Arizona's Long-Range Transmission Plan Will Increase Capacity For Future Growth

Key Takeaways

• Fortis' substantial capital investments in transmission and resource projects aim to boost rate base growth, enhancing future revenue and earnings stability.
  
• Strategic focus on large-scale renewables and formula-based rates in Arizona supports timely investment recovery, reinforcing long-term revenue and earnings growth.
  
• Regulatory delays, foreign exchange fluctuations, and rising costs could impact earnings, revenue growth, and cash flow stability for Fortis.

Catalysts

Operates as an electric and gas utility company in Canada, the United States, and the Caribbean countries.

• Fortis plans a 5-year capital investment of $26 billion, primarily focusing on regulated and transmission investments, including the long-range transmission plan and resource transition in Arizona. This is expected to increase the rate base by $14 billion by 2029, supporting average annual rate base growth of 6.5%, which will positively impact future revenue and earnings.
  
• The Arizona segment shows significant potential for growth, with service requests totaling over 10,000 megawatts from industries such as data centers and manufacturing, potentially increasing TEP's retail sales by 20% through customer load growth. This is likely to impact future revenue and earnings positively.
  
• Fortis' strategies on formula-based rates for its utilities, particularly in Arizona, aim to reduce regulatory lag and enable a timely recovery of investments. This financial approach could stabilize earnings and enhance revenue reliability.
  
• Fortis is addressing and preparing for an increase in large-scale renewable and natural gas projects, like the possible nuclear investments in Arizona and other integrated resource plans valued at $2.5 to $5 billion. This will strengthen the company's capacity to meet load growth, enhancing long-term revenue and earnings.
  
• The ongoing investments in ITC's transmission projects, such as the MISO LRTP, and the potential load growth from data centers and economic developments indicate opportunities for earnings growth through strategic infrastructure development beyond 2029.

Fortis Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fortis's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.0% today to 14.6% in 3 years time.
• Analysts expect earnings to reach CA$2.0 billion (and earnings per share of CA$3.78) by about May 2028, up from CA$1.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.0x on those 2028 earnings, down from 21.1x today. This future PE is lower than the current PE for the CA Electric Utilities industry at 24.0x.
• Analysts expect the number of shares outstanding to grow by 1.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.82%, as per the Simply Wall St company report.

Fortis Future Earnings Per Share Growth

Risks

• The ongoing regulatory delays and complexities in Arizona, such as the need to navigate formulaic rates and multiple rate proceedings, pose a risk to timely cost recovery, potentially affecting earnings and cash flow stability.
  
• Potential tariffs could indirectly impact the economic environment and customers served by Fortis, which may dampen growth and affect revenue streams.
  
• Exposure to foreign exchange rate fluctuations, particularly given the impact of the strengthening U.S. dollar, could affect Fortis' capital plan and financial results, influencing net margins.
  
• Competitive bidding processes for transmission projects, particularly in Iowa, create uncertainty in securing future investments, which may impact revenue growth from these projects.
  
• Rising operating and maintenance costs, as seen with TEP, coupled with challenges in cost recovery, may compress net margins if not managed effectively in rate cases.

Valuation

• The analysts have a consensus price target of CA$63.867 for Fortis based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$70.0, and the most bearish reporting a price target of just CA$42.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$13.5 billion, earnings will come to CA$2.0 billion, and it would be trading on a PE ratio of 20.0x, assuming you use a discount rate of 5.8%.
• Given the current share price of CA$67.54, the analyst price target of CA$63.87 is 5.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.