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The consolidated capital structure of Fortis is presented in the following table.
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---------------------------------------------------------------------------- Capital Structure (Unaudited) As at March 31, 2017 December 31, 2016 ($ millions) (%) ($ millions) (%) ---------------------------------------------------------------------------- Total debt and capital lease and finance obligations (net of cash) (1) 22,141 59.3 22,490 60.6 Preference shares 1,623 4.3 1,623 4.4 Common shareholders' equity 13,588 36.4 12,974 35.0 ---------------------------------------------------------------------------- Total 37,352 100.0 37,087 100.0 ---------------------------------------------------------------------------- (1) Includes long-term debt and capital lease and finance obligations, including current portion, and short-term borrowings, net of cash/T/
Including amounts related to non-controlling interests, the Corporation's capital structure as at March 31, 2017 was 56.5% total debt and capital lease and finance obligations (net of cash), 4.1% preference shares, 34.7% common shareholders' equity and 4.7% non-controlling interests (December 31, 2016 - 57.8% total debt and capital lease and finance obligations (net of cash), 4.2% preference shares, 33.3% common shareholders' equity and 4.7% non-controlling interests). The change in the Corporation's capital structure was mainly due to an increase in common equity at the Corporation due to the issuance of $500 million of common shares, used to repay short-term borrowings.
CREDIT RATINGS
As at March 31, 2017, the Corporation's credit ratings were as follows.
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Rating Agency Credit Rating Type of Rating Outlook ---------------------------------------------------------------------------- Standard & Poor's A- Corporate Stable BBB+ Unsecured debt Stable DBRS BBB (high) Unsecured debt Stable Moody's Investor Service Baa3 Issuer Stable Baa3 Unsecured debt Stable/T/
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 the level of debt at the holding company.
CAPITAL EXPENDITURE PROGRAM
A breakdown of the $709 million in gross consolidated capital expenditures by segment year-to-date 2017 is provided in the following table.
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Gross Consolidated Capital Expenditures (Unaudited) (1)
Year-to-Date March 31, 2017
($ millions)
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UNS Central FortisBC Fortis FortisBC ITC Energy Hudson Energy Alberta Electric ---------------------------------------------------------------------------- Total 268 127 50 94 93 21 ----------------------------------------------------------------------------
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Gross Consolidated Capital Expenditures (Unaudited) (1)
Year-to-Date March 31, 2017
($
millions)
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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 2017 are forecast to be approximately $3.0 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 2016 Annual MD&A.
At ITC approximately US$119 million was invested in the Multi-Value Projects ("MVPs") from the date of acquisition and an additional US$159 million is expected to be spent in 2017. The MVPs consist of four regional electric transmission projects that have been identified by MISO to address system capacity needs and reliability in various states.
FortisBC Energy's construction of the Tilbury liquefied natural gas ("LNG") facility expansion ("Tilbury LNG Facility Expansion") in British Columbia is ongoing. Approximately $424 million, including AFUDC and development costs, has been invested to the end of the first quarter of 2017. The total cost of the project scope that is currently under construction is estimated at approximately $470 million, including approximately $70 million of AFUDC and development costs, which could be impacted depending on the date the project is considered in service for rate-making purposes. The facility includes a second LNG tank and a new liquefier, both to be in service in mid-2017. Key activities during the first quarter included commissioning of the LNG storage tank and the continued installation of the liquefaction process area piping insulation, electrical and instrumentation cable and terminations.
Beginning with the first Order in Council ("OIC") in 2013, the Government of British Columbia continues to support the Tilbury LNG Facility Expansion. The most recent OIC issued in March 2017 further facilitates the expansion of the facility by increasing the capital cost limit to $425 million from $400 million, before AFUDC and development costs. This latest OIC also provides greater discretion around when certain projects approved pursuant to previous OICs, including the Tilbury LNG Facility Expansion, could be added to rate base.
Over the five-year period 2017 through 2021, gross consolidated capital expenditures are expected to be approximately $13 billion. The breakdown of the capital spending has not changed materially from that disclosed in the 2016 Annual MD&A.
ADDITIONAL INVESTMENT OPPORTUNITIES
In addition to the Corporation's base consolidated capital expenditure forecast, management is pursuing additional investment opportunities within existing service territories. These additional investment opportunities, as discussed below, are not included in the Corporation's base capital expenditure forecast.
The Corporation continues to pursue additional LNG infrastructure investment opportunities in British Columbia, including a pipeline expansion to the proposed Woodfibre LNG site and a further expansion of Tilbury.
FortisBC Energy's potential pipeline expansion is conditional on Woodfibre LNG proceeding with its LNG export facility. FortisBC Energy received an OIC from the Government of British Columbia effectively exempting this project from further regulatory approval by the British Columbia Utilities Commission. Woodfibre LNG has obtained an export license from the National Energy Board and received environmental assessment approvals from the Squamish First Nation, the British Columbia Environmental Assessment Office, and the Canadian Environmental Assessment Agency. FortisBC Energy also received environmental assessment approval from the Squamish First Nation and provincial environmental assessment approval in 2016. The potential pipeline expansion was initially estimated at a total project cost of up to $600 million, however, this estimate will be updated for final scoping, detailed construction estimates and scheduling. In November 2016 Woodfibre LNG announced the approval from its parent company, Pacific Oil & Gas Limited, which is part of the Singapore-based RGE group of companies, of the funds necessary to complete the project. This project may move forward pending additional approvals and a final investment decision by Woodfibre LNG but is not expected to be in service earlier than 2020.
The Corporation's Tilbury LNG facility is uniquely positioned to meet customer demand for clean-burning natural gas. The site is scalable and can accommodate additional storage and liquefaction equipment, and is relatively close to international shipping lanes. Fortis continues to have discussions with a number of potential export customers.
In January 2017 ITC received approval of a Presidential Permit from the U.S. Department of Energy for the Lake Erie Connector transmission line, which is a required approval for international border-crossing projects. Also in January, ITC received a report from Canada's National Energy Board recommending the issuance of a Certificate of Public Convenience and Necessity ("CPCN") with prescribed conditions for the transmission line. The Lake Erie Connector project at ITC is a proposed 1,000 MW, bi-directional, high-voltage direct current underwater transmission line that would provide the first direct link between the markets of the Ontario Independent Electricity System Operator and PJM Interconnection, LLC ("PJM"). The project would enable transmission customers to more efficiently access energy, capacity and renewable energy credit opportunities in both markets. The project continues to advance through regulatory, operational, and economic milestones. Key milestones for 2017 include: receiving final approval of the CPCN from Canada's Governor in Council with a decision expected on or before June 30, 2017; receiving approval from the U.S. Army Corps of Engineers and Pennsylvania Department of Environmental Protection in a joint application; completing project cost refinements; and securing favourable transmission service agreements with prospective counterparties. Pending achievement of key milestones, the expected in-service date for the project is late 2020.
The Wataynikaneyap Power Project continues to advance in Ontario. Wataynikaneyap Power consists of a partnership between 22 First Nations and FortisOntario, with a mandate to develop new transmission lines to connect remote First Nations communities to the electricity grid in Ontario. In 2016 the Government of Ontario designated Wataynikaneyap Power as the licensed transmission company to complete this project. FortisOntario reached an agreement with Renewable Energy Systems Canada in December 2016 to acquire its ownership interest in the Wataynikaneyap Partnership. The transaction was approved by the Ontario Energy Board ("OEB") and closed in March 2017. As a result, FortisOntario's ownership interest in the Wataynikaneyap Partnership has increased to 49%, with the remaining 51% ownership interest held by the 22 First Nations communities. The total estimated capital cost for the project, subject to final cost estimation, is approximately $1.35 billion and is expected to contribute to significant savings for the First Nations communities and result in a significant reduction in greenhouse gas emissions. In March 2017 the project reached a significant milestone with the approval by the OEB of a deferral account to recognize development costs incurred between November 2010 and the commencement of construction. In addition to environmental assessments underway, other regulatory approvals are currently being sought and the next regulatory milestone will be the preparation and filing of the leave to construct with the OEB. Construction will commence pending the receipt of permits, approvals and a cost-sharing agreement between the federal and provincial government.
The Corporation also has other significant opportunities that have not yet been included in the Corporation's capital expenditure forecast including, but not limited to: transmission investment opportunities at ITC; investment opportunities in New York Transco, LLC to address electric transmission constraints in New York State at CH Energy; renewable energy alternatives, gas-fired generation and transmission investments at UNS Energy; and further gas infrastructure opportunities at FortisBC Energy.
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, long-term debt offerings and equity injections from Fortis.
The Corporation's ability to service its debt obligations and pay dividends on its common 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. These include restrictions by certain regulators limiting the amount of annual dividends and restrictions by certain lenders limiting the amount of debt to total capitalization at the subsidiaries. In addition, there are practical limitations on using the net assets of each of the Corporation's regulated operating subsidiaries to pay dividends based on management's intent to maintain the regulator-approved capital structures for each of its regulated operating subsidiaries. The Corporation does not expect that maintaining the targeted capital structures of its regulated operating subsidiaries will have an impact on its ability to pay dividends in the foreseeable future.
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, and advances from minority investors. 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.
In November 2016 Fortis filed a short-form base shelf prospectus, under which the Corporation may issue common or preference shares, subscription receipts or debt securities in an aggregate principal amount of up to $5 billion during the 25-month life of the base shelf prospectus. In March 2017 Fortis issued $500 million common equity and in December 2016 issued $500 million unsecured notes at 2.85%, both under the base shelf prospectus.
In April 2017 ITC issued 30-year US$200 million 4.16% secured first mortgage bonds. The net proceeds from the issuance was used to repay credit facility borrowings and for general corporate purposes.
As at March 31, 2017, management expects consolidated fixed-term debt maturities and repayments to average approximately $740 million annually over the next five years. The combination of available credit facilities and manageable 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 in compliance with debt covenants as at March 31, 2017 and are expected to remain compliant throughout 2017.
CREDIT FACILITIES
As at March 31, 2017, the Corporation and its subsidiaries had consolidated credit facilities of approximately $5.4 billion, of which approximately $3.8 billion was unused, including $909 million unused under the Corporation's committed revolving corporate credit facility. The credit facilities are syndicated mostly with large banks in Canada and the United States, with no one bank holding more than 20% of these facilities. Approximately $5.0 billion of the total credit facilities are committed facilities with maturities ranging from 2017 through 2021.
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