While Wall Street celebrates Fortis Inc.'s consistent performance and low-risk growth, a closer examination of their recent earnings call transcript reveals a potential blind spot: an over-reliance on natural gas infrastructure in a world hurtling towards decarbonization. Despite Fortis' impressive 50 consecutive years of dividend increases and a robust five-year capital plan, their strategy hinges on a gamble that natural gas will remain a core energy source, even as government policies and public pressure push for rapid electrification.

This blind spot is most evident in British Columbia, where FortisBC faced a major setback with the denial of their Okanagan Capacity Upgrade application, a proposed $200 million natural gas pipeline expansion. While FortisBC maintains that the upgrade is necessary to address near-term capacity shortfalls, the BCUC's rejection signals a growing unease with long-term natural gas commitments, particularly in light of the province's ambitious CleanBC emissions reduction targets. The BCUC's directive to explore alternative solutions underscores this shift, favoring a more flexible, wait-and-see approach to natural gas infrastructure investment.

Adding fuel to the fire is the Affordable Gas Transition Act in New York, which effectively limits new natural gas connections, posing a challenge to Fortis' Central Hudson subsidiary. Although this service territory represents a smaller portion of Fortis' overall business, it underscores a broader trend towards electrification and potential constraints on natural gas demand growth.

Ironically, Fortis acknowledges the upward pressure on electricity demand across North America, particularly in Arizona and the Midwest, driven by surging economic growth and a clean energy transition. They even highlight the role of new natural gas peaking units in their Arizona integrated resource plans, framing them as a bridge to facilitate renewable energy additions. Yet, they seem to underplay the possibility that this bridge could be shorter than anticipated, given the rapid pace of technological advancements and the increasing affordability of renewable energy and storage solutions.

This potential for accelerated electrification raises a critical question: could Fortis be overestimating the longevity of its natural gas infrastructure investments? The risk is particularly acute in British Columbia, where natural gas distribution accounts for a significant portion of FortisBC's business. While their multi-year rate plans offer some protection against short-term demand fluctuations, they don't shield FortisBC from the long-term implications of a faster-than-expected shift towards electrification.

Hypothetical Scenario: Stagnating Natural Gas Demand in British Columbia

To assess this potential risk, let's consider a hypothetical scenario: imagine if electrification in British Columbia accelerates beyond current forecasts, driven by factors like declining costs of electric vehicles and heat pumps, increased government incentives for electrification, and growing public awareness of the climate impact of natural gas. If, for instance, natural gas demand growth in British Columbia stagnates in the next five years, instead of growing at the forecasted rate, FortisBC could be left with underutilized infrastructure and stranded assets.

The financial implications of such a scenario could be significant. Not only would FortisBC face a potential write-down of its natural gas assets, but it could also struggle to recover its investments through rate increases, particularly as customer affordability becomes a paramount concern for regulators. This, in turn, could strain Fortis Inc.'s overall financial performance and its ability to sustain its 50-year dividend growth streak.

While Fortis boasts a remarkable track record of consistent growth and shareholder returns, their apparent over-reliance on natural gas infrastructure raises a red flag in a world rapidly embracing decarbonization. As government policies and technological advancements continue to accelerate the shift towards electrification, Fortis' gas gamble could turn into a decarbonization bombshell, jeopardizing their long-term growth prospects and their ability to deliver on their promises to shareholders. The question remains: will the utility giant adapt to this rapidly changing energy landscape or cling to a fading fossil fuel past?

"Fun Fact: Fortis Inc. is named after the Latin word for "strong," reflecting their commitment to reliable energy delivery. However, in a rapidly changing energy landscape, true strength lies in adaptability and embracing innovation, even if it means redefining your core business."