Fortis Earnings: Capital Rotation Toward Regulated Investments Is a Positive for Shareholders

We are maintaining our CAD 57 per share fair value estimate after the company reported first-quarter adjusted earnings of CAD 0.91 per share compared with CAD 0.78 in the same year-ago period. The company reaffirmed its 4%-6% annual dividend growth outlook through 2027, in line with our estimates.

Fortis’ FTS stock now trades at a 6% premium to our fair value estimate as of May 3 after climbing 12% off its mid-March lows. Our narrow economic moat remains unchanged.

Fortis’ territories are less affected by weather than other utilities. Revenues at ITC, Central Hudson, and Western Canada have regulatory mechanisms that mitigate the financial impact of sales fluctuation. Earnings benefited by increased investments supporting rate base growth, higher earnings at UNS, and favorable exchange rates. Partially offsetting these benefits were higher interest costs and share dilution.

Earlier this week, Fortis announced plans to sell its unregulated Aitken Creek Natural Gas Storage facility for CAD 400 million to Enbridge. We think Fortis extracted a fair price for the assets, given the healthy prospects for Canadian gas production and LNG production over the next few years. However, the deal is too small to have a material effect on our fair value estimate.

Strategically, we like Fortis’ rotation of capital toward organic regulated investments. Fortis has identified CAD 22.3 billion of capital investment opportunities supporting 6% rate base growth. In the first quarter, Fortis invested CAD 1 billion in capital, putting it on track to invest CAD 4.3 billion this year.

In Arizona, TEP’s rate case remains ongoing. Regulatory staff recommended a 9.5% allowed return on equity and $3.6 billion rate base. While the 9.5% allowed ROE is less than TEP’s 10.25% request, it remains well above peer Arizona Public Service’s 8.7% from 2021. We expect a constructive outcome for TEP. We previously incorporated higher allowed returns in our forecast.