NiSource: Blackstone Pays Premium Price for Indiana Utility Share; Top Utilities Pick

We are raising our fair value estimate to $33 per share from $32 after NiSource NI announced a deal to sell a 19.9% interest in its largest subsidiary, NIPSCO, to Blackstone Infrastructure Partners. We are reaffirming our narrow moat and stable moat trend ratings for NiSource. The stock trades at a 17% discount to our updated fair value estimate.

The long-anticipated transaction priced far above our expectations at $2.15 billion, implying a $10.8 billion equity value for NiSource’s Indiana gas and electric utility, which contributes about half of NiSource’s total earnings. NiSource’s consolidated market cap, including its six gas distribution utilities, was $11.3 billion as of June 16. We had expected $1.5 billion of proceeds based on current utilities sector valuations.

At 32 times earnings, the deal is one of the richest ever for a regulated utility and an 80% premium to the utilities sector median and NiSource’s 17.5 P/E as of June 16. This confirms our view that NiSource deserves a premium valuation because of its clean energy growth opportunities and constructive regulation in Indiana.

Despite the premium price, the incremental value for NiSource shareholders is limited because of the small relative size of the deal and NiSource’s need to reduce debt with about half of the proceeds. The remaining proceeds and ongoing equity contributions from Blackstone will help fund what we expect will be $15 billion of capital investment during the next five years, in line with management’s plan.

On a consolidated basis, we forecast 7% average annual earnings growth during the next five years, in line with management’s 6%-8% target and among the top half of U.S. utilities in our coverage. Constructive regulatory outcomes at NiSource’s six gas utilities and a recent electric rate settlement at NIPSCO provide good earnings growth visibility for 2023 and 2024. We expect earnings dilution from the Blackstone deal to keep consolidated earnings mostly flat in 2024.