Fortis Inc. ("Fortis" or the "Corporation") (TSX:FTS) realized net earnings
applicable to common shares of $193 million in 2007, 31 per cent higher than
earnings of $147 million in 2006. Earnings per common share were $1.40 compared
to $1.42 last year.
"Fortis has delivered record earnings for the eighth consecutive year. It was
also a year of record growth with our expansion into natural gas distribution
through the acquisition of Terasen," says Stan Marshall, President and Chief
Executive Officer, Fortis Inc.
"The growth in annual earnings was primarily attributable to the acquisition of
Terasen in May, but also reflects the first full year of ownership of Fortis
Turks and Caicos, significant investment in electrical infrastructure at
FortisAlberta and FortisBC, stronger performance at Fortis Properties and lower
effective corporate taxes," explains Marshall.
Earnings for the fourth quarter were $79 million, or $0.51 per common share,
compared to $34 million, or $0.33 per common share, for the same quarter last
year. The 55 per cent increase in quarterly earnings per common share was
driven by the acquisition of Terasen. The Terasen Gas companies delivered $52
million for the fourth quarter, including a $7 million after-tax gain on the
sale of surplus land. Due to the seasonality of the business, virtually all of
the earnings of the Terasen Gas companies are generated in the first and fourth
quarters.
On May 17, 2007, Fortis acquired Terasen for $3.7 billion, establishing a new
business segment. The gas distribution segment is carried on by Terasen Gas
Inc. ("TGI"), Terasen Gas (Vancouver Island) Inc. ("TGVI"), and Terasen Gas
(Whistler) Inc. ("TGWI"), and is collectively referred to as the Terasen Gas
companies. Terasen serves over 918,000 customers or 96 per cent of natural gas
users in British Columbia. The Terasen acquisition doubles the regulated rate
base of Fortis to approximately $6.3 billion and establishes Fortis as the
largest investor-owned gas and electric distribution utility in Canada.
"The integration of Terasen within the Fortis Group of Companies has progressed
well. We expect the acquisition to be accretive to earnings per common share of
Fortis over the first full year of our ownership," says Marshall.
Coincident with the closing of the Terasen acquisition in May 2007, Fortis
completed a $1.15 billion common share issue, the net proceeds of which were
used to complete the purchase of Terasen. The remaining purchase price was
funded by assumed debt of $2.4 billion and drawings on existing credit
facilities. The common share issue, combined with the seasonality of earnings of
the Terasen Gas companies, diluted earnings per common share by approximately 7
cents in 2007.
Subsequent to the acquisition of Terasen, Standard and Poor's raised the
unsecured debt credit rating of Fortis to 'A-' from 'BBB'.
Dividends paid per common share grew to 82 cents in 2007, up 22 per cent from 67
cents paid per common share the previous year. Fortis increased its quarterly
common share dividend to 25 cents from 21 cents, commencing with the first
quarter dividend payable on March 1, 2008.
"The 19 per cent increase in the quarterly common share dividend to 25 cents
extends the Corporation's record of annual common share dividend increases to 35
consecutive years, the longest record of any public corporation in Canada," says
Marshall. "Growth in earnings has enabled Fortis to increase its quarterly
common share dividend by 92 per cent since 2003," he adds.
Canadian Regulated Electric Utilities delivered earnings of $125 million, up $12
million from earnings of $113 million in 2006. The increase was driven by
investment in electrical infrastructure at FortisAlberta and FortisBC associated
with customer growth, higher corporate income tax recoveries at FortisAlberta,
rate increases at FortisBC and a one-time after-tax gain of approximately $2
million at FortisOntario.
"A number of significant regulatory decisions received in 2007 and early 2008
will provide regulatory stability for 2008, enabling our utilities to focus on
carrying out the operations needed to meet the energy needs of customers," says
Marshall.
TGI, FortisBC, Newfoundland Power and Maritime Electric received regulatory
approval for their respective 2008 customer rates. In November, FortisAlberta
filed with its regulator a Negotiated Settlement Agreement ("NSA") for the
Company's 2008 and 2009 electricity rates. If approved, it will be the third
consecutive NSA reached by FortisAlberta. The allowed rates of return on common
equity for 2008 for the Corporation's four largest utilities, TGI,
FortisAlberta, FortisBC and Newfoundland Power, have increased from 2007 and
have been set at 8.62 per cent, 8.75 per cent, 9.02 per cent and 8.95 per cent,
respectively.
Caribbean Utilities reached an agreement in principle with the Government of the
Cayman Islands, in December, on the terms of the Company's new 20-year
generation licence and a new exclusive 20-year transmission and distribution
licence. The new licences are expected to be issued during the first quarter of
2008.
The Government of Belize enacted amendments simplifying the tariff-setting
methodology at Belize Electricity. The amendments, enacted in December, settle
outstanding matters relating to the regulator's Final Decision on customer
rates, effective July 1, 2007.
Caribbean Regulated Electric Utilities contributed earnings of $31 million, up
$8 million from earnings of $23 million in 2006. Performance was driven by the
first full year of earnings contribution from Fortis Turks and Caicos, and
electricity sales growth and lower finance charges at Belize Electricity,
partially offset by the impact of unfavourable foreign exchange rates associated
with the strengthening Canadian dollar. The impact of the increased investment
in Caribbean Utilities to 54 per cent in November 2006 was offset by lower
earnings at Caribbean Utilities, driven by a charge associated with the disposal
of steam-turbine assets.
Non-Regulated Fortis Generation contributed earnings of $24 million compared to
$27 million in 2006. Results were impacted by decreased hydroelectric production
due to lower rainfall.
Fortis Properties contributed earnings of $24 million, up $5 million from
earnings of $19 million in 2006. Results were driven by expanded hospitality
operations in western Canada and a $4 million favourable corporate tax
adjustment related to lower future corporate income tax rates. Results for 2006
included $3 million associated with a favourable corporate tax adjustment and a
gain on the sale of a hotel.
Corporate and other expenses were $61 million in 2007 compared to $35 million in
2006. The increase in corporate and other expenses was primarily driven by
Terasen acquisition-related finance charges.
Utility capital expenditures, before customer contributions, were approximately
$790 million in 2007, including $120 million relating to the Terasen Gas
companies from the date of acquisition.
"Our utilities have started their 2008 capital programs, totalling approximately
$900 million. Much of this capital work is occurring at our utilities in the
high-growth region of western Canada to meet increased energy demand and to
enhance the reliability of gas and electricity delivered to customers," says
Marshall. "Over the next five years, our consolidated utility capital program is
expected to exceed $4 billion. This capital program should drive growth in
earnings and dividends," he says.
"Fortis is pursuing acquisitions for profitable growth, focusing on
opportunities to acquire regulated natural gas and electric utilities in Canada,
the United States and the Caribbean," adds Marshall.
"As we continue to grow our business, we remain focused on serving our customers
well and delivering good returns to our shareholders," concludes Marshall.
Fortis Inc.
Interim Management Discussion and Analysis
For the 3- and 12-months ended December 31, 2007
Dated February 7, 2008
The following analysis should be read in conjunction with the Fortis Inc.
("Fortis" or the "Corporation") interim unaudited consolidated financial
statements for the 3- and 12-months ended December 31, 2007 and the Management
Discussion and Analysis and audited consolidated financial statements for the
year ended December 31, 2006 included in the Corporation's 2006 Annual Report.
This material has been prepared in accordance with National Instrument 51-102 -
Continuous Disclosure Obligations relating to Management Discussion and
Analysis. Financial information in this release has been prepared in accordance
with Canadian generally accepted accounting principles ("Canadian GAAP") and is
presented in Canadian dollars unless otherwise specified.
Fortis includes forward-looking statements in this material which reflect
management's expectations regarding the Corporation's future growth, results of
operations, performance, business prospects and opportunities. Wherever
possible, words such as "anticipate", "believe", "expects", "intend" or similar
expressions have been used to identify the forward-looking statements. These
statements reflect management's current beliefs and are based on information
currently available to the Corporation's management. Certain material factors or
assumptions have been applied in drawing the conclusions contained in the
forward-looking statements. These factors or assumptions are subject to inherent
risks and uncertainties surrounding future expectations generally. Such risk
factors or assumptions include, but are not limited to, regulation, integration
of Terasen Inc. ("Terasen") and management of expanding operations, operating
and maintenance risks, natural gas prices and supply, economic conditions,
weather and seasonality, interest rates, derivative instruments and hedging,
risks related to Terasen Gas (Vancouver Island) Inc., capital resources,
environment, insurance, licences and permits, energy prices, loss of service
area, First Nations Land, counter-party risk, labour relations, human resources
and liquidity risk. Fortis cautions readers that a number of factors could cause
actual results, performance or achievements to differ materially from the
results discussed or implied in the forward-looking statements. These factors
should be considered carefully and undue reliance should not be placed on the
forward-looking statements. For additional information with respect to certain
of these risks or factors, reference should be made to the Corporation's
continuous disclosure materials filed from time to time with Canadian securities
regulatory authorities including those factors described under the heading
"Business Risk Management" in the Management Discussion and Analysis for the
year ended December 31, 2006 and in the Management Discussion and Analysis for
the 3- and 12-months ended December 31, 2007. The Corporation disclaims any
intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
Fortis is the largest investor-owned distribution utility in Canada serving
2,000,000 gas and electricity customers. Its regulated holdings include a
natural gas utility in British Columbia and electric utilities in five Canadian
provinces and three Caribbean countries. Fortis owns non-regulated hydroelectric
generation assets across Canada and in Belize and Upper New York State. It also
owns hotels and commercial real estate in Canada. In 2007, the Corporation's
electricity distribution systems met a combined peak electricity demand of
approximately 5,700 megawatts ("MW") and its gas distribution system met a peak
day demand of 1,360 terajoules ("TJ").
The key goals of the Corporation's regulated utilities are to operate sound gas
and electricity distribution systems and deliver gas and electricity safely and
reliably to customers at reasonable rates. The Corporation's core business is
highly regulated. It is segmented by franchise area and, depending on regulatory
requirements, by the nature of the assets. The reporting segments of the
Corporation are: (i) Regulated Gas Utilities - Canadian, (ii) Regulated Electric
Utilities - Canadian, (iii) Regulated Electric Utilities - Caribbean, (iv)
Non-Regulated - Fortis Generation, (v) Non-Regulated - Fortis Properties, and
(vi) Corporate and Other. The Regulated Gas Utilities - Canadian segment is
comprised of the gas distribution businesses of Terasen carried out by Terasen
Gas Inc. ("TGI"), Terasen Gas (Vancouver Island) Inc. ("TGVI") and Terasen Gas
(Whistler) Inc. ("TGWI"), collectively referred to as the Terasen Gas companies.
The Regulated Electric Utilities - Canadian segment is comprised of
FortisAlberta, FortisBC, Newfoundland Power, FortisOntario and Maritime Electric
on Prince Edward Island ("PEI"). The Corporation's Regulated Electric Utilities
- Caribbean segment is comprised of wholly owned P.P.C. Limited and Atlantic
Equipment & Power (Turks and Caicos) Ltd., collectively referred to as Fortis
Turk and Caicos; Belize Electricity, in which Fortis holds a 70.1 per cent
controlling interest; and Caribbean Utilities, the sole provider of electricity
on Grand Cayman, in which Fortis holds an approximate 54 per cent controlling
interest. The earnings of the Corporation's regulated utilities are primarily
determined under traditional cost of service and rate of return methodologies.
Earnings of the Canadian regulated utilities are generally exposed to changes in
interest rates which factor into customer rate-setting mechanisms.
The Corporation's non-regulated generation assets operate in three countries and
have a combined generating capacity of 195 MW, principally hydroelectric. The
Corporation, through its non-regulated subsidiary Fortis Properties, owns and
operates 19 hotels with more than 3,500 rooms in eight Canadian provinces and
approximately 2.8 million square feet of commercial real estate primarily in
Atlantic Canada.
The Corporate and Other segment captures expense and revenue items not
specifically related to any other reportable segment, including corporate
financing, and general and administration costs, and, from May 17, 2007, the
expenses of non-regulated Terasen corporate-related activities and Terasen's 30
per cent ownership interest in CustomerWorks Limited Partnership ("CWLP"). CWLP
operates in partnership with Enbridge Inc. and is a non-regulated shared-service
business that provides customer service, meter reading, billing, credit, support
and collection services to the Terasen Gas companies and several smaller third
parties.
BUSINESS ACQUISITION
On May 17, 2007, Fortis completed the acquisition of all of the issued and
outstanding common shares of Terasen, formerly a wholly owned subsidiary of
Kinder Morgan, Inc., for aggregate consideration of $3.7 billion, including the
assumption of approximately $2.4 billion of consolidated debt. Terasen owns and
operates gas distribution businesses carried out by TGI, TGVI and TGWI. Terasen
is the principal natural gas distributor in British Columbia, serving over
918,000 customers or 96 per cent of natural gas users in the province. The
acquisition did not include the petroleum transportation assets of Kinder Morgan
Canada (formerly Terasen Pipelines), which are comprised primarily of refined
and crude oil pipelines.
A significant portion of the net cash purchase price of Terasen was satisfied
with the net proceeds of the public offering of Subscription Receipts completed
by Fortis on March 15, 2007. Fortis issued 44,275,000 Subscription Receipts for
gross proceeds of approximately $1.15 billion. Upon closing of the acquisition
on May 17, 2007, each Subscription Receipt was automatically exchanged, without
payment of additional consideration, for one Common Share of Fortis. Each
Subscription Receipt holder also received a cash payment of $0.21 which was an
amount equal to the dividend declared on the Common Shares of Fortis to holders
of record as of May 4, 2007. The remaining net cash purchase price was financed,
on an interim basis, by drawing $125 million on the Corporation's existing
credit facilities.
FINANCIAL HIGHLIGHTS
Fortis has adopted a strategy of profitable growth with earnings per common
share as the primary measure of performance. Key financial highlights, including
segmented earnings, for the fourth quarters and years ended December 31, 2007
and December 31, 2006 are provided in the table below.
----------------------------------------------------------------------
----------------------------------------------------------------------
Financial Highlights (Unaudited)
Periods Ended December 31st
----------------------------------------------------------------------
Quarter Annual
----------------------------------------------------------------------
($ millions, except
earnings per common
share and common
shares outstanding) 2007 2006 Variance 2007 2006 Variance
----------------------------------------------------------------------
Revenue and equity
income 1,018 394 624 2,718 1,472 1,246
----------------------------------------------------------------------
Cash flow from
operating
activities 152 59 93 373 263 110
----------------------------------------------------------------------
Net earnings
applicable to
common shares 79 34 45 193 147 46
----------------------------------------------------------------------
Basic earnings per
common share ($) 0.51 0.33 0.18 1.40 1.42 (0.02)
----------------------------------------------------------------------
Diluted earnings per
common share ($) 0.49 0.32 0.17 1.32 1.37 (0.05)
----------------------------------------------------------------------
Weighted average
number of common
shares outstanding
(millions) 155.4 104.0 51.4 137.6 103.6 34.0
----------------------------------------------------------------------
----------------------------------------------------------------------
Segmented Net Earnings
----------------------------------------------------------------------
Quarter Annual
----------------------------------------------------------------------
2007 2006 Variance 2007 2006 Variance
----------------------------------------------------------------------
Regulated Gas
Utilities -
Canadian
Terasen Gas
Companies (1) 52 - 52 50 - 50
----------------------------------------------------------------------
Regulated Electric
Utilities -
Canadian
FortisAlberta 6 9 (3) 48 42 6
----------------------------------------------------------------------
FortisBC (2) 7 6 1 31 27 4
----------------------------------------------------------------------
Newfoundland Power 9 9 - 30 30 -
----------------------------------------------------------------------
Other Canadian (3) 3 3 - 16 14 2
----------------------------------------------------------------------
25 27 (2) 125 113 12
----------------------------------------------------------------------
Regulated Electric
Utilities -
Caribbean (4) 9 8 1 31 23 8
----------------------------------------------------------------------
Non-Regulated -
Fortis Generation (5) 7 7 - 24 27 (3)
----------------------------------------------------------------------
Non-Regulated -
Fortis Properties 8 3 5 24 19 5
----------------------------------------------------------------------
Corporate and
Other (6) (22) (11) (11) (61) (35) (26)
----------------------------------------------------------------------
Net Earnings
Applicable to
Common Shares 79 34 45 193 147 46
----------------------------------------------------------------------
(1) Financial results are from May 17, 2007, the date of acquisition.
(2) Includes the regulated operations of FortisBC Inc. and non-regulated
operating, maintenance and management services related to the Waneta,
Brilliant and the Arrow Lakes hydroelectric plants and the distribution
system owned by the City of Kelowna. Also includes the former
Princeton Light and Power Company, Limited ("PLP"), but excludes the
non-regulated generation operations of FortisBC Inc.'s wholly owned
partnership, Walden Power Partnership. Effective January 1, 2007, PLP
was amalgamated with FortisBC Inc. as part of an internal corporate
reorganization.
(3) Includes Maritime Electric and FortisOntario. FortisOntario includes
Canadian Niagara Power and Cornwall Electric.
(4) Includes Belize Electricity, in which Fortis holds a 70.1 per cent
controlling interest; Caribbean Utilities, in which Fortis holds an
approximate 54 per cent controlling interest; and wholly owned Fortis
Turks and Caicos, acquired on August 28, 2006. On November 7, 2006,
Fortis acquired an additional approximate 16 per cent interest in
Caribbean Utilities and now owns approximately 54 per cent of the
Company. Caribbean Utilities' balance sheet as at November 7, 2006 was
consolidated in the December 31, 2006 balance sheet of Fortis.
Beginning with the first quarter of 2007, Fortis has been consolidating
Caribbean Utilities' financial statements on a two-month lag. During
2006, the statement of earnings of Fortis reflected the Corporation's
approximate 37 per cent interest in Caribbean Utilities, previously
accounted for on an equity basis on a two-month lag.
(5) Includes the operations of non-regulated generating assets in Belize,
Ontario, central Newfoundland, British Columbia and Upper New York
State.
(6) Includes net corporate expenses and, from May 17, 2007, the expenses of
non-regulated Terasen corporate-related activities and Terasen's 30 per
cent ownership interest in CWLP.
----------------------------------------------------------------------
----------------------------------------------------------------------
SEGMENTED FINANCIAL RESULTS
REGULATED GAS UTILITIES - CANADIAN
Terasen Gas Companies
----------------------------------------------------------------------
----------------------------------------------------------------------
Terasen Gas Companies
Financial Highlights (Unaudited)
Periods Ended December 31, 2007
----------------------------------------------------------------------
Quarter Year-to-date(1)
----------------------------------------------------------------------
Gas Volumes (TJ) 69,108 118,309
----------------------------------------------------------------------
($ millions)
----------------------------------------------------------------------
Revenue 548 905
----------------------------------------------------------------------
Energy Supply Costs 367 559
----------------------------------------------------------------------
Operating Expenses 66 150
----------------------------------------------------------------------
Amortization 23 58
----------------------------------------------------------------------
Finance Charges 33 80
----------------------------------------------------------------------
Gain on Sale of Property (8) (8)
----------------------------------------------------------------------
Corporate Taxes 15 16
----------------------------------------------------------------------
Earnings 52 50
----------------------------------------------------------------------
(1) Data is from May 17, 2007, the date of acquisition.
----------------------------------------------------------------------
----------------------------------------------------------------------
On May 17, 2007, Fortis acquired of all of the issued and outstanding common
shares of Terasen. Terasen owns and operates gas distribution businesses carried
out by TGI, TGVI and TGWI. Terasen is the principal distributor of natural gas
in British Columbia serving over 918,000 customers or 96 per cent of natural gas
users in the province. TGI provides gas distribution services to a service area
that extends from Vancouver to the Fraser Valley and the interior of British
Columbia. TGVI owns a combined gas distribution and transmission system
servicing customers along the Sunshine Coast and in various communities on
Vancouver Island, including Victoria and surrounding areas. TGWI provides
propane distribution services to approximately 2,400 customers in the Whistler
area.
Earnings: The Terasen Gas companies reported $52 million in earnings for the
fourth quarter and $50 million from the date of acquisition on May 17, 2007.
Seasonality materially impacts the earnings of the Terasen Gas companies as a
major portion of the gas distributed is ultimately used for space heating.
Virtually all of the earnings of the Terasen Gas companies are generated in the
first and fourth quarters. Performance was consistent with that expected to be
achieved by the Terasen Gas companies during the fourth quarter and consistent
with operating performance achieved during the fourth quarter of 2006. Results
for the quarter included a $7 million after-tax gain on the sale of surplus
land.
As a result of the operation of British Columbia Utilities Commission
("BCUC")-approved regulatory deferral mechanisms, changes in consumption levels
and the commodity cost of natural gas do not materially impact earnings of the
Terasen Gas companies. These mechanisms accumulate the margin impact of
variations in the actual-versus-forecast gas volumes consumed by residential and
commercial customers and also accumulate differences between actual natural gas
costs and forecast natural gas costs as recovered in base rates. Additionally,
as approved by the BCUC, the Terasen Gas companies use an interest-rate deferral
account to absorb interest-rate fluctuations, thereby effectively fixing the
rate of interest on short-term and variable-rate credit-facility borrowings.
Gas volumes: Gas volumes for the fourth quarter were 69,108 TJ compared to
64,514 TJ for the same quarter last year. The 7.1 per cent increase in gas
volumes quarter over quarter was due to cooler weather and growth in the number
of customers. Annual gas volumes were 220,977 TJ, up 5.7 per cent from 209,013
TJ in 2006, for the reasons described for the quarter. Increased volumes result
in both higher revenue and natural gas costs and, therefore, do not have a
material impact on the earnings of the Terasen Gas companies.
During 2007, net customer additions at TGI were 9,939, compared to 10,289 net
customer additions during 2006. Though 2007 was another strong year for housing
starts in British Columbia, adverse weather conditions slowed construction
activities late in the year. In addition, growth in multi-family housing also
impacted net additions as natural gas usage is less prevalent in this type of
dwelling. During 2007, net customer additions at TGVI were 3,922, compared to
4,120 net customer additions during 2006.
Following the acquisition of Terasen by the Corporation, Standard & Poor's
("S&P") raised its unsolicited long-term corporate credit and senior unsecured
debt credit ratings on TGI to 'A' from 'BBB' on June 19, 2007.
REGULATED ELECTRIC UTILITIES - CANADIAN
FortisAlberta
------------------------------------------------------------------------
------------------------------------------------------------------------
FortisAlberta
Financial Highlights (Unaudited)
Periods Ended December 31st
------------------------------------------------------------------------
Quarter Annual
------------------------------------------------------------------------
2007 2006 Variance 2007 2006 Variance
------------------------------------------------------------------------
Energy Deliveries
(GWh) 4,002 3,901 101 15,378 14,851 527
------------------------------------------------------------------------
($ millions)
------------------------------------------------------------------------
Revenue 68 66 2 270 251 19
------------------------------------------------------------------------
Operating Expenses 32 30 2 122 115 7
------------------------------------------------------------------------
Amortization 19 18 1 75 69 6
------------------------------------------------------------------------
Finance Charges 10 8 2 36 30 6
------------------------------------------------------------------------
Corporate Tax
Expense (Recovery) 1 1 - (11) (5) (6)
------------------------------------------------------------------------
Earnings 6 9 (3) 48 42 6
------------------------------------------------------------------------
------------------------------------------------------------------------
Earnings: FortisAlberta's earnings were $3 million lower quarter over quarter,
driven by higher operating expenses, amortization costs and finance charges.
Annual earnings were $6 million higher than last year, primarily due to higher
revenue associated with customer growth, and increased corporate income tax
recoveries, partially offset by higher operating expenses, amortization costs
and finance charges.
Energy Deliveries: Energy deliveries increased 101 gigawatt hours ("GWh"), or
2.6 per cent, quarter over quarter and increased 527 GWh, or 3.5 per cent, year
over year, due to increased energy demand related to customer growth. The
Company added approximately 18,000 customers during the year, bringing the total
number of customers at FortisAlberta to over 448,000.
Revenue: Revenue was $2 million higher quarter over quarter, driven by customer
growth and the 0.7 per cent increase in distribution rates billed to customers,
effective January 1, 2007.
Annual revenue was $19 million higher than last year, due to an increase of $11
million resulting from customer growth and the 0.7 per cent increase in
distribution rates billed to customers, effective January 1, 2007; an increase
of $3 million resulting from differences in the impact of various distribution
revenue deferrals; increased franchise fee revenue of $1 million; higher net
transmission revenue of $1 million, largely related to increased energy
deliveries, number of customers and Alberta Electric System Operator ("AESO")
billing and deferral adjustments; and increased miscellaneous revenue of $3
million. The increase in miscellaneous revenue was primarily due to early
distribution service termination penalties, increased third-party contract work
and interest earned on AESO Charges Deferral Accounts.
Expenses: Operating expenses were $2 million higher quarter over quarter,
primarily due to higher labour and employee-benefit costs, partially offset by
increased amounts charged to capital projects and lower municipal taxes. Annual
operating expenses were $7 million higher than last year, primarily due to
higher labour, employee-benefit and contracted manpower costs and material
purchases, partially offset by increased amounts charged to capital projects.
Amortization costs were $1 million higher quarter over quarter and $6 million
higher year over year, due to an increase in capital assets driven by load
growth, and upgrades and replacements of assets within the Company's service
territory, partially offset by amortization of increased customer contributions.
Finance charges were $2 million higher quarter over quarter and $6 million
higher year over year, primarily due to increased debt levels to finance capital
spending. On January 3, 2007, FortisAlberta issued $110 million 4.99% senior
unsecured debentures, maturing January 3, 2047. On April 21, 2006, FortisAlberta
issued $100 million 5.40% senior unsecured debentures, maturing April 21, 2036.
The net proceeds of the debenture issues were largely used to repay existing
credit-facility borrowings that were incurred primarily to fund capital
expenditures.
Corporate tax expense was comparable quarter over quarter. Higher current
corporate income taxes resulting from a decrease in deductions taken for tax
purposes compared to amounts taken for accounting purposes in 2007, as compared
to 2006, was largely offset by a reduction in future corporate income tax
expense. Annual corporate tax recovery was $6 million higher than last year,
primarily due to a future corporate income tax recovery in 2007 resulting from
the reduction of AESO deferral amounts upon which future corporate income tax is
calculated, partially offset by higher current corporate income taxes for the
reason described for the quarter.
FortisBC
------------------------------------------------------------------------
------------------------------------------------------------------------
FortisBC
Financial Highlights (Unaudited)
Periods Ended December 31st
------------------------------------------------------------------------
Quarter Annual
------------------------------------------------------------------------
2007 2006 Variance 2007 2006 Variance
------------------------------------------------------------------------
Electricity Sales
(GWh) 839 842 (3) 3,091 3,038 53
------------------------------------------------------------------------
($ millions)
------------------------------------------------------------------------
Revenue 61 58 3 229 216 13
------------------------------------------------------------------------
Energy Supply Costs 19 20 (1) 67 68 (1)
------------------------------------------------------------------------
Operating Expenses 20 17 3 69 63 6
------------------------------------------------------------------------
Amortization 8 7 1 31 28 3
------------------------------------------------------------------------
Finance Charges 7 6 1 26 23 3
------------------------------------------------------------------------
Corporate Taxes - 2 (2) 5 7 (2)
------------------------------------------------------------------------
Earnings 7 6 1 31 27 4
------------------------------------------------------------------------
------------------------------------------------------------------------
Earnings: FortisBC's earnings were slightly higher quarter over quarter. Annual
earnings were $4 million higher than last year, driven by increased electricity
rates, higher electricity sales and lower energy supply costs and corporate
taxes, partially offset by increased operating expenses, amortization costs and
finance charges.
Electricity Sales: Electricity sales decreased 3 GWh, or 0.4 per cent, quarter
over quarter, driven by warmer temperatures and the impact of reduced industrial
loads associated with a plant optimization by a significant industrial customer.
The decrease was partially offset by a reduction in the estimate of electricity
system losses and growth in the number of customers in the residential and
general service sectors.
Annual electricity sales increased 53 GWh, or 1.7 per cent, year over year. The
favourable impact on electricity sales of a reduction in the estimate of
electricity system losses and growth in the number of customers in the
residential and general service sectors more than offset the impact of reduced
industrial loads associated with a plant optimization by a significant
industrial customer. During the first quarter of 2007, an analysis of
electricity system losses resulted in a reduction of the estimate of system
losses, effective January 1, 2007. The reduction in system losses reflects
efficiency improvements arising from the Company's ongoing capital program of
upgrading and replacing generation, transmission and distribution ("T&D")
systems, as well as the refinement of the process for estimating system losses.
Revenue: Revenue was $3 million higher quarter over quarter, primarily due to
the impact of a 1.2 per cent increase in electricity rates, effective January 1,
2007; an incremental 2.1 per cent increase in electricity rates, effective April
1, 2007; and higher revenue contributions from non-regulated operating,
maintenance and management services. The increase was partially offset by lower
electricity sales for the quarter due to the reasons described above.
Annual revenue was $13 million higher than last year, primarily due to the
impact of the January 1, 2007 and April 1, 2007 electricity rate increases,
including the accrual during the first quarter of 2007 of the 2.1 per cent
increase in electricity rates to be collected from customers in 2008; higher
revenue contributions from non-regulated operating, maintenance and management
services; increased electricity sales for the year due to the reasons described
previously; and a decrease in performance-based rate-setting ("PBR") incentive
adjustments owing to customers.
Expenses: Energy supply costs were $1 million lower quarter over quarter and $1
million lower year over year. Despite having a higher proportion of purchased
energy versus energy generated from Company-owned hydroelectric generating
plants during 2007, energy supply costs decreased due to lower average power
purchase prices.
Operating expenses were $3 million higher quarter over quarter, primarily
related to higher non-regulated operating, maintenance and management services
expenses; the impact of the timing of certain 2007 operating and maintenance
projects and related expenditures; general inflationary cost increases; higher
labour costs; and an increase in the allowance for doubtful accounts associated
with the forestry sector. The increase in operating expenses was partially
offset by lower wheeling fees.
Annual operating expenses were $6 million higher than last year. The increase
was driven by higher operating expenses associated with non-regulated operating,
maintenance and management services; general inflationary cost increases; higher
labour costs; an increase in the allowance for doubtful accounts associated with
the forestry sector; and increased property taxes. The increase in operating
expenses was partially offset by lower wheeling and water fees and the impact of
increased capitalized overhead costs.
Amortization costs were $1 million higher quarter over quarter and $3 million
higher year over year. The increase was the result of an increase in the
capital assets of FortisBC due to its capital spending program.
Finance charges were $1 million higher quarter over quarter and $3 million
higher year over year, driven by increased borrowings to finance the Company's
capital spending program. On July 4, 2007, FortisBC issued $105 million 5.90%
senior unsecured debentures, maturing July 4, 2047. The net proceeds of the
debenture issue were used largely to repay existing credit-facility borrowings
that were incurred primarily to fund capital expenditures.
On June 21, 2007, Moody's Investors Service upgraded the credit rating on
FortisBC's senior unsecured debt to 'Baa2, Stable Outlook' from 'Baa3, Stable
Outlook'.
Corporate taxes were $2 million lower quarter over quarter, primarily due to
lower earnings before corporate taxes and higher deductions taken for corporate
income tax purposes compared to amounts taken for accounting purposes. Annual
corporate taxes were $2 million lower than last year, primarily due to higher
deductions taken for corporate income tax purposes compared to amounts taken for
accounting purposes, partially offset by higher earnings before corporate taxes.
Newfoundland Power
------------------------------------------------------------------------
------------------------------------------------------------------------
Newfoundland Power
Financial Highlights (Unaudited)
Periods Ended December 31st
------------------------------------------------------------------------
Quarter Annual
------------------------------------------------------------------------
2007 2006 Variance 2007 2006 Variance
------------------------------------------------------------------------
Electricity Sales
(GWh) 1,384 1,353 31 5,093 4,995 98
------------------------------------------------------------------------
($ millions)
------------------------------------------------------------------------
Revenue 132 114 18 490 421 69
------------------------------------------------------------------------
Energy Supply Costs 88 69 19 327 256 71
------------------------------------------------------------------------
Operating Expenses 14 15 (1) 53 54 (1)
------------------------------------------------------------------------
Amortization 9 9 - 34 33 1
------------------------------------------------------------------------
Finance Charges 8 9 (1) 33 33 -
------------------------------------------------------------------------
Corporate Taxes 3 3 - 12 14 (2)
------------------------------------------------------------------------
Non-Controlling
Interest 1 - 1 1 1 -
------------------------------------------------------------------------
Earnings 9 9 - 30 30 -
------------------------------------------------------------------------
------------------------------------------------------------------------
Earnings: Newfoundland Power's earnings of $9 million for the quarter and $30
million for the year were comparable to earnings for the same periods last year.
The impact of increased electricity sales was largely offset by the impact of
reduced electricity rates, due to a reduction in the allowed rate of return on
common equity ("ROE") for 2007.
Electricity Sales: Electricity sales increased 31 GWh, or 2.3 per cent, quarter
over quarter and increased 98 GWh, or 2.0 per cent, year over year, primarily
due to customer growth and an increase in average consumption.
Revenue: Revenue was $18 million higher quarter over quarter and $69 million
higher year over year. The increase was primarily due to the flow through of
higher purchased power costs, effective January 1, 2007, from Newfoundland and
Labrador Hydro ("Newfoundland Hydro"), and increased electricity sales,
partially offset by a decrease in electricity rates, effective January 1, 2007,
due to a lower allowed ROE for 2007.
Expenses: Energy supply costs were $19 million higher quarter over quarter and
$71 million higher year over year, primarily due to the flow through of higher
purchased power costs, effective January 1, 2007, from Newfoundland Hydro, and
increased electricity sales.
Operating expenses were $1 million lower quarter over quarter and year over
year. The decrease was primarily due to lower pension costs reflecting improved
returns on higher levels of plan assets attributable to pension funding and the
conclusion, in March 2007, of the amortization of retirement allowances
associated with a 2005 early retirement program. The decrease was partially
offset by higher labour costs reflecting normal wage increases and costs
incurred to repair major storm damage to certain distribution systems in
December 2007.
Amortization costs were comparable quarter over quarter and were $1 million
higher year over year. The increase was primarily due to the continued
investment in capital assets.
Finance charges were comparable quarter over quarter and year over year. On
August 17, 2007, Newfoundland Power issued $70 million 5.901% first mortgage
sinking fund bonds, maturing August 17, 2037. The net proceeds were used to
repay existing credit-facility borrowings, that were incurred principally to
fund capital expenditures, and to retire $31.5 million of maturing 11.875%
bonds.
Corporate taxes were comparable quarter over quarter and $2 million lower year
over year. The decrease reflected lower earnings before corporate taxes, and
higher deductions taken for corporate income tax purposes compared to deductions
taken for accounting purposes. The higher tax deductions largely related to
increased capital cost allowance driven by capital expenditures associated with
the Company's Rattling Brook hydroelectric plant during 2007.
Other Canadian Electric Utilities
------------------------------------------------------------------------
------------------------------------------------------------------------
Other Canadian Electric Utilities (Unaudited)(1)
Financial Highlights
Periods Ended December 31st
------------------------------------------------------------------------
Quarter Annual
------------------------------------------------------------------------
2007 2006 Variance 2007 2006 Variance
------------------------------------------------------------------------
Electricity Sales
(GWh)
------------------------------------------------------------------------
Maritime Electric 252 248 4 1,035 999 36
------------------------------------------------------------------------
FortisOntario 302 296 6 1,174 1,169 5
------------------------------------------------------------------------
Total 554 544 10 2,209 2,168 41
------------------------------------------------------------------------
($ millions)
------------------------------------------------------------------------
Revenue 66 63 3 263 252 11
------------------------------------------------------------------------
Energy Supply Costs 43 43 - 174 171 3
------------------------------------------------------------------------
Operating Expenses 8 8 - 29 28 1
------------------------------------------------------------------------
Amortization 5 4 1 17 15 2
------------------------------------------------------------------------
Finance Charges 4 3 1 17 15 2
------------------------------------------------------------------------
Corporate Taxes 3 2 1 10 9 1
------------------------------------------------------------------------
Earnings 3 3 - 16 14 2
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Includes Maritime Electric and FortisOntario
------------------------------------------------------------------------
------------------------------------------------------------------------
Earnings: Earnings from Other Canadian Electric Utilities were comparable
quarter over quarter. A one-time $2 million after-tax gain at FortisOntario,
related to a refund received as ordered by the regulator associated with an
interconnection arrangement, was offset by higher amortization costs and finance
charges. Annual earnings were $2 million higher than last year driven by the
one-time gain at FortisOntario, and increased electricity sales and basic
electricity rates, partially offset by higher amortization costs and finance
charges.
Electricity Sales: Electricity sales increased 10 GWh, or 1.8 per cent, quarter
over quarter, driven by higher average consumption due to cooler-than-normal
weather conditions experienced on PEI and in Ontario, partially offset by the
impact of the loss of a major industrial customer and a temporary shutdown of
operations of another industrial customer in Ontario. Electricity sales
increased 41 GWh, or 1.9 per cent, year over year. The increase was driven by
higher average consumption due to cooler-than-normal weather conditions
experienced on PEI and in Ontario and an increase in the number of customers at
Maritime Electric, partially offset by the impact of the loss of a major
industrial customer and a temporary shutdown of operations of another industrial
customer in Ontario.
Revenue: Revenue was $3 million higher quarter over quarter, driven by the $3
million refund received at FortisOntario and increased electricity sales,
partially offset by the impact of a reduction in rates at FortisOntario
associated with the flow through to customers of lower energy supply costs.
Annual revenue was $11 million higher than last year, primarily due to increased
electricity sales; the $3 million refund received at FortisOntario; a 3.35 per
cent increase in basic electricity rates at Maritime Electric, effective July 1,
2006; the impact of an increase in rates at FortisOntario associated with the
flow through to customers of higher energy supply costs; and increases in basic
distribution rates at FortisOntario in May 2006 and May 2007.
Expenses: Energy supply costs were comparable quarter over quarter. Decreased
energy market prices paid at FortisOntario were offset by the impact of
increased electricity sales. Annual energy supply costs were $3 million higher
than last year, driven by increased market energy prices paid at FortisOntario
and increased electricity sales. At Maritime Electric, actual energy supply
costs above or below the regulator-approved amount of 6.73 cents per kilowatt
hour ("kWh") are deferred for future recovery from, or refund to, customers over
a 12-month rolling period.
Operating expenses were comparable quarter over quarter and were $1 million
higher year over year. The increase was driven by higher insurance, regulatory
and legal costs and costs associated with an early retirement program at
FortisOntaro.
Amortization costs were $1 million higher quarter over quarter and $2 million
higher year over year, primarily due to continued investment in capital assets.
Finance charges were $1 million higher quarter over quarter and $2 million
higher year over year, due to borrowings required to finance capital spending
and higher energy supply costs at Maritime Electric.
Corporate taxes were $1 million higher quarter over quarter and year over year,
driven by higher earnings before corporate taxes, partially offset by higher
deductions taken for corporate income tax purposes compared to deductions taken
for accounting purposes. Additionally, during the fourth quarter of 2007, a $0.5
million charge to future tax expense was recorded due to the reduction of future
income tax asset balances, as a result of enacted future Federal income tax rate
reductions. A similar charge was recorded during the second quarter of 2006.
REGULATED ELECTRIC UTILITIES - CARIBBEAN
------------------------------------------------------------------------
------------------------------------------------------------------------
Regulated Electric Utilities - Caribbean(1)
Financial Highlights (Unaudited)
Periods Ended December 31st
------------------------------------------------------------------------
Quarter Annual
------------------------------------------------------------------------
2007 2006 Variance 2007 2006 Variance
------------------------------------------------------------------------
Average US:CDN
Exchange Rate (2) 0.98 1.14 (0.16) 1.07 1.13 (0.06)
------------------------------------------------------------------------
Electricity Sales
(GWh)
------------------------------------------------------------------------
Belize Electricity 95 91 4 382 360 22
------------------------------------------------------------------------
Caribbean Utilities 140 135 5 527 485(3) 42
------------------------------------------------------------------------
Fortis Turks and
Caicos 37 33 4 145 125(3) 20
------------------------------------------------------------------------
Total 272 259 13 1,054 970 84
------------------------------------------------------------------------
($ millions)
------------------------------------------------------------------------
Revenue 76 32(4) 44 307 101(4) 206
------------------------------------------------------------------------
Equity Income - 3 (3) - 10 (10)
------------------------------------------------------------------------
Energy Supply Costs 42 17 25 169 57 112
------------------------------------------------------------------------
Operating Expenses 10 5 5 49 13 36
------------------------------------------------------------------------
Amortization 7 2 5 28 7 21
------------------------------------------------------------------------
Finance Charges 4 1 3 15 5 10
------------------------------------------------------------------------
Corporate Taxes 1 1 - 2 2 -
------------------------------------------------------------------------
Non-Controlling
Interest 3 1 2 13 4 9
------------------------------------------------------------------------
Earnings 9 8 1 31 23 8
------------------------------------------------------------------------
(1) Includes Belize Electricity, in which Fortis holds a 70.1 per cent
controlling interest; Caribbean Utilities, in which Fortis holds an
approximate 54 per cent controlling interest; and wholly owned Fortis
Turks and Caicos.
(2) The reporting currency of Belize Electricity is the Belizean dollar
which is pegged to the US dollar at BZ$2.00 equals US$1.00. The
reporting currency of Caribbean Utilities is the Cayman Island dollar
which is pegged to the US dollar at CI$0.84 equals US$1.00. The
reporting currency of Fortis Turks and Caicos is the US dollar.
(3) Full year sales as reported by the utility.
(4) Revenue for the 3- and 12-months ended December 31, 2006 does not
include electricity sales for Caribbean Utilities, as this utility was
not consolidated in the financial statements of Fortis during those
periods. Revenue for the 12-months ended December 31, 2006 includes
electricity sales for Fortis Turks and Caicos from August 28, 2006, the
date of acquisition by Fortis.
------------------------------------------------------------------------
------------------------------------------------------------------------
On November 7, 2006, Fortis acquired an additional approximate 16 per cent
interest in Caribbean Utilities and now owns approximately 54 per cent of the
Company. Caribbean Utilities' balance sheet as at November 7, 2006 was
consolidated in the December 31, 2006 balance sheet of Fortis. Beginning with
the first quarter of 2007, Fortis has been consolidating Caribbean Utilities'
financial statements on a two-month lag. During 2006, the statement of earnings
of Fortis reflected the Corporation's approximate 37 per cent interest in
Caribbean Utilities, previously accounted for on an equity basis on a two-month
lag. Caribbean Utilities has an April 30th fiscal year end and, therefore,
quarterly data presented above for 2007 and 2006 includes financial results for
Caribbean Utilities for its second quarter ended October 31st. The annual data
for 2007 and 2006 above includes financial results for Caribbean Utilities for
the 12-month period ended October 31st.
Earnings: Earnings contribution from Regulated Electric Utilities - Caribbean
was $1 million higher quarter over quarter. The increase was driven by the
impact of the increased investment in Caribbean Utilities to approximately 54
per cent, partially offset by the impact of lower earnings at Caribbean
Utilities, driven by higher operating expenses, and the unfavourable impact of
foreign currency translation. Earnings contribution from Regulated Electric
Utilities - Caribbean for the fourth quarter was tempered by the $1 million
unfavourable impact of foreign exchange associated with translation of foreign
currency-denominated earnings, due to the strengthening of the Canadian dollar
against the US dollar. During the fourth quarter of 2007, the contribution to
earnings from Caribbean Utilities, Belize Electricity, and Fortis Turks and
Caicos was $3 million, $2 million, and $4 million, respectively.
Annual earnings contribution from Regulated Electric Utilities - Caribbean was
$8 million higher than last year. The increase was driven by the first full year
of earnings contribution from Fortis Turks and Caicos, and higher electricity
sales and lower finance charges at Belize Electricity, partially offset by the
unfavourable impact of foreign currency translation. The impact of the increased
investment in Caribbean Utilities to approximately 54 per cent was offset by
lower earnings at Caribbean Utilities, driven by a charge associated with the
disposal of steam-turbine assets and higher operating expenses. The charge on
disposal of the steam-turbine assets reduced earnings of Fortis by approximately
$2 million in 2007. Annual earnings contribution from Regulated Electric
Utilities - Caribbean was tempered by the $2 million unfavourable impact of
foreign exchange associated with translation of foreign currency-denominated
earnings, due to the strengthening of the Canadian dollar against the US dollar.
During 2007, the contribution to earnings by Caribbean Utilities, Belize
Electricity, and Fortis Turks and Caicos was $9 million, $12 million, and $10
million, respectively.
Electricity Sales: Total electricity sales reported by Regulated Electric
Utilities - Caribbean increased 13 GWh, or 5 per cent, quarter over quarter, and
increased 84 GWh, or 8.7 per cent, year over year. The increase was primarily
due to higher demand driven by customer growth as strong local economies fueled
new residential and commercial construction. Growth in electricity sales at
Fortis Turks and Caicos was led by the large hotels; however, the rate
applicable to this customer class is the lowest of all customer classes of
Fortis Turks and Caicos. Significant projects under construction on Turks and
Caicos Islands include a US$100 million 450-room expansion to the Beaches
Resorts Hotel, the Seven Stars Luxury resort, the 255,870-square foot Emerald
Point Condominium and Resort, and the 220,440-square foot Alexandra Resort and
Residencies. Commercial growth in Grand Cayman is being led by new developments,
including the 60,000-square foot Bank of Butterfield building, expected to come
on line in early 2008, and the 160,000-square foot Governor's Square shopping
and office centre, the 89,000-square foot Caribbean Club condominium complex,
and the 500,000-square foot phase-one of Camana Bay, each of which came on line
during 2007. Electricity sales growth at Caribbean Utilities during the quarter
was tempered by decreased air conditioning load due to above-average rainfall
and cooler-than-normal temperatures experienced during the period. Electricity
sales growth at Fortis Turks and Caicos during the quarter was lower than that
experienced in the preceding quarters due to expected seasonally cooler
temperatures and lower-than-expected tourism activity.
Revenue: In addition to the impact of consolidating Caribbean Utilities'
financial results during 2007, revenue increased quarter over quarter due to
electricity sales growth at Belize Electricity and Fortis Turks and Caicos, and
a 3.7 per cent increase in the value-added component of customer rates,
effective July 1, 2007, at Belize Electricity. The increase was partially offset
by the impact of foreign currency translation. Annual revenue was higher than
last year due to the reasons described for the quarter, in addition to the
impact of the first full year of ownership of Fortis Turks and Caicos, partially
offset by the impact of foreign currency translation.
Expenses: The increase in expenses quarter over quarter and year over year was
significantly impacted by the consolidation of Caribbean Utilities' financial
results, during 2007, partially offset by the impact of foreign currency
translation. Annual expenses also increased due to the impact of the first full
year of ownership of Fortis Turks and Caicos.
Operating expenses and amortization costs at Belize Electricity increased
quarter over quarter and year over year. Operating expenses increased largely
due to higher employee costs, new customer service and revenue loss reduction
initiatives and general increases in the cost of goods and services.
Amortization costs increased due to continued investment in capital assets.
Annual finance charges at Belize Electricity were lower than last year due to
lower debt balances. In June 2006, proceeds from a share offering at Belize
Electricity were used to repay certain trade payables and inter-company loans,
and drawings on overdraft facilities incurred primarily to finance the high cost
of power and fuel.
Operating expenses reported at Fortis Turks and Caicos increased quarter over
quarter and year over year, due to the impact of increased activity associated
with a high-growth environment.
Caribbean Utilities' operating expenses consolidated in the financial results of
the Corporation during the fourth quarter were higher than operating expenses
reported by Caribbean Utilities for the same quarter last year, driven by the
timing of certain T&D maintenance costs.
Caribbean Utilities' operating expenses consolidated in the financial results of
the Corporation during 2007 were higher than operating expenses reported by
Caribbean Utilities in 2006, driven by higher generation and T&D maintenance
costs, and operating expenses during the second quarter of 2006 being reduced by
a $1.4 million (US$1.2 million) gain on disposal of assets associated with an
insurance settlement. Additionally, during the first quarter of 2007, Regulated
Electric Utilities - Caribbean operating expenses included a $4.4 million
(US$3.7 million) charge on the disposal of Caribbean Utilities' steam-turbine
assets. Caribbean Utilities' amortization costs consolidated in the financial
results of the Corporation during the fourth quarter and the year were higher
than amortization costs reported by Caribbean Utilities during the same periods
last year due to continued investment in capital assets, including the addition
of a new 16-MW diesel-fired generating unit commissioned in June 2007. The
generating unit increased Caribbean Utilities' total installed generating
capacity to approximately 137 MW.
In June 2007, Caribbean Utilities closed the first tranche of a US$40 million
5.65% senior unsecured note offering in the amount of US$30 million and closed
the second tranche of US$10 million in November 2007. The senior unsecured notes
are due June 1, 2022. The proceeds from the debt offering were used to repay
certain indebtedness and to finance capital expenditures.
During 2007, Fortis Turks and Caicos commissioned an additional 7 MW of owned
generating capacity, bringing the combined generating capacity at Fortis Turks
and Caicos to 48 MW at the end of the year. In May 2007, Fortis Turks and Caicos
purchased four additional generating units, with a combined capacity of 13 MW,
which are expected to be installed and commissioned during 2008 and 2009. The
additional capacity was obtained in order to keep pace with strong customer
growth.
NON-REGULATED - FORTIS GENERATION
------------------------------------------------------------------------
------------------------------------------------------------------------
Non-Regulated - Fortis Generation
Financial Highlights (Unaudited)
Periods Ended December 31st
------------------------------------------------------------------------
Quarter Annual
------------------------------------------------------------------------
Energy Sales (GWh) 2007 2006 Variance 2007 2006 Variance
------------------------------------------------------------------------
Belize 52 53 (1) 167 178 (11)
------------------------------------------------------------------------
Ontario 179 186 (7) 707 722 (15)
------------------------------------------------------------------------
Central Newfoundland 40 59 (19) 137 168 (31)
------------------------------------------------------------------------
British Columbia 5 4 1 34 30 4
------------------------------------------------------------------------
Upper New York State 27 38 (11) 77 105 (28)
------------------------------------------------------------------------
Total 303 340 (37) 1,122 1,203 (81)
------------------------------------------------------------------------
------------------------------------------------------------------------
Quarter Annual
------------------------------------------------------------------------
($ millions) 2007 2006 Variance 2007 2006 Variance
------------------------------------------------------------------------
Revenue 19 20 (1) 75 80 (5)
------------------------------------------------------------------------
Energy Supply Costs 3 1 2 8 6 2
------------------------------------------------------------------------
Operating Expenses 3 4 (1) 14 15 (1)
------------------------------------------------------------------------
Amortization 2 3 (1) 10 11 (1)
------------------------------------------------------------------------
Finance Charges 2 2 - 10 10 -
------------------------------------------------------------------------
Corporate Taxes 2 1 1 8 8 -
------------------------------------------------------------------------
Non-Controlling
Interest - 2 (2) 1 3 (2)
------------------------------------------------------------------------
Earnings 7 7 - 24 27 (3)
------------------------------------------------------------------------
------------------------------------------------------------------------
Earnings: Earnings from Non-Regulated - Fortis Generation were comparable
quarter over quarter. The impact of decreased production due to lower rainfall
was largely offset by higher average wholesale prices in Ontario and lower
operating expenses. Annual earnings were $3 million lower than last year. The
decrease was primarily due to decreased production due to lower rainfall,
partially offset by higher average wholesale energy prices in Ontario and
decreased operating expenses.
Energy Sales: Energy sales decreased 37 GWh, or 10.9 per cent, quarter over
quarter and decreased 81 GWh, or 6.7 per cent, year over year. The decrease was
primarily due to lower production as a result of lower rainfall in most of the
operating regions; however, rainfall in 2006 was generally above normal levels.
Annual production in Belize in 2007 and 2006 was above expected levels based on
historical average rainfall. The decrease in annual energy sales was partially
offset by the impact of a full year of operations of the Dolgeville plant in
Upper New York State in 2007 compared to nine months of operations in 2006 as a
result of a disruption of water supply due to flooding during that year.
Revenue: Revenue was $1 million lower quarter over quarter and $5 million lower
year over year, driven by decreased production, partially offset by higher
average wholesale energy prices in Ontario and the flow through of increased
energy supply-related costs in central Newfoundland.
The average wholesale energy price per megawatt hour ("MWh") in Ontario during
the fourth quarter was $48.33 compared to $42.69 for the same quarter last year.
The average annual wholesale energy price per MWh in Ontario was $47.81 compared
to $46.38 last year. The increase in average wholesale energy prices in Ontario
resulted in an increase in each of fourth quarter and annual revenue of
approximately $1 million compared to the same periods last year.
Expenses: Operating expenses were $1 million lower quarter over quarter and year
over year, driven by the receipt of insurance proceeds in 2007 associated with
costs expensed late in 2006 related to the flood at the Dolgeville plant, and
the reallocation of costs from non-regulated Ontario generation operations to
regulated Ontario electricity operations.
NON-REGULATED - FORTIS PROPERTIES
------------------------------------------------------------------------
------------------------------------------------------------------------
Non-Regulated - Fortis Properties
Financial Highlights (Unaudited)
Periods Ended December 31st
------------------------------------------------------------------------
Quarter Annual
------------------------------------------------------------------------
($ millions) 2007 2006 Variance 2007 2006 Variance
------------------------------------------------------------------------
Real Estate Revenue 16 14 2 59 55 4
------------------------------------------------------------------------
Hospitality Revenue 34 28 6 132 108 24
------------------------------------------------------------------------
Total Revenue 50 42 8 191 163 28
------------------------------------------------------------------------
Operating Expenses 34 28 6 123 105 18
------------------------------------------------------------------------
Amortization 4 3 1 14 12 2
------------------------------------------------------------------------
Finance Charges 6 6 - 24 21 3
------------------------------------------------------------------------
Gain on Sale of
Property - - - - (2) 2
------------------------------------------------------------------------
Corporate Taxes (2) 2 (4) 6 8 (2)
------------------------------------------------------------------------
Earnings 8 3 5 24 19 5
------------------------------------------------------------------------
Earnings: Fortis Properties' earnings were $5 million higher quarter over
quarter, driven by a $4 million favourable corporate tax adjustment and expanded
hospitality operations in western Canada. Annual earnings were $5 million
higher than last year. Earnings last year included $3 million associated with a
favourable corporate tax adjustment and a gain on the sale of Days Inn Sydney.
Excluding the above items in 2006 and the $4 million corporate tax adjustment in
2007, annual earnings were $4 million higher than last year, driven by expanded
hospitality operations in western Canada.
On August 1, 2007, Fortis Properties purchased the Delta Regina in Saskatchewan
for approximately $50 million, including acquisition costs. Delta Regina is
comprised of 274 hotel rooms, the Saskatchewan Trade and Convention Centre,
52,000 square feet of Class A commercial office space and a parking garage. On
November 1, 2006, Fortis Properties purchased four hotels in Alberta and British
Columbia for approximately $52 million, including acquisition costs and assumed
debt, increasing hospitality operations by 454 rooms.
Revenue: Real estate revenue was $2 million higher quarter over quarter and $4
million higher year over year, due to the expanded Blue Cross Centre in Moncton,
revenue from the Delta Regina associated with real estate operations, and growth
experienced in all operating regions of the Company. The occupancy rate of the
Real Estate Division was 96.8 per cent as at December 31, 2007, up from 94.9 per
cent as at December 31, 2006, due to additional leasing in all operating regions
of the Company.
Hospitality revenue was $6 million higher quarter over quarter, over $5 million
of which was due to growth in the Company's hospitality operations in western
Canada.
Annual hospitality revenue was $24 million higher than last year, $23 million of
which was due to growth in the Company's hospitality operations in western
Canada, $1 million of which was due to increased revenue earned from the
expanded Ontario hotels and $1 million of which was due to increased revenue
earned from the Company's hospitality operations in Atlantic Canada. The
increases were partially offset by the impact of the elimination of revenue
following the sale of Days Inn Sydney in June 2006.
Revenue per available room ("REVPAR") for the fourth quarter of 2007 was $73.84
compared to $67.84 for the same quarter last year. REVPAR for 2007 was $79.31
compared to $72.67 for 2006. The increase in REVPAR was primarily attributable
to the addition of the four hotels in western Canada acquired on November 1,
2006 and the Delta Regina acquired on August 1, 2007.
Expenses: Operating expenses were $6 million higher quarter over quarter and $18
million higher year over year. The increase was primarily due to expanded
hospitality operations in western Canada and the expanded Ontario hotels and the
Blue Cross Centre. General inflationary cost pressures also contributed to the
increase. Year over year, the increase was partially offset by the elimination
of operating expenses following the sale of Days Inn Sydney in June 2006.
Finance charges were comparable quarter over quarter and $3 million higher year
over year. The increase year over year was primarily due to financings
associated with the four hotels in western Canada acquired on November 1, 2006
and the Delta Regina acquired on August 1, 2007.
Corporate taxes were $4 million lower quarter over quarter and $2 million lower
year over year. Corporate taxes during the fourth quarter of 2007 were reduced
by approximately $4 million due to the reduction of future income tax liability
balances resulting from enacted future Federal income tax rate reductions.
During the second quarter of 2006, corporate taxes were reduced by approximately
$2 million, also due to future Federal income tax rate reductions.
CORPORATE AND OTHER
------------------------------------------------------------------------
------------------------------------------------------------------------
Corporate and Other(1)
Financial Highlights (Unaudited)
Periods Ended December 31st
------------------------------------------------------------------------
Quarter Annual
------------------------------------------------------------------------
($ millions) 2007 2006 Variance 2007 2006 Variance
------------------------------------------------------------------------
Total Revenue 6 3 3 22 9 13
------------------------------------------------------------------------
Operating Expenses 5 3 2 13 11 2
------------------------------------------------------------------------
Amortization 1 1 - 6 3 3
------------------------------------------------------------------------
Finance Charges (2) 22 11 11 70 41 29
------------------------------------------------------------------------
Foreign Exchange
Gain - - - - (2) 2
------------------------------------------------------------------------
Corporate Tax
Recovery (2) (3) 1 (12) (11) (1)
------------------------------------------------------------------------
Preference Share
Dividends 2 2 - 6 2 4
------------------------------------------------------------------------
Net Corporate and
Other Expenses (22) (11) (11) (61) (35) (26)
------------------------------------------------------------------------
(1) Includes non-regulated Terasen corporate-related activities and
financial results of CWLP from May 17, 2007, the date of acquisition
(2) Includes dividends on preference shares classified as long-term
liabilities
------------------------------------------------------------------------
------------------------------------------------------------------------
The Corporate and Other segment captures expense and revenue items not
specifically related to any other reportable segment. Included in this segment
are finance charges, including interest on debt incurred directly by Fortis and
Terasen Inc. and dividends on preference shares classified as long-term
liabilities; foreign exchange gains or losses; dividends on preference shares
classified as equity; other corporate expenses, including Fortis and Terasen
corporate operating costs, net of recoveries from subsidiaries; interest and
miscellaneous revenues; and corporate income taxes. Also included in the
Corporate and Other segment are the financial results of CWLP. CWLP is a
non-regulated shared-service business in which Terasen holds a 30 per cent
interest. CWLP operates in partnership with Enbridge Inc. and provides customer
service, meter reading, billing, credit, support and collection services to the
Terasen Gas companies and several smaller third parties. CWLP's financial
results are recorded using the proportionate consolidation method of accounting.
Net corporate and other expenses were $11 million higher quarter over quarter
and $26 million higher year over year, driven by Terasen acquisition-related
finance charges.
Revenue was $3 million higher quarter over quarter, primarily due to the
inclusion of revenue from CWLP of $3 million for the quarter. Annual revenue was
$13 million higher than 2006. The increase was primarily due to the inclusion of
revenue from CWLP of $8 million from the date of acquisition, and higher
inter-company interest revenue due to increased inter-company lending.
Operating expenses were $2 million higher quarter over quarter, driven by
Terasen corporate and CWLP operating expenses. Annual operating expenses were $2
million higher than last year; however, operating expenses last year included
$1.7 million in business development costs. Excluding this item, annual
operating expenses were almost $4 million higher than last year, mainly for the
reason described for the quarter. The increase in annual preference share
dividends was associated with the First Preference Shares, Series F issued on
September 28, 2006.
The increase in finance charges quarter over quarter and year over year was
driven by Terasen acquisition-related finance charges of approximately $10
million for the quarter and $25 million from the date of acquisition, increased
credit-facility borrowings in support of general corporate activities, and
interest on US$40 million of unsecured subordinated convertible debentures
issued in November 2006 to fund, in part, the increased investment in Caribbean
Utilities. The increase was partially offset by the impact of lower foreign
exchange on US dollar-denominated interest payments.
An approximate $2 million ($1.7 million after-tax) foreign-exchange translation
gain on unhedged corporate US dollar-denominated debt was recorded in 2006.
There was no similar foreign-exchange translation gain during 2007, as all
corporate US dollar-denominated debt had been designated as a hedge against the
Corporation's US dollar-denominated foreign net investments. All
foreign-exchange translation gains and losses on corporate US dollar-denominated
debt in effective hedging relationships are recorded in other comprehensive
income, effective January 1, 2007.
During the fourth quarter of 2007, corporate tax recovery was reduced as a
result of purchase price allocation tax adjustments, and the impact of lower
enacted future Federal income tax rates on future income tax assets. The
reduction was partially offset by the impact of higher tax deductible corporate
expenses quarter over quarter. Annual corporate tax recovery was higher year
over year due to the impact of higher tax deductible corporate expenses,
partially offset by the impact of lower enacted future Federal income tax rates
as described above for the quarter.
In September 2007, Fortis privately placed US$200 million 6.60% senior unsecured
notes, due September 2037. The net proceeds were used to refinance existing
credit-facility indebtedness associated with the Terasen acquisition and for
general corporate purposes.
REGULATORY HIGHLIGHTS
The nature of regulation and a summary of material regulatory decisions and
applications associated with each of the Corporation's regulated gas and
electric utilities are summarized as follows:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Nature of Regulation
---------------------------------------------------------------------------
Allowed Returns (%) Supportive Features
Regulated Regulatory Allowed ----------------------------------------
Utility Commission Common 2006 2007 2008 Future or Historical
Equity Test Year Used to
(%) Set Rates
---------------------------------------------------------------------------
ROE COS(1)/ROE
------------------
Terasen BCUC PBR mechanisms
Gas through 2009:
Companies TGI: 50/50 sharing
TGI 35 8.80 8.37 8.62 of earnings above
or below the allowed
ROE.
TGVI 40 9.50 9.07 9.32 TGVI: 100 per cent
retention of
earnings from lower-
than-forecasted
operating and
maintenance costs
but no relief from
increased operating
and maintenance
costs
ROE automatic
adjustment formula
tied to long-term
Canada bond yields
--------------------
Future Test Year
---------------------------------------------------------------------------
FortisBC BCUC 40 9.20 8.77 9.02 COS/ROE
PBR mechanism
through 2008, with
option to continue
in 2009 - 50/50
sharing of earnings
above or below the
allowed ROE up to an
achieved ROE that is
200 basis points
above or below the
allowed ROE - excess
to deferral account
ROE automatic
adjustment formula
tied to long-term
Canada bond yields
--------------------
Future Test Year
---------------------------------------------------------------------------
Fortis- Alberta 37 8.93 8.51 8.75 COS/ROE
Alberta Energy and
Utilities ROE automatic
Board adjustment
("AEUB") formula tied to
(to December long-term Canada
31, 2007) bond yields
Alberta
Utilities
Commission
("AUC")
(effective
January 1,
2008)
--------------------
Future Test Year
---------------------------------------------------------------------------
Newfound- Newfoundland 45 9.24 8.60 8.95 COS/ROE
land and +/-50 +/-
Power Labrador bps 50 ROE automatic
Board of bps adjustment formula
Commissioners tied to long-term
of Public Canada bond yields
Utilities --------------------
("PUB") Future Test Year
---------------------------------------------------------------------------
Maritime Island 40 10.25 10.25 10.00 COS/ROE
Electric Regulatory
And
Appeals
Commission --------------------
("IRAC") Future Test Year
---------------------------------------------------------------------------
Fortis- Ontario 50 9.00 9.00 9.00 Canadian Niagara
Ontario Energy Power - COS/ROE
Board
("OEB")
(Canadian
Niagara
Power) Cornwall Electric -
Price cap with
Franchise commodity cost
Agreement flow through
(Cornwall --------------------
Electric) Historical Test Year
---------------------------------------------------------------------------
Belize Public ROA (2) Four-year COS/ROA
Electricity Utilities --------------------- agreements with
Commission N/A 10.00- 10.10- 10.10- market-based returns
("PUC") 15.00 15.00 15.00 --------------------
Future Test Year
---------------------------------------------------------------------------
Caribbean Electricity N/A 15.00 15.00 9.00- COS/ROA
Utilities Regulatory 11.00 Price-cap adjustment
Authority (3) mechanism tied to
(effective consumer price
2008 under indices (effective
proposed 2008 under proposed
new licence) new licence)
--------------------
Historical Test Year
---------------------------------------------------------------------------
Fortis Utilities N/A 17.50 17.50 17.50 COS/ROA
Turks make
and annual
Caicos filings
with the
Energy --------------------
Commission Future Test Year
---------------------------------------------------------------------------
(1) Cost of service
(2) Rate of return on rate base assets
(3) As per proposed new licence
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Material Regulatory Decisions and Applications
---------------------------------------------------------------------------
Regulated
Utility Summary Description
---------------------------------------------------------------------------
Terasen Gas - March 2007, BCUC approval of extension of
Companies PBR mechanisms through 2009 for both TGI and TGVI.
TGI - In November 2007, TGVI received conditional BCUC
TGVI approval for the construction of a 1.5 billion
cubic foot liquefied natural gas ("LNG") facility
on Vancouver Island for a total estimated cost
between $175 million and $200 million.
- BCUC approval of various rates at TGI, including
those for mid-stream and delivery for residential
customers in several service areas, effective
January 1, 2008. Increased mid-stream costs are
flowed through to customers without mark-up. The
approved rates also reflect the impact of an
increase in the allowed ROE for 2008 to 8.62 per
cent.
---------------------------------------------------------------------------
FortisBC - December 2006, BCUC approval of a 1.2 per cent
increase in customer rates, effective January 1,
2007.
- March 2007, BCUC order changing the treatment of
financing costs associated with large capital
projects during the period of construction. Result
is an additional 2.1 per cent increase in 2007
customer rates, effective April 1, 2007. The
impact of the increase in electricity rates
relating to the period January 1, 2007 through
March 31, 2007 will be recovered in 2008 customer
rates. The amount to be recovered was accrued in
the first quarter of 2007. Preliminary 2008
revenue requirement application filed on October
1, 2007 and updated by FortisBC on November 1,
2007. December 2007, BCUC approval of an NSA
associated with 2008 revenue requirement resulting
in a rate increase of 2.9 per cent, effective
January 1, 2008. The rate increase is primarily
the result of the Company's extensive capital
investment program and higher power purchase costs
due to ongoing customer growth and increased
electricity demand. Rates for 2008 reflect an
allowed ROE of 9.02 per cent.
- BCUC-approved NSA included updated 2007 gross
capital expenditures of approximately $147 million
for 2007 and $132 million for 2008.
- FortisBC intends on filing a 2009 and 2010 Capital
Plan with the BCUC in the third quarter of 2008.
---------------------------------------------------------------------------
FortisAlberta - June 2006, AEUB-approved 2006/2007 NSA associated
with 2006/2007 revenue requirements, providing for
a 0.7 per cent distribution rate increase,
effective January 1, 2007.
- AEUB initially approved 2007 distribution revenue
requirement based on an allowed ROE of 8.93 per
cent. The ROE was reduced to 8.51 per cent,
effective January 1, 2007, due to the impact of
lower long-term Canada bond yields on the
automatic adjustment formula used to calculate the
allowed ROE. As a result of the lower allowed ROE,
FortisAlberta expects it will refund to customers
in future rates approximately $1 million of the
revenue collected in base rates in 2007 by
including this refund in its 2008/2009 revenue
requirements application.
- June 2007, AEUB approval to sell amounts in annual
AESO Charges Deferral Account. In September 2007,
approximately $28 million of the 2006 AESO Charges
Deferral Account was sold to a Canadian chartered
bank for cash consideration of approximately $27
million and a receivable of approximately $1
million, due February 15, 2009. In December 2007,
approximately $38 million of the 2007 AESO Charges
Deferral Account was sold to a Canadian chartered
bank for cash consideration of approximately $36
million and a receivable of approximately $2
million, due February 2010.
- June 2007, filing of 2008/2009 revenue
requirements requesting an increase in base
distribution rates of 8.5 per cent, effective
January 1, 2008, and 9.0 per cent, effective
January 1, 2009.
- November 2007, filing of an NSA associated with
2008/2009 revenue requirements resulting in
revised base distribution rate increases of 6.8
per cent, effective January 1, 2008, and 7.3 per
cent, effective January 1, 2009. The NSA includes
forecast gross capital expenditures of
approximately $264 million for 2008 and $296
million for 2009, primarily to meet customer
growth and improve system reliability. If the NSA
is approved, no further hearing will be required.
Approval of the NSA is expected by the first half
of 2008. If approved, this will be the third
consecutive NSA reached by FortisAlberta. The
2008 revenue requirement included in the 2008/2009
NSA was determined using the 2007 ROE of 8.51 per
cent. The impact of the increase in the ROE for
2008 to 8.75 per cent will either be reflected in
the regulator's decision regarding the 2008/2009
NSA, or deferred and collected in future customer
rates.
- December 2007, regulator approval of interim
distribution rates, effective January 1, 2008.
- Effective January 1, 2008, FortisAlberta is
regulated by the AUC due to the separation of the
AEUB into two separate regulatory bodies.
---------------------------------------------------------------------------
Newfoundland - December 2006, PUB approval, on an interim basis,
Power of an average 0.07 per cent increase in customer
electricity rates, effective January 1, 2007. The
increase was due to a change in the flow through
of costs from Newfoundland Hydro, driven by
increased purchased power costs and the resulting
change in the wholesale purchased power rate,
partially offset by the impact of a reduction in
Newfoundland Power's allowed ROE to 8.60 per cent,
effective January 1, 2007. There was no impact on
Newfoundland Power's earnings in 2007 due to the
change in the flow through of costs from
Newfoundland Hydro. In April 2007, the PUB
ordered the final approval of the average 0.07 per
cent increase in customer electricity rates,
effective January 1, 2007.
- December 2006, PUB approval of an application
requesting amortization of $2.7 million of
unrecognized 2005 unbilled revenue as revenue in
2007 to offset the 2007 income tax impact of
changing to the accrual method for revenue
recognition, the deferred recovery of capital
asset amortization of $5.8 million similar to 2006
and the deferred recovery of $1.8 million
associated with the cost of replacement energy
required to be purchased while the Company's
Rattling Brook hydroelectric generating facility
is being refurbished.
- September 2007, PUB approval of 2008 Capital
Budget totalling approximately $51 million.
- December 2007, PUB approval of NSA associated with
2008 general rate application resulting in an
average 2.8 per cent increase in customer rates,
effective January 1, 2008. The rate increase is
largely driven by higher amortization costs. The
rate increase reflects an allowed ROE of 8.95 per
cent for 2008.
- PUB approval of the NSA will also result in, among
other things, (i) the amortization of $7.2 million
in 2008, and $4.6 million in each of 2009 and
2010, of the remaining $16.4 million balance of
the original December 2005 unbilled revenue
liability; (ii) amortization of approximately $3.9
million in each of 2008, 2009 and 2010 of
previously deferred amortization expense; (iii)
amortization over a period of three to five years
of certain deferred regulatory balances; (iv) for
2008 through 2010, the deferral of variations in
purchase power expense caused by differences in
the actual unit cost of energy and the unit cost
reflected in customer rates be recovered from, or
refunded to, customers through operation of the
Company's rate stabilization account.
---------------------------------------------------------------------------
Maritime - In October 2007, IRAC approval of 2008 gross
Electric capital expenditures of approximately $19 million.
- October 2007 filing for customer rates for the
period April 1, 2008 through March 31, 2009,
requesting an increase in basic electricity rates
of 1.8 per cent.
- January 2008, IRAC approval, as filed, of increase
in customer rates, effective April 1, 2008, and
approval of a maximum allowed ROE of 10.0 per cent
for 2008.
---------------------------------------------------------------------------
FortisOntario - April 2007, OEB approval of an average 0.9 per
cent increase in electricity distribution rates
for operations in each of Fort Erie, Port Colborne
and Gananoque, effective May 1, 2007. Increase
determined using OEB's incentive rate mechanism
comprised of a 1.9 per cent increase for
inflation, partially offset by a 1 per cent
decrease for a productivity adjustment.
- July 2007, OEB approval for the recovery in
customer rates, as requested, of approximately $2
million in extraordinary costs incurred as a
result of the snow storm in October 2006. The
extraordinary costs, which had been previously
deferred, are being recovered mostly over a period
of two years, beginning September 2007.
---------------------------------------------------------------------------
Belize - June 2007, PUC Final Decision on tariffs for
Electricity period July 1, 2007 to June 30, 2008, approving
changes to tariffs for certain customer classes
while maintaining the mean electricity rate at
BZ44.1 cents per kWh.
- Final Decision reflected many recommendations
provided by an independent expert who was
appointed by the PUC, subsequent to the objection
by Belize Electricity and the Government of
Belize, of the PUC's Initial Decision on the
Tariff Application.
- Belize Electricity objected and appealed the Final
Decision associated with adjustments for cost of
power, commercial loss targets and penalties
associated with reliability targets.
- In December 2007, amendments to the Electricity
(Tariffs, Charges and Quality of Services
Standards) Bylaws affecting the tariff-setting
process at Belize Electricity were enacted. The
result is a simplified tariff-setting methodology
allowing for improved rate stabilization. The
amendments settle outstanding matters related to
the PUC's June 2007 Final Decision on tariffs,
effective July 1, 2007.
- The overall mean electricity rate of BZ44.1 cents
per kWh remains in effect for the period July 1,
2007 to June 30, 2008. The recovery of the cost
of power component of rates remained at BZ25.3
cents per kWh, while the value-added component of
rates increased BZ0.6 cents per kWh to BZ16.8
cents per kWh, and the component of rates
associated with the recovery of rate stabilization
accounts decreased BZ0.6 cents per kWh to BZ2.0
cents per kWh.
---------------------------------------------------------------------------
Caribbean Utilities - Under its existing licence, Caribbean Utilities
was entitled to a 4.5 per cent rate increase,
effective August 1, 2007, primarily due to the
cost associated with the write-down of the steam-
turbine assets, increased operating costs, and
investment in capital assets.
- Basic rate increase not implemented August 1,
2007, due to freezing of basic electricity rates
during the period that the Hurricane Ivan cost
recovery surcharge ("CRS") is effective.
- Licence renewal negotiations concluded and
agreement in principle ("AIP") reached with the
Government of the Cayman Islands in December 2007
on the terms of new 20-year licences for Caribbean
Utilities covering generation, transmission and
distribution of electricity on Grand Cayman. The
terms of the AIP include competition for future
generating capacity and the general promotion of
renewable resources. The new licences are
expected to be issued in the first quarter of
2008, with impact on customer rates effective
January 1, 2008
- Effective January 1, 2008, as a result of the AIP,
basic customer rates were reduced by 3.25 per
cent, the CRS was removed and a fuel-duty rebate
funded by the Government of the Cayman Islands was
implemented for residential customers consuming
less than 1,500 kWh monthly, resulting in average
monthly savings to residential customers of
approximately 15 per cent. The 3.25 per cent
reduction in base rates will reduce annual revenue
by approximately US$2 million. Additionally,
Caribbean Utilities has forgone US$2.5 million of
revenue in 2008 as a result of the early
elimination of the CRS. Following the initial
basic rate reduction, customer rates will be
frozen until May 31, 2009 and will be subject to
annual review thereafter.
- The AIP will see the replacement of the current
allowed ROA of 15 per cent with a rate cap and
adjustment mechanism based on published consumer
price indices. The Company's ROA will now be
targeted in the range of 9 per cent to 11 per cent
beginning in 2008.
---------------------------------------------------------------------------
---------------------------------------------------------------------------
CONSOLIDATED FINANCIAL POSITION
The following table outlines the significant changes in the consolidated
balance sheets between December 31, 2007 and December 31, 2006. The
significant changes in the consolidated balance sheets associated with the
consolidation of Terasen as at December 31, 2007 are itemized separately
below.
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Fortis Inc.
Significant Changes in the Consolidated Balance Sheets (Unaudited)
between December 31, 2007 and December 31, 2006
---------------------------------------------------------------------------
Increase Other
due to Increase/
($ millions) Terasen (Decrease) Explanation
---------------------------------------------------------------------------
Cash 18 (1) The other decrease in cash was not
significant.
---------------------------------------------------------------------------
Accounts
receivable 349 - Included in the change associated with
Terasen was a $129 million increase in
accounts receivable from the date of
acquisition as a result of a seasonal
increase in sales.
---------------------------------------------------------------------------
Regulatory 146 (5) The other decrease in regulatory
assets - assets was driven by the sale of the
current and majority of FortisAlberta's 2006 AESO
long-term charges deferral account, partially
offset by an increase in energy costs
deferred at Maritime Electric due to
higher energy prices, and the deferral
of other post-employment benefit
("OPEB") costs at Newfoundland Power
in excess of that expensed under the
cash method of accounting. Included
in the change associated with Terasen
was a $50 million increase in
regulatory assets from the date of
acquisition, driven by an increase in
the fair market value of the gas
commodity swap contracts that is
deferred in a rate stabilization
account.
---------------------------------------------------------------------------
Inventories 203 (3) The other decrease in materials and
of gas, supplies was not significant. Included
materials in the change associated with Terasen
and supplies was a $108 million increase in
inventories of gas, materials and
supplies from the date of acquisition,
as a result of the typical seasonal
decrease in natural gas consumption
and the injection of gas into storage.
---------------------------------------------------------------------------
Deferred 27 (22) The other decrease in deferred charges
charges and and other assets was driven by the
other assets reclassification of $21 million of
deferred financing costs and $11
million of unamortized deferred losses
associated with a previously cancelled
forward interest-rate swap contract to
long-term debt and accumulated other
comprehensive loss, respectively, upon
adoption of new accounting standards
for Financial Instruments, Hedges and
Comprehensive Income on January 1,
2007. The decrease was partially
offset by an increase in accrued
pension assets.
---------------------------------------------------------------------------
Future income 18 12 The other increase in future income
tax assets - tax assets primarily related to the
long-term tax impact of costs associated with
the issuance of Common Shares upon the
conversion of Subscription Receipts on
May 17, 2007.
---------------------------------------------------------------------------
Utility capital 2,841 306 The other increase in utility capital
assets assets primarily related to $670
million invested in electricity
systems, partially offset by customer
contributions, amortization for the
12-month period and the impact of
foreign exchange on the translation of
US dollar-denominated utility capital
assets. Included in the change
associated with Terasen was a $73
million net increase in utility
capital assets from the date of
acquisition, due to capital spending,
less amortization for the period.
---------------------------------------------------------------------------
Income - 50 The increase in income producing
producing primarily related to the acquisition
properties of the Delta Regina by Fortis
Properties on August 1, 2007.
---------------------------------------------------------------------------
Intangibles, 9 (4) The other decrease in intangibles
net of was immaterial. The change in
amortization intangibles associated with Terasen
primarily related to the fair value of
customer contracts at CWLP recorded on
acquisition as part of the purchase
price allocation, less amortization
for the period.
---------------------------------------------------------------------------
Goodwill 907 (24) The other decrease in goodwill related
to the impact of foreign exchange on
the translation of the US dollar-
denominated goodwill amounts.
---------------------------------------------------------------------------
Short-term 376 1 The other increase in short-term
borrowings was not significant. Included in the
change associated with Terasen was a
$100 million increase in short-term
borrowings from the date of
acquisition, largely driven by
seasonality of operations including
the impact of increased gas
inventories.
---------------------------------------------------------------------------
Accounts 409 51 The other increase in accounts payable
payable and and accrued charges primarily related
accrued to an increase in the amounts owing at
charges FortisAlberta to the AESO for
transmission costs and flow through of
customer receipts, in addition to the
impact of increased capital spending.
Included in the change associated with
Terasen was a $120 million increase in
accounts payable and accrued charges
from the date of acquisition, driven
by an increase in the fair market
value of the gas commodity swap
contracts and timing of payments.
---------------------------------------------------------------------------
Dividends - 21 The increase in dividends payable
payable was driven by increased common shares
outstanding associated with the
issuance of 5.17 million Common Shares
in January 2007 and the issuance of
44.3 million Common Shares in May
2007, upon the completion of the
acquisition of Terasen. The increase
was also due to a 4-cent increase in
the declared quarterly dividend.
---------------------------------------------------------------------------
Income taxes 27 3 The other increase in income taxes
payable payable was not significant. Income
taxes payable at Terasen decreased $37
million from $64 million as at the
date of acquisition.
---------------------------------------------------------------------------
Deferred credits 170 12 The other increase in deferred credits
was primarily due to an increase in
the OPEB liability at Newfoundland
Power.
---------------------------------------------------------------------------
Regulatory 32 1 The other increase in regulatory
Liabilities liabilities was not significant.
- current and
long-term
---------------------------------------------------------------------------
Long-term debt 2,077 339 The other increase in long-term debt
and capital and capital lease obligations was
lease driven by the issuance of long-term
obligations debt and increased net committed
(including credit facilities' borrowings. The
current increase was partially offset by the
portion) impact of the early repayment of a
US$28.5M term loan at BECOL; the
conversion of US$9M of the
Corporation's 6.75% and 5.5% unsecured
subordinated convertible debentures;
regular debt repayments; the
reclassification of $21 million in
deferred financing costs, net of
amortization during the period, from
deferred charges and other assets,
upon adoption of new accounting
standards for Financial Instruments,
Hedges and Comprehensive Income on
January 1, 2007; and the impact of
foreign exchange upon the translation
of US dollar-denominated debt.
The issuance of long-term debt,
primarily to repay committed credit
facilities' borrowings and finance
capital expenditures, was comprised of
a $110 million senior unsecured
debenture offering by FortisAlberta; a
$70 million first mortgage sinking
fund bond issue by Newfoundland Power;
a $105 million senior unsecured
debenture offering by FortisBC; and a
US$40 million unsecured note issue by
Caribbean Utilities. In addition,
US$200 million senior unsecured notes
were issued by the Corporation,
primarily to refinance existing
indebtedness associated with the
Terasen acquisition and for general
corporate purposes. TGI also issued
$250 million in unsecured debentures
to repay long-term debt that matured
in October 2007.
The net $25 million increase in
committed credit facilities'
borrowings was driven by net drawings
of $124 million by the Corporation,
partially offset by net reductions of
$76 million by FortisAlberta, $2
million by Newfoundland Power and $21
million by FortisBC.
---------------------------------------------------------------------------
Non-controlling - (15) The decrease in non-controlling
interest interest primarily related to the
impact of foreign exchange on the
translation of the US dollar-
denominated non-controlling interest
amounts.
---------------------------------------------------------------------------
Shareholders' - 1,325 The increase in shareholders' equity
equity primarily related to the $1.12
billion, net of after-tax expenses,
issuance of Common Shares, upon the
conversion of Subscription Receipts,
to substantially finance the cash
purchase price of Terasen; the $146
million, net of after-tax expenses,
issuance of Common Shares in January
2007, combined with net earnings
reported for the year, less common
share dividends. The increase was
partially offset by an increase in
accumulated other comprehensive loss
driven by the impact of foreign
exchange on the translation of the
Corporation's net investments in
foreign subsidiaries and a $5 million
transitional adjustment to opening
accumulated other comprehensive loss
upon adoption of new accounting
standards for Financial Instruments,
Hedges and Comprehensive Income on
January 1, 2007.
---------------------------------------------------------------------------
---------------------------------------------------------------------------
LIQUIDITY
The following table outlines the summary of cash flows.
------------------------------------------------------------------------
------------------------------------------------------------------------
Fortis Inc.
Summary of Cash Flows (Unaudited)
Periods Ended December 31st
------------------------------------------------------------------------
Quarter Annual
------------------------------------------------------------------------
($ millions) 2007 2006 Variance 2007 2006 Variance
------------------------------------------------------------------------
Cash, beginning of
period 51 61 (10) 41 33 8
------------------------------------------------------------------------
Cash provided by
(used in)
Operating
activities 152 59 93 373 263 110
------------------------------------------------------------------------
Investing
activities (234) (243) 9 (2,033) (634) (1,399)
------------------------------------------------------------------------
Financing
activities 89 164 (75) 1,680 379 1,301
------------------------------------------------------------------------
------------------------------------------------------------------------
Foreign currency
impact on cash
balances - - - (3) - (3)
------------------------------------------------------------------------
Cash, end of period 58 41 17 58 41 17
------------------------------------------------------------------------
------------------------------------------------------------------------
Operating Activities: Cash flow from operating activities, after working
capital adjustments, was $93 million higher quarter over quarter. The increase
was driven by FortisAlberta, Caribbean Utilities and the Terasen Gas companies.
The increase in cash from operating activities at FortisAlberta was driven by
the sale, during the fourth quarter, of amounts accumulated during the year in
its 2007 AESO Charges Deferral Account, the positive impact of changes in other
regulatory deferral accounts and the timing of accounts receivable and accounts
payable. Terasen was acquired in May 2007 and, therefore, did not contribute to
cash flow of the Corporation during 2006. During the first quarter of 2007, the
Corporation began consolidating the financial results of Caribbean Utilities on
a two-month lag due to increasing its investment in the Company to an
approximate 54 per cent controlling interest in November 2006. During 2006,
Caribbean Utilities was accounted for on an equity basis on a two-month lag.
Annual cash flow from operating activities, after working capital adjustments,
was $110 million higher year over year. The increase was driven by
FortisAlberta, Caribbean Utilities and FortisBC, partially offset by cash used
in operating activities at the Terasen Gas companies. The increase in cash from
operating activities at FortisAlberta was driven by the sale of the majority of
the Company's 2006 AESO Charges Deferral Account, the impact of corporate tax
refunds received during 2007 compared to corporate taxes paid during 2006, the
positive impact of changes in other regulatory deferral accounts and the timing
of accounts receivable and accounts payable. The increase at FortisBC was
driven by the timing of accounts receivable and accounts payable. Cash used in
operating activities at the Terasen Gas companies was driven by the build up of
gas inventories and accounts receivable from customers from the date of
acquisition, due to seasonality of the business, combined with the timing of
payment of corporate income taxes.
Investing Activities: Cash used in investing activities was $9 million lower
quarter over quarter, driven by lower business acquisition activity, partially
offset by higher utility capital expenditures. During the fourth quarter of
2006, Fortis acquired an additional 16 per cent ownership interest in Caribbean
Utilities for a net purchase price of approximately $53 million and Fortis
Properties acquired four hotels in Alberta and British Columbia for a net
purchase price of approximately $40 million.
Annual cash used in investing activities was approximately $1.4 billion higher
than last year, primarily due to the acquisition of Terasen on May 17, 2007 for
$3.7 billion, including assumed debt of approximately $2.4 billion. This
acquisition resulted in a cash payment, including acquisition costs, of
approximately $1.25 billion, net of cash acquired. Also, on August 1, 2007,
Fortis Properties acquired the Delta Regina for a net cash purchase price of
approximately $50 million. Business acquisition activity during 2006 included
the acquisition of Fortis Turks and Caicos in August 2006 for a net purchase
price of approximately $76 million, in addition to the acquisitions occurring
during the fourth quarter of 2006 as described above. Annual cash used in
investing activities also increased due to significantly higher utility capital
expenditures.
Gross utility capital expenditures were $252 million for the fourth quarter,
$100 million higher than for the same quarter last year. Annual gross utility
capital expenditures were $790 million, $307 million higher than last year. The
increase was primarily due to capital expenditures incurred at the Terasen Gas
companies, Fortis Turks and Caicos, and Caribbean Utilities; increased capital
spending at FortisAlberta and FortisBC; and the commencement of the construction
of the 18-MW hydroelectric generating facility at Vaca on the Macal River in
Belize during the second quarter of 2007. Annual gross utility capital
expenditures also increased due to the refurbishment of the Rattling Brook
Hydroelectric generating facility at Newfoundland Power during 2007.
Contributions received in aid of construction were $3 million higher quarter
over quarter and $19 million higher year over year. The increase year over year
primarily related to the Terasen Gas companies, as well as increased utility
capital expenditures at FortisAlberta and FortisBC.
Financing Activities: Cash provided from financing activities was $89 million
during the fourth quarter, $75 million lower than the same quarter last year.
Annual cash provided from financing activities was $1.68 billion, approximately
$1.3 billion higher than last year.
During the fourth quarter, proceeds from net short-term borrowings of $74
million were driven by net drawings of $53 million by the Terasen Gas companies,
primarily to fund working capital requirements, and net drawings of
approximately $8 million, $6 million, and $5 million by FortisAlberta, Fortis
Inc., and Fortis Turks and Caicos, respectively. Annual proceeds from net
short-term borrowings of $103 million were driven by net drawings of $100
million, $11 million, $6 million, $5 million, and $5 million by Terasen,
Maritime Electric, Fortis Inc., Fortis Turks and Caicos, and Caribbean
Utilities, respectively, partially offset by the repayment of $22 million of net
short-term borrowings by FortisBC, with partial proceeds from its $105 million
debenture issue in July 2007. Proceeds from long-term debt, net of issue costs,
for the quarter and the year compared to the same periods last year are
summarized as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Proceeds from Long-Term Debt, Net of Issue Costs (Unaudited)
Periods Ended December 31st
--------------------------------------------------------------------------
Quarter Annual
--------------------------------------------------------------------------
($ millions) 2007 2006 Variance 2007 2006 Variance
--------------------------------------------------------------------------
Borrowings under
committed credit
facilities:
--------------------------------------------------------------------------
FortisAlberta 73 62 11 105 136 (31)
--------------------------------------------------------------------------
FortisBC - 11 (11) 19 21 (2)
--------------------------------------------------------------------------
Newfoundland Power 32 15 17 62 19 43
--------------------------------------------------------------------------
Corporate 60 34 26 417 136 281
--------------------------------------------------------------------------
165 122 43 603 312 291
--------------------------------------------------------------------------
Long-term debt
issuances, net
of costs:
------------------------------------------------------------------------
Terasen Gas
Companies 250 (1) - 250 250 (1) - 250
--------------------------------------------------------------------------
FortisAlberta - - - 110 (2) 100 (3) 10
--------------------------------------------------------------------------
FortisBC - - - 104 (4) - 104
--------------------------------------------------------------------------
Newfoundland
Power - - - 70 (5) - 70
--------------------------------------------------------------------------
Caribbean
Utilities 10 (6) - 10 48 (6)(7) - 48
--------------------------------------------------------------------------
Corporate - 45 (8) (45) 209 (9) 45 (8) 164
--------------------------------------------------------------------------
Other 4 2 2 6 12 (6)
--------------------------------------------------------------------------
264 47 217 797 157 640
--------------------------------------------------------------------------
Total 429 169 260 1,400 469 931
--------------------------------------------------------------------------
(1) Issued October 2007, 6.00% Unsecured Medium-Term Note Debentures, due
October 2037
(2) Issued January 2007, 4.99% Senior Unsecured Debentures, due January
2047
(3) Issued April 2006, 5.40% Senior Unsecured Debentures, due April 2036
(4) Issued July 2007, 5.90% Senior Unsecured Debentures, due July 2047
(5) Issued August 2007, 5.901% First Mortgage Sinking Fund Bonds, due
August 2037
(6) Issued November 2007, US$10 million 5.65% Senior Unsecured Notes, due
June 2022
(7) Issued June 2007, US$30 million 5.65% Senior Unsecured Notes, due June
2022
(8) Issued November 2006, US$40 million 5.50% Unsecured Subordinated
Convertible Debentures, due November 2016
(9) Issued September 2007, US$200 million 6.60% Senior Unsecured Notes, due
September 2037
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Borrowings under committed credit facilities by FortisAlberta, FortisBC and
Newfoundland Power during 2006 and 2007 were primarily in support of their
respective capital expenditure programs. During the fourth quarter of 2007, the
Corporation borrowed under its committed credit facility, primarily in support
of general corporate activities. During the fourth quarter of 2006, net
borrowings by the Corporation were used primarily to finance, in part, the
acquisition by Fortis Properties of four hotels in Alberta and British Columbia
in November 2006 and to finance, in part, the acquisition of the additional 16
per cent ownership interest in Caribbean Utilities in November 2006.
Annual borrowings by the Corporation under its committed credit facility in 2007
were used primarily to fund, on an interim basis, the remaining cash purchase
price of Terasen, including certain acquisition costs; to fund Common Share
issuance costs; to repay certain debt assumed upon the acquisition of Terasen;
to finance a significant portion of the cash purchase price of the Delta Regina
in August 2007; and in support of general corporate activities. Annual
borrowings by the Corporation under its committed credit facility in 2006 were
primarily used for the reasons described above for the fourth quarter of 2006,
in addition to fund the August 2006 acquisition of Fortis Turks and Caicos; to
fund an equity requirement of one of the Corporation's western electric
utilities; and for general corporate activities.
Net proceeds from the Corporation's US$200 million unsecured notes issued in
September 2007 were used to repay existing indebtedness previously borrowed
under the Corporation's committed credit facility associated with the Terasen
acquisition, and for general corporate purposes. Net proceeds from the
Corporation's US$40 million unsecured convertible debentures in 2006 were used
to fund, in part, the acquisition of the additional 16 per cent ownership
interest in Caribbean Utilities. The majority of the net proceeds from
long-term debt issues at FortisAlberta, FortisBC and Newfoundland Power during
2007 and 2006 were used to repay indebtedness previously borrowed under
respective committed credit facilities, and for general corporate purposes. Net
proceeds from Caribbean Utilities' US$40 million unsecured notes in 2007 were
used to repay certain indebtedness and to finance capital expenditures. The
proceeds from the issuance of $250 million unsecured debentures at TGI in
October 2007 were used to refinance $250 million of existing debt that matured
in October 2007.
Repayments of long-term debt and capital lease obligations for the quarter and
the year compared to the same periods last year are summarized as follows:
------------------------------------------------------------------------
------------------------------------------------------------------------
Repayment of Long-Term Debt and Capital Lease
Obligations (Unaudited)
Periods Ended December 31st
------------------------------------------------------------------------
Quarter Annual
------------------------------------------------------------------------
($ millions) 2007 2006 Variance 2007 2006 Variance
------------------------------------------------------------------------
Repayment of
committed credit
facilities:
------------------------------------------------------------------------
FortisAlberta 61 - 61 181 97 84
------------------------------------------------------------------------
FortisBC - - - 40 - 40
------------------------------------------------------------------------
Newfoundland Power - - - 64 - 64
------------------------------------------------------------------------
Corporate - - - 293 72 221
------------------------------------------------------------------------
61 - 61 578 169 409
------------------------------------------------------------------------
Repayment of
long-term debt
and capital lease
obligations:
------------------------------------------------------------------------
Terasen Gas
Companies 250 - 250 250 - 250
------------------------------------------------------------------------
Newfoundland Power 36 - 36 36 - 36
------------------------------------------------------------------------
BECOL 23 - 23 28 - 28
------------------------------------------------------------------------
Other 6 7 (1) 49 28 21
------------------------------------------------------------------------
315 7 308 363 28 335
------------------------------------------------------------------------
Total 376 7 369 941 197 744
------------------------------------------------------------------------
------------------------------------------------------------------------
The repayment of committed credit-facility borrowings by FortisAlberta, FortisBC
and Newfoundland Power during 2007 and 2006 was financed with partial proceeds
from various long-term debt issuances, as described above, in addition to
proceeds from the sale of FortisAlberta's 2006 AESO Charges Deferral Account.
During 2007, the net repayment of long-term committed credit-facility borrowings
by the Corporation was financed with partial proceeds from a 5.17 million Common
Share issue in January 2007 and the US$200 million unsecured notes issued in
September 2007. During 2006, the net repayment of committed credit-facility
borrowings by the Corporation was financed with partial proceeds from a $125
million, $121 million net of costs, preference share offering in September 2006.
The repayment of maturing long-term debt by TGI during the fourth quarter of
2007 was financed with proceeds from the issuance of the 6.00% $250 million
unsecured debentures. The repayment of maturing long-term debt by Newfoundland
Power during the fourth quarter of 2007 was financed with partial proceeds from
the Company's 5.901% bonds issued in August 2007. In November 2007, the term
loan at BECOL was repaid in full.
During the fourth quarter, net proceeds associated with the normal course
issuance of Common Shares under the Corporation's share purchase and stock
option plans were $5 million compared to $6 million during the same quarter last
year. Annual net proceeds associated with the issuance of Common Shares under
the Corporation's share purchase and stock option plans were $23 million
compared to $15 million last year. Additionally, on May 17, 2007, the
Corporation publicly issued 44.3 million of Common Shares for gross proceeds of
$1.15 billion, $1.1 billion net of costs, upon conversion of Subscription
Receipts that were initially issued in March 2007, to finance a significant
portion of the cash purchase price of Terasen. In January 2007, 5.17 million
Common Shares were also publicly issued for gross proceeds of approximately $150
million, $143 million net of costs. A significant portion of the net proceeds
from the Common Share issue in January 2007 was used to repay approximately $84
million of existing indebtedness incurred under the Corporation's committed
credit facilities. The remainder of the net proceeds was utilized to fund equity
requirements of the Corporation's regulated electric utilities in western
Canada, in support of their respective capital expenditure programs, and for
general corporate purposes.
Common share dividends were $39 million during the fourth quarter, up $19
million from the same quarter last year. Common share dividends were $128
million for the year, up $55 million from last year. The increase was due to an
increase in the number of Common Shares outstanding, primarily due to the
issuance of Common Shares pursuant to the Terasen acquisition and the issuance
of 5.17 million Common Shares in January 2007, and a higher dividend per Common
Share compared to the same periods in 2006.
Preference share dividends during 2007 and 2006 related to the preference shares
that were issued in September 2006.
Contractual Obligations: The consolidated contractual obligations over the next
5 years and for periods thereafter, as at December 31, 2007, are outlined in the
following table.
------------------------------------------------------------------------
------------------------------------------------------------------------
Fortis Inc.
Contractual Obligations (Unaudited)
as at December 31, 2007
------------------------------------------------------------------------
Total lesser greater
or equals than greater
to 1-3 4-5 than
($ millions) 1 year years years 5 years
------------------------------------------------------------------------
Long-term debt (1) 5,057 433 412 623 3,589
------------------------------------------------------------------------
Brilliant Terminal
Station ("BTS") (2) 66 3 5 5 53
------------------------------------------------------------------------
Gas purchase contract
obligations (3) 537 515 22 - -
------------------------------------------------------------------------
Power purchase
obligations
FortisBC (4) 2,856 40 74 76 2,666
FortisOntario (5) 286 21 43 45 177
Maritime Electric (6) 7 7 - - -
Belize Electricity (7) 15 2 2 2 9
------------------------------------------------------------------------
Capital cost (8) 402 14 34 39 315
------------------------------------------------------------------------
Joint-use asset and
shared service
agreements (9) 66 4 8 6 48
------------------------------------------------------------------------
Office lease - FortisBC (10) 20 1 2 2 15
------------------------------------------------------------------------
Operating lease
obligations (11) 176 20 33 30 93
------------------------------------------------------------------------
Other 25 6 10 9 -
------------------------------------------------------------------------
Total 9,513 1,066 645 837 6,965
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) In prior years, TGVI received non-interest bearing repayable loans
from the Federal and Provincial government of $50 million and $25
million, respectively, in connection with the construction and
operation of the Vancouver Island natural gas pipeline. As approved
by the BCUC, these loans have been recorded as government grants and
have reduced the amounts reported for utility capital assets. The
government loans are repayable in any fiscal year prior to 2012 under
certain circumstances and subject to the ability of TGVI to obtain
non-government subordinated debt financing on reasonable commercial
terms. As the loans are repaid and replaced with non-government
loans, utility capital assets and long-term debt will increase in
accordance with TGVI's approved capital structure, as will TGVI's
rate base, which is used in determining customer rates. The
repayment criteria were met in 2007 and TGVI is expected to make a
$6.5 million repayment on the loan in 2008. As at December 31, 2007,
the outstanding balance of the repayable government loans was $67
million including $6.5 million classified as current portion of long-
term debt. Repayments of the government loans beyond 2009 are not
included in the contractual obligations table above as the amount and
timing of the repayments are dependent upon annual BCUC approval of
the recovery of TGVI's Revenue Deficiency Deferral Account and the
ability of TGVI to replace the government loans with non-government
subordinated debt financing on reasonable commercial terms.
(2) On July 15, 2003, FortisBC began operating the BTS under an
agreement, the term of which expires in 2056, (unless the Company has
earlier terminated the agreement by exercising its right, at any time
after the anniversary date of the agreement in 2029, to give 36
months notice of termination). The BTS is jointly owned by the
Columbia Power Corporation and the Columbia Basin Trust (the
"Owners") and is used by the Company on its own behalf and on behalf
of the Owners. The agreement provides that FortisBC will pay the
Owners a charge related to the recovery of the capital cost of the
BTS and related operating costs.
(3) Gas purchase contract obligations relate to various gas purchase
contracts at the Terasen Gas companies. These obligations are based
on market prices that vary with gas commodity indices. The amounts
disclosed reflect index prices that were in effect as at December 31,
2007.
(4) Power purchase obligations for FortisBC include the Brilliant Power
Purchase Agreement (the "BPPA") as well as the Power Purchase
Agreement with BC Hydro. On May 3, 1996, an Order was granted by the
BCUC approving a 60-year BPPA for the output of the Brilliant
hydroelectric plant located near Castlegar, British Columbia. The
BPPA requires payments based on the operation and maintenance costs
and a return on capital for the plant in exchange for the specified
natural flow take-or-pay amounts of power. The BPPA includes a
market-related price adjustment after 30 years of the 60-year term.
The Power Purchase Agreement with BC Hydro, which expires in 2013,
provides for any amount of supply up to a maximum of 200 MW, but
includes a take-or-pay provision based on a five-year rolling
nomination of the capacity requirements.
(5) Power purchase obligations for FortisOntario primarily include a
long-term take-or-pay contract between Cornwall Electric and Hydro-
Quebec Energy Marketing for the supply of electricity and capacity.
The contract provides approximately 237 GWh of energy per year and up
to 45 MW of capacity at any one time. The contract, which expires
December 31, 2019, provides approximately one-third of Cornwall
Electric's load. Cornwall Electric also has a two-year contract in
place with Hydro-Quebec Energy Marketing which expires June 30, 2008.
This take-or-pay contract provides energy on an as-needed basis but
charges for 100 MW of capacity at $0.14 million per month.
(6) Maritime Electric has one take-or-pay contract with New Brunswick
Power ("NB Power") for the purchase of either capacity or energy.
This contract totals approximately $7 million through March 31, 2008.
(7) Power purchase obligations for Belize Electricity include a 15-year
power purchase agreement between Belize Electricity and Hydro Maya
for the supply of 3 MW of capacity, which commenced in February 2007,
and a two-year power purchase agreement between Belize Electricity
and Comision Federal de Electricidad of Mexico, expiring August 2008,
for the supply of 15 MW of firm energy. Belize Electricity has also
signed a 15-year power purchase agreement with Belize Cogeneration
Energy Limited ("Belcogen") that provides for the supply of
approximately 14 MW of capacity, which is scheduled to commence in
mid-2009. Belcogen has not yet commenced construction of the related
bagasse-fired electric generating facility; therefore, the obligation
related to the purchase power agreement with Belcogen has not been
included in the Corporation's contractual obligations.
(8) Maritime Electric has entitlement to approximately 6.7 per cent of
the output from the NB Power Dalhousie Generating Station and
approximately 4.7 per cent from the NB Power Point Lepreau Generating
Station for the life of each unit. As part of its participation
agreement, Maritime Electric is required to pay its share of the
capital costs of these units.
(9) FortisAlberta and an Alberta transmission service provider have
entered into an agreement in consideration for joint attachments of
distribution facilities to the transmission system. The expiry terms
of this agreement state that the agreement remains in effect until
the Company no longer has attachments to the transmission facilities.
Due to the unlimited term of this contract, the calculation of future
payments after 2012 includes payments to the end of 20 years.
However, the payments under this agreement may continue for an
indefinite period of time. FortisAlberta and an Alberta transmission
service provider have also entered into a number of service
agreements to ensure operational efficiencies are maintained through
coordinated operations. The service agreements have minimum expiry
terms of five years from September 1, 2005 and are subject to
extensions based on mutually agreeable terms.
(10) Under a sale-leaseback agreement, on September 29, 1993, FortisBC
began leasing its Trail, British Columbia office building for a term
of 30 years. The terms of the agreement grant FortisBC repurchase
options at approximately year 20 and year 28 of the lease term.
(11) Operating lease obligations include certain office, warehouse,
natural gas distribution asset, vehicle and equipment leases, and the
lease of electricity distribution assets of Port Colborne Hydro Inc.
---------------------------------------------------------------------------
---------------------------------------------------------------------------
CAPITAL RESOURCES
The Corporation's principal business of regulated gas and electric distribution
utilities requires ongoing access to capital to allow it to fund maintenance and
expansion of infrastructure. To help ensure access to capital, the Corporation
targets a long-term capital structure containing approximately 40 per cent
equity, including preference shares, and 60 per cent debt, as well as
investment-grade credit ratings. The capital structure of Fortis is presented
in the following table.
------------------------------------------------------------------------
------------------------------------------------------------------------
Fortis Inc.
Capital Structure (Unaudited)
------------------------------------------------------------------------
December 31, 2007 December 31, 2006
------------------------------------------------------------------------
($ millions) (%) ($ millions) (%)
------------------------------------------------------------------------
Total debt and capital
lease obligations
(net of cash) (1) 5,476 64.3 2,700 61.1
------------------------------------------------------------------------
Preference shares (2) 442 5.2 442 10.0
------------------------------------------------------------------------
Common shareholders' equity 2,601 30.5 1,276 28.9
------------------------------------------------------------------------
Total 8,519 100.0 4,418 100.0
------------------------------------------------------------------------
(1) Includes long-term debt, including current portion, and short-term
borrowings, net of cash
(2) Includes preference shares classified as both long-term liabilities
and equity
------------------------------------------------------------------------
------------------------------------------------------------------------
The change in the capital structure was driven by the issuance of 5.17 million
Common Shares in January 2007, for net after-tax proceeds of approximately $146
million; the issuance of 44.3 million Common Shares in May 2007, for net
after-tax proceeds of $1.12 billion; the $2.4 billion of consolidated debt
assumed upon the acquisition of Terasen and additional debt incurred to
partially finance the cash purchase price of Terasen; and debt incurred at the
subsidiaries in support of their capital expenditure programs. The capital
structure was also impacted by net earnings applicable to common shares less
common share dividends of $65 million during 2007, and an increase in
accumulated other comprehensive loss of $37 million during 2007.
Effective June 19, 2007, S&P raised the long-term corporate credit rating of
Fortis to 'A-' from 'BBB+' and the unsecured debt credit rating of Fortis to
'A-' from 'BBB'. The credit rating upgrades reflect the improved diversity of
Fortis resulting from the acquisition of Terasen, the stand-alone operations and
the financial separation of each of the regulated subsidiaries of Fortis,
management's commitment to maintaining low levels of debt at the holding company
level, the continued focus of Fortis on pursuing acquisitions in stable
regulated utilities and the success of FortisAlberta and FortisBC in executing
their large capital expenditure programs.
The Corporation's credit ratings are as follows:
S&P A- (long-term corporate and unsecured debt credit rating)
DBRS BBB(high) (unsecured debt credit rating)
Capital Program: The Corporation's principal business of regulated gas and
electric distribution utilities is capital intensive. Capital investment in
infrastructure is required to ensure continued and enhanced performance,
reliability and safety of the gas and electricity systems and to meet customer
growth. All costs considered to be maintenance and repairs are expensed as
incurred. Costs related to replacements, upgrades and betterments of capital
assets are capitalized as incurred. During 2007, approximately $87 million in
maintenance and repairs was expensed compared to approximately $59 million
expensed during 2006. The increase year over year was driven by the inclusion
of the Terasen Gas companies in the Corporation's financial results, from May
17, 2007, the date of acquisition; the impact of the consolidation of Caribbean
Utilities' financial results during 2007; and the first full year of ownership
of Fortis Turks and Caicos.
During 2007, actual gross consolidated utility capital expenditures of Fortis
were $790 million, which exceeded the estimate of $610 million, as disclosed at
December 31, 2006, by $180 million. The increase was driven by the Terasen Gas
companies and FortisAlberta. The Terasen Gas companies spent approximately $120
million during 2007, from the date of acquisition. The increase in capital
spending at FortisAlberta was driven by load growth and inflation and has been
included in FortisAlberta's 2008/2009 Distribution Access Tariff Application.
A summary of gross utility capital expenditures for 2007 by segment and asset
category is provided in the following table.
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Gross Utility Capital Expenditures (Unaudited)
Year Ended December 31, 2007
--------------------------------------------------------------------------
Tera- Fortis Fortis- NF Other Total Regu-
sen Alberta BC Power Regu- Regu- lated
Gas (1)(2) (1) (1)lated lated Utili-
Companies Utili- Utili- ties-
(1) ties- ties- Carib- Non
Cana- Cana- bean Regu-
dian dian lated Total
($ millions) (1) (3)
--------------------------------------------------------------------------
Generation - - 21 20 3 44 33 17 94
--------------------------------------------------------------------------
Transmission 50 - 67 5 5 127 9 - 136
--------------------------------------------------------------------------
Distribution 62 202 38 39 27 368 43 1 412
--------------------------------------------------------------------------
Facilities,
equipment,
vehicles
and other 5 63 14 4 2 88 19 4 111
--------------------------------------------------------------------------
Information
technology 3 20 7 4 1 35 2 - 37
--------------------------------------------------------------------------
Total 120 285 147 72 38 662 106 22 790
--------------------------------------------------------------------------
(1) Gross utility capital expenditures include removal and site restoration
expenditures which are permissible in rate base.
(2) Excludes payments of $2 million made to the AESO for investment in
transmission facilities
(3) Includes expenditures associated with assets under construction
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Gross consolidated utility capital expenditures for 2008 are expected to be
approximately $890 million. Planned capital expenditures are based on detailed
forecasts of demand, weather, cost of labour and materials, as well as other
factors which could change and cause actual expenditures to differ from
forecasts.
A summary of forecast gross utility capital expenditures for 2008 by segment and
asset category is provided in the following table.
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Forecast Gross Utility Capital Expenditures (Unaudited)
Year Ending December 31, 2008
--------------------------------------------------------------------------
Tera- Fortis Fortis- NF Other Total Regu-
sen Alberta BC Power Regu- Regu- lated
Gas (1)(2) (1) (1)lated lated Utili-
Companies Utili- Utili- ties-
(1) ties- ties- Carib- Non
Cana- Cana- bean Regu-
dian dian lated Total
($ millions) (1) (3)
--------------------------------------------------------------------------
Generation - - 17 4 3 24 25 32 81
--------------------------------------------------------------------------
Transmission 107 - 75 6 6 194 13 - 207
--------------------------------------------------------------------------
Distribution 125 196 31 36 24 412 55 1 468
--------------------------------------------------------------------------
Facilities,
equipment,
vehicles and
other 5 51 8 3 2 69 7 15 91
--------------------------------------------------------------------------
Information
technology 13 17 5 4 3 42 1 - 43
--------------------------------------------------------------------------
Total 250 264 136 53 38 741 101 48 890
--------------------------------------------------------------------------
(1) Gross utility capital expenditures include removal and site restoration
expenditures which are permissible in rate base.
(2) Excludes forecast payments of $22 million to be made to the AESO for
investment in transmission facilities
(3) Includes expenditures associated with assets under construction
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The percentage break down of 2007 actual and 2008 forecast gross utility
capital expenditures among sustaining, growth and other is as follows:
--------------------------------------------------------------------------
Gross Utility Capital Expenditures (Unaudited)
Year Ended December 31st
--------------------------------------------------------------------------
(%) Actual 2007 Forecast 2008
--------------------------------------------------------------------------
Growth 46 50
--------------------------------------------------------------------------
Sustaining (1) 35 35
--------------------------------------------------------------------------
Other (2) 19 15
--------------------------------------------------------------------------
Total 100 100
--------------------------------------------------------------------------
(1) Capital expenditures required to ensure continued and enhanced
performance, reliability and safety of generation and T&D assets
(2) Related to facilities, equipment, vehicles, information technology
systems and other assets
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Significant utility capital expenditure projects are summarized in the
following table.
--------------------------------------------------------------------------
Significant Capital Projects (Unaudited)
($ millions)
--------------------------------------------------------------------------
Costs
to
complete Expected
Actual Forecast after dates to
Utility Nature of project 2007 2008 2008 complete
--------------------------------------------------------------------------
Terasen Gas LNG storage facility - 50 125-150 2011
Companies - Vancouver Island
Squamish-to-Whistler 16 (1) 11 1 2008/2009
pipeline
Texada Island
Compressor Station 10 (1) - - 2007
Replacement of the
Vancouver low-pressure
system 5 (1) 6 - 2008
--------------------------------------------------------------------------
FortisAlberta New operations facility
in the City of Airdrie 21 8 - 2008
Automated Meter
Infrastructure ("AMI")
technology 7 24 80 2010
--------------------------------------------------------------------------
FortisBC New substations and
associated transmission
lines 49 13 - 2008
Generation asset upgrade
and life-extension
program 20 16 46 2011
--------------------------------------------------------------------------
Newfoundland Rattling Brook
Power hydroelectric generating
plant refurbishment 17 - - 2007
--------------------------------------------------------------------------
Caribbean New 16-MW diesel
Utilities generating unit 20 - - 2007
--------------------------------------------------------------------------
Non-Regulated- 18-MW Vaca hydroelectric
Fortis generating facility in
Generation Belize 14 30 13 2009
--------------------------------------------------------------------------
(1) Capital expenditures from May 17, 2007
--------------------------------------------------------------------------
--------------------------------------------------------------------------
During 2008, TGVI is expected to spend $50 million on the construction of a new
1.5 billion cubic foot LNG storage facility on Vancouver Island to meet current
and future gas demands. The facility is expected to be completed by 2011 for a
total cost of approximately $175 million to $200 million. It will allow more
efficient use of TGI's existing pipeline systems and result in improved
reliability and security of supply during planned or unplanned system
interruptions or in times of high demand. In November 2007, TGVI received
conditional BCUC approval for the construction of the facility. Construction is
expected to begin in April 2008 with the facility coming into service in 2011.
During 2007, TGI commenced the conversion of TGWI's piped propane system to
natural gas and approximately $16 million was spent on this project. The
propane system conversion will require TGI to extend its pipeline system to
Whistler by the construction of a 50-kilometre pipeline lateral from Squamish to
Whistler. The total capital cost of the project is estimated at approximately
$28 million.
Pending regulatory approval, approximately 405,000 customer sites at
FortisAlberta will have their conventional meters replaced by new AMI
technology. AMI technology will allow for remote collection of meter data and
result in more accurate reporting of customer consumption to retailers, based on
actual rather than estimated usage. This technology change will improve billing
accuracy, increase customer satisfaction, reduce customer inquiries, and
significantly reduce the operating cost of the current manual meter reading
practice. In 2008, FortisAlberta is expected to spend $24 million on AMI
implementation, which is expected to be fully implemented by 2010 at an
estimated capital cost of approximately $111 million over the four-year period.
During 2007, work commenced at FortisBC on a number of new substations and
associated transmission lines. Total capital expenditures associated with these
projects was $49 million in 2007, with $13 million expected to be incurred in
2008.
Since 1998, FortisBC's hydroelectric generating facilities have been subject to
an upgrade-and-life-extension program which is forecast to conclude in 2011.
Approximately $20 million was spent on this program in 2007, with an additional
$62 million expected to be incurred from 2008 through 2011.
In May 2007, BECOL received all major approvals for the construction of an
estimated $57 million (US$53 million) 18-MW hydroelectric generating facility at
Vaca on the Macal River in Belize. In 2008, BECOL is expected to spend $30
million on the construction of this generating facility. BECOL has signed a
50-year agreement with Belize Electricity for the sale of the energy to be
generated by the Vaca facility, expected to commence operations late in 2009.
The facility is being constructed downstream from the Chalillo and Mollejon
hydroelectric facilities and is expected to increase the average annual
production from the Macal River by approximately 80 GWh to 240 GWh. Assuming
normal hydrology, the facility is expected to be immediately accretive to
earnings when it comes into service in late 2009.
During 2007, capital expenditures associated with income producing properties
totalled approximately $13 million. In addition, Fortis Properties purchased
the Delta Regina hotel for approximately $50 million. Fortis Properties expects
to spend approximately $11 million in capital projects in 2008.
Fortis expects gross electric utility capital expenditures of more than $3
billion over the next five years will be driven by FortisAlberta, FortisBC and
the Corporation's regulated and non-regulated electric utility operations in the
Caribbean. Fortis expects gross gas utility capital expenditures over the next
five years to exceed $1 billion.
The cash required to complete the planned capital programs is expected to be
derived from a combination of long-term and short-term borrowings, internally
generated funds and the issuance of common shares and preference shares. Fortis
does not anticipate any difficulties accessing the required capital at
reasonable market terms.
Cash Flows: The Corporation's ability to service debt obligations, as well as
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 which may limit their ability to distribute cash to Fortis.
As at December 31, 2007, the Corporation and its subsidiaries had consolidated
authorized lines of credit of $2.2 billion, of which $1.1 billion was unused.
The following summary outlines the credit facilities of the Corporation and its
subsidiaries.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fortis Inc.
Credit Facilities (Unaudited)
-------------------------------------------------------------------------
Total as at Total as at
Corporate Regulated Fortis December 31, December 31,
($ millions) and Other Utilities Properties 2007 2006
-------------------------------------------------------------------------
Total credit
facilities 715 1,506 13 2,234 952
-------------------------------------------------------------------------
Credit
facilities
utilized
Short-term
borrowings (6) (468) (1) (475) (98)
-------------------------------------------------------------------------
Long-term debt (208) (322) - (530) (235)
-------------------------------------------------------------------------
Letters of credit
outstanding (55) (103) (1) (159) (72)
-------------------------------------------------------------------------
Credit facilities
available 446 613 11 1,070 547
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At December 31, 2007 and December 31, 2006, certain borrowings under the
Corporation's and subsidiaries' credit facilities have been 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.
Corporate and Other
At December 31, 2007, Terasen Inc. had a $100 million unsecured committed
revolving credit facility, maturing in May 2009. This credit facility was
reduced from $180 million in July 2007 and is available for general corporate
purposes. Letters of credit outstanding of $55 million at Terasen Inc. related
to its previously owned petroleum transportation business and are secured by a
letter of credit from the former parent company.
On May 14, 2007, Fortis cancelled its $50 million unsecured revolving demand
credit facility and renegotiated and amended its $250 million committed
unsecured credit facility, extending the maturity date to May 2012 and
increasing the amount available to $500 million with the ability, at the
Corporation's option, to increase the credit facility to an aggregate of $600
million. During the fourth quarter, the Corporation increased the amount of its
credit facility to $600 million in accordance with the terms thereof.
Regulated Utilities
At December 31, 2007, TGI had a $500 million unsecured committed revolving
credit facility. In August 2007, the facility was renegotiated and extended
with similar terms. The new facility matures in August 2012. At December 31,
2007, TGVI had a $350 million unsecured committed revolving credit facility,
maturing in January 2011. These facilities are utilized to finance working
capital requirements, capital expenditures and for general corporate purposes.
Additionally, TGVI had a $20 million subordinated unsecured committed
non-revolving credit facility, maturing January 2013. This facility can only be
utilized for purposes of refinancing any annual repayments that TGVI may be
required to make on non-interest bearing government contributions.
In May 2007, FortisAlberta terminated one of its $10 million unsecured demand
credit facilities and extended the maturity date of its $200 million unsecured
committed credit facility to May 2012 from May 2010.
In May 2007, FortisBC renegotiated and amended its $150 million unsecured
committed revolving credit facility, reallocating the amounts available between
the 364-day portion of the facility and the three-year portion of the facility,
and extending the maturity date of the three-year facility to May 2010 from May
2008. Additionally, the Company has the option to increase the credit facility
to an aggregate of $200 million subject to bank approval.
On November 27, 2006, Caribbean Utilities renegotiated its credit facilities,
increasing its capital expenditures line of credit from US$10 million to US$17
million and increasing each of its US$5 million operating line of credit and
US$5 million catastrophe standby loan to US$7.5 million.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation hedges exposures to fluctuations in interest rates and natural
gas commodity prices through the use of derivative instruments. The following
table indicates the valuation of derivative instruments as at December 31st.
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Fortis Inc.
Derivative Financial Instruments(1) (Unaudited)
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2007 2006
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Term to Number Carrying Fair Carrying Fair
maturity of Value Value Value Value
Liability (years) Swaps ($ millions)($ millions)($ millions)($ millions)
--------------------------------------------------------------------------
Interest-
Rate
Swaps 1-3 4 - - - (1)
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Natural
Gas
Commodity
Swaps and
Options Up to 3 244 (79) (79) - -
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(1) Includes derivative financial instruments of the Terasen Gas companies
from May 17, 2007, the date of acquisition
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Two of the four interest-rate swaps are held by Fortis Properties and are
designated as hedges of the cash flow risk related to floating-rate long-term
debt. The effective portion of changes in value of the interest rate swaps at
Fortis Properties is recorded in other comprehensive income. The remaining
interest-rate swaps and all of the natural gas commodity swaps and options are
held by the Terasen Gas companies. These interest-rate swaps are designated as
hedges of cash flow risk related to floating-rate debt instruments. The natural
gas commodity swaps and options are used to fix the effective purchase price of
natural gas as the majority of the natural gas supply contracts have floating
rather than fixed prices. At the Terasen Gas companies, changes in the fair
value of the interest-rate swaps and the natural gas commodity swaps and options
are deferred as a regulatory asset or liability, subject to regulatory approval,
for recovery from, or refund to, customers in future rates. The fair values of
the swaps and options were recorded in accounts payable as at December 31, 2007.
The interest-rate swaps are valued at the present value of future cash flows
based on published forward future interest-rate curves. The fair values of the
natural gas commodity swaps and options reflect the estimated amount that the
Corporation would have to pay if forced to settle all outstanding contracts at
year end.
The fair value of the Corporation's derivative financial instruments reflects a
point-in-time estimate based on relevant market information about the
instruments. 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 earnings or cash flows.
OFF-BALANCE SHEET ARRANGEMENTS
As at December 31, 2007, the Corporation had no off-balance sheet arrangements
such as transactions, agreements or contractual arrangements with unconsolidated
entities, structured finance entities, special purpose entities or variable
interest entities, that are reasonably likely to materially affect liquidity or
the availability of, or requirements for, capital resources.
BUSINESS RISK MANAGEMENT
Changes in the Corporation's significant business risks during the year ended
December 31, 2007 from those disclosed in the Corporation's Management
Discussion and Analysis for the year ended December 31, 2006 are described
below. Most are additional business risks that are associated with the recent
acquisition of Terasen.
Integration of Terasen and Management of Expanding Operations: Fortis continues
to integrate Terasen within the Fortis Group. As a result of the acquisition,
significant demands may be placed on the managerial, operational and financial
personnel and systems of the Corporation. No assurance can be given that the
Corporation's systems, procedures and controls will be adequate to support the
expansion of the Corporation's operations resulting from the acquisition. The
Corporation's future operating results will be affected by the ability of its
officers and key employees to manage changing business conditions and to
implement and improve its operational and financial controls and reporting
systems.
Gas Distribution Operating Risks: Terasen is exposed to various operational
risks, such as pipeline leaks, accidental damage to or fatigue cracks in mains
and service lines, corrosion in pipes, pipeline or equipment failure, other
issues that can lead to outages and leaks and any other accidents involving
natural gas, which could result in significant operational and environmental
liability. The facilities of the Terasen Gas companies are also exposed to the
effects of severe weather conditions and other acts of nature. In addition, many
of these facilities are located in remote areas, which may make access for
repair of damage due to weather conditions and other acts of nature difficult.
The Terasen Gas companies operate facilities in a terrain with a risk of loss or
damage from earthquakes, forest fires, floods, washouts, landslides, avalanches
and similar acts of nature. Terasen has insurance which provides coverage for
business interruption, liability and property damage, although the coverage
offered by this insurance is limited. In the event of a large uninsured loss
caused by severe weather conditions or other natural disasters, application will
be made to the BCUC for the recovery of these costs through higher rates to
offset any loss. However, there can be no assurance that the BCUC would approve
any such application.
Natural Gas Prices: At times in the past, the price of natural gas has been
only marginally lower than the comparable price for electricity for residential
customers in British Columbia, especially on Vancouver Island. There is no
assurance that natural gas will continue to maintain a competitive price
advantage in the future. If natural gas pricing becomes uncompetitive with
electricity pricing, the ability of the Terasen Gas companies to add new
customers could be impaired, and existing customers could reduce their
consumption of natural gas or eliminate its usage altogether as furnaces, water
heaters and other appliances are replaced. This may result in higher rates and,
in an extreme case, could ultimately lead to an inability to fully recover the
cost of service of the Terasen Gas companies in rates charged to customers. The
ability of the Terasen Gas companies to add new customers and sales volumes
could also be affected by lower prices of other competitive energy sources as
some commercial and industrial customers have the ability to switch to an
alternative fuel. The Terasen Gas companies employ a number of tools to reduce
its exposure to natural gas price volatility. These include purchasing gas for
storage and adopting hedging strategies to reduce price volatility and ensure,
to the extent possible, that natural gas commodity costs remain competitive with
electricity rates. Activities related to the hedging of gas prices are
currently approved by the BCUC and gains or losses effectively accrue entirely
to customers. Future BCUC determinations could materially impact the ability of
the Terasen Gas companies to recover the future cost of the natural gas they
deliver to customers.
Natural Gas Supply: The Terasen Gas companies are dependent on a limited
selection of pipeline and storage providers, particularly in the Vancouver,
Fraser Valley and Vancouver Island service areas where the majority of natural
gas distribution customers of the Terasen Gas companies are located. As a
result, regional market prices have been higher from time to time than prices
elsewhere in North America as a result of insufficient seasonal and peak storage
and pipeline capacity to serve the increasing demand for natural gas in British
Columbia. In addition, the Terasen Gas companies are dependent on a
single-source transmission pipeline. In the event of a prolonged service
disruption on the Spectra Pipeline System, residential customers of the Terasen
Gas companies could experience outages, thereby affecting revenues and incurring
costs to safely relight customers.
Weather and Seasonality: Weather has a significant impact on distribution
volume as a major portion of the gas distributed by the Terasen Gas companies is
ultimately used for space heating. Because of natural gas consumption patterns,
the Terasen Gas companies normally generate quarterly earnings that vary by
season and may not be a representative indicator of annual earnings. Virtually
all of the earnings of the Terasen Gas companies are generated in the first and
fourth quarters.
Regulation: The Terasen Gas companies are regulated by the BCUC, and TGI and
TGVI are subject to approved PBR Plans, which have been extended through 2009.
The PBR Plans include incentive mechanisms that provide the companies an
opportunity to earn returns in excess of the allowed ROEs determined by the
BCUC. Upon expiry of the PBR Plans, there is no certainty as to whether new PBR
Plans will be entered into or the particular terms of any such PBR Plans.
Labour Relations: The organized employees of TGI are represented by the
Canadian Office and Professional Employees Union, Local 378, which ratified a
new five-year collective agreement with TGI expiring in March 2012, ending
limited job action that began September 23, 2007, and by the International
Brotherhood of Electrical Workers ("IBEW"), Local 213, under a collective
agreement expiring on March 31, 2011.
On December 31, 2007, the collective agreement between FortisAlberta and the
United Utility Workers Association ("UUWA"), Local 200, was due to expire. On
December 13, 2007, FortisAlberta reached a tentative three-year collective
agreement with the UUWA, Local 200, which was ratified by the membership in
February 2008.
On January 31, 2008, the collective agreement between FortisBC and IBEW, Local
213, was due to expire. FortisBC and IBEW, Local 213, reached a Memorandum of
Agreement which was ratified in December 2007, extending the collective
agreement for one year to January 31, 2009.
Risks Related to TGVI: TGVI is a franchise under development in the
price-competitive service area of Vancouver Island, with a customer base and
revenue that is insufficient to meet its current cost of service and to recover
revenue deficiencies from prior years. Recovery of accumulated revenue
deficiencies from prior years puts gas at a cost disadvantage relative to
electricity. To assist with competitive rates during franchise development, the
Vancouver Island Natural Gas Pipeline Agreement ("VINGPA") provides royalty
revenues from the Government of British Columbia which currently cover
approximately 20 per cent of the current cost of service. These revenues are due
to expire at the end of 2011, after which time TGVI's customers will be required
to absorb the full commodity cost of gas and the recovery of any remaining
accumulated revenue deficiencies. When VINGPA expires in 2011, the remaining
$67 million non-interest bearing senior government debt, which is currently
treated as a government contribution against rate base, will be required to be
fully repaid. As this debt is repaid, the cost of the higher rate base will
increase the cost of service and customer rates making gas less competitive with
electricity on Vancouver Island.
First Nations Lands: The Terasen Gas companies and FortisBC provide service to
customers on First Nations lands and maintain gas and electric distribution
facilities on lands that are subject to land claims by various First Nations. A
treaty negotiation process involving various First Nations and the Government of
British Columbia is underway in British Columbia, but the basis upon which
settlements might be reached in the service areas of the Terasen Gas companies
and FortisBC is not clear. Furthermore, not all First Nations are participating
in the process. To date, the policy of the Government of British Columbia has
been to endeavour to structure settlements without prejudicing existing rights
held by third parties, such as the Terasen Gas companies and FortisBC. However,
there can be no certainty that the settlement process will not adversely affect
the business of the Terasen Gas companies and FortisBC. In addition,
FortisAlberta has distribution assets on First Nations' lands with access
permits to these lands held by FortisAlberta's predecessor, TransAlta Utilities
Corporation. In order for FortisAlberta to acquire these access permits, both
the Ministry of Indian and Northern Affairs Canada and the individual Band
council must grant approval. FortisAlberta may not be able to acquire the
access permits from TransAlta Utilities Corporation and may be unable to
negotiate land usage agreements with property owners or, if negotiated, such
agreements may be on terms that are less than favourable to FortisAlberta and,
therefore, may adversely affect the business of FortisAlberta.
Counter-Party Risk: The Terasen Gas companies are exposed to credit risk in the
event of non-performance by counterparties to derivative instruments, including
natural gas commodity swaps and options. The Terasen Gas companies are also
exposed to significant credit risk on physical off-system sales. Because the
Terasen Gas companies deal with high credit-quality institutions, in accordance
with established credit approval practices, the Terasen Gas companies do not
expect any counterparties to fail to meet their obligations. FortisAlberta is
exposed to credit risk associated with sales to retailers. Significantly all of
FortisAlberta's distribution service billings are to a relatively small group of
retailers. As required under regulation, FortisAlberta is required to minimize
its credit exposure associated with retailer billings by obtaining from the
retailer a cash deposit, bond, letter of credit, investment-grade credit rating
from a major rating agency, or having the retailer obtain a financial guarantee
from an entity with an investment-grade credit rating.
CHANGES IN ACCOUNTING POLICIES
The nature of and the impact on Fortis of adopting the new Canadian Institute of
Chartered Accountants ("CICA") accounting standards for Financial Instruments,
Hedges and Comprehensive Income, effective January 1, 2007, is described in
detail in Note 3 to the Corporation's interim unaudited consolidated financial
statements for the 3- and 12-month periods ended December 31, 2007. The most
significant impacts of adopting the new standards were: (i) the reallocation of
$21 million of deferred financing costs from deferred charges and other assets
to long-term debt; (ii) the reporting of a Statement of Comprehensive Income;
(iii) the recording, in other comprehensive loss, of unrecognized foreign
currency translation gains and losses on US dollar-denominated debt that is
hedging the Corporation's net investments in self-sustaining foreign operations;
(iv) the reallocation of $51 million of unrealized foreign currency translation
losses on net investments in self-sustaining foreign operations from the foreign
currency translation adjustment account in shareholders' equity to accumulated
other comprehensive loss; (v) the reallocation of an $11 million ($7 million
after-tax) unamortized loss balance relating to a previously cancelled
interest-rate swap contract from deferred charges and other assets, and the
reallocation of a $3 million ($2 million after-tax) unamortized gain balance
relating to a previously cancelled US dollar forward currency swap agreement
from deferred credits, to accumulated other comprehensive loss; and (vi) the
recording of opening fair value and subsequent changes in fair value of the
Corporation's interest-rate swap contracts in effective hedging relationships in
accumulated other comprehensive loss and other comprehensive loss, respectively.
The adoption of the accounting standards did not have a material impact on the
Corporation's consolidated statement of earnings for the 3- and 12-month periods
ended December 31, 2007.
Also as disclosed in Note 3 to the Corporation's interim unaudited consolidated
financial statements for the 3- and 12-month periods ended December 31, 2007,
Fortis adopted the revised standard for accounting changes, effective January 1,
2007. This new standard had no impact on the Corporation's interim unaudited
consolidated financial statements for the 3- and 12-month periods ended December
31, 2007, except for the disclosures provided in Note 3e to these interim
financial statements.
FUTURE ACCOUNTING PRONOUNCEMENTS
International Financial Reporting Standards ("IFRS"): In 2006, the Canadian
Accounting Standards Board ("AcSB") published a new strategic plan that will
significantly affect financial reporting requirements for Canadian companies.
The AcSB strategic plan outlines the convergence of Canadian GAAP with IFRS over
an expected five-year transitional period. By no later than March 31, 2008, the
AcSB is expected to issue a report confirming or revising the expected
transition date of January 1, 2011 for the conversion to IFRS. The proposed
transition date of January 1, 2011 will require the restatement for comparative
purposes amounts reported by the Corporation for its year ended December 31,
2010. While Fortis has begun assessing the adoption of IFRS for 2011, the
financial reporting impact on the Corporation cannot be reasonably estimated at
this time.
Rate-Regulated Operations: In March 2007, the AcSB issued an Exposure Draft on
rate-regulated operations that proposed: (i) the temporary exemption in Section
1100, Generally Accepted Accounting Principles, of the CICA Handbook providing
relief to entities subject to rate regulation from the requirement to apply the
Section to the recognition and measurement of assets and liabilities arising
from rate regulation be removed; (ii) the explicit guidance for rate-regulated
operations provided in Section 1600, Consolidated Financial Statements, Section
3061, Property, Plant and Equipment, Section 3465, Income Taxes, and Section
3475, Disposal of Long-Lived Assets and Discontinued Operations, be removed; and
(iii) Accounting Guideline 19, Disclosures by Entities Subject to Rate
Regulation ("AcG-19"), be retained as is.
In August 2007, the AcSB issued a Decision Summary on the Exposure Draft that
supported the removal of the temporary exemption in Section 1100, Generally
Accepted Accounting Principles, and the amendment to Section 3465, Income Taxes,
to recognize future income tax liabilities and assets as well as offsetting
regulatory assets and liabilities at entities subject to rate regulation. Both
changes will apply prospectively for fiscal years beginning on or after January
1, 2009. The AcSB also decided that the current guidance for rate-regulated
operations pertaining to property, plant and equipment, disposal of long-lived
assets and discontinued operations, and consolidated financial statements be
maintained, and that the existing AcG-19 will not be withdrawn from the Handbook
but that the guidance will be updated as a result of the other changes. The AcSB
also decided that the final Background Information and Basis for Conclusions
associated with its rate-regulation project would not express any views of the
AcSB regarding the status of US Statement of Financial Accounting Standards No.
71, Accounting for the Effects of Certain Types of Regulation, as an "other
source of GAAP" within the Canadian GAAP hierarchy.
Effective January 1, 2009, the impact on Fortis of the amendment to Section
3465, Income Taxes, will be the recognition of future income tax assets and
liabilities and related regulatory liabilities and assets for the amount of
future income taxes expected to be refunded to, or recovered from, customers in
future gas and electricity rates. Currently, the Terasen Gas companies,
FortisAlberta, FortisBC and Newfoundland Power use the taxes-payable method of
accounting for income taxes. The effect on the Corporation's consolidated
financial statements, if it had adopted amended Section 3465, Income Taxes, as
at December 31, 2007, would have been an increase in future tax assets and
future tax liabilities of $54 million and $489 million, respectively, and a
corresponding increase in regulatory liabilities and regulatory assets of $54
million and $489 million, respectively. Included in the amounts are the future
income tax effects of the subsequent settlement of the related regulatory assets
and liabilities through customer rates, and the separate disclosure of future
income tax assets and liabilities that are currently not recognized. Fortis is
continuing to assess and monitor any additional implications on its financial
reporting related to accounting for rate-regulated operations.
Inventories: In March 2007, the AcSB approved the new Section 3031, Inventories,
effective for fiscal years beginning on or after January 1, 2008. The new
standard requires inventories to be measured at the lower of cost or net
realizable value; disallows the use of a last-in first-out inventory-costing
methodology and requires that, when circumstances which previously caused
inventories to be written down below cost no longer exist, the amount of the
write down is to be reversed. This new standard is not expected to have a
material impact on the Corporation's earnings, cash flow or financial position.
Capital Disclosures: As a result of new Section 1535, Capital Disclosures,
Fortis will be required to include additional information in the Notes to the
financial statements about its capital and the manner in which it is managed.
This additional disclosure includes quantitative and qualitative information
regarding an entity's objectives, policies and processes for managing capital.
This Section is applicable to Fortis for the fiscal year beginning on January 1,
2008.
Disclosure and Presentation of Financial Instruments: New accounting
recommendations for disclosure and presentation of financial instruments,
Sections 3862 and 3863, are effective for the Corporation, beginning January 1,
2008. The new recommendations require disclosures of both qualitative and
quantitative information that enables users of financial statements to evaluate
the nature and extent of risks from financial instruments to which the
Corporation is exposed.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Corporation's consolidated financial statements in
accordance with Canadian 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 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 are necessary since the
regulatory environments in which the Corporation's utilities operate often
require amounts to be recorded at estimated values until these amounts are
finalized pursuant to regulatory decisions or other regulatory proceedings.
Due to changes in facts and circumstances and the inherent uncertainty involved
in making estimates, actual results may differ significantly from current
estimates. Estimates and judgments are reviewed periodically and, as
adjustments become necessary, are reported in earnings in the period they become
known. Interim financial statements may also employ a greater use of estimates
than the annual financial statements. There were no material changes in the
nature of the Corporation's critical accounting estimates for the 3- and
12-month periods ended December 31, 2007 from those disclosed in the
Corporation's Management Discussion and Analysis for the year ended December 31,
2006. However, the magnitude of the accounting estimates has increased due to
the acquisition of Terasen, which is described below.
Regulation: The Terasen Gas companies are regulated by the BCUC. As with the
Corporation's other regulated utilities, the timing of recognition of certain
assets, liabilities, revenues and expenses, as a result of regulation, may
differ from that otherwise expected using Canadian GAAP for entities not subject
to rate regulation. The accounting methods utilized and eventual recovery of
regulatory assets and liabilities are based on regulatory approval. With the
acquisition of Terasen, the Corporation's regulatory assets have increased
significantly. As at December 31, 2007, current and long-term regulatory assets
were $312 million compared to $171 million as at December 31, 2006. The
increase in regulatory assets was largely associated with BCUC-approved rate
stabilization accounts at the Terasen Gas companies.
Capital Asset Amortization: Amortization, by its very nature, is an estimate
based primarily on the useful life of assets. Estimated useful lives are based
on current facts and historical information and take into consideration the
anticipated physical life of the assets. As at December 31, 2007, the
Corporation's consolidated utility and income producing properties were $7.2
billion, or approximately 70 per cent of total consolidated assets, compared to
consolidated utility and income producing properties of $4.0 billion, or
approximately 74 per cent of total consolidated assets, as at December 31, 2006.
The increase in capital assets was primarily associated with the Terasen Gas
companies. Amortization expense for 2007 was $273 million compared to $178
million for 2006. Due to the increased size of the Corporation's capital
assets, changes in amortization rates can have a significant impact on the
Corporation's amortization expense.
Goodwill Impairment Assessments: Goodwill represents the excess, at the dates of
acquisition, of the purchase price over the fair value of net amounts assigned
to individual assets acquired and liabilities assumed relating to business
acquisitions. The Corporation is required to perform an annual impairment test
and at such time any event occurs or if circumstances change that would indicate
that the fair value of a reporting unit was below its carrying value. As at
December 31, 2007, consolidated goodwill was $1.54 billion compared to $661
million as at December 31, 2006. The net increase in goodwill was due to the
acquisition of Terasen.
Employee Future Benefits: The Corporation's defined benefit pension and other
post-employment benefit plans are subject to judgments utilized in the actuarial
determination of the expense and the related obligation. As at December 31,
2007, the Corporation had consolidated accrued benefit assets of $120 million
compared to $93 million as at December 31, 2006 and accrued benefit liabilities
of $150 million compared to $63 million as at December 31, 2006. The increase
in the accrued benefit assets and liabilities was primarily associated with the
acquisition of Terasen.
Revenue Recognition: The Terasen Gas companies record gas distribution revenues
on an accrual basis, similar to the majority of the Corporation's other
regulated utilities. Estimates of customer gas usage from the last meter
reading date to the balance sheet date are required in order to accrue unbilled
revenue. As at December 31, 2007, accrued unbilled revenue at the Terasen Gas
companies was approximately $174 million.
Contingencies: Fortis is subject to various legal proceedings and claims that
arise in the ordinary course of business operations. Management believes that
the amount of liability, if any, from these actions would not have a material
effect on the Corporation's financial position or results of operations.
The following describes the nature of the Corporation's contingent liabilities.
On March 26, 2007, the Minister of Small Business and Revenue and Minister
Responsible for Regulatory Reform (the "Minister") in British Columbia issued a
decision in respect of the appeal by TGI of an assessment of additional British
Columbia Social Service Tax in the amount of approximately $37 million
associated with the Southern Crossing Pipeline, which was completed in 2000. The
Minister has reduced the assessment to $7 million, including interest, which has
been paid in full to avoid accruing further interest and has been recorded as a
long-term regulatory deferral asset. On June 22, 2007, TGI filed an appeal of
the assessment with the B.C. Supreme Court.
A non-regulated subsidiary of Terasen received Notices of Assessment from Canada
Revenue Agency ("CRA") for additional taxes related to the taxation years 1999
through 2003. The exposure has been fully provided for in the consolidated
financial statements. Terasen has begun the appeal process associated with the
assessments.
The B.C. Ministry of Forests (the "Ministry") has alleged breaches of the Forest
Practices Code and negligence relating to a forest fire near Vaseux Lake and has
filed and served a writ and statement of claim against FortisBC. In addition,
the Company has been served with two filed writs and statements of claim by
private land owners in relation to the same matter. The Company is currently
communicating with its insurers and has filed a statement of defence in relation
to all of the actions. The outcome cannot be reasonably determined and
estimated at this time and, accordingly, no amount has been accrued in the
consolidated financial statements.
On March 24, 2006, Her Majesty the Queen in Right of Alberta (the "Crown") filed
a statement of claim in the Court of Queen's Bench of Alberta in the Judicial
District of Edmonton against FortisAlberta. The Crown's claim is that the
Company is responsible for a fire that occurred in October 2003 in an area of
the Province of Alberta commonly referred to as Poll Haven Community Pasture.
The Crown is seeking approximately $3 million in fire-fighting and suppression
costs and approximately $2 million in timber losses, as well as interest and
other costs. FortisAlberta and the Crown have exchanged several investigation
and expert reports. Both the factual evidence and expert opinion received to
date lead management to believe that FortisAlberta is not responsible for the
cause of the fire and has no liability for the damages. However, FortisAlberta
has not made any definitive assessment of potential liability and the outcome
with regard to the Company's liability for the claims made by the Crown is
indeterminable. No amount, therefore, has been accrued in the consolidated
financial statements.
In April 2006, CRA reassessed Maritime Electric's 1997-2004 taxation years. The
reassessment encompasses the Company's tax treatment, specifically the Company's
timing of deductions, with respect to: (i) the energy cost adjustment mechanism
amounts in the 2001-2004 taxation years; (ii) customer rebate adjustments in the
2001-2003 taxation years; and (iii) the Company's payment of approximately $6
million on January 2, 2001 associated with a settlement with NB Power regarding
the $450 million write-down of the Point Lepreau Nuclear Generating Station in
1998. Maritime Electric believes it has reported its tax position appropriately
in all aspects of the reassessment and filed a Notice of Objection with the
Chief of Appeals at CRA. Should the Company be unsuccessful in defending all
aspects of the reassessment, the Company would be required to pay approximately
$13 million in taxes and accrued interest. As at December 31, 2007, Maritime
Electric has provided for this amount through future and current income taxes
payable. The provisions of the Income Tax Act (Canada) require the Company to
deposit one-half of the assessment under objection with CRA. The amount
currently on deposit with the CRA arising from the reassessment is approximately
$6 million.
Legal proceedings were initiated against FortisUS Energy by the Village of
Philadelphia (the "Village"), New York. The Village claimed that FortisUS
Energy should honour a series of current and future payments set out in an
agreement between the Village and a former owner of the hydroelectric site,
located in the Village of Philadelphia municipality, now owned by FortisUS
Energy, totalling approximately $7 million (US$7 million). The First American
Title Insurance Company is defending the action on behalf of FortisUS Energy. A
Memorandum Decision and Order was filed by the State of New York Supreme Court
of Jefferson County on December 21, 2006 granting summary judgment to FortisUS
Energy dismissing the action by the Village. The Village, however, filed a
notice of appeal in January 2007. The appeal was heard by the court in December
2007. Management believes that the appeal will not be successful and, therefore,
no provision has been made in the consolidated financial statements.
QUARTERLY RESULTS
The following table sets forth unaudited quarterly information for each of the
eight quarters ended March 31, 2006 through December 31, 2007. The quarterly
information has been obtained from the Corporation's interim unaudited
consolidated financial statements which, in the opinion of management, have been
prepared in accordance with Canadian GAAP and as required by utility regulators.
The timing of the recognition of certain assets, liabilities, revenues and
expenses, as a result of regulation, may differ from that otherwise expected
using Canadian GAAP for non-regulated entities. These differences are disclosed
in Notes 2 and 4 to the Corporation's 2006 annual audited consolidated financial
statements and Note 5 to the Corporation's interim unaudited consolidated
financial statements for the 3- and 12-months ended December 31, 2007. These
operating results are not necessarily indicative of results for any future
period and should not be relied upon to predict future performance.
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Fortis Inc.
Summary of Quarterly Results (Unaudited)
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Net Earnings
Revenue and Applicable to Earnings per
Equity Income Common Shares Common Share
Quarter Ended ($ millions) ($ millions) Basic ($) Diluted ($)
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December 31, 2007 1,018 79 0.51 0.49
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September 30, 2007 651 31 0.20 0.20
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June 30, 2007 566 41 0.31 0.27
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March 31, 2007 483 42 0.38 0.35
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December 31, 2006 393 34 0.33 0.32
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September 30, 2006 342 39 0.37 0.36
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June 30, 2006 346 38 0.37 0.35
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March 31, 2006 391 37 0.35 0.34
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A 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. Given the diversified group of companies,
seasonality may vary. Financial results from May 17, 2007 were impacted by the
acquisition of Terasen. Virtually all of the earnings of the Terasen Gas
companies are generated in the first and fourth quarters. Financial results from
November 1, 2006 were impacted by the acquisition of four hotels in western
Canada. Financial results from August 28, 2006 were impacted by the acquisition
of Fortis Turks and Caicos, while earnings from January 1, 2007 were impacted by
the consolidation of a controlling interest in Caribbean Utilities. The
Corporation's interest in Caribbean Utilities was previously accounted for on an
equity basis.
December 2007/December 2006 - Net earnings applicable to common shares were $79
million, or $0.51 per common share, for the fourth quarter of 2007 compared to
earnings of $34 million, or $0.33 per common share, for the fourth quarter of
2006. The increase in earnings and earnings per common share was driven by
contributions from the Terasen Gas companies including a $7 million after-tax
gain on the sale of surplus land, partially offset by increased corporate costs
driven by Terasen acquisition-related finance charges.
September 2007/September 2006 - Net earnings applicable to common shares were
$31 million, or $0.20 per common share, for the third quarter of 2007, compared
to earnings of $39 million, or $0.37 per common share, for the third quarter of
2006. A $1.15 billion common share issue in May 2007, to fund a significant
portion of the cash purchase price of Terasen, combined with the seasonality of
earnings of the Terasen Gas companies, diluted earnings per common share for the
third quarter of 2007. Increased earnings contributions from FortisAlberta,
driven by customer growth and higher corporate income tax recoveries; increased
earnings contributions from Fortis Turks and Caicos, acquired August 2006; and
growth at Fortis Properties from expanded hospitality operations in western
Canada were more than offset by higher finance charges associated with
acquisitions, losses at the Terasen Gas companies due to seasonality of
operations, and lower non-regulated hydroelectric production due to lower
rainfall.
June 2007/June 2006 - Net earnings applicable to common shares were $41 million,
or $0.31 per common share, for the second quarter of 2007 compared to earnings
of $38 million, or $0.37 per common share, for the second quarter of 2006. The
$1.15 billion common share issue, combined with the seasonality of earnings of
the Terasen Gas companies, diluted earnings per common share for the second
quarter of 2007. The increase in overall earnings was driven by customer growth
and increased energy deliveries at FortisAlberta; rate increases and electricity
sales growth at FortisBC; and earnings contributions from Fortis Turks and
Caicos, acquired August 2006, and the Terasen Gas companies, acquired May 2007.
The increase was partially offset by higher acquisition-related finance charges,
the impact of decreased non-regulated hydroelectric production and lower
earnings from Fortis Properties. However, earnings at Fortis Properties during
the second quarter of 2006 were favourably impacted by $3 million associated
with the sale of Days Inn Sydney and reduction of future income tax liabilities.
March 2007/March 2006 - Net earnings applicable to common shares were $42
million, or $0.38 per common share, for the first quarter of 2007, up $5 million
from earnings of $37 million, or $0.35 per common share, for the first quarter
of 2006. Excluding the Corporation's $2 million share of a charge associated
with the disposal of a steam-turbine system at Caribbean Utilities, earnings
were $7 million higher than for the first quarter of 2006. The increase was
primarily due to electricity sales growth and lower corporate income taxes at
FortisAlberta, increased non-regulated hydroelectric production in Belize,
earnings contribution from Fortis Turks and Caicos, and electricity sales growth
and lower finance charges at Belize Electricity.
The impact of increased earnings on earnings per common share was partially
offset by the dilution created by the approximate $150 million issuance of 5.17
million Common Shares on January 18, 2007.
OUTLOOK
The Corporation's principal business of regulated gas and electric distribution
utilities is capital intensive. Over the next five years, the Corporation's
consolidated utility capital program is expected to exceed $4 billion. Most of
its more than $3 billion gross electric utility capital expenditures will be
driven by FortisAlberta, FortisBC and the Corporation's regulated and
non-regulated electric utility operations in the Caribbean. Gross gas utility
capital expenditures are expected to exceed $1 billion. The Corporation's
capital program should drive growth in earnings and dividends.
The Corporation continues to integrate Terasen within the Fortis Group. The
addition of the gas distribution business doubles the Corporation's investment
in regulated rate base assets to approximately $6.3 billion. The Corporation is
pursuing acquisitions for profitable growth, focusing on opportunities to
acquire regulated natural gas and electric utilities in Canada, the United
States and the Caribbean. Fortis will also pursue growth in its non-regulated
businesses in support of its regulated utility growth strategy.
OUTSTANDING SHARE DATA
At February 6, 2008, the Corporation had issued and outstanding 156,550,751
Common Shares, 5,000,000 First Preference Shares, Series C; 7,993,500 First
Preference Shares, Series E; and 5,000,000 First Preference Shares, Series F.
As at February 6, 2008, the number of Common Shares that would be issued upon
conversion of share options, convertible debt, First Preference Shares, Series C
and First Preference Shares, Series E is described in Notes 8 and 9 to the
interim unaudited consolidated financial statements for the 3- and 12-months
ended December 31, 2007 and Notes 11, 14 and 16 to the 2006 annual audited
consolidated financial statements.
Additional information, including the Fortis 2006 Annual Information Form,
Management Information Circular and Annual Report, is available on SEDAR at
www.sedar.com and on the Corporation's web site at www.fortisinc.com.
FORTIS INC.
Interim Consolidated Financial Statements
For the 3- and 12-months ended December 31, 2007 and 2006
(Unaudited)
Fortis Inc.
Consolidated Balance Sheets (Unaudited)
As at
(in millions)
December 31 December 31
2007 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $58 $41
Accounts receivable 635 286
Prepaid expenses 19 14
Regulatory assets (Note 5) 119 31
Inventories of gas, materials and supplies 233 33
--------------------------------------------------------------------------
1,064 405
Deferred charges and other assets 179 174
Regulatory assets (Note 5) 193 140
Future income taxes 37 7
Utility capital assets 6,722 3,575
Income producing properties 519 469
Intangibles, net of amortization 15 10
Goodwill 1,544 661
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$10,273 $5,441
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings (Note 6) $475 $98
Accounts payable and accrued charges 793 333
Dividends payable 43 22
Income taxes payable 30 -
Regulatory liabilities (Note 5) 20 19
Current installments of long-term debt and capital
lease obligations (Note 7) 436 85
Future income taxes 7 1
--------------------------------------------------------------------------
1,804 558
Deferred credits 261 79
Regulatory liabilities (Note 5) 372 340
Future income taxes 55 58
Long-term debt and capital lease obligations (Note 7) 4,623 2,558
Non-controlling interest 115 130
Preference shares 320 320
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7,550 4,043
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Shareholders' equity
Common shares (Note 8) 2,126 829
Preference shares 122 122
Contributed surplus 6 5
Equity portion of convertible debentures 6 7
Accumulated other comprehensive loss (Note 10) (88) (51)
Retained earnings 551 486
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2,723 1,398
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$10,273 $5,441
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Contingent liabilities and commitments (Note 17)
See accompanying Notes to interim consolidated financial statements.
Fortis Inc.
Consolidated Statements of Earnings (Unaudited)
For the periods ended December 31
(in millions, except per share amounts)
Quarter Ended Year Ended
2007 2006 2007 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Operating revenues $1,018 $391 $2,718 $1,462
Equity income - 3 - 10
--------------------------------------------------------------------------
1,018 394 2,718 1,472
--------------------------------------------------------------------------
Expenses
Energy supply costs 558 146 1,287 540
Operating 191 109 617 399
Amortization 78 47 273 178
--------------------------------------------------------------------------
827 302 2,177 1,117
--------------------------------------------------------------------------
Operating income 191 92 541 355
--------------------------------------------------------------------------
Finance charges (Note 12) 93 44 299 168
Gain on sale of property (Note 13) (8) - (8) (2)
--------------------------------------------------------------------------
85 44 291 166
--------------------------------------------------------------------------
Earnings before corporate taxes
and non-controlling interest 106 48 250 189
Corporate taxes (Note 14) 21 9 36 32
--------------------------------------------------------------------------
Net earnings before
non-controlling interest 85 39 214 157
Non-controlling interest 4 3 15 8
--------------------------------------------------------------------------
Net earnings 81 36 199 149
Preference share dividends 2 2 6 2
--------------------------------------------------------------------------
Net earnings applicable to
common shares $79 $34 $193 $147
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--------------------------------------------------------------------------
Earnings per common share (Note 8)
Basic $0.51 $0.33 $1.40 $1.42
Diluted $0.49 $0.32 $1.32 $1.37
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Fortis Inc.
Consolidated Statements of Retained Earnings
(Unaudited)
For the periods ended December 31
(in millions)
Quarter Ended Year Ended
2007 2006 2007 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Balance at beginning of period $511 $472 $486 $412
Net earnings applicable to
common shares 79 34 193 147
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590 506 679 559
Dividends on common shares (39) (20) (128) (73)
--------------------------------------------------------------------------
Balance at end of period $551 $486 $551 $486
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying Notes to interim consolidated financial statements.
Fortis Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
For the periods ended December 31
(in millions)
Quarter Ended Year Ended
2007 2006 2007 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net earnings $81 $36 $199 $149
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Unrealized foreign currency
translation losses - (24) (70) (30)
Gains (losses) on hedges of net investments
in self-sustaining foreign operations 1 (11) 48 (6)
Corporate (taxes) recovery (1) 2 (9) 1
--------------------------------------------------------------------------
Change in unrealized foreign
currency translation losses,
net of hedging activities and tax - (33) (31) (35)
--------------------------------------------------------------------------
Total other comprehensive loss, net of tax - (33) (31) (35)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Comprehensive income $81 $3 $168 $114
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying Notes to interim consolidated financial statements.
Fortis Inc.
Consolidated Statements of Cash Flows (Unaudited)
For the periods ended December 31
(in millions)
Quarter Ended Year Ended
2007 2006 2007 2006
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--------------------------------------------------------------------------
Operating Activities
Net earnings $81 $36 $199 $149
Items not affecting cash
Amortization - capital assets, net of
contributions in aid of construction 73 45 261 168
Amortization - intangibles 2 1 5 4
Amortization - other 3 1 7 6
Future income taxes (2) 15 - 10
Accrued employee future benefits (6) (1) (2) (3)
Non-controlling interest 4 3 15 8
Gain on sale of property (8) - (8) (2)
Other (5) - 2 (4)
Change in long-term regulatory assets
and liabilities 1 (19) 11 (30)
Increase in corporate income tax deposit - - - (6)
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143 81 490 300
Change in non-cash operating
working capital 9 (22) (117) (37)
--------------------------------------------------------------------------
152 59 373 263
--------------------------------------------------------------------------
Investing Activities
Change in deferred charges, other
assets and deferred credits 2 (13) (4) (25)
Purchase of utility capital assets (252) (152) (790) (483)
Purchase of income producing properties (3) (2) (13) (17)
Contributions in aid of construction 18 15 73 54
Proceeds on sale of capital assets 1 2 4 8
Business acquisitions, net of cash
acquired (Note 15) - (93) (1,303) (169)
Increase in investments - - - (2)
--------------------------------------------------------------------------
(234) (243) (2,033) (634)
--------------------------------------------------------------------------
Financing Activities
Change in short-term borrowings 74 18 103 38
Proceeds from long-term debt,
net of issue costs 429 169 1,400 469
Repayments of long-term debt and
capital lease obligations (376) (7) (941) (197)
Advances (to) from non-controlling
interest - - (3) 10
Issue of common shares, net of costs 5 6 1,267 15
Issue of preference shares, net of costs - - - 121
Dividends
Common shares (39) (20) (128) (73)
Preference shares (2) (2) (6) (2)
Subsidiary dividends paid to
non-controlling interest (2) - (12) (2)
--------------------------------------------------------------------------
89 164 1,680 379
--------------------------------------------------------------------------
Effect of exchange rate changes on
cash and cash equivalents - - (3) -
--------------------------------------------------------------------------
Change in cash and cash equivalents 7 (20) 17 8
Cash and cash equivalents, beginning
of period 51 61 41 33
--------------------------------------------------------------------------
Cash and cash equivalents, end of period $58 $41 $58 $41
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying Notes to interim consolidated financial statements.
Fortis Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the 3- and 12-months ended December 31, 2007 and 2006
(unless otherwise stated)
(Unaudited)
1. DESCRIPTION OF THE BUSINESS
Nature of Operations
Fortis Inc. ("Fortis" or the "Corporation") is principally a diversified,
international distribution utility holding company. Fortis segments its utility
operations by franchise area and, depending on regulatory requirements, by the
nature of the assets. Fortis also holds investments in non-regulated generation,
and commercial real estate and hotels, which are treated as two separate
segments. The Corporation's operating segments allow senior management to
evaluate the operational performance and assess the overall contribution of each
segment to the Corporation's long-term objectives. Each operating segment
operates as an autonomous unit, assumes profit and loss responsibility and is
accountable for its own resource allocation.
The following summary briefly describes the operations included in each of the
Corporation's reportable segments.
REGULATED UTILITIES
The following summary describes the Corporation's interests in Regulated Gas and
Electric Utilities in Canada and the Caribbean by utility:
Regulated Gas Utilities - Canadian
a. Terasen Gas Companies: Includes Terasen Gas Inc. ("TGI"), Terasen Gas
(Vancouver Island) Inc. ("TGVI") and Terasen Gas (Whistler) Inc. ("TGWI"), which
Fortis acquired through the acquisition of Terasen Inc. ("Terasen") on May 17,
2007.
TGI is the largest distributor of natural gas in British Columbia, serving
approximately 825,000 residential, commercial and industrial customers in a
service area that extends from Vancouver to the Fraser Valley and the interior
of British Columbia.
TGVI owns and operates the natural gas transmission pipeline from the Greater
Vancouver area across the Georgia Strait to Vancouver Island and the
distribution system on Vancouver Island and along the Sunshine Coast of British
Columbia, serving approximately 91,200 residential, commercial and industrial
customers.
In addition to providing transmission and distribution services to customers,
TGI and TGVI also obtain natural gas supplies on behalf of most residential and
commercial customers. Gas supplies are sourced primarily from northeastern
British Columbia and, through the Company's Southern Crossing Pipeline, from
Alberta.
TGWI owns and operates the propane distribution system in Whistler, British
Columbia, providing service to approximately 2,400 residential and commercial
customers.
Regulated Electric Utilities - Canadian
a. FortisAlberta: FortisAlberta owns and operates the electricity distribution
system in a substantial portion of southern and central Alberta, serving over
448,000 customers.
b. FortisBC: Includes FortisBC Inc., an integrated electric utility operating in
the southern interior of British Columbia serving approximately 154,000
customers. FortisBC Inc. owns four hydroelectric generating plants with a
combined capacity of 223 megawatts ("MW"). During 2007, the entitlement capacity
and energy output for a number of FortisBC Inc.'s hydroelectric generating units
was optimized as a result of past turbine and generator upgrade projects.
Entitlement capacity was rebalanced from 235 MW to 223 MW and energy output
increased by 11,000 MW hours as a result of negotiated adjustments to the Canal
Plant Agreement with BC Hydro.
Included with the FortisBC component of the Regulated Utilities - Canadian
segment are the non-regulated operating, maintenance and management services
relating to the 450-MW Waneta hydroelectric generating facility owned by Teck
Cominco Metals Ltd., the 149-MW Brilliant Hydroelectric Plant owned by Columbia
Power Corporation and the Columbia Basin Trust ("CPC/CBT"), the 185-MW Arrow
Lakes Hydroelectric Plant owned by CPC/CBT and the distribution system owned by
the City of Kelowna. FortisBC's assets also include the former Princeton Light
and Power Company, Limited ("PLP"). Effective January 1, 2007, PLP was
amalgamated with FortisBC Inc. as part of an internal corporate reorganization.
c. Newfoundland Power: Newfoundland Power is the principal distributor of
electricity in Newfoundland, serving more than 232,000 customers. Newfoundland
Power has an installed generating capacity of 139 MW, of which 96 MW is
hydroelectric generation.
d. Maritime Electric: Maritime Electric is the principal distributor of
electricity on Prince Edward Island, serving approximately 72,000 customers.
Maritime Electric also maintains on-Island diesel-fired generating facilities
with a combined capacity of 150 MW.
e. FortisOntario: FortisOntario provides an integrated electric utility service
to approximately 52,000 customers in Fort Erie, Cornwall, Gananoque and Port
Colborne in Ontario. FortisOntario operations include Canadian Niagara Power
Inc. ("Canadian Niagara Power") and Cornwall Street Railway, Light and Power
Company, Limited. Included in Canadian Niagara Power's accounts is the operation
of the electricity distribution business of Port Colborne Hydro Inc., which has
been leased from the City of Port Colborne under a ten-year lease agreement that
expires in April 2012. FortisOntario also owns a 10 per cent interest in each of
Westario Power Holdings Inc. and Rideau St. Lawrence Holdings Inc., two regional
electrical distribution companies formed in 2000 serving more than 27,000
customers.
Regulated Electric Utilities - Caribbean
a. Belize Electricity: Belize Electricity is the principal distributor of
electricity in Belize, Central America, serving approximately 73,000 customers.
The Company has an installed generating capacity of 36 MW. Fortis holds a 70.1
per cent controlling interest in Belize Electricity.
b. Caribbean Utilities: Caribbean Utilities is the sole provider of electricity
on Grand Cayman, Cayman Islands, serving more than 23,000 customers. The Company
has an installed generating capacity of 137 MW. On November 7, 2006, Fortis
acquired an additional approximate 16 per cent ownership interest in Caribbean
Utilities and now owns approximately 54 per cent of the Company. Caribbean
Utilities is a public company traded on the Toronto Stock Exchange (TSX:CUP.U)
and has an April 30th fiscal year end. Caribbean Utilities' balance sheet at
November 7, 2006 was consolidated in the December 31, 2006 balance sheet of
Fortis. Beginning with the first quarter of 2007, Fortis has been consolidating
Caribbean Utilities' financial statements on a two-month lag basis and,
accordingly, has consolidated Caribbean Utilities' October 31, 2007 balance
sheet, and statements of earnings and cash flows for the 3- and 12-months ended
October 31, 2007, with the Corporation's December 31, 2007 consolidated
financial statements. During 2006, the statement of earnings of Fortis reflected
the Corporation's approximate 37 per cent ownership interest in Caribbean
Utilities, previously accounted for on an equity basis on a two-month lag.
c. P.P.C. Limited and Atlantic Equipment & Power (Turks and Caicos) Ltd.
(collectively referred to as Fortis Turks and Caicos): Fortis Turks and Caicos
is the principal distributor of electricity on the Turks and Caicos Islands,
serving more than 8,700 customers. The Company has a combined diesel-fired
generating capacity of 48 MW. Fortis Turks and Caicos was acquired by Fortis,
through a wholly owned subsidiary, on August 28, 2006.
NON-REGULATED - FORTIS GENERATION
The following summary describes the Corporation's non-regulated generation
assets by location:
a. Belize: Operations consist of the 25-MW Mollejon and 7-MW Chalillo
hydroelectric facilities in Belize. All of the electricity output is sold to
Belize Electricity under a 50-year power purchase agreement expiring in 2055.
Hydroelectric generation operations in Belize are conducted through the
Corporation's wholly owned indirect subsidiary, Belize Electric Company Limited
("BECOL"), under a Franchise Agreement with the Government of Belize.
b. Ontario: Includes 75 MW of water-right entitlement associated with the
Niagara Exchange Agreement, a 5-MW gas-fired cogeneration plant in Cornwall and
six small hydroelectric generating stations in eastern Ontario with a combined
capacity of 8 MW. Non-regulated generation operations in Ontario are conducted
through FortisOntario Inc. and Fortis Properties. On January 1, 2006, the former
FortisOntario Generation Corporation was amalgamated with CNE Energy Inc. and,
effective January 1, 2007, CNE Energy Inc. was amalgamated with Fortis
Properties.
c. Central Newfoundland: Through the Exploits River Hydro Partnership ("Exploits
Partnership"), a partnership between the Corporation, through its wholly owned
subsidiary Fortis Properties, and Abitibi-Consolidated Company of Canada
("Abitibi-Consolidated"), 36 MW of additional capacity was developed and
installed at two of Abitibi-Consolidated's hydroelectric plants in central
Newfoundland. Upon the amalgamation of CNE Energy Inc. with Fortis Properties on
January 1, 2007, Fortis Properties directly holds the 51 per cent interest in
the Exploits Partnership and Abitibi-Consolidated holds the remaining 49 per
cent interest. Previously, the 51 per cent interest was held by CNE Energy Inc.
The Exploits Partnership sells its output to Newfoundland and Labrador Hydro
Corporation under a 30-year power purchase agreement expiring in 2033.
d. British Columbia: Includes the 16-MW run-of-river Walden hydroelectric power
plant near Lillooet, British Columbia. This plant sells its entire output to BC
Hydro under a long-term contract expiring in 2013. Hydroelectric generation
operations in British Columbia are conducted through the Walden Power
Partnership, a wholly owned partnership of FortisBC Inc.
e. Upper New York State: Includes the operations of four hydroelectric
generating stations in Upper New York State with a combined capacity of
approximately 23 MW operating under licences from the US Federal Energy
Regulatory Commission. Hydroelectric generation operations in Upper New York
State are conducted through the Corporation's indirect wholly owned subsidiary,
FortisUS Energy Corporation.
NON-REGULATED - FORTIS PROPERTIES
Fortis Properties owns and operates 19 hotels with more than 3,500 rooms in
eight Canadian provinces and approximately 2.8 million square feet of commercial
real estate primarily in Atlantic Canada.
CORPORATE AND OTHER
The Corporate and Other segment captures expense and revenue items not
specifically related to any other reportable segment. Included in this segment
are finance charges, including interest on debt incurred directly by Fortis and
Terasen Inc. and dividends on preference shares classified as long-term
liabilities, foreign exchange gains or losses, dividends on preference shares
classified as equity, other corporate expenses, including Fortis and Terasen
corporate operating costs, net of recoveries from subsidiaries, interest and
miscellaneous revenues, and corporate income taxes. Also included in the
Corporate and Other segment are the financial results of CustomerWorks Limited
Partnership ("CWLP"). CWLP is a non-regulated shared-services business in which
Terasen holds a 30 per cent interest. CWLP operates in partnership with Enbridge
Inc. and provides customer service contact, meter reading, billing, credit,
support and collection services to the Terasen Gas companies and several smaller
third parties. CWLP's financial results are recorded using the proportionate
consolidation method of accounting. Terasen was acquired by Fortis on May 17,
2007.
2. BASIS OF PRESENTATION
These interim consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("Canadian GAAP") for
interim financial statements and do not include all of the disclosures normally
found in the Corporation's annual consolidated financial statements. These
interim consolidated financial statements should be read in conjunction with the
Corporation's 2006 annual audited consolidated financial statements. 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.
Virtually all of the earnings of the Terasen Gas companies are generated in the
first and fourth quarters due to seasonality of the business. Given the
diversified group of companies, seasonality may vary.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim consolidated financial statements have been prepared in accordance
with Canadian GAAP, including selected accounting treatments that differ from
those used by entities not subject to rate regulation. The timing of the
recognition of certain assets, liabilities, revenues and expenses, as a result
of regulation, may differ from that otherwise expected using Canadian GAAP for
entities not subject to rate regulation. These differences and nature of
regulation are disclosed in Notes 2 and 4 to the Corporation's 2006 annual
audited consolidated financial statements and Note 5 to these interim
consolidated financial statements. These interim consolidated financial
statements have been prepared following the same accounting policies and methods
as those used in preparing the Corporation's 2006 annual audited consolidated
financial statements except as described below. All amounts are presented in
Canadian dollars unless otherwise stated.
Regulation
On May 17, 2007, Fortis acquired, through the acquisition of Terasen, TGI, TGVI
and TGWI, collectively referred to as the Terasen Gas companies. The Terasen Gas
companies are regulated by the British Columbia Utilities Commission ("BCUC").
The BCUC administers acts and regulations pursuant to the Utilities Commission
Act (British Columbia), covering such matters as tariffs, rates, construction,
operations, financing and accounting. The Terasen Gas companies operate under
both cost of service regulation and performance-based rate-setting ("PBR")
methodologies as administered by the BCUC. The BCUC uses a future test year in
the establishment of rates for the utility and, pursuant to this method,
forecasts the volume of gas that will be sold and transported, together with all
the costs of the utility, including the allowed rate of return on common equity
("ROE"), that the utility will incur in the test year. Rates are fixed to permit
the utility to collect all of its costs, including the allowed ROE, if the
forecast sales and transportation volumes are achieved. The BCUC has set allowed
ROEs for both TGI and TGVI based on multi-year agreements that have been renewed
until 2009. For 2007, the allowed ROE is 8.37 per cent for TGI and 9.07 per cent
for TGVI.
Effective January 1, 2007, the Corporation adopted the following new accounting
standards issued by the Canadian Institute of Chartered Accountants ("CICA").
a. Financial Instruments
Section 3855, Financial Instruments - Recognition and Measurement and Section
3861, Financial Instruments - Disclosure and Presentation, prescribe the
criteria for recognition and presentation of financial instruments on the
balance sheet and the measurement of financial instruments according to
prescribed classifications. These Sections also address how financial
instruments are measured subsequent to initial recognition and how the gains and
losses are recognized.
The Corporation is required to designate its financial instruments into one of
the following five categories: (i) held for trading, (ii) available for sale,
(iii) held to maturity, (iv) loans and receivables, or (v) other financial
liabilities. All financial instruments are to be initially measured at fair
value. Financial instruments classified as held for trading or available for
sale are subsequently measured at fair value with any change in fair value
recorded in earnings and other comprehensive income, respectively. All other
financial instruments are subsequently measured at amortized cost.
All derivative financial instruments, including derivative features embedded in
financial instruments or other contracts which are not considered closely
related to the host financial instrument or contract, are generally classified
as held for trading and, therefore, must be measured at fair value with changes
in fair value recorded in earnings. If a derivative financial instrument is
designated as a hedging item in a qualifying cash flow hedging relationship, the
effective portion of changes in fair value is recorded in other comprehensive
income. Any change in fair value relating to the ineffective portion is recorded
immediately in earnings. At the rate-regulated utilities, any difference between
the amount recognized upon a change in the fair value of a derivative financial
instrument, whether or not in a qualifying hedging relationship, and the amount
recovered from customers in current rates, is subject to regulatory deferral
treatment to be recovered from, or refunded to, customers in future rates.
Currently, the Corporation limits the use of derivative financial instruments to
those that qualify as hedges, as discussed in Note 3c.
The Corporation has designated its financial instruments as follows:
---------------------------------------------------------------------------
December 31, 2007 December 31, 2006
---------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(in millions) Value Fair Value Value Fair Value
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Held for trading
Cash and cash equivalents (1) $58 $58 $41 $41
Loans and receivables
Accounts receivable (2) 635 635 286 286
Other receivables due from
customers (2)(3) 7 7 6 6
Other financial liabilities
Short-term borrowings (2) 475 475 98 98
Accounts payable and accrued
charges (2) 793 793 333 333
Dividends payable (2) 43 43 22 22
Customer deposits (2)(4) 5 5 5 5
Long-term debt, including
current portion (5)(6) 5,023 5,635 2,614 2,940
Preference shares, classified
as debt (5)(7) 320 346 320 355
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(1) Due to the nature and/or short-term maturity of these financial
instruments, carrying value approximates fair value.
(2) Carrying value approximates amortized cost.
(3) Included in deferred charges and other assets on the balance sheet
(4) Included in deferred credits on the balance sheet
(5) Carrying value is measured at amortized cost using the effective
interest rate method.
(6) Carrying value at December 31, 2007 is net of unamortized deferred
financing costs of $33 million. On January 1, 2007, deferred financing
costs were reclassified from deferred charges and other assets in
accordance with the transitional provisions of Section 3855.
(7) Preference shares classified as equity are excluded from the
requirements of Section 3855; however, the estimated fair value of the
preference shares classified as equity as at December 31, 2007 was $107
million (December 31, 2006 - $129 million).
---------------------------------------------------------------------------
For the 3- and 12-months ended December 31, 2007, effective interest expense
associated with the Corporation's short-term borrowings, long-term debt and
preference shares classified as debt is disclosed in Note 12 to these interim
consolidated financial statements.
Under Section 3855, embedded derivatives are required to be separated from the
host contract and accounted for as a derivative financial instrument if the
embedded derivative and host contract are not closely related, and the combined
contract is not held for trading or measured at fair value. While some of the
Corporation's long-term debt contracts have prepayment options that qualify as
embedded derivatives to be separately recorded, none have been recorded as they
are immaterial to the Corporation's results of operations and financial
position. The Corporation has selected January 1, 2003 as the transition date
for recognizing embedded derivatives and, therefore, recognizes as separate
assets and liabilities only those derivatives embedded in hybrid instruments
issued, acquired or substantially modified on or after January 1, 2003.
As a result of adopting Section 3855, deferred financing costs of $21 million as
at January 1, 2007 relating to long-term debt have been reclassified from
deferred charges and other assets to long-term debt on the balance sheet. These
costs are amortized into earnings using the effective interest rate method over
the life of the related debt.
The Corporation's policy is to recognize transaction costs associated with
financial assets and liabilities, that are classified as other than held for
trading, as an adjustment to the cost of those financial assets and liabilities
recorded on the balance sheet. These transaction costs are amortized into
earnings using the effective interest rate method over the life of the related
financial instrument.
b. Comprehensive Income
Section 1530, Comprehensive Income, introduces a new financial statement
"Statement of Comprehensive Income" and provides guidance for the reporting and
display of other comprehensive income.
Comprehensive income represents the change in equity of an enterprise during a
period from transactions and other events arising from non-owner sources
including unrealized foreign currency translation gains and losses, net of
hedging activities, arising from self-sustaining foreign operations, and changes
in the fair value of the effective portion of cash flow hedging instruments.
As required, prior periods have not been restated as a result of implementing
Section 1530, except to reclassify unrealized foreign currency translation
losses on net investments in self-sustaining foreign operations, net of hedging
activities, of $51 million as at December 31, 2006 from the foreign currency
translation adjustment account in shareholders' equity to accumulated other
comprehensive loss (Note 10). As required upon initial application of Section
3855, all adjustments to the carrying amount of financial instruments are
recognized as an adjustment to the opening balance of accumulated other
comprehensive loss. No adjustments were made to the opening balance of retained
earnings.
c. Hedges
Section 3865, Hedges, specifies the criteria under which hedge accounting may be
applied, how hedge accounting should be performed under permitted hedging
strategies and the required disclosures. In keeping with its risk management
strategy, the Corporation may utilize derivative instruments to hedge its
exposure to foreign currency risk, interest rate risk and commodity price risk.
The Corporation has designated its US dollar-denominated long-term debt as a
hedge of the foreign-currency exchange risk related to its net investments in US
dollar-denominated self-sustaining foreign operations.
In the hedge of net investments in self-sustaining foreign operations, the
unrealized gains and losses on the translation of the US dollar-denominated
long-term debt serve to offset unrealized foreign-currency exchange gains and
losses on foreign net investments. The unrealized foreign-currency exchange
gains and losses on the US dollar-denominated long-term debt and the foreign net
investments are recognized in other comprehensive income (loss).
For the 3- and 12-months ended December 31, 2007, unrealized foreign-currency
translation losses of nil and $70 million, respectively, were recorded in other
comprehensive loss related to the Corporation's net investment in US
dollar-denominated self-sustaining foreign operations. These unrealized foreign
currency translation losses were partially offset by the effective portion of
unrealized after-tax gains of nil and $39 million for the 3- and 12-months ended
December 31, 2007, respectively, related to the translation of US
dollar-denominated long-term debt designated as a foreign-currency risk hedge
(Note 10). There was no ineffective portion.
The Corporation and its subsidiaries hedge exposures to fluctuations in interest
rates and natural gas prices through the use of derivative instruments. The
following table indicates the valuation of derivative financial instruments as
at December 31st.
2007 (1) 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Carrying Fair Carrying Fair
Term to Number Value Value Value Value
maturity of ($ ($ ($ ($
Liability (years) Swaps millions) millions) millions) millions)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Interest-
Rate
Swaps 1 to 3 4 - - - (1)
Natural Gas
Commodity
Swaps and
Options Up to 3 244 (79) (79) - -
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Includes derivative financial instruments of the Terasen Gas companies
from May 17, 2007, the date of acquisition
Fortis Properties has designated its interest-rate swap agreements as hedges of
the cash flow risk related to floating-rate long-term debt. As at January 1,
2007, in accordance with the transitional provisions of Section 3865, the fair
value of the interest-rate swap agreements of $(1) million was recorded as a
derivative financial instrument and grouped with deferred credits on the balance
sheet with the offset recorded to accumulated other comprehensive loss (Note
10). The interest-rate swaps are valued at the present value of future cash
flows based on published forward future interest-rate curves.
For the 3- and 12-months ended December 31, 2007, the amount of unrealized gains
recorded in other comprehensive loss for the effective portion of the change in
fair value of the interest-rate swap agreements at Fortis Properties, and at
BECOL up to the cancellation of its interest-rate swap, was immaterial (Note
10). There were no ineffective portions. The amounts recognized are reclassified
to finance charges in the periods during which the variability in cash flows of
the hedged items affect finance charges. The net loss reclassified to earnings
during the 3- and 12-months ended December 31, 2007 was immaterial.
The Terasen Gas companies have designated their interest-rate swap agreements as
hedges of cash flow risk related to floating-rate debt instruments. Any changes
in the fair value of these interest-rate swaps, whether or not in a qualifying
hedging relationship, are deferred as a regulatory asset or liability for
recovery from, or refund to, customers in future rates. The interest-rate swaps
are valued at the present value of future cash flows based on published forward
future interest-rate curves.
The majority of the natural gas supply contracts at the Terasen Gas companies
have floating, rather than fixed, prices and natural gas commodity swaps and
options are used, therefore, to fix the effective purchase price of natural gas.
As at December 31, 2007, none of the natural gas commodity swaps and options
were designated as hedges of the natural gas supply contracts. However, any
changes in the fair value of the natural gas commodity swaps and options,
whether or not in a qualifying hedging relationship, are deferred as a
regulatory asset or liability for recovery from, or refund to, customers in
future rates. The fair values of the natural gas commodity swaps and options
reflect the estimated amounts that the Terasen Gas companies would pay to
terminate the contracts as at December 31, 2007 and were recorded in accounts
payable as at December 31, 2007.
As at January 1, 2007, in accordance with the transitional provisions of Section
3865, unamortized deferred gain and loss balances related to the previous
cancellation of swap agreements were reclassified to accumulated other
comprehensive loss (Note 10). An unamortized loss balance of $11 million ($7
million after-tax), as at December 31, 2006, related to the previous
cancellation of an interest-rate swap agreement, was reclassified from deferred
charges and other assets and an unamortized gain balance of $3 million ($2
million after-tax), as at December 31, 2006, related to the previous
cancellation of a US dollar forward-currency swap agreement was reclassified
from deferred credits.
The Corporation had previously designated the interest-rate swap agreement as a
hedge of cash flow risk related to floating-rate long-term debt and designated
the US dollar forward-currency swap agreement as a hedge of foreign-currency
risk associated with US dollar-denominated long-term debt. These unamortized
balances are recognized in finance charges in the periods during which the
variability in cash flows of the original hedged items affects finance charges.
This change in treatment did not have a material impact on the Corporation's
earnings. Net losses reclassified to earnings during the 3- and 12-months ended
December 31, 2007 were immaterial.
There were no significant changes in the Corporation's risk management policies
and existing hedges as at January 1, 2007 as a result of adopting the new
standards.
d. Accounting Changes
Effective January 1, 2007, the Corporation adopted the revised Section 1506,
Accounting Changes, relating to changes in accounting policies, changes in
accounting estimates and errors.
Under revised Section 1506, voluntary changes in accounting policies are made
only if they result in the financial statements providing reliable and more
relevant information. Additional disclosure is required when the Corporation has
not applied a new primary source of Canadian GAAP that has been issued but is
not yet effective, as well as when changes in accounting estimates and errors
occur. Adoption of this revised standard had no impact on the Corporation's
interim consolidated financial statements for the 3- and 12-months ended
December 31, 2007, except for the disclosures provided in Note 3e.
Accounting policies issued, but not yet effective, that will be adopted by the
Corporation in a future period are described as follows:
International Financial Reporting Standards ("IFRS")
In 2006, the Canadian Accounting Standards Board ("AcSB") published a new
strategic plan that will significantly affect financial reporting requirements
for Canadian companies. The AcSB strategic plan outlines the convergence of
Canadian GAAP with IFRS over an expected five-year transitional period. By no
later than March 31, 2008, the AcSB is expected to issue a report confirming or
revising the expected transition date of January 1, 2011 for the conversion to
IFRS. The proposed transition date of January 1, 2011 will require the
restatement for comparative purposes amounts reported by the Corporation for its
year ended December 31, 2010. While Fortis has begun assessing the adoption of
IFRS for 2011, the financial reporting impact on the Corporation cannot be
reasonably estimated at this time.
e. Future Accounting Policies
Rate-Regulated Operations
In August 2007, the AcSB issued a Decision Summary that supported the removal of
the temporary exemption in Section 1100, Generally Accepted Accounting
Principles, of the CICA Handbook providing relief to entities subject to rate
regulation from the requirement to apply the Section to the recognition and
measurement of assets and liabilities arising from rate regulation. The AcSB
also amended Section 3465, Income Taxes, to recognize future income tax
liabilities and assets as well as offsetting regulatory assets and liabilities
at entities subject to rate regulation. Both changes will apply prospectively
for the Corporation beginning on January 1, 2009. The AcSB also decided that the
current guidance for rate-regulated operations pertaining to property, plant and
equipment, disposal of long-lived assets and discontinued operations, and
consolidated financial statements be maintained, and that the existing
Accounting Guideline 19, Disclosures by Entities Subject to Rate Regulation,
will not be withdrawn from the Handbook but that the guidance will be updated as
a result of the other changes. The AcSB also decided that the final Background
Information and Basis for Conclusions associated with its rate-regulation
project would not express any views of the AcSB regarding the status of US
Statement of Financial Accounting Standards No. 71, Accounting for the Effects
of Certain Types of Regulation, as an "other source of GAAP" within the Canadian
GAAP hierarchy.
Effective January 1, 2009, the impact on Fortis of the amendment to Section
3465, Income Taxes, will be the recognition of future income tax assets and
liabilities and related regulatory liabilities and assets for the amount of
future income taxes expected to be refunded to, or recovered from, customers in
future gas and electricity rates. Currently, the Terasen Gas companies,
FortisAlberta, FortisBC and Newfoundland Power use the taxes-payable method of
accounting for income taxes. The effect on the Corporation's consolidated
financial statements, if it had adopted amended Section 3465, Income Taxes, as
at December 31, 2007, would have been an increase in future tax assets and
future tax liabilities of $54 million and $489 million, respectively, and a
corresponding increase in regulatory liabilities and regulatory assets of $54
million and $489 million, respectively. Included in the amounts are the future
income tax effects of the subsequent settlement of the related regulatory assets
and liabilities through customer rates, and the separate disclosure of future
income tax assets and liabilities that are currently not recognized. Fortis is
continuing to assess and monitor any additional implications on its financial
reporting related to accounting for rate-regulated operations.
Inventories
Effective January 1, 2008, the Corporation will be adopting the new Section
3031, Inventories. The standard requires inventories to be measured at the lower
of cost or net realizable value, disallows the use of a last-in first-out
inventory-costing methodology, and requires that, when circumstances which
previously caused inventories to be written down below cost no longer exist, the
amount of the write down is to be reversed. This new standard is not expected to
have a material impact on the Corporation's earnings, cash flow or financial
position.
Capital Disclosures
As a result of new Section 1535, Capital Disclosures, Fortis will be required to
include additional information in the Notes to the financial statements about
its capital and the manner in which it is managed. This additional disclosure
includes quantitative and qualitative information regarding an entity's
objectives, policies and processes for managing capital. This Section is
applicable to Fortis for the fiscal year beginning on January 1, 2008.
Disclosure and Presentation of Financial Instruments
New accounting recommendations for disclosure and presentation of financial
instruments, Sections 3862 and 3863, are effective for the Corporation beginning
January 1, 2008. The new recommendations require disclosures of both qualitative
and quantitative information that enables users of financial statements to
evaluate the nature and extent of risks from financial instruments to which the
Corporation is exposed.
4. USE OF ESTIMATES
The preparation of the Corporation's consolidated financial statements in
accordance with Canadian 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 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 are necessary since the
regulatory environments in which the Corporation's utilities operate often
require amounts to be recorded at estimated values until these amounts are
finalized pursuant to regulatory decisions or other regulatory proceedings. Due
to changes in facts and circumstances and the inherent uncertainty involved in
making estimates, actual results may differ significantly from current
estimates. Estimates and judgments are reviewed periodically and, as adjustments
become necessary, are reported in earnings in the period they become known.
Interim financial statements may also employ a greater use of estimates than the
annual financial statements. There were no material changes in the nature of the
Corporation's critical accounting estimates during the 3- and 12-months ended
December 31, 2007 from those disclosed in the Corporation's Management
Discussion and Analysis for the year ended December 31, 2006. However, the
magnitude of the accounting estimates has increased due to the acquisition of
Terasen.
5. REGULATORY ASSETS AND LIABILITIES
A summary of the Corporation's current and long-term regulatory assets and
liabilities is provided below. A description of the nature of the significant
regulatory assets and liabilities is provided in Note 4 to the Corporation's
2006 annual audited consolidated financial statements in addition to the
disclosures provided in this Note.
As at December 31
(millions)
--------------------------------------------------------------------
Regulatory Assets 2007 2006
--------------------------------------------------------------------
--------------------------------------------------------------------
Rate stabilization accounts -
Terasen Gas companies (i) $99 $-
Rate stabilization accounts -
electric utilities (ii) 55 44
Regulatory other post-employment
benefit asset 60 36
AESO charges deferral 8 40
Deferred capital asset amortization 12 6
Weather normalization account 11 12
Residential unbundling (iii) 9 -
Deferred pension costs 8 9
Southern Crossing Pipeline tax
reassessment (iv) 7 -
Energy management costs 6 6
Lease costs 5 4
Other 32 14
--------------------------------------------------------------------
Total regulatory assets 312 171
Less: current portion (119) (31)
--------------------------------------------------------------------
Long-term regulatory assets $193 $140
--------------------------------------------------------------------
--------------------------------------------------------------------
Regulatory Liabilities
Future removal and site
restoration provision $319 $307
Unbilled revenue liability 22 25
Pension deferral 6 4
PBR earnings sharing mechanism 14 3
Other 31 20
--------------------------------------------------------------------
Total regulatory liabilities 392 359
Less: current portion (20) (19)
--------------------------------------------------------------------
Long-term regulatory liabilities $372 $340
--------------------------------------------------------------------
--------------------------------------------------------------------
(i) The rate stabilization accounts at the Terasen Gas companies are amortized
and recovered through customer rates as approved by the BCUC. The rate
stabilization accounts mitigate the effect on earnings of unpredictable and
uncontrollable factors, namely volume volatility, caused principally by weather,
and natural gas cost volatility. At TGI, a Revenue Stabilization Adjustment
Mechanism ("RSAM") accumulates the margin impact of variations in the
actual-versus-forecast gas volumes consumed by residential and commercial
customers.
Additionally, a Commodity Cost Reconciliation Account ("CCRA") and a Midstream
Cost Reconciliation Account ("MCRA") accumulate differences between actual
natural gas costs and forecast natural gas costs as recovered in base rates. The
MCRA captures the gas cost variances applicable to all sales customers while the
CCRA accumulates gas cost variances applicable to all residential customers and
certain industrial customers for whom TGI acquires gas supply.
At TGVI, a Gas Cost Variance Account ("GCVA") is used to mitigate the effect on
TGVI's earnings of natural gas cost volatility. TGVI also maintains a Revenue
Deficiency Deferral Account ("RDDA") to accumulate unrecovered costs of
providing service to customers or to draw down such costs where earnings exceed
an allowed ROE as set by the BCUC. The RDDA has accumulated the allowed earnings
in excess of achieved earnings prior to 2003 and is to be recovered through
future rates. During 2007, the RDDA has decreased as achieved earnings have
exceeded the allowed ROE.
The RSAM is anticipated to be recovered through rates over a three-year period,
with a total balance outstanding at December 31, 2007 of $18 million. The MCRA,
CCRA and GCVA accounts are anticipated to be fully recovered within the next
fiscal year. Recovery of the rate stabilization accounts is dependent on actual
natural gas consumption and recovery amounts approved by the BCUC.
(ii) The rate stabilization accounts associated with the Corporation's regulated
electric utilities (Newfoundland Power, Maritime Electric, Belize Electricity,
Caribbean Utilities and Fortis Turks and Caicos) are recovered or refunded
through customer rates as approved by the respective regulatory authorities. The
rate stabilization accounts primarily mitigate the effect on earnings of the
variability in the cost of fuel and/or purchased power above or below a forecast
or pre-determined level. Additionally, in the case of Belize Electricity, a rate
stabilization account is used to defer and recover hurricane damage and recovery
expenses from customers. The recovery period of the rate stabilization accounts
is variable and is subject to periodic review by the respective regulatory
authorities.
(iii) The residential unbundling costs are related to costs incurred by TGI to
develop a third-party marketer alternative for residential customers to purchase
natural gas from suppliers other than TGI. The BCUC approved the deferral of
these costs and their recovery over a three-year period. The balance as at
December 31, 2007 will be recovered from customers in 2008.
(iv) The Southern Crossing Pipeline tax-reassessment deferral relates to an
assessment of additional British Columbia Social Services Tax for which TGI has
filed an appeal. Depending on the success of the appeal, TGI will either be
refunded the balance or, alternatively, expects to recover the costs from
customers in future rates (Note 17).
6. CREDIT FACILITIES
As at December 31, 2007, the Corporation and its subsidiaries had consolidated
authorized lines of credit of $2.2 billion, of which $1.1 billion was unused.
The following summary outlines the credit facilities of the Corporation and its
subsidiaries.
Credit Total as at Total as at
Facilities Corporate Regulated Fortis December 31, December 31,
(in millions) and Other Utilities Properties 2007 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Total credit
facilities $715 $1,506 $13 $2,234 $952
Credit facilities
utilized
Short-term
borrowings (6) (468) (1) (475) (98)
Long-term debt
(Note 7) (208) (322) - (530) (235)
Letters of credit
outstanding (55) (103) (1) (159) (72)
--------------------------------------------------------------------------
Credit facilities
available $446 $613 $11 $1,070 $547
--------------------------------------------------------------------------
--------------------------------------------------------------------------
At December 31, 2007 and December 31, 2006, certain borrowings under the
Corporation's and subsidiaries' credit facilities have been 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.
Corporate and Other
At December 31, 2007, Terasen Inc. had a $100 million unsecured committed
revolving credit facility, maturing in May 2009. This credit facility was
reduced from $180 million in July 2007 and is available for general corporate
purposes. Letters of credit outstanding of $55 million at Terasen Inc. related
to its previously owned petroleum transportation business and are secured by a
letter of credit from the former parent company.
On May 14, 2007, Fortis cancelled its $50 million unsecured revolving demand
credit facility and renegotiated and amended its $250 million committed
unsecured credit facility, extending the maturity date to May 2012 and
increasing the amount available to $500 million with the ability, at the
Corporation's option, to increase the credit facility to an aggregate of $600
million. During the fourth quarter, the Corporation increased the amount of its
credit facility to $600 million in accordance with the terms thereof.
Regulated Utilities
At December 31, 2007, TGI had a $500 million unsecured committed revolving
credit facility. In August 2007, the facility was renegotiated and extended with
similar terms. The new facility matures in August 2012. At December 31, 2007,
TGVI had a $350 million unsecured committed revolving credit facility, maturing
in January 2011. These facilities are utilized to finance working capital
requirements, capital expenditures and for general corporate purposes.
Additionally, TGVI had a $20 million subordinated unsecured committed
non-revolving credit facility, maturing January 2013. This facility can only be
utilized for purposes of refinancing any annual repayments that TGVI may be
required to make on non-interest bearing government contributions.
In May 2007, FortisAlberta terminated one of its $10 million unsecured demand
credit facilities and extended the maturity date of its $200 million unsecured
committed credit facility to May 2012 from May 2010.
In May 2007, FortisBC renegotiated and amended its $150 million unsecured
committed revolving credit facility, reallocating the amounts available between
the 364-day portion of the facility and the three-year portion of the facility
and extending the maturity date of the three-year facility to May 2010 from May
2008. Additionally, the Company has the option to increase the credit facility
to an aggregate of $200 million subject to bank approval.
On November 27, 2006, Caribbean Utilities renegotiated its credit facilities,
increasing its capital expenditures line of credit from US$10 million to US$17
million and increasing each of its US$5 million operating line of credit and
US$5 million catastrophe standby loan to US$7.5 million.
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
As at As at
(in millions) December 31, 2007 December 31, 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Long-term debt and capital
lease obligations $4,562 $2,408
Long-term classification of credit
facilities (Note 6) 530 235
Deferred debt financing costs (Note 3) (33) -
--------------------------------------------------------------------------
Total long-term debt and capital
lease obligations 5,059 2,643
Less: Current installments of
long-term debt and capital
lease obligations (436) (85)
--------------------------------------------------------------------------
$4,623 $2,558
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Upon the acquisition of Terasen on May 17, 2007, the Corporation assumed $2.1
billion in long-term debt and capital lease obligations (Note 15).
On January 3, 2007, FortisAlberta closed a $110 million 4.99% senior unsecured
debenture offering, maturing January 3, 2047.
On June 1, 2007, Caribbean Utilities closed the first tranche of a US$40 million
5.65% senior unsecured note offering in the amount of US$30 million. On November
30, 2007, the second tranche in the amount of US$10 million was closed. The
senior unsecured notes are due June 1, 2022.
On July 4, 2007, FortisBC issued $105 million 5.90% senior unsecured debentures,
maturing July 4, 2047.
On August 17, 2007, Newfoundland Power issued $70 million 5.901% first mortgage
sinking fund bonds, maturing August 17, 2037.
On September 6, 2007, the Corporation issued US$200 million 6.60% senior
unsecured notes, maturing September 1, 2037.
On October 2, 2007, TGI issued $250 million 6.00% medium-term note debentures,
maturing October 2, 2037. The proceeds from the debentures were used to repay
debt maturing in October 2007.
On November 28, 2007, BECOL repaid early the remaining balance of its US$28.5
million term loan.
8. COMMON SHARES
a. Authorized: an unlimited number of Common Shares without nominal or par value.
December 31, 2007 December 31, 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Issued and Number of Amount Number of Amount
Outstanding Shares (in millions) Shares (in millions)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Common Shares 155,521,313 $2,126 104,091,542 $829
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Common Shares issued during the period were as follows:
Quarter Ended Year Ended
December 31, 2007 December 31, 2007
--------------------------------------------------------------------------
Number of Amount Number of Amount
Shares (in millions) Shares (in millions)
--------------------------------------------------------------------------
Opening balance 154,901,899 $2,117 104,091,542 $829
Public offering - - 5,170,000 146
Public offering
- Conversion of
Subscription
Receipts - - 44,275,000 1,119
Conversion of
debentures 347,703 3 882,626 9
Consumer Share
Purchase Plan 19,096 1 79,463 3
Dividend
Reinvestment Plan 43,746 1 203,763 5
Employee Share
Purchase Plan 44,810 1 240,578 6
Stock Option
Plans 164,059 3 578,341 9
--------------------------------------------------------------------------
Ending balance 155,521,313 $2,126 155,521,313 $2,126
--------------------------------------------------------------------------
--------------------------------------------------------------------------
On January 18, 2007, Fortis issued 5,170,000 Common Shares for $29.00 per common
share. The common share issue resulted in gross proceeds of approximately $150
million, or approximately $146 million net of after-tax expenses.
During 2007, holders of the Corporation's 6.75% Unsecured Subordinated
Convertible Debentures converted US$4 million of the US$10 million Debentures
into 435,490 Common Shares of the Corporation.
During 2007, holders of the Corporation's 5.50% Unsecured Subordinated
Convertible Debentures converted approximately US$5 million of the US$10 million
Debentures into 447,136 Common Shares of the Corporation.
On March 15, 2007, to finance a significant portion of the acquisition of
Terasen, the Corporation sold 44,275,000 Subscription Receipts at $26.00 each,
for gross proceeds of approximately $1.15 billion. Upon closing of the
acquisition on May 17, 2007, each Subscription Receipt was automatically
exchanged, without payment of additional consideration, for one Common Share of
Fortis. Each Subscription Receipt holder also received a cash payment of $0.21
which was an amount equal to the dividend declared on the Common Shares of
Fortis to holders of record as of May 4, 2007. The net proceeds to the
Corporation upon conversion of the Subscription Receipts were approximately
$1.12 billion, net of after-tax expenses.
At December 31, 2007, 9.9 million Common Shares remained reserved for issuance
under the terms of the Corporation's share purchase, dividend reinvestment and
stock option plans.
At December 31, 2007, Common Shares reserved for issuance under the terms of the
Corporation's convertible debentures and Preference Shares were 2.4 million and
26 million, respectively.
b. Earnings per Common Share
The Corporation calculates earnings per common share on the weighted average
number of common shares outstanding. The weighted average number of common
shares outstanding was 155.4 million and 104.0 million for the quarters ended
December 31, 2007 and December 31, 2006, respectively. The annual weighted
average number of common shares outstanding was 137.6 million and 103.6 million
at December 31, 2007 and December 31, 2006, respectively.
Diluted earnings per common share are calculated using the treasury stock method
for options and the "if-converted" method for convertible securities.
Earnings per common share are as follows:
Quarter Ended December 31st
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2007
--------------------------------------------------------------------------
Weighted Earnings
Average Per
Earnings Shares Common
(in millions) (in millions) Share
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net earnings applicable to common shares $79
Weighted average shares outstanding 155.4
--------------------------------------------------------------------------
Basic earnings per Common Share $0.51
--------------------------------------------------------------------------
Effect of potential dilutive securities:
Stock options - 1.2
Preference shares 4 11.5
Convertible debentures 1 2.5
--------------------------------------------------------------------------
Diluted earnings per Common Share $84 170.6 $0.49
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarter Ended December 31st
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2006
--------------------------------------------------------------------------
Weighted Earnings
Average Per
Earnings Shares Common
(in millions) (in millions) Share
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net earnings applicable to common shares $34
Weighted average shares outstanding 104.0
--------------------------------------------------------------------------
Basic earnings per Common Share $0.33
--------------------------------------------------------------------------
Effect of potential dilutive securities:
Stock options - 1.2
Preference shares 4 14.1
Convertible debentures 1 2.7
--------------------------------------------------------------------------
Diluted earnings per Common Share $39 122.0 $0.32
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Year Ended December 31st
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2007
--------------------------------------------------------------------------
Weighted Earnings
Average Per
Earnings Shares Common
(in millions) (in millions) Share
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net earnings applicable to common shares $193
Weighted average shares outstanding 137.6
--------------------------------------------------------------------------
Basic earnings per Common Share $1.40
--------------------------------------------------------------------------
Effect of potential dilutive securities:
Subscription receipts (1) - 7.8
Stock options - 1.2
Preference shares 16 11.5
Convertible debentures 3 2.8
--------------------------------------------------------------------------
Deduct anti-dilutive
impacts: 212 160.9
Convertible debentures (2) (1.4)
--------------------------------------------------------------------------
Diluted earnings per
Common Share $210 159.5 $1.32
--------------------------------------------------------------------------
Year Ended December 31st
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2006
--------------------------------------------------------------------------
Weighted Earnings
Average Per
Earnings Shares Common
(in millions) (in millions) Share
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net earnings applicable to common shares $147
Weighted average shares outstanding 103.6
--------------------------------------------------------------------------
Basic earnings per Common Share $1.42
--------------------------------------------------------------------------
Effect of potential dilutive securities:
Subscription receipts (1) - -
Stock options - 1.2
Preference shares 17 14.1
Convertible debentures 1 2.0
--------------------------------------------------------------------------
Deduct anti-dilutive impacts: 165 120.9
Convertible debentures - -
--------------------------------------------------------------------------
Diluted earnings per Common Share $165 120.9 $1.37
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Dilution relating to the period the Subscription Receipts were
outstanding, from March 15, 2007 to May 16, 2007, prior to their
conversion into Common Shares.
9. STOCK-BASED COMPENSATION PLANS
Stock Options
The Corporation is authorized to grant officers and certain key employees of
Fortis and its subsidiaries options to purchase Common Shares of the
Corporation. At December 31, 2007, the Corporation had the following stock
option plans: 2006 Stock Option Plan ("2006 Plan"), 2002 Stock Option Plan
("2002 Plan") and Executive Stock Option Plan. The 2002 Plan was adopted at the
Annual and Special General Meeting on May 15, 2002 to ultimately replace the
Executive and the former Directors' Stock Option Plans. The Executive Stock
Option Plan will cease to exist when all outstanding options are exercised or
expire in or before 2011. The 2006 Plan was approved at the May 2, 2006 Annual
Meeting at which Special Business was conducted. The 2006 Plan will ultimately
replace the 2002 Plan. The 2002 Plan will cease to exist when all outstanding
options are exercised or expire in or before 2016. The Corporation has ceased to
grant options under the Executive Stock Option Plan and 2002 Plan and all new
options are being granted by Fortis under the 2006 Plan. Options granted under
the 2006 Plan have a maximum term of seven years, which is reduced from ten
years under the 2002 Plan, and expire no later than three years after the
termination, death or retirement of the optionee. Directors are not eligible to
receive grants of options under the 2006 Plan. During 2006, the Corporation
replaced the equity component of directors' annual compensation with Deferred
Share Units ("DSUs").
Quarter Ended Year Ended
December 31, 2007 December 31, 2007
------------------------------------------------------------------------
------------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
------------------------------------------------------------------------
------------------------------------------------------------------------
Options outstanding,
beginning of period 3,855,830 $18.63 3,550,055 $16.11
Granted - - 754,800 27.75
Cancelled - - (34,743) 22.43
Exercised (164,059) 13.30 (578,341) 13.35
------------------------------------------------------------------------
Options outstanding,
end of period 3,691,771 18.86 3,691,771 18.86
------------------------------------------------------------------------
------------------------------------------------------------------------
Details of stock options outstanding Number of Exercise Expiry
as at December 31, 2007 are as follows: Options Price Date
------------------------------------------------------------------------
112,422 $9.57 2011
302,076 $12.03 2012
527,675 $12.81 2013
626,382 $15.28 2014
12,000 $15.23 2014
33,910 $14.55 2014
683,742 $18.40 2015
28,000 $18.11 2015
31,639 $20.82 2015
590,621 $22.94 2016
606,472 $28.19 2014
136,832 $25.76 2014
------------------------------------------------------------------------
3,691,771
------------------------------------------------------------------------
------------------------------------------------------------------------
Details of stock options vested Number of Exercise Expiry
as at December 31, 2007 are as follows: Options Price Date
------------------------------------------------------------------------
------------------------------------------------------------------------
112,422 $9.57 2011
302,076 $12.03 2012
527,675 $12.81 2013
457,450 $15.28 2014
7,000 $15.23 2014
19,262 $14.55 2014
316,422 $18.40 2015
14,000 $18.11 2015
14,769 $20.82 2015
130,735 $22.94 2016
------------------------------------------------------------------------
1,901,811
------------------------------------------------------------------------
------------------------------------------------------------------------
The weighted average exercise price of stock options vested as at December
31, 2007 was $14.84.
On May 7, 2007, the Corporation granted 617,968 options on common shares under
its 2006 Plan at the five-day volume weighted-average trading price immediately
preceding the date of grant of $28.19. These options vest evenly over a
four-year period on each anniversary of the date of grant. The options expire
seven years after the date of grant. The fair market value of each option
granted was $4.40 per option.
The fair value was estimated on the date of grant using the Black-Scholes fair
value option-pricing model and the following assumptions:
May 7, 2007
--------------------------------------------------
Dividend yield (%) 3.06
Expected volatility (%) 18.9
Risk-free interest rate (%) 4.18
Weighted-average expected life (years) 4.5
On August 16, 2007, the Corporation granted 136,832 options on common shares
under its 2006 Plan at the five-day volume weighted-average trading price
immediately preceding the date of grant of $25.76. These options vest evenly
over a four-year period on each anniversary of the date of grant. The options
expire seven years after the date of grant. The fair market value of each option
granted was $4.25 per option.
The fair value was estimated on the date of grant using the Black-Scholes fair
value option-pricing model and the following assumptions:
August 16, 2007
--------------------------------------------------
Dividend yield (%) 3.06
Expected volatility (%) 19.6
Risk-free interest rate (%) 4.43
Weighted-average expected life (years) 4.5
The Corporation records compensation expense upon the issuance of stock options
under its 2002 and 2006 Plans. Using the fair value method, the compensation
expense is amortized over the four-year vesting period of the options granted.
Under the fair value method, $0.6 million and $2.3 million was recorded as
compensation expense for the 3- and 12-months ended December 31, 2007,
respectively ($0.8 million and $2 million for the 3- and 12-months ended
December 31, 2006, respectively).
Directors' DSU Plan
In 2004, the Corporation introduced the Directors' DSU Plan as an optional
vehicle for directors to elect to receive credit of their annual retainer to a
notional account of DSUs in lieu of cash. The Corporation may also determine
from time to time that special circumstances exist that would reasonably justify
the grant of DSUs to a director as compensation in addition to any regular
retainer or fee to which the director is entitled. Additionally, in conjunction
with the approval of the 2006 Plan whereby directors were no longer eligible to
receive grants of stock options, directors who are not officers of the
Corporation became eligible for grants of DSUs representing the equity component
of directors' annual compensation.
Each DSU represents a unit with an underlying value equivalent to the value of
the Common Shares of the Corporation. For directors who elect to receive DSUs in
lieu of cash for their annual retainers, DSUs are credited as of January 1st of
each year by dividing the total applicable annual retainer by the daily average
of the high and low board lot trading prices of the Common Shares for the last
five trading days immediately preceding the date of grant of the DSUs.
The annual grant of DSUs, that comprises the equity component of directors'
annual compensation, is credited as of the grant date at the daily average of
the high and low board lot trading prices of the Common Shares for the last five
trading days immediately preceding the date of grant of the DSUs.
Notional dividends are assumed to accrue to the holder of the DSU and to be
reinvested on the quarterly dividend payment dates of the Corporation's Common
Shares. Upon retirement from the Board of Directors, a director participant in
the Directors' DSU Plan will receive a cash payment equivalent to the number of
DSUs credited to the notional account multiplied by the daily average of the
high and low board lot trading prices of the Corporation's Common Shares for the
last five trading days immediately preceding the date of payment.
Quarter Ended Year Ended
Number of DSUs: December 31, 2007 December 31, 2007
---------------------------------------------------------------------------
---------------------------------------------------------------------------
DSUs outstanding, beginning of period 69,181 46,959
Granted - 20,859
Granted - notional dividends reinvested 541 1,904
DSUs paid out - -
---------------------------------------------------------------------------
DSUs outstanding, end of period 69,722 69,722
---------------------------------------------------------------------------
---------------------------------------------------------------------------
For the 3- and 12-months ended December 31, 2007, expenses of $0.6 million and
$0.8 million, respectively, were recorded in relation to the Directors' DSU Plan
($0.4 million and $0.8 million for the 3- and 12-months ended December 31, 2006,
respectively).
Restricted Share Unit ("RSU") Plan
In 2004, the Corporation introduced the RSU Plan, which is included as a
component of the long-term incentives awarded only to the President and Chief
Executive Officer ("CEO") of the Corporation. Each RSU represents a unit with an
underlying value equivalent to the value of the Common Shares of the
Corporation. Notional dividends are assumed to accrue to the holder of the RSU
and to be reinvested on the quarterly dividend payment dates of the
Corporation's Common Shares. The RSU maturation period is three years from the
date of grant, at which time a cash payment is made to the President and CEO
based on the number of RSUs outstanding multiplied by the daily average of the
high and low board lot trading prices of the Corporation's Common Shares for the
last five trading days immediately preceding the date of payment.
Quarter Ended Year Ended
Number of RSUs: December 31, 2007 December 31, 2007
--------------------------------------------------------------------------
--------------------------------------------------------------------------
RSUs outstanding, beginning of period 67,090 66,845
Granted - 19,570
Granted - notional dividends reinvested 525 1,883
RSUs paid out - (20,683)
--------------------------------------------------------------------------
RSUs outstanding, end of period 67,615 67,615
--------------------------------------------------------------------------
--------------------------------------------------------------------------
In May 2007, RSUs paid out to the President and CEO of the Corporation were
20,683 at $28.01 per RSU, for a total of approximately $0.6 million. The payout
was made upon the three-year maturation period in respect of the RSU grant which
was made on May 11, 2004, and the President and CEO of the Corporation
satisfying the payment criteria.
For the 3- and 12-months ended December 31, 2007, expenses of $0.2 million and
$0.6 million, respectively, were recorded in relation to the RSU Plan ($0.3
million and $0.7 million for the 3- and 12-months ended December 31, 2006,
respectively).
10. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss includes unrealized foreign currency
translation gains and losses, net of hedging activities, gains and losses on
cash flow hedging activities and gains and losses on discontinued cash flow
hedging activities, as discussed in Note 3.
Quarter
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Opening balance Ending balance
September 30, Net December 31,
(in millions) 2007 change 2007
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Unrealized foreign currency translation
losses, net of hedging activities $(82) - $(82)
Losses on derivative instruments
designated as cash flow hedges,
net of tax (1) - (1)
Net losses on derivative instruments
previously discontinued as cash flow
hedges, net of tax (5) - (5)
--------------------------------------------------------------------------
Accumulated other comprehensive loss $(88) - $(88)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Year
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Opening Transition Ending
balance amount balance
January 1, January 1, Net December 31,
(in millions) 2007 2007 change 2007
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Unrealized foreign currency
translation losses,
net of hedging activities $(51) $- $(31) $(82)
Losses on derivative instruments
designated as cash flow hedges,
net of tax - (1) - (1)
Net losses on derivative instruments
previously discontinued as cash
flow hedges, net of tax - (5) - (5)
--------------------------------------------------------------------------
Accumulated other
comprehensive loss $(51) $(6) $(31) $(88)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
11. EMPLOYEE FUTURE BENEFITS
The Corporation and its subsidiaries each maintain one or a combination of
defined benefit pension plans, defined contribution pension plans and group
Registered Retirement Savings Plans ("RRSPs") for its employees. The cost of
providing the defined benefit arrangements was $26 million for 2007 (2006 - $20
million). The cost of providing the defined contribution arrangements and group
RRSPs was $10 million for 2007 (2006 - $8 million).
12. FINANCE CHARGES
Quarter Ended Year Ended
December 31 December 31
--------------------------------------------------------------------------
(in millions) 2007 2006 2007 2006
--------------------------------------------------------------------------
Interest - Long-term debt and
capital lease obligations $81 $40 $266 $155
- Short-term borrowings 11 2 27 6
Interest charged to construction (2) (1) (8) (4)
Interest earned (1) (1) (4) (4)
Unrealized foreign exchange loss
(gain) on long-term debt - - 1 (2)
Dividends on preference shares 4 4 17 17
--------------------------------------------------------------------------
$93 $44 $299 $168
--------------------------------------------------------------------------
--------------------------------------------------------------------------
13. GAIN ON SALE OF PROPERTY
In December 2007, TGI sold surplus land resulting in an $8 million ($7 million
after-tax) gain on sale.
In June 2006, Fortis Properties sold the Days Inn Sydney resulting in a $2
million ($1.6 million after-tax) gain on sale.
14. CORPORATE TAXES
Corporate taxes differ from the amount that would be expected by applying the
enacted Canadian federal and provincial statutory tax rates to earnings before
corporate taxes. The following is a reconciliation of the consolidated statutory
tax rate to the consolidated effective tax rate:
Quarter Ended Year Ended
December 31 December 31
(%) (%)
--------------------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------
Statutory tax rate 34.9 35.3 35.1 35.2
Preference share dividends 1.4 3.1 2.4 3.2
Differences between Canadian statutory
rates and those applicable to foreign
subsidiaries (4.4) (7.9) (7.1) (6.8)
Items capitalized for accounting but
expensed for income tax purposes 2.2 (5.8) (8.3) (10.7)
Capital cost allowance and other
deductions claimed for income tax
purposes over amounts recorded for
accounting purposes (6.0) (0.2) (4.8) (1.2)
Impact of reduction in income tax rates
on future income tax balances (4.0) (1.3) (2.4) (2.4)
Regulatory deferrals at
Newfoundland Power (2.3) - (1.0) -
TGI tax reassessment 3.5 - 0.9 -
Maritime Electric tax reassessment 2.5 - 1.0 0.9
Pension costs (1.4) (0.3) (0.7) (0.4)
Other (6.6) (4.1) (0.7) (0.9)
--------------------------------------------------------------------------
Effective tax rate 19.8 18.8 14.4 16.9
--------------------------------------------------------------------------
--------------------------------------------------------------------------
15. BUSINESS ACQUISITIONS
Terasen
On May 17, 2007, Fortis acquired all of the issued and outstanding common shares
of Terasen for aggregate consideration of approximately $3.7 billion. The net
cash purchase price of approximately $1.26 billion, including acquisition costs,
was primarily financed through proceeds from the issuance of common equity with
the remaining $125 million of the cash purchase price being financed, on an
interim basis, through drawings on the Corporation's committed credit
facilities.
Terasen owns and operates natural gas distribution businesses carried out by
TGI, TGVI and TGWI, collectively referred to as the Terasen Gas companies.
Terasen is the principal natural gas distributor in British Columbia, serving
over 918,000 customers or 96 per cent of natural gas users in the province.
The acquisition has been accounted for using the purchase method, whereby the
consolidated results of Terasen have been included in the consolidated financial
statements of Fortis commencing May 17, 2007. The financial results of the
Terasen Gas companies have been included in the Regulated Gas Utilities -
Canadian segment, while the expenses of non-regulated Terasen corporate-related
activities, and Terasen's 30 per cent investment in non-regulated CWLP have been
included in the Corporate and Other segment. The Terasen Gas companies are
regulated under traditional cost of service methodology. The determination of
revenue and earnings is based on regulated rates of return that are applied to
historic values which do not change with a change of ownership. Therefore, for
substantially all of the individual assets and liabilities associated with the
Terasen Gas companies, no fair market value adjustments were recorded as part of
the purchase price, because all of the economic benefits and obligations
associated with them beyond regulated rates of return accrue to the customers.
Accordingly, the book value of substantially all of the assets and liabilities
of the Terasen Gas companies has been assigned as fair value for the purchase
price allocation. Substantially all of the fair market value adjustments,
including intangibles, recorded as part of the purchase price allocation related
to non-regulated Terasen and its non-regulated investments.
The following table summarizes the fair value of the assets acquired and
liabilities assumed at the date of acquisition. The allocation of the purchase
price is subject to finalization, with adjustments, if any, to be completed
during the second quarter of 2008. The amount of the purchase price assignable
to goodwill is entirely associated with regulated Terasen Gas companies.
Approximately $40 million of goodwill is deductible for tax purposes. Of the $11
million in intangible assets, $10 million was assigned as the value associated
with customer contracts at CWLP. Approximately $1 million was assigned to the
Terasen trade-name associated with non-regulated activities and is not subject
to amortization.
(in millions) Total
----------------------------------------------------------------------
----------------------------------------------------------------------
Fair value assigned to net assets:
Utility capital assets $2,768
Current assets 355
Goodwill 907
Intangibles 11
Long-term regulatory assets 69
Other assets 42
Current liabilities (353)
Assumed short-term indebtedness (275)
Assumed long-term debt (including current portion) (Note 7) (2,077)
Long-term regulatory liabilities (29)
Other liabilities (165)
----------------------------------------------------------------------
1,253
Cash 3
----------------------------------------------------------------------
$1,256
----------------------------------------------------------------------
----------------------------------------------------------------------
Delta Regina Hotel
On August 1, 2007, Fortis Properties purchased assets comprised of the Delta
Regina Hotel, the Saskatchewan Trade and Convention Centre, 52,000 square feet
of commercial office space and a parking garage, in Regina, Saskatchewan for an
aggregate cash purchase price of approximately $50 million, including
acquisition costs.
The acquisition has been accounted for using the purchase method whereby the
results of operations have been consolidated in the financial statements of
Fortis commencing August 1, 2007.
The fair value of the net assets acquired is as follows.
(in millions) Total
-----------------------------------------------
-----------------------------------------------
Fair value assigned to net assets:
Income producing properties $50
-----------------------------------------------
-----------------------------------------------
16. SEGMENTED INFORMATION
a. Information by reportable segment is as follows:
Quarter Ended
($ millions)
December 31, 2007 REGULATED
--------------------------------------------------------------------------
Gas Utilities Electric Utilities
--------------------------------------------------------------------------
Terasen
Gas Total
Companies Fortis Fortis NF Other Electric Electric
-Canadian Alberta BC Power Canadian Canadian Caribbean
(1) (2) (3)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Operating revenues 548 68 61 132 66 327 76
Energy supply
costs 367 - 19 88 43 150 42
Operating expenses 66 32 20 14 8 74 10
Amortization 23 19 8 9 5 41 7
--------------------------------------------------------------------------
Operating income 92 17 14 21 10 62 17
Finance charges 33 10 7 8 4 29 4
Gain on sale
of property (8) - - - - - -
Corporate taxes
(recovery) 15 1 - 3 3 7 1
Non-controlling
interest - - - 1 - 1 3
--------------------------------------------------------------------------
Net earnings (loss) 52 6 7 9 3 25 9
Preference share
dividends - - - - - - -
--------------------------------------------------------------------------
Net earnings (loss)
applicable to
common shares 52 6 7 9 3 25 9
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Goodwill 907 227 221 - 63 511 126
Identifiable
assets 3,540 1,294 914 986 484 3,678 652
--------------------------------------------------------------------------
Total assets 4,447 1,521 1,135 986 547 4,189 778
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Gross capital
expenditures 56 80 39 19 11 149 36
--------------------------------------------------------------------------
--------------------------------------------------------------------------
December 31, 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Operating revenues - 66 58 114 63 301 32
Equity income - - - - - - 3
Energy supply costs - - 20 69 43 132 17
Operating expenses - 30 17 15 8 70 5
Amortization - 18 7 9 4 38 2
--------------------------------------------------------------------------
Operating income - 18 14 21 8 61 11
Finance charges - 8 6 9 3 26 1
Corporate taxes
(recovery) - 1 2 3 2 8 1
Non-controlling
interest - - - - - - 1
--------------------------------------------------------------------------
Net earnings (loss) - 9 6 9 3 27 8
Preference share
dividends - - - - - - -
--------------------------------------------------------------------------
Net earnings (loss)
applicable to
common shares - 9 6 9 3 27 8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Goodwill - 228 221 - 63 512 149
Identifiable assets - 1,158 810 929 447 3,344 679
--------------------------------------------------------------------------
Total assets - 1,386 1,031 929 510 3,856 828
--------------------------------------------------------------------------
Gross capital
expenditures - 67 38 19 13 137 15
--------------------------------------------------------------------------
Quarter Ended
($ millions)
December 31, 2007 NON-REGULATED
------------------------------
Inter-
Fortis Fortis Corporate segment
Generation Properties and Other eliminations Consolidated
--------------------------------------------------------------------------
Operating revenues 19 50 6 (8) 1,018
Energy supply
costs 3 - - (4) 558
Operating expenses 3 34 5 (1) 191
Amortization 2 4 1 - 78
--------------------------------------------------------------------------
Operating income 11 12 - (3) 191
Finance charges 2 6 22 (3) 93
Gain on sale
of property - - - - (8)
Corporate taxes
(recovery) 2 (2) (2) - 21
Non-controlling
interest - - - - 4
--------------------------------------------------------------------------
Net earnings (loss) 7 8 (20) - 81
Preference share
dividends - - 2 - 2
--------------------------------------------------------------------------
Net earnings (loss)
applicable to common
shares 7 8 (22) - 79
--------------------------------------------------------------------------
---------------------------------------------------------------------------
Goodwill - - - - 1,544
Identifiable assets 235 535 108 (19) 8,729
--------------------------------------------------------------------------
Total assets 235 535 108 (19) 10,273
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Gross capital
expenditures 7 3 4 - 255
--------------------------------------------------------------------------
--------------------------------------------------------------------------
December 31, 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Operating revenues 20 42 3 (7) 391
Equity income - - - - 3
Energy supply
costs 1 - - (4) 146
Operating expenses 4 28 3 (1) 109
Amortization 3 3 1 - 47
--------------------------------------------------------------------------
Operating income 12 11 (1) (2) 92
Finance charges 2 6 11 (2) 44
Corporate taxes
(recovery) 1 2 (3) - 9
Non-controlling interest 2 - - - 3
--------------------------------------------------------------------------
Net earnings (loss) 7 3 (9) - 36
Preference share
dividends - - 2 - 2
--------------------------------------------------------------------------
Net earnings (loss)
applicable to common
shares 7 3 (11) - 34
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Goodwill - - - - 661
--------------------------------------------------------------------------
Identifiable assets 246 486 43 (18) 4,780
--------------------------------------------------------------------------
Total assets 246 486 43 (18) 5,441
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Gross capital
expenditures - 2 - - 154
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Terasen was acquired on May 17, 2007.
(2) Includes Maritime Electric and FortisOntario
(3) Includes Belize Electricity, Fortis Turks and Caicos acquired on August
28, 2006, and Caribbean Utilities in Grand Cayman
Annual
($ millions)
December 31, 2007 REGULATED
--------------------------------------------------------------------------
Gas Utilities Electric Utilities
--------------------------------------------------------------------------
Terasen
Gas Total
Companies Fortis Fortis NF Other Electric Electric
-Canadian Alberta BC Power Canadian Canadian Caribbean
(1) (2) (3)
--------------------------------------------------------------------------
Operating
revenues 905 270 229 490 263 1,252 307
Energy supply
costs 559 - 67 327 174 568 169
Operating
expenses 150 122 69 53 29 273 49
Amortization 58 75 31 34 17 157 28
--------------------------------------------------------------------------
Operating income 138 73 62 76 43 254 61
Finance charges 80 36 26 33 17 112 15
Gain on sale
of property (8) - - - - - -
Corporate taxes
(recovery) 16 (11) 5 12 10 16 2
Non-controlling
interest - - - 1 - 1 13
--------------------------------------------------------------------------
Net earnings
(loss) 50 48 31 30 16 125 31
Preference share
dividends - - - - - - -
--------------------------------------------------------------------------
Net earnings (loss)
applicable to
common shares 50 48 31 30 16 125 31
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Goodwill 907 227 221 - 63 511 126
Identifiable
assets 3,540 1,294 914 986 484 3,678 652
--------------------------------------------------------------------------
Total assets 4,447 1,521 1,135 986 547 4,189 778
--------------------------------------------------------------------------
Gross capital
expenditures 120 285 147 72 38 542 106
--------------------------------------------------------------------------
December 31, 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Operating revenues - 251 216 421 252 1,140 101
Equity income - - - - - - 10
Energy supply
costs - - 68 256 171 495 57
Operating expenses - 115 63 54 28 260 13
Amortization - 69 28 33 15 145 7
--------------------------------------------------------------------------
Operating income - 67 57 78 38 240 34
Finance charges - 30 23 33 15 101 5
Gain on sale
of property - - - - - - -
Corporate taxes
(recovery) - (5) 7 14 9 25 2
Non-controlling
interest - - - 1 - 1 4
--------------------------------------------------------------------------
Net earnings
(loss) - 42 27 30 14 113 23
Preference share
dividends - - - - - - -
--------------------------------------------------------------------------
Net earnings (loss)
applicable to
common shares - 42 27 30 14 113 23
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Goodwill - 228 221 - 63 512 149
Identifiable assets - 1,158 810 929 447 3,344 679
--------------------------------------------------------------------------
Total assets - 1,386 1,031 929 510 3,856 828
--------------------------------------------------------------------------
Gross capital
expenditures - 243 111 60 37 451 27
--------------------------------------------------------------------------
Annual
($ millions)
December 31, 2007 NON-REGULATED
------------------------------
Inter-
Fortis Fortis Corporate segment
Generation Properties and Other eliminations Consolidated
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Operating revenues 75 191 22 (34) 2,718
Energy supply costs 8 - - (17) 1,287
Operating expenses 14 123 13 (5) 617
Amortization 10 14 6 - 273
--------------------------------------------------------------------------
Operating income 43 54 3 (12) 541
Finance charges 10 24 70 (12) 299
Gain on sale
of property - - - - (8)
Corporate taxes
(recovery) 8 6 (12) - 36
Non-controlling
interest 1 - - - 15
--------------------------------------------------------------------------
Net earnings (loss) 24 24 (55) - 199
Preference share
dividends - - 6 - 6
--------------------------------------------------------------------------
Net earnings (loss)
applicable to
common shares 24 24 (61) - 193
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Goodwill - - - - 1,544
--------------------------------------------------------------------------
Identifiable assets 235 535 108 (19) 8,729
--------------------------------------------------------------------------
Total assets 235 535 108 (19) 10,273
--------------------------------------------------------------------------
Gross capital
expenditures 17 13 5 - 803
--------------------------------------------------------------------------
December 31, 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Operating revenues 80 163 9 (31) 1,462
Equity income - - - - 10
Energy supply costs 6 - - (18) 540
Operating expenses 15 105 11 (5) 399
Amortization 11 12 3 - 178
--------------------------------------------------------------------------
Operating income 48 46 (5) (8) 355
Finance charges 10 21 39 (8) 168
Gain on sale
of property - (2) - - (2)
Corporate taxes
(recovery) 8 8 (11) - 32
Non-controlling
interest 3 - - - 8
--------------------------------------------------------------------------
Net earnings (loss) 27 19 (33) - 149
Preference share
dividends - - 2 - 2
--------------------------------------------------------------------------
Net earnings (loss)
applicable to
common shares 27 19 (35) - 147
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Goodwill - - - - 661
--------------------------------------------------------------------------
Identifiable assets 246 486 43 (18) 4,780
--------------------------------------------------------------------------
Total assets 246 486 43 (18) 5,441
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Gross capital
expenditures 3 17 2 - 500
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Terasen was acquired on May 17, 2007.
(2) Includes Maritime Electric and FortisOntario
(3) Includes Belize Electricity, Fortis Turks and Caicos acquired on August
28, 2006, and Caribbean Utilities in Grand Cayman
a. The Corporation has changed the reporting of its operating segments whereby
the financial results of Maritime Electric and FortisOntario have now been
aggregated into one reportable segment and presented as "Regulated Electric
Utilities - Other Canadian". Comparative segment information has been restated
to reflect this change in reporting.
Beginning with the second quarter of 2007, the Corporation began reporting a
new segment "Regulated Gas Utilities - Canadian" which included the financial
results of the regulated gas distribution businesses of Terasen, the principal
natural gas distributor in British Columbia, acquired by the Corporation on May
17, 2007. Additionally, the expenses of non-regulated Terasen corporate-related
activities, and Terasen's 30 per cent ownership interest in CWLP, have been
included in the Corporate and Other segment from May 17, 2007.
b. Inter-Segment Transactions
Inter-segment 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 inter-segment
transactions primarily related to the sale of energy from Fortis Generation to
Belize Electricity and FortisOntario, electricity sales from Newfoundland Power
to Fortis Properties and finance charges on inter-segment borrowings. The
significant inter-segment transactions for the 3- and 12-months ended December
31, 2007 and 2006 are detailed below.
Quarter Ended Year Ended
Inter-segment transactions December 31 December 31
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(in millions) 2007 2006 2007 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Sales from Fortis Generation to Belize
Electricity $3 $3 $15 $17
Sales from Fortis Generation to FortisOntario 1 1 1 1
Sales from Newfoundland Power to
Fortis Properties 1 1 4 3
Inter-segment finance charges on
borrowings from:
Corporate to Regulated Electric
Utilities - Canadian - 1 2 2
Corporate to Fortis Properties 2 2 8 5
Fortis Generation to Belize Electricity - - - 1
--------------------------------------------------------------------------
--------------------------------------------------------------------------
17. CONTINGENT LIABILITIES AND COMMITMENTS
Contingent liabilities
Fortis is subject to various legal proceedings and claims that arise in the
ordinary course of business operations. Management believes that the amount of
liability, if any, from these actions would not have a material effect on the
Corporation's financial position or results of operations.
The following describes the nature of the Corporation's contingent liabilities.
On March 26, 2007, the Minister of Small Business and Revenue and Minister
Responsible for Regulatory Reform (the "Minister") in British Columbia issued a
decision in respect of the appeal by TGI of an assessment of additional British
Columbia Social Service Tax in the amount of approximately $37 million
associated with the Southern Crossing Pipeline, which was completed in 2000. The
Minister has reduced the assessment to $7 million, including interest, which has
been paid in full to avoid accruing further interest and has been recorded as a
long-term regulatory deferral asset. On June 22, 2007, TGI filed an appeal of
the assessment with the B.C. Supreme Court (Note 5).
A non-regulated subsidiary of Terasen received Notices of Assessment from Canada
Revenue Agency ("CRA") for additional taxes related to the taxation years 1999
through 2003. The exposure has been fully provided for in the consolidated
financial statements. Terasen has begun the appeal process associated with the
assessments.
The B.C. Ministry of Forests (the "Ministry") has alleged breaches of the Forest
Practices Code and negligence relating to a forest fire near Vaseux Lake and has
filed and served a writ and statement of claim against FortisBC. In addition,
the Company has been served with two filed writs and statements of claim by
private land owners in relation to the same matter. The Company is currently
communicating with its insurers and has filed a statement of defence in relation
to all of the actions. The outcome cannot be reasonably determined and estimated
at this time and, accordingly, no amount has been accrued in the consolidated
financial statements.
On March 24, 2006, Her Majesty the Queen in Right of Alberta (the "Crown") filed
a statement of claim in the Court of Queen's Bench of Alberta in the Judicial
District of Edmonton against FortisAlberta. The Crown's claim is that the
Company is responsible for a fire that occurred in October 2003 in an area of
the Province of Alberta commonly referred to as Poll Haven Community Pasture.
The Crown is seeking approximately $3 million in fire-fighting and suppression
costs and approximately $2 million in timber losses, as well as interest and
other costs. FortisAlberta and the Crown have exchanged several investigation
and expert reports. Both the factual evidence and expert opinion received to
date leads management to believe that FortisAlberta is not responsible for the
cause of the fire and has no liability for the damages. However, FortisAlberta
has not made any definitive assessment of potential liability and the outcome
with regard to the Company's liability for the claims made by the Crown is
indeterminable. No amount, therefore, has been accrued in the consolidated
financial statements.
In April 2006, CRA reassessed Maritime Electric's 1997-2004 taxation years. The
reassessment encompasses the Company's tax treatment, specifically the Company's
timing of deductions, with respect to: (i) the energy cost adjustment mechanism
amounts in the 2001-2004 taxation years; (ii) customer rebate adjustments in the
2001-2003 taxation years; and (iii) the Company's payment of approximately $6
million on January 2, 2001 associated with a settlement with NB Power regarding
the $450 million write-down of the Point Lepreau Nuclear Generating Station in
1998. Maritime Electric believes it has reported its tax position appropriately
in all aspects of the reassessment and filed a Notice of Objection with the
Chief of Appeals at CRA. Should the Company be unsuccessful in defending all
aspects of the reassessment, the Company would be required to pay approximately
$13 million in taxes and accrued interest. As at December 31, 2007, Maritime
Electric has provided for this amount through future and current income taxes
payable. The provisions of the Income Tax Act (Canada) require the Company to
deposit one-half of the assessment under objection with CRA. The amount
currently on deposit with the CRA arising from the reassessment is approximately
$6 million.
Legal proceedings were initiated against FortisUS Energy by the Village of
Philadelphia (the "Village"), New York. The Village claimed that FortisUS Energy
should honour a series of current and future payments set out in an agreement
between the Village and a former owner of the hydroelectric site, located in the
Village of Philadelphia municipality, now owned by FortisUS Energy, totalling
approximately $7 million (US$7 million). The First American Title Insurance
Company is defending the action on behalf of FortisUS Energy. A Memorandum
Decision and Order was filed by the State of New York Supreme Court of Jefferson
County on December 21, 2006 granting summary judgment to FortisUS Energy
dismissing the action by the Village. The Village, however, filed a notice of
appeal in January 2007. The appeal was heard by the court in December 2007.
Management believes that the appeal will not be successful and, therefore, no
provision has been made in the consolidated financial statements.
Commitments
The Corporation's commitments are consistent with disclosures in the
Corporation's 2006 annual audited consolidated financial statements except as
described below.
The Terasen Gas companies are a party to various gas purchase contracts with
obligations totalling $537 million as at December 31, 2007. These obligations
are based on market prices that vary with gas commodity indices. The amount
reflects index prices in effect as at December 31, 2007.
Terasen also has various capital and operating leases associated with equipment,
facilities and natural gas distribution assets with obligations totalling $184
million as at December 31, 2007.
As at December 31, 2007, commitments associated with long-term debt repayments
for consolidated Terasen were $2.1 billion.
18. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to comply with current period
classifications.
CORPORATE INFORMATION
Fortis Inc. is the largest investor-owned distribution utility in Canada. With
total assets exceeding $10 billion and annual revenue of more than $2.7 billion,
the Corporation serves 2,000,000 gas and electricity customers. Its regulated
holdings include a natural gas utility in British Columbia and electric
distribution utilities in five Canadian provinces and three Caribbean countries.
Fortis owns non-regulated hydroelectric generation assets across Canada and in
Belize and Upper New York State. It also owns hotels and commercial real estate
across Canada. Fortis Inc. shares are listed on the Toronto Stock Exchange and
trade under the symbol FTS.
Share 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
E: service@computershare.com
W: www.computershare.com
For the year ended December 31, 2007, Fortis Inc. will be filing the
Certification of Annual Filings (Form 52-109F1) on SEDAR. Additional
information, including the Fortis 2006 Annual Information Form, Management
Information Circular and Annual Report, are available on SEDAR at www.sedar.com
and on the Corporation's web site at www.fortisinc.com.
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