ITC Holdings (ITC) is a mid-cap regulated electric utility with substantial growth prospects not seen elsewhere in the sector. ITC is expected to grow earnings by 13% a year, more than double the utility sector’s 4% to 6% growth rate. ITC focuses solely on federally regulated (Federally Energy Regulatory Commission FERC) transmission assets where allowed return on investments are higher than the typical state-regulated assets. The difference is federal regulations historically allowed for about 12% to 13% return on equity vs. the most recent quarter’s rate case average for state regulated allowed return on equity of 10.3%

In June 1014, the FERC reduced the formula for allowed ROE on transmission assets.  Because ITC is an independent company, it is allowed an adjustment upwards for its allowed ROE and the net result will be a declining ROE from its current average 13.1% to closer to 12%.  Larger transmission subsidiaries of giant utilities will experience a deeper reduction in allowed ROE to around 10.5% to 11.0%, more inline with state regulators.

Translating this into potential profits – for every dollar ITC invests in transmission assets, the allowed return is about 17% higher than the average utility investment whose rates are regulated by state agencies. The company just announced a $4.5 billion capital expenditure budget for the next 5 years. This should drive earnings higher by 11% to 13% annually as these assets become included in its rate base calculations. Net Property, Plant and Equipment should double in size from $4.8 billion to over $9.3 billion by 2018.

The stock has had an impressive run over the past year, rising from $29 to $38. ITC is up 27% over the previous 12 months while the S&P Utility ETF (XLU) is up 12%. Price targets range from $41 to $48, leaving plenty of room for future shareholder returns. There are currently 156 million shares outstanding, which is low for the sector, even after a recent 3-1 stock split (remember those?).

Over the past few years, the stock has had several uninterrupted moves higher. After collapsing in the 2009 market meltdown from $17 to $7, the stock rose nonstop back to $17 in 2010, paused a bit to $15, then rose to $26 in 2011. The stock paused again between $25 and $22, and then ran up to $32, paused again, then climbed to $35 in 2012/2013. Recently, the stock fell back to $31, and then charged up to its current $37 as the stock split was announced. Share prices would have to drop below $34 to signal a break in the most recent up trend.

The dividend yield is quite low for a utility, as ITC has been plowing investable cash back into its cap ex program. The current yield is only 1.5%, but dividends are expected to grow by 10% annually over the next few years. Dividend growth investors should be savoring this growth rate.

ITC may be considered to be fully valued and future capital gains will come from higher earnings and dividends. ITC is trading at a PE of 23, equal to its previous 5-yr high, and price to cash flow ratio is double industry valuations. With a low payout ratio of 36%, higher earnings and an expansion of the payout ratio will support higher dividends over the long-term.

Starting a beginning position in ITC, with the concept of adding to shares over time, would make a timely addition to the utility allocation of your portfolio.