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Morningstar | NiSource Reports Decent 2018 Results; Insurance Still Expected to Cover Most of Boston Gas Explosion

We are reaffirming our $26 per share fair value estimate after narrow-moat NiSource reported 2018 operating EPS of $1.30, beating our estimate by $0.04 and consensus by $0.02. However, operating earnings exclude roughly $0.06 per share of costs related to the tragic natural gas explosion north of Boston in September. These costs are for revenue not billed to affected customers and charitable contributions and will likely not be recovered by insurance. Including these costs would have resulted in reported operating earnings less than our estimate and consensus.

Third-party claims and other expenses have climbed to about $1.1 billion, but we suspect most of the claims have been identified. NiSource’s insurance policies have a combined limit of $1.1 billion ($800 million of casualty and $300 million of property), but even if claims and other expenses climb north of the $1.1 billion of insurance, we doubt it would have a material impact on our fair value estimate. We assume $50 million of fines, lawsuits, and other liabilities are not recovered by insurance.

NiSource initiated 2019 operating earnings guidance of $1.27 to $1.33 per share versus our estimate of $1.28 and consensus of $1.33 per share. In addition, NiSource expects 2019 capital expenditures of $1.6 billion to $1.7 billion versus approximately $1.8 billion invested in 2018. We had expected the investments to continue to accelerate, to a level of $1.86 billion this year, due in part to pipe replacement following the Boston explosion. The lower level is modestly disappointing as these investments drive rate base growth and earnings.