NiSource (NI) Ratings Affirmed by Moody's Following Split Plans

Moody's Investors Service affirmed the Baa2 senior unsecured rating of NiSource (NYSE: NI) after the announcement of a planned corporate separation. The rating outlook is stable.

RATINGS RATIONALE

The rating action is triggered by the recent announcement that NiSource is planning on a corporate separation. NiSource intends to split into two publicly traded companies: NiSource Inc.: a holding company with a portfolio of fully regulated electric and natural gas distribution utility subsidiaries; and Columbia Pipeline Group (CPG): a pure play natural gas pipeline, midstream and storage company.

The Baa2 rating also reflects another NiSource announcement, which is aimed at further restructuring CPG. The company is moving forward with the formation of a master limited partnership (MLP), prior to the corporate separation, to help fund CPG's extensive capital investment plans. Post corporate separation, the MLP will remain with CPG.

"The Baa2 rating affirmation of NiSource primarily reflects the credit profile of the electric and gas distribution utility businesses" said Lesley Ritter, Analyst. "The utility's $7.8 billion rate base benefits from supportive regulatory jurisdictions and this supportiveness helps mitigate NiSource's weaken pro-forma financial profile."

NiSource's legacy regulated low risk utility assets, including six local distribution gas companies (equivalent to 55% of rate base) and one vertically integrated electric and gas distribution utility Northern Indiana Public Service Company (Baa1, stable), are viewed as material credit positives. The regulatory authorities overseeing the utilities are supportive to long-term credit quality, provide an attractive suite of timely recovery mechanisms for costs and investments (approximately 70% of capital expenditures are recovered through trackers), and equity returns are authorized at levels at or above the national average.

NiSource also benefits from good geographical diversity and size, with a footprint spanning seven states across the Northeast quadrant of the US. Approximately 65% of the company will be represented by low risk natural gas distribution business, with the remainder being a vertically integrated electric utility in Indiana.

The rating is constrained by NiSource's weak financial profile, primarily relating to its elevated debt levels.

"NiSouce's high debt level appears to be permanent, and will keep some pressure on consolidated financial metrics, including a ratio of cash flow to debt in the 11-12% range over the next few years." Ritter added.

NiSource's extensive capital investment projects will keep some pressure on the financial profile for the foreseeable future, given the lag in cash flow generation relative to the company's debt. Furthermore, we expect the company to apply a conservative approach to its capital investments funding, including equity issuances if necessary. Overall, Moody's views the company's sound operational track record, low business risk, and constructive and diversified regulatory relationships as providing sufficient support for it to offset a financial profile that is weaker than the company's rating on a sustained basis.

The stable rating outlook reflects our expectation that the financial profile will improve over the next three to five years, with a debt to capitalization ratio of approximately 50% and a ratio of cash flow to debt slowly rising closer to the low-teens range. The stable outlook reflects an anticipated smooth corporate separation, and incorporates a view that NiSource's regulated utility capital expenditure plans will be financed with a balanced mix of debt and equity. The outlook also takes into account the credit supportiveness of NiSource's regulatory environments, the low business risk associated with its LDC operations, and the scale and scope of its footprint, which together mitigate metrics that are weak for the rating category.

What Could Change the Rating -- Up

An upgrade could be considered if there was further improvement in the utility's regulatory environment or if cash flow to debt rise to the high teens and interest coverage exceeds 4.0x on a sustained basis.

What Could Change the Rating -- Down

The rating could be downgraded if there is a decline in credit supportiveness of NiSource's regulatory environments, an adverse change in the company's business mix or corporate structure such that its business risk profile deteriorates, or if debt coverage and interest coverage ratios fall below 12% and 3.0x, on a sustained basis.

The principal methodology used in these ratings was the Regulated Electric and Gas Utilities published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Outlook Actions:

..Issuer: NiSource Finance Corporation

....Outlook, Remains Stable

Affirmations:

..Issuer: NiSource Finance Corporation

.... Issuer Rating, Affirmed Baa2

....Senior Unsecured Bank Credit Facility, Affirmed Baa2

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

....Senior Unsecured Shelf, Affirmed (P)Baa2

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