Fortis Inc. (FTS)

Fortis Inc. owns and operates power plants and utility networks across Canada and the United States. The company generates electricity, distributes it through wires and cables to customers’ homes and businesses, and also delivers natural gas through pipelines. It is a regulated utility, which means government agencies approve how much it can charge, but also guarantee it a stable, predictable return on the infrastructure it builds.

The business: moving electricity and gas from source to home

Fortis started in 1954 as a local utility in Newfoundland and has grown into a diversified utility company serving roughly three million customers across eight provinces in Canada and parts of the United States.

The company operates in three ways. First, it owns power generation assets — dams that produce hydroelectric power, natural gas turbines, and renewable energy facilities. These plants produce electricity. Second, it owns and operates the wires and poles and cables that move electricity from those plants to towns and cities. Third, it owns natural gas pipelines and distribution networks that deliver gas to homes and businesses for heating and cooking.

The work is straightforward but essential. Someone has to own the power plants. Someone has to own the wires. Without utilities, there is no electricity in your home.

Why this business has a predictable return

Most businesses try to earn a profit by charging whatever the market will bear. Utilities do not work that way. Because Fortis provides essential services that people cannot live without, and because there is no competition in most of its service territories, government regulators step in. They examine Fortis’s costs — the cost to build a new power plant, the cost to run it, the cost to maintain the distribution network — add an approved profit margin on top, and set the rates the company can charge. It is called “cost-plus regulation.”

This system has two effects. On one side, Fortis cannot charge whatever it wants. If it tries to gouge customers, regulators will not approve the rate increase. On the other side, Fortis gets a guarantee: if it builds a power plant for two billion dollars, regulators will set rates high enough that the company earns an allowed return on that investment. The customer pays, but the utility’s return is predictable and stable.

This stability is attractive to investors who want steady income rather than wild fluctuations. A pension fund can count on Fortis paying a reliable dividend year after year because the cash flows are locked in by regulation.

Making money in a regulated world

Fortis earns money in several ways within this structure.

Electricity generation and distribution generates revenue by selling electricity. Fortis’s hydroelectric dams in Newfoundland and Labrador are particularly valuable because the electricity is cheap to produce once the dam is built — water flows downhill, and the cost per megawatt-hour is very low. That low cost of generation becomes high profit margin when combined with the regulated rate, which is set to reflect the average cost of power in the region, not Fortis’s unique low cost.

Natural gas distribution generates revenue by delivering gas through pipelines to residential and commercial customers. The gas itself is bought from producers; Fortis buys it wholesale and sells it to customers at a regulated rate. The profit margin is the difference between what Fortis paid for the gas and the regulated price, plus a profit allowance for operating the distribution network.

The company’s profit comes partly from the spread between its costs and the allowed revenue, but also from the sheer size of the infrastructure it owns. Every mile of wire, every cubic foot of pipeline, every megawatt-hour of power — it is all generating a small but guaranteed return. Building more infrastructure therefore builds more profit.

Growth for a mature business

Fortis cannot grow by raising prices — regulators do not allow that. Instead, it grows by building new infrastructure. More dams, more distribution lines, more pipelines. Each investment goes into the “rate base” — the value of infrastructure that regulators approve a return on — so the bigger the rate base, the bigger the allowed profit.

This is why regulated utilities invest constantly. Fortis spends billions of dollars per year upgrading old power lines, replacing aging natural gas pipelines, and building new generation capacity. Some of this is replacing worn-out infrastructure (the wires eventually need replacement). Some of it is growth — connecting new neighborhoods and industrial customers to the grid.

The company is also positioned to benefit from the transition away from coal and toward renewable energy. More solar panels and wind turbines will need to be connected to the grid, which requires new wires and investment. Fortis owns the infrastructure; it will profit from building that new infrastructure and earning a regulated return on it.

The real risks utilities face

Regulated utilities are not risk-free, though people often think they are.

Regulatory risk is the biggest. If regulators decide the profit margin is too high and cut the allowed return, Fortis’s earnings fall. Canada and the U.S. are both democracies with elected governments, so regulatory policy can shift. A government could theoretically decide to lower allowed utility returns significantly, which would hurt Fortis shareholders.

Interest rate risk matters because utilities finance their infrastructure with debt. When interest rates are high, the cost of borrowing money to build a new power plant goes up, which reduces the profit from that investment. Conversely, when rates fall, utilities benefit because they can refinance old debt at lower cost.

Commodity risk hits the natural gas business. If the price of natural gas rises, Fortis has to buy it at higher cost. Regulators will eventually allow the company to pass the higher cost through to customers, but there is usually a lag. That lag eats into margins.

Operational risk is the day-to-day risk that something goes wrong — a dam fails, a pipeline ruptures, or a power plant breaks. These are catastrophic events. Fortis insures itself, but insurance is not perfect, and a major disaster could be very expensive.

How to research Fortis

Anyone studying Fortis should start with the annual 10-K filing (SEC CIK 0001666175) to understand which regulatory jurisdictions the company operates in, what the approved return is in each region, and what the company’s rate base looks like. The quarterly earnings calls reveal management commentary on regulatory proceedings, infrastructure investment plans, and how the company is positioning for the energy transition.

Key metrics include the regulated return on equity (the profit margin the regulator allows), debt-to-assets ratio (how much leverage the company carries), and dividend yield (what investors get paid). Also track the size of the rate base and the pace of capital investment — these indicate whether the company can keep growing even though its revenues are constrained.