Moody's lowers Citizens' credit ratings on $2.6B in bonds

October 8, 2013

Moody’s Investor Services has lowered Citizens Energy Group’s ratings on more than $2.6 billion in bonds.

The credit rating service has stuck with a “stable” outlook for Citizens’ ability to repay its debts. But an Oct. 3 report cites concerns across all the operations at the Indianapolis-based utility, which is a public trust that operates the city’s gas, steam, water and sewage services.

Among the troublesome issues cited by Moody's: Citizens can’t move cash across its divisions, the utility needs approval from state regulators before changing its rates, and there is “potential exposure to non-traditional municipal finance risks.”

The downgrades to Citizens’ bonds were:

— A1 to A2 on $927.1 million in first-lien revenue bonds for Citizens Water System.
— A2 to A3 on a $42.9 million in second-lien revenue bonds for Citizens Water.
— A1 to A2 on $884.7 million in first-lien revenue bonds for Citizens Wastewater Authority.
— A2 to A3 on $314 million in second-lien revenue bonds for Wastewater Authority.
— A2 to A3 on $125.4 million in bonds for Citizens Thermal Energy Systems.
— Aa3 to A2 on a $51.4 million in bonds for Citizens Gas Utility System.
— A2 to A3 on $291.3 million in bonds for Citizens Gas Distribution Utility System.

Despite the downgrades, Citizens' bond ratings remain in the “upper-medium grade” and “low credit risk” territory, by Moody’s standards. The highest-quality rating for corporate bonds is triple-A The rating levels descend to triple-C as the possibility of default increases, and finally to D, or default.

“We’re certainly disappointed in Moody’s decision to downgrade the company,” said Citizens spokesman Dan Considine, noting that the company maintained A-grades.

A review began in June after Citizens and Evansville-based Vectren Corp. unloaded ProLiance Energy, a financially troubled natural gas marketer they jointly owned, to Dallas-based Energy Transfer Partners.

Moody’s began the review to determine if ProLiance, which lost $51 million in 2012, had an effect on Citizens, which held a 39-percent stake.

Exiting the investment was a good thing, said Dan Aschenbach, a senior vice president at Moody’s. But Citizens' “corporate-like” mindset—compared to more conservative strategies used at municipal utilities—carries more risk, he said.

A second review of bonds tied to Citizens Water and Citizens Wastewater bonds also questioned ProLiance’s effects on those divisions. The review determined that there wasn’t a direct effect.

However, Moody's decided that the water and sewage divisions faced other hindrances—enough to lower ratings on their bonds.

The regulated process for changing water rates was a key concern, especially after Citizens in February filed with the Indiana Utility Regulatory Commission to increase water rates 14.7 percent and sewage rates 31.7 percent. The steeper charges were intended to cover infrastructure upgrades.

Most municipal utilities can change rates without state approval. But because Citizens is not owned by the city, it needs to go through the IURC. The process takes longer and could result in rejection. Indiana’s utility consumer office has already suggested slimmer rate increases of 3 percent for water and 25 percent for sewer.

Moody’s held onto a “stable” rating for the wastewater bonds, which will be affected by customers’ abilities to pay the steeper bills, Aschenbach said.

The thermal division, which provides steam heating to customers downtown, has too few customers, Moody's said. Although Citizens has “a strong market position,” the loss of a significant customer could seriously hinder revenue.

A spokeswoman for Citizens did not immediately respond to a request for comment.

Moody’s is one of three major credit rating services, the others being Fitch Ratings and Standard & Poor's. The latter two have not publicly indicated recently that they would review Citizens.


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