The rising tide of artificial intelligence (AI) is providing a lift to various sectors, from semiconductors to data centers. Moreover, with adoption of the technology across multiple industries forecast to increase, AI is here to stay - and AI applications require a lot of energy.
For instance, this report by Goldman Sachs expects data center power demand to soar by 160% by 2030. Put differently, this study by the World Economic Forum suggests that by 2028, AI could be using more power than the entire country of Iceland used in 2021.
AI's massive power draw has raised concerns over a potential delay in the global energy transition, and has led many analysts to raise their forecasts for natural gas (NGQ24) stocks, which they see as a “bridge” fuel to meet increasing demand. In particular, natural gas stocks are being singled out for their upside potential in the AI data center niche - and NiSource (NI) should be one of the key beneficiaries, according to a recent analyst note.
About NiSource Stock
Founded in 1912 as the Northern Indiana Public Service Company, Merrillville, Indiana-based NiSource (NI) is a fully regulated utility company. The company operates through two brands; Columbia Gas provides natural gas distribution services to over 1.6 million customers across six states, while NIPSCO delivers electricity to over 500,000 customers in northern Indiana.
NiSource currently commands a market cap of $13.46 billion. Up 15.6% on a YTD basis, NI has been a strong performer this year.
NI stock pays a quarterly dividend of $0.27 per share, which translates to a forward dividend yield of 3.5%.
NiSource has been raising dividends consistently for the past 12 years, and maintains a payout ratio of 61.31%, suggesting the dividend is well-covered by earnings.
Mixed Q1 Results
NiSource's results for the first quarter were a mixed bag, as the company's revenue fell short of estimates, while EPS surpassed expectations. Total operating revenues for the quarter came in at $1.71 billion, down 13.2% from the previous year amid a slowdown in customer revenues. However, EPS rose 10.4% annually to $0.85, outpacing the consensus estimate. The energy company's EPS has topped expectations in four out of the past five quarters.
Operationally, Columbia's total gas distribution in Sales and Transportation rose by 6.7% on a YoY basis to 207.3 Million British Thermal Units per Day (MMDth), while the company's electric segment sold 3,648.9 GWh worth of electricity in Q1, up from 3,582.8 GWh in the prior year.
NiSource generated net cash from operating activities of $456.2 million during Q1, and exited the quarter with a cash balance of $102.2 million. Also, the company reduced its short-term debt balance to $1.22 billion from $3.05 billion in the previous year.
NiSource's Strategic Positioning
NiSource works out of a friendly regulatory environment, which gives the energy holding company an edge. NI has operations in six utility-friendly states with governor-appointed regulatory commissions. This structure, which is comparable to elected commissions potentially swayed by public pressure for lower rates, favors predictable regulatory environments.
All of the commissions have either five members (Indiana, Pennsylvania, Maryland, Virginia, Ohio) or three members (Kentucky), with terms ranging from three to four years. This consistency fosters a stable environment for NiSource's long-term planning and investment decisions.
Additionally, with $14 billion in spending announcements for building data centers, NiSource's home turf of Indiana is poised to become a data center hub, which should translate to increasing demand for NiSource's services.
Coupled with favorable rates of return, the company's plans to grow its $18.8 billion regulated gas and electric base by 8%-10% over the next five years is well on track.
Renewable Energy Push
As the shift towards cleaner sources of energy gains traction, NiSource is making moves to ramp up its renewable energy capabilities.
NiSource has set ambitious emissions reduction goals: net zero by 2040 and a 90% cut by 2030, based on a 2005 baseline. The company retired two coal plants in 2021, and plans to eliminate all coal use by 2028 in Indiana, replacing it with $3 billion of wind and solar projects built through Build Transfer Agreements (BTAs) and Power Purchase Agreements (PPAs). Four wind farms and three solar facilities are already operational.
While gas distribution, representing two-thirds of revenue, has lower inherent emissions, NiSource is actively reducing methane leaks through mobile detection and pipeline modernization, targeting a 50% reduction by 2025 (again, using the 2005 baseline).
Analysts Say It's a ‘Strong Buy’
NiSource's mean price target of $31.75 suggests that the stock's rally has caught analysts off-guard, but price-target hikes could be forthcoming. In fact, NI just landed a fresh Street-high price target of $33 in new coverage from Mizuho on July 11.
Analyst Gabriel Moreen also started coverage at “Outperform,” and said in a note that NI should deliver above the midpoint of its projected EPS growth targets through 2028. The analyst listed a favorable regulatory environment and a stable balance sheet among the advantages that NiSource holds over its competitors, as well as its prime positioning in a growing data center hub.
The opinion on Wall Street is unanimous, as all 11 analysts in coverage have a rating of “Strong Buy” for NI stock.
