Executive Summary / Key Takeaways

• Fortis Inc. ($FTS) is a stable, regulated utility poised for accelerated growth, driven by a substantial $26 billion capital plan through 2029 focused on infrastructure modernization and the clean energy transition.
• The company is capitalizing on significant emerging demand, particularly from data centers in Arizona and large-scale transmission projects within the MISO Long Range Transmission Plan (LRTP) for its ITC segment.
• Strong financial performance in the first half of 2025, with Q2 EPS up $0.09 year-over-year to $0.76, underscores the effectiveness of its rate-base growth strategy and commitment to a 4% to 6% annual dividend growth through 2029.
• Technological advancements, such as the 200-megawatt Roadrunner Reserve Battery Storage Project, enhance grid reliability and facilitate renewable energy integration, strengthening Fortis's competitive position.
• Key factors for investors include the successful progression of regulatory approvals for new projects and formula rates, effective management of customer affordability, and the execution of its ambitious capital program amidst evolving industry trends.

Powering Progress: Fortis's Strategic Growth Pillars

Fortis Inc. (TSX/NYSE: FTS) stands as a cornerstone in the North American utility sector, a diversified electric and gas utility with a rich history dating back to 1885. Headquartered in St. John's, Canada, the company's core business revolves around the generation, transmission, and distribution of electricity and natural gas across Canada, the United States, and the Caribbean. This extensive footprint, coupled with an unwavering commitment to regulated operations, which constitute approximately 99% of its assets, forms the bedrock of its low-risk, predictable cash flow generation model. Fortis has consistently demonstrated its dedication to shareholder returns, boasting 51 consecutive years of dividend increases by 2024 and delivering an average annual total shareholder return of approximately 10% over two decades.

The utility industry is currently undergoing a transformative period, driven by electrification, the clean energy transition, and unprecedented demand from new high-load customers like data centers. Fortis's overarching strategy is to capitalize on these trends through substantial, regulated capital investments aimed at modernizing infrastructure, enhancing grid resiliency, and integrating cleaner energy sources. This strategic response is crucial in a competitive landscape populated by large, established players such as Duke Energy , Southern Company , NextEra Energy , and Emera , each vying for market share and growth opportunities within their respective service territories.

Fortis's strategic narrative is underpinned by its robust capital investment program. The company executed a record $5.2 billion in capital investments in 2024, contributing to approximately 6% adjusted EPS growth. Looking ahead, the recently announced 2025-2029 capital plan totals $26 billion, a $1 billion increase from the previous five-year outlook. This plan is characterized by its low-risk and highly executable nature, with virtually all investments being regulated and only 23% comprising major capital projects. This substantial investment is projected to expand Fortis's rate base by approximately $14 billion, reaching $53 billion by 2029, supporting an average annual rate base growth of 6.5%. This growth trajectory is an acceleration from the 6.3% in the prior five-year plan.

A significant component of this capital deployment is directed towards the clean energy transition and enhancing grid resiliency. Through 2024, Fortis achieved a 34% reduction in Scope 1 greenhouse gas emissions compared to 2019 levels. A prime example of this commitment is Tucson Electric Power's (TEP) plan to convert approximately 800 megawatts of coal-fired generation at its Springerville station to natural gas by 2030, aligning with Fortis's target to be coal-free by 2032. This conversion is not merely an environmental initiative; it is a strategic move to leverage "existing steel in the ground" and "transmission assets," offering a "great affordability story for our customers" by avoiding new infrastructure costs and maintaining local employment.

Technological Differentiators and Innovation

While Fortis operates primarily as a regulated utility, its technological advancements are critical to its operational efficiency and clean energy transition. A key recent development is the July 2025 placement into service of the first phase of the Roadrunner Reserve Battery Storage Project at TEP. This 200-megawatt energy storage system, with the capability to store 800-megawatt hours of energy, represents a tangible technological differentiator. It significantly enhances the integration of renewable energy onto the electric grid, providing flexibility and stability that traditional generation alone cannot. The "so what" for investors is clear: this technology directly supports Fortis's clean energy goals, improves grid reliability, and positions TEP to efficiently manage intermittent renewable resources, thereby optimizing asset utilization and potentially reducing operational costs over the long term. This capability strengthens Fortis's competitive moat by enabling more robust and flexible service delivery in an increasingly renewable-dependent energy landscape.

Beyond battery storage, Fortis's ongoing investments in grid modernization across its utilities, including advanced metering infrastructure (AMI) projects at FortisAlberta and wildfire technology, represent continuous technological evolution. These initiatives aim to improve situational awareness, enhance reliability, and reduce operational risks, contributing to cost efficiencies and improved customer service. While specific quantifiable performance metrics for all these technologies are not publicly detailed, their strategic intent is to bolster the company's foundational strengths in regulated utility operations and support its long-term growth.

Financial Fortitude: Performance and Liquidity

Fortis's financial performance in the first half of 2025 underscores its operational effectiveness. The company reported second-quarter earnings per share of $0.76, a $0.09 increase over the same period last year, with year-to-date EPS reaching $1.76, a $0.16 increase. This growth was primarily driven by rate-based investments and higher earnings at Central Hudson and FortisBC. Central Hudson, for instance, saw a $0.04 EPS increase in Q2 2025, reflecting rate base growth, rebasing of costs, and a higher allowed ROE effective July 1, 2024. FortisAlberta's growth was tempered by a lower allowed ROE of 8.97% effective January 1, 2025.

For the full year 2024, Fortis delivered adjusted EPS of $3.28, representing approximately 6% growth over 2023. This was supported by strong contributions from ITC, which saw 7% adjusted earnings growth driven by $1.5 billion in capital investments. The company's TTM financial ratios indicate a healthy Gross Profit Margin of 45.80%, an Operating Profit Margin of 28.90%, and a Net Profit Margin of 14.98%. The EBITDA Margin stands at 46.44%.

Liquidity and capital resources remain robust. Fortis raised over $1 billion of debt in the first half of 2025 to fund its capital program and repay borrowings. The $500 million At-The-Market (ATM) common equity program has not been utilized in 2025, providing additional funding flexibility. Credit ratings reflect this strength, with Fitch assigning a first-time BBB+ rating in May 2025, and Moody's and DBRS reaffirming their Baa3 and A (low) ratings, respectively. The company's funding plan targets average cash flow to debt metrics of over 12% through 2029, supporting its dividend growth commitment. Fortis also strategically manages foreign exchange risk, hedging up to 100% of forecasted U.S. cash flows two years out and 50% three years out, noting that a $0.05 change in the USD/CAD exchange rate impacts the five-year capital plan by approximately $600 million and annual EPS by about $0.05.

The Competitive Arena: Positioning and Edge

Fortis operates in a highly regulated and capital-intensive industry, facing competition from other large utilities like Duke Energy (DUK), Southern Company (SO), NextEra Energy (NEE), and Emera (EMA). Fortis's diversified geographic footprint across Canada, the U.S., and the Caribbean provides a qualitative edge in market positioning, offering greater resilience against localized disruptions compared to DUK's more regionally concentrated operations. Fortis's long-term contracted assets and diversified energy mix differentiate its service delivery.

Compared to Southern Company, Fortis's broader market exposure could offer superior resilience in revenue generation. Against NextEra Energy, a leader in renewable development, Fortis's balanced energy mix, including traditional hydroelectric and gas assets, provides greater reliability in diverse conditions. While NEE might lead in innovation speed for renewables, Fortis's regulatory strengths and operational steadiness offer better capital efficiency. In its home Canadian market, Fortis and Emera share similarities, but Fortis's extensive hydroelectric capacity and long-term asset ownership strategy provide a robust energy mix and stable market positioning.

Fortis's competitive advantages, or moats, are primarily its diversified geographic presence, regulatory licenses, and established energy infrastructure. These tangible benefits translate into enhanced customer loyalty and stable regulated income, contributing to superior margins and capital efficiency. The company's technological investments, such as battery storage, further enhance its competitive standing by enabling efficient renewable integration and grid stability.

Future Horizons: Outlook, Guidance, and Opportunities

Fortis's outlook is characterized by significant growth opportunities, particularly in Arizona and through its transmission segment, ITC. Tucson Electric Power (TEP) is at the forefront of new retail load growth, having reached an "agreement with a data center customer to serve a demand of approximately 300 megawatts that starts to ramp up in 2027 and will use existing and planned capacity." Further negotiations are underway for a full build-out to 600 megawatts at this initial site, and a potential second site requiring 500 to 700 megawatts, which would necessitate substantial new generation and transmission investments. Such a 300-megawatt load factor customer could increase TEP's retail sales by approximately 20% at full production. The company also estimates US$2.5 billion to US$5 billion of incremental investment opportunity associated with UNS Energy's Integrated Resource Plans.

In the transmission sector, ITC is poised for significant expansion through the MISO Long Range Transmission Plan (LRTP) Tranche 2.1 projects. The MISO Board approved 24 projects totaling US$21.8 billion in December 2024, with ITC's estimated portion ranging from US$3.7 billion to US$4.2 billion. These investments, primarily expected beyond 2029, are equivalent to 40% of ITC's current rate base. Additionally, the Big Cedar Load Expansion Project in Iowa, approved under MISO's expedited review, will involve transmission upgrades to serve 1,600 megawatts of new data center load, with a potential investment of up to USD 400 million. ITC also sees the possibility of approximately 5,000 megawatts of additional load growth from other proposed data center and economic development projects.

Regulatory progress is a key enabler of this growth. TEP filed its general rate application in June 2025, seeking new retail rates effective September 1, 2026, and proposing an annual formula rate adjustment. This mechanism, if approved, is expected to "improve rate stability for our customers, reduce regulatory and administrative burden as well as simplify the number of adjuster mechanisms," while allowing for timely recovery of prudent investments. Central Hudson also reached a multiyear rate settlement agreement with an allowed ROE of 9.5% and a common equity ratio of 48%, with an order expected in the second half of 2025.

Managing the Currents: Key Risks and Mitigation

Despite a strong outlook, Fortis faces several pertinent risks. The gradual and contingent nature of growth from large-scale energy projects, particularly the data center opportunities in Arizona, presents a potential risk to timely execution and expected returns, as negotiations and final investment decisions are ongoing. Regulatory risks are also apparent, with necessary approvals pending that could impact the timeline and financial returns of projects. For instance, the implementation of formula rates, while beneficial, requires commission approval.

Changes in government policies, including tariffs, pose a cost risk. While Fortis expects to recover higher costs through normal regulatory mechanisms, the company remains "laser focused on to make sure that the costs of implementing those capital plans and what we put in rate basis as cost-effective and as affordable as it can possibly be for our customers." The potential for "scalpel type cuts" to tax credits under the Inflation Reduction Act is also being monitored, though Fortis believes its existing credits are largely secure. Physical and climate risks, particularly wildfire risk, are actively managed through enhanced operational practices and Public Safety Power Shutoff (PSPS) plans implemented across its service territories. The October 2024 FERC order lowering the base MISO ROE by 4 basis points, resulting in approximately USD 26 million in refunds for ITC, highlights ongoing regulatory adjustments, though the annual EPS impact is anticipated to be less than $0.01.

Conclusion

Fortis Inc. presents a compelling investment thesis rooted in its stable, regulated utility model and a robust, accelerating capital plan. The company's strategic focus on infrastructure modernization, clean energy transition, and capitalizing on emerging load growth, particularly from data centers and large-scale transmission projects, positions it for sustained long-term value creation. Its consistent financial performance, strong liquidity, and a commitment to dividend growth underscore the resilience of its business model in a dynamic industry.

While regulatory approvals and the contingent nature of some large projects present execution risks, Fortis's proactive engagement with regulators and its track record of operational excellence provide a solid foundation. The company's technological advancements, such as battery storage, further enhance its competitive standing by enabling efficient renewable integration and grid stability. For discerning investors, Fortis offers a dependable growth story, driven by essential infrastructure investments and a clear strategic roadmap to meet evolving energy demands.