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Stock Analyst Update

What the Boston Tragedy Means for NiSource

The natural gas explosion at wholly owned Columbia Gas of Massachusetts will likely result in further acceleration of NiSource's safety program to replace bare steel and cast iron pipe.

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We are reaffirming our $26 per share fair value estimate and narrow-moat rating after a natural gas explosion at  NiSource's (NI) wholly owned Columbia Gas of Massachusetts resulted in one fatality and 25 injuries to residents in communities north of Boston. The utility is the fourth-largest of NiSource's seven operating gas distribution businesses and represents less than 10% of NiSource's total utility rate base.

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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Charles Fishman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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