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Heading into the Q1 call, we expected a much more modest cost increase; our expectation proved optimistic as NI now expects a 20% increase from the amount provided just a couple months ago. NI recently reached a settlement on what is likely one of its larger claims, thus taking some risk off the table for large future increases. But there is still a fair amount of uncertainty that remains concerning what’s embedded in estimations for claims yet to be settled / litigated (class action, wrongful death, municipalities); footnote language related to the possibility for further increases makes us a bit weary as well. We would be remiss if not admit that mgmt’s credibility is taking a bit of a hit with respect to this issue. 

NI provided initial 2019 guidance of $1.27-1.33, missing consensus at $1.33 (WRe $1.31). As we had expected, NI’s dividend announcement earlier this month was a sign for muted earnings growth off 2018A ($1.30). What we hadn’t expected was a re-basing of the company’s 5-7% annual growth rate off of a weak 2019 – we previously assumed that NI would get back on track by 2021 as the drag associated with MA would largely be offset / removed. To reflect NI’s new growth expectations, we are cutting our 2020E and 2021E to $1.39/$1.48 from $1.45/$1.55. Our PT is unchanged at $28. 

On Friday (2/1/19), NI raised its annual dividend to $0.80 from $0.78, representing 2.5% growth – well below the company’s targeted 5-7%. Following up with the company, we sense this as a signal that the drag associated with MA gas explosion fixes are worse than we originally thought likely leading to weak initial ’19 guidance. Issues include higher recovery and carrying costs. As such, we are cutting our 2019E to $1.31 from $1.35. Our updated estimate represents 2.5% growth off our 2018E of $1.28. We feel this is a more prudent growth rate and keeps the company within its 60-70% targeted payout ratio. We are also reducing are 2020E by $0.02 to $1.43 as we feel it may take a bit longer for NI to fully offset / eliminate the drag associated with MA.

PCG’s impending bankruptcy will impact a wide swath of companies especially renewables suppliers.  These include large ones investors are aware of (CWEN, NEE/NEP, ED) and smaller ones not so obvious (NRG, DTE, likely others).  For the other CA utilities, EIX and SRE, investors will be focused on what this means for getting long-term fixes for wildfire risks.  Project risk continues to rear its ugly head as we have seen with ACP pipeline delays.  Key updates this quarter include D/DUK on ACP, SO on Vogtle, AGR on NECEC and Vineyard Wind, and SRE on Cameron.  Pension risk (and OPEBs and NDTs) due to the Q4 market swoon and drop in rates could hurt as D highlighted recently.  NI, ETR and others may face some headwind.