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Fortis Reports Third Quarter Earnings of $278 million – Part 2

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FORWARD-LOOKING INFORMATION

The following Fortis Inc. ("Fortis" or the "Corporation") Management Discussion and Analysis ("MD&A") has been prepared in accordance with National Instrument 51-102 - Continuous Disclosure Obligations. The MD&A should be read in conjunction with the unaudited condensed consolidated interim financial statements and notes thereto for the three and nine months ended September 30, 2017 and the MD&A and audited consolidated financial statements for the year ended December 31, 2016 included in the Corporation's 2016 Annual Report. Financial information contained in the MD&A has been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") and is presented in Canadian dollars unless otherwise specified.

Fortis includes "forward-looking information" in the MD&A within the meaning of applicable Canadian securities laws and "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, collectively referred to as "forward-looking information". Forward-looking information included in the MD&A reflect expectations of Fortis management regarding future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as "anticipates", "believes", "budgets", "could", "estimates", "expects", "forecasts", "intends", "may", "might", "plans", "projects", "schedule", "should", "target", "will", "would" and the negative of these terms and other similar terminology or expressions have been used to identify the forward-looking information, which include, without limitation: the expected timing of filing of regulatory applications and receipt and outcome of regulatory decisions; the Corporation's forecast gross consolidated and segmented capital expenditures for 2017 and for the period from 2018 through 2022; the nature, timing and expected costs of certain capital projects including, without limitation, expansions of the Tilbury liquefied natural gas ("LNG") facility and the Eagle Mountain Woodfibre Gas Pipeline Project at FortisBC, flexible generation resource investment and combined cycle generation purchase at UNS Energy and additional opportunities beyond the base capital expenditure program including the Lake Erie Connector Project and the Wataynikaneyap Project; the expectation that subsidiary operating expenses and interest costs will be paid out of subsidiary operating cash flows; the expectation that cash required to complete subsidiary capital expenditure programs will be sourced from a combination of borrowings under credit facilities, long-term debt offerings and equity injections from Fortis; the expectation that maintaining the targeted capital structure of the Corporation's regulated operating subsidiaries will not have an impact on its ability to pay dividends in the foreseeable future; the expectation that cash required of Fortis to support subsidiary capital expenditure programs and finance acquisitions will be derived from a combination of borrowings under the Corporation's committed corporate credit facility and proceeds from the issuance of common shares, preference shares and long-term debt; expected consolidated fixed-term debt maturities and repayments over the next five years; the expectation that the Corporation and its subsidiaries will remain compliant with debt covenants throughout 2017; the intent of management to refinance certain borrowings under Corporation's and subsidiaries' long-term committed credit facilities with long-term permanent financing; the expectation that the adoption of future accounting pronouncements will not have a material impact on the Corporation's consolidated financial statements; the expectation that long-term debt will not be settled prior to maturity; the expectation that any liability from current legal proceedings and claims will not have a material adverse effect on the Corporation's consolidated financial position, results of operations or cash flows; the expectation that the Corporation's 2017 results will continue to benefit from the acquisition of ITC and the impact of the rate case settlement at UNS Energy; the Corporation's consolidated forecast rate base for 2022; the expectation that the Corporation's significant capital expenditure program will support continuing growth in earnings and dividends, and targeted average annual dividend growth through 2022.

Certain material factors or assumptions have been applied in drawing the conclusions contained in the forward-looking information, including, without limitation: the receipt of applicable regulatory approvals and requested rate orders, no material adverse regulatory decisions being received, and the expectation of regulatory stability; no material capital project and financing cost overrun related to any of the Corporation's capital projects; the realization of additional opportunities; the Board of Directors exercising its discretion to declare dividends, taking into account the business performance and financial conditions of the Corporation; 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; sufficient liquidity and capital resources; the continuation of regulator-approved mechanisms to flow through the cost of natural gas and energy supply costs in customer rates; the ability to hedge exposures to fluctuations in foreign exchange rates, natural gas prices and electricity prices; no significant changes in tax laws; no significant counterparty defaults; the continued competitiveness of natural gas pricing when compared with electricity and other alternative sources of energy; 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, environmental laws and regulations that may materially negatively affect the Corporation and its subsidiaries; maintenance of adequate insurance coverage; the ability to obtain and maintain licences and permits; retention of existing service areas; the continued tax deferred treatment of earnings from the Corporation's foreign operations; continued maintenance of information technology infrastructure and no material breach of cybersecurity; continued favourable relations with First Nations; favourable labour relations; 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 expenditure program.

Forward-looking information involves significant risks, uncertainties and assumptions. Fortis cautions readers that a number of factors could cause actual results, performance or achievements to differ materially from the results discussed or implied in the forward-looking information. These factors should be considered carefully and undue reliance should not be placed on the forward-looking information. Risk factors which could cause results or events to differ from current expectations are detailed under the heading "Business Risk Management" in this MD&A and in continuous disclosure materials filed from time to time with Canadian securities regulatory authorities and the Securities and Exchange Commission. Key risk factors for 2017 include, but are not limited to: uncertainty regarding the outcome of regulatory proceedings at the Corporation's utilities; uncertainty of the impact a continuation of a low interest rate environment may have on the allowed rate of return on common shareholders' equity at the Corporation's regulated utilities; the impact of fluctuations in foreign exchange rates; uncertainty related to proposed tax reform in the United States; risk associated with the impacts of less favourable economic conditions on the Corporation's results of operations; risk that the expected benefits of the acquisition of ITC may fail to materialize, or may not occur within the time periods anticipated; risk associated with the Corporation's ability to comply with Section 404(a) of the Sarbanes-Oxley Act of 2002 and the related rules of the U.S. Securities and Exchange Commission and the Public Company Accounting Oversight Board; risk associated with the completion of the Corporation's 2017 capital expenditures plan, including completion of major capital projects in the timelines anticipated and at the expected amounts; and uncertainty in the timing and access to capital markets to arrange sufficient and cost-effective financing to finance, among other things, capital expenditures and the repayment of maturing debt.

All forward-looking information in the MD&A is qualified in its entirety by the above cautionary statements and, except as required by law, Fortis disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise.

CORPORATE OVERVIEW

Fortis is a leader in the North American regulated electric and gas utility business, with total assets of approximately $47 billion and fiscal 2016 revenue of $6.8 billion. More than 8,000 employees of the Corporation serve utility customers in five Canadian provinces, nine U.S. states and three Caribbean countries.

Year-to-date September 30, 2017, the Corporation's electricity systems met a combined peak demand of 31,917 megawatts ("MW") and its gas distribution systems met a peak day demand of 1,567 terajoules. For additional information on the Corporation's operations and business segments, refer to Note 1 to the Corporation's unaudited condensed consolidated interim financial statements for the three and nine months ended September 30, 2017 and to the "Corporate Overview" section of the 2016 Annual MD&A.

SIGNIFICANT ITEMS

Terminated Acquisition of Interest in Waneta Dam: In May 2017 Fortis had entered into an agreement with Teck Resources Limited ("Teck") to acquire a two-thirds ownership interest in the Waneta Dam and related transmission assets in British Columbia. In August 2017 BC Hydro exercised its right of first offer to acquire Teck's two-thirds interest in the Waneta Dam and the purchase agreement between Fortis and Teck was terminated, resulting in the payment of a $28 million break fee ($24 million net of related transaction costs and tax) to Fortis.

FINANCIAL HIGHLIGHTS

Fortis has adopted a strategy of long-term profitable growth with the primary measure of financial performance being earnings per common share. Key financial highlights for the third quarter and year-to-date periods ended September 30, 2017 and 2016 are provided in the following table.

/T/

---------------------------------------------------------------------------- Consolidated Financial Highlights Periods Ended September 30 Quarter Year-to-Date ($ millions, except for common share data) 2017 2016 Variance 2017 2016 Variance ---------------------------------------------------------------------------- Revenue 1,901 1,528 373 6,190 4,785 1,405 Energy Supply Costs 478 503 (25) 1,756 1,698 58 Operating Expenses 504 439 65 1,657 1,367 290 Depreciation and Amortization 290 234 56 885 700 185 Other Income, Net 23 10 13 78 35 43 Finance Charges 225 164 61 686 457 229 Income Tax Expense 106 40 66 314 110 204 ---------------------------------------------------------------------------- Net Earnings 321 158 163 970 488 482 ---------------------------------------------------------------------------- Net Earnings Attributable to: Non-Controlling Interests 27 9 18 92 33 59 Preference Equity Shareholders 16 22 (6) 49 59 (10) Common Equity Shareholders 278 127 151 829 396 433 ---------------------------------------------------------------------------- Net Earnings 321 158 163 970 488 482 ---------------------------------------------------------------------------- Earnings per Common Share Basic ($) 0.66 0.45 0.21 2.00 1.40 0.60 Diluted ($) 0.66 0.45 0.21 2.00 1.39 0.61 Weighted Average Number of Common Shares Outstanding (# millions) 418.6 285.0 133.6 413.9 283.7 130.2 ---------------------------------------------------------------------------- Cash Flow from Operating Activities 800 478 322 1,990 1,409 581 ----------------------------------------------------------------------------

/T/

Revenue

The increase in revenue for the quarter and year to date was driven by the acquisition of ITC in October 2016, higher revenue at UNS Energy, and the flow through in customer rates of higher overall energy supply costs, partially offset by unfavourable foreign exchange associated with the translation of US dollar-denominated revenue. The increase in revenue at UNS Energy was mainly due to the impact of the rate case settlement, United States Federal Energy Regulatory Commission ("FERC") ordered transmission refunds recognized in the third quarter and year-to-date 2016 of $11 million ($7 million after tax) and $29 million ($18 million after tax), respectively, and higher short-term wholesale sales. The increase in revenue at UNS Energy was partially offset by $17 million ($10 million after tax) in revenue related to the settlement of Springerville Unit 1 matters recognized in the third quarter of 2016.

Energy Supply Costs

The decrease in energy supply costs for the quarter was primarily due to favourable foreign exchange associated with the translation of US dollar-denominated energy supply costs, partially offset by higher overall commodity costs.

The increase in energy supply costs year to date was primarily due to higher overall commodity costs, partially offset by favourable foreign exchange associated with the translation of US dollar-denominated energy supply costs.

Operating Expenses

The increase in operating expenses for the quarter and year to date was primarily due to the acquisition of ITC, and general inflationary and employee-related cost increases. The increase was partially offset by the receipt of a $28 million break fee ($24 million net of related transaction costs and tax) associated with the termination of the Waneta Dam purchase agreement in the third quarter of 2017, acquisition-related transaction costs of $4 million ($3 million after tax) and $39 million ($32 million after tax) for the third quarter and year-to-date 2016, respectively, associated with ITC, and favourable foreign exchange associated with the translation of US dollar-denominated operating expenses.

Depreciation and Amortization

The increase in depreciation and amortization for the quarter and year to date was primarily due to the acquisition of ITC and continued investment in energy infrastructure at the Corporation's other regulated utilities.

Other Income, Net

The increase in other income, net of expenses, for the quarter and year to date was primarily due to the acquisition of ITC. The favourable settlement of matters at UNS Energy pertaining to FERC-ordered transmission refunds of $11 million ($7 million after tax), in the first quarter of 2017, also contributed to the year-to-date increase.

Finance Charges

The increase in finance charges for the quarter and year to date was primarily due to the acquisition of ITC, including interest expense on debt issued to complete the financing of the acquisition. The increase was partially offset by acquisition-related transaction costs of $21 million ($16 million after tax) and $35 million ($26 million after tax) for the third quarter and year-to-date 2016, respectively, associated with ITC.

Income Tax Expense

The increase in income tax expense for the quarter and year to date was driven by the acquisition of ITC and higher earnings before taxes. ITC's higher federal and state jurisdictional tax rates also increased the total effective income tax rate of Fortis.

Net Earnings Attributable to Common Equity Shareholders and Basic Earnings per Common Share



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