Fortis Inc. ("Fortis" or the "Corporation") (TSX:FTS)(NYSE:FTS), a leader in the North American regulated electric and gas utility industry, released its 2016 annual results today (2/16). The Corporation's net earnings attributable to common equity shareholders for 2016 were $585 million, or $1.89 per common share, compared to $728 million, or $2.61 per common share, for 2015. For the fourth quarter of 2016, net earnings attributable to common equity shareholders were $189 million, or $0.49 per common share, compared to $135 million, or $0.48 per common share, for the same period in 2015. Year over year results were impacted by the Corporation's acquisition of electric transmission company ITC Holdings Corp. ("ITC") in 2016, and gains on the sale of non-core assets in 2015.
On an adjusted basis, net earnings attributable to common equity shareholders for 2016 were $721 million, or $2.33 per common share, an increase of $0.22 per common share, or 10%, compared to 2015. On an adjusted basis, for the fourth quarter of 2016, net earnings attributable to common equity shareholders were $246 million, or $0.64 per common share, an increase of $0.13 per common share, or 25%, compared to the same period in 2015. A reconciliation of adjusted net earnings and adjusted earnings per common share is provided in the Corporation's 2016 Management Discussion and Analysis.
"Fortis had another year of transformation in 2016," said Barry Perry, President and Chief Executive Officer, Fortis. "We announced and quickly closed the acquisition of ITC, the largest independent electric transmission company in the United States, and listed on the New York Stock Exchange, allowing Fortis to access the largest pool of capital in the world. We also received constructive regulatory decisions in a number of jurisdictions, which position us well for continued regulatory stability."
A transformative acquisition
On October 14, 2016, Fortis closed the acquisition of ITC in a transaction valued at approximately US$11.8 billion ($15.7 billion). Under the terms of the transaction, ITC shareholders received US$22.57 in cash and 0.7520 of a Fortis common share per ITC share, representing total consideration of approximately US$7.0 billion. Details on the financing of the acquisition, including the minority investment by GIC Private Limited, are included in the Corporation's 2016 Management Discussion and Analysis.
ITC owns and operates high-voltage transmission lines serving a system peak load exceeding 26,000 megawatts along approximately 25,000 kilometres in Michigan's lower peninsula and portions of Iowa, Minnesota, Illinois, Missouri, Kansas and Oklahoma that transmit electricity from approximately 570 generating stations to local distribution facilities connected to ITC's systems. ITC's rates are regulated by the United States Federal Energy Regulatory Commission ("FERC").
"Our strong financial performance for 2016 was driven by our low-risk and highly diversified portfolio of utilities. The addition of ITC dramatically increased our North American footprint and provides even greater stability in our business, with its predictable and stable cash flows," explained Mr. Perry. "ITC was immediately accretive to earnings per common share, excluding acquisition-related expenses, and we remain confident that this transaction will be nicely accretive in 2017."
Adjusted earnings per share and cash flow increase significantly
- Factors that resulted in growth in adjusted earnings per common share for 2016 included:
- strong performance at UNS Energy in Arizona, largely due to the settlement of Springerville Unit 1 matters, an increase in delivery revenue at Central Hudson, consistent with its three-year rate settlement, a higher allowance for funds used during construction ("AFUDC") at FortisBC Energy, and stronger performance from utilities in the Caribbean;
- accretion associated with the acquisition of ITC in October 2016, including the impact of finance charges associated with the acquisition and the increase in the weighted average number of common shares outstanding;
- contribution from Aitken Creek gas storage and higher earnings at the 335-megawatt Waneta Expansion, which commenced hydroelectric production in early April 2015; and
- favourable foreign exchange associated with US dollar-denominated earnings.
- Factors that resulted in growth in adjusted earnings per common share for the fourth quarter of 2016 included:
- accretion associated with the acquisition of ITC, as discussed above;
- contribution from Aitken Creek gas storage; and
- strong performance at the Corporation's utilities, including UNS Energy, Central Hudson, FortisBC Energy, and timing at FortisBC Electric.
- Earnings per common share growth was tempered by the sale of commercial real estate and hotel assets in 2015, higher Corporate and Other expenses, and lower earnings at FortisAlberta, mainly due to lower average energy consumption and higher operating expenses.
- Cash flow from operating activities for 2016 totalled $1.9 billion, 13% higher than 2015. The increase was driven by higher cash earnings at the regulated utilities, driven by ITC.
Execution of growth strategy
Consolidated capital expenditures for 2016 of $2.1 billion were higher than the Corporation's forecast of $1.9 billion, driven by capital spending at ITC from the date of acquisition. With ITC now included, gross consolidated capital expenditures for 2017 are expected to be approximately $3.0 billion.
Construction continues on the Tilbury liquefied natural gas ("LNG") facility expansion in British Columbia, the Corporation's largest ongoing capital project, at an estimated capital cost of $400 million, before AFUDC and development costs. The commissioning and start-up phase of this regulated project commenced in the fourth quarter of 2016, with an expected in-service date of mid-2017.
The Corporation continues to invest in four Multi-Value Projects ("MVPs") at ITC, which are regional electric transmission projects that have been identified by Midcontinent Independent System Operator ("MISO") to address system capacity needs and reliability in various states. The MVPs are in various stages of construction and include construction of new breaker stations, new transmission lines and the extension of existing substations. Approximately US$43 million was invested in the MVPs from the date of acquisition of ITC and an additional US$272 million is expected to be spent in 2017. Three of the MVPs are expected to be completed by the end of 2018, with the fourth scheduled for completion in 2023.
In addition to the Corporation's base consolidated capital expenditure forecast, management is pursuing additional investment opportunities within existing service territories. Specifically, the Corporation continues to pursue LNG infrastructure investment opportunities in British Columbia, including the potential pipeline expansion to the proposed Woodfibre LNG export facility and further expansion of its Tilbury LNG facility. Two other significant electric transmission investment opportunities include the Lake Erie Connector project at ITC, which would connect the Ontario and PJM grids for the first time, and the Wataynikaneyap Power project in Northwestern Ontario. Fortis and its utilities are focused on achieving key milestones in 2017 to advance these opportunities.
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