Fitch Ratings has assigned an 'A' rating to the following Indiana Finance Authority (IFA) bonds on behalf of Citizens Authority (CWA):

--$155.8 million first-lien wastewater utility revenue bonds, series 2015A (CWA Authority Project).

The series 2015A bonds are expected to sell via negotiation during the week of Feb. 2, 2015. Bond proceeds will be used by CWA to fund capital improvements to the system. A portion of the proceeds will also be used to repay a draw made on a line of credit (for capital projects), to fund a debt service reserve and pay costs of issuance.

Fitch also affirms the following ratings on the outstanding IFA bonds:

--$237 million first-lien wastewater utility revenue bonds, series 2014A (CWA Authority Project).

CWA has other parity debt outstanding that is not rated by Fitch.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The IFA's series 2015A first lien bonds are secured by CWA's series 2015A first lien wastewater revenue bonds, which are senior lien obligations of the wastewater system, payable from the system's net revenues.

KEY RATING DRIVERS

FINANCIAL PERFORMANCE DRIVES OUTLOOK: The revision to Positive from Stable reflects the system's better than expected financial results in fiscal 2014. Continued strong financial performance could result in upward rating movement.

SUBSTANTIAL CAPITAL REQUIREMENTS: CWA's capital program is driven by regulatory requirements and relies on significant annual debt issuance over the next five years. As a result, debt will continue to increase well above already high levels.

IMPROVED RATE REGULATORY ENVIRONMENT: CWA has maintained a good track record of achieving positive and timely outcomes of its rate cases filed with the Indiana Utility Regulatory Commission (IURC). Recent legislation and an expedited filing process for consent decree related debt costs should help reduce the timing delay between incurred costs and rate recovery.

LIMITED RATE AFFORDABILITY: Continued rate increases will result in rate pressure, with the average monthly wastewater utility bill currently at Fitch's affordability threshold of 1% of median household income (MHI). However, user charges are currently comparable to other large systems near the region.

FAVORABLE SERVICE TERITORY: The city of Indianapolis (the city) has a large and well diversified economy. The consistent steady gains in employment bolster the system's ratepayer base.

RATING SENSITIVITIES

SOLID FINANCIAL RESULTS AND RATE RELIEF: A sustained trend of strong financial performance, including improved liquidity could result in a rating upgrade. Fitch also expects CWA to continue to achieve timely rate recovery to sustain required capital funding.

ESCALATION IN CAPITAL NEEDS: Substantial increases to the current size and scope of the capital program would be viewed negatively.

CREDIT PROFILE

On Aug. 26, 2011, CWA acquired the system assuming most assets and certain liabilities of the city's sanitary district. The system is largely a retail provider of sanitary sewer service to nearly the entire consolidated city (Indianapolis-Marion County). The system has approximately 225,000 customer accounts, including seven wholesale customers.

SIZABLE CAPITAL NEEDS DRIVEN BY REGULATORY REQUIREMENTS

The system's substantial capital costs are driven by a consent decree (CD) requiring CWA to implement a $1.9 billion Combined Sewer Overflow (CSO)-Long-Term Control Plan (LTCP) by 2025. Over $560 million has been spent on CD projects to date. The current five-year CIP covers fiscal 2015-2019 and totals approximately $1.1 billion. CSO project costs included in the CIP total approximately $757 million during the next five years and account for roughly 68% of plan spending.

The necessary CSO-LTCP projects include the construction of several deep underground tunnels and storage facilities designed to capture 95%-97% of wet weather CSO and result in no more than two to four overflow events per typical year. Prior to the acquisition, the city had a history of proactively implementing a CSO-LTCP. Upon assuming the city's obligation under the CD, CWA has continued to aggressively implement the LTCP, which Fitch views positively.

CWA is currently in full compliance with the CD, according to the most recent six-month status report, dated Oct. 3, 2014. Other projects in the current CIP include general system improvements and expansions (26% of spending) and septic tank elimination efforts (7% of spending).

Approximately 80% of the current CIP is expected to be funded with bond proceeds (including series 2015A). The remaining amount will be funded by pay-go. Over the next four years, CWA plans to annually issue first-lien system bonds ranging between $173 million-$189 million each year. The significant debt is expected to be supported by a combination of annual base rate increases, through the standard IURC filings, and the Environmental Compliance Plan (ECP) recovery mechanism. The ECP is a new expedited rate-raising process for CWA to recover debt service costs associated with the CD. To date, CWA has not used the recovery mechanism.

The system's debt ratios are very high with debt per customer at $6,770, and debt per capita at $1,628, exceeding twice the 'A' category median for other utility credits. Debt ratios are expected to continue to increase in the foreseeable future as CWA plans to fund its significant CIP with bonds. However, management believes that the percentage of pay-go will be increased steadily, after fiscal 2019 (peak year for capital costs), with the goal of attaining 100% pay-go by the scheduled end of the CD in 2025. CWA also anticipates a steady improvement in pay-go funding for non-CD capital projects given CWA's ability to recover the system's depreciation costs through the rate making process. Nevertheless, Fitch expects debt levels to remain significant for several years as principal payout is slow with only 57% of outstanding principal amortizing in 20 years.

DEBT SERVICE COVERAGE OUTPERFORMED PROJECTIONS

The system's financial results were stronger than expected in fiscal 2014. Senior lien debt service coverage (DSC) of 2.1x outpaced CWA's projection of 1.89x for the year. Senior and second lien DSC of 1.6x was also more favorable than the 1.45x projected for fiscal 2014. The increase in coverage is due in part to the 21% rate increase (effective May 1, 2014). The full result of that increase and that of the 5.61% rate increase (effective Oct. 1, 2014) should be reflected in fiscal 2015 results (ending Sept. 30). Fitch expects CWA to maintain strong performance throughout the forecast period.

The system's liquidity also improved slightly over the prior year with days cash on hand at 201. Days of working capital for fiscal 2014 totaled 142, an increase from the negative 221 days reported in fiscal 2013. In addition, free cash to depreciation for fiscal 2014 has increased to 84% from 57% in the prior year. Construction funding is aided by the use of a $145 million line of credit with J.P. Morgan Chase and Wells Fargo that can be used only for capital. The line is used to cash flow construction expenses and then long-term bond funding is used to repay the draws on the line.

STABLE REGULATORY ENVIRONMENT EXPECTED

The IURC maintains jurisdiction over the approval of rates and charges of the system. In the past, the IURC's oversight has hindered timely rate increases for certain other utility systems. However, recent actions point to a more positive regulatory environment. In 2013, the Indiana Legislature passed Senate Bill 560, which helps to mitigate the effects of regulatory lag by requiring that rate cases take no longer than 300 days. Failure to act within the 300-day time frame will result in 50% of the rate request becoming effective immediately, subject to refund if the final order authorizes less than the 50%. The IURC has indicated its desire to finalize all rate cases within the 300-day requirement.

The IURC formally approved the details and the procedures of the ECP recovery mechanism on June 14, 2012, which can be applied beginning in fiscal 2014. This tool is designed to timely recover debt service, debt service reserve funds, costs of issuance related to CD costs. In addition, in February 2014, utility systems received the authorization (under Indiana House Bill 1132) to petition the IURC for adjustments of basic rates for certain capital costs including wastewater system replacements and upgrades. While over half of the system's projected rate increase requirements can occur through the ECP recovery mechanism, thus alleviating some of the risks related to timely rate increases, system rate affordability remains a concern.

FUTURE PLANNED RATE HIKES LIMIT AFFORDABILITY

Current wastewater user charges at $38.72 per month, based on the single-system's actual average consumption of approximately 4,500 gallons, are more affordable than Fitch's 7,500 gallon assumption for U.S. average household consumption ($54.12 per month). However current user charges are at 1.1%, slightly above Fitch's affordability threshold of 1%. On a combined system basis, rates reflecting average water and wastewater usage total $68.7 per month and are 1.9% of MHI, approaching Fitch's affordability threshold.

CWA maintains that its rates are in line with other systems in the region. CWA plans to increase rates annually either through general rate hikes or the ECP recovery mechanism. Fitch expects such rate hikes to be sizeable given debt needs.

LARGE AND DIVERSE SERVICE AREA

The city's economy remains well diversified and serves as the economic engine for the surrounding area. The city has a large retail sector as well as a significant manufacturing presence, which includes pharmaceuticals and automotives. The city's economy also includes health services, life and sciences companies and other business and professional service companies.

The service area county experienced a 1.8% increase in employment from 2013 to 2014. The November 2014 unemployment rate of 5.9% fell from the November 2013 rate of 6.8%, and is comparable to those of the state (5.8%) and nation (5.5%). MHI levels in the county are 12% and 20% lower than state and national levels, respectively.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2014);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2015 Water and Sewer Medians' (December 2014);

--'2015 Outlook: Water and Sewer' (December 2014).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2015 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409

2015 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978235

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.