Investor favorite NiSource faces questions after Massachusetts explosions

BOSTON, Sept 14 (Reuters) - Before gas explosions in Massachusetts sent its shares reeling on Friday, utility NiSource Inc was considered a secure play and its top investor was loading up on shares as part of a push into what it called "the safest, most defensive sector in the S&P 500."

All that changed in the aftermath of Thursday's gas explosions across three suburbs north of Boston that left at least one person dead, injured at least a dozen more, and drove thousands from their homes.

The area is served by the Columbia Gas of Massachusetts unit of NiSource, whose shares were down 11.5 percent at $24.84 on Friday afternoon.

The decline reflects concerns about potentially higher NiSource spending and penalties, said Morningstar analyst Charles Fishman. He expects regulators eventually will approve rates to cover more infrastructure spending at what is a minor piece of the sprawling Indiana-based utility holding company.

"This is certainly a tragedy. From an investment standpoint, for NiSource, this is a small part of their system," Fishman said. NiSource serves 1.4 million customers in Ohio and 1.3 million in Indiana, versus 320,000 in Massachusetts, according to its website.

NiSource spokesman Ken Stammen declined to comment on the financial impact of the blasts, whose cause remains under investigation.

Guggenheim Partners analyst Shar Pourreza said his current "neutral" rating on NiSource mainly reflects its high valuation, driven by a strong earnings and growth outlook. With a gain of 138 percent over the past five years through Thursday, NiSource had outperformed all other utilities in the S&P 500, with that sector gaining just 46 percent in the period.

Friday's stock decline marked a contrast to the role NiSource and other utilities have played as safe bets in many portfolios.

Managers of NiSource's top fund investor, the T. Rowe Price Capital Appreciation Fund, wrote in a June 30 report they loaded up on utilities to reduce risk. Disclosures show the fund held 16.8 million NiSource shares on June 30, up from 14.3 million on March 31.

"We believe utilities are the safest, most defensive sector in the S&P 500, and we believe many of the names that we own have the potential to grow earnings between 5 percent and 7 percent per year while offering dividend yields above 3 percent with limited economic risk," wrote the managers, led by David Giroux. (Reporting by Ross Kerber in Boston Editing by Matthew Lewis)