Fortis Earnings: Strong Start to Year

We are maintaining our CAD 57 per share fair value estimate for Fortis FTS after the company reported second-quarter adjusted earnings of CAD 0.62 per share, compared with CAD 0.57 in the same year-ago period. Management reaffirmed its 4%-6% dividend growth outlook through 2027, in line with our estimates.

Fortis’ stock now trades at a slight discount to our fair value estimate as of Aug. 2 after trading at an 8% premium to our fair value estimate in mid-May. Our narrow economic moat is unchanged.

Earnings in the quarter benefited from increased investments at its subsidiaries, partially offset by unfavorable foreign exchange and increased number of shares outstanding.

In Arizona, TEP’s rate case remains ongoing. An administrative law judge recommended a 9.4% allowed return on equity, slightly below the regulatory staff’s 9.5% recommendation. Slightly lowering our current allowed ROE estimate in line with the judge’s recommendation would not have a material effect on our fair value estimate.

While the judge’s allowed ROE recommendation is below the national average for U.S. utilities, we continue to believe management will secure a constructive outcome. This is a difficult task following peer Arizona Public Service’s controversial rate cut effective last year. The commission’s decision is expected in the coming months, with rates effective in September.

Fortis’ CH Energy subsidiary recently filed for new rates based on a 9.8% allowed ROE and 50% common equity ratio, with rates effective in July 2024. The request is consistent with our expectations.

The sale of Fortis’ unregulated Aitken Creek Natural Gas Storage facility for CAD 400 million to Enbridge is expected to close by the end of the year.

Fortis continues to progress on its CAD 22.3 billion capital investment program, supporting 6% rate base growth. In the first quarter, Fortis invested CAD 2 billion, putting it on track to invest over CAD 4 billion this year.