Fortis Earns $143 Million in First Quarter
Fortis Inc. ("Fortis" or the "Corporation") (TSX:FTS) achieved first quarter net earnings attributable to common equity shareholders of $143 million, or $0.67 per common share, compared to $151 million, or $0.79 per common share, for the first quarter of 2013.
Earnings for the first quarter of 2014 included $5 million, or $0.02 per common share, associated with Griffith Energy Services, Inc. ("Griffith"), which was sold in March 2014 for proceeds of approximately $105 million (US$95 million). Griffith was acquired as part of CH Energy Group, Inc. ("CH Energy Group") in June 2013. Earnings for the first quarter of 2014 were reduced by $11 million, or $0.05 per common share, in after-tax interest expense associated with convertible debentures issued to finance a portion of the pending acquisition of UNS Energy Corporation ("UNS Energy").
Earnings for the first quarter of 2013 included an after-tax extraordinary gain of $22 million, or $0.12 per common share, related to the settlement of expropriation matters associated with the Exploits River Hydro Partnership ("Exploits Partnership").
Excluding the impacts of Griffith, interest expense on the convertible debentures, and the Exploits Partnership, net earnings attributable to common equity shareholders for the first quarter of 2014 were $149 million, or $0.70 per common share, compared to $129 million, or $0.67 per common, for the same period last year.
Fortis announced in December 2013 that it agreed to acquire UNS Energy for US$60.25 per common share in cash, representing an aggregate purchase price of approximately US$4.3 billion, including the assumption of approximately US$1.8 billion of debt on closing. UNS Energy is a vertically integrated utility services holding company, headquartered in Tucson, Arizona, engaged through three subsidiaries in the regulated electric generation and energy delivery business, primarily in the State of Arizona, serving approximately 657,000 electricity and gas customers. In March 2014 UNS Energy common shareholders approved the acquisition of UNS Energy by Fortis and in April 2014 the U.S. Federal Energy Regulatory Commission approved the transaction. The closing of the acquisition, which is expected to occur by the end of 2014, is subject to certain government and regulatory approvals, including approval by the Arizona Corporation Commission ("ACC"), compliance with other applicable U.S. legislative requirements and the satisfaction of customary closing conditions.
"The approval process for the UNS Energy acquisition is progressing well," says Stan Marshall, President and Chief Executive Officer, Fortis Inc. In April 2014 the ACC Staff and other Intervenors filed their direct testimony in the merger proceeding, indicating that they would support the merger subject to certain conditions. Settlement discussions are currently underway between the Corporation, UNS Energy, the ACC Staff and other Intervenors.
"The acquisition is consistent with the Corporation's strategy of investing in high-quality regulated utility assets in Canada and the United States and is expected to be accretive to earnings per common share of Fortis in the first full year after closing, excluding one-time acquisition-related costs," explains Marshall.
To finance a portion of the UNS Energy acquisition, Fortis completed the sale of $1.8 billion 4% convertible unsecured subordinated debentures represented by installment receipts. Proceeds from the first installment of approximately $599 million were received in January 2014. In March 2014 the Corporation secured, as bridge financing for the pending acquisition of UNS Energy, an aggregate of $2 billion non-revolving term credit facilities from a syndicate of banks.
The Corporation's regulated utilities contributed earnings of $162 million, up $17 million quarter over quarter. The increase was driven by earnings of $18 million at Central Hudson Gas & Electric Corporation ("Central Hudson"), which was acquired as part of CH Energy Group in June 2013. After considering the common share offering and financing costs associated with the acquisition, Central Hudson was slightly accretive to earnings per common share. Newfoundland Power's earnings were $3 million higher quarter over quarter, mainly related to regulator-approved adjustments, which impacted the timing of quarterly earnings. Earnings at Caribbean Regulated Electric Utilities were $2 million higher compared to the first quarter of 2013, driven by electricity sales growth. The increases were partially offset by lower earnings at the FortisBC Energy companies. The first stage of the Generic Cost of Capital ("GCOC") Proceeding in British Columbia reduced the allowed rate of return on common shareholders' equity ("ROE") and equity component of capital structure for the benchmark utility, FortisBC Energy Inc., effective January 1, 2013; however, the impact of this regulatory decision was not recognized until the second quarter of 2013, when the decision was received. As a result, a reduction of earnings of approximately $5 million at the FortisBC Energy companies and $1 million at FortisBC Electric related to the first quarter of 2013 was not recognized until the second quarter of 2013.
In February 2014 the FortisBC Energy companies received regulatory approval for the amalgamation of their regulated utilities. The regulator approved the adoption of common rates for the majority of natural gas customers, to be phased in over a three-year period. The amalgamation must receive the consent of the Lieutenant Governor in Council and is expected to be effective on or about December 31, 2014. In March 2014 the regulatory decision on the second stage of the GCOC Proceeding in British Columbia was received. The decision resulted in increases in the equity component of capital structures for FortisBC Energy (Vancouver Island) Inc. and FortisBC Energy (Whistler) Inc. ("FEWI"), as well as an increase in the allowed ROE for FEWI. The outcome of the second stage of the GCOC Proceeding did not have a material impact on earnings for the first quarter of 2014.
Multi-year performance‑based rate applications are progressing in British Columbia and a cost of capital proceeding is continuing in Alberta. FortisAlberta is preparing to file a combined capital tracker application for 2013 through 2015, which is an application for revenue increases related to its capital program. Central Hudson will file a general rate application in the second half of 2014 to establish rates effective mid‑2015.
Excluding the impact of the Exploits Partnership, Non-Regulated Fortis Generation contributed $6 million to earnings, up $4 million quarter over quarter. Improved performance was driven by increased production in Belize due to higher rainfall.
Excluding the impact of Griffith, Non-Utility operations contributed earnings of less than $0.5 million, comparable with the first quarter of 2013.
Excluding the interest expense on the convertible debentures, Corporate and Other expenses were $1 million higher quarter over quarter. The increase was primarily due to interest expense on debt issued to complete the financing of the acquisition of Central Hudson, partially offset by a higher income tax recovery.
In March 2014 Fortis priced a private placement of US$500 million senior unsecured notes. The notes will be issued in multiple tranches with terms to maturity ranging from 5 years to 30 years and coupon rates ranging from 2.92% to 5.03%. Subject to the satisfaction of customary closing conditions, US$213 million of notes will be issued on June 30, 2014 and US$287 million of notes will be issued on September 15, 2014. Net proceeds from the sale of the notes will be used to refinance existing indebtedness and for general corporate purposes, including repayment of US-dollar drawings on the Corporation's committed credit facility.
Cash flow from operating activities was $265 million for the quarter compared to $283 million for the first quarter of 2013. Unfavourable changes in working capital were partially offset by favourable changes in long-term regulatory deferral accounts.
Fortis paid a dividend of 32 cents per common share on March 1, 2014, up from 31 cents for the fourth quarter of 2013. The 3.2% increase in the quarterly dividend translates into an annualized dividend of $1.28 and extends the Corporation's record of annual common share dividend increases to 41 consecutive years, the longest record of any public corporation in Canada.
Consolidated capital expenditures were approximately $237 million for the first quarter of 2014. Construction of the $900 million, 335‑megawatt Waneta Expansion hydroelectric generating facility ("Waneta Expansion") in British Columbia continues on time and on budget, with completion of the facility expected in spring 2015. Approximately $603 million has been invested in the Waneta Expansion since construction began in late 2010. FortisBC has begun preliminary work related to an expansion of its Tilbury liquefied natural gas ("LNG") facility in British Columbia. The Tilbury expansion, which remains subject to certain approvals, is estimated to cost approximately $400 million and is expected to include a second LNG tank and a new liquefier, both to be in service in 2016.
The Corporation's capital program is expected to total $1.4 billion in 2014. Over the five-year period 2014 through 2018, the Corporation's capital program is expected to exceed $6.5 billion. Additionally, UNS Energy has forecast that its capital program for 2015 through 2018 will be approximately $1.5 billion (US$1.4 billion).
"The Corporation expects earnings per common share growth in 2015 and beyond as a result of contributions from the Central Hudson and UNS Energy acquisitions, and our capital program, including the completion of the Waneta Expansion in 2015 and the Tilbury LNG facility expansion in 2016. This growth will support continuing growth in dividends," says Marshall.
"We are committed to grow your business profitably, while ever cognizant of our commitment to provide customers with safe, reliable, cost-effective energy service," he concludes.
View PDF for the financial highlights for the three months ended March 31, 2014 and 2013.
Fortis Inc. is the largest investor-owned gas and electric distribution utility in Canada. Its regulated utilities account for 90 per cent of total assets and serve more than 2.4 million customers across Canada and in New York State and the Caribbean. Fortis owns non-regulated hydroelectric generation assets in Canada, Belize and Upstate New York. The Corporation's non-utility investment is comprised of hotels and commercial real estate in Canada.
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