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NiSource to Split into Utility & Pure Play MLP; Unlock Value

Electric and natural gas provider NiSource Inc. (NI) announced that it will follow the MLP route to unlock value from its high quality natural gas midstream assets. The decision to form an MLP seems quite justified given the presence of NiSource’s midstream assets near the reserve rich Marcellus and Utica shales.

The formation of an MLP will give NiSource the opportunity to concentrate on its core electric and natural gas utility business, while the MLP will focus on natural gas pipeline, midstream operations and storage operations.

Advanced fracking technology has led to a shale gas boom in the U.S., which necessarily requires stepped-up natural gas midstream services. Midstream operations are capital intensive by nature and the formation of an MLP helps to raise funds from the capital markets.

NiSource’s MLP

The new MLP will include Columbia Gas Transmission, Columbia Gulf Transmission, NiSource Midstream Services, and other current NiSource natural gas pipeline, storage and midstream holdings. Columbia Pipeline Group along with its assets is strategically located to tap new opportunities in the midstream sector as the focus in the U.S. is shifting towards the use of more natural gas for power generation and other allied industries.

The MLP will have capital investment opportunity in the range of $12–$15 billion in the next 10 years, which will help it to further strengthen its position in the resource rich shales.

NiSource Post Separation

Post separation, the company will continue to serve its 3.4 million natural gas customers and 450,000 electric customers. In addition, the company will provide solid earnings results and increase its dividend 4% to 6% annually.

MLPs: A Recent Trend

Energy companies are increasingly forming MLPs, as the structure makes it more convenient to raise fresh capital from the markets. MLPs also enjoy tax exemption which is generally passed on to the unitholders.

In Jun 2014, CONSOL Energy Inc. (CNX) and Noble Energy Inc. (NBL) announced their plan to form an MLP that would provide midstream services for production from their joint venture in the Marcellus Basin. In end 2013, WPX Energy Corp. (WPX) announced its intention to form an MLP to develop natural gas properties in the Piceance Basin.

To Sum up

MLPs have become an important investment vehicle for energy companies since the first MLP was launched in 1981. MLPs have indeed gained prominence over the last three decades due to tax advantages and lower cost of capital. We expect more companies to opt for MLPs going forward due to the aforesaid reasons.

NiSource currently holds a Zacks Rank #3 (Hold).

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