EUR 850.00 For Business Accounts Only

Morningstar | Fortis Positioned Well for 6% Dividend Growth

Fortis manages regulated electric and gas utilities and independent transmission assets in North America. Recent acquisitions in America have made Fortis predominantly a U.S. utility, with roughly 60% of earnings at its U.S. operations. We like that management is focusing on organic investment opportunities and its dividend.The prized asset in the U.S. is ITC Holdings, which it acquired for $11.3 billion, along with a 19.9% minority investor GIC. We think Fortis' previous acquisitions were pricey, but ITC gives Fortis an opportunity to benefit from a long runway of U.S. transmission investment opportunities at a reasonable price. The Federal Energy Regulatory Commission recently ruled that ITC was not completely independent, cutting its transmission adder to 25 basis points, down from the previous 50 basis points. ITC's allowed returns on equity are still high compared with state-allowed returns.Rounding out Fortis' North American presence are two other acquisitions: CH Energy and UNS Energy. While UNS Energy offers growth above its domestic peers, Fortis must grapple with the area's transition to distributed generation and seeking appropriate utility compensation. A challenging regulatory environment in New York could pressure returns, but management has proved adept at managing regulatory relationships and finding growth opportunities.Fortis' main regulated Canadian operations are in British Columbia, Alberta, and Newfoundland. These relatively low-risk operations result in stable earnings and fund the consistent dividend growth of the past four decades. Rate base additions should be significant as the healthier Canadian economy drives usage and customer growth.Management continues to working toward securing additional capital growth projects, particularly as rate base growth slows in the outer years of the company's five-year plan. The most promising remain the Lake Erie Connector Project and the Wataynikaneyap Transmission Power Project. However, other opportunities remain, such as renewables, further transmission development, and grid modernization. We continue to be impressed by management's ability to execute on numerous capital growth opportunities.