonds outstanding and $43 million in outstanding second lien bonds. The first lien bonds are secured by net revenues of the water system. The second lien bonds are secured by the system's net revenues but paid after senior lien bond payments have been made.

CEG also owns and operates Indianapolis' former wastewater system and gas utility, both upgraded one notch by Moody’s. Each system's debt is issued independently and secured by pledged revenues to a separate dedicated trust.

CEG’s water enterprise's improved leverage is attributed to an increase in operating revenues since an approved rate case in 2016 that provides the system an ability to raise rates, recover costs, and have a more stable revenue stream for the foreseeable future. Legislation passed by the Indiana General Assembly in March 2016 authorizes CEG 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 water system revenue will fall short of the level authorized in a rate case.

Since the change revenues have increased about 18% while expenditures have slightly declined, resulting in much-improved margins and cash flows. CEG's operating revenues grew 8.5% during fiscal 2017, significantly outperforming its prior budgeted increase of 6.8%, according to Moody's. The increased operating revenues helped support improving financial metrics during fiscal 2017.

“The continued improvement of the system's financial metrics, which we believe will be sustained, supports our view of the system's stronger credit profile,” Moody’s said.

The water enterprise has almost $45 million in unrestricted capital expected for fiscal 2018, equivalent to six months of operating expenses, according to S&P. CEG's water system also has a rate stabilization fund of over $6 million, a committed $30 million line of credit that supplements working capital, and a $50 million line of credit, which it could use as an interim funding source for capital projects.

CEG has approximately 325,000 customer accounts, including five 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.

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