Overview
Moody’s Investors Service downgraded NiSource Inc. and several of its subsidiaries on February 01, 2002, impacting roughly $8 billion of outstanding debt securities. The rating agency lowered NiSource’s senior unsecured debt rating to Baa3 from Baa1 and moved certain subsidiary ratings to Baa2. All affected ratings carry negative outlooks.
Drivers of the downgrade
According to Moody’s, the downgrades reflect a combination of higher-than-expected debt levels and weaker cash flow from the company’s subsidiaries. Adjusted debt-to-capital for NiSource reached about 70% at year-end 2001. At the same time, retained cash flow-to-adjusted debt fell below 3% for 2001, a deterioration the ratings agency cited as a central concern.
Moody’s also pointed to execution risk tied to NiSource’s plan to bring leverage down over the next 12 to 18 months. The negative outlooks assigned to the ratings reflect uncertainty around the successful implementation of that deleveraging strategy.
Balance sheet and market values
NiSource faces the challenge of carrying more than $8 billion of debt while maintaining a market capitalization of roughly $4 billion. Management has signaled an intent to continue the current dividend, which Moody’s described as high relative to recent earnings. Outside of a pending sale, the company’s plan does not contemplate large-scale asset sales in the near term.
Subsidiary cash flow and regional pressures
Moody’s highlighted the company’s reliance on dividends from Northern Indiana Public Service Company (NIPSCO) to support parent-level cash needs. NIPSCO’s profitability is under pressure from a weak regional economy in northern Indiana associated with a cyclical downturn in the steel industry. The Indiana Utility Regulatory Commission is investigating whether to reduce NIPSCO’s retail electric rates, which adds regulatory uncertainty to the cash-flow outlook.
When combined with cash generation from Columbia, Bay State, and smaller units, Moody’s concluded that cash flows are insufficient to cover the company’s near-term requirements for debt service and common dividends.
Liquidity and near-term cash sources
Liquidity at NiSource has been strained but shows signs of stabilization. The company has received bank support and still has adequate unused capacity under a $2.5 billion bank facility, according to Moody’s. A planned sale of Indianapolis Water Company is expected to produce about $300 million in proceeds later in the spring, which Moody’s said should help accelerate debt reduction efforts.
Implications
Moody’s downgrade and negative outlook reflect both the elevated leverage and the limited near-term cash flow cushion at NiSource and its subsidiaries. The ratings action underscores execution risk around the company’s deleveraging plan and the sensitivity of its financial position to subsidiary performance, regulatory developments, and the timing of asset sales.