Fortis Inc.'s Strategic Position in the Clean Energy Transition and Grid Modernization: A Pathway to Sustainable Earnings and Dividends

Fortis Inc. (FTS) has long been a cornerstone of North America's utility sector, leveraging its regulated utility model to deliver stable earnings and consistent dividend growth. However, as the global energy landscape shifts toward decarbonization and grid modernization, Fortis is redefining its role as a strategic enabler of the clean energy transition. With a robust capital plan, regulatory tailwinds, and a disciplined approach to capital allocation, Fortis is positioning itself to sustain its long-term earnings momentum while maintaining one of the most reliable dividend records in the market.

Regulated Utility Growth: A Foundation for Earnings Stability

Fortis's business model is anchored in its regulated utility operations, which provide predictable cash flows through rate-regulated services. In 2024, the company delivered $1.6 billion in net earnings, a 6% increase in adjusted earnings per share (EPS) to $3.28, driven by 6% annual rate base growth. This growth was fueled by capital expenditures of $5.2 billion, with a $26 billion five-year capital plan (2025–2029) set to accelerate expansion. By 2029, the company expects its midyear rate base to grow from $39 billion in 2024 to $53 billion, a 6.5% compound annual growth rate (CAGR).

This rate base growth is critical for earnings sustainability. Regulated utilities derive income from the return on invested capital, meaning higher infrastructure investments directly translate to higher revenue. Fortis's focus on grid modernization, such as the $1.7 billion Wataynikaneyap Transmission Power project in Ontario, not only reduces reliance on fossil fuels but also creates long-term asset value. Such projects align with global decarbonization goals while ensuring Fortis captures the economic benefits of infrastructure upgrades.

Regulatory Tailwinds: Mitigating Risk and Enhancing Predictability

Regulatory developments in 2024 further solidified Fortis's advantage. The Arizona Corporation Commission's approval of a formula rate plan in October 2024 allows utilities to adjust rates annually based on predefined formulas, reducing the lag between cost increases and rate adjustments. This mechanism provides Fortis with greater operational flexibility and aligns with its strategy to minimize earnings volatility.

While the Federal Energy Regulatory Commission (FERC) reduced the base return on equity (ROE) for MISO transmission owners to 9.98% in 2024, the company's diversified portfolio and focus on high-growth regions like British Columbia and Alberta offset this impact. The retroactive adjustment resulted in a $22 million after-tax charge, but Fortis's scale and regulatory engagement capacity ensure such challenges are manageable.

Decarbonization Investments: Fueling Future Growth

Fortis's commitment to the clean energy transition is not merely symbolic. The company has already reduced corporate-wide direct greenhouse gas (GHG) emissions by 34% since 2019 and aims for a 50% reduction by 2030, with a net-zero target by 2050. These goals are operationalized through investments in renewable gas solutions, liquefied natural gas (LNG) infrastructure in British Columbia, and grid resilience projects.

The Wataynikaneyap project, which connects 17 First Nations communities to the Ontario grid, exemplifies Fortis's dual focus on sustainability and social impact. By replacing diesel generators with a modern transmission line, the project reduces emissions while unlocking economic opportunities for Indigenous communities. Such initiatives position Fortis as a partner in the energy transition, attracting long-term capital and regulatory support.

Dividend Sustainability: A 51-Year Legacy of Trust

Fortis's dividend growth is underpinned by a disciplined payout ratio and strong operating cash flow. In 2024, the company maintained a payout ratio of 73.6% based on actual earnings and 72.7% on adjusted earnings, with operating cash flow reaching $3.88 billion—a $337 million increase from 2023. Despite capital expenditures rising to $5.25 billion in 2024, the company's operating cash flow growth and debt financing strategy (leveraging regulated utility debt) ensure dividend sustainability.

With a long-term guidance of 4–6% annual dividend growth through 2029, Fortis continues its 51-year streak of consecutive increases. This reliability is particularly valuable in a low-growth, high-interest-rate environment, where investors seek income-generating assets with downside protection.

Investment Thesis and Recommendations

For long-term investors, Fortis represents a compelling case study in balancing regulated utility growth with proactive decarbonization. The company's strategic investments in grid modernization and clean energy infrastructure align with global energy transition trends, ensuring its relevance in a low-carbon future. Regulatory progress, such as formula rate approvals, further enhances earnings predictability, while its disciplined capital allocation supports both dividend growth and operational resilience.

Key Takeaways for Investors:
1. Dividend Safety: Fortis's payout ratio remains sustainable, supported by strong operating cash flow and a conservative capital structure.
2. Earnings Growth: The $26 billion capital plan and 6.5% CAGR rate base growth provide a clear pathway for long-term EPS expansion.
3. Regulatory Tailwinds: Formula rate mechanisms and decarbonization incentives reduce regulatory risk and align with policy trends.
4. Sustainability Alignment: Fortis's emission reduction targets and clean energy projects position it as a leader in the transition to a greener grid.

In a market increasingly focused on ESG (Environmental, Social, and Governance) criteria, Fortis Inc. stands out as a utility that combines financial discipline with strategic foresight. For investors seeking stable income and long-term capital appreciation, Fortis's strategic position in the clean energy transition and grid modernization offers a compelling case for inclusion in a diversified portfolio.