May 04, 2015 - 7:39pm EST by
2015 2016
Price: 44.14 EPS 0 0
Shares Out. (in M): 317 P/E 0 0
Market Cap (in $M): 14,000 P/FCF 0 0
Net Debt (in $M): 10,000 EBIT 0 0
TEV ($): 24,000 TEV/EBIT 0 0

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  • Spin-Off
  • Pipeline
  • Utility


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.
Utilities are valued as a multiple of their earnings, and JP Morgan sees the appropriate
multiples for NiSource as 18.4x 2016 earnings for the gas utility and 16.8x 2016 earnings
for the electric utility. Considering the $30+ billion dollars of growth capex available to
the utilities, which will drive an above average growth rate and premium asset base for
years, it is likely that the market will award NiSource a 20x multiple for gas distribution
earnings and 18x multiple for the electric utility. Using JP Morgan’s numbers for 2016:
$214 million of net income for gas distribution and $122 million for electric utility, this
implies $4.3 billion and $2.2 billion market value respectively: $20.50 per share
NiSource share.
Pipeline overview, comparison to comps, and future prospects: The Columbia
pipeline is an irreplaceable asset, one of only a few FERC regulated pipelines that
transport gas between Texas and the Northeast. This is crucial because the Northeast is
the lowest cost gas producing region in the US, hosting the Marcellus and Utica gas shale
plays. Here is a chart from Credit Suisse showing the relative economics of the different
shale plays. It was from before the oil price crash, but is still relevant as it shows the
Marcellus and the Utica as the most economic gas resources.
NiSource’s pipeline assets are held in the Columbia Pipeline Group subsidiary, according
to the following corporate structure:
NiSource has already IPO’d Columbia Pipeline Partners LP (CPPL), which currently has
a $28 share price and a $2.8 billion market cap. As seen above, CPPL owns a portion of
“CPG OpCo”, specifically 15.6%. CPG, the pipeline company NiSource will be spinning
off, owns 84.4% of “CPG OpCo”, 53.8% of CPPL and IDRs and the GP of CPPL.
CPPL’s $26.75 unit price and $2.7 billion market cap imply a value of $17.3 billion for CPG’s
interest in CPG OpCo, and $1.5 billion for CPG’s interest in CPPL. NI hasn't disclosed
how much debt will be at CPG when it is spun out, but I think the number should be
around $4.7 billion to maintain the utility’s leverage ratio in line with its peers. This
would imply an equity value of Spinco around $14.8 billion or just under $46/share
before ascribing any value to the IDRs at Spinco.