On an adjusted basis, net earnings attributable to common equity shareholders for the second quarter were $131 million, or $0.46 per common share, an increase of $8 million, or $0.02 per common share, over the second quarter of 2015. On a year-to-date basis, adjusted earnings were $321 million, or $1.13 per common share, an increase of $19 million, or $0.04 per common share, over 2015. A reconciliation of adjusted net earnings and adjusted earnings per common share is provided in the Corporation's Interim Management Discussion and Analysis for the three and six months ended June 30, 2016.
Strong second quarter earnings and cash flow; capital expenditure plan on track
Factors that resulted in growth in adjusted earnings for the second quarter included:
strong performance at most of the Corporation's regulated utilities;
contribution of $4 million from the Aitken Creek gas storage facility in British Columbia ("Aitken Creek"), which was acquired in early April 2016;
the strength of the US dollar relative to the Canadian dollar. Approximately 45% of Fortis' assets are denominated in US dollars. On an annual basis, earnings per common share are affected by approximately $0.01 for each $0.01 change in the US dollar relative to the Canadian dollar; and
the timing of quarterly earnings at FortisBC Electric compared to the second quarter of 2015.
Earnings growth was tempered by lower earnings at FortisAlberta, due to higher operating expenses and lower average energy consumption, and the sale of commercial real estate and hotel assets in 2015.
Cash flow from operating activities was $931 million for the first half of 2016, comparable with the first half of 2015.
Capital expenditures for the first half of 2016 were $859 million and the Corporation's consolidated capital expenditure forecast of $1.9 billion for 2016 is on track. Caribbean Utilities completed its 39.7 megawatt generation expansion project in the second quarter of 2016, on schedule and below budget, for a total cost of US$79 million.
"Our diversified portfolio of utilities continues to deliver strong results," said Mr. Barry Perry, President and Chief Executive Officer of Fortis. "Additionally, we expect the acquisition of ITC to further strengthen and diversify our business, as well as accelerate our growth. In the second quarter we achieved a number of significant milestones related to closing of the acquisition."
A transformative acquisition
In February 2016 Fortis announced the acquisition of ITC Holdings Corp. ("ITC") in a transaction (the "Acquisition") valued at approximately US$11.3 billion. ITC is the largest independent electric transmission company in the United States.
In April 2016 Fortis announced that it reached a definitive agreement with an affiliate of GIC Private Limited, Singapore's sovereign wealth fund, to acquire a 19.9% equity interest in ITC for aggregate consideration of US$1.228 billion in cash upon closing of the Acquisition. This completes a significant component of the ITC Acquisition financing plan.
In May 2016 and June 2016, both Fortis and ITC received shareholder approvals to proceed with the Acquisition. The transaction review by the Committee on Foreign Investment in the United States was completed in July 2016. The closing of the Acquisition remains subject to certain regulatory, state and federal approvals including, among others, those of the United States Federal Energy Regulatory Commission ("FERC") and the United States Federal Trade Commission/Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act, and the satisfaction of other customary closing conditions. The FERC and all of the state regulatory applications associated with the transaction were filed in the second quarter of 2016. The closing of the Acquisition is expected to occur in late 2016.
Execution of growth strategy
On April 1, 2016, Fortis completed the acquisition of Aitken Creek for approximately $349 million (US$266 million), plus working gas inventory. Aitken Creek is the only underground gas storage facility in British Columbia and has a total working gas capacity of 77 billion cubic feet. The facility is an integral part of western Canada's natural gas transmission network.
Construction continues on the Tilbury liquefied natural gas ("LNG") facility expansion ("Tilbury 1A") in British Columbia, the Corporation's largest ongoing capital project, at an estimated cost of $440 million. Approximately $368 million has been invested in Tilbury 1A to the end of the second quarter of 2016 and the facility is expected to be in service in the first quarter of 2017.
The Corporation continues to pursue additional LNG infrastructure investment opportunities in British Columbia, including FortisBC Energy's potential pipeline expansion to the Woodfibre LNG export facility. Woodfibre LNG has obtained an export license from the National Energy Board and received various environmental assessment approvals. FortisBC Energy also received environmental assessment approval from the Squamish First Nation during the second quarter of 2016. The potential pipeline expansion has an estimated total project cost of $600 million. A final investment decision by Woodfibre LNG is targeted for late 2016.
In addition to the ongoing work to secure regulatory approval for the acquisition of ITC, Fortis is actively engaged with all of its existing regulators and is focused on maintaining constructive regulatory relationships and outcomes across its utilities.
The most significant regulatory proceeding underway remains Tucson Electric Power Company's ("TEP") general rate application. TEP has requested new retail rates to be effective January 1, 2017, using the year ended June 30, 2015 as a historical test year. Since its last approved rate order in 2013, which used a 2011 historical test year, TEP's total rate base has increased by approximately US$0.6 billion and the common equity component of capital structure has increased from 43.5% to approximately 50%.
In the second quarter, Newfoundland Power received a decision on its general rate application, which resulted in a decrease in the allowed rate of return on common shareholder's equity to 8.50% from 8.80%, effective January 1, 2016. UNS Electric is awaiting the outcome of its general rate application and the Corporation's utilities in British Columbia and Alberta are undergoing generic cost of capital proceedings initiated by the respective regulators.
Fortis expects to close the Acquisition of ITC by the end of 2016. The Acquisition is expected to be accretive to earnings per common share in the first full year following closing, excluding one-time acquisition-related expenses. The Acquisition represents a singular opportunity for Fortis to significantly diversify its business in terms of regulatory jurisdictions, business risk profile and regional economic mix.
Over the five-year period through 2020, excluding ITC, the Corporation's capital program is expected to be over $9 billion. This investment in energy infrastructure is expected to increase rate base to more than $20 billion in 2020. Fortis expects long-term sustainable growth in rate base, resulting from investment in its existing utility operations and strategic acquisitions, to support continuing growth in earnings and dividends.
Fortis continues to target 6% average annual dividend growth through 2020. This dividend guidance takes into account many factors, including the expectation of reasonable outcomes for regulatory proceedings at the Corporation's utilities, the successful execution of the five-year capital expenditure program, and management's continued confidence in the strength of the Corporation's diversified portfolio of utilities and record of operational excellence. The Acquisition of ITC supports this dividend guidance.
"Our business continues to grow in 2016 and results in 2017 will benefit from the expected outcome of the TEP general rate case, the impact of ITC and continued growth of our underlying business," said Mr. Perry. "Over the long term, we are well positioned to enhance value for shareholders through the execution of our capital plan, the balance and strength of our diversified portfolio of businesses, as well as growth opportunities within our franchise regions," he concluded.