Aug 4, 2014
Fortis Inc. ("Fortis" or the "Corporation") (TSX:FTS) achieved second quarter net earnings attributable to common equity shareholders of $47 million, or $0.22 per common share, compared to $54 million, or $0.28 per common share, for the second quarter of 2013. For the first half of 2014, net earnings attributable to common equity shareholders were $190 million, or $0.89 per common share, compared to $205 million, or $1.06 per common share, for the first half of 2013.
Earnings for the second quarter were impacted by a number of significant items. Interest expense of $13 million after tax, or $0.06 per common share, associated with convertible debentures issued to finance a portion of the pending acquisition of UNS Energy Corporation ("UNS Energy") was recognized in the second quarter of 2014. Earnings for the second quarter of 2013 were reduced by $32 million, or $0.17 per common share, due to acquisition-related expenses and customer and community benefits offered to obtain regulatory approval of the acquisition of Central Hudson Gas & Electric Corporation ("Central Hudson"), compared to $1 million in acquisition-related expenses associated with UNS Energy in the second quarter of 2014. Earnings for the second quarter of 2013 were favourably impacted by an income tax recovery of $25 million, or $0.13 per common share, due to the enactment of higher deductions associated with Part VI.1 tax on the Corporation's preference share dividends. This income tax recovery impacted earnings at Newfoundland Power, Maritime Electric and the Corporate and Other segment in the second quarter of 2013.
Excluding the above-noted impacts of interest expense on the convertible debentures, acquisition'related expenses and Part VI.1 tax impacts, net earnings attributable to common equity shareholders for the second quarter of 2014 were $61 million, or $0.28 per common share, compared to $61 million, or $0.32 per common share, for the same period last year. Earnings per common share were impacted by an increase in the weighted average number of common shares outstanding, largely due to the issuance of 18.5 million common shares in June 2013 associated with the acquisition of Central Hudson.
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. The closing of the acquisition remains subject to approval by the Arizona Corporation Commission ("ACC") and the satisfaction of customary closing conditions. 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 transaction review by the Committee on Foreign Investment in the United States was completed in May 2014 and in June 2014 early termination of the waiting period under the Hart-Scott-Rodino Act was received.
"The approval process for the UNS Energy acquisition is progressing well," says Stan Marshall, Chief Executive Officer, Fortis Inc. In May 2014 the Corporation, UNS Energy, ACC Staff, the Residential Utility Consumer Office and other parties entered into a settlement agreement in which the parties agree that the merger is in the public interest and recommend approval by the ACC, subject to certain conditions. The settlement agreement is subject to review and approval by the ACC, which could approve, reject or require modifications to the settlement agreement as a condition of approval of the merger. In June 2014 a hearing was held before an ACC Administrative Law Judge ("ALJ"). On July 29, 2014, the ALJ issued an opinion and order recommending approval of the acquisition, as conditioned by the settlement agreement. Consideration of this recommended order has tentatively been scheduled for the ACC's open meeting to be held on August 12-13, 2014. The recommended order will be considered by the ACC in determining whether to approve the acquisition. If the transaction is approved by the ACC at this meeting, the acquisition is expected to close by the end of August 2014.
"The acquisition of UNS Energy will enhance the geographic diversification of the Corporation's regulated assets, resulting in no more than one-third of total assets being located in any one regulatory jurisdiction," says Marshall. "When we close the acquisition, total assets of Fortis will increase by approximately one-third to approach $25 billion."
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. The final installment is payable on a date to be fixed not less than 15 days nor more than 90 days following satisfaction of conditions precedent to the closing of the acquisition of UNS Energy. 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.
Corporate and Other expenses were $16 million higher quarter over quarter, excluding the impacts of interest expense on the convertible debentures, acquisition-related expenses and approximately $8 million associated with Part VI.1 tax. The increase was primarily due to a $4 million foreign exchange loss in the second quarter of 2014 compared to a $3 million foreign exchange gain in the same quarter last year and the impact of the release of income tax provisions of $5 million in the second quarter of 2013. The remaining increase was largely due to finance charges associated with the acquisition of Central Hudson and higher operating expenses, partially offset by a higher income tax recovery and interest income. The increase in operating expenses was mainly due to approximately $3 million after tax of retirement expenses recognized in the second quarter of 2014.
The Corporation's regulated utilities contributed earnings of $76 million compared to $78 million for the second quarter of 2013. Earnings in the second quarter of 2013 were favourably impacted by income tax recoveries of $13 million at Newfoundland Power and $4 million at Maritime Electric associated with Part VI.1 tax. Earnings in the second quarter of 2013 were reduced by the cumulative impact of the first stage of the Generic Cost of Capital ("GCOC") Proceeding in British Columbia, which reduced the allowed rate of return on common shareholders' equity ("ROE") and common equity component of capital structure for the benchmark utility, FortisBC Energy Inc., effective January 1, 2013. The cumulative impact of this regulatory decision was recognized in 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 recognized in the second quarter of 2013. Excluding the impacts of Part VI.1 tax and the GCOC Proceeding, earnings at the Corporation's regulated utilities increased by $9 million quarter over quarter. The increase was driven by earnings of $7 million at Central Hudson, which was acquired in June 2013. Earnings at Caribbean Regulated Electric Utilities were $2 million higher than the second quarter of 2013, driven by electricity sales growth.
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 received the consent of the Lieutenant Governor in Council in May 2014 and is expected to be effective 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 common 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 half of 2014.
Multi-year performance-based rate applications are progressing in British Columbia and a cost of capital proceeding is continuing in Alberta. In May 2014 FortisAlberta filed a combined capital tracker application for 2013 through 2015, which is an application for revenue increases related to its capital program. FortisAlberta continues to recognize capital tracker revenue based on the interim regulatory decision granting 60% of the applied for capital tracker amounts. A hearing on the combined capital tracker application is scheduled for October 2014 and a decision is expected in the first quarter of 2015. In July 2014 Central Hudson filed a general rate application to establish rates effective mid'2015.
Non-Regulated Fortis Generation contributed $6 million to earnings, $2 million higher quarter over quarter. Higher earnings were driven by increased production, mainly in Belize, due to higher rainfall.
Non-Utility operations contributed earnings of $7 million compared to $8 million for the second quarter of 2013. The decrease was primarily due to lower contribution from Fortis Properties' Hospitality Division.
In March 2014 Fortis priced a private placement of US$500 million in 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%. On June 30, 2014, Fortis issued US$213 million of the senior unsecured notes with a weighted average term to maturity of approximately 9 years and a weighted average coupon rate of 3.51%. Net proceeds were used to repay US-dollar denominated borrowings on the Corporation's committed credit facility and for general corporate purposes. The remaining US$287 million of the senior unsecured notes will be issued on September 15, 2014, subject to the satisfaction of customary closing conditions, and the net proceeds will be used to refinance existing indebtedness and for general corporate purposes.
Cash flow from operating activities was $586 million for the first half of 2014, $33 million higher than the same period last year. Higher cash earnings were partially offset by unfavourable changes in working capital.
Consolidated capital expenditures were approximately $535 million for the first half 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 $633 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 is estimated to cost approximately $400 million and will include a second LNG tank and a new liquefier, both to be in service in the second half of 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).
"Our investment in energy infrastructure to serve our customers is expected to grow by an average annual rate of 7% over the next five years," says Barry Perry, President, Fortis Inc. "Earnings contributions from the UNS Energy and Central Hudson acquisitions, combined with our capital program, including the completion of the Waneta Expansion in 2015 and the Tilbury LNG facility expansion in 2016, should support earnings per common share growth in 2015 and beyond."
View PDF for the Interim Management Discussion and Analysis and the Financials for the three and six months ended June 30, 2014.
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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