NiSource Inc. shares closed lower Nov. 7 after the company disclosed plans to pursue a minority stake sale of its primary utility subsidiary, a decision that seemed to surprise analysts who had been expecting plans to spin off a small gas utility.
Earlier in the day, NiSource announced it would pursue the sale of a minority stake in electric and gas utility subsidiary Northern Indiana Public Service Co., or NIPSCO, based on the results of a business review.
The Merrillville, Ind.-headquartered multi-utility, which provides electric and gas service to about 4 million customers in six states, expects the sale of up to a 19.9% ownership interest in NIPSCO to minimize future external capital market needs and eliminate all equity needs through at least 2025 while strengthening the company's "constrained balance sheet."
Management also sees the stake sale helping to "insulate" the company from rising commodity prices and higher interest rates while creating value throughout the energy transition.
NiSource's stock closed down nearly 6% at $24.37 on Nov. 7 after falling more than 7% in more than double average trading volume.
NiSource President and CEO Lloyd Yates said at the company's analyst day in New York that the review was "thorough" and that management considered different strategic opportunities before deciding to pursue the utility stake sale.
"We looked at all sorts of M&A," Yates said. "Things we could sell in part, in whole. Things we could buy. Other companies we could partner with, et cetera."
NiSource's management team and business review committee also entered into discussions with various counterparties.
No gas sale
Wall Street had been expecting NiSource to announce a strategic review of certain gas local distribution companies to finance an updated capital and earnings growth plan. Analysts have zeroed in on NiSource's local gas distribution companies as divestment targets due to lofty valuations in recent gas utility sales and executive commentary about the increasing value of the electric utility business.
Yates said selling a minority stake in NIPSCO "has a lot higher value" and less regulatory risk than selling one of the smaller gas LDCs. Aside from NIPSCO, which serves 830,000 natural gas and 470,000 electric customers, NiSource owns gas-only utilities in Kentucky, Maryland, Ohio, Pennsylvania and Virginia, all operating under the Columbia Gas name.
Some analysts suggested investors might have rewarded a decision to pursue a full spinoff of NIPSCO.
"Our evaluation concluded it's difficult to realize accretion through full [operating company] sales as NiSource and its customers benefit from scale, diversity and centralized service costs," Chief Risk Officer Shawn Anderson, who is also NiSource's senior vice president of strategy, said at the analyst day. "Selling an [operating company] or [operating companies] creates dis-synergies that take time to mitigate and put pressure on the remaining company and customers. Doing so is also tax-inefficient and is dilutive as a result of lost earnings and cash flow."
NiSource also dismissed the idea of pursuing the acquisition of other utilities or assets based on organic opportunities in its own business mix.
"It is hard for us to create value by paying market premiums when we have a massive inventory of opportunity that can be invested in at 1x rate base," Anderson said.
During the presentation, analysts questioned whether a full sale of the company was on the table.
"To date, we haven't gotten what I'll call a significant enough offer that would motivate us to sell NiSource at this point ... and we've talked to a lot of people," Yates said. Executives declined to clarify whether they received an offer for the company, which had a market capitalization of just about $10 billion as of Nov. 7.
"I don't think it would be appropriate for us to go through every step of the transaction review process and all of the different details that we had with potential counterparties," Anderson said. "Clearly, some of those could have been made in confidence."
Spending plans
NiSource has been investing in a transition to cleaner energy resources,, with more than $2 billion of its previous $10.6 billion capital spending plan earmarked for renewable energy investments as it retires its coal fleet.
NiSource plans to invest about $15 billion from 2023 to 2027 in renewable energy, infrastructure modernization, and efforts to reduce greenhouse gas emissions and enhance safety and reliability. The company expects the plan to contribute to a 6% to 8% annual growth rate in net operating earnings per diluted share from 2021 to 2027. The company previously targeted a compound annual growth rate of 7% to 9% through 2024
Over the long term, NiSource has identified about $30 billion of investment opportunities over the next 10 years, primarily on the gas side of the business.
In addition, NiSource said it would target net-zero Scope 1 and 2 greenhouse gas emissions by 2040. The company previously planned to cut carbon emissions by 90% from 2005 levels by 2030.
The company still plans to retire the remaining two coal-fired units at NIPSCO's R.M. Schahfer power plant by the end of 2025 and to retire the 455-MW Michigan City coal plant between 2026 and 2028.
Results
NiSource on Nov. 7 announced third-quarter 2022 non-GAAP net operating earnings available to common shareholders of $44.6 million, or 10 cents per diluted share, compared to non-GAAP net operating earnings available to common shareholders of $47.1 million, or 11 cents per share, for the same period of 2021. The S&P Capital IQ consensus normalized EPS estimate for the third quarter was 10 cents.
NiSource narrowed its 2022 non-GAAP diluted net operating EPS guidance to $1.44 to $1.46 and initiated 2023 guidance of $1.50 to $1.57 diluted net operating EPS.
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