NiSource Mostly Dodges The Falling Market Anvil

Summary

• NiSource is a $10.6 billion holding company for seven utilities, six of which are local distribution companies (LDCs) supplying natural gas and one supplying both gas and electricity.
• In February 2020, NiSource announced an agreement to sell one of its LDCs, Columbia Gas of Massachusetts, to Eversource for $1.1 billion to help settle its Merrimack Valley issues.
• While no investments are safe in the tough market decline, utilities like NiSource offer a dividend (yield of 3.0%), long-term growth from an established customer base, and cheap natural gas.
• Looking for a portfolio of ideas like this one? Members of Econ-Based Energy Investing get exclusive access to our model portfolio. Get started today »

After a large decline in the market today, investors may want to compare the drops between the overall market, the utilities, and NiSource (NYSE:NI) specifically. This is shown below.

NiSource has been resolving issues around the September 2018 Merrimack Valley explosions, including by selling its Columbia Gas of Massachusetts utility, where the explosions occurred.

After the sale, NiSource will comprise five gas local distribution utilities and one gas and electric utility, NIPSCO.

The company offers investors a 3% dividend, a low beta (0.20) and inexpensive fuel costs both for direct gas sales and as electrical generation fuel. Due to its debt it also benefits from the just-reduced Fed funds rate, while its dividend yield compares favorably to the current 10-year Treasury rate of 0.56%.

Data by YCharts

Macro Factors

Factors pressing on the stock market now are the global halts in business, travel, and trade from the coronavirus pandemic and, secondarily, the oil price war between Russia and OPEC. This resulted in a 2000+ point drop in the Dow Jones Industrial Average today, or about -7.8%.

* The West Texas Intermediate oil price closed an astonishingly -$11.33/barrel down (-27.2%) to $30.24/barrel after being off about 10% the last trading day. The Henry Hub natural gas price, which has been quite low, was up slightly to $1.78/MMBTU.

Moreover, stock market gyrations during the past week prompted the U.S. Federal Reserve to cut the Fed funds rate by 0.5%, to 1.0-1.25%.

For NiSource specifically, lower business and industrial activity (and exports) are negative, low gas prices are positive, and given its substantial debt load, lower interest rates are positive.

Natural Gas Supply And Prices

For both its retail gas distribution and its electrical generation, NiSource is advantaged by its proximity to the giant Marcellus and large Utica natural gas fields in Pennsylvania, Ohio, and West Virginia. This has kept gas prices low for customers.

The graph above shows how unconventional shale gas production has risen from the Marcellus, Utica, and elsewhere. For the week ending March 4, 2020, total U.S. gas supply was 99.4 billion cubic feet per day. Plenty of supply, even more supply from Permian associated gas, and a mild winter have kept natural gas prices low, a boon for NiSource’s customers, both for natural gas directly, and for electricity generated from natural gas.

2019 Results

In 2019, NiSource’s net income was $328 million, or $0.88/share. This compared to a loss of -65.6 million, or -$0.18/share for 2018.

The company’s operating earnings (a non-GAAP measure) were $1.32/share in 2019 compared to $1.30/share in 2018. The company was projecting operating earnings in 2020 of $1.36-$1.40/share but withdrew that upon announcing the sale of Columbia Gas of Massachusetts to northeastern utility Eversource (ES). The $1.1 billion transaction is expected to close in the third quarter of 2020 and is valued at less than the book value of the Columbia Gas of Massachusetts business.

The company said that upon completion of the transaction, it will offer 2021 net operating earnings per share guidance and that, with 2021 as a base year, it projects 5-7%/year growth in net operating earnings.

NiSource And Competitors

NiSource is a utility holding company headquartered in Merrillville, Indiana whose largest component utility is Northern Indiana Public Service (NIPSCO). It operates in two regulated segments: retail natural gas distribution and - in Indiana - retail electricity supply. It has nearly 500,000 electric customers in northern Indiana along with 3.5 million natural gas customers and 60,000 miles of pipeline in Ohio, Pennsylvania, Virginia, Kentucky, Maryland, Indiana, and (currently) Massachusetts.

NiSource is part of the 15-stock, price-weighted Dow Jones Utility Average Index (DJU). Although regulated utilities each have their own territories and so don’t compete directly, they do compete for investment. Other diversified utilities in the index are Sempra (SRE), Exelon (EXC), CenterPoint Energy (CNP), and Public Service Enterprise Group (PEG).

Other fuels such as propane and heating oil compete with natural gas in the residential and commercial heating market.

Sale Of Columbia Gas of Massachusetts To Eversource

NiSource’s $1.1 billion sale of its Columbia Gas of Massachusetts utility to fellow utility Eversource puts these assets in the hands of another company that already knows them. Columbia Gas of Massachusetts was one of a package of gas utilities NiSource acquired in 2000. It experienced several operational over-pressure incidents, the most recent one in September 2018. Ironically, NiSource was trying to replace aging pipe; however, an upstream mistake sent high-pressure gas through low-pressure lines into 60-100 homes (8600 customers) in the Merrimack Valley area of Massachusetts. The high-pressure gas discharge resulted in multiple fires and explosions that injured several and killed one person.

At that time, the Massachusetts governor assigned another utility, Eversource, to assist in recovery efforts. Eversource transmits electricity and distributes electricity, natural gas and water in New Hampshire, Connecticut, and Massachusetts. As part of its settlement with the U.S. Attorney for the District of Massachusetts, NiSource agreed to sell Columbia Gas of Massachusetts. The two service maps below show NiSource’s Columbia Gas of Massachusetts service area and Eversource’s general service area.

Safety An Element Of Competition

Investing in utilities requires considering their operational history.

Every utility faces the importance of finding and replacing deteriorating electrical lines and pipelines. The Columbia Gas of Massachusetts incidents with its +170-year-old pipeline noted above are one example. Public Service Enterprise Group (PEG) in New Jersey described similar pipeline replacement concerns and in Texas, a young girl was tragically killed in an Atmos Energy (ATO) pipeline explosion. Of course, the most prominent example of all is Pacific Gas and Electric’s line-failure-caused fires that have led to shutdowns, fires, and many dozen deaths. A Wall Street Journal story pointed to the failure of a 3-inch C-hook on a PG&E power line that was manufactured by Ohio Brass possibly as early as 1918, and installed soon after. As one expert says, no one knows how metal fatigues after 100 years.

Post-Merrimack Steps, Lawsuits, Regulation And Strategy

NiSource has made numerous operational changes, including installing automatic shut-off devices to guard against over-pressurization on every low-pressure system in its seven-state area.

According to the company, it “substantially completed the restoration in Merrimack Valley, including the settlement of all major customer claims related to the incident and completing service line verifications.” It has also reached a settlement with the U.S. Attorney of the District of Massachusetts, still subject to court approval, to resolve criminal investigation of the incident.

As part of the settlement, NiSource has agreed to pay a $53 million fine, forfeit any profits from the sale of Columbia Gas of Massachusetts to Eversource (the $1.1 billion price is below the book value), and implement safety measures throughout its entire system.

The Massachusetts Department of Public Utilities is continuing its review of the cause of the September 2018 event and of a September 2019 gas leak in greater Lawrence. In the Merrimack Valley explosions, NiSource was also subject to NTSB oversight.

More generally, NiSource has oversight from and reporting responsibilities to public utility commissions in each state in which it operates. In rate cases NiSource is answerable to a wide variety of input from customer-stakeholders.

Otherwise, strategically:

*NiSource added 28,000 net new natural gas customers in 2019 and reached commercial agreements for four wind projects.

*It replaced 337 miles of natural gas pipeline, 33 miles of underground electrical cable, and 1959 electric poles.

*NiSource anticipates spending $1.8-$1.9 billion in capital in 2020, similar to its 2019 spending.

Segment Earnings

The chart below shows the mix of NiSource’s 2019 operating earnings, a non-GAAP measure. Although NIPSCO is the only utility of the seven with electricity operations, electricity is an important source of operating earnings, at nearly 40% of the total.

Governance

As of December 3, 2019, Institutional Shareholder Services (ISS) ranked NiSource’s overall governance as a 5, with sub-scores of audit (5), board (3), shareholder rights (3), and compensation (7). On the ISS scale, 1 represents lower governance risk and 10 represents higher governance risk. The NiSource score is quite a bit lower than a year ago due to lower board and compensation sub-scores.

On February 14, 2020, shorted shares were a small 2.3% of floated shares, down from over 7% last year.

Insiders own a negligible 0.4% of the outstanding stock.

The company’s beta is a low 0.20: its stock moves with the overall market but far less sharply, as is typical for utilities.

Stock And Financial Highlights

NiSource’s closing price on March 9, 2020 was $27.69/share, 90% of its 52-week high of $30.67. The company’s current price is 91% of the one-year target price of $30.33/share.

This closing price gives NiSource a market capitalization of $10.6 billion; its enterprise value is $21.7 billion.

With 2019 earnings EPS of $0.88, the company’s trailing price-to-earnings ratio is 31.5. Analysts’ average estimate for 2020 EPS is $1.35/share, yielding a forward price-to-earnings ratio of 20.5.

A per-share dividend of $0.84 per yields 3.0% at the company’s current stock price. In contrast, the 10-year U.S. Treasury rate today is 0.56%.

As of December 31, 2019, the company had liabilities of $16.61 billion and assets of $22.66 billion, giving it a liability-to-asset ratio of 73%.

Data by YCharts

NiSource has an average analyst rating from fourteen analysts of 2.3, or “buy” leaning somewhat to “hold.”

On December 31, 2019, the company’s top five institutional holders were T. Rowe Price (13.8%), Vanguard (11.6%), BlackRock (8.3%), State Street (5.5%), and Deutsche Bank (3.6%). Some institutional fund holdings represent index fund investments that match the overall market.

Notes On Valuation And Risk

The company’s market value per share is about twice its book value of $13.36/share, indicating positive market sentiment.

The ratio of enterprise value to EBITDA is 11.1, suggesting the stock is not bargain-priced.

Recommendations

While many investors will of course want to wait out the market’s volatility and/or more clarity from NiSource post-sale in the third quarter, those looking for long-term investments now may be interested in low-beta NiSource with its decent 3.0% dividend (compared to 10-year Treasury rate of 0.56%).

The company has a high liability-to-asset ratio of 73%, typical for utilities, but has made significant strides in settling its Merrimack Valley incident liabilities, in part by selling its Columbia-Gas Massachusetts utility to Eversource.

On a general basis, NiSource benefits from lowered interest rates, low natural gas costs that are likely to stay dampened due to plentiful nearby reserves, and its industrially-rich electrical service area of northern Indiana.

Disclosure: I am/we are long SRE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.