Fortis Inc. ("Fortis" or the "Corporation") (TSX:FTS) achieved first quarter net
earnings attributable to common equity shareholders of $143 million, or $0.67
per common share, compared to $151 million, or $0.79 per common share, for the
first quarter of 2013.
Earnings for the first quarter of 2014 included $5 million, or $0.02 per common
share, associated with Griffith Energy Services, Inc. ("Griffith"), which was
sold in March 2014 for proceeds of approximately $105 million (US$95 million).
Griffith was acquired as part of CH Energy Group, Inc. ("CH Energy Group") in
June 2013. Earnings for the first quarter of 2014 were reduced by $11 million,
or $0.05 per common share, in after-tax interest expense associated with
convertible debentures issued to finance a portion of the pending acquisition of
UNS Energy Corporation ("UNS Energy").
Earnings for the first quarter of 2013 included an after-tax extraordinary gain
of $22 million, or $0.12 per common share, related to the settlement of
expropriation matters associated with the Exploits River Hydro Partnership
("Exploits Partnership").
Excluding the impacts of Griffith, interest expense on the convertible
debentures, and the Exploits Partnership, net earnings attributable to common
equity shareholders for the first quarter of 2014 were $149 million, or $0.70
per common share, compared to $129 million, or $0.67 per common, for the same
period last year.
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. 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 closing of
the acquisition, which is expected to occur by the end of 2014, is subject to
certain government and regulatory approvals, including approval by the Arizona
Corporation Commission ("ACC"), compliance with other applicable U.S.
legislative requirements and the satisfaction of customary closing conditions.
"The approval process for the UNS Energy acquisition is progressing well," says
Stan Marshall, President and Chief Executive Officer, Fortis Inc. In April 2014
the ACC Staff and other Intervenors filed their direct testimony in the merger
proceeding, indicating that they would support the merger subject to certain
conditions. Settlement discussions are currently underway between the
Corporation, UNS Energy, the ACC Staff and other Intervenors.
"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," explains
Marshall.
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. 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 Corporation's regulated utilities contributed earnings of $162 million, up
$17 million quarter over quarter. The increase was driven by earnings of $18
million at Central Hudson Gas & Electric Corporation ("Central Hudson"), which
was acquired as part of CH Energy Group in June 2013. After considering the
common share offering and financing costs associated with the acquisition,
Central Hudson was slightly accretive to earnings per common share. Newfoundland
Power's earnings were $3 million higher quarter over quarter, mainly related to
regulator-approved adjustments, which impacted the timing of quarterly earnings.
Earnings at Caribbean Regulated Electric Utilities were $2 million higher
compared to the first quarter of 2013, driven by electricity sales growth. The
increases were partially offset by lower earnings at the FortisBC Energy
companies. The first stage of the Generic Cost of Capital ("GCOC") Proceeding in
British Columbia reduced the allowed rate of return on common shareholders'
equity ("ROE") and equity component of capital structure for the benchmark
utility, FortisBC Energy Inc., 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. 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 not recognized until
the second quarter of 2013.
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 must receive the consent of the
Lieutenant Governor in Council and is expected to be effective on or about
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 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 quarter
of 2014.
Multi-year performance-based rate applications are progressing in British
Columbia and a cost of capital proceeding is continuing in Alberta.
FortisAlberta is preparing to file a combined capital tracker application for
2013 through 2015, which is an application for revenue increases related to its
capital program. Central Hudson will file a general rate application in the
second half of 2014 to establish rates effective mid-2015.
Excluding the impact of the Exploits Partnership, Non-Regulated Fortis
Generation contributed $6 million to earnings, up $4 million quarter over
quarter. Improved performance was driven by increased production in Belize due
to higher rainfall.
Excluding the impact of Griffith, Non-Utility operations contributed earnings of
less than $0.5 million, comparable with the first quarter of 2013.
Excluding the interest expense on the convertible debentures, Corporate and
Other expenses were $1 million higher quarter over quarter. The increase was
primarily due to interest expense on debt issued to complete the financing of
the acquisition of Central Hudson, partially offset by a higher income tax
recovery.
In March 2014 Fortis priced a private placement of US$500 million 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%. Subject to the satisfaction of customary closing conditions, US$213
million of notes will be issued on June 30, 2014 and US$287 million of notes
will be issued on September 15, 2014. Net proceeds from the sale of the notes
will be used to refinance existing indebtedness and for general corporate
purposes, including repayment of US-dollar drawings on the Corporation's
committed credit facility.
Cash flow from operating activities was $265 million for the quarter compared to
$283 million for the first quarter of 2013. Unfavourable changes in working
capital were partially offset by favourable changes in long-term regulatory
deferral accounts.
Fortis paid a dividend of 32 cents per common share on March 1, 2014, up from 31
cents for the fourth quarter of 2013. The 3.2% increase in the quarterly
dividend translates into an annualized dividend of $1.28 and extends the
Corporation's record of annual common share dividend increases to 41 consecutive
years, the longest record of any public corporation in Canada.
Consolidated capital expenditures were approximately $237 million for the first
quarter 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 $603 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, which remains subject to
certain approvals, is estimated to cost approximately $400 million and is
expected to include a second LNG tank and a new liquefier, both to be in service
in 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).
"The Corporation expects earnings per common share growth in 2015 and beyond as
a result of contributions from the Central Hudson and UNS Energy acquisitions,
and our capital program, including the completion of the Waneta Expansion in
2015 and the Tilbury LNG facility expansion in 2016. This growth will support
continuing growth in dividends," says Marshall.
"We are committed to grow your business profitably, while ever cognizant of our
commitment to provide customers with safe, reliable, cost-effective energy
service," he concludes.
Interim Management Discussion and Analysis
For the three months ended March 31, 2014
Dated May 8, 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 months ended March 31, 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 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 certain regulatory and government
approvals 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. 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 March 31, 2014, the Corporation's electricity distribution systems
met a combined peak demand of 6,299 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 months ended
March 31, 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 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.
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 closing of the acquisition, which is
expected to occur by the end of 2014, is subject to certain government and
regulatory approvals, including approval by the Arizona Corporation Commission
("ACC"), compliance with other applicable U.S. legislative requirements and the
satisfaction of customary closing conditions.
In April 2014 the ACC Staff and other Intervenors filed their direct testimony
in the merger proceeding, indicating that they would support the merger subject
to certain conditions. Settlement discussions are currently underway between the
Corporation, UNS Energy, the ACC Staff and other Intervenors. The ACC
Administrative Law Judge ("ALJ") assigned to this matter issued a procedural
order adopting the following schedule:
Settlement agreement filed May 16, 2014
Testimony in support of/opposition to settlement June 2, 2014
agreement
Settlement agreement responsive testimony June 13, 2014
Rebuttal testimony (if no settlement) May 16, 2014
ACC Staff/Intervenor rebuttal testimony (if no June 2, 2014
settlement)
UNS Energy and Fortis rejoinder testimony (if no June 13, 2014
settlement)
ALJ hearing commences June 16, 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 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 0%.
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 $16 million ($11 million after tax)
in interest expense associated with the Debentures was recognized in the first
quarter of 2014 and a total of approximately $72 million ($51 million after tax)
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.
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 three months ended March 31, 2014. Earnings for
the first quarter of 2014 included $5 million associated with Griffith from
normal operations to the date of sale.
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%. Subject to the satisfaction of customary closing
conditions, US$213 million of notes will be issued on June 30, 2014 and US$287
million of notes will be issued on September 15, 2014.
Net proceeds from the sale of the notes 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 $125 million 5.56% unsecured debentures
of a subsidiary maturing on September 15, 2014, and for general corporate
purposes, including repayment of US-dollar drawings on the Corporation's
committed credit facility.
FINANCIAL HIGHLIGHTS
Fortis has adopted a strategy of profitable growth with earnings per common
share and total shareholder return as the primary measures of performance. The
Corporation's business is segmented by franchise area and, depending on
regulatory requirements, by the nature of the assets. Key financial highlights
for the first quarters ended March 31, 2014 and 2013 are provided in the
following table.
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Consolidated Financial Highlights
(Unaudited) Quarter Ended March 31
($ millions, except for common share data) 2014 2013 Variance
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Revenue 1,455 1,113 342
Energy Supply Costs 679 505 174
Operating Expenses 319 221 98
Depreciation and Amortization 148 129 19
Other Income (Expenses), Net 7 6 1
Finance Charges 123 89 34
Income Tax Expense 39 30 9
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Earnings from Continuing Operations 154 145 9
Earnings from Discontinued Operations, Net
of Tax 5 - 5
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Earnings Before Extraordinary Item 159 145 14
Extraordinary Gain, Net of Tax - 22 (22)
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Net Earnings 159 167 (8)
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Net Earnings Attributable to:
Non-Controlling Interests 2 2 -
Preference Equity Shareholders 14 14 -
Common Equity Shareholders 143 151 (8)
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Net Earnings 159 167 (8)
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Earnings per Common Share from Continuing
Operations
Basic ($) 0.65 0.67 (0.02)
Diluted ($) 0.64 0.66 (0.02)
Earnings per Common Share
Basic ($) 0.67 0.79 (0.12)
Diluted ($) 0.66 0.76 (0.10)
Weighted Average Number of Common Shares
Outstanding (# millions) 213.6 192.0 21.6
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Cash Flow from Operating Activities 265 283 (18)
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Revenue
The increase in revenue was driven by the acquisition of Central Hudson Gas &
Electric Corporation ("Central Hudson"), higher electricity sales and gas
volumes, an increase in the base component of rates at most of the regulated
utilities, and favourable foreign exchange associated with the translation of US
dollar-denominated revenue.
Energy Supply Costs
The increase in energy supply costs was primarily due to the acquisition of
Central Hudson and higher electricity sales and gas volumes, which increased
fuel, power and natural gas purchases.
Operating Expenses
The increase in operating expenses 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 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
Other income, net of expenses, for the first quarter of 2014 was comparable to
the same period last year.
Finance Charges
The increase in finance charges was primarily due to $16 million 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
The increase in income tax expense was primarily due to higher earnings before
income taxes, driven by the acquisition of Central Hudson, and a decrease in
items capitalized for accounting purposes, but expensed for income tax purposes.
The increase was partially offset by the recognition of approximately $2 million
in income tax expense in the first quarter of 2013 associated with Part VI.1
tax.
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 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 impacts of Griffith, interest expense on the convertible
debentures, and the Exploits Partnership, earnings were $149 million compared to
$129 million for the same period last year. The increase was driven by earnings
of $18 million at Central Hudson, which was acquired in June 2013. Performance
at Non-Regulated Fortis Generation was favourably impacted by increased
production in Belize due to higher rainfall. Newfoundland Power's earnings were
$3 million higher quarter over quarter, mainly related to regulator-approved
adjustments, which impacted the timing of quarterly earnings. Earnings at
Caribbean Regulated Electric Utilities were $2 million higher compared to the
first quarter of 2013, driven by electricity sales growth.
The increases were partially offset by lower earnings at the FortisBC Energy
companies and higher Corporate and Other expenses. The first stage of the
Generic Cost of Capital ("GCOC") Proceeding in British Columbia reduced the
allowed ROE and equity component of capital structure for the benchmark utility,
FortisBC Energy Inc. ("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. 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 not recognized until
the second quarter of 2013. Corporate and Other expenses were $1 million higher
quarter over quarter. The increase was primarily due to interest expense on debt
issued to complete the financing of the acquisition of Central Hudson, partially
offset by a higher income tax recovery.
SEGMENTED RESULTS OF OPERATIONS
----------------------------------------------------------------------------
Segmented Net Earnings Attributable to Common Equity Shareholders
(Unaudited) Quarter Ended March 31
($ millions) 2014 2013 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Regulated Gas Utilities - Canadian
FortisBC Energy Companies 79 85 (6)
----------------------------------------------------------------------------
Regulated Gas & Electric Utility - United
States
Central Hudson 18 - 18
----------------------------------------------------------------------------
Regulated Electric Utilities - Canadian
FortisAlberta 25 26 (1)
FortisBC Electric 18 18 -
Newfoundland Power 10 7 3
Other Canadian Electric Utilities 7 6 1
----------------------------------------------------------------------------
60 57 3
----------------------------------------------------------------------------
Regulated Electric Utilities - Caribbean 5 3 2
Non-Regulated - Fortis Generation 6 24 (18)
Non-Regulated - Non-Utility 5 - 5
Corporate and Other (30) (18) (12)
----------------------------------------------------------------------------
Net Earnings Attributable to Common Equity
Shareholders 143 151 (8)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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)
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter Ended March 31
2014 2013 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gas Volumes (petajoules ("PJ")) 75 71 4
Revenue ($ millions) 513 492 21
Earnings ($ millions) 79 85 (6)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Primarily includes FEI, FortisBC Energy (Vancouver Island) Inc. and
FortisBC Energy (Whistler) Inc.
Gas Volumes
The increase in gas volumes was primarily due to higher average consumption by
residential, commercial and transportation customers as a result of colder
temperatures.
As at March 31, 2014, the total number of customers served by the FortisBC
Energy companies was approximately 962,000, up 6,000 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
regulator-approved 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 was primarily due to higher gas volumes and a higher
commodity cost of natural gas charged to customers, partially offset by a
decrease in the delivery component of customer rates at FEI as a result of the
outcome of the GCOC Proceeding.
In May 2013 the FortisBC Energy companies received a regulatory decision on the
first stage of the GCOC Proceeding in British Columbia, resulting in a decrease
in the allowed ROE and equity component of capital structure at FEI, the
benchmark utility, and an interim decrease in the allowed ROEs at FortisBC
Energy (Vancouver Island) Inc. ("FEVI") and FortisBC Energy (Whistler) Inc.
("FEWI"), effective January 1, 2013. The cumulative impact of this regulatory
decision was recognized in 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 FEWI and
an increase in the equity component of capital structure at 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 decrease in earnings was mainly due to the lower allowed ROE and equity
component of capital structure, effective January 1, 2013. The cumulative impact
of the first stage of the GCOC Proceeding was recognized in the second quarter
of 2013, when the decision was received, of which approximately $5 million
related to the first quarter of 2013. The cumulative impact of the outcome of
the second stage of the GCOC Proceeding was recognized in the first quarter of
2014 and did not have a material impact on earnings. Higher effective income
taxes also had an unfavourable impact on earnings quarter over quarter.
REGULATED GAS & ELECTRIC UTILITY - UNITED STATES
CENTRAL HUDSON
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter
Period Ended March 31 2014
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average US:CDN Exchange Rate (1) 1.10
----------------------------------------------------------------------------
Electricity Sales (gigawatt hours ("GWh")) 1,407
Gas Volumes (PJ) 10
Revenue ($ millions) 272
Earnings ($ millions) 18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The reporting currency of Central Hudson is the US dollar.
Electricity Sales & Gas Volumes
Electricity sales for the first quarter were 1,407 gigawatt hours ("GWh")
compared to 1,335 GWh for the same period last year. The increase was primarily
due to colder temperatures in the first quarter of 2014.
Gas volumes for the quarter were 10 petajoules ("PJ") compared to 9 PJ for the
same period last year. The increase was primarily due to colder temperatures in
the first quarter of 2014.
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 first quarter was US$247 million compared to US$195 million for
the same period last year. The increase in revenue was primarily due to the
recovery from customers of higher commodity purchases, which were driven by
higher wholesale prices. The increase in electricity sales and gas volumes also
had a favourable impact on revenue; however, the increase was largely offset by
the impact of regulatory revenue decoupling mechanisms.
Earnings
Earnings for the first quarter were US$16 million compared to US$14 million for
the same period last year. The increase in earnings was mainly due to US$2
million in expenses recognized in the first quarter of 2013, as a result of a
regulatory order denying the deferral of certain storm-restoration costs
incurred in previous years.
REGULATED ELECTRIC UTILITIES - CANADIAN
FORTISALBERTA
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter Ended March 31
2014 2013 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Energy Deliveries (GWh) 4,683 4,491 192
Revenue ($ millions) 126 118 8
Earnings ($ millions) 25 26 (1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Energy Deliveries
The increase in energy deliveries was driven by growth in the number of
customers and higher average consumption by residential, commercial, and farm
and irrigation customers, due to colder temperatures. The total number of
customers increased by approximately 9,000 year over year as at March 31, 2014,
as a result of favourable economic conditions.
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 was primarily due to an interim increase in customer
electricity distribution rates, effective January 1, 2014, and growth in the
number of customers. The increase 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 decrease in earnings was mainly due to lower net transmission revenue of
approximately $2 million, partially offset by rate base growth and growth in the
number of customers. Earnings associated with rate base growth, however,
continue to be tempered by the interim regulatory decision granting 60% of the
revenue requirement associated with the capital tracker component of the PBR
mechanism.
FORTISBC ELECTRIC (1)
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter Ended March 31
2014 2013 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Electricity Sales (GWh) 907 891 16
Revenue ($ millions) 95 88 7
Earnings ($ millions) 18 18 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 was primarily due to higher average
consumption as a result of colder temperatures in the first quarter of 2014.
Revenue
The increase in revenue was driven by an interim increase in base electricity
rates, effective January 1, 2014, and electricity sales growth.
Earnings
Earnings for the first quarter of 2014 were consistent with earnings for the
same period last year. The timing of recognition of regulatory deferrals had a
favourable impact on earnings quarter over quarter, which was largely offset by
a lower allowed ROE. In May 2013 FortisBC Electric received a regulatory
decision on the first stage of the GCOC Proceeding in British Columbia,
resulting in an interim decrease in the allowed ROE. The cumulative impact of
the regulatory decision was recognized in the second quarter of 2013, when the
decision was received, of which approximately $1 million related to the first
quarter of 2013. In March 2014 the regulatory decision on the second stage of
the GCOC Proceeding was received, resulting in no additional changes to FortisBC
Electric's allowed ROE or equity component of capital structure. For further
details on the GCOC Proceeding, refer to the "Material Regulatory Decisions and
Applications" section of this MD&A.
NEWFOUNDLAND POWER
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter Ended March 31
2014 2013 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Electricity Sales (GWh) 2,000 1,942 58
Revenue ($ millions) 209 197 12
Earnings ($ millions) 10 7 3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Electricity Sales
The increase in electricity sales was primarily due to customer growth and
higher average consumption, due to colder temperatures in the first quarter of
2014 and a higher concentration of electric-versus-oil heating in new home
construction.
Revenue
The increase in revenue 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 also rebased, allowing revenue
recognition to more closely reflect the seasonality of electricity sales.
Earnings
The increase in earnings was mainly due to the rebasing of customer electricity
rates, effective July 1, 2013, as discussed above. As a result, earnings were
higher in the first quarter and are expected to be lower in the third quarter.
Electricity sales growth also contributed to the increase in earnings. The
increase was partially offset by higher operating expenses associated with
restoration efforts following the loss of energy supply from Newfoundland and
Labrador Hydro and related power interruptions in January 2014.
OTHER CANADIAN ELECTRIC UTILITIES (1)
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter Ended March 31
2014 2013 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Electricity Sales (GWh) 716 671 45
Revenue ($ millions) 103 96 7
Earnings ($ millions) 7 6 1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 was driven by higher average consumption by
residential and commercial customers in Ontario and on Prince Edward Island
("PEI"), due to colder temperatures, and an increase in the number of customers
using electricity for home heating on PEI.
Revenue
The increase in revenue was primarily due to electricity sales growth, the flow
through in customer electricity rates of higher energy supply costs at
FortisOntario, and an increase in the base component of customer rates at
Maritime Electric, effective March 1, 2014. The increase was partially offset by
a higher regulatory rate of return adjustment at Maritime Electric in the first
quarter of 2014 compared to the same period last year.
Earnings
The increase in earnings was primarily due to higher earnings at FortisOntario
as a result of electricity sales growth, partially offset by a slight decrease
in earnings at Maritime Electric due to a higher regulatory rate of return
adjustment quarter over quarter.
REGULATED ELECTRIC UTILITIES - CARIBBEAN (1)
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter Ended March 31
2014 2013 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average US:CDN Exchange Rate (2) 1.10 1.01 0.09
----------------------------------------------------------------------------
Electricity Sales (GWh) 180 170 10
Revenue ($ millions) 74 66 8
Earnings ($ millions) 5 3 2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 was primarily due to warmer temperatures on
Grand Cayman, which increased air conditioning load, and growth in the number of
customers and improvements in tourism on the Turks and Caicos Islands.
Revenue
The increase in revenue was mainly due to approximately $6 million of favourable
foreign exchange associated with the translation of US dollar-denominated
revenue, electricity sales growth and a 1.8% increase in base customer
electricity rates at Caribbean Utilities, effective June 1, 2013.
Earnings
The increase in earnings was driven by electricity sales growth. Favourable
foreign exchange associated with the translation of US dollar-denominated
earnings also contributed to the increase in earnings.
NON-REGULATED - FORTIS GENERATION (1)
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter Ended March 31
2014 2013 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Energy Sales (GWh) 99 55 44
Revenue ($ millions) 11 5 6
Earnings ($ millions) 6 24 (18)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 was driven by increased production in Belize, due
to higher rainfall. Production in Upstate New York also contributed to the
increase, due to a generating unit being returned to service in October 2013.
Revenue
The increase in revenue was driven by higher production in Belize. Revenue was
also favourably impacted by increased production in Upstate New York and
approximately $1 million of foreign exchange associated with the translation of
US dollar-denominated revenue.
Earnings
The decrease in earnings 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.
Business development costs of approximately $1 million associated with
investigating a potential hydroelectric generating facility reduced earnings in
the first quarter of 2014. The decrease in earnings was partially offset by
higher production in Belize.
NON-REGULATED - NON-UTILITY (1)
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter Ended March 31
($ millions) 2014 2013 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue 54 53 1
Earnings 5 - 5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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, Inc. ("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 first quarter of 2014 was comparable to the
same period last year.
Earnings
Earnings for the first quarter of 2014 included $5 million associated with
Griffith from normal operations to the date of sale. Fortis Properties
contributed earnings of less than $0.5 million, comparable with the first
quarter of 2013.
CORPORATE AND OTHER (1)
----------------------------------------------------------------------------
Financial Highlights (Unaudited) Quarter Ended March 31
($ millions) 2014 2013 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue 7 6 1
Operating Expenses 5 3 2
Depreciation and Amortization - 1 (1)
Other Income (Expenses), Net 2 2 -
Finance Charges 33 10 23
Income Tax Recovery (13) (2) (11)
----------------------------------------------------------------------------
(16) (4) (12)
Preference Share Dividends 14 14 -
----------------------------------------------------------------------------
Net Corporate and Other Expenses (30) (18) (12)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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.
The increase in net Corporate and Other expenses was primarily due to an
increase in finance charges, partially offset by a higher income tax recovery.
The increase in finance charges was mainly due to: (i) $16 million ($11 million
after tax) in interest expense associated with convertible debentures issued to
finance a portion of the pending acquisition of UNS Energy; (ii) 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;
(iii) unfavourable foreign exchange associated with the translation of US
dollar-denominated interest expense; and (iv) 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.
Operating expenses were impacted by a number of items, including general
inflationary increases, an increase in consulting fees, and higher
employee-related compensation expenses.
The higher income tax recovery was driven by the overall increase in net
Corporate and Other expenses and approximately $2 million in income tax expense
recognized in the first quarter of 2013 associated with Part VI.1 tax.
Other income, net of expenses, included: (i) a foreign exchange gain of
approximately $4 million in the first quarter of 2014 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,
compared to approximately $2 million for the same period last year; and (ii)
approximately $2 million in expenses in the first quarter of 2014 related to the
pending acquisition of UNS Energy, compared to approximately $0.5 million
related to the acquisition of Central Hudson for the same period last year.
Preference share dividends associated with the First Preference Shares, Series K
issued in July 2013 were offset by the redemption of First Preference Shares,
Series C in July 2013 and a decrease in the annual fixed dividend rate on the
First Preference Shares, Series G, effective September 2013.
REGULATORY HIGHLIGHTS
The nature of regulation and material regulatory decisions and applications
associated with each of the Corporation's regulated gas and electric utilities
for the first quarter of 2014 are summarized as follows.
NATURE OF REGULATION
----------------------------------------------------------------------------
Allowed Returns (%) Supportive Features
-----------------------------------------
Future or
Allowed Historical Test
Common Year
Regulated Regulatory Equity Used to Set
Utility Authority (%) 2012 2013 2014 Customer Rates
----------------------------------------------------------------------------
ROE
----------------------
FEI British 38.5 9.50 8.75 8.75 COS/ROE
Columbia (1)
Utilities PBR mechanism for
Commission 2014 through 2018
("BCUC")
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 +/- +/- +/-
Board of 50 bps 50 bps 50 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 (4)
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 (5) (5) (5)
filings to
the
Government of
theTurks and
Caicos
Islands
If the actual ROA
is lower than the
allowed ROA, due to
additional costs
resulting from a
hurricane or other
event, the
utilities may apply
for an increase in
customer rates in
the following year.
-------------------
Future Test Year
----------------------------------------------------------------------------
(1) 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) Subject to change in June 2014 based on the annual operation of the
rate-cap adjustment mechanism
(5) 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 associated with significant capital
investment in recent years.
MATERIAL REGULATORY DECISIONS AND APPLICATIONS
The following summarizes the significant regulatory decisions and applications
for the Corporation's largest regulated utilities in the first quarter 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 must receive the consent of the Lieutenant
Governor in Council and is expected to be effective on or about 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% 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 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 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 equity component of
capital structure for FEVI and FEWI at 41.5%, and for FortisBC Electric,
reaffirmed the equity component of capital structure 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 ROE, effective January 1, 2013, for FEVI, FortisBC
Electric and FEWI is 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 equity component of capital structure for the amalgamated entity will be set
the same as the benchmark utility, FEI.
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.
----------------------------------------------------------------------------
Regulated
Utility Application/Proceeding Filing Date Expected Decision
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FEI Multi-Year PBR Plan for 2014- June 2013 Second half of
2018 2014
----------------------------------------------------------------------------
FortisBC Multi-Year PBR Plan for 2014- July 2013 Second half of
Electric 2018 2014
----------------------------------------------------------------------------
FortisAlberta Generic Cost of Capital -
Not
2013 and 2014 applicable Late 2014
Capital Tracker Applications -
2013, 2014 and 2015 May 2014 To be determined
----------------------------------------------------------------------------
Central Hudson General Rate Application for Second half
mid-2015 of 2014 First half of 2015
----------------------------------------------------------------------------
CONSOLIDATED FINANCIAL POSITION
The following table outlines the significant changes in the consolidated balance
sheets between March 31, 2014 and December 31, 2013.
Significant Changes in the Consolidated Balance Sheets (Unaudited) between
March 31, 2014 and December 31, 2013
---------------------------------------------------------------------------
Increase/
Balance Sheet (Decrease)
Account ($ millions) Explanation
---------------------------------------------------------------------------
Cash and cash 456 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 at
CH Energy Group, due to net proceeds
received from the sale of Griffith in
March 2014.
---------------------------------------------------------------------------
Accounts 133 The increase was primarily due to the
receivable impact of a seasonal increase in sales at
Central Hudson, the FortisBC Energy
companies and Newfoundland Power, combined
with operation of equal payment plans for
customers, mainly at the FortisBC Energy
companies and Newfoundland Power.
---------------------------------------------------------------------------
Inventories (68) The decrease was primarily due to the
normal seasonal reduction of gas in
storage at the FortisBC Energy companies,
due to higher consumption during the
winter months, partially offset by the
impact of higher commodity cost of natural
gas.
---------------------------------------------------------------------------
Regulatory 62 The increase was mainly due to higher rate
assets - stabilization accounts at the FortisBC
current and Energy companies and Central Hudson, an
long-term increase in regulatory deferred income
taxes, and the deferral of various other
costs, as permitted by the regulators.
---------------------------------------------------------------------------
Assets held for (112) The decrease related to the sale of
sale Griffith in March 2014.
---------------------------------------------------------------------------
Utility capital 154 The increase primarily related to utility
assets capital expenditures and the impact of
foreign exchange on the translation of US
dollar-denominated utility capital assets,
partially offset by depreciation and
customer contributions.
---------------------------------------------------------------------------
Short-term (96) 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.
---------------------------------------------------------------------------
Regulatory 87 The increase was primarily due to a higher
liabilities - Alberta Electric System Operator charges
current and deferral at FortisAlberta, an increase in
long-term rate stabilization accounts at the
FortisBC Energy companies and Central
Hudson, and an increase in the provision
for non-asset retirement obligation
removal costs.
---------------------------------------------------------------------------
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 (46) The decrease was mainly due to the
(including repayment of committed credit facility
current borrowings at FortisBC Electric, the
portion) Corporation and FortisAlberta. The
decrease was partially offset by the
impact of foreign exchange on the
translation of US-dollar denominated debt
and the issuance of US$30 million
unsecured notes at Central Hudson.
---------------------------------------------------------------------------
Shareholders' 138 The increase primarily related to: (i) net
equity (before earnings attributable to common equity
non-controlling shareholders for the three months ended
interests) March 31, 2014, less dividends declared on
common shares; (ii) the issuance of common
shares under the Corporation's dividend
reinvestment, employee share purchase and
stock option plans; and (iii) a decrease
in accumulated other comprehensive loss.
---------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The table below outlines the Corporation's sources and uses of cash for the
three months ended March 31, 2014, as compared to the same period in 2013,
followed by a discussion of the nature of the variances in cash flows.
----------------------------------------------------------------------------
Summary of Consolidated Cash Flows
(Unaudited) Quarter Ended March 31
($ millions) 2014 2013 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash, Beginning of Period 72 154 (82)
Cash Provided by (Used in):
Operating Activities 265 283 (18)
Investing Activities (110) (292) 182
Financing Activities 301 23 278
----------------------------------------------------------------------------
Cash, End of Period 528 168 360
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating Activities: Cash flow from operating activities was $18 million lower
quarter over quarter. The decrease was primarily due to unfavourable changes in
working capital, partially offset by favourable changes in long-term regulatory
deferral accounts. The unfavourable changes in working capital were mainly
related to current regulatory deferral accounts at Maritime Electric and the
FortisBC Energy companies and accounts receivable at Central Hudson, partially
offset by favourable changes related to accounts payable at FortisAlberta and
the FortisBC Energy companies.
Investing Activities: Cash used in investing activities was $182 million lower
quarter over quarter. The decrease was primarily due to the sale of Griffith in
March 2014 for proceeds of approximately $105 million (US$95 million), combined
with the impact of FortisBC Electric's acquisition of electrical utility assets
of the City of Kelowna in March 2013 for approximately $55 million.
Lower capital expenditures related to the non-regulated Waneta Expansion
hydroelectric generating facility ("Waneta Expansion") and at FortisAlberta were
largely offset by capital spending at Central Hudson in the first quarter of
2014 and higher capital expenditures at the FortisBC Energy companies.
Financing Activities: Cash provided by financing activities was $278 million
higher for the first quarter compared to the same period last year. The increase
was driven by the net proceeds from the first installment of the Corporation's
Debentures, higher proceeds from long-term debt and lower repayments of long
term debt. The increase was partially offset by higher repayments under
committed credit facilities classified as long term and unfavourable changes in
short-term borrowings quarter over quarter.
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 US$30 million in long-term debt, the
proceeds of which were used to repay maturing long-term debt and for other
general corporate purposes.
Repayments of long-term debt and capital lease and finance obligations and net
(repayments) borrowings under committed credit facilities for the quarter
compared to the same period last year are summarized in the following tables.
----------------------------------------------------------------------------
Repayments of Long-Term Debt and Capital Lease and Finance Obligations
(Unaudited)
Quarter Ended March 31
($ millions) 2014 2013 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FortisBC Energy Companies (1) (21) 20
Central Hudson (8) - (8)
Fortis Properties (1) (18) 17
Other (1) (1) -
----------------------------------------------------------------------------
Total (11) (40) 29
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net (Repayments) Borrowings Under Committed Credit Facilities (Unaudited)
Quarter Ended March 31
($ millions) 2014 2013 Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FortisAlberta (20) 48 (68)
FortisBC Electric (79) 32 (111)
Newfoundland Power - 21 (21)
Corporate (46) 35 (81)
----------------------------------------------------------------------------
Total (145) 136 (281)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 approximately $13 million were received in
the first quarter of 2014 to finance capital spending related to the Waneta
Expansion, compared to $22 million received during the first quarter of 2013.
Common share dividends paid in the first quarter of 2014 were $47 million, net
of $22 million of dividends reinvested, compared to $41 million, net of $19
million of dividends reinvested, paid in the same quarter of 2013. The dividend
paid per common share for the first quarter of 2014 was $0.32 compared to $0.31
for the first quarter of 2013. The weighted average number of common shares
outstanding for the first quarter of 2014 was 213.6 million compared to 192.0
million for the first quarter of 2013.
CONTRACTUAL OBLIGATIONS
The Corporation's consolidated contractual obligations with external third
parties in each of the next five years and for periods thereafter, as at March
31, 2014, are outlined in the following table. A detailed description of the
nature of the obligations is provided in the 2013 Annual MD&A and below, where
applicable.
----------------------------------------------------------------------------
Contractual
Obligations
(Unaudited) Due Due
As at March 31, 2014 within Due in Due in Due in Due in after
($ millions) Total 1 year year 2 year 3 year 4 year 5 5 years
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Long-term debt 7,158 737 129 281 81 306 5,624
Interest obligations
on long-term debt 7,277 400 361 340 326 319 5,531
Convertible
debentures
represented by
installment
receipts (1) 599 599 - - - - -
Interest obligations
on convertible
debentures
represented by
installment
receipts (1) 62 62 - - - - -
Government loan
obligations 15 - 10 5 - - -
Capital lease and
finance obligations 2,365 46 46 47 48 75 2,103
Gas purchase
contract
obligations (2) 490 356 71 18 15 12 18
Power purchase
obligations:
Central Hudson (3) 106 29 27 31 7 3 9
FortisBC Electric
(4) 24 12 7 3 2 - -
FortisOntario 294 46 50 51 53 54 40
Maritime Electric 93 41 37 1 1 1 12
Capital cost 542 21 19 21 19 21 441
Operating lease
obligations 31 6 5 5 5 4 6
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 68 38 18 9 - - 3
Performance Share
Unit Plan
obligations 12 2 5 5 - - -
Other 5 2 - - - - 3
----------------------------------------------------------------------------
Total 19,266 2,400 788 820 560 797 13,901
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 March 31, 2014. Gas purchase contract
obligations at Central Hudson are based on tariff rates as at March 31,
2014.
(3) Includes Central Hudson's contract to purchase 200 MW of installed
capacity from May 1, 2014 through April 30, 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 will be 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) On May 6, 2014, the BCUC approved FortisBC Electric's new power
purchase agreement ("PPA") 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. Amounts associated with the new PPA have not
been included in the contractual obligations table.
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 to US-based institutional
investors of US$500 million in senior unsecured notes. For further information
on the notes, refer to the "Significant Items" section of this MD&A. Debt and
interest obligations associated with these notes have not been included in the
Contractual Obligations table above.
For a discussion of the nature and amount of the Corporation's consolidated
capital expenditure program, that is not included in the preceding Contractual
Obligations table, refer to the "Capital Expenditure Program" section of this
MD&A.
CAPITAL STRUCTURE
The Corporation's principal businesses of regulated gas and electricity
distribution require ongoing access to capital to enable the utilities to fund
maintenance and expansion of infrastructure. Fortis raises debt at the
subsidiary level to ensure regulatory transparency, tax efficiency and financing
flexibility. Fortis generally finances a significant portion of acquisitions at
the corporate level with proceeds from common share, preference share and
long-term debt offerings. To help ensure access to capital, the Corporation
targets a consolidated long-term capital structure containing approximately 45%
equity, including preference shares, and 55% debt, as well as investment-grade
credit ratings. Each of the Corporation's regulated utilities maintains its own
capital structure in line with the deemed capital structure reflected in each of
the utility's customer rates.
The consolidated capital structure of Fortis is presented in the following table.
----------------------------------------------------------------------------
Capital Structure (Unaudited) As at
March 31, 2014 December 31, 2013
($ millions) (%)($ millions) (%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total debt and capital lease and
finance obligations (net of cash)
(1) 7,724 55.7 7,716 56.2
Preference shares 1,229 8.9 1,229 9.0
Common shareholders' equity 4,910 35.4 4,772 34.8
----------------------------------------------------------------------------
Total (2) 13,863 100.0 13,717 100.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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: (i) net earnings attributable to
common equity shareholders for the three months ended March 31, 2014, less
dividends declared on common shares; (ii) the issuance of common shares under
the Corporation's dividend reinvestment, employee share purchase and stock
option plans; and (iii) a decrease in accumulated other comprehensive loss.
Total debt remained substantially unchanged from December 31, 2013. The increase
in debt associated with the convertible debentures represented by installment
receipts was largely offset by an increase in cash and a decrease in short-term
borrowings and long-term debt.
Excluding capital lease and finance obligations, the Corporation's capital
structure as at March 31, 2014 was 54.3% debt, 9.1% 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 $237 million in gross consolidated capital expenditures by
segment for the first quarter of 2014 is provided in the following table.
----------------------------------------------------------------------------
Gross Consolidated Capital Expenditures (Unaudited) (1)
Quarter Ended March 31, 2014
($ millions)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other
Regulated
FortisBC Electric
Energy Central Fortis FortisBC Newfoundland Utilities -
Companies Hudson Alberta Electric Power Canadian
----------------------------------------------------------------------------
51 21 79 15 18 7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Regulated Non- Non-
Electric Total Regulated - Regulated -
Utilities - Regulated Fortis Non-
Caribbean Utilities Generation Utility Total
----------------------------------------------------------------------------
13 204 24 9 237
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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
("AFUDC").
Planned capital expenditures are based on detailed forecasts of energy demand,
weather, cost of labour and materials, as well as other factors, including
economic conditions, which could change and cause actual expenditures to differ
from 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, which remains subject to certain approvals, is estimated to cost
approximately $400 million and is expected to include a second LNG tank and a
new liquefier, both to be in service in 2016. FortisBC is pursuing additional
LNG investment opportunities, including 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
$24 million invested in the first quarter of 2014. Approximately $603 million
has been invested in the Waneta Expansion since construction began late in 2010.
Key construction activities during the first quarter of 2014 were focused on
civil construction and equipment installation. 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
included assembly of the turbine and generator components and installation of
powerhouse mechanical and electrical auxiliary systems. In addition, the
230-kilovolt transmission line construction had the conductor installation
completed.
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; 27% at Canadian Regulated Gas Utilities; 11% 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 March 31, 2014, management expects consolidated long-term debt maturities
and repayments to average approximately $310 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 March 31,
2014 and are expected to remain compliant throughout 2014.
CREDIT FACILITIES
As at March 31, 2014, the Corporation and its subsidiaries had consolidated
credit facilities of approximately $2.7 billion, of which $2.4 billion was
unused, including $824 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 $2.6 billion of the
total credit facilities are committed facilities with maturities ranging from
2014 through 2019.
The following table outlines the credit facilities of the Corporation and its
subsidiaries.
----------------------------------------------------------------------------
Credit Facilities (Unaudited) As at
December
Regulated Non- Corporate March 31, 31,
($ millions) Utilities Regulated and Other 2014 2013
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total credit
facilities 1,555 13 1,140 2,708 2,695
Credit facilities
utilized:
Short-term
borrowings (63) (1) - (64) (160)
Long-term debt
(including current
portion) - - (175) (175) (313)
Letters of credit
outstanding (67) - (1) (68) (66)
----------------------------------------------------------------------------
Credit facilities
unused 1,425 12 964 2,401 2,156
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at March 31, 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 May 2015 from May 2014.
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 $600 million to cover the
principal amount of the first installment of the Debentures in the event of a
mandatory redemption.
FINANCIAL INSTRUMENTS
The carrying values of the Corporation's consolidated financial instruments
approximate their fair values, reflecting the short-term maturity, normal trade
credit terms and/or nature of these instruments, except as follows.
----------------------------------------------------------------------------
Financial Instruments
(Unaudited) As at
March 31, 2014 December 31, 2013
Carrying Estimated Carrying Estimated
($ millions) Value Fair Value Value Fair Value
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Waneta Partnership
promissory note 50 52 50 50
Long-term debt, including
current portion 7,158 8,329 7,204 8,084
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 $112 million as at March
31, 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
("BECOL") and FortisUS Energy Corporation is the US dollar.
As at March 31, 2014, the Corporation's corporately issued US$1,033 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 March 31,
2014, the Corporation had approximately US$585 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 gain of approximately $4
million and $2 million during the three months ended March 31, 2014 and 2013,
respectively.
From time to time, the Corporation and its subsidiaries hedge exposures to
fluctuations in interest rates, foreign exchange rates and fuel, electricity and
natural gas prices through the use of derivative instruments. The Corporation
does not hold or issue derivative instruments for trading purposes and generally
limits the use of derivative instruments to those that qualify as accounting or
economic hedges. As at March 31, 2014, the Corporation's derivative instruments
primarily consisted of electricity swap contracts, gas swap and option
contracts, and gas purchase contract premiums. Electricity swap contracts are
held by Central Hudson. Gas swap and option contracts, and gas purchase contract
premiums are held by the FortisBC Energy companies.
The following table summarizes the Corporation's derivative instruments.
----------------------------------------------------------------------------
Derivative Instruments (Unaudited) As at
March 31, December 31,
2014 2013
Carrying Carrying
Number of Value (2) Value (2)
Asset (Liability) Maturity Contracts Volume (1) ($ millions) ($ millions)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Electricity swap
contracts 2017 9 3,041 23 10
Natural gas
derivatives:
Gas swaps and
option contracts 2014 5 3 (6) (13)
Gas purchase
contract premiums 2015 34 90 (5) (2)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 are used by Central Hudson to minimize commodity
price volatility for electricity purchases by fixing the effective purchase
price of electricity. The fair value of the electricity swap contracts was
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 March
31, 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 March 31, 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 $68 million as at March
31, 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 certain government and regulatory approvals, including
approval by the ACC, compliance with other applicable U.S. legislative
requirements and the satisfaction of customary closing conditions. The failure
to obtain the required approvals 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 approvals or the imposition of
unfavourable terms and/or conditions in such approvals 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 approvals, 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: A decision is pending from the
Belize Court of Appeal regarding the Corporation's appeal of the Belize Supreme
Court's dismissal of the Corporation's claim filed in October 2011 challenging
the constitutionality of the expropriation of the Corporation's investment in
Belize Electricity.
Fortis believes it has a strong, well-positioned case before the Belize Courts
supporting the unconstitutionality of the expropriation. There exists, however,
a possibility that the outcome of the litigation may be unfavourable to the
Corporation and the amount of compensation otherwise to be paid to Fortis under
the legislation expropriating Belize Electricity could be lower than the book
value of the Corporation's expropriated investment in Belize Electricity. The
book value was $112 million, including foreign exchange impacts, as at March 31,
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 $112 million long-term
other asset is not deemed impaired as at March 31, 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.
Fortis continues to control and consolidate the financial statements of BECOL,
the Corporation's indirect wholly owned non-regulated hydroelectric generating
subsidiary in Belize. As at March 31, 2014, Belize Electricity owed BECOL
approximately US$2 million for energy purchases, 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.
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 upgraded Central Hudson to
'A2' from 'A3' with a stable outlook in January 2014; and (ii) DBRS confirmed
FortisAlberta's credit rating at 'A(low)' and changed the trend to positive from
stable in February 2014.
Defined Benefit Pension and Other Post-Employment Benefit Plan Assets: As at
March 31, 2014, the fair value of the Corporation's consolidated defined benefit
pension and other post-employment benefit plan assets was $1,785 million, up
$123 million or 7%, from $1,662 million as at December 31, 2013.
Labour Relations: The collective agreements between customer service employees
at the FortisBC Energy companies and FortisBC Electric, and Canadian Office and
Professional Employees Union expired on March 31, 2014. Discussions to renew the
collective agreements are ongoing.
Power Supply Contract: 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 March 31, 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 in the future on similar terms.
CHANGES IN ACCOUNTING POLICIES
Effective January 1, 2014, as applied for in its Multi-Year PBR Plan for 2014
through 2018, the FortisBC Energy companies 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 months
ended March 31, 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 months ended March 31,
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 months ended March 31, 2014.
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 three months ended March
31, 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 is subject to court approval. In February 2014 the
Supreme Court of the State of New York, County of New York, issued a Consent
Order preliminarily certifying the matter as a class action and providing
directions leading to a Settlement Hearing to be held in June 2014.
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.
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
March 31, 2014, an obligation of US$46 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$3 million has been accrued in the consolidated financial
statements.
Asbestos Litigation
Prior to the acquisition of CH Energy Group, various asbestos lawsuits had been
brought against Central Hudson. While a total of 3,343 asbestos cases have been
raised, 1,171 remained pending as at March 31, 2014. Of the cases no longer
pending against Central Hudson, 2,017 have been dismissed or discontinued
without payment by the Company, and Central Hudson has settled the remaining 155
cases. The Company is presently unable to assess the validity of the remaining
asbestos lawsuits; however, based on information known to Central Hudson at this
time, including the Company's experience in the settlement and/or dismissal of
asbestos cases, Central Hudson believes that the costs which may be incurred in
connection with the remaining lawsuits will not have a material effect on its
financial position, results of operations or cash flows and, accordingly, no
amount has been accrued in the consolidated financial statements.
SUMMARY OF QUARTERLY RESULTS
The following table sets forth unaudited quarterly information for each of the
eight quarters ended June 30, 2012 through March 31, 2014. The quarterly
information has been obtained from the Corporation's interim unaudited
consolidated financial statements. These financial results are not necessarily
indicative of results for any future period and should not be relied upon to
predict future performance.
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Summary of Quarterly Results Net Earnings
Attributable
(Unaudited) to
Common Equity
Revenue Shareholders Earnings per Common Share
Quarter Ended ($ millions) ($ millions) Basic ($) Diluted ($)
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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
June 30, 2012 792 62 0.33 0.33
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The summary of the past eight quarters reflects the Corporation's continued
organic growth, growth from acquisitions, as well as the seasonality associated
with its businesses. Interim results will fluctuate due to the seasonal nature
of gas and electricity demand and water flows, as well as the timing and
recognition of regulatory decisions. Revenue is also affected by the cost of
fuel and purchased power and the commodity cost of natural gas, which are flowed
through to customers without markup. Given the diversified nature of the
Corporation's subsidiaries, seasonality may vary. Most of the annual earnings of
the FortisBC Energy companies are realized in the first and fourth quarters.
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. A discussion of the quarter over quarter variance in financial
results is provided in the "Financial Highlights" section of this MD&A.
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
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 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 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.
June 2013/June 2012: Net earnings attributable to common equity shareholders
were $54 million, or $0.28 per common share, for the second quarter of 2013
compared to earnings of $62 million, or $0.33 per common share, for the second
quarter of 2012. Earnings for the second quarter of 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 CH Energy Group,
compared to $3 million of acquisition-related expenses in the second quarter of
2012. 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.
In the second quarter of 2012, earnings were reduced by income tax expenses of
$3 million associated with Part VI.1 tax. Excluding the above-noted
acquisition-related and Part VI.1 tax impacts, net earnings for the second
quarter of 2013 were $61 million compared to $68 million for the second quarter
of 2012. The decrease in earnings was mainly due to lower contribution from the
FortisBC Energy companies, FortisAlberta and FortisBC Electric, and decreased
non-regulated hydroelectric production in Belize due to lower rainfall,
partially offset by lower Corporate expenses. Earnings at the FortisBC Energy
companies and FortisBC Electric were reduced by $8 million and $2 million,
respectively, as a result of the regulatory decision related to the first stage
of the GCOC Proceeding in British Columbia, which was received in the second
quarter of 2013. At the FortisBC Energy companies, earnings contribution from
rate base growth was largely offset by lower gas transportation volumes.
FortisAlberta's earnings decreased due to lower net transmission revenue and
timing of the recognition of a regulatory decision in 2012 impacting
depreciation, partially offset by the timing of operating expenses, rate base
growth and customer growth. At FortisBC Electric, lower-than-expected finance
charges, rate base growth and higher capitalized AFUDC favourably impacted
earnings. Lower Corporate expenses were primarily due to the favourable impact
of the release of income tax provisions in the second quarter of 2013, a higher
foreign exchange gain and lower finance charges, partially offset by higher
preference share dividends.
OUTLOOK
Fortis is focused on closing the UNS Energy acquisition by the end of 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.
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).
Following the closing of the acquisition of UNS Energy, 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.
The Corporation expects earnings per common share growth in 2015 and beyond as a
result of contributions from the Central Hudson and UNS Energy acquisitions, and
our capital program, including the completion of the Waneta Expansion in 2015
and the Tilbury LNG facility expansion in 2016. This growth will support
continuing growth in dividends.
OUTSTANDING SHARE DATA
As at May 7, 2014, the Corporation had issued and outstanding approximately
214.5 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 May 7, 2014 is as
follows.
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Conversion of Securities into Common Shares (Unaudited)
As at May 7, 2014 Number of
Common Shares
Security (millions)
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Stock Options 5.6
First Preference Shares, Series E 6.5
Convertible Debentures Represented by Installment Receipts 58.6
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Total 70.7
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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 months ended March 31, 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)
March 31, December 31,
2014 2013
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ASSETS
Current assets
Cash and cash equivalents $ 528 $ 72
Accounts receivable 865 732
Prepaid expenses 45 45
Inventories 75 143
Regulatory assets (Note 3) 179 150
Assets held for sale (Note 11) - 112
Deferred income taxes 22 42
------------------------------
1,714 1,296
Other assets 287 246
Regulatory assets (Note 3) 1,705 1,672
Deferred income taxes 23 7
Utility capital assets 11,772 11,618
Non-utility capital assets 652 649
Intangible assets 340 345
Goodwill 2,097 2,075
------------------------------
$ 18,590 $ 17,908
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings (Note 18) $ 64 $ 160
Accounts payable and other current liabilities 978 957
Regulatory liabilities (Note 3) 149 140
Convertible debentures represented by
installment receipts (Note 4) 599 -
Current installments of long-term debt 737 780
Current installments of capital lease and
finance obligations 7 7
Liabilities associated with assets held for
sale (Note 11) - 32
Deferred income taxes 8 8
------------------------------
2,542 2,084
Other liabilities 616 627
Regulatory liabilities (Note 3) 980 902
Deferred income taxes 1,075 1,078
Long-term debt 6,421 6,424
Capital lease and finance obligations 424 417
------------------------------
12,058 11,532
------------------------------
Shareholders' equity
Common shares (1) (Note 5) 3,816 3,783
Preference shares 1,229 1,229
Additional paid-in capital 17 17
Accumulated other comprehensive loss (41) (72)
Retained earnings 1,118 1,044
------------------------------
6,139 6,001
Non-controlling interests 393 375
------------------------------
6,532 6,376
------------------------------
$ 18,590 $ 17,908
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(1) No par value. Unlimited authorized shares; 214.3 million and 213.2
million issued and outstanding as at March 31, 2014 and December 31,
2013, respectively
Commitments and Contingencies (Notes 19 and 21, respectively)
See accompanying Notes to Interim Consolidated Financial Statements
Fortis Inc.
Consolidated Statements of Earnings (Unaudited)
For the three months ended March 31
(in millions of Canadian dollars, except per share amounts)
Quarter Ended
2014 2013
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue $ 1,455 $ 1,113
--------------------------
Expenses
Energy supply costs 679 505
Operating 319 221
Depreciation and amortization 148 129
--------------------------
1,146 855
--------------------------
Operating income 309 258
Other income (expenses), net (Note 8) 7 6
Finance charges (Note 9) 123 89
--------------------------
Earnings before income taxes, discontinued
operations and extraordinary item 193 175
Income tax expense (Note 10) 39 30
--------------------------
Earnings from continuing operations 154 145
Earnings from discontinued operations, net of tax
(Note 11) 5 -
--------------------------
Earnings before extraordinary item 159 145
Extraordinary gain, net of tax (Note 12) - 22
--------------------------
Net earnings $ 159 $ 167
--------------------------
--------------------------
Net earnings attributable to:
Non-controlling interests $ 2 $ 2
Preference equity shareholders 14 14
Common equity shareholders 143 151
--------------------------
$ 159 $ 167
--------------------------
--------------------------
Earnings per common share from continuing
operations (Note 13)
Basic $ 0.65 $ 0.67
Diluted $ 0.64 $ 0.66
Earnings per common share (Note 13)
Basic $ 0.67 $ 0.79
Diluted $ 0.66 $ 0.76
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying Notes to Interim Consolidated Financial Statements
Fortis Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
For the three months ended March 31
(in millions of Canadian dollars)
Quarter Ended
2014 2013
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings $ 159 $ 167
--------------------------
--------------------------
Other comprehensive income
Unrealized foreign currency translation gains, net
of hedging activities and tax 30 2
Unrealized employee future benefits gains, net of
tax 1 1
--------------------------
31 3
--------------------------
Comprehensive income $ 190 $ 170
--------------------------
--------------------------
Comprehensive income attributable to:
Non-controlling interests $ 2 $ 2
Preference equity shareholders 14 14
Common equity shareholders 174 154
--------------------------
$ 190 $ 170
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying Notes to Interim Consolidated Financial Statements
Fortis Inc.
Consolidated Statements of Cash Flows (Unaudited)
For the three months ended March 31
(in millions of Canadian dollars)
Quarter Ended
2014 2013
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating activities
Net earnings $ 159 $ 167
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation - capital assets 130 113
Amortization - intangible assets 13 12
Amortization - other 5 4
Deferred income tax recovery (7) (11)
Accrued employee future benefits (9) (1)
Equity component of allowance for funds used
during construction (Note 8) (2) (3)
Other 1 (10)
Change in long-term regulatory assets and
liabilities 30 (6)
Change in non-cash operating working capital
(Note 15) (55) 18
----------------------------
265 283
----------------------------
Investing activities
Change in other assets and other liabilities 3 5
Capital expenditures - utility capital assets (221) (233)
Capital expenditures - non-utility capital
assets (9) (13)
Capital expenditures - intangible assets (7) (7)
Contributions in aid of construction 18 10
Proceeds on sale of assets (Note 11) 106 1
Business acquisition, net of cash acquired - (55)
----------------------------
(110) (292)
----------------------------
Financing activities
Change in short-term borrowings (98) (48)
Proceeds from convertible debentures represented
by installment receipts, net of issue costs
(Note 4) 561 -
Proceeds from long-term debt, net of issue costs 33 -
Repayments of long-term debt and capital lease
and finance obligations (11) (40)
Net (repayments) borrowings under committed
credit facilities (145) 136
Advances from non-controlling interests 13 22
Issue of common shares, net of costs and
dividends reinvested 11 10
Dividends
Common shares, net of dividends reinvested (47) (41)
Preference shares (14) (14)
Subsidiary dividends paid to non-controlling
interests (2) (2)
----------------------------
301 23
----------------------------
Change in cash and cash equivalents 456 14
Cash and cash equivalents, beginning of period 72 154
----------------------------
Cash and cash equivalents, end of period $ 528 $ 168
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplementary Information to Consolidated Statements of Cash Flows (Note 15)
See accompanying Notes to Interim Consolidated Financial Statements
Fortis Inc.
Consolidated Statements of Changes in Equity (Unaudited)
For the three months ended March 31
(in millions of Canadian dollars)
Accumulated
Additional Other
Common Preference Paid-in Comprehensive
Shares Shares Capital Loss
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Note 5)
As at January 1, 2014 $ 3,783 $ 1,229 $ 17 $ (72)
Net earnings - - - -
Other comprehensive
income - - - 31
Common share issues 33 - (1) -
Stock-based
compensation - - 1 -
Advances from non-
controlling
interests - - - -
Foreign currency
translation impacts - - - -
Subsidiary dividends
paid to non-
controlling
interests - - - -
Dividends declared on
common shares ($0.32
per share) - - - -
Dividends declared on
preference shares - - - -
-------------------------------------------------------
As at March 31, 2014 $ 3,816 $ 1,229 $ 17 $ (41)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at January 1, 2013 $ 3,121 $ 1,108 $ 15 $ (96)
Net earnings - - - -
Other comprehensive
income - - - 3
Common share issues 28 - (1) -
Stock-based
compensation - - 1 -
Advances from non-
controlling
interests - - - -
Foreign currency
translation impacts - - - -
Subsidiary dividends
paid to non-
controlling
interests - - - -
Dividends declared on
common shares ($0.31
per share) - - - -
Dividends declared on
preference shares - - - -
-------------------------------------------------------
As at March 31, 2013 $ 3,149 $ 1,108 $ 15 $ (93)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-
Retained Controlling Total
Earnings Interests Equity
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at January 1, 2014 $ 1,044 $ 375 $ 6,376
Net earnings 157 2 159
Other comprehensive
income - - 31
Common share issues - - 32
Stock-based
compensation - - 1
Advances from non-
controlling
interests - 13 13
Foreign currency
translation impacts - 5 5
Subsidiary dividends
paid to non-
controlling
interests - (2) (2)
Dividends declared on
common shares ($0.32
per share) (69) - (69)
Dividends declared on
preference shares (14) - (14)
-------------------------------------------------------
As at March 31, 2014 $ 1,118 $ 393 $ 6,532
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at January 1, 2013 $ 952 $ 310 $ 5,410
Net earnings 165 2 167
Other comprehensive
income - - 3
Common share issues - - 27
Stock-based
compensation - - 1
Advances from non-
controlling
interests - 22 22
Foreign currency
translation impacts - 1 1
Subsidiary dividends
paid to non-
controlling
interests - (2) (2)
Dividends declared on
common shares ($0.31
per share) (60) - (60)
Dividends declared on
preference shares (14) - (14)
-------------------------------------------------------
As at March 31, 2013 $ 1,043 $ 333 $ 5,555
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying Notes to Interim Consolidated Financial Statements
FORTIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 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 11).
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. 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 closing of the acquisition,
which is expected to occur by the end of 2014, is subject to certain government
and regulatory approvals, including approval by the Arizona Corporation
Commission, compliance with other applicable U.S. legislative requirements and
the satisfaction of customary closing conditions (Notes 4 and 21).
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.
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 recorded 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 months ended March
31, 2014.
An evaluation of subsequent events through to May 7, 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 March 31, 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, the FortisBC Energy companies 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 months ended March 31, 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 months
ended March 31, 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 months ended March 31,
2014.
3. 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
March 31, December 31,
($ millions) 2014 2013
----------------------------------------------------------------------------
Regulatory assets
Deferred income taxes 845 833
Employee future benefits 425 440
Rate stabilization accounts 116 85
Deferred lease costs 85 76
Deferred energy management costs 79 76
Manufactured gas plant ("MGP") site
remediation deferral 57 47
Deferred operating overhead costs 46 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 20 21
Carrying charges - employee future benefits 16 14
Natural gas for transportation incentives 16 8
Whistler pipeline contribution deferral 13 13
Alternative energy projects cost deferral 12 11
Other regulatory assets 89 96
----------------------------------------------------------------------------
Total regulatory assets 1,884 1,822
Less: current portion (179) (150)
----------------------------------------------------------------------------
Long-term regulatory assets 1,705 1,672
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at
March 31, December 31,
($ millions) 2014 2013
----------------------------------------------------------------------------
Regulatory liabilities
Non-asset retirement obligation removal cost
provision 574 563
Rate stabilization accounts 200 177
Alberta Electric System Operator charges
deferral 105 73
Employee future benefits 58 55
Deferred income taxes 47 45
Customer and community benefits obligation 24 23
Carrying charges - employee future benefits 18 16
Meter reading and customer service variance
deferral 17 17
Rate base impact of tax repair project 14 13
Other regulatory liabilities 72 60
----------------------------------------------------------------------------
Total regulatory liabilities 1,129 1,042
Less: current portion (149) (140)
----------------------------------------------------------------------------
Long-term regulatory liabilities 980 902
----------------------------------------------------------------------------
----------------------------------------------------------------------------
4. 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 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 0%.
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 $16 million ($11 million after tax)
in interest expense associated with the Debentures was recognized in the first
quarter of 2014 and a total of approximately $72 million ($51 million after tax)
is expected to be incurred in 2014 (Notes 9 and 19).
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 $1.165 billion.
5. COMMON SHARES
Common shares issued during the period were as follows:
Quarter Ended
March 31, 2014
Number of
Shares Amount
(in thousands) ($ millions)
----------------------------------------------------------------------------
Balance, beginning of period 213,165 3,783
Dividend Reinvestment Plan 731 22
Consumer Share Purchase Plan 11 -
Employee Share Purchase Plan 173 5
Stock Option Plans 199 6
----------------------------------------------------------------------------
Balance, end of period 214,279 3,816
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. STOCK-BASED COMPENSATION PLANS
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 January 2014, 155,133 Performance Share Units ("PSUs") were granted to senior
management of the Corporation and its subsidiaries under the 2013 PSU Plan,
representing a component of the long-term incentives. 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 March 2014, 33,559 PSUs, representing two-thirds of the vested PSUs, were
paid out to the President and 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 President and CEO satisfying two of the three payment requirements,
as determined by the Human Resources Committee of the Board of Directors of
Fortis.
In February 2014, the Corporation granted 925,172 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 of
$30.73. The options granted under the 2012 Plan are exercisable for a period not
to exceed ten years from the date of grant, expire no later than three years
after the termination, death or retirement of the optionee and vest evenly over
a four-year period on each anniversary of the date of grant. Directors are not
eligible to receive grants of options under the 2012 Plan. The fair value of
each option granted was $3.53 per option.
The fair value was estimated at the date of grant using the Black-Scholes fair
value option-pricing model and the following assumptions:
Dividend yield (%) 3.81
Expected volatility (%) 20.3
Risk-free interest rate (%) 1.69
Weighted average expected life (years) 5.5
For the three months ended March 31, 2014, stock-based compensation expense of
approximately $2 million was recognized ($1 million for the three months ended
March 31, 2013).
7. EMPLOYEE FUTURE BENEFITS
The Corporation and its subsidiaries each maintain one or a combination of
defined benefit pension plans and defined contribution pension plans, including
group registered retirement savings plans, for employees. The Corporation and
certain subsidiaries also offer OPEB plans for qualifying employees. The net
benefit cost of providing the defined benefit pension and OPEB plans is detailed
in the following table.
Quarter Ended March 31
Defined Benefit
Pension Plans OPEB Plans
($ millions) 2014 2013 2014 2013
----------------------------------------------------------------------------
Components of net benefit
cost:
Service costs 10 8 3 2
Interest costs 21 12 4 3
Expected return on plan
assets (24) (13) (2) -
Amortization of actuarial
losses 7 7 2 2
Amortization of past service
credits/plan amendments - - (2) (1)
Regulatory adjustments 2 (3) 2 -
----------------------------------------------------------------------------
Net benefit cost 16 11 7 6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months ended March 31, 2014, the Corporation expensed $5 million
($4 million for the three months ended March 31, 2013) related to defined
contribution pension plans.
8. OTHER INCOME (EXPENSES), NET
Quarter Ended
March 31
($ millions) 2014 2013
----------------------------------------------------------------------------
Equity component of allowance for funds used
during construction ("AFUDC") 2 3
Net foreign exchange gain 4 2
Interest income 4 1
Other (1) -
Acquisition-related expenses (2) -
----------------------------------------------------------------------------
7 6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The net foreign exchange gain for the three months ended March 31, 2014 and 2013
is related to the translation into Canadian dollars of the Corporation's US
dollar-denominated long-term other asset representing the book value of the
Corporation's expropriated investment in Belize Electricity (Notes 18 and 20).
The acquisition-related expenses are associated with the pending acquisition of
UNS Energy (Note 1).
9. FINANCE CHARGES
Quarter Ended
March 31
($ millions) 2014 2013
----------------------------------------------------------------------------
Interest - Long-term debt and capital lease
and finance obligations 111 94
- Convertible debentures represented
by installment receipts 16 -
- Short-term borrowings 2 2
Debt component of AFUDC (6) (7)
----------------------------------------------------------------------------
123 89
----------------------------------------------------------------------------
----------------------------------------------------------------------------
10. INCOME TAXES
Income taxes differ from the amount that would be expected to be generated by
applying the enacted combined Canadian federal and provincial statutory income
tax rate to earnings before income taxes. The following is a reconciliation of
consolidated statutory income taxes to consolidated effective income taxes.
Quarter Ended
March 31
($ millions, except as noted) 2014 2013
----------------------------------------------------------------------------
Combined Canadian federal and provincial
statutory income tax rate 29.0% 29.0%
----------------------------------------------------------------------------
Statutory income tax rate applied to earnings
before income taxes, discontinued operations
and extraordinary item 56 51
Difference in Canadian provincial statutory
rates applicable to subsidiaries in different
Canadian jurisdictions (5) (6)
Difference between Canadian statutory rate and
rates applicable to foreign subsidiaries (2) (2)
Items capitalized for accounting purposes but
expensed for income tax purposes (13) (16)
Difference between capital cost allowance and
amounts claimed for accounting purposes 1 (2)
Non-deductible expenses 1 1
Impacts associated with Part VI.1 tax - 2
Difference between employee future benefits
paid and amounts expensed for accounting
purposes 2 1
Other (1) 1
----------------------------------------------------------------------------
Income tax expense 39 30
----------------------------------------------------------------------------
Effective income tax rate 20.2% 17.1%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at March 31, 2014, the Corporation had non-capital and capital loss
carryforwards of approximately $113 million (December 31, 2013 - $133 million),
of which $12 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.
11. SALE OF GRIFFITH
In March 2014 Griffith was sold for proceeds of approximately $105 million
(US$95 million). The assets and liabilities of Griffith were classified as held
for sale on the consolidated balance sheet as at December 31, 2013 and the
results of operations have been presented as discontinued operations on the
consolidated statements of earnings for the three months ended March 31, 2014.
The table below details the results of discontinued operations.
Quarter Ended
March 31
($ millions) 2014
----------------------------------------------------------------------------
Revenue 95
Earnings from discontinued operations before income taxes 8
Income tax expense (3)
----------------------------------------------------------------------------
Earnings from discontinued operations, net of tax 5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
12. 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 ($22 million after tax) was recognized in the first quarter of 2013.
13. EARNINGS PER COMMON SHARE
The Corporation calculates earnings per common share ("EPS") on the weighted
average number of common shares outstanding. Diluted EPS is calculated using the
treasury stock method for options and the "if-converted" method for convertible
securities.
EPS was as follows:
Quarter ended March 31, 2014
----------------------------------------------------------------------------
Net Earnings to Common Shareholders
----------------------------------------------------
Weighted
Average
Continuing Discontinued Extraordinary Number of
Operations Operations Item Total Shares
($ millions) ($ millions) ($ millions)($ millions) (millions)
----------------------------------------------------------------------------
Basic EPS 138 5 - 143 213.6
----------------------------------------------------------------------------
Effect of
potential
dilutive
securities:
Stock
Options - - - - 0.4
Preference
Shares 2 - - 2 6.9
----------------------------------------------------------------------------
Diluted EPS 140 5 - 145 220.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
EPS
---------------------------------------------------------------
Continuing Discontinued Extraordinary
Operations Operations Item Total
----------------------------------------------------------------------------
Basic EPS $ 0.65 $ 0.02 $ - $ 0.67
----------------------------------------------------------------------------
Effect of
potential
dilutive
securities:
Stock
Options
Preference
Shares
----------------------------------------------------------------------------
Diluted EPS $ 0.64 $ 0.02 $ - $ 0.66
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter ended March 31, 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 129 - 22 151 192.0
----------------------------------------------------------------------------
Effect of
potential
dilutive
securities:
Stock
Options - - - - 0.8
Preference
Shares 4 - - 4 10.0
----------------------------------------------------------------------------
Diluted EPS 133 - 22 155 202.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
EPS
---------------------------------------------------------------
Continuing Discontinued Extraordinary
Operations Operations Item Total
----------------------------------------------------------------------------
Basic EPS $ 0.67 $ - $ 0.12 $ 0.79
----------------------------------------------------------------------------
Effect of
potential
dilutive
securities:
Stock
Options
Preference
Shares
----------------------------------------------------------------------------
Diluted EPS $ 0.66 $ - $ 0.10 $ 0.76
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 as a conversion price of $30.72 per
common share, being a conversion rate of 32.5521 common shares per $1,000
principal amount of Debentures (Note 4). Accordingly, a total of approximately
58.6 million common shares could be issued and outstanding, which would have an
impact on basic EPS. Alternatively, if holders do not opt to convert the
Debentures into common shares, the Debentures would have an impact on diluted
EPS.
14. SEGMENTED INFORMATION
Information by reportable segment is as follows:
REGULATED UTILITIES
---------------------------------------------------------------
Gas &
Gas Electric Electric
---------------------------------------------------------------
Total
Quarter Ended FortisBC New- Elec- Elec-
March 31, Energy Central found- Other tric tric
2014 Cana- Hudson Fortis FortisBC land Cana- Cana- Carib-
($ millions) dian US Alberta Electric Power dian dian bean
----------------------------------------------------------------------------
Revenue 513 272 126 95 209 103 533 74
Energy supply
costs 251 137 - 27 149 69 245 45
Operating
expenses 71 89 43 22 25 13 103 9
Depreciation
and
amortization 46 11 41 14 13 7 75 9
----------------------------------------------------------------------------
Operating
income 145 35 42 32 22 14 110 11
Other income
(expenses),
net 1 2 2 - - - 2 -
Finance
charges 35 9 19 10 9 5 43 4
Income tax
expense
(recovery) 32 10 - 4 3 2 9 -
----------------------------------------------------------------------------
Net earnings
(loss) from
continuing
operations 79 18 25 18 10 7 60 7
Earnings from
discontinued
operations,
net of tax - - - - - - - -
----------------------------------------------------------------------------
Net earnings
(loss) 79 18 25 18 10 7 60 7
Non-
controlling
interests - - - - - - - 2
Preference
share
dividends - - - - - - - -
----------------------------------------------------------------------------
Net earnings
(loss)
attributable
to common
equity
shareholders 79 18 25 18 10 7 60 5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill 913 499 227 235 - 67 529 156
Identifiable
assets 4,631 1,902 3,084 1,776 1,422 694 6,976 724
----------------------------------------------------------------------------
Total assets 5,544 2,401 3,311 2,011 1,422 761 7,505 880
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross capital
expenditures 51 21 79 15 18 7 119 13
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter Ended
March 31,
2013
($ millions)
----------------------------------------------------------------------------
Revenue 492 - 118 88 197 96 499 66
Energy supply
costs 232 - - 25 145 62 232 41
Operating
expenses 72 - 40 20 23 13 96 8
Depreciation
and
amortization 46 - 36 13 12 7 68 8
----------------------------------------------------------------------------
Operating
income 142 - 42 30 17 14 103 9
Other income
(expenses),
net 1 - 2 - 1 - 3 -
Finance
charges 35 - 17 9 9 5 40 4
Income tax
expense
(recovery) 23 - 1 3 2 3 9 -
----------------------------------------------------------------------------
Net earnings
(loss) from
continuing
operations 85 - 26 18 7 6 57 5
Extraordinary
gain, net of
tax - - - - - - - -
----------------------------------------------------------------------------
Net earnings
(loss) 85 - 26 18 7 6 57 5
Non-
controlling
interests - - - - - - - 2
Preference
share
dividends - - - - - - - -
----------------------------------------------------------------------------
Net earnings
(loss)
attributable
to common
equity
shareholders 85 - 26 18 7 6 57 3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill 913 - 227 235 - 67 529 143
Identifiable
assets 4,608 - 2,806 1,758 1,419 709 6,692 652
----------------------------------------------------------------------------
Total assets 5,521 - 3,033 1,993 1,419 776 7,221 795
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross capital
expenditures 41 - 95 17 15 13 140 11
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NON-REGULATED
--------------------------------------
Quarter Ended
March 31, Corporate Inter-
2014 Fortis Non- and segment
($ millions) Generation Utility Other eliminations Total
----------------------------------------------------------------------------
Revenue 11 54 7 (9) 1,455
Energy supply
costs 1 - - - 679
Operating
expenses 2 42 5 (2) 319
Depreciation
and
amortization 1 6 - - 148
----------------------------------------------------------------------------
Operating
income 7 6 2 (7) 309
Other income
(expenses),
net - - 2 - 7
Finance
charges - 6 33 (7) 123
Income tax
expense
(recovery) 1 - (13) - 39
----------------------------------------------------------------------------
Net earnings
(loss) from
continuing
operations 6 - (16) - 154
Earnings from
discontinued
operations,
net of tax - 5 - - 5
----------------------------------------------------------------------------
Net earnings
(loss) 6 5 (16) - 159
Non-
controlling
interests - - - - 2
Preference
share
dividends - - 14 - 14
----------------------------------------------------------------------------
Net earnings
(loss)
attributable
to common
equity
shareholders 6 5 (30) - 143
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill - - - - 2,097
Identifiable
assets 909 675 1,290 (614) 16,493
----------------------------------------------------------------------------
Total assets 909 675 1,290 (614) 18,590
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross capital
expenditures 24 9 - - 237
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarter Ended
March 31,
2013
($ millions)
----------------------------------------------------------------------------
Revenue 5 53 6 (8) 1,113
Energy supply
costs - - - - 505
Operating
expenses 2 42 3 (2) 221
Depreciation
and
amortization 1 5 1 - 129
----------------------------------------------------------------------------
Operating
income 2 6 2 (6) 258
Other income
(expenses),
net - - 2 - 6
Finance
charges - 6 10 (6) 89
Income tax
expense
(recovery) - - (2) - 30
----------------------------------------------------------------------------
Net earnings
(loss) from
continuing
operations 2 - (4) - 145
Extraordinary
gain, net of
tax 22 - - - 22
----------------------------------------------------------------------------
Net earnings
(loss) 24 - (4) - 167
Non-
controlling
interests - - - - 2
Preference
share
dividends - - 14 - 14
----------------------------------------------------------------------------
Net earnings
(loss)
attributable
to common
equity
shareholders 24 - (18) - 151
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill - - - - 1,585
Identifiable
assets 780 678 620 (460) 13,570
----------------------------------------------------------------------------
Total assets 780 678 620 (460) 15,155
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross capital
expenditures 48 13 - - 253
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Related party transactions are in the normal course of operations and are
measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties. The significant related party
inter-segment transactions primarily related to: (i) electricity sales from
Newfoundland Power to Non-Utility; and (ii) finance charges on related party
borrowings. The significant related party inter-segment transactions for the
three months ended March 31, 2014 and 2013 were as follows:
Significant Related Party Inter-Segment
Transactions Quarter Ended
March 31
($ millions) 2014 2013
----------------------------------------------------------------------------
Sales from Newfoundland Power to Non-Utility 2 2
Inter-segment finance charges on lending from:
Corporate to Regulated Electric Utilities -
Caribbean 1 1
Corporate to Non-Utility 5 5
----------------------------------------------------------------------------
The significant related party inter-segment asset balances were as follows:
As at March 31
($ millions) 2014 2013
----------------------------------------------------------------------------
Inter-segment lending from:
Fortis Generation to Other Canadian Electric
Utilities 20 20
Corporate to Regulated Gas Utilities -
Canadian 18 -
Corporate to Regulated Electric Utilities -
Canadian 86 -
Corporate to Regulated Electric Utilities -
Caribbean 100 86
Corporate to Fortis Generation - 6
Corporate to Non-Utility 378 319
Other inter-segment assets 12 29
----------------------------------------------------------------------------
Total inter-segment eliminations 614 460
----------------------------------------------------------------------------
----------------------------------------------------------------------------
15. SUPPLEMENTARY INFORMATION TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended
March 31
($ millions) 2014 2013
----------------------------------------------------------------------------
Change in non-cash operating working capital:
Accounts receivable (145) (79)
Prepaid expenses 2 3
Regulatory assets - current portion (30) 34
Inventories 70 55
Accounts payable and other current liabilities 53 (30)
Regulatory liabilities - current portion (5) 35
----------------------------------------------------------------------------
(55) 18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-cash investing and financing activities:
Common share dividends reinvested 22 19
Additions to utility capital assets, non-
utility capital assets and intangible assets
included in current liabilities 79 70
Contributions in aid of construction included
in current assets 9 20
Exercise of stock options into common shares 1 1
----------------------------------------------------------------------------
16. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Corporation generally limits the use of derivative instruments to those that
qualify as accounting or economic hedges. As at March 31, 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.
Volume of Derivative Activity
As at March 31, 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) 1,068 1,095 659 219
Gas swap and option
contracts (petajoules) 3 - - -
Gas purchase contract
premiums (petajoules) 76 14 - -
----------------------------------------------------------------------------
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
March 31, December 31,
($ millions) 2014 2013
----------------------------------------------------------------------------
Gross derivative asset (1) 23 10
Gross derivative liability (1) (11) (15)
----------------------------------------------------------------------------
12 (5)
Netting (2) - -
Cash collateral - -
----------------------------------------------------------------------------
Total derivative balance (3) 12 (5)
------------------------------
------------------------------
(1) Refer to Note 17 for a discussion of the valuation techniques used to
calculate the fair value of the derivative instruments.
(2) Positions, by counterparty, are netted where the intent and legal right
to offset exists.
(3) Unrealized losses of $11 million on commodity risk-related derivative
instruments were recognized in current regulatory assets as at March
31, 2014 (December 31, 2013 - $15 million) and unrealized gains of $23
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.
17. FAIR VALUE MEASUREMENTS
Fair value is the price at which a market participant could sell an asset or
transfer a liability to an unrelated party. A fair value measurement is required
to reflect the assumptions that market participants would use in pricing an
asset or liability based on the best available information. These assumptions
include the risks inherent in a particular valuation technique, such as a
pricing model, and the risks inherent in the inputs to the model. A fair value
hierarchy exists that prioritizes the inputs used to measure fair value. The
Corporation is required to record all derivative instruments at fair value
except for those 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) March 31, 2014 December 31, 2013
Carrying Estimated Carrying Estimated
($ millions) Value Fair Value Value Fair Value
----------------------------------------------------------------------------
Long-term other asset -
Belize Electricity (1) 112 n/a(2) 108 n/a (2)
Other investments (1) (3) 6 6 6 6
Long-term debt, including
current portion (4) (7,158) (8,329) (7,204) (8,084)
Waneta Expansion Limited
Partnership ("Waneta
Partnership") promissory
note (5) (50) (52) (50) (50)
Electricity swap contracts
(6) 23 23 10 10
Natural gas derivatives: (7)
Gas swap and option
contracts (6) (6) (13) (13)
Gas purchase contract
premiums (5) (5) (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 18 and 20).
(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 $175 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 are used by Central Hudson to minimize commodity
price volatility for electricity purchases by fixing the effective purchase
price of electricity. The fair value of the electricity swap contracts was
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 March
31, 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.
18. FINANCIAL RISK MANAGEMENT
The Corporation is primarily exposed to credit risk, liquidity risk and market
risk as a result of holding financial instruments in the normal course of
business.
Credit risk Risk that a counterparty to a financial instrument might
fail to meet its obligations under the terms of the
financial instrument.
Liquidity risk Risk that an entity will encounter difficulty in raising
funds to meet commitments associated with financial
instruments.
Market risk Risk that the fair value or future cash flows of a financial
instrument will fluctuate due to changes in market prices.
The Corporation is exposed to foreign exchange risk,
interest rate risk and commodity price risk.
Credit Risk
For cash equivalents, trade and other accounts receivable, and long-term other
receivables, the Corporation's credit risk is generally limited to the carrying
value on the consolidated balance sheet. The Corporation generally has a large
and diversified customer base, which minimizes the concentration of credit risk.
The Corporation and its subsidiaries have various policies to minimize credit
risk, which include requiring customer deposits, prepayments and/or credit
checks for certain customers and performing disconnections and/or using
third-party collection agencies for overdue accounts.
FortisAlberta has a concentration of credit risk as a result of its distribution
service billings being to a relatively small group of retailers. As at March 31,
2014, FortisAlberta's gross credit risk exposure was approximately $114 million,
representing the projected value of retailer billings over a 37-day period. The
Company has reduced its exposure to $2 million by obtaining from the retailers
either a cash deposit, bond, letter of credit or an investment-grade credit
rating from a major rating agency, or by having the retailer obtain a financial
guarantee from an entity with an investment-grade credit rating.
The FortisBC Energy companies may be exposed to credit risk in the event of
non-performance by counterparties to derivative instruments. The companies use
netting arrangements to reduce credit risk and net settle payments with
counterparties where net settlement provisions exist. The following table
summarizes the FortisBC Energy companies net credit risk exposure to their
counterparties, as well as credit risk exposure to counterparties accounting for
greater than 10% net credit exposure, as it relates to their natural gas swaps
and options.
As at
March 31, December 31,
($ millions, except as noted) 2014 2013
----------------------------------------------------------------------------
Gross credit exposure before credit collateral
(1) 6 13
Credit collateral - -
----------------------------------------------------------------------------
Net credit exposure (2) 6 13
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Number of counterparties greater than 10% (#) 2 2
Net exposure to counterparties greater than
10% 5 11
----------------------------------------------------------------------------
(1) Gross credit exposure equals mark-to-market value on physically and
financially settled contracts, notes receivable and net receivables
(payables) where netting is contractually allowed. Gross and net credit
exposure amounts reported do not include adjustments for time value or
liquidity.
(2) Net credit exposure is the gross credit exposure collateral minus
credit collateral (cash deposits and letters of credit).
The Corporation is exposed to credit risk associated with the amount and timing
of fair value compensation that Fortis is entitled to receive from the
Government of Belize ("GOB") as a result of the expropriation of the
Corporation's investment in Belize Electricity by the GOB on June 20, 2011. As
at March 31, 2014, the Corporation had a long-term other asset of $112 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 17 and 20).
Additionally, as at March 31, 2014, Belize Electricity owed Belize Electric
Company Limited ("BECOL") approximately US$2 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 $310 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 March 31, 2014, the Corporation and its subsidiaries had consolidated
credit facilities of approximately $2.7 billion, of which $2.4 billion was
unused, including $824 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 $2.6 billion of the
total credit facilities are committed facilities with maturities ranging from
2014 through 2019.
The following summary outlines the credit facilities of the Corporation and its
subsidiaries.
As at
December
Regulated Non- Corporate March 31, 31,
($ millions) Utilities Regulated and Other 2014 2013
----------------------------------------------------------------------------
Total credit
facilities 1,555 13 1,140 2,708 2,695
Credit facilities
utilized:
Short-term
borrowings (1) (63) (1) - (64) (160)
Long-term debt (2) - - (175) (175) (313)
Letters of credit
outstanding (67) - (1) (68) (66)
----------------------------------------------------------------------------
Credit facilities
unused 1,425 12 964 2,401 2,156
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The weighted average interest rate on short-term borrowings was
approximately 1.3% as at March 31, 2014 (December 31, 2013 - 1.3%)
(2) As at March 31, 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 March 31, 2014 (December
31, 2013 - 1.8%).
As at March 31, 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 May 2015 from May 2014.
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 4).
The Corporation and its currently rated utilities target investment-grade credit
ratings to maintain capital market access at reasonable interest rates. As at
March 31, 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 4).
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 March 31, 2014, the Corporation's corporately issued US$1,033 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 March 31,
2014, the Corporation had approximately US$585 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 17 and 20) does not qualify
for hedge accounting as Belize Electricity is no longer a foreign subsidiary of
Fortis. As a result, foreign exchange gains and losses on the translation of the
long-term other asset associated with Belize Electricity are recognized in
earnings. The Corporation recognized in earnings a foreign exchange gain of
approximately $4 million and $2 million during the three months ended March 31,
2014 and 2013, respectively (Note 8).
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 16 and 17). 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.
19. COMMITMENTS
There were no material changes in the nature and amount of the Corporation's
commitments from the commitments disclosed in the Corporation's 2013 annual
audited consolidated financial statements, except as follows.
Commitments as at March 31, 2014 include Central Hudson's contract to purchase
200 megawatts ("MW") of installed capacity from May 1, 2014 through April 30,
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 will be 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.
On May 6, 2014, the BCUC approved FortisBC Electric's new power purchase
agreement ("PPA") 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 4).
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%. Subject
to the satisfaction of customary closing conditions, US$213 million of notes
will be issued on June 30, 2014 and US$287 million of notes will be issued on
September 15, 2014.
Net proceeds from the sale of the notes 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, including repayment of US-dollar drawings on the Corporation's
committed credit facility.
20. 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 is pending. Any decision of the Belize Court of Appeal may
be appealed to the Caribbean Court of Justice, the highest court of appeal
available for judicial matters in Belize.
Fortis believes it has a strong, well-positioned case before the Belize Courts
supporting the unconstitutionality of the expropriation. There exists, however,
a possibility that the outcome of the litigation may be unfavourable to the
Corporation and the amount of compensation otherwise to be paid to Fortis under
the legislation expropriating Belize Electricity could be lower than the book
value of the Corporation's expropriated investment in Belize Electricity. The
book value was $112 million, including foreign exchange impacts, as at March 31,
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 $112 million long-term
other asset is not deemed impaired as at March 31, 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.
21. 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 is subject to court approval. In February 2014 the
Supreme Court of the State of New York, County of New York, issued a Consent
Order preliminarily certifying the matter as a class action and providing
directions leading to a Settlement Hearing to be held in June 2014.
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.
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
March 31, 2014, an obligation of US$46 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 (Note
3).
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 the acquisition of CH Energy Group, various asbestos lawsuits had been
brought against Central Hudson. While a total of 3,343 asbestos cases have been
raised, 1,171 remained pending as at March 31, 2014. Of the cases no longer
pending against Central Hudson, 2,017 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.
22. 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. 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:
Barry V. Perry
Vice President Finance and Chief Financial Officer
Fortis Inc.
709.737.2822
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