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This past Thursday (8/1), a gas explosion leveled a Franklin County home in Pennsylvania and NI’s Columbia Gas was at fault. We saw little news coverage following and don’t believe many investors were aware last week. Thankfully there were no deaths / life-threatening injuries sustained as a result, but the incident is alarming given what transpired in the Merrimack Valley last year. At a high-level, the cause of the explosion appears to have closely mirrored that in MA. Columbia crews were replacing a low-pressure gas system and failed to recognize that the home was connected to the system. Thus, when re-activating the line, there was no regulator in place to moderate the pressure going into the home, leading to the explosion. This was the one thing NI could not let happen – Downgrade to Peer Perform. 

Utilities rose 3% in June on the back of continued declines in L-T rates.  But the market left utilities in the dust rising 7% for the month.  The S&P 500 is now up 17.3% for the first half of 2019, the best performance since 1997.  Utilities have held their own up 12.8%, but still trail by 450bps.  At least so far, it appears that lower interest rates are helping the broader market more than utilities.  Lower rates are a double-edged sword for utilities (see our recent report), as they can lead to lower allowed ROEs in rate cases.  Several of the more near-term exposed companies – PNW, CNP, AGR, ED and AEE – were among the worst performers last month. 

Today (6/17/2019) during market hours, Bloomberg reported that NI has received bids and is considering a sale of its MA subsidiary. The report indicated that a sale of Columbia MA could fetch up to $2B (~2x total rate base). In our view, a sale of MA makes sense and was the primary reason we stuck with our Outperform rating following the gas explosions last fall. A sale would remove the MA overhang on an otherwise solid investment story. We believe a natural suitor to be ES who could buy the property at a decent price, making it a win-win for both parties. NI outperformed the UTY by 180bps on the day following the news. 

The revival of the US/China trade war stopped the 2019 bull market in its tracks with the S&P 500 falling 6.6% and bond yields declining 36bps in May.  Utilities were a place to hide and only fell 1.3% beating the market by 530bps.  For the year, utilities are still slightly trailing the S&P 500 (9.4% vs 9.8%) though it feels like they are way ahead.   Utilities are back to a 21% P/E premium to the market vs a historic average of 3%.  They have hit this level a few times before – including this past December – and its proven to be great selling opportunities since this premium never lasted. So while we worry about the economy and trade wars and bonds going toward zero yields, we still think buying utilities here is buying near a peak and stay Underweight.  With rates this low, we are more wary of utility rate cases and ROEs – last month we saw NY PSC staff recommend an 8.3% ROE for ED.