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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| Elcora Advanced Materials Corp | TSXV:ERA | TSX Venture | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0.015 | 0.015 | 0.02 | 0.015 | 0.015 | 0.015 | 171,682 | 14:30:00 |
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Fortis Inc. ("Fortis" or the "Corporation") (TSX:FTS) achieved first quarter net
earnings attributable to common equity shareholders of $151 million, or $0.79
per common share, compared to $121 million, or $0.64 per common share, for the
first quarter of 2012.
Earnings for the quarter were favourably impacted by an extraordinary gain of
approximately $22 million net of tax, or $0.12 per common share, related to the
settlement of all matters, including release from all debt obligations,
pertaining to the Government of Newfoundland and Labrador's December 2008
expropriation of non-regulated hydroelectric generating assets and water rights
in central Newfoundland, then owned by Exploits River Hydro Partnership
("Exploits Partnership") in which Fortis holds an indirect 51% interest.
"In addition to the settlement of expropriation matters relating to Exploits
Partnership, performance for the quarter was driven by the regulated utilities
in western Canada, led by FortisAlberta," says Stan Marshall, President and
Chief Executive Officer, Fortis Inc.
Canadian Regulated Electric Utilities contributed earnings of $57 million, up $6
million from the first quarter of 2012. FortisAlberta's earnings increased $5
million, due to lower depreciation of $3 million and net transmission revenue of
approximately $2 million recognized in the first quarter of 2013 associated with
the finalization of 2012 transmission variances. The utility's depreciation
rates were reduced, effective January 1, 2012, as a result of the decision
related to FortisAlberta's 2012 revenue requirements, the impact of which was
not recognized until the second quarter of 2012 when the decision was received.
FortisBC Electric's earnings were $2 million higher quarter over quarter, due to
growth in energy infrastructure investment, timing of operating expenses,
lower-than-expected finance charges and depreciation, and higher capitalized
allowance for funds used during construction, partially offset by higher
effective income taxes.
FortisBC Electric acquired the City of Kelowna's (the "City's") electrical
utility assets for approximately $55 million in March 2013, which now allows
FortisBC Electric to directly serve some 15,000 customers formerly served by the
City. FortisBC Electric had provided the City with electricity under a wholesale
tariff and had operated and maintained the City's electrical utility assets
under contract since 2000.
Canadian Regulated Gas Utilities contributed earnings of $85 million, up $3
million from the first quarter of 2012. The increase in earnings was mainly due
to growth in energy infrastructure investment and increased gas transportation
volumes to industrial customers, partially offset by lower-than-expected
customer additions and higher effective income taxes.
Fortis paid a dividend of 31 cents per common share on March 1, 2013, up from 30
cents for the fourth quarter of 2012. The 3.3% increase in the quarterly
dividend translates into an annualized dividend of $1.24 and extends the
Corporation's record of annual common share dividend increases to 40 consecutive
years, the longest record of any public corporation in Canada.
FortisAlberta received a decision from its regulator in March 2013 approving an
interim increase in customer distribution rates, effective January 1, 2013,
including interim approval of 60% of the revenue requirement associated with
certain capital expenditures in 2013 not otherwise recovered under
performance-based rates. Final decisions on the utility's rates are expected in
the second half of 2013.
In April 2013 Newfoundland Power received a cost of capital decision whereby the
utility's allowed rate of return on common shareholders' equity ("ROE") and
common equity component of capital structure will remain at 8.8% and 45%,
respectively, for 2013 through 2015.
Final allowed ROEs and capital structure for 2013 remain to be determined for
FortisBC and FortisAlberta. A decision associated with the first phase of a
Generic Cost of Capital ("GCOC") Proceeding in British Columbia as it affects
FortisBC Energy Inc. is expected mid-2013 and the second phase of the
proceeding, which will affect the other FortisBC utilities, commenced in March
2013. The process for the GCOC Proceeding in Alberta is scheduled to commence in
the second quarter of 2013.
Caribbean Regulated Electric Utilities contributed $3 million of earnings,
consistent with the first quarter of 2012.
Non-Regulated Fortis Generation contributed $24 million of earnings compared to
$5 million for the first quarter of 2012. Excluding the $22 million after-tax
extraordinary gain on the settlement of expropriation matters, as noted above,
earnings decreased $3 million, mainly related to lower production in Belize due
to lower rainfall.
Fortis Properties contributed earnings of less than $0.5 million for the first
quarter of 2013 compared to $1 million for the first quarter of 2012. The
decrease was mainly due to lower occupancy levels at the Hospitality Division's
operations in central Canada.
Corporate and other expenses were $18 million compared to $21 million for the
first quarter of 2012. Corporate and other expenses for the first quarter of
2013 were reduced by $2 million related to foreign exchange, while corporate and
other expenses for the same quarter last year were increased by $1.5 million
associated with foreign exchange. CH Energy Group, Inc. ("CH Energy Group")
acquisition-related expenses were approximately $0.5 million after tax for the
first quarter of 2013 compared to $4 million after tax for the same quarter last
year. Excluding the above-noted acquisition-related expenses and foreign
exchange impacts, corporate and other expenses increased $4 million quarter over
quarter, mainly as a result of higher preference share dividends, partially
offset by lower finance charges.
Consolidated capital expenditures, before customer contributions, were
approximately $250 million for the first quarter of 2013. Construction of the
$900 million, 335-megawatt Waneta Expansion hydroelectric generating facility
("Waneta Expansion") in British Columbia continues on time and on budget, with
completion of the facility expected in spring 2015. Approximately $483 million
in total has been spent on the Waneta Expansion since construction began in late
2010.
The Corporation's capital program is expected to total $1.3 billion in 2013.
Over the five years 2013 through 2017, the Corporation's capital program,
including expenditures at Central Hudson Gas & Electric Corporation ("Central
Hudson"), is expected to total approximately $6 billion.
Cash flow from operating activities was $280 million for the quarter compared to
$328 million for the first quarter of 2012. The decrease was largely due to
changes in working capital quarter over quarter.
Fortis has consolidated credit facilities of $2.4 billion, of which $2.0 billion
was unused as at March 31, 2013, including $910 million available for borrowing
under its corporate credit facility.
The Corporation's debt credit ratings of A- and A(low) were affirmed by Standard
& Poor's and DBRS, respectively, in February 2013.
Fortis announced in February 2012 that it had entered into an agreement to
acquire CH Energy Group, for an aggregate purchase price of approximately US$1.5
billion, including the assumption of approximately US$500 million of debt on
closing. Central Hudson, the main business of CH Energy Group, serves 375,000
electric and gas customers in New York State's Mid-Hudson River Valley. Approval
of the acquisition by the New York State Public Service Commission ("PSC") is
the last significant regulatory matter required to close the transaction. A
Settlement Agreement among Fortis, CH Energy Group, PSC staff, registered
interveners and other parties was filed with the PSC in January 2013. A
Recommended Decision issued on May 3, 2013 by administrative law judges in
connection with the acquisition asserts that without modification of the terms
of the Settlement Agreement, the benefits of the acquisition are outweighed by
perceived detriments remaining after mitigation. The Recommended Decision is an
advisory opinion that will be considered by the PSC in determining whether to
approve the acquisition. While no assurance regarding a closing of the
transaction can be given until an order is issued by the PSC, a final decision
by the PSC and subsequent closing of the transaction is expected in June 2013.
Based on the terms of the current Settlement Agreement, the acquisition is
expected to be accretive to earnings per common share of Fortis within the first
full year of ownership, excluding acquisition-related expenses.
"We look forward to welcoming the employees of CH Energy Group to the Fortis
Group. The addition of this well-run U.S. utility and its proven track record
for providing customers with quality service will further enhance the
positioning of Fortis as a leader in the North American utility industry,"
concludes Marshall.
Interim Management Discussion and Analysis
For the three months ended March 31, 2013
Dated May 7, 2013
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 interim unaudited consolidated financial statements and
notes thereto for the three months ended March 31, 2013 and the MD&A and audited
consolidated financial statements for the year ended December 31, 2012 included
in the Corporation's 2012 Annual Report. Financial information contained in the
MD&A has been prepared in accordance with accounting principles generally
accepted in the United States ("US GAAP") and is presented in Canadian dollars
unless otherwise specified.
Fortis includes forward-looking information in the Management Discussion and
Analysis ("MD&A") within the meaning of applicable securities laws in Canada
("forward-looking information"). The purpose of the forward-looking information
is to provide management's expectations regarding the Corporation's future
growth, results of operations, performance, business prospects and
opportunities, and it 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", "believes", "budgets", "could", "estimates", "expects",
"forecasts", "intends", "may", "might", "plans", "projects", "schedule",
"should", "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 in the MD&A
includes, but is not limited to, statements regarding: the Corporation's
forecasted gross consolidated capital expenditures for 2013 and total capital
spending over the five-year period 2013 through 2017, including expenditures at
Central Hudson Gas & Electric Corporation; the expectation that capital
investment over the above-noted five-year period will allow utility rate base
and hydroelectric investment to increase at a combined compound annual growth
rate of approximately 6%; the expected nature, timing and capital cost related
to the construction of the Waneta Expansion hydroelectric generating facility
("Waneta Expansion"); the expectation that cash required to complete subsidiary
capital expenditure programs will be sourced from a combination of cash from
operations, borrowings under credit facilities, equity injections from Fortis
and long-term debt offerings; the expectation that the combination of available
credit facilities and relatively low annual debt maturities and repayments will
provide the Corporation and its subsidiaries with flexibility in the timing of
access to capital markets; the expected consolidated long-term debt maturities
and repayments on average annually over the next five years; the expectation
that the Corporation and its subsidiaries will remain compliant with debt
covenants during 2013; the expected timing of filing of regulatory applications
and of receipt of regulatory decisions; the expected timing of the closing of
the acquisition of CH Energy Group, Inc. ("CH Energy Group") by Fortis and the
expectation that, based on the terms of the current Settlement Agreement, the
acquisition will be accretive to earnings per common share of Fortis within the
first full year of ownership, excluding acquisition-related expenses; the
expectation that the Corporation's capital expenditure program will support
continuing growth in earnings and dividends; and the Corporation's expected
regulated midyear rate base in 2013 upon closing of the CH Energy Group
acquisition.
The forecasts and projections that make up the forward-looking information are
based on assumptions which include, but are not limited to: the receipt of
applicable regulatory approvals and requested rate orders, no material adverse
regulatory decisions being received and the expectation of regulatory stability;
FortisAlberta continues to recover its cost of service and earn its allowed rate
of return on common shareholders' equity ("ROE") under performance-based
rate-setting, which commenced for a five-year term effective January 1, 2013;
the receipt of regulatory approval of the acquisition of CH Energy Group from
the New York State Public Service Commission; the closing of the acquisition of
CH Energy Group before the expiry of the Subscription Receipts; 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 gas and electricity 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 the construction of the Waneta Expansion;
sufficient liquidity and capital resources; the expectation that the Corporation
will receive appropriate compensation from the Government of Belize ("GOB") for
fair value of the Corporation's investment in Belize Electricity that was
expropriated by the GOB; the expectation that Belize Electric Company Limited
will not be expropriated by the GOB; the continuation of regulator-approved
mechanisms to flow through the commodity cost of natural gas and energy supply
costs in customer rates; the ability to hedge exposures to fluctuations in
foreign exchange rates, natural gas commodity prices and fuel prices; 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 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 ability to obtain and maintain licences and permits; retention of
existing service areas; the ability to report under accounting principles
generally accepted in the United States beyond 2014 or the adoption of
International Financial Reporting Standards after 2014 that allows for the
recognition of regulatory assets and liabilities; the continued tax-deferred
treatment of earnings from the Corporation's Caribbean operations; continued
maintenance of information technology infrastructure; continued favourable
relations with First Nations; favourable labour relations; 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. 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, the
Corporation's MD&A for the year ended December 31, 2012 and in continuous
disclosure materials filed from time to time with Canadian securities regulatory
authorities. Key risk factors for 2013 include, but are not limited to:
uncertainty of the impact a continuation of a low interest rate environment may
have on the allowed ROE at each of the Corporation's regulated utilities in
western Canada; risks related to the ability to close the acquisition of CH
Energy Group, the timing of such closing and the realization of the benefits of
the acquisition; risk associated with the amount of compensation to be paid to
Fortis for its investment in Belize Electricity that was expropriated by the
GOB; and the timeliness of the receipt of compensation and the ability of the
GOB to pay the compensation owing to Fortis.
All forward-looking information in the MD&A 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 after the date hereof.
CORPORATE OVERVIEW
Fortis is the largest investor-owned distribution utility in Canada, serving
more than two million gas and electricity customers. Its regulated holdings
include electric utilities in five Canadian provinces and two Caribbean
countries and a natural gas utility in British Columbia, Canada. Fortis owns
non-regulated generation assets, primarily hydroelectric, in Canada, Belize and
Upstate New York, and hotels and commercial office and retail space in Canada.
Year-to-date March 31, 2013, the Corporation's electricity distribution systems
met a combined peak demand of approximately 5,152 megawatts ("MW") and its gas
distribution system met a peak day demand of 1,113 terajoules. For additional
information on the Corporation's business segments, refer to Note 1 to the
Corporation's interim unaudited consolidated financial statements for the three
months ended March 31, 2013 and to the "Corporate Overview" section of the 2012
Annual MD&A.
The Corporation's main business, utility operations, is highly regulated and the
earnings of the Corporation's regulated utilities are primarily determined under
cost of service ("COS") regulation. Generally under COS regulation, the
respective regulatory authority sets customer gas and/or electricity rates to
permit a reasonable opportunity for the utility to recover, on a timely basis,
estimated costs of providing service to customers, including a fair rate of
return on a regulatory deemed or targeted capital structure applied to an
approved regulatory asset value ("rate base"). The ability of a regulated
utility to recover prudently incurred costs of providing service and earn the
regulator-approved rate of return on common shareholders' equity ("ROE") and/or
rate of return on rate base assets ("ROA") depends on the utility achieving the
forecasts established in the rate-setting processes. As such, earnings of
regulated utilities are generally impacted by: (i) changes in the
regulator-approved allowed ROE and/or ROA; (ii) changes in rate base; (iii)
changes in energy sales or gas delivery volumes; (iv) changes in the number and
composition of customers; (v) variances between actual expenses incurred and
forecasted expenses used to determine revenue requirements and set customer
rates; and (vi) timing differences within an annual financial reporting period
between when actual expenses are incurred and when they are recovered from
customers in rates. When forward test years are used to establish revenue
requirements and set base customer rates, these rates are not adjusted as a
result of actual COS being different from that which is estimated, other than
for certain prescribed costs that are eligible to be deferred on the balance
sheet. In addition, the Corporation's regulated utilities, where applicable, are
permitted by their respective regulatory authority to flow through to customers,
without markup, the cost of natural gas, fuel and/or purchased power through
base customer rates and/or the use of rate stabilization and other mechanisms.
When performance-based rate-setting ("PBR") mechanisms are utilized in
determining annual revenue requirements and resulting customer rates, a formula
is generally applied that incorporates inflation and assumed productivity
improvements. The use of PBR mechanisms should allow a utility a reasonable
opportunity to recover prudent COS and earn its allowed ROE.
SIGNIFICANT ITEMS
Pending Acquisition of CH Energy Group, Inc.: On May 3, 2013 a Recommended
Decision was issued by administrative law judges in connection with the
Settlement Agreement filed by Fortis, CH Energy Group, Inc. ("CH Energy Group"),
New York State Public Service Commission ("PSC") staff, registered interveners
and other parties in January 2013 requesting approval of the acquisition of CH
Energy by Fortis. For further information on the pending acquisition and
Recommended Decision, refer to the "Business Risk Management" section of this
MD&A.
Settlement of Expropriation Matters - Exploits River Hydro Partnership:
Effective March 2013 the Corporation and the Government of Newfoundland and
Labrador ("Government") settled all matters, including release from all debt
obligations, pertaining to the Government's December 2008 expropriation of
non-regulated hydroelectric generating assets and water rights in central
Newfoundland, then owned by Exploits River Hydro Partnership ("Exploits
Partnership") in which Fortis holds an indirect 51% interest. As a result of the
settlement of expropriation matters, an extraordinary after-tax gain of
approximately $22 million was recognized in the first quarter of 2013.
Acquisition of the Electrical Utility Assets from the City of Kelowna: FortisBC
Electric acquired the City of Kelowna's (the "City's") electrical utility assets
for approximately $55 million in March 2013, which now allows FortisBC Electric
to directly serve some 15,000 customers formerly served by the City. FortisBC
Electric had provided the City with electricity under a wholesale tariff and had
operated and maintained the City's electrical utility assets under contract
since 2000.
Receipt of Regulatory Decisions: FortisAlberta received a decision from its
regulator in March 2013 approving an interim increase in customer distribution
rates, effective January 1, 2013.
In April 2013 Newfoundland Power received a decision on cost of capital. The
utility's allowed ROE and common equity component of capital structure have been
set for 2013 through 2015 and remain unchanged from 2012.
For a further discussion on the nature of the above regulatory decisions, refer
to the "Material Regulatory Decisions and Applications" section of this MD&A.
FINANCIAL HIGHLIGHTS
Fortis has adopted a strategy of profitable growth with earnings per common
share as the primary measure of performance. The Corporation's business is
segmented by franchise area and, depending on regulatory requirements, by the
nature of the assets. Key financial highlights for the first quarters ended
March 31, 2013 and March 31, 2012 are provided in the following table.
----------------------------------------------------------------------------
Consolidated Financial Highlights
(Unaudited) Quarter Ended March 31
($ millions, except for common share
data) 2013 2012 Variance
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Revenue 1,113 1,149 (36)
Energy Supply Costs 505 566 (61)
Operating Expenses 221 214 7
Depreciation and Amortization 129 119 10
Other Income (Expenses), Net 6 (3) 9
Finance Charges 89 91 (2)
Income Taxes 30 23 7
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Earnings Before Extraordinary Item 145 133 12
Extraordinary Gain, Net of Tax 22 - 22
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Net Earnings 167 133 34
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Net Earnings Attributable to:
Non-Controlling Interests 2 1 1
Preference Equity Shareholders 14 11 3
Common Equity Shareholders 151 121 30
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Net Earnings 167 133 34
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Earnings per Common Share Before
Extraordinary Item
Basic ($) 0.67 0.64 0.03
Diluted ($) 0.66 0.62 0.04
Earnings per Common Share
Basic ($) 0.79 0.64 0.15
Diluted ($) 0.76 0.62 0.14
Weighted Average Number of Common Shares
Outstanding (# millions) 192.0 189.0 3.0
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Cash Flow from Operating Activities 280 328 (48)
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Factors Contributing to Revenue Variance
Unfavourable
-- Lower commodity cost of natural gas charged to customers
-- Lower average gas consumption by residential and commercial customers,
due to warmer temperatures
-- Decreased non-regulated hydroelectric production in Belize, due to lower
rainfall
-- Decreased electricity sales at FortisBC Electric, due to warmer
temperatures
Favourable
-- An increase in gas delivery rates and the base component of electricity
rates at most of the regulated utilities, consistent with rate
decisions, reflecting ongoing investment in energy infrastructure and
forecasted certain higher expenses recoverable from customers
-- Higher average gas transportation volumes to industrial customers
-- Growth in the number of customers, driven by FortisAlberta
-- Increased electricity sales at Newfoundland Power, Maritime Electric and
Fortis Turks and Caicos
-- Net transmission revenue of approximately $2 million recognized at
FortisAlberta in the first quarter of 2013, associated with the
finalization of 2012 net transmission volume variances
Factors Contributing to Energy Supply Costs Variance
Favourable
-- Lower commodity cost of natural gas
-- Lower average gas consumption by residential and commercial customers,
which reduced natural gas purchases
Unfavourable
-- Increased electricity sales at Newfoundland Power, Maritime Electric and
Fortis Turks and Caicos, which increased fuel and power purchases
-- Increased costs at Maritime Electric associated with energy supply costs
being expensed in the first quarter of 2013 related to the New Brunswick
Power Point Lepreau nuclear generating station ("Point Lepreau"), which
returned to service in the fourth quarter of 2012
Factors Contributing to Operating Expenses Variance
Unfavourable
-- General inflationary and employee-related cost increases at most of the
Corporation's regulated utilities
-- Higher operating expenses at Newfoundland Power, mainly due to costs
incurred in the first quarter of 2013 associated with restoration
efforts following the loss of energy supply from Newfoundland and
Labrador Hydro ("Newfoundland Hydro") in January 2013, increased costs
associated with customer energy conservation programs, and the impact of
regulator-approved cost recovery deferrals in 2012, which reduced
operating expenses in the first quarter of last year
-- Higher contracting and information technology support costs at the
FortisBC Energy companies
Favourable
-- Timing of expenditures at FortisBC Electric
Factors Contributing to Depreciation and Amortization Expense Variance
Unfavourable
-- Continued investment in energy infrastructure
Favourable
-- Lower depreciation rates at FortisAlberta, effective January 1, 2012, as
a result of the 2012 distribution revenue requirements decision received
in April 2012. The cumulative impact of the overall decrease in
depreciation rates was recognized in the second quarter of 2012, when
the decision was received, of which approximately $3 million of
decreased depreciation expense related to the first quarter of 2012.
Factors Contributing to Other Income (Expenses), Net Variance
Favourable
-- Approximately $0.5 million of costs incurred during the first quarter of
2013, compared to $4 million of costs incurred during the first quarter
of 2012, related to the pending acquisition of CH Energy Group
-- A foreign exchange gain of approximately $2 million recognized in the
first quarter of 2013, compared to a foreign exchange loss of $1.5
million recognized in the first quarter of 2012, associated with the
translation of the US dollar-denominated long-term other asset
representing the book value of the Corporation's expropriated investment
in Belize Electricity
Factor Contributing to Finance Charges Variance
Favourable
-- Higher capitalized interest associated with the financing of the
construction of the Corporation's 51% controlling ownership interest in
the Waneta Expansion hydroelectric generating facility ("Waneta
Expansion")
Factors Contributing to Income Taxes Variance
Unfavourable
-- Higher earnings before income taxes
-- Differences in the deductions for income tax purposes compared to
accounting purposes quarter over quarter
Factor Contributing to Extraordinary Gain, Net of Tax Variance
Favourable
-- An approximate $25 million ($22 million after-tax) extraordinary gain
recognized in the first quarter of 2013 on the settlement of
expropriation matters associated with Exploits Partnership
Factors Contributing to Earnings Variance
Favourable
-- An approximate $22 million after-tax extraordinary gain recognized in
the first quarter of 2013 on the settlement of expropriation matters
associated with Exploits Partnership
-- Increased earnings at FortisAlberta, due to lower depreciation of $3
million and net transmission revenue of approximately $2 million
recognized in the first quarter of 2013 associated with the finalization
of 2012 net transmission volume variances
-- Increased earnings at the FortisBC Energy companies, mainly due to rate
base growth and increased transportation volumes to industrial
customers, partially offset by lower-than-expected customer additions
and higher effective income taxes
-- Lower corporate expenses due to: (i) a foreign exchange gain of
approximately $2 million recognized in the first quarter of 2013,
compared to a foreign exchange loss of $1.5 million recognized in the
first quarter of 2012, associated with the translation of the US dollar-
denominated long-term other asset representing the book value of the
Corporation's expropriated investment in Belize Electricity; (ii)
approximately $0.5 million of costs incurred during the first quarter of
2013, compared to $4 million of costs incurred during the first quarter
of 2012, related to the pending acquisition of CH Energy Group; and
(iii) lower finance charges, primarily due to higher capitalized
interest associated with financing of the construction of the
Corporation's 51% controlling ownership interest in the Waneta
Expansion. The above items were partially offset by higher preference
share dividends and a lower income tax recovery.
-- Increased earnings at FortisBC Electric, due to rate base growth, timing
of operating expenses, lower-than-expected finance charges and
depreciation, and higher capitalized allowance for funds used during
construction ("AFUDC"), partially offset by higher effective income
taxes
Unfavourable
-- Decreased non-regulated hydroelectric production in Belize, due to lower
rainfall
-- Decreased earnings at Maritime Electric, due to higher energy supply
costs, partially offset by higher electricity sales
-- Decreased earnings at Fortis Properties, mainly due to lower occupancy
levels at the Hospitality Division's operations in central Canada
SEGMENTED RESULTS OF OPERATIONS
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Segmented Net Earnings Attributable to Common Equity Shareholders
(Unaudited) Quarter Ended March 31
($ millions) 2013 2012 Variance
----------------------------------------------------------------------------
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Regulated Gas Utilities - Canadian
FortisBC Energy Companies 85 82 3
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Regulated Electric Utilities - Canadian
FortisAlberta 26 21 5
FortisBC Electric 18 16 2
Newfoundland Power 7 7 -
Other Canadian Electric Utilities 6 7 (1)
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57 51 6
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Regulated Electric Utilities - Caribbean 3 3 -
Non-Regulated - Fortis Generation 24 5 19
Non-Regulated - Fortis Properties - 1 (1)
Corporate and Other (18) (21) 3
----------------------------------------------------------------------------
Net Earnings Attributable to Common
Equity Shareholders 151 121 30
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For a discussion of the nature of regulation and material regulatory decisions
and applications pertaining to the Corporation's regulated utilities, refer to
the "Regulatory Highlights" section of this MD&A. A discussion of the financial
results of the Corporation's reporting segments is as follows.
REGULATED GAS UTILITIES - CANADIAN
FORTISBC ENERGY COMPANIES (1)
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter Ended March 31
2013 2012 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gas Volumes (petajoules ("PJ")) 71 72 (1)
Revenue ($ millions) 492 548 (56)
Earnings ($ millions) 85 82 3
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(1) Includes FortisBC Energy Inc. ("FEI"), FortisBC Energy (Vancouver
Island) Inc. ("FEVI") and FortisBC Energy (Whistler) Inc. ("FEWI")
Factors Contributing to Gas Volumes Variance
Unfavourable
-- Lower average gas consumption by residential and commercial customers,
due to warmer temperatures
Favourable
-- Higher average gas transportation volumes to industrial customers
As at March 31, 2013, the total number of customers served by the FortisBC
Energy companies was approximately 948,000. Net customer additions were 3,000
during the first quarter of 2013 compared to 1,000 during the first quarter of
2012.
The FortisBC Energy companies earn approximately the same margin regardless of
whether a customer contracts for the purchase and delivery of natural gas or
only for the delivery of natural gas. As a result of the operation of
regulator-approved deferral mechanisms, changes in consumption levels and the
commodity cost of natural gas from those forecasted to set residential and
commercial customer gas rates do not materially affect earnings.
Seasonality has a material impact on the earnings of the FortisBC Energy
companies as a major portion of the gas distributed is used for space heating.
Most of the annual earnings of the FortisBC Energy companies are realized in the
first and fourth quarters.
Factors Contributing to Revenue Variance
Unfavourable
-- Lower commodity cost of natural gas charged to customers
-- Lower average gas consumption by residential and commercial customers
-- Lower-than-expected customer additions
Favourable
-- An increase in the delivery component of customer rates, effective
January 1, 2013, mainly due to ongoing investment in energy
infrastructure and forecasted higher expenses recoverable from customers
as reflected in the 2012/2013 revenue requirements decision received in
April 2012
-- Higher average gas transportation volumes to industrial customers
Factors Contributing to Earnings Variance
Favourable
-- Rate base growth, due to continued investment in energy infrastructure
-- Higher average gas transportation volumes to industrial customers
Unfavourable
-- Lower-than-expected customer additions
-- Higher effective income taxes, due to differences in the deductions for
income tax purposes compared to accounting purposes quarter over quarter
REGULATED ELECTRIC UTILITIES - CANADIAN
FORTISALBERTA
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter Ended March 31
2013 2012 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Energy Deliveries (gigawatt hours
("GWh")) 4,491 4,482 9
Revenue ($ millions) 118 108 10
Earnings ($ millions) 26 21 5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Factors Contributing to Energy Deliveries Variance
Favourable
-- Growth in the number of customers, mainly in the residential sector,
with the total number of customers increasing by approximately 10,000
year over year as at March 31, 2013, driven by favourable economic
conditions
-- Higher average consumption by oil field customers, primarily due to
higher drilling activity
-- Higher average consumption by residential customers, due to cooler
temperatures
Unfavourable
-- Lower average consumption by oil and gas customers, mainly due to
decreased activity associated with a lower commodity price for natural
gas
As a significant portion of FortisAlberta's distribution revenue is derived from
fixed or largely fixed billing determinants, changes in quantities of energy
delivered are not entirely correlated with changes in revenue. Revenue is a
function of numerous variables, many of which are independent of actual energy
deliveries.
Factors Contributing to Revenue Variance
Favourable
-- An interim increase in customer electricity distribution rates,
effective January 1, 2013, associated with the regulator's interim
decision received in March 2013 related to FortisAlberta's PBR
Compliance Application
-- Growth in the number of customers
-- Net transmission revenue of approximately $2 million recognized in the
first quarter of 2013, associated with the finalization of 2012 net
transmission volume variances. As approved by the regulator in April
2012, FortisAlberta assumed the risk of volume variances related to net
transmission costs during 2012. The deferral of transmission volume
variances, however, was reinstated by the regulator, effective January
1, 2013.
Factors Contributing to Earnings Variance
Favourable
-- Lower depreciation rates, effective January 1, 2012, as a result of the
2012 distribution revenue requirements decision received in April 2012.
The cumulative impact of the overall decrease in depreciation rates was
recognized in the second quarter of 2012, when the decision was
received, of which approximately $3 million of decreased depreciation
expense related to the first quarter of 2012.
-- Net transmission revenue of approximately $2 million recognized in the
first quarter of 2013, for the reason discussed above
FORTISBC ELECTRIC (1)
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter Ended March 31
2013 2012 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Electricity Sales (GWh) 891 909 (18)
Revenue ($ millions) 88 87 1
Earnings ($ millions) 18 16 2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes the regulated operations of FortisBC Inc. and operating,
maintenance and management services related to the Waneta, Brilliant
and Arrow Lakes hydroelectric generating plants. In March 2013 FortisBC
Inc. acquired the City of Kelowna's electrical utility assets for
approximately $55 million, previous to which time FortisBC Inc. had
operated and maintained the assets under contract since 2000. For
further information, refer to the "Significant Items" section of this
MD&A. Excludes the non-regulated generation operations of FortisBC
Inc.'s wholly owned partnership, Walden Power Partnership.
Factor Contributing to Electricity Sales Variance
Unfavourable
-- Lower average consumption, due to warmer temperatures
Factors Contributing to Revenue Variance
Favourable
-- An increase in customer electricity rates, effective January 1, 2013,
mainly due to ongoing investment in energy infrastructure and forecasted
certain higher expenses recoverable from customers as reflected in the
2012/2013 revenue requirements decision received in August 2012
Unfavourable
-- The 2.0% decrease in electricity sales
-- Differences in the amortization to revenue of flow through adjustments
owing to customers quarter over quarter
Factors Contributing to Earnings Variance
Favourable
-- Rate base growth, due to continued investment in energy infrastructure
-- Lower operating expenses due to the timing of expenditures
-- Lower-than-expected finance charges and depreciation in the first
quarter of 2013
-- Higher capitalized AFUDC, as approved by the regulator
Unfavourable
-- Higher effective income taxes, due to lower deductions for income tax
purposes
NEWFOUNDLAND POWER
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter Ended March 31
2013 2012 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Electricity Sales (GWh) 1,942 1,914 28
Revenue ($ millions) 197 192 5
Earnings ($ millions) 7 7 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Factors Contributing to Electricity Sales Variance
Favourable
-- Growth in the number of customers
-- Higher average consumption, reflecting the higher concentration of
electric-versus-oil heating in new home construction combined with
economic growth
Factors Contributing to Revenue Variance
Favourable
-- The 1.5% increase in electricity sales
-- Increased amortization to revenue of regulatory liabilities and
deferrals, as approved by the regulator
Factors Contributing to Earnings Variance
Favourable
-- Electricity sales growth
Unfavourable
-- Increased operating expenses, mainly due to costs incurred in the first
quarter of 2013 associated with restoration efforts following the loss
of energy supply from Newfoundland Hydro in January 2013, increased
costs associated with customer energy conservation programs, and the
impact of regulator-approved cost recovery deferrals in 2012, which
reduced operating expenses in the first quarter of last year
-- Higher depreciation, due to continued investment in energy
infrastructure
OTHER CANADIAN ELECTRIC UTILITIES (1)
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter Ended March 31
2013 2012 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Electricity Sales (GWh) 671 645 26
Revenue ($ millions) 96 91 5
Earnings ($ millions) 6 7 (1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes Maritime Electric and FortisOntario. FortisOntario mainly
includes Canadian Niagara Power, Cornwall Electric and Algoma Power.
Factor Contributing to Electricity Sales Variance
Favourable
-- Higher average consumption, due to colder temperatures on Prince Edward
Island ("PEI") and in Ontario, as well as an increase in the number of
customers using electricity for home heating on PEI
Factor Contributing to Revenue Variance
Favourable
-- Higher electricity sales, driven by Maritime Electric, combined with an
increase in the basic component of customer rates at the utility,
effective March 1, 2013
Factors Contributing to Earnings Variance
Unfavourable
-- Higher energy supply costs at Maritime Electric, largely associated with
energy supply costs being expensed in the first quarter of 2013 related
to Point Lepreau, which returned to service in the fourth quarter of
2012
Favourable
-- Electricity sales growth at Maritime Electric
REGULATED ELECTRIC UTILITIES - CARIBBEAN (1)
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter Ended March 31
2013 2012 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average US:CDN Exchange Rate (2) 1.01 1.00 0.01
----------------------------------------------------------------------------
Electricity Sales (GWh) 170 166 4
Revenue ($ millions) 66 63 3
Earnings ($ millions) 3 3 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Comprised of Caribbean Utilities on Grand Cayman, Cayman Islands, in
which Fortis holds an approximate 60% controlling interest; three small
wholly owned utilities in the Turks and Caicos Islands, comprised of
FortisTCI Limited ("FortisTCI"), Atlantic Equipment & Power (Turks and
Caicos) Ltd. ("Atlantic") and Turks and Caicos Utilities Limited
("TCU"), acquired in August 2012, (collectively "Fortis Turks and
Caicos")
(2) The reporting currency of Caribbean Utilities and Fortis Turks and
Caicos is the US dollar.
Factor Contributing to Electricity Sales Variance
Favourable
-- Increased electricity sales at Fortis Turks and Caicos due to
electricity sales of 5 GWh at TCU, which was acquired in August 2012,
partially offset by lower average consumption by commercial customers at
FortisTCI, mainly due to higher fuel costs and resulting energy
conservation by customers
Factors Contributing to Revenue Variance
Favourable
-- Increased electricity sales at Fortis Turks and Caicos
-- An increase in electricity rates for FortisTCI's large hotel customers,
effective April 1, 2012
-- The flow through in customer electricity rates of higher energy supply
costs at Caribbean Utilities, due to an increase in the cost of fuel
Factors Contributing to Earnings Variance
Favourable
-- Decreased operating expenses at Caribbean Utilities, mainly due to lower
employee-related costs and maintenance costs
Unfavourable
-- Overall higher depreciation expense, due to continued investment in
energy infrastructure
NON-REGULATED - FORTIS GENERATION (1)
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter Ended March 31
2013 2012 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Energy Sales (GWh) 55 88 (33)
Revenue ($ millions) 5 9 (4)
Earnings ($ millions) 24 5 19
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Comprised of the financial results of non-regulated generation assets
in Belize, Ontario, British Columbia and Upstate New York, with a
combined generating capacity of 103 MW, mainly hydroelectric
Factor Contributing to Energy Sales and Revenue Variances
Unfavourable
-- Decreased production in Belize, due to lower rainfall
Factors Contributing Earnings Variance
Favourable
-- An approximate $22 million after-tax extraordinary gain on the
settlement of expropriation matters associated with Exploits
Partnership. For further information, refer to the "Significant Items"
section of this MD&A.
Unfavourable
-- Decreased production in Belize
NON-REGULATED - FORTIS PROPERTIES (1)
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter Ended March 31
2013 2012 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Hospitality - Revenue per Available Room
("RevPar") $ 66.04 $ 66.54 (0.8)%
Real Estate - Occupancy Rate (as at) 91.2% 92.2% (1.1)%
----------------------------------------------------------------------------
Hospitality Revenue ($ millions) 36 35 1
Real Estate Revenue ($ millions) 17 17 -
----------------------------------------------------------------------------
Total Revenue ($ millions) 53 52 1
----------------------------------------------------------------------------
Earnings ($ millions) - 1 (1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Fortis Properties owns and operates 23 hotels, comprised of more than
4,400 rooms, in eight Canadian provinces, and owns and operates
approximately 2.7 million square feet of commercial office and retail
space, primarily in Atlantic Canada.
Factors Contributing to RevPar Variance
Unfavourable
-- A 2.6% decrease in occupancy in all regions, with the most significant
decrease in central Canada
Favourable
-- A 1.8% increase in the average daily room rate, mainly in Atlantic
Canada and western Canada
Factor Contributing to Revenue Variance
Favourable
-- Increased revenue at the Hospitality Division, mainly due to
contribution from the StationPark All Suite Hotel, which was acquired in
October 2012, partially offset by lower revenue from other hotel
operations in central Canada
Factor Contributing to Earnings Variance
Unfavourable
-- Lower performance at the Hospitality Division, primarily due to the
impact of decreased occupancy levels at hotel operations in central
Canada
CORPORATE AND OTHER (1)
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter Ended March 31
($ millions) 2013 2012 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue 6 6 -
Operating Expenses 3 3 -
Depreciation and Amortization 1 1 -
Other Income (Expenses), Net 2 (5) 7
Finance Charges 10 11 (1)
Income Tax Recovery (2) (4) 2
----------------------------------------------------------------------------
(4) (10) 6
Preference Share Dividends 14 11 3
----------------------------------------------------------------------------
Net Corporate and Other Expenses (18) (21) 3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes Fortis net corporate expenses, net expenses of non-regulated
FortisBC Holdings Inc. ("FHI") corporate-related activities, and the
financial results of FHI's wholly owned subsidiary FortisBC Alternative
Energy Services Inc. and FHI's 30% ownership interest in CustomerWorks
Limited Partnership.
Factors Contributing to Net Corporate and Other Expenses Variance
Favourable
-- Increased other income, net of other expenses, primarily due to: (i) a
foreign exchange gain of approximately $2 million recognized in the
first quarter of 2013, compared to a foreign exchange loss of $1.5
million recognized in the first quarter of 2012, associated with the
translation of the US dollar-denominated long-term other asset
representing the book value of the Corporation's expropriated investment
in Belize Electricity; and (ii) approximately $0.5 million of costs
incurred during the first quarter of 2013, compared to $4 million of
costs incurred during the first quarter of 2012, related to the pending
acquisition of CH Energy Group
-- Lower finance charges, primarily due to higher capitalized interest
associated with the financing of the construction of the Corporation's
51% controlling ownership interest in the Waneta Expansion
Unfavourable
-- Higher preference share dividends, due to the issuance of First
Preference Shares, Series J in November 2012
-- Lower income tax recovery, due to higher Part VI.1 taxes and the release
of an income tax provision at FHI in the first quarter of 2012
REGULATORY HIGHLIGHTS
The nature of regulation and material regulatory decisions and applications
associated with each of the Corporation's regulated gas and electric utilities
for the first quarter of 2013 are summarized as follows.
NATURE OF REGULATION
----------------------------------------------------------------------------
Allowed Returns (%) Supportive
Features
------------------------------------------
Future or
Allowed Historical Test
Common Year
Regulated Regulatory Equity Used to Set
Utility Authority (%) 2011 2012 2013 Customer Rates
----------------------------------------------------------------------------
ROE COS/ROE
---------------------------
FEI British 40(1) 9.50 9.50 9.50(1) FEI: Prior to
Columbia January 1,
Utilities 2010, 50/50
Commission sharing of
("BCUC") earnings above
or below the
allowed ROE
under a PBR
mechanism that
expired on
December 31,
2009 with a
two-year phase-
out
FEVI BCUC 40(1) 10.00 10.00 10.00(1)
FEWI BCUC 40(1) 10.00 10.00 10.00(1) ROEs
established by
the BCUC -
2013 ROEs are
under review
---------------
Future Test
Year
----------------------------------------------------------------------------
FortisBC- BCUC 40(1) 9.90 9.90 9.90(1) COS/ROE
Electric
PBR mechanism
for 2009
through 2011:
50/50 sharing
of earnings
above or below
the allowed ROE
up to an
achieved ROE
that is 200
basis points
above or below
the allowed ROE
- excess to
deferral
account
ROE established
by the BCUC -
2013 ROE is
under review
---------------
Future Test
Year
----------------------------------------------------------------------------
Fortis- Alberta 41(1) 8.75 8.75 8.75(1) COS/ROE
Alberta Utilities
Commission
("AUC")
PBR mechanism
for 2013
through
2017 with
capital tracker
account
and other
supportive
features
ROE established
by the AUC -
2013 ROE is
under review
---------------
2012 test year
with 2013
through
2017 rates set
using PBR
mechanism
----------------------------------------------------------------------------
Newfound- Newfoundland 45 8.38 +/- 8.80 +/- 8.80 +/- COS/ROE
land Power and 50 bps 50 bps 50 bps
Labrador The allowed ROE
Board of was set using
Commissioners an
of automatic
Public adjustment
Utilities formula tied
("PUB") to long-term
Canada bond
yields for
2011. ROE
established by
the PUB for
2012 through
2015
---------------
Future Test
Year
----------------------------------------------------------------------------
Maritime- Island 40 9.75 9.75 9.75 COS/ROE
Electric Regulatory
and Appeals
Commission
---------------
Future Test
Year
----------------------------------------------------------------------------
Fortis- Ontario Canadian
Ontario Energy Board Niagara Power -
("OEB") 40 8.01 8.01 8.93(2) COS/ROE
Canadian
Niagara Power Algoma Power -
COS/ROE and
subject to
Rural and
Remote Rate
Algoma Power 40 9.85 9.85 9.85(2) Protection
("RRRP")
program
Franchise Cornwall
Agreement Electric -
Cornwall Price cap with
Electric commodity cost
flow through
---------------
Canadian
Niagara Power -
2009
test year for
2011 and 2012;
2013
test year for
2013
Algoma Power -
2011 test year
for
2011, 2012 and
2013
----------------------------------------------------------------------------
ROA COS/ROA
---------------------------
Caribbean- Electricity N/A 7.75 - 7.25 - 7.25 -
Utilities Regulatory 9.75 9.25 9.25(3) Rate-cap
Authority adjustment
("ERA") mechanism
("RCAM") based
on published
consumer price
indices
The Company may
apply for a
special
additional rate
to customers in
the event of a
disaster,
including a
hurricane.
---------------
Historical Test
Year
----------------------------------------------------------------------------
Fortis Utilities N/A 17.50(4) 17.50(4) 17.50(4) COS/ROA
Turks and make annual
Caicos filings to If the actual
the ROA is lower
Government of than the
the allowed ROA,
Turks and due to
Caicos additional
Islands costs resulting
from a
hurricane or
other event,
the utilities
may apply for
an increase in
customer rates
in the
following year.
---------------
Future Test
Year
----------------------------------------------------------------------------
(1) Capital structures and allowed ROEs for 2013 are interim and are
subject to change based on the outcomes of cost of capital proceedings
(2) Based on the ROE automatic adjustment formula, the allowed ROE for
regulated electric utilities in Ontario is 8.93% for 2013. This ROE is
not applicable to the regulated electric utilities until they are
scheduled to file full COS rate applications. As a result, the allowed
ROE of 8.93% is not applicable to Algoma Power in 2013.
(3) Subject to change in June 2013 based on the annual operation of the
RCAM
(4) Amount provided under licences as it relates to FortisTCI and Atlantic.
Amount provided under licence for TCU is 15%. Achieved ROAs at the
utilities were significantly lower than those allowed under licences as
a result of the inability, due to economic and political factors, to
increase base electricity rates associated with significant capital
investment in recent years.
MATERIAL REGULATORY DECISIONS AND APPLICATIONS
----------------------------------------------------------------------------
Regulated Summary Description
Utility
----------------------------------------------------------------------------
FEI/FEVI/FEWI - Effective January 1, 2013, rates increased by approximately
1.6% for typical residential customers at FEI in the Lower
Mainland, as a result of an increase in delivery rates in
accordance with the BCUC's decision in April 2012 pertaining
to the FortisBC Energy companies' 2012/2013 Revenue
Requirements Application ("RRA"), partially offset by a
decrease in midstream rates. Natural gas commodity rates
remained unchanged for customers at FEI, effective January 1,
2013.
- Effective January 1, 2013, rates increased approximately 5%
for typical customers at FEWI, as a result of an increase in
delivery rates, in accordance with the BCUC's decision in
April 2012 pertaining to the FortisBC Energy companies'
2012/2013 RRA, and an increase in natural gas commodity
rates.
- In February 2012 the BCUC approved FEI's amended
application for a general tariff for the provision of
compressed natural gas and liquefied natural gas ("LNG")
refuelling services for transportation vehicles. FEI's
application for changing its LNG sales and dispensing service
rate schedule from a pilot program to a permanent program is
pending before the BCUC. A decision on the application is
expected in the second quarter of 2013.
- In August 2011 FEI received a BCUC decision on the use of
Energy Efficiency and Conservation ("EEC") funds as
incentives for natural gas-fuelled vehicles ("NGVs"). FEI had
made these funds available to assist large customers in
purchasing NGVs in lieu of vehicles fuelled by diesel. The
decision determined that it was not appropriate to use EEC
funds for the above-noted purpose and the BCUC requested that
FEI provide further submissions to determine the prudency of
the EEC incentives. In August 2012 an application was filed
with the BCUC to review the prudency of the EEC incentives
totalling approximately $6 million. A decision was received
in April 2013 in which the BCUC determined that the EEC
incentives for NGVs were prudently incurred and can be
recovered from customers in rates.
- During the first quarter of 2013, the BCUC approved the
capital expenditures for the Telus Garden project at FortisBC
Alternative Energy Services Inc. ("FAES"); however, approval
of revisions to the rate design and rates is pending. There
has been no change in the status of the other projects at
FAES from that disclosed in the Corporation's 2012 Annual
MD&A.
- In April 2012 the FortisBC Energy companies applied to the
BCUC for the necessary approvals to amalgamate the three
utilities and implement common rates across the service
territories served by the amalgamated entity, effective
January 1, 2014. The BCUC issued its decision in February
2013 denying the request to implement common rates. The
FortisBC Energy companies filed a leave to appeal the
decision to the British Columbia Court of Appeal in March
2013 and filed an Application for Reconsideration with the
BCUC in April 2013.
- The public oral hearing for the first phase of a Generic
Cost of Capital ("GCOC") Proceeding to determine the allowed
ROE and appropriate capital structure for FEI, the designated
low-risk benchmark utility in British Columbia, occurred in
December 2012. A decision on the proceeding is expected mid-
2013. Effective January 1, 2013, as ordered by the BCUC in
December 2012, the current allowed ROE and capital structure
for FEI and all other regulated entities in British Columbia
that rely on the benchmark utility to establish rates are to
be maintained and made interim. FEVI, FEWI and FortisBC
Electric will have their allowed ROEs and capital structures
determined in the second phase of the GCOC Proceeding. In
March 2013 the BCUC initiated the second phase of the GCOC
Proceeding by establishing a procedural conference, which
took place in April 2013. The results of the GCOC Proceeding
could materially impact the earnings of the FortisBC Energy
companies and FortisBC Electric. For further discussion on
the nature of the GCOC Proceeding, refer to the "Material
Regulatory Decisions and Applications" section of the
Corporation's 2012 Annual MD&A.
----------------------------------------------------------------------------
FortisBC - Effective January 1, 2013, as approved by the BCUC in its
Electric August 2012 decision pertaining to FortisBC Electric's
2012/2013 RRA, customer electricity rates increased 4.2%.
- In July 2012 FortisBC Electric filed its Advanced Metering
Infrastructure ("AMI") Application, which was updated in
early 2013. A regulatory review by the BCUC and various
interveners concluded with an oral hearing in March 2013. A
decision on the application is expected in the second half of
2013. The AMI project proposes to improve and modernize
FortisBC Electric's grid by exchanging its manually read
meters with advanced meters. The AMI project is expected to
cost approximately $52 million.
- In March 2013 the BCUC approved the acquisition by FortisBC
Electric of the City of Kelowna's electrical utility assets
and allowed for approximately $38 million of the $55 million
purchase price to be included in FortisBC Electric's rate
base, resulting in the recognition of approximately $14
million of goodwill. The transaction closed in March 2013,
which now allows FortisBC Electric to directly serve some
15,000 customers formerly served by the City. Prior to the
acquisition, FortisBC Electric had provided the City with
electricity under a wholesale tariff and had operated and
maintained the City's electrical utility assets under
contract since 2000.
- In March 2012 the BCUC issued an order establishing a
written hearing process to review the prudency of
approximately $29 million in capital expenditures already
incurred related to the Kettle Valley Distribution Source
Project, which was substantially completed in 2009. In April
2013 the BCUC issued a decision approving substantially all
of the $29 million to be included in rate base, effective
from January 1, 2012.
----------------------------------------------------------------------------
FortisAlberta - In September 2012 the AUC issued a generic PBR Decision
outlining the PBR framework applicable to distribution
utilities in Alberta, including FortisAlberta, for a five-
year term, which commenced January 1, 2013. In the PBR
Decision, a formula that estimates inflation annually and
assumes productivity improvements is to be used by the
distribution utilities to determine customer rates on an
annual basis. The PBR framework also includes mechanisms for
the recovery or settlement of items determined to flow
through directly to customers and the recovery of costs
related to capital expenditures that are not being recovered
through the inflationary factor of the formula. The AUC also
approved: (i) a Z factor permitting an application for
recovery of costs related to significant unforeseen events;
(ii) a PBR re-opener mechanism permitting an application to
re-open and review the PBR plan to address specific problems
with the design or operation of the PBR plan; and (iii) an
ROE efficiency carry-over mechanism permitting an efficiency
incentive by allowing the utility to continue to benefit from
any efficiency gains achieved during the PBR term for two
years following the end of the term. The PBR formula does,
however, raise some concern and uncertainty for FortisAlberta
regarding the treatment of certain capital expenditures.
While the PBR Decision did provide for a capital tracker
mechanism for the recovery of costs related to certain
capital expenditures, FortisAlberta sought further
clarification regarding this mechanism in a Review and
Variance ("R&V") Application and a Capital Tracker
Application and sought leave to appeal the issue to the
Alberta Court of Appeal.
- In March 2013 the AUC issued a decision denying the R&V
Application. FortisAlberta has filed a leave to appeal the
decision on similar grounds as the leave to appeal the 2012
PBR Decision. Both appeals have been adjourned pending
further determinations in outstanding PBR-related
proceedings.
- In March 2013 the AUC issued an interim decision regarding
the Compliance Applications filed by the distribution
utilities in Alberta. The interim decision approved a
combined inflation and productivity factor of 1.71%, certain
adjustments to the Company's going-in rates, including
specific flow-through amounts, and the recovery, on an
interim basis, of 60% of the revenue requirement associated
with the 2013 capital tracker expenditures applied for to
provide a reasonable balance between the utilities'
forecasted 2013 customer rate adjustments related to the
capital trackers and potential customer rate-shock
implications. For FortisAlberta, the AUC approved
approximately $14.5 million of the $24 million in revenue
requested in its 2013 Capital Tracker Application. The
decision resulted in an interim increase in FortisAlberta's
distribution rates of approximately 4%, effective January 1,
2013, with collection from customers commencing April 1,
2013. A final decision on the Compliance Application, with
any subsequent adjustments to 2013 customer distribution
rates, is expected in the third quarter of 2013. A hearing on
the Capital Tracker Application is expected in June 2013,
with a decision expected in the second half of 2013.
- In October 2012 the AUC initiated a 2013 GCOC Proceeding to
establish the final allowed ROE for 2013 and determine
whether a formulaic ROE automatic adjustment mechanism should
be re-established. In November 2012 the 2013 GCOC Proceeding
was suspended until other regulatory matters were resolved.
In April 2013 the AUC recommenced the 2013 GCOC Proceeding to
set the allowed ROE and capital structure for distribution
utilities in Alberta for 2013 as well as the allowed ROE for
2014. In addition, an interim allowed ROE for 2015 will be
established. The AUC does not intend to consider the
possibility of re-establishing a formulaic ROE automatic
adjustment mechanism at this time. The process for the 2013
GCOC Proceeding is scheduled to commence in the second
quarter of 2013 with a hearing scheduled for early 2014. The
expected outcome of this proceeding is currently unknown.
- In its 2011 GCOC Decision, the AUC made statements
regarding cost responsibility for stranded assets, which
FortisAlberta and other utilities challenged as being
incorrectly made. As a result, FortisAlberta together with
other Alberta utilities filed an R&V Application with the
AUC. In June 2012 the AUC decided it would not permit an R&V
of the decision in question but would examine the issue in
the Utility Asset Disposition ("UAD") Proceeding, which was
reinitiated in November 2012. FortisAlberta and the other
Alberta utilities had also sought leave to appeal the
stranded asset pronouncements to the Alberta Court of Appeal
and temporarily adjourned that court process pending the
AUC's follow-up proceeding. Any decision by the AUC regarding
the treatment of stranded assets does not alter a utility's
right to a reasonable opportunity to recover prudent COS and
the right to earn a reasonable ROE. In June 2013
FortisAlberta, together with other Alberta utilities, will
file reply arguments in the UAD Proceeding, after which time
the AUC will commence deliberations with a decision expected
in the third quarter of 2013.
----------------------------------------------------------------------------
Newfound- - In April 2013 the PUB issued its decision related to
land Power Newfoundland Power's 2013/2014 General Rate Application
("GRA"), which was filed in September 2012, to establish the
Company's cost of capital for rate-making purposes. In its
decision, the PUB ordered that the allowed ROE and common
equity component of capital structure remain at 8.8% and 45%,
respectively, for 2013 through 2015. The PUB also ordered:
(i) the recognition of pension expense for regulatory
purposes in accordance with US GAAP and the related
regulatory asset to be recovered from customers over 15
years; (ii) a decrease in the overall composite depreciation
rate to 3.42% from 3.47%; (iii) the deferral of annual
customer energy conservation program costs to be recovered
from customers over the subsequent seven-year period; and
(iv) the approval of various regulatory amortizations over a
three-year period, including cost-recovery deferrals
recognized in 2011 and 2012, costs associated with the GRA
and the December 31, 2011 balance in the Weather
Normalization Account. The impact of the decision is expected
to increase customer electricity rates, effective January 1,
2013, by an overall average of approximately 5%, with
collection from customers commencing July 1, 2013. The
cumulative impact of the decision will be recorded in the
second quarter of 2013, when the decision was received, with
the impact of the decision related to the first quarter of
2013 determined to be immaterial.
- Through the annual operation of Newfoundland Hydro's Rate
Stabilization Plan, variances in the cost of fuel used to
generate electricity that Newfoundland Hydro sells to
Newfoundland Power are captured and flowed through to
customers through the operation of Newfoundland Power's Rate
Stabilization Account ("RSA"). Customer electricity rates are
expected to decrease approximately 8%, effective July 1,
2013, due to a decrease in the forecasted cost of oil to be
used to generate electricity at Newfoundland Hydro. The RSA
also captures variances in certain of Newfoundland Power's
costs, such as pension and energy supply costs. The above-
noted expected decrease in customer rates is not expected to
impact Newfoundland Power's earnings in 2013.
- Newfoundland Power plans to file an application with the
PUB in May 2013 to reduce customer electricity rates by an
overall average of approximately 3%, effective July 1, 2013,
as a result of the net impact of the GRA decision and annual
operation of the RSA.
- Newfoundland Power is required to file its GRA for 2016 on
or before June 1, 2015.
----------------------------------------------------------------------------
Maritime - In December 2012 the Electric Power (Energy Accord
Electric Continuation) Amendment Act ("Accord Continuation Act") was
enacted, which sets out the inputs, rates and other terms for
the continuation of the PEI Energy Accord ("Accord") for an
additional three years covering the period March 1, 2013
through February 29, 2016. Under the terms of the Accord
Continuation Act, Maritime Electric received, in March 2013,
proceeds of approximately $47 million from the Government of
PEI upon its assumption of Maritime Electric's $47 million
regulatory asset related to certain deferred incremental
replacement energy costs during the refurbishment of Point
Lepreau. Over the above-noted three-year period, increases in
electricity costs for a typical residential customer have
been set at 2.2%, effective March 1 annually, and Maritime
Electric's allowed ROE has been capped at 9.75% each year.
The resulting customer rate increases are due to the
collection from customers by Maritime Electric, acting as an
agent on behalf of the Government of PEI, of Point Lepreau-
related costs assumed by the Government of PEI and higher
COS. The proceeds were used by Maritime Electric to repay
short-term borrowings, pay a special dividend to Fortis to
maintain the utility's capital structure and to finance its
capital expenditure program.
----------------------------------------------------------------------------
FortisOntario - Effective January 1, 2013, residential customer rates in
Fort Erie, Gananoque and Port Colborne increased by an
average 6.8%, 5.9% and 7.4%, respectively. The rate increases
were the result of the OEB's decision pertaining to
FortisOntario's 2013 COS Application using a 2013 forward
test year and the recovery of smart meter costs and stranded
assets related to conventional meters and reflect an allowed
ROE of 8.93%.
- In March 2013 the OEB issued its decision on Algoma Power's
Third-Generation Incentive-Rate Mechanism Application for
customer electricity distribution rates and smart meter cost
recovery, effective January 1, 2013, resulting in an overall
increase in residential and commercial customer distribution
rates of 3.75%. Residential and commercial customer
distribution rates are adjusted by the average increase in
customer rates of all other distributor rate changes in
Ontario in the most recent rate year. The difference in the
recovery of COS in residential and commercial customer
distribution rates and the revenue requirement is compensated
from RRRP program funding. Recovery of smart meter costs
allocated to residential customers will also be recovered
from RRRP program funding as ordered by the OEB. Total RRRP
program funding for 2013 is expected to be approximately $12
million.
----------------------------------------------------------------------------
Caribbean - A Certificate of Need was filed with the ERA by Caribbean
Utilities Utilities in November 2011. In March 2012 proposals for the
installation of new generation units from six qualified
bidders, including Caribbean Utilities, was requested by the
ERA and Caribbean Utilities' proposal was submitted in July
2012. In February 2013 the ERA awarded the bid to develop,
install and operate two new 18-MW generation units to a third
party. In April 2013 the ERA announced that it will be
engaging an independent party to conduct an investigation of
irregularities in the bid process. The details of the
investigation have not yet been disclosed. Caribbean
Utilities is continuing its review of the ERA's analysis of
the bids.
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Fortis Turks - In March 2013 the Fortis Turks and Caicos utilities
and Caicos submitted their 2012 annual regulatory filings outlining
performance in 2012. Included in the filings were the
calculations, in accordance with the utilities' licences, of
rate base of US$195 million for 2012 and cumulative shortfall
in achieving allowable profits of US$105 million as at
December 31, 2012.
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CONSOLIDATED FINANCIAL POSITION
The following table outlines the significant changes in the consolidated balance
sheets between March 31, 2013 and December 31, 2012.
Significant Changes in the Consolidated Balance Sheets (Unaudited) between
March 31, 2013 and December 31, 2012
----------------------------------------------------------------------------
Balance Sheet Account Increase/
(Decrease) Explanation
($ millions)
----------------------------------------------------------------------------
Accounts receivable 88 The increase was primarily due to: (i)
the operation of equal payment plans
for customers, mainly at the FortisBC
Energy companies and Newfoundland
Power; (ii) the receivable recognized
in March 2013 upon the settlement of
expropriation matters associated with
Exploits Partnership; and (iii) the
impact of a seasonal increase in
electricity sales. The increase was
partially offset by lower unbilled
revenue accruals at the FortisBC
Energy companies, due to lower average
consumption as a result of warmer
temperatures.
----------------------------------------------------------------------------
Inventories (55) The decrease was driven by the normal
seasonal reduction of gas in storage
at the FortisBC Energy companies, due
to higher consumption during the
winter months, partially offset by the
impact of higher commodity cost of
natural gas.
----------------------------------------------------------------------------
Regulatory assets (27) The decrease was mainly due to: (i)
-current and long- proceeds of approximately $47 million
term received from the Government of PEI
upon its assumption of Maritime
Electric's regulatory asset associated
with certain deferred incremental
replacement energy costs during the
refurbishment of Point Lepreau; and
(ii) the $23 million change in the
deferral of the fair market value of
the natural gas derivatives at the
FortisBC Energy companies. The above
decreases were partially offset by
higher regulatory deferred income
taxes and an increase in the deferral
of various other costs, as permitted
by the regulators, mainly at the
FortisBC utilities and FortisAlberta.
----------------------------------------------------------------------------
Utility capital 156 The increase primarily related to: (i)
assets $230 million invested in electricity
and gas systems; (ii) the acquisition
of the City of Kelowna's electrical
utility assets by FortisBC Electric;
and (iii) the impact of foreign
exchange on the translation of US
dollar-denominated utility capital
assets. The above increases were
partially offset by depreciation and
customer contributions for the three
months ended March 31, 2013.
----------------------------------------------------------------------------
Short-term borrowings (47) The decrease was primarily due to a
reduction in borrowings at the
FortisBC Energy companies due to the
seasonality of operations, and the
repayment of borrowings at Maritime
Electric with a portion of proceeds
received from the Government of PEI in
March 2013, as discussed above.
----------------------------------------------------------------------------
Accounts payable and (80) The decrease was mainly due to: (i)
other current the timing of Alberta Electric System
liabilities Operator ("AESO") payments for
transmission costs and lower accounts
payable associated with transmission-
connected projects at FortisAlberta;
and (ii) the $23 million change in the
fair market value of the natural gas
derivatives at the FortisBC Energy
companies.
----------------------------------------------------------------------------
Regulatory 53 The increase was mainly due to a
liabilities - higher AESO charges deferral at
current and long- FortisAlberta and an increase in the
term rate stabilization accounts at the
FortisBC Energy companies.
----------------------------------------------------------------------------
Long-term debt 114 The increase was primarily due to
(including current higher committed credit facility
portion) borrowings at FortisAlberta, the
Corporation, FortisBC Electric and
Newfoundland Power. The committed
credit facility borrowings were
largely in support of energy
infrastructure investment, including
the construction of the Waneta
Expansion, and the acquisition of the
City of Kelowna's electrical utility
assets by FortisBC Electric. The
increase was partially offset by
regularly scheduled debt repayments at
the FortisBC Energy companies and
Fortis Properties.
----------------------------------------------------------------------------
Shareholders' equity 122 The increase was primarily due to net
(before non- earnings attributable to common equity
controlling shareholders for the three months
interests) ended March 31, 2013, less dividends
declared on common shares, and the
issuance of common shares under the
Corporation's dividend reinvestment,
stock option and employee share
purchase plans.
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LIQUIDITY AND CAPITAL RESOURCES
The table below outlines the Corporation's sources and uses of cash for the
three months ended March 31, 2013, as compared to the same period in 2012,
followed by a discussion of the nature of the variances in cash flows.
----------------------------------------------------------------------------
Summary of Consolidated Cash Flows
(Unaudited) Quarter Ended March 31
($ millions) 2013 2012 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash, Beginning of Period 154 87 67
Cash Provided by (Used in):
Operating Activities 280 328 (48)
Investing Activities (289) (211) (78)
Financing Activities 23 (94) 117
----------------------------------------------------------------------------
Cash, End of Period 168 110 58
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Operating Activities: Cash flow from operating activities was $48 million lower
quarter over quarter. The decrease was primarily due to unfavourable changes in
working capital at FortisAlberta and the FortisBC Energy companies, associated
with accounts payable and other current liabilities and current regulatory
deferral accounts, partially offset by favourable working capital changes
related to regulatory deferrals at Maritime Electric. Higher earnings quarter
over quarter were partially offset by unfavourable changes in deferred income
taxes attributable to regulatory deferrals and tax loss utilization.
Investing Activities: Cash used in investing activities was $78 million higher
quarter over quarter. The increase was driven by FortisBC Electric's acquisition
of electrical utility assets from the City of Kelowna in March 2013 for
approximately $55 million, and higher capital spending at FortisAlberta, largely
due to higher AESO capital contributions quarter over quarter.
Financing Activities: Cash provided by financing activities was $117 million
higher quarter over quarter. The increase was primarily due to: (i) higher net
borrowings under committed credit facilities classified as long-term; (ii) lower
net repayments of short-term borrowings; and (iii) higher proceeds from the
issuance of common shares. The above items were partially offset by higher
repayments of long-term debt and a decrease in advances received from
non-controlling interests.
Net repayments of short-term borrowings were $35 million lower quarter over
quarter. The decrease was mainly due to the FortisBC Energy companies, partially
offset by an increase in net repayments of short-term borrowings at Maritime
Electric. A portion of the cash proceeds received by Maritime Electric from the
Government of PEI, upon the assumption of the utility's regulatory asset related
to certain deferred Point Lepreau replacement energy costs, was used to repay
short-term borrowings in the first quarter of 2013.
Repayments of long-term debt and capital lease and finance obligations, and net
borrowings (repayments) under committed credit facilities for the quarter
compared to the same quarter last year are summarized in the following tables.
----------------------------------------------------------------------------
Repayments of Long-Term Debt and Capital Lease and Finance Obligations
(Unaudited)
Quarter Ended March 31
($ millions) 2013 2012 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FortisBC Energy Companies (21) (1) (20)
Caribbean Utilities (1) (1) -
Fortis Properties (18) (2) (16)
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Total (40) (4) (36)
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----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Borrowings (Repayments) Under Committed Credit Facilities (Unaudited)
Quarter Ended March 31
($ millions) 2013 2012 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FortisAlberta 48 (29) 77
FortisBC Electric 32 (9) 41
Newfoundland Power 21 14 7
Corporate 35 31 4
----------------------------------------------------------------------------
Total 136 7 129
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Borrowings under credit facilities by the utilities are primarily in support of
their capital expenditure programs and/or for working capital requirements.
Repayments are primarily financed through the issuance of long-term debt, cash
from operations and/or equity injections from Fortis. From time to time,
proceeds from preference share, common share and long-term debt offerings are
used to repay borrowings under the Corporation's committed credit facility.
Advances of approximately $22 million were received during the first quarter of
2013 from non-controlling interests in the Waneta Expansion Limited Partnership
("Waneta Partnership") to finance capital spending related to the Waneta
Expansion, compared to $29 million received during the first quarter of 2012. In
January 2012 advances of approximately $12 million were received from two First
Nations bands, representing their 15% equity investment in the LNG storage
facility on Vancouver Island.
Proceeds from the issuance of common shares were $8 million higher quarter over
quarter, reflecting an increase in the number of shares issued under the
Corporation's stock option and employee share purchase plans.
Common share dividends paid during the first quarter of 2013 were $41 million,
net of $19 million of dividends reinvested, compared to $44 million, net of $13
million of dividends reinvested, paid during the same quarter of 2012. The
dividend paid per common share for the first quarter of 2013 was $0.31 compared
to $0.30 for the first quarter of 2012. The weighted average number of common
shares outstanding for the first quarter was 192.0 million, compared to 189.0
million for the first quarter of 2012.
CONTRACTUAL OBLIGATIONS
The Corporation's consolidated contractual obligations with external third
parties in each of the next five years and for periods thereafter, as at March
31, 2013, are outlined in the following table. A detailed description of the
nature of the obligations is provided in the 2012 Annual MD&A and below, where
applicable.
----------------------------------------------------------------------------
Contractual
Obligations
(Unaudited) Due Due
As at March 31, 2013 within Due in Due in Due in Due in after
($ millions) Total 1 year year 2 year 3 year 4 year 5 5 years
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Long-term debt 6,014 81 693 280 314 103 4,543
Government loan
obligations 29 4 10 10 5 - -
Capital lease and
finance obligations 2,587 48 49 49 50 51 2,340
Interest obligations
on long-term debt 6,618 355 336 313 286 272 5,056
Gas purchase
contract
obligations (1) 225 225 - - - - -
Power purchase
obligations
FortisBC Electric 29 11 7 6 3 2 -
FortisOntario 346 47 49 50 52 53 95
Maritime Electric 131 38 41 37 1 1 13
Capital cost (2) 497 17 18 18 18 17 409
Operating lease
obligations 22 4 4 3 3 3 5
Waneta Partnership
promissory note 72 - - - - - 72
Joint-use asset and
shared service
agreements 62 4 3 3 3 3 46
Defined benefit
pension funding
contributions 75 35 15 12 9 1 3
Performance Share
Unit Plan
obligations 2 1 - 1 - - -
Other 6 2 1 - - - 3
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Total 16,715 872 1,226 782 744 506 12,585
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(1) Based on index prices as at March 31, 2013
(2) Maritime Electric has entitlement to approximately 4.7% of the output
from Point Lepreau for the life of the unit. As part of its
entitlement, Maritime Electric is required to pay its share of the
capital and operating costs of the unit. A major refurbishment of Point
Lepreau that began in 2008 was completed and the facility returned to
service in November 2012. The refurbishment is expected to extend the
facility's estimated life an additional 27 years and, as a result, the
total estimated capital cost obligation has increased approximately $51
million from that disclosed in the 2012 Annual MD&A.
Other contractual obligations, which are not reflected in the above table, did
not materially change from those disclosed in the 2012 Annual MD&A, except as
described as follows.
In March 2013 FortisBC Electric acquired the City of Kelowna's electrical
utility assets for approximately $55 million. For further information, refer to
the "Significant Items" section of this MD&A.
For a discussion of the nature and amount of the Corporation's consolidated
capital expenditure program, which is not included in the preceding Contractual
Obligations table, refer to the "Capital Expenditure Program" section of this
MD&A.
CAPITAL STRUCTURE
The Corporation's principal businesses of regulated gas and electricity
distribution require ongoing access to capital to enable the utilities to fund
maintenance and expansion of infrastructure. Fortis raises debt at the
subsidiary level to ensure regulatory transparency, tax efficiency and financing
flexibility. Fortis generally finances a significant portion of acquisitions at
the corporate level with proceeds from common share, preference share and
long-term debt offerings. To help ensure access to capital, the Corporation
targets a consolidated long-term capital structure containing approximately 40%
equity, including preference shares, and 60% debt, as well as investment-grade
credit ratings. Each of the Corporation's regulated utilities maintains its own
capital structure in line with the deemed capital structure reflected in each of
the utility's customer rates.
The consolidated capital structure of Fortis is presented in the following table.
----------------------------------------------------------------------------
Capital Structure
(Unaudited) As at
March 31, 2013 December 31, 2012
($ millions) (%) ($ millions) (%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total debt and capital lease
and finance obligations
(net of cash) (1) 6,376 55.0 6,317 55.3
Preference shares 1,108 9.5 1,108 9.7
Common shareholders' equity 4,114 35.5 3,992 35.0
----------------------------------------------------------------------------
Total (2) 11,598 100.0 11,417 100.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes long-term debt and capital lease and finance obligations,
including current portion, and short-term borrowings, net of cash
(2) Excludes amounts related to non-controlling interests
The change in the capital structure was primarily due to: (i) net earnings
attributable to common equity shareholders, net of dividends declared; (ii)
common shares issued, mainly under the Corporation's dividend reinvestment,
stock option and employee share purchase plans; and (iii) lower short-term
borrowings. The capital structure was also impacted by an increase in long-term
debt, mainly due to higher borrowings under committed credit facilities, largely
in support of energy infrastructure investment, partially offset by regularly
scheduled debt repayments.
Excluding capital lease and finance obligations, the Corporation's capital
structure as at March 31, 2013 was 53.2% debt, 9.9% preference shares and 36.9%
common shareholders' equity (December 31, 2012 - 53.6% debt, 10.1% preference
shares and 36.3% common shareholders' equity).
CREDIT RATINGS
The Corporation's credit ratings are as follows:
Standard & Poor's ("S&P") A- (long-term corporate and unsecured debt
credit rating)
DBRS A(low) (unsecured debt credit rating)
In February 2013 S&P and DBRS affirmed the Corporation's debt credit ratings.
The above-noted credit ratings reflect the Corporation's business-risk profile
and diversity of its operations, the stand-alone nature and financial separation
of each of the regulated subsidiaries of Fortis, management's commitment to
maintaining low levels of debt at the holding company level, the Corporation's
reasonable credit metrics and its demonstrated ability and continued focus on
acquiring and integrating stable regulated utility businesses financed on a
conservative basis. The credit ratings also reflect the Corporation's financing
plans for the pending acquisition of CH Energy Group and the expected completion
of the Waneta Expansion on time and on budget.
CAPITAL EXPENDITURE PROGRAM
Capital investment in infrastructure is required to ensure continued and
enhanced performance, reliability and safety of the gas and electricity systems
and to meet customer growth. All costs considered to be maintenance and repairs
are expensed as incurred. Costs related to replacements, upgrades and
betterments of capital assets are capitalized as incurred.
A breakdown of the $250 million in gross consolidated capital expenditures by
segment for the first quarter of 2013 is provided in the following table.
-------------------------------------------------------------
Gross Consolidated Capital
Expenditures (Unaudited) (1)
Quarter Ended
March 31, 2013
($ millions)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other
Regulated
FortisBC Electric
Energy Fortis FortisBC Newfoundland Utilities -
Companies Alberta Electric Power Canadian
----------------------------------------------------------------------------
38 95 17 15 13
----------------------------------------------------------------------------
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----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Regulated Non- Non-
Regulated Electric Regulated - Regulated -
Utilities - Utilities - Fortis Fortis
Canadian Caribbean Generation Properties Total
----------------------------------------------------------------------------
178 11 48 13 250
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Relates to cash payments to acquire or construct utility capital
assets, income producing properties and intangible assets, as reflected
on the consolidated statement of cash flows. Excludes capitalized
depreciation and amortization and non-cash equity component of AFUDC.
Planned capital expenditures are based on detailed forecasts of energy demand,
weather, cost of labour and materials, as well as other factors, including
economic conditions, which could change and cause actual expenditures to differ
from forecasts.
There have been no material changes in the overall expected level, nature and
timing of the Corporation's significant capital projects from those that were
disclosed in the 2012 Annual MD&A. Gross consolidated capital expenditures for
2013 are forecasted at approximately $1.3 billion.
Construction of the $900 million Waneta Expansion is ongoing, with an additional
$47 million spent in the first quarter of 2013. To date, approximately $483
million has been spent on the Waneta Expansion since construction began late in
2010. Key construction activities during the first quarter of 2013 included
ongoing placement of concrete in the powerhouse and intake, ongoing installation
of the powerhouse roof and turbine components, and intake-channel excavation
work.
Over the five-year period 2013 through 2017, gross consolidated capital
expenditures, including expenditures at Central Hudson Gas & Electric
Corporation ("Central Hudson"), are expected to be approximately $6 billion. The
approximate breakdown of the capital spending expected to be incurred is as
follows: 54% at Canadian Regulated Electric Utilities, driven by FortisAlberta;
20% at Canadian Regulated Gas Utilities; 11% at Central Hudson; 4% at Caribbean
Regulated Electric Utilities; and the remaining 11% at non-regulated operations.
Capital expenditures at the regulated utilities are subject to regulatory
approval. Over the five-year period, on average annually, the approximate
breakdown of the total capital spending to be incurred is as follows: 36% to
meet customer growth, 41% for sustaining capital expenditures, and 23% for
facilities, equipment, vehicles, information technology and other assets.
CASH FLOW REQUIREMENTS
At the subsidiary level, it is expected that operating expenses and interest
costs will generally be paid out of subsidiary operating cash flows, with
varying levels of residual cash flows available for subsidiary capital
expenditures and/or dividend payments to Fortis. Borrowings under credit
facilities may be required from time to time to support seasonal working capital
requirements. Cash required to complete subsidiary capital expenditure programs
is also expected to be financed from a combination of borrowings under credit
facilities, equity injections from Fortis and long-term debt offerings.
The Corporation's ability to service its debt obligations and pay dividends on
its common shares and preference shares is dependent on the financial results of
the operating subsidiaries and the related cash payments from these
subsidiaries. Certain regulated subsidiaries may be subject to restrictions that
may limit their ability to distribute cash to Fortis.
Cash required of Fortis to support subsidiary capital expenditure programs and
finance acquisitions is expected to be derived from a combination of borrowings
under the Corporation's committed corporate credit facility and proceeds from
the issuance of common shares, preference shares and long-term debt. Depending
on the timing of cash payments from the subsidiaries, borrowings under the
Corporation's committed corporate credit facility may be required from time to
time to support the servicing of debt and payment of dividends.
As at March 31, 2013, management expects consolidated long-term debt maturities
and repayments to average approximately $295 million annually over the next five
years. The combination of available credit facilities and relatively low annual
debt maturities and repayments will provide the Corporation and its subsidiaries
with flexibility in the timing of access to capital markets.
In May 2012 Fortis filed a base shelf prospectus under which Fortis may offer,
from time to time during the 25-month period from May 10, 2012, by way of a
prospectus supplement, common shares, preference shares, subscription receipts
and/or unsecured debentures in the aggregate amount of up to $1.3 billion (or
the equivalent in US dollars or other currencies). The base shelf prospectus
provides the Corporation with flexibility to access securities markets in a
timely manner. The nature, size and timing of any offering of securities under
the Corporation's base shelf prospectus will be consistent with the past
capital-raising practices of the Corporation and continue to be dependent upon
the Corporation's assessment of its requirements for funding and general market
conditions.
To finance a portion of the Corporation's pending acquisition of CH Energy
Group, Fortis offered and sold, by way of a prospectus supplement, approximately
$601 million of Subscription Receipts in June 2012 under a bought-deal offering
with a syndicate of underwriters. Fortis also closed an offering of
approximately $200 million First Preference Shares, Series J in November 2012,
by way of a prospectus supplement, under the above-noted base shelf prospectus.
Fortis and its subsidiaries were compliant with debt covenants as at March 31,
2013 and are expected to remain compliant throughout 2013.
CREDIT FACILITIES
As at March 31, 2013, the Corporation and its subsidiaries had consolidated
credit facilities of approximately $2.4 billion, of which $2.0 billion was
unused, including $910 million unused under the Corporation's $1 billion
committed revolving corporate credit facility. The credit facilities are
syndicated mostly with the seven largest Canadian banks, with no one bank
holding more than 20% of these facilities. Approximately $2.3 billion of the
total credit facilities are committed facilities with maturities ranging from
2013 through 2017.
The following summary outlines the credit facilities of the Corporation and its
subsidiaries.
----------------------------------------------------------------------------
Credit Facilities (Unaudited) As at
December
Regulated Fortis Corporate March 31, 31,
($ millions) Utilities Properties and Other 2013 2012
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total credit
facilities 1,383 13 1,030 2,426 2,460
Credit facilities
utilized:
Short-term
borrowings (89) - - (89) (136)
Long-term debt
(including current
portion) (178) - (88) (266) (150)
Letters of credit
outstanding (66) - (2) (68) (67)
----------------------------------------------------------------------------
Credit facilities
unused 1,050 13 940 2,003 2,107
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at March 31, 2013 and December 31, 2012, certain borrowings under the
Corporation's and subsidiaries' credit facilities were classified as long-term
debt. These borrowings are under long-term committed credit facilities and
management's intention is to refinance these borrowings with long-term permanent
financing during future periods.
In January 2013 FEVI's $20 million unsecured committed non-revolving credit
facility matured and was not replaced.
In April 2013 FortisBC Electric renegotiated and amended its credit facility
agreement resulting in an extension to the maturity of the Company's $150
million unsecured committed revolving credit facility with $100 million now
maturing in May 2016 and $50 million now maturing in May 2014. The amended
credit facility agreement contains substantially similar terms and conditions as
the previous credit facility agreement.
In April 2013 FHI extended its $30 million unsecured committed revolving credit
facility to mature in May 2014 from May 2013. The new agreement contains
substantially similar terms and conditions as the previous credit facility
agreement.
FINANCIAL INSTRUMENTS
The carrying values of the Corporation's consolidated financial instruments
approximate their fair values, reflecting the short-term maturity, normal trade
credit terms and/or nature of these instruments, except as follows.
----------------------------------------------------------------------------
Financial Instruments
(Unaudited) As at
March 31, 2013 December 31, 2012
Carrying Estimated Carrying Estimated
($ millions) Value Fair Value Value Fair Value
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Waneta Partnership
promissory note 48 52 47 51
Long-term debt, including
current portion 6,014 7,332 5,900 7,338
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The fair value of long-term debt is calculated using quoted market prices when
available. When quoted market prices are not available, as is the case with the
Waneta Partnership promissory note and certain long-term debt, the fair value is
determined by either: (i) discounting the future cash flows of the specific debt
instrument at an estimated yield to maturity equivalent to benchmark government
bonds or treasury bills, with similar terms to maturity, plus a credit risk
premium equal to that of issuers of similar credit quality; or (ii) by obtaining
from third parties indicative prices for the same or similarly rated issues of
debt of the same remaining maturities. Since the Corporation does not intend to
settle the long-term debt or promissory note prior to maturity, the excess of
the estimated fair value above the carrying value does not represent an actual
liability.
The Financial Instruments table above excludes the long-term other asset
associated with the Corporation's expropriated investment in Belize Electricity.
Due to uncertainty in the ultimate amount and ability of the Government of
Belize ("GOB") to pay appropriate fair value compensation owing to Fortis for
the expropriation of Belize Electricity, the Corporation has recorded the book
value of the expropriated investment, including foreign exchange impacts, in
long-term other assets, which totalled approximately $106 million as at March
31, 2013 (December 31, 2012 - $104 million).
Risk Management: The Corporation's earnings from, and net investments in,
foreign subsidiaries are exposed to fluctuations in the US dollar-to-Canadian
dollar exchange rate. The Corporation has effectively decreased the above-noted
exposure through the use of US dollar borrowings at the corporate level. The
foreign exchange gain or loss on the translation of US dollar-denominated
interest expense partially offsets the foreign exchange loss or gain on the
translation of the Corporation's foreign subsidiaries' earnings, which are
denominated in US dollars. The reporting currency of Caribbean Utilities, Fortis
Turks and Caicos, FortisUS Energy Corporation and Belize Electric Company
Limited ("BECOL") is the US dollar.
As at March 31, 2013, the Corporation's corporately issued US$557 million
(December 31, 2012 - US$557 million) long-term debt had been designated as an
effective hedge of the Corporation's foreign net investments. As at March 31,
2013, the Corporation had approximately US$16 million (December 31, 2012 - US$17
million) in foreign net investments remaining to be hedged. Foreign currency
exchange rate fluctuations associated with the translation of the Corporation's
corporately issued US dollar borrowings designated as effective hedges are
recorded in other comprehensive income and serve to help offset unrealized
foreign currency exchange gains and losses on the net investments in foreign
subsidiaries, which gains and losses are also recorded in other comprehensive
income.
Effective from June 20, 2011, the Corporation's asset associated with its
expropriated investment in Belize Electricity does not qualify for hedge
accounting as Belize Electricity is no longer a foreign subsidiary of Fortis. As
a result, foreign exchange gains and losses on the translation of the long-term
other asset associated with Belize Electricity are recognized in earnings. The
Corporation recognized in earnings a foreign exchange gain of approximately $2
million during the three months ended March 31, 2013 ($1.5 million foreign
exchange loss for the three months ended March 31, 2012).
From time to time, the Corporation and its subsidiaries hedge exposures to
fluctuations in interest rates, foreign exchange rates and fuel and natural gas
prices through the use of derivative instruments. The Corporation and its
subsidiaries do not hold or issue derivative instruments for trading purposes.
As at March 31, 2013, the Corporation's derivative contracts consisted of fuel
option contracts, natural gas swap and option contracts, and gas purchase
contract premiums. The fuel option contracts are held by Caribbean Utilities and
the remaining derivative instruments are held by the FortisBC Energy companies.
The following table summarizes the Corporation's derivative instruments.
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Derivative Instruments (Unaudited) As at
March 31, December 31,
2013 2012
Carrying Carrying
Number of Value (2) Value (2)
Liability Maturity Contracts Volume (1) ($ millions) ($ millions)
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Fuel option
contracts (3) 2013 6 13 - (1)
Natural gas
derivatives:
Gas swaps and
options 2014 35 19 (33) (51)
Gas purchase
contract
premiums 2014 46 80 (3) (8)
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(1) The volume for fuel option contracts is reported in millions of
imperial gallons and for natural gas derivatives is reported in
petajoules.
(2) Carrying value is estimated fair value. The liability represents the
gross derivatives balance.
(3) The carrying value of the fuel option contracts was less than $1
million as at March 31, 2013.
The fuel option contracts are used by Caribbean Utilities to reduce the impact
of volatility in fuel prices on customer rates, as approved by the regulator
under the Company's Fuel Price Volatility Management Program. The fuel option
contracts mature in April and October 2013. Approximately 70% of the Company's
annual diesel fuel requirements are under fuel hedging arrangements.
The natural gas derivatives held by the FortisBC Energy companies are used to
fix the effective purchase price of natural gas, as the majority of the natural
gas supply contracts at the FortisBC Energy companies have floating, rather than
fixed, prices. The price risk-management strategy of the FortisBC Energy
companies aims to improve the likelihood that natural gas prices remain
competitive, mitigate gas price volatility on customer rates and reduce the risk
of regional price discrepancies. As directed by the regulator in 2011, the
FortisBC Energy companies have suspended their commodity hedging activities with
the exception of certain limited swaps as permitted by the regulator. The
existing hedging contracts will continue in effect through to their maturity and
the FortisBC Energy companies' ability to fully recover the commodity cost of
gas in customer rates remains unchanged.
The changes in the fair values of the fuel option contracts and natural gas
derivatives are deferred as a regulatory asset or liability for recovery from,
or refund to, customers in future rates, as permitted by the regulators. The
fair values of the derivative instruments were recorded in accounts payable and
other current liabilities as at March 31, 2013 and December 31, 2012.
The fair value of the fuel option contracts reflects only the value of the
heating oil derivative and not the offsetting change in the value of the
underlying future purchases of heating oil and was calculated using published
market prices for heating oil or similar commodities where appropriate. The fair
value of the natural gas derivatives was calculated using the present value of
cash flows based on market prices and forward curves for the commodity cost of
natural gas. The fair values of the fuel option contracts and natural gas
derivatives are estimates of the amounts that the utilities would receive or
have to pay to terminate the outstanding contracts as at the balance sheet
dates.
The fair values of the Corporation's financial instruments, including
derivatives, reflect point-in-time estimates based on current and relevant
market information about the instruments as at the balance sheet dates. The
estimates cannot be determined with precision as they involve uncertainties and
matters of judgment and, therefore, may not be relevant in predicting the
Corporation's future consolidated earnings or cash flows.
OFF-BALANCE SHEET ARRANGEMENTS
With the exception of letters of credit outstanding of $68 million as at March
31, 2013 (December 31, 2012 - $67 million), the Corporation had no off-balance
sheet arrangements, such as transactions, agreements or contractual arrangements
with unconsolidated entities, structured finance entities, special purpose
entities or variable interest entities, that are reasonably likely to materially
affect liquidity or the availability of, or requirements for, capital resources.
BUSINESS RISK MANAGEMENT
Year-to-date 2013, the business risks of the Corporation were consistent with
those disclosed in the Corporation's 2012 Annual MD&A, including certain risks,
as disclosed below, and an update to those risks, where applicable.
Regulatory Risk: The allowed ROE and capital structure at Newfoundland Power
have been set for 2013 through 2015 and remain unchanged from 2012. Newfoundland
Power plans to file an application in May 2013 to obtain final approval for
customer electricity rates, effective January 1, 2013, commencing in July 2013
for collection from customers.
Final allowed ROEs and capital structure for 2013 remain outstanding for
FortisBC and FortisAlberta. The results of cost of capital proceedings could
materially impact the earnings of the above-noted utilities.
PBR commenced at FortisAlberta for a five-year term, which began January 1,
2013. In March 2013 interim distribution electricity rates under PBR were
approved by the AUC in addition to the recovery, on an interim basis, of 60% of
the revenue requirement associated with 2013 capital tracker expenditures
applied for by FortisAlberta. While the AUC's 2012 PBR decision provides for a
capital tracker mechanism to address recovery of certain capital expenditures
outside of the PBR formula, the mechanism has yet to be tested to confirm its
applicability to FortisAlberta's capital programs. Final decisions on
FortisAlberta's rates are expected in the second half of 2013.
For further information, refer to the "Material Regulatory Decisions and
Applications" section of this MD&A.
Completion of the Acquisition of CH Energy Group: Fortis announced in February
2012 that it had entered into an agreement to acquire CH Energy Group for
US$65.00 per common share in cash, for an aggregate purchase price of
approximately US$1.5 billion, including the assumption of approximately US$500
million of debt on closing. CH Energy Group is an energy delivery company
headquartered in Poughkeepsie, New York. Its main business, Central Hudson, is a
regulated transmission and distribution utility serving approximately 300,000
electric and 75,000 natural gas customers in eight counties of New York State's
Mid-Hudson River Valley. Approval of the acquisition by the PSC is the last
significant matter required to close the transaction. A Settlement Agreement
among Fortis, CH Energy Group, PSC Staff, registered interveners and other
parties was filed with the PSC in January 2013. The parties to the Settlement
Agreement have concluded that, based on the terms of the Settlement Agreement
the acquisition is in the public interest and have recommended approval by the
PSC. The deadline for submission of public comments in the proceeding was
extended to May 1, 2013 by the PSC. On May 3, 2013 administrative law judges
issued a Recommended Decision in connection with the acquisition asserting that
without modification of the terms of the Settlement Agreement, the benefits of
the acquisition are outweighed by perceived detriments remaining after
mitigation. The Recommended Decision is an advisory opinion that will be
considered by the PSC in determining whether to approve the acquisition.
Submissions responding to the Recommended Decision are due by May 17, 2013 with
responses to such submissions due by May 24, 2013. Fortis intends to engage in
further discussions to obtain PSC approval of the acquisition. While no
assurance regarding closing of the transaction can be given until an order is
issued by the PSC, a final decision from the PSC regarding the acquisition and
subsequent closing of the transaction is expected in June 2013. Based on the
terms of the current Settlement Agreement, the acquisition is expected to be
accretive to earnings per common share of Fortis within the first full year of
ownership, excluding acquisition-related expenses.
A delay in receiving a PSC decision, and/or conditions imposed under such
decision, may result in the failure to materialize some, or all, of the expected
benefits of the acquisition of CH Energy Group, or such benefits may not occur
within the time periods anticipated by the Corporation. The realization of such
benefits may also be impacted by other factors beyond the control of Fortis.
Unless extended by agreement of both parties, the agreement and plan of merger
between Fortis and CH Energy Group expires August 20, 2013.
A portion of the acquisition purchase price of CH Energy Group is expected to be
funded from net proceeds from the $601 million Subscription Receipts offering,
issued by the Corporation in June 2012, which proceeds are being held in escrow.
The Subscription Receipts Agreement ("Agreement") contains a deadline of June
30, 2013 for the release of the proceeds from the offering. If it is determined
that a PSC decision will not be received in time to allow closing of the
acquisition of CH Energy Group to occur on or before June 30, 2013, Fortis may
seek an extension of the June 30, 2013 deadline by way of amendment of the
Agreement. The Agreement may be amended by a special resolution approved by at
least two-thirds of the Subscription Receipts Holders ("Receipts Holders") at a
meeting, either in person or by proxy, with a quorum for the meeting of at least
two Receipts Holders collectively holding 25% of the Subscription Receipts. If
conditions precedent to the closing of the transaction are not fulfilled or
waived by June 30, 2013, or by the extension date for the Subscription Receipts
if approved by Receipts Holders, or if the agreement and plan of merger related
to the acquisition is terminated prior to such time, the proceeds from the
Subscription Receipts offering, plus pro rata interest earned, are required to
be returned to the Receipts Holders. As a result, closing of the transaction
subsequent to June 30, 2013, or the extension date for the Subscription Receipts
if approved by Receipts Holders, could result in the Corporation having to raise
alternative capital to finance the acquisition.
Also, additional acquisition-related expenses in 2013 could be higher than those
anticipated. Examples of expenses expected to be incurred include investment
banker merger and acquisition advisory fees and consulting and legal fees.
Expropriation of Shares in Belize Electricity: A decision is pending from the
Belize Court of Appeal regarding the Corporation's appeal of the Belize Supreme
Court's dismissal of the Corporation's claim filed in October 2011 challenging
the constitutionality of the expropriation of the Corporation's investment in
Belize Electricity.
Fortis believes it has a strong, well-positioned case before the Belize Courts
supporting the unconstitutionality of the expropriation. There exists, however,
a reasonable possibility that the outcome of the litigation may be unfavourable
to the Corporation and the amount of compensation otherwise to be paid to Fortis
under the legislation expropriating Belize Electricity could be lower than the
book value of the Corporation's expropriated investment in Belize Electricity.
The book value of the expropriated investment was $106 million, including
foreign exchange impacts, as at March 31, 2013 (December 31, 2012 - $104
million). If the expropriation is held to be unconstitutional, it is not
determinable at this time as to the nature of the relief that would be awarded
to Fortis, for example: (i) the ordering of the return of the shares to Fortis
and/or award of damages; or (ii) the ordering of compensation to be paid to
Fortis for the unconstitutional expropriation of the shares. Based on presently
available information, the $106 million long-term other asset is not deemed
impaired as at March 31, 2013. Fortis will continue to assess for impairment
each reporting period based on evaluating the outcomes of court proceedings
and/or compensation settlement negotiations. As well as continuing the
constitutional challenge of the expropriation, Fortis is also pursuing
alternative options for obtaining fair compensation, including compensation
under the Belize/United Kingdom Bilateral Investment Treaty.
Fortis continues to control and consolidate the financial statements of BECOL,
the Corporation's indirect wholly owned non-regulated hydroelectric generating
subsidiary in Belize. As at April 30, 2013, Belize Electricity owed BECOL US$4
million for overdue energy purchases, representing approximately 20% of BECOL's
annual sales to Belize Electricity. In accordance with long-standing agreements,
the GOB guarantees the payment of Belize Electricity's obligations to BECOL.
Capital Resources and Liquidity Risk - Credit Ratings: The Corporation's credit
ratings were affirmed in February 2013 and there were no changes in the credit
ratings of the Corporation's utilities year-to-date 2013, except Maritime
Electric's debt credit rating by S&P was updated from 'A- stable' to 'A stable'.
Defined Benefit Pension Plan Assets: As at March 31, 2013, the fair value of the
Corporation's consolidated defined benefit pension plan assets was $900 million,
up $32 million or 3.7%, from $868 million as at December 31, 2012.
Labour Relations: The collective agreement between employees in specified
occupations in the areas of administration and operations support at the
FortisBC Energy companies and the Canadian Office and Professional Employees
Union, Local 378, expired on March 31, 2012. A new three-year collective
agreement, expiring on March 31, 2015, was reached in March 2013.
The collective agreement between FortisBC Electric and the International
Brotherhood of Electrical Workers ("IBEW"), Local 213, expired on January 31,
2013. IBEW, Local 213, represents employees in specified occupations in the
areas of generation and transmission and distribution. The parties are currently
engaged in collective bargaining.
CHANGES IN ACCOUNTING POLICIES
The new US GAAP accounting pronouncements that are applicable to, and were
adopted by, Fortis, effective January 1, 2013, are described as follows:
Disclosures About Offsetting Assets and Liabilities
The Corporation adopted the amendments to Accounting Standards Codification
("ASC") Topic 210, Balance Sheet - Disclosures About Offsetting Assets and
Liabilities as outlined in Accounting Standards Updates ("ASU") No. 2011-11 and
2013-01. The amendments improve the transparency of the effect or potential
effect of netting arrangements on a company's financial position by expanding
the level of disclosures required by entities for such arrangements. The amended
disclosures are intended to assist financial statement users in understanding
significant quantitative differences between balance sheets prepared under US
GAAP and International Financial Reporting Standards ("IFRS"). ASU No. 2013-01
limits the scope of the new offsetting disclosure requirements previously issued
in ASU No. 2011-11 to certain derivative instruments, repurchase and reverse
repurchase agreements, and securities borrowing and lending arrangements that
are either offset on the balance sheet or subject to an enforceable master
netting or similar arrangement. The above-noted amendments were applied
retrospectively and did not materially impact the Corporation's interim
consolidated financial statements for the three months ended March 31, 2013.
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
The Corporation adopted the amendments to ASC Topic 220, Other Comprehensive
Income - Reporting of Amounts Out of Accumulated Other Comprehensive Income
("AOCI") as outlined in ASU No. 2013-02. The amendments improve the reporting of
reclassifications out of AOCI and require entities to report, in one place,
information about reclassifications out of AOCI and to present details of the
reclassifications in the disclosure for changes in AOCI balances. The effect of
the reclassification of significant items to net income in their entirety during
the reporting period must be reported in the respective line items in the
statement where net income is presented. The effect of items not reclassified to
net income in their entirety during the reporting period are to be presented in
the notes to the consolidated financial statements. The amendments were applied
by the Corporation prospectively and did not materially impact the Corporation's
interim consolidated financial statements for the three months ended March 31,
2013.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Corporation's interim unaudited consolidated financial
statements in accordance with US GAAP requires management to make estimates and
judgments that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting periods. Estimates and judgments are based on historical experience,
current conditions and various other assumptions believed to be reasonable under
the circumstances. Certain amounts are recorded at estimated values until these
amounts are finalized pursuant to regulatory decisions or other regulatory
proceedings. In April 2013 Newfoundland Power received a decision related to the
utility's cost of capital for rate-making purposes for 2013 through 2015, the
cumulative impacts of which will be recorded in the second quarter of 2013, when
the decision was received, with the impact related to the first quarter of 2013
determined to be immaterial. Due to changes in facts and circumstances, and the
inherent uncertainty involved in making estimates, actual results may differ
significantly from current estimates. Estimates and judgments are reviewed
periodically and, as adjustments become necessary, are recognized in earnings in
the period in which they become known.
Interim financial statements may also employ a greater use of estimates than the
annual financial statements. There were no material changes in the nature of the
Corporation's critical accounting estimates year-to-date 2013 from those
disclosed in the 2012 Annual MD&A.
Contingencies: The Corporation and its subsidiaries are subject to various legal
proceedings and claims associated with the ordinary course of business
operations. Management believes that the amount of liability, if any, from these
actions would not have a material effect on the Corporation's consolidated
financial position or results of operations.
The following describes the nature of the Corporation's contingent liabilities.
Fortis
In May 2012 CH Energy Group and Fortis entered into a proposed settlement
agreement with counsel to plaintiff shareholders pertaining to several
complaints, which named Fortis and other defendants, which were filed in, or
transferred to, the Supreme Court of the State of New York, County of New York,
relating to the proposed acquisition of CH Energy Group by Fortis. The
complaints generally alleged that the directors of CH Energy Group breached
their fiduciary duties in connection with the proposed acquisition and that CH
Energy Group, Fortis, FortisUS Inc. and Cascade Acquisition Sub Inc. aided and
abetted that breach. The settlement agreement is subject to court approval.
FHI
During 2007 and 2008, a non-regulated subsidiary of FHI received Notices of
Assessment from Canada Revenue Agency for additional taxes related to the
taxation years 1999 through 2003. The exposure has been fully provided for in
the consolidated financial statements. FHI is appealing these assessments.
In April 2013 FHI and Fortis were named as defendants in an action in the
British Columbia Supreme Court by the Coldwater Indian Band ("Band"). The claim
is in regard to interests in a pipeline right of way on reserve lands. The
pipeline on the right of way was transferred by FHI (then Terasen Inc.) to
Kinder Morgan Inc. in April 2007. The Band seeks orders cancelling the right of
way and claims damages for wrongful interference with the Band's use and
enjoyment of reserve lands. The outcome cannot be reasonably determined and
estimated at this time and, accordingly, no amount has been accrued in the
interim unaudited consolidated financial statements.
FortisBC Electric
The Government of British Columbia has alleged breaches of the Forest Practices
Code and negligence relating to a forest fire near Vaseux Lake in 2003, prior to
the acquisition of FortisBC Electric by Fortis, and has filed and served a writ
and statement of claim against FortisBC Electric dated August 2, 2005. The
Government of British Columbia has now disclosed that its claim includes
approximately $15 million in damages as well as pre-judgment interest, but that
it has not fully quantified its damages. In addition, private landowners have
filed separate writs and statements of claim dated August 19, 2005 and August
22, 2005 in relation to the same matter, which claims have now been settled.
FortisBC Electric and its insurers continue to defend the claim by the
Government of British Columbia. The outcome cannot be reasonably determined and
estimated at this time and, accordingly, no amount has been accrued in the
interim unaudited consolidated financial statements.
The Government of British Columbia filed a claim in the British Columbia Supreme
Court in June 2012 claiming on its behalf, and on behalf of approximately 17
homeowners, damages suffered as a result of a landslide caused by a dam failure
in Oliver, British Columbia in 2010. The Government of British Columbia alleges
in its claim that the dam failure was caused by the defendants', which includes
FortisBC Electric, use of a road on top of the dam. The Government of British
Columbia estimates its damages and the damages of the homeowners, on whose
behalf it is claiming, to be approximately $15 million. While FortisBC Electric
has not been served, the utility has retained counsel and has notified its
insurers. The outcome cannot be reasonably determined and estimated at this time
and, accordingly, no amount has been accrued in the interim unaudited
consolidated financial statements.
SUMMARY OF QUARTERLY RESULTS
The following table sets forth unaudited quarterly information for each of the
eight quarters ended June 30, 2011 through March 31, 2013. The quarterly
information has been obtained from the Corporation's interim unaudited
consolidated financial statements. The timing of the recognition of certain
assets, liabilities, revenue and expenses as a result of regulation may differ
from that otherwise expected using US GAAP for non-regulated entities. These
financial results are not necessarily indicative of results for any future
period and should not be relied upon to predict future performance.
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Summary of Quarterly Results
(Unaudited)
Net Earnings
Attributable to
Common Equity
Revenue Shareholders Earnings per Common Share
Quarter Ended ($ millions) ($ millions) Basic ($) Diluted ($)
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March 31, 2013 1,113 151 0.79 0.76
December 31, 2012 999 87 0.46 0.45
September 30, 2012 714 45 0.24 0.24
June 30, 2012 792 62 0.33 0.33
March 31, 2012 1,149 121 0.64 0.62
December 31, 2011 1,034 82 0.44 0.43
September 30, 2011 699 56 0.30 0.30
June 30, 2011 846 57 0.32 0.32
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The summary of the past eight quarters reflects the Corporation's continued
organic growth, growth from acquisitions, as well as the seasonality associated
with its businesses. Interim results will fluctuate due to the seasonal nature
of gas and electricity demand and water flows, as well as the timing and
recognition of regulatory decisions. Revenue is also affected by the cost of
fuel and purchased power and the commodity cost of natural gas, which are flowed
through to customers without markup. Given the diversified nature of the
Corporation's subsidiaries, seasonality may vary. Most of the annual earnings of
the FortisBC Energy companies are realized in the first and fourth quarters.
Earnings for the first quarter of 2013 included an extraordinary gain of
approximately $22 million after tax upon the settlement of expropriation matters
associated with Exploits Partnership. Earnings for the first, second and third
quarters of 2012 were reduced by approximately $4 million, $3 million and $0.5
million, respectively, associated with costs incurred related to the pending
acquisition of CH Energy Group. During the second quarter of 2012, the FortisBC
Energy companies and FortisAlberta received revenue requirements decisions,
effective January 1, 2012, the cumulative impacts of which, where such impacts
were different from those estimated, were recorded in the second quarter of
2012. Similarly, FortisBC Electric recorded the cumulative impacts of its rate
decision, effective January 1, 2012, in the third quarter of 2012 when the
decision was received. While not significant, the financial results from the
third quarter ended September 30, 2012 reflected the acquisition of TCU in
August 2012, financial results from the fourth quarter ended December 31, 2012
reflected the acquisition of the StationPark All Suite Hotel in October 2012 and
financial results from the fourth quarter ended December 31, 2011 reflected the
acquisition of the Hilton Suites Winnipeg Airport hotel in October 2011.
Earnings for the third quarter ended September 30, 2011 included the $11 million
after-tax termination fee paid to Fortis by Central Vermont Public Service
Corporation ("CVPS").
March 2013/March 2012: Net earnings attributable to common equity shareholders
were $151 million, or $0.79 per common share, for the first quarter of 2013
compared to earnings of $121 million, or $0.64 per common share, for the first
quarter of 2012. A discussion of the quarter over quarter variance in financial
results is provided in the "Financial Highlights" section of this MD&A.
December 2012/December 2011: Net earnings attributable to common equity
shareholders were $87 million, or $0.46 per common share, for the fourth quarter
of 2012 compared to earnings of $82 million, or $0.44 per common share, for the
fourth quarter of 2011. The increase in earnings was primarily due to higher
contribution from FortisAlberta, Other Canadian Regulated Electric Utilities and
FortisBC Electric, partially offset by decreased non-regulated hydroelectric
production in Belize associated with lower rainfall, increased corporate
expenses and decreased earnings at the FortisBC Energy companies. Higher
earnings at FortisAlberta were driven by rate base growth, net transmission
revenue of $2 million recognized in the fourth quarter of 2012 and the rate
revenue reduction accrual during the fourth quarter of 2011, reflecting the
cumulative impact from January 1, 2011 of the decrease in the allowed ROE for
2011. At Other Canadian Regulated Electric Utilities, improved performance was
mainly due to lower effective income taxes at Maritime Electric and the accrual
of the cumulative return earned on FortisOntario's capital investment in smart
meters. Increased earnings at FortisBC Electric were driven by rate base growth,
lower-than-expected finance charges in 2012 and higher pole-attachment revenue,
partially offset by the expiry of the PBR mechanism on December 31, 2011. The
increase in corporate expenses was largely due to a $3 million non-recurring
provision recognized in the fourth quarter of 2012 and lower effective income
tax recoveries, partially offset by a foreign exchange gain of $1 million
recognized in the fourth quarter of 2012, compared to a foreign exchange loss of
$1 million recognized in the fourth quarter of 2011, and lower finance charges.
At the FortisBC Energy companies, the decrease in earnings was mainly due to the
timing of certain operating and maintenance expenses during 2012, lower
capitalized AFUDC and lower-than-expected customer additions in 2012, partially
offset by rate base growth, higher gas transportation volumes to industrial
customers and lower effective income taxes.
September 2012/September 2011: Net earnings attributable to common equity
shareholders were $45 million, or $0.24 per common share, for the third quarter
of 2012 compared to earnings of $56 million, or $0.30 per common share, for the
third quarter of 2011. Earnings for the third quarter of 2012 were reduced by
$3.5 million related to foreign exchange and CH Energy Group acquisition-related
expenses. Earnings for the third quarter of 2011 were favourably impacted by a
one-time $11 million after-tax merger termination fee paid to Fortis by CVPS and
$2.5 million of foreign exchange. Excluding the above impacts, higher earnings
at FortisAlberta and FortisBC Electric for the quarter were partially offset by
decreased non-regulated hydroelectric generation in Belize, due to lower
rainfall, and a higher loss incurred at the FortisBC Energy companies. The
improved performance at FortisAlberta was due to net transmission revenue of
$3.5 million recognized in the third quarter of 2012, rate base growth and the
timing of operating expenses during 2012, partially offset by a lower allowed
ROE. At FortisBC Electric, improved performance was driven by rate base growth,
higher pole-attachment revenue and lower-than-expected finance charges. The
higher loss at the FortisBC Energy companies related to the unfavourable impact
of the difference in the timing of recognition of revenue associated with
seasonal gas consumption and certain increased regulator-approved expenses in
2012, lower capitalized AFUDC and lower-than-expected customer additions in
2012. The above items were partially offset by higher gas transportation volumes
to industrial customers and the timing of certain operating and maintenance
expenses during 2012.
June 2012/June 2011: Net earnings attributable to common equity shareholders
were $62 million, or $0.33 per common share, for the second quarter of 2012
compared to earnings of $57 million, or $0.32 per common share, for the second
quarter of 2011. The increase in earnings was mainly due to higher contribution
from FortisAlberta, increased non-regulated hydroelectric production in Belize
associated with higher rainfall, and higher earnings at Newfoundland Power,
partially offset by higher corporate expenses and decreased earnings at the
FortisBC Energy companies. Higher contribution from FortisAlberta related to
rate base growth, net transmission revenue of $3 million recognized in the
second quarter of 2012 and reduced depreciation as approved by the regulator,
were partially offset by a lower allowed ROE. Higher earnings at Newfoundland
Power were the result of lower effective income taxes and a higher allowed ROE.
The cumulative impact of the increase in the regulator-approved allowed ROE,
effective January 1, 2012, was recorded in the second quarter of 2012. The
increase in corporate expenses was due to approximately $4 million ($3 million
after tax) of costs incurred during the second quarter of 2012 related to the
pending acquisition of CH Energy Group and a lower income tax recovery,
partially offset by a foreign exchange gain of approximately $1.5 million
recognized in the second quarter of 2012. Decreased earnings at the FortisBC
Energy companies mainly related to lower-than-expected customer additions in
2012 and lower capitalized AFUDC, partially offset by higher gas transportation
volumes to industrial customers. A 7% increase in the weighted average number of
common shares outstanding quarter over quarter, largely associated with the
issuance of common equity mid-2011, had the impact of tempering earnings per
common share in the second quarter of 2012.
OUTLOOK
Over the five years 2013 through 2017, the Corporation's consolidated capital
expenditure program, including expenditures at Central Hudson, is expected to
total approximately $6 billion and will support continuing growth in earnings
and dividends. Capital investment over that period is expected to allow utility
rate base and hydroelectric generation investment to increase at a combined
compound annual growth rate of approximately 6%.
Approval by the PSC of the Corporation's acquisition of CH Energy Group is the
last significant regulatory matter required to close the transaction. While no
assurance regarding a closing of the transaction can be given until an order is
issued by the PSC, a final decision by the PSC and subsequent closing of the
transaction is expected in June 2013. With the acquisition of CH Energy Group,
the Corporation's regulated midyear rate base will increase to approximately $10
billion.
Fortis is focused on closing the CH Energy Group acquisition. The Corporation
also remains disciplined and patient in its pursuit of additional electric and
gas utility acquisitions in the United States and Canada that will add value for
its shareholders. Fortis will also pursue growth in its non-regulated businesses
in support of its regulated utility growth strategy.
OUTSTANDING SHARE DATA
As at May 6, 2013, the Corporation had issued and outstanding approximately
192.6 million common shares; 5.0 million First Preference Shares, Series C; 8.0
million First Preference Shares, Series E; 5.0 million First Preference Shares,
Series F; 9.2 million First Preference Shares, Series G; 10.0 million First
Preference Shares, Series H; 8.0 million First Preference Shares, Series J; and
18.5 million Subscription Receipts. Only the common shares of the Corporation
have voting rights. The Corporation's First Preference Shares do not have voting
rights unless and until Fortis fails to pay eight quarterly dividends, whether
or not consecutive and whether or not such dividends have been declared.
The number of common shares of Fortis that would be issued if all outstanding
stock options, First Preference Shares, Series C and E, and Subscription
Receipts were converted as at May 6, 2013 is as follows.
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Conversion of Securities into Common Shares (Unaudited)
As at May 6, 2013 Number of
Common Shares
Security (millions)
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Stock Options 5.2
First Preference Shares, Series C 3.8
First Preference Shares, Series E 6.0
Subscription Receipts 18.5
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Total 33.5
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Additional information, including the Fortis 2012 Annual Information Form,
Management Information Circular and Annual Report, is available on SEDAR at
www.sedar.com and on the Corporation's website at www.fortisinc.com.
FORTIS INC.
Interim Consolidated Financial Statements
For the three months ended March 31, 2013 and 2012
(Unaudited)
Prepared in accordance with accounting principles generally accepted in the
United States
Fortis Inc.
Consolidated Balance Sheets (Unaudited)
As at
(in millions of Canadian dollars)
March 31, December 31,
2013 2012
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 168 $ 154
Accounts receivable 675 587
Prepaid expenses 15 18
Inventories 78 133
Regulatory assets (Note 3) 129 185
Deferred income taxes 22 16
------------------------------
1,087 1,093
Other assets 206 200
Regulatory assets (Note 3) 1,544 1,515
Utility capital assets 9,779 9,623
Income producing properties 635 626
Intangible assets 319 325
Goodwill (Note 13) 1,585 1,568
------------------------------
$ 15,155 $ 14,950
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings (Note 18) $ 89 $ 136
Accounts payable and other current liabilities 886 966
Regulatory liabilities (Note 3) 110 72
Current installments of long-term debt 81 117
Current installments of capital lease and
finance obligations 7 7
Deferred income taxes 8 10
------------------------------
1,181 1,308
Other liabilities 635 638
Regulatory liabilities (Note 3) 696 681
Deferred income taxes 721 702
Long-term debt 5,933 5,783
Capital lease and finance obligations 434 428
------------------------------
9,600 9,540
------------------------------
Shareholders' equity
Common shares (1)(Note 4) 3,149 3,121
Preference shares 1,108 1,108
Additional paid-in capital 15 15
Accumulated other comprehensive loss (93) (96)
Retained earnings 1,043 952
------------------------------
5,222 5,100
Non-controlling interests (Note 5) 333 310
------------------------------
5,555 5,410
------------------------------
$ 15,155 $ 14,950
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) no par value: unlimited authorized shares; 192.5 million and 191.6
million issued and outstanding as at March 31, 2013 and December 31,
2012, respectively
Commitments and Contingent Liabilities (Notes 19 and 21, respectively)
See accompanying Notes to Interim Consolidated Financial Statements
Fortis Inc.
Consolidated Statements of Earnings (Unaudited)
For the three months ended March 31
(in millions of Canadian dollars, except per share amounts)
Quarter Ended
2013 2012
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue $ 1,113 $ 1,149
----------------------------
Expenses
Energy supply costs 505 566
Operating 221 214
Depreciation and amortization 129 119
----------------------------
855 899
----------------------------
Operating income 258 250
Other income (expenses), net (Note 8) 6 (3)
Finance charges (Note 9) 89 91
----------------------------
Earnings before income taxes and extraordinary
item 175 156
Income taxes (Note 10) 30 23
----------------------------
Earnings before extraordinary item 145 133
Extraordinary gain, net of tax (Note 11) 22 -
----------------------------
Net earnings $ 167 $ 133
----------------------------
----------------------------
Net earnings attributable to:
Non-controlling interests $ 2 $ 1
Preference equity shareholders 14 11
Common equity shareholders 151 121
----------------------------
$ 167 $ 133
----------------------------
----------------------------
Earnings per common share before extraordinary
item (Note 12)
Basic $ 0.67 $ 0.64
Diluted $ 0.66 $ 0.62
Earnings per common share (Note 12)
Basic $ 0.79 $ 0.64
Diluted $ 0.76 $ 0.62
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying Notes to Interim Consolidated Financial Statements
Fortis Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
For the three months ended March 31
(in millions of Canadian dollars)
Quarter Ended
2013 2012
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings $ 167 $ 133
----------------------------
----------------------------
Other comprehensive income (loss)
Unrealized foreign currency translation gains
(losses), net of hedging activities and tax 2 (2)
Unrealized employee future benefits gains, net
of tax 1 1
----------------------------
3 (1)
----------------------------
Comprehensive income $ 170 $ 132
----------------------------
----------------------------
Comprehensive income attributable to:
Non-controlling interests $ 2 $ 1
Preference equity shareholders 14 11
Common equity shareholders 154 120
----------------------------
$ 170 $ 132
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying Notes to Interim Consolidated Financial Statements
Fortis Inc.
Consolidated Statements of Cash Flows (Unaudited)
For the three months ended March 31
(in millions of Canadian dollars)
Quarter Ended
2013 2012
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating activities
Net earnings $ 167 $ 133
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation - utility capital assets and
income producing properties 113 107
Amortization - intangible assets 12 11
Amortization - other 4 1
Deferred income taxes (11) 5
Accrued employee future benefits (1) 4
Equity component of allowance for funds used
construction (Note 8) (3) (2)
Other (10) (14)
Change in long-term regulatory assets and
liabilities (9) 4
Change in non-cash operating working capital
(Note 15) 18 79
------------------------------
280 328
------------------------------
Investing activities
Change in other assets and other liabilities 5 4
Capital expenditures - utility capital assets (230) (211)
Capital expenditures - income producing
properties (13) (5)
Capital expenditures - intangible assets (7) (13)
Contributions in aid of construction 10 14
Proceeds on sale of utility capital assets and
income producing properties 1 -
Business acquisition, net of cash acquired
(Note 13) (55) -
------------------------------
(289) (211)
------------------------------
Financing activities
Change in short-term borrowings (48) (83)
Repayments of long-term debt and capital lease
and finance obligations (40) (4)
Net borrowings under committed credit
facilities 136 7
Advances from non-controlling interests 22 41
Issue of common shares, net of costs and
dividends reinvested 10 2
Dividends
Common shares, net of dividends reinvested (41) (44)
Preference shares (14) (11)
Subsidiary dividends paid to non-controlling
interests (2) (2)
------------------------------
23 (94)
------------------------------
Change in cash and cash equivalents 14 23
Cash and cash equivalents, beginning of period 154 87
------------------------------
Cash and cash equivalents, end of period $ 168 $ 110
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplementary Information to Consolidated Statements of Cash Flows (Note 15)
See accompanying Notes to Interim Consolidated Financial Statements
Fortis Inc.
Consolidated Statements of Changes in Equity (Unaudited)
For the three months ended March 31
(in millions of Canadian dollars)
Accumulated
Additional Other
Common Preference Paid-in Comprehensive
Shares Shares Capital Loss
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Note 4)
As at January 1,
2013 $ 3,121 $ 1,108 $ 15 $ (96)
Net earnings - - - -
Other comprehensive
income - - - 3
Common share issues 28 - (1) -
Stock-based
compensation - - 1 -
Advances from non-
controlling
interests - - - -
Foreign currency
translation impacts - - - -
Subsidiary dividends
paid to non-
controlling
interests - - - -
Dividends declared
on common shares
($0.31 per share) - - - -
Dividends declared
on preference
shares - - - -
--------------------------------------------------------
As at March 31, 2013 $ 3,149 $ 1,108 $ 15 $ (93)
----------------------------------------------------------------------------
As at January 1,
2012 $ 3,036 $ 912 $ 14 $ (95)
Net earnings - - - -
Other comprehensive
loss - - - (1)
Common share issues 14 - - -
Stock-based
compensation - - 1 -
Advances from non-
controlling
interests - - - -
Foreign currency
translation impacts - - - -
Subsidiary dividends
paid to non-
controlling
interests - - - -
Dividends declared
on common shares
($0.30 per share) - - - -
Dividends declared
on preference
shares - - - -
--------------------------------------------------------
As at March 31, 2012 $ 3,050 $ 912 $ 15 $ (96)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Retained Non-Controlling Total
Earnings Interests Equity
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at January 1,
2013 $ 952 $ 310 $ 5,410
Net earnings 165 2 167
Other comprehensive
income - - 3
Common share issues - - 27
Stock-based
compensation - - 1
Advances from non-
controlling
interests - 22 22
Foreign currency
translation impacts - 1 1
Subsidiary dividends
paid to non-
controlling
interests - (2) (2)
Dividends declared
on common shares
($0.31 per share) (60) - (60)
Dividends declared
on preference
shares (14) - (14)
--------------------------------------------------------
As at March 31, 2013 $ 1,043 $ 333 $ 5,555
----------------------------------------------------------------------------
As at January 1,
2012 $ 868 $ 208 $ 4,943
Net earnings 132 1 133
Other comprehensive
loss - - (1)
Common share issues - - 14
Stock-based
compensation - - 1
Advances from non-
controlling
interests - 41 41
Foreign currency
translation impacts - (2) (2)
Subsidiary dividends
paid to non-
controlling
interests - (2) (2)
Dividends declared
on common shares
($0.30 per share) (57) - (57)
Dividends declared
on preference
shares (11) - (11)
--------------------------------------------------------
As at March 31, 2012 $ 932 $ 246 $ 5,059
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying Notes to Interim Consolidated Financial Statements
FORTIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2013 and 2012 (unless otherwise stated)
(Unaudited)
1. DESCRIPTION OF THE BUSINESS
NATURE OF OPERATIONS
Fortis Inc. ("Fortis" or the "Corporation") is principally an international
distribution utility holding company. Fortis segments its utility operations by
franchise area and, depending on regulatory requirements, by the nature of the
assets. Fortis also holds investments in non-regulated generation assets, and
commercial office and retail space and hotels, which are treated as two separate
segments. The Corporation's reporting segments allow senior management to
evaluate the operational performance and assess the overall contribution of each
segment to the long-term objectives of Fortis. Each entity within the reporting
segments operates autonomously, assumes profit and loss responsibility and is
accountable for its own resource allocation.
The following outlines each of the Corporation's reportable segments and is
consistent with the basis of segmentation as disclosed in the Corporation's 2012
annual audited consolidated financial statements.
REGULATED UTILITIES
The Corporation's interests in regulated gas and electric utilities in Canada
and the Caribbean are as follows:
a. Regulated Gas Utilities - Canadian: Includes the FortisBC Energy
companies, comprised of FortisBC Energy Inc., FortisBC Energy (Vancouver
Island) Inc. ("FEVI") and FortisBC Energy (Whistler) Inc.
b. Regulated Electric Utilities - Canadian: Comprised of FortisAlberta;
FortisBC Electric; Newfoundland Power; and Other Canadian Electric
Utilities, which includes Maritime Electric and FortisOntario.
FortisOntario mainly includes Canadian Niagara Power Inc., Cornwall
Street Railway, Light and Power Company, Limited and Algoma Power Inc.
c. Regulated Electric Utilities - Caribbean: Comprised of Caribbean
Utilities, in which Fortis holds an approximate 60% controlling
ownership interest; three small wholly owned utilities in the Turks and
Caicos Islands, which include FortisTCI Limited, Atlantic Equipment &
Power (Turks and Caicos) Ltd. and Turks and Caicos Utilities Limited,
acquired in August 2012, (collectively "Fortis Turks and Caicos").
NON-REGULATED - FORTIS GENERATION
Fortis Generation includes the financial results of non-regulated generation
assets in Belize, Ontario, British Columbia and Upstate New York. Effective
March 2013 the Corporation and the Government of Newfoundland and Labrador
("Government") settled all matters, including release from all debt obligations,
pertaining to the Government's December 2008 expropriation of non-regulated
hydroelectric generating assets and water rights in central Newfoundland, then
owned by Exploits River Hydro Partnership ("Exploits Partnership") in which
Fortis holds an indirect 51% interest through Fortis Properties (Note 11).
NON-REGULATED - FORTIS PROPERTIES
Fortis Properties owns and operates 23 hotels, comprised of more than 4,400
rooms, in eight Canadian provinces, and owns and operates approximately 2.7
million square feet of commercial office and retail space, primarily in Atlantic
Canada.
CORPORATE AND OTHER
The Corporate and Other segment captures expense and revenue items not
specifically related to any reportable segment, and those business operations
that are below the required threshold for reporting as separate segments.
The Corporate and Other segment includes Fortis net corporate expenses and the
net expenses of non-regulated FortisBC Holdings Inc. ("FHI") corporate-related
activities. Also included in the Corporate and Other segment are the financial
results of CustomerWorks Limited Partnership ("CWLP") and FortisBC Alternative
Energy Services Inc. ("FAES"). CWLP is a non-regulated shared-services business
in which FHI holds a 30% interest. CWLP provides billing and customer care
services to utilities, municipalities and certain energy companies. CWLP's
financial results are recorded using the equity method of accounting. FAES is a
wholly owned subsidiary of FHI that provides alternative energy solutions,
including thermal-energy and geo-exchange systems.
PENDING ACQUISITION
In February 2012 Fortis announced that it had entered into an agreement to
acquire CH Energy Group, Inc. ("CH Energy Group") for US$65.00 per common share
in cash, for an aggregate purchase price of approximately US$1.5 billion,
including the assumption of approximately US$500 million of debt on closing. CH
Energy Group is an energy delivery company headquartered in Poughkeepsie, New
York. Its main business, Central Hudson Gas & Electric Corporation, is a
regulated transmission and distribution utility serving approximately 300,000
electric and 75,000 natural gas customers in eight counties of New York State's
Mid-Hudson River Valley. The transaction received CH Energy Group shareholder
approval in June 2012 and regulatory approval from the Federal Energy Regulatory
Commission and the Committee on Foreign Investment in the United States in July
2012. In addition, the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 expired in October 2012, satisfying another condition
necessary for consummation of the transaction.
Approval by the New York State Public Service Commission ("PSC") of the
Corporation's acquisition of CH Energy Group is the last significant regulatory
matter required to close the transaction. A Settlement Agreement among Fortis,
CH Energy Group, PSC staff, registered interveners and other parties was filed
with the PSC in January 2013. The parties to the Settlement Agreement have
concluded that, based on the terms of the Settlement Agreement, the acquisition
is in the public interest and have recommended approval by the PSC. A
Recommended Decision issued on May 3, 2013 by administrative law judges in
connection with the acquisition asserts that without modification of the
Settlement Agreement, the benefits of the acquisition are outweighed by
perceived detriments remaining after mitigation. The Recommended Decision is an
advisory opinion that will be considered by the PSC in determining whether to
approve the acquisition. While no assurance regarding a closing of the
transaction can be given until an order is issued by the PSC, a final decision
by the PSC and subsequent closing of the transaction is expected in June 2013.
Unless extended by agreement of both parties, the agreement and plan of merger
between Fortis and CH Energy Group expires August 20, 2013 (Notes 8, 19 and 21).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States ("US GAAP")
for interim financial statements. As a result, these interim consolidated
financial statements do not include all of the information and disclosures
required in the annual consolidated financial statements and should be read in
conjunction with the Corporation's 2012 annual audited consolidated financial
statements. In management's opinion, the interim consolidated financial
statements include all adjustments that are of a recurring nature and necessary
to present fairly the consolidated financial position of the Corporation.
Interim results will fluctuate due to the seasonal nature of gas and electricity
demand and water flows, as well as the timing and recognition of regulatory
decisions. As a result of natural gas consumption patterns, most of the annual
earnings of the FortisBC Energy companies are realized in the first and fourth
quarters. Given the diversified group of companies, seasonality may vary.
The preparation of the consolidated financial statements in accordance with US
GAAP requires management to make estimates and judgments that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Estimates and judgments are based on historical experience, current conditions
and various other assumptions believed to be reasonable under the circumstances.
Additionally, certain estimates and judgments are necessary since the regulatory
environments in which the Corporation's utilities operate often require amounts
to be recorded at estimated values until these amounts are finalized pursuant to
regulatory decisions or other regulatory proceedings. In April 2013 Newfoundland
Power received a decision related to the utility's cost of capital for 2013
through 2015, the cumulative impacts of which will be recorded in the second
quarter of 2013, when the decision was received, with the impact related to the
first quarter of 2013 determined to be immaterial. Due to changes in facts and
circumstances and the inherent uncertainty involved in making estimates, actual
results may differ significantly from current estimates. Estimates and judgments
are reviewed periodically and, as adjustments become necessary, are reported in
earnings in the period in which they become known.
Interim financial statements may also employ a greater use of estimates than the
annual financial statements. There were no material changes in the nature of the
Corporation's critical accounting estimates during the three months ended March
31, 2013.
An evaluation of subsequent events through to May 6, 2013, the date these
interim consolidated financial statements were approved by the Audit Committee
of the Board of Directors, was completed to determine whether circumstances
warranted recognition and disclosure of events or transactions in the interim
consolidated financial statements as at March 31, 2013.
All amounts are presented in Canadian dollars unless otherwise stated.
These interim consolidated financial statements include the accounts of Fortis
and its wholly owned subsidiaries and controlling ownership interests. All
significant intercompany balances and transactions have been eliminated on
consolidation.
These interim consolidated financial statements have been prepared following the
same accounting policies and methods as those used to prepare the Corporation's
2012 annual audited consolidated financial statements, except as described
below.
NEW ACCOUNTING POLICIES
Disclosures About Offsetting Assets and Liabilities
Effective January 1, 2013, the Corporation adopted the amendments to Accounting
Standards Codification ("ASC") Topic 210, Balance Sheet - Disclosures About
Offsetting Assets and Liabilities as outlined in Accounting Standards Updates
("ASU") No. 2011-11 and 2013-01. The amendments improve the transparency of the
effect or potential effect of netting arrangements on a company's financial
position by expanding the level of disclosures required by entities for such
arrangements. The amended disclosures are intended to assist financial statement
users in understanding significant quantitative differences between balance
sheets prepared under US GAAP and International Financial Reporting Standards
("IFRS"). ASU No. 2013-01 limits the scope of the new offsetting disclosure
requirements previously issued in ASU No. 2011-11 to certain derivative
instruments, repurchase and reverse repurchase agreements, and securities
borrowing and lending arrangements that are either offset on the balance sheet
or subject to an enforceable master netting or similar arrangement. The
above-noted amendments were applied retrospectively and did not materially
impact the Corporation's interim consolidated financial statements for the three
months ended March 31, 2013.
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
Effective January 1, 2013, the Corporation adopted the amendments to ASC Topic
220, Other Comprehensive Income - Reporting of Amounts Out of Accumulated Other
Comprehensive Income ("AOCI") as outlined in ASU No. 2013-02. The amendments
improve the reporting of reclassifications out of AOCI and require entities to
report, in one place, information about reclassifications out of AOCI and to
present details of the reclassifications in the disclosure for changes in AOCI
balances. The effect of the reclassification of significant items to net income
in their entirety during the reporting period must be reported in the respective
line items in the statement where net income is presented. The effect of items
not reclassified to net income in their entirety during the reporting period are
to be presented in the notes to the consolidated financial statements. The
amendments were applied by the Corporation prospectively commencing on January
1, 2013 and did not materially impact the Corporation's interim consolidated
financial statements for the three months ended March 31, 2013.
3. REGULATORY ASSETS AND LIABILITIES
A summary of the Corporation's regulatory assets and liabilities is provided
below. A detailed description of the nature of the Corporation's regulatory
assets and liabilities is provided in Note 7 to the Corporation's 2012 annual
audited consolidated financial statements.
As at
March 31, December 31,
($ millions) 2013 2012
----------------------------------------------------------------------------
Regulatory assets
Deferred income taxes 727 713
Employee future benefits 492 498
Deferred lease costs - FortisBC Electric 85 77
Rate stabilization accounts - electric
utilities 62 57
Deferred energy management costs 53 50
Deferred operating overhead costs 35 32
Deferred net losses on disposal of utility
capital assets and intangible assets 32 27
Rate stabilization accounts - FortisBC
Energy companies 29 48
Customer Care Enhancement Project cost
deferral 23 24
Income taxes recoverable on other post-
employment benefit ("OPEB") plans 23 23
Alternative energy projects cost deferral 21 18
Whistler pipeline contribution deferral 13 14
Deferred development costs for capital
projects 10 10
Deferred costs - smart meters 6 9
Replacement energy deferral - Point Lepreau
(1) - 47
Other regulatory assets 62 53
----------------------------------------------------------------------------
Total regulatory assets 1,673 1,700
Less: current portion (129) (185)
----------------------------------------------------------------------------
Long-term regulatory assets 1,544 1,515
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) In March 2013 Maritime Electric received proceeds of approximately $47
million from the Government of Prince Edward Island upon its assumption
of the utility's regulatory asset associated with the deferral of
certain incremental replacement energy costs during the refurbishment
of the New Brunswick Power Point Lepreau nuclear generating station.
As at
March 31, December 31,
($ millions) 2013 2012
----------------------------------------------------------------------------
Regulatory liabilities
Non-asset retirement obligation removal cost
provision 494 486
Rate stabilization accounts - FortisBC
Energy companies 133 117
Alberta Electric System Operator charges
deferral 71 44
Rate stabilization accounts - electric
utilities 44 46
Deferred income taxes 11 12
Deferred interest 9 9
Meter reading and customer service variance
deferral 9 6
Income tax variance deferral 3 7
Other regulatory liabilities 32 26
----------------------------------------------------------------------------
Total regulatory liabilities 806 753
Less: current portion (110) (72)
----------------------------------------------------------------------------
Long-term regulatory liabilities 696 681
----------------------------------------------------------------------------
----------------------------------------------------------------------------
4. COMMON SHARES
Common shares issued during the period were as follows:
Quarter Ended
March 31, 2013
Number of
Shares Amount
(in thousands) ($ millions)
----------------------------------------------------------------------------
Balance, beginning of period 191,566 3,121
Dividend Reinvestment Plan 563 19
Consumer Share Purchase Plan 9 -
Employee Share Purchase Plan 146 5
Stock Option Plans 192 4
----------------------------------------------------------------------------
Balance, end of period 192,476 3,149
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at March 31, 2013, Fortis had 18.5 million Subscription Receipts outstanding,
which were issued by the Corporation in June 2012 to finance a portion of the
pending acquisition of CH Energy Group (Note 1). The Subscription Receipts began
trading on the Toronto Stock Exchange on June 27, 2012 under the symbol "FTS.R".
Each Subscription Receipt will entitle the holder thereof to receive, on
satisfaction of the release conditions, and without payment of additional
consideration, one common share of Fortis and a cash payment equal to the
dividends declared on Fortis common shares during the period from June 27, 2012
to the date of issuance of the common shares in respect of the Subscription
Receipts to holders of record (Note 19).
5. NON-CONTROLLING INTERESTS
As at
March 31, December 31,
($ millions) 2013 2012
----------------------------------------------------------------------------
Waneta Expansion Limited Partnership
("Waneta Partnership") 242 220
Caribbean Utilities 72 71
Mount Hayes Limited Partnership 12 12
Preference shares of Newfoundland Power 7 7
----------------------------------------------------------------------------
333 310
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. STOCK-BASED COMPENSATION PLANS
In January 2013 8,497 Deferred Share Units ("DSUs") were granted to the
Corporation's Board of Directors, representing the first quarter equity
component of the Directors' annual compensation and, where opted, their first
quarter component of annual retainers in lieu of cash. Each DSU represents a
unit with an underlying value equivalent to the value of one common share of the
Corporation.
In March 2013 66,978 Performance Share Units ("PSUs") were paid out to the
President and Chief Executive Officer ("CEO") of the Corporation at $33.59 per
PSU, for a total of approximately $2 million. The payout was made upon the
three-year maturation period in respect of the PSU grant made in March 2010 and
the President and CEO satisfying the payment requirements, as determined by the
Human Resource Committee of the Board of Directors of Fortis.
In March 2013 the Corporation granted 807,600 options to purchase common shares
under its 2012 Stock Option Plan ("2012 Plan") at the five-day volume weighted
average trading price immediately preceding the date of grant of $33.58. The
options granted under the 2012 Plan are exercisable for a period not to exceed
ten years from the date of grant, expire no later than three years after the
termination, death or retirement of the optionee and vest evenly over a
four-year period on each anniversary of the date of grant. Directors are not
eligible to receive grants of options under the 2012 Plan. The fair value of
each option granted was $3.91 per option.
The fair value was estimated at the date of grant using the Black-Scholes fair
value option-pricing model and the following assumptions:
Dividend yield (%) 3.78
Expected volatility (%) 21.4
Risk-free interest rate (%) 1.31
Weighted average expected life (years) 5.3
For the three months ended March 31, 2013, stock-based compensation expense of
approximately $1 million was recognized ($1 million for the three months ended
March 31, 2012).
7. EMPLOYEE FUTURE BENEFITS
The Corporation and its subsidiaries each maintain one or a combination of
defined benefit pension plans and defined contribution pension plans, including
group registered retirement savings plans, for employees. The Corporation and
certain subsidiaries also offer OPEB plans for qualifying employees. The net
benefit cost of providing the defined benefit pension and OPEB plans is detailed
in the following tables.
Quarter Ended March 31
Defined Benefit
Pension Plans OPEB Plans
($ millions) 2013 2012 2013 2012
----------------------------------------------------------------------------
Components of net benefit
cost:
Service costs 8 7 2 2
Interest costs 12 12 3 3
Expected return on plan
assets (13) (12) - -
Amortization of actuarial
losses 7 6 2 1
Amortization of past service
credits/plan amendments - - (1) (1)
Regulatory adjustments (3) (1) - 1
----------------------------------------------------------------------------
Net benefit cost 11 12 6 6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months ended March 31, 2013, the Corporation expensed $4 million
($4 million for the three months ended March 31, 2012) related to defined
contribution pension plans.
8. OTHER INCOME (EXPENSES), NET
Quarter Ended
March 31
($ millions) 2013 2012
----------------------------------------------------------------------------
Equity component of allowance for funds used
during construction ("AFUDC") 3 2
Net foreign exchange gain (loss) 2 (2)
Interest income 1 1
Acquisition-related expenses - (4)
----------------------------------------------------------------------------
6 (3)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The foreign exchange gain for the three months ended March 31, 2013 comprised
approximately $2 million related to the translation into Canadian dollars of the
Corporation's US dollar-denominated long-term other asset representing the book
value of the Corporation's expropriated investment in Belize Electricity (Notes
18 and 20). For the three months ended March 31, 2012 a foreign exchange loss of
approximately $1.5 million was recognized on the translation into Canadian
dollars of the above-noted long-term other asset.
The acquisition-related expenses are associated with the pending acquisition of
CH Energy Group (Notes 1, 19 and 21).
9. FINANCE CHARGES
Quarter Ended
March 31
($ millions) 2013 2012
----------------------------------------------------------------------------
Interest - Long-term debt and capital lease
and finance obligations 94 94
- Short-term borrowings 2 1
Debt component of AFUDC (7) (4)
----------------------------------------------------------------------------
89 91
----------------------------------------------------------------------------
----------------------------------------------------------------------------
10. INCOME TAXES
Income taxes differ from the amount that would be expected to be generated by
applying the enacted combined Canadian federal and provincial statutory income
tax rate to earnings before income taxes. The following is a reconciliation of
consolidated statutory income taxes to consolidated effective income taxes.
Quarter Ended
March 31
($ millions, except as noted) 2013 2012
----------------------------------------------------------------------------
Combined Canadian federal and provincial
statutory income tax rate 29.0% 29.0%
----------------------------------------------------------------------------
Statutory income tax rate applied to
earnings before income taxes 51 45
Difference in Canadian provincial statutory
rates applicable to subsidiaries in
different Canadian jurisdictions (6) (6)
Difference between Canadian statutory rate
and rates applicable to foreign
subsidiaries (2) (2)
Items capitalized for accounting purposes
but expensed for income tax purposes (16) (15)
Difference between capital cost allowance
and amounts claimed for accounting purposes (2) 3
Non-deductible expenses 1 -
Difference between enacted and substantively
enacted income tax rates
associated with Part VI.1 tax 2 -
Difference between employee future benefits
paid and amounts expensed for accounting
purposes 1 -
Other 1 (2)
----------------------------------------------------------------------------
Income taxes 30 23
----------------------------------------------------------------------------
Effective income tax rate 17.1% 14.7%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at March 31, 2013, the Corporation had approximately $41 million (December
31, 2012 - $73 million) in non-capital and capital loss carryforwards, of which
$13 million (December 31, 2012 - $13 million) has not been recognized in the
consolidated financial statements. The non-capital loss carryforwards expire
between 2013 and 2033.
11. EXTRAORDINARY GAIN, NET OF TAX
Effective March 2013 Fortis and the Government settled all matters, including
release from all debt obligations, pertaining to the Government's December 2008
expropriation of non-regulated hydroelectric generating assets and water rights
in central Newfoundland, then owned by Exploits Partnership in which Fortis
holds an indirect 51% interest through Fortis Properties. The settlement of
expropriation matters resulted in the recognition of an extraordinary gain of
approximately $25 million ($22 million after tax) in the first quarter of 2013.
12. EARNINGS PER COMMON SHARE
The Corporation calculates earnings per common share ("EPS") on the weighted
average number of common shares outstanding. Diluted EPS is calculated using the
treasury stock method for options and the "if-converted" method for convertible
securities.
EPS were as follows:
Quarter Ended March 31
2013
------------------------------------------------
Earnings
to Common
Shareholders
Before Earnings
Extraordinary Extraordinary to Common
Item Gain Shareholders
($ millions) ($ millions) ($ millions)
----------------------------------------------------------------------------
Basic EPS 129 22 151
Effect of potential dilutive
securities:
Stock Options - - -
Preference Shares 4 - 4
----------------------------------------------------------------------------
Diluted EPS 133 22 155
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter Ended March 31
2013
------------------------------------------------
Weighted EPS
Average Before EPS
Shares Extraordinary Extraordinary
(millions) Item Gain EPS
----------------------------------------------------------------------------
Basic EPS 192.0 $ 0.67 $ 0.12 $ 0.79
Effect of potential dilutive
securities:
Stock Options 0.8
Preference Shares 10.0
----------------------------------------------------------------------------
Diluted EPS 202.8 $ 0.66 $ 0.10 $ 0.76
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter Ended March 31
2012
------------------------------------------------
Earnings
to Common
Shareholders
Before Earnings
Extraordinary Extraordinary to Common
Item Gain Shareholders
($ millions) ($ millions) ($ millions)
----------------------------------------------------------------------------
Basic EPS 121 - 121
Effect of potential dilutive
securities:
Stock Options - - -
Preference Shares 4 - 4
----------------------------------------------------------------------------
Diluted EPS 125 - 125
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter Ended March 31
2012
------------------------------------------------
Weighted EPS
Average Before EPS
Shares Extraordinary Extraordinary
(millions) Item Gain EPS
----------------------------------------------------------------------------
Basic EPS 189.0 $ 0.64 - $ 0.64
Effect of potential dilutive
securities:
Stock Options 1.0
Preference Shares 10.3
----------------------------------------------------------------------------
Diluted EPS 200.3 $ 0.62 - $ 0.62
----------------------------------------------------------------------------
----------------------------------------------------------------------------
13. BUSINESS ACQUISITION
In March 2013 FortisBC Electric acquired the City of Kelowna's (the "City's")
electrical utility assets for approximately $55 million, which now allows
FortisBC Electric to directly serve some 15,000 customers formerly served by the
City. FortisBC Electric had provided the City with electricity under a wholesale
tariff and had operated and maintained the City's electrical utility assets
under contract since 2000.
The acquisition was approved by the British Columbia Utilities Commission in
March 2013 and allowed for approximately $38 million of the purchase price to be
included in FortisBC Electric's rate base. Based on this regulatory decision,
the book value of the assets acquired has been assigned as fair value in the
preliminary purchase price allocation. FortisBC Electric is regulated under cost
of service and the determination of revenue and earnings is based on a regulated
rate of return that is applied to historic values, which do not change with a
change of ownership. Therefore, fair market value approximates book value and no
fair market value adjustments were recorded for the assets acquired because all
of the economic benefits and obligations associated with them beyond regulated
rates of return accrue to the customers.
The following table summarizes the preliminary allocation of the purchase price
to the assets acquired as at the date of acquisition based on their fair values.
($ millions)
----------------------------------------------------------------------------
Fair value assigned to assets:
Utility capital assets 38
Long-term deferred income tax asset 3
Goodwill 14
----------------------------------------------------------------------------
55
------------------------------------
------------------------------------
The acquisition, which qualifies as a business combination, has been accounted
for using the acquisition method, whereby financial results of the business
acquired have been consolidated in the financial statements of Fortis commencing
in March 2013.
14. SEGMENTED INFORMATION
Information by reportable segment is as follows:
REGULATED
--------------------------------------------------------------
Gas
Utilities Electric Utilities
--------------------------------------------------------------
FortisBC
Energy New-
Quarter Ended Companies found- Total
March 31, 2013 - Fortis FortisBC land Other Electric Electric
($ millions) Canadian Alberta Electric Power Canadian Canadian Caribbean
----------------------------------------------------------------------------
Revenue 492 118 88 197 96 499 66
Energy supply
costs 232 - 25 145 62 232 41
Operating
expenses 72 40 20 23 13 96 8
Depreciation
and
amortization 46 36 13 12 7 68 8
----------------------------------------------------------------------------
Operating
income 142 42 30 17 14 103 9
Other income,
net 1 2 - 1 - 3 -
Finance
charges 35 17 9 9 5 40 4
Income tax
expense
(recovery) 23 1 3 2 3 9 -
----------------------------------------------------------------------------
Net earnings
(loss) before
extraordinary
item 85 26 18 7 6 57 5
Extraordinary
gain, net of
tax - - - - - - -
----------------------------------------------------------------------------
Net earnings
(loss) 85 26 18 7 6 57 5
Non-
controlling
interests - - - - - - 2
Preference
share
dividends - - - - - - -
----------------------------------------------------------------------------
Net earnings
(loss)
attributable
to common
equity
shareholders 85 26 18 7 6 57 3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill 913 227 235 - 67 529 143
Identifiable
assets 4,608 2,806 1,758 1,419 709 6,692 758
----------------------------------------------------------------------------
Total assets 5,521 3,033 1,993 1,419 776 7,221 901(1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross capital
expenditures 38 95 17 15 13 140 11
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter Ended
March 31, 2012
($ millions)
----------------------------------------------------------------------------
Revenue 548 108 87 192 91 478 63
Energy supply
costs 302 - 25 142 58 225 40
Operating
expenses 70 39 21 20 12 92 8
Depreciation
and
amortization 40 35 12 11 7 65 7
----------------------------------------------------------------------------
Operating
income 136 34 29 19 14 96 8
Other income
(expenses),
net - 2 - - - 2 -
Finance
charges 35 15 10 9 5 39 4
Income tax
expense
(recovery) 19 - 3 3 2 8 -
----------------------------------------------------------------------------
Net earnings
(loss) 82 21 16 7 7 51 4
Non-
controlling
interests - - - - - - 1
Preference
share
dividends - - - - - - -
----------------------------------------------------------------------------
Net earnings
(loss)
attributable
to common
equity
shareholders 82 21 16 7 7 51 3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill 913 227 221 - 63 511 139
Identifiable
assets 4,586 2,506 1,677 1,324 690 6,197 708
----------------------------------------------------------------------------
Total assets 5,499 2,733 1,898 1,324 753 6,708 847(1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross capital
expenditures 46 79 17 15 9 120 10
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NON-REGULATED
-----------------------------------
Quarter Ended Inter-
March 31, 2013 Fortis Fortis Corporate segment
($ millions) Generation Properties and Other eliminations Consolidated
----------------------------------------------------------------------------
Revenue 5 53 6 (8) 1,113
Energy supply
costs - - - - 505
Operating
expenses 2 42 3 (2) 221
Depreciation
and
amortization 1 5 1 - 129
----------------------------------------------------------------------------
Operating
income 2 6 2 (6) 258
Other income,
net - - 2 - 6
Finance
charges - 6 10 (6) 89
Income tax
expense
(recovery) - - (2) - 30
----------------------------------------------------------------------------
Net earnings
(loss) before
extraordinary
item 2 - (4) - 145
Extraordinary
gain, net of
tax 22 - - - 22
----------------------------------------------------------------------------
Net earnings
(loss) 24 - (4) - 167
Non-
controlling
interests - - - - 2
Preference
share
dividends - - 14 - 14
----------------------------------------------------------------------------
Net earnings
(loss)
attributable
to common
equity
shareholders 24 - (18) - 151
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill - - - - 1,585
Identifiable
assets 780 678 514 (460) 13,570
----------------------------------------------------------------------------
Total assets 780 678 514 (460) 15,155
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross capital
expenditures 48 13 - - 250
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter Ended
March 31, 2012
($ millions)
----------------------------------------------------------------------------
Revenue 9 52 6 (7) 1,149
Energy supply
costs - - - (1) 566
Operating
expenses 3 40 3 (2) 214
Depreciation
and
amortization 1 5 1 - 119
----------------------------------------------------------------------------
Operating
income 5 7 2 (4) 250
Other income
(expenses),
net 1 - (5) (1) (3)
Finance
charges 1 6 11 (5) 91
Income tax
expense
(recovery) - - (4) - 23
----------------------------------------------------------------------------
Net earnings
(loss) 5 1 (10) - 133
Non-
controlling
interests - - - - 1
Preference
share
dividends - - 11 - 11
----------------------------------------------------------------------------
Net earnings
(loss)
attributable
to common
equity
shareholders 5 1 (21) - 121
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill - - - - 1,563
Identifiable
assets 612 612 462 (399) 12,778
----------------------------------------------------------------------------
Total assets 612 612 462 (399) 14,341
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross capital
expenditures 48 5 - - 229
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes the Corporation's long-term other asset associated with its
expropriated investment in Belize Electricity
Related party transactions are in the normal course of operations and are
measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties. The significant related party
inter-segment transactions primarily related to: (i) electricity sales from
Newfoundland Power to Fortis Properties; and (ii) finance charges on related
party borrowings. The significant related party inter-segment transactions for
the three months ended March 31, 2013 and 2012 were as follows:
Significant Inter-Segment Transactions Quarter Ended
March 31
($ millions) 2013 2012
----------------------------------------------------------------------------
Sales from Newfoundland Power to Fortis
Properties 2 2
Inter-segment finance charges on lending
from:
Corporate to Regulated Electric Utilities
- Caribbean 1 1
Corporate to Fortis Properties 5 4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The significant inter-segment asset balances were as follows:
As at March 31
($ millions) 2013 2012
----------------------------------------------------------------------------
Inter-segment lending from:
Fortis Generation to Other Canadian
Electric Utilities 20 20
Corporate to Regulated Electric Utilities
- Caribbean 86 76
Corporate to Fortis Generation 6 20
Corporate to Fortis Properties 319 257
Other inter-segment assets 29 26
----------------------------------------------------------------------------
Total inter-segment eliminations 460 399
----------------------------------------------------------------------------
----------------------------------------------------------------------------
15. SUPPLEMENTARY INFORMATION TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended
March 31
($ millions) 2013 2012
----------------------------------------------------------------------------
Change in non-cash operating working
capital:
Accounts receivable (79) (59)
Prepaid expenses 3 2
Regulatory assets - current portion 34 43
Inventories 55 58
Accounts payable and other current
liabilities (30) 9
Regulatory liabilities - current portion 35 26
----------------------------------------------------------------------------
18 79
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-cash investing and financing activities:
Common share dividends reinvested 19 13
Additions to utility capital assets, income
producing properties and intangible assets
included in current liabilities 70 105
Contributions in aid of construction
included in current assets 20 11
----------------------------------------------------------------------------
----------------------------------------------------------------------------
16. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Corporation generally limits the use of derivative instruments to those that
qualify as accounting or economic hedges. As at March 31, 2013, the
Corporation's derivative contracts consisted of fuel option contracts, natural
gas swap and option contracts, and gas purchase contract premiums. The fuel
option contracts are held by Caribbean Utilities and the remaining derivative
instruments are held by the FortisBC Energy companies.
Volume of Derivative Activity
As at March 31, 2013, the following notional volumes related to fuel option
contracts and natural gas commodity derivatives that are expected to be settled
are outlined below.
2013 2014
----------------------------------------------------------------------------
Fuel option contracts (millions of imperial
gallons) 13 -
Gas swaps and options (petajoules) 12 7
Gas purchase contract premiums (petajoules) 68 12
----------------------------------------------------------------------------
Presentation of Derivative Instruments in the Consolidated Financial Statements
In the Corporation's consolidated balance sheets, derivative instruments are
presented on a net basis by counterparty, where the right of offset exists.
The Corporation's outstanding derivative balances were as follows:
As at
March 31, December 31,
($ millions) 2013 2012
----------------------------------------------------------------------------
Gross derivatives balance (1) 36 60
Netting (2) - -
Cash collateral - -
----------------------------------------------------------------------------
Total derivative balances (3) 36 60
--------------------------------
--------------------------------
(1) Refer to Note 17 for a discussion of the valuation techniques used to
calculate the fair value of the derivative instruments.
(2) Positions, by counterparty, are netted where the intent and legal right
to offset exists.
(3) Unrealized losses of $36 million on commodity risk-related derivative
instruments as at March 31, 2013 were recognized in current regulatory
assets (December 31, 2012 - $60 million), which would otherwise be
recognized on the consolidated statement of comprehensive income and in
accumulated other comprehensive loss.
Cash flows associated with the settlement of all derivative instruments are
included in operating cash flows on the Corporation's consolidated statements of
cash flows.
17. FAIR VALUE MEASUREMENTS
Fair value is the price at which a market participant could sell an asset or
transfer a liability to an unrelated party. A fair value measurement is required
to reflect the assumptions that market participants would use in pricing an
asset or liability based on the best available information. These assumptions
include the risks inherent in a particular valuation technique, such as a
pricing model, and the risks inherent in the inputs to the model. A fair value
hierarchy exists that prioritizes the inputs used to measure fair value. The
Corporation is required to record all derivative instruments at fair value
except for those which qualify for the normal purchase and normal sale
exception.
The three levels of the fair value hierarchy are defined as follows:
Level 1: Fair value determined using unadjusted quoted prices in active
markets;
Level 2: Fair value determined using pricing inputs that are observable;
and
Level 3: Fair value determined using unobservable inputs only when
relevant observable inputs are not available.
The fair values of the Corporation's financial instruments, including
derivatives, reflect point-in-time estimates based on current and relevant
market information about the instruments as at the balance sheet dates. The
estimates cannot be determined with precision as they involve uncertainties and
matters of judgment and, therefore, may not be relevant in predicting the
Corporation's future consolidated earnings or cash flows.
The following table details the estimated fair value measurements of the
Corporation's financial instruments, all of which were measured using Level 2
pricing inputs, except for certain long-term debt as noted.
As at
Asset (Liability) March 31, 2013 December 31, 2012
Carrying Estimated Carrying Estimated
($ millions) Value Fair Value Value Fair Value
----------------------------------------------------------------------------
Long-term other asset -
Belize Electricity (1) 106 n/a (2) 104 n/a (2)
Long-term debt, including
current portion (3) (6,014) (7,332) (5,900) (7,338)
Waneta Partnership
promissory note (4) (48) (52) (47) (51)
Fuel option contracts (5) - - (1) (1)
Natural gas commodity
derivatives: (5)
Swaps and options (33) (33) (51) (51)
Gas purchase contract
premiums (3) (3) (8) (8)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Included in long-term other assets on the consolidated balance sheet
(2) The Corporation's expropriated investment in Belize Electricity is
recognized at book value, including foreign exchange impacts. The
actual amount of compensation that the Government of Belize may pay to
Fortis is indeterminable at this time (Notes 18 and 20).
(3) The Corporation's $200 million unsecured debentures due 2039 and
consolidated borrowings under credit facilities classified as long-term
of $266 million (December 31, 2012 - $150 million) are valued using
Level 1 inputs. All other long-term debt is valued using Level 2
inputs.
(4) Included in long-term other liabilities on the consolidated balance
sheet
(5) The fair values of the derivatives were recorded in accounts payable
and other current liabilities as at March 31, 2013 and December 31,
2012. The fair value of the fuel option contracts as at March 31, 2013
was less than $1 million.
The fair value of long-term debt is calculated using quoted market prices when
available. When quoted market prices are not available, as is the case with the
Waneta Partnership promissory note and certain long-term debt, the fair value is
determined by either: (i) discounting the future cash flows of the specific debt
instrument at an estimated yield to maturity equivalent to benchmark government
bonds or treasury bills, with similar terms to maturity, plus a credit risk
premium equal to that of issuers of similar credit quality; or (ii) by obtaining
from third parties indicative prices for the same or similarly rated issues of
debt of the same remaining maturities. Since the Corporation does not intend to
settle the long-term debt or promissory note prior to maturity, the excess of
the estimated fair value above the carrying value does not represent an actual
liability.
The fuel option contracts are used by Caribbean Utilities to reduce the impact
of volatility in fuel prices on customer rates, as approved by the regulator
under the Company's Fuel Price Volatility Management Program. The fair value of
the fuel option contracts reflects only the value of the heating oil derivative
and not the offsetting change in the value of the underlying future purchases of
heating oil and was calculated using published market prices for heating oil or
similar commodities where appropriate. The fuel option contracts mature in April
and October 2013. Approximately 70% of the Company's annual diesel fuel
requirements are under fuel hedging arrangements.
The natural gas commodity derivatives are used to fix the effective purchase
price of natural gas, as the majority of the natural gas supply contracts at the
FortisBC Energy companies have floating, rather than fixed, prices. The fair
value of the natural gas commodity derivatives was calculated using the present
value of cash flows based on market prices and forward curves for the commodity
cost of natural gas.
The fair values of the fuel option contracts and natural gas commodity
derivatives are estimates of the amounts that the utilities would receive or
have to pay to terminate the outstanding contracts as at the balance sheet
dates. As at March 31, 2013, none of the fuel option contracts or natural gas
commodity derivatives were designated as hedges of fuel purchases or natural gas
supply contracts. However, any gains or losses associated with changes in the
fair value of the derivatives were deferred as a regulatory asset or liability
for recovery from, or refund to, customers in future rates, as permitted by the
regulators.
18. FINANCIAL RISK MANAGEMENT
The Corporation is primarily exposed to credit risk, liquidity risk and market
risk as a result of holding financial instruments in the normal course of
business.
Credit Risk Risk that a counterparty to a financial instrument might
fail to meet its obligations under the terms of the
financial instrument.
Liquidity Risk Risk that an entity will encounter difficulty in raising
funds to meet commitments associated with financial
instruments.
Market Risk Risk that the fair value or future cash flows of a financial
instrument will fluctuate due to changes in market prices.
The Corporation is exposed to foreign exchange risk,
interest rate risk and commodity price risk.
Credit Risk
For cash equivalents, trade and other accounts receivable, and long-term other
receivables, the Corporation's credit risk is generally limited to the carrying
value on the consolidated balance sheet. The Corporation generally has a large
and diversified customer base, which minimizes the concentration of credit risk.
The Corporation and its subsidiaries have various policies to minimize credit
risk, which include requiring customer deposits, prepayments and/or credit
checks for certain customers and performing disconnections and/or using
third-party collection agencies for overdue accounts.
FortisAlberta has a concentration of credit risk as a result of its distribution
service billings being to a relatively small group of retailers. As at March 31,
2013, FortisAlberta's gross credit risk exposure was approximately $114 million,
representing the projected value of retailer billings over a 37-day period. The
Company has reduced its exposure to approximately $3 million by obtaining from
the retailers either a cash deposit, bond, letter of credit or an
investment-grade credit rating from a major rating agency, or by having the
retailer obtain a financial guarantee from an entity with an investment-grade
credit rating.
The FortisBC Energy companies may be exposed to credit risk in the event of
non-performance by counterparties to derivative instruments. The Company uses
netting arrangements to reduce credit risk and net settles payments with
counterparties where net settlement provisions exist. The following table
summarizes the FortisBC Energy companies' net credit risk exposure to its
counterparties, as well as credit risk exposure to counterparties accounting for
greater than 10% net credit exposure, as it relates to its natural gas swaps and
options.
As at
March 31, December 31,
($ millions, except for number of
counterparties) 2013 2012
----------------------------------------------------------------------------
Gross credit exposure before credit
collateral (1) 33 51
Credit collateral - -
----------------------------------------------------------------------------
Net credit exposure (2) 33 51
----------------------------------------------------------------------------
Number of counterparties greater than 10% 4 4
Net exposure to counterparties greater than
10% 30 45
----------------------------------------------------------------------------
(1) Gross credit exposure equals mark-to-market value on physically and
financially settled contracts, notes receivable and net receivables
(payables) where netting is contractually allowed. Gross and net credit
exposure amounts reported do not include adjustments for time value or
liquidity.
(2) Net credit exposure is the gross credit exposure collateral minus
credit collateral (cash deposits and letters of credit).
The Corporation is exposed to credit risk associated with the amount and timing
of fair value compensation that Fortis is entitled to receive from the
Government of Belize ("GOB") as a result of the expropriation of the
Corporation's investment in Belize Electricity by the GOB on June 20, 2011. As
at March 31, 2013, the Corporation had a long-term other asset of $106 million
(December 31, 2012 - $104 million), including foreign exchange impacts,
recognized on the consolidated balance sheet related to its expropriated
investment in Belize Electricity (Notes 17 and 20).
Additionally, as at March 31, 2013, Belize Electricity owed Belize Electric
Company Limited ("BECOL") approximately US$6 million for energy purchases of
which US$4 million was overdue. In accordance with long-standing agreements, the
GOB guarantees the payment of Belize Electricity's obligations to BECOL.
Liquidity Risk
The Corporation's consolidated financial position could be adversely affected if
it, or one of its subsidiaries, fails to arrange sufficient and cost-effective
financing to fund, among other things, capital expenditures and the repayment of
maturing debt. The ability to arrange sufficient and cost-effective financing is
subject to numerous factors, including the consolidated results of operations
and financial position of the Corporation and its subsidiaries, conditions in
capital and bank credit markets, ratings assigned by rating agencies and general
economic conditions.
To help mitigate liquidity risk, the Corporation and its larger regulated
utilities have secured committed credit facilities to support short-term
financing of capital expenditures and seasonal working capital requirements.
The Corporation's committed corporate credit facility is available for interim
financing of acquisitions and for general corporate purposes. Depending on the
timing of cash payments from the subsidiaries, borrowings under the
Corporation's committed corporate credit facility may be required from time to
time to support the servicing of debt and payment of dividends. As at March 31,
2013, average annual consolidated long-term debt maturities and repayments over
the next five years are expected to be approximately $295 million. The
combination of available credit facilities and relatively low annual debt
maturities and repayments provide the Corporation and its subsidiaries with
flexibility in the timing of access to capital markets.
As at March 31, 2013, the Corporation and its subsidiaries had consolidated
credit facilities of approximately $2.4 billion, of which $2.0 billion was
unused including $910 million unused under the Corporation's $1 billion
committed revolving corporate credit facility. The credit facilities are
syndicated mostly with the seven largest Canadian banks, with no one bank
holding more than 20% of these facilities. Approximately $2.3 billion of the
total credit facilities are committed credit facilities with maturities ranging
from 2013 to 2017.
The following table outlines the credit facilities of the Corporation and its
subsidiaries.
As at
December
Regulated Fortis Corporate March 31, 31,
($ millions) Utilities Properties and Other 2013 2012
----------------------------------------------------------------------------
Total credit
facilities 1,383 13 1,030 2,426 2,460
Credit facilities
utilized:
Short-term
borrowings (1) (89) - - (89) (136)
Long-term debt
(2) (178) - (88) (266) (150)
Letters of credit
outstanding (66) - (2) (68) (67)
----------------------------------------------------------------------------
Credit facilities
unused 1,050 13 940 2,003 2,107
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The weighted average interest rate on short-term borrowings was
approximately 2.1% as at March 31, 2013 (December 31, 2012 - 1.9%).
(2) As at March 31, 2013, no credit facility borrowings classified as long
term were included in current installments of long-term debt on the
consolidated balance sheet (December 31, 2012 - $20 million). The
weighted average interest rate on credit facility borrowings classified
as long-term debt was approximately 2.2% as at March 31, 2013 (December
31, 2012 - 2.1%).
As at March 31, 2013 and December 31, 2012, certain borrowings under the
Corporation's and subsidiaries' credit facilities were classified as long-term
debt. These borrowings are under long-term committed credit facilities and
management's intention is to refinance these borrowings with long-term permanent
financing during future periods.
In January 2013 FEVI's $20 million unsecured committed non-revolving credit
facility matured and was not replaced.
In April 2013 FortisBC Electric renegotiated and amended its credit facility
agreement resulting in an extension to the maturity of the Company's $150
million unsecured committed revolving credit facility with $100 million now
maturing in May 2016 and $50 million now maturing in May 2014. The amended
credit facility agreement contains substantially similar terms and conditions as
the previous credit facility agreement.
In April 2013 FHI extended its $30 million unsecured committed revolving credit
facility to mature in May 2014 from May 2013. The new agreement contains
substantially similar terms and conditions as the previous credit facility
agreement.
The Corporation and its currently rated utilities target investment-grade credit
ratings to maintain capital market access at reasonable interest rates. As at
March 31, 2013, the Corporation's credit ratings were as follows:
Standard & Poor's ("S&P") A- (long-term corporate and unsecured debt
credit rating)
DBRS A (low) (unsecured debt credit rating)
In February 2013 S&P and DBRS affirmed the Corporation's debt credit ratings.
The above-noted credit ratings reflect the Corporation's business-risk profile
and diversity of its operations, the stand-alone nature and financial separation
of each of the regulated subsidiaries of Fortis, management's commitment to
maintaining low levels of debt at the holding company level, the Corporation's
reasonable credit metrics and its demonstrated ability and continued focus on
acquiring and integrating stable regulated utility businesses financed on a
conservative basis. The credit ratings also reflect the Corporation's financing
plans for the pending acquisition of CH Energy Group and the expected completion
of the Waneta Expansion hydroelectric generating facility on time and on budget.
Market Risk
Foreign Exchange Risk
The Corporation's earnings from, and net investment in, foreign subsidiaries are
exposed to fluctuations in the US dollar-to-Canadian dollar exchange rate. The
Corporation has effectively decreased the above-noted exposure through the use
of US dollar borrowings at the corporate level. The foreign exchange gain or
loss on the translation of US dollar-denominated interest expense partially
offsets the foreign exchange loss or gain on the translation of the
Corporation's foreign subsidiaries' earnings, which are denominated in US
dollars. The reporting currency of Caribbean Utilities, Fortis Turks and Caicos,
FortisUS Energy Corporation and BECOL is the US dollar.
As at March 31, 2013, the Corporation's corporately issued US$557 million
(December 31, 2012 - US$557 million) long-term debt had been designated as an
effective hedge of the Corporation's foreign net investments. As at March 31,
2013, the Corporation had approximately US$16 million (December 31, 2012 - US$17
million) in foreign net investments remaining to be hedged. Foreign currency
exchange rate fluctuations associated with the translation of the Corporation's
corporately issued US dollar borrowings designated as effective hedges are
recorded in other comprehensive income and serve to help offset unrealized
foreign currency exchange gains and losses on the net investments in foreign
subsidiaries, which gains and losses are also recorded in other comprehensive
income.
Effective from June 20, 2011, the Corporation's asset associated with its
expropriated investment in Belize Electricity does not qualify for hedge
accounting as Belize Electricity is no longer a foreign subsidiary of Fortis
(Note 20). As a result, foreign exchange gains and losses on the translation of
the long-term other asset associated with Belize Electricity are recognized in
earnings. The Corporation recognized in earnings a foreign exchange gain of
approximately $2 million during the three months ended March 31, 2013 ($1.5
million foreign exchange loss for the three months ended March 31, 2012) (Note
8).
Interest Rate Risk
The Corporation and most of its subsidiaries are exposed to interest rate risk
associated with credit facility borrowings. The Corporation and its subsidiaries
may enter into interest rate swap agreements to help reduce this risk.
Commodity Price Risk
The FortisBC Energy companies are exposed to commodity price risk associated
with changes in the market price of natural gas and Caribbean Utilities is
exposed to commodity price risk associated with changes in the market price for
fuel (Notes 16 and 17). The risks have been reduced by entering into natural gas
derivatives and fuel option contracts that effectively fix the price of natural
gas purchases and fuel purchases, respectively. The natural gas derivatives and
fuel option contracts are recorded on the consolidated balance sheet at fair
value and any change in the fair value is deferred as a regulatory asset or
liability, subject to regulatory approval, for recovery from, or refund to,
customers in future rates.
The price risk-management strategy of the FortisBC Energy companies aims to
improve the likelihood that natural gas prices remain competitive, mitigate gas
price volatility on customer rates and reduce the risk of regional price
discrepancies. As directed by the regulator in 2011, the FortisBC Energy
companies have suspended their commodity hedging activities with the exception
of certain limited swaps as permitted by the regulator. The existing hedging
contracts will continue in effect through to their maturity and the FortisBC
Energy companies' ability to fully recover the commodity cost of gas in customer
rates remains unchanged. Any differences between the cost of natural gas
purchased and the price of natural gas included in customer rates are recorded
as regulatory deferrals and are recovered from, or refunded to, customers in
future rates, subject to regulatory approval.
19. COMMITMENTS
There were no material changes in the nature and amount of the Corporation's
commitments from the commitments disclosed in the Corporation's 2012 annual
audited consolidated financial statements, except as described as follows.
Maritime Electric has entitlement to approximately 4.7% of the output from the
New Brunswick Power Point Lepreau nuclear generating station ("Point Lepreau")
for the life of the unit. As part of its entitlement, Maritime Electric is
required to pay its share of the capital and operating costs of the unit. A
major refurbishment of Point Lepreau that began in 2008 was completed and the
station returned to service in November 2012. The refurbishment is expected to
extend the facility's estimated life an additional 27 years and, as a result,
the total estimated capital cost obligation has increased approximately $51
million from that disclosed in the 2012 annual audited consolidated financial
statements.
A portion of the acquisition purchase price of CH Energy Group is expected to be
funded from net proceeds from the $601 million Subscription Receipts offering,
issued by the Corporation in June 2012, which proceeds are being held in escrow
(Note 4). The Subscription Receipts Agreement ("Agreement") contains a deadline
of June 30, 2013 for the release of the proceeds from the offering. If it is
determined that PSC approval will not be received in time to allow closing of
the acquisition of CH Energy Group to occur on or before June 30, 2013, Fortis
may seek an extension of the June 30, 2013 deadline by way of amendment of the
Agreement. The Agreement may be amended by a special resolution approved by at
least two-thirds of the Subscription Receipts Holders ("Receipts Holders") at a
meeting, either in person or by proxy, with a quorum for the meeting of at least
two Receipts Holders collectively holding 25% of the Subscription Receipts. If
conditions precedent to the closing of the transaction are not fulfilled or
waived by June 30, 2013, or by the extension date for the Subscription Receipts
if approved by Receipts Holders, or if the agreement and plan of merger related
to the acquisition is terminated prior to such time, the proceeds from the
Subscription Receipts offering, plus pro rata interest earned, are required to
be returned to the Receipts Holders. As a result, closing of the transaction
subsequent to June 30, 2013, or the extension date for the Subscription Receipts
if approved by Receipts Holders, could result in the Corporation having to raise
alternative capital to finance the acquisition.
20. EXPROPRIATED ASSETS
Belize Electricity
On June 20, 2011, the GOB enacted legislation leading to the expropriation of
the Corporation's investment in Belize Electricity. Consequent to the
deprivation of control over the operations of the utility, the Corporation
discontinued the consolidation method of accounting for Belize Electricity, as
of June 20, 2011, and classified the book value, including foreign exchange
impacts, of the expropriated investment as a long-term other asset on the
consolidated balance sheet.
In October 2011 Fortis commenced an action in the Belize Supreme Court with
respect to challenging the constitutionality of the expropriation of the
Corporation's investment in Belize Electricity. Fortis commissioned an
independent valuation of its expropriated investment and submitted its claim for
compensation to the GOB in November 2011. The book value of the long-term other
asset is below fair value as at the date of expropriation as determined by
independent valuators. The GOB also commissioned a valuation of Belize
Electricity which is significantly lower than both the fair value determined
under the Corporation's valuation and the book value of the long-term other
asset.
In July 2012 the Belize Supreme Court dismissed the Corporation's claim of
October 2011. Also in July 2012, Fortis filed its appeal of the above-noted
trial judgment in the Belize Court of Appeal. The appeal was heard in October
2012 and a decision is pending. Any decision of the Belize Court of Appeal may
be appealed to the Caribbean Court of Justice, the highest court of appeal
available for judicial matters in Belize.
Fortis believes it has a strong, well-positioned case before the Belize Courts
supporting the unconstitutionality of the expropriation. There exists, however,
a reasonable possibility that the outcome of the litigation may be unfavourable
to the Corporation and the amount of compensation otherwise to be paid to Fortis
under the legislation expropriating Belize Electricity could be lower than the
book value of the Corporation's expropriated investment in Belize Electricity.
The book value was $106 million, including foreign exchange impacts, as at March
31, 2013 (December 31, 2012 and March 31, 2012 - $104 million). If the
expropriation is held to be unconstitutional, it is not determinable at this
time as to the nature of the relief that would be awarded to Fortis, for
example: (i) the ordering of the return of the shares to Fortis and/or award of
damages; or (ii) the ordering of compensation to be paid to Fortis for the
unconstitutional expropriation of the shares. Based on presently available
information, the long-term other asset is not deemed impaired as at March 31,
2013. Fortis will continue to assess for impairment each reporting period based
on evaluating the outcomes of court proceedings and/or compensation settlement
negotiations. As well as continuing the constitutional challenge of the
expropriation, Fortis is also pursuing alternative options for obtaining fair
compensation, including compensation under the Belize/United Kingdom Bilateral
Investment Treaty.
21. CONTINGENT LIABILITIES
The Corporation and its subsidiaries are subject to various legal proceedings
and claims associated with the ordinary course of business operations.
Management believes that the amount of liability, if any, from these actions
would not have a material effect on the Corporation's consolidated financial
position or results of operations.
The following describes the nature of the Corporation's contingent liabilities.
Fortis
In May 2012 CH Energy Group and Fortis entered into a proposed settlement
agreement with counsel to plaintiff shareholders pertaining to several
complaints, which named Fortis and other defendants, which were filed in, or
transferred to, the Supreme Court of the State of New York, County of New York,
relating to the proposed acquisition of CH Energy Group by Fortis. The
complaints generally alleged that the directors of CH Energy Group breached
their fiduciary duties in connection with the proposed acquisition and that CH
Energy Group, Fortis, FortisUS Inc. and Cascade Acquisition Sub Inc. aided and
abetted that breach. The settlement agreement is subject to court approval.
FHI
During 2007 and 2008, a non-regulated subsidiary of FHI received Notices of
Assessment from Canada Revenue Agency for additional taxes related to the
taxation years 1999 through 2003. The exposure has been fully provided for in
the consolidated financial statements. FHI is appealing these assessments.
In April 2013 FHI and Fortis were named as defendants in an action in the
British Columbia Supreme Court by the Coldwater Indian Band ("Band"). The claim
is in regard to interests in a pipeline right of way on reserve lands. The
pipeline on the right of way was transferred by FHI (then Terasen Inc.) to
Kinder Morgan Inc. in April 2007. The Band seeks orders cancelling the right of
way and claims damages for wrongful interference with the Band's use and
enjoyment of reserve lands. The outcome cannot be reasonably determined and
estimated at this time and, accordingly, no amount has been accrued in the
interim consolidated financial statements.
FortisBC Electric
The Government of British Columbia has alleged breaches of the Forest Practices
Code and negligence relating to a forest fire near Vaseux Lake in 2003, prior to
the acquisition of FortisBC Electric by Fortis, and has filed and served a writ
and statement of claim against FortisBC Electric dated August 2, 2005. The
Government of British Columbia has now disclosed that its claim includes
approximately $15 million in damages as well as pre-judgment interest, but that
it has not fully quantified its damages. In addition, private landowners have
filed separate writs and statements of claim dated August 19, 2005 and August
22, 2005 in relation to the same matter, which claims have now been settled.
FortisBC Electric and its insurers continue to defend the claim by the
Government of British Columbia. The outcome cannot be reasonably determined and
estimated at this time and, accordingly, no amount has been accrued in the
interim consolidated financial statements.
The Government of British Columbia filed a claim in the British Columbia Supreme
Court in June 2012 claiming on its behalf, and on behalf of approximately 17
homeowners, damages suffered as a result of a landslide caused by a dam failure
in Oliver, British Columbia in 2010. The Government of British Columbia alleges
in its claim that the dam failure was caused by the defendants', which includes
FortisBC Electric, use of a road on top of the dam. The Government of British
Columbia estimates its damages and the damages of the homeowners, on whose
behalf it is claiming, to be approximately $15 million. While FortisBC Electric
has not been served, the utility has retained counsel and has notified its
insurers. The outcome cannot be reasonably determined and estimated at this time
and, accordingly, no amount has been accrued in the interim consolidated
financial statements.
22. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to comply with current period
presentation.
CORPORATE INFORMATION
Fortis Inc. is the largest investor-owned distribution utility in Canada, with
total assets of approximately $15 billion and fiscal 2012 revenue totalling
approximately $3.7 billion. The Corporation serves more than two million gas and
electricity customers. Its regulated holdings include electric distribution
utilities in five Canadian provinces and two Caribbean countries and a natural
gas utility in British Columbia. Fortis owns and operates non-regulated
generation assets in Canada, Belize and Upstate New York. It also owns hotels
and commercial office and retail space in Canada.
The Common Shares; First Preference Shares, Series C; First Preference Shares,
Series E; First Preference Shares, Series F; First Preference Shares, Series G;
First Preference Shares, Series H; First Preference Shares, Series J; and
Subscription Receipts of Fortis are listed on the Toronto Stock Exchange and
trade under the ticker symbols FTS, FTS.PR.C, FTS.PR.E, FTS.PR.F, FTS.PR.G,
FTS.PR.H, FTS.PR.J and FTS.R, respectively.
Transfer Agent and Registrar:
Computershare Trust Company of Canada
9th Floor, 100 University Avenue
Toronto, ON M5J 2Y1
T: 514.982.7555 or 1.866.586.7638
F: 416.263.9394 or 1.888.453.0330
W: www.investorcentre.com/fortisinc
Additional information, including the Fortis 2012 Annual Information Form,
Management Information Circular and Annual Report, are available on SEDAR at
www.sedar.com and on the Corporation's web site at www.fortisinc.com.
FOR FURTHER INFORMATION PLEASE CONTACT:
Barry V. Perry
Vice President Finance and Chief Financial Officer
Fortis Inc.
709.737.2822
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