EX-99.4 5 a16-21995_1ex99d4.htm EX-99.4

Exhibit 99.4

 

May 5, 2016 Annual and Special Meeting

 

 

Notice of Annual and Special Meeting

 

and

 

Management Information Circular

 

March 18, 2016

 

YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR ALL NOMINEES AND RESOLUTIONS AT THE MEETING, INCLUDING THE ACQUISITION SHARE ISSUANCE RESOLUTION

 



 

 

MESSAGE FROM BOARD CHAIR AND PRESIDENT AND CHIEF EXECUTIVE OFFICER

 

March 18, 2016

 

Dear Fellow Shareholders:

 

It is our pleasure to invite you to attend the Fortis annual and special meeting of shareholders on May 5, 2016 at 10:30 a.m. (Newfoundland Daylight Time) in Salon A, Holiday Inn, St. John’s, Newfoundland and Labrador.

 

The items of business for consideration at this meeting are outlined in the notice of annual and special meeting of shareholders of Fortis and the accompanying management information circular. The annual business of the meeting includes resolutions to elect the directors of Fortis, appoint our auditors and vote on executive compensation. The special business of the meeting includes a resolution to approve the issuance of shares by Fortis as partial consideration for its proposed acquisition of ITC Holdings Corp. The contents and delivery of the management information circular have been approved by the Board of Directors.

 

The ITC Acquisition

 

Fortis has successfully grown its business through strategic acquisitions that have contributed to strong organic growth over the past decade. On February 9, 2016, we entered into an agreement to acquire ITC. The acquisition of ITC represents a singular opportunity for Fortis to significantly diversify its business in terms of regulatory jurisdictions, business risk profile and regional economic mix. The acquisition is in alignment with the Fortis business model and is expected to be accretive in the first full year following closing, excluding one-time acquisition-related expenses. Following closing of the acquisition, Fortis will proudly remain a Newfoundland and Labrador company, unique among North American utilities in the diversity of its regulated utility businesses and low risk profile.

 

ITC is the largest independent electric transmission company in the United States. ITCs experienced and execution-focused management team, which will continue to operate independently under the ownership structure of Fortis, has a proven track record of strong earnings per share growth, total shareholder return, cash flow from operations and operational efficiencies. From its initial public offering in 2005 through November 2015, ITC has delivered more than double the annual shareholder returns of the S&P 500 Utilities Sector Index, the benchmark index in ITCs industry.

 

Fortis experienced considerable growth in 2015, and the acquisition of ITC presents an opportunity to accelerate our growth strategy. The acquisition will expand the Corporation’s regional diversity from its current operations in five Canadian provinces, the U.S. states of New York and Arizona and three Caribbean countries, to include a presence in eight additional U.S. states. The acquisition of ITC also affords Fortis the opportunity to capitalize upon market trends including historical under-investment in infrastructure, enhancements to power delivery reliability and clean energy initiatives in the United States.

 

We are excited to present this unique opportunity for Fortis to significantly grow and diversify its business to our Shareholders. Your Board of Directors has unanimously approved the acquisition and unanimously recommends that Shareholders vote FOR the resolution approving the issuance of Common Shares in connection with the acquisition. Please see “Reasons to Vote in Favour of the Acquisition Share Issuance Resolution” immediately following this letter and the Circular for more information on this important transaction and the reasons for the Board’s recommendation.

 

Fortis Today

 

Fortis currently serves over three million gas and electricity customers across North America and in the Caribbean. Our focus on service to our customers and operating in an environmentally responsible manner, together with the expected benefits flowing from our planned C$9 billion investment in our energy networks over the next five years, positions Fortis

 

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to continue to deliver safe, reliable and efficient service to our customers while at the same time enhancing shareholder value.

 

Our 2015 financial results were strong, with earnings per share at C$2.61 and adjusted earnings per share at C$2.11, up 20.6 per cent from adjusted earnings per share of C$1.75 in 2014. Clearly, 2015 was an eventful year for our business with the successful integration of our newest utility UNS Energy Corporation in Arizona, the commissioning of the Waneta Expansion hydroelectric project ahead of schedule and on budget, the substantial gains realized on the sale of the hotel and commercial real estate business and other non-core businesses, the three-year rate settlement reached at Central Hudson Gas & Electric in New York State, and the reasonable settlement of matters related to the expropriation of Belize Electricity Limited. ITC had similarly strong results in 2015, with operating earnings of approximately US$324 million, or US$2.08 per diluted common share, compared to 2014 operating earnings of US$292 million, or US$1.85 per diluted common share.

 

In keeping with our record of raising our common share dividend to shareholders for 42 consecutive years, we increased our dividend twice in 2015 bringing quarterly dividends from C$0.32 per share to C$0.375 per share, representing a total increase of 17.2 per cent. These increases coupled with the initiation of dividend increase guidance of 6 per cent on average annually through 2020 demonstrate our confidence in the future of Fortis. The acquisition will support our average annual dividend growth target.

 

Your Board of Directors maintains a firm commitment to strong corporate governance principles. Through the course of 2015, we instituted a number of measures to reinforce our governance imperatives, including: (i) measures to enhance the annual assessment of the board and individual directors; (ii) ongoing board renewal through focused board succession planning, reflective of our competency and diversity objectives and resulting in a slate of nominees that includes four women; (iii) strengthening targets for executive short-term incentive payments; (iv) introducing non-financial corporate performance metrics to the executive compensation framework; (v) expanding disclosure related to annual incentive calculations and payments; (vi) revisions to the executive compensation structure to provide a proportionately larger component through long-term performance-based incentives; (vii) explanation of the key dynamics for the Corporation in the current risk environment; and (viii) providing disclosure on the Corporation’s approach to environmental sustainability. These measures enhance the understanding and the alignment of the policies and practices of Fortis with the interests of our shareholders.

 

Whether or not you plan to attend the annual and special meeting of shareholders in person or by viewing a live broadcast of the meeting at the Corporation’s website, www.fortisinc.com, we urge you to take some time to read and review this document, as well as the Annual Report and Annual Information Form, and then vote your common shares. Your Board of Directors unanimously recommends that Shareholders vote FOR all nominees and resolutions at the Meeting, including the resolution approving the issuance of Common Shares in connection with the acquisition.

 

We thank you for your support of our company, Fortis Inc.

 

Sincerely,

 

/s/ David G. Norris

 

/s/ Barry V. Perry

David G. Norris

 

Barry V. Perry

Chair, Board of Directors

 

President and Chief Executive Officer

 

ii



 

REASONS TO VOTE IN FAVOUR OF THE ACQUISITION SHARE ISSUANCE RESOLUTION

 

The Acquisition presents a singular opportunity for Fortis to significantly grow and diversify its business through an accretive transaction consistent with our long-term strategy of profitable growth. The Board has approved the Acquisition and recommends that Shareholders vote FOR the resolution approving the issuance of Common Shares in connection with the Acquisition, the full text of which is set out in the accompanying management information circular and in the form of proxy. Capitalized terms used below have the meanings given to them in the “Glossary of Defined Terms” contained in Schedule A to this Circular.

 

A Premier Fully-Regulated Electric Transmission Utility

 

·

 

Acquisition of the largest independent fully-regulated electric transmission utility in the U.S. with rates regulated by FERC.

 

·

 

Establishes scale and an additional platform for growth in the North American electric transmission sector.

 

 

 

 

 

Accretive to EPS

 

·

 

Accretive to EPS in the first full year following Closing, excluding one-time Acquisition-related expenses.

 

·

 

Earnings accretion and cash flow expected to support the Corporation’s average annual dividend growth target of 6% through 2020.

 

·

 

Financing strategy structured to allow Fortis to maintain an investment-grade credit rating.

 

 

 

 

 

Increases Diversification

 

·

 

Significantly enhances regulatory diversity and lowers overall rate regulatory risk.

 

·

 

Increases regional economic diversity — large Midwest eight-state business footprint.

 

·

 

Entry into a new business segment complementing electric and gas distribution with no commodity or fuel exposure.

 

 

 

 

 

Supportive FERC Regulation

 

·

 

FERC is a policy driven regulator committed to providing incentives for upgrading and expanding the electric transmission system.

 

·

 

FERC has been one of the most consistently supportive utility regulators in North America, providing reasonable returns and equity ratios.

 

·

 

Forward-looking rate-setting mechanism with true-up provides timely recovery and reduces regulatory lag.

 

 

 

 

 

Long-Term Rate Base Growth Prospects

 

·

 

Significant opportunity for investment across aging transmission assets.

 

·

 

Reliability enhancements required: federal regulatory-driven critical infrastructure protection, storm hardening and infrastructure replacements.

 

 

·

 

Significant changes are occurring in the U.S. generation fleet, which will require substantial transmission investment in the form of renewables, interconnections and general infrastructure build-out.

 

 

 

 

 

Proven Management Team

 

·

 

Proven track record: superior total shareholder return and cash flow generation.

 

·

 

Execution-oriented with a focus on safety, reliability and managing projects on time and on budget.

 

·

 

Cultural similarities: track record of operational excellence and focus on regulated business.

 

iii



 

 

NOTICE OF ANNUAL AND SPECIAL MEETING

 

WHAT

 

The annual and special meeting of shareholders of Fortis Inc. (“Fortis” or the “Corporation”).

 

 

 

WHEN

 

May 5, 2016 at 10:30 a.m. (Newfoundland Daylight Time) (the “Meeting”).

 

 

 

WHERE

 

Salon A, Holiday Inn St. John’s, 180 Portugal Cove Road, St. John’s, Newfoundland and Labrador.

 

 

 

WEBCAST

 

A live webcast of the Meeting will be available on our website at www.fortisinc.com.

 

 

 

BUSINESS TO BE

 

The Meeting will be held for the following purposes:

 

 

 

CONDUCTED AT THE MEETING

 

1.    to receive the Consolidated Financial Statements of Fortis for its financial year ended December 31, 2015, together with the Report of the Auditors thereon;

 

 

 

 

 

2.    to elect the directors of the Corporation;

 

 

 

 

 

3.    to appoint auditors and to authorize the directors to fix the auditors’ remuneration;

 

 

 

 

 

4.    to consider and, if supported, pass an advisory (non-binding) resolution on the approach to executive compensation of Fortis;

 

 

 

 

 

5.    to consider and, if deemed advisable, approve an ordinary resolution, the full text of which is set out in the accompanying management information circular (the “Circular”) under “Matters for Consideration of Shareholders — Acquisition of ITC Holdings Corp.”, approving the issuance of up to 117 million common shares of the Corporation (“Common Shares”) forming part of the consideration to be paid in connection with the acquisition by an indirect subsidiary of Fortis of all of the issued and outstanding common stock of ITC Holdings Corp. (“ITC”) pursuant to the terms of an agreement and plan of merger dated as of February 9, 2016 entered into between, among others, Fortis and ITC (the “Acquisition Share Issuance Resolution”); and

 

 

 

 

 

6.    to transact such other business as may properly be brought before the meeting or any adjournment(s) or postponement(s) thereof.

 

 

 

 

 

Your Board of Directors unanimously recommends that Shareholders vote FOR all nominees and resolutions at the Meeting, including the Acquisition Share Issuance Resolution.

 

 

 

YOUR RIGHT TO VOTE

 

You are entitled to receive notice of and to vote at our Meeting, or any adjournment or postponement thereof, if you are a holder of Common Shares (a “Shareholder”) at the close of business on March 18, 2016. A Shareholder who acquires their Common Shares after March 18, 2016 may request, not later than ten days before the Meeting, that their name be included in the list of Shareholders eligible to vote at the Meeting, and upon establishing proper ownership, such Shareholder shall be entitled to vote such Common Shares at the Meeting.

 

 

 

 

 

You have the right to vote your Common Shares on items 2 through 5 listed above and any other items that may properly come before the Meeting or any adjournment or postponement thereof.

 

 

 

ATTENDING THE MEETING

 

If you are a registered Shareholder and are attending the Meeting in person, you will need to register with our transfer agent Computershare Trust Company of Canada (“Computershare”) at the registration desk before entering the Meeting.

 

 

 

 

 

If you are a non-registered Shareholder, you can only vote your Common Shares in person at the Meeting if you have previously appointed yourself as the proxyholder for your Common Shares by printing your name in the space provided on your voting instruction form and submitting it as directed on the form. You may also appoint someone else as the proxyholder for your Common Shares by printing their name in the space provided on your voting instruction form and submitting it as directed on the form. You or your proxyholder must see a representative of Computershare before entering the Meeting to register your attendance at the Meeting.

 

 

 

APPROVAL OF THIS CIRCULAR

 

The Board of Directors of the Corporation has approved the contents of this Notice and the Circular and the sending of this Notice and the Circular to our Shareholders and to each of our directors and our auditors.

 

DATED at St. John’s, Newfoundland and Labrador, March 18, 2016

 

 

By Order of the Board of Directors

 

David C. Bennett

 

Vice President, Chief Legal Officer and Corporate Secretary

 

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TABLE OF CONTENTS

 

MESSAGE FROM BOARD CHAIR AND PRESIDENT AND CHIEF EXECUTIVE OFFICER

 

i

 

 

 

REASONS TO VOTE IN FAVOUR OF THE ACQUISITION SHARE ISSUANCE RESOLUTION

 

iii

 

 

 

NOTICE OF ANNUAL AND SPECIAL MEETING

 

iv

 

 

 

QUESTIONS AND ANSWERS ABOUT THE MEETING AND ACQUISITION

 

1

 

 

 

NOTICE TO READERS

 

7

 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

7

 

 

 

ADDITIONAL INFORMATION

 

10

 

 

 

PRESENTATION OF FINANCIAL INFORMATION

 

11

 

 

 

CAUTION REGARDING PRO FORMA FINANCIAL INFORMATION

 

11

 

 

 

CURRENCY AND EXCHANGE RATE INFORMATION

 

12

 

 

 

THIRD PARTY SOURCES

 

12

 

 

 

MATTERS FOR CONSIDERATION OF SHAREHOLDERS

 

13

 

 

 

FINANCIAL STATEMENTS

 

13

ELECTION OF DIRECTORS

 

13

APPOINTMENT OF AUDITORS AND AUTHORIZATION OF THE DIRECTORS TO FIX AUDITORS’ REMUNERATION

 

14

ADVISORY AND NON-BINDING RESOLUTION ON THE APPROACH TO EXECUTIVE COMPENSATION

 

14

ACQUISITION OF ITC HOLDINGS CORP

 

15

OTHER MATTERS

 

16

 

 

 

SPECIAL BUSINESS — THE ACQUISITION OF ITC HOLDINGS CORP

 

17

 

 

 

OVERVIEW

 

17

BACKGROUND AND RECOMMENDATION

 

18

THE ACQUISITION AGREEMENT

 

24

FINANCING THE ACQUISITION

 

34

CANADIAN AND U.S. SECURITIES LAW MATTERS

 

38

 

 

 

FORTIS

 

40

 

 

 

RECENT DEVELOPMENTS

 

40

CAPITALIZATION

 

41

CREDIT RATINGS

 

42

 

 

 

BOARD OF DIRECTORS

 

43

 

 

 

NOMINEES FOR ELECTION AS DIRECTORS

 

43

OVERALL ATTENDANCE IN 2015

 

55

ADDITIONAL DISCLOSURE RELATED TO DIRECTORS

 

55

MAJORITY VOTING FOR DIRECTORS

 

56

 

 

 

REPORT ON DIRECTOR COMPENSATION

 

57

 

 

 

DIRECTORS DEFERRED SHARE UNIT PLAN

 

60

DIRECTOR EQUITY OWNERSHIP

 

61

DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE

 

61

 

 

 

REPORT ON CORPORATE GOVERNANCE

 

62

 

 

 

CORPORATE GOVERNANCE

 

62

BOARD COMPOSITION AND SUCCESSION

 

63

BOARD INDEPENDENCE AND OPERATION

 

65

STRATEGY OVERSIGHT

 

66

LEADERSHIP SUCCESSION OVERSIGHT

 

67

RISK MANAGEMENT AND GOVERNANCE OVERSIGHT

 

67

ENVIRONMENTAL AND SUSTAINABILITY OVERSIGHT

 

68

AUDIT COMMITTEE

 

69

 



 

HUMAN RESOURCES COMMITTEE

 

70

GOVERNANCE AND NOMINATING COMMITTEE

 

72

EDUCATION AND ORIENTATION

 

73

 

 

 

REPORT ON EXECUTIVE COMPENSATION

 

74

 

 

 

2015 REPORT OF THE HUMAN RESOURCES COMMITTEE OF THE BOARD

 

74

CHANGES TO NAMED EXECUTIVE OFFICERS

 

74

COMPENSATION DISCUSSION AND ANALYSIS

 

75

EXECUTIVE COMPENSATION POLICY

 

75

COMPENSATION RISK CONSIDERATIONS

 

77

PENSION PLAN BENEFITS

 

90

2015 EXECUTIVE COMPENSATION

 

91

SHARE OWNERSHIP GUIDELINES

 

103

COMPENSATION CONSULTANTS

 

104

PERFORMANCE GRAPH

 

105

SUMMARY COMPENSATION TABLE

 

107

INCENTIVE PLAN AWARDS

 

109

RETIREMENT PLAN TABLES

 

112

TERMINATION AND CHANGE OF CONTROL BENEFITS

 

113

INDEBTEDNESS OF EXECUTIVE OFFICERS, DIRECTORS AND EMPLOYEES

 

115

 

 

 

INTERESTS OF ADVISORS

 

116

 

 

 

AUDITORS OF ITC

 

116

 

 

 

CONTACTING THE BOARD

 

117

 

 

 

DIRECTORS’ APPROVAL

 

117

 

 

 

CONSENT OF GOLDMAN, SACHS & CO

 

118

 

 

 

SCHEDULE A — GLOSSARY OF DEFINED TERMS

 

A-1

 

 

 

SCHEDULE B — STATEMENT OF CORPORATE GOVERNANCE PRACTICES

 

B-1

 

 

 

SCHEDULE B1 — BOARD MANDATE

 

B1-1

 

 

 

SCHEDULE C — OPINION OF GOLDMAN, SACHS & CO

 

C-1

 

 

 

SCHEDULE D — INFORMATION CONCERNING ITC HOLDINGS CORP

 

D-1

 

 

 

SCHEDULE E — ITC HISTORICAL FINANCIAL STATEMENTS AND MANAGEMENT’S DISCUSSION AND ANALYSIS

 

E-1

 

 

 

SCHEDULE F — SUPPLEMENTARY ITC INFORMATION

 

F-1

 

 

 

SCHEDULE G — RISK FACTORS

 

G-1

 

 

 

SCHEDULE H — PRO FORMA FINANCIAL STATEMENTS OF FORTIS AND ITC

 

H-1

 



 

 

MANAGEMENT INFORMATION CIRCULAR

 

QUESTIONS AND ANSWERS ABOUT THE MEETING AND ACQUISITION

 

The following is intended to answer certain key questions concerning the Meeting and the Acquisition and is qualified in its entirety by the more detailed information appearing elsewhere in this Circular. Capitalized terms used in this summary and elsewhere in this Circular and not otherwise defined have the meanings given to them in the “Glossary of Defined Terms” contained in Schedule A to this Circular.

 

Why did I receive this Circular?

 

This Circular was sent to Shareholders in advance of the Meeting to be held on May 5, 2016. In addition to electing directors, appointing auditors and the annual advisory vote on executive compensation, Shareholders will be asked to approve by a majority vote the issuance of Common Shares in connection with the proposed acquisition of ITC Holdings Corp. The consideration to be paid to shareholders of ITC is comprised of both cash and Fortis Common Shares.

 

Why am I being asked to approve the ITC Acquisition?

 

The Toronto Stock Exchange requires an acquiring company to obtain shareholder approval if the number of shares to be issued as purchase price consideration for an acquisition exceeds 25% of its outstanding shares. The Common Shares to be issued by Fortis as partial consideration will represent up to 41.5% of its currently outstanding Common Shares on a non-diluted basis. If Shareholder approval is not obtained, Fortis will not be able to complete this highly attractive acquisition.

 

Your Board of Directors has approved the Acquisition and recommends that you vote FOR the share issuance resolution.

 

Who is ITC?

 

ITC Holdings Corp. is the largest independent electric transmission company in the United States. Based in Novi, Michigan, ITC invests in transmission opportunities to improve reliability, expand access to markets, allow new generating resources to interconnect to transmission systems and lower the overall cost of delivered energy.

 

ITC owns and operates high voltage transmission facilities principally in Michigan, Iowa and Kansas, as well as Minnesota, Illinois, Missouri and Oklahoma, serving a combined peak load exceeding 26,000 megawatts in 2015, along approximately 15,600 circuit miles of transmission line. See “Schedule D — Information Concerning ITC Holdings Corp.” in this Circular.

 

Why should I vote FOR the resolution to issue Fortis Common Shares for the ITC Acquisition?

 

Reasons Shareholders should vote FOR the issuance of Fortis Common Shares as consideration for the Acquisition include:

 

·                                          Strategic Fit: The Acquisition is in alignment with the Corporation’s business model and acquisition strategy. Upon completion of the deal, Fortis will be a unique, highly diversified, low-risk regulated energy transportation platform.

 

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·                                          Accretive to Shareholders: The deal is expected to contribute to the Corporation’s bottom line almost immediately and be accretive to earnings per Common Share in the first full year following Closing, excluding one-time Acquisition-related expenses.

 

·                                          Supports Dividend Guidance: The projected earnings accretion from the Acquisition together with ITC’s strong, predictable cash flows is expected to support the Corporation’s average annual dividend growth target of 6% through 2020.

 

·                                          Platform for Growth: There is significant need for capital investment in the U.S. electric transmission sector due to factors that include historical underinvestment in infrastructure, regulator-mandated reliability enhancements and clean energy initiatives. ITC’s average rate base is expected to increase at a compound annual growth rate of 7.5% through 2018.

 

Why is ITC such a good strategic fit for Fortis?

 

The most important aspects of strategic fit to Fortis include:

 

·                                          Low-Risk Regulated Environment: Almost all of Fortis’ current footprint is in stable regulated markets. ITC’s rates are regulated by FERC, one of the most consistently supportive utility regulators in North America. FERC provides incentives for infrastructure investment and its simple rate-setting process with true-up reduces the regulatory lag found in some markets.

 

·                                          Management Expertise: Our model is to find the best managed businesses and let them do what they do best with the benefit of our supportive corporate culture and capital structure. The ITC management team has a proven track record of strong earnings per share growth, total shareholder return, cash flow from operations, disciplined capital project execution and operational excellence.

 

·                                          Increased Diversification: 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. Pro forma for the Acquisition, approximately 38% of our consolidated regulated operating earnings in 2015 would have been FERC-regulated. Fortis will expand its footprint from its current operations in five Canadian provinces, the U.S. states of New York and Arizona, and three Caribbean countries, to eight additional U.S. states.

 

·                                          Better Together: Consistent with our model, this Acquisition is structured to preserve ITC’s considerable strengths and add Fortis’ capital strength and support. This approach seeks to preserve ITC’s relationships with important stakeholders including its shareholders, management team, employees, business partners, communities and regulators.

 

Will Fortis still be the same company following the Acquisition?

 

·                                          What Stays the Same: Fortis will remain a Newfoundland and Labrador company headquartered in St. John’s. Our shares will continue to trade on the TSX and we will continue to file our public disclosure documents in Canada in accordance with Canadian rules. Most importantly, we will continue to be a regulated utility with a strong balance sheet and an investment-grade credit rating.

 

·                                          What Fortis Gains: Virtually 100% of our business will be regulated, with about 60% of our regulated assets and earnings in the United States pro forma the Acquisition (which represents an increase from approximately 40% of regulated assets and earnings currently in the United States). Fortis will be more diversified and have significantly enhanced growth opportunities. In short, Fortis will be a unique utility in the North American market: a highly diversified, low-risk regulated energy transportation platform.

 

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·                                          By the Numbers: Fortis will be one of the top 15 North American public utilities ranked by enterprise value after giving effect to the Acquisition, with an estimated enterprise value of C$42 billion. The 2016 forecast midyear rate base of Fortis is expected to increase by approximately C$8 billion to approximately C$26 billion. ITC shareholders will hold up to 29.3% of Fortis’ Common Shares at closing.

 

Why is Fortis listing on the New York Stock Exchange?

 

·                                          Fortis has Been Considering this Listing: Fortis has considered listing on the NYSE, in addition to the TSX, for several years. The benefits of an additional listing for both Fortis and its shareholders include access to a larger and more diverse market, including a much broader group of potential investors; enhanced ability to raise capital in the future; and an increased profile in the North American investment community, notably among U.S.-based utility analysts.

 

·                                          Fortis is now Required to List on the NYSE: Under the Acquisition Agreement, Fortis is required to list its Common Shares on the NYSE. Fortis will also become a “reporting” company for purposes of U.S. federal securities laws and will become subject to ongoing reporting obligations in the United States and certain other requirements under SEC rules and regulations. ITC shareholders and other persons in the U.S. who wish to own Fortis shares will now be able to trade them on a U.S.-based stock exchange.

 

How does Fortis intend to finance the cash portion of the Acquisition?

 

In addition to issuing Common Shares, an aggregate of approximately US$3.5 billion (C$4.9 billion based on the US$/C$ exchange rate on February 8, 2016) will be paid to ITC shareholders in satisfaction of the Cash Purchase Price for the ITC shares acquired in the Acquisition. The Acquisition is not conditional on financing and Fortis has commitments for Acquisition Credit Facilities in place that would be sufficient, if necessary, to fund the full Cash Purchase Price for the Acquisition. Fortis does not expect to drawdown on the Acquisition Credit Facilities.

 

Financing of the Cash Purchase Price for the Acquisition is expected to be achieved primarily through the issuance of approximately US$2 billion of Fortis debt and the sale of up to 19.9% of ITC to one or more infrastructure focused minority investors. See “Special Business — The Acquisition of ITC Holdings Corp. — Financing the Acquisition” in this Circular.

 

The anticipated financing of the Acquisition has been structured to allow Fortis to maintain an investment-grade credit rating and is consistent with the Corporation’s existing capital structure.

 

Did the Board of Directors of Fortis receive a fairness opinion in connection with the Acquisition?

 

Yes. On February 8, 2016, Goldman, Sachs & Co. rendered its oral opinion, subsequently confirmed in writing by delivery of a written opinion dated as of February 9, 2016, that, as of the date of its opinion and based upon and subject to the factors, assumptions, considerations, limitations and other matters set forth in Goldman, Sachs & Co.’s written opinion, the Aggregate Consideration (as defined in the written opinion) to be paid by Fortis for each outstanding share of common stock, no par value, of ITC pursuant to the Acquisition Agreement was fair from a financial point of view to Fortis. See “Special Business — The Acquisition of ITC Holdings Corp. — Background and Recommendation” and “Schedule C — Opinion of Goldman, Sachs & Co.” in this Circular.

 

The full text of the written opinion of Goldman, Sachs & Co., dated February 9, 2016, is attached to this Circular at Schedule C. The summary of the Goldman, Sachs & Co. opinion provided in this Circular is qualified in its entirety by reference to the full text of Goldman, Sachs & Co.’s written opinion. Goldman, Sachs & Co.’s advisory services and opinion were provided for the information and assistance of the board of directors of Fortis in connection with its consideration of the Acquisition and the opinion does

 

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not constitute a recommendation as to how any shareholder of Fortis should vote with respect to the resolutions described under “Matters for Consideration of Shareholders” or any other matter.

 

What are the voting approval levels required to pass the Meeting resolutions?

 

A simple majority of Shareholders represented in person or by proxy at the Meeting is required for each resolution described under “Matters for Consideration of Shareholders”. The Board has approved the Acquisition and recommends that Shareholders vote FOR each of the resolutions set out in this Circular, including the Acquisition Share Issuance Resolution.

 

Who is eligible to vote at or attend the Meeting?

 

The record date for determining the Shareholders entitled to receive notice of and vote at the Meeting is March 18, 2016. As of the record date, there were 283,042,758 Common Shares issued and outstanding. A Shareholder who acquires their Common Shares after the record date may request, not later than 10 days before the Meeting, that their name be included in the list of Shareholders eligible to vote at the Meeting, and upon establishing proper ownership, the Shareholder shall be entitled to vote their Common Shares at the Meeting. Any such request should be submitted to Computershare at the address provided in this Circular.

 

You may appoint a person or company other than the directors and officers designated by Fortis on your voting instruction form or form of proxy to represent you and vote on your behalf at the Meeting. To do so, write the name of the person you are appointing in the space provided on the corresponding form. Registered Shareholders must complete their voting instructions, date and sign the form, and return it to Computershare as instructed. Non-registered Shareholders must follow the instructions of their respective nominees.

 

I am a registered Shareholder. How can I vote my shares?

 

As a registered Shareholder, you can vote your shares in the following ways:

 

Internet

 

Go to www.investorvote.com. Enter the 15-digit control number printed on the form and follow the

 

 

instructions on screen.

Phone

 

1.866.732.8683 (toll-free in North America) and enter the 15-digit control number printed on the

 

 

form. Follow the interactive voice recording instructions to submit your vote.

Mail

 

Enter voting instructions, sign the proxy form and send your completed form of proxy to:

 

 

Computershare Trust Company of Canada

 

 

Attention: Proxy Department

 

 

100 University Avenue, 8th Floor

 

 

Toronto, Ontario

 

 

M5J 2Y1

In Person

 

Attend the Meeting and register with the transfer agent, Computershare Trust Company of Canada,

 

 

upon your arrival. Do not fill out and return your form of proxy if you intend to vote in person at the

 

 

Meeting.

Questions?

 

Call Kingsdale at 1.888.518.6828 (toll free within North America) or 416.867.2272 (collect call

 

 

outside North America).

 

I am a non-registered shareholder. How can I vote my shares?

 

If your Common Shares are not registered in your name, they will be held in the name of a “nominee”, usually a bank, trust company, securities dealer or other financial institution and, as such, your nominee will be the entity legally entitled to vote your Common Shares and must seek your instructions as to how to vote your Common Shares. If you are a non-registered shareholder there are two ways, listed below, that you can vote your Common Shares:

 

4



 

·                  Give your Voting Instructions — Your nominee is required to seek voting instructions from you in advance of the Meeting. Accordingly, you will receive from your nominee either (i) a voting instruction form for completion and execution by you, or (ii) a form of proxy for completion by you executed by the nominee and restricted to the number of Common Shares you own. These procedures permit non-registered shareholders to provide instructions to their nominees on how their beneficially owned Common Shares should be voted at the Meeting. Please note that each nominee has its own procedures which should be carefully followed to ensure your Common Shares are voted at the Meeting. You may vote using any of the voting methods outlined on the voting instruction form or form of proxy, including over the internet, by phone, by fax or by simply mailing in your instrument of proxy.

 

·                  Voting in person — If you wish to vote in person at the Meeting, insert your name in the space provided on the voting instruction form or form of proxy to appoint yourself as a proxyholder and follow the instructions of your nominee. Non-registered Shareholders who appoint themselves as proxyholders should present themselves to a representative of the transfer agent at the Meeting. If you plan to attend the Meeting to vote in person, it is not necessary to submit your choice on the voting instruction form or form of proxy as your vote will be taken and counted in person at the Meeting.

 

Should I send in my proxy now?

 

Yes. Once you have carefully read and considered the information in this Circular, you need to complete and submit the enclosed voting instruction form or form of proxy. You are encouraged to vote well in advance of the proxy cut off at 10:30 a.m. (Newfoundland Daylight time) on May 3, 2016 to ensure your Common Shares are voted at the Meeting. If the Meeting is adjourned or postponed please ensure that your Common Shares are voted not later than 48 hours (excluding Saturdays, Sundays, and holidays) before the time for holding the adjourned or postponed meeting. The proxy cut-off may be waived or extended by the Chair of the Meeting at his discretion, without notice.

 

Can I change my vote after I have voted my proxy?

 

Yes. A Shareholder who has submitted a form of proxy may revoke it. You can revoke your vote by: (i) voting again on the Internet or by telephone before 10:30 a.m. (Newfoundland Daylight time) on May 3, 2016; (ii) completing a voting instruction form or proxy form that is dated later than the voting instruction form or proxy form you are changing and mailing it as instructed on your voting instruction form or proxy form, as the case may be, so that it is received before 10:30 a.m. (Newfoundland Daylight time) on May 3, 2016; (iii) sending a notice in writing from you or your authorized attorney to the Corporation’s Corporate Secretary so that it is received before 10:30 a.m. (Newfoundland Daylight time) on May 3, 2016; or (iv) any other means permitted by law.

 

Does any Shareholder beneficially own 10% or more of the Corporation’s Common Shares?

 

No. To the knowledge of the directors and officers of Fortis, as of March 18, 2016, no Shareholder beneficially owns, directly or indirectly, or exercises control or discretion over, voting securities carrying 10% or more of the voting rights attached to our outstanding Common Shares. In addition, based on current information available to Fortis, after the Acquisition no current shareholder of ITC will by virtue of the transaction own 10% or more of the Common Shares.

 

When does Fortis expect the Acquisition to close?

 

The Acquisition is expected to close in late 2016. Closing is conditional on Fortis obtaining Shareholder approval and the satisfaction of other closing conditions including the approval of ITC shareholders, FERC and certain state regulators. See “Special Business — The Acquisition of ITC Holdings Corp. — The Acquisition Agreement”.

 

5



 

Are there any risks I should consider in connection with the Acquisition?

 

Yes. There are a number of risk factors relating to the Acquisition and the potential failure by Fortis to complete the Acquisition, all of which should be carefully considered. See “Schedule D — Information Concerning ITC Holdings Corp.” and “Schedule G — Risk Factors” in this Circular.

 

Who is soliciting my proxy?

 

Your proxy is being solicited on behalf of the management of Fortis. Management will solicit proxies primarily by mail but proxies may also be solicited personally by telephone, e-mail, internet or facsimile by directors, officers or employees of Fortis, or by such agents as Fortis may appoint.

 

Fortis has retained Kingsdale Shareholder Services (“Kingsdale”) in connection with the solicitation of proxies at a cost of C$47,250 plus reimbursement of expenses related to the solicitation. The cost of solicitation will be borne by Fortis. The costs of preparing and distributing the Meeting materials and the cost of soliciting proxies will be borne by Fortis. The Corporation will reimburse brokers and other entities for costs incurred by them in mailing Meeting materials to beneficial owners of Common Shares.

 

Who can I contact if I have additional questions?

 

If you require assistance in completing your proxy, please consult our proxy solicitor, Kingsdale Shareholder Services by telephone at 1.888.518.6828 toll-free in North America or call collect at 416.867.2272 outside of North America or by e-mail at contactus@kingsdaleshareholder.com.

 

YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT FORTIS SHAREHOLDERS VOTE FOR ALL NOMINEES AND ALL RESOLUTIONS AT THE MEETING, INCLUDING THE ACQUISITION SHARE ISSUANCE RESOLUTION.

 

6



 

NOTICE TO READERS

 

This management information circular (this “Circular”) is furnished in connection with the solicitation of proxies by and on behalf of management of Fortis Inc. (“Fortis” or the “Corporation”) for use at the annual and special meeting of Fortis shareholders (the “Meeting”) and any adjournment(s) or postponement(s) thereof for the purposes set forth in the accompanying Notice of Annual and Special Meeting. As a shareholder (“Shareholder”), it is very important that you read this material carefully and then vote your common shares of Fortis (“Common Shares”).

 

In this Circular, you, your and Shareholder refer to the common Shareholders of Fortis. “We”, “us”, “our”, the “Corporation”, and “Fortis” refer to Fortis Inc., unless otherwise indicated. Information in this Circular is as of March 18, 2016, unless otherwise indicated. No person has been authorized to give any information or to make any representations in connection with the acquisition by Fortis (the “Acquisition”) of ITC Holdings Corp. (“ITC”) and the other matters discussed in this Circular other than those contained in this Circular and, if given or made, any such information or representation should be considered not to have been authorized by Fortis or ITC and should not be relied upon.

 

Certain information in this Circular pertaining to ITC, including, but not limited to, the information contained in Schedules D, E and F to this Circular, has been furnished by ITC. Although Fortis does not have any knowledge that would indicate that such information relating to ITC is untrue or incomplete, neither Fortis nor any of its directors or officers assumes any responsibility for the accuracy or completeness of such information or for the failure by ITC to disclose events or information regarding ITC that may affect the completeness or accuracy of such information.

 

This Circular contains defined terms. For a list of defined terms used herein, see “Schedule A — Glossary of Defined Terms”. For a list of defined terms used in Schedules D and E to this Circular, see “Schedule E — ITC Historical Financial Statements and Management’s Discussion and Analysis”. For a list of defined terms used in Schedule F to this Circular, see “Schedule F — Supplementary ITC Information”.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Please refer to “Schedule A — Glossary of Defined Terms” for a list of defined terms used herein.

 

This Circular, including the schedules attached hereto, contains forward-looking information which reflects management’s current expectations regarding: (i) the future growth, results of operations, performance, business prospects and opportunities of the Corporation and ITC; (ii) the Acquisition; (iii) the integration of ITC’s electric transmission business with the existing operations of the Corporation; (iv) the impact of the Acquisition, the Minority Investment and the Acquisition Credit Facilities on the financial position of the Corporation; and (v) the outlook for the Corporation’s and ITC’s respective businesses and the electric transmission industry based on information currently available. These expectations may not be appropriate for other purposes. All forward-looking information is given pursuant to the “safe harbour” provisions of applicable Canadian securities legislation. The words “anticipates”, “assumes”, “believes”, “budgets”, “can”, “could”, “estimates”, “expects”, “forecasts”, “intends”, “may”, “might”, “opportunity”, “plans”, “projects”, “seeks”, “schedule”, “should”, “target”, “will”, “would” and similar expressions are often intended to identify forward-looking information, although not all forward-looking information contains these identifying words. The forward-looking information reflects management’s current beliefs and is based on information currently available to the Corporation’s management.

 

The forward-looking information contained in this Circular pertaining to the Acquisition includes, but is not limited to, statements regarding: the terms and conditions of the Acquisition; the satisfaction of the conditions to Closing; the completion of the Acquisition; the timing of Closing; the combined company’s future business prospects and performance, growth potential, financial strength, market profile, revenues, proceeds, working capital, capital expenditures, investment valuations, liquidity, income and margins; the realization of the anticipated benefits of the Acquisition by Fortis, including that the Acquisition will be accretive in the first full year following Closing, excluding one-time Acquisition-related expenses; that

 

7



 

the Acquisition will support the average annual dividend growth target of Fortis; the attractive rate base growth opportunities in the ITC service areas; the accuracy of the pro forma combined financial information, which does not purport to be indicative of the financial information that will result from the operations of Fortis on a consolidated basis following the Acquisition; the expectation that Fortis will use a combination of one or more Prospective Offerings and effect the Minority Investment to fund the Cash Purchase Price payable in connection with the Acquisition, and may utilize the Acquisition Credit Facilities to pay the balance of the Cash Purchase Price; the completion of the Minority Investment; the maximum number and percentage of Common Shares to be held by ITC shareholders as a result of the Acquisition; the intention of the parties to the Acquisition to seek, and the expected timing for, shareholder approvals in relation to the Acquisition; the listing on the TSX of the Consideration Shares; the impact of the Acquisition on a consolidated basis on the Corporation’s operations, infrastructure, opportunities, financial condition, access to capital and overall strategy; the ability of Fortis to satisfy its liabilities and meet its debt service obligations following completion of the Acquisition; the expectation that the Corporation and its subsidiaries will remain compliant with debt covenants through the completion of the Acquisition and the repayment, if necessary, of the Acquisition Credit Facilities; the expectation that the Corporation will maintain an investment-grade credit rating following the Acquisition; the expectation that Fortis will receive investment-grade credit ratings from either of Moody’s Investors Service, Inc. or Fitch Ratings Inc. prior to Closing; the expectation that Fortis will become an SEC registrant and have its Common Shares listed on the NYSE in connection with the Acquisition; the expectation that Fortis will be able to access the capital markets prior to and following the Acquisition to obtain funds that will constitute part of the Cash Purchase Price and, if necessary, to effect the repayment of the Acquisition Credit Facilities in accordance with their terms; the expected receipt of consent to the Acquisition from the lenders under ITC’s revolving credit facilities; the expected Acquisition-Related Costs; the expected aggregate payments to be made to the executive officers of ITC as a result of the Acquisition; the amount of indebtedness of ITC expected to have been incurred as of Closing; the performance, business prospects and opportunities of ITC and its subsidiaries; the availability of future investment opportunities in the electrical transmission industry in the United States; the United States federal regulatory environment and expectations in respect of the continued support for investment in the transmission industry by FERC; the expectation that ITC will continue to operate independently under the ownership structure of Fortis following the Acquisition, will retain its current employees and will continue to be based in Novi, Michigan; the expectation that Fortis will retain key employees of ITC and its subsidiaries; the regulatory environment in the states in which the ITC Regulated Operating Subsidiaries operate; the nature, timing and expected costs of certain capital projects including, without limitation, the four MVPs; the actual monthly peak loads experienced by the MISO Regulated Operating Subsidiaries compared to those forecasted; the range of refunds required to be paid to customers of the MISO Regulated Operating Subsidiaries in respect of the base rate complaints; the potential that challenges may be initiated at FERC that will require the ITC Regulated Operating Subsidiaries to take bonus depreciation; the economic environment in each of the states in which the ITC Regulated Operating Subsidiaries operate; the impact of the CPP and other clean energy policies on the electrical transmission industry in the United States and on future rate base growth; the anticipated impact of current and future environmental regulations on the business and operations of ITC; the anticipated impact of current and future reductions in the base ROE rate by FERC; and expectations in respect of the operations of ITC and its subsidiaries.

 

The forecasts and projections that make up the forward-looking information included in this Circular are based on assumptions which include, but are not limited to: the completion of the Acquisition; the receipt of Fortis and ITC shareholder approvals; the receipt of regulatory approvals relating to the Acquisition on terms acceptable to Fortis; the completion of the Minority Investment; the realization of the anticipated benefits of the Acquisition; the ability of Fortis to successfully integrate the business and operations of ITC into the Fortis group of companies; the expectation that ITC will be able to obtain the consent of the lenders under ITC’s revolving credit facilities; the ability of Fortis to retain key employees of ITC and the ITC Regulated Operating Subsidiaries; the economic environment in each of the states in which the ITC Regulated Operating Subsidiaries operate; the amount of borrowings, if any, to be drawn down under the Acquisition Credit Facilities; the ability of Fortis to satisfy the conditions to drawdown under the Acquisition Credit Facilities; the ability of Fortis to access the capital markets on acceptable terms prior

 

8



 

to and following the Acquisition; the aggregate amount of the Acquisition-Related Costs; the aggregate payments to be made to the executive officers of ITC as a result of the Acquisition; the accuracy and completeness of the ITC public and other disclosure incorporated in this Circular; the absence of undisclosed liabilities of ITC; the receipt of applicable regulatory approvals and requested rate orders, no material adverse regulatory decisions being received, and the expectation of regulatory stability; no significant variability in interest rates; no significant operational disruptions or environmental liability due to a catastrophic event or environmental upset caused by severe weather, other acts of nature or other major events; the continued ability to maintain the electricity and gas systems to ensure their continued performance; no severe and prolonged downturn in economic conditions; no significant decline in capital spending; no material capital project and financing cost overrun related to any of the Corporation’s or ITC’s capital projects; sufficient liquidity and capital resources; the continuation of regulator-approved mechanisms to flow through the cost of energy supply in customer rates; the ability to hedge exposures to fluctuations in foreign exchange rates, electricity prices and fuel prices; no significant counterparty defaults; the continued availability of natural gas, fuel, coal and electricity supply; continuation and regulatory approval of power supply and capacity purchase contracts; the ability to fund defined benefit pension plans, earn the assumed long-term rates of return on the related assets and recover net pension costs in customer rates; no significant changes in government energy plans and environmental laws that may materially negatively affect the operations and cash flows of the Corporation and its subsidiaries; no material change in public policies and directions by governments that could materially negatively affect the Corporation and its subsidiaries; maintenance of adequate insurance coverage; the realization of additional opportunities in the transmission sector following Closing; the Board exercising its discretion to declare dividends, taking into account the business performance and financial conditions of the Corporation; the ability to obtain and maintain licences and permits; retention of existing service areas; continued maintenance of information technology infrastructure; continued favourable relations with First Nations; favourable labour relations; continued ability to rely on contract labour to maintain the transmission systems of the ITC Regulated Operating Subsidiaries following completion of the Acquisition; that the Corporation can reasonably assess the merit of and potential liability attributable to ongoing legal proceedings; and sufficient human resources to deliver service and execute the capital program.

 

The forward-looking information is subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. Factors which could cause results or events to differ from current expectations include, but are not limited to: regulatory risk, including risks relating to pending and future changes in environmental regulations; interest rate risk, including the uncertainty of the impact that a continuation of a low interest rate environment may have on the ROE of the Corporation’s regulated utilities and of the ITC Regulated Operating Subsidiaries following completion of the Acquisition; risks associated with the continuation, renewal, replacement and/or regulatory approval of power supply and capacity purchase contracts; risks relating to energy prices; risks relating to the ability to obtain shareholder and regulatory approvals in connection with the Acquisition and the timing and terms thereof; state and federal regulatory legislative decisions and actions; interloper risk; risks relating to the inability to complete the Acquisition, including the negative impact such failure would have on the Corporation’s earnings per share and the reverse termination fee payable by Fortis to ITC in certain circumstances; the risk that conditions to the Acquisition may not be satisfied; risks relating to the focus of management time and attention on the Acquisition and other disruptions from the Acquisition making it more difficult to maintain business and operational relationships; the possibility that the anticipated benefits and value creation from the Acquisition will not be realized, or will not be realized within the expected time period; risks relating to any potential downgrade of the Corporation’s credit ratings; risks relating to the base rate complaints; risks relating to potential FERC challenges that could result in the ITC Regulated Operating Subsidiaries taking bonus depreciation; operating and maintenance risks, including the Corporation’s limited experience in the independent FERC-regulated transmission industry; the risk that ITC will not be integrated successfully; risks associated with a potential material decrease in the price of Common Shares, including the risk of such decrease negatively impacting the value of the consideration offered to ITC shareholders; risks associated with a failure to complete the Minority Investment; risks relating to the constraints that the Minority Investment may impose on Fortis’ ability to operate the ITC business in

 

9



 

accordance with its business plan following Closing; risks relating to the ability of Fortis to access capital markets on favourable terms or at all; the cost of debt and equity capital; risks associated with changes in economic conditions; changes in regional economic and market conditions which could affect customer growth and energy usage; capital project budget overrun, completion and financing risk in the Corporation’s long-term contracted generation business; risks associated with the administrative appeals of the denial of International Transmission Company’s claims of the industrial processing exemption from use tax; risks relating to the impact of actual loads, forecasted loads, regional economic conditions, weather conditions, union strikes, labour shortages, material and equipment prices and availability; risks relating to ITC’s ability to obtain necessary financing for planned capital expenditures; the performance of the stock market and changing interest rate environment; risks associated with the limitations on the amount of construction that can be undertaken on the systems of the ITC Regulated Operating Subsidiaries at any one time; risks from regulatory approvals for reasons relating to rate construct, environmental, siting, regional planning, cost recovery or other issues or as a result of legal proceedings; risks arising from variances between estimated and actual costs of construction contracts awarded and the potential for greater competition; risks based on investments in transmission network upgrades for generator interconnection projects significantly changing from prior estimates due to changes in the MISO queue for generation projects and other factors beyond the control of ITC; risks relating to the impairment of ITC’s material long-lived assets; insurance coverage risk; risk of loss of licences and permits; risk of loss of service area; risks relating to derivatives; the continued ability to hedge foreign exchange risk; counterparty risk; environmental risks; insurance risks; risks relating to human resources and labour relations; risk of unexpected outcomes of legal proceedings currently against the Corporation or ITC; risks relating to the use by ITC of contract workers; risk of not being able to access First Nations lands; weather and seasonality risk; commodity price risk; capital resources and liquidity risks; changes in critical accounting estimates; risks related to changes in tax legislation; the ongoing restructuring of the electric industry; changes to long-term contracts; risk of failure of information technology infrastructure and cyber-attacks or challenges to Fortis’ and ITC’s information security, and certain presently unknown or unforeseen risks, including, but not limited to, acts of terrorism. For additional information with respect to the Corporation’s risk factors and risk factors relating to the Acquisition, the failure to complete the Acquisition and the post-Acquisition business and operations of Fortis and ITC, reference should be made to “Schedule G — Risk Factors” and to the Corporation’s continuous disclosure materials filed from time to time with the Canadian securities regulatory authorities.

 

All forward-looking information in this Circular is qualified in its entirety by the above cautionary statements and, except as required by law, the Corporation undertakes no obligation to revise or update any forward-looking information as a result of new information, future events or otherwise.

 

ADDITIONAL INFORMATION

 

Additional information relating to Fortis is available under the Corporation’s profile on the Canadian System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com. Financial information relating to Fortis is provided in its comparative financial statements and management discussion and analysis for the most recently completed financial year. A copy of the Corporation’s most recent consolidated financial statements, interim financial statements, management discussion and analysis and annual information form may be obtained by Shareholders, without charge, on SEDAR at www.sedar.com, on the Fortis website at www.fortisinc.com, or upon request from the Corporate Secretary of Fortis at the following address:

 

Fortis Inc.

Fortis Place, Suite 1100

5 Springdale Street

P. O. Box 8837

St. John’s, NL

A1B 3T2

 

10



 

Reference is made in this Circular to the agreement and plan of merger dated as of February 9, 2016 entered into between, among others, Fortis and ITC (the “Acquisition Agreement”). The Acquisition Agreement has not been reproduced in this Circular, but has been filed by Fortis on SEDAR and can be accessed at www.sedar.com. A summary of the Acquisition Agreement is included in this Circular under the heading “Special Business — The Acquisition of ITC Holdings Corp. — The Acquisition Agreement”.

 

Fortis has filed, and expects to file, additional documents in respect of the Acquisition on SEDAR. The information contained on, or accessible through, Fortis’ website or SEDAR is not incorporated by reference into this Circular and is not, and should not be considered to be, a part of this Circular.

 

PRESENTATION OF FINANCIAL INFORMATION

 

The unaudited pro forma condensed consolidated financial statements of the Corporation included in this Circular are reported in Canadian dollars and have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). All financial information of ITC and the historical financial statements of ITC included in this Circular are reported in U.S. dollars and have been prepared in accordance with U.S. GAAP. The assets and liabilities of ITC shown in the unaudited pro forma condensed consolidated balance sheet of the Corporation as at December 31, 2015 are reported in Canadian dollars and reflect the U.S.-to-Canadian dollar period-end closing exchange rate. The revenues and expenses of ITC shown in the unaudited pro forma condensed consolidated statement of earnings of the Corporation for the year ended December 31, 2015 are reported in Canadian dollars and reflect the average U.S.-to-Canadian dollar exchange rates for such periods. Financial information in this Circular that has been derived from such unaudited pro forma condensed consolidated financial statements has been translated to Canadian dollars on the same basis. Such pro forma financial information (which includes the unaudited pro forma condensed consolidated financial statements described above) does not reflect the impact of the proposed Minority Investment (as defined below).

 

Certain tables and other figures in this Circular may not add due to rounding.

 

CAUTION REGARDING PRO FORMA FINANCIAL INFORMATION

 

The unaudited pro forma condensed consolidated financial statements included in this Circular give effect to the Acquisition and certain related adjustments described in the notes accompanying those financial statements, including an assumed financing of the Cash Purchase Price and the Acquisition-related expenses. The unaudited pro forma condensed consolidated balance sheet gives effect to the Acquisition as if it had closed on December 31, 2015. The unaudited pro forma condensed consolidated statement of earnings for the year ended December 31, 2015 gives effect to the Acquisition as if it had closed on January 1, 2015. The unaudited pro forma condensed consolidated financial statements are based on the respective historical audited consolidated financial statements of Fortis and ITC for the year ended December 31, 2015 included in this Circular. Pro forma financial information presented in this Circular has been derived from the unaudited pro forma condensed consolidated financial statements of Fortis included elsewhere in this Circular unless the context otherwise requires. Pro forma financial information presented in this Circular should be read together with those unaudited pro forma condensed consolidated financial statements and the respective audited historical consolidated financial statements of Fortis and ITC and related management’s discussion and analysis.

 

The unaudited pro forma condensed consolidated financial statements are presented for illustrative purposes only and do not necessarily reflect what the combined company’s financial conditions would have been had the Acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of the operations of the combined company. The actual financial position and results of operations of Fortis may differ significantly from the pro forma amounts reflected in the unaudited pro forma condensed consolidated financial statements due to a variety of factors. Among other things, the unaudited pro forma condensed consolidated financial statements assume that the Cash Purchase Price and the Acquisition-related expenses are initially fully funded from the proceeds of U.S. dollar denominated senior unsecured notes to be issued by Fortis. However, Fortis expects the Cash

 

11



 

Purchase Price and the Acquisition-related expenses will be financed from a combination of one or more Prospective Offerings, the purchase price paid by the Minority Investors in connection with the Minority Investment and, if and to the extent necessary, the proceeds of the Acquisition Credit Facilities. See “Special Business — The Acquisition of ITC Holdings Corp. — Financing the Acquisition”.

 

The unaudited pro forma information and adjustments, including the allocation of the purchase price, are based upon preliminary estimates of fair values of assets acquired and liabilities assumed, current available information and certain assumptions that Fortis believes are reasonable in the circumstances, as described in the notes to the unaudited pro forma condensed consolidated financial statements. The actual adjustments to the consolidated financial statements of Fortis upon the Closing will depend on a number of factors, including, among others, how the Cash Purchase Price and the Acquisition-related expenses are actually funded, the net assets of ITC on Closing and other additional information that becomes available after the date of this Circular. As a result, it is expected that actual adjustments will differ from the pro forma adjustments, and the differences may be material. See “Special Note Regarding Forward-Looking Statements” and “Schedule G — Risk Factors”.

 

CURRENCY AND EXCHANGE RATE INFORMATION

 

In this Circular, unless otherwise specified or the context otherwise requires, all dollar amounts are expressed in Canadian dollars. References to “dollars”, “$” or “C$” are to lawful currency of Canada. References to “U.S. dollars” or “US$” are to lawful currency of the United States of America.

 

The following table sets forth, for each of the periods indicated, the period-end closing exchange rate, the average noon exchange rate and the high and low noon exchange rates of one U.S. dollar in exchange for Canadian dollars as reported by the Bank of Canada.

 

 

 

Year ended December 31,

 

 

 

2015

 

2014

 

2013

 

High

 

1.3990

 

1.1643

 

1.0697

 

Low

 

1.1728

 

1.0614

 

0.9839

 

Average

 

1.2787

 

1.1045

 

1.0299

 

Period End

 

1.3840

 

1.1601

 

1.0636

 

 

On February 8, 2016, the day immediately prior to the entering into of the Acquisition Agreement, the noon buying rate as reported by the Bank of Canada was US$1.00 = C$1.3921 or C$1.00 = US$0.7183. On March 18, 2016, the noon buying rate as reported by the Bank of Canada was US$1.00 = C$1.2982 or C$1.00 = US$0.7703.

 

THIRD PARTY SOURCES

 

This Circular contains information from publicly available third party sources as well as industry data prepared by management of Fortis on the basis of its knowledge of the regulated utility industry in which Fortis operates (including management’s estimates and assumptions relating to the industry based on that knowledge). Fortis management’s knowledge of the regulated utility industry has been developed through its experience and participation in the industry. Management of Fortis believes that its industry data is accurate and that its estimates and assumptions are reasonable, but there can be no assurance as to the accuracy or completeness of this data. Third party sources, which include the Edison Electric Institute (“EEI”), the Federal Energy Regulatory Commission (“FERC”), and the SGS Statistical Services Transmission Reliability Benchmarking Study, generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. Although management of Fortis believes it to be reliable, Fortis has not independently verified any of the data from third party sources referred to in this Circular or analyzed or verified the underlying studies or surveys relied upon or referred to by such sources, or ascertained the underlying economic assumptions relied upon or referred to by such sources. Undue reliance should not be placed on such third party sources and industry data.

 

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MATTERS FOR CONSIDERATION OF SHAREHOLDERS

 

FINANCIAL STATEMENTS

 

Fortis will place before the Meeting the Corporation’s Consolidated Financial Statements for the year ended December 31, 2015 together with the auditors’ report thereon. The Consolidated Financial Statements, and related Management’s Discussion and Analysis, can be found at pages 14 through 147 of the Corporation’s 2015 Annual Report, which has been mailed to all of the registered Shareholders and those beneficial Shareholders who have requested to receive the Annual Report. The 2015 Fortis Annual Report is also available on the Fortis website at www.fortisinc.com and on the SEDAR website at www.sedar.com.

 

ELECTION OF DIRECTORS

 

The Articles of Fortis provide for a minimum of 3 and a maximum of 15 directors. The Board of Directors of the Corporation (the “Board of Directors” or the “Board”) currently consists of 10 members. Shareholders will be asked to elect the 10 directors currently serving and two new nominees, Margarita K. Dilley and Jo Mark Zurel, to serve as the 12 members of the Board.

 

Additional details pertaining to each of the nominees can be found on pages 43 through 54 of this Circular. The 12 nominees proposed for election as directors are as follows:

 

Tracey C. Ball

Douglas J. Haughey

Pierre J. Blouin

R. Harry McWatters

Peter E. Case

Ronald D. Munkley

Maura J. Clark

David G. Norris

Margarita K. Dilley

Barry V. Perry

Ida J. Goodreau

Jo Mark Zurel

 

If any of the proposed nominees should for any reason be unable to serve as a director of Fortis, the persons named in the enclosed form of proxy reserve the right to nominate and vote for another nominee in their discretion unless the Shareholder has specified in its proxy that their Common Shares are to be withheld from voting in the election of directors.

 

In accordance with the Fortis Majority Voting Policy, if any nominee for director receives, from the Common Shares voted at the Meeting, a greater number of votes “withheld” than “for” his or her election, such director must immediately tender his or her resignation to the Chair. Any such resignation will take effect only on acceptance by the Board. The Board shall accept such resignation absent exceptional circumstances that would warrant the director to continue to serve on the Board, as determined by the Board in accordance with its fiduciary duties to the Corporation and its shareholders. Within 90 days of the Meeting, the Board will make a final decision on the proposed resignation and announce it by way of media release. If the Board declines to accept the resignation, the media release shall fully state the reasons for that decision. Any director who tenders his or her resignation will not participate in the related deliberations of the Governance and Nominating Committee or the Board. The Fortis Majority Voting Policy does not apply to a contested election of directors, that is, where the number of nominees exceeds the number of directors to be elected. For more information on the Majority Voting Policy, please see the section of this Circular titled “Majority Voting For Directors” on page 56 of this Circular.

 

Management of Fortis and the Board recommend that Shareholders vote FOR these nominees. The persons named in your Proxy intend to vote FOR the election of each of these nominees unless you specify that authority to do so is withheld.

 

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APPOINTMENT OF AUDITORS AND AUTHORIZATION OF THE DIRECTORS TO FIX AUDITORS’

REMUNERATION

 

The Board, on the recommendation of its Audit Committee, proposes that the Shareholders appoint Ernst & Young LLP as the auditors of Fortis to hold office until the close of the next annual meeting of Shareholders.

 

The Board negotiates the fees paid to the auditors on an arm’s length basis. Such fees are based upon the complexity of the matters dealt with and the time expended by the auditors in providing services to Fortis. Management of Fortis believes that the fees negotiated in the past with the auditors of Fortis have been reasonable in all circumstances and would be comparable to fees charged by other auditors providing similar services.

 

Fees incurred by Fortis for work performed by its auditors, Ernst & Young LLP, during each of the last two financial years for audit, audit-related, tax and non-audit services were as follows:

 

External Auditor Service Fees

(C$000’s)

 

Ernst & Young LLP

 

2015

 

2014

 

Audit Fees

 

5,223

 

4,601

 

Audit-Related Fees

 

870

 

748

 

Tax Fees

 

475

 

119

 

Non-Audit Fees

 

 

48

 

Total

 

6,568

 

5,516

 

 

Audit fees were higher in 2015 than in 2014, mainly due to general increases in fees and the impact of foreign exchange on U.S. dollar-denominated audit fees. The increase in tax fees was largely due to additional work completed on the sale of non-core assets.

 

Management of Fortis and the Board recommend that Shareholders vote FOR the appointment of Ernst & Young LLP as the auditors of Fortis for 2016 and FOR the authorization of the Board to fix the remuneration of the auditors for 2016. The persons named in your Proxy intend to vote FOR the appointment and FOR the authorization of the Board to fix the remuneration of the auditors unless you specify that authority to do so is withheld.

 

ADVISORY AND NON-BINDING RESOLUTION ON THE APPROACH TO EXECUTIVE COMPENSATION

 

Compensation Objectives

 

As part of the Corporation’s commitment to strong corporate governance practices, the Board elected to put a non-binding advisory vote regarding the Corporation’s approach to executive compensation (“Say on Pay”) to the Meeting. The Board believes that the Corporation’s executive compensation policies and practices must closely align the interests of executives and Shareholders and be consistent with corporate governance best practices in Canada. The Say on Pay resolution (the “Advisory and Non-Binding Resolution on the Approach to Executive Compensation”) gives Shareholders an opportunity to indicate whether they support the disclosed objectives of the Corporation’s executive compensation policies and practices, discussed in more detail in the “Compensation Discussion and Analysis” section of this Circular.

 

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Resolution

 

“RESOLVED THAT:

 

On an advisory basis and not to diminish the role and responsibilities of the board of directors of the Corporation, the Shareholders of the Corporation accept the approach to executive compensation as described in the “Compensation Discussion and Analysis” section of this Circular”.

 

The Board recommends that Shareholders vote FOR the Advisory and Non-Binding Resolution on the Approach to Executive Compensation and, unless otherwise instructed, the persons named in your Proxy intend to vote FOR the non-binding advisory vote on the Advisory and Non-Binding Resolution on the Approach to Executive Compensation.

 

Non-Binding Nature of Resolution

 

Shareholders have the opportunity to vote FOR or AGAINST the non-binding advisory vote on Say on Pay. As this is an advisory vote, the results of the vote will not be binding on the Board. The Board will take the results of the vote into account, as appropriate, when considering future compensation polices, practices and decisions and in determining whether there is a need to increase its engagement with Shareholders on compensation and related matters.

 

ACQUISITION OF ITC HOLDINGS CORP.

 

The Acquisition

 

On February 9, 2016, Fortis entered into an agreement and plan of merger pursuant to which it has agreed to acquire all of the issued and outstanding common stock of ITC. Under the terms of the Acquisition, ITC shareholders will receive US$22.57 in cash and 0.7520 of a Common Share per share of ITC common stock. See “Special Business — The Acquisition of ITC Holdings Corp.”.

 

There were approximately 152.7 million shares of ITC common stock outstanding as of February 8, 2016 and less than 155.6 million shares of ITC common stock are expected to be outstanding on closing of the Acquisition (“Closing”). If the maximum number of shares of ITC common stock are issued and outstanding on Closing, pursuant to the Acquisition Agreement, an aggregate of approximately US$3.5 billion (the “Cash Purchase Price”) will be paid to ITC shareholders in satisfaction of the cash portion of the purchase price for the ITC common stock acquired in the Acquisition (C$4.9 billion based on the US$/C$ exchange rate on February 8, 2016). In addition to the Cash Purchase Price, Fortis will issue up to 117 million Common Shares (the “Consideration Shares”) to ITC shareholders as partial consideration for the Acquisition, representing up to 41.5% of the issued and outstanding Common Shares as of March 18, 2016. The Consideration Shares are expected to represent no more than 29.3% of outstanding Common Shares on Closing. Based on the closing price of the Common Shares (being C$41.38) and the US$/C$ exchange rate on February 8, 2016, the aggregate value of the Cash Purchase Price and Consideration Shares to be paid to the shareholders of ITC would be approximately US$7.0 billion (C$9.8 billion).

 

The Toronto Stock Exchange (the “TSX”) requires that shareholder approval be obtained in those instances where the number of securities issued or issuable in payment of the purchase price for an acquisition exceeds 25% of the number of securities of the listed issuer which are outstanding, on a non-diluted basis. Accordingly, Shareholders will be asked at the Meeting to vote on a resolution, the text of which is set out below, approving the issuance of the Consideration Shares to ITC shareholders as partial consideration for the Acquisition (the “Acquisition Share Issuance Resolution”). To be effective, the Acquisition Share Issuance Resolution must be approved by at least a simple majority of the votes cast by Shareholders present in person or represented by proxy at the Meeting. If Shareholder approval is obtained, Closing is expected to occur in late 2016, subject to the satisfaction of the other conditions to Closing. See “Special Business — The Acquisition of ITC Holdings Corp. — The Acquisition Agreement”.

 

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The issuance of up to 117 million common shares of Fortis Inc. (“Fortis”), forming part of the consideration to be paid in connection with the acquisition by an indirect subsidiary of Fortis of all of the issued and outstanding common stock of ITC Holdings Corp. (“ITC”) pursuant to the terms of an agreement and plan of merger dated as of February 9, 2016 entered into between, among others, Fortis and ITC, is hereby authorized and approved”.

 

Management of Fortis and the Board recommend that Shareholders vote FOR the Acquisition Share Issuance Resolution. The persons named in your Proxy intend to vote FOR the Acquisition Share Issuance Resolution unless you specify that authority to do so is withheld.

 

OTHER MATTERS

 

Fortis did not receive any Shareholder proposal on or prior to February 6, 2016 and management of Fortis does not know of any matter to come before the Meeting other than the foregoing. However, if any other matters should be properly brought before the Meeting, the Common Shares represented by proxies in favour of Fortis management nominees will be voted on such matters in accordance with the best judgment of the proxy nominees.

 

Shareholders entitled to vote at the next annual meeting to be held in 2017 and who wish to submit proposals in respect of any matter to be raised at such meeting must ensure that Fortis receives their proposals not later than February 4, 2017 in accordance with the provisions of the Corporations Act (Newfoundland and Labrador).

 

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SPECIAL BUSINESS — THE ACQUISITION OF ITC HOLDINGS CORP.

 

OVERVIEW

 

On February 9, 2016, Fortis and certain of its subsidiaries entered into the Acquisition Agreement with ITC which provides for, among other things, the acquisition by an indirect subsidiary of Fortis of all of the issued and outstanding common stock of ITC and the merger of the acquiring subsidiary of Fortis with and into ITC. Under the terms of the Acquisition Agreement, ITC shareholders will receive US$22.57 in cash and 0.7520 of a Common Share per share of ITC common stock. There were approximately 152.7 million shares of ITC common stock outstanding as of February 8, 2016 and less than 155.6 million shares of ITC common stock are expected to be outstanding on Closing. Fortis will issue up to 117 million Consideration Shares to ITC shareholders as partial consideration for the Acquisition, or up to 41.5% of its undiluted share count, and is seeking the approval of its Shareholders at the Meeting for the issuance of such Common Shares. See “Canadian and U.S. Securities Law Matters — TSX Approval”.

 

If the maximum number of shares of ITC common stock are issued and outstanding on Closing, and based on the closing price for the Common Shares and the US$/C$ exchange rate on February 8, 2016 (the day immediately prior to the entering into of the Acquisition Agreement):

 

·                  an aggregate of approximately US$3.5 billion will be paid to ITC shareholders in satisfaction of the Cash Purchase Price for the ITC common stock acquired in the Acquisition (C$4.9 billion);

 

·                  the aggregate value of the up to 117 million Consideration Shares to be issued to ITC shareholders would be approximately US$3.5 billion (C$4.9 billion);

 

·                  the aggregate value of the Cash Purchase Price and the Consideration Shares to be paid to the shareholders of ITC would be US$7.0 billion (C$9.8 billion); and

 

·                  the total aggregate purchase price for the Acquisition would be approximately US$11.5 billion (C$16.0 billion), including approximately US$4.5 billion (C$6.2 billion) of consolidated ITC indebtedness expected on Closing.

 

The actual number of Common Shares to be issued pursuant to the Acquisition Agreement will be determined at Closing based on the exchange ratio of 0.7520 Common Shares per share of ITC common stock and the number of shares of ITC common stock outstanding at such time. As required by the Acquisition Agreement, Fortis has applied to list the Consideration Shares on the TSX and will apply to list the Common Shares on the NYSE. Listing will be subject to the Corporation fulfilling all of the requirements of the TSX and the NYSE, respectively (the “Listing Conditions”). Fortis will not be able to satisfy the listing requirements of the TSX unless Shareholder Approval of the Acquisition Share Issuance Resolution is obtained at the Meeting or any adjournment or postponement thereof. See “Canadian and U.S. Securities Law Matters — TSX Approval”.

 

Closing of the Acquisition will not occur until the conditions contained in the Acquisition Agreement have been satisfied or waived. The Acquisition Agreement provides that all such conditions must be satisfied or waived by 5:00 pm Michigan local time on February 9, 2017 (the “End Date”), provided that the End Date may be extended for an additional six month period if the only conditions outstanding (other than those conditions which by their nature are to be satisfied at Closing) are the Required Regulatory Approvals or if there is at that time a Legal Restraint to Closing. The conditions to Closing include, among others, receipt by each of ITC and Fortis of the approval of their respective shareholders, receipt of the Required Regulatory Approvals, including, among others, those of FERC, the Committee on Foreign Investment in the United States, and the United States Federal Trade Commission/Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”) and certain other regulatory approvals, satisfaction of the Listing Conditions (subject only to a

 

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confirmatory official notice of issuance), the registration statement on Form F-4 filed by Fortis on March 17, 2016, which includes a prospectus of Fortis and a proxy statement of ITC (the “Registration Statement”), having been declared effective by the SEC under the United States Securities Act of 1933, as amended, or otherwise having become effective, and other customary closing conditions. Closing is expected to occur in late 2016. See “The Acquisition Agreement” for a more detailed description of the conditions to Closing.

 

Fortis expects that, prior to Closing, one or more infrastructure-focused minority investors unrelated to Fortis (the “Minority Investors”) will have entered into binding commitments to acquire, directly or indirectly, on or after Closing, up to an aggregate of 19.9% of the issued and outstanding common stock of ITC as part of the Acquisition (the “Minority Investment”). However, there can be no assurance at this time that the Minority Investment will be completed at or prior to Closing, or at all. If completed at or prior to Closing, the consideration paid by the Minority Investors would be used by Fortis to finance part of the Cash Purchase Price. Completion of the Acquisition is not conditional on the completion of the Minority Investment. See “Financing the Acquisition — The Minority Investment” and “Schedule G — Risk Factors — Risk Factors Relating to the Acquisition”.

 

ITC is the largest independent electric transmission company in the United States and is rate regulated by FERC. ITC owns and operates high-voltage transmission facilities in Michigan, Iowa, Minnesota, Illinois, Missouri, Kansas and Oklahoma, serving a combined peak load exceeding 26,000 megawatts (“MW”) in 2015 along approximately 15,600 miles of transmission line. ITC Midwest LLC (“ITC Midwest”) is also a registered utility in Wisconsin. As of December 31, 2015, ITC had assets of approximately US$7.6 billion. More detailed disclosure with respect to ITC can be found at “Schedule D — Information Concerning ITC Holdings Corp.”, “Schedule E — ITC Historical Financial Statements and Management’s Discussion and Analysis” and “Schedule F — Supplementary ITC Information”.

 

The Corporation’s management expects that the Acquisition will be accretive to the Corporation’s earnings per Common Share in the first full year following Closing, excluding one-time Acquisition-related expenses. Management believes that 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. On a combined basis, Fortis estimates that FERC-regulated operating earnings for 2015 would represent the Corporation’s highest proportion of regulated operating earnings at 38% and the consolidated 2016 midyear rate base of Fortis would increase by approximately C$8 billion to approximately C$26 billion. See “Background and Recommendation”.

 

BACKGROUND AND RECOMMENDATION

 

Background to the Acquisition

 

Fortis has successfully grown its business through strategic acquisitions that have contributed to strong organic growth over the past decade. As part of this growth strategy, Fortis has continuously evaluated opportunities to maximize shareholder value through strategic acquisitions that would enable Fortis to strengthen and diversify its business, while remaining committed to profitable growth. The proposed Acquisition results from such efforts, and is consistent with the Corporation’s disciplined growth strategy.

 

The proposed Acquisition and the provisions of the Acquisition Agreement are the result of arm’s length negotiations conducted among representatives of Fortis, ITC, the ITC administrative committee and their respective legal and financial advisors. The following is a brief summary of the negotiations, discussions and actions among the parties that preceded the execution and public announcement of the Acquisition Agreement.

 

In late October 2015, Fortis approached ITC regarding a potential acquisition and exploratory discussions occurred among members of Fortis management and members of ITC management regarding a potential acquisition. On November 30, 2015, ITC publicly announced that its board of directors would commence

 

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a review of strategic alternatives, including a potential sale of the company or the pursuit of other initiatives to maximize value for its shareholders (the “Strategic Process”).

 

In the following two months management of Fortis, together with its external financial and legal advisors, continued to consider the merits, feasibility and parameters of a potential acquisition of ITC. During this time, Fortis conducted an in depth technical, financial and legal due diligence review of ITC.

 

After careful consideration and discussion, the Board of Directors, following discussions with the Corporation’s management, financial advisors and legal counsel, determined to submit a proposal for the acquisition of ITC in connection with the Strategic Process initiated by ITC. Ultimately, the Fortis proposal dated February 3, 2016 was determined by the independent members of the ITC board of directors on February 8, 2016 to be in the best interest of ITC and the ITC shareholders, at which point the parties commenced negotiations to finalize the terms of the Acquisition as set out in the Acquisition Agreement.

 

On February 8, 2016, the Board convened a special meeting (the “February 8 Board Meeting”) to consider the proposed transaction, including the status of negotiations with respect to the Acquisition Agreement. Also in attendance at the February 8 Board Meeting were members of Fortis’ management and representatives of the Corporation’s legal advisors, BNS and Goldman, Sachs & Co. Representatives of Goldman, Sachs & Co. reviewed its financial analyses of the aggregate consideration to be paid by Fortis pursuant to the Acquisition Agreement, and then rendered Goldman, Sachs & Co.’s oral opinion, subsequently confirmed in writing by delivery of a written opinion dated as of February 9, 2016, that, as of the date of its opinion and based upon and subject to the factors, assumptions, considerations, limitations and other matters set forth in its written opinion, the Aggregate Consideration (as defined in the written opinion) to be paid by Fortis for each outstanding share of common stock, no par value, of ITC pursuant to the Acquisition Agreement was fair from a financial point of view to Fortis. See “Schedule C — Opinion of Goldman, Sachs & Co.” Following this presentation, and after further consideration of the Acquisition and discussions with the Corporation’s management, financial advisors and legal counsel, the Board unanimously determined that the Acquisition is in the best interests of Fortis and approved the Acquisition, including the entering into of the Acquisition Agreement presented at the February 8 Board Meeting, subject to certain minor amendments to be addressed by management. At the February 8 Board Meeting, the Board of Directors also determined to recommend that Shareholders vote in favour of the Acquisition Share Issuance Resolution as set out in this Circular and in the form of proxy.

 

Immediately prior to the commencement of the February 8 Board Meeting, the Board accepted the resignation of Mr. Paul J. Bonavia as a director of the Corporation. Mr. Bonavia resigned in order to remain in compliance with the rules of another entity of which he is a director. These rules would not permit Mr. Bonavia to serve as a director of Fortis following the announcement by the Corporation that it had entered into the Acquisition Agreement.

 

The parties and their external advisors concluded negotiation of the final terms of the Acquisition Agreement in parallel to and following the February 8 Board Meeting, and the Acquisition Agreement was executed early in the morning of February 9, 2016. A joint press release of Fortis and ITC announcing the Acquisition was disseminated prior to the opening of markets that day.

 

As at February 8, 2016, being the day immediately prior to the announcement of the Acquisition, the value of the consideration to be paid to the shareholders of ITC represented a 33% premium to ITC’s unaffected closing share price on November 27, 2015 and a 37% premium to ITC’s 30-day average unaffected share price prior to November 27, 2015.

 

Recommendation of the Board

 

Having undertaken a review of, and carefully considered, the opinion of Goldman, Sachs & Co. attached hereto at Schedule C, information concerning ITC, the proposed Acquisition and alternatives, including in depth consultation with Fortis management and the Corporation’s financial advisors and legal counsel and

 

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consideration of such other matters as the Board considered relevant, the Board unanimously determined that the Acquisition is in the best interests of Fortis and determined to recommend that Shareholders vote in favour of the resolution approving the issuance of the Consideration Shares in connection with the Acquisition. Accordingly, the Board unanimously approved and unanimously recommends that Shareholders vote FOR the Acquisition Share Issuance Resolution.

 

Reasons for the Recommendation

 

The Board, with the benefit of advice from Fortis management and following discussions with the Corporation’s financial and legal advisors, reviewed and considered a significant amount of information and considered a number of factors relating to the Acquisition. The following is a summary of the principal reasons for the unanimous conclusion of the Board that the Acquisition is in the best interests of Fortis.

 

Acquisition of a Premier Electric Transmission Utility

 

The Acquisition of ITC, the largest independent regulated electric transmission utility in the United States, represents a transformative and accretive transaction for Fortis. ITC has grown its average rate base at a compounded average growth rate of approximately 16% over the last three years and, as of December 31, 2015, ITC had assets of approximately US$7.6 billion. After giving effect to the Acquisition, Fortis will become one of the top 15 North American public utilities ranked by enterprise value, establishing scale and an additional platform for rate base growth and investment opportunity in a supportive FERC regulatory environment.

 

Accretive to Earnings per Common Share in First Full Year

 

The Acquisition aligns with the Corporation’s financial objectives and is expected to be accretive to earnings per Common Share in the first full year following Closing, excluding one-time Acquisition-related expenses. ITC has proven operational and development capabilities, generating predictable, reasonable returns on capital investments without commodity or fuel exposure. The projected earnings accretion together with ITC’s strong, predictable cash flows is expected to support the Corporation’s average annual dividend growth target of 6% through 2020.

 

Diversification of the Corporation’s Regulatory, Business and Regional Economic Mix

 

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.

 

Regulatory and Business. The Acquisition will significantly enhance the Corporation’s regulatory diversity and lower overall rate regulatory risk. Additionally, the FERC regulated electric transmission sector generates stable and predictable cash flows without commodity or fuel exposure. For the twelve months ended December 31, 2015, pro forma the Acquisition, ITC would have represented 38% of the Corporation’s consolidated regulated operating earnings and 38% of the Corporation’s regulated assets.

 

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(1)    Excluding one-time Acquisition-related expenses, Fortis’ “Long-term Contracted Generation”, “Non-Utility” and “Corporate and Other” segments and intercompany eliminations, ITC’s “ITC Holdings and other” segment and intercompany eliminations.

 

Regional Economic. The Acquisition will increase the Corporation’s regional economic diversity, which will further reduce the Corporation’s exposure to a downturn in any particular region served by the Fortis utilities. In addition to its current presence in five provinces, the U.S. states of New York and Arizona and three Caribbean countries, Fortis will gain a presence in eight additional U.S. states, being Michigan, Iowa, Minnesota, Illinois, Missouri, Kansas, Oklahoma and Wisconsin (where ITC Midwest is a registered utility but does not currently carry on business).

 

 

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Supportive FERC Regulation

 

ITC’s tariff rates are regulated by FERC, which has been one of the most consistently supportive utility regulators in North America, providing reasonable returns and equity ratios. Rates are set using a forward-looking rate-setting mechanism with an annual true-up, which provides timely cost recovery and reduces regulatory lag. The annual true-up accounts for any differences in projected load as well as differences in any other projected inputs in the formula (such as capital investments and operating expenses) and ensures that the ITC Regulated Operating Subsidiaries are appropriately compensated for the actual costs of service and receive their allowed return on common equity (“ROE”).

 

FERC also provides for ROE incentive “adders” for, among other things, the ownership and operation of transmission by independent transmission companies. FERC has historically allowed for a greater proportion of equity in target capital structures of transmission companies than is typical for provincial and state utility regulators. See “Schedule D — Information Concerning ITC Holdings Corp.”.

 

Significant Transmission Investment to Drive ITC’s Rate Base Growth

 

There is a significant need for capital investment in the aging U.S. electric transmission sector to improve reliability, expand access to power markets, allow new generating resources to interconnect to the transmission system and lower the overall cost of energy delivery. Investment in the transmission industry is required to address reliability standards established by NERC, including critical infrastructure protection, storm hardening and infrastructure replacement. Such investment also reduces transmission constraints and improves access to generation resources. ITC’s proven track record of successfully executing capital programs on time and on budget will help ensure Fortis is positioned to benefit from this need for capital investment. Based on ITC’s planned capital expenditure program, ITC’s average rate base and construction work in progress (“CWIP”) is expected to increase at a compounded average annual rate of approximately 7.5% through 2018. See “Schedule D — Information Concerning ITC Holdings Corp.” and “Schedule G — Risk Factors — Risk Factors Relating to the Post-Acquisition Business and Operations of the Corporation”.

 

ITC Average Rate Base & CWIP

 

 

Clean energy policies in the United States, including renewable portfolio standards, are driving the need for new transmission investment to facilitate the delivery of electricity from renewable energy resources to load-serving entities. With its economies of scale and geographic footprint, ITC is favourably positioned to participate in the significant transmission investment opportunity fostered by clean energy policies.

 

ITC Management Team has a Proven Track Record that Fits Well in the Fortis Ownership Model

 

The senior management team of ITC has consistently delivered safe, reliable and cost-efficient energy service while significantly increasing ITC’s scale and capabilities. The ITC management team has a proven track record of delivering strong earnings per share growth (delivering ITC shareholders a CAGR

 

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of 16.5% over the last ten years), total shareholder return, cash flow from operations and operational efficiencies. From its initial public offering in 2005 through November 2015, ITC has delivered more than double the annual shareholder returns of the S&P 500 Utilities Sector Index.

 

In addition, EEI’s 2014 Safety Survey ranks ITC in the top 10% for safety performance. ITC’s transmission systems routinely perform among the top 25% of utilities nationally for reliability performance as measured by the average number of sustained outages and momentary outages per circuit, according to the annual SGS Statistical Services Transmission Reliability Benchmarking Study, a national benchmark.

 

The Corporation’s approach to utility management is based on creating value for customers that translates into long-term value for Shareholders. Fortis structures its operations as separate operating companies in each jurisdiction. ITC’s experienced and execution-focused management team will continue to operate independently under the ownership structure of Fortis, with the benefit of access to additional capital and the utility management experience and expertise of Fortis. See “Schedule G — Risk Factors — Risk Factors Relating to the Post-Acquisition Business and Operations of the Corporation”.

 

Proven Acquisition Track Record of Fortis

 

Fortis has substantial experience in successfully integrating newly acquired enterprises into the Fortis group, including the acquisitions of UNS Energy in 2014, CH Energy Group in 2013, FortisBC Holdings (formerly Terasen Inc.) in 2007, and FortisBC Electric (formerly Aquila Networks Canada (British Columbia) Ltd.) and FortisAlberta (formerly Aquila Networks Canada (Alberta) Ltd.) in 2004.

 

Risk Factors Considered by the Board

 

In connection with its deliberations relating to the Acquisition, the Board also considered potential risks and negative factors concerning the Acquisition and the other transactions contemplated by the Acquisition Agreement, including the following:

 

·                  the risk that the Acquisition might not be completed in a timely manner or at all;

 

·                  the risk that the regulatory approval process could result in undesirable conditions, impose burdensome terms, and/or result in increased pre-tax transaction costs;

 

·                  the potential length of the regulatory approval process and the related period of time during which Fortis will be subject to the restrictions in the Acquisition Agreement;

 

·                  the effect that the length of time from announcement until Closing could have on the market price of the Common Shares, the Corporation’s operating results (particularly in light of the significant costs incurred in connection with the Acquisition), and the relationships with the Corporation’s employees, Shareholders, customers, partners and others that do business with Fortis;

 

·                  the fact that the Acquisition Agreement provides for a fixed exchange ratio and that no adjustment will be made in the consideration to be received by ITC shareholders as a result of a possible increase in the trading price of the Common Shares following the announcement of the Acquisition, while noting that the significant Cash Purchase Price will reduce the impact of an increase in the trading price of Common Shares on the value of the Acquisition consideration;

 

·                  potential challenges associated with coordinating Fortis’ and ITC’s operations;

 

·                  the risk that any inability to maintain the current management team of ITC could affect the combined company, as Fortis recognizes the value of ITC’s management and expertise and the value that ITC’s local management brings to ITC’s utilities;

 

·                  potential negative regulatory outcomes and the impact on allowed ROE that may result from the base rate complaints against certain of the ITC Regulated Operating Subsidiaries;

 

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·                  the risk that if the Acquisition Agreement is terminated, Fortis may be obligated to pay a termination fee under certain circumstances;

 

·                  the fact that the Acquisition Agreement provides for the ability of the ITC board of directors to, under certain circumstances, in a manner adverse to Fortis, withhold, withdraw, amend, modify or qualify its recommendation that ITC shareholders adopt the Acquisition Agreement;

 

·                  the enhanced regulatory burden and risk of exposure to litigation and regulatory action as a result of Fortis becoming a registrant with the SEC and having the Common Shares listed on the NYSE;

 

·                  the potential impact on the market price of the Common Shares as a result of the issuance of the Consideration Shares to ITC shareholders and the listing of the Common Shares on the NYSE;

 

·                  the fact that Fortis will incur substantial additional indebtedness in connection with the Acquisition that could adversely affect Fortis and its financial position, including its credit rating;

 

·                  the absence of a financing condition and ITC’s ability to specifically enforce Fortis’ obligations under the Acquisition Agreement;

 

·                  the potential that increases in interest rates could lead to the combined company’s growth opportunities being delayed or not pursued;

 

·                  the risk and likelihood of litigation arising against ITC and Fortis in connection with the Acquisition; and

 

·      the fact that no material synergy savings are expected to result from the Acquisition.

 

See “Schedule G — Risk Factors” for a further discussion of the risk factors relating to the Acquisition and the post-Acquisition business and operations of the Corporation. In addition, Shareholders should carefully consider the risk factors which relate to ITC described in “Schedule D — Information Concerning ITC Holdings Corp.”.

 

The foregoing summary of the information and factors considered by the Board is not intended to be exhaustive. In reaching its decision to approve the Acquisition Agreement and the transactions contemplated thereby, the Board did not quantify or assign any relative weights to the factors considered, but rather based its approval and recommendation on the totality of the information presented to and considered by it. In addition, individual directors may have given different weight to different factors. The conclusions and recommendation of the Board was made after considering the totality of the information and factors involved.

 

The foregoing discussion of the information and factors considered by the Board contains forward-looking information and statements, all of which are subject to various risks and assumptions. This information should be read in light of the factors described under the sections entitled “Special Note Regarding Forward-Looking Statements” and “Schedule G — Risk Factors” in this Circular.

 

THE ACQUISITION AGREEMENT

 

The summary of the material provisions of the Acquisition Agreement below and elsewhere in this Circular is qualified in its entirety by reference to the Acquisition Agreement, a copy of which has been filed by Fortis under the Corporation’s profile on SEDAR, which can be accessed at www.sedar.com. This summary may not contain all of the information about the Acquisition Agreement that is important to you. We urge you to read carefully the Acquisition Agreement in its entirety as it is the legal document governing the Acquisition.

 

The Acquisition

 

The Acquisition Agreement provides that, subject to the terms and conditions of the Acquisition Agreement, at Closing, Element Acquisition Sub Inc. (“Merger Sub”) will be merged with and into ITC

 

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and, as a result, the separate corporate existence of Merger Sub will cease, and ITC will continue as the surviving corporation and become a subsidiary of FortisUS Inc. (“FortisUS”).

 

Closing will occur on the third business day following the day on which the closing conditions set forth in the Acquisition Agreement and described under “— Conditions to the Acquisition” are satisfied or waived (other than those conditions that by their nature are to be satisfied at Closing, but subject to satisfaction or waiver of such conditions), or at such other time as ITC and Fortis agree in writing.

 

Acquisition Consideration

 

At Closing each share of ITC common stock issued and outstanding immediately prior to Closing (other than shares of ITC common stock held by Fortis, FortisUS, Merger Sub or any of Fortis’ direct or indirect wholly-owned subsidiaries or ITC or its wholly-owned subsidiaries and ITC restricted stock awards) will be converted into the right to receive (i) US$22.57 in cash; and (ii) 0.7520 of a Common Share.

 

The Acquisition consideration to be paid for each share of ITC common stock will be equitably adjusted (i) to reflect the effect of certain changes in the number of outstanding shares of common stock of ITC or the Common Shares (or securities convertible or exchangeable into or exercisable for shares of common stock of ITC or the Common Shares) that are issued and outstanding after the date of the Acquisition Agreement and prior to Closing or changes in the securities or classes of securities, including by reason of any reclassification, stock split (including a reverse stock split), stock dividend, recapitalization, merger, issuer tender or exchange offer, or other similar transaction; and (ii) where any cash dividend is declared or paid by Fortis on the Common Shares that are issued and outstanding after the date of the Acquisition Agreement and prior to Closing (other than declaration or payment of regular quarterly cash dividends on the Common Shares up to a specified maximum amount, with usual record and payment dates for such dividends). No adjustment in the consideration payable by Fortis in connection with the Acquisition will be required as a result of the payment by Fortis of regular quarterly dividends as currently forecasted in accordance with the Corporation’s average annual dividend growth target of 6% through 2020.

 

Treatment of Options, Restricted Stock and Performance Shares

 

Immediately prior to Closing, each outstanding option to purchase shares of ITC common stock and each outstanding ITC award of restricted stock will automatically become immediately vested and be cancelled and will only entitle the holder to receive (without interest) an amount in cash equal to: (i) in respect of options, the total number of shares of ITC common stock subject to the option multiplied by the excess, if any, of the Equity Award Consideration over the exercise price per share of ITC common stock under such option; and (ii) in respect of restricted stock, an amount in cash equal to the total number of shares of ITC common stock subject to such award immediately prior to Closing multiplied by the Equity Award Consideration, in each case less applicable withholding taxes.

 

Immediately prior to Closing, each outstanding award of performance shares under any ITC stock plan will automatically become vested at the higher of the target level of performance and the actual level of performance through Closing, and each performance share award will be cancelled and will only entitle its holder to receive (without interest) an amount in cash equal to the number of shares of ITC common stock subject to such award immediately prior to Closing multiplied by the Equity Award Consideration, less applicable withholding taxes. Furthermore, immediately prior to Closing, equivalent performance shares in respect of outstanding performance shares will vest in the same percentage as the performance shares underlying such equivalent performance shares (and, to the extent the percentage of the performance shares vesting exceeds 100%, additional equivalent performance shares will be deemed credited to each holder’s notional account and vested so that the number of equivalent performance shares deemed credited to such holder’s account and vested is equal to the number that would have been held in such account if the number of vested performance shares had been issued as of the grant date, rather than the target number of performance shares) and each equivalent performance share will be cancelled and will only entitle the holder of such equivalent performance share to receive (without interest) an amount in cash equal to the number of such equivalent performance shares deemed credited to such holder’s

 

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notional account as set forth above multiplied by the Equity Award Consideration, less applicable withholding taxes. See “Financing the Acquisition — Acquisition-Related Costs”.

 

Representations and Warranties

 

In the Acquisition Agreement, Fortis, FortisUS, Merger Sub and ITC have each made representations and warranties regarding matters which are customary in transactions such as the Acquisition. Certain of the representations and warranties in the Acquisition Agreement are subject to exceptions or qualifications, including, in certain cases, knowledge qualifications, which means that those representations and warranties would not be deemed untrue or incorrect as a result of matters of which certain executives of the party making the representation did not have actual knowledge after reasonable inquiry, and materiality or Material Adverse Effect qualifications.

 

The representations and warranties contained in the Acquisition Agreement, or in any instrument delivered pursuant thereto, including any rights arising out of any breach of such representations and warranties, will not survive Closing.

 

Covenants Regarding Conduct of Business by ITC Pending the Acquisition

 

Except as required pursuant to or permitted by the Acquisition Agreement, required by applicable law or consented to in writing by FortisUS (which consent may not be unreasonably withheld, conditioned or delayed), from the date of the Acquisition Agreement until the earlier of Closing or the termination of the Acquisition Agreement (with certain exceptions), ITC has agreed to, and to cause each of its subsidiaries to, conduct its business in the ordinary course of business consistent with past practice and good utility practice and to other customary operating covenants, including, among others, not to:

 

·                  directly or indirectly, take any action (including any action with respect to a third party) that would, or would reasonably be expected to, individually or in the aggregate, prevent, materially delay or materially impede the consummation of the Acquisition or the other transactions contemplated by the Acquisition Agreement or the ability of ITC or its affiliates to satisfy their obligations thereunder;

 

·                  issue, pledge, transfer, encumber or dispose of any equity securities of ITC or any of its subsidiaries except for: (i) the issuance of shares of ITC common stock upon the exercise, vesting or settlement of certain outstanding equity securities as of February 8, 2016 or pursuant to the employee stock purchase plans; (ii) issuances to ITC or to a wholly-owned subsidiary of ITC by any subsidiary of ITC; (iii) the grant of certain restricted stock; (iv) the issuance into notional accounts of certain additional performance shares in accordance with the terms of the grant agreements relating to performance shares outstanding as of February 8, 2016; or (v) pledges or liens relating to any indebtedness otherwise permitted to be incurred pending the Acquisition;

 

·                  except as explicitly permitted, sell or otherwise dispose of any business organization or division thereof or otherwise sell, assign, exclusively licence, allow to expire or dispose of any material assets, rights or properties;

 

·                  declare or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock other than (i) payment of ITC’s regular quarterly cash dividends, not to exceed certain specified amounts, with usual record and payment dates in accordance with past dividend practice; and (ii) any dividend or distribution by an ITC subsidiary to ITC or to a wholly-owned subsidiary of ITC;

 

·                  except as explicitly permitted (including, among others, for borrowings in the ordinary course of business under certain of ITC’s and its subsidiaries’ credit facilities), incur, repay or modify in any material respect any indebtedness, or guarantee the obligations of another person’s indebtedness (other than a wholly-owned subsidiary of ITC);

 

·                  except as required by the existing terms of a material ITC employee benefit plan, (i) increase the compensation or benefits of any of its officers (except in the ordinary course of business); (ii) grant

 

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any severance or termination pay to any of its officers (except in the ordinary course of business); (iii) enter into, amend, change or revise any employment, change in control, consulting or severance agreement or arrangement with certain officers and employees of ITC or terminate any such person other than for cause; or (iv) make certain changes or take certain actions in respect of any material ITC employee benefit plan; or

 

·                  waive, release, assign, discharge, settle, satisfy or compromise any material litigation, other than where the amount paid does not exceed US$25,000,000 in the aggregate or, if greater, does not materially exceed the total incurred case reserve amount for such matter maintained by ITC and/or its subsidiaries prior to February 9, 2016.

 

In addition, ITC has agreed to, and to cause its subsidiaries to, give any notices to third parties, and ITC and FortisUS have agreed to each use, and cause their respective subsidiaries to use, their reasonable best efforts to obtain certain third-party consents and ITC and FortisUS agree to coordinate and cooperate in identifying certain required consents.

 

Covenants Regarding Conduct of Business by Fortis, FortisUS and Merger Sub Pending the Acquisition

 

Except as required pursuant to or permitted by the Acquisition Agreement, required by applicable law or consented to in writing by ITC (which consent may not be unreasonably withheld, conditioned or delayed), from the date of the Acquisition Agreement until the earlier of Closing or the termination of the Acquisition Agreement (with certain exceptions), Fortis has agreed to, and to cause each of its subsidiaries to, conduct its business in the ordinary course of business consistent with past practice and, where applicable, good utility practice and to other customary operating covenants, including, among others not to:

 

·                  directly or indirectly, take any action (including any action with respect to a third party) that would, or would reasonably be expected to, individually or in the aggregate, prevent, materially delay or materially impede the consummation of the Acquisition or the other transactions contemplated by the Acquisition Agreement or the ability of Fortis or its affiliates to satisfy their obligations thereunder;

 

·                  make any acquisition of, or make any investment in any interest in, any business organization or division thereof or any assets, except for (i) purchases of equipment, inventory and other assets or pursuant to construction, operation and/or maintenance contracts, in each case in the ordinary course of business and good utility practice or pursuant to existing contracts; and (ii) acquisitions or investments that do not exceed US$500,000,000 individually;

 

·                  reclassify, combine, split, subdivide or amend the terms of any shares of capital stock of Fortis or any of its significant subsidiaries; or

 

·                  incur indebtedness for borrowed money that would reasonably be expected to cause the credit rating of Fortis to drop below investment grade.

 

No Solicitation

 

ITC has agreed not to and to cause its subsidiaries and their respective directors, officers and employees not to, and to use its reasonable best efforts to cause their respective representatives not to: (i) initiate, solicit, knowingly encourage or knowingly facilitate any inquiries with respect to or that could reasonably be expected to lead to, or the making, submission or announcement of, any acquisition proposal; (ii) participate or engage in any negotiations or discussions concerning, or furnish or provide access to its properties, books and records or any confidential information or data to, any person relating to an acquisition proposal, or any inquiry or proposal that could reasonably be expected to lead to any acquisition proposal; (iii) approve, endorse or recommend, or propose publicly to approve, endorse or recommend, any acquisition proposal; or (iv) execute or enter into, any letter of intent, agreement in principle, merger agreement, acquisition agreement or other similar agreement for any acquisition proposal.

 

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ITC has agreed to and to cause its subsidiaries and their respective directors, officers and employees to, and to use its reasonable best efforts to cause their respective representatives to: (i) immediately cease and cause to be terminated any solicitations, discussions or negotiations with any person (other than the parties to the Acquisition Agreement) in connection with an acquisition proposal that exists as of the date of the Acquisition Agreement, and (ii) promptly request each person that has, prior to the date of the Acquisition Agreement, executed a confidentiality agreement or similar agreement in connection with its consideration of acquiring ITC to return or destroy all confidential information furnished to such person by or on behalf of it or any of its subsidiaries prior to the date of the Acquisition Agreement.

 

ITC is required to promptly (and in any event within 24 hours) notify FortisUS if it receives an acquisition proposal, including a summary of the material terms of the proposal (including the identity of the person making such proposal). ITC is also required to keep FortisUS informed on a prompt basis of the status and material terms of such acquisition proposal, including any material changes in respect of any such proposal and to provide FortisUS with a summary of any material changes to any such acquisition proposal.

 

ITC may grant a waiver, amendment or release under any confidentiality or standstill agreement to the extent necessary to allow for a confidential acquisition proposal to be made to ITC or its board of directors if the ITC board of directors determines in good faith, after consultation with its outside legal counsel, that the failure to take such action could be reasonably likely to be inconsistent with its fiduciary duties under applicable law and so long as ITC promptly notifies FortisUS thereof (including the identity of such counterparty) after granting any such waiver, amendment or release and, if requested by FortisUS, grants FortisUS a waiver, amendment or release of any similar provision under the confidentiality agreement between ITC and Fortis.

 

The Acquisition Agreement does not prohibit ITC or the ITC board of directors from disclosing to its shareholders a position contemplated by Rule 14d-9 or Rule 14e-2(a) promulgated under the United States Securities Exchange Act of 1934, as amended (or any similar communication to shareholders). See “— ITC Board Recommendation”.

 

Prior to obtaining the approval of the ITC shareholders, ITC and the ITC board of directors may: (i) contact and engage in discussions with any person or group and their respective representatives who makes an acquisition proposal after the date of the Acquisition Agreement solely for the purpose of clarifying such acquisition proposal and the terms thereof; (ii) provide access to its properties, books and records and provide information or data in response to a request therefor by a person or group who makes a bona fide written acquisition proposal after the date of the Acquisition Agreement if the ITC board of directors has (a) determined in good faith, after consultation with its outside legal counsel and financial advisors, that such acquisition proposal could reasonably be expected to constitute, result in or lead to a superior proposal, and (b) received from such person or group an executed confidentiality agreement on terms no less favourable in the aggregate to ITC, as determined by ITC in good faith, to those contained in the confidentiality agreement between ITC and Fortis (except for such changes specifically necessary in order for ITC to be able to comply with its obligations under the Acquisition Agreement); or (iii) participate and engage in any negotiations or discussions with any person or group who makes a bona fide written acquisition proposal after the date of the Acquisition Agreement (which negotiations or discussions need not be solely for clarification purposes) if the ITC board of directors has determined in good faith, after consultation with its outside legal counsel and financial advisors, that such acquisition proposal could reasonably be expected to constitute, result in or lead to a superior proposal.

 

“Acquisition proposal” means any proposal, inquiry, indication of interest or offer from any person or group of persons (other than Fortis, FortisUS, Merger Sub or their respective affiliates) relating to any transaction or series of transactions, involving (i) any direct or indirect acquisition or purchase of (a) a business or assets that constitute 20% or more of the net revenues, net income or assets of ITC and its subsidiaries, taken as a whole, or (b) 20% or more of the total voting power of the equity securities of ITC; (ii) any tender offer, exchange offer or similar transaction that if consummated would result in any person or group of persons beneficially owning 20% or more of the total voting power of the equity

 

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securities of ITC; or (iii) any merger, reorganization, consolidation, share exchange, business combination, recapitalization, liquidation, dissolution or similar transaction involving ITC (or any subsidiary or subsidiaries of ITC whose business constitutes 20% or more of the net revenues, net income or assets of ITC and its subsidiaries, taken as a whole).

 

“Superior proposal” means an acquisition proposal involving (i) assets that generate more than 50% of the consolidated total revenues of ITC and its subsidiaries, taken as a whole; (ii) assets that constitute more than 50% of the consolidated total assets of ITC and its subsidiaries, taken as a whole; or (iii) more than 50% of the total voting power of the equity securities of ITC, in each case, that the ITC board of directors in good faith determines, after consultation with its outside counsel and financial advisor, would, if consummated, result in a transaction that is more favourable from a financial point of view to the shareholders of ITC than the transactions contemplated by the Acquisition Agreement after taking into account all such factors and matters considered appropriate in good faith by the ITC board of directors (including, to the extent considered appropriate by the ITC board of directors, (a) all strategic considerations, including whether such acquisition proposal is more favourable from a long-term strategic standpoint, (b) financial provisions and the payment of a termination fee by ITC to FortisUS under the Acquisition Agreement, (c) legal and regulatory conditions and other undertakings relating to ITC’s and its subsidiary’s customers, suppliers, regulators, lenders, partners, employees and other constituencies, (d) probable timing, (e) likelihood of consummation, and (f) with respect to which the cash consideration and other amounts (including costs associated with the acquisition proposal) payable at closing are subject to fully committed financing from recognized financial institutions), and after taking into account any changes to the terms of the Acquisition Agreement committed to in writing by Fortis and FortisUS in response to such superior proposal.

 

ITC Board Recommendation

 

Subject to the provisions described below, neither the ITC board of directors nor any committee thereof shall: (i) withhold, withdraw, qualify or modify, or resolve to or propose to withhold, withdraw, qualify or modify its recommendation that the ITC shareholders vote in favour of approving the Acquisition and the Acquisition Agreement in a manner adverse to Fortis or FortisUS; (ii) make any public statement inconsistent with such recommendation; (iii) approve, adopt or recommend any acquisition proposal, or any inquiry or proposal that would reasonably be expected to lead to any acquisition proposal; (iv) fail to reaffirm or re-publish such recommendation within ten business days of being requested by FortisUS to do so (provided, that FortisUS will not be entitled to request such a reaffirmation or re-publishing more than one time with respect to any single acquisition proposal other than in connection with an amendment to any financial terms of such acquisition proposal or any other material amendment to such acquisition proposal); (v) fail to announce publicly, within ten business days after a tender offer or exchange offer relating to any securities of ITC has been commenced, that the ITC board of directors recommends rejection of such tender or exchange offer; (vi) authorize, cause or permit ITC to enter into a merger agreement, letter of intent, agreement in principle, share purchase agreement, asset purchase agreement, share exchange agreement, option agreement or other similar contract (other than an acceptable confidentiality agreement) or recommend any tender offer providing for, with respect to, or in connection with, any acquisition proposal or requiring ITC to abandon, terminate, delay or fail to consummate the Acquisition or any other transaction contemplated by the Acquisition Agreement; or (vii) take any action pursuant to which any person (other than Fortis, FortisUS, Merger Sub or their respective affiliates) or acquisition proposal would become exempt from or not otherwise subject to any take-over statute or articles of incorporation provision relating to an acquisition proposal.

 

However, at any time prior to obtaining approval of the ITC shareholders, the ITC board of directors may (i) change its recommendation in respect of the Acquisition in response to an Intervening Event; or (ii) change its recommendation in respect of the Acquisition and/or terminate the Acquisition Agreement in order to enter into a definitive agreement with respect to a superior proposal where the ITC board of directors determines in good faith, after consultation with its financial advisors and outside legal counsel, that such acquisition proposal constitutes a superior proposal and such acquisition proposal is not withdrawn, and the ITC board of directors determines, after consultation with its financial advisors and

 

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outside legal counsel, that the failure to make such a change of recommendation in respect of the Acquisition or to terminate the Acquisition Agreement would be reasonably likely to be inconsistent with the ITC board of directors’ fiduciary duties under applicable laws.

 

The ITC board of directors may not change its recommendation in respect of the Acquisition or terminate the Acquisition Agreement in order to enter into a definitive agreement with respect to a superior proposal, unless (i) ITC provides prior written notice to FortisUS, specifying the material details of the Intervening Event or the material terms and conditions of the superior proposal and attaching a copy of the most current draft of any written agreement relating to the superior proposal; (ii) at or after 5:00 p.m., New York City time, three business days following the day on which ITC delivered such notice, the ITC board of directors reaffirms in good faith, after consultation with its outside counsel and financial advisors, that the failure to make a change of recommendation in respect of the Acquisition, or to terminate the Acquisition Agreement in order to enter into a definitive agreement with respect to a superior proposal, would be reasonably likely to be inconsistent with its fiduciary duties under applicable laws, and, in the case of an acquisition proposal, such acquisition proposal continues to constitute a superior proposal; and (iii) if requested by FortisUS, ITC has negotiated in good faith with FortisUS during the period from the delivery of the notice described above until 5:00 p.m., New York City time, three business days following the day on which such notice was delivered (and in the case of a superior proposal where Fortis or FortisUS has committed to any changes to the terms of the Acquisition Agreement and there is a subsequent amendment to any material term of the superior proposal, for an additional three business days following the delivery by ITC to FortisUS of a new notice with respect to such amendment) to make such adjustments to the terms and conditions of the Acquisition Agreement so that, in the case of an acquisition proposal, such acquisition proposal would cease to be a superior proposal, or (b) in the case of an Intervening Event, the failure of the ITC board of directors to make a change of recommendation in respect of the Acquisition would not be reasonably likely to be inconsistent with its fiduciary duties under applicable laws.

 

Please see “— Termination of the Acquisition Agreement” and “— Termination Fees”.

 

Efforts to Obtain Required Shareholder Votes

 

The Acquisition Agreement requires ITC to promptly, but no more than 20 business days after the Registration Statement is declared effective by the SEC or after the SEC declares that it has no further comments on or will not review the Registration Statement, take all reasonable action necessary to duly call, give notice of, convene and hold a shareholders’ meeting for the purpose of obtaining ITC shareholder approval of the Acquisition Agreement. Unless ITC’s board of directors has modified its recommendation regarding the Acquisition as permitted under the Acquisition Agreement, as further discussed in “— ITC Board Recommendation”, ITC will include in the proxy statement its recommendation that its shareholders approve and adopt the Acquisition Agreement and the Acquisition and, subject to the consent of ITC’s financial advisors, such financial advisors’ respective written opinions that, as of the date of the Acquisition Agreement, the per share Acquisition consideration is fair, from a financial point of view, to ITC shareholders (other than the excluded holders with respect to certain of the financial opinions). The Acquisition Agreement requires the ITC board of directors to use reasonable best efforts to obtain ITC shareholder approval of the Acquisition Agreement.

 

The Acquisition Agreement also requires Fortis to take all reasonable action necessary to duly call, give notice of, convene and hold, the Meeting for the purpose of obtaining Shareholder approval of the Acquisition Share Issuance Resolution.

 

ITC Financing Cooperation

 

ITC has agreed to use its reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to arrange the financing to be undertaken by Fortis in connection with the Acquisition and transactions related to such financing, including, among other things, using reasonable best efforts to (i) negotiate and enter into definitive agreements with respect

 

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thereto, (ii) satisfy (or obtain a waiver of) on a timely basis of all conditions to obtaining such financing, and (iii) consummate the financing at or prior to Closing.

 

ITC has agreed to use its reasonable best efforts to, and to cause its representatives to, on a timely basis, provide all customary cooperation that is reasonably requested by FortisUS to assist in connection with obtaining the financing to be undertaken by Fortis in connection with the Acquisition. ITC has agreed to use its reasonable best efforts to obtain an amendment to certain of its credit facilities so that, after giving effect to the Acquisition, no default or event of default exists under such credit facilities. See “Schedule D — Information Concerning ITC Holdings Corp. — Outstanding Indebtedness”.

 

In connection with the Minority Investment, binding commitments for such Minority Investment are required to be in place no later than 90 days after the date of the Acquisition Agreement (which date may be extended for 30 days with the consent of ITC (which may not be unreasonably withheld, conditioned or delayed), which consent will not be required where such Minority Investor would not reasonably be expected to delay any Required Regulatory Approval) and prior to such date Fortis has agreed to provide written notice to ITC which such notice will contain the identity of each Minority Investor, the amount that such Minority Investor will invest in the Minority Investment and all of the other material terms and conditions of such Minority Investment. Minority Investors will not be permitted to have direct or indirect beneficial ownership of ITC (on, prior to or immediately following Closing) (i) that exceeds 19.9% in the aggregate; or (ii) that would prevent FortisUS from meeting certain tax requirements with respect to its ownership of ITC after Closing (taking into account any agreement relating to the rights of the third party investors to nominate or appoint directors to the board of directors of ITC after Closing). No Minority Investor will, at any time from the date of the Acquisition Agreement until the earlier of Closing and the termination of the Acquisition Agreement, impair the incentives granted by FERC to subsidiaries of ITC as a result of ITC’s independence from Market Participants. Fortis has agreed not to undertake any Minority Investment that would reasonably be expected to materially delay, materially impede or otherwise prevent the consummation of the transactions contemplated by the Acquisition Agreement, including as a result of any consents of any governmental entity necessary to consummate the transactions contemplated by the Acquisition Agreement.

 

Other Covenants and Agreements

 

Fortis, FortisUS and ITC have made certain other covenants to and agreements regarding various other matters including, among others: (i) indemnification of directors and officers of ITC and ITC’s subsidiaries for certain acts occurring at or prior to Closing; (ii) the maintenance of ITC’s existing Novi, Michigan headquarters as well as the regional headquarters of ITC’s operating subsidiaries in the metropolitan areas where they are located immediately prior to Closing, for ten years from Closing; (iii) for a period of one year after Closing, the provision of charitable contributions and community support within the communities in which ITC and its subsidiaries operate at a level comparable in the aggregate to ITC’s levels of contribution and support on the date of the Acquisition Agreement; (iv) an agreement not to implement certain initiatives that would result in ITC and its subsidiaries employing substantially fewer individuals in the aggregate than immediately prior to Closing, (v) the use of reasonable best efforts to arrange and obtain the committed financing in connection with the Acquisition and to (a) keep ITC reasonably informed concerning the status of the financing to be undertaking by Fortis in connection with the Acquisition, (b) at all times prior to Closing, keep and maintain any committed financing that is funded in advance of Closing available to fund the transactions contemplated by the Acquisition Agreement, and (c) agree to certain restrictions on amending, supplementing, modifying, terminating or reducing, or granting any waiver of any condition or remedy under the Acquisition Credit Facilities without ITC’s prior written consent; (vi) the use of reasonable best efforts to cause the Consideration Shares to be listed on the NYSE and the TSX and ITC’s agreement to use reasonable best efforts to cooperate in connection with the foregoing; and (vii) the chief executive officer of ITC’s attendance at meetings of the Board of Directors after Closing and the Corporation’s reasonable efforts to cause the chief executive officer (or, in certain circumstances, another person mutually agreed upon by the ITC board of directors and the Board of Directors in consultation with the chief executive

 

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officer of ITC) to be elected to the Board of Directors at the first annual general meeting of Shareholders following Closing and at the following such meeting.

 

Consents and Approvals

 

FortisUS, Fortis, Merger Sub and ITC have agreed to use their best efforts and to cooperate to obtain all required consents and make all required filings, which consents include, among others, the approval of FERC, the Committee on Foreign Investment in the United States (“CFIUS”), the United States Federal Trade Commission/Department of Justice under the HSR Act and state and local public utility commission approvals (or disclaimer of jurisdiction or similar action) in each of Wisconsin, Illinois, Oklahoma, Missouri and Kansas (collectively, the “Required Regulatory Approvals”). In addition, the approval of the Federal Communications Commission will be obtained in connection with the Acquisition.

 

Prior to Closing, Fortis, FortisUS and Merger Sub have agreed not to and to cause their affiliates not to permit any action which would reasonably be expected to materially and adversely impact the ability of the Fortis, FortisUS and Merger Sub to secure all required consents and filings with or from any governmental entity to consummate the transactions contemplated by the Acquisition Agreement, or take any action with any governmental entity relating to the foregoing, or agree, in writing or otherwise, to do any of the foregoing, in each case which would reasonably be expected to materially delay or prevent the consummation of the transactions contemplated by the Acquisition Agreement or result in the failure to satisfy any condition to consummation of the transactions contemplated by the Acquisition Agreement.

 

Conditions to the Acquisition

 

Conditions to the Obligations of Fortis, FortisUS, Merger Sub and ITC. The respective obligations of Fortis, FortisUS, Merger Sub and ITC to consummate the Acquisition are subject to the satisfaction or waiver of the following mutual conditions: (i) approval of the Acquisition Agreement by an affirmative vote of the holders of at least a majority of the outstanding shares of ITC common stock entitled to vote at the special meeting; (ii) absence of any law (whether temporary, preliminary or permanent) which prohibits, restrains or enjoins the consummation of the Acquisition (a “Legal Restraint”); (iii) all required consents and filings have been obtained, made or given and are in full force and effect and not subject to appeal, and all applicable waiting periods imposed by any government entity (including the HSR Act) are terminated or have expired; (iv) the approval by Shareholders of the Acquisition Share Issuance Resolution; (v) the Consideration Shares having been approved for listing on the NYSE and the TSX, subject to official notice of issuance; (vi) the Registration Statement having been declared effective by the SEC and no stop order suspending the effectiveness of the Registration Statement having been issued by the SEC and no proceedings for that purpose having been initiated or threatened by the SEC; and (vii) there not having occurred since the date of the Acquisition Agreement any event that, individually or in the aggregate, has had, or would reasonably be expected to have, a Material Adverse Effect in respect of either of ITC or Fortis. There are also additional customary conditions under the Acquisition Agreement relating to the performance by the parties of their respective obligations thereunder.

 

Termination of the Acquisition Agreement

 

The Acquisition Agreement may be terminated and the Acquisition may be abandoned at any time prior to Closing, notwithstanding the adoption of the Acquisition Agreement by the shareholders of ITC, under the following circumstances:

 

·      by mutual written consent of Fortis and ITC;

 

·                  by either Fortis or ITC: (i) if any court of competent jurisdiction or other governmental entity has issued an order, decree or ruling or taken any other final action restraining, enjoining or otherwise prohibiting the Acquisition and such order, decree, ruling or other action is or will have become final and non-appealable (and the party seeking to terminate the Acquisition Agreement has used such

 

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standard of effort as may be required by the Acquisition Agreement to prevent, oppose and remove such restraint, injunction or other prohibition); (ii) if the Acquisition has not been completed on or before the End Date and the failure of Closing to occur on or before the End Date was not primarily caused by the breach of the obligations under the Acquisition Agreement of the party seeking to terminate the Acquisition Agreement (provided that the End Date is subject to an extension to August 9, 2017 if the only closing conditions outstanding are the conditions relating to Legal Restraints or the Required Regulatory Approvals); (iii) ITC shareholder approval of the Acquisition Agreement is not obtained at the special meeting of ITC shareholders; or (iv) Shareholder approval of the Acquisition Share Issuance Resolution is not obtained at the Meeting;

 

·                  by ITC: (i) if Fortis, FortisUS or Merger Sub has breached or failed to perform its representations, warranties, covenants or agreements contained in the Acquisition Agreement, which breach or failure to perform (a) would cause certain of the conditions to ITC’s obligation to consummate the Acquisition to not be satisfied, and (b) cannot be cured or has not been cured by the earlier of 30 days after written notice thereof has been given by ITC to Fortis or three business days prior to the End Date, but only if ITC is not in material breach of any covenant or agreement in the Acquisition Agreement; (ii) in order to enter into a definitive agreement with respect to a superior proposal, if such termination occurs before ITC shareholders approve the Acquisition Agreement and so long as ITC complies with its obligations with respect to a superior proposal, if prior to or concurrently with such termination, ITC pays the applicable termination fee to FortisUS (as described below); or (iii) if the Board of Directors (a) changes its recommendation in respect of the Acquisition prior to obtaining Shareholder approval of the Acquisition Share Issuance Resolution, (b) fails to include such recommendation in the Circular, or (c) formally resolves to effect or publicly announces an intention to effect any of the foregoing, prior to obtaining Shareholder approval of the Acquisition Share Issuance Resolution;

 

·                  by Fortis: (i) if ITC has breached or failed to perform its representations, warranties, covenants or agreements contained in the Acquisition Agreement, which breach or failure to perform (a) would cause certain of the conditions to Fortis, FortisUS or Merger Sub’s obligation to consummate the Acquisition to not be satisfied, and (b) cannot be cured or has not been cured by the earlier of 30 days after written notice thereof has been given by Fortis to ITC or three business days prior to the End Date, but only if each of Fortis, FortisUS and Merger Sub is not in material breach of any covenant or agreement in the Acquisition Agreement; or (ii) if the ITC board of directors (a) changes its recommendation in respect of the Acquisition prior to obtaining ITC shareholder approval of the Acquisition Agreement, (b) fails to include such recommendation in the proxy statement distributed to ITC shareholders, (c) recommends an acquisition proposal other than the Acquisition to ITC shareholders prior to obtaining ITC shareholder approval of the Acquisition Agreement, or (d) formally resolves to effect or publicly announces an intention to effect any of the foregoing, prior to obtaining ITC shareholder approval of the Acquisition Agreement.

 

Termination Fees

 

ITC has agreed to pay a termination fee of US$245 million to FortisUS if: (i) the Acquisition Agreement is terminated by ITC in order to enter into a definitive agreement with respect to a superior proposal, if such termination occurs before ITC shareholders approve the Acquisition Agreement; (ii) the Acquisition Agreement is terminated by Fortis because the ITC board of directors (a) changes its recommendation in respect of the Acquisition prior to obtaining ITC shareholder approval of the Acquisition Agreement, (b) fails to include such recommendation in the proxy statement distributed to ITC shareholders, (c) recommends an acquisition proposal other than the Acquisition to ITC shareholders prior to obtaining ITC shareholder approval of the Acquisition Agreement or (d) formally resolves to effect or publicly announces an intention to effect any of the foregoing, prior to obtaining ITC shareholder approval of the Acquisition Agreement; or (iii) the Acquisition Agreement is terminated by either Fortis or ITC (a) because Closing does not occur on or before the End Date where the primary cause of the failure of Closing to occur on or before the End Date was not the breach of the obligations under the Acquisition Agreement of the party seeking to terminate the Acquisition Agreement or (b) because of a failure to

 

33



 

obtain ITC shareholder approval of the Acquisition Agreement at the special meeting of ITC shareholders, and, in each case, an acquisition proposal is made to ITC, its board of directors or shareholders or otherwise becomes publicly known, at any time after the date of the Acquisition Agreement and prior to the vote to approve the Acquisition Agreement at the special meeting of ITC shareholders and within 12 months of such termination, ITC enters into a definitive agreement with respect to such acquisition proposal, which is subsequently consummated, or consummates an acquisition proposal. In the case of item (iii), all references in the definition of “acquisition proposal” set forth above in “— No Solicitation” to “20% or more” will be deemed to be references to “more than 50%”).

 

Fortis has agreed to pay to ITC a termination fee of US$245 million if the Acquisition Agreement is terminated by ITC because the Board of Directors (i) changes its recommendation in respect of the Acquisition prior to obtaining Fortis shareholder approval of the Acquisition Share Issuance Resolution; (ii) fails to include such recommendation in the Circular; or (iii) formally resolves to effect or publicly announces an intention to effect any of the foregoing, prior to obtaining Shareholder approval of the Acquisition Share Issuance Resolution.

 

Fortis has agreed to pay ITC a termination fee of US$280 million if all other conditions to the obligations of each party to effect the Acquisition and conditions to the obligations of Fortis, FortisUS and Merger Sub to effect the Acquisition have been satisfied or waived and the Acquisition Agreement is terminated (i) by either Fortis or ITC because a court of competent jurisdiction or other governmental entity has issued an order, decree or ruling or taken any other final action restraining, enjoining or otherwise prohibiting the Acquisition and such order, decree, ruling or other action is or will have become final and non-appealable (and the party seeking to terminate the Acquisition Agreement has used such standard of effort as may be required by the Acquisition Agreement to prevent, oppose and remove such restraint, injunction or other prohibition) and such Legal Restraint arises in connection with the Required Regulatory Approvals; (ii) by either Fortis or ITC because Closing does not occur on or before the End Date and the primary cause of the failure of Closing to occur on or before the End Date was not the breach of the obligations under the Acquisition Agreement of the party seeking to terminate the Acquisition Agreement, and at the time of such termination, any Required Regulatory Approval has not been obtained or any Legal Restraint to Closing in connection therewith has not been removed; or (iii) by ITC where Fortis or FortisUS has breached or failed to perform its covenants or agreements set forth in the Acquisition Agreement with respect to obtaining Required Regulatory Approvals, which breach or failure to perform would cause certain of the conditions to ITC’s obligation to consummate the Acquisition to not be satisfied, and such breach cannot be cured or has not been cured in accordance with the terms of the Acquisition Agreement.

 

Modification, Amendment or Waiver

 

At any time prior to Closing, the Acquisition Agreement may be amended by written agreement among Fortis, FortisUS, Merger Sub and ITC, subject to applicable law. With respect to certain specified provisions, no amendment, waiver or other modification adverse to any financing source will be effective as to such financing source without its prior written consent.

 

FINANCING THE ACQUISITION

 

Fortis has agreed to pay US$22.57 in cash and 0.7520 of a Common Share per share of ITC common stock on Closing. There were approximately 152.7 million shares of ITC common stock outstanding as of February 8, 2016 and less than 155.6 million shares of ITC common stock are expected to be outstanding on Closing. Fortis will issue up to 117 million Consideration Shares to ITC shareholders as partial consideration for the Acquisition, or up to 41.5% of its undiluted share count as of March 18, 2016, and is seeking the approval of its Shareholders at the Meeting for the issuance of such Common Shares. If the maximum number of shares of ITC common stock are issued and outstanding on Closing, and based on the closing price for the Common Shares and the US$/C$ exchange rate on February 8, 2016, an aggregate of approximately US$3.5 billion will be paid to ITC shareholders in satisfaction of the Cash Purchase Price for the ITC common stock acquired in the Acquisition (C$4.9 billion) and the aggregate

 

34



 

value of the Cash Purchase Price and Consideration Shares to be paid to the shareholders of ITC would be US$7.0 billion (C$9.8 billion).

 

At Closing, the Cash Purchase Price and the Acquisition-related expenses are expected to be financed from: (i) the issuance of approximately US$2 billion of Fortis debt, (ii) a combination of one or more offerings of equity securities, equity-linked securities, first preference shares, second preference shares and/or hybrid debt-equity securities to be completed by Fortis on or prior to Closing (items (i) and (ii) being collectively referred to herein as the “Prospective Offerings”); (iii) the purchase price paid by the Minority Investors in connection with the Minority Investment; and (iv) if and to the extent necessary, borrowings under the Acquisition Credit Facilities. The debt securities are expected to be denominated primarily in U.S. dollars in order to provide a significant natural currency hedge for the Corporation’s U.S. dollar earnings. See “— The Minority Investment”. Any aggregate amount outstanding under the Acquisition Credit Facilities following Closing will be reduced as described below under “— Acquisition Credit Facilities”.

 

The Minority Investment

 

Fortis expects that, prior to Closing, one or more Minority Investors will have entered into binding commitments to acquire, directly or indirectly, at or after Closing, up to an aggregate of 19.9% of the issued and outstanding common stock of ITC as part of the Acquisition. The Minority Investment will reduce the aggregate Cash Purchase Price payable by Fortis in connection with the Acquisition. Fortis has undertaken a competitive auction process to solicit bids on the Minority Investment from a number of interested parties and is currently in discussions with potential Minority Investors. If and when the Corporation agrees to terms regarding the Minority Investment, Fortis will announce that it has entered into one or more binding agreements providing for the Minority Investment. However, there can be no assurance at this time that the Minority Investment will be completed at or prior to Closing, or at all. Completion of the Acquisition is not conditional on completion of the Minority Investment.

 

The Acquisition Agreement provides that binding commitments with respect to the Minority Investment must be in place no later than 90 days after the date of the Acquisition Agreement, which date may be extended by 30 days with the consent of ITC (which consent may not be unreasonably withheld, conditioned or delayed) and which consent shall not be required where the applicable Minority Investor(s) would not reasonably be expected to delay receipt of any Required Regulatory Approvals. If the Minority Investment cannot be completed prior to the deadline imposed by the Acquisition Agreement, Fortis expects to proceed with the Minority Investment following Closing. The Acquisition Agreement also imposes restrictions on the identity of the Minority Investors by providing that such Minority Investors shall not impair the incentives granted by FERC to subsidiaries of ITC as a result of ITC’s independence from Market Participants. Fortis has also covenanted in the Acquisition Agreement not to permit any Minority Investment that could materially delay, materially impede or otherwise prevent the consummation of the Acquisition or that would prevent FortisUS from meeting certain U.S. tax requirements with respect to its ownership of ITC after Closing (taking into account any agreement relating to the rights of the Minority Investors to nominate or appoint directors to the board of directors of ITC after Closing). The execution of a binding agreement with respect to the Minority Investment will result in the permanent reduction in the commitments under the Acquisition Credit Facilities. See “The Acquisition Agreement” and “Schedule G — Risk Factors — Risk Factors Relating to the Acquisition”.

 

Acquisition Credit Facilities

 

For purposes of financing the Acquisition, on February 9, 2016, Fortis obtained: (i) a commitment letter from The Bank of Nova Scotia (“BNS”), pursuant to which BNS committed to provide to Fortis, upon the terms and subject to the conditions set forth therein, an aggregate amount of US$1.7 billion in non-revolving term senior unsecured equity bridge facilities, repayable in full 364 days following their advance (the “Equity Bridge Facilities”); and (ii) a commitment letter from Goldman Sachs Bank USA (“Goldman Sachs Bank”), pursuant to which Goldman Sachs Bank committed to provide to Fortis, upon the terms and subject to the conditions set forth therein, a US$2.0 billion non-revolving term senior

 

35



 

unsecured debt bridge facility (the “Debt Bridge Facility” and together with the Equity Bridge Facilities, the “Acquisition Credit Facilities”), repayable in full 364 days following its advance. Goldman Sachs Bank has syndicated 60% of the Debt Bridge Facility to three other financial institutions, each of which have agreed to provide 20% of such facility. BNS may syndicate a portion of the Equity Bridge Facilities.

 

The Acquisition Credit Facilities would be sufficient, if necessary, to fund the full Cash Purchase Price for the Acquisition and estimated Acquisition-related expenses. However, Fortis does not expect to draw on the Acquisition Credit Facilities, as it expects to use a combination of one or more Prospective Offerings and to effect the Minority Investment to fund the Cash Purchase Price payable in connection with the Acquisition. If such financing sources are unavailable to Fortis on terms acceptable to Fortis on or prior to Closing, Fortis will borrow amounts under the Acquisition Credit Facilities, the material terms of which are summarized below, to finance the necessary portion of the Cash Purchase Price. If any amount is drawn under the Acquisition Credit Facilities at Closing, Fortis expects to refinance the borrowing using the net proceeds from a combination of one or more offerings of equity securities, equity-linked securities, first preference shares, second preference shares, medium-term debt and/or hybrid debt-equity securities or from amounts extended under other debt financings.

 

Following Closing, if any amounts are borrowed under the Equity Bridge Facilities: (i) the net proceeds obtained by Fortis from certain equity offerings, including the Minority Investment, if any; and (ii) a pro rata proportion (based on the ratio of the outstanding commitments or loans outstanding under the Equity Bridge Facilities on the one hand and the Debt Bridge Facility on the other hand) of the net cash proceeds of certain dispositions by Fortis or its subsidiaries to third parties of property or assets where the net cash proceeds of such disposition exceed US$100 million, will in each case be required to be used to prepay the Equity Bridge Facilities (each, an “Equity Prepayment Obligation”).

 

The commitments available to be drawn under the Equity Bridge Facilities will be reduced by the amount of the net proceeds arising as a result of the occurrence of any Equity Prepayment Obligation prior to any drawdown of the Equity Bridge Facilities. In addition, following payment, prepayment or effective reduction to zero of the Debt Bridge Facility, the net proceeds (or the commitments) obtained in respect of certain bank loans or credit facilities, or the net proceeds obtained in respect of certain other long-term debt financing by Fortis or its subsidiaries (the “Permanent Debt”), will result in a reduction in the outstanding commitments or prepayment of the outstanding loans, as applicable, under the Equity Bridge Facilities, subject to certain exclusions. Any reduction in the outstanding commitments under the Equity Bridge Facilities will be irreversible and any loans prepaid thereunder may not be re-borrowed.

 

Following Closing, if any amounts are borrowed under the Debt Bridge Facility: (i) the net proceeds (or, in the case of certain bank loans or credit facilities, the commitments) obtained by Fortis or any of its subsidiaries from Permanent Debt; (ii) the net cash proceeds obtained by Fortis from certain equity offerings by Fortis and its subsidiaries, including, for greater certainty, the Minority Investment, completed after the Equity Bridge Facilities have been reduced (or offerings have been commenced in an aggregate amount sufficient to reduce the Equity Bridge Facilities) to an agreed threshold amount; and (iii) a pro rata proportion (based on the ratio of the outstanding commitments or loans outstanding under the Debt Bridge Facility on the one hand and the Equity Bridge Facilities on the other hand) of the net cash proceeds of certain dispositions by Fortis or its subsidiaries to third parties of property or assets where the net cash proceeds of such disposition exceed US$100 million, will in each case be required to be used to prepay the Debt Bridge Facility (each, a “Debt Prepayment Obligation”).

 

The commitments available to be drawn under the Debt Bridge Facility will be reduced by the amount of the net proceeds arising as a result of the occurrence of any Debt Prepayment Obligation prior to drawdown of the Debt Bridge Facility. Any reduction in the outstanding commitments under the Debt Bridge Facility will be irreversible and any loans prepaid thereunder may not be re-borrowed.

 

Each of the credit agreements pursuant to which the Acquisition Credit Facilities will be provided, if necessary, would contain customary representations and warranties, affirmative and negative covenants and events of default that will be substantially similar to those in the Corporation’s acquisition credit

 

36



 

agreement dated as of March 28, 2014 with BNS, as administrative agent, and the lending institutions from time to time party thereto. Pursuant to these covenants, Fortis would be required to maintain a consolidated debt to consolidated capitalization ratio of not more than 0.70:1, which is the current consolidated debt to consolidated capitalization ratio in Fortis’ existing revolving corporate credit facility with BNS, as administrative agent, and the lending institutions from time to time party thereto (the “Revolving Facility”). Fortis would also be required to obtain an unsecured debt credit rating from either of Moody’s Investors Service, Inc. (“Moody’s”) or Fitch Ratings Inc. (“Fitch”), neither of which currently rates Fortis or its debt securities.

 

The Equity Bridge Facilities and the Debt Bridge Facility are subject to customary conditions to funding including, among others, that the Acquisition is consummated on the terms set forth in the Acquisition Agreement, without any amendments, supplements or waivers or other modifications that are materially adverse to the applicable lenders, unless made with the prior written consent of BNS or Goldman Sachs Bank, as applicable (such consent not to be unreasonably withheld, delayed or conditioned); that no Material Adverse Effect in respect of ITC shall have occurred; and, in the case of the Equity Bridge Facilities, that Fortis shall have received gross cash proceeds from Permanent Debt and/or borrowings under the Debt Bridge Facility of not less than US$2.0 billion and, in the case of the Debt Bridge Facility, that Fortis shall have received a minimum amount of gross cash proceeds from certain offerings including, for greater certainty, the Minority Investment, and/or borrowings under the Equity Bridge Facilities (or any replacement facility) of not less than US$1.2 billion.

 

Customary fees are payable by Fortis in respect of the Acquisition Credit Facilities and amounts outstanding under the Acquisition Credit Facilities will bear interest at market rates.

 

As of March 18, 2016, Fortis and its subsidiaries had consolidated credit facilities of approximately C$3.5 billion, of which C$2.4 billion was unused, including an unused amount of approximately C$590 million under the Corporation’s C$1.0 billion committed Revolving Facility. Fortis also has the ability to request that the lenders under the Revolving Facility increase the credit under the Revolving Facility by up to an additional C$300 million pursuant to an accordion feature in its Revolving Facility; however, Fortis does not expect to seek such increase in connection with the financing of the Acquisition. As of December 31, 2015, on a pro forma basis after giving effect to the Acquisition and the initial financing plans in connection with the Acquisition (as assumed in the unaudited pro forma condensed consolidated financial statements included in Schedule H to this Circular), Fortis would have approximately C$23.6 billion of total indebtedness outstanding (on a consolidated basis), including an expected C$6.2 billion of debt of ITC (on a consolidated basis). The Corporation expects to maintain an investment-grade credit rating following the Acquisition. See “Fortis — Credit Ratings” and “Schedule G — Risk Factors”.

 

Acquisition-Related Costs

 

Fortis (on a consolidated basis) expects to incur up to US$219 million in estimated non-recurring costs in connection with the Acquisition (the “Acquisition-Related Costs”), calculated on a pro forma basis as of December 31, 2015, composed of (i) approximately US$133 million of costs related to ITC options, restricted stock and performance shares as described below under “— Costs Relating to Options, Restricted Stock and Performance Shares” and (ii) expenses of approximately US$86 million associated with financial advisory, consulting, accounting, tax, legal and other professional services, bridge facility commitment fees, debt refinancing fees, costs associated with change of control and integration, listing and registration expenses, underwriting and agency fees, out-of-pocket costs and other costs of a non-recurring nature. When incurred, approximately US$119 million of the Acquisition-Related Costs are expected to be fully expensed and approximately US$100 million are expected to form part of the Acquisition purchase price in accordance with U.S. GAAP. In addition to these estimated Acquisition-Related Costs expected to be incurred by Fortis, ITC expects to incur estimated expenses of approximately US$18 million associated with employee retention arrangements and approximately US$3 million associated with the accelerated vesting of options and restricted stock. See “— Costs Relating to

 

37



 

Options, Restricted Stock and Performance Shares” and “Schedule G — Risk Factors — Risk Factors Relating to the Acquisition”.

 

Costs Relating to Options, Restricted Stock and Performance Shares

 

Immediately prior to Closing, each outstanding option to purchase shares of ITC common stock and each award of restricted stock will automatically become immediately vested and be cancelled and will only entitle the holder to receive an amount in cash. In addition, each outstanding award of performance shares under any ITC stock plan will automatically become vested immediately prior to Closing at the higher of the target level of performance and the actual level of performance through Closing, and each performance share award will be cancelled and will only entitle its holder to receive an amount in cash. See “The Acquisition Agreement — Treatment of Options, Restricted Stock and Performance Shares”. Incremental costs expected to be incurred by Fortis and ITC as a result of the foregoing are approximately US$136 million. See “— Acquisition-Related Costs”.

 

CANADIAN AND U.S. SECURITIES LAW MATTERS

 

TSX Approval

 

Pursuant to Section 611(c) of the Toronto Stock Exchange Company Manual (the “TSX Manual”), security holder approval is required in those instances where the number of securities issued or issuable in payment of the purchase price for an acquisition exceeds 25% of the number of securities of the listed issuer which are outstanding, on a non-diluted basis. There were approximately 152.7 million shares of ITC common stock outstanding as of February 8, 2016. ITC is permitted under the Acquisition Agreement to issue common stock upon (i) the exercise, vesting or settlement of ITC options, restricted stock, performance shares or equivalent performance shares outstanding on February 8, 2016 or (ii) pursuant to the ITC employee share purchase plan. As a result of the restrictions on the issuance of stock by ITC contained in the Acquisition Agreement, less than 155.6 million shares of ITC common stock are expected to be outstanding on Closing. Therefore, if the Acquisition is completed, up to 117 million Common Shares will be issued as partial payment of the purchase price for the Acquisition, representing up to 41.5% of the current issued and outstanding Common Shares. Accordingly, the TSX requires that the Acquisition Share Issuance Resolution must be approved by an ordinary resolution of Shareholders, which requires a majority of the votes (50% + 1) cast by or on behalf of Shareholders, either in person or by proxy, at the Meeting or any adjournment or postponement thereof (“Shareholder Approval”).

 

The proposed Acquisition and the provisions of the Acquisition Agreement are the result of arm’s length negotiations conducted among representatives of Fortis, ITC, the ITC administrative committee and their respective legal and financial advisors. Based on current information available to Fortis, after the Acquisition no current shareholder of ITC will by virtue of the transaction own 10% or more of the Common Shares, and the Acquisition will not materially affect control of Fortis.

 

The TSX Manual and applicable Canadian securities legislation provide in certain instances that certain insiders or related parties are not entitled to vote on transactions that are required to be approved by a company’s security holders. To the knowledge of the directors and executive officers of Fortis, after reasonable inquiry, no votes attached to the Common Shares will be excluded in determining whether Shareholder Approval of the Acquisition Share Issuance Resolution has been obtained.

 

Fortis has applied to list the Consideration Shares on the TSX. Listing will be subject to Fortis fulfilling all of the requirements of the TSX. As described above, Fortis will not be able to satisfy the listing requirements of the TSX unless Shareholder Approval of the Acquisition Share Issuance Resolution is obtained.

 

38



 

New York Stock Exchange Listing and SEC Registration

 

It is a condition to the completion of the Acquisition that Fortis become a registrant with the United States Securities and Exchange Commission (the “SEC”) and have the Consideration Shares listed on the New York Stock Exchange (the “NYSE”). The issuance of the Consideration Shares to ITC shareholders requires Fortis to file the Registration Statement. Fortis will apply to list its Common Shares on the NYSE. Listing will be subject to the Corporation fulfilling all of the listing requirements of the NYSE. Fortis expects that its Common Shares will commence trading on the NYSE at or prior to Closing under the symbol “FTS”.

 

Upon the effectiveness of the Registration Statement, Fortis will be a “reporting” company for purposes of U.S. federal securities laws and will become subject to ongoing reporting obligations in the United States and certain other requirements under SEC rules and regulations. On Closing, Fortis expects to continue to qualify as a “foreign private issuer” under applicable U.S. federal securities laws and satisfy the other eligibility requirements of the multi-jurisdictional disclosure system (“MJDS”) adopted by the SEC; however, Fortis could subsequently lose its status as a “foreign private issuer” and, consequently, its eligibility to use MJDS. For so long as it is eligible to use MJDS, Fortis will be entitled to substantially satisfy its U.S. reporting obligations by filing its Canadian continuous disclosure documents with the SEC under the cover of the applicable MJDS form. By listing its Common Shares, Fortis will also become subject to certain NYSE standards and rules, which impose additional corporate governance and other obligations on listed companies; however, as a foreign private issuer, Fortis would be permitted to instead follow Canadian governance practices to the extent that they differ. Despite its status as a foreign private issuer and eligibility to report using the MJDS forms, Fortis will be subject to a number of the disclosure and other requirements mandated by the U.S. Sarbanes-Oxley Act of 2002 and the rules and regulations adopted to effect these requirements. Among other things, these rules and regulations will require the Corporation’s auditor to attest to the effectiveness of the Corporation’s internal control over financial reporting (starting with the second annual report that Fortis files with the SEC after the effectiveness of the Registration Statement). This auditor’s attestation report is not required under Canadian securities laws. For a discussion of some of the associated risks, see “Schedule G — Risk Factors — Risk Factors Relating to the Acquisition”.

 

39



 

FORTIS

 

RECENT DEVELOPMENTS

 

Registration Statement Filed with the SEC

 

On March 17, 2016, Fortis filed the Registration Statement on Form F-4 with the SEC to register the issuance of Common Shares to ITC shareholders in connection with the Acquisition. The Registration Statement has not yet been declared effective by the SEC and is subject to review and comment by the SEC. The Registration Statement has been filed by Fortis on SEDAR and can be accessed at www.sedar.com, and any subsequent amendment to the Registration Statement will also be filed by Fortis on SEDAR. Fortis intends to issue a news release upon the Registration Statement having been declared effective by the SEC.

 

Litigation Relating to the Acquisition

 

Following announcement of the Acquisition, three putative class actions were filed by purported shareholders of ITC on behalf of a purported class of ITC shareholders in Oakland County Circuit Court, State of Michigan. Paolo Guerra v. Albert Ernst, et al., was filed on February 26, 2016, Harvey Siegelman v. Joseph L. Welch, et al., was filed on March 2, 2016, and Alan Poland v. Fortis Inc., et al., was filed on March 4, 2016 (the “Complaints”). The Complaints name as defendants a combination of ITC and the individual members of the ITC board of directors, Fortis, FortisUS and Merger Sub. The Complaints generally allege, among other things, that (i) ITC’s directors breached their fiduciary duties in connection with the Acquisition Agreement (including, but not limited to, various alleged breaches of duties of good faith, loyalty, care and independence), (ii) ITC’s directors failed to take appropriate steps to maximize shareholder value and claims that the Acquisition Agreement contains several deal protection provisions that are unnecessarily preclusive and (iii) a combination of ITC, Fortis, FortisUS and Merger Sub aided and abetted the purported breaches of fiduciary duties. The Complaints seek class action certification and a variety of relief including, among other things, enjoining defendants from completing the proposed Acquisition, unspecified rescissory and costs, including compensatory damages, and attorneys’ fees and expenses.

 

On March 8, 2016, the ITC board of directors received a demand letter from a fourth purported shareholder demanding that the board remedy the same claimed breaches of fiduciary duty asserted in the Complaints. On March 14, 2016, the Guerra state court action was dismissed by the plaintiff and refiled in the United States District Court, Eastern District of Michigan, as Paolo Guerra v. Albert Ernst, et al. The federal complaint names the same defendants (plus FortisUS), asserts the same general allegations and seeks the same types of relief as in the state court case.

 

Fortis, ITC and the ITC board of directors believe the lawsuits are without merit and intend to vigorously defend against them. Additional lawsuits arising out of or relating to the Acquisition Agreement or the Acquisition may be filed in the future.

 

Executive Appointment

 

On March 15, 2016, the Board approved the appointment of Mr. Jim Laurito to the position of Executive Vice President, Business Development effective April 1, 2016.

 

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CAPITALIZATION

 

The following table sets out the consolidated cash and cash equivalents and the consolidated capitalization of Fortis as at December 31, 2015:

 

·      on an actual basis; and

 

·                  on a pro forma basis, to give effect to the Acquisition (as if it had closed on December 31, 2015) and certain related adjustments.

 

The following table should be read together with the unaudited pro forma condensed consolidated financial statements, the respective historical audited consolidated financial statements of Fortis and ITC and the related management’s discussion and analysis.

 

The pro forma financial information in the table is derived from the unaudited pro forma condensed consolidated financial statements included in this Circular. This pro forma information is provided for illustrative purposes only and does not necessarily reflect what the consolidated capitalization of Fortis would have been on December 31, 2015 if the Acquisition had closed on that date. The pro forma adjustments applied to this information are based upon preliminary estimates, current available information and certain assumptions. It is expected that the actual adjustments will differ from these pro forma adjustments, and the differences may be material. See “Caution Regarding Pro Forma Financial Information”, “Special Note Regarding Forward-Looking Statements” and “Schedule G — Risk Factors”.

 

 

 

As at December 31, 2015

 

 

 

Actual

 

Pro Forma (1)(2)

 

 

 

(in millions of Canadian dollars)

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

242

 

$

261

 

 

 

 

 

 

 

Total debt and capital lease and finance obligations (3)

 

$

12,192

 

$

23,553

 

Shareholders’ equity

 

 

 

 

 

Common Shares (4)

 

5,867

 

10,636

 

Preference shares

 

1,820

 

1,820

 

Additional paid-in capital

 

14

 

14

 

Accumulated other comprehensive income

 

791

 

791

 

Retained earnings

 

1,388

 

1,256

 

Total capitalization (5)

 

$

22,072

 

$

38,070

 

 


 

(1)             After giving effect to the Acquisition and the related adjustments described in the notes accompanying the unaudited pro forma condensed consolidated financial statements, including the issuance by Fortis to shareholders of ITC of 113.8 million Consideration Shares and assumed funding of the Cash Purchase Price and the Acquisition-related expenses entirely from the proceeds of U.S. dollar-denominated senior unsecured notes to be issued by Fortis. ITC debt, which was approximately C$6.2 billion as at December 31, 2015, will become part of the consolidated indebtedness of Fortis on Closing. For purposes of this table, the assets and liabilities of ITC, which has a U.S. dollar functional currency, and the additional assumed U.S. dollar denominated financing have been translated at the exchange rate on December 31, 2015 set out in the unaudited pro forma condensed consolidated financial statements.

 

(2)             Does not reflect the Minority Investment or any other alternative financing for funding of the Cash Purchase Price and the Acquisition- related expenses. Fortis expects the Cash Purchase Price and the Acquisition-related expenses will be financed from a combination of one or more Prospective Offerings, the purchase price paid by the Minority Investors in connection with the Minority Investment and, if and to the extent necessary, the borrowing under the Acquisition Credit Facilities. See “Special Business — The Acquisition of ITC Holdings Corp. — Financing the Acquisition”. In addition, this column does not give effect to any changes in the Common Shares, long-term debt or capital lease and finance obligations of Fortis between January 1, 2016 and March 18, 2016.

 

(3)             Includes long-term debt and capital lease and finance obligations, including the current portion, and short-term borrowings.

 

(4)             As at December 31, 2015, on an actual basis, there were 281.6 million Common Shares issued and outstanding. Fortis will issue up to 117 million Common Shares to ITC shareholders as partial consideration for the Acquisition. During the period from January 1, 2016 up to but excluding March 18, 2016, Fortis issued an aggregate of 1,480,139 Common Shares pursuant to the Corporation’s Dividend Reinvestment Plan, Consumer Share Purchase Plan, 2012 ESPP and upon the exercise of options granted pursuant to the 2012, 2006 and 2002 Stock Option Plans, for aggregate consideration of approximately C$48 million. An aggregate of 4,650,830 Common Shares were issuable upon the exercise of options outstanding at March 18, 2016.

 

(5)       Excludes non-controlling interests.

 

There have been no material changes to the share or loan capital of Fortis since December 31, 2015.

 

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CREDIT RATINGS

 

In February 2016, following the announcement by Fortis that it had entered into the Acquisition Agreement with ITC, S&P affirmed the Corporation’s long-term corporate credit rating of A-, revised its unsecured debt credit rating to BBB+ from A- and revised its outlook on the Corporation to negative from stable. Similarly, in February 2016 DBRS placed the Corporation’s issuer rating and unsecured debt credit rating of A (low) under review with negative implications. The capital structure of Fortis is not expected to materially change as a result of the Acquisition; however, no assurance can be provided that a further ratings downgrade will not occur. Fortis expects that it will continue to have an investment-grade credit rating following completion of the Acquisition.

 

The credit ratings accorded to the Corporation and its unsecured debt by rating agencies are not a recommendation to buy, hold or sell the Corporation’s debt, since such ratings do not comment as to its market price or suitability for a particular investor. Credit ratings are intended to provide investors with an independent measure of the credit quality of an issue of securities and are intended to be indicators of the likelihood of payment and of the capacity and willingness of the issuer to meet its financial commitment on an obligation in accordance with the terms of the obligation.

 

S&P’s long-term issuer credit ratings are on a scale that ranges from AAA to D, which represents the range from highest to lowest quality of the issuers rated. S&P’s A- rating category is the third highest of the ten major rating categories used by S&P. According to the S&P rating system, an issuer rated A has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than issuers in higher-rated categories. S&P’s long-term debt credit ratings use a similar scale. According to the S&P rating system, debt securities rated BBB exhibit adequate protection parameters; however, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the issuer to meet its financial commitment on the obligation. Ratings designations may be modified by the addition of a plus or minus. A plus or minus designation indicates the relative standing of the issuer or the debt, as applicable, within a category. S&P’s rating outlook assesses the potential direction that a rating may be headed over the immediate to longer-term, with outlooks falling into one of five categories: positive, negative, stable, developing or not meaningful. A negative outlook indicates that a rating may be lowered.

 

DBRS’ credit ratings are on a long-term debt rating scale that ranges from AAA to D, which represents the range from highest to lowest quality of the securities rated. The A rating category is the third highest of the ten major ratings categories used by DBRS. According to the DBRS rating system, debt securities rated A are of good credit quality and indicate that the capacity for the payment of financial obligations is considered substantial but that the instrument may be vulnerable to future events. The assignment of a “(high)” or “(low)” modifier within each rating category indicates relative standing within such category. The “high” and “low” grades are not used for the AAA category.

 

There is no assurance that any rating will remain in effect for any given period of time or that any rating will not be revised or withdrawn entirely by a rating agency in the future if, in its judgment, circumstances so warrant and, if any such rating is so revised or withdrawn, Fortis is under no obligation to update this Circular. See “Schedule G — Risk Factors — Risk Factors Relating to the Post-Acquisition Business and Operations of the Corporation”.

 

42



 

BOARD OF DIRECTORS

 

NOMINEES FOR ELECTION AS DIRECTORS

 

This section provides information on each of the 12 persons nominated for election as director at the Meeting, including the background, experience, meeting attendance, other public board memberships and Fortis securities held. Based on questionnaires completed by each of the proposed nominees, the Board has determined that other than Mr. Perry, each nominee has no material relationship with Fortis and is, therefore, independent of Fortis. Mr. Perry is not independent because he is the President and Chief Executive Officer of Fortis. Each of the nominees was elected to his or her present term of office at the annual meeting of Shareholders held on May 7, 2015, with the exception of Mr. Zurel and Ms. Dilley, who are each being nominated for the first time.

 

There are no contracts, arrangements or understandings between any director or executive officer or any other person pursuant to which any of the nominees has been nominated for election as a director of the Corporation.

 

TRACEY C. BALL

 

 

 

Corporate Director

 

Edmonton, Alberta

Expertise/Experience:

 

 

·   Finance/Accounting

Age: 58

 

·   Capital Markets

Director since: May 2014

 

·   Governance and Risk

 

 

·   Legal/Regulatory

Independent

 

·   Senior Executive

 

Ms. Ball retired in September 2014 as Executive Vice President and Chief Financial Officer of Canadian Western Bank Group. Prior to joining a predecessor to Canadian Western Bank Group in 1987, she worked in public accounting and consulting. Ms. Ball has served on several private and public sector boards, including the Province of Alberta Audit Committee and the Financial Executives Institute of Canada. She currently serves on the City of Edmonton LRT Governance Board.

 

Ms. Ball graduated from Simon Fraser University with a Bachelor of Arts (Commerce). She is a member of the Canadian Chartered Professional Accountants of Canada, the Institute of Chartered Accountants of Alberta, and the Association of Chartered Professional Accountants of British Columbia. Ms. Ball was elected as a Fellow of the Institute of Chartered Accountants of Alberta in 2007. She holds an ICD.D designation from the Institute of Corporate Directors.

 

Ms. Ball was appointed to the Audit Committee on May 14, 2014. Ms. Ball serves as Chair of FortisAlberta Inc.

 

 

 

 

 

Voting Results of 2014 and 2015 Annual Meeting

 

Board / Committee Membership

 

2015 Attendance

 

Year

 

For

 

Withheld

 

Board of Directors

 

11 of 12

 

 

 

 

 

 

 

Audit

 

5 of 5

 

2014

 

99.76

%

0.24

%

 

 

 

 

2015

 

99.75

%

0.25

%

 

Securities Held (1) and Total Market Value as at March 20, 2015 and March 18, 2016 (2)

 

Date

 

Common Shares

 

DSUs

 

Market Value of Securities

 

Meets Share Ownership Target

March 2015

 

350

 

3,234

 

C$

139,525

 

Applicable 2018

March 2016

 

4,950

 

7,284

 

C$

477,248

 

Yes (3.1x)

 

43



 

PIERRE J. BLOUIN

 

 

 

Corporate Director

 

Ile Bizard, Quebec

Expertise/Experience:

 

 

·   Finance/Accounting

Age: 58

 

·   Capital Markets

Director since: May 2015

 

·   Public Policy and Government Relations

 

 

·   Senior Executive

Independent

 

·   Executive Compensation

 

 

 

·   Legal/Regulatory

 

Mr. Blouin served as the Chief Executive Officer of Manitoba Telecom Services, Inc. until his retirement in December 2014. Prior to joining Manitoba Telecom Services, Inc. as its Chief Executive Officer in 2005, Mr. Blouin held various executive positions in the Bell Canada Entreprises group of companies, including Group President, Consumer Markets for Bell Canada, Chief Executive Officer of BCE Emergis, Inc. and Chief Executive Officer of Bell Mobility.

 

Mr. Blouin graduated from Hautes Etudes Commerciales with a Bachelor of Commerce in Business Administration. He is a Fellow of the Purchasing Management Association of Canada and a Fellow of the Institute of Canadian Bankers.

 

Mr. Blouin was appointed to the Human Resources Committee on May 7, 2015.

 

 

 

 

 

Voting Results of 2015 Annual Meeting

 

Board / Committee Membership

 

2015 Attendance

 

Year

 

For

 

Withheld

 

Board of Directors

 

9 of 9 (3)

 

 

 

 

 

 

 

Human Resources

 

4 of 4 (4)

 

2015

 

99.81

%

0.19

%

 

Securities Held (1) and Total Market Value as at March 20, 2015 and March 18, 2016(2)

 

Date

 

Common Shares

 

DSUs

 

Market Value of Securities

 

Meets Share Ownership Target

March 2015

 

1,750

 

 

C$

68,128

 

Applicable 2019

March 2016

 

2,380

 

3,294

 

C$

221,343

 

 

44



 

PETER E. CASE

 

 

 

Corporate Director

 

Kingston, Ontario

Expertise/Experience:

 

 

·   Finance/Accounting

Age: 61

 

·   Capital Markets

Director since: May 2005

 

·   Utilities/Energy

 

 

·   Legal/Regulatory

Independent

 

 

 

Mr. Case retired in February 2003 as Executive Director, Institutional Equity Research at CIBC World Markets. During his 17 year career as senior investment analyst with CIBC World Markets and BMO Nesbitt Burns and its predecessors, Mr. Case’s coverage of Canadian and selected U.S. pipeline and energy utilities was consistently rated among the top in that sector.

 

Mr. Case graduated from Queen’s University with a Bachelor of Arts and an MBA and from Wycliffe College, University of Toronto, with a Master of Divinity.

 

Mr. Case was appointed Chair of the Audit Committee in March 2011 and was appointed to the Governance and Nominating Committee in May 2013. Mr. Case served on the Board of FortisOntario Inc. from 2003 through 2010 and as Chair of that Board from 2009 through 2010.

 

 

 

 

 

Voting Results of 2014 and 2015 Annual Meeting

 

Board / Committee Membership

 

2015 Attendance

 

Year

 

For

 

Withheld

 

Board of Directors

 

12 of 12

 

 

 

 

 

 

 

Audit (Chair)

 

5 of 5

 

2014

 

99.73

%

0.27

%

Governance & Nominating

 

3 of 3

 

2015

 

99.03

%

0.97

%

 

Securities Held (1) and Total Market Value as at March 20, 2015 and March 18, 2016 (2)

 

Date

 

Common Shares

 

DSUs

 

Market Value of Securities

 

Meets Share Ownership Target

March 2015

 

18,500

 

18,425

 

C$

1,437,490

 

Yes (6.4x)

March 2016

 

16,500

 

21,924

 

C$

1,498,920

 

Yes (8.6x)

 

45



 

MAURA J. CLARK

 

Corporate Director

New York, New York

 

Age: 57

Director since: May 2015

 

Independent

 

 

Expertise/Experience:

·   Finance/Accounting

·   Capital Markets
·   Utilities/Energy
·   Senior Executive
·   International Business
·   Legal/Regulatory
·   Mergers and Acquisitions

 

Ms. Clark retired from Direct Energy, a subsidiary of Centrica plc, in March 2014 where she was President of Direct Energy Business, a leading energy retailer in Canada and the United States. Previously Ms. Clark was Executive Vice President of North American Strategy and Mergers and Acquisitions for Direct Energy. Ms. Clark’s prior experience includes investment banking and serving as Chief Financial Officer of an independent oil refining and marketing company.

 

Ms. Clark graduated from Queen’s University with a Bachelor of Arts in Economics. She is a member of the Association of Chartered Professional Accountants of Ontario.

 

Ms. Clark was appointed to the Audit Committee on May 7, 2015.

 

 

 

 

 

Voting Results of 2015

 

Board / Committee Membership

 

2015 Attendance

 

Year

 

For

 

Withheld

 

Board of Directors

 

9 of 9 (3)

 

 

 

 

 

 

 

Audit

 

3 of 3 (5)

 

2015

 

99.82

%

0.18

%

 

Securities Held (1) and Total Market Value as at March 20, 2015 and March 18, 2016 (2)

 

Date

 

Common Shares

 

DSUs

 

Market Value of Securities

 

Meets Share Ownership Target

March 2015

 

 

 

 

Applicable 2019

March 2016

 

 

2,115

 

C$

82,506

 

 

46



 

MARGARITA K. DILLEY

 

Corporate Director

Washington, D.C.

 

Age: 58

Director since: New Nominee

 

Independent

 

 

Expertise/Experience:

·   Finance/Accounting

·   Governance and Risk Management

·   Capital Markets

·   Utilities/Energy

·   Senior Executive

·   International Business

·   Mergers and Acquisitions

 

Ms. Dilley retired from ASTROLINK International LLC in 2004, an international wireless broadband telecommunications company, where she was Vice President and Chief Financial Officer. Ms. Dilley’s prior experience includes serving as Director, Strategy & Corporate Development as well as Treasurer for Intelsat.

 

Ms. Dilley graduated from Cornell University with a Bachelor of Arts, from Columbia University with a Master of Arts and from Wharton Graduate School, University of Pennsylvania with an MBA.

 

Ms. Dilley serves as the Chair of the Board of CH Energy Group, Inc.

 

Board / Committee Membership

 

Attendance

New Nominee

 

N/A

 

Securities Held (1) and Total Market Value as at March 18, 2016 (2)

 

Year

 

Common Shares

 

DSUs

 

Market Value of Securities

 

Meets Share Ownership Target

2016

 

 

 

 

Applicable 2020

 

47



 

IDA J. GOODREAU

 

 

 

Corporate Director

 

Vancouver, British Columbia

Expertise/Experience:

 

 

·   Senior Executive

Age: 64

 

·   Executive Compensation

Director since: May 2009

 

·   Governance and Risk Management

 

 

 

Independent

 

 

 

Ms. Goodreau is past President and Chief Executive Officer of LifeLabs. Prior to joining LifeLabs in March 2009, Ms. Goodreau served as President and Chief Executive Officer of Vancouver Coastal Health Authority from 2002. She has held senior leadership roles in several Canadian and international pulp and paper and natural gas companies.

 

Ms. Goodreau graduated from the University of Windsor with a Bachelor of Commerce, Honours, and an MBA, and from the University of Western Ontario with a Bachelor of Arts (English and Economics).

 

Ms. Goodreau serves on the Human Resources Committee and was appointed to the Governance and Nominating Committee in May 2015. She serves as a director of FortisBC Energy Inc. and FortisBC Inc. and is Chair of those companies’ Governance Committees.

 

 

 

 

 

Voting Results of 2014 and 2015 Annual Meeting

 

Board / Committee Membership

 

2015 Attendance

 

Year

 

For

 

Withheld

 

Board of Directors

 

12 of 12

 

 

 

 

 

 

 

Human Resources

 

8 of 8

 

2014

 

98.92

%

1.08

%

Governance and Nominating

 

2 of 2 (6)

 

2015

 

97.94

%

2.06

%

 

Securities Held (1) and Total Market Value as at March 20, 2015 and March 18, 2016 (2)

 

Date

 

Common Shares

 

DSUs

 

Market Value of Securities

 

Meets Share Ownership Target

March 2015

 

 

21,451

 

C$

835,087

 

Yes (5.8x)

March 2016

 

 

25,068

 

C$

977,903

 

Yes (6.3x)

 

48



 

 

DOUGLAS J. HAUGHEY

 

 

 

Corporate Director

 

Calgary, Alberta

Expertise/Experience:

 

 

·   Finance/Accounting

Age: 59

 

·   Utilities/Energy

Director since: May 2009

 

·   Senior Executive

 

 

·   Executive Compensation

Independent

 

·   Governance and Risk Management

 

 

 

·   Mergers and Acquisitions

 

From August 2012 through May 2013, Mr. Haughey was Chief Executive Officer of The Churchill Corporation, a commercial construction and industrial services company focused on the western Canadian market. From 2010 through its successful sale to Pembina Pipeline in April 2012, he served as President and Chief Executive Officer of Provident Energy Ltd., an owner/operator of natural gas liquids midstream facilities. From 1999 through 2008, Mr. Haughey held several executive roles with Spectra Energy and predecessor companies. He had overall responsibility for its western Canadian natural gas midstream business, was President and Chief Executive Officer of Spectra Energy Income Fund and also led Spectra’s strategic development and mergers and acquisitions teams based in Houston, Texas.

 

Mr. Haughey graduated from the University of Regina with a Bachelor of Administration and from the University of Calgary with an MBA. He holds an ICD.D designation from the Institute of Corporate Directors.

 

Mr. Haughey serves on the Audit Committee and the Human Resources Committee and was appointed chair of the Human Resources Committee in March 2015. He serves on the Board of Directors of FortisAlberta Inc. and served as Chair of that Board from 2003 to February 2016.

 

 

 

 

 

Voting Results of 2014 and 2015 Annual Meeting

 

Board / Committee Membership

 

2015 Attendance

 

Year

 

For

 

Withheld

 

Board of Directors

 

12 of 12

 

 

 

 

 

 

 

Audit

 

5 of 5

 

2014

 

99.70

%

0.30

%

Human Resources (Chair)

 

8 of 8

 

2015

 

98.67

%

1.33

%

 

Securities Held (1) and Total Market Value as at March 20, 2015and March 18, 2016 (2)

 

Date

 

Common Shares

 

DSUs

 

Market Value of Securities

 

Meets Share Ownership Target

March 2015

 

10,000

 

13,261

 

C$

905,551

 

Yes (6.2x)

March 2016

 

10,000

 

16,559

 

C$

1,036,067

 

Yes (6.2x)

 

49



 

R. HARRY McWATTERS

 

 

 

President,

 

Vintage Consulting Group Inc.

 

Summerland, British Columbia

Expertise/Experience:

 

 

·   Public Policy and Government Relations

Age: 70

 

·   Senior Executive

Director since: May 2007

 

·   Governance and Risk Management

 

 

 

Independent

 

 

 

Mr. McWatters is President of Vintage Consulting Group Inc., Harry McWatters Inc., and Encore Vineyards Ltd., all of which are engaged in various aspects of the British Columbia wine industry. He is the founder and past President of Sumac Ridge Estate Wine Group.

 

Mr. McWatters serves on the Governance and Nominating Committee. He is a former director of FortisBC Holdings Inc. and FortisBC Inc., where he served as Chair from 2006 through 2010.

 

 

 

 

 

Voting Results of 2014 and 2015 Annual Meeting

 

Board / Committee Membership

 

2015 Attendance

 

Year

 

For

 

Withheld

 

Board of Directors

 

12 of 12

 

 

 

 

 

 

 

Governance & Nominating

 

3 of 3

 

2014

 

99.41

%

0.59

%

 

 

 

 

2015

 

99.69

%

0.31

%

 

Securities Held (1) and Total Market Value as at March 20, 2015 and March 18, 2016 (2)

 

Date

 

Common Shares

 

DSUs

 

Market Value of Securities

 

Meets Share Ownership Target

March 2015

 

1,100

 

25,588

 

C$

1,038,964

 

Yes (7.2x)

March 2016

 

1,100

 

29,367

 

C$

1,188,518

 

Yes (7.7x)

 

50



 

RONALD D. MUNKLEY

 

 

 

Corporate Director

 

Mississauga, Ontario

Expertise/Experience:

 

 

·   Finance/Accounting

Age: 70

 

·   Capital Markets

Director since: May 2009

 

·   Utilities/Energy

 

 

·   Senior Executive

Independent

 

·   Executive Compensation

 

 

·   Governance and Risk Management

 

 

·   Legal/Regulatory

 

 

·   Mergers and Acquisitions

 

Mr. Munkley retired in April 2009 as Vice Chairman and Head of the Power and Utility Business of CIBC World Markets. While there he acted as lead advisor on over 175 capital markets and strategic and advisory assignments for North American Utility clients. Prior to that he was COO at Enbridge Inc. and Chairman of Enbridge Consumer Gas. Previously he was President and CEO of Consumer Gas where he led the company through deregulation and restructuring in the 1990s.

 

Mr. Munkley graduated from Queen’s University with a Bachelor of Science (Engineering), Honours. He is a professional engineer and has completed the Executive and Senior Executive Programs of the University of Western Ontario and the Partners, Directors and Senior Officers Certificate of the Canadian Securities Institute.

 

Mr. Munkley was appointed Chair of the Governance and Nominating Committee on May 14, 2014 and also serves on the Human Resources Committee.

 

 

 

 

 

Voting Results of 2014 and 2015 Annual Meeting

 

Board / Committee Membership

 

2015 Attendance

 

Year

 

For

 

Withheld

 

Board of Directors

 

12 of 12

 

 

 

 

 

 

 

Human Resources

 

8 of 8

 

2014

 

99.64

%

0.36

%

Governance & Nominating (Chair)

 

3 of 3

 

2015

 

98.67

%

1.33

%

 

Securities Held (1) and Total Market Value as at March 20, 2015 and March 18, 2016 (2)

 

Date

 

Common Shares

 

DSUs

 

Market Value of Securities

 

Meets Share Ownership Target

March 2015

 

12,000

 

13,261

 

C$

983,411

 

Yes (6.8x)

March 2016

 

12,000

 

16,559

 

C$

1,114,087

 

Yes (6.6x)

 

51



 

DAVID G. NORRIS

 

 

 

Corporate Director

 

St. John’s, Newfoundland and

 

Labrador

Expertise/Experience:

 

 

·   Finance/Accounting

Age: 68

 

·   Public Policy and Government Relations

 

 

·   Senior Executive

Director since: May 2005

 

·   Executive Compensation

 

 

 

·   Governance and Risk Management

 

Independent

 

·   Mergers and Acquisitions

 

Mr. Norris was a financial and management consultant from 2001 until his retirement in December 2013. Prior to that he was Executive Vice President, Finance and Business Development of Fishery Products International Limited. Previously, he held Deputy Minister positions with the Department of Finance and Treasury Board of the Government of Newfoundland and Labrador.

 

Mr. Norris graduated from Memorial University of Newfoundland with a Bachelor of Commerce, Honours, and from McMaster University with an MBA.

 

Mr. Norris was appointed Chair of the Board of Fortis in December 2010 and serves on all Board Committees. He served as Chair of the Audit Committee from May 2006 through March 2011. He served as a director of Newfoundland Power Inc. from 2003 through 2010 and served as Chair of that Board from 2006 through 2010. Mr. Norris served as a director of Fortis Properties Corporation from 2006 through 2010.

 

 

 

 

 

Voting Results of 2014 and 2015 Annual Meeting

 

Board / Committee Membership

 

2015 Attendance

 

Year

 

For

 

Withheld

 

Board of Directors (Chair)

 

12 of 12

 

 

 

 

 

 

 

Audit

 

5 of 5

 

2014

 

99.57

%

0.43

%

Human Resources

 

8 of 8

 

2015

 

97.89

%

2.11

%

Governance & Nominating

 

3 of 3

 

 

 

 

 

 

 

 

Securities Held (1) and Total Market Value as at March 20, 2015and March 18, 2016 (2)

 

Date

 

Common Shares

 

DSUs

 

Market Value of Securities

 

Meets Share Ownership Target

 

March 2015

 

13,265

 

41,055

 

C$

2,114,678

 

Yes (7.3x)

 

March 2016

 

13,477

 

46,603

 

C$

2,343,721

 

Yes (7.1x)

 

 

52



 

BARRY V. PERRY

 

 

 

President and Chief Executive Officer Fortis Inc.

St. John’s, Newfoundland and Labrador

 

 

 

Age: 51

 

 

Director since: January 2015

 

 

 

 

 

Not Independent

 

 

 

Mr. Perry is President and Chief Executive Officer of Fortis. Prior to his current position at Fortis, Mr. Perry served as President from June 30, 2014 to December 31, 2014 and prior to that served as Vice President, Finance and Chief Financial Officer of the Corporation since 2004. Mr. Perry joined the Fortis organization in 2000 as Vice President, Finance and Chief Financial Officer of Newfoundland Power Inc.

 

He graduated from Memorial University of Newfoundland with a Bachelor of Commerce and is a member of the Association of Chartered Professional Accountants of Newfoundland and Labrador.

 

Mr. Perry serves as a director of Fortis utility subsidiaries in Alberta, British Columbia, Arizona, and New York.

 

 

 

 

 

Voting Results of 2015 Annual Meeting

 

Board / Committee Membership

 

2015 Attendance

 

Year

 

For

 

Withheld

 

Board of Directors

 

12 of 12

 

 

 

 

 

 

 

 

 

 

 

2015

 

99.44

%

0.56

%

Securities Held (7)

 

 

 

 

 

 

 

 

 

 

53



 

JO MARK ZUREL

 

 

 

President,

 

Stonebridge Capital Inc.

Expertise/Experience:

St. John’s, Newfoundland and Labrador

 

·   Finance/Accounting
·   Capital Markets
·   Senior Executive
·   Governance and Risk Management
·   Mergers and Acquisitions

 

Age: 52

Director since: New Nominee

 

 

Independent

 

Mr. Zurel is President of Stonebridge Capital Inc., a private investment company, and a Corporate Director. From 1998 to 2006, Mr. Zurel was Senior Vice-President and Chief Financial Officer of CHC Helicopter Corporation. Mr. Zurel has served on several private and public sector boards, including Major Drilling Group International Inc., the Canada Pension Plan Investment Board and Fronteer Gold Inc. He also serves on the boards of a private company and several not for profit organizations.

 

Mr. Zurel graduated from Dalhousie University with a Bachelor of Commerce. He is a Fellow of the Association of Chartered Professional Accountants of Newfoundland and Labrador. He holds an ICD.D designation from the Institute of Corporate Directors.

 

He has served as a director of Newfoundland Power Inc. since 2008 and as Chair of that Board since 2012.

 

Board / Committee Membership

 

Attendance

New Nominee

 

N/A

 

Securities Held (1) and Total Market Value as at March 18, 2016 (2)

 

Year

 

Common Shares

 

DSUs

 

Market Value of Securities

 

Meets Share Ownership Target

 

2016

 

9,949

 

0

 

C$

388,110

 

N/A

 

 


(1)                           Represents Common Shares and/or Deferred Share Units (“DSUs”), beneficially owned, controlled or directed, directly or indirectly. This information has been furnished by the respective nominee. Additional details can be found in the “Report On Director Compensation” section starting on page 57 of this Circular.

(2)                           Calculated using the closing price of Common Shares on the TSX as at March 20, 2015 of C$38.93 and as at March 18, 2016 of C$39.01.

(3)                           There were three meetings of the Board in 2015 prior to Ms. Clark and Messrs. Blouin and Bonavia being elected to the Board.

(4)                           There were four meetings of the Human Resource Committee in 2015 prior to Mr. Blouin being appointed to that Committee. Mr. Blouin has attended all meetings of the Human Resource Committee since his appointment.

(5)                           There were two meetings of the Audit Committee in 2015 prior to Ms. Clark being appointed to the Committee. Ms. Clark has attended all meetings of the Audit Committee since her appointment.

(6)                           There was one meeting of the Governance and Nominating Committee in 2015 prior to Ms. Goodreau being appointed to that Committee. Ms. Goodreau has attended all meetings of the Governance and Nominating Committee since her appointment.

(7)                           Options are granted to Mr. Perry in his capacity as President and CEO of Fortis and are detailed on page 100 of this Circular. Mr. Perry does not receive any compensation for his role as a director of the Corporation.

 

54



 

OVERALL ATTENDANCE IN 2015

 

Below is a summary of attendance by all directors at Board and Committee meetings held during 2015. The Meeting attendance for each current nominee is reported above in their respective biographies under the heading “Nominees for Election as Directors” and summarized below in the table “2015 Attendance Record of Non-Executive Directors Standing for Re-Election”.

 

 

 

Number of

 

Attendance at

 

Board/Committee

 

Meetings

 

all Meetings

 

Board

 

12

 

96

%

Audit Committee

 

5

 

97

%

Human Resources Committee

 

8

 

100

%

Governance and Nominating Committee

 

3

 

100

%

Total number of meetings held

 

28

 

97

%

 

Fortis believes that an active board governs more effectively. We expect that directors attend all regularly scheduled meetings of the Board, all regularly scheduled meetings of committees of which they are members, and the annual meeting of Shareholders. While we recognize that the short notice of special Board meetings may sometimes conflict with directors’ schedules, the directors are expected to use reasonable efforts to attend all special meetings of the Board. Directors may participate by teleconference if they are unable to attend in person.

 

The tables below summarizes the number of Board and committee meetings attended by each non-executive director during 2015.

 

2015 Attendance Record of Non -Executive Directors Standing for Re-Election

 

 

 

 

 

 

 

 

 

 

 

Total Board and

 

 

 

Board Meetings

 

Committee Meetings

 

Committee Meetings

 

Director

 

No. of Meetings

 

Attended

 

No. of Meetings

 

Attended

 

No. of Meetings

 

Attended

 

T.C. Ball

 

11 of 12

 

92

%

5 of 5

 

100

%

16 of 17

 

94

%

P.J. Blouin

 

9 of 9

 

100

%

4 of 4

 

100

%

13 of 13

 

100

%

P.E. Case

 

12 of 12

 

100

%

8 of 8

 

100

%

20 of 20

 

100

%

M.J. Clark

 

9 of 9

 

100

%

3 of 3

 

100

%

12 of 12

 

100

%

I.J. Goodreau

 

12 of 12

 

100

%

10 of 10

 

100

%

22 of 22

 

100

%

D.J. Haughey

 

12 of 12

 

100

%

13 of 13

 

100

%

25 of 25

 

100

%

R.H. McWatters

 

12 of 12

 

100

%

3 of 3

 

100

%

15 of 15

 

100

%

R.D. Munkley

 

12 of 12

 

100

%

11 of 11

 

100

%

23 of 23

 

100

%

D.G. Norris

 

12 of 12

 

100

%

16 of 16

 

100

%

28 of 28

 

100

%

 

2015 Attendance Record of Non-Executive Directors Not Standing for Re-Election

 

 

 

 

 

 

 

 

 

 

 

Total Board and

 

 

 

Board Meetings

 

Committee Meetings (1)

 

Committee Meetings

 

Director

 

No. of Meetings

 

Attended

 

No. of Meetings

 

Attended

 

No. of Meetings

 

Attended

 

P.J. Bonavia

 

11 of 12

 

92

%

 

 

11 of 12

 

92

%

 


(1) Mr. Bonavia was not a member of any committee as he was considered non-independent.

 

ADDITIONAL DISCLOSURE RELATED TO DIRECTORS

 

Within the 10-year period ended March 18, 2016, Fortis is not aware of any proposed director of Fortis who had been a director or executive officer of any issuer which, while that person was acting in that capacity or within a year of ceasing to act in that capacity, (i) became bankrupt or made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets or (ii) was subject to an order that was issued while the director was acting in such

 

55



 

capacity, or that was issued after the director ceased to be acting in such capacity and which resulted from an event that occurred while the director was acting in such capacity.

 

MAJORITY VOTING FOR DIRECTORS

 

Fortis has adopted a Majority Voting Policy which stipulates that if any nominee for director receives, from the Common Shares voted at an annual meeting, a greater number of votes “withheld” than “for” his or her election, such director must immediately tender his or her resignation to the Chair. Any such resignation will take effect on acceptance by the Board. The Governance and Nominating Committee will expeditiously consider the director’s offer to resign and recommend to the Board whether such resignation should be accepted. The Board shall accept such resignation absent exceptional circumstances that would warrant the director to continue to serve on the Board, as determined by the Board in accordance with its fiduciary duties to the Corporation and its shareholders. Within 90 days of the annual meeting, the Board will make a final decision on the proposed resignation and announce it by way of media release. If the Board declines to accept the resignation, the media release shall fully state the reasons for that decision. Any director who tenders his or her resignation will not participate in the deliberations of the Governance and Nominating Committee or the Board relating to his or her resignation. This Majority Voting Policy does not apply to a contested election of directors, that is, where the number of nominees exceeds the number of directors to be elected.

 

56



 

REPORT ON DIRECTOR COMPENSATION

 

Principles of Director Compensation

 

The compensation of non-executive directors is intended to attract and retain highly qualified individuals with the capability to meet the responsibilities of the Board and to closely align directors’ interests with those of shareholders. Non-executive directors receive a significant portion of their compensation in the form of DSUs and are subject to minimum share ownership requirements to promote long-term alignment with shareholder interest. Non-executive directors have not received stock options since 2006.

 

Benchmarking

 

Non-executive director compensation is reviewed annually by the Governance and Nominating Committee to ensure that it is reasonable in light of the time required from directors and aligns directors’ interests with those of shareholders. When reviewing director compensation in 2014, the Governance and Nominating Committee engaged Willis Towers Watson (“Towers Watson”) to assess the Corporation’s compensation of non-executive directors against a comparator group of 36 publicly traded North American utility companies having regard to the workload, responsibilities and expectations on directors, and trends in director compensation. Having regard to these considerations, Towers Watson concluded that the Corporation’s total non-executive director compensation was positioned below the 50th percentile of the Corporation’s peer group. Based on the Governance and Nominating Committee’s input and recommendation, the Board approved the following changes in director compensation for 2015 and 2016.

 

 

 

 

 

 

 

Approved changes for

 

 

 

2014

 

2015

 

2016

 

Position

 

Retainer

 

DSU grant

 

Retainer

 

DSU grant

 

Retainer

 

DSU grant

 

Non-Executive Board Chair

 

C$

170,000

 

C$

120,000

 

C$

190,000

 

C$

140,000

 

C$

205,000

 

C$

155,000

 

Directors

 

C$

50,000

 

C$

95,000

 

C$

55,000

 

C$

100,000

 

C$

60,000

 

C$

105,000

 

 

Following the above changes, the Corporation’s non-executive director compensation remains below the 50th percentile of the Corporation’s peer group.

 

Components of Director Compensation

 

During 2015, annual compensation for directors, other than Mr. Perry, consisted of:

 

(i)                                     an annual cash retainer;

 

(ii)                                     meeting attendance fees (other than Mr. Norris as independent Chair of the Board); and

 

(iii)                                      a grant of DSUs.

 

57



 

Each of these components of director compensation is described in more detail below. Fortis does not provide option-based compensation, non-equity based incentive compensation or a pension program to its directors. The following table summarizes the director fee schedule for 2015 as compared to the previous two years:

 

Compensation Type

 

2015

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Annual Non-Executive Board Chair Retainer (cash or optional DSUs)

 

C$

190,000

 

C$

170,000

 

C$

170,000

 

Annual Director Retainer (cash or optional DSUs) (1)

 

C$

55,000

 

C$

50,000

 

C$

50,000

 

Annual Audit Committee Chair Retainer (cash or optional DSUs)

 

C$

20,000

 

C$

20,000

 

C$

20,000

 

Annual Human Resources and Governance and Nominating Committee Chair Retainers (cash or optional DSUs)

 

C$

15,000

 

C$

15,000

 

C$

15,000

 

Annual Non-Executive Board Chair Share-Based Compensation (mandatory DSUs)

 

C$

140,000

 

C$

120,000

 

C$

120,000

 

Annual Share-Based Compensation (mandatory DSUs)

 

C$

100,000

 

C$

95,000

 

C$

95,000

 

Board and Committee Meeting Attendance Fee (cash) (1)(2)

 

C$

1,500

 

C$

1,500

 

C$

1,500

 

 


(1)                  US resident directors are paid in US$.

(2)                  Since January 1, 2013, the Chair of the Board has not received meeting fees.

 

The following table details the director compensation for 2015:

 

Individual Director Compensation — 2015

 

 

 

 

 

Share-Based

 

 

 

 

 

 

 

Fees

 

Awards

 

All Other

 

 

 

 

 

Earned (1)

 

(DSUs) (2)

 

Compensation (3)

 

Total

 

 

 

C$

 

C$

 

C$

 

C$

 

Tracey C. Ball

 

24,000

 

155,000

 

57,764

 

236,764

 

Pierre J. Blouin

 

29,310

 

77,500

 

1,173

 

107,983

 

Paul J. Bonavia

 

27,523

 

77,500

 

7,401

(4)

112,424

 

Peter E. Case

 

105,000

 

100,000

 

27,272

 

232,272

 

Maura J. Clark

 

71,803

 

50,000

 

757

 

122,560

 

Frank J. Crothers (5)

 

25,341

 

50,000

 

29,542

 

104,883

 

Ida J. Goodreau

 

88,000

 

100,000

 

97,014

 

285,014

 

Douglas J. Haughey

 

105,000

 

100,000

 

95,032

 

300,032

 

R. Harry McWatters

 

77,500

 

100,000

 

37,315

 

214,815

 

Ronald D. Munkley

 

104,500

 

100,000

 

20,032

 

224,532

 

David G. Norris

 

190,000

 

140,000

 

59,576

 

389,576

 

Michael A. Pavey (6)

 

17,750

 

25,000

 

37,210

 

79,690

 

Barry V. Perry (7)

 

 

 

 

 

Total

 

865,727

 

1,075,000

 

470,088

 

2,410,545

 

 


(1)                  These amounts include all cash fees earned for services as a director of Fortis, including annual director and committee chair retainers and meeting fees, where applicable. For US resident directors, all cash fees are paid in U.S. dollars and reported in Canadian dollar equivalent.

(2)                  These amounts represent the annual share-based compensation in the form of DSUs granted to a director of Fortis. These include both the mandatory equity component of the annual retainer of C$100,000 for a director and C$140,000 for the Chair of the Board and an optional component of the annual director retainer or committee chair retainer paid in DSUs rather than in cash at the election of the director. The amounts represent the cash equivalent at the time of issue. The cumulative DSU holdings of participants also increased through the notional reinvestment of dividends on their outstanding DSUs.

(3)                  These amounts include the value of notional reinvestment of dividends earned on outstanding DSUs on dividend payment dates, as well as all fees paid or payable by a subsidiary of Fortis to a director in his or her capacity as a director of the payor subsidiary and other amounts paid to or for the benefit of directors. In the case of Mr. Crothers, director fees of US$7,000 were paid by Caribbean Utilities Company, Ltd. in U.S. dollars and converted into Canadian dollars at an average annual exchange rate of US$1.00 = C$1.2788.

(4)                  Mr. Bonavia was paid US$5,000 prior to joining the Board pursuant to an engagement with the Corporation.

 

58



 

(5)                  Mr. Crothers retired from the Board on May 7, 2015.

(6)                  Mr. Pavey passed away in February 2015.

(7)                  In his role as CEO, Mr. Perry did not receive compensation as a director of Fortis. Director fees paid to Mr. Perry from subsidiaries of Fortis are reported in footnote (5) of the Summary Compensation Table on page 107 of this Circular.

 

The following table details the share-based awards held by each director as at December 31, 2015:

 

Outstanding Share-Based Awards Table (1)

(as at December 31, 2015)

 

 

 

 

 

 

 

Market or payout

 

 

 

Number of shares or

 

Market or payout value of

 

value of vested share-

 

 

 

units that have not

 

share-based awards that have

 

based awards not paid

 

 

 

vested (2)

 

not vested (2) (3)

 

out or distributed

 

Name

 

(#)

 

(C$)

 

(C$)

 

 

 

 

 

 

 

 

 

Tracey C. Ball

 

6,517

 

243,816

 

 

Pierre J. Blouin

 

2,169

 

81,136

 

 

 

Paul J. Bonavia

 

2,169

 

81,136

 

 

 

Peter E. Case

 

21,015

 

786,153

 

 

Maura J. Clark

 

1,399

 

52,346

 

 

 

Frank J. Crothers (4)

 

 

 

 

Ida J. Goodreau

 

24,127

 

902,607

 

 

Douglas J. Haughey

 

15,702

 

587,414

 

 

R. Harry McWatters

 

28,385

 

1,061,869

 

 

Ronald D. Munkley

 

15,702

 

587,414

 

 

David G. Norris

 

45,121