Indiana Finance Authority — Moody’s assigns Aa3 rating to Indiana Finance Authority (IN) First Lien Water Utility Revenue Bonds, Series 2021A (Citizens Energy Group Project); outlook stable

Rating Action: Moody’s assigns Aa3 rating to Indiana Finance Authority (IN) First Lien Water Utility Revenue Bonds, Series 2021A (Citizens Energy Group Project); outlook stableGlobal Credit Research – 10 Mar 2021New York, March 10, 2021 — Moody’s Investors Service has assigned an Aa3 rating to Indiana Finance Authority’s $71.3 million First Lien Water Utility Revenue Bonds, Series 2021A (Citizens Energy Group Project). The outlook is stable.RATINGS RATIONALEThe Aa3 rating considers the water utility’s strong financial position, which is supported by ratemaking statutes such as SEA 560 and SEA 383, which provide cost recovery transparency as costs are recovered through a state regulatory process. While the state regulates water rates, which is a unique characteristic among US municipal water utilities, the CEG water enterprise mitigates this risk by having a clear and demonstrated rate setting mechanism that allows for rate adjustments as needed to recover costs, pay debt service and maintain a sound financial condition. The water utility is managed by City of Indianapolis, Indiana acting by and through its Board of Directors for Utilities of its Department of Public Utilities d/b/a Citizens Energy Group (CEG), which also manages the gas, wastewater and thermal services within the City of Indianapolis, the state capital and primary center for economic activity in the region. The Aa3 rating acknowledges the separate indenture that governs the repayment of the water enterprise bonds, which is distinct from the financial results of the other Citizens Energy Group enterprises.Financial metrics remain strong with a debt service coverage ratio (DSCR) averaging approximately 1.70x-1.75x over the last four fiscal years, owing to a 16% rate increase in 2016, which resulted in an increase of almost $30 million per year in annual operating revenue. Prior to the rate increase, the DSCR was closer to 1.2x. CEG’s water enterprise also has a manageable capital improvement plan, totaling $280 million over the next five years, or approximately $56.1 million per year. We anticipate forecasted DSCRs to remain in line with recent levels at approximately 1.70x. The utility’s liquidity position is also adequate with approximately $53.6 million in unrestricted cash as of September 30, 2020, equating to days cash on hand of just over 200 days.RATING OUTLOOKThe rating outlook is stable given our expectations that the utility will maintain a sound financial position driven by its strong service area, along with the utility’s solid internal liquidity levels that are consistent with recent fiscal year levels.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING- Debt service coverage that consistently exceeds 2.0x, coupled with internal cash liquidity over 250 days cash on hand, both on a sustained basis- Citizens soundly manages its water enterprise capital improvement planFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING- Debt service coverage ratio falls below 1.50x on a sustained basis- Internal cash liquidity declining to below 100 days cash on hand on a sustained basisLEGAL SECURITYSimilar to other outstanding First Lien water revenue bonds, the Series 2021A Bonds are secured by net revenues of the water system. The bond rate covenant is 1.20x on all First Lien debt service requirements or 1.0x on all required First Lien deposits. The additional bonds test is historical net revenues on maximum annual debt service (MADs) of First Lien debt or 1.20x historical net revenues (considering adjustments for rate increases and acquisitions) on MADs of First Lien debt.The debt service reserve requirement is 50% of MADS and is eligible to be funded with a surety.USE OF PROCEEDSThe proceeds will be used to fund capital improvements, to refund the remaining $47.5 million of CEG’s Water System First Lien Revenue Bonds Series 2011G and to pay the premium for a debt service reserve fund insurance policy to be deposited into a debt service reserve for the Series 2021A Bonds. The remaining proceeds will be used to pay the cost of issuance.PROFILECitizens Energy Group (Citizens or CEG) is the trade name of the Department of Public Utilities of the City of Indianapolis, Indiana (the Department). The Department was formed in 1929 to provide the governance structure for the City of Indianapolis to act as a successor trustee of a public charitable trust (the Energy Trust) providing natural gas utility services in the City of Indianapolis and to own and operate other utility systems serving areas within and outside the City of Indianapolis.Citizens operates the Gas Utility & Distribution System; the Thermal Energy System; the Water System; and the Wastewater System (through a contract with the owner of the Wastewater system, CWA Authority, Inc.). Each system issues debt independently secured by pledged revenues of each system to a separate dedicated trust.These separate trusts are designed to insulate one trust from liability for obligations of another trust, so they do not become jointly liable solely because the same entity is the trustee of both. Citizens’ water indenture and CWA Authority Inc.’s wastewater indentures, however, permit only the use of the excess revenues for the water and wastewater systems, respectively.METHODOLOGYThe principal methodology used in this rating was US Municipal Utility Revenue Debt published in October 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1095545. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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