The Indiana Finance Authority will head into the market as soon as Tuesday with Indianapolis-based water and wastewater utility refundings using a young and forward delivery structure popular in the present market to attain savings.
The Indiana Finance Authority serves as conduit the CWA Authority Inc. in an offering of an $80.7 million first-lien wastewater refunding series and a $175 million forward first-lien wastewater refunding series. The IFA on behalf of Residents Energy Group will sell $81 million of first-lien water utility refunding bonds and $13.4 million of first-lien water utility forward refunding bonds.
Each are geared toward refunding higher coupon bonds.
Residents Energy Group is the trade name of the Department of Public Utilities of the City of Indianapolis, which is the successor trustee of a public charitable trust that manages natural gas utility services in the town and owns and operates other utility systems. CWA is a not-for-profit formed to own and operate the wastewater system, while Residents Energy Group manages it through an agreement with CWA.
Each system issues debt independently secured by pledged revenues of every system to a separate dedicated trust. Each transactions are slated to cost Tuesday with Citigroup acting as senior manager.
CWA and Residents stress the credit strengths of the governance structure that insulates the system from political influence. The “structure depoliticizes the decision-making process and enables Residents and CWA to implement private-sector practices for the general public good,” reads an investor presentation.
The IFA and CWA launched a young offer June 23 on various bonds from deals in 2014 and 2016 as a part of the wastewater transaction. It closed Friday. Citigroup is serving because the dealer manager for the tender and Globic Advisors Inc. is the tender agent. The IFA and Residents’ tender invited holders of some bonds sold in 2014, 2016, and 2018 to tender their bonds as a part of the water refunding.
Ahead of the sale, Moody’s Investors Service affirmed its Aa3 and stable outlook on the primary water lien bonds and S&P Global Rankings affirmed its AA and stable outlook.
“The Aa3 rating recognizes Residents Energy Group Water’s position as monopoly provider of essential water services to roughly 350,000 customers in the town of Indianapolis and surrounding areas and a sound financial profile,” Moody’s said.
State regulation of water rates by the Indiana Utility Regulatory Commission — a novel characteristic amongst U.S. municipally owned water utilities — is factored within the rating as is state laws that gives cost recovery mechanisms allowing for the recovery of infrastructure expenses outside of a rate setting case.
Residents Water’s financial performance has been sound, with annual debt service coverage of 1.7 times to 1.8 times during the last three years.
The utility has $757.4 million of outstanding first-lien bonds and no second-lien debt.
S&P said while the ownership and governance structure are unique amongst municipalities, it “ultimately views Residents’ as in scope for our municipal utility revenue bond criteria on condition that the management and governance structure is ultimately a not-for-profit trust providing service to a single municipality.”
Moody’s affirmed the primary wastewater Aa3 rating and stable outlook which “recognizes CWA’s monopolistic position as provider of essential sewer services to a big customer base primarily inside the city of Indianapolis and a sound financial profile driven by credit accretive rate treatment,” Moody’s said.
The rating is “constrained at the present rating level by substantial capital spending requirements regarding a federally mandated consent decree designed to cut back combined sewer overflows — or CSOs — that has increased leverage,” Moody’s added.
Completion of the $2.4 billion program is predicted in 2025 at which era an estimated 210 billion gallons of CSO will likely be prevented from entering Indianapolis waterways.
Pledged revenue provided 2.14 times coverage in 2022 — over the 1.2 times requirement — and 1.88 times when counting each senior- and second-lien debt while the system enjoys a robust track record on rate increases with the Utility Regulatory Commission.
S&P affirmed its AA rating and stable outlook on the water bonds and raised the second lien rating to AA from AA-minus because lower than 12% of the authority’s total debt stays on the second lien and analysts “now not consider junior-lien bondholders are materially disadvantaged relative to senior-lien bondholders given the de minimis amount of debt on the second lien and really strong pro forma financial metrics.
The system has $1.8 billion of outstanding first-lien revenue bonds and $214 million under the second lien.