Morningstar

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

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Securities In This Article
Fortis Inc
(FTS)

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.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Andrew Bischof, CFA

Strategist
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Andrew Bischof, CFA, CPA, is a strategist, AM Resources, for Morningstar*. He covers electric, gas and water utilities. He conducts comprehensive research and analysis on his covered companies to provide insights into investment opportunities. He assesses financial statements, competitive advantages, and economic indicators to determine a stock’s intrinsic value. He is a five-time Morningstar Outstanding Research Achievement award winner, which recognizes thought leadership and equity research quality as voted on by senior management.

Before joining Morningstar in 2011, Bischof worked in treasury for Mead Johnson Nutrition. Previously, He was a group audit officer for Bank of America in Chicago, and before that, an auditor for Ernst & Young.

Bischof holds a bachelor’s degree in business administration and accounting and a master’s degree in accounting from the University of Wisconsin. He also holds a master’s degree in business administration, with a concentration in finance, from Indiana University’s Kelley School of Business. Additionally, he holds the Chartered Financial Analyst® and Certified Public Accountant designations.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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