Topic: Dividend Stocks

A 3.7% yield and new projects make Fortis Inc. appealing

September 8, 2020|by Jim Bates

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This firm is now focused on improving the performance and reliability of its regulated businesses rather than pursuing new acquisitions.  

That not only cuts risk but also provides extra cash flow to raise annual dividend rates by 6% each year through 2024. 

FORTIS INC. (Toronto symbol FTS; www.fortisinc.com) began supplying electricity to St. John’s, Newfoundland, in 1885. It is now the main power utility in that province as well as PEI.

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Over the past few years, Fortis has used acquisitions to cut its reliance on Atlantic Canada. In 2004, the company paid $1.5 billion for regulated power companies in Alberta and B.C. Fortis later paid $3.7 billion for Terasen (now called Fortis BC Energy). It distributes natural gas to 1.0 million customers in B.C.

The company has also expanded outside of Canada. In June 2013, it paid $1.5 billion U.S. for CH Energy Group. It distributes electricity and gas in the Mid-Hudson River Valley of New York State. In August 2014, Fortis then purchased UNS Energy for $4.5 billion. It operates power plants and distributes electricity and gas in Arizona.

In October 2016, Fortis again expanded in the U.S. with the purchase of ITC Holdings Corp. (New York symbol ITC). It owns 25,100 kilometres of high-voltage power lines in the U.S. Midwest. Including ITC’s $4.8 billion U.S. debt, the total purchase price was $11.8 billion. Fortis later sold a minority stake in ITC to Singapore’s sovereign wealth fund for $1.2 billion U.S.

As a result of those acquisitions, the company now gets about 65% of its earnings from its U.S. businesses.

With those operations, Fortis’s revenue rose 30.0%, from $6.76 billion in 2015 to $8.78 billion in 2019. Earnings before unusual items soared 89.3%, from $589 million to $1.12 billion. The company sold shares to help pay for those acquisitions, so earnings per share gained just 20.9%, from $2.11 to $2.55.

To further cover the costs of its acquisitions, Fortis sold its 51% interest in B.C.’s Waneta Expansion Hydroelectric Project for $1 billion in April 2019. That’s partly why revenue in the first quarter of 2020 fell 1.8%, to $2.39 billion from $2.44 billion a year earlier.

Excluding one-time items, earnings fell 0.3%, to $315 million from $316 million. Due to more shares outstanding, earnings per share fell at a faster rate of 8.1%, to $0.68 from $0.74.

COVID-19 has had little impact on Fortis’s operations. Higher power demand from residential users, many of whom are working from home during the crisis, has helped offset lower demand from industrial users. Hotter-than-normal weather in Arizona also spurred higher demand for electricity to power air conditioning systems.

Dividend Stocks: More renewable projects are in the pipeline

The company now plans to spend $18.8 billion on new projects and upgrades to its operations between 2020 and 2024. Most of that spending will go toward improving the reliability of its transmission lines.

Fortis is also converting its fossil fuel-burning power plants in Arizona to renewable sources. It will cut emissions at its Tucson Electric Power utility by 80% as part that overall plan to reduce carbon emissions. The goal is to complete the Tuscon cuts by 2035 through the closure of two coal-fired power plants. New wind and solar projects will replace them.

The company expects renewable sources to supply 40% of Tucson Electric’s total output by 2030. That should rise to 70% by 2035.

Fortis is also planning to build a new 47-kilometre gas pipeline that would supply a liquefied natural gas (LNG) facility in Squamish, B.C. It originally expected to complete the pipeline for the plant’s opening in 2023. However, disruptions caused by COVID-19 will probably delay the project by a year or two.

Outside of its budgeted five-year plan, the company is evaluating several other projects. Those include a new underwater transmission line for Lake Erie. It will connect the electrical power systems of Ontario with those of the northeastern U.S. A two-way line makes it easier for electricity producers in both regions to trade excess power. If Fortis decides to move ahead with that project, it could begin operating as early as 2024.

All together, Fortis’s capital investments will increase its rate base by about $10 billion to over $38 billion in 2024. Regulators use rate base—the value of the company’s assets—to calculate its approved rate of return and the power rates for its customers.

The rising value of the company’s rate base, and the resulting increase in cash flow, is why Fortis now plans to raise your dividend by 6% each year through 2024. The current annual rate of $1.91 yields 3.7%.

Like most utilities, the company has a high debt burden. As of March 31, 2020, its long-term debt of $23.1 billion is a high 95% of its market cap.

However, steady cash flows from its regulated businesses give Fortis plenty of room to service that debt. Moreover, it’s likely that interest rates will remain low for several years due to the COVID-19 pandemic. That will make it easier for Fortis to refinance loans that come due in the next few years. On March 31, the company also held cash of $272 million.

Recommendation in The Successful Investor: Fortis Inc. is a buy.