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Rating Action:

MOODY'S CONFIRMS THE DEBT RATINGS OF NISOURCE, INC. AND ITS SUBSIDIARIES (Baa3 SENIOR UNSECURED)

08 Jul 2003
MOODY'S CONFIRMS THE DEBT RATINGS OF NISOURCE, INC. AND ITS SUBSIDIARIES (Baa3 SENIOR UNSECURED)

Over $7 Billion of Securities Affected

New York, July 08, 2003 -- Moody's Investors Service confirmed the ratings of NiSource, Inc. (NI) and its subsidiaries, concluding a review for possible downgrade begun on May 13, 2003. The rating outlook is stable.

The rating confirmation follows NI's announcements of the sales of Columbia Energy Resources (CER, its E&P subsidiary) and Primary Energy (its co-generation business) -- NI's two remaining non-regulated businesses of significant size -- and a 20% decrease in its common dividend rate. These actions result in a relatively neutral financial impact but are beneficial to NI's credit standing by reducing its direct debt service obligations, conserving some cash to be available for debt reduction, working capital, or capital expenditure needs, and reducing its overall business risk. They also indicate management's willingness to take measures to ensure at least a minimal investment grade profile for NI.

The stable rating outlook assumes that: 1) the company will close the CER and Primary sales in a timely manner and under terms currently contemplated; 2) contingent obligations that NI retains in the CER and Primary sales will not materialize; 3) the company will refinance the $750 million of the long-term debt maturing in November; and 4) NI will not raise dividends to levels that will be detrimental to its credit. A negative change in NI's rating or outlook would result if these assumptions do not hold. NI's ratings reflect its stable but modest debt protection measures, and a sustained improvement in those measures would be a cause for positive rating action over the medium term.

Moody's notes that in each of the sales of CER and Primary, NI will remain guarantor of CER and Primary's obligations that could result in a liability for NI in event of a default by CER or Primary. Guaranties on certain of Primary's and CER's obligations also contain rating triggers that cause either letters of credit to be posted or interest costs to go up (rating trigger-related collateral calls of about $255 million by the company's estimate). Thus, while CER and Primary's debt will be eliminated from NI's balance sheet, the company will be contingently liable for them for the remaining terms of those obligations. This risk is mitigated by the buyers' indemnities that backstop NI's guarantee obligations, should they materialize. Both purchasers are entities newly formed by financial investors for the purpose of these acquisitions and have yet to demonstrate a track record in managing these assets.

The Impacts of the Asset Sales and the Dividend Cut

Both the CER and Primary sales result in the purchaser assuming the direct obligations related to those businesses. These sales will benefit NI by eliminating about $360 million of direct obligations relating to Primary and CER, reducing short-term debt from the cash proceeds (roughly $320 million) and eliminating the related capital expenditures (about $110 million) and exposure to commodity price and other business risks related to those assets.

The CER sale will net after-tax cash proceeds of $220 million and will eliminate long-term gas prepay contracts with an outstanding balance of about $240 million. The CER sale will eliminate about $100 million of capital expenditures and roughly the same amount of EBITDA.

The Primary sale will net cash proceeds of about $100 million and remove a $120 million capital lease from its books. NI will retain guarantees related to this capital lease plus $64 million of operating leases, which will be footnoted in its financial statements post-sale. NI will keep Whiting, the largest of Primary's projects. Whiting accounts for roughly half of Primary's assets, capacity, and debt. It also accounts for the majority of Primary's losses, with expected pre-tax losses of $28 million in 2003.

Financial Analysis

Together, these sales will result in a slight decline in NI's free cash flow, but the cash saved in the dividend cut (roughly $60 million a year) will offset it. These transactions will likewise have a minor impact on debt-to-capital, since the reduction in debt (almost $700 million including debt assumed by the buyers) is matched by a write-down in equity of roughly half that amount (mostly related to the write-down for CER).

Pro forma for the two asset sales and the dividend cut, adjusted debt-to-capital (including total on-balance sheet debt plus deferred revenues related to the prepays plus operating leases x 8) will fall slightly from 62% as of 3/31/03 to 61% pro forma. Pro forma, retained cash flow-to-adjusted debt will improve from 11% for the last twelve months ended 3/31/03 to 12%.

With the decrease in low-return assets (roughly a third of NI's assets are investments in E&P and in Primary), NI's investments in its remaining business segments will more closely match their EBIT contributions: roughly one-third each from gas distribution, power, and gas transmission. Its future results should have a high degree of predictability, as these businesses are all regulated.

The following ratings have been confirmed with a stable outlook:

NiSource, Inc. -- (P)Ba2 preferred shelf;

Bay State Gas Company -- Baa2 senior unsecured medium-term notes;

The Columbia Energy Group -- Baa2 senior unsecured notes;

NiSource Capital Markets, Inc. -- Baa3 senior unsecured debt;

Northern Indiana Public Service Company -- Baa2 senior unsecured debt and long-term issuer ratings, Baa3 preferred stock, Baa1 senior secured pollution control revenue bonds, Baa2 senior unsecured pollution control revenue bonds, VMIG-2 short-term rating;

NiSource Finance Corporation -- Baa3 long-term issuer rating, Baa3 senior unsecured debt, (P)Baa3 senior unsecured shelf, and Prime-3 commercial paper.

NiSource, Inc., headquartered in Merrillville, Indiana, is a diversified energy distribution company with natural gas and electric operations.

New York
John Diaz
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Mihoko Manabe
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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