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Fortis forks out big premium to acquire U.S. utility

Fortis Inc. is paying a substantial premium for a beachhead in the U.S. regulated power business as the St. John's-based company seeks expansion opportunities south of the border.

At first blush, the details of the $470-million (U.S.) deal agreement to buy Vermont's largest electric utility would appear to be a departure from Fortis's typically tight-fisted approach to acquisitions.

Known for his disciplined approach, Fortis president and chief executive officer Stan Marshall has always insisted on not overpaying for additions to his holding company's existing gas and electricity assets.

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However, Fortis is paying $35.10 a share in cash for Central Vermont Public Service Corp. (CVPS) in a transaction that includes the assumption of about $230-million in debt. The per-share price works out to a 44-per-cent premium to the company's previous trading price.

"It seems to be a sizable premium for Central Vermont Public Service shareholders," said Daniele Seitz, an analyst with Dudack Research Group LLC in New York.

The CVPS deal is in addition to Fortis's already announced plans to spend about $5.5-billion (Canadian) in capital expenditures over the next five years.

But investors who have relied on a steady dividend stream from Fortis over the years need not fret, even if the acquisition price does appear somewhat "lofty," says UBS Securities Canada Inc. analyst Chad Friess.

In a separate announcement Monday, Fortis announced a $300- to $345-million bought deal of common shares, at a purchase price of $33 a share, net proceeds of which will be used for a variety of purposes, including paying down debt.

Mr. Friess points out in a research note that the equity issue will help keep Fortis's debt-to-capital ratio in check; it will increase only modestly to 59 per cent from 58 per cent.

"It's a positive read-through for the dividend. They should be able to continue to grow the dividend," Mr. Friess said in an interview Monday.

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CVPS, based in Rutland, Vt., will likely prove to be a stable source of earnings growth, he added. The analyst is forecasting an earnings contribution from CVPS of $24-million (U.S.) in 2012.

"While the deal appears somewhat rich, Vermont brings with it organic growth opportunities which [Fortis]believes will drive annual rate base growth of 9 per cent through 2015," Mr. Friess wrote in his note.

"In addition, we believe this initial foray into the U.S. utility sector will serve as a springboard for further accretive deals of regulated assets. Assuming [Fortis']strong organic growth outlook is preserved, we see little risk to valuation."

Fortis, Canada's largest publicly listed distribution utility, has total assets of about $13-billion (Canadian). Fiscal 2010 revenue reached about $3.7-billion. It serves some 2.1 million gas and electricity customers.

Regulated holdings include electric distribution utilities in five Canadian provinces and three Caribbean countries and a natural gas utility in British Columbia. There are also non-regulated generation assets in Canada, Belize and upper New York state.

Peter Fox-Penner, a principal at Washington-based economic consultancy Brattle Group, says there is some risk venturing into the regulated U.S. power market because it has a more marked political element than in other countries.

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"In every state, there is concern over electricity rates," he said in an interview. "That is an ever-present consideration in the United States regulated electricity industry."

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