Morningstar | Fortis Starts the Year Off on a Good Note, Reports 1Q Earnings
We are reaffirming our CAD 50 fair value estimate, along with our narrow economic moat and stable moat trend ratings, after Fortis reported first-quarter adjusted earnings of $0.74 per share compared with $0.70 in the year-ago period.Management reaffirmed its 6% dividend growth guidance to 2023, in line with our estimates. We expect rate-base growth in line with dividend growth through this time frame. While trading in line with our fair value estimate, Fortis remains one of our more attractive utilities in a sector we view as 12% overvalued.
Management recently closed the sale of its stake in the Waneta Expansion for $1 billion to Columbia Power and Columbia Basin and Trust. The transaction will net a $450 million gain on the investment, to be recognized in the second quarter. Proceeds will be used to pay down debt--Fortis recently bought back $400 million in notes--and support its capital plan. This sale should allay the need for incremental equity for the company's $17.3 billion, five-year capital investment plan.
Fortis recently filed a rate case at Tucson Electric Power with the Arizona Corporation Commission, requesting a 10.35% allowed return on equity and a 53% equity capital structure. The filing seeks approval for $700 million in rate-base increases, off a base of $2 billion, for grid and renewable energy investments since its 2017 rate-case decision. We expect a decision in line with the 2017 decision. Any upside in the decision would be accretive to our fair value estimate.
Fortis filed its 2020 to 2024 multiyear rate plan at its Fortis BC subsidiary as well. At the Federal Energy Regulatory Commission, further decisions regarding MISO base ROE complaints and notice of inquiries should continue to progress through the year.
Earnings were supported by favorable weather at UNS and approved rate increases at its TEP subsidiary, partially offset by lower results at its nonregulated energy infrastructure unit and more shares outstanding.
Fortis is principally an international electric and gas utility holding company. Co. also holds investments in non-regulated generation assets. Co.'s business segments are: Regulated Electric & Gas Utilities - United States; Regulated Gas Utility - Canadian; Regulated Electric Utilities - Canadian; Regulated Electric Utilities - Caribbean; Non-Regulated - Fortis Generation; Non-regulated - Non-Utility; and Corporate and Other. Its regulated utilities served more than 3.0 million customers across Canada and in New York State and the Caribbean. Co. also holds investments in non-regulated generation assets in Canada and Belize, through Fortis Generation.
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