MOODY'S CONFIRMS NIPSCO; PLACES NISOURCE ON REVIEW FOR POSSIBLE DOWNGRADE
Moody's Investors Service confirmed the debt security ratings of Northern Indiana Public Service Company and Indianapolis Water Company as well as the commercial paper rating of NiSource Capital Markets Inc. In addition, Moody's placed the ratings of NiSource, Inc. ( NiSource, formerly known as NIPSCO Industries Inc.) and the long term ratings of NiSource Capital under review for possible downgrade in light of the announcement today of a proposed hostile acquisition of The Columbia Energy Group. The $7 billion acquisition includes projected issuance of debt and equity totaling $ 5.7 billion and the assumption of existing Columbia debt of roughly $ 2 billion.
Ratings confirmed are:
Northern Indiana Public Service Company's Senior Secured A2
Northern Indiana Public Service Company's Senior Secured PCB A2
Northern Indiana Public Service Company's Senior Unsecured A3
Northern Indiana Public Service Company's Senior Unsecured PCB A3
Northern Indiana Public Service Company's Senior Unsecured A3
Northern Indiana Public Service Company's LT Issuer Rating A3
Northern Indiana Public Service Company's Preferred Stock "a3"
Northern Indiana Public Service Company's Commercial Paper P-1
NiSource Capital Markets, Inc.'s Commercial Paper P-2
Indianapolis Water Company's Senior Unsecured A2
Ratings place under review for possible downgrade are:
NiSource Inc.'s Senior Unsecured Baa1
NiSource Capital Markets, Inc.'s Senior Unsecured Baa1
NiSource Capital Markets, Inc.'s Junior Subordinated Baa2
NiSource Capital Markets, Inc.'s Senior Unsecured Shelf (P) Baa1
NIPSCO Capital Trust I Preferred Stock "baa1"
The transaction will require the borrowing of significant amounts of debt at NiSource which could impact the ratings of NiSource as well as NiSource Capital which enjoys the benefit of a Support Agreement from NiSource. The review will focus on the deterioration in the cash coverage at NiSource due to the impact of the incremental $3 billion in debt which may be offset by the lowered business risk of the new entity. The new company will receive roughly 60% of its cash flow from gas distribution businesses and, as a result will be less focused on the electric business. NiSource has clearly stated its intentions to diversify into the gas and water distribution businesses. However, the Columbia acquisition more than doubles the size of the company and changes its from a pre-dominantly electric company to a gas transmission and distribution company with electric operations. This is an important distinction since the proforma coverage ratios are below the average for the NiSource rating category of Baa1, but are closer to the averages for similarly rated gas distribution companies. Given the demonstrated "free cash" generation of both Northern Indiana Public Service Company and Columbia Energy, it appears the incremental debt can be serviced (as well as the incremental dividend requirements of the new equity) from the existing cash flows of both companies without the requirements of "synergy savings" or "revenue enhancements" typical of many transactions of this type.
There are uncertainties surrounding the eventual outcome of the offer including the entrance of other bidders, the reaction of Columbia's management, the approval and requirements of numerous regulators and the ability of NiSource to issue roughly $2.5 billion in equity in conjunction with $3 billion of debt. NiSource has indicated that it would quickly balance its capital structure after winning its bid for Columbia by refinancing the bridge loan it has arranged. Given the regulated cash flows generated by NIPSCO and Columbia the combined entity should comfortably cover the costs of the bridge should the timing of the refinancing change. However, if the bridge financing were not repaid with long term debt and equity the ratings would most likely fall.
NiSource investors should not see significant impact on the credit quality of the company during the long process of receiving approvals for a merger of this kind. However, the nature of merging regulated entities allows time for other bidders to emerge or Columbia management to mount a defense or counteroffer.
NiSource, Inc., headquartered in Merrillville, Indiana, is a diversified distribution company with electric, gas and water operations.
Northern Indiana Public Service Company is a regulated electric and gas utility headquartered in Hammond, Indiana.
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