DALLAS – Indiana's Citizens Energy Group heads into the market with a $49 million refunding of natural gas utility bonds bolstered by an upgrade from S&P Global Ratings.
The second lien gas utility distribution system refunding bonds will sell through the Indiana Finance Authority on Tuesday with Bank of America Merrill Lynch running the books.
The rating agency upgraded the bonds to AA from AA-minus ahead of the sale. The outlook is stable.
"We have good financials and there is also the fact that we haven't issued [GUD] debt in decades, said Sara Mamuska-Morris, CEG's director of Treasury. " Our debt service coverage ratios are excellent and we have a good history of recovery with the rating agencies."
Citizens has approximately $258.6 million in gas system-supported debt, that includes both gas utility distribution bonds, its GUD credit, and gas utility system bonds, the GUS credit.
"The higher rating reflects our opinion that the amount of debt outstanding on the city's senior GUS lien and the senior GUDS first lien is minimal, as well as management's claim that no additional debt will be issued under these liens in the coming years," said S&P Global Ratings credit analyst Andrew Bredeson. S&P affirmed its AA ratings on the GUS bonds.
Mamuska-Morris said that gas related bonds also benefit from the gas system's normal temperature adjustment which reduces fluctuations in charges due to mild winters. That mitigates the impact of weather variation on financial performance.
Proceeds from the series 2016A bonds will advance refund Citizens' series 2008B GUDS bonds with 15% present value savings expected, said Mamuska-Morris.
The savings are in line with the savings Citizens achieved in its latest water system 2016B first lien $200 million bond refunding, which priced on October 13. Mamuska-Morris said the refunding achieved a savings of 14% of savings. Morgan Stanley ran the books.
S&P upgraded those bonds to AA-minus from A in June on the back of Citizens' general creditworthiness and its very strong enterprise and financial risk profiles.
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, which benefits all of CEG's utilities.
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.
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.