EUR 850.00 For Business Accounts Only

Morningstar | Promising Capital Opportunities Could Offset Slower Growth in 2021-22; Fortis Reports 2Q Earnings

We are reaffirming our CAD 46 fair value estimate, along with our narrow economic moat and stable moat trend ratings, after Fortis reported second-quarter adjusted earnings of CAD 0.57 per share compared with CAD 0.61 in the year-ago period.

After adjusting for unrealized mark-to-market losses at Aitken Creek and U.S. tax reform, earnings grew slightly year over year. Increase in investments continue to boost nonregulated infrastructure earnings and transmission rate base at ITC. Mostly offsetting these positives were higher operating expenses at UNS due to planned generation outages, unfavorable foreign exchange rates, and higher average shares outstanding.

Management continues working toward securing additional capital growth projects, particularly as rate base growth slows in the outer years of the company's five-year growth plan. The most promising remain the Lake Erie Connector Project and the Wataynikaneyap Transmission Power Project. However, other opportunities remain, such as renewables, transmission development, and grid modernization. We remain cautiously optimistic that management will be able to find opportunities that will grow rate base at its three-year 6% rate base growth. We don't include any of these projects in our forecast due to the considerable regulatory risk.

On the regulatory front, we are closely watching a third-party Federal Energy Regulatory Commission complaint contesting ITC's independence as a stand-alone transmission company. A negative ruling would put the company's 50-basis-point allowed return adder at risk, and likely lead us to reduce our fair value estimate $1 to $2 per share. We were disappointed by the rate base outcome at CH Hudson, where the approved regulatory settlement allowed for just 8.8% allowed return on equity for the next three years, one of the lowest among its peer group.