NiSource: A 177-Year-Old Utility's Data Center Reinvention Creates an Asymmetric Risk/Reward (NYSE:NI) - NI Stock Research Report

## Executive Summary / Key Takeaways * NiSource is transforming from a traditional regulated utility into a data center infrastructure powerhouse, with a unique GenCo regulatory structure that protects existing customers while capturing massive AI-driven load growth, potentially re-rating the stock from a slow-growth utility to a structural growth story. * The GenCo model represents regulatory innovation: a $7 billion investment backed by Blackstone (TICKER:BX)'s $1.5 billion commitment will serve a single investment-grade data center customer with 2,400 MW by 2032, generating $0.25-$0.45 per share by 2033 while refunding $1 billion in savings to existing customers. * Operational excellence through AI-driven productivity programs is creating hidden margin leverage, with 16-24% field productivity improvements and $77 million in O&M savings supporting management's commitment to keep customer bill increases below 5% annually despite massive capital deployment. * Financial trajectory has accelerated meaningfully: base business supports 6-8% annual EPS growth through 2030, while the consolidated business including GenCo targets 8-9% CAGR through 2033, with 2026 guidance of $2.02-$2.07 representing a clear inflection point. * The primary risk is execution concentration: a single data center customer represents essentially 100% of GenCo's initial capacity, creating customer concentration risk that, if terminated, could impair $7 billion in assets and force a fundamental re-evaluation of the growth thesis. ## Setting the Scene: From Gas Distribution to Digital Infrastructure NiSource, founded in 1847 and headquartered in Merrillville, Indiana, spent most of its 177-year history as a traditional regulated utility. The company operates through two primary segments: Columbia Operations, which distributes natural gas to 3.2 million customers across Ohio, Pennsylvania, Virginia, Kentucky, and Maryland; and NIPSCO Operations, which provides both gas and electric service to northern Indiana. This geographic footprint positions NiSource squarely in the industrial heartland, where manufacturing resurgence and data center development are creating unprecedented electricity demand. The utility industry is experiencing a structural inflection point. Data centers, driven by AI and cloud computing, could consume up to 9% of U.S. power by 2030, according to industry estimates. This creates a fundamental challenge: how can regulated utilities serve these massive, concentrated loads without burdening existing residential and commercial customers with the cost? NiSource's answer, the GenCo model, represents a regulatory innovation that directly addresses this industry-wide problem. By creating a separate regulated entity to serve large-load customers, NiSource can invest $7 billion in new generation assets while protecting its existing customer base from both cost and risk. Northern Indiana's attractiveness for data centers stems from several factors: available land, proximity to Chicago's fiber optic networks, a skilled workforce, and critically, a constructive regulatory environment. While competitors like American Electric Power (TICKER:AEP) and Duke Energy (TICKER:DUK) have larger footprints and greater scale, they lack NiSource's focused strategy and regulatory approval for a load-segregation model. American Electric Power's $72 billion capex plan targets 7-9% earnings growth, but spreads investment across a vast territory without the data center concentration that could drive superior returns. Duke Energy's 9.5-9.9% ROE and 27% operating margins reflect operational efficiency, but its Indiana operations compete directly with NIPSCO without the benefit of a GenCo-style structure. NiSource's smaller scale—$5.5 billion in annual revenue versus American Electric Power's $21 billion—actually becomes an advantage, allowing surgical focus on high-growth opportunities rather than broad-based system upgrades. ## Technology, Products, and Strategic Differentiation The GenCo model is NiSource's primary technological and regulatory innovation. Approved by the Indiana Utility Regulatory Commission in September 2025, this structure establishes NIPSCO GenCo as a regulated entity that declines traditional retail jurisdiction. Instead, it enters into direct contracts with large-load customers, with NIPSCO acting as the intermediary. Why does this matter? It fundamentally alters the risk-reward equation for massive capital investments. Traditional utility ratemaking spreads costs across all customers, creating political and regulatory risk. GenCo isolates these costs, ensuring that data center infrastructure is paid for by data center customers while generating system benefits that flow back to existing ratepayers. The contract structure itself provides multiple layers of risk mitigation. The 15-year initial term includes fixed capacity charges, pass-through cost treatment, and termination payment mechanisms that cap NiSource's exposure. Approximately $1 billion in savings will flow back to existing NIPSCO retail customers over the contract life, transforming a potential political liability into a stakeholder benefit. Blackstone Infrastructure Partners' $1.5 billion equity commitment, representing a 19.9% minority interest, serves two purposes: it reduces NiSource's financing needs and provides third-party validation of the model's economics. As CFO Shawn Anderson noted, "It reinforces our strong balance sheet. It lowers our cost of capital. It provides diversification from traditional capital markets." Beyond GenCo, NiSource's operational technology initiatives are creating sustainable competitive advantages. The Work Management Intelligence Program, launched in Ohio in mid-2023 and expanded to five states by July 2024, uses AI-driven scheduling to optimize field operations. The results are quantifiable: 16.5% average productivity gains across Pennsylvania, Maryland, Kentucky, and Virginia, translating to over 60,000 hours of productivity improvement in Q1 2025 alone. By Q2 2025, the fully deployed Work & Asset Management ERP program delivered up to 24% improvement in field productivity, equivalent to over 83,000 incremental work hours. This directly supports the affordability promise—keeping bill increases below 5% annually—while enabling the company to execute a $28 billion capital plan without operational strain. Project Apollo, the continuous improvement program, generated $77 million in O&M savings in 2024, exceeding internal expectations. These aren't one-time cost cuts; they represent permanent efficiency gains that offset inflationary pressures and support margin expansion. In an industry where operating margins typically range from 19-27% (Duke Energy: 27%, CMS (TICKER:CMS): 26%, American Electric Power: 26%, DTE (TICKER:DTE): 19%), NiSource's 22.9% operating margin is competitive, but the trajectory is more important. The combination of AI-driven productivity and continuous improvement suggests margin expansion potential that peers, burdened by larger legacy systems, will struggle to match. ## Financial Performance & Segment Dynamics NiSource's financial results demonstrate accelerating momentum. For the nine months ended September 30, 2025, NIPSCO Operations generated $2.41 billion in revenue, up 20.3% year-over-year, while operating income grew 28% to $678.5 million. Columbia Operations delivered $2.34 billion in revenue, up 24.7%, with operating income increasing 24% to $620.1 million. This dual-segment strength matters because it shows the company isn't relying solely on the data center story; the core utility business is growing robustly through rate base additions and economic development.

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The segment mix reveals strategic optionality. Columbia's gas operations, representing 48% of the five-year capital plan, provide stable, predictable cash flows with lower regulatory risk than electric generation. Gas system hardening investments recover quickly—81% of base plan investments begin recovery within twelve months—creating a self-funding mechanism for growth. NIPSCO's electric operations, while smaller, offer higher growth potential. The 3,051 MW of renewable capacity added since 2020, with another 395 MW under development, positions NIPSCO as a clean energy leader in a region still heavily dependent on coal. The Dunns Bridge solar complex, one of the largest in the country, came online in January 2025 at prices approximately 50% lower than current market rates, locking in a durable cost advantage. Capital deployment is accelerating dramatically. The 2025 capital plan of $4.0-$4.3 billion excludes $400-$500 million for data center-related investments. The 2026-2030 base business plan calls for $21 billion, while data center contract assets require an additional $6.4 billion. This $28 billion total represents one of the largest investment cycles in NiSource's history. The significance of this acceleration lies in: Rate base growth of 8-10% annually through 2029, expanding to 9-11% with data centers, directly translates to earnings growth. In the utility sector, where growth is typically measured in low single digits, this trajectory is exceptional. American Electric Power targets 7-9% earnings growth from $72 billion in capex; NiSource achieves similar growth rates with less than 40% of the capital, reflecting superior capital efficiency.

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The balance sheet is positioned to absorb this investment wave. As of September 30, 2025, NiSource had $905 million in net available liquidity and a debt-to-capitalization ratio of 54.7%, well below the 70% covenant limit. The company issued $2.4 billion in senior notes in 2025 at rates of 5.35% and 5.85%, demonstrating access to capital markets despite higher interest rates. More importantly, the Blackstone partnership provides $1.5 billion in equity at the GenCo level, reducing the need for dilutive parent-level equity issuance. Management's plan to issue $300-$500 million annually in maintenance ATM equity {{EXPLANATION: ATM equity,At-The-Market equity refers to a type of stock offering where a company sells newly issued shares directly into the secondary market at prevailing market prices. This allows companies to raise capital incrementally over time, often with less market disruption than a traditional large offering.}} is modest relative to the $28 billion capital program, suggesting minimal dilution risk. Cash flow generation remains robust. Annual operating cash flow of $1.78 billion and free cash flow of -$861.5 million (negative due to heavy capex) are typical for a utility in an investment phase. The key metric is FFO-to-debt, which was 14.6% in 2024 and is targeted at 14-16% through the plan period. This provides 160 basis points of cushion above the 13% downgrade threshold, giving rating agencies confidence despite the heavy investment cycle. As Anderson stated, "Our current guidance is 14% to 16% in all years of our plan and our downgrade threshold is 13%. So there's already adequate cushion baked in."

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## Outlook, Management Guidance, and Execution Risk Management's guidance signals clear acceleration. NiSource is reaffirming the upper half of 2025 adjusted EPS guidance of $1.85-$1.89, representing growth from the $1.42 achieved in the first nine months. More significantly, 2026 consolidated EPS guidance of $2.02-$2.07 includes $0.01-$0.02 from GenCo development, establishing a baseline for data center contributions. The base business is expected to grow 6-8% annually through 2030, while the consolidated business including GenCo targets 8-9% CAGR through 2033. The GenCo contribution trajectory is particularly instructive. In 2030, GenCo is expected to add $0.10-$0.15 per share, growing to $0.25-$0.45 by 2033. This range incorporates only the currently announced customer; the strategic negotiation pipeline of 1-3 gigawatts offers upside to the high end, with potential for another 3 gigawatts beyond that. As Anderson explained, "The $0.25 to $0.45 through 2033 contemplates multiple customers at the top end. But our full strategic negotiation pipeline, 1 to 3 gigawatts would outperform the top end of that range." This demonstrates optionality: the base case is conservative, and success in securing additional data center customers creates a call option on earnings growth that isn't reflected in current guidance. Execution risks are material and concentrated. The company has never constructed generation assets of this type and scale, creating potential for cost overruns or delays. The EPC contract {{EXPLANATION: EPC contract,An Engineering, Procurement, and Construction (EPC) contract is a comprehensive agreement where a single contractor is responsible for the design, procurement of materials, and construction of a project. This type of contract typically shifts significant risk from the project owner to the contractor, as they are responsible for delivering a complete facility by a set deadline and budget.}} with Quanta Infrastructure Solutions Group (TICKER:PWR) and Zachry Industrial mitigates some risk, but inflation, supply chain disruptions, or labor shortages could pressure budgets. The contract includes cost-sharing arrangements and liquidated damages for late delivery, but these provide partial protection, not complete elimination of risk. If actual costs exceed the $7 billion estimate, NiSource must fund the difference, potentially reducing cash flows for other purposes or requiring additional financing. Customer concentration risk is the most significant threat to the thesis. The initial data center customer will consume 2,400 MW, equivalent to NIPSCO's existing generating capacity when fully delivered. If the customer terminates or defaults, NiSource may not be able to replace the demand, potentially stranding billions in assets. The termination payment mechanism is capped and depends on the customer's ability to pay, creating a credit risk overlay. While the customer is investment-grade, the scale of the commitment relative to NiSource's $20.9 billion market capitalization means any default would be catastrophic. This concentration also creates bargaining power asymmetry; disputes would pit NiSource against a customer with vastly greater resources. Regulatory and political risks persist. The One Big Beautiful Bill Act (OBBBA), enacted July 2025, doesn't currently impact NiSource's plans, but its implementation could alter the regulatory landscape. The EPA's proposed repeal of GHG emissions standards could save customers $675 million, but this is a double-edged sword: it reduces costs but also removes a driver for clean energy investment. In Maryland, the Climate Solutions Now Act requires 60% GHG reductions by 2031, creating potential compliance costs for Columbia Gas of Maryland. While NiSource's Net Zero Goal by 2040 aligns with these trends, it remains subject to technological and economic feasibility assumptions that may not materialize. ## Valuation Context At $44.13 per share, NiSource trades at 23.2 times trailing earnings and 23.7 times forward earnings, a modest premium to the utility sector average of approximately 20 times. The EV/EBITDA multiple of 13.3 times is in line with peers: American Electric Power trades at 12.9 times, Duke Energy trades at 11.6 times, CMS trades at 13.6 times, and DTE trades at 15.0 times. This suggests the market has not yet assigned a premium for NiSource's superior growth trajectory. The dividend yield of 2.54% is lower than Duke Energy's 3.44% or American Electric Power's 3.07%, reflecting NiSource's decision to retain capital for growth rather than maximize current income.

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Cash flow multiples tell a more compelling story. The price-to-operating cash flow ratio of 9.5 times compares favorably to American Electric Power's 9.7 times and Duke Energy's 8.0 times, despite NiSource's higher growth rate. The negative free cash flow (-$861.5 million TTM) is typical for a utility in heavy investment mode and should not be viewed as a red flag. What matters is the relationship between investment and returns: NiSource's 8-10% rate base growth from $28 billion in capex should generate superior earnings growth compared to peers investing similar amounts across larger, more mature systems. The balance sheet metrics support continued investment. Debt-to-equity of 1.41 times is conservative relative to Duke Energy's 1.70 times and CMS's 1.92 times. The 54.7% debt-to-capitalization ratio provides ample headroom for additional financing. Return on equity of 9.1% trails American Electric Power's 12.9% and CMS's 11.2%, but this reflects NiSource's lower leverage and higher equity component. As data center assets come online and begin generating returns, ROE should improve toward peer levels. Valuation must be considered in the context of the growth inflection. The base utility business justifies the current multiple, while the GenCo data center strategy represents a free call option. If NiSource executes on its 1-3 gigawatt pipeline and achieves the high end of its $0.25-$0.45 per share GenCo contribution by 2033, the stock would trade at approximately 18 times 2033 earnings, assuming 6% base growth. This creates an asymmetric risk/reward profile: limited downside from the stable utility franchise, with significant upside if data center momentum continues. ## Conclusion NiSource stands at an inflection point where a 177-year-old utility franchise is being transformed by two powerful forces: a structurally unique data center strategy and AI-driven operational excellence. The GenCo model solves the industry-wide problem of serving massive concentrated loads without burdening existing customers, creating a platform that competitors cannot easily replicate. Combined with productivity gains that support sub-5% bill increases during a $28 billion investment cycle, NiSource has engineered a rare combination of growth and affordability. The investment thesis hinges on execution of the initial 2,400 MW data center contract and successful conversion of the 1-3 gigawatt negotiation pipeline. While customer concentration creates meaningful risk, the contractual protections, Blackstone partnership, and regulatory support provide multiple layers of mitigation. The base utility business, growing at 6-8% annually with best-in-class operational metrics, offers downside protection that pure-play data center developers cannot match. For investors, the critical variables to monitor are construction progress on the $7 billion GenCo assets and progress in securing additional data center customers. Success on both fronts would validate NiSource's transformation from a slow-growth utility to a structural beneficiary of the AI revolution, likely commanding a valuation premium commensurate with its superior growth trajectory. Failure would expose the concentration risk inherent in betting on a single customer, but the stable gas distribution franchise would likely limit permanent capital impairment. This asymmetric profile—substantial upside with manageable downside—defines the compelling risk/reward opportunity in NiSource today.