The utility sector has been a hotbed of consolidation activity, and recently, ITC Holdings (NYSE:ITC) became the target of attention from north of the border. Yet even as Fortis (TSX:FTS) prepares to move forward with its $11.3 billion deal to buy out its U.S. counterpart, ITC still has to keep operating successfully. Coming into Thursday's fourth-quarter financial report, ITC investors wanted evidence of continued progress in the company's strategic vision, and ITC's results were consistent with most people's expectations. Let's look more closely at the latest results from ITC Holdings as well as the Fortis deal.
ITC makes more from less
ITC Holdings' fourth-quarter results showed mixed performance. Operating revenues slumped 3% to $224 million, which fell well short of the expectations of most investors. GAAP net income also fell, but operating earnings climbed 15% to $87.6 million, and that worked out to $0.57 per share. That was a penny better than the consensus forecast among those following the stock.
A closer look at ITC's numbers reveals some additional details. The utility said that its revenues would have been $301 million had it not been for reductions of about $77 million associated with various rate refund liabilities. Higher revenue requirements applied because of its larger rate base at regulated subsidiaries, and an increase in cost-sharing revenues came about because more capital projects were included within the regional cost-sharing system.
ITC's cost-containment strategies had some successes, but didn't pan out everywhere. Operation and maintenance costs fell by more than 20%, with about $7 million in savings coming primarily because of reduced needs for vegetation management during the quarter. General overhead, however, rose by more than $8 million, and ITC said that higher personnel costs and professional services expenses were the primary destination for increased spending. Heightened levels of borrowing also added $50 million of interest expense to the downward pressure on earnings.
ITC closed the year on its capital spending books as well, finishing with total investment of $771 million. More than half of that went to ITC Midwest, with its ITC Transmission and METC units getting the bulk of the remainder.
CEO Joseph Welch was happy with how the year went. "I am very pleased to report that 2015 was another year of strong operational and financial performance," Welch said. Yet he also emphasized the importance of the Fortis deal, calling the Canadian utility "the ideal partner to provide a broad platform for ITC to make long-term strategic investments in electric transmission... to modernize electrical infrastructure in the United States."
Details on the Fortis acquisition
ITC and Fortis first announced their deal in early February. Under its terms, ITC shareholders will get $22.57 in cash and 0.752 shares of Fortis for every ITC share they own. That represented a premium of about a third over the utility's price as of late November.
For Fortis, the benefits of the deal are clear. Owning ITC will give the Canadian utility the largest pure-play electricity transmission company in the U.S., and it will diversify Fortis' portfolio beyond its existing presence in Canada, Arizona, New York, and three Caribbean countries. Fortis also believes that regulation by the Federal Energy Regulatory Commission will result in favorable rates that can generate solid profits.
Still, many investors will be dissatisfied with the merger. In early 2015, the stock climbed above its current value when ITC said it would consider various strategic options, and investors had apparently hoped for a more lucrative deal than what Fortis provided. Nevertheless, with the utility sector generally having seen share-price weakness over the past year, some fallback is reasonable.
ITC stock didn't respond dramatically to the earnings report, given that its price is generally locked to the cash and Fortis stock offered in the merger bid. Going forward, as long as regulatory processes go smoothly and ITC's operations don't produce any big hiccups, investors can expect a deal to occur later this year.