OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB-' long-term Issuer Default Ratings (IDRs) of NiSource Inc. (NI) and its subsidiaries.

Fitch has also revised NI's Rating Outlook to Positive from Stable in anticipation of its separation from Columbia Pipeline Group (CPG, IDR 'BBB-'/Outlook Stable) on July 1, 2015. After the separation, NI will become a fully regulated natural gas and electric utility holding company.

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

The affirmation and Positive Outlook reflect NI's lower operating risk as a fully regulated holding company in diversified and supportive service territories, better than expected improvement in forecasted credit metrics, and management's willingness to issue equity to preserve credit quality if needed. Although the leverage ratios will continue to be elevated in the intermediate term, the Positive Outlook embeds Fitch's expectation that adjusted debt to EBITDAR will improve to low to mid 4x range toward the end of a five-year forecast period. In its prior review in September 2014, Fitch had identified adjusted debt to EBITDAR threshold of 4.75x on a sustained basis for a positive rating action.

KEY RATING DRIVERS

Low Business Risk
NI's fully regulated business model will be considerably less risky, supported by stable cash flow and earnings from a geographically diverse mix of regulated gas and electric utilities in seven states. Currently, CPG represents approximately 30% of operating earnings. After the separation, gas and electric operations will represent 65% and 35%, respectively, of the operating income. Over time, Fitch expects gas operations will represent a greater share of the total earnings as the company invests more than twice as much capex in its gas utilities as it does in its electric utility. Fitch considers such a trend positive for NI's credit as the regulations governing the gas utilities are considered relatively more supportive and the gas utilities are not subject to the stringent environmental mandates.
Supportive Regulation
The ratings and Positive Outlook also consider the supportive regulatory framework that NI's utilities enjoy in their respective jurisdictions. This is key for NI's creditworthiness in light of the aggressive gas system safety and modernization programs at the gas utilities and NIPSCO's environmental capex. Approximately, 75% of capex investment is expected to be recovered through trackers and rate structures with minimal lag and 65% of net revenue is not subject to volume fluctuations.

The gas utility operations have reduced cyclicality and earned stable cash flow through de-coupling mechanisms and trackers. All gas utilities have accelerated infrastructure trackers and energy efficiency programs. Most gas utilities have decoupling, straight fixed variable rates and/or weather normalization mechanisms.

NIPSCO's gas and electric operations are operating under seven-year plans that expire in November 2020. The capex totals \$1.9 billion over 2013 to 2020 (\$1.1 billion electric investments and \$830 million gas investments) for replacement and maintenance of utility equipment, with approximately 75% recovery through semi-annual trackers and the remaining deferred for recovery under a general rate case. NIPSCO's approved environmental spending plan includes over \$800 million for generating plant investment which is 100% recoverable through a tracker. NIPSCO's two MISO transmission projects enjoy FERC's forward looking rates and CWIP recovery.

High Leverage
NI's leverage will remain high relative to its peers primarily as a result of the legacy debt associated with the acquisition of Columbia Energy Group in November 2000. Additionally, NiSource is undertaking a significant capital expenditure program across the gas and electric segments (\$1.4 billion combined annually) compared to \$780 million in 2011 and \$1 billion in 2012. Such a large program is expected to put pressure on the credit metrics in the intermediate term.

Weak Credit Metrics Expected to Improve
Fitch's most recent projection indicates that NI's debt to Operating EBITDAR will continue to be elevated through 2018 and decline to approximately 4.6 times (x) in 2019 and 4.3x in 2020. FFO adjusted leverage is expected decline from over 5x in 2016 to 4.7x in 2020 and FFO fixed charge coverage will improve from 3.5x to 3.8x. Fitch's projection incorporates 2014 bonus depreciation benefits and a reasonable amount of equity issuance. Beyond 2020, Fitch expects these metrics, particularly the debt to EBITDAR ratio to improve modestly as various capex programs complete in stages. The FFO metrics could also benefit from the margin improvement partially offset by expiration of bonus depreciation.

Rating Linkages
NI and NIPSCO's ratings historically were and will continue to be closely linked due to the fact that NI finances substantially all of its utility operations through NIF with guarantee from NI. As of Dec. 31, 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 are expected to share a five-year \$1.5 billion revolver at NIF that carries a 70% debt to cap financial covenant.

KEY ASSUMPTIONS
--Approximately \$1.4 billion of capex annually from 2016 to 2020 (\$400 million electric and approximately \$1 billion gas);
--Reasonable amount of equity issuance;
--Dividend payout ratio approximately 60%;
--2014 bonus depreciation;
--Existing recovery mechanisms at the gas and electric utilities continue to take effect throughout the projection period.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Reduced regulatory risk with expanded revenue tracking or recovery mechanisms;
--Higher visibility for adjusted debt to EBITDAR to sustain below 4.75x.

Negative: Future developments that may, individually or collectively, lead to stabilization of the ratings at the current rating level include:
--Material adverse changes in the regulatory construct;
--Low probability to achieve adjusted debt to EBITDAR below 4.75x.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings with a Positive Outlook:

NiSource Inc.
--IDR at 'BBB-';
--Short-term IDR at 'F3'.

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'.