Fortis Closes Private Placement to Boost Capital

In the utilities sector, Fortis is adapting to a complex landscape characterized by both challenges and prospects. The recent closure of a $500 million private placement is part of a broader strategy to bolster its capital base, supporting its robust capital investment plan and commitment to renewable energy. However, this progress is tempered by higher corporate costs and regulatory hurdles that the company must navigate. 

Core Advantages Driving Sustained Success 

Fortis (TSX:FTS) has exhibited strong operational and financial performance, primarily from its regulated utilities. The company’s capital investments are progressing well, with $1.1 billion allocated in the first quarter of 2024 as part of a $4.8 billion capital plan for the year. Additionally, Fortis boasts a positive growth outlook, with an impressive track record of increasing dividends for 50 consecutive years. The company projects a 4% to 6% annual growth in dividends through 2028, alongside an expected rate base growth of $12 billion, elevating it to over $49 billion by 2028, which translates to an average annual growth rate of 6.3%. The release of the 2024 Climate Report further highlights Fortis's dedication to addressing climate-related challenges. 

Critical Issues Affecting Fortis's Performance 

Despite these strengths, Fortis encounters challenges related to higher corporate costs, which have hindered the growth of its regulated utilities. The recent disposition of Aitken Creek has had a measurable impact, decreasing earnings per share by $0.03 during the quarter. Performance concerns in Arizona, including increased depreciation and operating costs, as well as lower retail revenue due to milder weather conditions, also pose challenges. Currently, Fortis's share price exceeds its estimated fair value, suggesting potential overvaluation compared to industry peers. The company’s Price-To-Earnings Ratio of 19.1x is higher than the peer average of 18.6x, indicating additional valuation concerns. 

Strategies for Leveraging Growth 

Fortis possesses significant avenues for growth, particularly in renewable energy initiatives. The company has earmarked $7 billion for investments in cleaner energy, focusing on interconnecting renewables to the grid, as well as enhancing renewable generation and energy storage capabilities in Arizona. The anticipated growth in data center loads within ITC Midwest, especially with Google's plans for a new data center launching in 2026, presents another promising avenue. Regulatory developments, including the BCUC's approval of FortisBC's renewable natural gas application, may further enhance the company's growth prospects. Additionally, the draft tranche two portfolio release by MISO is viewed favorably, signaling potential investment opportunities within ITC’s operations 

Key Risks and Challenges 

Fortis faces several threats that could impede its growth. Regulatory and legal challenges, such as the recent Iowa District Court decision regarding the Iowa ROFR, represent notable risks. Competitive pressures and uncertainties surrounding investment opportunities in ITC's footprint, pending MISO Board approval, add to the complexity. Economic factors, including engagements with S&P regarding physical risks related to climate change, further complicate the landscape. Wildfire risks also remain a concern, with no specific regulatory mechanisms currently addressing these challenges. 

Fortis's solid operational and financial performance, supported by substantial capital investments and consistent results from regulated utilities, indicates potential for continued success. However, higher corporate costs and performance issues in Arizona have tempered growth, and the current share price, above estimated fair value with a Price-To-Earnings Ratio of 19.1x compared to the peer average of 18.6x, suggests caution. The company's commitment to renewable energy investments and favorable regulatory developments positions it for future growth, although regulatory and legal challenges, competitive pressures, and economic factors related to climate risks could influence performance.