NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the long-term Issuer Default Ratings (IDRs) of NiSource Inc. (NI) and its subsidiaries following its announcement to separate the natural gas pipeline business Columbia Pipeline Group (CPG) into a standalone company. After the separation, NI will become a fully regulated natural gas and electric utility holding company.
The affirmations include NiSource Finance Corp. (NIF or NI Finance) and NiSource Capital Markets Inc. (NICM), NI's two financing subsidiaries, and Northern Indiana Public Service Co. (NIPSCO), an electric and gas utility. Fitch has also affirmed the senior unsecured rating of NIPSCO at 'BBB' and assigned an 'F3' short-term IDR to NI.
The Rating Outlook for all entities is Stable. Approximately $8.2 billion of long-term debt is affected. A complete list of rating actions is provided at the end of this release.
Additionally, based on preliminary information from NI management, Fitch expects CPG to be rated low investment grade.
KEY RATING DRIVERS:
Lower Business Risk with Evolving Capital Structure:
Fitch views favorably that the expected fully regulated operations are lower risk than its present mix of businesses, supported by stable cash flow and earnings from a geographically diverse mix of regulated gas and electric utilities.
However, Fitch believes positive rating actions are premature at this time as NI's capital structure is expected to continue to evolve. A potential positive rating movement is highly dependent upon the final capital structure after the spinoff, the willingness to issue adequate equity to support its capital spending commitments, and the successful execution of the pre-spin strategies, including the public offering of the master limited partnership initially consisting of a 14.6% interest in CPG.
Supportive Regulatory Environment:
The ratings and Outlook reflect the supportive regulatory framework that NI's utilities enjoy in their respective jurisdictions, in light of the aggressive gas and electric system safety and modernization programs and NIPSCO's environmental capex.
The gas utility operations have reduced cyclicality and earned stable cash flow through de-coupling mechanisms and trackers. Most recently, Massachusetts HB 4164 was passed in June 2014 and supports gas infrastructure safety and modernization investment and allows for recovery between rate cases and reduces regulatory lag. Columbia Gas of Massachusetts (CMA) plans to file an infrastructure plan by year end 2014 with an anticipated effective date in early 2015.
Indiana SB 560 provides cost recovery outside of base rate proceedings for transmission, distribution and storage projects undertaken for the purpose of safety, reliability, system modernization, or economic development.
NIPSCO's gas and electric operations are operating under seven-year plans that expire in November 2020 totaling $1.8 billion ($1.1 billion electric investments and $710 million gas investments) for replacement and maintenance of utility equipment, with approximately 75% recovery through trackers and the remaining deferred for recovery under a general rate case. NIPSCO's approved environmental spending plan includes over $600 million for generating plant investment which is 100% recoverable through a tracker. Fitch has assumed that the utilities are able to continue to earn returns based upon the currently approved capital structure, not the imputed one based on the capital structure of the parent company.
Credit Metrics:
NI's leverage is high among its peer groups primarily as a result of the legacy debt associated with the acquisition of Columbia Energy Group in November 2000. Based on the preliminary assessment of management's business plan, Fitch projects NI's debt to Operating EBITDAR from 2016 to 2017 to average approximate 4.9 times (x) and FFO fixed charge cover to average 3.3x. These metrics could potentially improve to 4.4x and 3.5x respectively, by 2020. Fitch's projection considers the expiration of the bonus depreciation benefits and a reasonable amount of equity issuance to support the sizable capital spending which is approximately $1.2 billion annually. Typically NI's leverage peaks at the end of the year as a result of seasonal gas storage purchases at its gas utilities and drops during the following months as gas costs are recovered. These metrics are somewhat weak in 2016 and 2017 and will become stronger beginning 2018 for its rating category relative to its peers with a similar risk profile.
Strong Parent Sub Linkages:
NI and NIPSCO's ratings historically were and will continue to be closely linked due to the fact that NI finances majority of its operations through NIF with guarantee from NI. As of June 30, 2014, NIPSCO had $95.5 million of medium term notes and $226 million of pollution control bonds outstanding issued through Jasper Co. Indiana. Columbia Gas of Massachusetts (aka Bay State Gas) had $40 million of notes outstanding (not rated by Fitch). All NI subsidiaries currently share a revolver at NIF. The remaining entities after the separation are expected to continue to share a credit facility at NIF.
RATING SENSITIVITIES:
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Reduced regulatory risk with expanded revenue tracking mechanisms;
--Well capitalized balance sheet after the separation which contributes to improving credit metrics with expected sustained consolidated debt to Operating EBITDAR below 4.75x.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Materially unfavorable regulatory decisions;
--Not issuing adequate equity to support the significant capital program resulting in sustained consolidated debt to Operating EBITDAR above 5.50x.
Fitch has affirmed the following ratings with a Stable Outlook:
NiSource Inc.
--IDR at 'BBB-'.
NiSource Finance Corp.
--Senior unsecured at 'BBB-';
--Commercial paper at 'F3.
NiSource Capital Markets
--Senior unsecured at 'BBB-'.
Northern Indiana Public Service Co.
--IDR at 'BBB-';
--Senior unsecured and revenue bonds at 'BBB'.
Fitch has assigned the following rating with a Stable Outlook:
NiSource Inc.
--Short-term IDR at 'F3'.
Fitch has withdrawn the following IDRs, as these entities and their IDRs are no long considered analytically meaningful for the credit quality of the debt that have been issued out of them:
NiSource Finance Corp.
--IDR at 'BBB-';
--Short-term IDR at 'F3'.
NiSource Capital Markets
--IDR at 'BBB-'.
All debt issued by NiSource Finance Corp. and NiSource Capital Markets was fully guaranteed by NI, and the ratings of those issuances remain outstanding.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 13, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2013);
--'Rating U.S. Utilities, Power and Gas Companies' (March 9, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722085
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=884874
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