Fortis Inc. ("Fortis" or the "Corporation") (TSX:FTS) achieved second quarter
net earnings attributable to common equity shareholders of $47 million, or $0.22
per common share, compared to $54 million, or $0.28 per common share, for the
second quarter of 2013. For the first half of 2014, net earnings attributable to
common equity shareholders were $190 million, or $0.89 per common share,
compared to $205 million, or $1.06 per common share, for the first half of 2013.
Earnings for the second quarter were impacted by a number of significant items.
Interest expense of $13 million after tax, or $0.06 per common share, associated
with convertible debentures issued to finance a portion of the pending
acquisition of UNS Energy Corporation ("UNS Energy") was recognized in the
second quarter of 2014. Earnings for the second quarter of 2013 were reduced by
$32 million, or $0.17 per common share, due to acquisition-related expenses and
customer and community benefits offered to obtain regulatory approval of the
acquisition of Central Hudson Gas & Electric Corporation ("Central Hudson"),
compared to $1 million in acquisition-related expenses associated with UNS
Energy in the second quarter of 2014. Earnings for the second quarter of 2013
were favourably impacted by an income tax recovery of $25 million, or $0.13 per
common share, due to the enactment of higher deductions associated with Part
VI.1 tax on the Corporation's preference share dividends. This income tax
recovery impacted earnings at Newfoundland Power, Maritime Electric and the
Corporate and Other segment in the second quarter of 2013.
Excluding the above-noted impacts of interest expense on the convertible
debentures, acquisition-related expenses and Part VI.1 tax impacts, net earnings
attributable to common equity shareholders for the second quarter of 2014 were
$61 million, or $0.28 per common share, compared to $61 million, or $0.32 per
common share, for the same period last year. Earnings per common share were
impacted by an increase in the weighted average number of common shares
outstanding, largely due to the issuance of 18.5 million common shares in June
2013 associated with the acquisition of Central Hudson.
Fortis announced in December 2013 that it agreed to acquire UNS Energy for
US$60.25 per common share in cash, representing an aggregate purchase price of
approximately US$4.3 billion, including the assumption of approximately US$1.8
billion of debt on closing. UNS Energy is a vertically integrated utility
services holding company, headquartered in Tucson, Arizona, engaged through
three subsidiaries in the regulated electric generation and energy delivery
business, primarily in the State of Arizona, serving approximately 657,000
electricity and gas customers. The closing of the acquisition remains subject to
approval by the Arizona Corporation Commission ("ACC") and the satisfaction of
customary closing conditions. In March 2014 UNS Energy common shareholders
approved the acquisition of UNS Energy by Fortis and in April 2014 the U.S.
Federal Energy Regulatory Commission approved the transaction. The transaction
review by the Committee on Foreign Investment in the United States was completed
in May 2014 and in June 2014 early termination of the waiting period under the
Hart-Scott-Rodino Act was received.
"The approval process for the UNS Energy acquisition is progressing well," says
Stan Marshall, Chief Executive Officer, Fortis Inc. In May 2014 the Corporation,
UNS Energy, ACC Staff, the Residential Utility Consumer Office and other parties
entered into a settlement agreement in which the parties agree that the merger
is in the public interest and recommend approval by the ACC, subject to certain
conditions. The settlement agreement is subject to review and approval by the
ACC, which could approve, reject or require modifications to the settlement
agreement as a condition of approval of the merger. In June 2014 a hearing was
held before an ACC Administrative Law Judge ("ALJ"). On July 29, 2014, the ALJ
issued an opinion and order recommending approval of the acquisition, as
conditioned by the settlement agreement. Consideration of this recommended order
has tentatively been scheduled for the ACC's open meeting to be held on August
12-13, 2014. The recommended order will be considered by the ACC in determining
whether to approve the acquisition. If the transaction is approved by the ACC at
this meeting, the acquisition is expected to close by the end of August 2014.
"The acquisition of UNS Energy will enhance the geographic diversification of
the Corporation's regulated assets, resulting in no more than one-third of total
assets being located in any one regulatory jurisdiction," says Marshall. "When
we close the acquisition, total assets of Fortis will increase by approximately
one-third to approach $25 billion."
To finance a portion of the UNS Energy acquisition, Fortis completed the sale of
$1.8 billion 4% convertible unsecured subordinated debentures represented by
installment receipts. Proceeds from the first installment of approximately $599
million were received in January 2014. The final installment is payable on a
date to be fixed not less than 15 days nor more than 90 days following
satisfaction of conditions precedent to the closing of the acquisition of UNS
Energy. In March 2014 the Corporation secured, as bridge financing for the
pending acquisition of UNS Energy, an aggregate of $2 billion non-revolving term
credit facilities from a syndicate of banks.
Corporate and Other expenses were $16 million higher quarter over quarter,
excluding the impacts of interest expense on the convertible debentures,
acquisition-related expenses and approximately $8 million associated with Part
VI.1 tax. The increase was primarily due to a $4 million foreign exchange loss
in the second quarter of 2014 compared to a $3 million foreign exchange gain in
the same quarter last year and the impact of the release of income tax
provisions of $5 million in the second quarter of 2013. The remaining increase
was largely due to finance charges associated with the acquisition of Central
Hudson and higher operating expenses, partially offset by a higher income tax
recovery and interest income. The increase in operating expenses was mainly due
to approximately $3 million after tax of retirement expenses recognized in the
second quarter of 2014.
The Corporation's regulated utilities contributed earnings of $76 million
compared to $78 million for the second quarter of 2013. Earnings in the second
quarter of 2013 were favourably impacted by income tax recoveries of $13 million
at Newfoundland Power and $4 million at Maritime Electric associated with Part
VI.1 tax. Earnings in the second quarter of 2013 were reduced by the cumulative
impact of the first stage of the Generic Cost of Capital ("GCOC") Proceeding in
British Columbia, which reduced the allowed rate of return on common
shareholders' equity ("ROE") and common equity component of capital structure
for the benchmark utility, FortisBC Energy Inc., effective January 1, 2013. The
cumulative impact of this regulatory decision was recognized in the second
quarter of 2013, when the decision was received. As a result, a reduction of
earnings of approximately $5 million at the FortisBC Energy companies and $1
million at FortisBC Electric related to the first quarter of 2013 was recognized
in the second quarter of 2013. Excluding the impacts of Part VI.1 tax and the
GCOC Proceeding, earnings at the Corporation's regulated utilities increased by
$9 million quarter over quarter. The increase was driven by earnings of $7
million at Central Hudson, which was acquired in June 2013. Earnings at
Caribbean Regulated Electric Utilities were $2 million higher than the second
quarter of 2013, driven by electricity sales growth.
In February 2014 the FortisBC Energy companies received regulatory approval for
the amalgamation of their regulated utilities. The regulator approved the
adoption of common rates for the majority of natural gas customers, to be phased
in over a three-year period. The amalgamation received the consent of the
Lieutenant Governor in Council in May 2014 and is expected to be effective
December 31, 2014. In March 2014 the regulatory decision on the second stage of
the GCOC Proceeding in British Columbia was received. The decision resulted in
increases in the common equity component of capital structures for FortisBC
Energy (Vancouver Island) Inc. and FortisBC Energy (Whistler) Inc. ("FEWI"), as
well as an increase in the allowed ROE for FEWI. The outcome of the second stage
of the GCOC Proceeding did not have a material impact on earnings for the first
half of 2014.
Multi-year performance-based rate applications are progressing in British
Columbia and a cost of capital proceeding is continuing in Alberta. In May 2014
FortisAlberta filed a combined capital tracker application for 2013 through
2015, which is an application for revenue increases related to its capital
program. FortisAlberta continues to recognize capital tracker revenue based on
the interim regulatory decision granting 60% of the applied for capital tracker
amounts. A hearing on the combined capital tracker application is scheduled for
October 2014 and a decision is expected in the first quarter of 2015. In July
2014 Central Hudson filed a general rate application to establish rates
effective mid-2015.
Non-Regulated Fortis Generation contributed $6 million to earnings, $2 million
higher quarter over quarter. Higher earnings were driven by increased
production, mainly in Belize, due to higher rainfall.
Non-Utility operations contributed earnings of $7 million compared to $8 million
for the second quarter of 2013. The decrease was primarily due to lower
contribution from Fortis Properties' Hospitality Division.
In March 2014 Fortis priced a private placement of US$500 million in senior
unsecured notes. The notes will be issued in multiple tranches with terms to
maturity ranging from 5 years to 30 years and coupon rates ranging from 2.92% to
5.03%. On June 30, 2014, Fortis issued US$213 million of the senior unsecured
notes with a weighted average term to maturity of approximately 9 years and a
weighted average coupon rate of 3.51%. Net proceeds were used to repay US-dollar
denominated borrowings on the Corporation's committed credit facility and for
general corporate purposes. The remaining US$287 million of the senior unsecured
notes will be issued on September 15, 2014, subject to the satisfaction of
customary closing conditions, and the net proceeds will be used to refinance
existing indebtedness and for general corporate purposes.
Cash flow from operating activities was $586 million for the first half of 2014,
$33 million higher than the same period last year. Higher cash earnings were
partially offset by unfavourable changes in working capital.
Consolidated capital expenditures were approximately $535 million for the first
half of 2014. 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 $633 million has been invested in the Waneta
Expansion since construction began in late 2010. FortisBC has begun preliminary
work related to an expansion of its Tilbury liquefied natural gas ("LNG")
facility in British Columbia. The Tilbury expansion is estimated to cost
approximately $400 million and will include a second LNG tank and a new
liquefier, both to be in service in the second half of 2016.
The Corporation's capital program is expected to total $1.4 billion in 2014.
Over the five-year period 2014 through 2018, the Corporation's capital program
is expected to exceed $6.5 billion. Additionally, UNS Energy has forecast that
its capital program for 2015 through 2018 will be approximately $1.5 billion
(US$1.4 billion).
"Our investment in energy infrastructure to serve our customers is expected to
grow by an average annual rate of 7% over the next five years," says Barry
Perry, President, Fortis Inc. "Earnings contributions from the UNS Energy and
Central Hudson acquisitions, combined with our capital program, including the
completion of the Waneta Expansion in 2015 and the Tilbury LNG facility
expansion in 2016, should support earnings per common share growth in 2015 and
beyond."
Fortis Inc. to Hold Investor Day on October 1
Fortis will hold an Investor Day on Wednesday, October 1, 2014, in Toronto,
Ontario. Barry Perry, President and incoming Chief Executive Officer, Fortis,
along with the Corporation's Executive Vice Presidents and members of the senior
management team, will provide an update on Fortis operations, recent
developments and strategic outlook.
The event will take place at St. Andrew's Club & Conference Centre (located in
the Sun Life Building), 150 King Street West, 16th Floor (Garden Suite).
Registration will begin at 8:00 a.m. (Eastern) on October 1, 2014 with
management presentations scheduled from 8:30 a.m. to 12:30 p.m. (Eastern).
Institutional investors, analysts and members of the financial community
interested in attending can register in advance by contacting Angela Doyle,
Investor Analyst, Fortis via email at adoyle@fortisinc.com or via telephone at
709.737.5292.
A live and archived audio webcast of the event will be available on the
Corporation's website at www.fortisinc.com.
Interim Management Discussion and Analysis
For the three and six months ended June 30, 2014
Dated August 1, 2014
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 and six months ended June 30, 2014 and the MD&A and
audited consolidated financial statements for the year ended December 31, 2013
included in the Corporation's 2013 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 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 expected timing of
closing the acquisition of UNS Energy Corporation ("UNS Energy") by Fortis and
the expectation that the acquisition will be accretive to earnings per common
share of Fortis in the first full year after closing, excluding one-time
acquisition-related costs; the expected increase in the Corporation's rate base
at the time of closing the acquisition of UNS Energy; the expectation that the
acquisition of UNS Energy will lessen the business risk of Fortis by enhancing
the geographic diversification of the Corporation's regulated assets; the
Corporation's forecast gross consolidated capital expenditures for 2014 and
total capital spending over the five-year period 2014 through 2018;
UNS Energy's forecast capital program for 2015 through 2018; the financing costs
the Corporation expects to incur in 2014 associated with the convertible
debentures represented by Installment Receipts (the "Debentures"); the expected
net proceeds from the final installment of the Debentures; the nature, timing
and amount of certain capital projects and their expected costs and time to
complete; the expectation that the Corporation's significant capital expenditure
program will support continuing growth in earnings and dividends; 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 Corporation's subsidiaries will be able to
source the cash required to fund their 2014 capital expenditure programs; the
expected consolidated long-term debt maturities and repayments in 2014 and on
average annually over the next five years; the expectation that the Corporation
and its subsidiaries will continue to have reasonable access to capital in the
near to medium terms; 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 expectation that the Corporation and its subsidiaries will
remain compliant with debt covenants during 2014; and the expected timing of
filing of regulatory applications and of receipt of regulatory decisions.
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's continued recovery of its cost of service and ability
to earn its allowed rate of return on common shareholder's equity ("ROE") under
performance-based rate-setting ("PBR"), which commenced for a five-year term
effective January 1, 2013; the receipt of regulatory approval required to close
the acquisition of UNS Energy; the receipt of the final installment of the
Debentures; 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 hydroelectric generating facility; 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
cost of natural gas and energy supply costs in customer rates;
the ability to hedge exposures to fluctuations in foreign exchange rates,
natural gas prices and electricity prices; no significant 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 US GAAP beyond 2018 or the adoption of International
Financial Reporting Standards after 2018 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, 2013 and in continuous
disclosure materials filed from time to time with Canadian securities regulatory
authorities. Key risk factors for 2014 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 the Corporation's regulated utilities; uncertainty
regarding the treatment of certain capital expenditures at FortisAlberta under
the newly implemented PBR mechanism; risks relating to the ability to close the
acquisition of UNS Energy, the timing of such closing and the realization of the
anticipated 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 the
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 electric and gas distribution utility in
Canada, with total assets of approximately $18.6 billion and fiscal 2013 revenue
exceeding $4 billion. Its regulated utilities account for approximately 90% of
total assets and serve approximately 2.5 million customers across Canada and in
New York State and the Caribbean. Fortis owns non-regulated hydroelectric
generation assets in Canada, Belize and Upstate New York. The Corporation's
non-utility investment is comprised of hotels and commercial real estate in
Canada.
Year-to-date June 30, 2014, the Corporation's electricity distribution systems
met a combined peak demand of 6,305 megawatts ("MW") and its gas distribution
system met a peak day demand of 1,462 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 and six months
ended June 30, 2014 and to the "Corporate Overview" section of the 2013 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 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 and common equity component of capital
structure; (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 forecast 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 UNS Energy Corporation: In December 2013 Fortis entered
into an agreement and plan of merger to acquire UNS Energy Corporation ("UNS
Energy") (NYSE:UNS) for US$60.25 per common share in cash, representing an
aggregate purchase price of approximately US$4.3 billion, including the
assumption of approximately US$1.8 billion of debt on closing. UNS Energy is a
vertically integrated utility services holding company, headquartered in Tucson,
Arizona, engaged through three subsidiaries in the regulated electric generation
and energy delivery business, primarily in the State of Arizona, serving
approximately 657,000 electricity and gas customers.
The closing of the acquisition remains subject to approval by the Arizona
Corporation Commission ("ACC") and the satisfaction of customary closing
conditions. In March 2014 UNS Energy common shareholders approved the
acquisition of UNS Energy by Fortis and in April 2014 the U.S. Federal Energy
Regulatory Commission ("FERC") approved the transaction. The transaction review
by the Committee on Foreign Investment in the United States was completed in May
2014 and in June 2014 early termination of the waiting period under the
Hart-Scott-Rodino Act was received.
In May 2014 the Corporation, UNS Energy, ACC Staff, the Residential Utility
Consumer Office and other parties entered into a settlement agreement in which
the parties agree that the merger is in the public interest and recommend
approval by the ACC, subject to certain conditions. The settlement agreement is
subject to review and approval by the ACC, which could approve, reject or
require modifications to the settlement agreement as a condition of approval of
the merger. In June 2014 a hearing was held before an ACC Administrative Law
Judge ("ALJ"). On July 29, 2014, the ALJ issued an opinion and order
recommending approval of the acquisition, as conditioned by the settlement
agreement. Consideration of this recommended order has tentatively been
scheduled for the ACC's open meeting to be held on August 12-13, 2014. The
recommended order will be considered by the ACC in determining whether to
approve the acquisition. If the transaction is approved by the ACC at this
meeting, the acquisition is expected to close by the end of August 2014.
The acquisition is consistent with the Corporation's strategy of investing in
high-quality regulated utility assets in Canada and the United States and is
expected to be accretive to earnings per common share of Fortis in the first
full year after closing, excluding one-time acquisition-related costs. At the
time of closing the acquisition, the Corporation's consolidated rate base is
expected to increase by approximately US$3 billion. The acquisition of UNS
Energy will further mitigate business risk for Fortis by enhancing the
geographic diversification of the Corporation's regulated assets, resulting in
no more than one-third of total assets being located in any one regulatory
jurisdiction.
In March 2014 the Corporation secured, as bridge financing for the pending
acquisition of UNS Energy, an aggregate of $2 billion non-revolving term credit
facilities from a syndicate of banks. The non-revolving term credit facilities
are comprised of a $1.7 billion short-term bridge facility, repayable in full
nine months following its advance, and a $300 million medium-term bridge
facility, repayable in full on the second anniversary of its advance.
Convertible Debentures Represented by Installment Receipts: To finance a portion
of the pending acquisition of UNS Energy, in January 2014, Fortis, through a
direct wholly owned subsidiary, completed the sale of $1.8 billion aggregate
principal amount of 4% convertible unsecured subordinated debentures,
represented by Installment Receipts (the "Debentures").
The offering of the Debentures consisted of a bought deal placement of $1.594
billion aggregate principal amount of Debentures underwritten by a syndicate of
underwriters and the sale of $206 million aggregate principal amount of
Debentures to certain institutional investors on a private placement basis (the
"Offerings").
The Debentures were sold on an installment basis at a price of $1,000 per
Debenture, of which $333 was paid on closing of the Offerings and the remaining
$667 is payable on a date ("Final Installment Date") to be fixed not less than
15 days nor more than 90 days following satisfaction of conditions precedent to
the closing of the acquisition of UNS Energy. Prior to the Final Installment
Date, the Debentures are represented by Installment Receipts. The Installment
Receipts began trading on the Toronto Stock Exchange ("TSX") on January 9, 2014
under the symbol "FTS.IR". The Debentures will not be listed. The Debentures
will mature on January 9, 2024 and bear interest at an annual rate of 4% per
$1,000 principal amount of Debentures until and including the Final Installment
Date, after which the interest rate will be zero.
If the Final Installment Date occurs prior to the first anniversary of the
closing of the Offerings, holders of Debentures who have paid the final
installment will be entitled to receive, in addition to the payment of accrued
and unpaid interest, an amount equal to the interest that would have accrued
from the day following the Final Installment Date to, but excluding, the first
anniversary of the closing of the Offerings had the Debentures remained
outstanding until such date. Approximately $18 million ($13 million after tax)
and $34 million ($24 million after tax) in interest expense associated with the
Debentures was recognized in the second quarter and first half of 2014,
respectively. A total of approximately $72 million ($51 million after tax) in
interest expense associated with the Debentures is expected to be incurred in
2014.
At the option of the holders and provided that payment of the final installment
has been made, each Debenture will be convertible into common shares of Fortis
at any time after the Final Installment Date but prior to maturity or redemption
by the Corporation at a conversion price of $30.72 per common share, being a
conversion rate of 32.5521 common shares per $1,000 principal amount of
Debentures.
The Debentures will not be redeemable, except that Fortis will redeem the
Debentures at a price equal to their principal amount plus accrued and unpaid
interest following the earlier of: (i) notification to holders that the
conditions necessary to approve the acquisition of UNS Energy will not be
satisfied; (ii) termination of the acquisition agreement; and (iii) July 2,
2015, if notice of the Final Installment Date has not been given to holders on
or before June 30, 2015. In addition, after the Final Installment Date, any
Debentures not converted may be redeemed by Fortis at a price equal to their
principal amount plus unpaid interest accrued prior to the Final Installment
Date. Under the terms of the Installment Receipt Agreement, Fortis agreed that
until such time as the Debentures have been redeemed in accordance with the
foregoing or the Final Installment Date has occurred, the Corporation will at
all times maintain availability under its committed revolving corporate credit
facility of not less than $600 million to cover the principal amount of the
first installment of the Debentures in the event of a mandatory redemption.
At maturity, Fortis will have the right to pay the principal amount due in
common shares, which will be valued at 95% of the weighted average trading price
on the TSX for the 20 consecutive trading days ending five trading days
preceding the maturity date.
The proceeds of the first installment of the Offerings were approximately $599
million, or $561 million net of issue costs. A significant portion of the net
proceeds is cash on hand, while a portion was used to repay borrowings under the
Corporation's existing revolving credit facility and for other general corporate
purposes, including intercompany loan advances to subsidiaries. The net proceeds
of the final installment payment of the Offerings are expected to be, in
aggregate, approximately $1.165 billion.
Private Placement of US Notes: In March 2014 Fortis priced a private placement
to US-based institutional investors of US$500 million in senior unsecured notes.
The notes will be issued in multiple tranches with terms to maturity ranging
from 5 years to 30 years and coupon rates ranging from 2.92% to 5.03%. The
weighted average term to maturity is approximately 11 years and the weighted
average coupon rate is 3.85%.
On June 30, 2014, Fortis issued US$213 million of the senior unsecured notes
with a weighted average term to maturity of approximately 9 years and a weighted
average coupon rate of 3.51%. Net proceeds were used to repay US-dollar
denominated borrowings on the Corporation's committed credit facility and for
general corporate purposes.
The remaining US$287 million of the senior unsecured notes will be issued on
September 15, 2014, subject to the satisfaction of customary closing conditions.
Net proceeds will be used to refinance existing indebtedness, including the
US$150 million 5.74% senior unsecured notes of Fortis maturing on October 30,
2014 and $125 million 5.56% unsecured debentures of a subsidiary maturing on
September 15, 2014, and for general corporate purposes.
Sale of Griffith: In March 2014 Griffith Energy Services, Inc. ("Griffith") was
sold for proceeds of approximately $105 million (US$95 million). The results of
operations have been presented as discontinued operations on the consolidated
statements of earnings for the six months ended June 30, 2014. Earnings for the
first quarter of 2014 included $5 million associated with Griffith from normal
operations to the date of sale.
FINANCIAL HIGHLIGHTS
Fortis has adopted a strategy of profitable growth with earnings per common
share and total shareholder return as the primary measures of performance. The
Corporation's business is segmented by franchise area and, depending on
regulatory requirements, by the nature of the assets. Key financial highlights
for the second quarter and year-to-date periods ended June 30, 2014 and 2013 are
provided in the following table.
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Consolidated Financial Highlights (Unaudited)
Periods Ended June 30 Quarter Year-to-Date
($ millions, except for
common share data) 2014 2013 Variance 2014 2013 Variance
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Revenue 1,056 790 266 2,511 1,903 608
Energy Supply Costs 403 282 121 1,082 787 295
Operating Expenses 307 206 101 626 427 199
Depreciation and
Amortization 149 130 19 297 259 38
Other Income
(Expenses), Net (1) (44) 43 6 (38) 44
Finance Charges 124 92 32 247 181 66
Income Tax Expense
(Recovery) 9 (34) 43 48 (4) 52
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Earnings from
Continuing Operations 63 70 (7) 217 215 2
Earnings from
Discontinued
Operations, Net of Tax - - - 5 - 5
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Earnings Before
Extraordinary Item 63 70 (7) 222 215 7
Extraordinary Gain, Net
of Tax - - - - 22 (22)
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Net Earnings 63 70 (7) 222 237 (15)
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Net Earnings
Attributable to:
Non-Controlling
Interests 3 2 1 5 4 1
Preference Equity
Shareholders 13 14 (1) 27 28 (1)
Common Equity
Shareholders 47 54 (7) 190 205 (15)
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Net Earnings 63 70 (7) 222 237 (15)
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Earnings per Common
Share from Continuing
Operations
Basic ($) 0.22 0.28 (0.06) 0.87 0.95 (0.08)
Diluted ($) 0.22 0.28 (0.06) 0.86 0.94 (0.08)
Earnings per Common
Share
Basic ($) 0.22 0.28 (0.06) 0.89 1.06 (0.17)
Diluted ($) 0.22 0.28 (0.06) 0.88 1.05 (0.17)
Weighted Average Common
Shares Outstanding (#
millions) 214.8 193.4 21.4 214.2 192.7 21.5
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Cash Flow from
Operating Activities 321 270 51 586 553 33
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Revenue
The increase in revenue for the quarter and year to date was driven by the
acquisition of Central Hudson Gas & Electric Corporation ("Central Hudson") in
June 2013. Higher electricity sales and gas volumes, an increase in the base
component of rates at most of the regulated utilities, an increase in the
commodity cost of natural gas charged to customers at the FortisBC Energy
companies, and favourable foreign exchange associated with the translation of US
dollar-denominated revenue also contributed to the increase in revenue.
Energy Supply Costs
The increase in energy supply costs for the quarter and year to date was
primarily due to the acquisition of Central Hudson and a higher commodity cost
of natural gas at the FortisBC Energy companies. Higher electricity sales and
gas volumes also contributed to the increase in fuel, power and natural gas
purchases.
Operating Expenses
The increase in operating expenses for the quarter and year to date was
primarily due to the acquisition of Central Hudson and general inflationary and
employee-related cost increases.
Depreciation and Amortization
The increase in depreciation and amortization for the quarter and year to date
was primarily due to the acquisition of Central Hudson and continued investment
in energy infrastructure at the Corporation's regulated utilities.
Other Income (Expenses), Net
The increase in other income, net of expenses, for the quarter and year to date
was mainly due to lower acquisition-related expenses. Approximately $41 million
(US$40 million), or $26 million (US$26 million) after tax, of expenses
associated with customer and community benefits offered by the Corporation to
close the acquisition of CH Energy Group, Inc. ("CH Energy Group") were
recognized in the second quarter of 2013, as well as an additional $8 million
($6 million after tax) in costs related to that acquisition. In comparison,
expenses related to the pending acquisition of UNS Energy in 2014 were
approximately $2 million ($1 million after tax) for the second quarter and $4
million ($3 million after tax) year to date. Higher interest income also
contributed to the increase in other income period over period. The increase was
partially offset by unfavourable foreign exchange on 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. The Corporation recognized a foreign exchange loss of
approximately $4 million for the second quarter, with no net foreign exchange
impact year-to-date 2014, compared to foreign exchange gains of approximately $3
million and $5 million for the second quarter and year-to-date 2013,
respectively.
Finance Charges
The increase in finance charges for the quarter and year to date was primarily
due to approximately $18 million ($13 million after tax) and $34 million ($24
million after tax) in interest expense associated with convertible debentures
issued to finance a portion of the pending acquisition of UNS Energy, and the
acquisition of Central Hudson, including interest expense on debt issued to
complete the financing of the acquisition.
Income Tax Expense (Recovery)
The increase in income tax expense for the quarter and year to date was
primarily due to an income tax recovery of $25 million in the second quarter of
2013, due to the enactment of higher deductions associated with Part VI.1 tax,
and the release of income tax provisions of $5 million in the second quarter of
2013. The remaining increase in income tax expense for the quarter and year to
date compared to the same periods last year was mainly due to an increase in
earnings before income taxes.
Earnings from Discontinued Operations, Net of Tax
Approximately $5 million in earnings from discontinued operations, net of tax,
was recognized in the first quarter of 2014 associated with Griffith, which was
sold in March 2014, from normal operations to the date of sale.
Extraordinary Gain, Net of Tax
An approximate $22 million after-tax extraordinary gain was recognized in the
first quarter of 2013 on the settlement of expropriation matters associated with
the Exploits River Hydro Partnership ("Exploits Partnership").
Net Earnings Attributable to Common Equity Shareholders
Earnings were impacted by a number of significant items. Earnings for the
quarter and year to date were reduced by $13 million and $24 million,
respectively, in after-tax interest expense associated with the convertible
debentures. Earnings for the second quarter and year-to-date 2013 were reduced
by $32 million, due to acquisition-related expenses and customer and community
benefits offered to obtain regulatory approval of the acquisition of Central
Hudson, compared to $1 million and $3 million in acquisition-related expenses
associated with UNS Energy in the second quarter and year-to-date 2014,
respectively. Earnings for the second quarter of 2013 were favourably impacted
by an income tax recovery of $25 million, due to the enactment of higher
deductions associated with Part VI.1 tax on the Corporation's preference share
dividends. Earnings year-to-date 2014 included $5 million from discontinued
operations associated with Griffith, while earnings for the same period last
year included an approximate $22 million extraordinary gain associated with the
Exploits Partnership.
Excluding the above-noted impacts of interest expense on the convertible
debentures, acquisition-related expenses and Part VI.1 tax impacts, net earnings
attributable to common equity shareholders for the second quarter of 2014 were
$61 million, consistent with the same period last year. Corporate and Other
expenses were higher quarter over quarter, reflecting a $4 million foreign
exchange loss in the second quarter of 2014 compared to a $3 million foreign
exchange gain in the same quarter last year and the impact of the release of
income tax provisions of $5 million in the second quarter of 2013. The remaining
increase was largely due to finance charges associated with the acquisition of
Central Hudson and higher operating expenses, partially offset by a higher
income tax recovery and interest income. The increase in operating expenses was
mainly due to approximately $3 million after tax of retirement expenses
recognized in the second quarter of 2014.
The decrease was partially offset by earnings contribution from Central Hudson,
which was acquired in June 2013, and the timing of the recognition of the
regulatory decision on the first stage of the Generic Cost of Capital ("GCOC")
Proceeding in British Columbia at the FortisBC Energy companies and FortisBC
Electric in 2013. The first stage of the GCOC Proceeding reduced the allowed ROE
and common equity component of capital structure for the benchmark utility,
FortisBC Energy Inc. ("FEI"), effective January 1, 2013. The cumulative impact
of this regulatory decision was recognized in the second quarter of 2013, when
the decision was received. As a result, a reduction of earnings of approximately
$5 million at the FortisBC Energy companies and $1 million at FortisBC Electric
related to the first quarter of 2013 was recognized in the second quarter of
2013. Earnings at Caribbean Regulated Utilities were $2 million higher than the
second quarter of 2013, driven by electricity sales growth. Higher earnings at
Non-Regulated Fortis Generation were driven by increased production, mainly in
Belize, due to higher rainfall.
Excluding the above-noted impacts of Griffith, interest expense on the
convertible debentures, the Exploits Partnership, acquisition-related expenses
and Part VI.1 tax impacts, net earnings attributable to common equity
shareholders year to date were $212 million compared to $190 million for the
same period last year. The increase was mainly due to the same reasons discussed
above for the quarter; however, the timing of the recognition of the GCOC
Proceeding in British Columbia did not have an impact on earnings on a
year-to-date basis. In addition, Newfoundland Power's earnings were $3 million
higher year to date, due to electricity sales growth and the rebasing of
customer electricity rates, effective July 1, 2013. The increase was partially
offset by higher Corporate and Other expenses. The increase in Corporate and
Other expenses on a year-to-date basis was primarily due to the same reasons
discussed above for the quarter.
SEGMENTED RESULTS OF OPERATIONS
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Segmented Net Earnings Attributable to Common Equity Shareholders
(Unaudited)
Periods Ended June 30 Quarter Year-to-Date
($ millions) 2014 2013 Variance 2014 2013 Variance
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Regulated Gas
Utilities - Canadian
FortisBC Energy
Companies 12 6 6 91 91 -
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Regulated Gas &
Electric Utility -
United States
Central Hudson 7 - 7 25 - 25
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Regulated Electric
Utilities -
Canadian
FortisAlberta 26 25 1 51 51 -
FortisBC Electric 7 8 (1) 25 26 (1)
Newfoundland Power 11 24 (13) 21 31 (10)
Other Canadian
Electric Utilities 5 9 (4) 12 15 (3)
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49 66 (17) 109 123 (14)
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Regulated Electric
Utilities - Caribbean 8 6 2 13 9 4
Non-Regulated - Fortis
Generation 6 4 2 12 27 (15)
Non-Regulated - Non-
Utility 7 8 (1) 12 9 3
Corporate and Other (42) (36) (6) (72) (54) (18)
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Net Earnings
Attributable to
Common Equity
Shareholders 47 54 (7) 190 205 (15)
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The following is a discussion of the financial results of the Corporation's
reporting segments. A discussion of the nature of regulation and material
regulatory decisions and applications pertaining to the Corporation's regulated
utilities is provided in the "Regulatory Highlights" section of this MD&A.
REGULATED GAS UTILITIES - CANADIAN
FORTISBC ENERGY COMPANIES (1)
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Financial Highlights (Unaudited)
Quarter Year-to-Date
Periods Ended June 30 2014 2013 Variance 2014 2013 Variance
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Gas Volumes
(petajoules ("PJ")) 36 36 - 111 107 4
Revenue ($ millions) 282 246 36 795 738 57
Earnings ($ millions) 12 6 6 91 91 -
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(1) Primarily includes FEI, FortisBC Energy (Vancouver Island) Inc. and
FortisBC Energy (Whistler) Inc.
Gas Volumes
Gas volumes for the quarter were consistent with the same period last year. The
year-to-date increase in gas volumes was primarily due to higher average
consumption by residential, commercial and transportation customers as a result
of colder temperatures in the first quarter of 2014.
As at June 30, 2014, the total number of customers served by the FortisBC Energy
companies was approximately 961,000, an increase of 5,000 customers from
December 31, 2013.
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 regulatory
deferral mechanisms, changes in consumption levels and the commodity cost of
natural gas from those forecast 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.
Revenue
The increase in revenue for the quarter and year to date was primarily due to a
higher commodity cost of natural gas charged to customers. Higher gas volumes
also contributed to the increase in revenue year to date. Revenue for the
quarter was also favourably impacted by the timing of the recognition of the
regulatory decision on the first stage of the GCOC Proceeding in British
Columbia. The first stage of the GCOC Proceeding reduced the allowed ROE and
common equity component of capital structure for the benchmark utility, FEI,
effective January 1, 2013. The cumulative impact of this regulatory decision was
recognized the second quarter of 2013, when the decision was received.
In March 2014 the regulatory decision on the second stage of the GCOC Proceeding
was received, resulting in an increase in the allowed ROE at FortisBC Energy
(Whistler) Inc. ("FEWI") and an increase in the common equity component of
capital structure at FortisBC Energy (Vancouver Island) Inc. ("FEVI") and FEWI,
effective January 1, 2013. The cumulative impact of this regulatory decision was
recognized in the first quarter of 2014, when the decision was received. For
further details on the GCOC Proceeding, refer to the "Material Regulatory
Decisions and Applications" section of this MD&A.
Earnings
The increase in earnings for the quarter was mainly due to the timing of the
recognition of the cumulative impact of the first stage of the GCOC Proceeding.
A reduction of earnings of approximately $5 million related to the first quarter
of 2013 was recognized in the second quarter of 2013.
Year-to-date earnings were consistent with the same period last year. The
regulatory decision on the first stage of the GCOC Proceeding did not have an
impact on earnings on a year-to-date basis. The cumulative impact of the
regulatory decision on the second stage of the GCOC Proceeding was recognized in
the first quarter of 2014 and did not have a material impact on earnings.
REGULATED GAS & ELECTRIC UTILITY - UNITED STATES
CENTRAL HUDSON (1)
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Financial Highlights (Unaudited)
Quarter Year-to-Date
Periods Ended June 30 2014 2013 Variance 2014 2013 Variance
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Average US:CDN
Exchange Rate (2) 1.09 1.02 0.07 1.10 1.01 0.09
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Electricity Sales
(gigawatt hours
("GWh")) 1,169 - 1,169 2,576 - 2,576
Gas Volumes (PJ) 5 - 5 15 - 15
Revenue ($ millions) 190 - 190 462 - 462
Earnings ($ millions) 7 - 7 25 - 25
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(1) Financial results of Central Hudson are from June 27, 2013, the date of
acquisition.
(2) The reporting currency of Central Hudson is the US dollar.
Electricity Sales & Gas Volumes
Electricity sales for the quarter were 1,169 gigawatt hours ("GWh") compared to
1,195 GWh for the same period last year. The decrease in electricity sales was
mainly due to lower sales at several large industrial customers and lower
average consumption. Electricity sales for the first half of 2014 were 2,576 GWh
compared to 2,530 GWh for the same period last year. The increase was primarily
due to colder temperatures, mainly in the first quarter of 2014.
Gas volumes for the quarter and year to date were comparable with the same
period last year.
Seasonality impacts delivery revenue at Central Hudson, as electricity sales are
highest during the summer months, primarily due to the use of air conditioning
and other cooling equipment, and gas volumes are highest during the winter
months, primarily due to space-heating usage.
Revenue
Revenue for the quarter and year to date was US$174 million and US$420 million,
respectively, compared to US$153 million and US$347 million, respectively, for
the same periods last year. The increase in revenue for the quarter and year to
date was primarily due to the recovery from customers of higher commodity
purchases, which were driven by higher wholesale prices. The increase in
electricity sales also had a favourable impact on revenue year-to-date 2014;
however, the increase was largely offset by the impact of regulatory revenue
decoupling mechanisms.
Earnings
Earnings for the quarter were US$6 million compared to US$8 million for the same
period last year. The decrease in earnings was due to a number of items,
including the impact of higher depreciation and expenses during the two-year
rate freeze period post acquisition in June 2013. The decrease in electricity
sales quarter over quarter did not impact earnings as a result of the operation
of revenue decoupling mechanisms.
Earnings year to date of US$23 million were consistent with the same period last
year. The impact of US$2 million in expenses recognized in the first quarter of
2013 as a result of a regulatory order denying the deferral of certain
storm-restoration costs was largely offset by lower earnings in the second
quarter of 2014, as discussed above.
REGULATED ELECTRIC UTILITIES - CANADIAN
FORTISALBERTA
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Financial Highlights (Unaudited)
Quarter
Periods Ended June 30 2014 2013 Variance 2014 2013 Variance
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Energy Deliveries
(GWh) 4,091 3,995 96 8,774 8,486 288
Revenue ($ millions) 129 117 12 255 235 20
Earnings ($ millions) 26 25 1 51 51 -
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Energy Deliveries
The increase in energy deliveries for the quarter and year to date was driven by
growth in the number of customers and higher average consumption by residential,
commercial, and farm and irrigation customers, mainly due to colder
temperatures. Lower levels of precipitation also contributed to the increase in
energy deliveries for farm and irrigation customers. The total number of
customers increased by approximately 9,000 year over year as at June 30, 2014,
as a result of strong economic growth in the Province of Alberta.
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.
Revenue
The increase in revenue for the quarter and year to date was primarily due to an
interim increase in customer distribution rates, effective January 1, 2014,
growth in the number of customers and an increase in revenue related to
flow-through costs to customers. The increase for the year-to-date period was
partially offset by lower net transmission revenue. Approximately $2 million was
recognized in the first quarter of 2013 associated with the finalization of 2012
net transmission volume variances.
Earnings
The increase in earnings for the quarter was mainly due to rate base growth and
growth in the number of customers, partially offset by the timing of certain
operating expenses. Earnings year to date were consistent with the same period
last year. The impact of rate base growth and growth in the number of customers
was offset by lower net transmission revenue, as discussed above, and the timing
of certain operating expenses.
Earnings associated with rate base growth continue to be tempered by the interim
regulatory decision granting 60% of the revenue requirement associated with the
capital tracker component of the PBR mechanism. For further details on
FortisAlberta's Capital Tracker Application, refer to the "Material Regulatory
Decisions and Applications" section of this MD&A.
FORTISBC ELECTRIC (1)
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Financial Highlights (Unaudited)
Quarter Year-to-Date
Periods Ended June 30 2014 2013 Variance 2014 2013 Variance
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Electricity Sales
(GWh) 694 681 13 1,601 1,572 29
Revenue ($ millions) 71 68 3 166 156 10
Earnings ($ millions) 7 8 (1) 25 26 (1)
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(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. Excludes the non-regulated
generation operations of FortisBC Inc.'s wholly owned Walden Power
Partnership.
Electricity Sales
The increase in electricity sales for the quarter and year to date was driven by
customer growth. Higher average consumption as a result of colder temperatures
in the first quarter of 2014 also had a favourable impact on year-to-date
electricity sales.
Revenue
The increase in revenue for the quarter and year to date was driven by an
interim refundable increase in base electricity rates, effective January 1,
2014, and electricity sales growth.
Earnings
The decrease in earnings for the quarter was primarily due to the timing of
operating and maintenance expenses and the impact of lower-than-expected finance
charges in 2013, which were not subject to regulatory deferral mechanisms. The
decrease was partially offset by the timing of the recognition of the regulatory
decision on the first stage of the GCOC Proceeding in British Columbia in 2013.
The cumulative impact of the regulatory decision was recognized in the second
quarter of 2013, when the decision was received, of which approximately $1
million related to the first quarter of 2013. The timing of recognition of
regulatory deferrals also had a favourable impact on earnings quarter over
quarter.
The decrease in earnings year to date was due to the same factors discussed
above for the quarter; however, the timing of the recognition of the first stage
of the GCOC Proceeding did not have an impact on earnings on a year-to-date
basis. For further details on the GCOC Proceeding, refer to the "Material
Regulatory Decisions and Applications" section of this MD&A.
NEWFOUNDLAND POWER
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Financial Highlights (Unaudited)
Quarter Year-to-Date
Periods Ended June 30 2014 2013 Variance 2014 2013 Variance
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Electricity Sales
(GWh) 1,346 1,288 58 3,346 3,230 116
Revenue ($ millions) 145 132 13 354 329 25
Earnings ($ millions) 11 24 (13) 21 31 (10)
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Electricity Sales
The increase in electricity sales for the quarter and year to date was primarily
due to higher average consumption and customer growth. Higher average
consumption was driven by colder temperatures in 2014, an increase in commercial
activity and an increase in electric space heating.
Revenue
The increase in revenue for the quarter and year to date was primarily due to
electricity sales growth and an increase in base electricity rates, effective
July 1, 2013, as reflected in the 2013/2014 General Rate Application ("GRA")
decision received in April 2013. As part of the GRA, customer electricity rates
were rebased, allowing revenue recognition to more closely reflect the
seasonality of electricity sales.
Earnings
The decrease in earnings for the quarter was mainly due to an approximate $13
million income tax recovery in the second quarter of 2013, due to the enactment
of higher deductions associated with Part VI.1 tax. The impact of electricity
sales growth was offset by higher operating expenses, depreciation and finance
charges.
The decrease in earnings year to date was mainly due to the $13 million income
tax recovery in the second quarter of 2013, as discussed above. Excluding the
$13 million tax recovery, earnings increased by $3 million year to date compared
to the same period last year. The increase in earnings was mainly due to
electricity sales growth and the rebasing of customer electricity rates,
effective July 1, 2013, as discussed above. As a result, earnings were higher in
the first quarter of 2014 and are expected to be lower in the third quarter of
2014. The increase was partially offset by higher operating expenses, primarily
associated with restoration efforts following the loss of energy supply from
Newfoundland and Labrador Hydro and related power interruptions in January 2014,
and higher depreciation and finance charges.
OTHER CANADIAN ELECTRIC UTILITIES (1)
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Financial Highlights (Unaudited)
Quarter Year-to-Date
Periods Ended June 30 2014 2013 Variance 2014 2013 Variance
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Electricity Sales
(GWh) 582 558 24 1,298 1,229 69
Revenue ($ millions) 87 87 - 190 183 7
Earnings ($ millions) 5 9 (4) 12 15 (3)
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(1) Comprised of Maritime Electric and FortisOntario. FortisOntario mainly
includes Canadian Niagara Power, Cornwall Electric and Algoma Power.
Electricity Sales
The increase in electricity sales for the quarter and year to date was driven by
higher average consumption by residential and commercial customers in Ontario
and Prince Edward Island ("PEI"), due to colder temperatures. An increase in the
number of customers using electricity for home heating on PEI also had a
favourable impact on electricity sales for both periods.
Revenue
Revenue for the quarter was favourably impacted by electricity sales growth and
an increase in the base component of customer rates at Maritime Electric,
effective March 1, 2014. The increase was largely offset by the flow through in
customer electricity rates of lower energy supply costs at FortisOntario, and a
higher regulatory rate of return adjustment at Maritime Electric in the second
quarter of 2014 compared to the same period last year.
The increase in revenue year to date was primarily due to electricity sales
growth and an increase in the base component of customer rates at Maritime
Electric, as discussed above. The increase was partially offset by a higher
regulatory rate of return adjustment at Maritime Electric in the first half of
2014 compared to the same period last year.
Earnings
The decrease in earnings for the quarter and year to date was mainly due to an
approximate $4 million income tax recovery at Maritime Electric in the second
quarter of 2013, due to the enactment of higher deductions associated with Part
VI.1 tax, and a higher regulatory rate of return adjustment at Maritime
Electric. The decrease was partially offset by higher earnings at FortisOntario
due to electricity sales growth, the timing of depreciation and lower income
taxes.
REGULATED ELECTRIC UTILITIES - CARIBBEAN (1)
----------------------------------------------------------------------------
Financial Highlights (Unaudited)
Quarter Year-to-Date
Periods Ended June 30 2014 2013 Variance 2014 2013 Variance
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Average US:CDN Exchange 1.09 1.02 0.07 1.10 1.01 0.09
Rate (2)
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Electricity Sales (GWh) 197 193 4 377 363 14
Revenue ($ millions) 78 70 8 152 136 16
Earnings ($ millions) 8 6 2 13 9 4
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(1) Comprised of Caribbean Utilities on Grand Cayman, Cayman Islands, in
which Fortis holds an approximate 60% controlling interest and two
wholly owned utilities in the Turks and Caicos Islands, FortisTCI
Limited ("FortisTCI") and Turks and Caicos Utilities Limited ("TCU")
(collectively "Fortis Turks and Caicos")
(2) The reporting currency of Caribbean Utilities and Fortis Turks and
Caicos is the US dollar.
Electricity Sales
The increase in electricity sales for the quarter and year to date was primarily
due to growth in the number of customers and increases in tourism on the Turks
and Caicos Islands. Warmer temperatures on Grand Cayman, which increased air
conditioning load, also contributed to the year-to-date increase in electricity
sales.
Revenue
The increase in revenue for the quarter and year to date was mainly due to
approximately $5 million and $11 million, respectively, of favourable foreign
exchange associated with the translation of US dollar-denominated revenue,
electricity sales growth, and an increase in base customer electricity rates at
Caribbean Utilities.
Earnings
The increase in earnings for the quarter and year to date was primarily due to
electricity sales growth and favourable foreign exchange associated with the
translation of US dollar-denominated earnings. The increase was partially offset
by higher overall operating expenses, net of higher capitalized overhead costs
at Fortis Turks and Caicos.
NON-REGULATED - FORTIS GENERATION (1)
----------------------------------------------------------------------------
Financial Highlights (Unaudited)
Quarter Year-to-Date
Periods Ended June 30 2014 2013 Variance 2014 2013 Variance
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Energy Sales (GWh) 122 83 39 221 138 83
Revenue ($ millions) 11 7 4 22 12 10
Earnings ($ millions) 6 4 2 12 27 (15)
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(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
Energy Sales
The increase in energy sales for the quarter and year to date was primarily due
to increased production in Belize due to higher rainfall and in Upstate New York
due to a generating unit being returned to service in October 2013.
Revenue
The increase in revenue for the quarter and year to date was driven by increased
production in Belize. Revenue was also impacted by increased production in
Upstate New York and favourable foreign exchange associated with the translation
of US dollar-denominated revenue.
Earnings
The increase in earnings for the quarter was driven by increased production,
mainly in Belize, partially offset by approximately $1 million in business
development costs associated with investigating a potential hydroelectric
generating facility in British Columbia.
The decrease in earnings year to date was primarily due to the recognition of an
approximate $22 million after-tax extraordinary gain on the settlement of
expropriation matters associated with the Exploits Partnership in the first
quarter of 2013. Excluding the $22 million extraordinary gain, earnings
increased by $7 million year to date compared to the same period last year. The
increase in earnings was driven by increased production, mainly in Belize, and
favourable foreign exchange associated with the translation of
US-dollar-denominated earnings. The increase was partially offset by
approximately $2 million in business development costs, as discussed above.
NON-REGULATED - NON-UTILITY (1)
----------------------------------------------------------------------------
Financial Highlights (Unaudited)
Periods Ended June 30 Quarter Year-to-Date
($ millions) 2014 2013 Variance 2014 2013 Variance
----------------------------------------------------------------------------
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Revenue 65 65 - 119 118 1
Earnings 7 8 (1) 12 9 3
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(1) Comprised of Fortis Properties and Griffith. 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. Griffith was acquired in June 2013 as part of the acquisition of
CH Energy Group and was sold in March 2014. As such, the results of
operations of Griffith have been presented as discontinued operations on
the consolidated statements of earnings and, accordingly, revenue
excludes amounts associated with Griffith. Earnings, however, reflect
the financial results of Griffith to the date of sale in March 2014.
Revenue
Revenue at Fortis Properties for the quarter and year to date was comparable to
the same periods last year.
Earnings
Fortis Properties contributed earnings of $7 million for the second quarter of
2014 compared to $8 million for the same period last year. The decrease was
primarily due to lower performance at the Hospitality Division and higher
depreciation due to capital asset additions and improvements, partially offset
by lower finance charges.
Year-to-date 2014, earnings included $5 million associated with Griffith from
normal operations to the date of sale in March 2014. Excluding the impact of
Griffith, Fortis Properties contributed earnings of $7 million year-to-date 2014
compared to $9 million for the same period last year. The decrease in earnings
at Fortis Properties was due to the same factors discussed above for the
quarter.
CORPORATE AND OTHER (1)
----------------------------------------------------------------------------
Financial Highlights (Unaudited)
Periods Ended June 30 Quarter Year-to-Date
($ millions) 2014 2013 Variance 2014 2013 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue 8 7 1 15 13 2
Operating Expenses 9 3 6 14 6 8
Depreciation and
Amortization 1 - 1 1 1 -
Other Income
(Expenses), Net (3) (46) 43 (1) (44) 43
Finance Charges 35 11 24 68 21 47
Income Tax Recovery (11) (31) 20 (24) (33) 9
----------------------------------------------------------------------------
(29) (22) (7) (45) (26) (19)
Preference Share
Dividends 13 14 (1) 27 28 (1)
----------------------------------------------------------------------------
Net Corporate and
Other Expenses (42) (36) (6) (72) (54) (18)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes Fortis net Corporate expenses; net expenses of non-regulated
FortisBC Holdings Inc. ("FHI") and CH Energy Group's corporate-related
activities; and the financial results of FHI's wholly owned subsidiary
FortisBC Alternative Energy Services Inc.
Net Corporate and Other expenses were significantly impacted by the following
items:
i. finance charges of $18 million ($13 million after tax) for the second
quarter and $34 million ($24 million after tax) year-to-date 2014
associated with the convertible debentures issued in January 2014 to
finance a portion of the pending acquisition of UNS Energy;
ii. other expenses of approximately $41 million (US$40 million), or $26
million (US$26 million) after tax, associated with customer and
community benefits offered by the Corporation to close the acquisition
of CH Energy Group, recognized in the second quarter of 2013;
iii.other expenses of $2 million ($1 million after tax) and $4 million ($3
million after tax) for the second quarter and year-to-date 2014 related
to the pending acquisition of UNS Energy, compared to approximately $8
million ($6 million after tax) in the second quarter of 2013 related to
the acquisition of CH Energy Group;
iv. an $8 million income tax recovery in the second quarter of 2013, due to
the enactment of higher deductions associated with Part VI.1 tax. In the
first quarter of 2013, income tax expense included $2 million associated
with Part VI.1 tax;
v. a foreign exchange loss of approximately $4 million for the second
quarter of 2014, with no net foreign exchange impact year-to-date 2014,
compared to foreign exchange gains of approximately $3 million and $5
million for the second quarter and year-to-date 2013, respectively,
associated with the Corporation's US dollar-denominated long-term other
asset, representing the book value of the Corporation's expropriated
investment in Belize Electricity; and
vi. the release of income tax provisions of approximately $5 million in the
second quarter of 2013.
Excluding the above-noted items, net Corporate and Other expenses were $24
million for the quarter and $45 million year to date, compared to $20 million
and $38 million, respectively, for the same periods last year. The increase was
primarily due to higher finance charges and operating expenses, partially offset
by a higher income tax recovery and interest income.
The increase in finance charges was mainly due to: (i) the acquisition of
Central Hudson in June 2013, including the US$325 million notes offering in
October 2013, and drawings under the Corporation's committed credit facility;
(ii) unfavourable foreign exchange associated with the translation of US
dollar-denominated interest expense; and (iii) higher credit facility fees,
including amounts related to the Corporation's $2 billion non-revolving term
credit facilities secured as bridge financing for the pending acquisition of UNS
Energy.
The increase in operating expenses was mainly due to approximately $4 million
($3 million after tax) of retirement expenses recognized in the second quarter
of 2014, combined with higher legal and consulting fees and general inflationary
increases.
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 half of 2014 are summarized as follows.
NATURE OF REGULATION
----------------------------------------------------------------------------
Significant
Allowed Returns (%) Features
-----------------------------------------
Allowed Future or
Common Historical Test
Regulated Regulatory Equity Year Used to Set
Utility Authority (%) 2012 2013 2014 Customer Rates
----------------------------------------------------------------------------
ROE
----------------------
FEI British 38.5 9.50 8.75 8.75 COS/ROE
Columbia (1)
Utilities FEI - PBR mechanism
Commission for 2014 through
("BCUC") 2018
FEVI BCUC 41.5 10.00 9.25 9.25
(1) ROEs established by
the BCUC
FEWI BCUC 41.5 10.00 9.50 9.50
(1)
-------------------
Future Test Year
----------------------------------------------------------------------------
FortisBC BCUC 40 9.90 9.15 9.15 COS/ROE
Electric
PBR mechanism for
2014 through 2018
ROE established by
the BCUC
-------------------
Future Test Year
----------------------------------------------------------------------------
Central New York State 48 (2) 10.00 10.00 10.00 COS/ROE
Hudson Public (2)
Service
Commission
("PSC")
Earnings sharing
mechanism
effective July 1,
2013: 50%/50%
sharing of earnings
above the allowed
ROE up to 50 basis
points above the
allowed ROE; and
10%/90% sharing of
earnings in excess
of 50 basis points
above the allowed
ROE
ROE established by
the PSC
-------------------
Future Test Year
----------------------------------------------------------------------------
FortisAlberta Alberta 41 (3) 8.75 8.75 8.75 COS/ROE
Utilities (3) (3)
Commission
("AUC")
PBR mechanism for
2013 through 2017
with capital
tracker account and
other supportive
features
ROE established by
the AUC
-------------------
2012 test year with
2013 through
2017 rates set
using PBR mechanism
----------------------------------------------------------------------------
Newfoundland Newfoundland 45 8.80 8.80 8.80 COS/ROE
Power and Labrador +/- 50 +/- 50 +/- 50
Board of bps bps bps ROE established by
Commissioners the PUB
of Public
Utilities
("PUB")
-------------------
Future Test Year
----------------------------------------------------------------------------
Maritime Island 40 9.75 9.75 9.75 COS/ROE
Electric Regulatory
and Appeals
Commission
ROE established by
the Government of
PEI under the PEI
Energy Accord
-------------------
Future Test Year
----------------------------------------------------------------------------
FortisOntario Ontario Energy Canadian Niagara
Board Power - COS/ROE
Canadian 40 8.01 8.93 8.93 Algoma Power -
Niagara Power COS/ROE and subject
to Rural and Remote
Rate
Algoma Power 40 9.85 9.85 9.85 Protection program
Franchise Cornwall Electric -
Agreement Price cap with
Cornwall commodity cost flow
Electric through
-------------------
Canadian Niagara
Power - 2009
test year for 2009
through 2012; 2013
test year for 2013
through 2016
Algoma Power - 2011
test year for 2012
through 2014
----------------------------------------------------------------------------
ROA
----------------------
Caribbean Electricity N/A 7.25 - 6.50 - 7.00 - COS/ROA
Utilities Regulatory 9.25 8.50 9.00
Authority
Rate-cap adjustment
mechanism 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 Turks Utilities make N/A 17.50 17.50 17.50 COS/ROA
and Caicos annual (4) (4) (4)
filings to
the
Government of
the Turks and
Caicos
Islands
If the actual ROA
is lower than the
allowed ROA, the
utilities may apply
for an increase in
customer rates in
the following year.
-------------------
Historical Test
Year
----------------------------------------------------------------------------
(1) Effective January 1, 2013. For 2012, the allowed deemed equity component
of the capital structure was 40%.
(2) Effective until June 30, 2015
(3) Capital structure and allowed ROE for 2013 and 2014 are interim and are
subject to change based on the outcome of a cost of capital proceeding.
(4) Amount allowed under licences as it relates to FortisTCI. Amount allowed
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
customer electricity rates.
MATERIAL REGULATORY DECISIONS AND APPLICATIONS
The following summarizes the significant regulatory decisions and applications
for the Corporation's largest regulated utilities in the first half of 2014.
FortisBC Energy Companies and FortisBC Electric
In February 2014 the FortisBC Energy companies received regulatory approval for
the amalgamation of its regulated utilities. The regulator approved the adoption
of common rates for the majority of natural gas customers, to be phased in over
a three-year period. The amalgamation received the consent of the Lieutenant
Governor in Council in May 2014 and is expected to be effective December 31,
2014.
In May 2013 the BCUC issued its decision on the first stage of the GCOC
Proceeding in British Columbia. Effective January 1, 2013, the decision set the
ROE of the benchmark utility, FEI, at 8.75% with a 38.5% common equity component
of capital structure. The common equity component of capital structure will
remain in effect until December 31, 2015. Effective January 1, 2014 through
December 31, 2015, the BCUC has also introduced an Automatic Adjustment
Mechanism ("AAM") to set the allowed ROE for the benchmark utility on an annual
basis. The AAM will take effect when the long-term Government of Canada bond
yield exceeds 3.8%. In January 2014 the BCUC confirmed that the necessary
conditions for the AAM to be triggered for the 2014 allowed ROE have not been
met; therefore, the benchmark allowed ROE remains at 8.75% for 2014. FEVI, FEWI
and FortisBC Electric's allowed ROEs and common equity component of capital
structures were determined in the second stage of the GCOC Proceeding. However,
as a result of the decision on the first stage of the GCOC Proceeding, which
reduced the allowed ROE of the benchmark utility by 75 basis points, the interim
allowed ROEs for FEVI, FEWI and FortisBC Electric decreased to 9.25%, 9.25% and
9.15%, respectively, effective January 1, 2013, while the deemed common equity
component of capital structures remained unchanged.
In March 2014 the BCUC issued its decision on the second stage of the GCOC
Proceeding. Effective January 1, 2013, the decision set the common equity
component of capital structure for FEVI and FEWI at 41.5%, and reaffirmed the
common equity component of capital structure for FortisBC Electric at 40%. The
BCUC reaffirmed for FEVI and FortisBC Electric a risk premium over the benchmark
utility of 50 basis points and 40 basis points, respectively, and set FEWI's
equity risk premium at 75 basis points, which represented an increase of 25
basis points. The resulting allowed ROEs, effective January 1, 2013, for FEVI,
FortisBC Electric and FEWI are 9.25%, 9.15%, and 9.50%, respectively. The
cumulative impact of the outcome of the second stage of the GCOC Proceeding was
recognized in the first quarter of 2014 and did not have a material impact on
earnings.
Once amalgamation of the FortisBC Energy companies is completed, the allowed ROE
and common equity component of capital structure for the amalgamated entity will
be set the same as the benchmark utility, FEI.
FortisAlberta
In May 2014 FortisAlberta filed a combined 2013, 2014 and 2015 Capital Tracker
Application as required by the regulator. The application requested capital
tracker revenue of approximately $23 million for 2013, $48 million for 2014 and
$69 million for 2015. A hearing related to the combined Capital Tracker
Application is scheduled for October 2014. FortisAlberta continues to recognize
capital tracker revenue based on the interim regulatory decision granting 60% of
the applied for capital tracker amounts. Any adjustment by the regulator to the
interim decision will result in an adjustment to FortisAlberta's revenue. Such
an adjustment would be recognized in the consolidated financial statements when
the regulatory decision is received, or when sufficient information is available
to reasonably estimate the required adjustment in accordance with US GAAP.
Central Hudson
In July 2014 Central Hudson filed a General Rate Application seeking to increase
electricity and natural gas delivery rates effective July 1, 2015. A delivery
rate freeze was implemented for electricity and natural gas delivery rates
through to June 30, 2015 as part of the regulatory approval of the acquisition
of Central Hudson by Fortis. Central Hudson committed to invest US$215 million
in capital expenditures during the two-year delivery rate freeze period ending
June 30, 2015. In its General Rate Application, the Company has requested an
allowed ROE of 9.0% with a 48% common equity component of capital structure. The
current rate order includes an allowed ROE of 10.0% with a 48% common equity
component of capital structure.
Significant Regulatory Proceedings
The following table summarizes ongoing regulatory proceedings, including filing
dates and expected timing of decisions for the Corporation's largest regulated
utilities.
----------------------------------------------------------------------------
Expected
Regulated Utility Application/Proceeding Filing Date Decision
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FEI Multi-Year PBR Plan for June 2013 Second half of
2014-2018 2014
----------------------------------------------------------------------------
FortisBC Electric Multi-Year PBR Plan for July 2013 Second half of
2014-2018 2014
FortisAlberta GCOC 2013 and 2014 Not applicable Fourth quarter
of 2014
Capital Tracker
Applications - 2013, 2014 First quarter of
and 2015 May 2014 2015
----------------------------------------------------------------------------
Central Hudson General Rate Application July 2014 First half of
for mid-2015 2015
----------------------------------------------------------------------------
CONSOLIDATED FINANCIAL POSITION
The following table outlines the significant changes in the consolidated balance
sheets between June 30, 2014 and December 31, 2013.
Significant Changes in the Consolidated Balance Sheets (Unaudited) between
June 30, 2014 and December 31, 2013
----------------------------------------------------------------------------
Increase/
Balance Sheet (Decrease)
Account ($ millions) Explanation
----------------------------------------------------------------------------
Cash and cash 540 The increase was driven by cash on hand at
equivalents the Corporation, due to net proceeds
received from the first installment of the
Debentures issued in January 2014 and the
US$213 million unsecured notes issued in
June 2014, and at CH Energy Group, due to
net proceeds received from the sale of
Griffith in March 2014.
----------------------------------------------------------------------------
Accounts (104) The decrease was primarily due to the
receivable impact of a seasonal decrease in sales at
the FortisBC Energy companies, FortisBC
Electric and Newfoundland Power, partially
offset by an increase in the operation of
equal payment plans for customers, mainly
at the FortisBC Energy companies and
Newfoundland Power. Lower transmission
riders and the timing of Alberta Electric
System Operator ("AESO") refunds at
FortisAlberta also contributed to the
decrease.
----------------------------------------------------------------------------
Regulatory 100 The increase was mainly due to an increase
assets - in the manufactured gas plant site
current and remediation deferral at Central Hudson and
long-term an increase in regulatory deferred income
taxes. The increase was partially offset by
a decrease in the deferral for employee
future benefits.
----------------------------------------------------------------------------
Assets held for (112) The decrease related to the sale of
sale Griffith in March 2014.
----------------------------------------------------------------------------
Utility capital 234 The increase related to utility capital
assets expenditures, partially offset by
depreciation and customer contributions.
----------------------------------------------------------------------------
Short-term (60) The decrease was primarily due to a
borrowings reduction in borrowings at the FortisBC
Energy companies, due to the seasonality of
operations and proceeds received from an
intercompany loan advance from Fortis,
financed by a portion of the proceeds from
the Debentures.
----------------------------------------------------------------------------
Accounts payable (56) The decrease was mainly due to lower
and other amounts owing for purchased power at
current Newfoundland Power associated with
liabilities seasonality of operations and the timing of
payments at FortisAlberta. The decrease was
partially offset by an increase in amounts
associated with transmission-connected
projects at FortisAlberta.
----------------------------------------------------------------------------
Regulatory 73 The increase was primarily due to a higher
liabilities - AESO charges deferral at FortisAlberta, an
current and increase in the provision for non-asset
long-term retirement obligation removal costs, and an
increase in rate stabilization accounts at
Central Hudson.
----------------------------------------------------------------------------
Convertible 599 The increase was due to the first
debentures installment of the Debentures issued in
represented by January 2014.
installment
receipts
----------------------------------------------------------------------------
Long-term debt (47) The decrease was mainly due to the
(including repayment of credit facility borrowings at
current the Corporation, FortisBC Electric, and
portion) FortisAlberta, and regularly scheduled debt
repayments. The decrease was partially
offset by the issuance of US$213 million
and US$30 million unsecured notes at the
Corporation and Central Hudson,
respectively.
----------------------------------------------------------------------------
Other 51 The increase was mainly due to an increase
liabilities in the manufactured gas plant site
remediation provision at Central Hudson.
----------------------------------------------------------------------------
Shareholders' 122 The increase related to net earnings
equity (before attributable to common equity shareholders
non-controlling for the six months ended June 30, 2014,
interests) less dividends declared on common shares,
and the issuance of common shares under the
Corporation's dividend reinvestment,
employee share purchase and stock option
plans.
----------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The table below outlines the Corporation's sources and uses of cash for the
quarter and year-to-date periods ended June 30, 2014, as compared to the same
periods in 2013, followed by a discussion of the nature of the variances in cash
flows.
----------------------------------------------------------------------------
Summary of Consolidated Cash Flows (Unaudited)
Periods Ended June 30 Quarter Year-to-Date
($ millions) 2014 2013 Variance 2014 2013 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash, Beginning of
Period 528 168 360 72 154 (82)
Cash Provided by (Used
in):
Operating Activities 321 270 51 586 553 33
Investing Activities (288) (1,268) 980 (398) (1,560) 1,162
Financing Activities 55 1,097 (1,042) 356 1,120 (764)
Effect of Exchange
Rate Changes on
Cash and Cash
Equivalents (4) - (4) (4) - (4)
----------------------------------------------------------------------------
Cash, End of Period 612 267 345 612 267 345
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating Activities: Cash flow from operating activities was $51 million
higher quarter over quarter. The increase was primarily due to higher cash
earnings and favourable changes in working capital. The favourable changes in
working capital were mainly associated with current regulatory deferrals at the
FortisBC Energy companies and FortisAlberta and accounts receivable at Central
Hudson, partially offset by unfavourable changes associated with accounts
payable and other current liabilities and long-term regulatory deferrals.
Cash flow from operating activities was $33 million higher year to date compared
to the same period last year. The increase was primarily due to higher cash
earnings, partially offset by unfavourable changes in working capital, mainly
associated with accounts receivable and current regulatory deferrals at the
FortisBC Energy companies and Maritime Electric, respectively.
Investing Activities: Cash used in investing activities was $980 million lower
for the quarter and $1,162 million lower year to date compared to the same
periods last year. The decrease was primarily due to the acquisition of CH
Energy Group in June 2013 for a net cash purchase price of $1,019 million and
FortisBC Electric's acquisition of the electrical utility assets from the City
of Kelowna in March 2013 for approximately $55 million. The sale of Griffith in
March 2014 for proceeds of approximately $105 million (US$95 million) also
contributed to the decrease in cash used. The decrease was partially offset by
cash proceeds received in the second quarter of 2013 from the settlement of
expropriation matters associated with the Exploits Partnership. Lower capital
expenditures at FortisAlberta and at the non-regulated Waneta Expansion
hydroelectric generating facility ("Waneta Expansion"), mainly in the first
quarter of 2014, were largely offset by capital spending at Central Hudson and
higher capital expenditures at the FortisBC Energy companies.
Financing Activities: Cash provided by financing activities was $1,042 million
lower for the quarter and $764 million lower year to date compared to the same
periods last year. The decrease was primarily due to financing associated with
the acquisition of CH Energy Group in June 2013, including borrowings under the
Corporation's committed credit facility and the issuance of common shares, and
lower advances from non-controlling interests. The decrease was partially offset
by net proceeds from the first installment of the Corporation's Debentures in
January 2014, higher net proceeds from long-term debt and favourable changes in
short-term borrowings.
In January 2014 approximately $599 million, or $561 million net of issue costs,
was received from the first installment of the Corporation's Debentures, to be
used to finance a portion of the pending acquisition of UNS Energy. A
significant portion of the net proceeds is cash on hand, while a portion was
used to repay borrowings under the Corporation's existing revolving credit
facility and for other general corporate purposes, including intercompany loan
advances to subsidiaries.
In March 2014 Central Hudson issued 10-year US$30 million in long-term debt with
a floating interest rate of 3-month LIBOR plus 1%. The net proceeds were used to
repay maturing long-term debt and for other general corporate purposes.
In June 2014 the Corporation issued US$213 million unsecured notes with terms to
maturity ranging from 5 years to 30 years and coupon rates ranging from 2.92% to
4.88%. The weighted average term to maturity is approximately 9 years and the
weighted average coupon rate is 3.51%. Net proceeds were used to repay US-dollar
denominated borrowings on the Corporation's committed credit facility and for
general corporate purposes.
In May 2013 Caribbean Utilities issued 15-year US$10 million 3.34% and 20-year
US$40 million 3.54% senior unsecured notes. The net proceeds were used to repay
short-term borrowings and to finance capital expenditures.
Repayments of long-term debt and capital lease and finance obligations and net
(repayments) borrowings under committed credit facilities for the quarter and
year to date compared to the same periods last year are summarized in the
following tables.
----------------------------------------------------------------------------
Repayments of Long-Term Debt and Capital Lease and Finance Obligations
(Unaudited)
Periods Ended June 30 Quarter Year-to-Date
($ millions) 2014 2013 Variance 2014 2013 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FortisBC Energy
Companies (2) (5) 3 (3) (26) 23
Central Hudson (8) - (8) (16) - (16)
Caribbean Utilities (15) (17) 2 (15) (17) 2
Fortis Properties (7) (2) (5) (8) (20) 12
Other (1) (1) - (2) (2) -
----------------------------------------------------------------------------
Total (33) (25) (8) (44) (65) 21
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net (Repayments) Borrowings Under Committed Credit Facilities (Unaudited)
Periods Ended June 30 Quarter Year-to-Date
($ millions) 2014 2013 Variance 2014 2013 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FortisAlberta - 46 (46) (20) 94 (114)
FortisBC Electric - 1 (1) (79) 33 (112)
Newfoundland Power - 1 (1) - 22 (22)
Corporate (128) 514 (642) (174) 549 (723)
----------------------------------------------------------------------------
Total (128) 562 (690) (273) 698 (971)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Borrowings under credit facilities by the utilities are primarily in support of
their respective 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 from non-controlling interests in the Waneta Expansion Limited
Partnership ("Waneta Partnership") of $4 million and $17 million were received
in the second quarter and year-to-date 2014, respectively, to finance capital
spending related to the Waneta Expansion, compared to $20 million received
during the second quarter of 2013 and $42 million year-to-date 2013.
Proceeds from the issuance of common shares were $567 million lower for the
quarter and $566 million lower year to date compared to the same periods in
2013. The decreases were due to the issuance of 18.5 million common shares, as a
result of the conversion of the Subscription Receipts on closing of the CH
Energy Group acquisition, for proceeds of approximately $567 million, net of
after-tax expenses.
Common share dividends paid in the second quarter of 2014 were $48 million, net
of $20 million of dividends reinvested, compared to $44 million, net of $15
million of dividends reinvested, paid in the same quarter of 2013. Common share
dividends paid year-to-date 2014 were $95 million net of $42 million in
dividends reinvested, compared to $85 million, net of $34 million in dividends
reinvested, paid year-to-date 2013. The dividend paid per common share for the
first and second quarters of 2014 was $0.32 compared to $0.31 for the first and
second quarters of 2013. The weighted average number of common shares
outstanding for the second quarter and year-to-date 2014 was 214.8 million and
214.2 million, respectively, compared to 193.4 million and 192.7 million for the
same periods in 2013.
CONTRACTUAL OBLIGATIONS
The Corporation's consolidated contractual obligations with external third
parties in each of the next five years and for periods thereafter, as at June
30, 2014, are outlined in the following table. A detailed description of the
nature of the obligations is provided in the 2013 Annual MD&A and below, where
applicable.
----------------------------------------------------------------------------
Contractual Obligations (Unaudited)
Due Due
As at June 30, 2014 within Due in Due in Due in Due in after
($ millions) Total 1 year year 2 year 3 year 4 year 5 5 years
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Long-term debt 7,157 714 138 303 81 160 5,761
Interest obligations
on long-term debt 7,187 391 365 344 327 325 5,435
Convertible
debentures
represented by
installment
receipts (1) 599 599 - - - - -
Interest obligations
on convertible
debentures
represented by
installment
receipts (1) 44 44 - - - - -
Government loan
obligations 5 - 5 - - - -
Capital lease and
finance obligations 2,346 45 46 47 48 76 2,084
Gas purchase
contract
obligations (2) 481 255 170 17 13 11 15
Power purchase
obligations:
Central Hudson (3) 102 35 27 25 4 3 8
FortisBC Electric
(4) 315 44 36 29 23 19 164
FortisOntario 281 46 50 51 53 54 27
Maritime Electric 83 41 27 1 1 1 12
Capital cost (5) 563 19 22 20 22 20 460
Operating lease
obligations 26 6 5 4 4 4 3
Waneta Partnership
promissory note 72 - - - - - 72
Joint-use asset and
shared service
agreements 53 3 3 3 3 2 39
Defined benefit
pension funding
contributions (6) 102 43 37 17 1 1 3
Performance Share
Unit Plan
obligations 16 2 5 9 - - -
Other 15 11 - - - 3 1
----------------------------------------------------------------------------
Total 19,447 2,298 936 870 580 679 14,084
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) To finance a portion of the pending acquisition of UNS Energy, in
January 2014 Fortis completed the sale of $1.8 billion aggregate
principal amount of 4% convertible unsecured subordinated debentures of
the Corporation represented by installment receipts. For further
information on the Debentures, refer to the "Significant Items" section
of this MD&A.
(2) Gas purchase contract obligations at the FortisBC Energy companies are
based on index prices as at June 30, 2014. Gas purchase contract
obligations at Central Hudson are based on tariff rates as at June 30,
2014.
(3) Includes Central Hudson's contract to purchase 200 MW of installed
capacity from May 2014 through April 2017 totalling approximately US$63
million. The New York Independent System Operator ("NYISO") has been
authorized by FERC to create a new capacity zone in the Lower Hudson
Valley to maintain system reliability and attract investments in new and
existing generation, which was implemented in May 2014. The key terms of
the contract provide that Central Hudson will pay the settlement price
in the NYISO Capacity Spot Market auction for the relevant month of
delivery minus US$0.175 per kilowatt-month, times the contract quantity
of the product delivered during the month.
(4) In May 2014 the BCUC approved FortisBC Electric's new power purchase
agreement with BC Hydro to purchase up to 200 MW of capacity and 1,752
GWh per year of associated energy for a 20-year term, effective July 1,
2014.
(5) Maritime Electric has entitlement to approximately 4.7% of the output
from the New Brunswick Power Point Lepreau nuclear generating station
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. The total estimated capital cost obligation has increased by $21
million from that disclosed in the 2013 Annual MD&A. The increase
reflects revised cost forecasts from New Brunswick Power and changes in
the entitlement agreement.
(6) Defined benefit pension funding contributions are based on estimates
provided under the latest completed actuarial valuations, which
generally provide funding estimates for a period of three to five years
from the date of the valuations. The increase in contributions from that
disclosed in the 2013 Annual MD&A reflects estimates from the actuarial
valuations completed as at December 31, 2013.
Other contractual obligations, which are not reflected in the above table, did
not materially change from those disclosed in the 2013 Annual MD&A.
In March 2014 Fortis priced a private placement of US$500 million in senior
unsecured notes to US-based institutional investors. In June 2014 Fortis issued
US$213 million in senior unsecured notes. Debt and interest obligations in the
Contractual Obligations table include the US$213 million in senior unsecured
notes issued in June 2014. For further information on the notes, refer to the
"Significant Items" section of this MD&A.
For a discussion of the nature and amount of the Corporation's consolidated
capital expenditure program not included in the preceding Contractual
Obligations table, refer to the "Capital Expenditure Program" section of this
MD&A.
CAPITAL STRUCTURE
The Corporation's principal businesses of regulated gas and electricity
distribution require ongoing access to capital to enable the utilities to fund
maintenance and expansion of infrastructure. Fortis raises debt at the
subsidiary level to ensure regulatory transparency, tax efficiency and financing
flexibility. Fortis generally finances a significant portion of acquisitions at
the corporate level with proceeds from common share, preference share and
long-term debt offerings. To help ensure access to capital, the Corporation
targets a consolidated long-term capital structure containing approximately 45%
equity, including preference shares, and 55% debt, as well as investment-grade
credit ratings. Each of the Corporation's regulated utilities maintains its own
capital structure in line with the deemed capital structure reflected in each of
the utility's customer rates.
The consolidated capital structure of Fortis is presented in the following table.
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Capital Structure (Unaudited)
As at
June 30, 2014 December 31, 2013
($ millions) (%) ($ millions) (%)
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Total debt and capital
lease and finance
obligations (net of cash)
(1) 7,666 55.6 7,716 56.2
Preference shares 1,229 8.9 1,229 9.0
Common shareholders' equity 4,894 35.5 4,772 34.8
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Total (2) 13,789 100.0 13,717 100.0
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(1) Includes long-term debt, capital lease and finance obligations,
including current portion, convertible debentures represented by
installment receipts and short-term borrowings, net of cash
(2) Excludes amounts related to non-controlling interests
The improvement in the capital structure was primarily due to an increase in
common shareholders' equity as a result of net earnings attributable to common
equity shareholders for the six months ended June 30, 2014, less dividends
declared on common shares, and the issuance of common shares under the
Corporation's dividend reinvestment, employee share purchase and stock option
plans. A decrease in total debt also contributed to the improvement in the
capital structure. An increase in cash and a decrease in short-term borrowings
and long-term debt more than offset the increase in debt associated with the
convertible debentures represented by installment receipts.
Excluding capital lease and finance obligations, the Corporation's capital
structure as at June 30, 2014 was 54.2% debt, 9.2% preference shares and 36.6%
common shareholders' equity (December 31, 2013 - 54.9% debt, 9.2% preference
shares and 35.9% common shareholders' equity).
CREDIT RATINGS
The Corporation's credit ratings are as follows:
Standard & Poor's ("S&P") A- / Negative (long-term corporate and unsecured
debt credit rating)
DBRS A(low) / Under Review - Developing Implications
(unsecured debt credit rating)
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, and management's commitment to
maintaining low levels of debt at the holding company level. In December 2013,
after the announcement by Fortis that it had entered into an agreement to
acquire UNS Energy, DBRS placed the Corporation's credit rating under review
with developing implications. Similarly, S&P revised its outlook on the
Corporation to negative from stable. S&P indicated that an outlook revision to
stable would likely occur when the Corporation's Debentures are converted to
equity.
CAPITAL EXPENDITURE PROGRAM
A breakdown of the $535 million in gross consolidated capital expenditures by
segment for the first half of 2014 is provided in the following table.
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Gross Consolidated Capital Expenditures (Unaudited) (1)
Year-to-Date June 30, 2014
($ millions)
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Other
Regulated
FortisBC Electric
Energy Central Fortis FortisBC Newfoundland Utilities -
Companies Hudson Alberta Electric Power Canadian
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127 49 162 35 44 19
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Regulated Non- Non-
Electric Total Regulated - Regulated -
Utilities - Regulated Fortis Non-
Caribbean Utilities Generation Utility Total
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28 464 55 16 535
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(1) Relates to cash payments to acquire or construct utility capital assets,
non-utility capital assets and intangible assets, as reflected on the
consolidated statement of cash flows. Excludes the non-cash equity
component of allowance for funds used during construction.
Planned capital expenditures are based on detailed forecasts of energy demand,
weather, cost of labour and materials, as well as other factors, including
economic conditions, which could change and cause actual expenditures to differ
from those forecast.
Gross consolidated capital expenditures for 2014 are forecast to be
approximately $1.4 billion. There have been no material changes in the overall
expected level, nature and timing of the Corporation's significant capital
projects from those that were disclosed in the 2013 Annual MD&A.
FortisBC has begun preliminary work related to an expansion of its Tilbury
liquefied natural gas ("LNG") facility in British Columbia. The Tilbury
expansion is estimated to cost approximately $400 million and will include a
second LNG tank and a new liquefier, both to be in service in the second half of
2016. FortisBC is pursuing additional LNG investment opportunities, including a
further expansion of Tilbury and a pipeline expansion for the proposed Woodfibre
LNG site in British Columbia. These additional opportunities are not included in
the Corporation's capital expenditure forecast.
Construction of the $900 million Waneta Expansion is ongoing, with an additional
$54 million invested in the first half of 2014. Approximately $633 million has
been invested in the Waneta Expansion since construction began late in 2010. Key
construction activities during the first half of 2014 were focused on civil
construction and equipment installation, assembly and testing. Civil
construction included forming and casting on concrete at the intake structure,
forming of the power tunnel transition and excavation of the tailrace channel.
Equipment installation and assembly continued with the turbine and generator
components and powerhouse mechanical and electrical auxiliary systems. Testing
was performed on various components and systems. In addition, construction of
the 230-kilovolt transmission line was completed and is available for
energization, which is scheduled for September 2014.
Over the five-year period 2014 through 2018, gross consolidated capital
expenditures, excluding capital spending at UNS Energy, are expected to exceed
$6.5 billion. The approximate breakdown of the capital spending expected to be
incurred is as follows: 50% at Canadian Regulated Electric Utilities, driven by
FortisAlberta; 26% at Canadian Regulated Gas Utilities; 12% at Central Hudson;
5% at Caribbean Regulated Electric Utilities; and the remaining 7% 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: 46% for sustaining capital expenditures, 37% to meet customer growth,
and 17% 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. The subsidiaries
expect to be able to source the cash required to fund their 2014 capital
expenditure programs.
As at June 30, 2014, management expects consolidated long-term debt maturities
and repayments to average approximately $280 million annually over the next five
years. The combination of available credit facilities and relatively low annual
debt maturities and repayments beyond 2014 will provide the Corporation and its
subsidiaries with flexibility in the timing of access to capital markets.
Fortis and its subsidiaries were compliant with debt covenants as at June 30,
2014 and are expected to remain compliant throughout 2014.
CREDIT FACILITIES
As at June 30, 2014, the Corporation and its subsidiaries had consolidated
credit facilities of approximately $2.7 billion, of which $2.5 billion was
unused, including $958 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 $2.6 billion of the
total credit facilities are committed facilities with maturities ranging from
2015 through 2019.
The following table outlines the credit facilities of the Corporation and its
subsidiaries.
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Credit Facilities (Unaudited) As at
December
Regulated Non- Corporate June 30, 31,
($ millions) Utilities Regulated and Other 2014 2013
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Total credit facilities 1,547 13 1,137 2,697 2,695
Credit facilities
utilized:
Short-term borrowings (98) (2) - (100) (160)
Long-term debt
(including current
portion) - - (41) (41) (313)
Letters of credit
outstanding (65) - (1) (66) (66)
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Credit facilities unused 1,384 11 1,095 2,490 2,156
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As at June 30, 2014 and December 31, 2013, 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 February 2014 Maritime Electric's $50 million unsecured revolving credit
facility matured and the Company negotiated a new $50 million unsecured
committed revolving credit facility, maturing in February 2019.
In April 2014 FortisBC Electric extended the maturity of its $150 million
unsecured committed revolving credit facility, with $100 million now maturing in
May 2017 and $50 million now maturing in April 2015.
In April 2014 FHI extended its $30 million unsecured committed revolving credit
facility to mature in April 2015.
In June 2014 FortisOntario extended its $30 million unsecured committed
revolving credit facility to mature in June 2015 from June 2014.
In July 2014 FEI, FortisAlberta and Newfoundland Power amended their $500
million, $250 million and $100 million, respectively, committed revolving credit
facilities, resulting in extensions to their maturity dates to August 2016,
August 2019 and August 2019, respectively, from August 2015, August 2018 and
August 2017, respectively.
For the purpose of bridge financing for the pending acquisition of UNS Energy,
in March 2014 the Corporation secured an aggregate of $2 billion non-revolving
term credit facilities from a syndicate of banks. The non-revolving term credit
facilities are comprised of a $1.7 billion short-term bridge facility, repayable
in full nine months following its advance, and a $300 million medium-term bridge
facility, repayable in full on the second anniversary of its advance. The credit
facilities table does not include the $2 billion credit facilities.
As a result of closing the Debentures related to the pending acquisition of UNS
Energy, the Corporation agreed to maintain availability under its committed
revolving corporate credit facility of not less than $600 million to cover the
principal amount of the first installment of the Debentures in the event of a
mandatory redemption.
FINANCIAL INSTRUMENTS
The carrying values of the Corporation's consolidated financial instruments
approximate their fair values, reflecting the short-term maturity, normal trade
credit terms and/or nature of these instruments, except as follows.
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Financial Instruments (Unaudited)
As at
June 30, 2014 December 31, 2013
Carrying Estimated Carrying Estimated
($ millions) Value Fair Value Value Fair Value
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Waneta Partnership
promissory note 51 53 50 50
Long-term debt, including
current portion 7,157 8,453 7,204 8,084
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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) 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 $108 million as at June 30,
2014 (December 31, 2013 - $108 million).
Risk Management: 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-denominated 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 Central Hudson,
Caribbean Utilities, Fortis Turks and Caicos, Belize Electric Company Limited
and FortisUS Energy Corporation is the US dollar.
As at June 30, 2014, the Corporation's corporately issued US$1,126 million
(December 31, 2013 - US$1,033 million) long-term debt had been designated as an
effective hedge of the Corporation's foreign net investments. As at June 30,
2014, the Corporation had approximately US$490 million (December 31, 2013 -
US$560 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-denominated 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 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 loss of approximately $4
million for the three months ended June 30, 2014, with no net foreign exchange
impact for the first half of 2014 (foreign exchange gain of $3 million and $5
million for the three and six months ended June 30, 2013, respectively).
From time to time, the Corporation and its subsidiaries hedge exposures to
fluctuations in interest rates, foreign exchange rates and fuel, electricity and
natural gas prices through the use of derivative instruments. The Corporation
does not hold or issue derivative instruments for trading purposes and generally
limits the use of derivative instruments to those that qualify as accounting or
economic hedges. As at June 30, 2014, the Corporation's derivative instruments
primarily consisted of electricity swap contracts, gas swap and option
contracts, and gas purchase contract premiums. Electricity swap contracts are
held by Central Hudson. Gas swap and option contracts, and gas purchase contract
premiums are held by the FortisBC Energy companies and Central Hudson.
The following table summarizes the Corporation's derivative instruments.
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Derivative Instruments (Unaudited) As at
June 30, December 31,
2014 2013
Carrying Carrying
Number of Value (2) Value (2)
Asset (Liability) Maturity Contracts Volume (1) ($ millions) ($ millions)
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Electricity swap
contracts 2017 11 2,766 25 10
Natural gas
derivatives:
Gas swaps and
option
contracts 2015 11 3 (4) (13)
Gas purchase
contract
premiums 2015 55 91 (6) (2)
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(1) The electricity swap contracts are in GWh and natural gas derivatives
are in PJ.
(2) Carrying value is estimated fair value. The asset (liability) represents
the gross derivatives balance.
The electricity swap contracts and natural gas derivatives are used by Central
Hudson to minimize commodity price volatility for electricity and natural gas
purchases by fixing the effective purchase price for the defined commodities.
The fair values of the electricity swap contracts and natural gas derivatives
were calculated using forward pricing provided by independent third parties.
The natural gas derivatives are used by the FortisBC Energy companies to fix the
effective purchase price of natural gas, as the majority of the natural gas
supply contracts have floating, rather than fixed, prices. 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 cost of natural gas.
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, 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 maturities and the FortisBC Energy
companies' ability to fully recover the 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.
The fair values of the electricity swap 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. As at June
30, 2014, none of the electricity swap contracts and natural gas derivatives
were designated as hedges of electricity and natural gas supply contracts.
The changes in the fair values of the electricity swap 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 value of the electricity swap contracts is recorded in accounts receivable
and other long-term assets and the fair value of the natural gas derivatives is
recorded in accounts payable and other current liabilities as at June 30, 2014
and December 31, 2013.
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 $66 million as at June
30, 2014 (December 31, 2013 - $66 million), the Corporation had no off-balance
sheet arrangements that are reasonably likely to materially affect liquidity or
the availability of, or requirements for, capital resources.
BUSINESS RISK MANAGEMENT
Year-to-date 2014, the business risks of the Corporation were generally
consistent with those disclosed in the Corporation's 2013 Annual MD&A, including
certain risks, as disclosed below, and an update to those risks, where
applicable.
Regulatory Risk: For further information, refer to the "Material Regulatory
Decisions and Applications" section of this MD&A.
Completion of the Acquisition of UNS Energy: The closing of the acquisition of
UNS Energy is subject to normal commercial risks that the acquisition will not
close on the terms negotiated, or at all. The pending acquisition remains
subject to receipt of regulatory approval by the ACC, and the satisfaction of
customary closing conditions. The failure to obtain the required approval or
satisfy or waive the conditions may result in the termination of the agreement
and plan of merger and the failure to materialize some, or all, of the expected
benefits of the acquisition 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. If the closing of the acquisition of UNS
Energy does not take place as contemplated, the Corporation could suffer adverse
consequences, including the loss of investor confidence.
A substantial delay in obtaining regulatory approval or the imposition of
unfavourable terms and/or conditions in such approval could have a material
adverse effect on the Corporation's ability to complete the acquisition and on
the Corporation's or UNS Energy's business, financial condition or results of
operations. Fortis intends to complete the acquisition as soon as practicable
after obtaining the required regulatory approval, and satisfying the other
required closing conditions. Failure to realize the anticipated benefits of the
acquisition of UNS Energy may impact the financial performance of the
Corporation.
For the purpose of financing the acquisition, the Corporation completed the $1.8
billion Debenture Offering in January 2014 and obtained an aggregate of $2
billion non-revolving term credit facilities. For further information, refer to
the "Significant Items" section of this MD&A.
Failure to obtain sufficient long-term financing at acceptable terms could
result in additional financing costs and the failure to materialize some, or
all, of the expected benefits of the acquisition.
If a material amount of the final installment is not paid by holders of
Debentures, Fortis may be required to draw down additional funds under the $2
billion non-revolving term credit facilities and it may take Fortis longer than
anticipated to repay these credit facilities.
Fortis is exposed to foreign exchange risk associated with the acquisition of
UNS Energy as the cash consideration for the acquisition is required to be paid
in US dollars, while funds raised in the Debenture Offering, which will
constitute a significant portion of the funds used to finance the acquisition,
are denominated in Canadian dollars. As a result, a strengthening US dollar
prior to payment of the Final Installment will increase the purchase price
translated in Canadian dollars. In addition, the operations of UNS Energy are
conducted in US dollars and, following the acquisition, the consolidated
earnings and cash flows of Fortis will be impacted to a greater extent by
fluctuations in the US dollar-to-Canadian dollar exchange rate.
Fortis also expects to incur a number of costs associated with completing the
acquisition. The majority of these costs will be non-recurring expenses and will
consist of transaction costs related to the acquisition, including costs related
to financing and obtaining regulatory approval. Additional unanticipated costs
may be incurred in 2014 related to the acquisition.
Expropriation of Shares in 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 was rendered by the Belize Court of Appeal on May 15, 2014.
The two Belizean judges found in favour of the GOB; however, the third judge
delivered a strong dissenting opinion concluding that the expropriation was
contrary to the Belize Constitution. An appeal of the decision to the Caribbean
Court of Justice, the final court for appeals arising in Belize, was filed in
June 2014 and a hearing is expected in the fourth quarter of 2014.
Fortis believes it has a strong, well-positioned case supporting the
unconstitutionality of the expropriation. There exists, however, a possibility
that the outcome of the litigation may be unfavourable to the Corporation and
the amount of compensation to be paid to Fortis could be lower than the book
value of the Corporation's expropriated investment in Belize Electricity. The
book value was $108 million, including foreign exchange impacts, as at June 30,
2014 (December 31, 2013 - $108 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) ordering return of the
shares to Fortis and/or award of damages; or (ii) ordering compensation to be
paid to Fortis for the unconstitutional expropriation of the shares and/or award
of damages. Based on presently available information, the $108 million long-term
other asset is not deemed impaired as at June 30, 2014. 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.
Capital Resources and Liquidity Risk - Credit Ratings: The Corporation's credit
ratings were affirmed by S&P in April 2014 and DBRS in February 2014.
Year-to-date 2014, the following changes were made to the credit ratings of the
Corporation's utilities: (i) Moody's Investor Service ("Moody's") upgraded
Central Hudson to 'A2' from 'A3' with a stable outlook in January 2014; (ii)
DBRS confirmed FortisAlberta's credit rating at 'A(low)' and changed the trend
to positive from stable in February 2014; (iii) S&P confirmed Maritime
Electric's and Caribbean Utilities' credit ratings at 'A' and 'A-',
respectively, both with a negative outlook in May 2014; (iv) in June 2014
Moody's affirmed the long-term credit ratings of FHI, FEI, FEVI and FortisBC
Electric and changed the ratings outlook to stable from negative; and (v) Fitch
Ratings confirmed Central Hudson's credit rating at 'A' and revised the outlook
to negative from stable in July 2014.
Defined Benefit Pension and Other Post-Employment Benefit Plan Assets: As at
June 30, 2014, the fair value of the Corporation's consolidated defined benefit
pension and other post-employment benefit plan assets was $1,835 million, up
$173 million or 10%, from $1,662 million as at December 31, 2013.
Labour Relations: The collective agreements between the FortisBC Energy
companies and Canadian Office and Professional Employees Union ("COPE") and
FortisBC Electric and COPE representing customer service employees expired on
March 31, 2014. The collective agreements have been renewed for a three-year
period expiring on March 31, 2017.
The collective agreement between FortisBC Electric and International Brotherhood
of Electrical Workers ("IBEW") expired on January 31, 2013. In December 2013,
following a labour disruption, the IBEW and FortisBC Electric agreed to binding
interest arbitration. The arbitration process was completed in June 2014 and the
arbitrator's decision is expected in the second half of 2014.
Power Supply Contracts: In May 2014 the BCUC approved FortisBC Electric's new
power purchase agreement with BC Hydro to purchase up to 200 MW of capacity and
1,752 GWh per year of associated energy for a 20-year term, effective July 1,
2014.
FortisBC Electric has a power-supply sale agreement with BC Hydro for the sale
of electricity generated from its non-regulated Walden Power Partnership
hydroelectric generating facility, which has a net book value of approximately
$10 million as at June 30, 2014. Subject to a five-month notice of termination
by BC Hydro, which has not yet been issued, this agreement could expire.
Accordingly, the Company is exposed to the risk that it will not be able to sell
the power from this facility beyond the expiry of the current contract on
similar terms.
CHANGES IN ACCOUNTING POLICIES
Effective January 1, 2014, as applied for in its Multi-Year PBR Plan for 2014
through 2018, FEI began depreciating utility capital assets and amortizing
intangible assets the year after the assets are available for use. Prior to
January 1, 2014, depreciation and amortization commenced the month after the
assets were available for use.
The new US GAAP accounting pronouncements that are applicable to, and were
adopted by, Fortis, effective January 1, 2014, are described as follows.
Obligations Resulting from Joint and Several Liability Arrangements
The Corporation adopted Accounting Standards Update ("ASU") No. 2013-04
Obligations Resulting from Joint and Several Liability Arrangements for Which
the Total Amount of the Obligation is Fixed at the Reporting Date. The
above-noted ASU was applied retrospectively and did not materially impact the
Corporation's interim consolidated financial statements for the three and six
months ended June 30, 2014.
Parent's Accounting for the Cumulative Translation Adjustment
The Corporation adopted the amendments to Accounting Standards Codification
("ASC") Topic 830, Foreign Currency Matters - Parent's Accounting for the
Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or
Groups of Assets within a Foreign Entity or of an Investment in a Foreign
Entity, as outlined in ASU No. 2013-05. The amendments were applied by the
Corporation prospectively and did not materially impact the Corporation's
interim consolidated financial statements for the three and six months ended
June 30, 2014.
Presentation of an Unrecognized Tax Benefit
The Corporation adopted the amendments to ASC Topic 740, Income Taxes -
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, as
outlined in ASU No. 2013-11. The amendments were applied by the Corporation
prospectively and did not materially impact the Corporation's interim
consolidated financial statements for the three and six months ended June 30,
2014.
FUTURE ACCOUNTING PRONOUNCEMENTS
Reporting Discontinued Operations and Disclosures of Disposals of Components of
an Entity
In April 2014 the Financial Accounting Standards Board ("FASB") issued ASU No.
2014-08, Reporting Discontinued Operations and Disclosures of Disposals of
Components of an Entity. The amendments in this update change the requirements
for reporting discontinued operations and require additional disclosures about
discontinued operations. This update is effective for annual and interim periods
beginning on or after December 15, 2014 and is to be applied prospectively.
Fortis does not expect that the adoption of this update will have a material
impact on its consolidated financial statements.
Revenue from Contracts with Customers
In May 2014 FASB issued ASU No. 2014-09, Revenue from Contracts with Customers.
The amendments in this update create ASC Topic 606, Revenue from Contracts with
Customers, and supersede the revenue recognition requirements in ASC Topic 605,
Revenue Recognition, including most industry-specific revenue recognition
guidance throughout the codification. This standard completes a joint effort by
FASB and the International Accounting Standards Board to improve financial
reporting by creating common revenue recognition guidance for US GAAP and
International Financial Reporting Standards that clarifies the principles for
recognizing revenue and that can be applied consistently across various
transactions, industries and capital markets. This standard is effective for
annual and interim periods beginning on or after December 15, 2016 and is to be
applied on a full retrospective or modified retrospective basis. Early adoption
is not permitted. Fortis is assessing the impact that the adoption of this
standard will have on its consolidated financial statements.
Accounting for Share-Based Payments When the Terms of an Award Provide That a
Performance Target Could Be Achieved after the Requisite Service Period
In June 2014 FASB issued ASU No. 2014-12, Accounting for Share-Based Payments
When the Terms of an Award Provide That a Performance Target Could Be Achieved
after the Requisite Service Period. The amendments in this update are intended
to resolve diversity in practice for employee share-based payments with
performance targets that can entitle an employee to benefit from an award
regardless of if they are rendering services at the date of the performance
target is achieved. This update is effective for annual and interim periods
beginning on or after December 15, 2015 and may be applied prospectively or
retrospectively. Fortis does not expect that the adoption of this update will
have a material impact on its consolidated financial statements.
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. Additionally, certain estimates and
judgments are necessary since the regulatory environments in which the
Corporation's regulated utilities operate often require amounts to be recognized
at estimated values until these amounts are finalized pursuant to regulatory
decisions or other regulatory proceedings. 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. In the event that a
regulatory decision is received after the balance sheet date but before the
consolidated financial statements are issued, the facts and circumstances are
reviewed to determine whether or not it is a recognized subsequent event.
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 six months ended June 30,
2014 from those disclosed in the 2013 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 adverse effect on the Corporation's
consolidated financial position or results of operations.
The following describes the nature of the Corporation's contingencies.
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 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 acquisition and that CH Energy Group, Fortis,
FortisUS Inc. and Cascade Acquisition Sub Inc. aided and abetted that breach.
The settlement agreement was subject to court approval. On June 19, 2014 the
Supreme Court of the State of New York, County of New York issued an Order and
Final Judgment approving the settlement agreement thereby concluding the
proceedings.
Following the announcement of the proposed acquisition of UNS Energy on December
11, 2013, four complaints which named Fortis and other defendants were filed in
the Superior Court of the State of Arizona ("Superior Court") in and for the
County of Pima and one claim in the United States District Court in and for the
District of Arizona, challenging the proposed acquisition. The complaints
generally allege that the directors of UNS Energy breached their fiduciary
duties in connection with the proposed transaction and that UNS Energy, Fortis,
FortisUS Inc., and Color Acquisition Sub Inc. aided and abetted that breach. On
March 13, 2014, two of the four complaints filed in the Superior Court were
dismissed by the plaintiffs. On March 18, 2014, counsel for the parties in the
two actions remaining in the Superior Court executed a Memorandum of
Understanding recording an agreement-in-principle on the structure of a
settlement to be proposed to the Superior Court for approval following closing
of the acquisition. On April 15, 2014, the complaint filed in the United States
District Court was dismissed by the plaintiff. The outcome of these lawsuits
cannot be predicted with any certainty and, accordingly, no amount has been
accrued in the consolidated financial statements.
FHI
In April 2013 FHI and Fortis were named as defendants in an action in the
British Columbia Supreme Court ("B.C. 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 consolidated financial statements.
FortisBC Energy Companies
FEI was the plaintiff in a B.C. Supreme Court action against the City of Surrey
("Surrey") in which FEI sought the court's determination on the manner in which
costs related to the relocation of a natural gas transmission pipeline would be
shared between the Company and Surrey. The relocation was required due to the
development and expansion of Surrey's transportation infrastructure. FEI claimed
that the parties had an agreement that dealt with the allocation of costs.
Surrey advanced counterclaims, including an allegation that FEI breached the
agreement and that Surrey suffered damages as a result. In December 2013 the
court issued a decision ordering FEI and Surrey to share equally the cost of the
pipeline relocation. The court also decided that Surrey was successful in its
counterclaim that FEI breached the agreement. The amount of damages that may be
awarded to Surrey at a subsequent hearing cannot be reasonably determined and
estimated at this time and, accordingly, no amount has been accrued in the
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 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. 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 consolidated financial statements.
The Government of British Columbia filed a claim in the B.C. 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 include 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 Company 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 consolidated financial
statements.
Central Hudson
Former Manufactured Gas Plant ("MGP") Facilities
Central Hudson and its predecessors owned and operated MGPs to serve their
customers' heating and lighting needs. These plants manufactured gas from coal
and oil beginning in the mid- to late 1800s with all sites ceasing operations by
the 1950s. This process produced certain by-products that may pose risks to
human health and the environment.
The New York State Department of Environmental Conservation ("DEC"), which
regulates the timing and extent of remediation of MGP sites in New York State,
has notified Central Hudson that it believes the Company or its predecessors at
one time owned and/or operated MGPs at seven sites in Central Hudson's franchise
territory. The DEC has further requested that the Company investigate and, if
necessary, remediate these sites under a Consent Order, Voluntary Clean-up
Agreement or Brownfield Clean-up Agreement. Central Hudson accrues for
remediation costs based on the amounts that can be reasonably estimated. As at
June 30, 2014, an obligation of US$105 million was recognized in respect of MGP
remediation and, based upon cost model analysis completed in 2012, it is
estimated, with a 90% confidence level, that total costs to remediate these
sites over the next 30 years will not exceed US$152 million.
Central Hudson has notified its insurers and intends to seek reimbursement from
insurers for remediation, where coverage exists. Further, as authorized by the
PSC, Central Hudson is currently permitted to defer, for future recovery from
customers, differences between actual costs for MGP site investigation and
remediation and the associated rate allowances, with carrying charges to be
accrued on the deferred balances at the authorized pre-tax rate of return.
Eltings Corners
Central Hudson owns and operates a maintenance and warehouse facility. In the
course of Central Hudson's hazardous waste permit renewal process for this
facility, sediment contamination was discovered within the wetland area across
the street from the main property. Based on the investigation work completed by
Central Hudson, the DEC and Central Hudson agreed in late 2013 that no
additional investigation efforts are necessary. As requested by the DEC, Central
Hudson submitted a draft Corrective Measures Study scoping document for review
by the DEC. The extent of the contamination has been established and
approximately US$3 million has been accrued in the consolidated financial
statements.
Asbestos Litigation
Prior to and after the acquisition of CH Energy Group, various asbestos lawsuits
have been brought against Central Hudson. While a total of 3,344 asbestos cases
have been raised, 1,169 remained pending as at June 30, 2014. Of the cases no
longer pending against Central Hudson, 2,020 have been dismissed or discontinued
without payment by the Company, and Central Hudson has settled the remaining 155
cases. The Company is presently unable to assess the validity of the remaining
asbestos lawsuits; however, based on information known to Central Hudson at this
time, including the Company's experience in the settlement and/or dismissal of
asbestos cases, Central Hudson believes that the costs which may be incurred in
connection with the remaining lawsuits will not have a material effect on its
financial position, results of operations or cash flows and, accordingly, no
amount has been accrued in the consolidated financial statements.
SUMMARY OF QUARTERLY RESULTS
The following table sets forth unaudited quarterly information for each of the
eight quarters ended September 30, 2012 through June 30, 2014. The quarterly
information has been obtained from the Corporation's interim unaudited
consolidated financial statements. These financial results are not necessarily
indicative of results for any future period and should not be relied upon to
predict future performance.
----------------------------------------------------------------------------
Summary of Quarterly Results Net Earnings
(Unaudited) Attributable to
Common Equity
Revenue Shareholders Earnings per Common Share
Quarter Ended ($ millions) ($ millions) Basic ($) Diluted ($)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, 2014 1,056 47 0.22 0.22
March 31, 2014 1,455 143 0.67 0.66
December 31, 2013 1,229 100 0.47 0.47
September 30, 2013 915 48 0.23 0.23
June 30, 2013 790 54 0.28 0.28
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
----------------------------------------------------------------------------
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The summary of the past eight quarters reflects the Corporation's continued
organic growth, growth from acquisitions and associated acquisition-related
expenses, 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.
June 2014/June 2013: Net earnings attributable to common equity shareholders
were $47 million, or $0.22 per common share, for the second quarter of 2014
compared to earnings of $54 million, or $0.28 per common share, for the second
quarter of 2013. A discussion of the quarter over quarter variance in financial
results is provided in the "Financial Highlights" section of this MD&A.
March 2014/March 2013: Net earnings attributable to common equity shareholders
were $143 million, or $0.67 per common share, for the first quarter of 2014
compared to earnings of $151 million, or $0.79 per common share, for the first
quarter of 2013. Earnings for the first quarter of 2014 included $5 million from
discontinued operations associated with Griffith and were reduced by $11 million
in after-tax interest expense associated with the convertible debentures.
Earnings for the first quarter of 2013 included an approximate $22 million
extraordinary gain associated with the Exploits Partnership. Excluding the
above-noted items, earnings for the first quarter of 2014 were favourably
impacted by: (i) contribution of $18 million from Central Hudson; (ii) increased
non-regulated hydroelectric generation in Belize; (iii) regulator-approved
adjustments at Newfoundland Power, which impacted the timing of quarterly
earnings; and (iv) electricity sales growth at the Caribbean Regulated Electric
Utilities. The increases were partially offset by lower earnings at the FortisBC
Energy companies and higher Corporate and Other expenses. The first stage of the
GCOC Proceeding in British Columbia reduced the allowed ROE and common equity
component of capital structure for the benchmark utility, FEI, effective January
1, 2013; however, the impact of this regulatory decision was not recognized
until the second quarter of 2013, when the decision was received.
December 2013/December 2012: Net earnings attributable to common equity
shareholders were $100 million, or $0.47 per common share, for the fourth
quarter of 2013 compared to earnings of $87 million, or $0.46 per common share,
for the fourth quarter of 2012. Results for the fourth quarter of 2013 were
impacted by the acquisition of CH Energy Group, including contribution of $11
million from Central Hudson and a net loss of approximately $2 million at the
non-regulated operations. Earnings for the fourth quarter of 2013 were also
favourably impacted by: (i) increased non-regulated hydroelectric generation in
Belize, partially offset by income tax expenses associated with the Exploits
Partnership; (ii) higher earnings at Caribbean Regulated Electric Utilities,
driven by the capitalization of overhead costs at Fortis Turks and Caicos; (iii)
higher earnings at the FortisBC Energy companies and FortisBC Electric, mainly
due to lower-than-expected finance charges and rate base growth, partially
offset by decreases in the allowed ROEs for each of the utilities and the common
equity component of capital structure at FEI; and (iv) a gain on the sale of
land at Newfoundland Power. The increase was partially offset by lower earnings
at FortisAlberta and Other Canadian Electric Utilities. The timing of
depreciation and certain operating expenses, and lower net transmission revenue
at FortisAlberta were partially offset by rate base growth and growth in the
number of customers. At Other Canadian Electric Utilities, the decrease was
primarily due to the impact of the cumulative return adjustment on smart meter
investments at FortisOntario in 2012. Corporate and Other expenses were
comparable quarter over quarter.
September 2013/September 2012: Net earnings attributable to common equity
shareholders were $48 million, or $0.23 per common share, for the third quarter
of 2013 compared to earnings of $45 million, or $0.24 per common share, for the
third quarter of 2012. Results for the third quarter of 2013 were impacted by
the acquisition of CH Energy Group. Central Hudson contributed $12 million to
earnings for the third quarter of 2013 and Griffith incurred a net loss of
approximately $2.5 million. Due to the common share offering and financing costs
associated with the acquisition, earnings per common share for the third quarter
of 2013 were not materially impacted by the acquisition of CH Energy Group.
Earnings for the third quarter of 2013 were favourably impacted by increased
non-regulated hydroelectric generation in Belize, due to higher rainfall, and
lower Corporate expenses. Lower Corporate expenses were primarily due to a
higher income tax recovery, resulting from the release of income tax provisions
in the third quarter of 2013 and the recognition of income tax expense
associated with Part VI.1 tax in the third quarter of 2012, and a lower foreign
exchange loss, partially offset by higher preference share dividends and
redemption costs. The increase in earnings was partially offset by lower
contribution from the FortisBC Energy companies, FortisBC Electric,
FortisAlberta and Newfoundland Power. At the FortisBC Energy companies, lower
earnings were primarily due to higher operating and maintenance expenses, and
decreases in the allowed ROE and the common equity component of the capital
structure as a result of the regulatory decision related to the first stage of
the GCOC Proceeding in British Columbia, partially offset by rate base growth.
Decreased earnings at FortisBC Electric were mainly due to a decrease in the
interim allowed ROE as a result of the regulatory decision related to the first
stage of the GCOC Proceeding in British Columbia, lower pole-attachment revenue
and higher effective income taxes, partially offset by rate base growth and
lower-than-expected finance charges. At FortisAlberta, lower net transmission
revenue and $1 million of costs related to flooding in southern Alberta in June
2013 were largely offset by rate base growth, customer growth and timing of
operating expenses. Decreased earnings at Newfoundland Power due to the reversal
of statute-barred Part VI.1 tax in the third quarter of 2012 were partially
offset by rate base growth and lower storm-related costs.
OUTLOOK
Fortis is focused on closing the UNS Energy acquisition by the end of August
2014. The acquisition is consistent with the Corporation's strategy of investing
in high-quality regulated utility assets in Canada and the United States and is
expected to be accretive to earnings per common share of Fortis in the first
full year after closing, excluding one-time acquisition-related costs. The
acquisition lessens the business risk for Fortis by enhancing the geographic
diversification of the Corporation's regulated assets, resulting in no more than
one-third of total assets being located in any one regulatory jurisdiction.
At the time of closing the acquisition of UNS Energy, the Corporation's
consolidated rate base is expected to increase by approximately US$3 billion,
and Fortis utilities will serve more than 3,000,000 electricity and gas
customers.
Following the closing of the acquisition of UNS Energy, total assets of Fortis
will increase by approximately one-third to approach $25 billion. Regulated
utilities in the United States will represent approximately one-third of total
assets, and regulated utilities and non-regulated hydroelectric generation
assets will comprise approximately 97% of the Corporation's total assets.
Over the five-year period 2014 through 2018, the Corporation's capital program
is expected to exceed $6.5 billion. Additionally, UNS Energy has forecast that
its capital program for 2015 through 2018 will be approximately $1.5 billion
(US$1.4 billion).
The investment in energy infrastructure to serve the Corporation's customers is
expected to grow by an average annual rate of 7% over the next five years.
Earnings contributions from the UNS Energy and Central Hudson acquisitions,
combined with our capital program, including the completion of the Waneta
Expansion in 2015 and the Tilbury LNG facility expansion in 2016, should support
earnings per common share growth in 2015 and beyond.
OUTSTANDING SHARE DATA
As at July 31, 2014, the Corporation had issued and outstanding approximately
215.4 million common shares; 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; 10.0 million First Preference Shares, Series K; and
1.8 million Installment 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 E and convertible debentures
represented by installment receipts were converted as at July 31, 2014 is as
follows.
----------------------------------------------------------------------------
Conversion of Securities into Common Shares (Unaudited)
As at July 31, 2014 Number of
Common Shares
Security (millions)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Stock Options 5.5
First Preference Shares, Series E 6.3
Convertible Debentures Represented by Installment Receipts 58.6
----------------------------------------------------------------------------
Total 70.4
----------------------------------------------------------------------------
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Additional information, including the Fortis 2013 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 and six months ended June 30, 2014 and 2013
(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)
December
June 30, 31,
2014 2013
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 612 $ 72
Accounts receivable 628 732
Prepaid expenses 32 45
Inventories 127 143
Regulatory assets (Note 4) 147 150
Assets held for sale (Note 12) - 112
Deferred income taxes 30 42
------------------------
1,576 1,296
Other assets 290 246
Regulatory assets (Note 4) 1,775 1,672
Deferred income taxes 23 7
Utility capital assets 11,852 11,618
Non-utility capital assets 656 649
Intangible assets 340 345
Goodwill 2,074 2,075
------------------------
$ 18,586 $ 17,908
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings (Note 19) $ 100 $ 160
Accounts payable and other current liabilities 901 957
Regulatory liabilities (Note 4) 155 140
Convertible debentures represented by installment
receipts (Note 5) 599 -
Current installments of long-term debt 714 780
Current installments of capital lease and finance
obligations 7 7
Liabilities associated with assets held for sale
(Note 12) - 32
Deferred income taxes 8 8
------------------------
2,484 2,084
Other liabilities 678 627
Regulatory liabilities (Note 4) 960 902
Deferred income taxes 1,088 1,078
Long-term debt 6,443 6,424
Capital lease and finance obligations 415 417
------------------------
12,068 11,532
------------------------
Shareholders' equity
Common shares (1)(Note 6) 3,849 3,783
Preference shares 1,229 1,229
Additional paid-in capital 17 17
Accumulated other comprehensive loss (69) (72)
Retained earnings 1,097 1,044
------------------------
6,123 6,001
Non-controlling interests 395 375
------------------------
6,518 6,376
------------------------
$ 18,586 $ 17,908
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(1) No par value. Unlimited authorized shares; 215.3 million and 213.2
million issued and outstanding as at June 30, 2014 and December 31,
2013, respectively
Commitments and Contingencies (Notes 20 and 22, respectively)
See accompanying Notes to Interim Consolidated Financial Statements
Fortis Inc.
Consolidated Statements of Earnings (Unaudited)
For the periods ended June 30
(in millions of Canadian dollars, except per share amounts)
Quarter Ended Six Months Ended
2014 2013 2014 2013
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue $ 1,056 $ 790 $ 2,511 $ 1,903
--------------------------------------------
Expenses
Energy supply costs 403 282 1,082 787
Operating 307 206 626 427
Depreciation and amortization 149 130 297 259
--------------------------------------------
859 618 2,005 1,473
--------------------------------------------
Operating income 197 172 506 430
Other income (expenses), net
(Note 9) (1) (44) 6 (38)
Finance charges (Note 10) 124 92 247 181
--------------------------------------------
Earnings before income taxes,
discontinued operations and
extraordinary item 72 36 265 211
Income tax expense (recovery)
(Note 11) 9 (34) 48 (4)
--------------------------------------------
Earnings from continuing
operations 63 70 217 215
Earnings from discontinued
operations net of tax (Note 12) - - 5 -
--------------------------------------------
Earnings before extraordinary
item 63 70 222 215
Extraordinary gain, net of tax
(Note 13) - - - 22
--------------------------------------------
Net earnings $ 63 $ 70 $ 222 $ 237
--------------------------------------------
--------------------------------------------
Net earnings attributable to:
Non-controlling interests $ 3 $ 2 $ 5 $ 4
Preference equity shareholders 13 14 27 28
Common equity shareholders 47 54 190 205
--------------------------------------------
$ 63 $ 70 $ 222 $ 237
--------------------------------------------
--------------------------------------------
Earnings per common share from
continuing operations (Note 14)
Basic $ 0.22 $ 0.28 $ 0.87 $ 0.95
Diluted $ 0.22 $ 0.28 $ 0.86 $ 0.94
Earnings per common share (Note
14)
Basic $ 0.22 $ 0.28 $ 0.89 $ 1.06
Diluted $ 0.22 $ 0.28 $ 0.88 $ 1.05
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See accompanying Notes to Interim Consolidated Financial Statements
Fortis Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
For the periods ended June 30
(in millions of Canadian dollars)
Quarter Ended Six Months Ended
2014 2013 2014 2013
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings $ 63 $ 70 $ 222 $ 237
--------------------------------------------
--------------------------------------------
Other comprehensive (loss)
income
Unrealized foreign currency
translation (losses) gains, net
of hedging activities and tax (28) 5 2 7
Unrealized employee future
benefits gains, net of tax - - 1 1
--------------------------------------------
(28) 5 3 8
--------------------------------------------
Comprehensive income $ 35 $ 75 $ 225 $ 245
--------------------------------------------
--------------------------------------------
Comprehensive income
attributable to:
Non-controlling interests $ 3 $ 2 $ 5 $ 4
Preference equity shareholders 13 14 27 28
Common equity shareholders 19 59 193 213
--------------------------------------------
$ 35 $ 75 $ 225 $ 245
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----------------------------------------------------------------------------
See accompanying Notes to Interim Consolidated Financial Statements
Fortis Inc.
Consolidated Statements of Cash Flows (Unaudited)
For the periods ended June 30
(in millions of Canadian dollars)
Quarter Ended Six Months Ended
2014 2013 2014 2013
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating activities
Net earnings $ 63 $ 70 $ 222 $ 237
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation - capital assets 130 115 260 228
Amortization - intangible
assets 13 11 26 23
Amortization - other 6 4 11 8
Deferred income tax recovery (9) (15) (16) (26)
Accrued employee future
benefits 8 (4) (1) (5)
Equity component of allowance
for funds used during
construction (Note 9) (1) (1) (3) (4)
Other 6 (34) 7 (44)
Change in long-term regulatory
assets and liabilities (37) 4 (7) (2)
Change in non-cash operating
working capital (Note 16) 142 120 87 138
--------------------------------------------
321 270 586 553
--------------------------------------------
Investing activities
Change in other assets and other
liabilities 1 (4) 4 1
Capital expenditures - utility
capital assets (278) (282) (499) (515)
Capital expenditures - non-
utility capital assets (7) (11) (16) (24)
Capital expenditures -
intangible assets (13) (9) (20) (16)
Contributions in aid of
construction 8 20 26 30
Proceeds on disposal and
settlement of assets (Notes 12
and 13) 1 18 107 19
Business acquisitions, net of
cash acquired - (1,000) - (1,055)
--------------------------------------------
(288) (1,268) (398) (1,560)
--------------------------------------------
Financing activities
Change in short-term borrowings 37 (30) (61) (78)
Proceeds from convertible
debentures represented by
installment receipts, net of
issue costs (Note 5) - - 561 -
Proceeds from long-term debt,
net of issue costs 227 51 260 51
Repayments of long-term debt and
capital lease and finance
obligations (33) (25) (44) (65)
Net (repayments) borrowings
under committed credit
facilities (128) 562 (273) 698
Advances from non-controlling
interests 4 21 17 43
Issue of common shares, net of
costs and dividends reinvested
(Note 6) 12 579 23 589
Dividends
Common shares, net of
dividends reinvested (48) (44) (95) (85)
Preference shares (13) (14) (27) (28)
Subsidiary dividends paid to
non-controlling interests (3) (3) (5) (5)
--------------------------------------------
55 1,097 356 1,120
--------------------------------------------
Effect of exchange rate changes
on cash and cash equivalents (4) - (4) -
--------------------------------------------
Change in cash and cash
equivalents 84 99 540 113
Cash and cash equivalents,
beginning of period 528 168 72 154
--------------------------------------------
Cash and cash equivalents, end
of period $ 612 $ 267 $ 612 $ 267
--------------------------------------------
--------------------------------------------
Supplementary Information to Consolidated Statements of Cash Flows (Note 16)
See accompanying Notes to Interim Consolidated Financial Statements
Fortis Inc.
Consolidated Statements of Changes in Equity (Unaudited)
For the periods ended June 30
(in millions of Canadian dollars)
Accumulated
Additional Other
Common Preference Paid-in Comprehensive
Shares Shares Capital Loss
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Note 6)
As at January 1, 2014 $ 3,783 $ 1,229 $ 17 $ (72)
Net earnings - - - -
Other comprehensive income - - - 3
Common share issues 66 - (2) -
Stock-based compensation - - 2 -
Advances from non-
controlling interests - - - -
Foreign currency translation
impacts - - - -
Subsidiary dividends paid to
non-controlling interests - - - -
Dividends declared on common
shares ($0.64 per share) - - - -
Dividends declared on
preference shares - - - -
------------------------------------------------
As at June 30, 2014 $ 3,849 $ 1,229 $ 17 $ (69)
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As at January 1, 2013 $ 3,121 $ 1,108 $ 15 $ (96)
Net earnings - - - -
Other comprehensive income - - - 8
Common share issues 618 - (1) -
Stock-based compensation - - 2 -
Advances from non-
controlling interests - - - -
Foreign currency translation
impacts - - - -
Subsidiary dividends paid to
non-controlling interests - - - -
Dividends declared on common
shares ($0.62 per share) - - - -
Dividends declared on
preference shares - - - -
------------------------------------------------
As at June 30, 2013 $ 3,739 $ 1,108 $ 16 $ (88)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-
Retained Controlling Total
Earnings Interests Equity
-------------------------------------------------------------
-------------------------------------------------------------
As at January 1, 2014 $ 1,044 $ 375 $ 6,376
Net earnings 217 5 222
Other comprehensive income - - 3
Common share issues - - 64
Stock-based compensation - - 2
Advances from non-
controlling interests - 17 17
Foreign currency translation
impacts - 3 3
Subsidiary dividends paid to
non-controlling interests - (5) (5)
Dividends declared on common
shares ($0.64 per share) (137) - (137)
Dividends declared on
preference shares (27) - (27)
---------------------------------
As at June 30, 2014 $ 1,097 $ 395 $ 6,518
-------------------------------------------------------------
-------------------------------------------------------------
As at January 1, 2013 $ 952 $ 310 $ 5,410
Net earnings 233 4 237
Other comprehensive income - - 8
Common share issues - - 617
Stock-based compensation - - 2
Advances from non-
controlling interests - 43 43
Foreign currency translation
impacts - 4 4
Subsidiary dividends paid to
non-controlling interests - (5) (5)
Dividends declared on common
shares ($0.62 per share) (125) - (125)
Dividends declared on
preference shares (28) - (28)
---------------------------------
As at June 30, 2013 $ 1,032 $ 356 $ 6,163
-------------------------------------------------------------
-------------------------------------------------------------
See accompanying Notes to Interim Consolidated Financial Statements
FORTIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended June 30, 2014 and 2013 (unless otherwise
stated)
(Unaudited)
1. DESCRIPTION OF THE BUSINESS
NATURE OF OPERATIONS
Fortis Inc. ("Fortis" or the "Corporation") is principally an international
electric and gas 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 and non-utility assets, 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 with substantial autonomy, 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 2013
annual audited consolidated financial statements.
REGULATED UTILITIES
The Corporation's interests in regulated gas and electric utilities are as follows:
a. Regulated Gas Utilities - Canadian: Includes the FortisBC Energy
companies, primarily comprised of FortisBC Energy Inc. ("FEI"), FortisBC
Energy (Vancouver Island) Inc. and FortisBC Energy (Whistler) Inc.
b. Regulated Gas & Electric Utility - United States: Includes Central
Hudson Gas & Electric Corporation ("Central Hudson"), which was acquired
by Fortis as part of the acquisition of CH Energy Group, Inc. ("CH
Energy Group") in June 2013.
c. Regulated Electric Utilities - Canadian: Comprised of FortisAlberta,
FortisBC Electric, Newfoundland Power, and Other Canadian Electric
Utilities (Maritime Electric and FortisOntario). FortisOntario mainly
includes Canadian Niagara Power Inc., Cornwall Street Railway, Light and
Power Company, Limited and Algoma Power Inc.
d. Regulated Electric Utilities - Caribbean: Comprised of Caribbean
Utilities, in which Fortis holds an approximate 60% controlling
interest, and two wholly owned utilities in the Turks and Caicos
Islands, FortisTCI Limited and Turks and Caicos Utilities Limited
(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.
NON-REGULATED - NON-UTILITY
a. 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.
b. Griffith: Comprised primarily of Griffith Energy Services, Inc.
("Griffith"), which supplies petroleum products and related services in
the Mid-Atlantic Region of the United States. Griffith was acquired by
Fortis as part of the acquisition of CH Energy Group in June 2013 and
was sold in March 2014 (Note 12).
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 net corporate expenses of Fortis, and
non-regulated FortisBC Holdings Inc. ("FHI") and CH Energy Group. Also included
in the Corporate and Other segment are the financial results of FortisBC
Alternative Energy Services Inc. ("FAES"). FAES is a wholly owned subsidiary of
FHI that provides alternative energy solutions, including thermal-energy and
geo-exchange systems.
PENDING ACQUISITION
In December 2013 Fortis entered into an agreement and plan of merger to acquire
UNS Energy Corporation ("UNS Energy") (NYSE:UNS) for US$60.25 per common share
in cash, representing an aggregate purchase price of approximately US$4.3
billion, including the assumption of approximately US$1.8 billion of debt on
closing. UNS Energy is a vertically integrated utility services holding company,
headquartered in Tucson, Arizona, engaged through three subsidiaries in the
regulated electric generation and energy delivery business, primarily in the
State of Arizona, serving approximately 657,000 electricity and gas customers.
The closing of the acquisition remains subject to approval by the Arizona
Corporation Commission and the satisfaction of customary closing conditions
(Notes 5 and 22). In March 2014 UNS Energy common shareholders approved the
acquisition of UNS Energy by Fortis and in April 2014 the U.S. Federal Energy
Regulatory Commission ("FERC") approved the transaction. The transaction review
by the Committee on Foreign Investment in the United States was completed in May
2014 and in June 2014 early termination of the waiting period under
Hart-Scott-Rodino Act was received.
In May 2014 the Corporation, UNS Energy, ACC Staff, the Residential Utility
Consumer Office and other parties entered into a settlement agreement in which
the parties agree that the merger is in the public interest and recommend
approval by the ACC, subject to certain conditions. The settlement agreement is
subject to review and approval by the ACC, which could approve, reject or
require modifications to the settlement agreement as a condition of approval of
the merger. In June 2014 a hearing was held before an ACC Administrative Law
Judge ("ALJ"). On July 29, 2014, the ALJ issued an opinion and order
recommending approval of the acquisition, as conditioned by the settlement
agreement. Consideration of this recommended order has tentatively been
scheduled for the ACC's open meeting to be held on August 12-13, 2014. The
recommended order will be considered by the ACC in determining whether to
approve the acquisition. If the transaction is approved by the ACC at this
meeting, the acquisition is expected to close by the end of August 2014.
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 2013 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 regulated utilities operate often
require amounts to be recognized at estimated values until these amounts are
finalized pursuant to regulatory decisions or other regulatory proceedings. 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. In the event that a regulatory decision is received after the balance
sheet date but before the consolidated financial statements are issued, the
facts and circumstances are reviewed to determine whether or not it is a
recognized subsequent event.
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 and six months
ended June 30, 2014.
An evaluation of subsequent events through to July 31, 2014, 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 June 30, 2014.
All amounts are presented in Canadian dollars unless otherwise stated.
These interim consolidated financial statements are comprised of 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
2013 annual audited consolidated financial statements, except as described
below.
Effective January 1, 2014, as applied for in its Multi-Year Performance-Based
Ratemaking Plan for 2014 through 2018, FEI began depreciating utility capital
assets and amortizing intangible assets the year after the assets are available
for use. Prior to January 1, 2014, depreciation and amortization commenced the
month after the assets were available for use.
New Accounting Policies
Obligations Resulting from Joint and Several Liability Arrangements
Effective January 1, 2014, the Corporation adopted Accounting Standards Update
("ASU") No. 2013-04 Obligations Resulting from Joint and Several Liability
Arrangements for Which the Total Amount of the Obligation is Fixed at the
Reporting Date. The above-noted ASU was applied retrospectively and did not
materially impact the Corporation's interim consolidated financial statements
for the three and six months ended June 30, 2014.
Parent's Accounting for the Cumulative Translation Adjustment
Effective January 1, 2014, the Corporation adopted the amendments to Accounting
Standards Codification ("ASC") Topic 830, Foreign Currency Matters - Parent's
Accounting for the Cumulative Translation Adjustment upon Derecognition of
Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an
Investment in a Foreign Entity, as outlined in ASU No. 2013-05. The amendments
were applied by the Corporation prospectively and did not materially impact the
Corporation's interim consolidated financial statements for the three and six
months ended June 30, 2014.
Presentation of an Unrecognized Tax Benefit
Effective January 1, 2014, the Corporation adopted the amendments to ASC Topic
740, Income Taxes - Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward
Exists, as outlined in ASU No. 2013-11. The amendments were applied by the
Corporation prospectively and did not materially impact the Corporation's
interim consolidated financial statements for the three and six months ended
June 30, 2014.
3. FUTURE ACCOUNTING PRONOUNCEMENTS
Reporting Discontinued Operations and Disclosures of Disposals of Components of
an Entity
In April 2014 the Financial Accounting Standards Board ("FASB") issued ASU No.
2014-08, Reporting Discontinued Operations and Disclosures of Disposals of
Components of an Entity. The amendments in this update change the requirements
for reporting discontinued operations and require additional disclosures about
discontinued operations. This update is effective for annual and interim periods
beginning on or after December 15, 2014 and is to be applied prospectively.
Fortis does not expect that the adoption of this update will have a material
impact on its consolidated financial statements.
Revenue from Contracts with Customers
In May 2014 FASB issued ASU No. 2014-09, Revenue from Contracts with Customers.
The amendments in this update create ASC Topic 606, Revenue from Contracts with
Customers, and supersede the revenue recognition requirements in ASC Topic 605,
Revenue Recognition, including most industry-specific revenue recognition
guidance throughout the codification. This standard completes a joint effort by
FASB and the International Accounting Standards Board to improve financial
reporting by creating common revenue recognition guidance for US GAAP and
International Financial Reporting Standards that clarifies the principles for
recognizing revenue and that can be applied consistently across various
transactions, industries and capital markets. This standard is effective for
annual and interim periods beginning on or after December 15, 2016 and is to be
applied on a full retrospective or modified retrospective basis. Early adoption
is not permitted. Fortis is assessing the impact that the adoption of this
standard will have on its consolidated financial statements.
Accounting for Share-Based Payments When the Terms of an Award Provide That a
Performance Target Could Be Achieved after the Requisite Service Period
In June 2014 FASB issued ASU No. 2014-12, Accounting for Share-Based Payments
When the Terms of an Award Provide That a Performance Target Could Be Achieved
after the Requisite Service Period. The amendments in this update are intended
to resolve diversity in practice for employee share-based payments with
performance targets that can entitle an employee to benefit from an award
regardless of if they are rendering services at the date of the performance
target is achieved. This update is effective for annual and interim periods
beginning on or after December 15, 2015 and may be applied prospectively or
retrospectively. Fortis does not expect that the adoption of this update will
have a material impact on its consolidated financial statements.
4. REGULATORY ASSETS AND LIABILITIES
A summary of the Corporation's regulatory assets and liabilities is provided
below. For a detailed description of the nature of the Corporation's regulatory
assets and liabilities, refer to Note 7 to the Corporation's 2013 annual audited
consolidated financial statements.
As at
June 30, December 31,
($ millions) 2014 2013
----------------------------------------------------------------------------
Regulatory assets
Deferred income taxes 869 833
Employee future benefits 407 440
Manufactured gas plant ("MGP") site remediation
deferral (1) 117 47
Rate stabilization accounts 90 85
Deferred energy management costs 82 76
Deferred lease costs 80 76
Deferred operating overhead costs 48 43
Deferred net losses on disposal of utility capital
assets and intangible assets 41 35
Income taxes recoverable on other post-employment
benefit ("OPEB") plans 24 24
Customer Care Enhancement Project cost deferral 19 21
Carrying charges - employee future benefits 16 14
Natural gas for transportation incentives 15 8
Whistler pipeline contribution deferral 13 13
Alternative energy projects cost deferral 13 11
Other regulatory assets 88 96
----------------------------------------------------------------------------
Total regulatory assets 1,922 1,822
Less: current portion (147) (150)
----------------------------------------------------------------------------
Long-term regulatory assets 1,775 1,672
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) In May 2014 remediation investigation was completed at one of Central
Hudson's seven MGP sites, resulting in the recognition of an approximate
$62 million (US$58 million) remediation liability. As authorized by the
regulator, Central Hudson is currently permitted to defer, for future
recovery from customers, differences between actual costs for MGP site
investigation and remediation and the associated rate allowances, which
resulted in a corresponding increase in the MGP site remediation
deferral (Note 22).
As at
June 30, December 31,
($ millions) 2014 2013
----------------------------------------------------------------------------
Regulatory liabilities
Non-asset retirement obligation removal cost
provision 580 563
Rate stabilization accounts 185 177
Alberta Electric System Operator charges deferral 98 73
Employee future benefits 57 55
Deferred income taxes 51 45
Customer and community benefits obligation 24 23
Carrying charges - employee future benefits 19 16
Meter reading and customer service variance
deferral 16 17
Rate base impact of tax repair project 14 13
Other regulatory liabilities 71 60
----------------------------------------------------------------------------
Total regulatory liabilities 1,115 1,042
Less: current portion (155) (140)
----------------------------------------------------------------------------
Long-term regulatory liabilities 960 902
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. CONVERTIBLE DEBENTURES REPRESENTED BY INSTALLMENT RECEIPTS
To finance a portion of the pending acquisition of UNS Energy, in January 2014,
Fortis, through a direct wholly owned subsidiary, completed the sale of $1.8
billion aggregate principal amount of 4% convertible unsecured subordinated
debentures, represented by Installment Receipts (the "Debentures").
The offering of the Debentures consisted of a bought deal placement of $1.594
billion aggregate principal amount of Debentures underwritten by a syndicate of
underwriters and the sale of $206 million aggregate principal amount of
Debentures to certain institutional investors on a private placement basis (the
"Offerings").
The Debentures were sold on an installment basis at a price of $1,000 per
Debenture, of which $333 was paid on closing of the Offerings and the remaining
$667 is payable on a date ("Final Installment Date") to be fixed not less than
15 days nor more than 90 days following satisfaction of conditions precedent to
the closing of the acquisition of UNS Energy. Prior to the Final Installment
Date, the Debentures are represented by Installment Receipts. The Installment
Receipts began trading on the Toronto Stock Exchange ("TSX") on January 9, 2014
under the symbol "FTS.IR". The Debentures will not be listed. The Debentures
will mature on January 9, 2024 and bear interest at an annual rate of 4% per
$1,000 principal amount of Debentures until and including the Final Installment
Date, after which the interest rate will be zero.
If the Final Installment Date occurs prior to the first anniversary of the
closing of the Offerings, holders of Debentures who have paid the final
installment will be entitled to receive, in addition to the payment of accrued
and unpaid interest, an amount equal to the interest that would have accrued
from the day following the Final Installment Date to, but excluding, the first
anniversary of the closing of the Offerings had the Debentures remained
outstanding until such date. Approximately $18 million ($13 million after tax)
and $34 million ($24 million after tax) in interest expense associated with the
Debentures was recognized in the second quarter and first half of 2014,
respectively. A total of approximately $72 million ($51 million after tax) in
interest expense associated with the Debentures is expected to be incurred in
2014 (Notes 10 and 20).
At the option of the holders and provided that payment of the final installment
has been made, each Debenture will be convertible into common shares of Fortis
at any time after the Final Installment Date but prior to maturity or redemption
by the Corporation at a conversion price of $30.72 per common share, being a
conversion rate of 32.5521 common shares per $1,000 principal amount of
Debentures (Note 14).
The Debentures will not be redeemable, except that Fortis will redeem the
Debentures at a price equal to their principal amount plus accrued and unpaid
interest following the earlier of: (i) notification to holders that the
conditions necessary to approve the acquisition of UNS Energy will not be
satisfied; (ii) termination of the acquisition agreement; and (iii) July 2,
2015, if notice of the Final Installment Date has not been given to holders on
or before June 30, 2015. In addition, after the Final Installment Date, any
Debentures not converted may be redeemed by Fortis at a price equal to their
principal amount plus unpaid interest accrued prior to the Final Installment
Date. Under the terms of the Installment Receipt Agreement, Fortis agreed that
until such time as the Debentures have been redeemed in accordance with the
foregoing or the Final Installment Date has occurred, the Corporation will at
all times maintain availability under its committed revolving corporate credit
facility of not less than $600 million to cover the principal amount of the
first installment of the Debentures in the event of a mandatory redemption.
At maturity, Fortis will have the right to pay the principal amount due in
common shares, which will be valued at 95% of the weighted average trading price
on the TSX for the 20 consecutive trading days ending five trading days
preceding the maturity date.
The proceeds of the first installment of the Offerings were approximately $599
million, or $561 million net of issue costs. A significant portion of the net
proceeds is cash on hand, while a portion was used to repay borrowings under the
Corporation's existing revolving credit facility and for other general corporate
purposes, including intercompany loan advances to subsidiaries. The net proceeds
of the final installment payment of the Offerings are expected to be, in
aggregate, approximately $1.165 billion.
6. COMMON SHARES
Common shares issued during the period were as follows:
Quarter Ended Year-to-Date
June 30, 2014 June 30, 2014
Number of Number of
Shares Amount Shares Amount
(in thousands) ($ millions) (in thousands) ($ millions)
----------------------------------------------------------------------------
Balance, beginning
of period 214,279 3,816 213,165 3,783
Dividend
Reinvestment
Plan 660 21 1,391 43
Consumer Share
Purchase Plan 8 - 19 -
Employee Share
Purchase Plan 70 2 243 7
Stock Option
Plans 318 10 517 16
----------------------------------------------------------------------------
Balance, end of
period 215,335 3,849 215,335 3,849
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. STOCK-BASED COMPENSATION PLANS
Stock Options
In February and June 2014, the Corporation granted options to purchase common
shares under the 2012 Stock Option Plan ("2012 Plan") at the five-day volume
weighted average trading price immediately preceding the date of grant. 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 following options were granted in 2014:
June 2014 February 2014
----------------------------------------------------------------------------
Options granted (#) 23,584 925,172
Exercise price ($) 32.23 30.73
Grant date fair value ($) 2.69 3.53
----------------------------------------------------------------------------
The fair value was estimated at the date of grant using the Black-Scholes fair
value option-pricing model and the following assumptions:
June 2014 February 2014
----------------------------------------------------------------------------
Dividend yield (%) 3.8 3.8
Expected volatility (%) 15.9 20.3
Risk-free interest rate (%) 1.52 1.69
Weighted average expected life (years) 5.5 5.5
----------------------------------------------------------------------------
Directors' Deferred Share Unit Plan
In January 2014, 7,766 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 and is entitled to accrue notional common share dividends equivalent
to those declared by the Corporation's Board of Directors.
In April 2014, 7,520 DSUs were granted to the Corporation's Board of Directors,
representing the second quarter equity component of the Directors' annual
compensation and, where opted, their second quarter component of annual
retainers in lieu of cash.
Performance Share Unit Plans
The Corporation's Performance Share Unit ("PSU") Plans represent a component of
long-term compensation awarded to senior management of the Corporation and its
subsidiaries. Each PSU represents a unit with an underlying value equivalent to
the value of one common share of the Corporation and is subject to a three-year
vesting period, at which time a cash payment may be made, as determined by the
Human Resources Committee of the Board of Directors. Each PSU is entitled to
accrue notional common share dividends equivalent to those declared by the
Corporation's Board of Directors.
In January and June 2014 155,133 and 23,791 PSUs, respectively, were granted to
senior management of the Corporation and its subsidiaries under the 2013 PSU
Plan.
In March 2014, 33,559 PSUs, representing two-thirds of the vested PSUs, were
paid out to the Chief Executive Officer ("CEO") of the Corporation at $30.67 per
PSU, for a total of approximately $1 million. The payout was made upon the
three-year maturation period in respect of the PSU grant made in March 2011 and
the CEO satisfying two of the three payment requirements, as determined by the
Human Resources Committee of the Board of Directors of Fortis.
In April 2014, 78,536 share units were granted to senior management of a U.S.
subsidiary of the Corporation under a 2014 Share Unit Plan. The 2014 Share Unit
Plan was modelled after the Corporation's 2013 PSU Plan, with differences in the
payment criteria at the end of the three-year vesting period.
For the three and six months ended June 30, 2014, stock-based compensation
expense of approximately $3 million and $5 million, respectively, was recognized
($3 million and $4 million for the three and six months ended June 30, 2013,
respectively).
8. EMPLOYEE FUTURE BENEFITS
The Corporation and its subsidiaries each maintain one or a combination of
defined benefit pension plans and defined contribution pension plans, including
group registered retirement savings plans, for employees. The Corporation and
certain subsidiaries also offer OPEB plans for qualifying employees. The net
benefit cost of providing the defined benefit pension and OPEB plans is detailed
in the following table.
Quarter Ended June 30
Defined Benefit
Pension Plans OPEB Plans
($ millions) 2014 2013 2014 2013
--------------------------------
Components of net benefit cost:
Service costs 9 8 2 2
Interest costs 20 11 6 3
Expected return on plan assets (24) (14) (2) -
Amortization of actuarial losses 8 7 - 1
Amortization of past service credits/plan
amendments - - (3) (1)
Regulatory adjustments 3 (4) 1 1
----------------------------------------------------------------------------
Net benefit cost 16 8 4 6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year-to-Date June 30
Defined Benefit
Pension Plans OPEB Plans
($ millions) 2014 2013 2014 2013
--------------------------------
Components of net benefit cost:
Service costs 19 16 5 4
Interest costs 41 23 10 6
Expected return on plan assets (48) (27) (4) -
Amortization of actuarial losses 15 14 2 3
Amortization of past service credits/plan
amendments - - (5) (2)
Regulatory adjustments 5 (7) 3 1
----------------------------------------------------------------------------
Net benefit cost 32 19 11 12
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three and six months ended June 30, 2014, the Corporation expensed $5
million and $10 million, respectively ($3 million and $7 million for the three
and six months ended June 30, 2013 respectively), related to defined
contribution pension plans.
9. OTHER INCOME (EXPENSES), NET
Quarter Ended Year-to-Date
June 30 June 30
($ millions) 2014 2013 2014 2013
----------------------------------------------------------------------------
Equity component of allowance for funds used
during construction ("AFUDC") 1 1 3 4
Net foreign exchange (loss) gain (4) 3 - 5
Interest income 3 1 7 2
Acquisition-related expenses (2) (8) (4) (8)
Acquisition-related customer and community
benefits - (41) - (41)
Other 1 - - -
----------------------------------------------------------------------------
(1) (44) 6 (38)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The net foreign exchange loss and gain relates 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 19 and 21).
The acquisition-related expenses in 2014 are associated with the pending
acquisition of UNS Energy (Note 1) and the acquisition-related expenses in 2013
were associated with the acquisition of CH Energy Group.
10. FINANCE CHARGES
Quarter Ended Year-to-Date
June 30 June 30
($ millions) 2014 2013 2014 2013
----------------------------------------------------------------------------
Interest:
Long-term debt and capital lease and
finance obligations 109 94 220 188
Convertible debentures represented by
installment receipts (Note 5) 18 - 34 -
Short-term borrowings 3 2 5 4
Debt component of AFUDC (6) (4) (12) (11)
----------------------------------------------------------------------------
124 92 247 181
----------------------------------------------------------------------------
----------------------------------------------------------------------------
11. 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 Year-to-Date
June 30 June 30
($ millions, except as noted) 2014 2013 2014 2013
----------------------------------------------------------------------------
Combined Canadian federal and provincial
statutory income tax rate 29.0% 29.0% 29.0% 29.0%
----------------------------------------------------------------------------
Statutory income tax rate applied to
earnings before income taxes and
extraordinary item 21 10 77 61
Difference between Canadian statutory
income tax rate and rates applicable to
foreign subsidiaries (3) (5) (5) (7)
Difference in Canadian provincial
statutory income tax rates applicable to
subsidiaries in different Canadian
jurisdictions (2) (2) (7) (8)
Items capitalized for accounting purposes
but expensed for income tax purposes (9) (10) (22) (26)
Difference between capital cost allowance
and amounts claimed for accounting
purposes (1) - - (2)
Non-deductible expenses 1 1 2 2
Impacts associated with Part VI.1 tax - (25) - (23)
Release of income tax reserves - (5) - (5)
Difference between employee future
benefits paid and amounts expensed for
accounting purposes 1 - 3 1
Other 1 2 - 3
----------------------------------
Income tax expense (recovery) 9 (34) 48 (4)
----------------------------------------------------------------------------
Effective income tax rate 12.5% (94.4%) 18.1% (1.9%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In June 2013 the Government of Canada enacted changes associated with Part VI.1
tax on the Corporation's preference share dividends. In accordance with US GAAP,
income taxes are required to be recognized based on enacted tax legislation. In
the second quarter of 2013, the Corporation recognized an approximate $25
million income tax recovery due to the enactment of higher deductions associated
with Part VI.1 tax.
In June 2013 a settlement was reached with Canada Revenue Agency resulting in
the release of income tax provisions of approximately $5 million.
As at June 30, 2014, the Corporation had non-capital and capital loss
carryforwards of approximately $148 million (December 31, 2013 - $133 million),
of which $16 million (December 31, 2013 - $12 million) has not been recognized
in the consolidated financial statements. The non-capital loss carryforwards
expire between 2014 and 2034.
12. SALE OF GRIFFITH
In March 2014 Griffith was sold for proceeds of approximately $105 million
(US$95 million). The assets and liabilities of Griffith were classified as held
for sale on the consolidated balance sheet as at December 31, 2013 and the
results of operations to the date of sale are presented as discontinued
operations on the consolidated statements of earnings for the three and six
months ended June 30, 2014.
The table below details the results of discontinued operations.
Year-to-Date
June 30
($ millions) 2014
----------------------------------------------------------------------------
Revenue 95
Earnings from discontinued operations before income taxes 8
Income tax expense (3)
----------------------------------------------------------------------------
Earnings from discontinued operations, net of tax 5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
13. EXTRAORDINARY GAIN, NET OF TAX
In March 2013 the Corporation and the Government of Newfoundland and Labrador
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 the
Exploits River Hydro Partnership, in which Fortis held an indirect 51% interest.
As a result of the settlement, an extraordinary gain of approximately $25
million ($22 million after tax) was recognized in the first quarter of 2013.
14. EARNINGS PER COMMON SHARE
The Corporation calculates earnings per common share ("EPS") on the weighted
average number of common shares outstanding. Diluted EPS is calculated using the
treasury stock method for options and the "if-converted" method for convertible
securities.
EPS was as follows:
Quarter Ended June 30, 2014
---------------------------------------------------------------
Net Earnings to Common Shareholders
---------------------------------------------------
Weighted
Average
Continuing Discontinued Extraordinary Number of
Operations Operations Item Total Shares
($ millions) ($ millions) ($ millions)($ millions) (millions)
----------------------------------------------------------------------------
Basic EPS 47 - - 47 214.8
----------------------------------------------------------------------------
Effect of
potential
dilutive
securities:
Stock
Options - - - - 0.5
Preference
Shares 3 - - 3 6.9
----------------------------------------------------------------------------
50 - - 50 222.2
Deduct anti-
dilutive
impacts
Preference
Shares (3) - - (3) (6.9)
----------------------------------------------------------------------------
Diluted EPS 47 - - 47 215.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter Ended June 30, 2014
---------------------------------------------------
EPS
---------------------------------------------------
Continuing Discontinued Extraordinary
Operations Operations Item Total
----------------------------------------------------------------
Basic EPS $ 0.22 $ - $ - $ 0.22
----------------------------------------------------------------
Effect of
potential
dilutive
securities:
Stock
Options
Preference
Shares
----------------------------------------------------------------
Deduct anti-
dilutive
impacts
Preference
Shares
----------------------------------------------------------------
Diluted EPS $ 0.22 $ - $ - $ 0.22
----------------------------------------------------------------
----------------------------------------------------------------
Quarter Ended June 30, 2013
---------------------------------------------------------------
Net Earnings to Common Shareholders
----------------------------------------------------
Weighted
Average
Continuing Discontinued Extraordinary Number of
Operations Operations Item Total Shares
($ millions) ($ millions) ($ millions)($ millions) (millions)
----------------------------------------------------------------------------
Basic EPS 54 - - 54 193.4
----------------------------------------------------------------------------
Effect of
potential
dilutive
securities:
Stock
Options - - - - 0.7
Preference
Shares 4 - - 4 10.0
----------------------------------------------------------------------------
58 - - 58 204.1
Deduct anti-
dilutive
impacts
Preference
Shares (4) - - (4) (10.0)
----------------------------------------------------------------------------
Diluted EPS 54 - - 54 194.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter Ended June 30, 2013
---------------------------------------------------
EPS
---------------------------------------------------
Continuing Discontinued Extraordinary
Operations Operations Item Total
----------------------------------------------------------------
Basic EPS $ 0.28 $ - $ - $ 0.28
----------------------------------------------------------------
Effect of
potential
dilutive
securities:
Stock
Options
Preference
Shares
----------------------------------------------------------------
Deduct anti-
dilutive
impacts
Preference
Shares
----------------------------------------------------------------
Diluted EPS $ 0.28 $ - $ - $ 0.28
----------------------------------------------------------------
----------------------------------------------------------------
Year-to-Date June 30, 2014
--------------------------------------------------------------
Net Earnings to Common Shareholders
---------------------------------------------------
Weighted
Average
Continuing Discontinued Extraordinary Total Number of
Operations Operations Item ($ Shares
($ millions) ($ millions) ($ millions) millions) (millions)
----------------------------------------------------------------------------
Basic EPS 185 5 - 190 214.2
----------------------------------------------------------------------------
Effect of
potential
dilutive
securities:
Stock
Options - - - - 0.5
Preference
Shares 5 - - 5 6.9
----------------------------------------------------------------------------
Diluted EPS 190 5 - 195 221.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year-to-Date June 30, 2014
---------------------------------------------------
EPS
---------------------------------------------------
Continuing Discontinued Extraordinary
Operations Operations Item Total
-----------------------------------------------------------------
Basic EPS $ 0.87 $ 0.02 $ - $ 0.89
-----------------------------------------------------------------
Effect of
potential
dilutive
securities:
Stock
Options
Preference
Shares
-----------------------------------------------------------------
Diluted EPS $ 0.86 $ 0.02 $ - $ 0.88
-----------------------------------------------------------------
-----------------------------------------------------------------
Year-to-Date June 30, 2013
----------------------------------------------------------------
Net Earnings to Common Shareholders
-----------------------------------------------------
Weighted
Average
Continuing Discontinued Extraordinary Number of
Operations Operations Item Total Shares
($ millions) ($ millions) ($ millions) ($ millions) (millions)
----------------------------------------------------------------------------
Basic EPS 183 - 22 205 192.7
----------------------------------------------------------------------------
Effect of
potential
dilutive
securities:
Stock
Options - - - - 0.7
Preference
Shares 8 - - 8 10.0
----------------------------------------------------------------------------
Diluted EPS 191 - 22 213 203.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year-to-Date June 30, 2013
---------------------------------------------------
EPS
---------------------------------------------------
Continuing Discontinued Extraordinary
Operations Operations Item Total
---------------------------------------------------------------
Basic EPS $ 0.95 $ - $ 0.11 $ 1.06
---------------------------------------------------------------
Effect of
potential
dilutive
securities:
Stock
Options
Preference
Shares
---------------------------------------------------------------
Diluted EPS $ 0.94 $ - $ 0.11 $ 1.05
---------------------------------------------------------------
---------------------------------------------------------------
Following the satisfaction of all conditions precedent to the closing of the
acquisition of UNS Energy, at the option of holders and provided that payment of
the final installment has been made, each Debenture will be convertible into
common shares of Fortis at any time after the Final Installment Date but prior
to maturity or redemption by the Corporation at a conversion price of $30.72 per
common share, being a conversion rate of 32.5521 common shares per $1,000
principal amount of Debentures (Note 5). Accordingly, a total of approximately
58.6 million common shares could be issued and outstanding, which would have an
impact on basic EPS. Alternatively, if holders do not opt to convert the
Debentures into common shares, the Debentures would have an impact on diluted
EPS.
15. SEGMENTED INFORMATION
Information by reportable segment is as follows:
REGULATED UTILITIES
--------------------------------------------------------------
Gas &
GasElectric Electric
--------------------------------------------------------------
Total
FortisBC New- Elec- Elec-
Quarter Ended Energy Central found- Other tric tric
June 30, 2014 Cana- Hudson Fortis FortisBC land Cana- Cana- Carib-
($ millions) dian US Alberta Electric Power dian dian bean
----------------------------------------------------------------------------
Revenue 282 190 129 71 145 87 432 78
Energy supply
costs 119 79 - 17 87 56 160 46
Operating
expenses 67 80 42 21 22 13 98 10
Depreciation
and
amortization 46 12 41 14 13 6 74 9
----------------------------------------------------------------------------
Operating
income 50 19 46 19 23 12 100 13
Other income
(expenses),
net 1 1 - - 1 - 1 1
Finance
charges 35 8 20 9 10 5 44 4
Income tax
expense
(recovery) 3 5 - 3 3 2 8 -
----------------------------------------------------------------------------
Net earnings
(loss) 13 7 26 7 11 5 49 10
Non-
controlling
interests 1 - - - - - - 2
Preference
share
dividends - - - - - - - -
----------------------------------------------------------------------------
Net earnings
(loss)
attributable
to common
equity
shareholders 12 7 26 7 11 5 49 8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill 913 481 227 235 - 67 529 151
Identifiable
assets 4,600 1,910 3,135 1,761 1,396 696 6,988 707
----------------------------------------------------------------------------
Total assets 5,513 2,391 3,362 1,996 1,396 763 7,517 858
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross capital
expenditures 76 28 83 20 26 12 141 15
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter Ended
June 30, 2013
($ millions)
----------------------------------------------------------------------------
Revenue 246 - 117 68 132 87 404 70
Energy supply
costs 90 - - 14 80 56 150 43
Operating
expenses 65 - 38 22 16 12 88 8
Depreciation
and
amortization 46 - 36 12 13 7 68 9
----------------------------------------------------------------------------
Operating
income 45 - 43 20 23 12 98 10
Other income
(expenses),
net - - - 1 - - 1 1
Finance
charges 36 - 18 10 9 5 42 3
Income tax
expense
(recovery) 3 - - 3 (10) (2) (9) -
----------------------------------------------------------------------------
Net earnings
(loss) 6 - 25 8 24 9 66 8
Non-
controlling
interests - - - - - - - 2
Preference
share
dividends - - - - - - - -
----------------------------------------------------------------------------
Net earnings
(loss)
attributable
to common
equity
shareholders 6 - 25 8 24 9 66 6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill 913 486 227 235 - 67 529 149
Identifiable
assets 4,528 1,763 2,927 1,748 1,394 691 6,760 680
----------------------------------------------------------------------------
Total assets 5,441 2,249 3,154 1,983 1,394 758 7,289 829
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross capital
expenditures 58 - 135 16 23 15 189 13
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NON-REGULATED
-----------------------------------
Quarter Ended Inter-
June 30, 2014 Fortis Non- Corporate segment
($ millions) Generation Utility and Other eliminations Total
-------------------------------------------------------------------------
Revenue 11 65 8 (10) 1,056
Energy supply
costs - - - (1) 403
Operating
expenses 2 43 9 (2) 307
Depreciation
and
amortization 2 5 1 - 149
-------------------------------------------------------------------------
Operating
income 7 17 (2) (7) 197
Other income
(expenses),
net (1) - (3) (1) (1)
Finance
charges - 6 35 (8) 124
Income tax
expense
(recovery) - 4 (11) - 9
-------------------------------------------------------------------------
Net earnings
(loss) 6 7 (29) - 63
Non-
controlling
interests - - - - 3
Preference
share
dividends - - 13 - 13
-------------------------------------------------------------------------
Net earnings
(loss)
attributable
to common
equity
shareholders 6 7 (42) - 47
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill - - - - 2,074
Identifiable
assets 903 684 1,356 (636) 16,512
-------------------------------------------------------------------------
Total assets 903 684 1,356 (636) 18,586
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross capital
expenditures 31 7 - - 298
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarter Ended
June 30, 2013
($ millions)
-------------------------------------------------------------------------
Revenue 7 65 7 (9) 790
Energy supply
costs - - - (1) 282
Operating
expenses 2 42 3 (2) 206
Depreciation
and
amortization 1 6 - - 130
-------------------------------------------------------------------------
Operating
income 4 17 4 (6) 172
Other income
(expenses),
net - - (46) - (44)
Finance
charges - 6 11 (6) 92
Income tax
expense
(recovery) - 3 (31) - (34)
-------------------------------------------------------------------------
Net earnings
(loss) 4 8 (22) - 70
Non-
controlling
interests - - - - 2
Preference
share
dividends - - 14 - 14
-------------------------------------------------------------------------
Net earnings
(loss)
attributable
to common
equity
shareholders 4 8 (36) - 54
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill - - - - 2,077
Identifiable
assets 832 808 643 (458) 15,556
-------------------------------------------------------------------------
Total assets 832 808 643 (458) 17,633
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross capital
expenditures 31 11 - - 302
-------------------------------------------------------------------------
-------------------------------------------------------------------------
REGULATED UTILITIES
--------------------------------------------------------------
Gas &
GasElectric Electric
--------------------------------------------------------------
Total
FortisBC New- Elec- Elec-
Year-to-Date Energy Central found- Other tric tric
June 30, 2014 Cana- Hudson Fortis FortisBC land Cana- Cana- Carib-
($ millions) dian US Alberta Electric Power dian dian bean
----------------------------------------------------------------------------
Revenue 795 462 255 166 354 190 965 152
Energy supply
costs 370 216 - 44 236 125 405 91
Operating
expenses 138 169 85 43 47 26 201 19
Depreciation
and
amortization 92 23 82 28 26 13 149 18
----------------------------------------------------------------------------
Operating
income 195 54 88 51 45 26 210 24
Other income
(expenses),
net 2 3 2 - 1 - 3 1
Finance
charges 70 17 39 19 19 10 87 8
Income tax
expense
(recovery) 35 15 - 7 6 4 17 -
----------------------------------------------------------------------------
Net earnings
(loss) from
continuing
operations 92 25 51 25 21 12 109 17
Earnings from
discontinued
operations,
net of tax - - - - - - - -
----------------------------------------------------------------------------
Net earnings
(loss) 92 25 51 25 21 12 109 17
Non-
controlling
interests 1 - - - - - - 4
Preference
share
dividends - - - - - - - -
----------------------------------------------------------------------------
Net earnings
(loss)
attributable
to common
equity
shareholders 91 25 51 25 21 12 109 13
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill 913 481 227 235 - 67 529 151
Identifiable
assets 4,600 1,910 3,135 1,761 1,396 696 6,988 707
----------------------------------------------------------------------------
Total assets 5,513 2,391 3,362 1,996 1,396 763 7,517 858
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross capital
expenditures 127 49 162 35 44 19 260 28
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year-to-Date
June 30, 2013
($ millions)
----------------------------------------------------------------------------
Revenue 738 - 235 156 329 183 903 136
Energy supply
costs 322 - - 39 225 118 382 84
Operating
expenses 137 - 78 42 39 25 184 16
Depreciation
and
amortization 92 - 72 25 25 14 136 17
----------------------------------------------------------------------------
Operating
income 187 - 85 50 40 26 201 19
Other income
(expenses),
net 1 - 2 1 1 - 4 1
Finance
charges 71 - 35 19 18 10 82 7
Income tax
expense
(recovery) 26 - 1 6 (8) 1 - -
----------------------------------------------------------------------------
Net earnings
(loss) from
continuing
operations 91 - 51 26 31 15 123 13
Extraordinary
gain, net of
tax - - - - - - - -
----------------------------------------------------------------------------
Net earnings
(loss) 91 - 51 26 31 15 123 13
Non-
controlling
interests - - - - - - - 4
Preference
share
dividends - - - - - - - -
----------------------------------------------------------------------------
Net earnings
(loss)
attributable
to common
equity
shareholders 91 - 51 26 31 15 123 9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill 913 486 227 235 - 67 529 149
Identifiable
assets 4,528 1,763 2,927 1,748 1,394 691 6,760 680
----------------------------------------------------------------------------
Total assets 5,441 2,249 3,154 1,983 1,394 758 7,289 829
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross capital
expenditures 99 - 230 33 38 28 329 24
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NON-REGULATED
-----------------------------------
Year-to-Date Inter-
June 30, 2014 Fortis Non- Corporate segment
($ millions) Generation Utility and Other eliminations Total
-------------------------------------------------------------------------
Revenue 22 119 15 (19) 2,511
Energy supply
costs 1 - - (1) 1,082
Operating
expenses 4 85 14 (4) 626
Depreciation
and
amortization 3 11 1 - 297
-------------------------------------------------------------------------
Operating
income 14 23 - (14) 506
Other income
(expenses),
net (1) - (1) (1) 6
Finance
charges - 12 68 (15) 247
Income tax
expense
(recovery) 1 4 (24) - 48
-------------------------------------------------------------------------
Net earnings
(loss) from
continuing
operations 12 7 (45) - 217
Earnings from
discontinued
operations,
net of tax - 5 - - 5
-------------------------------------------------------------------------
Net earnings
(loss) 12 12 (45) - 222
Non-
controlling
interests - - - - 5
Preference
share
dividends - - 27 - 27
-------------------------------------------------------------------------
Net earnings
(loss)
attributable
to common
equity
shareholders 12 12 (72) - 190
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill - - - - 2,074
Identifiable
assets 903 684 1,356 (636) 16,512
-------------------------------------------------------------------------
Total assets 903 684 1,356 (636) 18,586
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross capital
expenditures 55 16 - - 535
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year-to-Date
June 30, 2013
($ millions)
-------------------------------------------------------------------------
Revenue 12 118 13 (17) 1,903
Energy supply
costs - - - (1) 787
Operating
expenses 5 83 6 (4) 427
Depreciation
and
amortization 2 11 1 - 259
-------------------------------------------------------------------------
Operating
income 5 24 6 (12) 430
Other income
(expenses),
net - - (44) - (38)
Finance
charges - 12 21 (12) 181
Income tax
expense
(recovery) - 3 (33) - (4)
-------------------------------------------------------------------------
Net earnings
(loss) from
continuing
operations 5 9 (26) - 215
Extraordinary
gain, net of
tax 22 - - - 22
-------------------------------------------------------------------------
Net earnings
(loss) 27 9 (26) - 237
Non-
controlling
interests - - - - 4
Preference
share
dividends - - 28 - 28
-------------------------------------------------------------------------
Net earnings
(loss)
attributable
to common
equity
shareholders 27 9 (54) - 205
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill - - - - 2,077
Identifiable
assets 832 808 643 (458) 15,556
-------------------------------------------------------------------------
Total assets 832 808 643 (458) 17,633
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross capital
expenditures 79 24 - - 555
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 for the three and six months ended June 30, 2014 and
2013 were as follows:
Significant Related Party Inter-Segment
Transactions Quarter Ended Year-to-Date
June 30 June 30
($ millions) 2014 2013 2014 2013
----------------------------------------------------------------------------
Sales from Fortis Generation to
Other Canadian Electric Utilities 1 1 1 1
Sales from Newfoundland Power to Non-Utility 1 1 3 3
Inter-segment finance charges on lending from:
Corporate to Regulated Electric Utilities -
Canadian 1 - 1 -
Corporate to Regulated Electric Utilities -
Caribbean 2 1 3 2
Corporate to Non-Utility 5 4 10 9
----------------------------------------------------------------------------
The significant related party inter-segment asset balances were as follows:
As at
June 30
($ millions) 2014 2013
----------------------------------------------------------------------------
Inter-segment lending from:
Fortis Generation to Other Canadian Electric
Utilities 20 20
Corporate to Regulated Gas Utilities -
Canadian 37 -
Corporate to Regulated Electric Utilities -
Canadian 85 -
Corporate to Regulated Electric Utilities -
Caribbean 96 85
Corporate to Fortis Generation - 6
Corporate to Non-Utility 387 325
Other inter-segment assets 11 22
----------------------------------------------------------------------------
Total inter-segment eliminations 636 458
----------------------------------------------------------------------------
----------------------------------------------------------------------------
16. SUPPLEMENTARY INFORMATION TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended Year-to-Date
June 30 June 30
($ millions) 2014 2013 2014 2013
----------------------------------------------------------------------------
Change in non-cash operating working capital:
Accounts receivable 233 205 88 126
Prepaid expenses 12 (1) 14 2
Inventories (54) (37) 16 18
Regulatory assets - current portion 29 6 (1) 40
Accounts payable and other current liabilities (87) (43) (34) (73)
Regulatory liabilities - current portion 9 (10) 4 25
----------------------------------------------------------------------------
142 120 87 138
----------------------------
----------------------------
Non-cash investing and financing activities:
Common share dividends reinvested 20 15 42 34
Additions to utility and non-utility capital
assets, and intangible assets included in
current liabilities 84 73 84 73
Contributions in aid of construction included in
current assets 5 14 5 14
Exercise of stock options into common shares 1 - 2 1
----------------------------------------------------------------------------
17. 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 June 30, 2014, the Corporation's
derivative instruments primarily consisted of electricity swap contracts, gas
swap and option contracts, and gas purchase contract premiums. Electricity swap
contracts are held by Central Hudson. Gas swap and option contracts, and gas
purchase contract premiums are held by the FortisBC Energy companies and Central
Hudson.
Volume of Derivative Activity
As at June 30, 2014, the following notional volumes related to electricity and
natural gas derivatives that are expected to be settled are outlined below.
2014 2015 2016 2017
----------------------------------------------------------------------------
Electricity swap contracts (gigawatt hours) 793 1,095 659 219
Gas swap and option contracts (petajoules) 2 1 - -
Gas purchase contract premiums (petajoules) 54 37 - -
----------------------------------------------------------------------------
Presentation of Derivative Instruments in the Consolidated Financial Statements
On the Corporation's consolidated balance sheet, 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
June 30, December 31,
($ millions) 2014 2013
----------------------------------------------------------------------------
Gross derivative asset (1) 25 10
Gross derivative liability (1) (10) (15)
----------------------------------------------------------------------------
15 (5)
Netting (2) - -
Cash collateral - -
----------------------------------------------------------------------------
Total derivative balance (3) 15 (5)
----------------------------
----------------------------
(1) Refer to Note 18 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 $10 million on commodity risk-related derivative
instruments were recognized in current regulatory assets as at June 30,
2014 (December 31, 2013 - $15 million) and unrealized gains of $25
million (December 31, 2013 - $10 million) were recognized in current and
long-term regulatory liabilities. These unrealized losses and gains
would otherwise be recognized in earnings.
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.
18. 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 that 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 other investments, certain long-term debt and
derivative instruments, as noted.
As at
Asset (Liability) June 30, 2014 December 31, 2013
Carrying Estimated Carrying Estimated
($ millions) Value Fair Value Value Fair Value
----------------------------------------------------------------------------
Long-term other asset - Belize
Electricity (1) 108 n/a(2) 108 n/a (2)
Other investments (1) (3) 6 6 6 6
Long-term debt, including current
portion (4) (7,157) (8,453) (7,204) (8,084)
Waneta Expansion Limited
Partnership ("Waneta
Partnership") promissory note (5) (51) (53) (50) (50)
Electricity swap contracts (6) 25 25 10 10
Natural gas derivatives: (7)
Gas swap and option contracts (4) (4) (13) (13)
Gas purchase contract premiums (6) (6) (2) (2)
----------------------------------------------------------------------------
(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 19 and 21).
(3) Other investments were valued using Level 1 inputs.
(4) The Corporation's $200 million unsecured debentures due 2039 and
consolidated borrowings under credit facilities classified as long-term
debt of $41 million (December 31, 2013 - $313 million) are valued using
Level 1 inputs. All other long-term debt is valued using Level 2 inputs.
(5) Included in long-term other liabilities on the consolidated balance
sheet
(6) The fair value of the electricity swap contracts is recorded in accounts
receivable and other long-term assets. The fair value of electricity
swap contracts was determined using Level 3 inputs.
(7) The fair value of the natural gas derivatives is recorded in accounts
payable and other current liabilities.
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) 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 electricity swap contracts and natural gas derivatives are used by Central
Hudson to minimize commodity price volatility for electricity and natural gas
purchases by fixing the effective purchase price for the defined commodities.
The fair values of the electricity swap contracts and natural gas derivatives
were calculated using forward pricing provided by independent third parties.
The natural gas derivatives are used by the FortisBC Energy companies to fix the
effective purchase price of natural gas, as the majority of the natural gas
supply contracts have floating, rather than fixed, prices. 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 cost of natural gas.
The fair values of the electricity swap 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. As at June
30, 2014, none of the electricity swap contracts and natural gas derivatives
were designated as hedges of electricity and 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.
19. 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 June 30,
2014, FortisAlberta's gross credit risk exposure was approximately $113 million,
representing the projected value of retailer billings over a 37-day period. The
Company has reduced its exposure to $2 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 and Central Hudson may be exposed to credit risk
in the event of non-performance by counterparties to derivative instruments. The
companies use netting arrangements to reduce credit risk and net settle payments
with counterparties where net settlement provisions exist.
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 June 30, 2014, the Corporation had a long-term other asset of $108 million
(December 31, 2013 - $108 million), including foreign exchange impacts,
recognized on the consolidated balance sheet related to its expropriated
investment in Belize Electricity (Notes 18 and 21).
Additionally, as at June 30, 2014, Belize Electricity owed Belize Electric
Company Limited ("BECOL") approximately US$3 million for energy purchases, of
which less than US$1 million was overdue (December 31, 2013 - US$4 million, of
which less than US$1 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. Over the next
five years, average annual consolidated long-term debt maturities and repayments
are expected to be approximately $280 million. The combination of available
credit facilities and relatively low annual debt maturities and repayments
beyond 2014 provides the Corporation and its subsidiaries with flexibility in
the timing of access to capital markets.
As at June 30, 2014, the Corporation and its subsidiaries had consolidated
credit facilities of approximately $2.7 billion, of which $2.5 billion was
unused, including $958 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 $2.6 billion of the
total credit facilities are committed facilities with maturities ranging from
2015 through 2019.
The following summary outlines the credit facilities of the Corporation and its
subsidiaries.
As at
Regulated Non- Corporate June 30, December 31,
($ millions) Utilities Regulated and Other 2014 2013
--------------------------------------------------------
Total credit
facilities 1,547 13 1,137 2,697 2,695
Credit facilities
utilized:
Short-term
borrowings (1) (98) (2) - (100) (160)
Long-term debt (2) - - (41) (41) (313)
Letters of credit
outstanding (65) - (1) (66) (66)
----------------------------------------------------------------------------
Credit facilities
unused 1,384 11 1,095 2,490 2,156
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The weighted average interest rate on short-term borrowings was
approximately 1.2% as at June 30, 2014 (December 31, 2013 - 1.3%)
(2) As at June 30, 2014, credit facility borrowings classified as long term
included $nil in current installments of long-term debt on the
consolidated balance sheet (December 31, 2013 - $43 million). The
weighted average interest rate on credit facility borrowings classified
as long-term debt was approximately 1.2% as at June 30, 2014 (December
31, 2013 - 1.8%).
As at June 30, 2014 and December 31, 2013, 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 February 2014 Maritime Electric's $50 million unsecured revolving credit
facility matured and the Company negotiated a new $50 million unsecured
committed revolving credit facility, maturing in February 2019.
In April 2014 FortisBC Electric extended the maturity of its $150 million
unsecured committed revolving credit facility, with $100 million now maturing in
May 2017 and $50 million now maturing in April 2015.
In April 2014 FHI extended its $30 million unsecured committed revolving credit
facility to mature in April 2015.
In June 2014 FortisOntario extended its $30 million unsecured committed
revolving credit facility to mature in June 2015 from June 2014.
In July 2014 FEI, FortisAlberta and Newfoundland Power amended their $500
million, $250 million and $100 million, respectively, committed revolving credit
facilities, resulting in extensions to their maturity dates to August 2016,
August 2019 and August 2019, respectively, from August 2015, August 2018 and
August 2017, respectively.
For the purpose of bridge financing for the pending acquisition of UNS Energy
(Note 1), in March 2014 the Corporation secured an aggregate of $2 billion
non-revolving term credit facilities from a syndicate of banks. The
non-revolving term credit facilities are comprised of a $1.7 billion short-term
bridge facility, repayable in full nine months following its advance, and a $300
million medium-term bridge facility, repayable in full on the second anniversary
of its advance. The credit facilities table does not include the $2 billion
credit facilities.
As a result of closing the Debentures related to the pending acquisition of UNS
Energy (Note 1), the Corporation agreed to maintain availability under its
committed revolving corporate credit facility of not less than $600 million to
cover the principal amount of the first installment of the Debentures in the
event of a mandatory redemption (Note 5).
The Corporation and its currently rated utilities target investment-grade credit
ratings to maintain capital market access at reasonable interest rates. As at
June 30, 2014, the Corporation's credit ratings were as follows:
Standard & Poor's ("S&P") A- / Negative (long-term corporate and unsecured
debt credit rating)
DBRS A(low) / Under Review - Developing Implications
(unsecured debt credit rating)
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, and management's commitment to
maintaining low levels of debt at the holding company level. In December 2013,
after the announcement by Fortis that it had entered into an agreement to
acquire UNS Energy, DBRS placed the Corporation's credit rating under review
with developing implications. Similarly, S&P revised its outlook on the
Corporation to negative from stable. S&P indicated that an outlook revision to
stable would likely occur when the Corporation's Debentures are converted to
equity (Note 5).
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-denominated 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 Central Hudson, Caribbean Utilities, Fortis
Turks and Caicos, BECOL and FortisUS Energy Corporation is the US dollar.
As at June 30, 2014, the Corporation's corporately issued US$1,126 million
(December 31, 2013 - US$1,033 million) long-term debt had been designated as an
effective hedge of the Corporation's foreign net investments. As at June 30,
2014, the Corporation had approximately US$490 million (December 31, 2013 -
US$560 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-denominated 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 June 20, 2011, the Corporation's asset associated with its
expropriated investment in Belize Electricity (Notes 18 and 21) 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 loss of
approximately $4 million for the three months ended June 30 2014, with no net
foreign exchange impact for the first half of 2014 (foreign exchange gain of $3
million and $5 million for the three and six months ended June 30 2013,
respectively) (Note 9).
Interest Rate Risk
The Corporation and most of its subsidiaries are exposed to interest rate risk
associated with borrowings under variable-rate credit facilities and the
refinancing of long-term debt. 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 Central Hudson is exposed to
commodity price risk associated with changes in the market price of electricity
and natural gas (Notes 17 and 18). The risks have been reduced by entering
derivative contracts that effectively fix the price of natural gas purchases and
electricity purchases, respectively. The natural gas and electricity derivatives
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, as permitted by
the regulators, 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, 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 maturities and the FortisBC Energy
companies' ability to fully recover the 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.
20. COMMITMENTS
There were no material changes in the nature and amount of the Corporation's
commitments from the commitments disclosed in the Corporation's 2013 annual
audited consolidated financial statements, except as follows.
Commitments as at June 30, 2014 include Central Hudson's contract to purchase
200 megawatts of installed capacity from May 2014 through April 2017 totalling
approximately US$63 million. The New York Independent System Operator ("NYISO")
has been authorized by FERC to create a new capacity zone in the Lower Hudson
Valley to maintain system reliability and attract investments in new and
existing generation, which was implemented in May 2014. The key terms of the
contract provide that Central Hudson will pay the settlement price in the NYISO
Capacity Spot Market auction for the relevant month of delivery minus US$0.175
per kilowatt-month, times the contract quantity of the product delivered during
the month.
In May 2014 the BCUC approved FortisBC Electric's new power purchase agreement
with BC Hydro to purchase up to 200 MW of capacity and 1,752 GWh per year of
associated energy for a 20-year term, effective July 1, 2014.
To finance a portion of the pending acquisition of UNS Energy, in January 2014,
Fortis completed the sale of $1.8 billion aggregate principal amount of 4%
convertible unsecured subordinated debentures of the Corporation represented by
installment receipts (Note 5).
In March 2014 Fortis priced a private placement to US-based institutional
investors of US$500 million in senior unsecured notes. The notes will be issued
in multiple tranches with terms to maturity ranging from 5 years to 30 years and
coupon rates ranging from 2.92% to 5.03%. The weighted average term to maturity
is approximately 11 years and the weighted average coupon rate is 3.85%. On June
30, 2014, Fortis issued US$213 million of the senior unsecured notes with a
weighted average term to maturity of approximately 9 years and a weighted
average coupon rate of 3.51%. Debt and interest obligations for the Corporation
as at June 30, 2014 reflect the US$213 million senior unsecured notes issued in
June 2014. The remaining US$287 million of the senior unsecured notes will be
issued on September 15, 2014, subject to the satisfaction of customary closing
conditions.
Maritime Electric has entitlement to approximately 4.7% of the output from the
New Brunswick Power Point Lepreau nuclear generating station 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. The total estimated capital cost
obligation has increased by $21 million from that disclosed in the Corporation's
2013 annual audited consolidated financial statements. The increase reflects
revised cost forecasts from New Brunswick Power and changes in the entitlement
agreement.
Defined benefit pension funding contributions are based on estimates provided
under the latest completed actuarial valuations, which generally provide funding
estimates for a period of three to five years from the date of the valuations.
Contributions have increased from that disclosed in the Corporation's 2013
annual audited consolidated financial statements and reflect estimates from the
actuarial valuations completed as at December 31, 2013.
21. EXPROPRIATED ASSETS
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 was rendered by the Belize Court of Appeal on May 15, 2014.
The two Belizean judges found in favour of the GOB; however, the third judge
delivered a strong dissenting opinion concluding that the expropriation was
contrary to the Belize Constitution. An appeal of the decision to the Caribbean
Court of Justice, the final court for appeals arising in Belize, was filed in
June 2014 and a hearing is expected in the fourth quarter of 2014.
Fortis believes it has a strong, well-positioned case supporting the
unconstitutionality of the expropriation. There exists, however, a possibility
that the outcome of the litigation may be unfavourable to the Corporation and
the amount of compensation to be paid to Fortis could be lower than the book
value of the Corporation's expropriated investment in Belize Electricity. The
book value was $108 million, including foreign exchange impacts, as at June 30,
2014 (December 31, 2013 - $108 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) ordering return of the
shares to Fortis and/or award of damages; or (ii) ordering compensation to be
paid to Fortis for the unconstitutional expropriation of the shares and/or award
of damages. Based on presently available information, the $108 million long-term
other asset is not deemed impaired as at June 30, 2014. 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.
22. 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 adverse effect on the Corporation's consolidated
financial position or results of operations.
The following describes the nature of the Corporation's contingencies.
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 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 acquisition and that CH Energy Group, Fortis,
FortisUS Inc. and Cascade Acquisition Sub Inc. aided and abetted that breach.
The settlement agreement was subject to court approval. On June 19, 2014 the
Supreme Court of the State of New York, County of New York issued an Order and
Final Judgment approving the settlement agreement thereby concluding the
proceedings.
Following the announcement of the proposed acquisition of UNS Energy on December
11, 2013, four complaints which named Fortis and other defendants were filed in
the Superior Court of the State of Arizona ("Superior Court") in and for the
County of Pima and one claim in the United States District Court in and for the
District of Arizona, challenging the proposed acquisition. The complaints
generally allege that the directors of UNS Energy breached their fiduciary
duties in connection with the proposed transaction and that UNS Energy, Fortis,
FortisUS Inc., and Color Acquisition Sub Inc. aided and abetted that breach. On
March 13, 2014, two of the four complaints filed in the Superior Court were
dismissed by the plaintiffs. On March 18, 2014, counsel for the parties in the
two actions remaining in the Superior Court executed a Memorandum of
Understanding recording an agreement-in-principle on the structure of a
settlement to be proposed to the Superior Court for approval following closing
of the acquisition. On April 15, 2014, the complaint filed in the United States
District Court was dismissed by the plaintiff. The outcome of these lawsuits
cannot be predicted with any certainty and, accordingly, no amount has been
accrued in the consolidated financial statements.
FHI
In April 2013 FHI and Fortis were named as defendants in an action in the
British Columbia Supreme Court ("B.C. 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 consolidated financial statements.
FortisBC Energy Companies
FEI was the plaintiff in a B.C. Supreme Court action against the City of Surrey
("Surrey") in which FEI sought the court's determination on the manner in which
costs related to the relocation of a natural gas transmission pipeline would be
shared between the Company and Surrey. The relocation was required due to the
development and expansion of Surrey's transportation infrastructure. FEI claimed
that the parties had an agreement that dealt with the allocation of costs.
Surrey advanced counterclaims, including an allegation that FEI breached the
agreement and that Surrey suffered damages as a result. In December 2013 the
court issued a decision ordering FEI and Surrey to share equally the cost of the
pipeline relocation. The court also decided that Surrey was successful in its
counterclaim that FEI breached the agreement. The amount of damages that may be
awarded to Surrey at a subsequent hearing cannot be reasonably determined and
estimated at this time and, accordingly, no amount has been accrued in the
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 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. 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 consolidated financial statements.
The Government of British Columbia filed a claim in the B.C. 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 include 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 Company 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 consolidated financial
statements.
Central Hudson
Former MGP Facilities
Central Hudson and its predecessors owned and operated MGPs to serve their
customers' heating and lighting needs. These plants manufactured gas from coal
and oil beginning in the mid- to late 1800s with all sites ceasing operations by
the 1950s. This process produced certain by-products that may pose risks to
human health and the environment.
The New York State Department of Environmental Conservation ("DEC"), which
regulates the timing and extent of remediation of MGP sites in New York State,
has notified Central Hudson that it believes the Company or its predecessors at
one time owned and/or operated MGPs at seven sites in Central Hudson's franchise
territory. The DEC has further requested that the Company investigate and, if
necessary, remediate these sites under a Consent Order, Voluntary Clean-up
Agreement or Brownfield Clean-up Agreement. Central Hudson accrues for
remediation costs based on the amounts that can be reasonably estimated. As at
June 30, 2014, an obligation of US$105 million was recognized in respect of MGP
remediation and, based upon cost model analysis completed in 2012, it is
estimated, with a 90% confidence level, that total costs to remediate these
sites over the next 30 years will not exceed US$152 million.
Central Hudson has notified its insurers and intends to seek reimbursement from
insurers for remediation, where coverage exists. Further, as authorized by the
New York State Public Service Commission, Central Hudson is currently permitted
to defer, for future recovery from customers, differences between actual costs
for MGP site investigation and remediation and the associated rate allowances,
with carrying charges to be accrued on the deferred balances at the authorized
pre-tax rate of return (Note 4).
Eltings Corners
Central Hudson owns and operates a maintenance and warehouse facility. In the
course of Central Hudson's hazardous waste permit renewal process for this
facility, sediment contamination was discovered within the wetland area across
the street from the main property. Based on the investigation work completed by
Central Hudson, the DEC and Central Hudson agreed in late 2013 that no
additional investigation efforts are necessary. As requested by the DEC, Central
Hudson submitted a draft Corrective Measures Study scoping document for review
by the DEC. The extent of the contamination has been established and
approximately US$3 million has been accrued in the consolidated financial
statements.
Asbestos Litigation
Prior to and after the acquisition of CH Energy Group, various asbestos lawsuits
have been brought against Central Hudson. While a total of 3,344 asbestos cases
have been raised, 1,169 remained pending as at June 30, 2014. Of the cases no
longer pending against Central Hudson, 2,020 have been dismissed or discontinued
without payment by the Company, and Central Hudson has settled the remaining 155
cases. The Company is presently unable to assess the validity of the remaining
asbestos lawsuits; however, based on information known to Central Hudson at this
time, including the Company's experience in the settlement and/or dismissal of
asbestos cases, Central Hudson believes that the costs which may be incurred in
connection with the remaining lawsuits will not have a material effect on its
financial position, results of operations or cash flows and, accordingly, no
amount has been accrued in the consolidated financial statements.
23. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to comply with current period
presentation.
CORPORATE INFORMATION
Fortis Inc. is the largest investor-owned electric and gas distribution utility
in Canada, with total assets of approximately $18.6 billion and fiscal 2013
revenue exceeding $4 billion. Its regulated utilities account for approximately
90% of total assets and serve approximately 2.5 million customers across Canada
and in New York State and the Caribbean. Fortis owns non-regulated hydroelectric
generation assets in Canada, Belize and Upstate New York. The Corporation's
non-utility investment is comprised of hotels and commercial real estate in
Canada.
The Common Shares; 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; First Preference Shares, Series K; and
Installment Receipts of Fortis are listed on the Toronto Stock Exchange and
trade under the ticker symbols FTS, FTS.PR.E, FTS.PR.F, FTS.PR.G, FTS.PR.H,
FTS.PR.J, FTS.PR.K, and FTS.IR, 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 2013 Annual Information Form,
Management Information Circular and Annual Report, are available on SEDAR at
www.sedar.com and on the Corporation's website at www.fortisinc.com.
FOR FURTHER INFORMATION PLEASE CONTACT:
Karl W. Smith
Executive Vice President and Chief Financial Officer
Fortis Inc.
709.737.2822
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