HITE Hedge Asset Management, an investment firm specializing in the energy sector and its transition, today released the following letter addressed to the Board and Management of NiSource Inc. (NYSE: NI).
We at HITE Hedge, owners of more than two million shares, applaud your appointment of Mr. Lloyd Yates as Chief Executive Officer. We believe Mr. Yates to be an effective and open-minded leader, capable of building on NiSource’s recent successes for the benefit of its customers, employees, and shareholders alike.
Furthermore, we believe that NiSource has truly world class assets, and represents one of the best rate-of-change stories among utilities, both economically and environmentally. We applaud, as should all stakeholders, the improvements the entire 7,500-person NiSource team has made to the safety and methane emissions of its natural gas pipeline network, as well as its growing investment in renewable generation. These investments improve NiSource’s durability as both an award-winning employer and critical economic engine for its service areas.
In all, NiSource has demonstrated the kind of leadership we need more of in this country.
We also believe that both of NiSource’s major lines of business have substantial underappreciated value, and that this team deserves better access to capital to continue this leadership and accelerate the benefits of capital investment to its customers.
While public markets in the US are loath to give capital to natural gas distributors, private markets are willing to both capitalize these assets at higher multiples and provide additional low-cost capital for needed investment in their service territories. To wit, recent transactions have valued natural gas utilities at greater than 30 times forward earnings, 50% higher than NiSource is trading today based on our forward estimates.
Natural gas will be a necessary bridge fuel for years to come, both to provide heat and electricity at a reasonable cost to customers and to enable the electric vehicle revolution. In the context of this reality, it will be important to give natural gas utilities like NiSource low-cost capital to minimize methane leaks through pipeline repair and replacement. Today, only private markets appear to recognize this value and need for capital.
We further expect NiSource’s electric utility, part of its NIPSCO operations in northern Indiana, to benefit from both renewable power generation and electrification of vehicle fleets. These trends are not as advanced in the Midwest as they are in some places around the country, but we see closing this gap as an opportunity for NiSource investors and the economy of northern Indiana alike.
Unfortunately, we do not expect public markets to recognize the value of NiSource’s assets, the hard work of its employees, or the acumen of its leadership. Public investors in the US have turned their back on natural gas. In addition, NiSource suffers from a long-running market inefficiency: the sum-of-parts discount. While NiSource remains public, we believe its mix of leading natural gas and electric utilities will never receive the premium valuation it deserves, nor the low cost of capital required to maximize its economic and environmental contributions to its service area.
Meanwhile, private markets, particularly infrastructure funds, have both the capital and the extended timeframe to recognize the value of NiSource’s assets and provide it sufficient capital to fully realize its vision of an equitable, renewable future, and improve its balance sheet, all to the benefit of the states in which it does business.
Specifically, we believe access to lower cost equity capital could enable NiSource to accelerate its pipeline replacement and modernization program, further reducing methane leakage, and further accelerate its development of renewable generation. This acceleration will benefit the health and well-being of constituents in their service territories, generate significant economic activity, and do so at the lowest available cost.
As such, we strongly encourage Mr. Yates and the NiSource Board to aggressively pursue a privatization transaction that pulls forward these benefits for customers, employees, and investors alike.
We are optimistic that both the appointment of an open-minded executive like Mr. Yates and the involvement of leading activist Elliott Management pave the way for such a transaction. We stand ready to support these efforts to the best of our ability.