More Needed to Run Further

Research evidence excerpt

More Needed to Run Further

(from $83) and $60 (from $61),

respectively. Our new price targets reflect a mark-to-market to lower peer trading 2028E P/E

multiples than our last Fortis update. We continue to value the ITC business at a 15% premium

to our peer large-cap utility trading 2028 P/E multiple given its formula rates, above-average

ROE and equity ratio, and all of its incremental opportunities. We still assign a 5% premium to

the Arizona business given large load growth opportunities and formula rates. We continue to

apply a 5% discount multiple to Fortis's Central Hudson utility given its below-average allowed

ROE, equity ratio and growth profile. For the Canadian businesses, we are applying sizable

21-22x multiples, which is a 15% discount to what we estimate Hydro One is worth.

As mentioned, Canadian utilities have historically traded at premium valuations to US peers for

a few reasons: 1) investment universe scarcity with just a handful of peer investor-owned

utilities; 2) persistently lower Canadian bond yields, which make Canadian utility dividend

yields more attractive; and 3) constructive regulation with favorable, timely recovery / incentive

mechanisms. While some of these characteristics are a broad benefit for consolidated Fortis, we

are reflecting these positive attributes specifically in the 21-22x multiples we apply for valuation

of FTS's Canada businesses. As it pertains to Fortis's Canada utilities versus Hydro One, we think

H.TO warrants a stronger premium as a pure-play Canada utility with a uniquely favorable

regulatory JRAP framework that includes 1) five-year plans; 2) formula rates; 3) largely

revenue-decoupled mechanisms; and 4) performance-based incentives tied to efficiency – a

strong combination that most US peers do not fully replicate.