EUR 850.00 For Business Accounts Only

Morningstar | Regulated Investment Drives Fortis' Earnings and Dividend Growth

Fortis manages regulated electric and gas utilities and independent transmission assets in North America. Acquisitions in America have made Fortis predominantly a U.S. utility, with roughly 65% of earnings at its U.S. operations.We like management's renewed focus on the company's many internal growth projects. Management has continued to execute on numerous capital growth opportunities, which should support more than 6% rate base and dividend growth through 2023. The prized asset in the U.S. is ITC Holdings, which it acquired for $11.3 billion, along with a 19.9% minority investor GIC. ITC gives Fortis an opportunity to benefit from a long runway of U.S. transmission investment opportunities at a reasonable price. ITC's allowed returns on equity are higher compared with state-allowed returns.Rounding out Fortis' North American presence are two other acquisitions: CH Energy and UNS Energy. UNS Energy offers faster growth than its domestic peers with the area's population growth and transition to cleaner generation. A challenging regulatory environment in New York could pressure returns, but management has proved adept at managing regulatory relationships and finding growth opportunities.Fortis' main regulated Canadian operations are in British Columbia, Alberta, and Newfoundland. These relatively low-risk operations result in stable earnings and fund the consistent dividend growth of the past four decades. Rate base additions should be significant as the healthier Canadian economy drives usage and customer growth. Returns are lower in Canada, due to a lower cost of capital from a lower equity component compared with its U.S. counterparts.Management continues to secure additional capital growth projects, particularly as rate base growth slows in the outer years of the company's five-year plan. The most promising near-term investment is the Lake Erie Connector Project. However, other opportunities remain, such as renewable energy, further transmission development, and grid modernization. We continue to be impressed by management's ability to execute on numerous capital growth opportunities.