Fitch: NiSource Plan Expands Ranks of MLP Utility Sponsors

NiSource's recent announcement of plans to form an MLP underscores a growing trend among utility holding companies to form MLPs for their natural gas oriented businesses, according to Fitch Ratings.

On Sept. 28, NiSource announced a plan to separate its natural gas pipeline business Columbia Pipeline Group (CPG) into a standalone company. NiSource will also form a pipeline, midstream and storage master limited partnership (MLP) with initial assets including a 14.6% interest in CPG. This announcement follows the IPO of Enable Midstream Partners, a partnership between CenterPoint Energy and OGE Energy, in April 2014, and Dominion's registration with the SEC in March 2014 proposing the IPO of its MLP.

Fitch expects that MLPs (or similar structures such as yieldcos) will continue to be popular financing vehicles due to the low interest rate environment, investors' penchant for yield, and the tax-advantaged status of an MLP. In addition, the shale gas boom in the US has led to an explosion of investment opportunities across the entire natural gas infrastructure food chain. Gas-related businesses meet MLP investors' expectations for cash flow stability and growth prospects.

By setting up MLPs, utilities can unlock the value of the gas-related assets and provide an additional funding source for expansion. The announcement of an MLP or anticipation of an announcement could also lead to a revaluation of the equity and bonds of the utility sponsor, thus lowering the cost of capital for the company. NiSource's stock price increased by 6.7% and its 10-year bond spread narrowed by 3% by mid-day Sept. 29, one day after the announcement.

The rating implications for an MLP utility sponsor are typically associated with judging the strength of its linkages with the MLP, structural subordination issues, and stated use of MLP proceeds. Fitch generally consolidates an MLP's financials if there are substantial legal, operational and financial linkages between the MLP and the utility sponsor. However, under certain situations when a utility sponsor becomes a warehouse vehicle that buys up assets and packages them for a drop-down to its MLP, Fitch may assess the sponsor's credit on an unconsolidated basis. Fitch's rating approach with respect to MLP consolidation is independent of that conferred by standard accounting treatment.

Fitch affirmed NiSource's 'BBB-' Issuer Default Rating (IDR) and Stable Outlook upon the announcement. Fitch rates pro-forma NiSource on a standalone basis since CPG and the MLP will be separated from the regulated business. Fitch does not expect material linkages between CPG and the new NiSource, and the formation of MLP has no direct impact on the new NiSource's ongoing credit profile. Going forward, Fitch considers NiSource's final capital structure post separation key to the rating.

Please refer to Fitch's press release published on Sept. 29 affirming NiSource ratings after the announcement for more details on the rating rationale and see our special report, "MLP Formation Has Rating Implications for Utility Sponsors" published on July 31, 2014, for more information.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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MLP Formation Has Rating Implications for Utility Sponsors

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