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Stock Strategist

Wide Moat and FERC Policy Should Continue to Drive Growth for ITC

It has among the best prospects of any regulated utility we cover.

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Since its initial public offering in 2005,  ITC Holdings (ITC) has achieved healthy returns on invested capital and strong earnings growth. This success has been due to the company's wide economic moat as well as incentive rates for independent transmission companies, which the Federal Energy Regulatory Commission has used to promote efficiency improvements to the U.S. electricity transmission grid. Although returns are likely to decline as growth shifts to ITC's transmission businesses with lower allowed returns on equity, we believe earnings growth will remain strong and returns will stay well above ITC's cost of capital. We think these attractive returns on capital,  growth prospects , low uncertainty due to constructive regulation, and 1.7% dividend yield make ITC an attractive opportunity for long-term investors.

ITC is the only pure-play independent transmission company in the United States. In 1999, FERC Order 2000 created the legal basis for ITC. The ruling required utilities to transfer operational control of their transmission systems to regional transmission organizations to facilitate more-competitive wholesale markets. It also allowed RTOs to accommodate independently owned, for-profit transmission companies like ITC.

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Charles Fishman does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.