Fortis Reports 2015 Earnings of $728 Million
Fortis Inc. (“Fortis” or the “Corporation”) (TSX:FTS), a leader in the North American electric and gas utility industry, released its 2015 annual results today. Driven by its U.S. utility acquisitions, gains on non-core asset dispositions, completion of the Waneta hydroelectric generating facility (“Waneta Expansion”), and strong results from its Canadian utilities, Fortis’ net earnings attributable to common equity shareholders for 2015 were $728 million, or $2.61 per common share, compared to $317 million, or $1.41 per common share, for 2014. For the fourth quarter of 2015, net earnings attributable to common equity shareholders were $135 million, or $0.48 per common share, compared to $113 million, or $0.44 per common share, for the same period in 2014.
“Fortis had a year of transformation and growth in 2015, with all utilities contributing,” said Barry Perry, President and Chief Executive Officer, Fortis. “We delivered a record year in earnings, which demonstrates the success of our growth strategy. We also advanced our business on several fronts. We successfully integrated our Arizona utility; divested non‑core assets to focus on the core utility business; and sharpened our focus on additional investments within our franchise areas.
“Last week we announced the acquisition of ITC, a premier pure-play transmission utility in a transaction valued at US$11.3 billion,” continued Mr. Perry. “We are very excited about this opportunity to continue our growth strategy, further strengthen and diversify our business, and also accelerate our growth. We continue to be committed to profitable growth that adds value for our shareholders.”
Strong earnings and cash flow; successful execution of capital program
- On an adjusted basis, net earnings attributable to common equity shareholders for 2015 were $589 million, or $2.11 per common share, an increase of $195 million, or $0.36 per common share, over 2014. On an adjusted basis, for the fourth quarter of 2015, net earnings attributable to common equity shareholders were $142 million, or $0.51 per common share, an increase of $27 million, or $0.06 per common share, over the same period in 2014. A reconciliation of adjusted net earnings and adjusted earnings per common share is provided in the Corporation’s 2015 Management Discussion and Analysis.
- Factors that resulted in growth in adjusted earnings per common share included:
- a full year’s contribution from UNS Energy in Arizona, which was acquired in mid‑August 2014, partially offset by Corporate finance charges and an increase in the weighted average number of common shares outstanding associated with the acquisition.
- contribution of $22 million for the year and $6 million for the fourth quarter from the Waneta Expansion, which came online in early April 2015;
- rate base growth associated with capital expenditures and growth in the number of customers at FortisAlberta;
- a higher allowance for funds used during construction at FortisBC Energy. The timing of earnings associated with regulatory deferral mechanisms at FortisBC Energy and FortisBC Electric also had an overall favourable impact on the fourth quarter of 2015.
- the resetting of customer rates at Central Hudson, effective July 1, 2015;
- the continued strength of the US dollar relative to the Canadian dollar. On an annual basis, earnings per common share are affected by approximately $0.04 for each $0.05 change in the US dollar-to-Canadian dollar exchange rate.
- Earnings growth was tempered by an increase in Corporate expenses and lower earnings contribution due to the sale of the commercial real estate and hotel assets.
- Cash flow from operating activities for 2015 totalled $1.7 billion, 70% higher than last year. The increase was driven by higher cash earnings and favourable changes in working capital.
- Consolidated capital expenditures for 2015 totalled $2.2 billion, the Corporation’s largest annual capital program to date, and was in line with the Corporation’s forecast. The $900 million Waneta Expansion was completed in 2015, ahead of schedule and within budget, and progress continues on the $440 million Tilbury liquefied natural gas facility expansion in British Columbia.
Continuation of growth strategy through acquisitions
Fortis has grown its business through strategic acquisitions that have also contributed to strong organic growth over the past decade. On February 9, 2016, Fortis and ITC Holdings Corp. (“ITC”) (NYSE:ITC) entered into an agreement and plan of merger pursuant to which Fortis will acquire ITC in a transaction (the “Acquisition”) valued at approximately US$11.3 billion, based on the closing price for Fortis common shares and the foreign exchange rate on February 8, 2016. ITC is the largest independent pure-play electric transmission company in the United States. Under the terms of the transaction, ITC shareholders will receive US$22.57 in cash and 0.7520 Fortis common shares per ITC share, representing total consideration of approximately US$6.9 billion, and Fortis will assume approximately US$4.4 billion of ITC consolidated indebtedness. The financing of the Acquisition has been structured to allow Fortis to maintain investment‑grade credit ratings and is consistent with the Corporation’s existing capital structure. Financing of the cash portion of the Acquisition will be achieved primarily through the issuance of approximately US$2 billion of Fortis debt and the sale of up to 19.9% of ITC to one or more infrastructure-focused minority investors.
The closing of the Acquisition is subject to ITC and Fortis shareholder approvals, the satisfaction of other customary closing conditions, and certain regulatory, state and federal approvals including, among others, the United States Federal Energy Regulatory Commission. The closing of the Acquisition is expected to occur in late 2016.
Additionally, in December 2015 Fortis announced the acquisition of the Aitken Creek Gas Storage Facility (“Aitken Creek”) for approximately US$266 million. Aitken Creek is the largest gas storage facility in British Columbia with a total working gas capacity of 77 billion cubic feet and is an integral part of Western Canada’s natural gas transmission network. The acquisition is subject to regulatory approval and is expected to close in the first half of 2016.
Fortis continues to focus on maintaining constructive regulatory relationships and outcomes across its utilities and its regulatory calendar remains very active.
In November 2015 Tucson Electric Power Company (“TEP”), UNS Energy’s largest utility, filed a general rate application with the Arizona Corporation Commission requesting new retail rates to be effective January 1, 2017, using the year ended June 30, 2015 as a historical test year. Since its last approved rate order in 2013, which used a 2011 historical test year, TEP’s total rate base has increased by approximately US$0.6 billion and the common equity component of capital structure increased from 43.5% to approximately 50%.
Newfoundland Power recently filed a general rate application for 2016 and FortisBC Energy, the benchmark utility in British Columbia, filed its application to review cost of capital for 2016. The regulator in Alberta has also initiated a generic cost of capital proceeding for 2016 and 2017, which includes FortisAlberta.
Fortis is focused on closing the acquisition of ITC by the end of 2016. The Acquisition is in alignment with the Corporation’s business model and acquisition strategy, and is expected to provide approximately 5% accretion to earnings per common share in the first full year following closing, excluding one-time acquisition-related expenses and assuming a stable currency exchange environment. The Acquisition represents a singular opportunity for Fortis to significantly diversify its business in terms of regulatory jurisdictions, business risk profile and regional economic mix.
Substantially all of Fortis’ assets are low‑risk, regulated utilities and long‑term contracted energy infrastructure. No single regulatory jurisdiction comprises more than one-third of total assets. Over the five-year period through 2020, excluding the acquisition of ITC, the Corporation’s highly executable capital program is expected to be approximately $9 billion. This investment in energy infrastructure is expected to increase rate base to almost $21 billion in 2020 and produce a five-year compound annual growth rate in rate base of approximately 5%.
On a pro forma basis, 2016 forecast midyear rate base of Fortis is expected to increase by approximately $8 billion to approximately $26 billion, as a result of the acquisition of ITC. Following the Acquisition, Fortis will be one of the top 15 North American public utilities ranked by enterprise value, with an estimated enterprise value of $42 billion. Additionally, ITC’s midyear rate base, including construction work in progress, is expected to increase at a compound annual growth rate of approximately 7.5% through 2018, based on ITC’s planned capital expenditure program.
Fortis continues to target 6% average annual dividend growth through 2020. This dividend guidance takes into account many factors, including the expectation of reasonable outcomes for regulatory proceedings at the Corporation’s utilities, the successful execution of the five‑year capital expenditure plan, and management’s continued confidence in the strength of the Corporation’s diversified portfolio of assets and record of operational excellence. The pending acquisition of ITC further supports this dividend guidance.
Fortis expects long-term sustainable growth in rate base, assets and earnings resulting from strategic acquisitions and investment in its existing utility operations. The Corporation is also committed to identifying and executing on opportunities for incremental rate base and earnings growth through additional investments in existing service territories, and in new franchise areas.
Teleconference to Discuss 2015 Annual Results
A teleconference and webcast will be held on February 18 at 9:00 a.m. (Eastern). Barry Perry, President and Chief Executive Officer, Fortis, and Karl Smith, Executive Vice President, Chief Financial Officer, Fortis, will discuss the Corporation’s 2015 annual results.
Analysts, members of the media and other interested parties in North America are invited to participate by calling 1.877.223.4471. International participants may participate by calling 647.788.4922. Please dial in 10 minutes prior to the start of the call. No pass code is required.
A live and archived audio webcast of the teleconference will be available on the Corporation’s website, www.fortisinc.com.
A replay of the conference will be available two hours after the conclusion of the call until March 18, 2016. Please call 1.800.585.8367 or 416.621.4642 and enter pass code 22316534.
View PDF for the Management Discussion and Analysis and Financial Statements and Notes for the years ended December 31, 2015 and 2014.