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Rating Action:

Moody's places on review for downgrade the ratings for the Indianapolis Gas Utility; A2 rating assigned to Series 2013A bonds

21 Jun 2013

Citizens Gas Issuing $48.8 Million Refunding Revenue Bonds for Savings

New York, June 21, 2013 --

Moody's Rating

Issue: Gas Utility Distribution System Second Lien Revenue Refunding Bonds, Series 2013A; Rating: A2; Sale Amount: $48,000,000; Expected Sale Date: 06-21-2013; Rating Description: Revenue: Government Enterprise

Opinion

Moody's Investors Service has placed the ratings of the Indianapolis Gas Utility Distribution System on review for possible downgrade. We have also assigned an A2 rating to the Indianapolis, Indiana $48,800,000 (Citizens Gas) Gas Utility Distribution System Second Lien Revenue Refunding Bonds, Series 2013 A. The bonds are scheduled to price in late June 2013. We have also assigned a rating to the outstanding First Lien revenue bonds Series 1986B, which were not previously carrying an underlying rating though parity debt had been rated prior to maturation. Moody's review applies to the outstanding second lien bonds and the outstanding first lien bonds.

RATINGS RATIONALE

Moody's has placed the ratings under review for possible downgrade to further evaluate the extent of the financial losses of Proliance on Citizens Gas Utility System ; the financial role of the Citizens Trust in the operation of the gas distribution utility; and management's plan to manage its gas supply operations.

The A2 rating on the second lien bonds recognizes the improved rate-setting record of the distribution system that has provided generally sound financial metrics despite being regulated by the state's regulatory board. The cost recovery process is different than other municipal gas utilities since Citizens Gas has the requirement to seek state regulatory board approval for rate increases, which could result in weakening financial metrics if rate petitions are either not approved on a timely basis or not approved for the full amount requested. While the Distribution System's debt service coverage fell to 1.49 times in 2011 due to lower sales margins, a rate increase did provide improved coverage in 2012. Stable debt service coverage of 1.80 times is anticipated through 2018.

But the significant loss from an unregulated business of Citizens Energy Group will require a writedown on the books of the Gas Utility System in 2013 which is expected to result in a technical violation of the 1.40 times rate covenant of the 1986 Gas Utility System indenture. While by itself such a violation is a significant credit negative, the Citizens Energy Group is selling the Proliance entity which will lessen the fundamental risk of that unregulated business on the financial affairs of the Gas Utility System going forward. There is no effect on compliance with the rate covenant in the Distribution System's Second Lien indenture.

The Indianapolis gas Distribution System is owned and managed by the Citizens Energy Group. The bonds are issued by the City of Indianapolis and the bond security is net gas system revenues subordinate to the 1986 first lien indenture bonds.

The A2 rating further reflects the diverse mix of residential, commercial and industrial customers; there are no dominant customers; and there is stable contracted gas supply arrangements. Citizens Gas has an exclusive right to serve customers in its service area. The City of Indianapolis (rated Aaa) has a sound economy with continued recovery reflected in employment and income gains.

Outlook

Moody's has placed the ratings under review for possible downgrade to further evaluate the extent of the financial losses; the financial role of the Citizens Trust in the operation of the gas utility; and management's plan to manage its gas supply operations.

What Could Change the Rating UP:

The rating could have positive pressure if there was a longer consistent record of improvement in the timeliness of rate approvals; more consistent trend of annual debt service coverage; and improved internal financial liquidity.

What Could Change the Rating DOWN:

The credit rating could face negative pressure if total debt service coverage trend weakens to below 1. 50 times or liquidity narrows, particularly as the utility shifts more of its debt to the subordinate lien which has no debt service reserve fund. Also, the rating could be pressured should any of the trust businesses have direct impact on indentured financial operations.

STRENGTHS:

*The utility provides energy services to the City of Indianapolis (Aaa; negative), and has a diverse customer base. The local economy has been stable.

*Competitive rate structure and exclusivity as the only gas distributor in its service area and with no customer concentration

*Rate policies include weather normalization and decoupling of rates for conservation which has helped stabilize cash flow. A board policy to establish new rates every three years also continues to provide a stabilizing influence on debt service coverage

*A new state statute sets more certain timetables for cost recovery through the regulatory process but remains untested

*Limited borrowing plans

*Sound gas price hedging strategies include natural gas storage and price hedging agreements

CHALLENGES:

*Regulated by Indiana Utility Regulatory Commission, the same board that regulates investor owned utilities.

*Satisfactory liquidity but primarily consisting of short-term lines of credit

*Subordinate lien bonds have weak security provisions. Lack of a debt service reserve fund is a credit weakness particularly as more of the utility's debt structure is shifted to the subordinate lien

*Unregulated Proliance a business of Citizens Energy Group has had financial losses and the impairment losses will impact debt service coverage for the gas utility which places it in violation of bond covenant of 1.40 times coverage in 2013

RATING METHODOLOGY

The principal methodology used in this rating was U.S. Public Power Electric Utilities published in April 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Dan Aschenbach
Senior Vice President
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Kurt J Krummenacker
VP - Senior Credit Officer
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's places on review for downgrade the ratings for the Indianapolis Gas Utility; A2 rating assigned to Series 2013A bonds
No Related Data.
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