Canadian utility makes push into U.S.
North American gas, electric markets prove enticing
From its remote headquarters in Newfoundland, Canada’s largest investor-owned utility is making inroads into the U.S. energy market.
Fortis Inc. began trading on the New York Stock Exchange this month, after completing its acquisition of ITC Holdings, the biggest independent electric transmission company in the U.S., for $11.3 billion.
The ITC deal followed Fortis’ purchase of electric and natural gas utilities in New York and Arizona in 2013 and 2014, respectively.
And more deals are likely for the company, which now operates in nine U.S. states, five Canadian provinces and three Caribbean countries.
All told, U.S. holdings now account for 60% of Fortis’ $45 billion in assets.
“There’s been a fair amount of consolidation that’s occurred in the U.S. utility industry,” Barry Perry, the president and CEO of Fortis, said after ringing the bell to open the New York Stock Exchange last Tuesday.
“There are probably four or five (companies) that could make sense for Fortis. I’m not going to give the names, but I think when we’re ready to grow again, we’ll have some more opportunities.”
For the most part, Fortis is interested in companies primarily involved in the transmission and distribution of electricity, not power generation, he said.
The year 2016 is shaping up as a banner one for mergers and acquisitions in the North American electric and gas markets, with $69.6 billion in deals through the first six months of the year, according to the professional services firm PwC.
That exceeds the total for all of 2015: $66.8 billion.
With demand for electricity in the U.S. stagnant and the price of power persistently low, utilities are looking for improved economies of scale through consolidations with other operators, especially in regulated markets, where rates of return are more or less assured.
Moreover, energy markets are changing as record U.S. production and low prices make gas the leading fuel for electricity production, and concerns over car- bon emissions drive investments in wind, solar and other forms of renewable energy.
“ITC was a unique opportunity, really,” Perry said of the Michigan-based transmission company, which was founded in 1999 as a subsidiary of the utility Detroit Edison and owns highvoltage lines in seven states, mostly in the Midwest.
“It gave us a good footprint in the U.S. where wind generation is occurring. We think we’re on the right side of a long-term trend in investment in transmission, to hook up renewable power, to modernize the grid,” he said.
That ITC footprint includes 16,000 miles of transmission lines, enough to cross Canada from Fortis’ headquarters in St. John’s, Newfoundland and Labrador, to Victoria, British Columbia, five times.
“It’s sort of an evolution for us,” Perry said of Fortis, which started as a utility serving St. John’s in 1885. “We sort of marched across the country buying some other investor-owned utilities. Then we looked back across the country and realized there weren’t a lot of other opportunities to expand. Most of the remaining electricity infrastructure in Canada is owned by big government corporations like Hydro Quebec and Manitoba Hydro.”
With those Canadian assets likely to remain in government hands, Fortis started focusing on the U.S. market, where more opportunities beckoned, and government regulation is comparable to that of Canada.
“I think there are still those opportunities to continue to expand in America, more than there is in Canada at this point in time,” he said.
Recent moves by other Canadian energy companies bear out Perry’s claim.
In September, Enbridge Inc. announced plans to buy Houston-based Spectra Energy Group for $28 billion, a purchase that would combine the companies’ oil and gas pipeline assets to create the largest North American energy infrastructure company.
Over the summer, TransCanada, the oil and gas pipeline giant in Calgary, completed a $13 billion acquisition of another Houston-based company, Columbia Pipeline Group, to form one of the leading gas transmission businesses on the continent.
Despite his company’s growing presence in the U.S., Perry has no plans to move Fortis’ small headquarters and staff.
“There’s something special about being based in St. John’s,” he said. “It keeps us grounded.”