ST JOHN'S, NEWFOUNDLAND AND LABRADOR--(CCNMatthews - Aug. 5, 2005) - Fortis Inc. (TSX:FTS) reported net earnings applicable to common shares of $38.2 million for the second quarter of 2005, $14.3 million higher than net earnings applicable to common shares of $23.9 million for the same quarter last year. Earnings per common share were $1.48 compared to $1.22 per common share for the second quarter last year. Year-to-date net earnings applicable to common shares were $77.4 million, up $33.2 million, compared to $44.2 million for the first half of 2004. Earnings per common share were $3.08 year to date compared to $2.38 per common share for the first half of 2004.
Regulated Utilities contributed $39.8 million in earnings compared to $21.6 million for the second quarter last year. FortisAlberta and FortisBC, which were acquired on May 31, 2004, contributed $20.1 million this quarter representing 3 months of earnings compared to 1 month for the second quarter of 2004.
Results this quarter include a $7.0 million positive net after-tax adjustment to FortisAlberta's earnings, associated with the resolution of tax-related matters resulting in the reduction of liabilities associated with prior periods, partially offset by amounts provided for the final settlement of billings related to prior years. Results also include approximately $1.4 million in after-tax interest revenue from a tax settlement at Newfoundland Power and a $1.1 million positive adjustment to Caribbean Utilities' earnings related to a change in the accounting practice for recognizing unbilled revenue. In addition, Fortis Properties' earnings were $1.1 million higher quarter over quarter. Earnings were also affected by a $1.0 million after-tax foreign exchange charge associated with the translation of US$75 million of unhedged corporate debt. Earnings per common share were also impacted by the dilution created by the issuance of 1.74 million common shares on March 1, 2005.
"It was another active period for Fortis on the regulatory front," says Stan Marshall, President and Chief Executive Officer, Fortis Inc. "Five of our seven distribution utilities, FortisBC, FortisAlberta, Maritime Electric, Belize Electricity and Caribbean Utilities, completed regulatory proceedings and negotiations which provide more certainty in the near term," adds Marshall.
Consolidated utility capital expenditures reached $189.2 million year to date. These expenditures were primarily focused on electrical infrastructure initiatives, the majority of which were driven by FortisAlberta and FortisBC. Fortis expects to spend approximately $400 million in 2005 on its consolidated utility capital programs.
"During the quarter, Fortis also completed the acquisition of Princeton Light and Power Company, Limited which was another step for Fortis in growing our utility assets in British Columbia," says Marshall. Princeton Light and Power is an electric utility serving approximately 3,200 customers, mainly in Princeton, British Columbia.
"Results from Non-regulated Generation held steady this quarter, reflecting the diversity of assets within the segment," says Marshall. The Corporation's Non-regulated Generation segment delivered $3.2 million in earnings for the second quarter. The impact of reduced production in Belize, due to lower rainfall levels, was mitigated by higher wholesale energy prices in Ontario.
"In July, an important milestone was reached when the storing of water began at the Chalillo dam in Belize which will immediately benefit production at the Mollejon generating facility downstream," says Marshall. "The 7-megawatt hydroelectric plant at the dam is scheduled to be commissioned later this year. The upstream storage and hydroelectric facility will improve reliability of energy supply to customers and make the country of Belize more self-sufficient in meeting its growing energy demand," he adds. The US$30 million facility will increase average annual energy production from the Macal River to 170 gigawatt hours ("GWh") from 80 GWh.
"Fortis Properties' earnings were strengthened by its expansion into Alberta and Manitoba earlier this year," says Marshall. "The Company also completed the expansion to the Delta St. John's Hotel this quarter, one month ahead of schedule, making it Atlantic Canada's largest hotel and conference centre," he adds. Fortis Properties contributed $4.8 million to earnings for the second quarter.
"With approximately $210 million of utility capital expenditure projects planned to be completed in the second half of 2005, Fortis continues to grow rapidly. Many of these projects are driven by robust customer growth in western Canada and the need to enhance the reliability of our electricity systems. Fortis continues to position itself as the leading Canadian electric distribution utility," concludes Marshall.
Fortis Inc.
Interim Management Discussion and Analysis
For the three and six months ended June 30, 2005
Dated August 5, 2005
The following analysis should be read in conjunction with the Fortis
Inc. ("Fortis" or the "Corporation") interim unaudited consolidated
financial statements for the three and six months ended June 30, 2005
and the Management Discussion and Analysis and audited consolidated
financial statements for the year ended December 31, 2004 included in
the Corporation's 2004 Annual Report. This material has been prepared
in accordance with National Instrument 51-102 relating to Management
Discussion and Analysis.
Fortis includes forward-looking statements in this material. By
their very nature, forward-looking statements are based on underlying
assumptions and are subject to inherent risks and uncertainties
surrounding future expectations generally. Such events include, but
are not limited to, general economic, market and business conditions,
regulatory developments, weather and competition. Fortis cautions
readers that should certain events or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may
vary significantly from those expected. 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.
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.
Financial information in this release has been prepared in accordance
with generally accepted accounting principles ("Canadian GAAP") and
is presented in Canadian dollars unless otherwise specified.
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Financial Highlights (Unaudited)
Period Ended June 30th
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($ millions, except
per common share amounts) Quarter Year-to-date
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Revenue and equity
income 365.0 254.5 746.7 505.3
---------------------------------------------------------------------
Cash flow from
operations 49.9 48.2 129.2 70.1
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Net earnings applicable
to common shares 38.2 23.9 77.4 44.2
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Basic earnings per
common share ($) 1.48 1.22 3.08 2.38
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Diluted earnings per
common share ($) 1.36 1.15 2.81 2.27
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Segmented Net Earnings Contribution
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Quarter Year-to-date
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2005 2004 2005 2004
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Regulated Utilities
- Canadian (1) 34.8 17.0 67.8 32.3
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Regulated Utilities
- Caribbean (2) 5.0 4.6 8.4 7.6
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Non-regulated - Fortis
Generation (3) 3.2 3.2 13.2 6.1
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Non-regulated - Fortis
Properties 4.8 3.7 6.4 4.7
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Corporate (9.6) (4.6) (18.4) (6.5)
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Net earnings applicable
to common shares 38.2 23.9 77.4 44.2
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(1) Includes the operations of Newfoundland Power, Maritime Electric,
FortisOntario (comprised of Canadian Niagara Power and Cornwall
Electric), FortisAlberta and FortisBC.
(2) Includes the operations of Belize Electricity and the
Corporation's 37.3 per cent equity investment in Caribbean
Utilities Company, Ltd.
(3) Includes the operations of non-regulated generating assets in
British Columbia, Ontario, central Newfoundland, Upper New York
State and Belize.
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Net earnings for the second quarter were $38.2 million, or $1.48 per
common share, compared to $23.9 million, or $1.22 per common share,
for the same quarter last year. Second quarter results include 3
months of earnings from FortisAlberta and FortisBC compared to 1
month for the second quarter of 2004. Results this quarter include a
$7.0 million positive net after-tax adjustment to FortisAlberta's
earnings, associated with the resolution of tax-related matters
resulting in the reduction of liabilities associated with prior
periods, partially offset by amounts provided for the final
settlement of billings related to prior years. Results also include
approximately $1.4 million in after-tax interest revenue from a tax
settlement at Newfoundland Power and a $1.1 million positive
adjustment to Caribbean Utilities' earnings related to a change in
the accounting practice for recognizing unbilled revenue. In
addition, Fortis Properties' earnings were $1.1 million higher
quarter over quarter. The increase in earnings for the second quarter
was partly constrained by a $1.0 million after-tax foreign exchange
charge associated with the translation of US$75 million of unhedged
corporate debt, increased early retirement and pension costs at
Newfoundland Power and a decrease in other revenue and increased
operating expenses at Belize Electricity. Earnings per common share
were also impacted by dilution from the issuance of 1.74 million
common shares on March 1, 2005.
Year-to-date net earnings were $77.4 million, or $3.08 per common
share, compared to $44.2 million, or $2.38 per common share, for the
first half of 2004. In addition to the $7.0 million positive net
after-tax adjustment at FortisAlberta, the $1.4 million in after-tax
interest revenue at Newfoundland Power and the $1.1 million positive
adjustment to Caribbean Utilities' earnings, results for the first
half of 2005 include a $7.9 million after-tax gain resulting from the
settlement of contractual matters between FortisOntario and Ontario
Power Generation Inc. ("OPGI"). The earnings contribution from
FortisAlberta and FortisBC, the timing of recognition of earnings at
Newfoundland Power, earnings growth at Fortis Properties, increased
wholesale energy prices in Ontario and increased hydroelectric
production in central Newfoundland also contributed to results year
to date. The increase in earnings year to date was partly
constrained by a $1.5 million after-tax foreign exchange charge
associated with the translation of US$75 million of unhedged
corporate debt, lower hydroelectric production in Belize, due to
lower rainfall levels, and increased amortization and finance charges
at Belize Electricity. Earnings per common share were also impacted
by dilution from the issuance of 1.74 million common shares on March
1, 2005.
REGULATED UTILITIES - CANADIAN (1)
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Regulated Utilities - Canadian
Financial Highlights (Unaudited)
Period Ended June 30th
---------------------------------------------------------------------
Earnings
---------------------------------------------------------------------
Quarter Year-to-date
---------------------------------------------------------------------
($ millions) 2005 2004(1) 2005 2004(1)
---------------------------------------------------------------------
Newfoundland Power 11.5 10.9 24.5 22.9
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Maritime Electric 2.3 2.0 4.4 4.1
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FortisOntario 0.9 0.9 2.0 2.1
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FortisAlberta (1) 14.7 2.4 22.6 2.4
---------------------------------------------------------------------
FortisBC (1) 5.4 0.8 14.3 0.8
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Earnings 34.8 17.0 67.8 32.3
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---------------------------------------------------------------------
(1) Regulated Utilities - Canadian include the operations of
Newfoundland Power, Maritime Electric, FortisOntario (comprised
of Canadian Niagara Power and Cornwall Electric), FortisAlberta
and FortisBC. On May 31, 2004, Fortis completed the transaction
to acquire Aquila, Inc.'s 2 utilities in western Canada (renamed
FortisAlberta and FortisBC). Financial results for FortisAlberta
and FortisBC are since June 1, 2004 only. FortisBC includes the
results of Princeton Light and Power Company, Limited ("PLP").
PLP was acquired by Fortis, through a wholly owned subsidiary, on
May 31, 2005 and financial results for PLP are only reported
since June 1, 2005.
Earnings from Regulated Utilities - Canadian were $34.8 million for
the second quarter compared to $17.0 million for the same quarter
last year. The increase in earnings from Regulated Utilities -
Canadian was primarily related to the acquisition of the utilities in
western Canada on May 31, 2004 and $1.4 million in after-tax interest
revenue as a result of Newfoundland Power's tax settlement with the
Canada Revenue Agency ("CRA"). FortisAlberta's second quarter results
include the $7.0 million positive net after-tax adjustment,
associated with the resolution of tax-related matters resulting in
the reduction of liabilities associated with prior periods, partially
offset by amounts provided for the final settlement of billings
related to prior years.
Year-to-date earnings from Regulated Utilities - Canadian were $67.8
million compared to $32.3 million for the same period last year. The
increase in earnings was primarily related to the acquisition of the
utilities in western Canada on May 31, 2004, the $7.0 million
positive net after-tax adjustment at FortisAlberta, the $1.4 million
after-tax interest revenue and the timing of recognition of earnings
at Newfoundland Power.
Newfoundland Power
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Newfoundland Power
Financial Highlights (Unaudited)
Period Ended June 30th
---------------------------------------------------------------------
Quarter Year-to-date
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Electricity Sales (GWh) 1,240 1,222 2,940 2,887
---------------------------------------------------------------------
($ millions)
---------------------------------------------------------------------
Revenue 105.7 97.3 241.1 223.5
---------------------------------------------------------------------
Energy Supply Costs 57.5 50.9 140.6 127.7
---------------------------------------------------------------------
Operating Expenses 13.8 12.9 28.0 26.8
---------------------------------------------------------------------
Amortization 9.3 9.2 19.9 18.6
---------------------------------------------------------------------
Finance Charges 7.7 7.6 15.4 15.2
---------------------------------------------------------------------
Corporate Taxes 5.7 5.7 12.4 12.0
---------------------------------------------------------------------
Non-controlling
Interest 0.2 0.1 0.3 0.3
---------------------------------------------------------------------
Earnings 11.5 10.9 24.5 22.9
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---------------------------------------------------------------------
Newfoundland Power's earnings for the second quarter were $11.5 million compared to $10.9 million for the same quarter last year. The increase in earnings primarily related to a tax settlement with the CRA and increased electricity sales, partially offset by a 0.5 per cent rate reduction, effective January 1, 2005, increased early retirement and pension costs and the change in the purchased power rate structure. Year-to-date earnings were $24.5 million compared to $22.9 million for the same period last year. Year-to-date earnings increased primarily due to the favourable impact of the change in the purchased power rate structure, the impact of the tax settlement and increased electricity sales, partially offset by the 0.5 per cent rate reduction and increased early retirement and pension costs.
During the second quarter, Newfoundland Power entered into an agreement with the CRA that provides for the full settlement of an outstanding tax dispute, on a prospective basis, regarding Newfoundland Power's revenue recognition method. Earnings for the second quarter include an estimated $1.4 million of interest revenue, net of tax, associated with the $6.9 million deposit with the CRA.
Effective January 1, 2005, the introduction of a new rate structure changed the basis upon which Newfoundland and Labrador Hydro ("Newfoundland Hydro") charges Newfoundland Power for purchased power. The new purchased power rate structure resulted from an order by the Newfoundland and Labrador Board of Commissioners of Public Utilities ("PUB") in 2004 and was intended to encourage conservation which, in turn, should lower long-term consumer electricity costs. In 2005, approximately one quarter of annual purchased power costs will be incurred as a fixed charge recognized evenly throughout the year. Previously, purchased power costs varied based on the amount of electricity used by Newfoundland Power's customers.
Earnings for the second quarter were approximately $0.3 million lower than what they would have been under the prior purchased power rate structure. This reduction in earnings was the result of a partial reversal of the $1.2 million increase in earnings for the first quarter of 2005 compared to the same quarter last year, as a result of the change in this rate structure. Earnings in the third and fourth quarters are also expected to demonstrate the seasonality effect of the new purchased power rate structure.
Excluding the impact of the interest associated with the tax settlement and the change in the purchased power rate structure, second quarter and year-to-date earnings decreased $0.5 million and $0.7 million, respectively, compared to the same periods last year. The decrease in earnings was due primarily to a 0.5 per cent decrease in customer electricity rates, effective January 1, 2005, increased costs related to a voluntary Early Retirement Program ("ERP"), higher pension costs and increased amortization costs. The decrease in earnings was partially offset by higher electricity sales and increased revenue from pole rentals.
Electricity sales for the second quarter increased to 1,240 GWh from 1,222 GWh for the same quarter last year. Residential sales increased 1.1 per cent while commercial and street lighting sales increased 2.0 per cent. Year-to-date electricity sales increased to 2,940 GWh from 2,887 GWh for the same period last year. Residential sales increased 1.7 per cent while commercial and street lighting electricity sales increased 1.9 per cent. The increase in residential sales was due primarily to increased usage and the increase in commercial sales was attributable to growth in the service sector of the economy and continued development of the oil industry in the province.
Revenue for the second quarter was $105.7 million compared to $97.3 million for the same quarter last year. Year-to-date revenue was $241.1 million compared to $223.5 million for the same period last year. On July 1, 2004, electricity rates charged to customers increased by 5.4 per cent as a result of the flow through of a 9.3 per cent increase in the rate charged by Newfoundland Hydro for purchased power. As a result of this change, both revenues and purchased power cost increased approximately $5.1 million during the second quarter and $12.3 million year to date, with no overall impact on earnings. Revenue also grew as a result of higher electricity sales, increased revenue from pole rentals and from interest revenue accrued as part of the tax settlement, partially offset by the impact of a 0.5 per cent reduction in customer electricity rates, effective January 1, 2005. This rate reduction resulted from the annual operation of the automatic adjustment formula which reduced Newfoundland Power's rate of return on equity for the purpose of setting rates from 9.75 per cent in 2004 to 9.24 per cent in 2005.
Energy supply costs for the second quarter increased to $57.5 million compared to $50.9 million for the same quarter last year. In addition to the $5.1 million impact of the July 1, 2004 increase in the rate Newfoundland Hydro charges Newfoundland Power, energy supply costs increased $0.9 million due to electricity sales growth and $0.6 million due to the seasonality impact of the revised purchased power rate structure. Year-to-date energy supply costs were $140.6 million compared to $127.7 million for the same period last year. The increase was primarily due to the $12.3 million impact of the increase in the rate charged by Newfoundland Hydro and increased electricity sales, partially offset by the $1.7 million reduction associated with the seasonality impacts of the change to the new purchased power rate structure.
Operating expenses increased $0.9 million over the second quarter last year and $1.2 million over the first half of 2004. The increase was primarily the result of costs associated with the ERP, increased pension costs and normal wage and inflationary increases, partially offset by the continued focus on cost management and control. As approved by the PUB in 2004, the amortization of pension costs and retirement allowances associated with the ERP began April 1, 2005, with $0.6 million being amortized in the second quarter.
Amortization costs were $9.3 million for the second quarter compared to $9.2 million for the same quarter last year. The increase in amortization costs, as a result of growth in capital assets, was partially offset by the impact of timing differences in net margin. Annual amortization of capital assets is allocated over the 4 quarters based on expected net margin. Year-to-date amortization costs were $19.9 million compared to $18.6 million for the same period last year. Year-to-date amortization costs increased as a result of growth in capital assets and the impact of timing differences in net margin.
Effective July 1, 2005, electricity rates charged to customers increased by an average rate of 5.2 per cent. The increase resulted from the normal annual operation of Newfoundland Hydro's Rate Stabilization Plan. Variances in the cost of fuel used by Newfoundland Hydro to generate the electricity it sells to Newfoundland Power are captured and flowed through to customers through the operation of the Rate Stabilization Plan. This increase in customer rates will not have a financial impact on Newfoundland Power.
Maritime Electric
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Maritime Electric
Financial Highlights (Unaudited)
Period Ended June 30th
---------------------------------------------------------------------
Quarter Year-to-date
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Electricity Sales (GWh) 241 233 497 489
---------------------------------------------------------------------
($ millions)
---------------------------------------------------------------------
Revenue 28.3 28.2 57.6 57.7
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Energy Supply Costs 17.0 17.5 35.1 36.1
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Operating Expenses 3.1 2.8 6.2 5.8
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Amortization 2.4 2.3 4.8 4.5
---------------------------------------------------------------------
Finance Charges 2.0 2.2 4.2 4.4
---------------------------------------------------------------------
Corporate Taxes 1.5 1.4 2.9 2.8
---------------------------------------------------------------------
Earnings 2.3 2.0 4.4 4.1
---------------------------------------------------------------------
---------------------------------------------------------------------
Maritime Electric's earnings for the second quarter were $2.3 million compared to $2.0 million for the same quarter last year. Year-to-date earnings were $4.4 million compared to $4.1 million for the same period last year.
Electricity sales for the second quarter were 241 GWh, an increase of 3.4 per cent over the same quarter last year. Residential sales were up 2.5 per cent while commercial sales rose 4.2 per cent. Year-to-date electricity sales were 497 GWh, an increase of 1.6 per cent over the same period last year. The increase in residential sales was largely due to an expanding customer base and higher consumption. Commercial sales rose due to increased manufacturing and processing output.
Revenue for the second quarter was $28.3 million, comparable to the same quarter last year. Year-to-date revenue was $57.6 million, comparable to the first half of 2004. Increased revenue from higher electricity sales was offset by increased amortization of recoverable costs against revenue as permitted in the interim Order issued by the Island Regulatory and Appeals Commission ("IRAC") on January 6, 2005. The interim Order allows Maritime Electric to establish an energy cost adjustment mechanism ("ECAM"), with application to the period commencing January 1, 2004, and to commence amortization of the $20.8 million in recoverable costs to December 31, 2003. Recoverable costs of $1.5 million were amortized in 2004, with a further $2.5 million being amortized in 2005.
Energy supply costs for the second quarter were $17.0 million compared to $17.5 million for the same quarter last year. Year-to-date energy supply costs were $35.1 million compared to $36.1 million for the same period last year. The decrease in energy supply costs was a result of the expiration of the Emera contract, the avoidance of the use of expensive on-Island peaking capacity and lower-than-anticipated curtailable energy costs. In the first half of 2005, Maritime Electric purchased the majority of its energy from New Brunswick Power Corporation ("NB Power") through several energy purchase agreements.
As at June 30, 2005, Maritime Electric has spent $24.3 million on the construction of a $35 million 50-megawatt ("MW") generating facility on Prince Edward Island. This facility, which can operate on light oil or natural gas, will address submarine cable loading issues and reduce the Company's reliance on imported electricity. The targeted in-service date is late 2005.
Maritime Electric filed a General Rate Application ("GRA") in April 2004 requesting a 2 per cent increase in base rates, effective July 1, 2005. On June 24, 2005, the IRAC issued its Order with respect to the GRA approving the requested 2 per cent increase with the current interim and transitional ECAM to remain in effect until June 30, 2006.
FortisOntario
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FortisOntario
Financial Highlights (Unaudited)
Period Ended June 30th
---------------------------------------------------------------------
Quarter Year-to-date
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Electricity Sales (GWh) 272 265 603 633
---------------------------------------------------------------------
($ millions)
---------------------------------------------------------------------
Revenue 32.0 28.6 70.2 63.0
---------------------------------------------------------------------
Energy Supply Costs 24.9 21.8 55.5 48.5
---------------------------------------------------------------------
Operating Expenses 3.0 2.9 6.2 6.0
---------------------------------------------------------------------
Amortization 1.3 1.2 2.5 2.5
---------------------------------------------------------------------
Finance Charges 1.3 1.3 2.6 2.6
---------------------------------------------------------------------
Corporate Taxes 0.6 0.5 1.4 1.3
---------------------------------------------------------------------
Earnings 0.9 0.9 2.0 2.1
---------------------------------------------------------------------
---------------------------------------------------------------------
FortisOntario's earnings for the second quarter were $0.9 million, comparable to the same quarter last year. Year-to-date earnings were $2.0 million, comparable to the same period last year.
Electricity sales for the second quarter were 272 GWh compared to 265 GWh for the same quarter last year. Year-to-date electricity sales were 603 GWh compared to 633 GWh for the first half of 2004. The decrease in electricity sales year-to-date primarily related to lower average customer usage in the first quarter of 2005 compared to the same period last year and the loss of an industrial customer in Cornwall in the second quarter of 2004.
Revenue for the second quarter was $32.0 million, up $3.4 million from $28.6 million for the same quarter last year. The increase in revenue was primarily due to increased electricity sales and the effect of increases in Cornwall Electric rates, effective July 2004. Year-to-date revenue was $70.2 million, up $7.2 million from $63.0 million for the first half of 2004. The decline in year-to-date electricity sales was more than offset by increases in Cornwall Electric rates and the change in the cost of power component billed to Canadian Niagara Power's fixed-price customers, effective April 1, 2004. The cost of power component changed from a fixed price of 4.3 cents per kWh to a two-tier pricing regime of 4.7 cents per kWh for the first 750 kWh and 5.5 cents per kWh for the balance. This change increased both revenue and energy supply costs; however, it did not impact earnings.
On December 9, 2002, the Government of Ontario enacted Bill 210, the Electricity Pricing, Conservation and Supply Act, 2002, which implemented a freeze on transmission and distribution rates. FortisOntario expects to file a GRA in September 2005 to set rates effective May 1, 2006.
FortisAlberta (2)
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FortisAlberta
Financial Highlights (Unaudited)
Period Ended June 30th
---------------------------------------------------------------------
Quarter Year-to-date
---------------------------------------------------------------------
2005 2004(2) 2005 2004(2)
---------------------------------------------------------------------
Electricity Sales (GWh) 3,402 1,047 7,087 1,047
---------------------------------------------------------------------
($ millions)
---------------------------------------------------------------------
Revenue 75.7 17.2 134.3 17.2
---------------------------------------------------------------------
Operating Expenses 27.9 8.0 54.8 8.0
---------------------------------------------------------------------
Amortization 16.9 4.4 30.7 4.4
---------------------------------------------------------------------
Finance Charges 5.8 1.3 11.8 1.3
---------------------------------------------------------------------
Corporate Taxes 10.4 1.1 14.4 1.1
---------------------------------------------------------------------
Earnings 14.7 2.4 22.6 2.4
---------------------------------------------------------------------
---------------------------------------------------------------------
(2) On May 31, 2004, Fortis completed the transaction to acquire
Aquila, Inc.'s 2 utilities in western Canada (renamed
FortisAlberta and FortisBC). Financial results for FortisAlberta
and FortisBC are since June 1, 2004 only. Comparative figures
for 2004 provided in the table are for the month of June 2004
only.
On May 31, 2004, Fortis, through a wholly owned subsidiary, acquired all of the issued and outstanding shares of Aquila Networks Canada (Alberta) Ltd. (renamed "FortisAlberta"). FortisAlberta owns and operates the electricity distribution system in a substantial portion of southern and central Alberta and distributes electricity to approximately 407,000 customers using about 103,000 kilometers of power lines. FortisAlberta is regulated by the Alberta Energy and Utilities Board ("AEUB") under traditional cost of service regulation.
On May 24, 2005, the AEUB approved the Negotiated Settlement Agreement (the "Settlement") dealing with all aspects of FortisAlberta's 2005 Distribution Access Tariff Application. The Settlement, which eliminates the need for a full-scale hearing process, resulted in a 2005 distribution revenue requirement of $215.4 million which translates into a 2.1 per cent increase on base rates for 2005, effective August 1, 2005. The approved revenue requirement reflects forecast operating expenses of $101.0 million and capital expenditures of $134.3 million. The cumulative impact of the 2.1 per cent rate increase from January 1, 2005 through July 31, 2005 will be recovered from customers August 2005 through December 2005 through a distribution adjustment rider. FortisAlberta expects to file for its 2006 customer rates in the fourth quarter of 2005.
In June 2005, FortisAlberta and the City of Airdrie signed a 10-year Electric Distribution Franchise Agreement. This agreement grants FortisAlberta the exclusive right to own, operate and maintain the electric distribution service within the City of Airdrie's rights-of-way.
While the financial results of Fortis include the financial results of FortisAlberta from June 1, 2004 only, certain of FortisAlberta's comparative financial data for the 3 months ended June 30, 2004 is provided below.
FortisAlberta's second quarter and year-to-date earnings were $14.7 million and $22.6 million, respectively. FortisAlberta's results for the second quarter include a $7.0 million positive net after-tax adjustment, associated with the resolution of tax-related matters resulting in the reduction of liabilities associated with prior periods, partially offset by amounts provided for the final settlement of billings related to prior years.
Revenue for the second quarter was favourably impacted by the reduction of liabilities associated with prior periods, the recording of the cumulative impact from January 1, 2005 through June 30, 2005 of the 2.1 per cent electricity rate increase associated with the Settlement and increased electricity sales revenue due to residential and industrial load growth, partially offset by amounts relating to the final settlement of billings related to prior periods. Electricity sales for the second quarter were 3,402 GWh compared to 3,223 GWh for the same quarter last year.
Operating expenses for the second quarter were favourably impacted, primarily due to the shifting of resources to capital projects to satisfy customer demand for new facilities and reduced external consultant costs. Amortization costs increased due to capital asset growth and the recording of the cumulative impact of the Settlement from January 1, 2005 through June 30, 2005 as a result of higher amortization rates.
Finance charges for the second quarter were favourably impacted by lower interest rates due to the repayment of higher cost loans upon close of the acquisition. Concurrent with the Company's purchase by Fortis on May 31, 2004, FortisAlberta borrowed $393 million on a short-term basis from a syndicate of Canadian chartered banks. These funds were used to repay amounts owed to the Company's former parent. The interest rate on the new debt was substantially less than the interest rate paid by FortisAlberta on the debt owed to its former parent. On October 25, 2004, FortisAlberta closed its $400 million public debenture offering equally divided between 5.33 per cent Senior Unsecured Debentures due October 31, 2014 and 6.22 per cent Senior Unsecured Debentures due October 31, 2034. The proceeds from this offering were used to repay FortisAlberta's short-term debt previously noted.
FortisBC (3)
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FortisBC
Financial Highlights (Unaudited)
Period Ended June 30th
---------------------------------------------------------------------
Quarter Year-to-date
---------------------------------------------------------------------
2005(4) 2004(3) 2005(4) 2004(3)
---------------------------------------------------------------------
Electricity Sales (GWh) 642 212 1,474 212
---------------------------------------------------------------------
($ millions)
---------------------------------------------------------------------
Revenue 44.1 12.4 99.5 12.4
---------------------------------------------------------------------
Energy Supply Costs 12.0 3.7 30.6 3.7
---------------------------------------------------------------------
Operating Expenses 15.9 4.5 32.0 4.5
---------------------------------------------------------------------
Amortization 4.7 1.4 9.3 1.4
---------------------------------------------------------------------
Finance Charges 4.2 1.4 8.8 1.4
---------------------------------------------------------------------
Corporate Taxes 1.9 0.6 4.5 0.6
---------------------------------------------------------------------
Earnings 5.4 0.8 14.3 0.8
---------------------------------------------------------------------
---------------------------------------------------------------------
(3) On May 31, 2004, Fortis completed the transaction to acquire
Aquila, Inc.'s 2 utilities in western Canada (renamed
FortisAlberta and FortisBC). Financial results for
FortisAlberta and FortisBC are since June 1, 2004 only.
Comparative figures for 2004 provided in the table above are for
the month of June 2004 only.
(4) On May 31, 2005, Fortis, through a wholly owned subsidiary,
acquired PLP. Financial results for PLP are only reported since
June 1, 2005.
On May 31, 2004, Fortis, through a wholly owned subsidiary, acquired all of the issued and outstanding shares of Aquila Networks Canada (British Columbia) Ltd. (renamed "FortisBC"). FortisBC is an integrated utility operating in the southern interior of British Columbia, serving directly and indirectly over 146,000 customers. FortisBC is regulated by the British Columbia Utilities Commission ("BCUC"). FortisBC's revenue and rates are based on traditional cost of service regulation. However, FortisBC is also subject to a performance-based rate mechanism that is used in establishing annual rate adjustments.
On May 31, 2005, the BCUC issued its decision on FortisBC's 2005 Revenue Requirement application approving a 3.4 per cent rate increase, effective January 1, 2005. This rate replaced the interim rate of 3.7 per cent. Due to the change in rates, approximately $0.25 million was accrued at June 30, 2005 and will be refunded to customers in the third quarter of 2005. The decision also approved a rate of return on equity of 9.43 per cent and the continuation of a common equity ratio of 40 per cent. FortisBC submitted its 2005 Capital Plan in the amount of $121.6 million, of which $117.3 was approved and $4.3 million is subject to further review and approval. FortisBC will file a Revenue Requirement application in fall 2005 to determine customer rates for 2006.
On May 31, 2005, Fortis, through a wholly owned subsidiary, acquired all issued common and preference shares of Princeton Light and Power Company, Limited ("PLP") for $3.7 million. PLP is an electric utility serving approximately 3,200 customers, mainly in Princeton, British Columbia. PLP presently purchases its wholesale power from FortisBC under a long-term contract. The financial results of PLP are included in the FortisBC segmented results and are only reported since June 1, 2005. The impact of PLP on second quarter earnings was negligible.
While the financial results of Fortis include the financial results of FortisBC from June 1, 2004 only, certain of FortisBC's comparative financial data for the 3 months ended June 30, 2004 is provided below.
FortisBC's second quarter and year-to-date earnings were $5.4 million and $14.3 million, respectively. Earnings were favourably impacted by higher electricity revenue and lower finance charges, partially offset by increased operating expenses and amortization costs.
Revenue for the second quarter was favourably impacted primarily due to increased heating loads caused by cooler weather, customer growth attributable to continued population growth in the Okanagan area, the final 3.4 per cent rate increase approved by the BCUC, effective January 1, 2005, and an increase in the amount accrued for unbilled revenue. Electricity sales for the second quarter were 642 GWh compared to 613 GWh for the same quarter last year.
Operating expenses for the second quarter were impacted by increased customer service and system maintenance activities and general inflationary increases, partially offset by a refund relating to a BC capital tax appeal. Amortization costs increased mainly due to growth in the capital asset base.
Finance charges for the second quarter were favourably impacted by lower interest rates and increased capitalized interest associated with large capital projects, despite increased borrowings in the first half of 2005 to finance FortisBC's significant capital expenditure program. The lower interest rates were due to lower cost public debt. In late 2004, FortisBC issued $140 million of public debentures at an interest rate of 5.48 per cent. This debt primarily replaced debt owed to the previous shareholder, which bore interest at a significantly higher rate.
REGULATED UTILITIES - CARIBBEAN (5)
---------------------------------------------------------------------
---------------------------------------------------------------------
Regulated Utilities - Caribbean
Financial Highlights (Unaudited)
Period Ended June 30th
---------------------------------------------------------------------
Quarter Year-to-date
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Average US Exchange Rate 1.24 1.36 1.24 1.34
---------------------------------------------------------------------
($ millions)
---------------------------------------------------------------------
Belize Electricity 1.9 2.4 2.8 3.5
---------------------------------------------------------------------
Caribbean Utilities -
Equity Income 3.1 2.2 5.6 4.1
---------------------------------------------------------------------
Earnings 5.0 4.6 8.4 7.6
---------------------------------------------------------------------
---------------------------------------------------------------------
(5) Regulated Utilities in the Caribbean include the operations of
Belize Electricity and the Corporation's 37.3 per cent equity
investment in Caribbean Utilities Company, Ltd.
Regulated Utilities - Caribbean earnings were $5.0 million for the
second quarter compared to $4.6 million for the same quarter last
year. The increase was primarily due to a $1.1 million positive
adjustment related to a change in Caribbean Utilities' accounting
practice for recognizing unbilled revenue. The increase was
partially offset by decreased earnings at Belize Electricity
primarily due to a decrease in other revenue and increased operating
expenses. Regulated Utilities - Caribbean earnings were $8.4 million
year to date compared to $7.6 million for the same period last year.
In addition to the $1.1 million adjustment at Caribbean Utilities,
year-to-date earnings increased due to the recovery in the first
quarter of fuel costs that were expensed following Hurricane Ivan,
partially offset by increased amortization and finance charges at
Belize Electricity. Both the earnings from Belize Electricity and
Caribbean Utilities were also impacted by the depreciation of the US
dollar relative to the Canadian dollar compared to the same periods
last year.
Belize Electricity
---------------------------------------------------------------------
---------------------------------------------------------------------
Belize Electricity
Financial Highlights (Unaudited)
Period Ended June 30th
---------------------------------------------------------------------
Quarter Year-to-date
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Electricity Sales (GWh) 92 85 168 157
---------------------------------------------------------------------
($ millions)
---------------------------------------------------------------------
Revenue 18.7 19.9 34.1 35.9
---------------------------------------------------------------------
Energy Supply Costs 10.0 10.2 18.1 18.5
---------------------------------------------------------------------
Operating Expenses 2.9 3.0 5.7 6.0
---------------------------------------------------------------------
Amortization 1.6 1.7 3.3 3.3
---------------------------------------------------------------------
Finance Charges 1.4 1.4 2.8 2.8
---------------------------------------------------------------------
Foreign Exchange Gain (0.2) (0.1) (0.4) (0.3)
---------------------------------------------------------------------
Corporate Taxes and
Non-controlling Interest 1.1 1.3 1.8 2.1
---------------------------------------------------------------------
Earnings 1.9 2.4 2.8 3.5
---------------------------------------------------------------------
---------------------------------------------------------------------
Belize Electricity's earnings for the second quarter were $1.9 million (BZ$3.0 million) compared to $2.4 million (BZ$3.4 million) for the same quarter last year. The decrease in earnings was primarily due to a decrease in other revenue and increased operating expenses, partially offset by the increase in the foreign exchange gain recognized on Belize Electricity's euro-denominated debt. Year-to-date earnings were $2.8 million (BZ$4.5 million) compared to $3.5 million (BZ$5.1 million) for the same period last year. The decrease in earnings was primarily related to increased amortization costs and finance charges. Second quarter and year-to-date earnings also decreased due to the impact of the depreciation of the US dollar relative to the Canadian dollar compared to the same periods last year.
Electricity sales for the second quarter were 92 GWh, 8.2 per cent higher than the same quarter last year. Year-to-date electricity sales were 168 GWh, 7.0 per cent higher than the first half of 2004. The increased electricity sales in both the residential and commercial segments were driven by economic growth.
Revenue for the second quarter was $18.7 million (BZ$30.0 million) compared to $19.9 million (BZ$29.1 million) for the same quarter last year. Excluding foreign exchange impacts, revenue increased 3.1 per cent compared to the same period last year. The increase was due to higher electricity sales, partially offset by a final reduction in electricity rates of BZ$0.01 per kWh, implemented in July 2004, and a decrease in other revenue. Year-to-date revenue was $34.1 million (BZ$55.1 million) compared to $35.9 million (BZ$53.3 million). Excluding foreign exchange impacts, revenue increased 3.4 per cent compared to the first half of 2004. The increase was due to higher electricity sales, partially offset by the final reduction of rates. Rates have been reduced by BZ$0.05 per kWh, equal to the commitment provided by Fortis when it acquired Belize Electricity in October 1999.
Energy supply costs for the second quarter were $10.0 million (BZ$16.1 million) compared to $10.2 million (BZ$14.9 million) for the same quarter last year. Year-to-date energy supply costs were $18.1 million (BZ$29.3 million) compared to $18.5 million (BZ$27.5 million) for the first half of 2004. Excluding foreign exchange impacts, the increase in energy supply costs was associated with higher electricity sales.
Operating expenses for the second quarter were $2.9 million (BZ$4.6 million) compared to $3.0 million (BZ$4.3 million) for the same quarter last year. Year-to-date operating expenses were $5.7 million (BZ$9.1 million) compared to $6.0 million (BZ$8.9 million) for the first half of 2004. Excluding foreign exchange impacts, operating expenses increased in the second quarter compared to the same quarter last year, primarily due to higher planned salary costs. Year to date, this increase was partially offset by the impact of management's focus on cost control and the timing of expenses in the first quarter of 2005.
Amortization costs and finance charges for the second quarter increased BZ$0.2 million and BZ$0.1 million, respectively. Year to date, amortization costs and finance charges each increased BZ$0.4 million. The increase in amortization costs and finance charges was directly related to continued investments in Belize Electricity's capital program. Additionally, short-term debt levels increased in the second quarter to help meet operational needs.
Belize Electricity is regulated by the Public Utilities Commission ("PUC") and electricity rates in Belize are comprised of 2 components. The first, Value Added Delivery, ("VAD"), is subject to price cap and the second is the cost of fuel and purchased power, including the variable cost of generation, which is a flow through in customer rates. Belize Electricity filed its first full Tariff Application on March 2, 2005 to establish a new 4-year VAD tariff setting arrangement. On April 18, 2005, the PUC delivered its initial Decision on the Tariff Application with respect to approval of regulated values, tariffs and other fees for the tariff period July 1, 2005 through June 30, 2009.
Belize Electricity's Tariff Application proposed an increase in rates of approximately 14 per cent, inclusive of recovery of its rate stabilization account, resulting in an increase in rates in the first year of the tariff period from BZ$0.349 per kWh to BZ$0.40 per kWh. In its initial Decision, the PUC approved an increase of 8.6 per cent resulting in rates of BZ$0.379 per kWh. Belize Electricity filed a written objection on the initial Decision, which resulted in the appointment by the PUC of an independent consultant to review the initial Decision. On July 14, 2005 the PUC delivered its final Decision approving an increase in rates of 11 per cent, inclusive of recovery of the rate stabilization account balance, as at June 30, 2005, to BZ$0.39 per kWh. The increase is effective July 1, 2005 and applies to the first 3 years of the 4-year tariff period. In the fourth year, the rate decreases to BZ$0.377 per kWh.
Caribbean Utilities
---------------------------------------------------------------------
---------------------------------------------------------------------
Caribbean Utilities
Financial Highlights (Unaudited)
Period Ended June 30th
---------------------------------------------------------------------
Quarter Year-to-date
---------------------------------------------------------------------
($ millions) 2005 2004 2005 2004
---------------------------------------------------------------------
Equity Income 3.1 2.2 5.6 4.1
---------------------------------------------------------------------
---------------------------------------------------------------------
Fortis accounts for its 37.3 per cent interest in Caribbean Utilities on an equity basis. Equity earnings are recorded on a lag basis and, therefore, the quarterly earnings noted above represent the Corporation's share of Caribbean Utilities' earnings for its fourth quarters ended April 30, 2005 and April 30, 2004.
This quarter was Caribbean Utilities' second quarter post-Hurricane Ivan. Caribbean Utilities and the Cayman Islands are continuing to recover from the impact of Hurricane Ivan. Approximately 95 MW, or 77 per cent of pre-Ivan capacity, have been recovered as of June 2005, with an additional 5.7 MW expected to be recovered shortly and an additional 16.8 MW to be recovered by December 15, 2005. The addition of an 8.4-MW gas turbine unit has also been contracted for standby purposes. These combined efforts will return total capacity to 120 MW by summer 2006 compared to 123 MW pre-Ivan.
Equity income for the second quarter was $3.1 million compared to $2.2 million for the same quarter last year. The increase was primarily due to a $1.1 million positive adjustment related to a change in Caribbean Utilities' accounting practice for recognizing unbilled revenue, partially offset by the impact of the depreciation of the US dollar relative to the Canadian dollar compared to the same quarter last year. While Caribbean Utilities recorded a positive US$2.5 million (CDN $3.0 million) retroactive adjustment to its April 30, 2004 retained earnings, Fortis recorded its 37.3 per cent share, or $1.1 million, in 2005 second quarter earnings. Excluding the $1.1 million adjustment and foreign exchange impact, equity earnings increased slightly over the same quarter last year, primarily due to the reduction of Hurricane Ivan loss estimates recorded by Caribbean Utilities in its fourth quarter.
Year to date, equity income was $5.6 million compared to $4.1 million for the same period last year. In addition to the factors described for the second quarter, equity income also increased due to the recovery in the first quarter of 2005 of fuel costs that were expensed following Hurricane Ivan.
The economy of Grand Cayman continues to show moderate but steady improvement post Hurricane Ivan. Although Caribbean Utilities has business interruption insurance, with a 24-month indemnity period, the Company's recovery is intrinsically tied to the recovery of the Grand Cayman economy.
Caribbean Utilities has made a claim for its business interruption loss. Typically, the ultimate recovery under a business interruption policy is judgmental and subject to negotiations between the insured and the insurance company. Caribbean Utilities filed a US$3.6 million claim for business interruption loss for its fourth quarter for a total claim of US$8.1 million for fiscal 2005. The business interruption calculation methodology has now been agreed with the insurance adjustors that will facilitate the monthly calculation of the business interruption claims.
Caribbean Utilities submitted a proposal to the Cayman Islands Government ("Government") in July 2002 to extend its current License and replace the 15 per cent return on rate base mechanism for adjusting customer rates with a price cap mechanism. The non-binding tentative agreement signed by Caribbean Utilities and the Government in June 2004 expired following Hurricane Ivan. The Government recently enacted the Electricity Regulatory Authority Bill (the "ERA Bill") which purports to establish a new regulatory and licensing regime for the electricity industry in the Cayman Islands. The Company is currently assessing the ERA Bill to determine its potential impact on Caribbean Utilities' contractual rights under its existing Licence with the Government. The current Licence is still in effect and is scheduled to expire in January 2011. The Government, the Electrical Regulatory Authority and Caribbean Utilities have agreed to recommence discussions in a couple of months regarding any new licence or licences that may be granted to Caribbean Utilities.
Upon submitting its Final Return for its 2005 fiscal year end to Government on July 21, 2005, Caribbean Utilities determined that, under its current License, it is permitted a rate increase of 9.5 per cent, effective August 1, 2005, as a result of substantial costs incurred from Hurricane Ivan. As such an increase would not be in the best interest of Grand Cayman and its residents, the Government and Caribbean Utilities have agreed on a Cost Recovery Surcharge ("CRS") of 0.749 cents per kWh for each kWh of electricity consumed by the customer. This represents an increase in base rates of 4.68 per cent, less than half of the 9.5 per cent permitted under the Licence. The CRS is effective for August 2005 billings for a period of approximately 3 years. It has also been agreed with the Government that there will be a freeze on basic billing rates during this 3-year period and no retroactive increases in billing rates is permitted after the CRS has been fully recovered. Caribbean Utilities has uninsured hurricane losses of US$14.0 million. After discussions with Government, Caribbean Utilities agreed to absorb a further US$0.5 million of these losses leaving US$13.5 million to be recovered through the CRS. In total, Caribbean Utilities has agreed to absorb US$3.6 million of additional costs associated with Hurricane Ivan which will not be recovered from customer rates.
NON-REGULATED - FORTIS GENERATION (6)
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-Regulated - Fortis Generation
Financial Highlights (Unaudited)
Period Ended June 30th
---------------------------------------------------------------------
---------------------------------------------------------------------
Quarter Year-to-date
---------------------------------------------------------------------
Energy Sales (GWh) 2005 2004 2005 2004
---------------------------------------------------------------------
Central Newfoundland 48 41 83 60
---------------------------------------------------------------------
Ontario 176 177 360 363
---------------------------------------------------------------------
Belize 7 11 14 26
---------------------------------------------------------------------
British Columbia (6) 11 6 16 6
---------------------------------------------------------------------
Upper New York State 16 22 33 37
---------------------------------------------------------------------
Total 258 257 506 492
---------------------------------------------------------------------
---------------------------------------------------------------------
Quarter Year-to-date
---------------------------------------------------------------------
($ millions) 2005 2004 2005 2004
---------------------------------------------------------------------
Revenue 19.2 17.0 36.2 33.7
---------------------------------------------------------------------
Energy Supply Costs 1.8 1.2 3.6 2.8
---------------------------------------------------------------------
Operating Expenses 4.4 3.8 9.3 8.0
---------------------------------------------------------------------
Amortization 2.5 2.5 5.1 5.0
---------------------------------------------------------------------
Finance Charges 4.0 3.8 7.9 7.6
---------------------------------------------------------------------
Gain on settlement of
contractual matters - - (10.0) -
---------------------------------------------------------------------
Corporate Taxes 2.4 2.1 5.9 4.0
---------------------------------------------------------------------
Non-controlling
Interest 0.9 0.4 1.2 0.2
---------------------------------------------------------------------
Earnings 3.2 3.2 13.2 6.1
---------------------------------------------------------------------
---------------------------------------------------------------------
(6) Fortis Generation includes the operations of non-regulated
generating assets in central Newfoundland, Ontario, British
Columbia, Belize and Upper New York State. The British Columbia
energy sales represent energy sales from the 16-MW run-of-river
Walden hydroelectric power plant, which was acquired on May 31,
2004 as part of FortisBC.
Earnings from the Non-regulated - Fortis Generation segment were $3.2
million for the second quarter, comparable to the same quarter last
year. Year-to-date earnings were $13.2 million compared to $6.1
million for the first half of 2004. The increase in earnings was
primarily due to a $7.9 million after-tax gain resulting from the
settlement of contractual matters between FortisOntario and OPGI.
Excluding this after-tax gain, earnings year to date were $5.3
million compared to $6.1 million for the first half of 2004. The
decrease in earnings was primarily associated with lower production
in Belize, as a result of lower rainfall levels, partially offset by
the impact of higher wholesale energy prices in Ontario and higher
production in central Newfoundland.
Generation revenue for the second quarter was $19.2 million compared
to $17.0 million for the same quarter last year. Generation revenue
increased primarily due to higher wholesale energy prices in Ontario.
For the second quarter, the average wholesale energy price in Ontario
was $60.24 per megawatt hour ("MWh") compared to $46.89 per MWh hour
for the same quarter last year. Year-to-date generation revenue was
$36.2 million compared to $33.7 million for the first half of 2004.
The increase was primarily due to increased production in central
Newfoundland and higher wholesale energy prices in Ontario, partially
offset by lower hydroelectric production in Belize due to lower
rainfall levels.
Operating expenses for the second quarter were $4.4 million compared
to $3.8 million for the same quarter last year. Year-to-date
operating expenses were $9.3 million compared to $8.0 million for the
first half of 2004. The increase was primarily related to an
increase in water right fees and business development costs in
Ontario.
The Chalillo dam was substantially completed during the quarter and
became operational on July 12, 2005. The 7-MW generating unit at the
dam is scheduled for completion by the end of 2005. The US$30
million development is an upstream storage and hydroelectric
generating facility that is expected to increase average annual
energy production from the Macal River by approximately 90 GWh.
Operations in Upper New York State include the operations of the
Dolgeville unit, which went out of service late January 2005 as a
result of flooding. The Dolgeville unit is expected to be operational
late 2005 and business interruption insurance is expected to mitigate
revenue lost during the period of non-operation.
NON-REGULATED - FORTIS PROPERTIES
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-Regulated - Fortis Properties
Financial Highlights (Unaudited)
Period Ended June 30th
---------------------------------------------------------------------
Quarter Year-to-date
---------------------------------------------------------------------
($ millions) 2005 2004 2005 2004
---------------------------------------------------------------------
Real Estate Revenue 13.3 13.3 26.5 26.3
---------------------------------------------------------------------
Hospitality Revenue 27.5 21.4 47.3 38.6
---------------------------------------------------------------------
Total Revenue 40.8 34.7 73.8 64.9
---------------------------------------------------------------------
Operating Expenses 25.2 21.5 48.1 42.8
---------------------------------------------------------------------
Amortization 2.8 2.3 5.3 4.7
---------------------------------------------------------------------
Finance Charges 4.7 4.7 9.6 9.3
---------------------------------------------------------------------
Corporate Taxes 3.3 2.5 4.4 3.4
---------------------------------------------------------------------
Earnings 4.8 3.7 6.4 4.7
---------------------------------------------------------------------
---------------------------------------------------------------------
Fortis Properties' earnings for the second quarter were $4.8 million
compared to $3.7 million for the same quarter last year. Year-to-date
earnings were $6.4 million compared to $4.7 million for the same
period last year. Higher earnings from operations, including
contributions from the 3 hotels acquired in western Canada in
February 2005 and the expanded Delta St. John's Hotel operations,
primarily contributed to the increase. The $15 million expansion to
the Delta St. John's Hotel was completed June 1, 2005, 1 month ahead
of schedule, and resulted in the addition of 128 rooms and
approximately 5,000 square feet of meeting space.
Real estate revenue for the second quarter was $13.3 million,
comparable to the same quarter last year. Year-to-date real estate
revenue was $26.5 million compared to $26.3 million for the first
half of 2004. The occupancy level in the Real Estate Division was
95.3 per cent at June 30, 2005 compared to 95.1 per cent at June 30,
2004.
Hospitality revenue for the second quarter was $27.5 million, up $6.1
million from $21.4 million for the same quarter last year. Year-to-
date hospitality revenue was $47.3 million, up $8.7 million from
$38.6 million for the first half of 2004. Revenue per available room
("REVPAR") for the second quarter was $76.58 compared to $75.36 for
the same quarter last year. The 1.6 per cent increase in REVPAR was
attributable to increases in both average room rate and occupancy
level compared to the same quarter last year.
The increase in revenue, operating expenses and amortization for the
quarter and year to date was primarily due to the 3 hotels acquired
in February 2005 and the expanded operations of the Delta Hotel St.
John's.
Fortis Properties has commenced a $7.0 million expansion of the
Holiday Inn Sarnia, which is scheduled for completion in the first
half of 2006. In July 2005, Fortis Properties received approval from
the Greater Moncton Planning Commission for a $7.1 million, 55,000
leaseable square foot expansion to the Blue Cross Centre in Moncton.
Approximately half of the proposed expansion space is pre-leased.
Fortis Properties is also planning an estimated $2.5 million
expansion to the catering and conference facilities at the Holiday
Inn Kitchener, which will increase rentable banquet and catering
space from 7,800 square feet to 13,300 square feet.
CORPORATE
---------------------------------------------------------------------
---------------------------------------------------------------------
Corporate
Financial Highlights (Unaudited)
Period Ended June 30th
---------------------------------------------------------------------
Quarter Year-to-date
---------------------------------------------------------------------
($ millions) 2005 2004 2005 2004
---------------------------------------------------------------------
Total Revenue 2.6 2.4 5.2 4.4
---------------------------------------------------------------------
Operating Expenses 3.1 1.7 5.3 3.9
---------------------------------------------------------------------
Amortization 0.7 0.2 1.4 0.4
---------------------------------------------------------------------
Finance Charges 5.6 3.9 11.6 6.3
---------------------------------------------------------------------
Foreign Exchange Loss 1.2 - 1.8 -
---------------------------------------------------------------------
Corporate Taxes (2.4) (1.1) (4.7) (4.0)
---------------------------------------------------------------------
Preference Share
Dividends 4.1 2.3 8.3 4.4
---------------------------------------------------------------------
Non-controlling Interest (0.1) - (0.1) (0.1)
---------------------------------------------------------------------
Net Corporate Expenses (9.6) (4.6) (18.4) (6.5)
---------------------------------------------------------------------
---------------------------------------------------------------------
The Corporate segment captures a number of expense and revenue items
not specifically related to any operating segment. Included in the
Corporate segment are finance charges related to debt incurred
directly by Fortis, including foreign exchange gains or losses,
preference share dividends, other corporate expenses net of
recoveries from subsidiaries, miscellaneous revenues and corporate
income taxes.
Net corporate expenses for the second quarter totaled $9.6 million,
$5.0 million higher than the same quarter last year. Year-to-date net
corporate expenses totaled $18.4 million, $11.9 million higher
compared to the first half of 2004. The increase primarily related to
higher operating expenses, financing charges, including amortization
of deferred acquisition financing costs, foreign exchange loss and
preference share dividends. Operating expenses increased partly due
to increased salary expense and certain non-recurring acquisition
expenses. The increased financing charges related to the purchase of
FortisAlberta and FortisBC on May 31, 2004. On January 29, 2004,
Fortis issued 4.9 per cent First Preference Units which were
subsequently converted to 4.9 per cent Series E First Preference
Shares in the last half of 2004. On October 28, 2004, Fortis issued
US$150 million 10-year 5.74 per cent Senior Unsecured Notes due
October 31, 2014. During the second quarter, Fortis also recorded a
$1.0 million after-tax unrealized foreign exchange loss ($1.5 million
year to date) related to foreign currency exchange rate fluctuations
associated with US$75 million of the Corporation's US-denominated
long-term debt.
Year-to-date net corporate expenses for 2004 were also positively
impacted as Fortis recorded a $1.8 million corporate income tax
recovery related to the tax benefit associated with non-capital
losses.
CONSOLIDATED FINANCIAL POSITION
The following table outlines the significant changes in the
consolidated balance sheets between June 30, 2005 and December 31,
2004.
Increase
Balance Sheet Item (Decrease) Explanation
($millions)
---------------------------------------------------------------------
---------------------------------------------------------------------
Cash and cash equivalents (10.4) The decrease primarily related
to the repayment of the $22.5
million term loan by
FortisOntario offset by the
$10 million (pre-tax) OPGI
settlement.
Accounts receivable 13.8 The increase primarily related
to timing of refunds to
customers at FortisAlberta, an
increase at Newfoundland Power
related to interest receivable
on the tax settlement with CRA
and normal seasonal sales
variances across the
subsidiaries.
Future income tax assets 51.8 The increase primarily related
(long-term) to the recognition of future
income taxes as a result of
the change in the regulatory
tax methodology at
FortisAlberta.
Utility capital assets 105.3 The increase related to $189.2
million invested in
electricity systems less
contributions and amortization
for the 6-month period.
Income producing properties 69.3 On February 1, 2005, Fortis
Properties acquired 3 hotels
located in western Canada for
$62.6 million. The remaining
increase primarily related to
the expansion of the Delta St.
John's Hotel.
Short-term borrowings (54.7) The decrease primarily related
to the repayment of short-term
borrowings at the Corporate
level with proceeds from the
common share issuance and
replacement of short-term
facilities at FortisBC with
long-term committed
facilities, partially offset
by higher short-term
borrowings at Newfoundland
Power, FortisAlberta, Maritime
Electric and Belize
Electricity primarily to fund
utility capital expenditure
programs.
Accounts payable and (18.1) The decrease primarily related
accrued charges to the normal seasonal
reduction of purchased power
costs at Newfoundland Power as
well as the timing of
purchased power payments at
Belize Electricity.
Other regulatory liabilities 38.9 The increase primarily
consisted of a regulatory
liability associated with the
future income tax asset
increase at FortisAlberta
partially offset by a decrease
of regulatory liabilities
relating to prior periods and
a decrease in deferrals
relating to Alberta Electrical
System Operator contributions,
distribution riders and
interchange and transmission
costs.
Long-term debt (including 73.0 In March 2005, Fortis
current portion) Properties completed a 5.1 per
cent 5-year $29.6 million
financing of the Edmonton and
Calgary Greenwood Inns
acquired in February 2005. In
April 2005, Fortis Properties
completed a 5.35 percent
5-year $12.3 million financing
of the Winnipeg Greenwood Inn
that was also acquired in
February 2005.
FortisBC and FortisAlberta
drew down $44.8 million and
$10.0 million, respectively,
under long-term committed
facilities associated with the
interim financing of each
subsidiary's respective
capital programs. These
borrowing facilities have a
3-year term and will mature in
May 2008. These borrowings
will likely be replaced with
long-term permanent financing
in future periods.
Belize Electricity and the
Exploits Partnership also drew
down approximately $1.1
million and $0.1 million,
respectively, on their
existing facilities.
Also contributing to the
increase was $4.0 million in
debt assumed on the
acquisition of PLP on May 31,
2005 and the impact of the
translation of the
Corporation's US-denominated
debt at a higher foreign
exchange rate at June 30, 2005
compared to December 31, 2004.
These increases were partially
offset by regular debt
repayments during the 6-month
period. Additionally, during
the second quarter,
FortisOntario repaid its $22.5
million term loan due in 2007.
Shareholders' equity 182.5 The increase primarily related
to the issuance of 1.74
million common shares of the
Corporation in the first
quarter which resulted in
gross proceeds of $129.9
million. The remainder of the
increase primarily related to
the net earnings reported for
the 6-month period less common
share dividends.
LIQUIDITY AND CAPITAL RESOURCES
The following table outlines the summary of cash flow.
---------------------------------------------------------------------
---------------------------------------------------------------------
Fortis Inc.
Summary of Cash Flow (Unaudited)
Period Ended June 30th
---------------------------------------------------------------------
Quarter Year-to-date
---------------------------------------------------------------------
($ millions) 2005 2004 2005 2004
---------------------------------------------------------------------
Cash, beginning of
period 64.2 44.8 37.2 65.1
---------------------------------------------------------------------
Cash provided by (used
in)
---------------------------------------------------------------------
Operating activities 49.9 48.2 129.2 70.1
---------------------------------------------------------------------
Investing activities (97.7) (800.8) (246.9) (828.8)
---------------------------------------------------------------------
Financing activities 10.4 758.2 107.2 743.7
---------------------------------------------------------------------
Foreign currency
impact on cash
balances - 0.7 0.1 1.0
---------------------------------------------------------------------
Cash, end of period 26.8 51.1 26.8 51.1
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating Activities: Cash flow from operations, after working
capital adjustments, was $49.9 million for the second quarter, up
$1.7 million from $48.2 million for the same quarter last year. The
increase primarily related to operating cash flows contributed from
FortisAlberta and FortisBC and favourable working capital changes at
Maritime Electric and Fortis Properties, partially offset by the
impact of the timing of purchase power payments and recovery of fuel
costs at Belize Electricity and the impact of higher corporate
finance charges associated with the acquisition of FortisAlberta and
FortisBC compared to the same quarter last year.
Year-to-date cash flow from operations, after working capital
adjustments, was $129.2 million, up $59.1 million from $70.1 million
for the same period last year. Operating cash flows from
FortisAlberta and FortisBC contributed $51.3 million to this
increase. Year-to-date operating cash flows also increased primarily
due the gain on the OPGI settlement, favourable working capital
changes at Maritime Electric and Fortis Properties, the impact of
increased wholesale energy prices in Ontario and higher hydroelectric
production in central Newfoundland. These increases were partially
mitigated by the impact of the timing of purchase power payments and
recovery of fuel costs at Belize Electricity, reduced hydroelectric
production resulting from lower rainfall in Belize, the timing of
payments at Newfoundland Power and the impact of higher corporate
finance charges associated with the acquisition of FortisAlberta and
FortisBC.
Investing Activities: Cash used in investing activities was $97.7
million, down $703.1 million from the second quarter last year. Year
to date, cash used in investing activities was $246.9 million, down
$581.9 million from the same period last year. The decrease was
primarily due to a decrease in cash used in business acquisitions,
partially offset by increased utility and income producing capital
expenditures.
During the second quarter of 2004, Fortis acquired FortisAlberta and
FortisBC and purchased the remaining 5 per cent interest in BECOL.
During the second quarter of 2005, Fortis, through a wholly owned
subsidiary, acquired all issued common and preference shares of PLP
for a purchase price of $3.7 million, paid by $3.3 million in cash
and $0.4 million in common shares of Fortis.
Utility capital expenditures were $97.8 million compared to $45.3
million for the same quarter last year. Year to date, utility capital
expenditures were $189.2 million compared to $72.0 million for the
same period last year. The increase in utility capital expenditures
primarily related to capital spending at FortisAlberta and FortisBC.
In addition, Maritime Electric is currently constructing a new $35
million 50-MW generating facility on Prince Edward Island and
construction was substantially completed on the US$30 million
Chalillo Project in Belize in the second quarter of 2005.
Capital expenditures associated with income producing properties were
$6.8 million compared to $5.8 million for the same quarter last year.
Year-to-date capital expenditures were $74.2 million compared to $7.1
million for the same period last year. The increase primarily
related to the acquisition of 3 hotels in western Canada for $62.6
million in February 2005 and the completion of the $15 million
expansion of the Delta St. John's Hotel in June 2005.
During the second quarter, approximately $11.8 million was received
in contributions in aid of construction compared to $1.1 million for
the same quarter last year. Year-to-date contributions in aid of
construction were $22.7 million compared to $1.9 million for the same
period last year. The increase primarily related to contributions
associated with capital programs of FortisAlberta and FortisBC.
Financing Activities: Cash provided from financing activities in the
second quarter was $10.4 million compared to $758.2 million for the
second quarter last year. Year to date, cash provided from financing
activities was $107.2 million compared to $743.7 million for the
first half of 2004. The cash from financing activities for the first
half of 2004 primarily related to the financing of the acquisition of
FortisAlberta and FortisBC, net of regular repayment of long-term
debt and payment of common share dividends.
During the second quarter, FortisBC and FortisAlberta drew down $44.8
million and $10.0 million, respectively, under long-term committed
facilities associated with the interim financing of each subsidiary's
respective capital programs. These borrowing facilities have a 3-year
term and mature in May 2008. These borrowings will likely be replaced
with long-term permanent financing in future periods. Belize
Electricity drew down approximately $0.4 million on its existing
facilities with $1.1 million drawn year to date. In April 2005,
Fortis Properties completed a 5.35 per cent 5-year $12.3 million loan
related to the February 1, 2005 acquisition of the Winnipeg Greenwood
Inn. This loan was in addition to the 5.1 per cent 5-year $29.6
million loan related to the financing of the Edmonton and Calgary
Greenwood Inns completed in the first quarter. FortisOntario also
repaid its $22.5 million term loan in the second quarter.
Year to date, cash provided from financing activities included the
issuance of 1.74 million common shares of the Corporation, which
resulted in net proceeds of $123.9 million. The remaining financing
activities primarily related to change in short-term borrowings and
regular repayment of long-term debt and payment of common share
dividends.
Contractual Obligations: The consolidated contractual obligations
over the next 5 years and for periods thereafter are outlined in the
following table.
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Fortis Inc.
Contractual Obligations (Unaudited)
as at June 30th, 2005
---------------------------------------------------------------------
less greater
than than
($ millions) Total 1 year 1-3 years 4-5 years 5 years
---------------------------------------------------------------------
Long-term Debt 1,983.1 30.6 148.1 124.0 1,680.4
---------------------------------------------------------------------
Capital Lease
Obligations 4.6 1.4 2.3 0.9 -
---------------------------------------------------------------------
Power Purchase
Obligations
FortisBC (1) 2,958.5 31.0 100.5 53.0 2,774.0
FortisOntario (2) 355.6 21.5 64.5 45.9 223.7
Maritime
Electric (3) 13.8 12.2 1.6 - -
---------------------------------------------------------------------
Capital Cost (4) 206.0 15.7 43.3 25.4 121.6
---------------------------------------------------------------------
Brilliant Terminal
Station
("BTS") (5) 67.6 2.3 7.1 4.7 53.5
---------------------------------------------------------------------
Joint-use Asset
Agreements (6) 48.8 3.7 6.7 6.0 32.4
---------------------------------------------------------------------
Operating Lease
Obligations (7) 35.7 6.6 13.8 10.5 4.8
---------------------------------------------------------------------
Office Lease -
FortisBC (8) 22.2 0.9 3.1 2.4 15.8
---------------------------------------------------------------------
Other 1.9 0.6 0.1 0.1 1.1
---------------------------------------------------------------------
Total 5,697.8 126.5 391.1 272.9 4,907.3
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Power purchase obligations of FortisBC include the Brilliant
Power Purchase Contract as well as Firm Power Purchase Contracts.
On May 3, 1996, an Order was granted by the BCUC approving a 60-
year power purchase contract for the output of the Brilliant
hydroelectric plant located near Castlegar, BC. The Brilliant
plant is owned by the Brilliant Power Corporation ("BPC"), a
corporation owned as to 50 per cent by each of the Columbia Power
Corporation and the Columbia Basin Trust. FortisBC operates and
maintains the Brilliant plant for the BPC in return for a
management fee. The contract requires fixed monthly payments
based on specified natural flow take-or-pay amounts of energy.
The contract includes a market-related price adjustment after 30
years of the 60-year term. In addition, FortisBC has a long-term
minimum-payment firm power purchase contract with BC Hydro. This
contract includes a take-or-pay provision based on a 5-year
rolling nomination of capacity requirements.
(2) Power purchases for FortisOntario primarily include a long-term
contract with 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.
(3) Maritime Electric has one take-or-pay contract for the purchase
of either capacity or energy. The obligation is subjected to
force majeure provisions that impact the ability of the supplier
to deliver or Maritime Electric to receive the energy contracted.
This contract totals approximately $20 million through October
2006.
(4) 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.
(5) On July 15, 2003, the utility in B.C. began leasing the use of
the BTS under a 30-year lease. The lease provides that FortisBC
will pay the Brilliant Joint Venture a charge related to the
recovery of the capital cost of the BTS and related operating
costs.
(6) FortisAlberta and an Alberta transmission provider have entered
into a number of service agreements to ensure operational
efficiencies are maintained through coordinated operations. The
agreements have minimum expiry terms of 20 years and are subject
to extension based on mutually agreeable terms.
(7) Operating lease obligations include certain office, vehicle, and
equipment leases as well as the lease of electricity distribution
assets of Port Colborne Hydro Inc.
(8) Under a sale-leaseback agreement, on September 29, 1993, the
utility in B.C. began leasing its Trail, BC office building for a
term of 30 years. The terms of the agreement grant FortisBC
repurchase options at year 20 and year 30 of the lease term. On
December 1, 2004, FortisBC also entered into a 5-year lease for
the Kelowna head office. The terms of the lease allow for
termination without penalty after 3 years.
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CAPITAL RESOURCES
The Corporation's principal business of regulated electric utilities
requires Fortis to have ongoing access to capital to allow it to
build and maintain the electricity systems in its service
territories. In order to ensure access to capital is maintained, the
Corporation targets a long-term capital structure that includes a
minimum of 40 per cent equity and 60 per cent debt as well as
investment grade credit ratings. The Corporation targets the equity
component of its capital structure to consist of at least 75 per cent
common share equity. The capital structure of Fortis is presented in
the following table.
Capital Structure June 30, 2005 December 31, 2004
($ millions) (%) ($ millions) (%)
---------------------------------------------------------------------
Total Debt (net
of cash) 2,099.1 58.3 2,070.3 61.1
Equity Preference
Shares 319.5 8.9 319.5 9.4
Shareholders' Equity 1,182.6 32.8 1,000.1 29.5
---------------------------------------------------------------------
Total 3,601.2 100.0 3,389.9 100.0
---------------------------------------------------------------------
The improvement in the Corporation's capital structure is primarily
the result of the issuance of 1.7 million common shares of the
Corporation for net after-tax proceeds of $126.1 million. The
proceeds were used to repay outstanding short-term indebtedness and
for general corporate purposes, including capital expenditures. The
Corporation also reported net earnings less common share dividends of
$48.1 million for the first half of 2005.
As at June 30, 2005, the Corporation's credit ratings were as
follows:
Standard & Poors ("S&P") BBB(+)
Dominion Bond Rating Service ("DBRS") BBB (high)
In December 2004, S&P confirmed its corporate credit rating on the
Corporation at BBB(+). S&P is maintaining a negative outlook on
Fortis reflecting the Corporation's financial profile combined with
execution risks associated with a large capital expenditure program.
In January 2005, DBRS confirmed the rating on the Corporation's bonds
at BBB (high). Fortis will continue to update both S&P and DBRS on
the progress of the integration of FortisAlberta and FortisBC.
Capital Program: The Corporation's principal business of regulated
electric utilities is capital intensive. Utility capital expenditures
for 2005 are expected to be approximately $400 million of which
$189.2 million has been incurred year to date.
The Corporation's utility capital assets are expected to grow at an
average annual rate of 6 per cent for the next 5 years. The
significant capital programs at FortisAlberta and FortisBC are the
primary drivers for this expected growth. The cash needed to complete
the capital programs is expected to be supplied by a combination of
long-term and short-term borrowings, internally generated funds and
common share issuances. Fortis does not anticipate any issues with
accessing the required capital.
Cash Flows: The Corporation's ability to service debt obligations as
well as dividends on its common 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 outlined in Note 9 to the Fortis Inc. consolidated audited
financial statements for the year ended December 31, 2004, Belize
Electricity remains non-compliant with its debt service coverage
ratio related to its BZ$11.8 million loan with the International Bank
for Reconstruction and Development ("IBRD"). The IBRD has
acknowledged this non-compliance and has encouraged the Company to
continue to improve its debt service ratio. Fortis does not expect
any change in the regular debt repayment schedule relating to this
loan.
The Walden Power Partnership ("WPP") was not in compliance with its
debt service ratio of 1.2 times as required by the loan covenant
related to a $6.4 million mortgage. Compliance with the debt service
covenant is required at the end of each fiscal year. Fortis does not
expect any change in the regular debt repayment schedule relating to
this mortgage.
The Corporation and its subsidiaries had consolidated authorized
lines of credit of $747.1 million of which $478.9 million was unused
at June 30, 2005. The following summary outlines the Corporation's
credit facilities by reporting segments.
Credit Facilities Regulated Fortis Fortis
($ millions) Corporate Utilities Generation Properties Total
---------------------------------------------------------------------
---------------------------------------------------------------------
Total credit
facilities 210.0 516.5 8.1 12.5 747.1
Utilized at
June 30, 2005 (2.6) (185.3) (2.8) (2.3) (193.0)
Letters of credit
outstanding (4.9) (67.7) - (2.6) (75.2)
---------------------------------------------------------------------
Credit facilities
available 202.5 263.5 5.3 7.6 478.9
---------------------------------------------------------------------
Certain borrowings under the Corporation's credit facilities have
been classified as long-term debt. These borrowings are under long-
term credit facilities and Management's intention is to refinance
these borrowings with long-term permanent financing during future
periods. The following summary outlines the balance sheet
classification as at June 30, 2005 of the Corporation's utilized
credit facilities by reporting segments.
Credit Facilities Regulated Fortis Fortis
($ millions) Corporate Utilities Generation Properties Total
---------------------------------------------------------------------
---------------------------------------------------------------------
Short-term
borrowings 2.6 130.5 2.8 2.3 138.2
Long-term debt - 54.8 - - 54.8
---------------------------------------------------------------------
Total credit
facilities
utilized 2.6 185.3 2.8 2.3 193.0
---------------------------------------------------------------------
In January 2005, Fortis entered into a $50 million unsecured
revolving/non-revolving term credit facility for its general
corporate purposes, including acquisitions. Fortis also entered into
a $15 million demand facility.
In January 2005, Newfoundland Power cancelled its $110 million
uncommitted lines of credit and entered into a syndicated $100
million committed revolving term credit facility and a $20 million
uncommitted demand facility.
In January 2005, Maritime Electric entered into a $25 million non-
revolving unsecured short-term bridge financing, due January 2006, to
support the construction of the 50-MW generating facility.
In May 2005, Fortis renegotiated its $145 million unsecured
revolving/non-revolving term credit facility to a $145 million
unsecured revolving term credit facility that matures in May 2008.
This facility can be used for general corporate purposes, including
acquisitions.
In May 2005, FortisAlberta renegotiated its $100 million unsecured
revolving/non-revolving term credit facility to a $150 million
unsecured revolving term credit facility that matures in May 2008.
In May 2005, FortisBC renegotiated its $100 million unsecured
revolving/non-revolving term credit facility to a $100 million
unsecured revolving term credit facility that matures in May 2008.
Additionally, in May 2005 FortisBC entered into a $50 million
unsecured revolving/non-revolving credit facility.
OFF-BALANCE SHEET ARRANGEMENTS
Disclosure is required of all 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. The Corporation had no such off-balance sheet
arrangements as at June 30, 2005.
BUSINESS RISK MANAGEMENT
The Corporation's significant business risks are regulation, the
integration of FortisAlberta and FortisBC, use of derivative
instruments and hedging, energy prices, weather and general economic
conditions, loss of service territory, environmental, insurance,
labour relations and liquidity risks. The geographic and regulatory
diversity of the Corporation's operations mitigate the significance
of any single business risk. There were no material changes to the
Corporation's significant business risks during the quarter from
those disclosed in the 2004 Management Discussion and Analysis for
the year ended December 31, 2004 except that regulation risk for 2005
has been reduced due to recent regulatory decisions and negotiations
in FortisAlberta, FortisBC, Maritime Electric, Belize Electricity and
Caribbean Utilities. The risk associated with the integration of
FortisAlberta and FortisBC has also lessened with the separation of
operations at the 2 companies nearing completion with most key
executive team members appointed and established.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Corporation's unaudited interim consolidated
financial statements in accordance with Canadian GAAP requires
management to make estimates and assumptions 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 period.
Estimates are based on historical experience, current conditions and
various other assumptions believed to be reasonable under the
circumstances. Changes in facts and circumstances may result in
revised estimates and actual results could differ from those
estimates. There were no material changes to the Corporation's
critical accounting estimates during the quarter from those disclosed
in the 2004 Management Discussion and Analysis for the year ended
December 31, 2004 except as discussed below. Interim financial
statements may employ a greater use of estimates than the annual
financial statements.
Contingencies: Fortis is a party to a number of disputes and
lawsuits in the normal course of business. Contingent liabilities as
of June 30, 2005 are consistent with disclosures in the 2004 Fortis
Inc. Annual Consolidated Financial Statements except as noted below:
In 2002, CRA confirmed a 2000 reassessment related to the
Newfoundland Power's 1993 taxation year, which included in income the
value of electricity consumed in December 1993 but not billed until
January 1994. Newfoundland Power's practice has been to record
revenue on a billed basis. This method has been audited and accepted
previously by CRA and is in accordance with regulatory requirements.
During the second quarter, Newfoundland Power entered into an
agreement with CRA that provides for the full settlement of this
issue on a prospective basis. Under the terms of the settlement, CRA
will cancel all outstanding reassessments related to the Company's
revenue recognition policy in past years and refund the Company's
deposit along with interest. The provisions of the Income Tax Act
required the Company to deposit approximately $6.9 million with CRA,
representing one half of the amount under appeal. At June 30, 2005,
this deposit has been reclassified as a current receivable on the
balance sheet. Revenue for the second quarter of 2005 includes an
estimated $2.1 million ($1.4 million after-tax) of accrued interest
revenue, as a result of the settlement.
In a statement of claim filed on August 18, 2003 in the Court of the
Queen's Bench of Alberta, EPCOR Energy Services (Alberta) Inc. is
pursuing damages of approximately $83 million for alleged breaches of
certain agreements between it and FortisAlberta, distribution tariff
terms and conditions and fiduciary duty, as well as for negligence.
FortisAlberta has not to date made a definitive assessment of
potential liability with respect to this claim. Management believes
that the claim of approximately $83 million is largely without merit.
Management believes that any finding or ruling against FortisAlberta
would not have an adverse effect on the financial profile of
FortisAlberta.
FortisBC has received correspondence and met with the B.C. Ministry
of Forests (the "Ministry") to discuss the possibility of an invoice
being issued to the Company related to fire suppression costs
associated with certain forest fires in FortisBC's service territory
in 2003. The Ministry has alleged breaches of the Forest Practices
Code and negligence and indicated that they would be filing a writ
against FortisBC. FortisBC is currently communicating with the
Ministry and its insurers.
QUARTERLY RESULTS
The following table sets forth unaudited quarterly information for
each of the 8 quarters ended September 30, 2003 through June 30,
2005. This information has been obtained from the Corporation's
unaudited interim 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 operating results are
not necessarily indicative of results for any future period and
should not be relied upon to predict future performance.
---------------------------------------------------------------------
---------------------------------------------------------------------
Fortis Inc.
Summary of Quarterly Results (Unaudited)
---------------------------------------------------------------------
Quarter Ended Operating Net Earnings Earnings
Revenue Earnings per per
and applicable Common Common
Equity to Common Share Share
Income Shares Basic Diluted
($000's) ($000's) ($) ($)(1)
---------------------------------------------------------------------
June 30, 2005 364,948 38,188 1.48 1.36
---------------------------------------------------------------------
March 31, 2005 381,789 39,196 1.60 1.45
---------------------------------------------------------------------
December 31, 2004 337,170 21,176 0.89 0.85
---------------------------------------------------------------------
September 30, 2004 303,653 25,452 1.07 1.00
---------------------------------------------------------------------
June 30, 2004 254,513 23,946 1.22 1.15
---------------------------------------------------------------------
March 31, 2004 250,793 20,281 1.16 1.12
---------------------------------------------------------------------
December 31, 2003 210,624 14,760 0.85 0.82
---------------------------------------------------------------------
September 30, 2003 191,445 18,114 1.05 0.99
---------------------------------------------------------------------
(1) The diluted earnings per common share for 2003 have been restated
to reflect the issuance of convertible preference shares in June
2003.
---------------------------------------------------------------------
---------------------------------------------------------------------
A summary of the past 8 quarters reflects the Corporation's continued growth as well as the seasonality associated with its businesses. From June 2004, financial results were impacted by the acquisition of FortisAlberta and FortisBC. The Corporation's non-utility investment, Fortis Properties, generally produces its highest earnings in the second and third quarters. Given the diversified group of companies, seasonality may vary. Each of the comparative quarterly earnings has increased as a result of both the Corporation's acquisition strategy as well as improved operating earnings at most subsidiaries.
June 2005/June 2004 - Net earnings for the second quarter were $38.2 million, or $1.48 per common share, compared to $23.9 million, or $1.22 per common share, for the second quarter of 2004. Second quarter results include 3 months of earnings from FortisAlberta and FortisBC compared to 1 month for the second quarter of 2004. Results this quarter include a $7.0 million positive net after-tax adjustment to FortisAlberta's earnings, associated with the resolution of tax-related matters resulting in the reduction of liabilities associated with prior periods, partially offset by amounts provided for the final settlement of billings related to prior years. Results also include approximately $1.4 million in after-tax interest revenue from a tax settlement at Newfoundland Power and a $1.1 million positive adjustment to Caribbean Utilities' earnings related to a change in the accounting practice for recognizing unbilled revenue. Fortis Properties' earnings were $1.1 million higher quarter over quarter. The increase in earnings for the second quarter was partly constrained by a $1.0 million after-tax foreign exchange charge associated with the translation of US$75 million of unhedged corporate debt. Earnings per common share were also impacted by dilution from the common share issuance in March 2005.
March 2005/March 2004 - Net earnings for the first quarter were $39.2 million, or $1.60 per common share, compared to $20.3 million, or $1.16 per common share, for the first quarter of 2004. In the first quarter, Fortis reported a $7.9 million after-tax gain resulting from the settlement between FortisOntario and OPGI.
The Corporation's earnings, excluding the impact of the OPGI settlement, although not a measure under Canadian GAAP, would have been $31.3 million in the first quarter, or $1.28 per common share, 10.3 per cent higher than earnings per common share of $1.16 for the first quarter last year. Although the Corporation believes that it is useful supplemental information, readers should be cautioned that this information should not be confused with or used as an alternative for net earnings determined in accordance with Canadian GAAP.
The earnings contributions from the acquisition of FortisAlberta and FortisBC, as well as timing of recognition of earnings at Newfoundland Power, primarily contributed to this increase. Fortis also reported $0.7 million in earnings related to the recovery of hurricane-related expenses, associated with damages to Caribbean Utilities in Grand Cayman from Hurricane Ivan. Fortis Properties also reported improved earnings over the same quarter last year. The increase in earnings per common share was constrained by lower hydroelectric production in Belize and the dilution created by the common share issuance in March 2005.
December 2004/December 2003 - For the quarter ended December 2004, net earnings applicable to common shares were 43.5 per cent higher than for the same quarter in 2003. Earnings per common share increased 4.7 per cent over the same quarter in 2003. The increase in earnings was primarily associated with the acquisition of FortisAlberta and FortisBC, as well as improved operating income at most subsidiaries. The increase in quarterly earnings was affected by Hurricane Ivan. In September 2004, Grand Cayman was struck by Hurricane Ivan, a Category V hurricane that significantly affected Caribbean Utilities' distribution system. Equity earnings of Caribbean Utilities are recorded on a lag basis and, therefore, the Corporation's portion of the uninsured hurricane-related costs, which approximate $8.2 million, reduced the Corporation's equity earnings from Caribbean Utilities for the fourth quarter of 2004.
The Corporation's fourth quarter earnings in 2004, excluding the impact of Hurricane Ivan, although not a measure under Canadian GAAP, would have been $29.4 million, $8.2 million higher than actual fourth quarter earnings of $21.2 million, or $1.23 per common share, 44.7 per cent higher than earnings per common share of $0.85 for the fourth quarter last year. The Corporation believes that it is useful supplemental information as it provides an indication of the results excluding the impact of the Hurricane Ivan. Readers should be cautioned, however, that this information should not be confused with or used as an alternative for net earnings determined in accordance with Canadian GAAP.
September 2004/September 2003 - For the quarter ended September 2004, net earnings applicable to common shares were 40.5 per cent higher than the same quarter last year. Earnings per common share increased 1.9 per cent over the same quarter last year. The increase in earnings was primarily associated with the acquisition of FortisAlberta and FortisBC, as well as improved operating income at most subsidiaries. The increase was partially offset by lower production in Belize and timing of expenditures associated with production in Ontario.
OUTLOOK
The Corporation's principal business of regulated electric utilities is capital intensive and Fortis expects that most of its capital expenditures for the next 5 years will relate primarily to FortisAlberta and FortisBC. Consolidated utility capital expenditures for 2005 are expected to be approximately $400 million.
Fortis also expects to focus its capital on funding further acquisitions of electric utility assets. Fortis will continue to pursue acquisition opportunities both in Canada and outside of Canada. Fortis will also pursue growth in its non-regulated businesses including hydroelectric generation, hotels and real estate.
OUTSTANDING SHARE DATA
At August 4, 2005, the Corporation had issued and outstanding 25,742,238 common shares, 5,000,000 Series C First Preference Shares, 7,993,500 Series E First Preference Shares and 6,500 Series D First Preference Shares.
FORTIS INC.
Interim Consolidated Financial Statements
For the three and six months ended June 30, 2005 and 2004
(Unaudited)
Fortis Inc.
Consolidated Balance Sheets (Unaudited)
As At
(in thousands)
June 30 December 31
2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $26,847 $37,203
Accounts receivable 183,424 169,649
Corporate income tax deposit (Note 13) 6,949 -
Other regulatory assets 14,623 15,245
Materials and supplies 30,440 30,235
Future income taxes - 4,204
---------------------------------------------------------------------
262,283 256,536
---------------------------------------------------------------------
Corporate income tax deposit (Note 13) - 6,949
Deferred charges 152,118 152,320
Other regulatory assets 49,892 45,309
Future income taxes (Note 8) 65,507 13,661
Utility capital assets 2,452,357 2,347,067
Income producing properties 410,330 341,069
Investments 165,014 163,769
Intangibles, net of amortization 16,613 18,455
Goodwill 515,226 514,041
---------------------------------------------------------------------
$4,089,340 $3,859,176
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---------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings (Note 12) $138,171 $192,858
Accounts payable and accrued charges 251,934 270,055
Dividends payable 16,006 14,997
Other regulatory liabilities 10,689 23,657
Current installments of long-term debt 32,016 36,062
Future income taxes 2,071 -
---------------------------------------------------------------------
450,887 537,629
Deferred credits 34,020 29,828
Other regulatory liabilities (Note 8) 59,408 7,519
Future income taxes 49,283 48,432
Long-term debt (Note 12) 1,955,711 1,878,639
Non-controlling interest 37,926 37,487
Equity preference shares (Note 4) 319,530 319,530
---------------------------------------------------------------------
2,906,765 2,859,064
---------------------------------------------------------------------
Shareholders' equity
Common shares (Note 5) 808,143 675,215
Contributed surplus 2,622 1,831
Equity portion of convertible debentures 1,599 1,550
Foreign currency translation adjustment (14,900) (15,497)
Retained earnings 385,111 337,013
---------------------------------------------------------------------
1,182,575 1,000,112
---------------------------------------------------------------------
$4,089,340 $3,859,176
---------------------------------------------------------------------
---------------------------------------------------------------------
See accompanying notes to the interim consolidated financial
statements.
Fortis Inc.
Consolidated Statements of Earnings (Unaudited)
For the periods ended June 30
(in thousands, except per share amounts)
Quarter Ended Six Months Ended
2005 2004 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues $361,887 $252,291 $741,165 $501,217
Equity income 3,061 2,222 5,572 4,089
---------------------------------------------------------------------
364,948 254,513 746,737 505,306
---------------------------------------------------------------------
Expenses
Operating 219,845 163,355 473,158 342,199
Amortization 42,155 25,240 82,331 44,672
---------------------------------------------------------------------
262,000 188,595 555,489 386,871
---------------------------------------------------------------------
Operating income 102,948 65,918 191,248 118,435
Finance charges
(Note 7) 35,155 25,016 71,053 46,266
Gain on settlement
of contractual
matters (Note 11) - - (10,000) -
---------------------------------------------------------------------
35,155 25,016 61,053 46,266
---------------------------------------------------------------------
Earnings before
income taxes 67,793 40,902 130,195 72,169
Corporate income
taxes 23,643 12,982 41,845 21,472
---------------------------------------------------------------------
Net earnings before
non-controlling
interest and
preference share
dividends 44,150 27,920 88,350 50,697
Non-controlling
interest 1,811 1,662 2,663 2,040
Preference share
dividends 4,151 2,312 8,303 4,430
---------------------------------------------------------------------
Net earnings
applicable to
common shares $38,188 $23,946 $77,384 $44,227
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted average
common shares
outstanding 25,716 19,595 25,109 18,521
---------------------------------------------------------------------
Earnings per common
share
Basic $1.48 $1.22 $3.08 $2.38
Diluted $1.36 $1.15 $2.81 $2.27
---------------------------------------------------------------------
---------------------------------------------------------------------
Consolidated Statements of Retained Earnings (Unaudited)
For the periods ended June 30
(in thousands)
Quarter Ended Six Months Ended
2005 2004 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Balance at beginning
of period $361,566 $305,822 $337,013 $294,986
Net earnings
applicable to common
shares 38,188 23,946 77,384 44,227
---------------------------------------------------------------------
399,754 329,768 414,397 339,213
Dividends on common
shares (14,643) (12,864) (29,286) (22,309)
---------------------------------------------------------------------
Balance at end of
period $385,111 $316,904 $385,111 $316,904
---------------------------------------------------------------------
---------------------------------------------------------------------
See accompanying notes to the interim consolidated financial
statements.
Fortis Inc.
Consolidated Statements of Cash Flows (Unaudited)
For the periods ended June 30
(in thousands)
Quarter Ended Six Months Ended
2005 2004 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating Activities
Net earnings
applicable to common
shares $38,188 $23,946 $77,384 $44,227
Items not affecting
cash
Amortization-capital
assets, net of
contributions in
aid of
construction 39,537 23,420 77,199 41,362
Amortization-
intangibles 921 921 1,842 1,842
Amortization-other 1,697 899 3,290 1,468
Future income
taxes 10,624 2,141 9,435 (719)
Accrued employee
future benefits (527) (1,332) (1,028) (1,813)
Equity income, net
of dividends (1,187) (145) (1,243) -
Stock-based
compensation 403 290 790 438
Unrealized foreign
exchange loss
(gain) on
long-term debt 962 (82) 1,359 (328)
Non-controlling
interest 1,811 1,662 2,663 2,040
Other 407 1,366 294 (373)
---------------------------------------------------------------------
92,836 53,086 171,985 88,144
Change in non-cash
operating working
capital (42,950) (4,844) (42,761) (18,080)
---------------------------------------------------------------------
49,886 48,242 129,224 70,064
---------------------------------------------------------------------
Investing Activities
Change in deferred
charges and credits (1,742) 3,529 (3,301) 2,837
Purchase of utility
capital assets (97,781) (45,289) (189,152) (71,982)
Purchase of income
producing
properties (6,825) (5,813) (74,217) (7,154)
Contributions in aid
of construction 11,804 1,080 22,681 1,857
Proceeds on sale of
utility capital
assets 136 12 354 15
Business
acquisitions, net
of cash (3,248) (754,353) (3,248) (754,353)
Increase in
investements - (4) - (4)
---------------------------------------------------------------------
(97,656) (800,838) (246,883) (828,784)
---------------------------------------------------------------------
Financing Activities
Change in short-term
borrowings (17,079) 1,003,607 (54,737) 953,737
Proceeds from
long-term debt 67,620 1,086 98,016 7,100
Repayment of
long-term debt (26,339) (8,393) (35,243) (18,328)
Repayment of assumed
acquisition debt - (557,381) - (557,381)
Advances (to) from
non-controlling
interest (1,367) 274 (1,064) 440
Issue of equity
preference shares - - - 44,936
Issue of common
shares 2,626 332,296 130,314 336,364
Dividends -
Common shares (14,643) (12,864) (29,286) (22,309)
Subsidiary
dividends paid to
non-controlling
interest (378) (427) (789) (842)
---------------------------------------------------------------------
10,440 758,198 107,211 743,717
---------------------------------------------------------------------
Effect of exchange
rate changes on cash (27) 701 92 1,021
---------------------------------------------------------------------
Change in cash and
cash equivalents (37,357) 6,303 (10,356) (13,982)
Cash and cash
equivalents,
beginning of period 64,204 44,809 37,203 65,094
---------------------------------------------------------------------
Cash and cash
equivalents, end of
period $26,847 $51,112 $26,847 $51,112
---------------------------------------------------------------------
---------------------------------------------------------------------
See accompanying notes to the interim consolidated financial
statements.
FORTIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the periods ended June 30, 2005 and 2004
(Unaudited)
1. NATURE OF OPERATIONS AND 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 Fortis Inc. ("Fortis" or
the "Corporation") annual consolidated financial statements. These
interim consolidated financial statements should be read in
conjunction with the Corporation's consolidated financial statements
for the year ended December 31, 2004. Interim results will fluctuate
due to the seasonal nature of electricity demand and water flows as
well as the timing and recognition of regulatory decisions.
Consequently, interim results are not necessarily indicative of
annual results.
Fortis is principally a diversified, international electric utility
holding company. The Corporation segments its utility operations by
franchise area and, depending on regulatory requirements, by the
nature of the assets. Fortis also holds investments in commercial
real estate and hotel properties which are treated as a separate
segment. The 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.
The following summary briefly describes the operations included in
each of the Corporation's operating and reportable segments.
Regulated Utilities - Canadian
The following summary describes the Corporation's interest in
Regulated Utilities in Canada by subsidiary:
a. Newfoundland Power: Newfoundland Power is the principal
distributor of electricity in Newfoundland.
b. Maritime Electric: Maritime Electric is the principal distributor
of electricity on Prince Edward Island.
c. FortisOntario: FortisOntario provides an integrated electric
utility service to customers in Fort Erie, Cornwall, Gananoque and
Port Colborne in Ontario. FortisOntario includes the operations of
Canadian Niagara Power Inc. ("Canadian Niagara Power") and
Cornwall Street Railway, Light and Power Company, Limited
("Cornwall Electric"). Included in Canadian Niagara Power's
accounts are the operations of the electricity distribution
business of Port Colborne Hydro Inc., which has been leased from
the City of Port Colborne under a 10-year lease agreement entered
into in April 2002. FortisOntario also owns a 10 per cent interest
in each of Westario Power and Rideau St. Lawrence, 2 regional
electric distribution companies formed in 2000.
d. FortisAlberta: On May 31, 2004, Fortis, through a wholly owned
subsidiary, acquired all of the issued and outstanding shares of
Aquila Networks Canada (Alberta) Ltd. (renamed "FortisAlberta").
FortisAlberta owns and operates the distribution system in a
substantial portion of southern and central Alberta.
e. FortisBC: On May 31, 2004, Fortis, through a wholly owned
subsidiary, acquired all of the issued and outstanding shares of
Aquila Networks Canada (British Columbia) Ltd. (renamed
"FortisBC"). FortisBC is an integrated utility operating in the
southern interior of British Columbia. Included with the FortisBC
component of the Regulated Utilities - Canadian segment are the
non-regulated operating, maintenance and management services
relating to the 450-megawatt ("MW") Waneta hydroelectric
generating facility owned by Teck Cominco, the 145-MW Brilliant
Hydroelectric Plant owned by Columbia Power Corporation and the
Columbia Basin Trust ("CPC/CBT"), the 150-MW Arrow Lakes
Hydroelectric Plant owned by CPC/CBT and the distribution system
owned by the City of Kelowna. As of June 1, 2005, the FortisBC
component of Regulated Utilities - Canadian segment includes
Princeton Light and Power Company, Limited ("PLP"). On May 31,
2005, Fortis, through a wholly owned subsidiary, acquired all
issued common and preference shares of PLP. PLP is an electric
utility serving approximately 3,200 customers, mainly in
Princeton, British Columbia. PLP presently purchases its wholesale
power from FortisBC under a long-term contract.
Regulated Utilities - Caribbean
The following summary describes the Corporation's interest in
Regulated Utilities in the Caribbean by utility:
a. Belize Electricity: Belize Electricity is the principal
distributor of electricity in Belize, Central America. The
Corporation holds a 68 per cent controlling interest in the
Company.
b. Caribbean Utilities: Caribbean Utilities is the sole provider of
electricity on Grand Cayman, Cayman Islands. The Corporation's
37.3 per cent interest in the Company is accounted for on the
equity basis of accounting.
Non-regulated - Fortis Generation
The following summary describes the Corporation's non-regulated
generation assets by location:
a. Ontario: Operations include the 75-MW Rankine hydroelectric
generating station at Niagara Falls, the 5-MW Cornwall District
Heating cogeneration plant and 6 small hydroelectric generating
stations in eastern Ontario with a combined capacity of 8 MW.
Non-regulated generating operations in Ontario are conducted
through FortisOntario Inc. and FortisOntario Generation
Corporation.
b. Belize: Operations consist of the 25-MW Mollejon hydroelectric
facility in Belize. All of its electricity output is sold to
Belize Electricity under a 50-year Power Purchase Agreement.
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.
c. Central Newfoundland: Through the Exploits River Hydro Partnership
("Exploits Partnership"), a partnership between the Corporation
and Abitibi-Consolidated Company of Canada ("Abitibi-
Consolidated"), 36 MW of additional capacity was developed and
installed at 2 of Abitibi-Consolidated's hydroelectric plants in
central Newfoundland. The Corporation holds a 51 per cent interest
in the Exploits Partnership and Abitibi-Consolidated holds the
remaining 49 per cent interest. The Exploits Partnership sells its
output to Newfoundland and Labrador Hydro Corporation under a
25-year power purchase agreement.
d. Upper New York State: Includes the operations of 4 hydroelectric
generating stations in Upper New York State with a combined
capacity of 23 MW operating under a license from the U.S. Federal
Energy Regulatory Commission. Hydroelectric generation operations
in Upper New York State are conducted through the Corporation's
wholly owned indirect subsidiary, FortisUS Energy Corporation.
e. 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. Hydroelectric generating operations in British Columbia
are conducted through the Walden Power Partnership, a wholly owned
subsidiary of FortisBC.
Non-regulated - Fortis Properties
Fortis Properties owns and operates hotels in 6 provinces in Canada
and commercial real estate in Atlantic Canada. On February 1, 2005,
Fortis Properties acquired 3 hotels in western Canada that have
approximately 650 rooms and 27,000 square feet of banquet space.
Corporate
Corporate includes finance charges associated with corporate debt,
dividends on preference securities, other corporate expenses net of
recoveries from subsidiaries, interest and miscellaneous revenues and
related corporate income taxes.
2. 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 interim consolidated
financial statements have been prepared following the same accounting
policies and methods as those used in preparing the most recent
annual financial statements. All amounts are presented in Canadian
dollars unless otherwise stated.
3. USE OF ESTIMATES
The preparation of the Corporation's interim consolidated financial
statements in accordance with Canadian GAAP requires management to
make estimates and assumptions 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 period. Estimates are
based on historical experience, current conditions and various other
assumptions believed to be reasonable under the circumstances.
Changes in facts and circumstances may result in revised estimates
and actual results could differ from those estimates. There were no
material changes to the Corporation's critical accounting estimates
during the quarter from those disclosed in the 2004 Management
Discussion and Analysis for the year ended December 31, 2004 except
as disclosed in Note 13 to the interim consolidated financial
statements. Interim financial statements may employ a greater use of
estimates than the annual financial statements.
4. EQUITY PREFERENCE SHARES
Authorized:
(a) an unlimited number of First Preference Shares, without nominal
or par value; and
(b) an unlimited number of Second Preference Shares, without nominal
or par value.
June 30, 2005 December 31, 2004
---------------------------------------------------------------------
Number of Amount Number of Amount
Shares (in thousands) Shares (in thousands)
---------------------------------------------------------------------
Series C First
Preference Shares 5,000,000 $122,992 5,000,000 $122,992
Series D First
Preference
Shares 6,500 38 6,500 38
Series E First
Preference Shares 7,993,500 196,500 7,993,500 196,500
---------------------------------------------------------------------
13,000,000 $319,530 13,000,000 $319,530
---------------------------------------------------------------------
5. CAPITAL STOCK
Authorized: an unlimited number of Common Shares without nominal or
par value:
June 30, 2005 December 31, 2004
---------------------------------------------------------------------
a)Issued and Number of Amount Number of Amount
Outstanding Shares (in thousands) Shares (in thousands)
---------------------------------------------------------------------
Common Shares 25,738,314 $808,143 23,882,323 $675,215
---------------------------------------------------------------------
Common shares issued during the period were as follows:
Quarter Ended Year-to-date
June 30, 2005 June 30, 2005
---------------------------------------------------------------------
Number of Amount Number of Amount
Shares (in thousands) Shares (in thousands)
---------------------------------------------------------------------
Balance, beginning
of period 25,687,520 $805,063 23,882,323 $675,215
Public offering - - 1,740,000 126,072
Partial
consideration in
business
acquisition 5,917 443 5,917 443
Consumer Share
Purchase Plan 4,843 358 11,200 826
Dividend
Reinvestment Plan 11,831 876 23,221 1,715
Employee Share
Purchase Plan 5,656 419 23,834 1,759
Director and
Executive Stock
Option Plans 22,547 984 51,819 2,113
---------------------------------------------------------------------
25,738,314 $808,143 25,738,314 $808,143
---------------------------------------------------------------------
On March 1, 2005, Fortis issued 1,740,000 common shares of the
Corporation at $74.65 per common share. The common share issuance
resulted in gross proceeds of $129.9 million. Net proceeds after
tax-effected issuance costs totalled $126.1 million. The proceeds of
the issuance were used to pay outstanding indebtedness and for
general corporate purposes.
On May 31, 2005, Fortis issued 5,917 common shares of the Corporation
at a fair value of $74.83 per common share, the 5-day average trading
price of Fortis' Common Shares for the last five trading days
immediately preceding the acquisition, to the shareholders of PLP,
combined with a cash payment, to acquire all of the issued common and
preference shares of PLP.
At June 30, 2005, 1,651,571 common shares remained in the reserve for
issue under the terms of the above Plans.
b) Earnings per Common Share
The Corporation calculates earnings per common share on the weighted
average number of common shares outstanding. The year-to-date
weighted average common shares outstanding were 25,108,729 and
18,520,628 at June 30, 2005 and June 30, 2004, respectively.
The weighted average common shares outstanding were 25,716,293 and
19,594,980 for the quarters ended June 30, 2005 and June 30, 2004,
respectively. Diluted earnings per common share are calculated using
the treasury stock method for options and the "if-converted" method
for convertible securities.
c) Stock Options
The Corporation is authorized to grant, to the directors of Fortis
and certain key employees of the Corporation and its subsidiaries,
options to purchase common shares of the Corporation. At June 30,
2005, the Corporation had the following stock-based compensation
plans: Executive Stock Option Plan, Directors' Stock Option Plan and
2002 Stock Option Plan. The 2002 Stock Option Plan was adopted at the
Annual and Special General Meeting on May 15, 2002 to ultimately
replace the Executive and Directors' Stock Option Plans. The
Executive and Directors' Stock Options Plans will cease to exist when
all outstanding options are exercised or expire in or before 2011.
Quarter Ended Year-to-date
June 30, 2005 June 30, 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Number of Weighted Number of Weighted
Options Average Price Options Average Price
---------------------------------------------------------------------
---------------------------------------------------------------------
Outstanding at
beginning of
period 887,370 $55.82 720,647 $50.28
Granted 7,000 $72.45 202,995 $73.58
Cancelled (6,256) $66.24 (6,256) $66.24
Exercised (22,547) $43.65 (51,819) $40.78
---------------------------------------------------------------------
Outstanding at end
of period 865,567 $56.20 865,567 $56.20
---------------------------------------------------------------------
---------------------------------------------------------------------
Details of stock
options outstanding Number of Exercise Expiry
are as follows: Options Price Date
---------------------------------------------------------------------
5,000 $38.27 2006
117,286 $38.27 2011
165,222 $48.14 2012
176,832 $51.24 2013
177,948 $61.12 2014
3,000 $60.91 2014
20,544 $58.20 2014
192,735 $73.62 2015
7,000 $72.45 2015
---------------------------------------------------------------------
---------------------------------------------------------------------
865,567
---------------------------------------------------------------------
---------------------------------------------------------------------
Options vested at end of period 375,796
---------------------------------------------------------------------
---------------------------------------------------------------------
Stock-based Compensation
On March 1, 2005, the Corporation issued 195,995 options on common
shares under its 2002 Stock Option Plan at the 5-day average trading
price immediately preceding the date of grant of $73.62. These
options vest evenly over a 4-year period on each anniversary of the
date of grant. The options expire 10 years after the date of grant.
The fair market value of each option granted was $10.98 per option.
On May 11, 2005, the Corporation issued 7,000 options on common
shares under its 2002 Stock Option Plan at the 5-day average trading
price immediately preceding the date of grant of $72.45. These
options vest evenly over a 4-year period on each anniversary of the
date of grant. The options expire 10 years after the date of grant.
The fair market value of each option granted was $10.32 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:
March 1, 2005 May 11, 2005
---------------------------------------------------------------------
Dividend yield (%) 3.44 3.44
Expected volatility (%) 15.3 15.2
Risk-free interest rate (%) 4.28 4.12
Weighted-average expected life (years) 7.5 7.5
The Corporation records compensation expense upon the issuance of
stock options under its Stock Option Plans. Using the fair value
method, the compensation expense is amortized over the 4-year vesting
period of the options granted. Upon exercise, the proceeds of the
options are credited to capital stock at the option price. Therefore,
an exercise of options below the current market price has a dilutive
effect on capital stock and shareholders' equity. Under the fair
value method, $0.4 million and $0.8 million were recorded as
compensation expense for the quarter ended and 6 months ended June
30, 2005, respectively ($0.3 million and $0.4 million for the quarter
ended and 6 months ended June 30, 2004, respectively).
6. EMPLOYEE FUTURE BENEFITS
The Corporation provides pension arrangements and other post-
employment benefits to qualified employees through both defined
contribution and defined benefit arrangements. The cost of providing
the defined benefit arrangements was $4.8 million for the quarter
($2.7 million for the second quarter of 2004) and $8.3 million year
to date ($5.0 million year to date for 2004). The cost of providing
the defined contribution arrangements for the quarter was $0.7
million ($0.7 million for the second quarter 2004) and $1.5 million
year to date ($1.3 million year to date for 2004).
7. FINANCE CHARGES
Quarter Ended Year-to-date
June 30 June 30
(in thousands) 2005 2004 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Amortization of debt
and stock issue
expenses $94 $19 $346 $138
Interest - long term
debt 34,982 22,636 69,721 44,389
- short-term 1,377 3,921 3,367 4,530
Interest charged to
construction (1,478) (1,048) (2,668) (1,668)
Interest earned (782) (430) (1,072) (795)
Unrealized foreign
exchange loss (gain)
on long-term debt 962 (82) 1,359 (328)
---------------------------------------------------------------------
$35,155 $25,016 $71,053 $46,266
---------------------------------------------------------------------
---------------------------------------------------------------------
8. INCOME TAXES
In FortisAlberta, as prescribed by the AEUB in its Negotiated
Settlement Agreement of May 24, 2005, provincial income tax expenses
are recovered through customer rates based on the taxes payable
method and federal income tax expenses will now be recovered through
customer rates based on a modified liability method. Therefore,
current rates collected from customers do not include the recovery of
future provincial income taxes related to certain temporary
differences between the tax basis of assets and liabilities and their
carrying amounts for regulatory purposes but these taxes are expected
to be collected in rates when they become payable. Under the
modified liability method, current rates will now include the
recovery of future federal income taxes related to specified
temporary differences between the tax basis of assets and liabilities
and their carrying amounts for regulatory purposes.
As a result of collecting a portion of future income taxes associated
with federal income taxes within current rates, FortisAlberta has now
recognized all future income taxes (associated with federal taxes)
within the financial statements. Since only a certain portion of the
federal future income taxes have been included in rates,
FortisAlberta has recorded an offsetting regulatory liability equal
to the amount of future income taxes recognized in these financial
statements that have not yet been reflected in rates. These amounts
will be reflected in future rates to customers as the timing
differences reverse.
Regulatory accounting principles allow for the recognition of a
liability when a future tax asset is recognized if it is probable
that a future reduction in revenue will result when that future tax
asset is realized. Therefore, to the extent that it is probable that
the realization of the future tax asset will result in a future
reduction in rates collected from customers when the timing
differences reverse, FortisAlberta has recognized a regulatory
liability. In addition, FortisAlberta continues to recognize future
income taxes for certain deferral amounts where the future income
taxes will not be collected in future rates.
9. a) SEGMENTED INFORMATION
Information by reportable segment is as follows:
Quarter ended
(in thousands of dollars)
Regulated Utilities
---------------------------------------------------------------------
June 30, Nfld Maritime Fortis Fortis Fortis Total Total
2005 Power Electric Ont. Alta. BC Canadian Caribbean
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating
revenues 105,654 28,304 32,014 75,734 44,107 285,813 18,709
Equity
income - - - - - - 3,061
Energy
supply
costs 57,494 16,963 24,935 - 12,050 111,442 10,010
Operating
expenses 13,818 3,168 3,035 27,868 15,903 63,792 2,861
Amortiza-
tion 9,270 2,419 1,244 16,889 4,707 34,529 1,625
---------------------------------------------------------------------
Operating
income 25,072 5,754 2,800 30,977 11,447 76,050 7,274
Finance
charges 7,721 1,968 1,288 5,841 4,200 21,018 1,161
Gain on
settle-
ment
of contract-
ual matters - - - - - - -
Corporate
income
taxes 5,696 1,510 615 10,371 1,874 20,066 325
Non-control-
ling inte-
rest 147 - - - - 147 837
Preference
share
dividends - - - - - - -
---------------------------------------------------------------------
Net Earn-
ings
(loss) 11,508 2,276 897 14,765 5,373 34,819 4,951
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - 19,858 45,577 229,097 220,694 515,226 -
Identifi-
able
assets 796,668 257,467 123,770 690,237 623,911 2,492,053 203,857
Equity
investment
assets - - - - - - 162,480
---------------------------------------------------------------------
Total
assets 796,668 277,325 169,347 919,334 844,605 3,007,279 366,337
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expendi-
tures 11,475 12,483 1,988 33,121 28,187 87,254 2,677
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-Regulated
---------------------------------------------------------------------
Inter-
Fortis segment Consoli
Generation Properties Corporate elimination -dated
---------------------------------------------------------------------
Operating
revenues 19,211 40,789 2,631 (5,266) 361,887
Equity
income - - - - 3,061
Energy supply
costs 1,768 - - (1,750) 121,470
Operating
expenses 4,408 25,235 3,080 (1,001) 98,375
Amortization 2,550 2,751 700 - 42,155
---------------------------------------------------------------------
Operating
income 10,485 12,803 (1,149) (2,515) 102,948
Finance
charges 4,016 4,689 6,786 (2,515) 35,155
Gain on
settlement
of contract-
ual
matters - - - - -
Corporate inc-
ome
taxes 2,383 3,268 (2,399) - 23,643
Non-control-
ling
interest 868 - (41) - 1,811
Preference
share divi-
dends - - 4,151 - 4,151
---------------------------------------------------------------------
Net Earnings
(loss) 3,218 4,846 (9,646) - 38,188
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - - - - 515,226
Identifiable
assets 268,536 426,391 50,236 (29,439) 3,411,634
Equity
investment
assets - - - - 162,480
---------------------------------------------------------------------
Total
assets 268,536 426,391 50,236 (29,439) 4,089,340
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expendit-
ures 7,693 6,825 157 - 104,606
---------------------------------------------------------------------
---------------------------------------------------------------------
Regulated Utilities
---------------------------------------------------------------------
June 30, Nfld Maritime Fortis Fortis Fortis Total Total
2004 Power Electric Ont. Alta. BC Canadian Caribbean
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating
revenues 97,342 28,204 28,626 17,167 12,350 183,689 19,930
Equity
income - - - - - - 2,222
Energy
supply
costs 50,931 17,468 21,761 - 3,672 93,832 10,204
Operating
expenses 12,867 2,830 2,879 8,028 4,499 31,103 2,954
Amortiza-
tion 9,198 2,281 1,246 4,362 1,414 18,501 1,679
---------------------------------------------------------------------
Operating
income 24,346 5,625 2,740 4,777 2,765 40,253 7,315
Finance
charges 7,615 2,133 1,294 1,253 1,393 13,688 1,371
Corporate
income
taxes 5,711 1,395 557 1,128 559 9,350 268
Non-control-
ling
interest 148 - (1) - - 147 1,107
Preference
share
dividends - - - - - - -
---------------------------------------------------------------------
Net Earn-
ings
(loss) 10,872 2,097 890 2,396 813 17,068 4,569
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - 19,858 45,577 227,351 222,602 515,388 -
Identifi-
able
assets 761,319 229,994 114,360 593,953 549,844 2,249,470 222,236
Equity
invest-
ment
assets - - - - - - 165,263
---------------------------------------------------------------------
Total
assets 761,319 249,852 159,937 821,304 772,446 2,764,858 387,499
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expendi-
tures 15,433 4,858 2,818 6,810 7,217 37,136 4,955
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-Regulated
---------------------------------------------------------------------
Inter-
Fortis segment Consoli
Generation Properties Corporate elimination -dated
---------------------------------------------------------------------
Operating
revenues 16,956 34,666 2,460 (5,410) 252,291
Equity
income - - - - 2,222
Energy supply
costs 1,151 - - (1,538) 103,649
Operating
expenses 3,820 21,541 1,743 (1,455) 59,706
Amortization 2,479 2,338 243 - 25,240
---------------------------------------------------------------------
Operating
income 9,506 10,787 474 (2,417) 65,918
Finance
charges 3,784 4,646 3,944 (2,417) 25,016
Corporate
income
taxes 2,065 2,453 (1,154) - 12,982
Non-control-
ling
interest 450 - (42) - 1,662
Preference
share divi-
dends - - 2,312 - 2,312
---------------------------------------------------------------------
Net Earn-
ings
(loss) 3,207 3,688 (4,586) - 23,946
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - - - - 515,388
Identifi-
able
assets 267,203 348,919 48,030 (30,662) 3,105,196
Equity
invest-
ment
assets - - - - 165,263
---------------------------------------------------------------------
Total
assets 267,203 348,919 48,030 (30,662) 3,785,847
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expendi-
tures 3,118 5,813 80 - 51,102
---------------------------------------------------------------------
---------------------------------------------------------------------
Year to date
(in thousands of dollars)
Regulated Utilities
---------------------------------------------------------------------
June 30, Nfld Maritime Fortis Fortis Fortis Total Total
2005 Power Electric Ont. Alta. BC Canadian Caribbean
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating
revenues 241,090 57,590 70,174 134,329 99,481 602,664 34,096
Equity
income - - - - - - 5,572
Energy
supply
costs 140,592 35,106 55,559 - 30,605 261,862 18,144
Operating
expenses 28,019 6,166 6,178 54,789 31,946 127,098 5,645
Amortiza-
tion 19,857 4,818 2,487 30,735 9,342 67,239 3,237
---------------------------------------------------------------------
Operating
income 52,622 11,500 5,950 48,805 27,588 146,465 12,642
Finance
charges 15,413 4,182 2,576 11,811 8,741 42,723 2,401
Gain on
settlement
of contrac-
tual
matters - - - - - - -
Corporate
income
taxes 12,457 2,924 1,372 14,383 4,526 35,662 540
Non-control-
ling
interest 292 - - - - 292 1,277
Preference
share
dividends - - - - - - -
---------------------------------------------------------------------
Net Earnings
(loss) 24,460 4,394 2,002 22,611 14,321 67,788 8,424
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - 19,858 45,577 229,097 220,694 515,226 -
Identifi-
able
assets 796,668 257,467 123,770 690,237 623,911 2,492,053 203,857
Equity
investment
assets - - - - - - 162,480
---------------------------------------------------------------------
Total
assets 796,668 277,325 169,347 919,334 844,605 3,007,279 366,337
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expendi-
tures 26,015 21,441 2,932 66,946 51,114 168,448 5,140
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-Regulated
--------------------------------------------------------------------
Inter-
Fortis segment Consoli
Generation Properties Corporate elimination -dated
--------------------------------------------------------------------
Operating
revenues 36,181 73,827 5,203 (10,806) 741,165
Equity
income - - - - 5,572
Energy supply
costs 3,628 - - (3,632) 280,002
Operating
expenses 9,254 48,066 5,293 (2,200) 193,156
Amortization 5,105 5,351 1,399 82,331
--------------------------------------------------------------------
Operating
income 18,194 20,410 (1,489) (4,974) 191,248
Finance
charges 7,891 9,613 13,399 (4,974) 71,053
Gain on
settlement
of contrac-
tual
matters (10,000) - - - (10,000)
Corporate
income
taxes 5,918 4,450 (4,725) - 41,845
Non-control-
ling
interest 1,176 - (82) - 2,663
Preference
share
dividends - - 8,303 - 8,303
---------------------------------------------------------------------
Net
Earnings
(loss) 13,209 6,347 (18,384) - 77,384
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - - - - 515,226
Identifiable
assets 268,536 426,391 50,236 (29,439)3,411,634
Equity
investment
assets - - - - 162,480
---------------------------------------------------------------------
Total
assets 268,536 426,391 50,236 (29,439)4,089,340
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expenditures 14,266 74,217 1,298 - 263,369
---------------------------------------------------------------------
---------------------------------------------------------------------
Regulated Utilities
---------------------------------------------------------------------
June 30, Nfld Maritime Fortis Fortis Fortis Total Total
2004 Power Electric Ont. Alta. BC Canadian Caribbean
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating
revenues 223,480 57,733 63,067 17,167 12,350 373,797 35,863
Equity
income - - - - - - 4,089
Energy
supply
costs 127,729 36,107 48,504 - 3,672 216,012 18,478
Operating
expenses 26,838 5,796 6,010 8,028 4,499 51,171 6,004
Amortiza-
tion 18,579 4,561 2,477 4,362 1,414 31,393 3,286
---------------------------------------------------------------------
Operating
income 50,334 11,269 6,076 4,777 2,765 75,221 12,184
Finance
charges 15,231 4,375 2,600 1,253 1,393 24,852 2,500
Corporate
income
taxes 11,957 2,766 1,301 1,128 559 17,711 480
Non-control-
ling
interest 295 - - - - 295 1,632
Preference
share
dividends - - - - - - -
---------------------------------------------------------------------
Net
Earnings
(loss) 22,851 4,128 2,175 2,396 813 32,363 7,572
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - 19,858 45,577 227,351 222,602 515,388 -
Identifi-
able
assets 761,319 229,994 114,360 593,953 549,844 2,249,470 222,236
Equity
invest-
ment
assets - - - - - - 165,263
---------------------------------------------------------------------
Total
assets 761,319 249,852 159,937 821,304 772,446 2,764,858 387,499
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expendi-
tures 30,840 8,063 4,537 6,810 7,217 57,467 9,431
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-Regulated
---------------------------------------------------------------------
Inter-
Fortis segment Consoli
Generation Properties Corporate elimination -dated
---------------------------------------------------------------------
Operating
revenues 33,673 64,857 4,423 (11,396) 501,217
Equity
income - - - - 4,089
Energy supply
costs 2,828 - - (5,131) 232,187
Operating
expenses 8,042 42,842 3,910 (1,957) 110,012
Amortization 4,947 4,653 393 - 44,672
---------------------------------------------------------------------
Operating
income 17,856 17,362 120 (4,308) 118,435
Finance
charges 7,558 9,304 6,360 (4,308) 46,266
Corporate income
taxes 4,001 3,352 (4,072) - 21,472
Non-controlling
interest 197 - (84) - 2,040
Preference
share dividends - 4,430 - - 4,430
---------------------------------------------------------------------
Net Earnings
(loss) 6,100 4,706 (6,514) - 44,227
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - - - - 515,388
Identifiable
assets 267,203 348,919 48,030 (30,662) 3,105,196
Equity
investment
assets - - - - 165,263
---------------------------------------------------------------------
Total
assets 267,203 348,919 48,030 (30,662) 3,785,847
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expenditures 4,115 7,154 969 - 79,136
---------------------------------------------------------------------
---------------------------------------------------------------------
9. b) Related Party Transactions
Related party transactions are in the normal course of operations and
are measured at the exchange amount, which is the amount of
consideration established and agreed to by the related parties.
Related party transactions primarily relate to the sale of energy
from BECOL to Belize Electricity and finance charges on inter-company
borrowings.
10. BUSINESS ACQUISITION
On May 31, 2005, Fortis acquired all of the issued and outstanding
common and preference shares of PLP for an aggregate purchase price
of $3.7 million. PLP is an electric utility that serves
approximately 3,200 customers, mainly in Princeton, British Columbia.
PLP presently purchases its wholesale power from FortisBC under a
long-term contract.
The acquisition was financed through a combination of cash
consideration of $3.3 million and the issuance of 5,917 common shares
of the Corporation at a fair value of $74.83 per Common Share, the 5-
day average trading price of Fortis' Common Shares for the last five
trading days immediately preceding the acquisition.
The acquisition is accounted for using the purchase method, whereby
the results of full operations have been included in the consolidated
financial statements commencing May 31, 2005. The book value of these
assets and liabilities has been assigned as fair value for purchase
price allocation. The regulated nature of PLP and the determination
of its revenues and earnings are based on historic values and do not
change with market conditions or change of ownership. Therefore, no
fair market value increments were recorded as part of the purchase
price on individual assets and liabilities because all economic
benefits and obligations associated with them will accrue to the
customers.
The purchase price allocation to net assets based on their fair
values is as follows:
(in thousands)
---------------------------------------------------------------------
---------------------------------------------------------------------
Fair value assigned to net assets:
Utility capital assets $6,381
Current assets 1,168
Goodwill 1,185
Other assets 445
Current liabilities (1,094)
Assumed long-term debt (3,990)
Future income taxes (329)
Other liabilities (75)
---------------------------------------------------------------------
$3,691
---------------------------------------------------------------------
---------------------------------------------------------------------
11. GAIN ON SETTLEMENT OF CONTRACTUAL MATTERS
In the first quarter of 2005, Fortis recorded a $7.9 million after-
tax gain ($10 million pre-tax) resulting from the settlement of
contractual matters between FortisOntario and Ontario Power
Generation Inc.
12. SHORT-TERM AND LONG-TERM DEBT
The Corporation and its subsidiaries had consolidated authorized
lines of credit of $747.1 million of which $478.9 million was unused
at June 30, 2005. The following summary outlines the Corporation's
credit facilities by reporting segments.
Credit Facilities Regulated Fortis Fortis
($ millions) Corporate Utilities Generation Properties Total
---------------------------------------------------------------------
---------------------------------------------------------------------
Total credit
facilities 210.0 516.5 8.1 12.5 747.1
Utilized at
June 30, 2005 (2.6) (185.3) (2.8) (2.3) (193.0)
Letters of credit
outstanding (4.9) (67.7) - (2.6) (75.2)
---------------------------------------------------------------------
Credit facilities
available 202.5 263.5 5.3 7.6 478.9
---------------------------------------------------------------------
Certain borrowings under the Corporation's credit facilities have
been classified as long-term debt. These borrowings are under long-
term credit facilities and Management's intention is to refinance
these borrowings with long-term permanent financing during future
periods. The following summary outlines the balance sheet
classification as at June 30, 2005 of the Corporation's utilized
credit facilities by reporting segments.
Credit Facilities Regulated Fortis Fortis
($ millions) Corporate Utilities Generation Properties Total
---------------------------------------------------------------------
---------------------------------------------------------------------
Short-term
borrowings 2.6 130.5 2.8 2.3 138.2
Long-term debt - 54.8 - - 54.8
---------------------------------------------------------------------
Total credit
facilities
utilized 2.6 185.3 2.8 2.3 193.0
---------------------------------------------------------------------
In March 2005, Fortis Properties completed a 5.1 per cent 5-year
$29.6 million loan related to the financing of the Edmonton and
Calgary Greenwood Inns that were acquired on February 1, 2005.
In April 2005, Fortis Properties completed a 5.35 per cent 5-year
$12.3 million loan related to the Winnipeg Greenwood Inn which was
acquired on February 1, 2005.
In May 2005, Fortis renegotiated its $145 million unsecured
revolving/non-revolving term credit facility to a $145 million
unsecured revolving term credit facility that matures in May 2008.
This facility can be used for general corporate purposes, including
acquisitions. There were no amounts drawn on this facility at June
30, 2005.
In May 2005, FortisAlberta renegotiated its $100 million unsecured
revolving/non-revolving term credit facility to a $150 million
unsecured revolving term credit facility that matures in May 2008.
At June 30, 2005, there was $10.0 million drawn on this facility.
In May 2005, FortisBC renegotiated its $100 million unsecured
revolving/non-revolving term credit facility to a $100 million
unsecured revolving term credit facility that matures in May 2008.
Additionally, in May 2005, FortisBC entered into a $50 million
unsecured revolving/non-revolving credit facility. At June 30, 2005,
there was $44.8 million drawn on this facility. These borrowings are
reported as long-term debt as they can be covered by existing long-
term financing arrangements and Management's intention is to
refinance these borrowings with long-term permanent financing during
future periods.
13. CONTINGENT LIABILITIES AND COMMITMENTS
Contingent liabilities and commitments as of June 30, 2005 are
consistent with disclosures in the annual audited consolidated
financial statements for the year ended December 31, 2004 except as
described below:
(a) Newfoundland Power
In 2002, Canada Revenue Agency ("CRA") confirmed a 2000 reassessment
related to the Newfoundland Power's 1993 taxation year, which
included in income the value of electricity consumed in December
1993 but not billed until January 1994. Newfoundland Power's practice
has been to record revenue on a billed basis. This method has been
audited and accepted previously by CRA and is in accordance with
regulatory requirements.
During the second quarter, Newfoundland Power entered into an
agreement with CRA that provides for the full settlement of this
issue on a prospective basis. Under the terms of the settlement, CRA
will cancel all outstanding reassessments related to the Company's
revenue recognition policy in past years and refund the Company's
deposit along with interest. The provisions of the Income Tax Act
required the Company to deposit approximately $6.9 million with CRA,
representing one half of the amount under appeal. At June 30, 2005,
this deposit has been reclassified as a current receivable on the
balance sheet. Revenue for the second quarter of 2005 includes an
estimated $2.1 million ($1.4 million after-tax) of accrued interest
revenue, as a result of the settlement.
Newfoundland Power will record revenue for income tax purposes on the
accrual basis starting in 2006, and each of the 2006, 2007 and 2008
taxation years will include 1/3 of the value of the electricity
consumed by its customers in December 2005 but not billed until
January 2006. Newfoundland Power will file an application with the
PUB in the second half of 2005 to address the appropriate revenue
recognition policy for regulatory purposes on a prospective basis.
(b) Fortis Alberta
In a statement of claim filed on August 18, 2003 in the Court of the
Queen's Bench of Alberta, EPCOR Energy Services (Alberta) Inc. is
pursuing damages of approximately $83 million for alleged breaches of
certain agreements between it and FortisAlberta, distribution tariff
terms and conditions and fiduciary duty, as well as for negligence.
FortisAlberta has not to date made a definitive assessment of
potential liability with respect to this claim. Management believes
that the claim of approximately $83 million is largely without merit.
Management believes that any finding or ruling against FortisAlberta
would not have an adverse effect on the financial profile of
FortisAlberta.
(c) FortisBC
FortisBC has received correspondence and met with the B.C. Ministry
of Forests (the "Ministry") to discuss the possibility of an invoice
being issued to the Company related to fire suppression costs
associated with certain forest fires in FortisBC's service territory
in 2003. The Ministry has alleged breaches of the Forest Practices
Code and negligence and indicated that they would be filing a writ
against FortisBC. FortisBC is currently communicating with the
Ministry and its insurers.
14. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to comply with
current period's classifications.
CORPORATE INFORMATION
Fortis Inc. is primarily a diversified, international electric
utility holding company with assets of approximately $4.0 billion and
annual revenues of approximately $1.2 billion. The Corporation holds
investments in regulated distribution utilities, non-regulated
generation operations and a non-utility company with investments in
real estate and hotels. The Common Shares, Series C First Preference
Shares and Series E First Preference Shares of Fortis Inc. are traded
on the Toronto Stock Exchange under the symbols FTS, FTS.PR.C, and
FTS.PR.E, respectively. Fortis Inc. information can be accessed at
www.fortisinc.com.
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
W: www.computershare.com
E: service@computershare.com
For the quarter ended June 30, 2005, Fortis Inc. will be filing the
Internal Certification of Interim Filings during Transition Period
(Form 52-109FT2) on SEDAR. Additional information including the
Annual Information Form, Management Information Circular and Annual
Report are available on SEDAR at www.sedar.com.
FOR FURTHER INFORMATION PLEASE CONTACT:
Fortis Inc.
Mr. Barry V. Perry
Vice President Finance and Chief Financial Officer
(709) 737-2800
