NiSource Inc.: A Solid Midwest Utility
- NiSource provides electricity and natural gas to northern Indiana.
- The company has a solid history of generating cash from operations.
- It has a higher debt/equity ratio than other utilities.
NiSource (Northern Indiana Public Service Company)(NYSE:NI), is the 7th largest diversified utility (out of 29) by market capitalization (it is currently $7.83 billion in size). It has the 9th highest P/E (58.02) and the 12th highest forward P/E (12.29). It ranks 14/29 based on its dividend yield, which is currently 3.36%.
Here is a map from FERC that shows the utilities' primary markets:
And here's a map from the company's website that shows all the states it operates in:
The company is divided into two operating segments: electric power and gas
distribution. It derives revenue from three sources:
- Gas distribution: this unit accounts for 42% of the company's revenue. It has approximately 2.6 million customers
- Gas transportation: this unit accounts for 21% of the company's revenue
- Electric power: this unit accounts for 37% of the company's revenue. It has approximately 469,000 customers.
Its asset mix indicates that the company is more of a gas distributor than electric provider:
This is obviously a function of geography: being in the north, the company is subject more to cold weather than warm.
The company's generation capabilities are coal-based: it has three coal-fired generating stations capable of 2,540 MW of generating capabilities. This could subject the company to more stringent regulation in the future. From its latest 10K:
On October 23, 2015, the EPA issued a final rule to regulate CO2 emissions from existing fossil-fuel EGUs under section 111(D) of the CAA. The final rule establishes national CO2 emission-rate standards that are applied to each state’s mix of affected EGUs to establish state-specific emission-rate and mass-emission limits. The final rule requires each state to submit a plan indicating how the state will meet the EPA's emission-rate or mass-emission limit, including possibly imposing reduction obligations on specific units. If a state does not submit a satisfactory plan, the EPA will impose a federal plan on that state.
On February 9, 2016, the U.S. Supreme Court stayed implementation of the CPP until litigation is decided on its merits. On October 16, 2017, the EPA published in the Federal Register a Notice of Proposed Rulemaking that would repeal the CPP. The public will have until April 26, 2018 to comment on this proposal, after which time the proposal may become final. On December 28, 2017, in a separate but related action, the EPA published an Advanced Notice of Proposed Rulemaking in the Federal Register to solicit information from the public about a potential future rulemaking to limit greenhouse gas emissions from existing fossil-fuel EGUs. The public will have until February 26, 2018 to comment on the proposal. NIPSCO will continue to monitor this matter and cannot estimate its impact at this time. Should costs be incurred to comply with the CPP, NIPSCO believes such costs will be eligible for recovery through customer rates.
In addition, its coal plants are aging; the company will be retiring 50% of its coal fleet by 2023.
Let's turn to the relevant data from the financial reports:
Last year the company had a nice increase in total income, which rose 8.53%. Because it relies on coal for power generation, its gross margin is high. Its operating margin is subject to some variability, but that is to be expected: between depreciation and ongoing maintenance, it has a large number of expenses. Its cash flow from operations (CFO) is increasing, which allows the company to maintain a high-interest coverage ratio. Dividend investors will be pleased with its conservative payout ratio.
My primary concern with the company is its capital structure, which is 63% debt and 37% equity. When you combine that with its need to add to its generating capacity, you run into the following scenario:
1.) Raise new funds via debt, which it will be doing in a higher rate environment. And, because it has a higher debt/equity ratio, it will probably have to offer higher interest rates on its newly floated debt.
2.) Raise funds via equity, which will dilute current shareholders' holdings.
These flaws are not fatal. It does mean, however, that in the future the company should expect somewhat higher interest expenses or the possibility of share dilution.
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