ST. JOHN'S, NEWFOUNDLAND AND LABRADOR--(CCNMatthews - Feb. 7, 2006) - Fortis Inc.(TSX:FTS). "We have delivered record earnings for the sixth consecutive year while enhancing prospects for growth in the future," says Stan Marshall, President and Chief Executive Officer, Fortis Inc.
Fortis has experienced significant growth in Canada and the Caribbean region over the past 10 years and today serves more than 1,000,000 electricity customers. The regulated rate base of Fortis utilities is approaching $3 billion and total assets of Fortis now surpass $4.3 billion, more than 3 times total assets in 2000.
Annual earnings were $137.1 million, 50.8 per cent higher than earnings of $90.9 million last year. Earnings per common share were $1.35 compared to $1.07 last year. The increase in earnings was primarily due to a full year of earnings contributions from FortisAlberta and FortisBC, which were acquired on May 31, 2004, higher wholesale energy prices in Ontario, higher equity income from Caribbean Utilities, and a $7.9 million after-tax gain resulting from the settlement of contractual matters between FortisOntario and Ontario Power Generation Inc. (the "OPGI Settlement"). The increase was partially offset by higher corporate finance charges associated with the acquisition of FortisAlberta and FortisBC.
Earnings for the fourth quarter were $22.3 million, or $0.22 per common share, compared to $21.2 million, or $0.22 per common share, for the fourth quarter of 2004. Higher earnings from Non-regulated Generation, related mainly to higher average wholesale energy prices and increased production, were partially offset by lower earnings from Regulated Utilities. Fourth quarter earnings at FortisAlberta were reduced by a one-time adjustment of approximately $3.0 million largely related to the implementation of the Negotiated Rate Settlement reached on May 24, 2005.
"Fortis has increased its annual dividend payment for 32 consecutive years, the longest record of any public corporation in Canada," says Marshall. Dividends paid to common shareholders increased to 59 cents, up from 54 cents per common share last year. The quarterly common share cash dividend increased 12.3 per cent to 16 cents per common share, commencing with the fourth quarter dividend paid on December 1, 2005.
Canadian Regulated Utilities delivered $104.8 million in earnings in 2005, 31.3 per cent higher than earnings of $79.8 million last year. All utilities achieved higher earnings year over year with the exception of Newfoundland Power where results declined slightly mainly due to a formula-driven reduction in its allowed rate of return on equity.
"FortisBC and FortisAlberta have been substantially integrated within the Fortis Group," says Marshall. "FortisBC was established as a stand-alone company in 2005. Separate senior management teams and boards of directors are now in place at both utilities. FortisAlberta signed a 10-year franchise agreement with the City of Airdrie and reached an agreement with EPCOR Energy Services (Alberta) Inc. to settle all aspects of a claim arising prior to acquisition by Fortis. The Airdrie Agreement and the EPCOR settlement resolved the last remaining outstanding issues related to the acquisition of FortisAlberta," explains Marshall.
Fortis invested approximately $425 million in its consolidated utility capital program this year. FortisBC and FortisAlberta invested approximately $116 million and $165 million, before customer contributions, respectively, to meet growth in energy demand and to enhance the reliability of their electricity systems. "Over the next 5 years, investments in utility capital projects are expected to approach $2 billion. This substantial investment, most of which will occur at our western utilities, is required to ensure that we continue to meet the needs of existing and new customers," adds Marshall.
Our Caribbean Regulated Utilities contributed $19.4 million to earnings in 2005, $11.4 million higher than earnings in 2004. Belize Electricity's results were driven by an 11 per cent increase in electricity rates, effective July 1, 2005, as a result of a 4-year tariff agreement, and higher electricity sales. At Caribbean Utilities, the return to close-to-normal operations following Hurricane Ivan helped increase equity income. In the fourth quarter of 2004, Fortis incurred a charge of $8.2 million associated with the damage to Caribbean Utilities in Grand Cayman from Hurricane Ivan, the Category V hurricane which caused unprecedented damage to the infrastructure of the Cayman Islands in September 2004.
Non-regulated Generation operations contributed $29.6 million to earnings in 2005 compared to $12.8 million last year. The operating segment results were primarily driven by higher wholesale energy prices in Ontario, which averaged $68.49 per megawatt hour ("MWh") in 2005 compared to $49.95 per MWh last year, and the $7.9 million after-tax gain resulting from the OPGI Settlement.
"The completion of the Chalillo hydroelectric project this year marks a significant milestone for Belize towards becoming an energy self-sufficient country," says Marshall. The upstream storage and hydroelectric generating facility is expected to double average energy production from the Macal River to 160 gigawatt hours.
Fortis Properties achieved earnings of $14.1 million in 2005 compared to $11.8 million last year. The Company's performance was strengthened by the contribution of the 3 Greenwood Inn hotels in Alberta and Manitoba, acquired in February, and the completion of the Delta St. John's Hotel expansion. Fortis Properties' operations now include almost 3,000 hotel rooms and approximately 2.7 million square feet of commercial real estate.
"We will continue to focus on fulfilling our obligation to serve our customers and to grow our business profitability," says Marshall. "As we move through 2006 and beyond, we will maintain our discipline as we identify growth opportunities which add value for our customers and value for our shareholders. As we implement our growth strategy, we will continue to leverage the technical and management expertise which underpins our reputation as a leading operator of utilities," says Marshall.
"We wish to acknowledge the leadership, guidance and wisdom of Dr. Angus Bruneau, Chair of the Board of Directors of Fortis Inc., who will be retiring from our Board this year," concludes Marshall. Dr. Bruneau will not be standing for re-election to the Board of Fortis Inc. at the Fortis Annual General Meeting in May 2006 in accordance with Board policy regarding director retirement. Dr. Bruneau held the position of President and Chief Executive Officer of Fortis Inc. when the company was incorporated in 1987 and has served as Chair of the Board since 1988.
Fortis Inc.
Interim Management Discussion and Analysis
For the three and twelve months ended December 31, 2005
Dated February 7, 2006
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 twelve months ended December
31, 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 December 31st
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($ millions, except per
common share amounts) Quarter Annual
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2005 2004 2005 2004
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Revenue and equity income 353.1 337.2 1,441.5 1,146.1
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Cash flow from operations 74.4 91.6 303.4 272.3
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Net earnings applicable
to common shares 22.3 21.2 137.1 90.9
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Basic earnings per
common share ($)(1) 0.22 0.22 1.35 1.07
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Diluted earnings per
common share ($)(1) 0.21 0.21 1.24 1.01
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Segmented Net Earnings Contribution
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Quarter Annual
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2005 2004 2005 2004
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Newfoundland Power 2.9 3.3 30.7 31.1
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Maritime Electric 1.7 1.8 9.1 8.2
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FortisOntario 0.2 0.9 4.3 4.2
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FortisAlberta(2) 4.2 7.5 36.1 18.6
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FortisBC(2) 5.7 11.6 24.6 17.7
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Regulated Utilities
- Canadian 14.7 25.1 104.8 79.8
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Belize Electricity 2.0 1.6 8.0 7.2
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Caribbean Utilities
- Equity Income 2.8 (5.8) 11.4 0.8
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Regulated Utilities
- Caribbean 4.8 (4.2) 19.4 8.0
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Total Regulated Utilities 19.5 20.9 124.2 87.8
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Non-regulated
- Fortis Generation (3) 8.5 4.7 29.6 12.8
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Non-regulated
- Fortis Properties 2.9 2.8 14.1 11.8
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Corporate (8.6) (7.2) (30.8) (21.5)
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Net earnings applicable
to common shares 22.3 21.2 137.1 90.9
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(1) Earnings per common share data reflect the 4-for-1 stock split
completed in October 2005.
(2) Financial results for FortisAlberta and FortisBC are from June 1,
2004.
(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 applicable to common shares for the fourth quarter were
$22.3 million, or $0.22 per common share, compared to $21.2 million,
or $0.22 per common share, for the same quarter last year. Higher
earnings from Non-regulated Generation, as a result of higher
wholesale energy prices in Ontario and Upper New York State and
increased production, partially offset by increased operating
expenses, were partially offset by decreased earnings from Regulated
Utilities and higher Corporate expenses. The decrease in earnings
from Regulated Utilities was primarily driven by lower earnings at
FortisAlberta and FortisBC, partially offset by higher equity income
from Caribbean Utilities. FortisAlberta's earnings for the fourth
quarter of 2005 were reduced by a one-time adjustment of
approximately $3.0 million largely related to the implementation of
the Negotiated Rate Settlement reached on May 24, 2005.
Additionally, during the fourth quarter of last year, FortisBC
recorded a $3.7 million after-tax increase to earnings related to the
refinement of the process of estimating unbilled electricity revenue.
Also, equity income in the fourth quarter of 2004 included an $8.2
million charge associated with the damage from Hurricane Ivan.
Annual net earnings applicable to common shares were $137.1 million,
or $1.35 per common share, compared to $90.9 million, or $1.07 per
common share, for 2004. The increase in earnings was primarily due
to a full year of earnings contributions from FortisAlberta and
FortisBC, the favourable impact of higher wholesale energy prices in
Ontario, higher equity income from Caribbean Utilities, and a $7.9
million after-tax gain resulting from the settlement of contractual
matters between FortisOntario and Ontario Power Generation Inc.
("OPGI"). The increase was partially offset by higher corporate
finance charges associated with the acquisition of FortisAlberta and
FortisBC in 2004. With the exception of Newfoundland Power, all
operating segments reported improved financial results over last
year. Newfoundland Power's earnings declined slightly mainly due to
a formula-driven 51 basis point reduction in its allowed rate of
return on common equity ("ROE") in 2005.
Earnings per common share for the quarter and the year, compared to
the same periods in 2004 were impacted by the dilution created by the
$130 million issue of common shares in March 2005.
REGULATED UTILITIES - CANADIAN
Newfoundland Power
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Newfoundland Power
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Electricity Sales (GWh) 1,191 1,236 5,004 4,979
---------------------------------------------------------------------
($ millions)
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Revenue 101.4 104.3 420.0 404.4
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Energy Supply Costs 69.1 71.9 256.0 244.0
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Operating Expenses 13.9 14.0 53.8 51.8
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Amortization 6.3 6.4 32.1 31.0
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Finance Charges 7.9 7.6 31.4 30.4
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Corporate Taxes 1.2 1.0 15.4 15.5
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Non-controlling Interest 0.1 0.1 0.6 0.6
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Earnings 2.9 3.3 30.7 31.1
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Newfoundland Power's earnings for the fourth quarter were $2.9
million compared to $3.3 million for the same quarter last year. The
$0.4 million net decrease in quarterly earnings was due to lower
electricity sales, an 0.5 per cent decrease in customer electricity
rates, effective January 1, 2005, costs associated with an early
retirement program offered in the first quarter of 2005 and higher
finance charges, partially offset by a lower purchase power unit
cost, the seasonal effect of the new purchased power rate structure
and reduced operating expenses. Annual earnings were $30.7 million
compared to $31.1 million last year. The $0.4 million net decrease
in annual earnings was due to the 0.5 per cent decrease in customer
electricity rates, early retirement program costs and higher
amortization costs and finance charges. The decrease in earnings was
partially mitigated by interest revenue that resulted from the income
tax settlement with Canada Revenue Agency ("CRA") in June 2005, a
lower purchase power unit cost, higher electricity sales and
increased revenue from pole rentals.
Electricity sales for the fourth quarter were 1,191 gigawatt hours
("GWh"), 3.6 per cent lower than electricity sales of 1,236 GWh for
the same quarter last year. The decrease was primarily a result of
lower average customer usage and normal variation on the meter
reading schedule, partially offset by an increase in the number of
customers. Annual electricity sales were 5,004 GWh, 0.5 per cent
higher than electricity sales of 4,979 GWh last year. Residential
electricity sales increased 0.3 per cent and commercial electricity
sales and street lighting increased 0.2 per cent compared to last
year.
Revenue for the fourth quarter was $101.4 million compared to $104.3
million for the same quarter last year. The $2.9 million decrease in
quarterly revenue was due to lower electricity sales and the 0.5 per
cent decrease in customer electricity rates, partially offset by
higher revenue from pole rentals. The electricity rate reduction
resulted from the operation of the automatic adjustment formula which
reduced the forecast ROE for the purpose of setting rates from 9.75
per cent in 2004 to 9.24 per cent in 2005.
Annual revenue was $420.0 million compared to $404.4 million last
year. The $15.6 million increase in annual revenue was due to a 5.4
per cent increase in electricity rates charged to customers,
effective July 1, 2004, as a result of the flow through of an
increase in the rate Newfoundland and Labrador Hydro ("Newfoundland
Hydro") charges the Company for purchased power. Due to this change,
both revenue and purchased power, as described below, increased in
2005 by approximately $12.0 million. Both increases had no impact on
Newfoundland Power's 2005 earnings. Annual revenue also increased as
a result of higher electricity sales, increased pole rentals and
interest revenue related to the CRA income tax settlement, partially
offset by the 0.5 per cent reduction in customer electricity rates,
effective January 1, 2005.
In June 2005, the Company entered into an agreement with CRA that
provided for the full settlement of the Company's revenue recognition
policy for tax purposes on a prospective basis, beginning in 2006.
The Company's policy has been to record revenue on a billed basis, in
accordance with regulatory practice, whereas the position of the CRA
is that revenue should be recorded on an accrual basis for income tax
purposes. CRA cancelled all outstanding reassessments related to the
Company's revenue recognition policy in past years and refunded the
Company's $6.9 million income tax deposit along with interest.
Revenue in 2005 included $2.1 million of interest revenue, resulting
in increased earnings of $1.4 million, net of tax, as a result of the
CRA income tax settlement.
Energy supply costs for the fourth quarter were $69.1 million
compared to $71.9 million for the same quarter last year. The $2.8
million decrease in quarterly energy supply costs was primarily due
to reduced electricity sales and a lower purchased power unit cost.
As well, purchased power for the fourth quarter of 2005 included the
seasonal impact of a new purchased power rate structure, effective
January 1, 2005.
Annual energy supply costs were $256.0 million compared to $244.0
million last year. The July 1, 2004 increase in the rate charged by
Newfoundland Hydro, as described above, resulted in a $12.0 million
increase in energy supply costs. Annual energy supply costs also
increased due to electricity sales growth offset by a lower purchase
power unit cost compared to last year.
Effective January 1, 2005, the introduction of a new purchased power
rate structure changed the basis upon which Newfoundland Hydro
charges the Company for purchased power. This change was the result
of an order of the Newfoundland and Labrador Board of Commissioners
of Public Utilities ("PUB") and was intended to promote energy
conservation.
The change in the purchased power rate structure resulted in a
movement from an energy only charge to an energy and demand charge
from Newfoundland Hydro to Newfoundland Power. Under this rate
structure, a portion of the Company's annual purchased power cost,
the demand charge, is set at a fixed amount based on peak billing
demand for the previous winter season. Previously, under the energy
only rate structure, purchased power costs varied based on the amount
of electricity used by Newfoundland Power's customers. Based on the
Company's demand and energy sales, the cost of purchased power per
kilowatt hour ("kWh") was 5.225 cents in 2005 compared to 5.234 cents
in the latter half of 2004.
Operating expenses for the fourth quarter were $13.9 million,
comparable to the same quarter last year. Annual operating expenses
were $53.8 million compared to $51.8 million last year. The $2.0
million increase in annual operating expenses was primarily due to
the amortization of pension costs and retirement allowances
associated with the early retirement program offered in the first
quarter of 2005. In total, 76 employees retired under the early
retirement program, completed in April 2005, which resulted in a
reduction in labour costs that effectively offset normal wage
increases. Additional labour savings were realized as a result of
improved system reliability and better weather conditions year over
year. Continued focus on cost management and control initiatives
also mitigated the impact of other inflationary increases.
Amortization costs were $6.3 million, comparable to the same quarter
last year. Annual amortization costs increased $1.1 million over
last year. The increase in annual amortization costs related to
continued investment in the Company's property, plant and equipment
required to provide electricity service.
Finance charges for the fourth quarter were $7.9 million compared to
$7.6 million for the same quarter last year. Annual finance charges
were $31.4 million compared to $30.4 million last year. The increase
in quarterly and annual finance charges was primarily due to the
replacement of $60.0 million of lower-cost short-term borrowings with
30-year 5.441% first mortgage sinking fund bonds in August 2005.
On December 23, 2005, the Company received an order from the PUB with
respect to an Accounting Policy Application filed in September 2005.
The PUB approved the proposed change to Newfoundland Power's revenue
recognition policy from the billed basis to the accrual basis for
financial and regulatory purposes, effective January 1, 2006. The
Company also received approval to recognize $3.1 million of the 2005
unbilled revenue balance as revenue in 2006 to offset the impact of
the transition to the accrual basis for income tax purposes, and to
defer recovery of approximately $5.8 million in increased
amortization of capital assets in 2006. The disposition of the
remaining 2005 unbilled revenue balance has been deferred until the
Company's next general rate application ("GRA") which is anticipated
in 2006 for the purpose of setting electricity rates for 2007.
In January 2006, the Company received approval from the PUB of its
final 2006 electricity rates, which remain unchanged from 2005. The
rates are based on a range of return on rate base of 8.50 per cent to
8.86 per cent, which includes an ROE of 9.24 per cent, also unchanged
from 2005.
Maritime Electric
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Maritime Electric
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Electricity Sales (GWh) 242 242 989 977
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($ millions)
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Revenue 28.9 27.8 116.7 115.4
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Energy Supply Costs 18.3 16.8 71.6 71.3
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Operating Expenses 3.4 3.4 12.5 12.4
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Amortization 2.4 2.3 9.7 9.2
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Finance Charges 1.8 2.2 7.6 8.7
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Corporate Taxes 1.3 1.3 6.2 5.6
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Earnings 1.7 1.8 9.1 8.2
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Maritime Electric's earnings for the fourth quarter were $1.7
million, comparable to the same quarter last year. Annual earnings
were $9.1 million compared to $8.2 million last year. The $0.9
million increase in annual earnings was primarily due to increased
electricity sales, a 2 per cent increase in basic electricity rates,
effective July 1, 2005, and lower finance charges.
On January 6, 2005, the Island Regulatory and Appeals Commission
("IRAC") issued an Interim Order which re-established an energy cost
adjustment mechanism ("ECAM") with application to the period
commencing January 1, 2004. This mechanism will help mitigate the
impact of fluctuating energy costs on the Company's financial results
as it will allow Maritime Electric to collect/rebate energy costs
above/below a base rate of 6.73 cents per kWh. The Interim Order
also allowed Maritime Electric to commence amortization of the $20.8
million in recoverable costs accumulated as at December 31, 2003.
Recoverable costs of $1.5 million were amortized in 2004 while $2.5
million was amortized in 2005.
On June 24, 2005, IRAC issued its Order with respect to Maritime
Electric's GRA filed in April 2004 for the period ending June 30,
2006. The Order approved the requested 2 per cent increase in basic
electricity rates, effective July 1, 2005, with the new ECAM,
effective January 1, 2004, to remain in effect until June 30, 2006.
Electricity sales for the fourth quarter were 242 GWh, comparable to
the same quarter last year. Annual electricity sales were 989 GWh,
an increase of 1.2 per cent over last year. A 0.4 per cent increase
in residential sales was largely due to an expanded customer base
while a 2.0 per cent increase in commercial sales was driven by
customers in the general service and small industrial sectors.
Revenue for the fourth quarter was $28.9 million compared to $27.8
million for the same quarter last year. Annual revenue was $116.7
million compared to $115.4 million last year. The increase in
quarterly and annual revenue was the result of the 2 per cent basic
electricity rate increase, effective July 1, 2005, and higher
electricity sales, partially offset by increased amortization of
recoverable costs as permitted by the January 6, 2005 Interim Order.
Energy supply costs for the fourth quarter were $18.3 million
compared to $16.8 million for the same quarter last year. Favorable
adjustments related to the operation of the new ECAM resulted in a
$1.5 million reduction in energy supply costs in the fourth quarter
of 2004. Annual energy supply costs were $71.6 million compared to
$71.3 million last year. The $0.3 million increase in annual energy
supply costs was primarily due to increased energy sales. Annual
gross energy supply costs, before ECAM adjustments, however, were
$8.2 million lower than last year primarily due to the expiration of
the Emera Inc. purchase power contract in December 2004 and lower-
than-anticipated curtailable energy costs. During 2005, Maritime
Electric purchased the majority of its energy from New Brunswick
Power Corporation ("NB Power") under several energy purchase
agreements.
Amortization costs for the fourth quarter were $2.4 million,
comparable to the same quarter last year. Annual amortization costs
were $9.7 million compared to $9.2 million last year. The increase in
annual amortization costs reflects the Company's continued investment
in its energy delivery system infrastructure.
Finance charges for the fourth quarter were $1.8 million compared to
$2.2 million for the same quarter last year. Annual finance charges
were $7.6 million compared to $8.7 million last year. The decrease
in quarterly and annual finance charges reflected the continued use
of short-term financing for and the capitalization of interest costs
associated with the construction of the 50-megawatt ("MW") combustion
turbine generating facility in Charlottetown, Prince Edward Island.
Maritime Electric is currently in the commissioning phase of the $35
million 50-MW generating facility. This facility, which can operate
on light oil or natural gas, will address submarine cable loading
issues, reduce the Company's reliance on imported electricity and
improve security of supply. The commissioning and winter operation
testing is scheduled for completion in February 2006.
On November 8, 2005, Maritime Electric filed an application with
respect to its proposed 2006 Capital Budget which was approved by
IRAC on January 20, 2006.
On January 31, 2006, the Company filed an application with IRAC
proposing an overall increase in customer electricity rates of 1.6
per cent, effective July 1, 2006, and a further amortization of $1.5
million in 2006 and $1.3 million in 2007 of the recoverable costs
accumulated as at December 31, 2003.
FortisOntario(1)
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FortisOntario
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Electricity Sales (GWh) 296 300 1,195 1,198
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($ millions)
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Revenue 32.9 31.9 139.7 125.2
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Energy Supply Costs 25.7 25.5 110.2 96.5
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Operating Expenses 4.1 3.1 14.5 12.3
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Amortization 1.3 1.0 5.1 4.8
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Finance Charges 1.3 1.3 5.1 5.2
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Corporate Taxes 0.3 0.1 0.5 2.2
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Earnings 0.2 0.9 4.3 4.2
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(1) FortisOntario is comprised of Canadian Niagara Power Inc.
("Canadian Niagara Power") and Cornwall Street Railway, Light and
Power Company, Limited ("Cornwall Electric").
FortisOntario's earnings for the fourth quarter were $0.2 million
compared to $0.9 million for the same quarter last year. The $0.7
million decrease in quarterly earnings was primarily due to costs
associated with an early retirement program offered in the fourth
quarter of 2005 and increased operating expenses. Annual earnings
were $4.3 million, comparable to last year. The recognition of a
$1.6 million future tax asset associated with the favourable
resolution of a CRA reassessment related to Cornwall Electric in 2005
was nearly offset by the costs associated with the early retirement
program and increased operating expenses.
Electricity sales of 296 GWh and 1,195 GWh for the fourth quarter and
the year, respectively, were comparable to the same periods last
year.
Revenue for the fourth quarter was $32.9 million compared to $31.9
million for the same quarter last year. The $1.0 million net
increase in quarterly revenue was primarily due a change in the cost
of power component billed to Canadian Niagara Power's customers,
partially offset by a decrease in Cornwall Electric's electricity
rates, effective July 1, 2005. Annual revenue was $139.7 million
compared to $125.2 million last year. The $14.5 million net increase
in annual revenue was primarily due to a 12 per cent increase in
Cornwall Electric's electricity rates on July 1, 2004, the change in
the cost of power component billed to Canadian Niagara Power's
customers, partially offset by a 4.5 per cent decrease in Cornwall
Electric's rates effective July 1, 2005. The change in the cost of
power component billed increased both revenue and energy supply
costs; however, it did not impact earnings.
Energy supply costs for the fourth quarter were $25.7 million
compared to $25.5 million for the same quarter last year. Annual
energy supply costs were $110.2 million compared to $96.5 million
last year. The increase in quarterly and annual energy supply costs
was primarily related to increased cost of power at Cornwall Electric
and the change in the cost of power component billed to Canadian
Niagara Power's customers.
Operating expenses for the fourth quarter were $4.1 million compared
to $3.1 million for the same quarter last year. Annual operating
expenses were $14.5 million compared to $12.3 million last year. The
increase in quarterly and annual operating expenses was primarily due
to $0.8 million in costs associated with the early retirement program
offered in the fourth quarter of 2005, and an increase in the
allocation of shared service costs from non-regulated Ontario
generation operations of $0.3 million for the quarter and $1.4
million for the year. The allocation increase resulted from a recent
internal cost allocation study.
Amortization costs for the fourth quarter were $1.3 million compared
to $1.0 million for the same quarter last year. Annual amortization
costs were $5.1 million compared to $4.8 million last year. The
increase in quarterly and annual amortization costs was due to
continued investment in the Company's property, plant and equipment
required to provide electricity service.
Corporate taxes for the fourth quarter were $0.3 million, slightly
higher than $0.1 million for the same quarter last year. Annual
corporate taxes were $0.5 million compared to $2.2 million last year.
The $1.7 million net decrease in annual corporate taxes was primarily
due to the recognition of a $1.6 million future tax asset associated
with the favourable resolution of a CRA reassessment of a tax asset
created when Cornwall Electric was acquired by a previous owner.
This was partially offset by the impact of a higher effective
corporate income tax rate compared to last year.
On September 6, 2005, Canadian Niagara Power made application to the
Ontario Energy Board ("OEB") for new electrical distribution rates,
effective May 1, 2006. The new electrical distribution rates are
based on 2004 costs using a deemed capital structure, at 50 per cent
long-term debt and 50 per cent common equity, with an allowed ROE of
9.0 per cent. On September 6, 2005, applications were made for the
final approval of regulatory asset and liability balances, as of
December 31, 2004, and the approval of "Rate Riders" to recover these
balances, beginning May 1, 2006. Approval had previously been given
by the OEB for the interim recovery of these regulatory assets and
liabilities. Regulatory assets and liabilities arising in 2005 will
be subject to rate recovery in future rate applications.
FortisAlberta (2)
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FortisAlberta
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
2005 2004(2) 2005 2004(2)
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Electricity Sales (GWh) 3,833 3,537 14,445 7,964
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($ millions)
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Revenue 58.7 57.3 259.8 129.7
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Operating Expenses 30.0 27.7 113.0 60.2
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Amortization 15.8 13.7 61.4 31.3
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Finance Charges 6.3 5.9 24.2 10.8
---------------------------------------------------------------------
Corporate Taxes 2.4 2.5 25.1 8.8
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Earnings 4.2 7.5 36.1 18.6
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(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 from June 1, 2004.
On May 31, 2004, Fortis, through an indirect 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 central and southern Alberta and distributes electricity to approximately 415,000 customers using approximately 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 dealing with all aspects of FortisAlberta's 2005 Distribution Access Tariff Application. The Negotiated Settlement resulted in a 2005 distribution revenue requirement of $215.4 million which translated into a 2.1 per cent increase on base rates for 2005, effective August 1, 2005. The approved revenue requirement reflected forecast operating expenses of $101.0 million and capital expenditures of $134.3 million, before customer contributions. The cumulative impact of the Negotiated Settlement on results for the first half of 2005 was reflected in the second quarter of 2005. FortisAlberta billed customers on interim rates for the period January 1, 2005 through July 31, 2005. The revenue shortfall for this period was collected from customers over the period August 2005 through December 2005 through a distribution adjustment rider.
On November 22, 2005, as a result of the operation of the automatic adjustment formula, the AEUB issued its Return on Equity Decision which set FortisAlberta's allowed ROE at 8.93 per cent for 2006, down from 9.5 per cent for 2005. This decrease is directly related to lower long-term Canada bond yields.
The Company filed its 2006/2007 Distribution Access Tariff Application ("2006/2007 Application") with the AEUB on December 12, 2005. The 2006/2007 Application includes a 2006 distribution revenue requirement of $221.2 million. This revenue requirement reflects a forecast level of operating expenses of $103.6 million and a forecast level of capital expenditures of $193.0 million, before customer contributions. If approved, the filing will result in no distribution rate increase in 2006 and a 3 per cent rate increase to customer rates in 2007. More than 75 per cent of the Company's capital expenditures in 2006 and 2007 will be directed towards improving and expanding poles and wires facilities. On December 20, 2005, interim rates were approved by the AEUB, effective January 1, 2006. A decision on the 2006/2007 Application is expected in the latter part of 2006.
On August 8, 2005, FortisAlberta announced that an agreement was reached with EPCOR Energy Services (Alberta) Inc. ("EPCOR") to settle all aspects of the claim filed on August 18, 2003 in the Court of Queen's Bench of Alberta. All amounts related to the settlement were reflected in the second quarter results of FortisAlberta as the Company had adequate provisions in its financial statements to offset the impact of the settlement. Proceeds received under an insurance policy have partially offset the settlement of the EPCOR claim and were reflected in the third quarter.
FortisAlberta's earnings for the fourth quarter were $4.2 million compared to $7.5 million for the same quarter last year. The $3.3 million decrease in quarterly earnings was primarily due to revenue deferrals and higher amortization costs, resulting from the Negotiated Settlement, as well as higher finance charges and a higher effective corporate income tax rate. Annual earnings were $36.1 million compared to $18.6 million for the 7-month period ended December 31, 2004. The $17.5 million increase in annual earnings was primarily due to a full year of earnings contributions from FortisAlberta in 2005. Annual results for FortisAlberta included $7.1 million in earnings primarily associated with the resolution of items pertaining to prior periods relating to taxes, load settlement and the EPCOR claim settlement, net of the insurance recovery, partially offset by adjustments associated with the implementation of the Negotiated Settlement and the impact of a higher effective corporate income tax rate.
Electricity sales for the fourth quarter were 3,833 GWh, 8.4 per cent higher than electricity sales of 3,537 GWh for the same quarter last year. The increase in quarterly electricity sales was mainly due to an increase in both consumption and the number of customers in the residential, commercial, and oil and gas sectors due to a strong provincial economy. These increases were partially offset by decreased consumption in the farming and irrigation sector as a result of unusually high levels of precipitation in 2005. Annual electricity sales were 14,445 GWh compared to 7,964 GWh for the 7-month period ended December 31, 2004. Total electricity sales for 2004 were 13,908 GWh. Annual electricity sales were also impacted by the factors described for the quarter.
Revenue for the fourth quarter was $58.7 million compared to $57.3 million for the same quarter last year. The $1.4 million net increase in quarterly revenue was primarily due to the 2.1 per cent increase in electricity rates, higher electricity sales, higher gains related to transmission revenue and costs, and the unfavourable impact on revenue in the fourth quarter of 2004 associated with certain billing adjustments. The increase was partially offset by a deferral of revenue related to future income taxes collected in rates, resulting from the Negotiated Settlement, and a decrease in other revenue. The decrease in other revenue was due to the fourth quarter of 2004 including revenue earned by FortisAlberta as a result of post-Hurricane Ivan restoration assistance provided to Caribbean Utilities. Annual revenue was $259.8 million compared to $129.7 million for the 7-month period ended December 31, 2004. Annual revenue was favourably impacted by higher electricity rates and sales, increased franchise fee revenue and higher gains related to transmission revenue and costs, partially offset by a decrease in other revenue as described above for the quarter. Annual revenue was also favourably impacted by the resolution of tax-related matters resulting in the reduction of liabilities associated with prior periods, the insurance recovery related to the settlement of the EPCOR claim and the finalization of load settlement amounts related to prior periods.
Operating expenses for the fourth quarter were $30.0 million compared to $27.7 million for the same quarter last year. The $2.3 million increase in quarterly operating expenses was primarily due to higher labour, overtime and material costs associated with increased line maintenance activities, an increase in property taxes and a change from 2004 in the method used to record inter-company operating expense recoveries. Annual operating expenses were $113.0 million compared to $60.2 million for the 7-month period ended December 31, 2004. Annual operating expenses were also impacted by the factors described for the quarter.
Amortization costs for the fourth quarter were $15.8 million compared to $13.7 million for the same quarter last year. The $2.1 million increase in quarterly amortization costs was due to higher depreciation rates as a result of the Negotiated Settlement and an increase in capital assets primarily due to load growth within the Company's service territory. Annual amortization costs were $61.4 million compared to $31.3 million for the 7-month period ended December 31, 2004. Annual amortization costs were also impacted by the factors described for the quarter.
Finance charges for the fourth quarter were $6.3 million compared to $5.9 million for the same quarter last year. Coincident 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. Finance charges were higher primarily due to the interest rate on the $400 million public debentures issued on October 25, 2004 being higher than that on the short-term bridge facility, noted above, that was repaid with the proceeds of the debenture issue. Annual finance charges were $24.2 million compared to $10.8 million for the 7-month period ended December 31, 2004. Annual finance charges were also impacted by the factors described for the quarter.
Corporate taxes for the fourth quarter were $2.4 million compared to $2.5 million for the same quarter last year. Compared to the fourth quarter last year, the effective income tax rate was higher primarily due to the impact of adjustments resulting from differences between income for accounting and income tax purposes. Annual corporate taxes were $25.1 million compared to $8.8 million for the 7-month period ended December 31, 2004. Annual corporate taxes were also impacted by the factor described for the quarter, in addition to the impact of higher earnings in 2005.
In June 2005, FortisAlberta and the City of Airdrie signed a 10-year electric distribution franchise agreement. The franchise agreement grants FortisAlberta the exclusive right to own, operate and maintain the electric distribution service within the City of Airdrie's rights-of-way.
FortisBC (3)
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FortisBC
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
2005(4) 2004(3) 2005(4) 2004(3)
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Electricity Sales (GWh) 820 789 2,968 1,662
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($ millions)
---------------------------------------------------------------------
Revenue 50.2 55.1 194.7 109.5
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Energy Supply Costs 15.9 16.1 60.4 32.9
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Operating Expenses 16.8 15.4 64.8 33.4
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Amortization 4.9 4.2 19.0 9.9
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Finance Charges 5.4 3.1 18.5 8.5
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Corporate Taxes 1.5 4.7 7.4 7.1
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Earnings 5.7 11.6 24.6 17.7
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(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 from June 1, 2004. The FortisBC
segment includes the regulated operations of FortisBC Inc., non-
regulated operating, maintenance and management services related
to the Waneta, Brilliant and Arrows Lake hydroelectric plants,
and the operations of Princeton Light and Power Company, Limited
("PLP") as described below.
(4) On May 31, 2005, Fortis, through an indirect wholly owned
subsidiary, acquired PLP. Financial results for PLP are included
in the FortisBC segmented results from June 1, 2005.
On May 31, 2004, Fortis, through an indirect wholly owned subsidiary, acquired all of the issued and outstanding shares of Aquila Networks Canada (British Columbia) Ltd. (renamed "FortisBC"). FortisBC is an integrated electric utility operating in the southern interior of British Columbia, serving directly and indirectly approximately 150,000 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 regulatory ("PBR") 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, filed on November 26, 2004, approving a 3.4 per cent electricity rate increase, effective January 1, 2005. This rate replaced the interim refundable rate of 3.7 per cent. Due to the change in rates, approximately $0.3 million was refunded to customers during the third quarter of 2005. The decision also approved an ROE of 9.43 per cent, the continuation of a common equity ratio of 40 per cent and the 2005 Capital Plan in the amount of $121.6 million.
In order to establish 2006 rates, FortisBC filed a Revenue Requirements Application ("2006 Application") with the BCUC on November 24, 2005. FortisBC's 2006 Application seeks approval of a 5.9 per cent electricity rate increase, effective January 1, 2006. The rate increase is primarily related to the Company's capital expenditure program. The BCUC approved an interim refundable rate increase of 5.9 per cent, effective January 1, 2006. The 2006 Application will be reviewed with the BCUC in February 2006, with negotiation or hearing scheduled thereafter, and includes a proposed new PBR mechanism to determine revenue requirements for 2007 through 2009. The 2006 Application is based on the continuation of the Generic ROE mechanism and a cost of capital for rate making purposes to reflect a capital structure of 40 per cent equity and 60 per cent debt. The ROE used in the 2006 Application was 8.69 per cent, down from 9.43 per cent for 2005. This decrease is directly related to lower long-term Canada bond yields.
On January 31, 2006, FortisBC received approval from the BCUC for its $111.7 million 2006 Capital Plan, with approximately $27.0 million in projects subject to a further approval process. Significant areas of capital investment planned for 2006 include the expansion and upgrading of the transmission and distribution systems in the South Okanagan and Kelowna areas. Planned capital expenditures also include the continuation of upgrades and life extension work on hydroelectric generation facilities on the Kootenay River.
In June 2005, a British Columbia utility applied to the BCUC for, among other things, a review of the current ROE adjustment mechanism that also applies to FortisBC. The application is subject to a regulatory process in which FortisBC is participating to the extent that the proceedings affect FortisBC. The impact and materiality of any changes to the ROE adjustment mechanism cannot be estimated or reasonably determined at this time. A decision on the ROE adjustment mechanism is expected in the first quarter of 2006.
On May 31, 2005, Fortis, through an indirect 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 from June 1, 2005.
FortisBC's earnings for the fourth quarter were $5.7 million compared to $11.6 million for the same quarter last year. The $5.9 million net decrease in quarterly earnings was primarily due to lower accrued unbilled electricity revenue and increased operating expenses, amortization costs and finance charges, partially offset by an increase in other revenue. Annual earnings were $24.6 million compared to $17.7 million for the 7-month period ended December 31, 2004. The $6.9 million increase in annual earnings was primarily due a full year of earnings contribution from FortisBC in 2005.
Electricity sales for the fourth quarter were 820 GWh compared to 789 GWh for the same quarter last year. The 3.9 per cent increase in quarterly electricity sales was mainly due to an increase in the number of residential customers, as a result of continued population growth in the Okanagan region, and increased heating loads caused by cooler winter weather in 2005. Annual electricity sales were 2,968 GWh compared to 1,662 GWh for the 7-month period ended December 31, 2004. Total electricity sales for 2004 were 2,873 GWh. Annual electricity sales were also favourably impacted by the factors described for the quarter.
Revenue for the fourth quarter was $50.2 million compared to $55.1 million for the same quarter last year. The $4.9 million net decrease in quarterly revenue was due to higher revenue in the fourth quarter last year as a result of a $5.7 million ($3.7 million after-tax) favourable adjustment to unbilled revenue and an overall refinement in the process of estimating unbilled revenue for 2004. This decrease was partially offset by increased electricity sales, the 3.4 per cent increase in electricity rates, effective January 1, 2005, and higher other revenue. Other revenue was higher quarter over quarter primarily due to an increase in PBR incentive adjustments. Annual revenue was $194.7 million compared to $109.5 million for the 7-month period ended December 31, 2004. Annual revenue was similarly impacted by the factors described for the quarter with the exception of a decrease in other revenue during 2005 as a result of PBR adjustments.
Energy supply costs were $15.9 million, slightly lower than $16.1 million for the same quarter last year. Annual energy supply costs were $60.4 million compared to $32.9 million for the 7-month period ended December 31, 2004. Annual energy supply costs for 2005 were impacted by increased purchase volumes, partially offset by lower average power purchase prices. Energy supply costs for the 7-month period ended December 31, 2004 included a $1.1 million favourable adjustment which reduced energy supply costs for that period.
Operating expenses for the fourth quarter were $16.8 million compared to $15.4 million for the same quarter last year. The $1.4 million increase in quarterly operating expenses was primarily due to increased customer service, system maintenance activities and general inflationary increases. Annual operating expenses were $64.8 million compared to $33.4 million for the 7-month period ended December 31, 2004. Annual operating expenses were also impacted by the factors described for the quarter, partially offset by a $0.5 million refund relating to a British Columbia capital tax appeal in 2005.
Amortization costs for the fourth quarter were $4.9 million compared to $4.2 million for the same quarter last year. The $0.7 million increase in quarterly amortization costs was mainly due to an increase in capital assets resulting from the Company's capital expenditure program. Annual amortization costs were $19.0 million compared to $9.9 million for the 7-month period ended December 31, 2004. Annual amortization costs were also impacted by the factor described for the quarter. A depreciation study was completed by the Company during the third quarter of 2005. Any future changes in depreciation expense as a result of the depreciation study will, subject to BCUC approval, be included in rates charged to customers.
Finance charges for the fourth quarter were $5.4 million compared to $3.1 million for the same quarter last year. The $2.3 million increase in quarterly finance charges was primarily due to increased borrowings to finance FortisBC's capital expenditure program and a decrease in capitalized interest compared to the same quarter last year, due to the completion of the South Okanagan substation project early in the fourth quarter of 2005. Quarterly finance charges also increased due to the interest rate associated with the $140 million debentures, issued on November 30, 2004, being higher than that on short-term debt repaid with the proceeds of the issue. Coincident with the Company's purchase by Fortis on May 31, 2004, FortisBC borrowed, on a short-term basis, $155 million by way of a demand note from Fortis. 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 FortisBC on the debt owed to its former parent. Net proceeds from the $140 million debenture issue were used primarily to repay the short-term demand note described above.
Annual finance charges were $18.5 million compared to $8.5 million for the 7-month period ended December 31, 2004. Annual finance charges were impacted by increased borrowings to finance FortisBC's capital expenditure program and a higher interest rate on the $140 million debentures issued on November 30, 2004, partially offset by an increase in capitalized interest associated with large long-term capital projects.
In November 2005, FortisBC completed a 30-year 5.6% $100 million senior unsecured debenture issue. Proceeds from the debt issue were used to repay certain indebtedness under FortisBC's credit facilities, which was incurred primarily to fund capital expenditures. The remaining proceeds were used for working capital purposes.
REGULATED UTILITIES - CARIBBEAN
Belize Electricity
---------------------------------------------------------------------
Belize Electricity
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Average US:CDN Exchange
Rate 1.17 1.22 1.21 1.30
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Electricity Sales (GWh) 87 84 350 330
---------------------------------------------------------------------
($ millions)
---------------------------------------------------------------------
Revenue 19.8 17.1 75.8 71.9
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Energy Supply Costs 10.8 9.0 40.8 37.7
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Operating Expenses 2.8 2.6 10.7 11.0
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Amortization 1.2 1.3 5.8 6.1
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Finance Charges 1.7 1.2 6.0 5.3
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Foreign Exchange Loss
(Gain) 0.1 0.4 (0.4) 0.3
---------------------------------------------------------------------
Corporate Taxes and
Non-controlling Interest 1.2 1.0 4.9 4.3
---------------------------------------------------------------------
Earnings 2.0 1.6 8.0 7.2
---------------------------------------------------------------------
Belize Electricity's earnings for the fourth quarter were $2.0 million (BZ$3.3 million) compared to $1.6 million (BZ$2.6 million) for the same quarter last year. Annual earnings were $8.0 million (BZ$12.9 million) compared to $7.2 million (BZ$10.7 million) last year. The increase in quarterly and annual earnings was primarily due to the 11 per cent increase in electricity rates, effective July 1, 2005, as a result of the new 4-year tariff agreement, higher electricity sales and the foreign exchange impact associated with the Company's Euro-denominated debt. The increase was partially offset by higher finance charges and operating expenses and the impact of the depreciation of the US dollar relative to the Canadian dollar compared to the same periods last year.
Belize Electricity is regulated by the Public Utilities Commission ("PUC") and base electricity rates in Belize are comprised of 2 components. The first component is Value Added Delivery ("VAD") and the second is the cost of fuel and purchased power ("COP"), 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 July 14, 2005, the PUC delivered its final Decision ("Decision") approving an overall 11 per cent increase in electricity rates, inclusive of the recovery of rate stabilization account balances, to BZ39.0 cents per kWh from BZ34.9 cents per kWh, effective July 1, 2005 through July 31, 2006. As a result of the Decision, the VAD component of electricity rates increased to BZ16.2 cents per kWh from BZ14.0 cents per kWh while the COP component increased to BZ21.0 cents per kWh from BZ17.5 cents per kWh. Previously, the VAD was subject to a BZ5.0 cent reduction over a 5-year transition period that ended June 30, 2005. Belize Electricity's regulation includes a Cost of Power Rate Stabilization Account ("CPRSA") designed to normalize changes in the price of electricity due to fluctuating cost of power. The CPRSA stabilizes electricity rates for consumers while providing Belize Electricity with a mechanism which permits the recovery of its cost of power. Effective July 1, 2002, a Hurricane Cost of Power Rate Stabilization Account ("HCPRSA") was also established to normalize hurricane reconstruction costs. As a result of the Decision, a BZ$6.0 million threshold level ("Threshold Event") for the CPRSA was authorized by the PUC to allow for adjustments to the tariff once new deferrals to the CPRSA reach this level. Adjustments to the tariff as a result of a Threshold Event may require adjustments to the COP component of the tariff and additional CPRSA recovery surcharges at any time during a calendar year.
In October 2005, a Threshold Event associated with the CPRSA occurred, at which time the CPRSA reached BZ$27.0 million. In December 2005, the Company submitted an application to the PUC for a tariff adjustment to recover the excess deferrals to the CPRSA and to increase the COP component of rates to reflect actual and forecasted cost of power for the period July 1, 2005 through June 30, 2006. On December 31, 2005, the PUC approved a BZ0.6 cent per kWh increase in electricity rates associated with the recovery of the excess deferrals to the CPRSA and a BZ4.5 cent per kWh increase in the COP component of electricity rates. The result was an overall increase in rates of 13 per cent from BZ39.0 cents per kWh to BZ44.1 cents per kWh, effective January 1, 2006. This increase in electricity rates will have no impact on Belize Electricity's 2006 earnings due to the flow through of cost of power to customers. The PUC also approved a reduction in the Threshold Event level to BZ$3.0 million and approved that there will be no electricity rate decreases until the CPRSA is fully repaid. At December 31, 2005, the balance in the CPRSA and HCPRSA owing from customers was BZ$29.2 million.
Electricity sales for the fourth quarter were 87 GWh, 3.6 per cent higher than for the same quarter last year, primarily due to commercial sales growth. Annual electricity sales were 350 GWh, 6.1 per cent higher than last year due to increased sales in both the residential and commercial sectors. The increased sales were driven by economic growth.
Revenue for the fourth quarter was $19.8 million (BZ$33.4 million) compared to $17.1 million (BZ$27.8 million) for the same quarter last year. Excluding foreign exchange impacts, quarterly revenue increased 20.1 per cent over the same quarter last year. The increase was primarily due to the 18 per cent increase in the VAD and COP components of electricity rates, effective July 1, 2005 and electricity sales growth. Annual revenue was $75.8 million (BZ$125.4 million) compared to $71.9 million (BZ$110.1 million) last year. Excluding foreign exchange impacts, annual revenue increased 13.9 per cent over last year. The increase was due to the 18 per cent increase in base electricity rates, as described above, and electricity sales growth, partially offset by the final reduction of rates of BZ 1 cent per kWh, implemented July 1, 2004 through June 30, 2005.
Energy supply costs for the fourth quarter were $10.8 million (BZ$18.2 million) compared to $9.0 million (BZ$14.7 million) for the same quarter last year. Annual energy supply costs were $40.8 million (BZ$67.6 million) compared to $37.7 million (BZ$57.7 million) last year. The increase in quarterly and annual energy supply costs reflects the increase in the COP component of electricity rates, effective July 1, 2005, and electricity sales growth, partially offset by foreign exchange impacts.
Operating expenses for the fourth quarter were $2.8 million (BZ$4.8 million) compared to $2.6 million (BZ$4.3 million) for the same quarter last year. Annual operating expenses were $10.7 million (BZ$17.7 million) compared to $11.0 million (BZ$16.9 million) last year. Excluding foreign exchange impacts, quarterly and annual operating expenses increased due to higher employee costs and general increases in the cost of goods and services, partially offset by the impact of the Company's focus on controlling costs and improving operating efficiencies and productivity.
Amortization costs for the fourth quarter were $1.2 million (BZ$2.1 million), comparable to the same quarter last year. Annual amortization costs were $5.8 million (BZ$9.8 million) compared to $6.1 million (BZ$9.7 million) last year. Excluding foreign exchange impacts, annual amortization costs increased due to capital asset growth, partially offset by the recovery of all generation equipment depreciation through the COP, as a result of the July 1, 2005 final tariff Decision.
Finance charges for the fourth quarter were $1.7 million (BZ$2.8 million) compared to $1.2 million (BZ$1.8 million) for the same quarter last year. Annual finance charges were $6.0 million (BZ$9.9 million) compared to $5.3 million (BZ$8.2 million) last year. Quarterly and annual finance charges increased primarily due to higher utilization of overdraft facilities, additional short-term loans to help meet operational needs and lower levels of capitalized interest as a result of delayed capital expenditures, partially offset by foreign exchange impacts.
The foreign exchange losses (gains) primarily related to foreign currency exchange rate fluctuations associated with Belize Electricity's Euro-denominated debt. Net foreign exchange losses for the fourth quarter were $0.3 million (BZ$0.6 million) lower than for the same quarter last year. During 2005, a net $0.4 million (BZ$0.6 million) foreign exchange gain was recorded compared to a net foreign exchange loss of $0.3 million (BZ$0.4 million) last year. Overall, the US dollar strengthened relative to the Euro in 2005.
Caribbean Utilities
---------------------------------------------------------------------
Caribbean Utilities
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Average US:CDN Exchange
Rate 5 1.19 1.28 1.22 1.32
---------------------------------------------------------------------
($ millions)
---------------------------------------------------------------------
Equity Income 2.8 (5.8) 11.4 0.8
---------------------------------------------------------------------
(5) Quarterly equity income for 2005 and 2004 were translated at the
average US:CDN exchange rate during the 3 month periods ended
October 31, 2005 and 2004, respectively, as equity income is
recorded on a lag basis. Annual 2005 and 2004 equity income was
translated at the average US:CDN exchange rate during the 12
month periods ended October 31, 2005 and 2004, respectively, due
to the reason noted above.
Fortis accounts for its 36.9 per cent interest in Caribbean Utilities on an equity basis. Equity income is recorded on a lag basis and, therefore, the quarterly equity income noted above represents the Corporation's share of Caribbean Utilities' earnings for its second quarters ended October 31, 2005 and October 31, 2004.
Caribbean Utilities and the Cayman Islands are continuing to recover from the impact of Hurricane Ivan which struck Grand Cayman in September 2004. Approximately 5 per cent of the Company's pre-Ivan customers remained without electricity at the end of October 31, 2005, with approximately 107 MW of generating capacity restored or leased. The Company expects electricity sales to achieve 100 per cent of pre-Ivan sales by the end of April 2006 and anticipates returning to a total owned capacity of approximately 120 MW by the summer of 2006 compared to 123 MW pre-Ivan.
Caribbean Utilities submitted a proposal to the Cayman Islands Government (the "Government") in July 2002 to extend its current License and replace the 15 per cent rate of 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 current Licence is still in effect and is scheduled to expire in January 2011 or when replaced by a new Licence by mutual agreement. In May 2005, a new Government was elected in the Cayman Islands and, in November 2005, the Company resumed License extension discussions with the new Government with the objective of obtaining a new License by the summer of 2006.
Upon submitting its Final Return to Government on July 21, 2005 for its 2005 fiscal year end, Caribbean Utilities determined that, under its current License, it was permitted a rate increase of 9.5 per cent, effective August 1, 2005, as a result of substantial costs incurred from Hurricane Ivan. The Company determined, without prejudice to its rights under its existing License, that given the post-hurricane economic realities, it would not have been in the best interest of the Cayman Islands and its residents, or in the longer-term interest of the Company, to implement the rate increase as allowed under the License. The Company and the Government agreed on a Cost Recovery Surcharge ("CRS") of US0.89 cents per kWh for each kWh of electricity consumed by customers. The CRS represents a 4.7 per cent average increase in base electricity rates, less than half of the 9.5 per cent permitted under the Licence. The CRS became effective for August 2005 billings and will continue for a period of approximately 3 years. It has also been agreed with the Government that there will be no increase in basic billing rates until July 31, 2008 and no retroactive increases in billing rates is permitted after the CRS has been fully recovered. Caribbean Utilities had direct uninsured hurricane losses of US$14.0 million. By agreement with Government, Caribbean Utilities will recover US$13.4 million of the US$14.0 million uninsured losses through the CRS. In addition, Caribbean Utilities has agreed to absorb US$3.6 million of indirect costs incidental to the Hurricane which will not be recovered from customer rates. These indirect costs were recorded in Caribbean Utilities' fiscal year ended April 30, 2005.
Equity income recorded from Caribbean Utilities for the fourth quarter increased $8.6 million over equity income recorded in the same quarter last year. The increase was primarily due to the impact of Hurricane Ivan on 2004 fourth quarter equity income which included the Corporation's portion of uninsured hurricane-related costs of approximately $8.2 million. The increase also related to post-hurricane economic recovery, the favorable impact of continuing business interruption loss insurance ("BI") claims, and the impact of the CRS effective August 1, 2005. In 2005, the BI claim calculation methodology was agreed to with the insurance adjustors which is facilitating the monthly calculation of the BI claims by Caribbean Utilities following Hurricane Ivan. The BI claim calculation includes a revenue growth factor of 5.625 per cent with the BI claim being calculated on a contribution margin basis. During its second quarter ended October 31, 2005, Caribbean Utilities recorded a BI insurance claim of US$1.8 million. From the end of the deductible period on October 25, 2004 to the end of October 2005, the Company recorded US$12.4 million in BI insurance claims. Typically, the ultimate recovery under a BI policy is judgmental and subject to negotiations between the insured and the insurance company. Given the subjectivity of the ultimate settlement and the lengthy claim coverage period, many contingencies may exist in the ultimate settlement. To date, US$22.0 million has been received from the insurers in relation to the Company's property damage and BI claims. Effective August 1, 2005, the CRS was implemented resulting in a $1.1 million increase in Caribbean Utilities' earnings for the quarter ended October 31, 2005. Approximately US$12.3 million of direct uninsured hurricane losses remains to be collected by Caribbean Utilities from customers through the CRS.
Annual equity income recorded from Caribbean Utilities increased $10.6 million over equity income recorded in 2004. In addition to the factors described for the quarter, the annual increase was also due to a $1.1 million positive adjustment related to a change in Caribbean Utilities' accounting practice for recognizing unbilled revenue. 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 share, or $1.1 million, in 2005 equity income. The remaining increase in equity income was due to the recovery in 2005 of 2004 fuel costs that were expensed following Hurricane Ivan and the reduction of hurricane-loss estimates recorded by Caribbean Utilities in its fourth quarter of 2004. The increase in fourth quarter and annual equity income was partially offset by the impact of the depreciation of the US dollar relative to the Canadian dollar compared to the same periods last year.
NON-REGULATED - FORTIS GENERATION (6)
---------------------------------------------------------------------
Non-Regulated - Fortis Generation
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
Energy Sales (GWh) 2005 2004 2005 2004
---------------------------------------------------------------------
Central Newfoundland 50 63 159 152
---------------------------------------------------------------------
Ontario 182 184 708 721
---------------------------------------------------------------------
Belize 36 21 68 63
---------------------------------------------------------------------
British Columbia (6) 8 8 39 23
---------------------------------------------------------------------
Upper New York State 35 23 75 69
---------------------------------------------------------------------
Total 311 299 1,049 1,028
---------------------------------------------------------------------
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
($ millions) 2005 2004 2005 2004
---------------------------------------------------------------------
Revenue 26.0 20.0 84.0 69.2
---------------------------------------------------------------------
Energy Supply Costs 1.6 1.7 6.2 5.8
---------------------------------------------------------------------
Operating Expenses 6.1 3.6 17.8 16.1
---------------------------------------------------------------------
Amortization 2.6 2.7 10.4 10.2
---------------------------------------------------------------------
Finance Charges 2.7 3.9 14.0 15.4
---------------------------------------------------------------------
Gain on settlement of
contractual matters - - (10.0) -
---------------------------------------------------------------------
Corporate Taxes 3.5 1.7 13.8 7.0
---------------------------------------------------------------------
Non-controlling Interest 1.0 1.7 2.2 1.9
---------------------------------------------------------------------
Earnings 8.5 4.7 29.6 12.8
---------------------------------------------------------------------
(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.
The earnings contribution from Non-regulated Generation operations for the fourth quarter was $8.5 million, up $3.8 million from the same quarter last year. The increase in quarterly earnings was primarily due to higher wholesale energy prices in Ontario and Upper New York State, increased production and lower finance charges, partially offset by higher operating expenses.
The annual earnings contribution from Non-regulated Generation operations was $29.6 million, up $16.8 million from last year. Annual earnings increased primarily due to higher wholesale energy prices in Ontario and a $7.9 million after-tax gain resulting from the settlement of contractual matters between FortisOntario and OPGI.
Energy sales for the fourth quarter were 311 GWh compared to 299 GWh for the same quarter last year. The 12 GWh increase in quarterly energy sales was primarily due to higher production in Belize and Upper New York State, partially offset by lower production in central Newfoundland. Annual energy sales were 1,049 GWh compared to 1,028 GWh last year. The 21 GWh increase in annual energy sales was primarily due to a full year of operations of the 16-MW run-of-river Walden hydroelectric plant compared to 7 months in 2004. The Walden plant was acquired upon the Corporation's acquisition of FortisBC on May 31, 2004. The annual increase was also due to higher production at central Newfoundland, Upper New York State and Belize, partially offset by decreased production in Ontario. Quarterly and annual energy production was primarily impacted by rainfall levels.
Generation revenue for the fourth quarter was $26.0 million compared to $20.0 million for the same quarter last year. Quarterly generation revenue increased $6.0 million primarily due to higher wholesale energy prices in Ontario and Upper New York State and an overall increase in production. The average wholesale energy price per megawatt hour ("MWh") in Ontario was $71.46 compared to $50.80 for the same quarter last year. The average wholesale energy price per MWh in Upper New York State was US$70.94 compared to US$46.75 for the same quarter last year. Annual generation revenue was $84.0 million compared to $69.2 million last year. The $14.8 million increase in annual revenue was driven by higher wholesale energy prices in Ontario. The average annual wholesale energy price per MWh in Ontario was $68.49 compared to $49.95 last year. The increase in annual revenue was also attributable to higher wholesale energy prices in Upper New York State and an overall increase in production.
Operating expenses for the fourth quarter were $6.1 million compared to $3.6 million for the same quarter last year. The increase in quarterly operating expenses was primarily due to a $1.7 million ($1.1 million after-tax) write down of Rankine assets and $0.5 million of costs associated with an early retirement program at FortisOntario. This increase was partially offset by a $0.8 million insurance gain ($0.4 million after-tax) related to the involuntary disposition of assets associated with the Dolgeville plant in Upper New York State. Additionally, operating expenses were higher in the fourth quarter due to favourable true-up adjustments made in the same quarter last year associated with operations in central Newfoundland. The Dolgeville plant went out of service late January 2005, as a result of flooding damage, and became operational again in October 2005. The gain in the fourth quarter is based on cash proceeds received to date from the insurance company related to property damage. A business interruption insurance claim has also been initiated, the proceeds from which are expected to mitigate revenue lost during the period of non-operation. The Rankine assets were written down as a result of the implementation of the Niagara Exchange Agreement ("NEA"). The NEA assigns FortisOntario's water rights on the Niagara River to OPGI and facilitates the irrevocable exchange of 75 MW of wholesale electric power supply to FortisOntario from OPGI until April 30, 2009 in exchange for FortisOntario's agreement not to seek renewal of the water entitlement at that time.
Annual operating expenses were $17.8 million compared to $16.1 million last year. The $1.7 million net increase in annual operating expenses was primarily due to the write down of the Rankine assets, costs associated with the early retirement program at FortisOntario and the impact of the full year of operations of the Walden plant, partially offset by a $1.4 million reduction in the allocation of shared-service costs to non-regulated Ontario generation operations resulting from a recent internal cost allocation study.
Finance charges were $2.7 million compared to $3.9 million for the same quarter last year. The $1.2 million decrease in quarterly finance charges was primarily due to a reduction of inter-company finance charges in the Belizean operations and the repayment of a $22.5 million term loan in the second quarter of 2005 associated with the Ontario operations. Annual finance charges were $14.0 million compared to $15.4 million last year. The $1.4 million decrease in annual finance charges was primarily due to the repayment of the $22.5 million term loan.
The Chalillo dam in Belize began storing water in July 2005 and the 7-MW hydroelectric plant at the dam commenced generating electricity in September 2005. The facility is expected to double the amount of average annual hydroelectric energy produced in the Belizean operations.
NON-REGULATED - FORTIS PROPERTIES
---------------------------------------------------------------------
Non-Regulated - Fortis Properties
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
($ millions) 2005 2004 2005 2004
---------------------------------------------------------------------
Real Estate Revenue 13.2 13.7 52.9 52.8
---------------------------------------------------------------------
Hospitality Revenue 25.1 19.5 101.5 81.5
---------------------------------------------------------------------
Total Revenue 38.3 33.2 154.4 134.3
---------------------------------------------------------------------
Operating Expenses 25.7 21.9 100.0 87.2
---------------------------------------------------------------------
Amortization 3.1 2.6 11.2 9.7
---------------------------------------------------------------------
Finance Charges 5.2 4.5 20.0 18.1
---------------------------------------------------------------------
Corporate Taxes 1.4 1.4 9.1 7.5
---------------------------------------------------------------------
Earnings 2.9 2.8 14.1 11.8
---------------------------------------------------------------------
Fortis Properties' earnings for the fourth quarter were $2.9 million, comparable to the same quarter last year. Annual earnings were $14.1 million compared to $11.8 million last year. The increase in annual earnings was due to higher earnings from operations, including contributions from the 3 hotels acquired in Alberta and Manitoba in February 2005 and the expanded Delta St. John's Hotel operations, partially offset by increased amortization and finance charges. The $15 million expansion to the Delta St. John's Hotel was completed June 1, 2005, one month ahead of schedule, and resulted in the addition of 128 rooms and approximately 3,000 square feet of meeting space.
Real estate revenue for the fourth quarter was $13.2 million compared to $13.7 million for the same quarter last year. The $0.5 million decrease in quarterly real estate revenue was primarily due to the recognition of certain deferred revenue items in the fourth quarter of 2004. Annual real estate revenue was $52.9 million, comparable to last year. The occupancy level in the Real Estate Division was 95.9 per cent at December 31, 2005, up from 95.0 per cent at December 31, 2004.
Hospitality revenue for the fourth quarter was $25.1 million, up $5.6 million from the same quarter last year. Revenue per available room ("REVPAR") for the fourth quarter was $63.38 compared to $61.37 for the same quarter last year. The 3.3 per cent increase in REVPAR was primarily attributable to an average increase in occupancy.
Annual hospitality revenue was $101.5 million, up $20.0 million from last year. REVPAR for 2005 was $70.95 compared to $70.72 last year. The slight increase in REVPAR was primarily due to a small increase in average room rate combined with consistent occupancy compared to last year.
The increase in revenue, operating expenses, amortization costs and finance charges for the fourth quarter and the year was primarily due to the 3 hotels acquired in February 2005 and the expanded operations of the Delta St. John's Hotel. Increased finance charges were partially offset by the impact of lower principal balances on scheduled debt.
In 2005, Fortis Properties commenced an estimated $7.7 million, 64-room expansion of the Holiday Inn Sarnia, an estimated $2.5 million, 11,000 square foot expansion to the Holiday Inn Kitchener-Waterloo, primarily associated with expanded catering and conference facilities, and a $7.2 million expansion of the Blue Cross Centre in Moncton. Approximately half of the Blue Cross Centre expansion is pre-leased. Capital expenditures related to these expansions were $6.7 million in 2005 with completion expected by mid-2006.
CORPORATE
---------------------------------------------------------------------
Corporate
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
($ millions) 2005 2004 2005 2004
---------------------------------------------------------------------
Total Revenue 1.9 2.6 10.0 10.2
---------------------------------------------------------------------
Operating Expenses 3.0 2.1 9.5 8.7
---------------------------------------------------------------------Amortization 0.8 0.6 2.9 1.5
---------------------------------------------------------------------
Finance Charges 5.4 6.2 22.3 18.7
---------------------------------------------------------------------
Preference Share Dividends 4.2 4.1 16.6 12.3
---------------------------------------------------------------------
Foreign Exchange Gain - (1.5) (2.0) (1.5)
---------------------------------------------------------------------
Corporate Taxes (2.9) (1.7) (8.3) (7.8)
---------------------------------------------------------------------
Non-controlling Interest - - (0.2) (0.2)
---------------------------------------------------------------------
Net Corporate Expenses (8.6) (7.2) (30.8) (21.5)
---------------------------------------------------------------------
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, interest and miscellaneous revenues and related corporate income taxes.
Net corporate expenses for the fourth quarter totaled $8.6 million, an increase of $1.4 million over the same quarter last year. The increase primarily related to lower revenue, increased operating expenses, and lower net unrealized foreign exchange gains, partially offset by lower finance charges. Revenues decreased due to a reduction in inter-company interest revenue. Operating expenses increased primarily as a result of the finalization of certain restructuring costs related to the western utilities which had not been provided for in the acquisition purchase price. The result was a charge to operating expenses of $1.2 million ($0.8 million after-tax). Finance charges were lower due to the repayment in March 2005, with proceeds from the common equity issue, of a portion of the short-term bridge facilities that were used to acquire FortisAlberta and FortisBC, partially offset by the impact of higher interest on the 10-year 5.74% US$150 million Senior Unsecured Notes that replaced the remainder of the short-term bridge facilities. Net unrealized foreign exchange gains primarily related to foreign currency exchange rate fluctuations associated with unhedged US dollar-denominated Corporate long-term debt. Both foreign exchange rates and levels of unhedged debt varied from the same quarter last year.
Annual net corporate expenses totaled $30.8 million, $9.3 million higher than last year. The increase in annual net corporate expenses primarily related to higher finance charges, including amortization of deferred acquisition financing costs, increased preference share dividends and higher operating expenses. The increase in finance charges primarily related to the acquisition of the utilities in western Canada, partially offset by lower short-term interest expense. Preference share dividends increased due to a full year of dividends paid on the 4.9% Series E First Preference Shares. On January 29, 2004, Fortis issued 4.9% First Preference Units which were subsequently converted to 4.9% Series E First Preference Shares in the last half of 2004. Annual operating expenses were higher than last year due to the charge associated with the finalization of certain restructuring costs, certain non-recurring acquisition-related costs and increased professional fees, partially offset by decreased pension costs as a result of assumption changes for 2005.
Annual net corporate expenses for 2004 were also positively impacted as Fortis recorded a $1.8 million corporate income tax recovery related to the tax benefit associated with non-capital losses.
CONSOLIDATED FINANCIAL POSITION
The following table outlines the significant changes in the consolidated balance sheets between December 31, 2005 and December 31, 2004.
---------------------------------------------------------------------
Fortis Inc.
Significant Changes in the Consolidated Balance Sheets
between December 31, 2005 and December 31, 2004
---------------------------------------------------------------------
Increase
(Decrease) Explanation
($ millions)
---------------------------------------------------------------------
Accounts receivable 13.6 The increase primarily related to
the timing of refunds to customers
in 2004 at FortisAlberta and
increased accounts receivable
balances in 2005 at FortisAlberta due
to the increase in the distribution
electricity rates and higher amounts
receivable from customers for
contributions in aid of construction.
---------------------------------------------------------------------
Regulatory assets 24.3 The increase primarily related to
(current and higher transmission cost deferrals at
long-term) FortisAlberta, increased rate
stabilization account balances at
Belize Electricity and increased
deferred other post-employment
benefit plan costs at Newfoundland
Power, partially offset by decreased
ECAM balances at Maritime Electric.
---------------------------------------------------------------------
Future income tax 45.2 The increase primarily related to
assets (long-term) the recognition of future income
taxes as a result of the change in
2005 in the regulatory tax
methodology at FortisAlberta.
---------------------------------------------------------------------
Utility capital 234.4 The increase related to $424.8
assets million invested in electricity
systems less contributions in aid of
construction and amortization.
---------------------------------------------------------------------
Income producing 73.5 On February 1, 2005, Fortis
properties Properties acquired 3 hotels in
Alberta and Manitoba for
approximately $63 million. The
remaining increase primarily related
to the expansions to the Delta St.
John's Hotel, the Holiday Inn Sarnia
and the Blue Cross Centre in Moncton,
partially offset by amortization.
---------------------------------------------------------------------
Goodwill (1.9) Goodwill was reduced by $2.6 million
upon the recognition of a future tax
asset as a result of a favourable CRA
reassessment at Cornwall Electric. A
further reduction of $0.5 million was
a result of the finalization of
certain restructuring cost accruals
associated with the acquisition of
FortisAlberta and FortisBC. This
decrease was partially offset by $1.2
million of goodwill created upon the
acquisition of PLP on May 31, 2005.
---------------------------------------------------------------------
Short-term (133.0) The decrease primarily related to
borrowings the repayment of short-term
borrowings at the Corporate level
with partial proceeds from the March
2005 $130 million common share issue,
repayment of short-term facilities at
Newfoundland Power, Fortis Properties
and FortisBC, partially offset by
higher short-term borrowings at
Maritime Electric primarily to fund
its utility capital expenditure
program.
---------------------------------------------------------------------
Income taxes 20.4 The increase primarily related to
payable the timing of income tax installments
at FortisAlberta and increased income
taxes payable at Maritime Electric.
---------------------------------------------------------------------
Deferred credits 9.4 The increase primarily related to
higher accrued other post-employment
benefit plan obligations at
Newfoundland Power and FortisBC.
---------------------------------------------------------------------
Regulatory 51.9 The increase primarily related to a
liabilities regulatory liability associated with
(long-term) the future income tax asset increase
at FortisAlberta.
---------------------------------------------------------------------
Long-term debt and 215.3 In March 2005, Fortis Properties
capital lease completed a 5-year 5.1% $29.6 million
obligations financing of the Edmonton and Calgary
(including Greenwood Inns, acquired February
current portion) 2005. In April 2005, Fortis
Properties completed a 5-year 5.35%
$12.3 million financing of the
Winnipeg Greenwood Inn, also acquired
February 2005.
FortisBC, FortisAlberta and Corporate
drew down $70.0 million, $56.7
million and $18.0 million,
respectively, under term credit
facilities. The borrowings at
FortisBC and FortisAlberta were
primarily associated with the interim
financing of each subsidiary's
respective capital program. The
borrowings at Corporate were
primarily to fund equity injections
in certain subsidiaries. These term
credit facilities have a 3-year term
and mature in May 2008. FortisBC
repaid these borrowings using a
portion of the proceeds from the
issue of 5.6% $100 million Senior
Unsecured Debentures due November 9,
2035. The remainder of the proceeds
from the FortisBC debenture issue was
used for working capital purposes.
Similarly, the borrowings under the
3-year term credit facilities at
FortisAlberta and Corporate will
likely be replaced with long-term
permanent financing in future
periods.
In August 2005, Newfoundland Power
closed a private placement of $60
million bonds. The net proceeds from
the private placement were used to
repay short-term indebtedness and for
general corporate purposes.
On May 31, 2005, there was $4.0
million in debt assumed on the
acquisition of PLP. This long-term
debt was refinanced in September 2005
using revolving credit facilities.
These increases were partially offset
by the impact of the translation of
the Corporation's US dollar-
denominated debt at a lower foreign
exchange rate at December 31, 2005
compared to December 31, 2004 and
regular debt repayments during the
year. Additionally, during the second
quarter, FortisOntario repaid its
$22.5 million term loan due in 2007.
---------------------------------------------------------------------
Shareholders' 213.3 The increase primarily related to
equity the issuance of 6.96 million common
shares of the Corporation (adjusted
for stock split) in March 2005 for
gross proceeds of approximately $130
million and proceeds from shares
issued under the Corporation's share
purchase, dividend reinvestment and
stock option plans. The remainder of
the increase primarily related to net
earnings reported for the year, less
common share dividends.
---------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The following table outlines the summary of cash flows.
---------------------------------------------------------------------
Fortis Inc.
Summary of Cash Flows (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
($ millions) 2005 2004 2005 2004
---------------------------------------------------------------------
Cash, beginning of period 18.6 40.1 37.2 65.1
---------------------------------------------------------------------
Cash provided by (used
in)
---------------------------------------------------------------------
Operating activities 74.4 91.6 303.4 272.3
---------------------------------------------------------------------
Investing activities (123.6) (141.3) (466.9) (1,026.3)
---------------------------------------------------------------------
Financing activities 64.0 46.8 159.9 726.5
---------------------------------------------------------------------
Foreign currency impact
on cash balances - - (0.2) (0.4)
---------------------------------------------------------------------
Cash, end of period 33.4 37.2 33.4 37.2
---------------------------------------------------------------------
Operating Activities: Cash flow from operations, after working capital adjustments, was $74.4 million for the fourth quarter, down $17.2 million from $91.6 million for the same quarter last year. The decrease was due to a change in working capital, partially offset by higher earnings, compared to the same quarter last year. The decrease in working capital was driven by higher accounts payable balances in 2004 due to the timing of construction costs for the Chalillo project at BECOL and payments relating to purchased power at Belize Electricity.
Annual cash flow from operations, after working capital adjustments, was $303.4 million, up $31.1 million from $272.3 million last year. The increase was driven by a full year of earnings contributions from FortisAlberta and FortisBC, compared to 7 months in 2004, and higher earnings contributions from Non-regulated Generation in 2005, including the gain on the settlement of contractual matters between FortisOntario and OPGI. This increase was partially offset by changes in working capital, primarily at FortisAlberta and FortisBC. An increase in regulatory assets in the western utilities in 2005 was partially offset by higher income taxes payable at FortisAlberta. Additionally, working capital in 2004 was favourably impacted by the return of funds on deposit at FortisAlberta.
Investing Activities: Cash used in investing activities during the fourth quarter was $123.6 million, down $17.7 million from the fourth quarter last year. The decrease was primarily due to lower deferred charges and credits, partially offset by increased utility capital expenditures, net of contributions in aid of construction, and increased capital expenditures associated with income producing properties. On an annual basis, cash used in investing activities was $466.9 million, down $559.4 million from last year. The decrease was primarily due to less cash used in business acquisitions, partially offset by increased utility and income producing capital expenditures.
Utility capital expenditures for the fourth quarter were $134.0 million compared to $124.7 million for the same quarter last year. Annual utility capital expenditures were $424.8 million compared to $262.5 million last year. The increase in quarterly and annual utility capital expenditures was primarily related to capital spending at FortisAlberta and FortisBC. In addition, Maritime Electric continued the construction of the $35 million 50-MW generating facility on Prince Edward Island during 2005 and construction of the Chalillo Project in Belize was completed in the second half of 2005.
Capital expenditures for the fourth quarter associated with income producing properties were $7.4 million compared to $4.9 million for the same quarter last year. Capital expenditures for income producing properties during the fourth quarter of 2005 primarily related to the expansion of the Holiday Inn Sarnia and the Blue Cross Centre in Moncton. During the fourth quarter of 2004, these expenditures primarily related to the Delta St. John's Hotel expansion. Annual capital expenditures for income producing properties were $83.9 million compared to $16.1 million last year. The increase in annual capital expenditures primarily related to the acquisition of 3 hotels in Alberta and Manitoba for approximately $63 million in February 2005, the completion of the $15 million expansion to the Delta St. John's Hotel in June 2005 and the expansion of the Holiday Inn Sarnia and the Blue Cross Centre in Moncton.
During the fourth quarter, approximately $12.9 million was received from contributions in aid of construction compared to $6.3 million for the same quarter last year. Annual contributions in aid of construction were $45.1 million compared to $17.1 million last year. The increase in quarterly and annual contributions in aid of construction primarily related to the capital expenditure programs of FortisAlberta and FortisBC.
During 2005, cash used in business acquisitions related to the purchase of PLP on May 31, 2005 while cash used in business acquisitions during 2004 related to the purchase of FortisAlberta and FortisBC and the acquisition of the remaining 5 per cent interest in Belize Electric Company Limited ("BECOL") from the Social Security Board of the Government of Belize.
Financing Activities: Cash provided from financing activities in the fourth quarter was $64.0 million compared to $46.8 million for the same quarter last year. Cash provided from financing activities in the fourth quarter of 2005 related primarily to the net borrowings under long-term debt facilities at FortisAlberta, FortisBC and Corporate, partially offset by the payment of common share dividends and regular long-term debt repayments. During the fourth quarter of 2005, FortisAlberta and Corporate drew down $35.8 million and $18.0 million, respectively, under term credit facilities. In November 2005, FortisBC issued 30-year 5.6% $100 million senior unsecured debentures of which $70.0 million was used to repay borrowings under term credit facilities. The remaining proceeds were used for working capital purposes. Borrowings under term credit facilities at FortisAlberta and FortisBC were primarily associated with the interim financing of capital expenditure programs. The borrowings at Corporate were primarily to fund equity injections in certain subsidiaries. These term credit facilities mature in May 2008. Borrowings under these 3-year term credit facilities will likely be replaced with long-term permanent financing in future periods. Cash from financing activities for the same quarter in 2004 primarily related to financing activities associated with the acquisition of FortisAlberta and FortisBC, partially offset by the payment of common share dividends.
Annual cash provided from financing activities was $159.9 million compared to $726.5 million last year. Cash provided from financing activities in 2005 primarily related to net borrowings under long-term debt facilities at Newfoundland Power, FortisAlberta and FortisBC to fund respective capital programs, the issuance in March 2005 of 6.96 million common shares (adjusted for stock split) of the Corporation, which resulted in net after-tax proceeds of $126.1 million, and borrowings to finance the acquisition of the 3 Greenwood Inn hotels in February 2005, partially offset by the payment of common share dividends, the repayment by FortisOntario of its $22.5 million term loan, regular repayments of long-term debt and net repayments of short-term indebtedness. During 2005, FortisAlberta and FortisBC drew down $56.8 million and $70.0 million, respectively, under 3-year term credit facilities while Corporate drew down $18.0 million. The borrowings under these term credit facilities were used for the same reasons as described for the fourth quarter. In August 2005, Newfoundland Power closed a private placement of 30-year 5.441% $60 million first mortgage sinking fund bonds. The net proceeds from the private placement were used to repay short-term indebtedness and for general corporate purposes. Also, a portion of the net proceeds of the March 2005 common share issue were used to repay certain Corporate short-term indebtedness. In November 2005, FortisBC issued 30-year 5.6% $100 million senior unsecured debentures, of which $70.0 million was used to repay borrowings under the 3-year term credit facility. In April 2005, Fortis Properties completed a 5-year 5.35% $12.3 million loan related to the acquisition of the Winnipeg Greenwood Inn. This loan was in addition to the 5-year 5.1% $29.6 million loan related to the financing of the Edmonton and Calgary Greenwood Inns completed in the first quarter. Additionally, $4.0 million in debt was assumed on the acquisition of PLP on May 31, 2005. This long-term debt was refinanced in September 2005 using revolving credit facilities.
Cash provided from financing activities in 2004 primarily related to financings associated with the acquisition of FortisAlberta and FortisBC. During 2004, approximately $1,281.4 million in net proceeds was secured from the issuance of preference shares, common shares and long-term debt of which $557.4 million was used to repay assumed acquisition debt. The remaining financing activities primarily related to short-term borrowings and regular repayment of long-term debt and payment of common share dividends.
Contractual Obligations: The consolidated contractual obligations over the next 5 years and for periods thereafter are outlined in the following table.
---------------------------------------------------------------------
Fortis Inc.
Contractual Obligations (Unaudited)
as at December 31, 2005
---------------------------------------------------------------------
less greater
than than
($ millions) Total 1 year 1-3 years 4-5 years 5 years
---------------------------------------------------------------------
Long-term Debt 2,126.4 29.9 164.2 226.6 1,705.7
---------------------------------------------------------------------
Brilliant
Terminal
Station(1) 68.1 2.5 4.9 4.9 55.8
--------------------------------------------------------------------
Power Purchase
Obligations
FortisBC (2) 2,917.1 37.7 72.2 74.0 2,733.2
FortisOntario(3) 344.3 21.3 64.5 46.7 211.8
Maritime
Electric (4) 4.0 4.0 - - -
---------------------------------------------------------------------
Capital Cost (5) 454.5 20.0 47.9 39.1 347.5
---------------------------------------------------------------------
Joint-use Asset
and Shared
Service
Agreements (6) 63.8 3.7 11.2 6.5 42.4
---------------------------------------------------------------------
Operating Lease
Obligations (7) 21.0 4.4 10.6 5.4 0.6
---------------------------------------------------------------------
Office Lease
- FortisBC (8) 22.3 0.9 1.9 2.7 16.8
---------------------------------------------------------------------
Other 5.7 1.5 2.9 0.1 1.2
---------------------------------------------------------------------
Total 6,027.2 125.9 380.3 406.0 5,115.0
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(1) On July 15, 2003, FortisBC began operating the Brilliant Terminal
Station ("BTS") under an agreement the term of which expires in
2056 (unless the Company has earlier terminated the agreement by
exercising its right, at any time after the anniversary date of
the agreement in 2029, to give 36 months' notice of termination).
The agreement provides that FortisBC will pay a charge related to
the recovery of the capital cost of the BTS and related operating
expenses.
(2) 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 which
expires in 2013. This contract includes a take-or-pay provision
based on a 5-year rolling nomination of capacity requirements.
(3) Power purchase obligations for FortisOntario primarily include a
long-term take-or-pay contract between Cornwall Electric and
Hydro-Quebec Energy Marketing for the supply of electricity and
capacity. The contract provides approximately 237 GWh of energy
per year and up to 45 MW of capacity at any one time. The
contract, which expires December 31, 2019, provides approximately
one-third of Cornwall Electric's load. Cornwall Electric also
has a one-year contract in place with Hydro-Quebec Energy
Marketing which expires June 30, 2006. This take-or-pay contract
provides energy on an as-needed basis, but charges for 100 MW of
capacity at $0.14 million per month.
(4) Maritime Electric has one take-or-pay contract for the purchase
of either capacity or energy. This contract totals approximately
$4.0 million through October 2006.
(5) 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.
(6) FortisAlberta and an Alberta transmission service provider have
entered into an agreement in consideration for joint attachments
of distribution facilities to the transmission system. The expiry
terms of this agreement state that the agreement remains in
effect until the Company no longer has attachments to the
transmission facilities. Due to the unlimited term of this
contract the calculation of future payments after 2010 includes
payments to the end of 20 years. However, the payments under
this agreement may continue for an indefinite period of time.
FortisAlberta and an Alberta transmission service provider have
also entered into a number of service agreements to ensure
operational efficiencies are maintained through coordinated
operations. The service agreements have minimum expiry terms of
five years from September 1, 2005, and are subject to 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, FortisBC
began leasing its Trail, BC office building for a term of 30
years. The terms of the agreement grant FortisBC repurchase
options at approximately year 20 and year 28 of the lease term.
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.
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Fortis Inc.
Capital Structure
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December 31, 2005 December 31, 2004
---------------------------------------------------------------------
($ millions) (%)($ millions) (%)
---------------------------------------------------------------------
Total debt and
capital lease
obligations
(net of cash) 2,182.5 58.7 2,096.4 61.4
---------------------------------------------------------------------
Preference shares 319.5 8.6 319.5 9.4
---------------------------------------------------------------------
Shareholders' equity 1,213.4 32.7 1,000.1 29.2
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Total 3,715.4 100.0 3,416.0 100.0
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The improvement in the Corporation's capital structure is primarily
the result of the issuance of 6.96 million common shares of the
Corporation (adjusted for stock split) for net after-tax proceeds of
$126.1 million in March 2005. 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 $74.7 million
for 2005 compared to $42.0 million for 2004. Earnings growth in 2005
allowed the Corporation to increase its common share dividends to
$62.4 million, or 59 cents per common share, compared to $48.8
million, or 54 cents per common share, in 2004. Fortis has increased
its annual dividend payments to common shareholders for 32
consecutive years. The dividend payout ratio was 43.7 per cent
compared to 50.3 per cent for 2004.
As at December 31, 2005, the Corporation's credit ratings were as
follows:
Standard & Poors ("S&P") BBB(+)
Dominion Bond Rating Service ("DBRS") BBB(high)
In December 2005, S&P confirmed its corporate credit rating on the
Corporation at BBB(+) and revised its outlook from negative to
stable. The outlook was revised based on greater stability in the
business and financial risk profiles of Fortis and reduced concerns
surrounding the level of operational and funding risk involved with
the Corporation's major capital expenditure program. DBRS is
conducting its annual review of the Corporation's credit rating.
DBRS currently rates the Corporation at BBB(high). Fortis will
continue to update both S&P and DBRS on the execution of its capital
expenditure program.
Capital Program: The Corporation's principal business of regulated
electric utilities is capital intensive. Consolidated capital
expenditures of Fortis for 2006 are expected to be almost $450
million, of which approximately $420 million will be invested in
regulated electric utilities. Approximately 75 per cent of the $420
million investment in regulated electric utilities will be
attributable to FortisAlberta and FortisBC. The Corporation's total
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
under existing consumer and employee share purchase plans, dividend
reinvestment plan and stock option plans. Fortis does not anticipate
any difficulties 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.
At December 31, 2005, Belize Electricity was non-compliant with its
debt service coverage ratio of 1.5 times related to its BZ$10.6
million loan with the International Bank for Reconstruction and
Development ("IBRD") and its BZ$17.9 million loan with the Caribbean
Development Bank. Belize Electricity's debt service ratio was 0.67
times at December 31, 2005. A waiver was obtained for December 2005
from the IBRD. Discussions with the Caribbean Development Bank are
ongoing with a view to cure and or amend the covenants. Fortis does
not expect any change in the regular debt repayment schedule relating
to these loans.
The Corporation and its subsidiaries had consolidated authorized
lines of credit of $747.1 million, of which $538.8 million was unused
at December 31, 2005. The following summary outlines the
Corporation's credit facilities by reporting segments as at December
31.
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Fortis Inc.
Credit Facilities as at December 31st
---------------------------------------------------------------------
Regulated Fortis Fortis Total Total
($ millions) Corporate Utilities Generation Properties 2005 2004
---------------------------------------------------------------------
Total credit
facilities 210.0 518.8 5.8 12.5 747.1 543.2
Credit
facilities
utilized
Short-term
borrowings (2.8) (53.9) (2.8) (0.4)(59.9)(192.9)
Long-term debt (18.0) (56.8) - - (74.8) -
Letters of
credit
outstanding (4.6) (66.8) - (2.2)(73.6) (91.0)
---------------------------------------------------------------------
Credit
facilities
available 184.6 341.3 3.0 9.9 538.8 259.3
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At December 31, 2005, 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.
In January 2005, Fortis entered into a $50 million unsecured revolving/term credit facility for its general corporate purposes, including acquisitions. In May 2005, Fortis renegotiated its $145 million unsecured revolving/term credit facility to a $145 million unsecured term credit facility that matures in May 2008. This facility can be used for general corporate purposes, including acquisitions. In December 2005, Fortis renegotiated its $50 million unsecured revolving/term credit facility to an unsecured term credit facility that matures in January 2009. Fortis also entered into a $15 million demand facility during 2005.
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 2006, the Company renegotiated the $100 million credit facility extending the term from 1 to 3 years.
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 January 2006, this $25 million short-term bridge financing was extended until June 2007.
In May 2005, FortisAlberta renegotiated its $100 million unsecured revolving/term credit facility to a $150 million unsecured term credit facility that matures in May 2008.
In May 2005, FortisBC renegotiated its $100 million unsecured revolving/term credit facility to a $100 million unsecured term credit facility that matures in May 2008. Additionally, in May 2005 FortisBC entered into a $50 million unsecured revolving/term credit facility.
In September 2005, PLP entered into $5.4 million of credit facilities consisting of a $0.7 million revolving demand operating line and a $4.7 million non-revolving demand installment loan.
OFF-BALANCE SHEET ARRANGEMENTS
Disclosure is required of all off-balance sheet arrangements such as transactions, agreements or contractual arrangements with unconsolidated entities, structured finance entities, special purpose entities or variable interest entities that are reasonably likely to materially affect liquidity or the availability of, or requirements for, capital resources. The Corporation had no such off-balance sheet arrangements as at December 31, 2005.
RELATED PARTY TRANSACTIONS
Related party transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. The significant related party transactions primarily related to the sale of energy from BECOL to Belize Electricity and finance charges on inter-company borrowings. The significant related party transactions for the years ended December 31, 2005 and December 31, 2004 are detailed below.
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Fortis Inc.
Related Party Transactions
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($ millions) 2005 2004
---------------------------------------------------------------------
Sales from BECOL to Belize Electricity $8.2 $8.1
---------------------------------------------------------------------
Inter-company finance charges on borrowings from:
---------------------------------------------------------------------
Corporate to FortisBC - 2.4
---------------------------------------------------------------------
Corporate to Fortis Properties 3.8 1.9
---------------------------------------------------------------------
Corporate to BECOL 2.2 1.9
---------------------------------------------------------------------
BECOL to Belize Electricity 2.3 2.1
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BUSINESS RISK MANAGEMENT
The Corporation's significant business risks are regulation, the integration and separation of FortisAlberta and FortisBC, use of derivative instruments and hedging, energy prices, weather and general economic conditions, loss of service areas, environmental, insurance, labour relations, human resources 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 for the year ended December 31, 2005 from those disclosed in the 2004 Management Discussion and Analysis for the year ended December 31, 2004, except for that described below.
Regulation: Rate applications that establish revenue requirements may be subject to negotiated settlement procedures as well as pursued through public hearing processes. In 2005, significant regulatory rate decisions were received at Maritime Electric, FortisAlberta, FortisBC, Belize Electricity and Caribbean Utilities which reduced regulatory risk for 2005. In September 2005, Canadian Niagara Power made application to the OEB for new electricity distribution rates effective May 1, 2006. In order to establish 2006 rates, FortisBC filed a GRA with the BCUC on November 24, 2005. FortisBC's application seeks approval of a 5.9 per cent rate increase effective January 1, 2006. Within the 2006 rate application, FortisBC also proposes a new PBR mechanism. FortisBC is proposing the application be disposed of through a negotiated settlement process. FortisAlberta filed a full 2006/2007 Distribution Tariff Application on December 12, 2005 pertaining to 2006 and 2007 customer electricity rates and capital expenditures. As well, on January 31, 2006, Maritime Electric filed a GRA for electricity rates effective July 1, 2006. There can be no assurance that the rate orders issued will permit these utilities to recover all costs actually incurred and to earn the expected rates of return. A failure to obtain acceptable rate orders may adversely affect the business carried on by each of these utilities, the undertaking or timing of proposed expansion projects, the issue and sale of securities, ratings assigned by rating agencies and other matters which may, in turn, negatively impact the Corporation's results of operations or financial position.
Integration and Separation of FortisAlberta and FortisBC: Risks associated with integrating and separating the operations of FortisAlberta and FortisBC were reduced in 2005. The separation was substantially completed in 2005, ahead of schedule, with both companies having established separate management teams and boards of directors. FortisBC has also established a locally based head office in Kelowna, British Columbia and has transitioned most of its business functions from FortisAlberta. The final step, however, will be the repatriation of information technology systems, which is expected to be completed in late 2006 or early 2007.
Loss of Service Area: 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. Previous to this agreement, the City of Airdrie had provided the Company with notice of its intention to terminate its franchise agreement and to pursue its rights under the Municipal Act to purchase the Company's distribution network. In 2005, this agreement has reduced franchise area erosion risk. Presently, there are no transactions initiated pursuant to the Municipal Act. However, upon expiration of franchise agreements, there is a risk that municipalities will opt to purchase the distribution assets existing within the boundaries of the municipality, the loss of which could have a material adverse affect on the financial condition and results of operations of FortisAlberta.
Human Resources: The ability of Fortis to deliver superior operating performance in a cost-effective manner is dependent on the Corporation's ability to attract, develop and retain a skilled workforce. Like other utilities across Canada, Fortis utilities are faced with demographic challenges relating to trades, technical staff and engineers. The growing size of the Corporation and an increasingly competitive marketplace present certain recruitment challenges going forward. The Corporation's significant consolidated capital expenditure program over the next several years will present challenges in ensuring the Corporation has the qualified workforce necessary to complete the capital work initiatives. In particular, the Alberta market is a highly competitive job market where it is difficult to attract new employees. During 2005, a strategic review of human resources throughout the Fortis Group of Companies was completed. The specific focus of the review was to ensure that Fortis has the necessary line staff, engineering technicians and engineers needed to complete future work plans pertaining to both organic and new growth initiatives, and assume future leadership roles within the organization.
CHANGES IN ACCOUNTING POLICIES
Variable Interest Entities: Effective January 1, 2005, the Corporation adopted the recommendations of the Canadian Institute of Chartered Accountants ("CICA") on accounting for variable interest entities as per Accounting Guideline 15 ("AcG-15"). The Corporation performed a review of its business arrangements with other entities and concluded that the entities do not require consolidation and that no variable interests are required to be disclosed under the requirements AcG-15. There was no impact, therefore, to the financial statements upon adopting AcG-15.
Revenue: Up to December 31, 2005, Newfoundland Power recognized revenue on the billed basis as approved by the PUB. On December 23, 2005, the Company received an order from the PUB with respect to an Accounting Policy Application filed with the PUB in September 2005. The PUB approved the proposed change to Newfoundland Power's revenue recognition policy from the billed basis to the accrual basis for financial and regulatory purposes, effective January 1, 2006.
FUTURE ACCOUNTING PRONOUNCEMENTS
Conditional Asset Retirement Obligations: In December 2005, the CICA issued EIC-159 - Conditional Asset Retirement Obligations ("EIC-159"). EIC-159 requires entities to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The accounting treatment in EIC-159 is to be applied retroactively, with restatement of prior periods, to all financial statements for interim and annual reporting periods ending after March 31, 2006. The Corporation is in the process of reviewing EIC-159 to determine the potential impact on its financial statements. EIC-159 was issued in response to the United States Financial Accounting Standards Board's Accounting for Conditional Asset Retirement Obligations, Interpretation No. 47 ("FIN 47") issued in June 2005. FIN 47 was issued due to the diverse accounting practices that have developed with respect to the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and/or method of settlement are conditional on a future event.
Financial Instruments, Hedges and Comprehensive Income: New accounting standards for financial instruments (recognition and measurement), hedges and comprehensive income have been issued by the CICA and are applicable for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2006. These standards address the criteria for recognition of financial instruments on the balance sheet and the measurement of financial instruments for related gains and losses, provide guidance on how hedge accounting is performed and the required disclosures, as well as provide standards for reporting and displaying comprehensive income. These standards are intended to harmonize Canadian accounting principles for these items with international accounting standards, including those in the United States. The Corporation is in the process of reviewing these new standards to determine the potential impact on its financial statements.
CHANGE IN PRESENTATION
Accounting for Rate Regulated Operations The Accounting Standards Board ("AcSB") of the CICA is reviewing Canadian GAAP applicable to enterprises with rate-regulated operations. Potential future changes in this area could have a material impact on the Corporation's financial statements. The AcSB has released Accounting Guideline 19 ("AcG-19") on disclosure by entities subject to rate regulation as an interim measure pending completion of the full project. AcG-19 requires disclosure regarding the nature and effects of rate regulation, as well as additional information on how rate regulation has affected the entity's financial statements. The Corporation has adopted AcG-19 for its fiscal year ended December 31, 2005 and the required disclosures will be reported in the Corporation's 2005 annual audited consolidated financial statements. The adoption of AcG-19 had no impact on the Corporation's net earnings. As a result of adopting AcG-19, Fortis has changed the basis of presentation of certain of its assets and liabilities and has restated certain comparative 2004 figures. Fortis now provides separate disclosure for and no longer nets the following assets and liabilities: (i) regulatory other post-employment benefit ("OPEB") assets and the associated accrued OPEB obligations, (ii) accrued pension benefit assets and the related regulatory pension deferral (iii) the accrual for unbilled revenue and the associated regulatory liability, and (iv) utility capital assets, capital lease obligations and regulatory deferred lease costs. The impact of this change in the basis of presentation was a $33.4 million increase in long-term regulatory assets (2004 - $26.5 million), a $31.3 million increase in deferred credits (2004 - $25.1 million), a $5.1 million increase in deferred charges (2004 - 7.5 million), a $32.8 million increase in long-term regulatory liabilities (2004 - $34.9 million), a $27.8 million increase in accounts receivable (2004 - $27.4 million), a $23.7 million increase in utility capital assets (2004 - $24.6 million), a $25.5 million increase in long-term debt and capital lease obligations (2004 - $25.8 million) and a $0.2 million increase in current installments of long-term debt and capital lease obligations (2004 - $0.2 million).
Preference Shares: As at December 31, 2005, the Corporation changed the basis of presentation of preference share dividends on the statement of earnings. Preference share dividends are now presented with finance charges before "Earnings Before Income Taxes" rather than presented under "Net Earnings Before Non-Controlling Interest and Preference Share Dividends" on the statement of earnings. This change in presentation has been adopted retroactively with restatement of comparative figures.
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 reporting periods. 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. Interim financial statements may employ a greater use of estimates than the annual financial statements. There were no material changes to the Corporation's critical accounting estimates during 2005 from those disclosed in the 2004 Management Discussion and Analysis for the year ended December 31, 2004 except as discussed below.
Contingencies: Fortis is a party to a number of disputes and lawsuits in the normal course of business. Contingent liabilities as of December 31, 2005 are consistent with disclosures in the Corporation's 2004 annual audited 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 2005, Newfoundland Power entered into an agreement with CRA that provided for the full settlement of this issue on a prospective basis, beginning in 2006. CRA canceled all outstanding reassessments related to the Company's revenue recognition policy in past years and refunded the Company's $6.9 million income tax deposit along with interest. Revenue in 2005 included $2.1 million of interest revenue, resulting in increased earnings of $1.4 million, net of tax, as a result of the CRA income tax settlement.
In a statement of claim filed on August 18, 2003 in the Court of the Queen's Bench of Alberta, EPCOR sought 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. On August 8, 2005 FortisAlberta announced that an agreement was reached with EPCOR to settle all aspects of the claim. All amounts related to the settlement were reflected in the second quarter results of FortisAlberta as the Company had adequate provisions in its financial statements to offset the impact of the settlement. On October 3, 2005, FortisAlberta signed an agreement with Aquila, Inc. and its insurers, which partitioned an insurance policy intended to cover legal expenses incurred to defend a lawsuit, as well as any amounts rendered against FortisAlberta by way of a legal ruling, or agreed to in a settlement. The proceeds received under this insurance policy partially offset the settlement of the EPCOR claim and were reflected in the third quarter results.
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 has filed, but not served, a writ and statement of claim against FortisBC. FortisBC is currently communicating with the Ministry and its insurers. In addition, FortisBC has become aware of two writs and statements of claim filed, but not served, by private land owners in relation to the same matter. The outcome cannot be reasonably determined and estimated at this time and, accordingly, no amount has been accrued in the financial statements.
On January 5, 2006, FortisBC was served a writ and statement of claim filed with the B.C. Supreme Court under the Class Proceedings Act, 1995 on behalf of a class consisting of all persons who are or were customers of FortisBC and who paid or have been charged FortisBC's late payment penalties at any time between April 1, 1981 and the date of any judgment in this action. The claim is that forfeitures of the prompt payment discount offered to customers constitute "interest" within the meaning of section 347 of the Criminal Code and, since the effective annual rate of such interest exceeds 60 per cent, they are illegal and void. In the action, the class seeks damages and restitution of all late payment penalties which were forfeited. The outcome cannot be reasonably determined and estimated at this time and, accordingly, no amount has been accrued in the financial statements.
In May 2003, Cornwall Electric received a CRA reassessment disallowing amounts claimed as capital cost allowance ("CCA") in respect of a Class 14 asset of Cornwall Electric. This Class 14 asset was created upon acquisition of Cornwall Electric by a previous owner. As a result, CCA deductions totaling $2.1 million claimed during the 1998 to 2001 taxation years were disallowed. The opening undepreciated capital cost of the Class 14 asset, including valuation allowance, was valued at approximately $1.4 million on Cornwall Electric's balance sheet. Cornwall Electric had filed a Notice of Objection with the CRA. During the third quarter of 2005, Cornwall Electric obtained a favourable resolution of the CRA reassessment. The impact of this resolution resulted in the recognition in FortisOntario of a future tax asset of $4.2 million, a $2.6 million reduction of goodwill and a $1.6 million reduction of future income tax expense.
Asset Retirement Obligations: In measuring the fair value of asset retirement obligations, the Corporation is required to make reasonable estimates concerning the method of settlement and settlement dates associated with the legally obligated asset retirement costs. If reasonable estimates cannot be made, the asset retirement obligation and offsetting capital asset are recognized when the timing and the amount can be reasonably estimated. There are no asset retirement obligations recorded at December 31, 2005.
QUARTERLY RESULTS
The following table sets forth unaudited quarterly information for each of the 8 quarters ended March 30, 2004 through December 31, 2005. All earnings per common share data have been adjusted to reflect the increased number of shares as a result of the 4-for-1 stock split completed in October 2005. The quarterly information has been obtained from the Corporation's unaudited interim consolidated financial statements which, in the opinion of management, have been prepared in accordance with Canadian GAAP and as required by utility regulators. The timing of the recognition of certain assets, liabilities, revenues and expenses as a result of regulation may differ from that otherwise expected using Canadian GAAP for non-regulated entities. These operating results are not necessarily indicative of results for any future period and should not be relied upon to predict future performance.
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Fortis Inc.
Summary of Quarterly Results (Unaudited)
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Net Earnings Earnings Earnings
Revenue applicable to per per
and Equity Common Common Common
Quarter Income Shares Share Share
Ended ($ thousands) ($ thousands) Basic ($) Diluted ($)
---------------------------------------------------------------------
December 31,
2005 353,084 22,263 0.22 0.21
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September 30,
2005 341,650 37,450 0.36 0.33
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June 30, 2005 364,948 38,188 0.37 0.34
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March 31, 2005 381,789 39,196 0.40 0.36
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December 31, 2004 337,170 21,176 0.22 0.21
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September 30, 2004 303,653 25,452 0.26 0.25
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June 30, 2004 254,513 23,946 0.30 0.28
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March 31, 2004 250,793 20,281 0.29 0.27
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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.
December 2005/December 2004 - Net earnings applicable to common shares for the fourth quarter of 2005 were $22.3 million, or $0.22 per common share, compared to $21.2 million, or $0.22 per common share, for the same quarter last year. Higher earnings from Non-regulated Generation, as a result of higher wholesale energy prices in Ontario and Upper New York State and increased production, partially offset by increased operating expenses, were partially offset by decreased earnings from Regulated Utilities and higher Corporate expenses. The decrease in earnings from Regulated Utilities was primarily driven by lower earnings at FortisAlberta and FortisBC, partially offset by higher equity income from Caribbean Utilities. FortisAlberta's earnings for the fourth quarter of 2005 were reduced by a one-time adjustment of approximately $3.0 million largely related to the implementation of the Negotiated Rate Settlement reached on May 24, 2005. Additionally, during the fourth quarter of last year, FortisBC recorded a $3.7 million after-tax increase to earnings related to the refinement of the process of estimating unbilled electricity revenue. Also, equity income in the fourth quarter of 2004 included an $8.2 million charge associated with the damage from Hurricane Ivan.
Earnings per common share for the fourth quarter, compared to the same quarter last year, were impacted by the dilution created by the common shares issued in March 2005.
September 2005/September 2004 - Net earnings applicable to common shares for the third quarter of 2005 were $37.4 million, or $0.36 per common share, compared to $25.5 million, or $0.26 per common share, for the same quarter last year. Earnings for the third quarter were $11.9 million higher than for the same quarter last year primarily due to higher average wholesale energy prices in Ontario, a $3.1 million, net of tax, unrealized foreign exchange gain associated with the translation of US$60 million of unhedged corporate long-term debt and increased earnings at Belize Electricity, Caribbean Utilities and Fortis Properties. Earnings from the Regulated Canadian Utilities were comparable quarter over quarter. The net impact of several adjustments at FortisAlberta, FortisBC and FortisOntario and higher earnings at Maritime Electric helped offset lower quarterly earnings at Newfoundland Power related to the new purchase power rate structure and higher finance charges at the utilities in western Canada. Growth in earnings per common share quarter over quarter was partially offset by the dilution created by the common shares issued in March 2005.
June 2005/June 2004 - Net earnings applicable to common shares for the second quarter were $38.2 million, or $0.37 per common share, compared to $23.9 million, or $0.30 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 included 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 included 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 also $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 unrealized foreign exchange loss associated with the translation of US$75 million of unhedged corporate debt. Growth in earnings per common share quarter over quarter was partially offset by the dilution created by the common shares issued in March 2005.
March 2005/March 2004 - Net earnings applicable to common shares for the first quarter were $39.2 million, or $0.40 per common share, compared to $20.3 million, or $0.29 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 of contractual matters 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 $0.32 per common share, 10.3 per cent higher than earnings per common share of $0.29 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 shares issued in March 2005.
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 capital expenditures for 2006 are expected to be almost $450 million of which approximately $420 million will be invested in Regulated Utilities.
Fortis also expects to focus its capital on funding further acquisitions of utility assets. Fortis will continue to pursue acquisition opportunities in Canada, the Caribbean and the United States. Fortis will also pursue growth in its non-regulated businesses including hydroelectric generation, hotels and real estate.
OUTSTANDING SHARE DATA
At February 6, 2006, the Corporation had issued and outstanding 103,232,653 Common Shares, 5,000,000 Series C First Preference Shares and 7,993,500 Series E First Preference Shares. The number of Common Shares that would be issued upon conversion of the Series C and Series E First Preference Shares, share options and convertible debt, as at December 31, 2005, is described in the Notes to the December 31, 2005 unaudited interim consolidated financial statements.
FORTIS INC.
Interim Consolidated Financial Statements
For the three and twelve months ended December 31, 2005 and 2004
(Unaudited)
Fortis Inc.
Consolidated Balance Sheets (Unaudited)
As at December 31
(in thousands)
2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
(Note 3)
ASSETS
Current assets
Cash and cash equivalents $33,416 $37,203
Accounts receivable 204,169 190,565
Prepaids 9,786 6,534
Regulatory assets 33,289 24,682
Materials and supplies 32,033 30,235
Future income taxes - 4,204
---------------------------------------------------------------------
312,693 293,423
Corporate income tax deposit - 6,949
Deferred charges 148,140 148,343
Regulatory assets 82,315 66,628
Future income taxes (Note9) 58,815 13,661
Utility capital assets 2,606,061 2,371,678
Income producing properties 414,608 341,069
Investments 167,393 163,769
Intangibles, net of amortization 14,027 18,455
Goodwill 512,139 514,041
---------------------------------------------------------------------
$4,316,191 $3,938,016
---------------------------------------------------------------------
---------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities
Short-term borrowings(Note 13) $59,868 $192,858
Accounts payable and accrued charges 265,223 272,490
Dividends payable 17,924 14,997
Income taxes payable 22,785 2,380
Regulatory liabilities 19,392 19,247
Current installments of
long-term debt and capital
lease obligations 31,392 36,286
Future income taxes 6,714 -
---------------------------------------------------------------------
423,298 538,258
Deferred credits 64,261 54,891
Regulatory liabilities(Note 9) 86,780 34,875
Future income taxes 44,718 48,432
Long-term debt and capital
lease obligations (Note 13) 2,124,674 1,904,431
Non-controlling interest 39,555 37,487
Preference shares (Note 5) 319,492 319,530
---------------------------------------------------------------------
3,102,778 2,937,904
---------------------------------------------------------------------
Shareholders' equity
Common shares (Note 6) 813,304 675,215
Contributed surplus 3,179 1,831
Equity portion of convertible
debentures 1,500 1,550
Foreign currency translation
adjustment (16,312) (15,497)
Retained earnings 411,742 337,013
---------------------------------------------------------------------
1,213,413 1,000,112
---------------------------------------------------------------------
$4,316,191 $3,938,016
---------------------------------------------------------------------
---------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements.
Fortis Inc.
Consolidated Statements of Earnings (Unaudited)
For the periods ended December 31
(in thousands, except per
share amounts)
Quarter Ended Year Ended
2005 2004 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
(Note 3) (Note 3)
Operating revenues $350,230 $342,958 $1,430,005 $1,145,287
Equity income (loss) 2,854 (5,788) 11,466 842
---------------------------------------------------------------------
353,084 337,170 1,441,471 1,146,129
---------------------------------------------------------------------
Expenses
Operating 241,119 231,023 926,295 766,628
Amortization 38,454 34,831 157,622 113,672
---------------------------------------------------------------------
279,573 265,854 1,083,917 880,300
---------------------------------------------------------------------
Operating income 73,511 71,316 357,554 265,829
Finance charges (Note 8) 36,024 32,198 137,219 110,054
Preference share dividends 4,151 4,096 16,606 12,319
Gain on settlement of
contractual matters (Note
12) - - (10,000) -
---------------------------------------------------------------------
40,175 36,294 143,825 122,373
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Earnings before income taxes 33,336 35,022 213,729 143,456
Corporate income taxes 9,036 11,241 70,416 46,927
---------------------------------------------------------------------
Net earnings before
non-controlling interest 24,300 23,781 143,313 96,529
Non-controlling interest 2,037 2,605 6,216 5,674
---------------------------------------------------------------------
Net earnings applicable to
common shares $22,263 $21,176 $137,097 $90,855
---------------------------------------------------------------------
Weighted average common
shares outstanding (Note6)
103,119 95,458 101,750 84,738
---------------------------------------------------------------------
Earnings per common share
Basic $0.22 $0.22 $1.35 $1.07
Diluted $0.21 $0.21 $1.24 $1.01
---------------------------------------------------------------------
---------------------------------------------------------------------
Consolidated Statements of Retained Earnings (Unaudited)
For the periods ended December 31
(in thousands)
Quarter Ended Year Ended
2005 2004 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Balance at beginning of
period $406,020 $329,495 $337,013 $294,986
Net earnings applicable to
common shares 22,263 21,176 137,097 90,855
---------------------------------------------------------------------
428,283 350,671 474,110 385,841
Dividends on common shares (16,541) (13,658) (62,368) (48,828)
---------------------------------------------------------------------
Balance at end of period $411,742 $337,013 $411,742 $337,013
---------------------------------------------------------------------
---------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements.
Fortis Inc.
Consolidated Statements of Cash Flows (Unaudited)
As at December 31
(in thousands)
Quarter Ended Year Ended
2005 2004 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating Activities
Net earnings applicable to
common shares $22,263 $21,176 $137,097 $90,855
Items not affecting cash
Amortization-capital
assets, net of
contributions in aid of
construction 35,822 32,801 147,222 105,817
Amortization-intangibles 1,665 921 4,428 3,684
Amortization-other 967 1,109 5,972 4,171
Future income taxes 3,040 4,874 12,322 9,006
Accrued employee future
benefits 4,817 4,097 1,915 1,970
Equity (income) loss, net
of dividends (1,039) 4,505 (3,426) 3,962
Stock-based compensation 392 271 1,569 969
Unrealized foreign
exchange loss (gain) on
long-term debt 71 (1,036) (2,335) (1,229)
Non-controlling interest 2,037 2,605 6,216 5,674
Other 1,339 2,189 1,653 67
---------------------------------------------------------------------
71,374 73,512 312,633 224,946
Change in non-cash
operating working capital 3,021 18,081 (9,208) 47,322
---------------------------------------------------------------------
74,395 91,593 303,425 272,268
---------------------------------------------------------------------
Investing Activities
Change in deferred charges
and credits 4,354 (18,641) (1,550) (12,673)
Purchase of utility
capital assets (133,950) (124,688) (424,754) (262,546)
Purchase of income
producing properties (7,375) (4,922) (83,875) (16,123)
Contributions in aid of
construction 12,921 6,309 45,130 17,127
Proceeds on sale of
utility capital assets 574 662 1,556 702
Business acquisitions, net
of cash 40 - (3,258) (752,735)
Increase in investments (193) - (193) (8)
---------------------------------------------------------------------
(123,629) (141,280) (466,944)(1,026,256)
---------------------------------------------------------------------
Financing Activities
Change in short-term
borrowings 4,774 (657,705) (132,818) 90,821
Proceeds from long-term
debt 154,321 723,440 348,698 746,646
Repayment of long-term
debt and capital lease
obligations (81,261) (12,412) (126,411) (38,533)
Repayment of assumed
acquisition debt - - - (557,381)
Redemption of preference
shares - - (38) -
Advances from (to)
non-controlling interest 257 292 (596) 722
Issue of preference shares - 5,315 - 194,709
Issue of common shares 2,926 1,904 135,253 340,060
Dividends -
Common shares (16,541) (13,658) (62,368) (48,828)
Subsidiary dividends paid
to non-controlling
interest (441) (413) (1,803) (1,686)
---------------------------------------------------------------------
64,035 46,763 159,917 726,530
---------------------------------------------------------------------
Effect of exchange rate
changes on cash (7) 76 (185) (433)
---------------------------------------------------------------------
Change in cash and cash
equivalents 14,794 (2,848) (3,787) (27,891)
Cash and cash equivalents,
beginning of period 18,622 40,051 37,203 65,094
---------------------------------------------------------------------
Cash and cash equivalents,
end of period $33,416 $37,203 $33,416 $37,203
---------------------------------------------------------------------
---------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements.
FORTIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the periods ended December 31, 2005 and 2004 (unless otherwise
stated)
(Unaudited)
1. DESCRIPTION OF THE BUSINESS
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.
Nature of Operations
Fortis is principally a diversified, international electric utility holding company. Fortis segments its utility operations by franchise area and, depending on regulatory requirements, by the nature of the assets. Fortis also holds investments in non-regulated generation and commercial real estate and hotel properties which are treated as separate segments. 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. Each operating segment operates as an autonomous unit, assumes profit and loss responsibilities and is accountable for its own resource allocation.
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 operations include 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 is the operation of the electricity distribution business of Port Colborne Hydro Inc., which has been leased from the City of Port Colborne under a 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 electrical distribution companies formed in 2000.
d. FortisAlberta: On May 31, 2004, Fortis, through an indirect 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 an indirect 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 an indirect 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 Company, Ltd. ("Caribbean Utilities"): Caribbean Utilities is the sole provider of electricity on Grand Cayman, Cayman Islands. The Corporation's 36.9 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. In January 2006, FortisOntario Generation Corporation was amalgamated with CNE Energy Inc.
b. Belize: Operations consist of the 25-MW Mollejon and 7-MW Chalillo hydroelectric facilities in Belize. All of their 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, through an indirect wholly owned subsidiary, CNE Energy Inc., 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: Operations include the 4 hydroelectric generating stations in Upper New York State with a combined capacity of 23 MW operating under licenses from the U.S. Federal Energy Regulatory Commission. Hydroelectric generation operations in Upper New York State are conducted through the Corporation's indirect wholly owned subsidiary, FortisUS Energy Corporation.
e. British Columbia: Operations include 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 Alberta and Manitoba that have approximately 650 rooms and 27,000 square feet of banquet space. Including the new hotels, Fortis Properties owns almost 3,000 hotel rooms and approximately 2.7 million square feet of commercial real estate.
Corporate
Corporate includes 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, 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 2004 annual audited consolidated financial statements except as described below. All amounts are presented in Canadian dollars unless otherwise stated.
Effective January 1, 2005, the Corporation adopted the recommendations of the CICA on accounting for variable interest entities as per Accounting Guideline 15 ("AcG-15"). The Corporation performed a review of its business arrangements with other entities and concluded that the entities do not require consolidation and that no variable interests are required to be disclosed under the requirements of AcG-15. There was no impact, therefore, to the financial statements upon adopting AcG-15.
3. CHANGE IN PRESENTATION
Accounting for Rate Regulated Operations
The Accounting Standards Board of the CICA has released Accounting Guideline 19 ("AcG-19") on disclosure by entities subject to rate regulation. AcG-19 requires disclosure regarding the nature and effects of rate regulation, as well as additional information on how rate regulation has affected the entity's financial statements. The Corporation has adopted AcG-19 for its fiscal year ended December 31, 2005 and the required disclosures will be reported in the Corporation's 2005 annual audited consolidated financial statements. The adoption of AcG-19 had no impact on the Corporation's net earnings. As a result of adopting AcG-19, Fortis has changed the basis of presentation of certain of its assets and liabilities and has restated certain comparative 2004 figures. Fortis now provides separate disclosure for and no longer nets the following assets and liabilities: (i) regulatory other post-employment benefit ("OPEB") assets and the associated accrued OPEB obligations, (ii) accrued benefit pension assets and the related regulatory pension deferral (iii) the accrual for unbilled revenue and the associated regulatory liability, and (iv) utility capital assets, capital lease obligations and regulatory deferred lease costs. The impact of this change in the basis of presentation was a $33.4 million increase in long-term regulatory assets (2004 - $26.5 million), a $31.3 million increase in deferred credits (2004 - $25.1 million), a $5.1 million increase in deferred charges (2004 - $7.5 million), a $32.8 million increase in long-term regulatory liabilities (2004 - $34.9 million), a $27.8 million increase in accounts receivable (2004 - $27.4 million), a $23.7 million increase in utility capital assets (2004 - $24.6 million), a $25.5 million increase in long-term debt and capital lease obligations (2004 - $25.8 million) and a $0.2 million increase in current installments of long-term debt and capital lease obligations (2004 - $0.2 million).
Preference Shares
As at December 31, 2005, the Corporation changed the basis of presentation of preference share dividends on the statement of earnings. Preference share dividends are now presented with finance charges before "Earnings Before Income Taxes" rather than presented under "Net Earnings Before Non-Controlling Interest and Preference Share Dividends" on the statement of earnings. This change in presentation has been adopted retroactively with restatement of comparative figures.
4. 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. Interim financial statements may employ a greater use of estimates than the annual financial statements. There were no material changes to the Corporation's critical accounting estimates for the year ended December 31, 2005 from those disclosed in the 2004 Management Discussion and Analysis for the year ended December 31, 2004 except as disclosed in the Interim Management Discussion and Analysis for the three and twelve months ended December 31, 2005 and Note 14 to these interim consolidated financial statements.
5. 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.
Issued and Outstanding December 31, 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
Series E First
Preference Shares 7,993,500 196,500 7,993,500 196,500
---------------------------------------------------------------------
Total 12,993,500 $319,492 13,000,000 $319,530
---------------------------------------------------------------------
---------------------------------------------------------------------
Series C First Preference Shares
The Series C First Preference Shares are entitled to fixed cumulative preferential cash dividends at a rate of $1.3625 per share per annum. On or after June 1, 2010, the Corporation may, at its option, redeem for cash the Series C First Preference Shares, in whole at any time or in part from time to time, at $25.75 per share if redeemed before June 1, 2011, at $25.50 per share if redeemed on or after June 1, 2011 but before June 1, 2012, at $25.25 per share if redeemed on or after June 1, 2012 but before June 1, 2013 and at $25.00 per share if redeemed on or after June 1, 2013 plus, in each case, all accrued and unpaid dividends up to but excluding the date fixed for redemption.
On or after June 1, 2010, the Corporation may, at its option, convert all, or from time to time any part of the outstanding Series C First Preference Shares into fully-paid and freely-tradable common shares of the Corporation. The number of common shares into which each Preference Share may be so converted will be determined by dividing the then applicable redemption price per Preference Share, together with all accrued and unpaid dividends up to but excluding the date fixed for conversion, by the greater of $1.00 and 95 per cent of the then current market price of the common shares at such time.
On or after September 1, 2013, each Series C First Preference Share will be convertible at the option of the holder on the third day of September, December, March and June of each year into freely tradable common shares determined by dividing $25.00, together with all accrued and unpaid dividends up to but excluding the date fixed for conversion, by the greater of $1.00 and 95 per cent of the then current market price of the common shares. If a holder of Series C First Preference Share elects to convert any of such shares into common shares, the Corporation can redeem such Series C First Preference Shares for cash or arrange for the sale of those shares to substitute purchasers.
Series D First Preference Shares
On January 29, 2004, Fortis issued 8,000,000 First Preference Units of the Corporation. Each First Preference Unit consisted of one Series D First Preference Share of the Corporation and one Series E First Preference Share Purchase Warrant (a "Warrant"). Upon close of the acquisition of FortisAlberta and FortisBC, which occurred May 31, 2004, each Warrant entitled the holder to acquire 0.75 of a Series E First Preference Share upon payment of $18.75 per Warrant. Holders of Series D First Preference Shares had the right to convert each Series D First Preference Share into 0.25 of a Series E First Preference Share and to exercise a Warrant (in conjunction with the payment of $18.75) on July 15, 2004, September 1, 2004 and December 1, 2004.
The purchase price of $6.25 per First Preference Share Unit resulted in initial gross proceeds of approximately $50 million. During the remainder of 2004, Fortis received additional gross proceeds of approximately $149.9 million from the conversion of 7,993,500 of the First Preference Units. On December 1, 2004 the remaining 6,500 First Preference Units were cancelled and replaced with the issuance of 6,500 Series D First Preference Shares.
On September 20, 2005, the 6,500 Series D First Preference Shares were redeemed, without premium, at a redemption price of $6.25 per Series D First Preference Share. Prior to the redemption, the quarterly cash dividend payable with respect to the Series D First Preference Shares that were not converted was reduced to $0.01 per share, being equivalent to 0.64 per cent per annum per Series D First Preference Share.
Series E First Preference Shares
The Series E First Preference Shares are entitled to receive fixed cumulative preferential cash dividends in the amount of $1.2250 per share per annum.
On and after June 1, 2013, the Corporation may, at its option, redeem all, or from time to time any part of, the outstanding Series E First Preference Shares by the payment in cash of a sum per redeemed share equal to $25.75 if redeemed during the 12 months commencing June 1, 2013, $25.50 if redeemed during the 12 months commencing June 1, 2014, $25.25 if redeemed during the 12 months commencing June 1, 2015, and $25.00 if redeemed on or after June 1, 2016 plus, in each case, all accrued and unpaid dividends up to but excluding the date fixed for redemption. On and after June 1, 2013, the Corporation may, at its option, convert all, or from time to time any part of the outstanding Series E First Preference Shares into fully paid and freely tradable common shares of the Corporation. The number of common shares into which each Preference Share may be so converted will be determined by dividing the then applicable redemption price per Series E First Preference Share, together with all accrued and unpaid dividends up to, but excluding the date fixed for conversion, by the greater of $1.00 and 95 per cent of the then current market price of the common shares at such time.
On or after September 1, 2016, each Series E First Preference Share will be convertible at the option of the holder on the first business day of September, December, March and June of each year, into fully paid and freely tradable common shares determined by dividing $25.00, together with all accrued and unpaid dividends up to but excluding the date fixed for conversion, by the greater of $1.00 and 95 per cent of the then current market price of the common shares. If a holder of Preference Shares elects to convert any of such shares into common shares, the Corporation can redeem such Preference Shares for cash or arrange for the sale of those shares to other purchasers.
6. CAPITAL STOCK
On September 28, 2005, the Board of Directors of Fortis declared a stock dividend effecting a 4-for-1 stock split of the Corporation's outstanding Common Shares. The stock dividend was paid on October 21, 2005 to shareholders of record on October 14, 2005. For all periods presented, all references to the number of common shares issued and outstanding, weighted average number of common shares, basic and diluted earnings per common share amounts, and stock option data have been retroactively restated to reflect the effect of this stock split.
Authorized: an unlimited number of Common Shares without nominal or par value.
December 31, 2005 December 31, 2004
---------------------------------------------------------------------
a)Issued and Number of Amount Number of Amount
Outstanding Shares (in thousands) Shares (in thousands)
---------------------------------------------------------------------
Common Shares 103,203,981 $813,304 95,529,292 $675,215
---------------------------------------------------------------------
Common shares issued during the period were as follows:
Quarter Ended Year Ended
December 31, 2005 December 31, 2005
---------------------------------------------------------------------
Number of Amount Number of Amount
Shares (in thousands) Shares (in thousands)
---------------------------------------------------------------------
Opening balance 103,067,296 $810,156 95,529,292 $675,215
Public offering - - 6,960,000 126,072
Partial
consideration
in business
acquisition
(Note 11) - - 23,668 443
Consumer Share
Purchase Plan 23,992 600 86,588 1,799
Dividend
Reinvestment Plan 41,701 1,042 171,301 3,526
Employee Share
Purchase Plan 36,552 914 151,724 3,088
Directors' and
Executive Stock
Option Plans 34,440 592 281,408 3,161
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103,203,981 $813,304 103,203,981 $813,304
---------------------------------------------------------------------
On March 1, 2005, Fortis issued 6,960,000 Common Shares (adjusted for stock split) of the Corporation at $18.66 per common share (adjusted for stock split). The common share issuance resulted in gross proceeds of approximately $130 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 23,668 Common Shares (adjusted for stock split) of the Corporation at a fair value of $18.71 per common share, the 5-day average trading price of Fortis' Common Shares for the last five trading days immediately preceding the acquisition (adjusted for stock split), to the shareholders of PLP, combined with a cash payment, to acquire all of the issued common and preference shares of PLP.
At December 31, 2005, 6,355,560 Common Shares remained reserved for issue under the terms of the above noted share purchase, dividend reinvestment and stock option plans (adjusted for stock split).
b) Earnings per Common Share
The Corporation calculates earnings per common share on the weighted average number of common shares outstanding. The annual weighted average number of common shares outstanding were 101,749,758 and 84,737,532 at December 31, 2005 and December 31, 2004, respectively (adjusted for stock split).
The weighted average number of common shares outstanding were 103,119,468 and 95,458,344 for the quarters ended December 31, 2005 and December 31, 2004, respectively (adjusted for stock split). Diluted earnings per common share are calculated using the treasury stock method for options and the "if-converted" method for convertible securities.
Earnings per common share are as follows:
Quarter Ended December 31
---------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------
Weighted Weighted
Average Earnings Average Earnings
Earnings Shares(1) per Earnings Shares(1) per
(in (in Common (in (in Common
thousands) thousands) Share(1)thousands) thousands) Shares(1)
---------------------------------------------------------------------
Earnings $22,263 $21,176
Weighted
average
shares
outstan-
ding 103,119 95,458
---------------------------------------------------------------------
Basic
Earnings per
Common Share $0.22 $0.22
---------------------------------------------------------------------
Effect of
dilutive
securities:
Stock options - 1,046 - 543
Preference
Shares 4,151 19,689 4,096 21,818
Convertible
debentures 268 1,925 279 1,924
---------------------------------------------------------------------
Diluted
Earnings
per
Common
Share $26,682 125,779 $0.21 $25,551 119,743 $0.21
---------------------------------------------------------------------
Year Ended December 31
---------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------
Weighted Weighted
Average Earnings Average Earnings
Earnings Shares(1) per Earnings Shares(1) per
(in (in Common (in (in Common
thousands) thousands) Share(1)thousands) thousands) Shares(1)
---------------------------------------------------------------------
Earnings $137,097 $90,855
Weighted
average
shares
outstan-
ding 101,750 84,738
---------------------------------------------------------------------
Basic
Earnings
per Common
Share $1.35 $1.07
---------------------------------------------------------------------
Effect of
dilutive
securities:
Stock options - 1,046 - 543
Preference
Shares 16,606 19,689 12,319 16,154
Convertible
debentures 1,104 1,925 1,186 1,924
---------------------------------------------------------------------
Diluted
Earnings
per
Common
Share $154,807 124,410 $1.24 $104,360 103,359 $1.01
---------------------------------------------------------------------
c) Stock Options
The Corporation is authorized to grant certain key employees and
directors of Fortis Inc. and its subsidiaries, options to purchase
Common Shares of the Corporation. At December 31, 2005, the
Corporation had the following stock-based compensation plans:
Executive 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 Stock Option Plan will
cease to exist when all outstanding options are exercised or expire
in or before 2011. The Directors' Stock Option Plan ceased to exist
at December 31, 2005 as all outstanding options under this Plan had
been exercised. As a result of the October 2005 stock split, all
stock options were split 4-for-1 with the exercise price at one
quarter of the pre-split exercise price (Note 6).
Quarter Ended Year Ended
December 31, 2005 December 31, 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Number of Weighted Number of Weighted
Options Average Options Average
Price Price
---------------------------------------------------------------------
---------------------------------------------------------------------
Outstanding
at beginning
of period 3,456,316 $14.15 2,882,588 $12.57
Granted - $- 845,720 $18.49
Cancelled - $- (25,024) $16.56
Exercised (34,440) $10.75 (281,408) $10.44
---------------------------------------------------------------------
Outstanding at
end of period 3,421,876 $14.18 3,421,876 $14.18
---------------------------------------------------------------------
---------------------------------------------------------------------
Details of stock options outstanding are as follows:
Number of Exercise Expiry
Options Price Date
---------------------------------------------------------------------
448,624 $9.57 2011
642,428 $12.03 2012
703,468 $12.81 2013
709,136 $15.28 2014
12,000 $15.23 2014
73,540 $14.55 2014
770,940 $18.40 2015
28,000 $18.11 2015
33,740 $20.82 2015
---------------------------------------------------------------------
---------------------------------------------------------------------
3,421,876
---------------------------------------------------------------------
---------------------------------------------------------------------
Options vested at end of period 1,452,602
---------------------------------------------------------------------
---------------------------------------------------------------------
Stock-based Compensation
On March 1, 2005, the Corporation issued 783,980 options (adjusted for stock split) on common shares under its 2002 Stock Option Plan at the 5-day average trading price immediately preceding the date of grant of $18.40 (adjusted for stock split). 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 $2.75 per option (adjusted for stock split).
On May 11, 2005, the Corporation issued 28,000 options (adjusted for stock split) on common shares under its 2002 Stock Option Plan at the 5-day average trading price immediately preceding the date of grant of $18.11 (adjusted for stock split). 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 $2.58 per option (adjusted for stock split).
On August 16, 2005, the Corporation issued 33,740 options (adjusted for stock split) on common shares under its 2002 Stock Option Plan at the 5-day average trading price immediately preceding the date of grant of $20.82 (adjusted for stock split). 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 $2.82 per option (adjusted for stock split).
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 August 16, 2005
--------------------------------------------------------------------
Dividend yield (%) 3.44 3.44 3.44
Expected volatility (%) 15.3 15.2 14.9
Risk-free interest rate (%) 4.28 4.12 3.93
Weighted-average
expected life (years) 7.5 7.5 7.5
The Corporation records compensation expense upon the issuance of
stock options under its 2002 Stock Option Plan. Using the fair value
method, the compensation expense is amortized over the 4-year vesting
period of the options. Under the fair value method, $0.4 million
and $1.6 million were recorded as compensation expense for the
quarter ended and year ended December 31, 2005, respectively ($0.3
million and $1.0 million for the quarter ended and year ended
December 31, 2004, respectively).
7. 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 $5.5 million for the fourth
quarter of 2005 ($5.3 million for the fourth quarter of 2004) and
$16.2 million for the year ($13.4 million for 2004). The cost of
providing the defined contribution arrangements for the fourth
quarter of 2005 was $1.2 million ($1.7 million for the fourth quarter
of 2004) and $3.5 million for the year ($3.6 million for 2004).
8. FINANCE CHARGES
Quarter Ended Year Ended
December 31 December 31
(in thousands) 2005 2004 2005 2004
--------------------------------------------------------------------
--------------------------------------------------------------------
Amortization of debt
and stock issue expenses $600 $1,780 $1,093 $1,984
Interest - long term debt 38,224 32,807 143,505 101,094
- short-term
borrowings 1,369 3,622 5,435 17,181
Interest charged
to construction (2,043) (1,988) (6,727) (4,895)
Interest earned (2,197) (2,987) (3,752) (4,081)
Unrealized foreign exchange
loss (gain) on long-term debt 71 (1,036) (2,335) (1,229)
--------------------------------------------------------------------
$36,024 $32,198 $137,219 $110,054
--------------------------------------------------------------------
--------------------------------------------------------------------
9. INCOME TAXES
At FortisAlberta, as prescribed by the AEUB in 2005, provincial income tax expenses are recovered through customer rates based on the taxes payable method and federal income tax expenses are recovered through customer rates based on a modified liability method. Previously, FortisAlberta followed the taxes payable method for accounting for provincial and federal income taxes. Under the current modified liability method, current customer rates 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 federal future income taxes within current customer rates, FortisAlberta has now recognized all federal future income taxes within the financial statements. The Company has set up a regulatory liability equal to the amount of federal future income taxes recognized in these financial statements that have not yet been reflected in customer rates. These amounts will be reflected in future rates to customers as timing differences reverse. FortisAlberta continues to recognize future income taxes for certain deferral amounts where the future income taxes will not be collected in future customer rates.
10. a) SEGMENTED INFORMATION Information by reportable segment is as follows:
Quarter ended
(in thousands of dollars $)
Regulated Utilities
---------------------------------------------------------------------
Nfld Maritime Fortis Fortis Fortis Total Total
Power Electric Ontario Alberta BC Canadian Caribbean
December
31, 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating
revenues 101,411 28,882 32,905 58,668 50,164 272,030 19,836
Equity
income - - - - - - 2,854
Energy
supply
costs 69,054 18,268 25,750 - 15,934 129,006 10,789
Operating
expenses 13,953 3,380 4,079 29,987 16,781 68,180 2,850
Amortiza-
tion 6,267 2,433 1,337 15,788 4,924 30,749 1,228
---------------------------------------------------------------------
Operating
income 12,137 4,801 1,739 12,893 12,525 44,095 7,823
Finance
charges 7,925 1,829 1,254 6,325 5,350 22,683 1,741
Preference
share
dividends - - - - - - -
Corporate
income
taxes 1,176 1,275 323 2,397 1,487 6,658 342
Non-
controlling
interest 147 - - - - 147 904
---------------------------------------------------------------------
Net earnings
(loss) 2,889 1,697 162 4,171 5,688 14,607 4,836
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - 19,858 42,947 228,615 220,719 512,139 -
Identifiable
assets 850,059 267,565 120,867 758,449 722,392 2,719,332 212,157
Equity
investment
assets - - - - - - 164,808
---------------------------------------------------------------------
Total
assets 850,059 287,423 163,814 987,064 943,111 3,231,471 376,965
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expendi-
tures 17,571 6,628 5,265 58,210 38,885 126,559 3,580
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-Regulated
---------------------------------------------------------------------
Inter-
Fortis segment Consolidated
Generation Properties Corporate elimination
December
31, 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating
revenues 26,043 38,287 1,884 (7,850) 350,230
Equity income - - - - 2,854
Energy supply
costs 1,635 - - (5,085) 136,345
Operating
expenses 6,093 25,683 3,027 (1,059) 104,774
Amortization 2,623 3,069 785 - 38,454
---------------------------------------------------------------------
Operating
income 15,692 9,535 (1,928) (1,706) 73,511
Finance
charges 2,681 5,188 5,437 (1,706) 36,024
Preference
share
dividends - - 4,151 - 4,151
Corporate
income taxes 3,499 1,430 (2,893) - 9,036
Non-controlling
interest 1,027 - (41) - 2,037
---------------------------------------------------------------------
Net earnings
(loss) 8,485 2,917 (8,582) - 22,263
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - - - - 512,139
Identifiable
assets 267,049 427,753 41,655 (28,702) 3,639,244
Equity
investment
assets - - - - 164,808
---------------------------------------------------------------------
Total assets 267,049 427,753 41,655 (28,702) 4,316,191
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expenditures 3,178 7,375 633 - 141,325
---------------------------------------------------------------------
---------------------------------------------------------------------
Regulated Utilities
---------------------------------------------------------------------
Nfld Maritime Fortis Fortis Fortis Total Total
Power Electric Ontario Alberta BC Canadian Caribbean
December
31, 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating
revenues 104,380 27,825 31,835 57,316 55,111 276,467 17,126
Equity
income - - - - - - (5,788)
Energy
supply
costs 71,945 16,785 25,471 - 16,123 130,324 9,048
Operating
expenses 13,995 3,450 3,050 27,730 15,392 63,617 2,620
Amortiza-
tion 6,385 2,295 1,025 13,720 4,238 27,663 1,253
---------------------------------------------------------------------
Operating
income 12,055 5,295 2,289 15,866 19,358 54,863 (1,583)
Finance
charges 7,593 2,232 1,291 5,865 3,083 20,064 1,602
Preference
share
dividends - - - - - - -
Corporate
income
taxes 998 1,268 138 2,528 4,665 9,597 235
Non-
controlling
interest 150 - - - - 150 754
---------------------------------------------------------------------
Net earnings
(loss) 3,314 1,795 860 7,473 11,610 25,052 (4,174)
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - 19,858 45,577 229,097 219,509 514,041 -
Identifiable
assets 825,310 240,268 118,326 612,480 613,436 2,409,820 200,305
Equity
investment
assets - - - - - - 161,292
---------------------------------------------------------------------
Total
assets 825,310 260,126 163,903 841,577 832,945 2,923,861 361,597
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expendi-
tures 15,799 11,357 2,153 35,162 47,723 112,194 3,656
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-Regulated
---------------------------------------------------------------------
Inter-
Fortis segment Consolidated
Generation Properties Corporate elimination
December
31, 2004
Operating
revenues 20,033 33,199 2,584 (6,451) 342,958
Equity income - - - - (5,788)
Energy supply
costs 1,692 - - (2,924) 138,140
Operating
expenses 3,637 21,910 2,088 (989) 92,883
Amortization 2,685 2,645 585 - 34,831
---------------------------------------------------------------------
Operating
income 12,019 8,644 (89) (2,538) 71,316
Finance
charges 3,833 4,481 4,756 (2,538) 32,198
Preference
share
dividends - - 4,096 - 4,096
Corporate
income taxes 1,741 1,365 (1,697) - 11,241
Non-
controlling
interest 1,741 - (40) - 2,605
---------------------------------------------------------------------
Net earnings
(loss) 4,704 2,798 (7,204) - 21,176
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - - - - 514,041
Identifiable
assets 267,758 354,223 53,017 (22,440) 3,262,683
Equity
investment
assets - - - - 161,292
---------------------------------------------------------------------
Total assets 267,758 354,223 53,017 (22,440) 3,938,016
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expenditures 8,730 4,922 108 - 129,610
---------------------------------------------------------------------
---------------------------------------------------------------------
Year Ended
(in thousands of dollars $)
Regulated Utilities
---------------------------------------------------------------------
Nfld Maritime Fortis Fortis Fortis Total Total
Power Electric Ontario Alberta BC Canadian Caribbean
December
31, 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating
revenues 419,963 116,693 139,668 259,775 194,765 1,130,864 75,790
Equity
income - - - - - - 11,466
Energy
supply
costs 255,954 71,568 110,164 - 60,412 498,098 40,845
Operating
expenses 53,812 12,535 14,520 113,006 64,738 258,611 10,725
Amortiza-
tion 32,143 9,670 5,100 61,395 19,038 127,346 5,770
---------------------------------------------------------------------
Operating
income 78,054 22,920 9,884 85,374 50,577 246,809 29,916
Finance
charges 31,369 7,614 5,058 24,198 18,513 86,752 5,614
Preference
share
dividends - - - - - - -
Gain on
settlement
of
contractual
matters - - - - - - -
Corporate
income
taxes 15,368 6,224 493 25,105 7,424 54,614 1,261
Non-
controlling
interest 588 - - - - 588 3,610
---------------------------------------------------------------------
Net earnings
(loss) 30,729 9,082 4,333 36,071 24,640 104,855 19,431
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - 19,858 42,947 228,615 220,719 512,139 -
Identifia-
ble
assets 850,059 267,565 120,867 758,449 722,392 2,719,332 212,157
Equity
investment
assets - - - - - - 164,808
---------------------------------------------------------------------
Total
assets 850,059 287,423 163,814 987,064 943,111 3,231,471 376,965
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expendi-
tures 55,399 40,369 10,913 164,962 115,989 387,632 15,197
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-Regulated
---------------------------------------------------------------------
Inter-
Fortis segment Consolidated
Generation Properties Corporate elimination
December
31, 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating
revenues 83,955 154,403 9,977 (24,984) 1,430,005
Equity income - - - - 11,466
Energy supply
costs 6,204 - - (11,232) 533,915
Operating
expenses 17,812 99,967 9,490 (4,225) 392,380
Amortization 10,380 11,244 2,882 - 157,622
---------------------------------------------------------------------
Operating
income 49,559 43,192 (2,395) (9,527) 357,554
Finance
charges 14,051 19,988 20,341 (9,527) 137,219
Preference
share
dividends - - 16,606 - 16,606
Gain on
settlement
of
contractual
matters (10,000) - - - (10,000)
Corporate
income taxes 13,811 9,077 (8,347) - 70,416
Non-
controlling
interest 2,183 - (165) - 6,216
---------------------------------------------------------------------
Net earnings
(loss) 29,514 14,127 (30,830) - 137,097
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - - - - 512,139
Identifiable
assets 267,049 427,753 41,655 (28,702) 3,639,244
Equity
investment
assets - - - - 164,808
---------------------------------------------------------------------
Total assets 267,049 427,753 41,655 (28,702) 4,316,191
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expenditures 19,310 83,875 2,615 - 508,629
---------------------------------------------------------------------
---------------------------------------------------------------------
Regulated Utilities
---------------------------------------------------------------------
Nfld Maritime Fortis Fortis Fortis Total Total
Power Electric Ontario Alberta BC Canadian Caribbean
December
31, 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating
revenues 404,447 115,407 125,250 129,738 109,522 884,364 71,945
Equity
income - - - - - - 842
Energy
supply
costs 244,012 71,345 96,543 - 32,901 444,801 37,711
Operating
expenses 51,755 12,459 12,273 60,177 33,432 170,096 11,033
Amortiza-
tion 30,987 9,176 4,751 31,356 9,893 86,163 6,127
---------------------------------------------------------------------
Operating
income 77,693 22,427 11,683 38,205 33,296 183,304 17,916
Finance
charges 30,394 8,656 5,233 10,782 8,531 63,596 5,571
Preference
share
dividends - - - - - - -
Corporate
income
taxes 15,586 5,591 2,197 8,856 7,058 39,288 982
Non-
controlling
interest 591 - - - - 591 3,358
---------------------------------------------------------------------
Net earnings
(loss) 31,122 8,180 4,253 18,567 17,707 79,829 8,005
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - 19,858 45,577 229,097 219,509 514,041 -
Identifi-
able
assets 825,310 240,268 118,326 612,480 613,436 2,409,820 200,305
Equity
invest-
ment
assets - - - - - - 161,292
---------------------------------------------------------------------
Total
assets 825,310 260,126 163,903 841,577 832,945 2,923,861 361,597
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expendi-
tures 60,315 26,806 9,631 73,564 57,111 227,427 16,661
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-Regulated
---------------------------------------------------------------------
Inter-
Fortis segment Consolidated
Generation Properties Corporate elimination
December
31, 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating
revenues 69,170 134,363 10,175 (24,730) 1,145,287
Equity income - - - - 842
Energy supply
costs 5,849 - - (11,011) 477,350
Operating
expenses 16,083 87,237 8,691 (3,862) 289,278
Amortization 10,189 9,711 1,482 - 113,672
---------------------------------------------------------------------
Operating
income 37,049 37,415 2 (9,857) 265,829
Finance charges 15,418 18,080 17,246 (9,857) 110,054
Preference
share dividends - - 12,319 - 12,319
Corporate
income taxes 6,977 7,519 (7,839) - 46,927
Non-controlling
interest 1,891 - (166) - 5,674
---------------------------------------------------------------------
Net earnings
(loss) 12,763 11,816 (21,558) - 90,855
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - - - - 514,041
Identifiable
assets 267,758 354,223 53,017 (22,440) 3,262,683
Equity
investment
assets - - - - 161,292
---------------------------------------------------------------------
Total assets 267,758 354,223 53,017 (22,440) 3,938,016
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expenditures 17,290 16,123 1,168 - 278,669
---------------------------------------------------------------------
---------------------------------------------------------------------
10. 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. The
significant related party transactions primarily related to the sale
of energy from BECOL to Belize Electricity and finance charges on
inter-company borrowings. The significant related party transactions
for the years ended December 31, 2005 and December 31, 2004 are
detailed below.
Related Party Transactions
($millions) 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Sales from BECOL to Belize Electricity $8.2 $8.1
Inter-company finance charges on borrowings from:
Corporate to FortisBC - 2.4
Corporate to Fortis Properties 3.8 1.9
Corporate to BECOL 2.2 1.9
BECOL to Belize Electricity 2.3 2.1
---------------------------------------------------------------------
11. BUSINESS ACQUISITIONS
Princeton Light and Power Company, Limited
On May 31, 2005, Fortis, through an indirect wholly owned subsidiary, acquired all 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 23,668 Common Shares (adjusted for stock split) of the Corporation at a fair value of $18.71 per Common Share, the 5-day average trading price of Fortis' Common Shares for the last five trading days immediately preceding the acquisition (adjusted for stock split).
The acquisition has been 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 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 1,210
Other assets 445
Current liabilities (1,109)
Assumed long-term debt (3,990)
Future income taxes (329)
Other liabilities (75)
---------------------------------------------------------------------
$3,701
---------------------------------------------------------------------
---------------------------------------------------------------------
Fortis Properties
On February 1, 2005, Fortis Properties purchased the assets
comprising the businesses of one Greenwood Inn Hotel in Manitoba and
two Greenwood Inn Hotels in Alberta for cash consideration of $62.8
million. The acquisition has been accounted for using the purchase
method, whereby the results of operations have been included in the
consolidated financial statements from the date of acquisition.
The purchase price allocation to net assets based on their fair
values is as follows:
(in thousands)
---------------------------------------------------------------------
---------------------------------------------------------------------
Fair value assigned to net assets:
Income producing properties $62,600
Other assets 229
Other liabilities (69)
---------------------------------------------------------------------
$62,760
---------------------------------------------------------------------
---------------------------------------------------------------------
12. 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.
13. SHORT-TERM AND LONG-TERM DEBT
The Corporation and its subsidiaries had consolidated authorized
lines of credit of $747.1 million of which $538.8 million was unused
at December 31, 2005. The following summary outlines the
Corporation's credit facilities by reporting segments as at December
31.
Credit
Facilities Regulated Fortis Fortis Total Total
($ millions) Corporate Utilities Generation Properties 2005 2004
-------------------------------------------------------------------
-------------------------------------------------------------------
Total credit
facilities 210.0 518.8 5.8 12.5 747.1 543.2
Credit
facilities
utilized
Short-term
borrowings (2.8) (53.9) (2.8) (0.4)(59.9)(192.9)
Long-term debt (18.0) (56.8) - - (74.8) -
Letters of
credit
outstanding (4.6) (66.8) - (2.2)(73.6) (91.0)
-------------------------------------------------------------------
Credit facilities
available 184.6 341.3 3.0 9.9 538.8 259.3
-------------------------------------------------------------------
At December 31, 2005, 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.
In January 2005, Fortis entered into a $50 million unsecured revolving/term credit facility for its general corporate purposes, including acquisitions. In May 2005, Fortis renegotiated its $145 million unsecured revolving/term credit facility to a $145 million unsecured term credit facility that matures in May 2008. This facility can be used for general corporate purposes, including acquisitions. At December 31, 2005, there was $18.0 million drawn on this facility, all of which has been reported as long-term debt. In December 2005, Fortis renegotiated its $50 million unsecured revolving/term credit facility to an unsecured term credit facility that matures in January 2009. Fortis also entered into a $15 million demand facility during 2005.
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 2006, the Company renegotiated the $100 million credit facility extending the term from 1 to 3 years.
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 January 2006, this $25 million short-term bridge financing was extended until June 2007.
In March 2005, Fortis Properties completed a 5-year 5.1% $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-year 5.35% $12.3 million loan related to the Winnipeg Greenwood Inn which was acquired on February 1, 2005.
In May 2005, FortisAlberta renegotiated its $100 million unsecured revolving/term credit facility to a $150 million unsecured term credit facility that matures in May 2008. At December 31, 2005, there was $56.8 million drawn on this facility, all of which has been reported as long-term debt.
In May 2005, FortisBC renegotiated its $100 million unsecured revolving/term credit facility to a $100 million unsecured term credit facility that matures in May 2008. Additionally, in May 2005 FortisBC entered into a $50 million unsecured revolving/term credit facility. At December 31, 2005, there were no amounts drawn on these facilities.
In August 2005, Newfoundland Power closed a private placement of $60 million 5.441% first mortgage sinking fund bonds, due August 15, 2035. The net proceeds from the private placement were used to repay short-term indebtedness and for general corporate purposes.
In September 2005, PLP entered into $5.4 million of credit facilities consisting of a $0.7 million revolving demand operating line and a $4.7 million non-revolving demand installment loan.
In November 2005, FortisBC completed a 30-year 5.6% $100 million senior unsecured debenture issue. Proceeds from the debt issue were used to repay certain existing indebtedness under FortisBC's credit facilities, which was incurred primarily to fund capital expenditures. The remaining proceeds were used for working capital purposes.
As a result of the October 2005 4-for-1 stock split, the conversion price of Fortis US$10 million, 6.75% Unsecured Subordinated Convertible Debentures ("6.75% Convertible Debentures"), due 2012, and US$10 million, 5.50% Unsecured Subordinated Convertible Debentures ("5.50% Convertible Debentures"), due 2013, have been reduced to one quarter of the original conversion price from US$36.74 per share and US$47.86 per share to US$9.19 per share and US$11.97 per share, respectively. The 6.75% Convertible Debentures are redeemable by the Corporation at par at any time on or after March 12, 2007, and are convertible, at the option of the holder, into the Corporation's Common Shares at the revised price per share noted above. The 5.5% Convertible Debentures are redeemable by the Corporation at par at any time on or after May 20, 2008, and are convertible, at the option of the holder, into the Corporations Common Shares at the revised price per share noted above.
14. CONTINGENT LIABILITIES AND COMMITMENTS
Contingent liabilities and commitments as of December 31, 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, the 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 2005, Newfoundland Power entered into an agreement with CRA that provided for the full settlement of this issue on a prospective basis, beginning in 2006. CRA canceled all outstanding reassessments related to the Company's revenue recognition policy in past years and refunded the Company's $6.9 million deposit along with interest of approximately $2.1 million ($1.4 million after-tax). 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.
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. On December 23, 2005, the Company received an order from the PUB with respect to an Accounting Policy Application filed in September 2005. The PUB approved the proposed change to Newfoundland Power's revenue recognition policy from the billed basis to the accrual basis for financial and regulatory purposes, effective January 1, 2006.
(b) FortisAlberta
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. ("EPCOR") sought 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. On August 8, 2005 FortisAlberta announced that an agreement was reached with EPCOR to settle all aspects of the claim. All amounts related to the settlement were reflected in the second quarter results of FortisAlberta as the Company had adequate provisions to offset this settlement. On October 3, 2005, FortisAlberta signed an agreement with Aquila, Inc. and its insurers, which partitioned an insurance policy, intended to cover legal expenses incurred to defend a lawsuit, as well as any amounts rendered against FortisAlberta by way of a legal ruling, or agreed to in a settlement. The proceeds received under this insurance policy have partially offset the settlement of the EPCOR claim and were reflected in the third quarter.
(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 has filed, but not served, a writ and statement of claim against FortisBC. FortisBC is currently communicating with the Ministry and its insurers. In addition, FortisBC has become aware of two writs and statements of claim filed, but not served, by private land owners in relation to the same matter. The outcome cannot be reasonably determined and estimated at this time and, accordingly, no amount has been accrued in the financial statements.
On January 5, 2006, FortisBC was served a writ and statement of claim filed with the B.C. Supreme Court under the Class Proceedings Act, 1995 on behalf of a class consisting of all persons who are or were customers of FortisBC and who paid or have been charged FortisBC's late payment penalties at any time between April 1, 1981 and the date of any judgment in this action. The claim is that forfeitures of the prompt payment discount offered to customers constitute "interest" within the meaning of section 347 of the Criminal Code and, since the effective annual rate of such interest exceeds 60 per cent, they are illegal and void. In the action, the class seeks damages and restitution of all late payment penalties which were forfeited. The outcome cannot be reasonably determined and estimated at this time and, accordingly, no amount has been accrued in the financial statements.
(d) Cornwall Electric
In May 2003, Cornwall Electric received a CRA reassessment disallowing amounts claimed as capital cost allowance ("CCA") in respect of a Class 14 asset of Cornwall Electric. This Class 14 asset was created upon acquisition of Cornwall Electric by a previous owner. As a result, CCA deductions totaling $2.1 million claimed during the 1998 to 2001 taxation years were disallowed. The opening undepreciated capital cost of the Class 14 asset, including valuation allowance, was valued at approximately $1.4 million on Cornwall Electric's balance sheet. Cornwall Electric had filed a Notice of Objection with the CRA. During the third quarter of 2005, Cornwall Electric obtained a favourable resolution of the CRA reassessment. The impact of this resolution resulted in the recognition in FortisOntario of a future tax asset of $4.2 million, a $2.6 million reduction of goodwill and a $1.6 million reduction of future income tax expense.
15. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to comply with current periods' classifications including certain changes in the basis of presentation as described in Note 3.
CORPORATE INFORMATION
Fortis Inc. is primarily a diversified, international electric utility holding company with assets exceeding $4.3 billion and annual revenues over $1.4 billion. The Corporation holds investments in regulated electric 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 year ended December 31, 2005, Fortis Inc. will be filing the Certification of Annual Filings (Form 52-109F1) on SEDAR. Additional information including the 2004 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
