Fortis (FTS) Q1 2025: $1.4B CapEx Fuels 6.5% Rate Base Growth Ambition

2025-05-07 | By EarningsIQ Research

Fortis opened 2025 with $1.4 billion deployed into regulated utility infrastructure, signaling a clear commitment to its five-year, $26 billion capital plan and 6.5% annual rate base growth. Management is navigating policy headwinds, including tariffs and regulatory shifts, with a disciplined funding approach and a focus on customer affordability. With major transmission and load growth opportunities emerging, especially in Arizona and at ITC, Fortis is positioning for incremental upside but faces ongoing inflation and policy uncertainty.

Summary

• Capital Deployment Momentum: Early-year execution puts Fortis on track for its $26 billion five-year plan.
• Regulatory Adaptation: Constructive outcomes in BC and Arizona support investment and rate stability.
• Load Growth Pipeline: Large-scale data center and industrial demand is driving future infrastructure opportunities.

Performance Analysis

Fortis delivered a steady start to 2025, with $1.4 billion invested in its utility systems during the first quarter, equating to 27% of the annual capital plan already deployed. This heavy early spend reflects the company’s focus on regulated asset growth, which underpins its 6.5% targeted annual rate base expansion through 2029. Segment results showed broad-based, if measured, growth: Central Hudson contributed most to EPS upside due to rate-based growth and a favorable regulatory outcome, while ITC and Western Canadian utilities each added modest gains. However, UNS Energy saw a decline, with lower wholesale margins and timing mismatches between cost growth and rate recovery, highlighting execution risk in markets with lagged regulatory mechanisms.

Currency tailwinds also played a role, with a stronger US dollar adding three cents to EPS, while higher share count from the DRIP program diluted per-share results by one cent. Fortis’ balance sheet remains stable, supported by over $1 billion in new debt issuance and confirmed investment-grade ratings, though the company remains vigilant on funding flexibility as capital needs rise.

• Segment Variability: Central Hudson and ITC delivered positive earnings contributions, offsetting softness at UNS Energy.
• Currency and Cost Structure: FX tailwinds aided results, but higher costs and share dilution partially offset gains.
• Funding Discipline: No usage of the $500 million ATM program, with DRIP participation steady at 38% and credit metrics holding above 12% FFO/debt.

Operationally, Fortis’ regulated model continues to provide stable cash flows, but margin expansion depends on timely regulatory cost recovery and managing inflationary pressures.

Executive Commentary

Strategic Positioning

1. Transmission and Load-Driven Growth

Fortis’ largest growth lever is its investment in transmission and load expansion, particularly at ITC, transmission operator, and Tucson Electric Power (TEP), Arizona utility. The company is advancing $3.7 to $4.2 billion USD of MISO LRTP Tranche 2.1 projects, with the bulk of spend expected post-2029, while also targeting system upgrades in Iowa. In Arizona, TEP is negotiating with a large customer for a 300 MW initial phase, with additional high-load customers in the pipeline, signaling long-term demand tailwinds from data centers and industrial users.

2. Regulatory Construct and Policy Navigation

Constructive regulatory outcomes underpin Fortis’ ability to recover costs and invest for growth. The recent BC Utilities Commission decision locked in a multi-year rate framework, while Arizona’s planned rate case seeks approval for a formula rate mechanism, which would reduce regulatory lag and improve rate stability. Across the portfolio, regulatory mechanisms are expected to allow pass-through of prudent cost increases, including tariff-driven inflation, though affordability remains a key focus.

3. Funding and Balance Sheet Flexibility

Fortis is maintaining a conservative funding posture, relying on its DRIP program, debt issuance, and an unused $500 million ATM facility for flexibility. Management is focused on keeping credit metrics healthy as CapEx rises, with contingency plans for any decline in DRIP participation or shifts in equity market conditions. The goal is to fund growth while preserving investment-grade ratings and dividend growth guidance of 4% to 6% annually.

4. Policy and Macro Headwinds

Tariffs and US policy uncertainty present cost risks, but management expects most impacts to be recoverable through regulatory frameworks. The company is monitoring potential changes to the Inflation Reduction Act, but most tax credits are already secured or in safe harbor, limiting near-term risk. Supply chain disruption is not anticipated, with cost inflation the primary concern for future rate cases and customer affordability.

5. Incremental Opportunity Pipeline

Beyond the base plan, Fortis is actively pursuing incremental investment opportunities, including data center and economic development load in the Midwest and Southwest US, and new resource and capacity projects in British Columbia. These could drive upside to the current $26 billion plan, but timing and regulatory clarity remain gating factors.

Key Considerations

Fortis’ quarter was defined by disciplined execution and a clear focus on regulated growth, but the evolving policy and macro environment requires ongoing vigilance. Investors should weigh the following factors:

Key Considerations:

• Regulatory Resilience: Multi-year frameworks and formula rates help mitigate cost inflation, but customer affordability pressure is rising.
• Load Growth Upside: Data center and industrial demand in Arizona and the Midwest could accelerate rate base expansion if negotiations convert to signed contracts.
• Funding Optionality: DRIP participation and ATM facility provide flexibility, but rising CapEx may require opportunistic equity issuance if internal funding wanes.
• Policy Volatility: Tariffs and potential IRA changes are manageable near-term, but persistent inflation or tax policy shifts could pressure customer bills and regulatory outcomes.
• Segment Divergence: Not all utilities are contributing equally; UNS Energy faces margin compression until rate cases catch up with cost growth.

Risks

Fortis faces risk from persistent inflation, particularly if tariff-driven cost increases outpace regulatory recovery or erode customer affordability. US policy changes to tax credits, or delays in regulatory approvals for formula rates, could impact planned investment returns. Segment-specific challenges, such as lagged rate recovery at UNS Energy, highlight the importance of timely regulatory action. Macro volatility in FX and interest rates also creates funding and translation risk for this cross-border utility.

Forward Outlook

For Q2 2025, Fortis expects:

• Continued execution of its $26 billion five-year capital plan, with emphasis on transmission and Arizona load growth projects.
• Progress on regulatory filings, including TEP’s rate case and Central Hudson settlement negotiations.

For full-year 2025, management reaffirmed:

• Annual dividend growth guidance of 4% to 6% through 2029.
• Rate base growth target of 6.5% annually, reaching $53 billion by 2029.

Leadership highlighted ongoing monitoring of tariffs, supply chain, and policy changes, with no expected near-term impact to capital execution. Key watchpoints include regulatory outcomes in Arizona and Iowa, and conversion of load growth negotiations into contracted projects.

Takeaways

Fortis’ regulated utility model continues to deliver stable growth, but the real story is the emerging pipeline of large-scale load and transmission opportunities. Investors should monitor:

• Execution on Incremental Growth: Conversion of Arizona and Midwest load growth prospects into signed agreements will be a key catalyst for upside to the current plan.
• Regulatory Adaptability: The pace and outcome of formula rate adoption and multi-year frameworks will determine Fortis’ ability to offset cost inflation and maintain customer affordability.
• Funding Discipline: Continued strong DRIP participation and unused ATM capacity provide flexibility, but any slippage may require equity issuance or alternative funding strategies.

Conclusion

Fortis is executing on its core regulated growth model, with early-year capital deployment and a robust pipeline of investment opportunities. Success will depend on regulatory agility, disciplined funding, and the ability to convert load growth into rate base expansion while maintaining customer affordability.

Industry Read-Through

Fortis’ results reinforce the ongoing shift toward large-scale transmission and data center-driven load growth across North American utilities. The constructive regulatory environment in BC and Arizona, along with proactive capital planning, sets a template for peers navigating similar inflation and policy headwinds. Tariff cost pass-through and formula rate mechanisms are becoming critical tools for utilities to manage macro volatility. Those with diversified regulatory frameworks and strong funding flexibility will be best positioned to capitalize on the next wave of electrification and grid modernization.

FTS Utilities Electric Utilities Transmission Regulation Rate Base CapEx Dividend