NiSource (NI) Thrives On A Favorable Regulatory Environment

On Aug 5, 2016, we issued an updated research report on diversified utility NiSource Inc. (NYSE:NI) .

Recently, the utility reported second-quarter 2016 operating earnings of 8 cents per share, surpassing the Zacks Consensus Estimate of 7 cents by 14.3%.The increase in earnings is attributable to investments in infrastructure and the impact of its long-term regulatory program.

NiSource has a 100% regulated utility business model. A constructive regulatory environment in its service territories is enabling the company to keep up infrastructural investments. These investments will improve reliability and safety of the company’s services, and provide efficient natural gas services to its increasing customer base.

During the second quarter, Columbia Gas of Kentucky submitted a plea with the Kentucky Public Service Commission to increase its base rates to recover investments and other costs associated with ongoing investments to improve system, safety and reliability. If the plea is approved, this case would increase annual revenues by about $25 million. Columbia Gas of Pennsylvania has also filed a plea for an increase in base rates to support the continued investments in infrastructure. On securing approval, this case would add an incremental $55 million to revenues.

The company will invest nearly $1.5 billion in planned utility infrastructure investments in 2016 and has identified long-term infrastructure investments worth $20 billion. Continued investments will allow the company to achieve the targeted earnings growth rate of 4–6% over the long term.

At the end of the second quarter, the company had available liquidity of $619 million. NiSource’s credit rating was upgraded by Fitch to "BBB" from "BBB-". In addition, the company’s investment grade ratings of "BBB+" and "Baa2" with stable outlooks were maintained by Standard & Poor's and Moody's, respectively. An improving and stable credit rating will allow the company to leverage persistently low interest rates and obtain additional funds at cheaper costs.

However, uncertain weather patterns, operational risks and delays in project completion continue to pose headwinds.

Zacks Rank& Key Picks

NiSource Inc. carries a Zacks Rank #2 (Buy).Other well-placed stocks in the utility space include Korea Electric Power Corp. (NYSE:KEP) , sporting a Zacks Rank #1 (Strong Buy), and DTE Energy Company (NYSE:DTE) and CMS Energy Corp. (NYSE:CMS) , both carrying a Zacks Rank #2.