We recently reiterated our Neutral recommendation for NiSource Inc. (NI) as we find the company’s divestment strategy, robust balance sheet and dividend yield of 5.3% attractive.
However, the lack of near-term earnings growth opportunities due to multiple regulatory overhangs continue to be a concern. Therefore, we are keeping on the sidelines presently.
NiSource’s strategy of divesting its non-core businesses and transforming itself into a pure play regulated company bode well in our view. NiSource is quickly divesting its non-core assets to concentrate on its gas distribution, electricity distribution and generation, and pipeline and storage operations.
Merrillville, Indiana based NiSource focuses on core, rate-regulated asset-based businesses with almost its entire operating income coming from rate-regulated businesses. It has the nation’s fourth largest natural gas pipeline, the largest natural gas distribution network east of the Rocky Mountains, and one of the nation’s largest natural gas storage networks from the Gulf Coast through the Midwest, Mid-Atlantic, New England and Northeast.
We believe NiSource’s regulated operations should see significant growth, as they 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.
Although NiSource lagged estimates in the December quarter, it is making steady progress in key business priorities that will help it improve performance and reach the targeted earnings in 2011.
The company continues to focus on its four-part key initiatives to build a platform for long-term, sustainable growth includes regulatory initiatives; commercial growth and expansion of the gas transmission and storage business; financial management of the balance sheet; and process and expense management.
NiSource has improved its balance sheet and maintained its investment grade credit ratings in the past years. The company remains well-positioned to comfortably meet its long-term 3%-5% EPS growth target. Moreover, we believe income-seeking investors will also find the company’s current dividend yield of 5.3% attractive.
On the negative side, however, we note that the key fuel sources for NiSource’s electricity generating fleet are coal and natural gas. These sources expose the company to the risk of volatile commodity prices as well as fluctuations in associated transportation costs.
Furthermore, NiSource is exposed to significant regulations at state and federal levels. Any change in the existing business or regulatory environment may likely prevent the company from successfully executing its four-stage business plan, in our view. This may largely affect investor sentiments.
As a result, we remain on the sidelines. Nevertheless, NiSource currently maintains a Zacks #2 Rank, which transforms into a short-term Buy rating. The company is at par with its closest peer Dominion Resources Inc. (D), which also has a Zacks #2 Rank.
DOMINION RES VA (D): Free Stock Analysis Report
NISOURCE INC (NI): Free Stock Analysis Report
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