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Rating Action:

Moody's changes NiSource's outlook to stable

24 Nov 2009

Approximately $7 billion of debt affected

New York, November 24, 2009 -- Moody's Investors Service affirmed the ratings of NiSource Inc. and its subsidiaries (including its guaranteed primary financing vehicles NiSource Finance Corporation, rated Baa3 senior unsecured) and changed their outlooks to stable from negative. The stabilization of the outlook reflects Moody's assessment that, while the company's credit metrics are weak for investment grade, the company has made sufficient improvement in the rate structures of its utilities and in its near-term liquidity, to allay the potential for significant deterioration.

"Since we assigned the negative outlook, NiSource has undergone a series of rate proceedings and resolved various legacy issues that were overhangs on the credit," says Moody's Vice President Mihoko Manabe. "Their credit metrics are still weak but they should be durable, because of their improved business risk profile."

Moody's notes that the electric rate case at NiSource's subsidiary Northern Indiana Public Service Company (NIPSCO, Baa2 senior unsecured) is still not over. Given that NIPSCO is the largest single operating subsidiary of NiSource, Moody's has considered NIPSCO's electric rate case to be important to NiSource's overall credit quality. The conclusion of this long and contentious rate case is not expected until the spring of next year, and the company expects to follow it closely with another electric case as well as a smaller case for its gas division.

Moody's stabilizing NiSource's outlook at this time prior to the conclusion of NIPSCO's current rate case is based on Moody's understanding of the Indiana regulatory framework and its history of generally constructive rate decisions, and is premised on the outcomes of the current and upcoming electric and gas rate cases being supportive of a solid investment-grade credit profile for NIPSCO. NiSource will continue to pursue rate cases periodically in its other six state jurisdictions, but Moody's believes that they will be mostly incremental to the round of rate cases it has successfully concluded over the last few years. The rate designs it has obtained in those recent regulatory initiatives provide for an array of trackers and other rate adjustments that reduce the need for large base rate cases thereby mitigating regulatory risk and potential credit downside in the foreseeable near future, in Moody's view.

As an example of NiSource's most recent progress on the regulatory front, Bay State Gas Company (Bay State, Baa2 senior unsecured) received a $19 million rate increase from the Massachusetts Department of Public Utilities. Although the allowed return-on-equity was 9.95%, below the current industry average, the company obtained a decoupling rate design and a main replacement tracker, which Moody's considers as credit-positive for gas utilities.

The stabilization of NiSource's outlook is also based on Moody's analysis of the latest iteration of the company's long-range plan. The plan continues the company's current financial strategy, with capital expenditures and dividends being maintained at about current levels. This level of spending will keep NiSource in a negative free cash flow position, which is not unusual for utilities, but notable for a company with a significant amount of debt maturing every year for the foreseeable future. Moody's notes that the plan, assuming full execution, would result in only a modest improvement in its leveraged credit profile. This financial plan, if executed as presented, would support NiSource's low investment-grade rating in keeping with the management's public commitment, but with little credit accretion or shareholder growth over the intermediate term. Moody's also notes that NiSource's ratings could be pressured if the management prematurely returns to a more accelerated growth strategy, as it did a couple of years ago that initially triggered the negative outlook in late 2007.

The rating agency said that the portfolio of regulated gas and electric utilities in seven states plus a multi-regional gas pipeline and storage system results in a relatively low business risk profile and significant stability which should enable NiSource to support its current substantial financial leverage. Given that roughly 60% of NiSource's operating income comes from utilities, Moody's applied the utility methodology published last August. After Moody's standard adjustments and excluding the non-recurring $295 million tax refund, NiSource's cash flow from operations pre-working capital-to-interest ratio was 3.2 times, and retained cash flow-to-debt was 11% at fiscal year-end 2008 around the seasonal borrowing peak.

As of September 30, 2009, NiSource had substantial liquidity, with over $1 billion available under its $1.5 billion revolver, in addition to $475 million of accounts receivable sales capacity. NiSource expects approval of another $75 million receivables facility in January 2010. Yesterday, NiSource used a portion of the facility to retire $417 million of maturing long-term debt. Moody's will be monitoring NiSource's strategy to deal with the $681 million of long-term debt maturing next November, as well as the renewal of its $1.5 billion revolver as well as the $385 million term loan that matures in 2011.

The last rating action was on February 4, 2009 when Moody's commented that NiSource's ratings and negative outlook were not impacted by the company's then latest long-range financial plan.

The principal methodology used in rating NiSource, NIPSCO, and Bay State was Regulated Electric and Gas Utilities, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating NiSource can also be found in the Credit Policy & Methodologies directory.

Outlook Actions:

..Issuer: Bay State Gas Company

....Outlook, Changed To Stable From Negative

..Issuer: NiSource Capital Markets, Inc.

....Outlook, Changed To Stable From Negative

..Issuer: NiSource Finance Corporation

....Outlook, Changed To Stable From Negative

..Issuer: NiSource Inc.

....Outlook, Changed To Stable From Negative

..Issuer: Northern Indiana Public Service Company

....Outlook, Changed To Stable From Negative

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

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

New York
William L. Hess
Managing Director
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's changes NiSource's outlook to stable
No Related Data.
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