- ITC takeover continues Canadian invasion of U.S. power sector
- Acquisition caps $10.4 billion of U.S. purchases for Fortis
Fortis Inc. and Algonquin Power & Utilities Corp. turned to the U.S. on the same day for their biggest deals ever as Canadian power companies increasingly seek higher returns buying assets south of the border.
Fortis’s $6.9 billion cash-and-stock acquisition of power-line operator ITC Holdings Corp. caps $10.4 billion of U.S. purchases by Fortis since 2012. Algonquin agreed Tuesday to pay about $1.5 billion for a Missouri utility. The deals are part of about $60 billion of U.S. utility assets bought by Canadian companies over the past decade, according to data compiled by Bloomberg.
The Canadian shopping spree by Fortis, Algonquin and Emera Inc. is driving U.S. power deals as they seek higher returns in a bigger market for generation and transmission lines. Utilities in the U.S. including ITC are generally allowed by regulators to collect bigger profits and Canadian buyers with cheaper access to financing are often able to pay more.
“They have a lower cost of capital, so coming in Fortis had a bit of an advantage over some of its U.S. peers,” Andrew Bischof, an analyst at Morningstar Inc. in Chicago, said in a phone interview. Fortis will gain from the acquisition as fossil-fuel generation is swapped out for cleaner power, driving demand for new transmission lines, he said. “There’s a very long runway for transmission opportunities. There are a lot of coal plant retirements, renewable builds and updating the current infrastructure.”
Algonquin announced an agreement to purchase Empire District Electric Co. for $34 a share in cash. Algonquin, an Oakville, Ontario-based renewable energy utility, is expanding its footprint of regulated businesses in the U.S. Midwest with the acquisition of Joplin, Missouri-based Empire, the companies said in a statement. Including debt, the deal amounts to $2.4 billion, the companies said.
By acquiring ITC, Fortis will add to its U.S. holdings. ITS will make up 39 percent of the regulated earnings of the St. John’s, Newfoundland and Labrador-based company, according to a company presentation. Fortis will get 62 percent of its earnings from the U.S. after the deal, up from about 38 percent previously, according to National Bank Financial estimates. The power and natural gas distributor bought Arizona utility owner UNS Energy Corp. for $2.5 billion in cash in 2014 and New York utility owner CH Energy Group Inc. for about $969 million in 2013.
The ITC and Empire purchases follow $1.51 billion of acquisitions announced last October by TransCanada Corp. and Brookfield Renewable Energy Partners LP of Pennsylvania power plants and Emera’s $6.5 billion purchase of Teco Energy Inc. announced last September.
Novi, Michigan-based ITC, the only publicly traded U.S. company whose assets are entirely transmission lines, is currently allowed returns on equity of about 13 percent by the Federal Energy Regulatory Commission, compared with Fortis’s 9 percent, according to Patrick Kenny, an analyst at National Bank Financial in Calgary. ITC’s planned capital program is expected to support compounded average annual rate base growth of about 7.5 percent through 2018, compared with Fortis’s 4.5 percent growth expected through 2020, Kenny wrote in a note on Tuesday.
Fortis has its origins with the formation of the St. John’s Electric Company in 1885 in Canada’s easternmost province a few years after Thomas Edison introduced commercial use of electricity for lighting. The company has grown dramatically over the past decade, thanks to a string of acquisitions that continue with the ITC purchase.
“This deal has it all for Fortis and was a bull’s eye for us,” Barry Perry, chief executive officer of Fortis, said Tuesday on a conference call. “This company has substantial growth prospects.”
Consolidation in the U.S. power industry is poised to continue as companies try to overcome weak electricity demand with acquisitions, according to Bischof. However, with deal premiums becoming “lofty,” buyers will have to be careful, he said.
Fortis is paying the equivalent of $44.90 for each ITC share, a 14 percent premium to Monday’s close, and a 33 percent higher than the close on Nov. 27, before Bloomberg News reported that ITC was exploring a sale. The offer, which totals $11.3 billion including assumed debt, includes $22.57 in cash and 0.752 Fortis shares apiece.
Fortis fell a record 10 percent to C$37.14 on Tuesday in Toronto after the company said it plans to issue new shares to partially fund the equity portion of the ITC purchase. That dragged ITC shares 1.9 percent lower. Algonquin, which announced the deal near the close of trading, fell 2.5 percent to C$11.55.
“Utilities are paying up for growth to offset some of the negative to slightly negative demand growth that you’re seeing now out of the U.S.,” Bischof said. “It’s definitely a longer-term play to offset that lagging growth on the electric side.”