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27 Oct 2000
MOODY'S DOWNGRADES NISOURCE (TO Baa2 SR. UNS.); CONFIRMS RATINGS OF COLUMBIA ENERGY (A3 SR. UNS.) AND NISOURCE'S SUBSIDIARIES; ASSIGNS PRIME-2 TO NISOURCE FINANCE CORP.'S CP PROGRAM; CHANGES BAY STATE GAS'S OUTLOOK TO STABLE
About $6 Billion of Existing Obligations Affected / A $6 Billion CP Program Newly-Rated.
New York, October 27, 2000 -- Moody's Investors Service downgraded NiSource Inc.'s ratings,
confirmed the ratings of The Columbia Energy Group and NiSource's subsidiaries,
and assigned a rating of Prime-2 to NiSource Finance Corporation.
Moody's also changed the outlook on Bay State Gas Company's ratings to
stable from negative. The rating outlooks are stable for Columbia
and NiSource and its subsidiaries. The ratings are as follows:
Columbia Energy GroupA3 senior unsecured debt
Prime-2 commercial paper
NiSource, Inc.Baa2 senior unsecured debt
NiSource Capital MarketsBaa2 senior unsecured debt
Prime-2 commercial paper
NiSource Capital Trust I"baa2" PIES
Northern Indiana Public Service Company A2 first mortgage bonds
A3 senior unsecured debt, issuer rating
"a3" preferred stock
Prime-1 commercial paper
A2 senior secured pollution control revenue bonds
A3 senior unsecured pollution control revenue bonds
VMIG 1 short-term rating
Bay State Gas CompanyA2 senior unsecured
Prime-1 commercial paper
These rating actions end reviews for downgrade begun in June 1999 for
Columbia Energy and NiSource and in October 1999 for Northern Indiana
Public Service Company (NIPSCO) when Columbia and NiSource began negotiating
a merger. Bay State Gas and Indianapolis Water Company, another
NiSource subsidiary, were not under review for downgrade.
The $8.5 billion acquisition (including $2.5
billion of Columbia's debt that NiSource will assume) is expected to close
on November 1, 2000.
The downgrade for NiSource reflects the $4 to $6 billion
of debt (depending on Columbia shareholders' elections) that it will incur
in this acquisition, and minimal coverage of its debt service obligations
and increased common dividend requirements. Dividends that NiSource
will receive from Columbia will be less than the interest expense NiSource
will have to pay on the acquisition debt. However, we do
not expect a material increase in dividends that NiSource will receive
from NIPSCO, Bay State, and other NiSource subsidiaries,
so that their financial positions should be little affected by the increase
in parent's debt.
Since the merger was agreed upon in March 2000, NiSource and Columbia
have mitigated the leveraging of the combined entity by selling about
$620 million after-tax of assets and applying the proceeds
to pay down their short-term debt. In addition, purchasers
assumed debt related to those assets, reducing NiSource/Columbia's
debt by another $270 million. Still being marketed are Columbia's
propane and petroleum businesses and NiSource's Indiana Water Company
- all which will help to reduce a significant amount of debt once
These asset sales not only reduce the initial leverage of the combined
companies, but also reduce the overall business risk, a double
benefit. The combined companies will primarily focus on stable
regulated gas and electric businesses. Pro forma, almost
90% of their EBITDA will be derived from regulated businesses,
with most of the rest coming from Columbia's relatively low-risk
E&P business. Furthermore, those divested businesses
required substantial capital and produced low or uneven returns.
The sale of those businesses results in an entity with stable cash flows,
moderate and predictable capital needs, qualities that will enable
it to support the $8 billion of consolidated debt, preferred,
In just the last two years, NiSource has quadrupled its assets with
the 1999 acquisition of Bay State Gas in 1999 for $780 million
and the Columbia acquisition and has changed from a regional utility to
a national gas company. NiSource is acquiring a company twice its
size in terms of market capital and the acquisition may take a while to
digest operationally and financially. It may well make another
acquisition as it evolves as a gas company. However, both
NiSource and Columbia managements have a good record in cost-cutting.
Columbia's dividends to NiSource could triple from their low historic
levels. However, the higher payout should not impair Columbia's
credit quality. The substantial excess cash that had been invested
in its growth businesses will instead be used for dividends to the parent
and for debt repayment. Its new payout (expected to be in the 50%
range) will be higher than its historic levels (20% range) but
still lower than its peers' (70% range).
While financial measures for NIPSCO are strong for its rating category
deregulation of the electric industry in Indiana would pose significant
risk to the company and would likely affect the rating. The company's
assets are higher cost than competitors and only through the use of higher
cost coal and environmental emissions credits generated through capital
spending on remediation equipment has the company diminished the disadvantage
it would face in an open market. While this is a long-term
concern for the electric assets, the slow pace of deregulation in
Indiana and the expectation of greater caution based on recent events
in the electric markets it is unlikely that NIPSCO will face competitive
pressures over the next several years. Should the climate change,
the rating would be pressured downward.
The improvement in Bay State's rating outlook from negative to stable
reflects our view that its debt protection measures have stabilized since
being acquired by NiSource in February 1999. We expect that its
dividends will be managed so that the company will internally meet its
capital requirements and its debt levels will remain flat.
Structure of the New Company
Upon closing of the acquisition, NiSource, Inc. (Old
NiSource) will merge with a new holding company (New NiSource),
which will also be named NiSource, Inc. New NiSource's first-tier
subsidiaries will be Columbia and Old NiSource's operating subsidiaries:
NIPSCO, NiSource Capital Markets, Bay State, and Indianapolis
Another first-tier subsidiary will be NiSource Finance Corp.,
a newly-created finance subsidiary, which will issue the
acquisition debt. NiSource Finance Corp.'s newly rated $6
billion commercial paper program is fully backed by a 364-day revolving
facility of the same amount. New NiSource will provide a full guarantee
of all obligations of NiSource Finance Corp.
The Terms of the Acquisition
Columbia shareholders can elect to receive New NiSource stock (about $74
per share face value, for up to 30% of Columbia's outstanding
shares). Or, they can receive a combination of $70
cash and $2.60 face value of SAILS (a hybrid combining zero
coupon debt plus an equity forward sales contract that converts to about
$100 million of New NiSource stock in 2004). With the strengthening
of NiSource's stock price since the merger was announced, the likelihood
is higher that more shareholders will elect to take the all-stock
option. Another reason the all-stock option may be attractive
would be tax deferral.
The more shareholders who take the all-stock option, the
less debt New NiSource will have to incur, and the less financial
risk will exist for the merging entities. The cash portion of the
merger will range from approximately $4 billion (if 30%
of Columbia's shares are exchanged for NiSource shares) to $6 billion
(if all of the Columbia shares are exchanged for the cash and SAILS).
NiSource will initially finance the cash portion of the acquisition with
a $6 billion credit facility. We expect NiSource will issue
long-term debt soon after the closing to term out the bank debt.
NiSource, Inc., headquartered in Merrillville,
Indiana, is a diversified distribution company with electric,
gas, and water operations. The Columbia Energy Group,
the largest integrated natural gas company in the U.S.,
is based in Herndon, Virginia.
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
Vice President - Senior Analyst
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
No Related Data.
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