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Stock Strategist Industry Reports

Is Natural Gas Heating Going the Way of Buggy Whips?

We think not, and the market's misperception results in an attractive share price for NiSource.

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In 2019, Berkeley, California, became the first city in the country to pass a ban on natural gas in new buildings. One liberal college town does not make a trend, but other cities followed, and several utilities have gone wobbly on natural gas. Dominion Energy (D), for example, sold its gas transmission business and abandoned the Atlantic Coast Pipeline with its partner Duke Energy (DUK). At Consolidated Edison’s (ED) presentation on environmental, social, and governance issues, the CEO said the utility does not expect to make further gas transmission investments. DTE Energy (DTE) plans to spin off its midstream business, and CenterPoint Energy (CNP) and OGE Energy (OGE) are exploring the sale of theirs. And fracking has become a political issue. No wonder NiSource (NI), with 60% of operating earnings from natural gas distribution, has lagged the Morningstar Utilities Index as the economy recovers from COVID-19.

We don’t believe natural gas heating is going the way of buggy whips. Electrification of building space and water heating has significant technical and economic obstacles, and the market’s misperception of the future of natural gas results in an attractive price for NiSource shares. NiSource has accelerated the pace of gas pipeline restoration investment following a tragic natural gas explosion in 2018, and this will reduce risk and cut methane emissions. NiSource’s electric utility will close its last coal-fired power plant in 2028 and replace the capacity with wind, solar, and energy storage. These actions should result in better than 7% earnings growth, strong dividend growth, an improved ESG profile, and reduced risk for investors.

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