Mr. Barry Perry reports
FORTIS DELIVERS EARNINGS OF $198 MILLION FOR THE FIRST QUARTER OF 2015
Fortis Inc. has released its first quarter results.
"Fortis is positioned for a strong 2015 based on the performance of our major utilities in the first quarter," says Barry Perry, president and chief executive officer, Fortis. "Also, the $900-million, 335-megawatt Waneta expansion hydroelectric generating facility in British Columbia came on-line early April, six weeks ahead of schedule and on budget, while maintaining an excellent safety and environmental protection record. The facility will contribute to earnings beginning in the second quarter."
Net earnings attributable to common equity shareholders for the first quarter were $198-million, or 72 cents per common share, compared with $143-million, or 67 cents per common share, for the first quarter of 2014. Excluding a number of one-time impacts, adjusted net earnings attributable to common equity shareholders for the first quarter were $179-million, or 65 cents per common share, compared with $146-million, or 68 cents per common share, for the first quarter of 2014. While UNS Energy contributed $20-million to earnings in the first quarter, as expected the acquisition had a 13-cent dilutive impact on earnings per common share, after considering the common share offering and finance charges associated with the acquisition. The earnings of UNS Energy are highly seasonal, with approximately 75 per cent of earnings contributed in the second and third quarters.
"Our enterprise-wide capital program is expected to surpass $2-billion this year and is well advanced, with more than $550-million invested in the first quarter," said Mr. Perry. FortisBC's Tilbury liquefied natural gas expansion (known as Tilbury 1A), at an estimated total cost of approximately $440-million, is the largest capital project continuing. Tilbury 1A will add 950 billion British thermal units of storage and 34 billion British thermal units daily of liquefaction when the second LNG tank and new liquefier come in service, which is expected to occur by the end of 2016.
In January, 2015, UNS Energy closed the purchase of an additional ownership interest in the Springerville unit 1 generating facility for $46-million (U.S.), as expected, following the expiry of the lease agreement. UNS Energy's ownership interests in Springerville unit 1 now total 49.5 per cent.
"A number of significant regulatory processes were concluded in the quarter, ensuring continuing regulatory stability for our utilities," said Mr. Perry. "In addition to the proceedings concluded in Alberta, our application for new rates in New York state was advanced as well."
At FortisAlberta, regulatory decisions were received in March, 2015, on the utility's capital tracker applications and the generic cost of capital (GCOC) proceeding. The capital tracker decision approved revenue for substantially all of FortisAlberta's capital programs as filed; previously, revenue was recognized on an interim basis at 60 per cent of the applied for amounts. The GCOC proceeding set the utility's allowed rate of return on common shareholder's equity (ROE) for 2013 through 2015 at 8.30 per cent, down from the interim allowed ROE of 8.75 per cent, and set the common equity component of capital structure at 40 per cent, down from 41 per cent approved on an interim basis. The impact of the decreases in the allowed ROE and common equity component of capital structure only applies to the portion of FortisAlberta's revenue that is associated with capital tracker amounts throughout the term of the performance-based rate setting regulation. As a result of these regulatory decisions, in the first quarter of 2015, FortisAlberta recognized a positive $10-million capital tracker revenue adjustment associated with 2013 and 2014.
At Central Hudson, a joint settlement proposal was filed in February, 2015, that proposes new rates at the utility for a three-year period beginning July 1, 2015, reflecting an allowed ROE of 9.0 per cent and a 48-per-cent common equity component of capital structure. A delivery rate freeze was implemented for electricity and natural gas delivery rates through to June 30, 2015, as part of the regulatory approval of the acquisition of Central Hudson by Fortis. Central Hudson committed to invest $215-million (U.S.) in capital expenditures during the two-year delivery rate freeze period ending June 30, 2015. Public statement and evidentiary hearings were held in March, 2015, and a final joint proposal was executed in April, 2015. The final joint settlement proposal is targeted to go to the regulator in June for consideration and approval.
"Fortis remains focused on our core regulated utility business and long-term contracted energy infrastructure," explained Mr. Perry. "We expect to make an announcement regarding the outcome of the strategic review of Fortis Properties in the second quarter of 2015."
In March, 2015, the corporation entered into an agreement to sell its non-regulated generation assets in upstate New York and Ontario. The sale of the generation assets in upstate New York and Ontario is expected to close in the second quarter of 2015 and the second half of 2015, respectively.
Fortis continues to be one of the highest-rated utility holding companies in North America, with its corporate debt rated A- by Standard and Poor's and A (low) by DBRS, which helps ensure efficient access to capital. In February, 2015, Tucson Electric Power Company, UNS Energy's largest utility, issued $300-million (U.S.) 10-year senior unsecured notes at 3.05 per cent. Net proceeds were primarily used to repay long-term debt and credit facility borrowings, and to finance capital expenditures. UNS Energy and its regulated utilities received credit rating upgrades from Moody's Investor Service in the first quarter of 2015.
"Fortis continues to build on its dividend record to shareholders," said Mr. Perry. "The corporation paid a quarterly dividend of 34 cents per common share on March 1, 2015, compared with 32 cents paid on Dec. 1, 2014. The 6.25-per-cent increase extends the corporation's record of annualized common share dividend increases to 42 consecutive years, the longest record of any public corporation in Canada.
"Following a decade of growth driven mainly by acquisitions, Fortis has entered a period of significant organic growth."
Over the five-year period through 2019, the corporation's capital program is expected to be approximately $9-billion. This investment in energy infrastructure is expected to increase midyear rate base by approximately 38 per cent from $14-billion in 2014 to more than $19-billion in 2019 and produce a five-year compound annual growth rate (CAGR) of approximately 6.5 per cent. Two new natural gas infrastructure investments in British Columbia that Fortis is pursuing -- Tilbury 1B and the pipeline expansion to Woodfibre LNG -- could increase the five-year CAGR in rate base to 7.5 per cent.
"Looking out over the five-year horizon, we expect our capital investment to support continuing growth in earnings and dividends," concluded Mr. Perry.
Significant items
Completion of the Waneta expansion hydroelectric generating facility
On April 1, 2015, the corporation completed construction of the $900-million, 335 mw Waneta expansion hydroelectric generating facility ahead of schedule and on budget. Fortis has a 51-per-cent controlling ownership interest in the Waneta expansion, with Columbia Power Corp. and Columbia Basin Trust holding the remaining 49-per-cent interest. Construction of the Waneta expansion, which is adjacent to the Waneta dam and powerhouse facilities on the Pend d'Oreille River, south of Trail, B.C., commenced late in 2010.
Regulatory decisions at FortisAlberta
In March, 2015, regulatory decisions were received on FortisAlberta's capital tracker applications and the generic cost of capital (GCOC) proceeding in Alberta. The capital tracker decision approved revenue for substantially all of FortisAlberta's capital programs as filed; previously, revenue was recognized on an interim basis at 60 per cent of the applied for amounts. The GCOC proceeding set FortisAlberta's allowed ROE for 2013 through 2015 at 8.30 per cent, down from the interim allowed ROE of 8.75 per cent, and set the common equity component of capital structure at 40 per cent, down from 41 per cent approved on an interim basis. The impact of the decreases in the allowed ROE and common equity component of capital structure only applies to the portion of FortisAlberta's revenue that is associated with capital tracker amounts throughout the term of the PBR regulation. As a result of these regulatory decisions, in the first quarter of 2015, FortisAlberta recognized a positive $10-million capital tracker revenue adjustment associated with 2013 and 2014. This adjustment reflects the combined impact of the capital tracker decision and the GCOC decision, taking into consideration the capital tracker revenue previously recognized on an interim basis for 2013 and 2014 at 60 per cent of the applied for amounts.
Sale of non-regulated generation assets
In March, 2015, the corporation entered into an agreement to sell its non-regulated generation assets in upstate New York and Ontario. The sale of the generation assets in upstate New York and Ontario is expected to close in the second quarter of 2015 and the second half of 2015, respectively. As a result, the associated assets and liabilities have been classified as held for sale on the corporation's interim unaudited consolidated balance sheet as at March 31, 2015. A gain on the sale is expected to be recognized in earnings at the time of closing.
Financial highlights
Fortis has adopted a strategy of profitable growth with earnings per common share and total shareholder return as the primary measures of performance. The corporation's business is segmented by franchise area and, depending on regulatory requirements, by the nature of the assets. Key financial highlights for the first quarters ended March 31, 2015, and 2014 are provided in the table.
CONSOLIDATED FINANCIAL HIGHLIGHTS
(In millions, except per share)
Quarter ended March 31,
2015 2014
Revenue $ 1,915 $ 1,455
Energy supply costs 833 679
Operating expenses 473 319
Depreciation and amortization 215 148
Other income (expenses), net 17 7
Finance charges 134 123
Income tax expense 57 39
Earnings from continuing operations 220 154
Earnings from discontinued operations,
net of tax - 5
Net earnings 220 159
Net earnings attributable to
Non-controlling interests 2 2
Preference equity shareholders 20 14
Common equity shareholders 198 143
Net earnings 220 159
Earnings per common share from
continuing operations
Basic 0.72 0.65
Diluted 0.71 0.64
Earnings per common share
Basic 0.72 0.67
Diluted 0.71 0.66
Cash flow from operating activities 450 265
Revenue
The increase in revenue was driven by the acquisition of UNS Energy in August, 2014. Favourable foreign exchange associated with the translation of U.S.-dollar-denominated revenue and a capital tracker revenue adjustment of approximately $10-million at FortisAlberta also contributed to the increase. The increase was partially offset by lower gas volumes at FortisBC Energy.
Energy supply costs
The increase in energy supply costs was primarily due to the acquisition of UNS Energy and unfavourable foreign exchange associated with the translation of U.S.-dollar-denominated energy supply costs. The increase was partially offset by lower gas volumes at FortisBC Energy, which decreased natural gas purchases.
Operating expenses
The increase in operating expenses was primarily due to the acquisition of UNS Energy, unfavourable foreign exchange associated with the translation of U.S.-dollar-denominated operating expenses, and general inflationary and employee-related cost increases.
Depreciation and amortization
The increase in depreciation and amortization was primarily due to the acquisition of UNS Energy and continued investment in energy infrastructure at the corporation's regulated utilities.
Other income (expenses), net
The increase in other income, net of expenses, was mainly due to favourable foreign exchange on the translation of the corporation's U.S.-dollar-denominated long-term other asset representing the book value of the corporation's expropriated investment in Belize Electricity Ltd.
Finance charges
The increase in finance charges was primarily due to the acquisition of UNS Energy, including interest expense on debt issued to complete the financing of the acquisition. The increase was partially offset by lower interest on convertible debentures. Approximately $16-million ($11-million after tax) in interest expense was recognized in the first quarter of 2014 associated with convertible debentures issued to finance a portion of the acquisition of UNS Energy. In October, 2014, the convertible debentures were substantially all converted into common shares of the corporation.
Income tax expense
The increase in income tax expense was primarily due to higher earnings before income taxes, driven by the acquisition of UNS Energy.
Net earnings attributable to common equity shareholders and basic earnings per common share
The increase in adjusted net earnings attributable to common equity shareholders for the quarter was driven by the corporation's regulated utilities. UNS Energy contributed earnings of $20-million in the first quarter of 2015. Earnings at FortisBC Energy and FortisBC Electric were $9-million and $5-million, respectively, higher quarter over quarter, largely due to timing of quarterly earnings compared with the same periods last year resulting from the impact of regulatory deferral mechanisms. FortisAlberta's earnings were favourably impacted by higher capital tracker revenue for 2015 and customer growth. Central Hudson and Eastern Canadian regulated electric utilities also reported improved performance.
The increase in earnings at the regulated utilities was partially offset by lower earnings at the corporation's non-regulated subsidiaries, largely due to decreased production in Belize as a result of lower rainfall and costs at Fortis Properties associated with the continuing strategic review. Higher preference share dividends and finance charges in the corporate and other segment associated with the acquisition of UNS Energy decreased earnings for the first quarter of 2015.
The decrease in adjusted earnings per common share was primarily due to the 13-cent dilutive impact of the acquisition of UNS Energy, after considering the finance charges associated with the acquisition and the increase in the weighted average number of common shares outstanding. The earnings of UNS Energy are highly seasonal, with approximately 75 per cent of earnings contributed in the second and third quarters. The decrease in adjusted earnings per common share was partially offset by other increases in adjusted net earnings attributable to common equity shareholders, as discussed above.
Segmented results of operations
Regulated electric and gas utilities -- United States
UNS Energy
Electricity sales and gas volumes
Electricity sales for the first quarter were 3,397 gigawatt-hours compared with 3,199 gwh for the same period last year. The increase was primarily due to an increase in short-term wholesale sales as a result of more favourable commodity prices compared with the same period last year. Short-term wholesale sales are flowed through to customers and have no impact on earnings.
Gas volumes for the first quarter were five petajoules, comparable with the same period last year.
Seasonality impacts the earnings of UNS Energy. Earnings for the electric utilities are generally highest in the second and third quarters due to the use of air conditioning and other cooling equipment and earnings for the gas utility are generally highest in the first and fourth quarters due to space-heating requirements. In 2014 approximately 75 per cent of UNS Energy's earnings was recognized in the second and third quarters, excluding acquisition-related expenses.
Revenue
Revenue for the first quarter was $350-million (U.S.) compared with $333-million (U.S.) for the same period last year. The increase was primarily due to the flow through to customers of higher purchased power and fuel supply costs as a result of the operation of UNS Energy's regulatory cost recovery mechanisms.
Earnings
Earnings for the first quarter were approximately $17-million (U.S.), comparable with the same period last year.
Central Hudson
Electricity sales and gas volumes
Electricity sales and gas volumes for the first quarter of 2015 were comparable with the same period last year.
Seasonality impacts delivery revenue at Central Hudson, as electricity sales are highest during the summer months, primarily due to the use of air conditioning and other cooling equipment, and gas volumes are highest during the winter months, primarily due to space-heating usage.
Revenue
The increase in revenue was due to approximately $32-million of favourable foreign exchange associated with the translation of U.S.-dollar-denominated revenue. The recovery of deferred electricity and gas costs, higher gas revenue associated with a new contract in late 2014, as well as energy-efficiency incentives earned during the quarter upon achieving energy saving targets established by the regulator, also contributed to the increase in revenue. The increase was partially offset by the recovery from customers of lower commodity costs, which were mainly due to lower wholesale prices.
Changes in electricity sales and gas volumes at Central Hudson are subject to regulatory revenue decoupling mechanisms and, as a result, do not have a material impact on revenue and earnings.
Earnings
The increase in earnings was primarily due to approximately $3-million of favourable foreign exchange associated with the translation of U.S.-dollar-denominated earnings. A new gas contract in late 2014 and energy-efficiency incentives earned during the quarter, as discussed above, also contributed to the increase in earnings, and were partially offset by the impact of higher operating expenses during the two-year rate freeze period postacquisition in June, 2013.
Regulated gas utility -- Canadian
FortisBC Energy
Gas volumes
The decrease in gas volumes was primarily due to lower average consumption as a result of warmer temperatures.
FortisBC Energy earns approximately the same margin regardless of whether a customer contracts for the purchase and delivery of natural gas or only for the delivery of natural gas. As a result of the operation of regulatory deferral mechanisms, changes in consumption levels and the cost of natural gas from those forecast to set customer gas rates do not materially affect earnings.
Seasonality has a material impact on the earnings of FortisBC Energy as a major portion of the gas distributed is used for space heating. Most of the annual earnings of FortisBC Energy are realized in the first and fourth quarters.
Revenue
The decrease in revenue was primarily due to lower gas volumes, partially offset by a higher commodity cost of natural gas charged to customers and the timing of regulatory flow-through deferral amounts. Prior to the amalgamation of FortisBC Energy Inc. (FEI), FortisBC Energy (Vancouver Island) Inc. (FEVI) and FortisBC Energy (Whistler) Inc. (FEWI) on Dec. 31, 2014, FEVI was subject to a rate stabilization mechanism which accumulated the difference between revenue received and actual cost of service, thereby reducing the seasonality of revenue and earnings. As a result of the amalgamation, effective Jan. 1, 2015, this rate stabilization mechanism ceased, resulting in greater seasonality whereby revenue and earnings will be higher in the first and fourth quarters, and lower in the second and third quarters.
Earnings
The increase in earnings was driven by approximately $12-million associated with the timing of regulatory flow-through deferral amounts, as discussed above. This increase was partially offset by a decrease in the allowed ROE and equity component of capital structure as a result of the amalgamation of FEVI and FEWI with FEI, effective Dec. 31, 2014. Prior to the amalgamation, the allowed ROEs for FEVI and FEWI were 9.25 per cent and 9.50 per cent, respectively, on a common equity component of capital structure of 41.5 per cent. Effective Jan. 1, 2015, the allowed ROE and common equity component of capital structure revert to those of FEI, which are 8.75 per cent and 38.5 per cent, respectively.
Regulated electric utilities -- Canadian
FortisAlberta
Energy deliveries
The decrease in energy deliveries was primarily due to lower average consumption by residential, commercial and farm and irrigation customers due to warmer temperatures, partially offset by growth in the number of customers. The total number of customers increased by approximately 12,000 year over year as at March 31, 2015, driven by residential customers as a result of favourable economic conditions in Alberta in 2014.
As a significant portion of FortisAlberta's distribution revenue is derived from fixed or largely fixed billing determinants, changes in quantities of energy delivered are not entirely correlated with changes in revenue. Revenue is a function of numerous variables, many of which are independent of actual energy deliveries.
Revenue
The increase in revenue was primarily due to a $10-million capital tracker revenue adjustment recognized in the first quarter of 2015 associated with 2013 and 2014, and higher revenue resulting from the operation of the PBR formula, including an increase in customer rates based on a combined inflation and productivity factor of 1.49 per cent and higher 2015 capital tracker revenue. Growth in the number of customers and higher revenue related to flow-through costs to customers also contributed to the increase in revenue.
In March, 2015, regulatory decisions were received on FortisAlberta's capital tracker applications and the GCOC proceeding in Alberta. The capital tracker decision approved revenue for substantially all of FortisAlberta's capital programs as filed; previously, revenue was recognized on an interim basis at 60 per cent of the applied for amounts. The GCOC proceeding set the utility's allowed ROE for 2013 through 2015 at 8.30 per cent, down from the interim allowed ROE of 8.75 per cent, and set the common equity component of capital structure at 40 per cent, down from 41 per cent approved on an interim basis. The impact of the decreases in the allowed ROE and common equity component of capital structure only applies to the portion of FortisAlberta's revenue that is associated with capital tracker amounts throughout the term of the PBR regulation. The $10-million capital tracker revenue adjustment associated with 2013 and 2014 reflects the combined impact of the capital tracker decision and the GCOC decision, taking into consideration the capital tracker revenue previously recognized on an interim basis for 2013 and 2014 at 60 per cent of the applied for amounts.
Earnings
The increase in earnings was driven by capital tracker revenue of approximately $10-million recognized in the first quarter of 2015 associated with 2013 and 2014, as well as rate base growth and associated 2015 capital tracker revenue and growth in the number of customers.
FortisBC Electric
Electricity sales
The decrease in electricity sales was mainly due to lower average consumption as a result of warmer temperatures.
Revenue
Revenue for the first quarter of 2015 was comparable to the same period last year. An interim refundable increase in base electricity rates, effective Jan. 1, 2015, and the amortization of regulatory deferral adjustments owing to customers were largely offset by lower electricity sales.
Earnings
The increase in earnings was primarily due to the timing of earnings compared with the same period last year as a result of the impact of regulatory deferral mechanisms, timing of power purchase costs and rate base growth.
Eastern Canadian electric utilities
Electricity sales
The increase in electricity sales was driven by customer growth and higher average consumption in Newfoundland and Prince Edward Island, including an increase in the number of customers using electricity for home heating. The increase was partially offset by lower average consumption by residential customers in Ontario.
Revenue
The increase in revenue was primarily due to electricity sales growth and the flow-through in customer electricity rates of higher energy supply costs at FortisOntario.
Earnings
The increase in earnings was primarily due to electricity sales growth and lower operating costs associated with restoration efforts at Newfoundland Power following the loss of energy supply from Newfoundland and Labrador Hydro and related power interruptions in January, 2014.
Regulated electric utilities -- Caribbean
Electricity sales
Electricity sales for the quarter were consistent with the same period last year.
Revenue
The increase in revenue was driven by approximately $9-million of favourable foreign exchange associated with the translation of U.S.-dollar-denominated revenue, partially offset by the flow through in customer electricity rates of lower fuel costs at Caribbean utilities.
Earnings
Earnings for the quarter were consistent with the same period last year. Foreign exchange associated with the translation of U.S.-dollar-denominated earnings had a slightly favourable impact on earnings, which was largely offset by higher depreciation.
Non-regulated -- Fortis Generation
Energy sales
The decrease in energy sales was primarily due to decreased production in Belize due to lower rainfall. Decreased production in upstate New York and Ontario, due to lower rainfall and generating units taken out of service for repairs, also contributed to the overall decrease in energy sales.
Revenue
The decrease in revenue was primarily due to decreased production in Belize, upstate New York and Ontario.
Earnings
The decrease in earnings was primarily due to decreased production in Belize, upstate New York and Ontario, partially offset by $1-million in business development costs in the first quarter of 2014 associated with investigating a potential generating facility in British Columbia.
Non-regulated -- non-utility
Revenue
Revenue at Fortis Properties for the first quarter of 2015 was comparable to the same period last year.
Earnings
Fortis Properties generated a loss of approximately $2-million in the first quarter of 2015 compared with earnings of less than $500,000 for the same period last year. The decrease in earnings was primarily due to costs associated with the continuing strategic review and higher finance charges. Earnings for the first quarter of 2014 include $5-million associated with Griffith from normal operations to the date of sale.
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. An announcement on the outcome of the strategic review is expected to be made in the second quarter of 2015.
Corporate and other
Net corporate and other expenses were impacted by the following items:
- A foreign exchange gain of approximately $9-million in the first quarter
of 2015, compared with approximately $4-million for the same period last
year, associated with the corporation's U.S.-dollar-denominated long-term
other asset, representing the book value of the corporation's
expropriated investment in Belize Electricity, which was included in
other income, net of expenses;
- Finance charges of $16-million ($11-million after tax) in the first
quarter of 2014 associated with the convertible debentures issued in
January, 2014, to finance a portion of the acquisition of UNS Energy;
- Other expenses of $2-million ($1-million after tax) in the first quarter
of 2014 related to the acquisition of UNS Energy.
Excluding the above-noted items, net corporate and other expenses were $30-million for the first quarter of 2015 compared with $22-million for the same period last year. The increase was primarily due to higher preference share dividends and finance charges associated with the acquisition of UNS Energy in August, 2014. Finance charges were also impacted by unfavourable foreign exchange associated with the translation of U.S.-dollar-denominated interest expense.
Material regulatory decisions and applications
The nature of regulation associated with each of the corporation's regulated electric and gas utilities is generally consistent with that disclosed in the 2014 annual management's discussion and analysis. The following summarizes the significant regulatory decisions and applications for the corporation's regulated utilities in the first quarter of 2015.
Central Hudson
In July, 2014, Central Hudson filed a general rate application (GRA) seeking to increase electricity and natural gas delivery rates effective July 1, 2015. A delivery rate freeze was implemented for electricity and natural gas delivery rates through to June 30, 2015, as part of the regulatory approval of the acquisition of Central Hudson by Fortis. Central Hudson committed to invest $215-million (U.S.) in capital expenditures during the two-year delivery rate freeze period ending June 30, 2015. In its GRA, the company requested an allowed ROE of 9.0 per cent with a 48-per-cent common equity component of capital structure for a term of one year. The current rate order includes an allowed ROE of 10.0 per cent with a 48-per-cent common equity component of capital structure. 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 ROE of 9.0 per cent and a 48-per-cent common equity component of capital structure. The joint settlement proposal includes continuation of certain mechanisms currently in place, including revenue decoupling and earnings sharing mechanisms. Under the proposed earnings sharing mechanism, the company and customers share equally earnings in excess of 50 basis points above the allowed ROE up to an achieved ROE that is 100 basis points above the allowed ROE. Public statement and evidentiary hearings were held in March, 2015, and a final joint proposal was executed in April, 2015. The final joint settlement proposal is targeted to go to the regulator in June for consideration and approval.
FortisBC Energy and FortisBC Electric
On Dec. 31, 2014, FEI, FEVI and FEWI were amalgamated, as approved by the British Columbia Utilities Commission (BCUC) in February, 2014, and FEI is the resulting company. Prior to the amalgamation, the allowed ROEs for FEVI and FEWI were 9.25 per cent and 9.50 per cent, respectively, on a common equity component of capital structure of 41.5 per cent. Effective Jan. 1, 2015, the allowed ROE and common equity component of capital structure revert to those of FEI, which are 8.75 per cent and 38.5 per cent, respectively.
In compliance with the PBR decisions issued by the BCUC in September, 2014, in January and February, 2015, FEI and FortisBC Electric, respectively, filed for approval of their 2015 rates under the PBR decisions. The applications assume a forecast midyear rate base of approximately $3,656-million and $1,267-million for FEI and FortisBC Electric, respectively, and request approval of customer rate increases of approximately 2.0 per cent and 4.6 per cent over 2014 rates, respectively, determined under a formulaic approach for operating and maintenance costs and capital costs. A decision on the final rate increases is expected in the second quarter of 2015.
FEI is required to file an application to review the 2016 benchmark allowed ROE and common equity component of capital structure by no later than Nov. 30, 2015. As FEI is the benchmark utility, the review of the application could have an impact on FortisBC Electric.
FortisAlberta
In March, 2015, the Alberta Utilities Commission (AUC) issued its decision on the GCOC proceeding in Alberta. The GCOC proceeding set FortisAlberta's allowed ROE for 2013 through 2015 at 8.30 per cent, down from the interim allowed ROE of 8.75 per cent, and set the common equity component of capital structure at 40 per cent, down from 41 per cent approved on an interim basis. The AUC also decided that it will not re-establish a formula-based approach to setting the allowed ROE on an annual basis. The allowed ROE of 8.30 per cent and common equity component of capital structure of 40 per cent will remain in effect for 2016 and beyond on an interim basis. For regulated utilities in Alberta under PBR mechanisms, including FortisAlberta, the allowed ROE and common equity component of capital structure resulting from the GCOC proceeding applies only to the portion of revenue that is associated with capital tracker amounts throughout the term of the PBR regulation.
In March, 2015, the AUC also issued its decision related to FortisAlberta's 2013, 2014 and 2015 capital tracker applications. The decision: indicated which capital programs met the criteria established in the original PBR decision and were, therefore, approved for collection from customers; approved FortisAlberta's accounting test; and provided clarification on certain inputs to be used in the accounting test, including the conclusion that the weighted average cost of capital used in the accounting test is to be based on actual debt rates, and the allowed ROE and capital structure approved in the GCOC proceeding. Substantially all of FortisAlberta's capital programs were approved as filed.
FortisAlberta completed the required capital tracker compliance filing in April, 2015, requesting that the adjustments to capital tracker revenue be considered in the 2016 annual rates application to be filed in September, 2015, and reflected in customer rates effective Jan. 1, 2016. A decision on the capital tracker compliance filing is expected in the second half of 2015.
Additional capital tracker revenue of approximately $10-million was recognized in the first quarter of 2015 related to 2013 and 2014 capital expenditures. This adjustment reflects the combined impact of the capital tracker decision and the GCOC decision, taking into consideration the capital tracker revenue previously recognized on an interim basis for 2013 and 2014 at 60 per cent of the applied for amounts. Capital tracker revenue for 2015 also reflects the impact of both decisions, taking into consideration the estimated 2015 capital expenditures related to qualifying capital programs.
In May, 2015, FortisAlberta will file an application with the AUC seeking capital tracker revenue for 2016 and 2017, as well as a true-up to the actual 2014 capital expenditures. As part of this application, the company will provide more comprehensive information on the components of the capital program that were not fully approved in the capital tracker decision, seeking approval of the related capital expenditures incurred in 2013, 2014 and 2015. A hearing related to this proceeding is scheduled for October, 2015, with a decision from the AUC expected in the first quarter of 2016.
In April, 2015, the AUC initiated a 2016 GCOC proceeding. A preproceeding conference will be held in May, 2015, after which the AUC will identify the issues it has determined to be in scope for this proceeding. In addition, an informal roundtable discussion will be held in June, 2015, to explore procedural alternatives that may expedite completion of the 2016 GCOC proceeding in a timely manner.
Eastern Canadian electric utilities
Newfoundland Power is required to file a GRA on or before June 1, 2015, to establish customer electricity rates for 2016, unless otherwise directed by the Newfoundland and Labrador Board of Commissioners of Public Utilities (PUB). In April, 2015, Newfoundland Power filed an application with the PUB to defer the filing of its next GRA to on or before June 1, 2016, and to request a 2016 cost recovery deferral of $4-million. The application is currently under review by the PUB.
Liquidity and capital resources
Operating activities
Cash flow from operating activities was $185-million higher quarter over quarter. The increase was primarily due to higher cash earnings, largely due to the acquisition of UNS Energy, and favourable changes in working capital associated with accounts receivable at FortisBC Energy and UNS Energy. The increase was partially offset by unfavourable changes in long-term regulatory deferrals at FortisBC Energy and FortisAlberta.
Investing activities
Cash used in investing activities was $443-million higher quarter over quarter. The increase was driven by capital expenditures at UNS Energy, and higher capital spending at FortisBC Energy, FortisBC Electric and FortisAlberta. Proceeds from the sale of Griffith in March, 2014, of approximately $105-million ($95-million (U.S.)) also contributed to the variance.
Financing activities
Cash provided by financing activities was $145-million lower quarter over quarter. The decrease was primarily due to lower proceeds from the corporation's convertible debentures and higher repayments of long-term debt, partially offset by higher proceeds from the issuance of long-term debt, lower net repayments of committed credit facility borrowings and changes in short-term borrowings.
In January, 2014, proceeds of approximately $599-million, or $561-million net of issue costs, were received from the first instalment of the convertible debentures issued to finance a portion of the acquisition of UNS Energy. Initially, a portion of the net proceeds were cash on hand, while a portion was used to repay borrowings under the corporation's committed credit facility and for other general corporate purposes, including intercompany loan advances to subsidiaries.
Borrowings under credit facilities by the utilities are primarily in support of their respective capital expenditure programs and/or for working capital requirements. Repayments are primarily financed through the issuance of long-term debt, cash from operations and/or equity injections from Fortis. From time to time, proceeds from preference share, common share and long-term debt offerings are used to repay borrowings under the corporation's committed credit facility.
Common share dividends paid in the first quarter of 2015 were $60-million, net of $34-million of dividends reinvested, compared with $47-million, net of $22-million of dividends reinvested, paid in the same quarter of 2014. The dividend paid per common share for the first quarter of 2015 was 34 cents compared with 32 cents for the first quarter of 2014. The weighted average number of common shares outstanding for the first quarter of 2015 was 276.7 million compared with 213.6 million for the same quarter of 2014.
Capital structure
The corporation's principal businesses of regulated electric and gas utilities require continuing access to capital to enable the utilities to finance maintenance and expansion of infrastructure. Fortis raises debt at the subsidiary level to ensure regulatory transparency, tax efficiency and financing flexibility. Fortis generally finances a significant portion of acquisitions at the corporate level with proceeds from common share, preference share and long-term debt offerings. To help ensure access to capital, the corporation targets a consolidated long-term capital structure containing approximately 45 per cent equity, including preference shares, and 55 per cent debt, as well as investment-grade credit ratings. Each of the corporation's regulated utilities maintains its own capital structure in line with the deemed capital structure reflected in each of the utility's customer rates.
Excluding capital lease and finance obligations, the corporation's capital structure as at March 31, 2015, was 55.1 per cent debt, 8.9 per cent preference shares and 36.0 per cent common shareholders' equity (Dec. 31, 2014 -- 55.0 per cent debt, 9.4 per cent preference shares and 35.6 per cent common shareholders' equity).
The change in the capital structure was due to an increase in long-term debt, mainly due to the impact of foreign exchange on the translation of U.S.-dollar denominated debt and the issuance of long-term debt, largely in support of energy infrastructure investment, partially offset by regularly scheduled debt repayments. The capital structure was also impacted by an increase in common shareholders' equity as a result of: an increase in accumulated other comprehensive income associated with the translation of the corporation's U.S.-dollar-denominated investments in subsidiaries, net of hedging activities and tax; net earnings attributable to common equity shareholders for the three months ended March 31, 2015, less dividends declared on common shares; and the issuance of common shares under the corporation's dividend reinvestment, employee share purchase and stock option plans.
Credit ratings
The corporation's credit ratings are as follows:
- Standard & Poor's (S&P) A-/stable (long-term corporate and unsecured
debt credit rating);
-
DBRS A (low)/stable (unsecured debt credit rating).
The above-noted credit ratings reflect the corporation's low business risk profile and diversity of its operations, the stand-alone nature and financial separation of each of the regulated subsidiaries of Fortis, and management's commitment to maintaining reasonable levels of debt at the holding company level. In April, 2015, S&P confirmed the corporation's credit rating with a stable outlook.
Capital expenditure program
Planned capital expenditures are based on detailed forecasts of energy demand, weather, cost of labour and materials, as well as other factors, including economic conditions, which could change and cause actual expenditures to differ from those forecast.
Gross consolidated capital expenditures for 2015 are forecast to be approximately $2.2-billion. There have been no material changes in the overall expected level, nature and timing of the corporation's significant capital projects from those that were disclosed in the 2014 annual MD&A.
Construction of the $900-million, 335 mw Waneta expansion was completed on April 1, 2015, ahead of schedule and on budget. The expansion adds a second powerhouse, immediately downstream of the Waneta dam on the Pend d'Oreille River, that shares the existing hydraulic head and generates clean, renewable, cost-effective power from water that would otherwise be spilled. The project included construction of a 10-kilometre, 230-kilovolt transmission line and provides enough energy to power about 60,000 homes per year. On April 2, 2015, the Waneta expansion began generating power, all of which will be sold to BC Hydro and FortisBC Electric under 40-year contracts.
Construction of FortisBC's Tilbury liquefied natural gas (LNG) facility expansion (Tilbury 1A) in Delta, B.C., is continuing. Key construction activities during the quarter focused on completion of the LNG tank concrete foundation and commencement of the tank wall and bottom steel plate. Tilbury 1A will be included in regulated rate base and is estimated to cost approximately $440-million, including an equity component of allowance for funds used during construction. It will include a second LNG tank and a new liquefier, both expected to be in service by the end of 2016.
FortisBC is pursuing additional LNG infrastructure investment opportunities, including a further $450-million expansion of Tilbury (Tilbury 1B) and a $600-million pipeline expansion to the proposed LNG facility by Woodfibre LNG in Squamish, B.C. In December, 2014, FortisBC received an order in council from the government of British Columbia effectively exempting these projects from further regulatory approval by the British Columbia Utilities Commission; however, Tilbury 1B approval is conditional upon having long-term energy supply contracts in place for 70 per cent of the additional liquefaction capacity, on average for the first 15 years of operation. FortisBC has a conditional contract with Hawaiian Electric Company that would meet this requirement, subject to the regulatory approval process in Hawaii. The pipeline expansion is conditional on Woodfibre LNG proceeding with its LNG facility. These additional $1-billion of investment opportunities, which would be included in FortisBC's regulated rate base, are not included in the corporation's capital expenditure forecast.
In January, 2015, upon expiration of the Springerville unit 1 lease, UNS Energy closed the purchase of an additional ownership interest in the unit for $46-million (U.S.). UNS Energy's ownership interests in Springerville unit 1 now total 49.5 per cent. Additionally, upon expiration of the Springerville coal handling facilities lease in April, 2015, UNS Energy purchased the previously leased coal handling assets for $73-million (U.S.).
Over the five-year period through 2019, gross consolidated capital expenditures are expected to be approximately $9-billion. The approximate breakdown of the capital spending expected to be incurred is as follows: 37 per cent at U.S. regulated electric and gas utilities; 36 per cent at Canadian regulated electric utilities, driven by FortisAlberta; 20 per cent at Canadian regulated gas utility; 5 per cent at Caribbean regulated electric utilities; and the remaining 2 per cent at non-regulated operations. Capital expenditures at the regulated utilities are subject to regulatory approval. Over the five-year period, on average annually, the approximate breakdown of the total capital spending to be incurred is as follows: 50 per cent for sustaining capital expenditures; 28 per cent to meet customer growth; and 22 per cent for facilities, equipment, vehicles, information technology and other assets.
Cash flow requirements
At the subsidiary level, it is expected that operating expenses and interest costs will generally be paid out of subsidiary operating cash flows, with varying levels of residual cash flows available for subsidiary capital expenditures and/or dividend payments to Fortis. Borrowings under credit facilities may be required from time to time to support seasonal working capital requirements. Cash required to complete subsidiary capital expenditure programs is also expected to be financed from a combination of borrowings under credit facilities, equity injections from Fortis and long-term debt offerings.
The corporation's ability to service its debt obligations and pay dividends on its common shares and preference shares is dependent on the financial results of the operating subsidiaries and the related cash payments from these subsidiaries. Certain regulated subsidiaries may be subject to restrictions that may limit their ability to distribute cash to Fortis.
Cash required of Fortis to support subsidiary capital expenditure programs and finance acquisitions is expected to be derived from a combination of borrowings under the corporation's committed corporate credit facility, and proceeds from the issuance of common shares, preference shares and long-term debt. Depending on the timing of cash payments from the subsidiaries, borrowings under the corporation's committed corporate credit facility may be required from time to time to support the servicing of debt and payment of dividends. The subsidiaries expect to be able to source the cash required to finance their 2015 capital expenditure programs.
In April, 2015, FortisBC Energy filed a short-form base-shelf prospectus to establish a medium-term note debenture program under which FortisBC Energy may issue debentures in an aggregate principal amount of up to $1-billion during the 25-month life of the shelf prospectus. In April, 2015, FortisBC Energy issued 30-year $150-million 3.375-per-cent unsecured debentures. The net proceeds were used to repay short-term borrowings.
As at March 31, 2015, management expects consolidated fixed-term debt maturities and repayments to average approximately $250-million annually over the next five years. The combination of available credit facilities and relatively low annual debt maturities and repayments provides the corporation and its subsidiaries with flexibility in the timing of access to capital markets.
Fortis and its subsidiaries were compliant with debt covenants as at March 31, 2015, and are expected to remain compliant throughout 2015.
Credit facilities
As at March 31, 2015, the corporation and its subsidiaries had consolidated credit facilities of approximately $3.8-billion, of which approximately $2.1-billion was unused, including $477-million unused under the corporation's committed revolving corporate credit facility. The credit facilities are syndicated mostly with the seven largest Canadian banks, with no one bank holding more than 20 per cent of these facilities. Approximately $3.6-billion of the total credit facilities are committed facilities with maturities ranging from 2015 through 2020.
As at March 31, 2015, and Dec. 31, 2014, certain borrowings under the corporation's and subsidiaries' credit facilities were classified as long-term debt. These borrowings are under long-term committed credit facilities and management's intention is to refinance these borrowings with long-term permanent financing during future periods.
In March, 2015, the corporation amended its $1-billion corporate committed credit facility, resulting in an increase in the facility to $1.3-billion and an extension of the maturity date to July, 2020, from July, 2018. As at March 31, 2015, the additional $300-million was not available for use as syndication by creditors was not finalized.
In March, 2015, UNS Energy repaid its $130-million (U.S.) non-revolving term loan commitment using net proceeds from the issuance of long-term debt.
In April, 2015, FortisBC Electric amended its $150-million unsecured committed revolving credit facility to now mature in May, 2018.
Derivative instruments
The corporation generally limits the use of derivative instruments to those that qualify as accounting, economic or cash flow hedges. The corporation is required to record all derivative instruments at fair value, except for those that qualify for the normal purchase and normal sale exception. The fair value of derivative instruments are estimates of the amounts that the utilities would receive or have to pay to terminate the outstanding contracts as at the balance sheet dates.
Energy contracts subject to regulatory deferral
UNS Energy holds electricity power purchase contracts and gas swap and option contracts to reduce its exposure to energy price risk associated with purchased power and gas requirements. UNS Energy primarily applies the market approach for fair value measurements using independent third party information, where possible. When published prices are not available, adjustments are applied based on historical price curve relationships, and transmission and line losses. The fair value of gas option contracts are estimated using a Black-Scholes option-pricing model, which includes inputs such as implied volatility, interest rates and forward price curves. UNS Energy also considers the impact of counterparty credit risk using current and historical default and recovery rates, as well as its own credit risk using credit default swap data.
Central Hudson holds electricity swap contracts and gas swap and option contracts to minimize commodity price volatility for electricity and natural gas purchases by fixing the effective purchase price for the defined commodities. The fair value of the electricity swap contracts and gas swap and option contracts was calculated using forward pricing provided by independent third parties.
FortisBC Energy holds gas purchase contract premiums to fix the effective purchase price of natural gas, as the majority of the natural gas supply contracts have floating, rather than fixed, prices. The fair value of the natural gas derivatives was calculated using the present value of cash flows based on market prices and forward curves for the cost of natural gas.
As at March 31, 2015, these energy contract derivatives were not designated as hedges; however, any unrealized gains or losses associated with changes in the fair value of the derivatives are deferred as a regulatory asset or liability for recovery from, or refund to, customers in future rates, as permitted by the regulators. These unrealized losses and gains would otherwise be recorded in earnings. As at March 31, 2015, unrealized losses of $89-million (Dec. 31, 2014 -- $69-million) were recognized in current regulatory assets and no unrealized gains were recognized in regulatory liabilities.
Cash flow hedges
UNS Energy holds interest rate swaps, expiring through 2020, to mitigate its exposure to volatility in variable interest rates on debt, and a power purchase swap, expiring in September, 2015, to hedge the cash flow risk associated with a long-term power supply agreement. The aftertax unrealized gains and losses on cash flow hedges are recorded in other comprehensive income and reclassified to earnings as they become realized. The loss expected to be reclassified to earnings within the next 12 months is estimated to be approximately $4-million.
Cash flows associated with the settlement of all derivative instruments are included in operating activities on the corporation's consolidated statement of cash flows.
Off-balance sheet arrangements
With the exception of letters of credit outstanding of $204-million as at March 31, 2015 (Dec. 31, 2014 -- $192-million), the corporation had no off-balance sheet arrangements that are reasonably likely to materially affect liquidity or the availability of, or requirements for, capital resources.
Outlook
Fortis is a leader in the North American electric and gas utility business, currently serving more than three million customers. The corporation's focus continues to be on low-risk, regulated utility businesses and long-term contracted energy infrastructure.
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. An announcement on the outcome of the strategic review is expected to be made in the second quarter of 2015. Fortis Properties comprises approximately 3 per cent of the corporation's total assets.
Following a decade of growth driven mainly by acquisitions, Fortis has entered a period of significant organic growth. The corporation's enterprise-wide capital program is expected to surpass $2-billion in 2015. Over the five-year period through 2019, the corporation's capital program is expected to be approximately $9-billion. This investment in energy infrastructure is expected to increase midyear rate base by approximately 38 per cent from $14-billion in 2014 to more than $19-billion in 2019 and produce a five-year compound annual growth rate (CAGR) of approximately 6.5 per cent. Two new natural gas infrastructure investments in British Columbia that Fortis is pursuing -- Tilbury 1B and the pipeline expansion to Woodfibre LNG -- could increase the five-year CAGR in rate base to 7.5 per cent.
Looking out over the five-year horizon, the corporation expects this capital investment to support continuing growth in earnings and dividends.
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share)
Quarter ended March 31,
2015 2014
Revenue $ 1,915 $ 1,455
Expenses
Energy supply costs 833 679
Operating 473 319
Depreciation and amortization 215 148
1,521 1,146
Operating income 394 309
Other income (expenses), net 17 7
Finance charges 134 123
Earnings before income taxes and discontinued
operations 277 193
Income tax expense 57 39
Earnings from continuing operations 220 154
Earnings from discontinued operations, net of tax - 5
Net earnings $ 220 $ 159
Net earnings attributable to
Non-controlling interests $ 2 $ 2
Preference equity shareholders 20 14
Common equity shareholders 198 143
$ 220 $ 159
Earnings per common share from continuing
operations
Basic $ 0.72 $ 0.65
Diluted $ 0.71 $ 0.64
Earnings per common share
Basic $ 0.72 $ 0.67
Diluted $ 0.71 $ 0.66
We seek Safe Harbor.
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