BMO on FTSApril 15, 2021 | 20:35 ET | 20:35 ET~ Fortis FTS-TSX Rating Outperform Price: Apr-15 $54.79 Target $60.00 Total Rtn 13% Bottom Line: FERC's signal to potentially reduce transmission incentive adders would be an incremental negative for Fortis shares. That said, the potential impact is manageable and could be offset by new organic growth announcements in the years ahead. Accordingly, we are reiterating our Outperform rating and $60 target on the FTS shares. Key Points FERC signals that it could reduce transmission incentives. In a Federal Energy Regulatory Commission (FERC) proceeding today, the agency signaled that it could look to potentially reduce or remove the existing transmission organization incentive for electric transmission companies (also commonly referred to as the RTO adder). Currently, the Commission provides a standardized 50 bps increase to the base allowed ROE to transmission companies that join a Transmission Organization (this is in addition to the independence adder). We believe the market will be surprised by this action especially in the context of recent directional positive language from the FERC (and U.S. President Biden) on the importance of electric transmission infrastructure to support the planned U.S. renewable power construction build-out. ~2% "potential" EPS downside. If the RTO adder is hypothetically reduced to zero, the all-in ITC ROE would decline to 10.27% vs. 10.77% currently. Utilities in North America generally have an allowed ROE ranging from 8.5-10%. Every 10 bps change in ITC ROE is about $0.01/sh impact to FTS, translating to ~$0.05 EPS downside potential or 2% of 2022E consensus ($2.95) if the RTO is fully stripped. ITC is 31% of the company's total earnings. Next steps. Following the proceeding, FERC issued a supplemental notice of proposed rulemaking to propose and seek comments on this potential change in transmission incentive policies. The Commission will then issue a final ruling. If the final ruling results in a reduction in the RTO adder, we would not be surprised to see the industry challenge the final ruling in courts. At this juncture, we are maintaining our ITC earnings estimates.
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Seems counterintuitive to me. With the anticipated increased load on the grid due to advent of millions of EV's this should be the time to increase incentives.