NiSource Reaches Landmark Settlement in Indiana

We are reaffirming our $32 fair value estimate for NiSource NI after the company announced it reached a settlement in its Indiana electric rate review case, one of the largest in recent years. We are also reaffirming our narrow moat and stable moat trend ratings.

NiSource trades at a 17% discount to our fair value estimate, making it one of the most undervalued utilities in our coverage as of March 13. Although its 17 times price/earnings ratio and 3.7% dividend yield are near the sector median, we think NiSource deserves a premium valuation, given its highly constructive regulation and growth opportunities, both of which the Indiana decision supports. We rank NiSource in the top five of all U.S. utilities for most constructive regulation.

The settlement would result in a $291.8 million annualized rate increase, below the $395 million request but in line with our expectations. We consider this a constructive outcome that keeps NiSource on track to deliver at least 7% earnings growth for the next three years.

We expect NiSource to hit the top end of management’s $1.54-$1.60 earnings per share guidance range for 2023, implying a second consecutive year of 7% earnings growth. The new Indiana rates will begin in September and support what we expect will be another year of 7% earnings growth in 2024. We assume regulators approve the settlement.

The Indiana settlement also should make it easier for NiSource to complete its planned sale of a minority interest in the Indiana utility at a higher valuation than NiSource’s common stock. This should be a positive for shareholders by providing low-cost capital to support what we estimate will be an average $3 billion of capital investment annually for at least the next five years, much of which will go to clean energy projects in Indiana.

Ongoing constructive regulation and the minority interest sale should help management maintain a 60%-70% dividend payout ratio, higher than most utilities and supporting 6% dividend growth.