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Rating Action:

Moody's changes NiSource's outlook to negative from stable

03 Dec 2007
Moody's changes NiSource's outlook to negative from stable

About $6 billion of debt obligations affirmed

New York, December 03, 2007 -- Moody's Investors Service changed NiSource Inc.'s outlook to negative from stable and affirmed the debt ratings of the company and its subsidiaries. The change in outlook indicates the near-term risk of erosion in the company's already weak credit metrics, following the implementation of the company's new long-term business plan that entails a significant step-up in capital expenditures and regulatory activity.

"NiSource has spent much of the past seven years conserving cash flow while restructuring its operations and balance sheet," says Moody's Vice President Mihoko Manabe. "This shift in the company's orientation towards earnings growth brings potential for more debt and execution risk."

According to the company, the long-term plan is designed to increase earnings meaningfully in 2011 through rounds of rate filings and a capital investment program of more than $1 billion a year. In the interim, earnings are expected to remain flat. The plan also includes a partial IPO of a pipeline MLP in the near term.

The rating affirmations reflect NiSource's current position as a solid Baa3 credit, given the strength of its large portfolio of rate-regulated natural gas and electric assets with very low business risk that offsets its weak financial metrics. The company would remain a Baa3 and its outlook could return to stable, if it achieves the financial performance it plans over the next 18 to 24 months.

The change in outlook to negative is triggered by the significant execution risks in successfully implementing the plan, particularly on some critical factors over which NiSource has limited control. Much of the forecasted top-line growth depends on the outcome and timing of multiple rate cases and pipeline projects that are subject to regulatory action.

NiSource also faces challenges on other fronts that are more within its purview, such as escalating operating and capital costs. The company for years has been struggling to contain operating and maintenance expense growth which has been outpacing revenue growth. Furthermore, acute labor and material shortages industry-wide are making cost overruns on construction projects increasingly common and raising the likelihood of lower-than-expected returns. Moody's notes that, NiSource's plan anticipates investing substantial sums for some years before realizing meaningful earnings growth.

The management's long-standing public commitment to investment-grade ratings supports the rating affirmation and improves the likelihood of the outlook eventually being stabilized. On the other hand, NiSource's long-term plan will result in large funding gaps that will likely be predominantly debt financed. Future financing activity could reintroduce some balance sheet complexity that the company has reduced over the past several years. Project financings will add to off-balance sheet obligations. The creation of an MLP will introduce high payouts and other risks that come with that corporate finance model, although the IPO itself would not have a rating impact on NiSource.

With the negative outlook, Moody's will be watching a number of milestones expected to be reached over the next year or so. These events include rate cases planned for its Northern Indiana Public Service (NIPSCO), Columbia of Ohio, and Columbia of Pennsylvania subsidiaries; resolution of legacy issues related to NIPSCO (the purchase of two power plants that address both a looming capacity shortage and losses at the affiliate Whiting power plant) and the troubled IBM business services outsourcing agreement (a restructured contract expected prior to the end of this year).

Moody's will also monitor the progress on some key pipeline projects which are a material component of NiSource's long-term growth plan. The Millennium Pipeline project is expected to come online in late 2008, and the company is awaiting regulatory approval on the Eastern Market Expansion project.

Achievement of these milestones would help to set a foundation for earnings growth longer term and, if accompanied by adequate financial performance, could lead to the stabilization of NiSource's rating outlook. A significant shortfall from the long-term plan would subject its ratings to possible downgrade.

<!-- section id="5154" -->

Headquartered in Merrillville, Indiana, NiSource Inc. is a diversified natural gas and electric company.

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

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