Citizens says buying water, sewer systems won't harm bond rating

March 13, 2010

Citizens Energy Group’s plan to buy the city’s water and sewer systems will require the utility to raise $262 million in new bond debt.

And the $1.5 billion in debt from the city utilities that Citizens will inherit will more than triple its existing debt load.

Yet Citizens executives maintain the financial load of the $1.9 billion deal should not impair the bond ratings of its principal utilities—Citizens Gas, which serves 266,000 customers, and Citizens Thermal, which provides steam and chilled water to more than 200 downtown buildings.

Lykins Lykins

“We do not anticipate it will affect the credit” negatively, said Carey Lykins, president and CEO of Citizens Energy.

Company officials say ratings agencies view each of Citizens’ regulated utilities separately.

But bond ratings agencies are not entirely myopic in that regard.

For example, earlier this month, in assigning an A2 “stable” rating to $10.6 million in bonds for Citizens Thermal, Moody’s Investors Service noted that the rating is also “based on the sound record of financial results, including the strength of the consolidated Citizens Energy Group Trust.”

Maintaining top-notch credit is important to preserving favorable financing rates to minimize the cost of infrastructure improvements. Between now and 2014, Citizens Energy plans to spend $50 million annually, primarily for distribution line improvements, Moody’s said.

Credit ratings agencies have yet to digest Citizens’ proposed water/sewer acquisitions, announced March 10.

The deal, if approved by the City-County Council, the boards of the city utilities and state regulators, would require Citizens to assume $1.5 billion in city debt consisting of the combined debt of the water and sewer utilities.

Citizens Energy’s existing long-term debt is one-third of that amount, or $471.1 million, according to its 2009 annual report.

In its most recent rating of the gas utility’s debt, Moody’s last month cited strengths such as sound gas price hedging strategies, limiting borrowing plans, and the benefits of the gas utility “which includes earnings of affiliated businesses.”

As for cash to complete the water and sewer system purchase, Lykins contemplates raising $262 million through bonds. Citizens is looking at using “Build America” bonds, which the U.S. Treasury introduced last year. They provide a federal subsidy for a larger portion of borrowing costs than traditional tax-exempt bonds, equal to 35 percent of the interest payment on the bonds.

Under the proposed sale, the city would receive total proceeds of $425 million, in addition to casting off the $1.5 billion in debt.

Citizens would pay the city $262.6 million by October 2011. The balance of the cash the city would get would come in the form of annual payments.

Rather than receive the money gradually over time, the city plans a $140 million bond issue backed by those expected payments. It also would receive the balance of money in the wastewater system’s general fund.

Ballard Ballard

Mayor Greg Ballard heralds the deal for its potential to help the financially challenged city pay for numerous capital improvements, from bike trails to roads. He called it the “equivalent of a massive jobs bill.”

Ballard has also championed the measure as a way to take politics out of the city’s utilities, which have long been haunted by real and imagined incidents of political patronage.

Citizens factsOpponents of Ballard’s utility sale, including several leading Democrats, have assailed the mayor’s proposed deal, arguing an independent consulting firm should have been engaged to study the 24 proposals received for the utilities.

The mayor instead created an infrastructure advisory commission, chaired by William Blomquist, dean of the school of liberal arts at IUPUI, to study options for the city’s utilities.

Critics also decry the removal of the City-County Council’s oversight of ratemaking.

Ballard counters removing the utilities from city control also allows a more businesslike evaluation of ratemaking, removing political pressure that sometimes makes it difficult to raise rates to fund needed infrastructure improvements.

The mayor’s staff noted that the Indiana Utility Regulatory Commission also reviews water rates, along with input from the Office of Utility Consumer Counselor.

But water and, to some degree, wastewater operations would indeed be a new business for Citizens. It did operate a wastewater facility at its former coke oven plant along Prospect Street, but water is a whole different story.

As a result, Citizens intends to continue to work, in an as-of-yet-undefined way, with Veolia Water and with United Water, which now manage for the city the water and wastewater systems, respectively.

Lykins said there’s an informal agreement with those firms to tap their expertise. He foresees a more formal arrangement later as Citizens dives deeper into the books and operations of the city utilities “to figure out who’s going to do what.”

Ultimately, the combination of the city utilities with Citizens’ holdings is expected to provide cost savings across the board, such as better joint procurement opportunities and the elimination of duplicative back-office functions.

The annual savings are projected to be $40 million a year, yet Citizens officials won’t say how many jobs will be eliminated. Citizens now has about 750 employees. The city’s two utilities, combined, are estimated to have at least as many.

City officials said Citizens provided the best potential for bringing rate savings. Unlike an investor-owned utility, it can use tax-exempt financing under its status as a public charitable trust.

Michael Huber, the city’s director of enterprise development, said while some of the 23 other firms that expressed interest in the water and sewer utilities may have been able to provide more upfront cash, Citizens brought the greatest potential for helping reduce rates for customers.

Still, the debate will rage in coming months as to whether selling the utilities to Citizens provided the highest and best return for taxpayers.

Might, for example, the city have waited until market conditions improved for the hope of fetching a higher price for the utilities? Some still contend the city in 2002, under former Mayor Bart Peterson, paid too much—$515 million—to buy the water company from Merrillville-based utility NiSource.

One former Indianapolis Water Co. executive under NiSource ownership, former general counsel Peter Beering, said a case could be made that now is the time for the city to sell the utilities, particularly in light of infrastructure needs.

With property tax caps and the economy still sluggish, “the stress on your [city] budget is immense,” he said. “You don’t have many options” for raising cash.

Indianapolis Water currently is seeking a 35-percent rate increase to pay for capital improvements that had been delayed for years under a rate freeze following the city’s purchase of the utility.

As for Citizens, “those guys know how to make hard choices. They’re in a very different business,” Beering said.•


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