Fortis Releases 2014 Annual Results

Press Releases

February 19, 2015

Fortis Inc. (“Fortis” or the “Corporation”) (TSX:FTS) released its 2014 annual results today.  Net earnings attributable to common equity shareholders for 2014 were $317 million, or $1.41 per common share, compared to $353 million, or $1.74 per common share, for 2013.  Excluding the impact of non-recurring items in 2014 and 2013, described further below, net earnings attributable to common equity shareholders for 2014 were $407 million, or $1.81 per common share, an increase of $63 million, or $0.11 per common share, from $344 million, or $1.70 per common share, for 2013.

In December 2014 Fortis increased its quarterly common share dividend to 34 cents from 32 cents, commencing with the first quarter dividend payable on March 1, 2015, which translates into an annualized dividend of $1.36.  Fortis has raised its annualized dividend to common shareholders for 42 consecutive years, the record for a public corporation in Canada.

In August 2014 Fortis acquired UNS Energy Corporation (“UNS Energy”) for US$60.25 per common share in cash, for a purchase price of approximately US$4.5 billion, including the assumption of approximately US$2.0 billion of debt. UNS Energy, headquartered in Tucson, Arizona, is engaged through its primary subsidiaries in the regulated electric generation and energy delivery business, primarily in the State of Arizona, and serves approximately 658,000 electricity and gas customers.

“The acquisition of UNS Energy in Arizona has transformed Fortis from the largest investor-owned distribution utility in Canada to a leader in electric and gas utilities in North America,” says Barry Perry, President and Chief Executive Officer, Fortis.  Fortis now has more than $26 billion of assets, with the acquisition of UNS Energy bolstering assets by approximately one-third.  Fortis now owns nine utilities – five in Canada, two in the United States and two in the Caribbean – and serves more than three million electricity and gas customers.

Financing of the net cash purchase price of approximately $2.7 billion (US$2.5 billion) is substantially complete. Fortis completed the sale of $1.8 billion 4% convertible unsecured subordinated debentures, represented by installment receipts (“Convertible Debentures”). Proceeds from the initial installment of approximately $599 million were received in January 2014.  Proceeds from the final installment of approximately $1.2 billion were received on October 28, 2014. Following the receipt of the final installment, approximately 58.2 million common shares of Fortis were issued on conversion of the debentures. In September 2014 Fortis issued 24 million 4.1% Cumulative Redeemable Fixed Rate Reset First Preference Shares, Series M for gross proceeds of $600 million.  The remainder of the purchase price was financed through credit facility borrowings.

“Our annual consolidated capital program reached a record $1.7 billion in 2014, almost 50% higher than 2013,” says Perry. “Our Waneta Expansion is progressing well and UNS Energy completed the purchase of the 550-megawatt Gila River plant in the fourth quarter, as expected.”

Construction of the $900 million, 335‑megawatt (“MW”) 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 $679 million has been invested in the Waneta Expansion since construction began in late 2010. In October 2014 FortisBC started construction of its $400 million Tilbury liquefied natural gas (“LNG”) facility expansion in British Columbia, which will include a second LNG tank and a new liquefier, both to be in service by the end of 2016.  The Tilbury expansion will be included in regulated rate base.  In December 2014 UNS Energy purchased the 550-MW Unit 3 Gila River combined cycle gas-fired generating station for $252 million (US$219 million). Gila River strengthens the Company’s generation portfolio and reduces its reliance on coal-based generation.

Results for both years were impacted by non-recurring items, largely associated with the acquisition of UNS Energy in 2014 and Central Hudson Gas & Electric Corporation (“Central Hudson”) in 2013.  Earnings for 2014 were reduced by $39 million, or $0.17 per common share, due to acquisition‑related expenses and customer benefits offered to obtain regulatory approval of the acquisition of UNS Energy, compared to $34 million, or $0.17 per common share, associated with the acquisition of Central Hudson in 2013. Interest expense of $51 million after tax, including a make‑whole payment, or $0.23 per common share, associated with the Convertible Debentures issued to finance a portion of the acquisition of UNS Energy was recognized in 2014. In addition, earnings for 2013 were favourably impacted by an income tax recovery of $23 million, or $0.11 per common share, due to the enactment of higher deductions associated with Part VI.1 tax on the Corporation’s preference share dividends, and an extraordinary gain of $20 million, or $0.10 per common share, related to the settlement of expropriation matters associated with the Exploits River Hydro Partnership (“Exploits Partnership”).

“Regulated Utilities performed well during the year,” says Perry.  “The UNS Energy acquisition closed in just eight months and contributed significantly during the year.  Excluding one-time acquisition‑related expenses, the acquisition of UNS Energy was immediately accretive to earnings per common share.”

Regulated Utilities contributed earnings of $460 million compared to $392 million for 2013. The increase was driven by $60 million of earnings at UNS Energy from the date of acquisition and the first full year of earnings contribution from Central Hudson, which was acquired in June 2013.  FortisAlberta’s earnings were $9 million higher year over year, driven by rate base growth and an increase in the number of customers. Earnings at Caribbean Regulated Electric Utilities were $4 million higher than 2013, driven by electricity sales growth. The increases were partially offset by lower earnings at Eastern Canadian Electric Utilities, due to income tax recoveries of approximately $17 million in 2013 associated with Part VI.1 tax, and at FortisBC Electric, primarily due to the impact of lower‑than-expected finance charges in 2013.  Earnings at the FortisBC Energy companies were comparable with 2013.

“The regulatory calendar was extensive again in 2014 and significant regulatory processes are ongoing in Alberta and New York,” says Perry.  “A focus across the organization has been one of maintaining trust and credibility with our regulators by filing high-quality applications that are transparent and comprehensive,” he adds.

A decision on multi-year performance‑based rate-setting applications in British Columbia was received in September 2014 and did not have a material impact on earnings for 2014. A generic cost of capital proceeding is continuing in Alberta and the outcome is expected in the first quarter of 2015. A hearing related to FortisAlberta’s combined capital tracker application for 2013 through 2015, which is an application for revenue increases related to its capital expenditure program, was held in October 2014. In 2013 and 2014, FortisAlberta recognized capital tracker revenue based on the interim regulatory decision granting 60% of the applied for capital tracker amounts. In December 2014 an interim decision was received granting FortisAlberta 90% of the applied for capital tracker amounts for 2015.  A final decision on the combined capital tracker application is expected in the first quarter of 2015. In July 2014 Central Hudson filed a general rate application to establish rates effective July 1, 2015.  A Joint Settlement Proposal was filed in February 2015 that provides for new rates at Central Hudson for a three-year period beginning July 1, 2015, reflecting an allowed rate of return on common shareholders’ equity of 9.0% and a 48% common equity component of capital structure.  Public statement hearings are expected to be held in March or April with the Joint Settlement Proposal targeted to go to the regulator in June for consideration and approval.

Non-Regulated Fortis Generation contributed $20 million to earnings compared to $39 million for 2013. The decrease was primarily due to the recognition of an approximate $20 million after-tax extraordinary gain on the settlement of expropriation matters associated with the Exploits Partnership in 2013.

Non-Utility operations contributed earnings of $28 million, an increase of $10 million from 2013.  Earnings for 2014 included $5 million associated with Griffith Energy Services, Inc. (“Griffith”) compared to a loss of $5 million for 2013. Griffith was acquired as part of the acquisition of Central Hudson in June 2013 and was sold in March 2014 for proceeds of approximately $105 million (US$95 million).  Earnings at Fortis Properties of $23 million were comparable with 2013.  In September 2014 the Corporation announced that it would engage in a review of strategic options for its hotel and commercial real estate business, operating as Fortis Properties.  Strategic options may include, but are not limited to, a sale of all or a portion of the assets, a sale of shares of Fortis Properties or an initial public offering.

“The strategic review of Fortis Properties continues and we expect to make a decision on the future of this business in the second quarter of 2015,” says Perry.

Corporate and Other expenses were $33 million higher year over year, excluding the impacts of interest expense on the Convertible Debentures, acquisition‑related expenses and income tax recoveries of approximately $6 million associated with Part VI.1 tax in 2013. The increase was primarily due to higher finance charges, largely due to the acquisitions of UNS Energy and Central Hudson, and higher operating expenses. The increase in operating expenses was mainly due to employee-related expenses, including approximately $11 million in one-time after‑tax retirement expenses; share-based compensation expenses, as a result of share price appreciation; higher legal and consulting fees; and general inflationary increases. The increase in Corporate and Other expenses was partially offset by an $8 million foreign exchange gain compared to $6 million in 2013, a higher income tax recovery and interest income.

Cash flow from operating activities was $982 million for 2014, an increase of $83 million from 2013. The increase was driven by higher cash earnings, partially offset by unfavourable changes in working capital and long-term regulatory deferrals.

Earnings for the fourth quarter were $113 million, or $0.44 per common share, compared to $100 million, or $0.47 per common share, for the same quarter in 2013.  The increase in earnings for the quarter was primarily due to: (i) earnings contribution of $23 million from UNS Energy; (ii) higher earnings at FortisAlberta, driven by customer growth and the timing of operating expenses; and (iii) higher earnings at the Non-Utility segment, due to higher contribution from Fortis Properties and the impact of a net loss of approximately $2.5 million at Griffith in the fourth quarter of 2013. The increase was partially offset by higher net Corporate and Other expenses and lower earnings at Central Hudson. The increase in net Corporate and Other expenses was primarily due to higher finance charges and preference share dividends associated with the financing of the acquisition of UNS Energy, and approximately $4 million in after-tax interest expense associated with the Convertible Debentures, partially offset by a higher income tax recovery. At Central Hudson, the continued impact of higher depreciation and operating expenses during the two-year rate freeze post acquisition had an unfavourable impact on earnings.  Higher storm-restoration and other non‑recurring expenses also reduced Central Hudson’s earnings in the fourth quarter of 2014. The decrease in earnings per common share was due to the impact of an increase in the weighted average number of common shares outstanding due to the issuance of 58.2 million common shares in October 2014 upon conversion of the Convertible Debentures issued to finance a portion of the acquisition of UNS Energy.

Fortis is one of the highest-rated utility holding companies in North America, with its corporate debt rated A- by Standard & Poor’s (“S&P”) and A(low) by DBRS. In October 2014, following the completion of equity financing associated with the acquisition of UNS Energy, S&P confirmed the Corporation’s credit rating and revised its outlook to Stable.  Similarly, in December 2014 DBRS confirmed the Corporation’s credit rating with a Stable outlook.

“The capital markets have shown confidence in Fortis, as evidenced by the successful large financings we completed during the year,” says Perry.  “In addition to the $1.8 billion common equity and $600 million preference share issues associated with the UNS Energy acquisition, Fortis and its utilities raised more than $1 billion in long-term debt in 2014 at attractive interest rates.”

In June and September, Fortis issued a total of US$500 million in senior unsecured notes, with terms to maturity ranging from 5 to 30 years and coupon rates ranging from 2.92% to 5.03%. The net proceeds were used to repay US-dollar denominated borrowings on the Corporation’s credit facility, to refinance existing indebtedness, including the US$150 million 5.74% senior unsecured notes of Fortis that matured in October and $125 million 5.56% unsecured debentures of a subsidiary that matured in September, and for general corporate purposes. In September FortisAlberta issued $275 million unsecured debentures in two tranches, comprised of 10-year $150 million unsecured debentures at 3.30% and 30-year $125 million unsecured debentures at 4.11%. Net proceeds were used to repay $200 million 5.33% unsecured debentures that matured in October, to finance capital expenditures and for general corporate purposes. In October FortisBC Electric issued 30-year $200 million unsecured debentures at 4.00%. Net proceeds were used to repay existing indebtedness, including $140 million 5.48% unsecured debentures that matured in November. Long-term debt offerings were also completed at Central Hudson and Caribbean Regulated Electric Utilities.

“This is a very exciting time for Fortis.  Following a decade of significant growth, mainly resulting from acquisitions, Fortis is entering a period of significant growth from our existing operations.  Our consolidated capital program, which is designed to ensure we continue to meet the energy needs of our customers, is expected to exceed $2.0 billion in 2015.  Over the five-year period through 2019, it is expected to approach $9 billion,” says Perry.

“Over the next five years, total investment in energy infrastructure is expected to increase midyear rate base by approximately 36% from $14 billion in 2014 to approximately $19 billion in 2019.  This capital investment should allow rate base to increase at a five-year compound annual growth rate of approximately 6.5% through 2019,” he explains.

“Fortis is also pursuing significant natural gas investment opportunities, particularly in British Columbia.  Two new regulated projects – a further expansion of the Tilbury LNG facility and the Woodfibre pipeline expansion, could increase the five-year compound annual growth rate through 2019 to 7.5%,” concludes Perry.

Teleconference to Discuss 2014 Annual Results

A teleconference and webcast will be held on February 19 at 10:00 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 2014 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 1, 2015.  Please call 1.800.585.8367 or 416.621.4642 and enter pass code 44984280.

View PDF for the Management Discussion and Analysis and Financial Statements and Notes for the period ended December 31, 2014.

For more information, please contact:
Karl Smith
Executive Vice President, Chief Financial Officer
Fortis Inc.
Phone: 709.737.2822​

IBF2