Approximately $150 million of debt securities affected
New York, October 17, 2022 -- Moody's Investors Service has assigned a Aa3 rating to Indiana Finance Authority's proposed $150 million First Lien Wastewater Utility Revenue Bonds, Series 2022B (CWA Authority Project) (Green Bonds) issued for CWA Authority, Inc. (CWA). The outlook is stable.
RATINGS RATIONALE
The Aa3 rating assigned to CWA's first lien revenue bonds considers the essential sanitary sewer services it provides to a large customer base primarily within the City of Indianapolis and a sound financial profile driven by credit accretive rate treatment. CWA's credit profile, however, is constrained by substantial capital spending requirements and its regulation by the state commission, which is unique relative to other municipal wastewater systems. That said, CWA has managed these risks quite well.
CWA's capital spending requirements is driven by a 20-year spending program in response to a federally mandated Consent Decree designed to reduce combined sewer overflows (CSO's). The current estimated budget for the related spending program is $2.0 billion with completion anticipated in 2025. By completion, an estimated 210 billion gallons of CSO will be prevented from entering the Indianapolis waterways. Approximately $1.56 billion of spending has been made under this program to date.
CWA is rate regulated by the Indiana Utility Regulatory Commission (IURC) under a municipal ratemaking statute. The statute requires that rates be sufficient to cover operating costs, debt service and depreciation or capital expenditures, whichever is greater. The statute states that the intent of the rates and charges is to produce income sufficient to maintain utility property in a sound physical and financial condition to render adequate and efficient service and rates. CWA has managed its rate regulated status quite well with the utility being able to secure approval for rate increases supportive of current credit quality. The most recent rate increase was finalized in 2019 and provided for a three-phase increase in base rate revenues in each of 2019 (11.9% increase), 2020 (4.6%) and 2021 (3.8%).
RATING OUTLOOK
The stable outlook reflects our expectation for steady all-in debt service coverage levels, including second lien debt of around 1.4x-1.5x, no need for significant rate increase requests to complete the consent decree capital plan, and for the consent decree capital plan to remain on schedule.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING
- Once the consent decree capital plan is completed, a first lien debt service coverage ratio consistently above 1.75x
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING
- Debt service coverage ratio consistently below 1.3x
- Major construction delays associated with the consent decree capital plan
LEGAL SECURITY
The Series 2022B bonds are secured by the net revenues of the wastewater system. The indenture provides for a 1.20x on all First Lien Debt Service Requirement (with adjustments for rate stabilization transfers) or 1.0x on all required First Lien deposits. The bonds have a debt service reserve funded at the lesser of 10% of par amount of bonds, maximum annual debt service, or 125% of average annual debt service.
USE OF PROCEEDS
The First Lien Wastewater Utility Revenue Bonds, Series 2022B will be used to fund capital spending requirements for CWA's wastewater system associated with the federally mandated Consent Decree.
PROFILE
The wastewater system of the City of Indianapolis is owned by CWA Authority, Inc., a separate nonprofit corporation, which, through an inter-local agreement entered into between Citizens Energy Group (Citizens) and the City of Indianapolis, has the power to exercise all rights and powers of the City, except the City's taxing power. The Wastewater System is managed by employees of Citizens under an operating agreement between Citizens and CWA.
METHODOLOGY
The principal methodology used in this rating was US Municipal Utility Revenue Debt Methodology published in April 2022 and available at https://ratings.moodys.com/api/rmc-documents/386721. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
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