Thesis: NiSource (NI) is a utility that is spinning off a pipeline business. Utilities are
valued on a multiple of earnings and pipelines are valued a multiple of EBITDA,
meaning the pipeline may be obscuring the value of the utility. NiSource stock is almost
entirely owned by retail and long-only investors likely focused on the utility sector. Post
spin-off, the parts may trade at a 50%+ premium to the current whole, based on comps
and the valuation of a publicly listed pipeline MLP subsidiary. And there is a clear path
for the closing of the valuation gap through “drop down” sales of pipeline assets into the
MLP subsidiary. There are easy and logical hedges available to make this a market
neutral investment. Buy NiSource.
Background: NiSource is a Fortune 500 utility company, included in the S&P 500,
founded in 1912. It acquired Columbia Energy Group via a merger in 2000. NiSource,
along with Columbia, provide natural gas transmission, storage and distribution and
electric generation, transmission and storage. In September 2014, NiSource announced it
would spin off Columbia Pipeline Group (CPG) and would IPO a “drop-down” MLP
subsidiary. The IPO of the pipeline MLP subsidiary, CPPL, was successfully completed
on February 6th, 2015, and immediately after NiSource filed additional documents
towards the spinoff of CPG, expected in “mid 2015”.
Utility overview, comparison to comps, and future prospects:
NiSource has two utilities businesses, a gas transmission business and an electric
generation and distribution business. The gas transmission business provides gas to over
3.3 million residential, commercial and industrial customers across 7 states. The electrical
utility provides electricity to 455,000 customers in 20 counties in northern Indiana, using
a variety of renewable and non-renewable sources of energy, with a capacity of more
than 3,000 megawatts.
JP Morgan does a good job of identifying appropriate comparable companies relative to
each of the two NiSource utilities businesses, which are shown below along with their
financial metrics.