Fortis CEO says no merchant transmission in future with ITC plans

Fortis Inc. officials on Feb. 18 laid out a few more details about the planned purchase of ITC Holdings (NYSE:ITC) for $11.3bn during the company’s 4Q15 earnings call, including that the combined company will focus on transmission plans that feature long-term contracts.

A financial analyst during the call asked whether Fortis intends to pursue competitive transmission projects through the regulated or unregulated portion of its businesses.

“We will be very much competitive on transmission across North America,” said Barry Perry, president and CEO of Fortis. “But the opportunities have to really closely track the risk profile of the regulated business. We are not going to be looking at merchant transmission.”

Perry added: “We will have to have reputable counterparties, long-term contractual arrangements, those kinds of characteristics. We are not getting in the merchant business.”

Perry and Karl Smith, Fortis executive vice president and CFO, addressed the plan for Fortis to acquire ITC in a cash and stock transaction in which ITC shareholders would receive US$22.57 in cash and 0.752 Fortis shares per ITC share, which was announced Feb. 9.

The deal would combine the U.S. and Canadian utility assets of Fortis, which is based in St. John’s Newfoundland and Labrador, with the transmission asset business of ITC, which is based in Novi, Mich. ITC’s management team will remain in place and all ITC employees will be retained, with ITC keeping its headquarters and operations control in Novi, Perry said during the call.

ITC shareholders would own about 27% of Fortis’ common shares once the transaction is closed, Smith said.

Financing for the cash portion of the deal would be achieved mainly through the issuance of about $2bn of Fortis debt and the sale of up to 19.9% of ITC to one or more infrastructure-focused minority investors, the companies said when the deal was announced.

Fortis has received “a great deal of inbound interest” for the stake in ITC, Perry said during the Feb. 18 call, noting, “We expect that we will secure investors within 90 days.”

Fortis will make sure that any partner it brings in will not affect the status of ITC in terms of its regulation at FERC and its return on equity, Perry said, telling analysts that the independent status of the organization is an important factor in the transaction.

Fortis shares currently are traded on the Toronto Stock Exchange (TSX), and it expects to list shares on the NYSE by the middle of the year, Perry said.

“As is customary with dual-listed stocks on the TSX and NYSE, the common shares will freely trade between both exchanges,” he said.

Fortis expects to gain regulatory approvals from FERC, several states and other federal agencies to allow the transaction to close by the end of 2016.

“None of the states where approval is required have rate jurisdiction, and there’s no rate increase being proposed as part of the FERC approval process,” Perry said.

When the deal was announced, ITC and Fortis said that they will seek regulatory approvals in Illinois, Kansas, Missouri, Oklahoma and Wisconsin, and that they do not expect to need approvals from regulators in Iowa, Michigan or Minnesota.

Perry said that the deal is structured to have no negative impacts on employees, the tax base in any state or facility locations.

“This acquisition is a natural strategic fit, enabling the ongoing long-term investment in the grid that customers need and regulators expect, while providing a platform for ITC to continue its operational excellence and track record of service and reliability,” he said.

Addressing a question, Perry said that Fortis has no plans for other major acquisitions, and that the company’s focus will be making sure that ITC is integrated well within the Fortis group of companies.

“Let me be clear, we are not rushing out to do other acquisitions,” Perry said. “This is a large transaction. It’s going to add a tremendous amount of value to Fortis in both the existing business and the development projects that ITC is working on.”

Earnings report

Fortis reported record earnings for 2015 driven by utility acquisitions in the U.S., gains on non-core asset sales, the completion of the Waneta hydroelectric generation facility expansion in British Columbia and strong results from Canadian utilities, the company said in a Feb. 18 statement.

For all of 2015, Fortis reported net earnings of C$728m, or C$2.61 per common share, compared with C$317m, or C$1.41 per common share, for 2014. The gain was attributed to, among other things, a full year of contributions from UNS Energy in Arizona, which was acquired in the middle of 2014, new rates at Central Hudson Gas & Electric in New York and contributions from the expansion of the Waneta expansion project, which came online in early April 2015.

Fortis reported 4Q15 net earnings of C$135m, or C48 cents per common share, compared with C$113m, or C44 cents per common share in 4Q14.