Despite NiSource Inc.’s strong earnings posted for the fourth quarter and full year 2001, Moody’s Investor Services on Friday downgraded the company’s senior debt to Baa3 and its subsidiaries to Baa2, noting that the “outlook remains negative.” Moody’s said the downgrades reflect higher-than-expected debt levels and weaker-than-expected cash flow from the company’s subsidiaries.

On Wednesday, NiSource reported net income of $66.9 million ($0.32 per diluted share) for the fourth quarter of 2001, compared to a net income loss of $4.2 million ($0.02 loss per diluted share) for the equivalent quarter in 2000. The company also had a strong full year, turning a loss in 2000 into a sizeable gain in 2001. The company reported $216.2 million ($1.03 per diluted share) in 2001 net income, compared to $150.9 million ($1.12 per diluted share) in 2000 (see Daily GPI, Jan.31).

“The negative outlooks reflect the execution risk entailed in the company’s plan to de-leverage itself over the next 12 to 18 months,” the rating service said. “With market capital of roughly $4 billion, it will be a challenge to issue enough equity to offset over $8 billion of debt on its balance sheet. Other than the pending sale of the Indianapolis Water Company, NiSource’s plan does not include any large asset sales in the near future.”

While Moody’s said it recognizes the strength of the company’s utility subsidiaries, the low business risk does not fully offset the risk of the heavy debt burden incurred in the Columbia Energy acquisition a little over a year ago (see Daily GPI, Nov. 1, 2000). The service pointed out that NiSource’s adjusted debt-to-capital is very high at about 70% at year-end 2001. Retained cash flow-to-adjusted debt is very low at under 3% for 2001.

The downgrade also reflects NiSource’s reliance on dividends from its Northern Indiana Public Service Company (NIPSCO) subsidiary, which is currently riding out a weak economy in northern Indiana. “The local economy and a substantial portion of NIPSCO’s revenues are tied to the steel industry, which is undergoing a cyclical downturn and consolidation,” Moody’s said. “Furthermore, the Indiana Utility Regulatory Commission is investigating whether to reduce NIPSCO’s retail electric rates. A significant reduction in NIPSCO’s rates would stress the parent company, which is expecting it to provide almost three-quarters of its cash flows.”

Moody’s said it may take further rating action if the company is not successful in implementing its new plan over the near-term.

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