Fitch Upgrades NI and NIPSCO's IDR to 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded the Long-Term Issuer Default Ratings (IDRs) of NiSource Inc. (NI) and Northern Indiana Public Service Company (NIPSCO) to 'BBB' from 'BBB-'. The Rating Outlook is Stable.

A complete list of rating actions is provided at the end of this release.

The rating and Outlook reflect NI's low operating risk as a fully regulated utility holding company with supportive regulation and improved business risk profile in recent years. The ratings also consider NI's robust capex program and management's willingness to issue equity to preserve credit quality, if needed. Fitch estimates that NI's leverage ratios as measured by debt-to-operating EBITDAR will remain elevated in the intermediate term, due to its large capex program and legacy debt, before improving to high-4x by 2020.

KEY RATING DRIVERS

Low Business Risk

NI's fully regulated, relatively low-risk business model is supported by stable cash flows and earnings from a geographically diverse mix of regulated gas and electric utilities in seven states. Gas distribution and electric operations represent 61% and 39%, respectively, of the total rate base. Over time, Fitch expects gas operations to represent a greater share of the rate base as the company invests more than twice as much capex in its gas utilities as it does in its electric segment. Fitch considers this trend to be positive as NI's gas distribution utilities benefit from more supportive regulations with less exposure to stringent environmental mandates.

Supportive Regulation

The ratings and Stable Outlook consider supportive regulatory frameworks across NI's operating utilities' service territories. Balanced regulation is particularly important from a credit perspective in light of NI's aggressive gas and electric infrastructure modernization programs and high debt leverage. Approximately 77% of capex investment in the next several years is expected to be recovered through trackers and other cost-recovery mechanisms.

Most of NI's gas utilities have decoupling, straight fixed variable rates and/or weather normalization mechanisms. All of NI's gas utilities use infrastructure trackers on a regular basis except Pennsylvania.

In Indiana, the Transmission, Distribution and Storage System Improvement Charge (TDSIC) statute provides for cost recovery outside of general rate case proceedings for gas or electric safety, reliability and modernization and allows pre-approval of a seven-year plan of eligible investments. If approved, up to 80% of eligible costs can be recovered using semi-annual trackers. NIPSCO's two MISO transmission projects benefit from constructive FERC regulation, including forward-looking rates and CWIP recovery.

NIPSCO Settlements Constructive

Fitch views recent developments in NIPSCO's pending rate proceedings favorably.

NIPSCO reached a settlement in March 2016 for a seven-year electric TDSIC plan that includes $1.25 billion of eligible investments. A final order is expected in the third quarter of 2016. If the settlement is approved by the Indiana Utility Regulatory Commission (IURC), NIPSCO expects to start recovery based on TDSIC's semi-annual rate adjustment mechanism.

NIPSCO's gas segment is in the midst of an $800 million gas infrastructure modernization program. On March 30, 2016, the IURC approved the semi-annual tracker (TDSIC-3) that NIPSCO filed in August 2015, including approximately $74 million of investments through mid-2015. Rates took effect on April 1, 2016. NIPSCO submitted its latest semi-annual tracker TDSIC-4 update with the IURC on Feb. 29, 2016.

On Feb. 19, 2016, NIPSCO reached a settlement of its electric base rate case that, if approved by the IURC, would allow a revenue increase of $72.5 million, based on an authorized ROE of 9.975% before certain riders. The rate increase under the terms of the settlement represents approximately 58% of NIPSCO's rate increase request. A final order is expected in the third quarter of 2016.

High Capex Pressures Credit Metrics

NI's capex began to ramp up in 2012. From 2012 to 2015, capex averaged $1.23 billion per year compared to $709 million per year from 2008 to 2011. NI capex is expected to average $1.45 billion per year 2016 - 2021.

Fitch projects that NI's debt-to-operating EBITDAR will continue to be over 5x through 2019 and decline to high-4x in 2020. FFO adjusted leverage is expected to decline to high-4x in 2020 from 5.3x in 2016 and FFO fixed charge coverage to improve from 3.4x to 4x. Fitch's projection incorporates bonus depreciation benefits and a certain amount of equity issuance.

Rating Linkages

NI and NIPSCO's IDRs will continue to be equalized reflecting strong operational, strategic and financial linkage. NI finances substantially all of its utility operations through NiSource Finance (NIF) with guarantee from NI. All NI subsidiaries share a five-year $1.5 billion revolver at NIF.

KEY ASSUMPTIONS

--An average of $1.45 billion capex annually from 2016 to 2021;

--Dividend payout ratio averages approximately 63%;

--Balanced regulation and continued utilization of jurisdictional cost-recovery mechanisms for NI's gas and electric utility subsidiaries throughout the projection period.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--NI and NIPSCO could be upgraded if adjusted debt-to-operating EBITDAR is expected to sustain below 4x.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Material adverse changes in NI's regulatory construct;

--Negative rating pressure could mount if adjusted debt to operating EBITDAR sustains below 5.25x with low probability to recover.

FULL LIST OF RATING ACTIONS

Fitch has upgraded following ratings with a Stable Outlook:

NiSource Inc.

--LT IDR to 'BBB' from 'BBB-'.

NiSource Finance Corp.

--Senior unsecured notes to 'BBB' from 'BBB-'.

NiSource Capital Markets, Inc.

--Senior unsecured notes to 'BBB' from 'BBB-'.

Northern Indiana Public Service Co.

--LT IDR to 'BBB' from 'BBB-';

--Senior unsecured and revenue bonds to 'BBB+' from 'BBB'.

Fitch has affirmed following ratings with a Stable Outlook:

NiSource Inc.

--Short-term IDR at 'F3'.

NiSource Finance Corp.

--Commercial paper at 'F3'.

Date of Relevant Rating Committee: June 16, 2016

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

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Contacts

Fitch Ratings
Primary Analyst
Julie Jiang, +1-212-908-0708
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Maude Trembley, +1-312-368-3203
Director
or
Committee Chairperson
Philip Smyth, CFA, +1-212-908-0531
Senior Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Julie Jiang, +1-212-908-0708
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Maude Trembley, +1-312-368-3203
Director
or
Committee Chairperson
Philip Smyth, CFA, +1-212-908-0531
Senior Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com