Fortis is one of those companies that seem to successfully expand through acquisition. The utility’s recent purchases have helped to diversify its geographical presence while also limiting its risk.

FORTIS INC. (Toronto symbol FTS; www.fortisinc.com) began supplying electricity to St. John’s, Newfoundland, in 1885. The company is now the main power utility in Newfoundland and PEI.

To cut its reliance on Atlantic Canada, Fortis paid $1.5 billion for regulated power companies in Alberta and B.C. in 2004. It later acquired Terasen (now called Fortis BC Energy), which distributes natural gas to 1.2 million customers in B.C. Fortis paid $3.7 billion for this business.

The company is also using acquisitions to expand outside of Canada. In June 2013, it paid $1.5 billion U.S. for CH Energy Group, which distributes electricity and gas in New York State’s Mid-Hudson River Valley. In August 2014, Fortis purchased UNS Energy for $4.5 billion. This firm operates power plants and distributes electricity and gas in Arizona.

Thanks to these new operations, Fortis’s revenue jumped 79.5%, from $3.7 billion in 2011 to $6.7 billion in 2015.

Earnings rose 12.4%, from $347.0 million in 2011 to $390.0 million in 2013. The company typically sells new shares to pay for its acquisitions. Due to more shares outstanding, earnings per share declined 6.3%, from $1.74 to $1.63.

Costs to integrate these new businesses cut Fortis’s earnings to $1.39 a share (or $374.0 million) in 2014. However, earnings rebounded to $2.59 a share (or $728.0 million) in 2015. If you disregard unusual items, earnings per share rose 20.6%, from $1.75 in 2014 to $2.11 in 2015.

In February 2016, Fortis announced its largest acquisition to date. It is paying $6.9 billion U.S. in cash and shares for ITC Holdings Corp. (New York symbol ITC).

This firm owns 25,100 kilometres of high-voltage power lines in the U.S. Midwest. Including ITC’s $4.4-billion U.S. debt, the total purchase price is $11.3 billion U.S.

Following the acquisition, ITC shareholders will own 27% of the combined company. Fortis will continue to trade on the TSX, but will also be listed on the New York Stock Exchange.

The company will issue $2 billion U.S. in new bonds to help pay for ITC. The move will add to its long-term debt of $11.0 billion as of March 31, 2016. That’s a high 87% of its market cap.

However, high debt levels are common for utility companies. Their rate-regulated operations, like ITC, give them steady cash flows to service their debt and invest in new projects. Moreover, Fortis is selling 19.9% of ITC to Singapore’s sovereign wealth fund for $1.2 billion U.S.

Blue Chip Stocks: ITC shareholders vote on the deal

ITC shareholders have already voted in favour of the deal. If regulators also approve, Fortis expects to complete the purchase by the end of 2016.

Big acquisitions like this add risk. However, the combined company will be among the top 15 power utilities in North America. ITC’s transmission lines also complement Fortis’s power plants and related operations in Arizona and New York State.

In addition, the purchase will help Fortis profit from the U.S. government’s plan to encourage new wind farms and other renewable-energy projects. That should spur demand for new transmission lines, particularly in the U.S. Midwest.

Fortis also recently paid $266 million U.S. for a 93.8% stake in the Aitken Creek underground natural gas storage facility in northeastern B.C.; BP Canada owns the remaining 6.2%.

This purchase will let Fortis benefit from expanding gas production in the Montney region. It would also help the company profit from plans to construct terminals on B.C.’s Pacific coast in order to export liquefied natural gas to Asia. If built, these new plants will likely need facilities to store their unprocessed gas and avoid supply disruptions.

In addition to acquisitions, Fortis continues to upgrade its existing operations. Over the next five years through 2020, it expects to spend $9 billion on these improvements. Regulators will probably let the company pass along most of these costs to its customers in the form of higher power rates.

Excluding ITC, Fortis will probably earn $2.16 a share in 2016. The stock trades at 20.8 times that estimate. ITC should lift its 2017 earnings to $2.49 a share, and the stock trades at a more reasonable 18.1 times that forecast.

The company has increased its dividend for 42 consecutive years; the current annual rate of $1.50 a share yields 3.3%. The additional earnings from ITC will help Fortis meet its goal of raising the dividend by 6% each year through 2020.
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