NiSource Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

NiSource Inc. is an energy holding company with a focus on regulated natural gas and electric utility operations, primarily serving customers in the Midwest and Mid-Atlantic regions of the United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

NiSource operates through two primary segments: Gas Distribution Operations, which provides regulated natural gas delivery services, and Electric Operations, which generates, transmits, and distributes electricity. Their service territory spans across Indiana, Pennsylvania, Maryland, Ohio, Massachusetts, Kentucky, and Virginia. They serve approximately 3.2 million natural gas customers and 0.7 million electric customers.

Their operations are highly regulated, which means revenue generation is largely determined by regulatory frameworks. They engage in long-term planning for their energy transition including investing in infrastructure, renewable energy and other technologies, with a focus on delivering safe, affordable, and reliable energy to customers.

Revenue Distribution

  • Gas Distribution Operations: This segment accounts for a significant portion of revenue, primarily from charges related to natural gas delivery services. Revenues in this area are heavily influenced by rates approved by state regulators and customer consumption patterns.
  • Electric Operations: This segment contributes another major portion of revenue, primarily through rates charged for electricity generation, transmission, and distribution. Revenues here are also affected by regulated rates, as well as demand patterns and regional market dynamics.
  • Other operations this segment includes investments in renewable energy projects, such as wind and solar, which are increasingly contributing to revenues.
  • Energy Transition: There is a clear strategic shift across the industry toward cleaner energy sources. This includes transitioning away from fossil fuels to increase renewable energy production and usage. This shift also requires companies to improve efficiency to lower emissions and manage infrastructure to accommodate new technology. This is going to be a defining factor for growth over the coming decades.
  • Regulatory Landscape: Utility companies are subject to strict regulation, with frequent changes that directly influence their pricing, profitability, and the types of projects they are allowed to undertake. Thus, being able to navigate a highly regulated market is key.
  • Technological Advancement: The utility sector is also being impacted by new technologies including smart grids, energy storage, and electric vehicle infrastructure, each of which presents opportunities and challenges.
  • Demand Shift: A change in residential and industrial demand, driven by several factors including electrification of heating and transportation, is changing how they should allocate capital.

Margins

  • Operating margins: They are highly influenced by regional weather patterns, and other uncontrollable factors. However, they remain relatively stable in both gas distribution and electric production, averaging between 12 and 18 percent. For instance, Columbia Gas and NIPSCO both had similar operating margins of 22.5 and 24.8 respectively in their latest quarterly reports.
  • Net margin: Net margins are more variable than operating margins. These fluctuate between 5 and 15 percent, because they include interest expenses, income taxes, one time profits and losses, non-recurring items etc.

Competitive Landscape

NiSource faces competition on several fronts.

  • Direct Competitors: Other utility companies in its regions, like American Electric Power and Duke Energy are immediate competitors. They also seek to increase market share and grow revenue.
  • Alternative Energy Providers: They may start to pose competition in the long term as more customers become comfortable using alternatives, for example, solar energy from companies like SunPower and Sunrun.
  • Municipal Utilities: Some local governments have their own utilities, as opposed to being served by large providers like NiSource.
  • Acquiring companies: Also pose a threat in the future as the trend is clearly more companies consolidating operations within the sector, it can lead to them losing market share and influence if an acquiring company is stronger.
  • Regional Competitors They also have to battle for customer share within their specific regions, and thus must maintain price attractiveness compared to the regional competition.

What Makes NiSource Different?

  • Regulated Earnings: Earnings are relatively stable due to regulations and contracts, making the company’s earnings more predictable, and easier to value over long periods of time.
  • Strong Regional Focus: They are strongly focused within the mid-Atlantic and midwestern states, giving them an advantage in these regions.
  • Energy Transition Focus: They have made progress in developing wind, solar, and battery storage technologies. They are committed to sustainable energy and are aligning with the long-term view of climate goals.
  • Infrastructure Investment: They have made large capital investments to modernize their infrastructure, which are set to make their operations more efficient.

Financials

Here’s a breakdown of NI’s financials, based on the given filings:

  • Revenue: The overall revenues have seen a slow but consistent growth, and have been driven largely by rate hikes and acquisitions, as opposed to organic growth. Revenue for the three months ended March 31, 2024, came in at $1.64 billion, compared with $1.59 billion for the same period in 2023.

  • Operating Expenses: They increased to $1.49 billion in the three months ended March 31, 2024, from $1.38 billion for the same period in 2023, mostly due to increased cost of sales.

  • Operating Income: As a result of higher operational expenses, the operating income for the three months ended March 31, 2024, decreased to $150.2 million compared with $201.7 million for the same period in 2023.

  • Net Income: Similarly net income was lower at $85.7 million compared with 170 million for the same period in 2023. This indicates profitability is under pressure and operating income is getting less efficient.

  • Earnings Per Share (EPS): Basic earnings per share for the three months ended March 31, 2024, came to 0.19 compared to 0.39 in 2023, as profit was lower.

  • Balance Sheet: Total assets have increased slightly to $34.81 billion, while the equity remained similar at around $11.6 billion. Long-term debt has been roughly the same over the past year. The company appears to be financially stable, but they are still highly dependent on debt financing. Their debt to equity ratio sits at around 2, indicating they may be over-levered if they fail to produce high growth and profits in the future.

 **Short-Term Borrowings**: They have made use of several short term borrowings, primarily through commercial paper, a revolving credit agreement, and some notes. If there's a crisis where credit is tight, they may have issues refinancing their short term debt. However, these debts are usually used to finance working capital requirements.

 **Pension Obligations:** They have a net pension liability of about 1.4 billion dollars. As such, changes to pension performance and interest rates may have a material effect on the company's overall balance sheet health.

Recent Concerns/Controversies and Management’s View

  • Increased Operating Expenses: In the latest earnings call, management acknowledged that rising operating expenses and taxes contributed to the lower earnings and that they are trying to cut costs going forward. This could help improve profitability but for now it has had a negative impact on finances.
  • Net Loss Due to Write-Offs and Impairments: They have shown signs of problems with goodwill and property and plant equipment. These are noncash charges that reduced profits, but they are likely signs of previous acquisitions that have not been successful.
  • Regulatory Uncertainty: Changes to rate structures or environmental regulations could affect the company’s revenue, profits, or ability to pursue various infrastructure projects. Thus, future profitability is heavily linked to them remaining on the good side of regulators.

Moat Rating: 3/5

NiSource’s competitive advantage lies primarily in their regulated utility operations, providing somewhat of a natural monopoly. This has benefits, since the company is protected by regulatory agencies and rate increases. This also leads to a very stable and predictable revenue stream. However, the moat is not as strong as other businesses because, they still face considerable competition in regions they serve, have limited pricing power, and are exposed to political and regulatory risk. Therefore I will grade them a 3/5.

Legitimate Risks

  • Regulatory Actions: Adverse changes in rate regulations can hurt profitability and may also slow progress on infrastructure and renewable energy projects. This is a very significant risk, because so much of their revenue is derived from regulated rates.
  • Economic Downturn: A recession or economic slowdown may reduce consumption of both gas and electricity, which will hurt revenue for both operating segments.
  • Technological Disruption: Innovation by competitors or the emergence of new technologies could disrupt traditional utility models, especially as they relate to renewable energy.
  • High Leverage: Their reliance on debt financing also makes them more susceptible to problems if interest rates rise or if they have troubles repaying debt. Also makes it harder to refinance should they have problems meeting payments.
  • Environmental Regulations and Climate Changes: New environmental regulations, and the increasing importance of climate change could force the company to invest more in green energy solutions or abandon existing profitable facilities before the end of their useful lives.

Business Resilience

NiSource has demonstrated resilience in its ability to navigate economic downturns, thanks to its predictable, regulated business model. Their operations are vital for the day-to-day functioning of many towns and cities they serve. They have also begun to position themselves for an energy transition, which they think will lead them into the future. However, the level of debt in their balance sheet is still concerning and needs to be reduced. Therefore the resilience score is a 3/5.

Understandability: 2 / 5

While understanding their business model of gas and electricity generation is simple. Understanding the impacts of changing regulatory landscapes, complex accounting standards, their financial statements, and how future technological changes could affect them makes it more complex, and time consuming to form a complete and meaningful picture. As such, I am rating their understandability at 2/5.

Balance Sheet Health: 3/5

They have a stable financial position and consistent, predictable income. Their debt levels are relatively high and their pension liabilities also pose a risk. It is important to carefully analyze their accounting practices to see how these numbers fit within their financials. However their income is very stable and predictable. Overall I am rating their balance sheet health at 3/5.