NiSource Inc.
/ (NI-NYSE)NiSource Inc.’s third-quarter 2014 earnings missed the Zacks Consensus Estimate and decreased year over year, primarily due to increase in total operating expenses and shares outstanding. However, top line improved year over year mainly on the back of higher revenues from the Gas Transportation and Storage, and Electric and Other segments. The company’s steady infrastructure modernization and expansion program is appreciable, which will subsequently allow it to strengthen its generation portfolio and improve reliability. Proposed separation of the natural gas pipeline and allied businesses will enable the company to focus more on its regulated utilities. However, volatile commodity prices and risks like stricter government regulation and inconsistent weather conditions raise concerns. Thus, we are maintaining our Neutral recommendation.
/ Equity Research / NI | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Outperform
Date of Last Change / 11/14/2010
Current Price (10/30/14) / $42.37
Target Price / $44.00
SUMMARY
/ Equity Research / NI | Page 1SUMMARY DATA
52-Week High / $42.3752-Week Low / $30.80
One-Year Return (%) / 36.11
Beta / 0.52
Average Daily Volume (sh) / 2,263,939
Shares Outstanding (mil) / 315
Market Capitalization ($mil) / $13,347
Short Interest Ratio (days) / 4.68
Institutional Ownership (%) / 80
Insider Ownership (%) / 1
Annual Cash Dividend / $1.04
Dividend Yield (%) / 2.45
5-Yr. Historical Growth Rates
Sales (%) / N/A
Earnings Per Share (%) / 10.2
Dividend (%) / 2.4
P/E using TTM EPS / 25.2
P/E using 2014 Estimate / 24.9
P/E using 2015 Estimate / 23.3
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Below Avg.,
Type of Stock / Large-Blend
Industry / Util-Elec Pwr
Zacks Industry Rank * / 100 out of 267
RECENT NEWS
NiSource (NI) Misses Q3 Earnings on Higher Expenses – Oct 30, 2014
NiSource Inc. reported third-quarter 2014 operating earnings of $0.14 per share from continuing operations, missing the Zacks Consensus Estimate of $0.16 by 12.5%. Quarterly earnings decreased 22.2% from $0.18 a year ago, primarily due to higher total operating expenses and an increase in shares outstanding.
The company recorded quarterly GAAP earnings of $0.10 per share compared with $0.16 per share in the prior year.
Total Revenues
NiSource’s gross revenues of $1.14 billion lagged the Zacks Consensus Estimate by 1.2%. On a year-over-year basis, the reported top line increased 5% primarily on the back of higher contribution from the Gas Transportation and Storage, and Electric and Other segments. This was partially offset by decreased revenues from the Gas Distribution segment.
Highlights of the Release
In the quarter under review, NiSource’s total operating expenses increased 10.8% to $738.6 million from $666.6 million a year ago, primarily due to higher operation and maintenance expenses as well as depreciation and amortization expenses.
Despite an improvement in gross revenues, the company’s operating income in the reported quarter stood at $180.3 million, down 1.9% year over year primarily due to increased total operating expenses.
Interest expenses increased 5.7% year over year to $109.6 million due to higher outstanding debts.
Financial Position
As of Sep 30, 2014, NiSource had cash and cash equivalents of $17.7 million versus $26.8 million as of Dec 31, 2013.
Long-term debt (excluding amounts due within one year) as of Sep 30, 2014 was $8,397.4 million versus $7,593.2 million as of Dec 31, 2013.
In the first nine months of 2014, net cash flows from operating activities were $886.5 million versus $1,078.6 million in the year-ago period.
NiSource’s capital expenditure was $1,441.7 million in the first nine months of 2014 compared with $1,297.3 million in the year-ago period.
Business Update
NiSource is on track with the separation of its natural gas pipeline and related businesses which will form a stand-alone publicly traded company, Columbia Pipeline Group Inc. Upon customary approvals, the transaction will likely occur in the middle of 2015. Post-completion, NiSource Inc. will engage in fully-regulated natural gas and electric utility operations while Columbia Pipeline Group Inc. will deal with the natural gas pipeline, and the midstream and storage business.
Guidance
For 2014, NiSource expects to achieve earnings on the higher end of its earnings guidance range of $1.61–$1.71 per share.
The company’s capital investment program of $2.2 billion for 2014 is on track.
VALUATION
NiSource’s shares are presently at 25.2x trailing 12-month EPS, compared to the 18.3x average for the peer group and 18.2x for the S&P 500. Over the last five years, the company’s shares have traded in the P/E multiple range of 12.1x to 25.2x on trailing 12-month earnings.
The trailing 12-month EV/EBITDA multiple is higher than the industry average.
Our target price of $44.00 is based on the P/E multiple of 25.9x, based on the 2014 EPS.
Key Indicators
Earnings Surprise and Estimate Revision History
NOTE – THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET.
OVERVIEW
Merrillville, IN based NiSource Inc. is an energy holding company whose subsidiaries provide natural gas, electricity and other products and services in the U.S. Its operating subsidiaries deliver energy to roughly 3.8 million customers located within the high-demand energy corridor stretching from the GulfCoast through the Midwest to New England. NiSource has one of the nation’s largest natural gas distribution networks east of the Rocky Mountains and one of the largest natural gas storage networks extending from the GulfCoast through the Midwest, Mid-Atlantic, New England and Northeast.
NiSource’s principal subsidiaries include Columbia, Northern Indiana, and BayState. NiSource derives substantially all of its revenues from the operations of its 13direct subsidiaries. Columbia is a vertically-integrated natural gas distribution, transmission and storage holding company, providing services to customers in the Midwest, the Mid-Atlantic and the Northeast. Northern Indiana is a vertically-integrated gas and electric company, providing services to customers in northern Indiana. BayState is a natural gas distribution company serving customers in Massachusetts. The core business arms of NiSource Inc are:
Natural Gas Distribution Operations which serve more than 3.4 million customers in seven states and operate about 58,000 miles of pipeline.
Columbia Pipeline Group or CPG subsidiaries own and operate nearly 15,000 miles of natural gas transmission pipelines and operate one of the nation’s largest underground natural gas storage systems capable of storing roughly 642 Billion cubic feet (Bcf) of natural gas. The company’s interstate pipeline extends from the Gulf of Mexico to Lake Erie, NY, and the eastern seaboard. NEVCO is an unregulated business unit of NiSource that looks after the company’s mineral rights in the Marcellus and Utica basins. Another unregulated subsidiary, NiSource Midstream, offers gathering, treating, conditioning, processing, compression and liquids handling services.
At its Electric Operations business, NiSource generates, transmits and distributes electricity through its subsidiary Northern Indiana, to about 460,000 customers in 20 counties in the northern part of Indiana. It operates 3 coal-fired electric generating stations with net capacity of 2,540 megawatt (MW), 4 gas-fired generating units and 2 hydroelectric plants. It engages in wholesale and transmission transactions. The company also owns the combined cycle gas turbine operated Sugar Creek facility which has a maximum capacity generation of 535 MW. This brings the total operating capacity to 3,291 MW.
The other operations of the company include gas marketing, power trading and real estate activities. NiSource has made a decision to significantly scale back its unregulated natural gas marketing activities as part of its strategy to focus on its core regulated businesses.
The four business segments of the company are: Gas Distribution (39% of 2013 revenues), Columbia Pipeline Group (29%of 2013 revenues), Electric Operations (28%of 2013 revenues) and Other (4%of 2013 revenues).
Source: Company
REASONS TO BUY
NiSource’s focus on core, rate-regulated asset-based businesses and planned capital investments worth more than $2.2 billion in 2014 will allow the company to deliver earnings growth in the 5% to 7% range over the long term. The company’s regulated operations should see significant growth, as these operate in an area that accounts for nearly 50% of the nation’s natural gas consumption and where over 40% of its population is based. NiSource’s large-scale modernization programs will prove to be a key performance catalyst in the long run. The company’s Columbia Gas of Massachusetts and Columbia Gas of Ohio businesses witnessed positive rate changes in the first quarter of 2014, which will propel the company’s revenue trajectory.
The current shale boom in the U.S. explains NiSource’s aggressive investments for midstream development as well as modernization initiatives. To capitalize on resource-rich Marcellus and Utica basins, the company steadily increased its investments in the last three years and plans to further spend over $4 billion on upgrade work in the next five years. In 2011, the company invested nearly $302 million and for 2014, midstream capital spending is expected to be $807.3 million. Notable project advancements include construction of the liquids pipeline project under the Pennant Midstream venture which is currently underway and is scheduled for completion in the third quarter of 2014. This line will have a supply capacity of around 90,000 barrels of liquids per day. The company also has several projects lined up for service start-up in 2014 including the critical Columbia Pipeline program which is estimated to add 1 billion cubic feet of capacity (bcf). In addition, NiSource received commitments from its customers for availing midstream services from its Rayne and Leach XPress projects. Together these projects will create outlets for delivering 1.5 bcf of natural gas to the end markets. To sum up, NiSource looks well-positioned for the future as its midstream expansion efforts will garner favorable returns. The recent projection released by ICF International reveals that midstream infrastructure requirements for natural gas in North America will likely be 303,000 miles through 2035.
Source: Company
NiSource’s NIPSCO is also undertaking massive electric modernization projects which will ensure better service reliability and lead to customer retention. The company’s electric business segment, NIPSCO, got the green signal for its 7-year, $1.1 billion electric modernization program. The program will offer a range of upgrade services that will enhance NiSource’s system quality. It has gradually increased its electric investments in the last three years. In 2011, the company invested nearly $268 million and has plans to spend around $450 million in the electric segment for 2014. The steady economic improvement in Indiana is a key factor behind the rising electric investments. NiSource is also gearing up to expand its transmission capacity and is relying on a 100 mile, 345 kilovolt line and a 66 mile, 765 kilovolt line projects to catapult its business in Northern Indiana. This infrastructure-investment driven strategy will bode well with its future growth.
Source: Company
NiSource continues to make significant progress in strengthening its financial position. The company retained a strong liquidity position, which as of Mar 31, 2014 stood at $1.7 billion. In addition, cash balance witnessed a sharp 42% rise to $35 million as of Mar 31, 2014. The company’s strong cash generation capabilities will offer sufficient flexibility for investments in various growth-augmenting projects besides meeting the fund requirements to maximize shareholder wealth through payment of regular dividends. NiSource has paid increased dividends for the last three years. This year was not an exception as the company recently raised its quarterly dividend by 4% to $0.26 per share. This reflects a step forward to the company’s goal of achieving an annual dividend growth target of 3% to 5%, which will attract investors’ attention.
Source: Company
NiSource retained its investment grade credit rating of Baa2 by Moody’s indicating the company’s ability to effectively pay off its debt obligations. Besides Moody’s, Fitch’s also reaffirmed NiSource’s credit ratings at BBB-. These stable credit ratings will allow the company an easy access to the financial markets as well as lower the cost of borrowing.
REASONS TO SELL
The key fuel sources for NiSource’s electricity generating fleet are coal and natural gas. The company’s gas distribution operation comprises purchasing and reselling natural gas. As a result, the company faces significant risk of volatile commodity prices as well as fluctuations in associated transportation costs. NiSource mainly combats this volatile price environment through hedging and relies on regulatory recovery mechanisms to fully recover the costs incurred in operations. Rate base recovery however is largely uncertain. Apart from this, the company may also face the risk of reduced demand due to customers resorting to energy conservation, if the prices for gas and electricity rise.
NiSource is subject to significant state, local and federal government regulations. Furthermore, the company’s financial results depend on frequent regulatory proceedings for the timely recovery of incurred costs. Going forward, we expect the cost of compliance with environmental regulations to significantly impact NiSource’s revenue base.
NiSource’s operations are spread over a wide geographic area and are influenced by varied and extreme weather conditions. Adverse weather conditions might present operational challenges and hinder service reliability and contractual obligations. Sustained mild weather patterns will also have an adverse impact on demand and constrain margins.
NiSource’s distribution, transmission and storage activities might be disrupted by accidents and other risks like gas leaks, power line downtimes, third party damages, large scale outages and mechanical problems. The recent explosion at the Columbia Gulf Pipeline in Feb 2014 affected the company’s pipeline operations which serves a major part of the GulfCoast.
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of NI. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1034 companies covered: Outperform - 15.4%, Neutral - 77.9%, Underperform – 6.1%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
Research Analyst / Priyam BhattacharyaCopy Editor / Jewel Saha
Content Ed. / Jewel Saha
Lead Analyst / Jewel Saha
QCA / Jewel Saha
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