In order to strengthen its cash flow, this electrical utility is expanding beyond its base in Atlantic Canada.
The company’s earnings were down in the most recent quarter, due in large part to losses from hedging contracts. However, regulated contracts and new projects should help sustain the company’s dividend, which has been raised each year for the past 44 years. Further increases are promised over the next four years, while the dividend yields 4.1%.
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FORTIS INC. (Toronto symbol FTS; www.fortisinc.com) is the main supplier of electrical power in the province of Newfoundland and Labrador as well as PEI.
To cut its reliance on Atlantic Canada, the company has expanded to other parts of Canada and the U.S.
In October 2016, Fortis paid $7.0 billion U.S. in cash and shares for ITC Holdings Corp. That firm 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 U.S. Fortis then sold a portion of ITC to Singapore’s sovereign wealth fund for $1.2 billion U.S.
In March 2018, Fortis reached a new funding arrangement with Ottawa and the Ontario government to move ahead with the Wataynikaneyap Power project. It will connect 17 remote First Nations communities in Northern Ontario to the main electricity grid.
The project will cost $1.6 billion and should begin operating in 2023. First Nations communities will own 51% of Wataynikaneyap Power, with Fortis owning 49%.
Fortis now plans to focus on improving the reliability and efficiency of its operations. Between 2018 and 2022, it expects to spend $15.1 billion on capital projects.
Those include $1 billion U.S. on a new underwater transmission line under Lake Erie that would connect the electrical power systems of Ontario and those in the northeastern U.S. That two-way line will make it easier for electricity producers in both regions to trade excess power.
Dividend stocks: Projected 6% dividend increases forecast through 2022
In the three months ended June 30, 2018, earnings declined 5.1%, to $240 million from $253 million a year earlier. Due to more shares outstanding, earnings per share fell at a faster rate of 6.6%, to $0.57 from $0.61. Revenue also slipped 3.4%, to $1.95 billion from $2.02 billion. Revenues were lower as a result of higher foreign exchange costs. Costs related to the new U.S. corporate tax rules also hurt its results.
The lower earnings are mainly due to losses on hedging contracts that the company uses to lock in natural gas prices at its Aitken Creek underground gas storage facility in B.C.
Rising interest rates may lower the appeal of utilities among income-seeking investors. Higher rates will also increase borrowing costs to raise funds for new projects. Even so, most of this company’s revenue comes from regulated operations. That should sustain its cash flow for upgrades, new investments and dividend increases.
Fortis has increased its dividend each year for the past 44 years. The company now plans to raise that annual payment by about 6% each year through 2022. The current annual rate of $1.70 yields a high 4.1%.
Fortis will likely earn $2.54 a share in 2018. The stock trades at a reasonable 16.4 times that estimate.
Recommendation in TSI Dividend Advisor: Fortis is a buy.
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