What the Boston Tragedy Means for NiSource

We are reaffirming our $26 per share fair value estimate and narrow-moat rating after a natural gas explosion at

We have reduced our 2018 operating earnings estimate by $0.04 per share, to $1.25 per share, to account for higher operating expenses associated with the tragedy. In addition, we assume $100 million of capitalized non-operating expenses to account for lawsuits and fines.

Our fair value estimate is unchanged, as we estimate the benefit to earnings and cash flow from an increase in capital expenditures will, for the most part, offset the near-term higher operating expenses, fines and other liabilities from the explosion.

Long-term, we believe the explosion will result in further acceleration of NiSource’s safety program to replace bare steel and cast iron pipe. NiSource is currently spending $80 million to $120 million per year in its Massachusetts modernization program, the majority earmarked for pipe replacement. We estimate the modernization program is replacing roughly 30 miles per year of substandard pipe, or a 20- to 25-year replacement cycle for the roughly 700 miles of pipe in Massachusetts. We expect NiSource will reach an agreement with regulators to accelerate the modernization program following the accident.

We have increased our estimate of NiSource's five-year capital spending program to $9.8 billion from $9.4 billion. We expect NiSource to exceed its $1.6 billion to $1.8 billion per year capital expenditure guidance range for 2019 and 2020 by about $200 million over the two-year period. The Massachusetts utility would likely not be the only NiSource unit that accelerates pipe replacement.

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