CHICAGO — Moody's Investors Service downgraded $2.6 billion of Indianapolis Citizens Energy Group Water, Gas and Thermal and CWA Wastewater Revenue Bonds Thursday.

Moody's lowered $927 million of first lien water system bonds to A2 from A1 and second lien bonds to A3 from A2 while lowering $885 million of first lien wastewater bonds to A2 from A1 and $314 million of second lien bonds to A3 from A2.

Moody's also downgraded another $125 million of Indianapolis Thermal Energy System Revenue bonds to A3 from A2; $51 million of Indianapolis first lien Gas Utility System bonds two notches to A2 from Aa3; and $291 million of Indianapolis Gas Distribution Utility System bonds to A3 from A2.

The outlook is stable.

Moody's had placed the ratings of various Indianapolis Citizens Energy Group ratings on review for a possible downgrade in July. The agency also assigned a MIG-1 rating to the sale of Thermal Energy System bond anticipation notes.

The city of Indianapolis Board of Directors for Utilities, doing business as Citizens Energy Group, owns the gas, thermal and water systems and operates the wastewater system through the CWA, a separate legal entity that is still governed by the same Indianapolis Board of Directors for Utilities.

The downgrades recognize the business model under which CEG enterprises operate "embody constraints and elements" that are different from those of the great majority of U.S. public finance enterprises, Moody's said.

The ratings reflect the potential for performance challenges that are not expected for mainline municipal enterprises such as CEG's investment in ProLiance Holdings LLC, a wholesale natural gas marketing operation with annual revenues in excess of $1 billion, which exposes it to earnings volatility. During 2012, ProLiance suffered a $51 million loss and the potential for earning volatility continues as CEG held on to a portion of the business following a sale earlier this year, Moody's said.

Each of the revenue bond indentures at Indianapolis CEG Water System, CWA, Gas and Thermal contain bondholder protections similar to that of a typical municipal utility enterprise, including a legal structure that provides some insulation from financial exposure to its broader unregulated business activities.

But, Moody's said it believes "there are weaknesses in the structure, including the ability to move cash across the system, particularly from the Gas and Thermal utilities, that in our opinion detract from credit quality."

In addition to CEG's more corporate-like business risk taking strategy, the downgrade stems from factors including a regulated rate-setting process and potential exposure to non-traditional municipal finance risks since CEG governs all the utilities as well as Citizens Resource's unregulated businesses.

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