MOODY'S CONFIRMS NIPSCO AND BAY STATE RATINGS
Moody's concluded its review and confirmed the ratings of Northern Indiana Public Service Company (NIPSCO), NIPSCO Capital Markets, Inc. and Bay State Gas Company. The long term ratings of these companies were placed on review in December, 1997 after the announcement of the merger of NIPSCO Industries, Inc. (Industries) and Bay State Gas Company. All necessary approvals for the merger have been received except the approval of the Securities and Exchange Commission (SEC) which is expected shortly. The ratings confirmed by Moody's are:
Northern Indiana Public Service Company's
First Mortgage Bonds A2 outlook stable
Secured Pollution Control Bonds A2 outlook stable
Senior Unsecured MTN A3 outlook stable
Issuer Rating A3 outlook stable
Unsecured Pollution Control Bonds A3 outlook stable
Preferred Stock "a3" outlook stable
NIPSCO Capital Markets, Inc.
Senior Unsecured MTN Baa1 outlook stable
Junior Subordinated Debentures Baa2 outlook stable
Bay State Gas Company's
Senior Unsecured A2 outlook negative
Short Term Prime-1 outlook negative
The short term commercial paper ratings of Prime-1 at NIPSCO and Prime-2 at NIPSCO Capital Markets, Inc. were not on review and therefore, are unaffected by this confirmation.
Northern Indiana Public Service Company
The rating of NIPSCO reflects the company's continued strong cash flow generation, with funds from operation to interest expense at 6.25 times for the twelve months ended 9/30/98 as well as the protective regulatory environment in Indiana. The rating is highly dependent on the slow pace of deregulation in Indiana which affords the company the opportunity to address its assets lack of competitiveness.
NIPSCO faces challenges on several fronts including a concentration of industrial customers ( 60% of retail sales) and higher than average production costs and retail rates. Higher production costs result from older plants with higher heat rates, but also from environmental equipment installed to reduce emissions and higher-cost, low-sulfur coal. Although costs are higher NIPSCO may "generate" emissions credits which can be sold to lower total production costs to a level close to competitors'. In the alternative, other Indiana producers could be required to increase their operating costs to a comparable level through additional emissions control equipment or higher-cost, low-sulfur coal. In essence, the company has staked its future electricity earnings on increasing environmental compliance costs across coal generation.
While higher production costs can be explained, NIPSCO's high retail rates are above other utilities and at greatest risk in a deregulating environment. It is important to note that NIPSCO's service territory is close to the greater Chicago metropolitan market and NIPSCO's rates are closer to those seen in that market. Moreover, NIPSCO has negotiated with several large customers to build "inside the fence" generating stations which provide power at very competitive rates. This approach keeps competitors from gaining a foothold in NIPSCO's service territory and releases on-system capacity for higher margin retail business.
Bay State Gas Company
In addition to confirming the above listed ratings for Bay State, Moody's has assigned a negative outlook to the ratings which reflects currently depressed debt protection measures, and our expectation that Bay State will be restricted from improving these measures significantly in the near term.
Bay State will be a 100% regulated subsidiary of Industries after the merger is completed. We expect that 1999 earnings and cash flow will be below historical averages as the result of continued warmer than normal weather. Despite the weather impact, Bay State could generate sufficient internal cash to cover capital expenditures if its dividend payout is reduced. This would also improve the company's capital structure. Longer term, Bay State is permitted to recover the acquisition premium, to the extent that operating economies can be effected.
NIPSCO Industries, Inc.
Finally, Industries is acquiring distribution businesses, natural gas and water, which have the effect of lowering overall business risk. Given the regulated returns of those distribution businesses, Moody's believes that NIPSCO should be able to maintain its margins. However, how the dividend streams of these businesses will evolve and the extent of support they will get from Industries in the future is an open question the company has yet to address. This uncertainty coupled with the acquisitions at IWC Resources, wholly owned by Industries, and potential capital spending requirements at Bay State Gas indicate possible cash requirements from Industries over the next two years.
Northern Indiana Public Service Company is a regulated utility that provides natural gas and electricity to a population of approximately 2.2 million across the northern third of Indiana. With nearly 700,000 gas customers and 404,000 electric customers, NIPSCO is the largest natural gas distribution company, and the second largest electric distribution company, in the state of Indiana.
NIPSCO Industries, Inc. is an energy/utility-based holding company that has both regulated and non-regulated subsidiaries. Its regulated subsidiaries provide electricity and natural gas in northern Indiana, water in central Indiana, and interstate natural gas pipeline services. The Company's non-regulated businesses are primarily energy or utility focused.
NIPSCO Capital Markets, based in Indiana, engages in financing activities with a support agreement from NIPSCO Industries, Inc.
Bay State Gas Company is a diversified gas distribution company operating primarily in Massachusetts with smaller operations in Maine and New Hampshire. Bay State also owns a small interstate gas transmission line, and has a small but growing energy marketing segment.
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