Fortis Inc. $27 – Toronto symbol FTS

FORTIS INC. $27 (Toronto symbol FTS; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 104.9 million; Market cap: $2.8 billion; SI Rating: Above average) operates electrical power plants in Atlantic Canada, Ontario, Alberta and British Columbia. It also invests in power utilities in the United States and the Caribbean region, and owns hotels and commercial real estate. In 2006, the company earned $1.37 a share (total $148.8 million), up 10.5% from $1.24 a share ($137.1 million) in 2005 (the 2005 earnings included an unusual $7.9 million after-tax gain). Most of the higher earnings came from strong growth at its regulated power plants in Western Canada and the Caribbean. Revenue rose 2.1%, to $1.47 billion from $1.44 billion. In the past few years, Fortis has used acquisitions to geographically diversify its operations. Its latest purchase is the regulated gas distribution business of Terasen Inc. (formerly called BC Gas), which supplies gas to over 900,000 customers in British Columbia. This deal will double the company’s customer base to 1.9 million, and nicely complement its electrical power operations. Fortis will pay $3.7 billion for Terasen, including assuming $2.3 billion of Terasen debt. The company had cash of just $40.9 million ($0.39 a share) at the end of 2006, so it plans to sell common shares worth up to $1.15 billion to help pay for this purchase. That will expand its shares outstanding by 40%. The extra shares will help offset the extra debt. Still, Fortis’s long-term debt-to-equity will probably move up, from 1.8 times to roughly 2.0 times. But the steady cash flow from these high-quality assets will help Fortis pay down its debt. After the acquisition, regulated utilities will account for 92% of Fortis’s assets, which helps cut its risk. The experience of integrating its 2004 purchase of electric power plants in Alberta and B.C. should also help it deal with provincial regulators. Fortis will probably earn $1.43 a share in 2007, excluding the Terasen assets, and the stock trades at 18.9 times that figure. The purchase should not hurt the company’s long-time policy of annual dividend increases. The current rate of $0.84 yields 3.1%. Fortis is a buy.