ST. JOHN'S, NEWFOUNDLAND--(CCNMatthews - May 1, 2006) - Fortis Inc. (TSX:FTS) reported net earnings applicable to common shares of $36.6 million, or $0.35 per common share, for the first quarter of 2006 compared to earnings of $39.2 million, or $0.40 per common share, for the first quarter of 2005.
Earnings for the first quarter last year included a $7.9 million after-tax gain resulting from the settlement of contractual matters between FortisOntario and Ontario Power Generation Inc. ("Ontario Settlement"). Excluding this one-time item, the Corporation's earnings were up 16.9 per cent, or $5.3 million, in the first quarter of 2006 compared to the first quarter of 2005. The growth in earnings was primarily due to higher earnings at FortisBC and FortisAlberta and increased non-regulated hydroelectric production.
Canadian regulated utilities delivered earnings of $35.1 million for the first quarter of 2006, $2.2 million higher than earnings of $32.9 million for the first quarter of 2005.
"Increasing electricity demand and a 5.9 per cent interim rate increase at FortisBC contributed to the earnings growth achieved by our utilities in western Canada," says Stan Marshall, President and Chief Executive Officer, Fortis Inc. "The performance of these utilities was partially offset by a $2.3 million decline in earnings at Newfoundland Power, due primarily to a change in the Company's revenue recognition policy to the accrual method which is consistent with other Canadian utilities. On an annual basis, Newfoundland Power's earnings are expected to remain comparable with the prior year," adds Marshall.
Caribbean regulated utilities contributed $3.1 million to earnings for the first quarter of 2006 compared to $3.5 million for the first quarter of 2005. A decrease in equity income from Caribbean Utilities, driven by higher fuel costs, was partially offset by $0.5 million in increased earnings at Belize Electricity, primarily due to an 11 per cent increase in electricity rates, effective July 1, 2005.
"Our utilities invested $104.3 million in capital projects this quarter to meet the needs of our customers. Approximately $80 million of this investment was undertaken at FortisAlberta and FortisBC," says Marshall. "On a consolidated basis, we plan to invest approximately $450 million in capital projects this year, the majority of which are being driven by robust customer growth in western Canada and the continuing need to maintain and enhance the reliability of electricity systems," adds Marshall.
Non-regulated Fortis Generation contributed $5.4 million to earnings for the first quarter of 2006 compared to $2.1 million for the first quarter of 2005, excluding the Ontario Settlement. The $3.3 million growth in earnings was primarily related to higher hydroelectric production in Belize, partially offset by the impact of lower average wholesale energy prices in Ontario.
"Our hydroelectric operations in Belize benefited from higher rainfall levels and the addition of the Chalillo dam and storage facility in the fall of 2005," explains Marshall. "Overall, generation in Belize climbed to 27 gigawatt hours, almost quadruple that in the same quarter last year."
Fortis Properties contributed $1.5 million to earnings for the first quarter of 2006, comparable to the first quarter of 2005. During the quarter, Fortis Properties continued its expansion projects at the Blue Cross Centre in Moncton, Holiday Inn Sarnia and Holiday Inn Kitchener-Waterloo. Completion of these projects is expected during the second quarter of 2006.
"The extensive capital programs of our utilities in Alberta and British Columbia will drive organic growth for the remainder of 2006 and for years to come," concludes Marshall.
Fortis Inc.
Interim Management Discussion and Analysis
For the three months ended March 31, 2006
Dated May 1, 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 months ended March 31, 2006 and
the Management Discussion and Analysis and audited consolidated
financial statements for the year ended December 31, 2005 included in
the Corporation's 2005 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 Canadian generally accepted accounting principles ("Canadian
GAAP") and is presented in Canadian dollars unless otherwise
specified.
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Financial Highlights (Unaudited)
Quarter Ended March 31st
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($millions, except per
common share amounts) 2006 2005 Increase
(Decrease)
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Revenue and equity income 390.8 381.8 9.0
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Cash flow from operations 49.4 79.3 (29.9)
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Net earnings applicable
to common shares 36.6 39.2 (2.6)
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Basic earnings per
common share ($) (1) 0.35 0.40 (0.05)
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Diluted earnings per
common share ($) (1) 0.34 0.36 (0.02)
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Segmented Net Earnings Contribution
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2006 2005 Increase
(Decrease)
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FortisAlberta 9.5 7.8 1.7
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FortisBC (2) 11.8 8.9 2.9
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Newfoundland Power 10.7 13.0 (2.3)
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Maritime Electric 2.1 2.1 -
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FortisOntario (3) 1.0 1.1 (0.1)
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Regulated Utilities
- Canadian 35.1 32.9 2.2
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Belize Electricity 1.5 1.0 0.5
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Caribbean Utilities
- Equity Income 1.6 2.5 (0.9)
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Regulated Utilities
- Caribbean 3.1 3.5 (0.4)
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Total Regulated Utilities 38.2 36.4 1.8
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Non-Regulated
- Fortis Generation (4) 5.4 10.0 (4.6)
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Non-Regulated
- Fortis Properties 1.5 1.5 -
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Corporate (8.5) (8.7) 0.2
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Net earnings applicable
to common shares 36.6 39.2 (2.6)
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(1) Earnings per common share data for 2005 have been restated to
reflect the 4-for-1 stock split completed in October 2005.
(2) Includes the regulated operations of FortisBC Inc., non-regulated
operating, maintenance and management services related to the
Waneta, Brilliant and the Arrows Lake hydroelectric plants, and
the distribution system owned by the City of Kelowna. Also
includes Princeton Light and Power Company, Limited ("PLP"), but
excludes the non-regulated generation operations of FortisBC
Inc.'s wholly owned partnership, Walden Power Partnership.
Financial results for PLP are included in the FortisBC segmented
results from May 31, 2005, the date of acquisition of PLP by
Fortis, through an indirect wholly owned subsidiary.
(3) FortisOntario includes Canadian Niagara Power Inc. ("Canadian
Niagara Power") and Cornwall Street Railway, Light and Power
Company, Limited ("Cornwall Electric").
(4) 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 were $36.6 million, or $0.35
per common share, for the first quarter of 2006 compared to earnings
of $39.2 million, or $0.40 per common share, for the first quarter of
2005. Earnings for the first quarter last year included a $7.9
million after-tax gain resulting from the settlement of contractual
matters ("Ontario Settlement") between FortisOntario and Ontario
Power Generation Inc. ("OPGI"). Excluding the Ontario Settlement,
the Corporation's earnings were $5.3 million higher in the first
quarter of 2006 compared to the first quarter of 2005 primarily due
to higher earnings at FortisBC and FortisAlberta, and increased non-
regulated hydroelectric production in Belize. The increase in
earnings was also due to an 11 per cent increase in electricity
rates, effective July 1, 2005, and higher electricity sales at Belize
Electricity. Partially offsetting the earnings increase was an
anticipated decline in earnings at Newfoundland Power as a result of
a change in the Company's revenue recognition policy, a decrease in
equity income from Caribbean Utilities, driven by higher fuel costs,
and the impact of lower average wholesale energy prices in Ontario.
Earnings per common share for the first quarter of 2006 were impacted
by the dilution created by the $130 million issue of common shares on
March 1, 2005.
REGULATED UTILITIES - CANADIAN
FortisAlberta
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FortisAlberta
Financial Highlights (Unaudited)
Quarter Ended March 31st
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2006 2005 Increase
(Decrease)
---------------------------------------------------------------------
Electricity Sales (GWh) 3,754 3,685 69
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($millions)
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Revenue 61.8 58.6 3.2
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Operating Expenses 28.7 26.9 1.8
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Amortization 15.7 13.9 1.8
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Finance Charges 6.8 6.0 0.8
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Corporate Taxes 1.1 4.0 (2.9)
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Earnings 9.5 7.8 1.7
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Regulation: FortisAlberta filed its 2006/2007 Distribution Access
Tariff Application ("2006/2007 Application") with the Alberta Energy
and Utilities Board ("AEUB") on December 12, 2005. The 2006/2007
Application includes a 2006 distribution revenue requirement of
$221.2 million and an allowed rate of return on common equity ("ROE")
of 8.93 per cent. The revenue requirement reflects a forecast level
of operating expenses of $103.6 million included in base rates and
$13.0 million that will be collected by separate rate riders. The
revenue requirement also reflects a forecast level of capital
expenditures of $193.0 million, before customer contributions, in
addition to $10.7 million expected to be contributed to Alberta
Electric System Operator projects. If approved, the filing will
result in no distribution rate increase in 2006 with a 3 per cent
rate increase in 2007. The Company is currently charging interim
rates, effective January 1, 2006, as approved by the AEUB. The
hearing on the 2006/2007 Application is expected to take place in the
spring of 2006 with an AEUB decision expected in the fall of 2006.
Earnings: FortisAlberta's earnings were $1.7 million higher quarter
over quarter primarily due to increased revenue and a lower effective
corporate income tax rate, partially offset by higher operating
expenses, amortization costs and finance charges.
Electricity Sales: Electricity sales were 69 gigawatt hours ("GWh"),
or 1.9 per cent, higher quarter over quarter. The increase was
primarily due to growth in consumption and the number of customers in
the commercial and industrial sectors as a result of a strong
provincial economy.
Revenue: Revenue was $3.2 million higher quarter over quarter.
Higher electricity sales revenue, driven by growth in the residential
and the commercial and industrial sectors contributed $1.3 million to
the increase in revenue, while increased franchise fee revenue and
higher other revenue contributed $0.6 million and $0.3 million to the
increase, respectively. Franchise fee revenue was higher primarily
due to an increase in transmission rates in 2006. Approximately $1.0
million of the $3.2 million increase was the result of the impact of
the 2.1 per cent increase in electricity rates, effective January 1,
2005, not being reflected in the first quarter of 2005 as the rate
increase was not approved and, therefore, not recorded until the
second quarter of 2005.
Expenses: Operating expenses were $1.8 million higher quarter over
quarter primarily due to increased labour, employee benefit expenses
and contracted manpower, partially offset by the impact of
productivity improvements achieved by the Company. The strong
Alberta economy has had an inflationary effect on labour rates.
These labour rate increases, combined with higher customer activities
associated with a mild winter in 2006, have resulted in higher labour
and contracted manpower expenses over the same quarter last year
associated with operating programs like meter reading and line
maintenance. Employee benefit expenses were higher as a result of
increased defined contribution pension and other post-employment
benefits costs. In 2005, contributions to the defined contribution
plan were funded from the pension plan surplus. In 2006,
FortisAlberta is required to fund such contributions. Additionally,
costs associated with corporate governance, including contracted
manpower, were higher quarter over quarter related to compliance
activities associated with Canadian Securities Administrators'
requirements that will come into effect over the next 2 years.
Amortization costs were $1.8 million higher quarter over quarter as a
result of an increase in approved depreciation rates combined with an
increase in the depreciable asset base due primarily to load growth
within FortisAlberta's service territory. The 2005 depreciation
rates were not approved until the second quarter of 2005 and,
therefore, were not reflected in the results for the first quarter of
2005.
Finance charges were $0.8 million higher quarter over quarter due to
higher debt levels used to finance capital projects required to
satisfy FortisAlberta's obligations to serve its customers.
Corporate taxes were $2.9 million lower quarter over quarter
associated with lower earnings before income taxes and a lower
effective corporate income tax rate. The decrease in the effective
corporate income tax rate was due to an increase in deductions taken
for income tax purposes in excess of amounts for accounting purposes
in the first quarter of 2006 compared to the same quarter last year.
FortisBC
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FortisBC
Financial Highlights (Unaudited)
Quarter Ended March 31st
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2006 2005 Increase
(Decrease)
---------------------------------------------------------------------
Electricity Sales (GWh) 840 832 8
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($millions)
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Revenue 62.7 55.4 7.3
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Energy Supply Costs 19.2 18.6 0.6
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Operating Expenses 15.4 16.1 (0.7)
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Amortization 7.1 4.6 2.5
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Finance Charges 5.6 4.5 1.1
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Corporate Taxes 3.6 2.7 0.9
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Earnings 11.8 8.9 2.9
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Regulation: In order to establish 2006 rates, FortisBC filed a
Revenue Requirements Application ("2006 Application") with the
British Columbia Utilities Commission ("BCUC") on November 24, 2005.
Using an ROE of 8.69 per cent, the Company's 2006 Application seeks
approval of a 5.9 per cent increase in customer electricity rates,
effective January 1, 2006. The rate increase is largely driven by
the Company's extensive capital expenditure program currently
underway for 2006. The BCUC approved an interim refundable rate
increase of 5.9 per cent, effective January 1, 2006.
The 2006 Application proposes a new performance-based rate setting
mechanism covering the years 2006 through 2009, higher depreciation
rates, as a result of a depreciation study on the estimated useful
lives of the Company's property, plant and equipment, as well as an
increase in capitalized overhead costs. In April 2006, the Company
entered negotiations to settle the 2006 Application. If negotiations
are not successful, a public hearing is scheduled for June 2006. The
BCUC decision on the 2006 Application would be determined subsequent
to the negotiations or public hearing.
In June 2005, a British Columbia utility applied to the BCUC for,
among other things, a review of the current ROE mechanism applicable
to regulated utilities in British Columbia. On March 2, 2006, the
BCUC issued an order approving adjustments to the ROE mechanism,
which resulted in the 2006 ROE for FortisBC increasing from 8.69 per
cent to 9.20 per cent. The increased ROE will be reflected in the
final calculation of the Company's 2006 customer electricity rates.
On January 31, 2006, FortisBC received approval from the BCUC for its
2006 Capital Plan of $111.7 million, net of customer contributions,
of which approximately $27.0 million in projects is subject to
further review and approval, which the Company is in the process of
obtaining.
Earnings: FortisBC segment earnings were $2.9 million higher quarter
over quarter primarily due to increased electricity revenue and lower
operating expenses, partially offset by increased amortization costs,
finance charges and energy supply costs.
Electricity Sales: Electricity sales were 8 GWh, or 1.0 per cent,
higher quarter over quarter due to customer growth in the Okanagan
area.
Revenue: Revenue was $7.3 million higher quarter over quarter. The
increase was primarily due to the 5.9 per cent interim refundable
rate increase and customer growth. Revenue also increased due to
revenue contribution from Princeton Light and Power Company, Limited
("PLP") of $0.8 million and increased non-regulated operating,
maintenance and management service revenue of $0.5 million. PLP was
acquired by Fortis on May 31, 2005.
Expenses: Energy supply costs were $0.6 million higher quarter over
quarter primarily as a result of increased purchased volumes and
prices. Energy supply costs represent the cost of purchasing energy
and capacity from third parties. Hydro facilities owned by FortisBC
generate approximately 50 per cent of the energy and 30 per cent of
the capacity necessary to meet existing customer demand. The
majority of the additional energy and capacity required to meet
existing customer demand is purchased under firm, long-term power
purchase contracts. Any remaining energy and capacity required is
purchased on the open market and is subject to fluctuations in market
rates.
Operating expenses were $0.7 million lower quarter over quarter. The
decrease was primarily due to increased capitalized overhead of $2.4
million, partially offset by the impact of increased customer service
and system maintenance activities and general inflationary increases
totaling approximately $1.1 million, PLP operating expenses of $0.4
million and increased expenses related to non-regulated operating,
maintenance and management services of $0.2 million.
The increase in capitalized overhead resulted from a change in
estimating capitalized overhead, effective January 1, 2006.
Capitalized overhead is now estimated as a percentage of all
corporate overhead costs, whereas previously the percentage was
applied to a limited pool of corporate costs. The change in estimate
for the capitalized overhead rate is subject to approval by the BCUC
as part of FortisBC's 2006 Application and, therefore, may be
subsequently adjusted.
Amortization costs were $2.5 million higher quarter over quarter. The
increase was due to a higher composite depreciation rate and the
impact of an increase in FortisBC's depreciable asset base due to its
capital expenditure program. The composite depreciation rate
increased from 2.6 per cent to 3.6 per cent, effective January 1,
2006, based on the results of a depreciation study undertaken to
estimate the appropriate useful lives over which FortisBC's property,
plant and equipment should be amortized. The change in the
depreciation rate estimate is subject to approval by the BCUC as part
of the Company's 2006 Application and, therefore, may be subsequently
adjusted.
Finance charges were $1.1 million higher quarter over quarter
primarily due to increased borrowings to finance the Company's
capital expenditure program.
Newfoundland Power
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Newfoundland Power
Financial Highlights (Unaudited)
Quarter Ended March 31st
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2006 2005 Increase
(Decrease)
---------------------------------------------------------------------
Electricity Sales (GWh) 1,633 1,700 (67)
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($millions)
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Revenue 131.8 135.4 (3.6)
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Energy Supply Costs 82.7 83.1 (0.4)
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Operating Expenses 14.6 14.2 0.4
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Amortization 9.8 10.6 (0.8)
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Finance Charges 8.1 7.7 0.4
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Corporate Taxes 5.8 6.7 (0.9)
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Non-Controlling Interest 0.1 0.1 -
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Earnings 10.7 13.0 (2.3)
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Regulation: In January 2006, Newfoundland Power received approval
from the Newfoundland and Labrador Board of Commissioners of Public
Utilities ("PUB") of its final 2006 electricity rates, which remain
unchanged from 2005. The rates are based on a range of rate of return
on rate base of 8.50 per cent to 8.86 per cent, which includes an
allowed ROE of 9.24 per cent, also unchanged from 2005.
Effective January 1, 2006, the Company changed its revenue
recognition policy from the billed basis to the accrual basis, as
approved by the PUB on December 23, 2005. In conjunction with the
change in revenue recognition policy, the PUB approved a one-time
revenue accrual of $3.1 million in 2006. This amount represents that
portion of unbilled revenue at December 31, 2005 of $23.6 million,
required to offset the income tax effects of changing to the accrual
basis of revenue recognition. The disposition of the remaining 2005
unbilled revenue balance has been deferred until the Company's next
general rate application, which is anticipated in 2006 for the
purpose of setting rates for 2007. The PUB also ordered that the
Company defer recovery of a $5.8 million increase in 2006
amortization costs. The deferral increases earnings in 2006 and
results in a regulatory asset to be recovered in future customer rates.
During the first quarter of 2006, $1.7 million of the $5.8 million
deferral was recognized, which offset what would otherwise have been a
$1.7 million increase in amortization.
Earnings: Newfoundland Power's earnings were $2.3 million lower quarter
over quarter primarily due to the change in the Company's revenue
recognition policy which reduced earnings in the first quarter of 2006
by approximately $2.0 million compared to the same quarter last year.
The transition to recording revenue on the accrual basis, while having
no material impact on annual earnings, will result in a shift in 2006
quarterly earnings compared to 2005. Earnings in the first and second
quarters will be reduced compared to the same quarters in 2005 while
earnings in the third and fourth quarters will increase, in total, by a
similar amount.
Electricity Sales: Electricity sales were 67 GWh lower quarter over
quarter. Electricity sales in the first quarter of 2006 were adjusted
downward by 57 GWh due to the change in revenue recognition policy.
Under the previous billed basis of recognizing revenue, revenue was
recorded as bills were rendered to customers. Therefore, approximately
one-half of the total value of electricity service delivered at month
end was not recognized as revenue until billed in the following month.
Under the newly implemented accrual basis of recognizing revenue, the
unbilled revenue is accrued in the same month as the electricity
service is delivered. The 57-GWh decrease in electricity sales
represented the difference between electricity delivered to customers
during the latter half of December 2005 and the latter half of March
2006. Sales accrued in the latter half of 2006 are expected to offset
this first quarter reduction. Annual electricity sales for 2006 are
not expected to be materially different from 2005 as a result of the
change in revenue recognition policy. The remaining 10-GWh, or 0.6 per
cent, decrease in electricity sales quarter over quarter was due to a
2.0 per cent decline in average consumption by both residential and
commercial customers, partially offset by the impact of customer
growth. Average consumption was affected by changes in customer
demographics and customer reaction to the increased price of fuels and
electricity.
Revenue: Revenue was $3.6 million lower quarter over quarter primarily
due to the change in revenue recognition policy. Changing to the
accrual basis resulted in a $4.3 million reduction of revenue compared
to the first quarter of 2005. The decrease is expected to reverse with
the accrual of higher sales and associated revenue in the latter half
of 2006. Lower average consumption also contributed to a decrease in
revenue, however, the decrease was more than offset by the recording of
$0.9 million of the $3.1 million one-time revenue accrual approved by
the PUB and an increase in fixed customer charge revenue due to
customer growth of 1.1 per cent quarter over quarter.
Expenses: Energy supply costs decreased $0.4 million quarter over
quarter primarily due to lower consumption.
Lower production estimates from the Company's own hydroelectric
generating facilities necessitated an increase in purchased power.
Effective January 1, 2006, the Company's annual production estimate was
reduced based on the outcome of a recent hydrology study, resulting in
a $0.6 million increase in purchased power costs quarter over quarter.
A portion of the increased cost will be reversed over the remainder of
2006, resulting in an overall increase in purchased power costs for the
year totaling approximately $0.4 million.
Operating expenses were $0.4 million higher quarter over quarter
primarily due to amortization of costs associated with a 2005 early
retirement program and higher pension costs, partially offset by
reduced labour costs and the Company's on-going focus on managing
inflationary and other upward cost pressures. The early retirement
program was completed in the first quarter of 2005 and amortization of
the early retirement costs began in April 2005.
Amortization costs decreased $0.8 million quarter over quarter due to a
difference in the quarterly allocation of amortization based on net
margin, partially offset by the impact of continued investment in the
Company's capital assets. Annual amortization of capital assets
continues to be allocated quarterly based on net margin. As the
quarterly allocation of net margin is affected by the change to the
accrual basis of revenue recognition and is lower in the first quarter
of 2006 compared to the same quarter last year, amortization in the
first quarter was lower by $1.1 million. The decrease is expected to
fully reverse with increased amortization in later quarters.
Finance charges were $0.4 million higher quarter over quarter due to
the replacement of $60 million of lower cost short-term borrowings with
a new series of 5.441%, 30-year first mortgage sinking fund bonds in
August 2005.
Corporate taxes decreased $0.9 million quarter over quarter due to
lower earnings before taxes, partially offset by the impact of a
slightly higher effective corporate income tax rate resulting from the
transition to the accrual basis of revenue recognition for income tax
purposes.
Maritime Electric
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Maritime Electric
Financial Highlights (Unaudited)
Quarter Ended March 31st
---------------------------------------------------------------------
2006 2005 Increase
(Decrease)
---------------------------------------------------------------------
Electricity Sales (GWh) 255 256 (1)
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($millions)
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Revenue 29.9 29.3 0.6
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Energy Supply Costs 18.3 18.2 0.1
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Operating Expenses 3.1 3.0 0.1
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Amortization 2.5 2.4 0.1
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Finance Charges 2.4 2.2 0.2
---------------------------------------------------------------------
Corporate Taxes 1.5 1.4 0.1
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Earnings 2.1 2.1 -
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Regulation: On January 31, 2006, Maritime Electric filed an application
with the Island Regulatory and Appeals Commission ("IRAC") proposing an
overall increase in customer electricity rates of 1.6 per cent,
effective July 1, 2006, and a further amortization of the $20.8 million
in recoverable costs accumulated as at December 31, 2003 of $1.5
million in 2006 and $1.3 million in 2007.
The proposed 1.6 per cent overall increase in electricity rates is the
result of a proposed 3.35 per cent increase in basic electricity rates,
partially offset by the impact of the refund to customers of energy-
related costs associated with the operation of the energy cost
adjustment mechanism ("ECAM"). Maritime Electric expects to receive a
decision on its rate application in the second quarter of 2006.
On April 5, 2006, Maritime Electric filed with IRAC an Application for
approval of a 39-megawatt ("MW") Wind Power Purchase Agreement
("Agreement") with the Government of Prince Edward Island ("PEI"). If
approved, the Agreement will take effect on January 1, 2007. Recent
legislation proclaimed by the Government of PEI will require Maritime
Electric to obtain at least 15 per cent of its annual energy
requirements from renewable sources such as wind-powered energy by
2010. This Agreement will help the Company reach this 15 per cent
target.
Earnings: Maritime Electric's earnings for the first quarter of 2006
were $2.1 million, comparable to the same quarter last year.
Electricity Sales: Electricity sales for the first quarter of 2006 were
255 GWh, comparable to the same quarter last year. Residential sales
were down 1.2 per cent while commercial sales increased 0.8 per cent
quarter over quarter. Residential sales decreased due to reduced
consumption as a result of a milder-than-normal winter season and
commercial sales increased primarily due to higher consumption by
customers in the general service sector.
Revenue: Revenue increased $0.6 million quarter over quarter as a
result of a 2 per cent basic electricity rate increase, effective July
1, 2005, and a $0.3 million decrease in amortization of pre-2004
recoverable costs from customers. Amortization of pre-2004 recoverable
costs from customers was $2.5 million in 2005, while $1.5 million of
such costs is expected to be amortized in 2006.
Expenses: Energy supply costs (adjusted for the ECAM) for the first
quarter of 2006 were $18.3 million, comparable to the same quarter last
year. Gross energy supply costs before ECAM adjustments, however, were
$0.7 million lower than for the same quarter last year, primarily due
to lower-than-anticipated curtailable energy costs. During the first
quarter of 2006 and 2005, Maritime Electric purchased the majority of
its energy from New Brunswick Power Corporation ("NB Power") under
several energy purchase agreements.
Early in the first quarter of 2006, Maritime Electric commissioned its
new 50-MW combustion turbine generating facility. This facility
operates on light oil or natural gas and will address submarine cable
loading issues and improve security of supply.
FortisOntario
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FortisOntario
Financial Highlights (Unaudited)
Quarter Ended March 31st
---------------------------------------------------------------------
2006 2005 Increase
(Decrease)
---------------------------------------------------------------------
Electricity Sales (GWh) 325 331 (6)
---------------------------------------------------------------------
($millions)
---------------------------------------------------------------------
Revenue 33.2 38.2 (5.0)
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Energy Supply Costs 25.8 30.6 (4.8)
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Operating Expenses 3.2 3.1 0.1
---------------------------------------------------------------------
Amortization 1.3 1.3 -
---------------------------------------------------------------------
Finance Charges 1.2 1.3 (0.1)
---------------------------------------------------------------------
Corporate Taxes 0.7 0.8 (0.1)
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Earnings 1.0 1.1 (0.1)
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Regulation: On September 6, 2005, Canadian Niagara Power made
application to the Ontario Energy Board ("OEB") for new electricity
distribution rates to become effective May 1, 2006. The proposed
electricity 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. A decision from the OEB
on the electricity distribution rate application is expected during the
second quarter of 2006.
Earnings: Earnings for the first quarter of 2006 were $1.0 million,
comparable to the same quarter last year. A decrease in electricity
sales and an increase in the allocation of shared service costs from
non-regulated Ontario generation operations were partially offset by
the savings realized from an early retirement program completed in the
fourth quarter of 2005.
Electricity Sales: Electricity sales were 6 GWh, or 1.8 per cent, lower
quarter over quarter. The decrease was primarily due to the impact of
warmer weather conditions in the first quarter of 2006 compared to the
first quarter of 2005 and the loss in December 2005 of an industrial
customer.
Revenue: Revenue was $5.0 million lower quarter over quarter due to a
$4.3 million decrease in the cost of power billed to customers as a
result of lower energy prices, and lower electricity sales.
Expenses: Energy supply costs were $4.8 million lower quarter over
quarter. Lower energy prices and electricity sales contributed $4.3
million and $0.5 million, respectively, to the decrease.
Operating expenses were $0.1 million higher quarter over quarter. The
increase was primarily due to a $0.3 million increase in the allocation
of shared service costs from non-regulated Ontario generation
operations, partially offset by savings realized from the early
retirement program completed in the fourth quarter of 2005.
REGULATED UTILITIES - CARIBBEAN
Belize Electricity
---------------------------------------------------------------------
Belize Electricity
Financial Highlights (Unaudited)
Quarter Ended March 31st
---------------------------------------------------------------------
2006 2005 Increase
(Decrease)
---------------------------------------------------------------------
Average US:CDN Exchange Rate 1.15 1.23 (0.08)
---------------------------------------------------------------------
Electricity Sales (GWh) 80 76 4
---------------------------------------------------------------------
($millions)
---------------------------------------------------------------------
Revenue 20.1 15.4 4.7
---------------------------------------------------------------------
Energy Supply Costs 11.7 8.1 3.6
---------------------------------------------------------------------
Operating Expenses 2.7 2.8 (0.1)
---------------------------------------------------------------------
Amortization 1.4 1.6 (0.2)
---------------------------------------------------------------------
Finance Charges 1.6 1.4 0.2
---------------------------------------------------------------------
Foreign Exchange Loss (Gain) 0.1 (0.2) 0.3
---------------------------------------------------------------------
Corporate Taxes
and Non-Controlling Interest 1.1 0.7 0.4
---------------------------------------------------------------------
Earnings 1.5 1.0 0.5
---------------------------------------------------------------------
Regulation: Belize Electricity's base electricity rates 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. On July 14, 2005, the Public Utilities Commission of Belize ("PUC") approved a new 4-year tariff setting agreement, resulting in an 11 per cent overall increase in electricity rates, inclusive of the recovery of rate stabilization account balances, to BZ39.0 cents per kilowatt hour ("kWh") from BZ34.9 cents per kWh, effective July 1, 2005. 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. The component related to the recovery of excess fuel costs deferred to the Cost of Power Rate Stabilization Account ("CPRSA") was reduced from BZ3.4 cents per kWh to BZ1.8 cents per kWh.
On December 31, 2005, the PUC approved a BZ0.6 cent per kWh, or 1.5 per cent, increase in electricity rates associated with the recovery of the excess deferrals to the CPRSA and a BZ4.5 cents per kWh, or 11.5 per cent, increase in electricity rates related to COP. There was no increase in the VAD component of rates. The result was an overall 13 per cent increase in electricity rates to BZ44.1 cents per kWh from BZ39.0 cents per kWh, effective January 1, 2006. This increase in electricity rates was the result of the PUC's final decision on Belize Electricity's Threshold Event Review Application filed on December 20, 2005 and had no impact on Belize Electricity's earnings due to the flow through of cost of power to customers.
On March 31, 2006, the Company filed its Annual Tariff Review Application for the annual tariff period July 1, 2006 through June 30, 2007, proposing that the average mean electricity rate and its components remain unchanged from those in effect from January 1, 2006. The PUC's initial decision on the Application, issued on April 28, 2006, confirmed the Company's average mean electricity rate at BZ44.1 cents per kWh. A final decision on the Application is expected by the end of the second quarter of 2006.
Earnings: Belize Electricity's earnings were $0.5 million (BZ$1.1 million) higher quarter over quarter. The increase 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, and higher electricity sales, partially offset by the foreign exchange impact associated with the Company's Euro-denominated debt and higher finance charges.
Electricity Sales: Electricity sales were 4 GWh, or 5.3 per cent, higher quarter over quarter primarily due to increased sales in both the residential and commercial sectors driven by economic growth.
Revenue: Revenue was $4.7 million (BZ$9.6 million) higher quarter over quarter. Excluding foreign exchange impacts, revenue increased 38.1 per cent over the same quarter last year. The increase was primarily due to the increase in the VAD and COP components of electricity rates, effective July 1, 2005, the increase in the COP component of electricity rates, effective January 1, 2006, and electricity sales growth.
Expenses: Energy supply costs were $3.6 million (BZ$7.0 million) higher quarter over quarter. Excluding foreign exchange impacts, energy supply costs increased 52.6 per cent over the same quarter last year. The increase was primarily due to increases in the COP component of electricity rates, effective July 1, 2005 and January 1, 2006, and electricity sales growth.
Excluding foreign exchange impacts, operating expenses were BZ$0.2 million higher quarter over quarter due to higher employee costs and general increases in the cost of goods and services.
Amortization costs were slightly lower quarter over quarter due to the recovery of all generation equipment depreciation through cost of power, as a result of the July 1, 2005 Final Tariff Decision, and the impact of foreign exchange, partially offset by increased amortization costs due to capital asset growth.
Finance charges were $0.2 million (BZ$0.3 million) higher quarter over quarter primarily due to higher utilization of overdraft facilities and interest on short-term loans to help meet operational needs, partially offset by foreign exchange impacts.
The foreign exchange losses and gains primarily related to foreign currency exchange rate fluctuations associated with Belize Electricity's Euro-denominated debt. Net foreign exchange losses for the first quarter of 2006 were $0.1 million (BZ$0.2 million) compared to a net foreign exchange gain of $0.2 million (BZ$0.3 million) for the first quarter of 2005. The US dollar weakened relative to the Euro during the first quarter of 2006 compared to the first quarter of 2005.
Caribbean Utilities
---------------------------------------------------------------------
Caribbean Utilities
Financial Highlights (Unaudited)
Quarter Ended March 31st
---------------------------------------------------------------------
2006 2005 Increase
(Decrease)
---------------------------------------------------------------------
Average US:CDN Exchange
Rate 1 1.17 1.21 (0.4)
---------------------------------------------------------------------
($millions)
---------------------------------------------------------------------
Equity Income 1.6 2.5 (0.9)
---------------------------------------------------------------------
(1) Quarterly equity income for 2006 and 2005 were translated at
the average US:CDN exchange rate during the 3-month periods ended
January 31, 2006 and 2005, respectively, as equity income is
recorded on a lag basis.
Fortis accounts for its 37.0 per cent interest in Caribbean Utilities on an equity basis. Equity income is recorded on a lag basis and, as a result, the quarterly equity income noted above represents the Corporation's share of Caribbean Utilities' earnings for its third quarters ended January 31, 2006 and 2005.
Regulation: Caribbean Utilities and the Government of the Cayman Islands recommenced Licence negotiations in November 2005 and discussions are ongoing. The Company's Licence remains in full force and effect until January 2011, or until replaced by a new Licence by mutual agreement.
Equity Income: Caribbean Utilities and the Cayman Islands are continuing to recover from the impact of Hurricane Ivan ("Ivan") which struck Grand Cayman in September 2004. Caribbean Utilities is now regularly meeting pre-Ivan generation and sales levels and expects to consistently meet or exceed these pre-Ivan levels as well as attain pre-Ivan customer numbers by the end of July 2006. Caribbean Utilities also anticipates returning to a total owned generating capacity of approximately 120 MW by the summer of 2006 compared to 123 MW pre-Ivan.
Equity income recorded from Caribbean Utilities was $0.9 million lower quarter over quarter. The decrease was primarily due to higher fuel expenses associated with the timing of expensing previously deferred fuel costs. During its third quarter ended January 31, 2006, Caribbean Utilities expensed US$2.0 million of previously deferred fuel costs whereas, during the same quarter last year, a US$1.7 million deferral of fuel costs was recorded. The impact was a US$3.7 million decrease in Caribbean Utilities' earnings quarter over quarter. Under its current Licence, Caribbean Utilities recovers the cost of fuel above the base price from its customers through a monthly fuel factor adjustment on a 2-month delay basis and defers its recoverable fuel cost on a rolling 2-month deferral basis. Movement in the deferred fuel account is normal and is dependant on fuel prices, fuel usage and kWh sales. Large swings in this account, although normal, occur infrequently and, for any particular period, the impact is timing in nature.
Equity income also decreased from the same quarter last year due to increased insurance premiums, insurance-related consulting fees, interest expense and lease costs associated with temporary generation. Partially offsetting the decrease in equity income was the positive impact of higher electricity sales due to post-Ivan sales recovery and revenue associated with the hurricane cost recovery surcharge ("CRS") implemented on August 1, 2005. Residential and commercial electricity sales at Caribbean Utilities increased 52 per cent and 32 per cent, respectively, during its third quarter ended January 31, 2006 over the same quarter last year. During its third quarter, the Company recorded approximately US$1.0 million in revenue associated with the hurricane CRS with approximately US$11.3 million, as of January 31, 2006, of direct uninsured hurricane losses remaining to be collected from customers through the CRS. The CRS is expected to remain in place for approximately 3 years.
NON-REGULATED - FORTIS GENERATION
---------------------------------------------------------------------
Non-Regulated - Fortis Generation
Financial Highlights (Unaudited)
Quarter Ended March 31st
---------------------------------------------------------------------
Increase
Energy Sales (GWh) 2006 2005 (Decrease)
---------------------------------------------------------------------
Central Newfoundland 38 35 3
---------------------------------------------------------------------
Ontario 187 184 3
---------------------------------------------------------------------
Belize 27 7 20
---------------------------------------------------------------------
British Columbia 3 5 (2)
---------------------------------------------------------------------
Upper New York State 29 17 12
---------------------------------------------------------------------
Total 284 248 36
---------------------------------------------------------------------
---------------------------------------------------------------------
Increase
($millions) 2006 2005 (Decrease)
---------------------------------------------------------------------
Revenue 19.3 17.0 2.3
---------------------------------------------------------------------
Energy Supply Costs 1.9 1.9 -
---------------------------------------------------------------------
Operating Expenses 4.0 4.8 (0.8)
---------------------------------------------------------------------
Amortization 2.7 2.6 0.1
---------------------------------------------------------------------
Finance Charges 2.7 3.9 (1.2)
---------------------------------------------------------------------
Gain on Settlement of
Contractual Matters - (10.0) 10.0
---------------------------------------------------------------------
Corporate Taxes 2.2 3.5 (1.3)
---------------------------------------------------------------------
Non-Controlling Interest 0.4 0.3 0.1
---------------------------------------------------------------------
Earnings 5.4 10.0 (4.6)
---------------------------------------------------------------------
Earnings: The earnings contribution from Non-regulated Fortis Generation was down $4.6 million quarter over quarter primarily due to earnings for the first quarter of last year including the $7.9 million after-tax ($10 million pre-tax) Ontario Settlement. Excluding the impact in the first quarter of 2005 of the Ontario Settlement, earnings were $3.3 million higher for the first quarter of 2006 compared to the same quarter last year as a result of increased production combined with lower finance charges and operating costs, partially offset by the impact of lower average wholesale energy prices in Ontario.
Energy Sales: Energy sales were 36 GWh, or 14.5 per cent, higher quarter over quarter primarily due to higher hydroelectric production in Belize and Upper New York State. Production in Belize was favourably impacted by higher rainfall levels and the operation of the Chalillo dam and its hydroelectric generating facility. Production in Upper New York State increased primarily due to 3 months of operations of the Dolgeville plant in the first quarter of 2006 compared to one month in the same quarter last year. In late January 2005, the Dolgeville plant went out of service as a result of flooding and did not resume production until October 2005.
Revenue: Generation revenue was $2.3 million higher quarter over quarter. This increase was driven by higher production, partially offset by the impact of lower average wholesale energy prices in Ontario. The average wholesale energy price per megawatt hour ("MWh") in Ontario was $50.98 compared to $55.99 for the same quarter last year, resulting in a decrease in revenue of approximately $0.8 million.
Expenses: Operating expenses were $0.8 million lower quarter over quarter. Approximately $0.3 million of cost savings associated with the cessation of operations at the Rankine Generating Station upon implementation of the Niagara Exchange Agreement ("NEA") in late 2005 were experienced in the first quarter of 2006 compared to the same quarter last year. 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. Operating expenses also decreased primarily due to a $0.3 million reduction in the allocation of shared-service costs to non-regulated Ontario generation operations and lower business development costs in Ontario.
Finance charges were $1.2 million lower quarter over quarter. The decrease was primarily due to a reduction of inter-company finance charges in the Belizean operations and the repayment of a $22.5 million term loan in the second quarter of 2005 associated with the Ontario operations.
NON-REGULATED - FORTIS PROPERTIES
---------------------------------------------------------------------
Non-Regulated - Fortis Properties
Financial Highlights (Unaudited)
Quarter Ended March 31st
---------------------------------------------------------------------
Increase
($millions) 2006 2005 (Decrease)
---------------------------------------------------------------------
Real Estate Revenue 13.6 13.2 0.4
---------------------------------------------------------------------
Hospitality Revenue 21.5 19.8 1.7
---------------------------------------------------------------------
Total Revenue 35.1 33.0 2.1
---------------------------------------------------------------------
Operating Expenses 24.6 22.8 1.8
---------------------------------------------------------------------
Amortization 2.8 2.6 0.2
---------------------------------------------------------------------
Finance Charges 5.1 4.9 0.2
---------------------------------------------------------------------
Corporate Taxes 1.1 1.2 (0.1)
---------------------------------------------------------------------
Earnings 1.5 1.5 -
---------------------------------------------------------------------
Earnings: Fortis Properties' earnings for the first quarter of 2006 were $1.5 million, comparable to the same quarter last year. Slightly higher earnings from operations were offset by increased amortization and finance charges.
Revenue: Real estate revenue was $0.4 million higher quarter over quarter due to growth experienced in all of the Company's operating regions. The occupancy level in the Real Estate Division was 95.9 per cent at March 31, 2006, up from 95.1 per cent at March 31, 2005.
Hospitality revenue was $1.7 million higher quarter over quarter. The growth was primarily attributable to results for the first quarter of 2006 including the operations of the 3 Greenwood Inn hotels for 3 months compared to 2 months for the first quarter of 2005, and increased revenue at the Delta Brunswick. Revenue per available room ("REVPAR") for the first quarter of 2006 was $59.26 compared to $60.15 for the same quarter last year. The 1.5 per cent decrease in REVPAR was attributable to a decrease in average occupancy quarter over quarter, primarily associated with the Company's Newfoundland operations. Average room rates remained relatively stable quarter over quarter.
Expenses: Operating expenses, amortization costs and finance charges were higher quarter over quarter primarily due to the addition of the 3 Greenwood Inn hotels and the expanded operations of the Delta St. John's Hotel.
During the first quarter, Fortis Properties continued the $7.7 million 64-room expansion of the Holiday Inn Sarnia, the $2.5 million 11,000-square foot expansion of conference facilities at the Holiday Inn Kitchener-Waterloo and the $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 projects were approximately $4.7 million in the first quarter of 2006 with approximately $11.7 million incurred to date. The projects are expected to be completed during the second quarter of 2006.
The 3 Greenwood Inn hotels in Alberta and Manitoba, and the expanded operations of the Delta St. John's Hotel, Holiday Inn Sarnia, Holiday Inn Kitchener-Waterloo and Blue Cross Centre in Moncton are expected to be Fortis Properties' primary sources of revenue and earnings growth in 2006.
CORPORATE
---------------------------------------------------------------------
Corporate
Financial Highlights (Unaudited)
Quarter Ended March 31st
---------------------------------------------------------------------
Increase
($millions) 2006 2005 (Decrease)
---------------------------------------------------------------------
Total Revenue 2.0 2.6 (0.6)
---------------------------------------------------------------------
Operating Expenses 2.4 2.2 0.2
---------------------------------------------------------------------
Amortization 0.7 0.7 -
---------------------------------------------------------------------
Finance Charges 5.5 6.0 (0.5)
---------------------------------------------------------------------
Foreign Exchange Loss 0.2 0.6 (0.4)
---------------------------------------------------------------------
Preference Share Dividends 4.2 4.2 -
---------------------------------------------------------------------
Corporate Tax Recovery (2.4) (2.3) (0.1)
---------------------------------------------------------------------
Non-Controlling Interest (0.1) (0.1) -
---------------------------------------------------------------------
Net Corporate Expenses (8.5) (8.7) 0.2
---------------------------------------------------------------------
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, foreign exchange gains or losses, preference share dividends, other corporate expenses, net of recoveries from subsidiaries, interest and miscellaneous revenues and corporate income taxes.
Net corporate expenses were $0.2 million lower quarter over quarter primarily due to lower finance charges and a reduction in net unrealized foreign exchange losses, partially offset by a decrease in inter-company interest revenue. Finance charges were lower in the first quarter of 2006 compared to the same quarter last year due to the repayment in March 2005 of a portion of the short-term bridge facilities that were used to acquire FortisAlberta and FortisBC with partial proceeds from the $130 million common equity issue on March 1, 2005. The net unrealized foreign exchange losses related to foreign currency exchange rate fluctuations associated with unhedged US dollar-denominated Corporate long-term debt. Both foreign exchange rates and levels of unhedged debt varied from the same quarter last year.
CONSOLIDATED FINANCIAL POSITION
The following table outlines the significant changes in the consolidated balance sheets between March 31, 2006 and December 31, 2005.
---------------------------------------------------------------------
Fortis Inc.
Significant Changes in the Consolidated Balance Sheets
(Unaudited) between March 31, 2006 and December 31, 2005
---------------------------------------------------------------------
Increase
($millions) (Decrease) Explanation
---------------------------------------------------------------------
Cash and cash equivalents (11.9) The decrease primarily related
to income tax instalment
payments made during the 3-
month period, combined with
the use of cash for capital
expenditures and working
capital purposes.
---------------------------------------------------------------------
Accounts receivable 10.1 The increase primarily related
to normal seasonal sales
variances resulting from
higher electricity sales
during winter months,
partially offset by lower
amounts receivable from
customers for contributions in
aid of construction at
FortisAlberta.
---------------------------------------------------------------------
Utility capital assets 47.4 The increase related to $104.3
million invested in
electricity systems, less
customer contributions and
amortization for the 3-month
period.
---------------------------------------------------------------------
Income taxes payable (15.2) The decrease primarily related
to income tax instalment
payments made by
FortisAlberta, FortisOntario
and Maritime Electric during
the 3-month period, partially
offset by current income tax
accruals.
---------------------------------------------------------------------
Long-term debt and 47.0 The increase primarily related
capital lease obligations to drawings on long-term
(including current portion) credit facilities by
FortisAlberta and the
Corporation. FortisAlberta
increased its drawings under
long-term credit facilities by
$40.5 million to fund capital
expenditures during the 3-
month period. The Corporation
increased its drawings under
long-term credit facilities by
$6.5 million for general
corporate purposes.
Belize Electricity also
obtained a loan of
approximately $4.0 million to
finance capital expenditures.
These increases, combined with
the impact of the translation
of the Corporation's US
dollar-denominated debt at a
higher foreign exchange rate
at March 31, 2006 compared to
December 31, 2005, were
partially offset by regular
debt repayments during the 3-
month period.
---------------------------------------------------------------------
Shareholders' equity 24.2 The increase primarily related
to the net earnings reported
for the 3-month period, less
common share dividends.
---------------------------------------------------------------------
LIQUIDITY
The following table outlines the summary of cash flows.
---------------------------------------------------------------------
Fortis Inc.
Summary of Cash Flows (Unaudited)
Quarter Ended March 31st
---------------------------------------------------------------------
Increase
($millions) 2006 2005 (Decrease)
---------------------------------------------------------------------
Cash, beginning of period 33.4 37.2 (3.8)
---------------------------------------------------------------------
Cash provided by (used in)
---------------------------------------------------------------------
Operating activities 49.4 79.3 (29.9)
---------------------------------------------------------------------
Investing activities (101.7) (149.2) 47.5
---------------------------------------------------------------------
Financing activities 40.4 96.8 (56.4)
---------------------------------------------------------------------
Foreign currency impact
on cash balances - 0.1 (0.1)
---------------------------------------------------------------------
Cash, end of period 21.5 64.2 (42.7)
---------------------------------------------------------------------
Operating Activities: Cash flow from operations, after working capital adjustments, decreased $29.9 million quarter over quarter. The decrease was due primarily to changes in working capital. The decrease in cash provided from working capital was driven by the timing of income tax instalment payments at FortisAlberta, FortisOntario and Maritime Electric and a general change in the timing of receipt and payment of other working capital items.
Investing Activities: Cash used in investing activities was down $47.5 million quarter over quarter. The decrease was primarily due to lower capital expenditures associated with income producing properties, partially offset by increased utility capital expenditures, net of contributions in aid of construction.
Gross utility capital expenditures were $104.3 million for the first quarter of 2006 compared to $91.4 million for the same quarter last year. The increase in capital expenditures was primarily related to capital spending at FortisAlberta, which was largely driven by customer growth in the residential and commercial and industrial sectors. The increase was partially offset by a decrease in utility capital expenditures at Maritime Electric and Belize Electric Company Limited due to the substantial completion, during 2005, of the construction of the 50-MW combustion turbine generating facility on PEI and the Chalillo Project in Belize.
Capital expenditures associated with income producing properties were $6.6 million for the first quarter of 2006, a decrease of $60.8 million from the same quarter last year. The decrease primarily related to the acquisition of 3 hotels in Alberta and Manitoba for approximately $63 million in February 2005 and the completion of the expansion to the Delta St. John's Hotel in June 2005. The decrease was partially offset by approximately $4.7 million in capital expenditures during the first quarter of 2006 related to the expansion of the Holiday Inn Sarnia, Holiday Inn Kitchener-Waterloo and Blue Cross Centre in Moncton.
During the first quarter of 2006, approximately $9.6 million of contributions in aid of construction were received compared to $10.9 million during the same quarter last year. The decrease primarily related to lower contributions at Belize Electricity, partially offset by increased contributions associated with FortisAlberta's capital expenditure program.
Financing Activities: Cash provided from financing activities was down $56.4 million quarter over quarter. The decrease primarily related to the issue of 6,960,000 common shares of the Corporation on March 1, 2005, which resulted in gross proceeds of approximately $130 million. The proceeds were used to repay certain outstanding short-term indebtedness and for general corporate purposes. In addition, during the first quarter of 2005, Fortis Properties obtained an external $29.6 million loan to finance the acquisition of the Edmonton and Calgary Greenwood Inn hotels.
During the first quarter of 2006, FortisAlberta increased its drawings under long-term credit facilities by $40.5 million to fund capital expenditures. Additionally, the Corporation increased its drawings under its long-term credit facilities by $6.5 million and Belize Electricity obtained a loan of approximately $4.0 million to finance capital expenditures.
The remaining change in cash provided from financing activities quarter over quarter primarily related to the change in short-term borrowings, regular payment of long-term debt and payment of common share dividends.
Contractual Obligations: The consolidated contractual obligations over the next 5 years and for periods thereafter, as at March 31, 2006, are outlined in the following table.
---------------------------------------------------------------------
Fortis Inc.
Contractual Obligations (Unaudited)
as at March 31, 2006
---------------------------------------------------------------------
less greater
than than
($millions) Total 1 year 1-3 years 4-5 years 5 years
---------------------------------------------------------------------
Long-term debt 2,172.8 29.7 114.7 324.9 1,703.5
Brilliant
Terminal
Station
("BTS") (1) 70.0 2.6 5.1 5.1 57.2
---------------------------------------------------------------------
Power purchase
obligations
FortisBC (2) 2,907.7 37.2 72.6 73.0 2,724.9
FortisOntario(3) 342.1 22.2 67.1 47.0 205.8
Maritime
Electric (4) 3.0 3.0 - - -
---------------------------------------------------------------------
Capital cost (5) 449.5 19.8 48.6 37.8 343.3
---------------------------------------------------------------------
Joint-use asset
and shared
service
agreements (6) 63.6 2.8 7.5 7.2 46.1
---------------------------------------------------------------------
Operating lease
obligations (7) 19.5 3.9 9.0 6.3 0.3
---------------------------------------------------------------------
Office lease
- FortisBC (8) 22.0 0.9 2.1 2.6 16.4
---------------------------------------------------------------------
Other 5.4 1.6 2.5 0.1 1.2
---------------------------------------------------------------------
Total 6,055.6 123.7 329.2 504.0 5,098.7
---------------------------------------------------------------------
(1) On July 15, 2003, FortisBC began operating the BTS under an
agreement the term of which expires in 2056 (unless the Company
has earlier terminated the agreement by exercising its right, at
any time after the anniversary date of the agreement in 2029, to
give 36 months' notice of termination). The BTS is jointly owned
by the Columbia Power Corporation and the Columbia Basin Trust
(the "Owners") and is used by the Company on its own behalf and
on behalf of the Owners. The agreement provides that FortisBC
will pay 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 Agreement (the "BPPA") as well as the Power
Purchase Agreement with BC Hydro. On May 3, 1996, an Order was
granted by the BCUC approving a 60-year BPPA for the output of
the BTS located near Castlegar, British Columbia. The BPPA
requires monthly payments based on the operation and maintenance
costs and a return on capital for the plant, in exchange for the
specified natural flow take-or-pay amounts of power. The BPPA
includes a market-related price adjustment after 30 years of the
60-year term. The Power Purchase Agreement with BC Hydro, which
expires in 2013, provides for any amount of supply up to a
maximum of 200 MW, but includes a take-or-pay provision based on
a 5-year rolling nomination of the 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 1-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 1 take-or-pay contract for the purchase of
either capacity or energy. This contract totals approximately
$3.0 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 5
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, British Columbia office building for a
term of 30 years. The terms of the agreement grant FortisBC
repurchase options at approximately year 20 and year 28 of the
lease term. On December 1, 2004, FortisBC also entered into a 5-
year lease for the Kelowna, British Columbia head office. The
terms of the lease allow for termination without penalty after 3
years.
---------------------------------------------------------------------
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.
---------------------------------------------------------------------
Fortis Inc.
Capital Structure (Unaudited)
---------------------------------------------------------------------
March 31, 2006 December 31, 2005
---------------------------------------------------------------------
($millions) (%) ($millions) (%)
---------------------------------------------------------------------
Total debt and
capital lease
obligations
(net of cash) 2,250.4 59.1 2,182.5 58.7
---------------------------------------------------------------------
Preference shares 319.5 8.4 319.5 8.6
---------------------------------------------------------------------
Shareholders' equity 1,237.6 32.5 1,213.4 32.7
---------------------------------------------------------------------
Total 3,807.5 100.0 3,715.4 100.0
---------------------------------------------------------------------
The change in the Corporation's capital structure is primarily the
result of increased total debt used to finance the consolidated capital
program of Fortis, combined with net earnings less common share
dividends of $20.1 million for the first quarter of 2006.
As at March 31, 2006, the Corporation's unsecured debt credit ratings
were as follows:
Standard & Poors ("S&P") BBB
Dominion Bond Rating Service ("DBRS") BBB(high)
In December 2005, S&P confirmed its credit rating on the Corporation's
unsecured debt 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. In February 2006, DBRS confirmed
the rating on the Corporation's unsecured debt 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. Gross consolidated capital
expenditures of Fortis for 2006 are expected to be approximately $450
million, of which $110.9 million was invested in the first quarter of
2006. Approximately $425 million is expected to be invested in
Regulated Utilities, of which approximately 75 per cent is expected to
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 over the next 5 years. The
significant capital programs at FortisAlberta and FortisBC are the
primary drivers of 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 issues under the 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.
As outlined in the Fortis Inc. 2005 Annual Report, Belize Electricity
remains non-compliant with its debt service coverage ratio of 1.5 times
related to its $5.5 million (BZ$9.4 million) loan with the
International Bank for Reconstruction and Development ("IBRD") and its
$9.8 million (BZ$16.8 million) loan with the Caribbean Development
Bank. 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 $795.5 million, of which $542.7 million was unused at
March 31, 2006. The following summary outlines the Corporation's
credit facilities by reporting segments.
----------------------------------------------------------------------
Fortis Inc.
Credit Facilities (Unaudited)
----------------------------------------------------------------------
Total Total
as at as at
March December
Regulated Fortis Fortis 31, 31,
($millions) Corporate Utilities Generation Properties 2006 2005
----------------------------------------------------------------------
Total credit
facilities 210.0 567.2 5.8 12.5 795.5 747.1
----------------------------------------------------------------------
Credit
facilities
utilized
----------------------------------------------------------------------
Short-term
borrowings (2.6) (65.0) (1.2) - (68.8) (59.9)
----------------------------------------------------------------------
Long-term
debt (24.5) (97.3) - - (121.8) (74.8)
----------------------------------------------------------------------
Letters of
credit
outstanding (4.7) (55.3) - (2.2) (62.2) (73.6)
----------------------------------------------------------------------
Credit
facilities
available 178.2 349.6 4.6 10.3 542.7 538.8
----------------------------------------------------------------------
At March 31, 2006 and December 31, 2005, certain borrowings under the Corporation's and subsidiaries' 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 2006, Newfoundland Power renegotiated its syndicated $100 million committed revolving term credit facility extending the term from 1 to 3 years, with maturity now in January 2009.
In January 2006, Maritime Electric's $25 million non-revolving unsecured short-term bridge financing, in support of the construction of the 50-MW combustion turbine generating facility, was extended until July 2007.
In March 2006, FortisAlberta amended its term syndicated credit facility increasing the amount available to $200 million from $150 million and extending the maturity date from May 2008 to May 2010. In addition, the Company has the ability to request an increase in the limit of this credit facility by $50 million under the same terms of the existing credit facility.
OFF-BALANCE SHEET ARRANGEMENTS
Disclosure is required of all off-balance sheet arrangements such as transactions, agreements or contractual arrangements with unconsolidated entities, structured finance entities, special purpose entities or variable interest entities that are reasonably likely to materially affect liquidity or the availability of, or requirements for, capital resources. The Corporation had no such off-balance sheet arrangements as at March 31, 2006.
BUSINESS RISK MANAGEMENT
There were no material changes to the Corporation's significant business risks for the quarter ended March 31, 2006 from those disclosed in the Corporation's Management Discussion and Analysis for the year ended December 31, 2005, except for those 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 September 2005, Canadian Niagara Power made application to the OEB for new electricity distribution rates to become effective May 1, 2006, and a decision on the application is expected during the second quarter of 2006. In April 2006, FortisBC entered negotiations to settle its 2006 Application filed with the BCUC on November 24, 2005. If negotiations are not successful, a public hearing is scheduled for June 2006. The BCUC decision on the 2006 Application would be determined subsequent to the negotiations or public hearing. FortisBC is currently charging interim rates, effective January 1, 2006, as approved by the BCUC. FortisAlberta filed a full 2006/2007 Application on December 12, 2005, pertaining to 2006 and 2007 customer electricity rates and capital expenditures. The hearing on the 2006/2007 Application is expected to take place in the spring of 2006 with an AEUB decision expected in the fall of 2006. FortisAlberta is currently charging interim rates, effective January 1, 2006, as approved by the AEUB. Maritime Electric expects to receive a decision on its rate application, filed with IRAC on January 31, 2006, in the second quarter of 2006. On March 31, 2006, Belize Electricity filed its Annual Tariff Review Application for the annual tariff period July 1, 2006 through June 30, 2007, proposing that the average mean electricity rate and its components remain unchanged from that in effect from January 1, 2006. A final decision on the Application is expected by the end of the second quarter of 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.
Labour Relations: The collective agreement between FortisBC and Local 213 of the International Brotherhood of Electrical Workers ("IBEW") expired on January 31, 2005. IBEW represents employees in specified occupations in the area of generation, transmission and distribution. The Company and the IBEW reached an agreement which was ratified in early January 2006. The agreement expires on January 31, 2008. The collective agreement between FortisBC and Local 378 of the Canadian Office and Professional Employees Union ("COPE") expired on January 31, 2006. COPE represents employees in office and professional occupations. Discussions between the Company and COPE commenced in the first quarter of 2006 and are currently ongoing.
The majority of employees at FortisAlberta are represented by the United Utility Workers Association ("UUWA"). There are 2 collective agreements with the UUWA. The Dispatch/Contact Centre Collective Agreement expired December 31, 2004 and the main collective agreement expired December 31, 2005. The Company is currently in negotiations to renew both of these agreements and expects to enter into new contracts in the first half of 2006.
Belize Electricity's collective agreement with the Belize Energy Workers Union was signed on November 29, 2000 and is to be reviewed every 5 years. Preparations are underway for union negotiations which are expected to commence by mid 2006.
CHANGES IN ACCOUNTING POLICIES
Revenue Recognition: Effective January 1, 2006, Newfoundland Power prospectively changed its revenue recognition policy from a billed basis to an accrual basis, as approved by the PUB. The change in revenue recognition policy, while having no material impact on Newfoundland Power's annual earnings, will result in a shift in the Company's 2006 quarterly earnings compared to 2005. Earnings in the first and second quarters will be reduced compared to the same quarters in 2005 while earnings in the third and fourth quarters will increase, in total, by a similar amount. The PUB also approved a one-time revenue accrual of $3.1 million in 2006. This amount represents that portion of unbilled revenue at December 31, 2005 of $23.6 million, required to offset the income tax effects of changing to the accrual basis of revenue recognition. The disposition of the remaining 2005 unbilled revenue balance has been deferred until the Company's next general rate application, which is anticipated in 2006 for the purpose of setting rates for 2007.
FUTURE ACCOUNTING PRONOUNCEMENTS
During the first quarter of 2006, there were no changes to the Corporation's disclosure of future accounting pronouncements from those disclosed in the Corporation's Management Discussion and Analysis for the year ended December 31, 2005.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Corporation's interim unaudited 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. Additionally, certain estimates are necessary since the regulatory environments in which the Corporation's utilities operate often require amounts to be recorded at estimated values until these amounts are finalized pursuant to regulatory decisions or other regulatory proceedings.
Due to changes in facts and circumstances and the inherent uncertainty involved in making estimates, actual results may differ significantly from current estimates. Estimates are reviewed periodically and, as adjustments become necessary, are reported in earnings in the period they become known. Interim financial statements may also employ a greater use of estimates than the annual financial statements. There were no material changes to the Corporation's critical accounting estimates for the three months ended March 31, 2006 from those disclosed in the Corporation's Management Discussion and Analysis for the year ended December 31, 2005 except as discussed below.
Interim Rates: FortisAlberta and FortisBC are currently charging interim rates that are subject to change based upon regulator approval of the final rates to be charged to customers in 2006. The difference between the interim rates currently charged and the final approved rates could result in material adjustments to the financial results of FortisAlberta and FortisBC. Any adjustments resulting from the regulators' decisions on the 2006 final rates will be recorded during the periods the decisions are received.
Amortization and Capitalized Overhead: FortisBC has completed a depreciation study on the estimated useful lives of its property, plant and equipment. The study recommended an increase in the Company's composite depreciation rate from 2.6 per cent to 3.6 per cent. Additionally, FortisBC has completed an analysis of its capitalized overhead allocation method. This analysis supported a change in the estimate of capitalized overhead. The revised estimate calculates capitalized overhead as a percentage of all corporate overhead costs whereas previously the percentage was applied to a limited pool of corporate costs.
FortisBC's 2006 Application, which is subject to BCUC approval, and the Corporation's financial statements for the first quarter of 2006 are based on the revised depreciation rate and revised capitalized overhead estimate. The change in estimates for amortization expense and capitalized overhead have been applied prospectively in the financial statements. Any change in the estimate of amortization expense and method of estimating capitalized overhead as a result of the BCUC decision on the 2006 Application will be recorded in the period the BCUC decision is received.
Contingencies: Fortis is a party to a number of disputes and lawsuits in the normal course of business. The Corporation's contingent liabilities are consistent with disclosures in the Corporation's 2005 annual audited consolidated financial statements except as noted below.
Maritime Electric
In April 2006, Canada Revenue Agency ("CRA") reassessed Maritime Electric's 1997-2004 taxation years. The reassessment encompasses the Company's tax treatment, specifically the Company's timing of deductions, with respect to: (i) the ECAM in the 2001-2004 taxation years, (ii) customer rebate adjustments in the 2001-2003 taxation years, and (iii) the Company's payment of approximately $6 million on January 2, 2001 associated with a settlement with NB Power regarding its $450 million write down of the Point Lepreau Nuclear Generating Station in 1998.
The Company believes it has reported its tax position appropriately in all aspects of the reassessment and intends to file a Notice of Objection with the Chief of Appeals at CRA. Should the Company be unsuccessful in defending all aspects of the reassessment, the Company would be required to pay approximately $11.6 million in taxes and accrued interest. The Company has provided for, through future and current income taxes payable, approximately $10 million and, therefore, an additional liability of $1.6 million would arise. In this event, the Company would apply to IRAC to include this amount in the regulatory rate-making process. The provisions of the Income Tax Act require the Company to deposit one half of the assessment under objection with CRA and the Company intends to deposit approximately $5.8 million with CRA by the end of June 2006.
FortisAlberta
On March 24, 2006, Her Majesty the Queen in Right of Alberta filed a statement of claim in the Court of Queen's Bench of Alberta in the Judicial District of Edmonton against FortisAlberta. The Crown's claim is that the Company is responsible for a fire that occurred in October of 2003 in an area of the Province of Alberta commonly referred to as "Poll Haven Community Pasture". The Crown is seeking approximately $2.7 million in fire-fighting and suppression costs and approximately $2.4 million in timber losses, as well as interest and other costs. Given the preliminary stage of the proceedings, FortisAlberta has not made any definitive assessment of potential liability with respect to the litigation. However, management does not believe that the Company contributed to, or is responsible for, the fire and, therefore, management is of the view that the allegations are without merit.
QUARTERLY RESULTS
The following table sets forth unaudited quarterly information for each of the 8 quarters ended June 30, 2004 through March 31, 2006. The quarterly information has been obtained from the Corporation's interim unaudited consolidated financial statements which, in the opinion of management, have been prepared in accordance with Canadian GAAP and as required by utility regulators. The timing of the recognition of certain assets, liabilities, revenues and expenses as a result of regulation may differ from that otherwise expected using Canadian GAAP for non-regulated entities. These differences are disclosed in the Notes to the Corporation's 2005 annual audited consolidated financial statements. These operating results are not necessarily indicative of results for any future period and should not be relied upon to predict future performance.
---------------------------------------------------------------------
Fortis Inc.
Summary of Quarterly Results (Unaudited)
---------------------------------------------------------------------
Net Earnings
Revenue Applicable to
and Equity Common Earnings per
Quarter Income Shares Common Share (1)
Ended ($thousands) ($thousands) Basic ($) Diluted ($)
---------------------------------------------------------------------
March 31, 2006 390,827 36,605 0.35 0.34
---------------------------------------------------------------------
December 31, 2005 353,084 22,263 0.22 0.21
---------------------------------------------------------------------
September 30, 2005 341,650 37,450 0.36 0.33
---------------------------------------------------------------------
June 30, 2005 364,948 38,188 0.37 0.34
---------------------------------------------------------------------
March 31, 2005 381,789 39,196 0.40 0.36
---------------------------------------------------------------------
December 31, 2004 337,170 21,176 0.22 0.21
---------------------------------------------------------------------
September 30, 2004 303,653 25,452 0.26 0.25
---------------------------------------------------------------------
June 30, 2004 254,513 23,946 0.30 0.28
---------------------------------------------------------------------
(1) Earnings per common share data have been restated to reflect the
4-for-1 stock split completed in October 2005.
A summary of the past 8 quarters reflects the Corporation's continued growth as well as the seasonality associated with its businesses. From May 31, 2004, financial results were impacted by the acquisition of FortisAlberta and FortisBC, while financial results from February 1, 2005 were impacted by the acquisition of 3 Greenwood Inn hotels. 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. Given the diversified group of companies, seasonality may vary. Most of the Corporation's utility investments produce their highest earnings in the first quarter. The Corporation's non-utility investment, Fortis Properties, generally produces its highest earnings in the second and third quarters. The comparability of 2006 and 2005 quarterly earnings and revenue has been somewhat impacted by the shift in reported revenue at Newfoundland Power resulting from the change to the accrual basis of revenue recognition from the billed basis. The comparability of 2005 and 2004 quarterly earnings is somewhat impacted by the seasonality effect of the new purchased power rate structure at Newfoundland Power, effective January 1, 2005. Each of the comparative quarterly earnings, except for the comparative first quarters ended March 31, 2006 and March 31, 2005, has increased as a result of both the Corporation's acquisition strategy and improved operating earnings at most subsidiaries. Results for the first quarter of 2005 included the $7.9 million after-tax Ontario Settlement.
March 2006/March 2005 - Net earnings applicable to common shares were $36.6 million, or $0.35 per common share, for the first quarter of 2006 compared to earnings of $39.2 million, or $0.40 per common share, for the first quarter of 2005. Earnings for the first quarter last year included the $7.9 million after-tax Ontario Settlement. Excluding the Ontario Settlement in 2005, earnings increased quarter over quarter primarily due to higher earnings at FortisBC and FortisAlberta, and increased non-regulated hydroelectric production in Belize. The increase in earnings was also due to an 11 per cent increase in electricity rates, effective July 1, 2005, and higher electricity sales at Belize Electricity. Partially offsetting the earnings increase was an anticipated decline in earnings at Newfoundland Power as a result of a change in the Company's revenue recognition policy, a decrease in equity income from Caribbean Utilities, driven by the higher fuel costs, and the impact of lower average wholesale energy prices in Ontario.
Earnings per common share for the first quarter of 2006 were impacted by the dilution created by the $130 million issue of common shares on March 1, 2005.
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 Fortis Generation, as a result of higher average 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 2004, 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 of 2005 were impacted by the dilution created by the $130 million issue of common shares on March 1, 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 in 2004 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 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 $130 million issue of common shares on March 1, 2005.
June 2005/June 2004 - Net earnings applicable to common shares for the second quarter of 2005 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 $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 $130 million issue of common shares on March 1, 2005.
SUBSEQUENT EVENT
On April 21, 2006, FortisAlberta closed a $100 million unsecured debenture offering. The net proceeds of the offering will primarily be used to refinance drawings on FortisAlberta's term syndicated credit facility and to fund operating and capital expenditures. The debentures will bear interest at an interest rate of 5.40 per cent per annum, payable semi-annually on April 21 and October 21, and mature on April 21, 2036.
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. Gross consolidated capital expenditures for 2006 are expected to be approximately $450 million, approximately $425 million of which is expected to 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 of hydroelectric generation, hotels and real estate.
OUTSTANDING SHARE DATA
At April 30, 2006, the Corporation had issued and outstanding 103,384,041 Common Shares, 5,000,000 First Preference Shares Series C and 7,993,500 First Preference Shares Series E. The number of Common Shares, as at March 31, 2006, that would be issued upon conversion of convertible debt and the First Preference Shares Series C and Series E is described in the Notes to the 2005 Fortis annual audited consolidated financial statements. The number of Common Shares, as at March 31, 2006, that would be issued upon conversion of share options is described in the Notes to the interim unaudited consolidated financial statements for the three months ended March 31, 2006.
FORTIS INC.
Interim Consolidated Financial Statements
For the three months ended March 31, 2006 and 2005
(Unaudited)
Fortis Inc.
Consolidated Balance Sheets (Unaudited)
As at
(in thousands)
March 31 December 31
2006 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $21,523 $33,416
Accounts receivable 214,232 204,169
Prepaid expenses 12,757 9,786
Regulatory assets 31,091 33,289
Materials and supplies 36,296 32,033
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315,899 312,693
Deferred charges 149,819 148,140
Regulatory assets 88,430 82,315
Future income taxes 57,079 58,815
Utility capital assets 2,653,424 2,606,061
Income producing properties 418,588 414,608
Investments 167,566 167,393
Intangibles, net of
amortization 12,975 14,027
Goodwill 512,139 512,139
---------------------------------------------------------------------
$4,375,919 $4,316,191
---------------------------------------------------------------------
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings (Note 5) $68,848 $59,868
Accounts payable and accrued
charges 267,526 265,223
Dividends payable 17,938 17,924
Income taxes payable 7,616 22,785
Regulatory liabilities 13,363 19,392
Current instalments of
long-term debt and capital
lease obligations 31,216 31,392
Future income taxes 2,819 6,714
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409,326 423,298
Deferred credits 67,962 64,261
Regulatory liabilities 84,737 86,780
Future income taxes 45,070 44,718
Long-term debt and capital
lease obligations (Note 5) 2,171,879 2,124,674
Non-controlling interest 39,881 39,555
Preference shares 319,492 319,492
---------------------------------------------------------------------
3,138,347 3,102,778
---------------------------------------------------------------------
Shareholders' equity
Common shares (Note 6) 816,914 813,304
Contributed surplus 3,540 3,179
Equity portion of convertible
debentures 1,506 1,500
Foreign currency translation
adjustment (16,203) (16,312)
Retained earnings 431,815 411,742
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1,237,572 1,213,413
---------------------------------------------------------------------
$4,375,919 $4,316,191
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Contingent liabilities and commitments (Note 12)
Subsequent event (Note 13)
See accompanying notes to interim consolidated financial statements.
Fortis Inc.
Consolidated Statements of Earnings (Unaudited)
For the three months ended March 31
(in thousands, except per share amounts)
Quarter Ended
2006 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues $389,208 $379,278
Equity income 1,619 2,511
---------------------------------------------------------------------
390,827 381,789
---------------------------------------------------------------------
Expenses
Operating 253,268 253,313
Amortization 44,167 40,176
---------------------------------------------------------------------
297,435 293,489
---------------------------------------------------------------------
Operating income 93,392 88,300
---------------------------------------------------------------------
Finance charges (Note 9) 37,470 35,898
Preference share dividends 4,152 4,152
Gain on settlement of
contractual matters (Note 10) - (10,000)
---------------------------------------------------------------------
41,622 30,050
---------------------------------------------------------------------
Earnings before income taxes 51,770 58,250
Corporate income taxes 13,948 18,202
---------------------------------------------------------------------
Net earnings before
non-controlling interest 37,822 40,048
Non-controlling interest 1,217 852
---------------------------------------------------------------------
Net earnings applicable to
common shares $36,605 $39,196
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted average common shares
outstanding (Note 6) 103,287 98,005
---------------------------------------------------------------------
Earnings per common share
(Note 6)
Basic $0.35 $0.40
Diluted $0.34 $0.36
---------------------------------------------------------------------
---------------------------------------------------------------------
Consolidated Statements of Retained Earnings (Unaudited)
For the three months ended March 31
(in thousands)
2006 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Balance at beginning of period $411,742 $337,013
Net earnings applicable to
common shares 36,605 39,196
---------------------------------------------------------------------
448,347 376,209
Dividends on common shares (16,532) (14,643)
---------------------------------------------------------------------
Balance at end of period $431,815 $361,566
---------------------------------------------------------------------
---------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements.
Fortis Inc.
Consolidated Statements of Cash Flows (Unaudited)
For the three months ended March 31
(in thousands)
Quarter Ended
2006 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating Activities
Net earnings applicable to
common shares $36,605 $39,196
Items not affecting cash
Amortization - capital assets,
net of contributions in aid of
construction 41,668 37,662
Amortization - intangibles 1,052 921
Amortization - other 1,447 1,593
Future income taxes (3,499) (1,189)
Accrued employee future
benefits 202 (501)
Equity loss (income), net of
dividends 170 (56)
Stock-based compensation 386 387
Unrealized foreign exchange
loss on long-term debt (Note 9) 321 397
Non-controlling interest 1,217 852
Other 79 (113)
---------------------------------------------------------------------
79,648 79,149
Change in non-cash operating
working capital (30,250) 189
---------------------------------------------------------------------
49,398 79,338
---------------------------------------------------------------------
Investing Activities
Change in deferred charges and
credits (532) (1,559)
Purchase of utility capital
assets (104,306) (91,371)
Purchase of income producing
properties (6,638) (67,392)
Contributions in aid of
construction 9,611 10,877
Proceeds on sale of utility
capital assets 493 218
Increase in investments (387) -
---------------------------------------------------------------------
(101,759) (149,227)
---------------------------------------------------------------------
Financing Activities
Change in short-term
borrowings 8,954 (37,658)
Proceeds from long-term debt 51,772 30,396
Repayment of long-term debt
and capital lease obligations (7,182) (8,904)
Advances from non-controlling
interest 247 303
Issue of preference shares - -
Issue of common shares 3,585 127,688
Dividends
Common shares (16,532) (14,643)
Subsidiary dividends paid to
non-controlling interest (410) (411)
---------------------------------------------------------------------
40,434 96,771
---------------------------------------------------------------------
Effect of exchange rate
changes on cash 34 119
---------------------------------------------------------------------
Change in cash and cash
equivalents (11,893) 27,001
Cash and cash equivalents,
beginning of period 33,416 37,203
---------------------------------------------------------------------
Cash and cash equivalents, end
of period $21,523 $64,204
---------------------------------------------------------------------
---------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements.
1. DESCRIPTION OF THE BUSINESS
Fortis Inc. ("Fortis" or the "Corporation") 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 hotels, 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 responsibility 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 utility:
a. FortisAlberta: FortisAlberta owns and operates the electricity distribution system in a substantial portion of southern and central Alberta.
b. FortisBC: Includes FortisBC Inc., an integrated electric utility operating in the southern interior of British Columbia. FortisBC Inc. owns 4 hydroelectric generation plants with a combined total capacity of 235 MW. 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 149-MW Brilliant Hydroelectric Plant owned by Columbia Power Corporation and the Columbia Basin Trust ("CPC/CBT"), the 185-MW Arrow Lakes Hydroelectric Plant owned by CPC/CBT and the distribution system owned by the City of Kelowna. Commencing May 31, 2005, the FortisBC component of Regulated Utilities - Canadian segment also 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 customers, mainly in Princeton, British Columbia. PLP presently purchases its wholesale power from FortisBC Inc. under a Power Purchase Agreement ("PPA").
c. Newfoundland Power: Newfoundland Power is the principal distributor of electricity in Newfoundland. Newfoundland Power also has an installed generating capacity of 146 MW of which 95 MW is hydroelectric generation.
d. Maritime Electric: Maritime Electric is the principal distributor of electricity on Prince Edward Island. Maritime Electric also maintains on-Island generating facilities at Charlottetown and Borden-Carleton with a combined total capacity of 150 MW.
e. 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. 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 Holdings Inc. and Rideau St. Lawrence Holdings Inc., 2 regional electrical distribution companies formed in 2000.
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 37.0 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: Includes 75 MW of water right entitlement associated with the Niagara Exchange Agreement, 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 the former 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 the electricity output is sold to Belize Electricity under a 50-year PPA. 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 an indirect 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 30-year PPA.
d. Upper New York State: Includes the operations of 4 hydroelectric generating stations in Upper New York State with a combined capacity of 23 MW operating under licences from the US Federal Energy Regulatory Commission. Hydroelectric generation operations in Upper New York State are conducted through the Corporation's indirect wholly owned subsidiary, FortisUS Energy Corporation.
e. British Columbia: Includes the 16-MW run-of-river Walden hydroelectric power plant near Lillooet, British Columbia. This plant sells its entire output to BC Hydro under a long-term contract. Hydroelectric generating operations in British Columbia are conducted through the Walden Power Partnership, a wholly owned partnership of FortisBC Inc.
Non-Regulated - Fortis Properties
Fortis Properties owns and operates hotels in 6 provinces in Canada and commercial real estate in Atlantic Canada. Its holdings include 15 hotels with more than 2,900 rooms and approximately 2.7 million square feet of commercial real estate.
Corporate
Corporate includes finance charges related to debt incurred directly by Fortis, foreign exchange gains or losses, preference share dividends, other corporate expenses, net of recoveries from subsidiaries, interest and miscellaneous revenues and corporate income taxes.
2. BASIS OF PRESENTATION
These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") for interim financial statements and do not include all of the disclosures normally found in the Corporation's annual consolidated financial statements. These interim consolidated financial statements should be read in conjunction with the Corporation's 2005 annual audited consolidated financial statements. 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. Given the diversified group of companies, seasonality may vary. Most of the Corporation's utility investments produce their highest earnings in the first quarter. The Corporation's non-utility investment, Fortis Properties, generally produces its highest earnings in the second and third quarters.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim consolidated financial statements have been prepared in accordance with Canadian GAAP, including selected accounting treatments that differ from those used by entities not subject to rate regulation. The timing of the recognition of certain assets, liabilities, revenues and expenses, as a result of regulation, may differ from that otherwise expected using Canadian GAAP for entities not subject to rate regulation. These differences and nature of regulation are disclosed in Notes 2 and 4 to the Corporation's 2005 annual audited consolidated financial statements. These interim consolidated financial statements have been prepared following the same accounting policies and methods as those used in preparing the Corporation's 2005 annual audited consolidated financial statements except as described below. All amounts are presented in Canadian dollars unless otherwise stated.
Revenue Recognition
Effective January 1, 2006, Newfoundland Power prospectively changed its revenue recognition policy from a billed basis to an accrual basis, as approved by the Newfoundland and Labrador Board of Commissioners of Public Utilities ("PUB"). The change in revenue recognition policy, while having no material impact on Newfoundland Power's annual earnings, will result in a shift in the Company's 2006 quarterly earnings compared to 2005. Earnings in the first and second quarters will be reduced compared to the same quarters in 2005 while earnings in the third and fourth quarters will increase, in total, by a similar amount. The change in the revenue recognition policy resulted in a $4.3 million and $2.0 million decrease in revenue and earnings, respectively, during the first quarter of 2006 compared to the same quarter last year. The PUB also approved a one-time revenue accrual of $3.1 million in 2006. This amount represents that portion of unbilled revenue at December 31, 2005 of $23.6 million, required to offset the income tax effects of changing to the accrual basis of revenue recognition. The disposition of the remaining 2005 unbilled revenue balance has been deferred until the Company's next general rate application, which is anticipated in 2006 for the purpose of setting rates for 2007.
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 reporting periods.
Estimates are based on historical experience, current conditions and various other assumptions believed to be reasonable under the circumstances. Additionally, certain estimates are necessary since the regulatory environments in which the Corporation's utilities operate often require amounts to be recorded at estimated values until these amounts are finalized pursuant to regulatory decisions or other regulatory proceedings. Due to changes in facts and circumstances and the inherent uncertainty involved in making estimates, actual results may differ significantly from current estimates. Estimates are reviewed periodically and, as adjustments become necessary, are reported in earnings in the period they become known. Interim financial statements may also employ a greater use of estimates than the annual financial statements.
There were no material changes to the Corporation's critical accounting estimates during the three months ended March 31, 2006 from those disclosed in the Corporation's Management Discussion and Analysis for the year ended December 31, 2005 except as discussed below and as described in Note 12 to these interim consolidated financial statements.
Interim Rates
FortisAlberta and FortisBC are currently charging interim rates that are subject to change based upon regulator approval of the final rates to be charged to customers in 2006. The difference between the interim rates currently charged and the final approved rates could result in material adjustments to the financial results of FortisAlberta and FortisBC. Any adjustments resulting from the regulators' decisions on the 2006 final rates will be recorded during the periods the decisions are received. In April 2006, FortisBC entered negotiations to settle its 2006 Revenue Requirements Application ("2006 Application"). If negotiations are not successful, a public hearing is scheduled for June 2006. The British Columbia Utilities Commission ("BCUC") decision on the 2006 Application would be determined subsequent to the negotiations or public hearing. A hearing on FortisAlberta's 2006/2007 Distribution Access Tariff Application is expected to take place in the spring of 2006 with an Alberta Energy and Utilities Board decision expected in the fall of 2006.
Amortization and Capitalized Overhead
FortisBC has completed a depreciation study on the estimated useful lives of its property, plant and equipment. The study recommended an increase in the Company's composite depreciation rate from 2.6 per cent to 3.6 per cent. Additionally, FortisBC has completed an analysis of its capitalized overhead allocation method. This analysis supported a change in the estimate of capitalized overhead. The revised estimate calculates capitalized overhead as a percentage of all corporate overhead costs whereas previously the percentage was applied to a limited pool of corporate costs.
FortisBC's 2006 Application, which is subject to BCUC approval, and the Corporation's financial statements for the first quarter of 2006 are based on the revised depreciation rate and revised capitalized overhead estimate. The change in estimates for amortization expense and capitalized overhead have been applied prospectively in the financial statements. Any change in the estimate of amortization expense and method of estimating capitalized overhead as a result of the BCUC decision on the 2006 Application will be recorded in the period the BCUC decision is received.
5. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
The Corporation and its subsidiaries had consolidated authorized lines of credit of $795.5 million of which $542.7 million was unused at March 31, 2006. The following summary outlines the Corporation's credit facilities by reporting segments.
Total Total
as at as at
Credit March December
Facilities Regulated Fortis Fortis 31, 31,
($millions) Corporate Utilities Generation Properties 2006 2005
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Total credit
facilities 210.0 567.2 5.8 12.5 795.5 747.1
Credit
facilities
utilized
Short-term (2.6) (65.0) (1.2) - (68.8) (59.9)
borrowings
Long-term debt (24.5) (97.3) - - (121.8) (74.8)
Letters of credit
outstanding (4.7) (55.3) - (2.2) (62.2) (73.6)
-----------------------------------------------------------------------
Credit facilities
available 178.2 349.6 4.6 10.3 542.7 538.8
-----------------------------------------------------------------------
-----------------------------------------------------------------------
At March 31, 2006 and December 31, 2005, certain borrowings under the Corporation's and subsidiaries' 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 2006, Newfoundland Power renegotiated its syndicated $100 million committed revolving term credit facility extending the term from 1 to 3 years, with maturity now in January 2009.
In January 2006, Maritime Electric's $25 million non-revolving unsecured short-term bridge financing, in support of the construction of the 50-MW combustion turbine generating facility, was extended until July 2007.
In March 2006, FortisAlberta amended its syndicated term credit facility increasing the amount available to $200 million from $150 million and extending the maturity date from May 2008 to May 2010. In addition, the Company has the ability to request an increase in the limit of this credit facility by $50 million under the same terms of the existing credit facility.
6. COMMON SHARES
Authorized: an unlimited number of Common Shares without nominal or par value.
March 31, 2006 December 31, 2005
--------------------------------------------------------------------
a) Issued and Number of Amount Number of Amount
Outstanding Shares (in thousands) Shares (in thousands)
--------------------------------------------------------------------
Common Shares 103,384,041 $816,914 103,203,981 $813,304
--------------------------------------------------------------------
Common Shares issued during the period were as follows:
Quarter Ended
March 31, 2006
--------------------------------------------------------------------
Number of Amount
Shares (in thousands)
--------------------------------------------------------------------
Opening balance 103,203,981 $813,304
Consumer Share
Purchase Plan 21,388 493
Dividend Reinvestment
Plan 44,988 1,037
Employee Share
Purchase Plan 68,486 1,578
Directors' and
Executive Stock
Option Plans 45,198 502
--------------------------------------------------------------------
103,384,041 $816,914
--------------------------------------------------------------------
At March 31, 2006, 6,160,879 Common Shares remained reserved for issue under the terms of the above noted share purchase, dividend reinvestment and stock option plans.
b) Earnings per Common Share
The Corporation calculates earnings per common share on the weighted average number of common shares outstanding. The weighted average number of common shares outstanding were 103,287,270 and 98,004,660 for the quarters ended March 31, 2006 and March 31, 2005, respectively. Diluted earnings per common share are calculated using the treasury stock method for options and the "if-converted" method for convertible securities.
Earnings per common share are as follows:
Quarter Ended March 31
-----------------------------------------------------------------------
2006 2005
-----------------------------------------------------------------------
Weighted Weighted
Average Earnings Average Earnings
Earnings Shares per Earnings Shares(1) per
(in (in Common (in (in Common
thousands) thousands) Share thousands) thousands) Share(1)
-----------------------------------------------------------------------
Earnings $36,605 $39,196
Weighted
average
shares
outstan-
ding 103,287 98,005
-----------------------------------------------------------------------
Basic
Earnings per
Common Share $0.35 $0.40
-----------------------------------------------------------------------
Effect of
dilutive
securities:
Stock options - 1,283 - 824
Preference
Shares 4,152 14,096 4,152 19,690
Convertible
debentures 262 1,925 279 1,924
-----------------------------------------------------------------------
Diluted
Earnings
per
Common
Share $41,019 120,591 $0.34 $43,627 120,443 $0.36
-----------------------------------------------------------------------
(1) The share information has been restated to reflect the 4-for-1
stock split completed in October 2005.
7. 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 March 31, 2006, 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 the former Directors' Stock Option Plans. The Executive Stock Option Plan will cease to exist when all outstanding options are exercised or expire in or before 2011.
Quarter Ended
March 31, 2006
--------------------------------------------------------------------
--------------------------------------------------------------------
Number of Options Weighted Average Price
--------------------------------------------------------------------
--------------------------------------------------------------------
Options outstanding
at beginning of period 3,421,876 $14.18
Granted 626,761 $22.94
Cancelled - $ -
Exercised (45,198) $10.16
--------------------------------------------------------------------
Options outstanding at
end of period 4,003,439 $15.60
--------------------------------------------------------------------
--------------------------------------------------------------------
Details of stock options outstanding are as follows:
Number of Exercise Expiry
Options Price Date
----------------------------------------------------------------
417,992 $9.57 2011
629,964 $12.03 2012
703,468 $12.81 2013
709,136 $15.28 2014
12,000 $15.23 2014
72,423 $14.55 2014
769,955 $18.40 2015
28,000 $18.11 2015
33,740 $20.82 2015
626,761 $22.94 2016
----------------------------------------------------------------
4,003,439
----------------------------------------------------------------
----------------------------------------------------------------
Options vested at end of period 1,606,263
----------------------------------------------------------------
----------------------------------------------------------------
Stock-based Compensation
On February 28, 2006, the Corporation granted 626,761 options on common shares under its 2002 Stock Option Plan at the 5-day average trading price immediately preceding the date of grant of $22.94. 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 $3.90 per option.
The fair value was estimated on the date of grant using the Black-Scholes fair value option-pricing model and the following assumptions:
February 28, 2006
--------------------------------------------------------------------
Dividend yield (%) 3.02
Expected volatility (%) 16.7
Risk-free interest rate (%) 4.12
Weighted-average expected life (years) 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 was recorded as compensation expense for the quarter ended March 31, 2006 ($0.4 million for the quarter ended March 31, 2005).
8. 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 $5.4 million for the quarter ended March 31, 2006 ($3.4 million for the quarter ended March 31, 2005). The cost of providing the defined contribution arrangements for the quarter ended March 31, 2006 was $0.9 million ($0.8 million for the quarter ended March 31, 2005).
9. FINANCE CHARGES
Quarter Ended
March 31
(in thousands) 2006 2005
-----------------------------------------------------------------
-----------------------------------------------------------------
Amortization of debt and
stock issue expenses $147 $252
Interest - Long-term debt and 37,458 35,193
capital lease obligations
- Short-term borrowings 1,753 1,990
Interest charged to construction (1,117) (1,190)
Interest earned (1,092) (744)
Unrealized foreign exchange loss on
long-term debt 321 397
-----------------------------------------------------------------
$37,470 $35,898
-----------------------------------------------------------------
-----------------------------------------------------------------
10. 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.
11. SEGMENTED INFORMATION
a) Information by reportable segment is as follows:
Quarter ended
(In thousands of dollars)
Regulated Utilities
---------------------------------------------------------------------
March 31, Nfld Maritime Fortis Fortis Fortis Total Total
2006 Power Electric Ont. Alta. BC Canadian Caribbean
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating
revenues 61,803 62,730 131,792 29,880 33,240 319,445 20,085
Equity
income - - - - - - 1,619
Energy
supply
costs - 19,231 82,662 18,277 25,756 145,926 11,732
Operating
expenses 28,701 15,368 14,560 3,148 3,263 65,040 2,706
Amortiza-
tion 15,715 7,126 9,784 2,547 1,334 36,506 1,421
---------------------------------------------------------------------
Operating
income 17,387 21,005 24,786 5,908 2,887 71,973 5,845
Finance
charges 6,749 5,599 8,136 2,399 1,236 24,119 1,654
Preference
share
dividends - - - - - - -
Corporate
income
taxes 1,148 3,554 5,844 1,444 662 12,652 346
Non-control-
ling inte-
rest - - 148 - - 148 691
--------------------------------------------------------------------
Net Earn-
ings
(loss) 9,490 11,852 10,658 2,065 989 35,054 3,154
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill 228,615 220,719 - 19,858 42,947 512,139 -
Identifi-
able
assets 789,188 737,796 861,998 270,891 119,092 2,778,965 214,575
Equity
investment
assets - - - - - - 165,031
---------------------------------------------------------------------
Total
assets 1,017,803 958,515 861,998 290,749 162,039 3,291,104 379,606
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expendi-
tures 54,590 25,607 12,023 5,704 1,883 99,807 3,426
Non-Regulated
---------------------------------------------------------------------
Inter-
Fortis Fortis segment Consoli
Generation Properties Corporate elimination -dated
---------------------------------------------------------------------
Operating
revenues 19,283 35,137 2,022 (6,764) 389,208
Equity
income - - - - 1,619
Energy
supply
costs 1,909 - - (3,494) 156,073
Operating
expenses 4,029 24,553 2,371 (1,504) 97,195
Amortiza-
tion 2,651 2,842 747 - 44,167
---------------------------------------------------------------------
Operating
income 10,694 7,742 (1,096) (1,766) 93,392
Finance
charges 2,637 5,150 5,676 (1,766) 37,470
Preference
share
dividends - - 4,152 - 4,152
Corporate
income
taxes 2,219 1,114 (2,383) - 13,948
Non-control-
ling inte-
rest 420 - (42) - 1,217
---------------------------------------------------------------------
Net Earn-
ings
(loss) 5,418 1,478 (8,499) - 36,605
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - - - - 512,139
Identifi-
able
assets 259,987 434,743 40,111 (29,632) 3,698,749
Equity
investment
assets - - - - 165,031
---------------------------------------------------------------------
Total
assets 259,987 434,743 40,111 (29,632) 4,375,919
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expendi-
tures 746 6,638 327 - 110,944
Regulated Utilities
---------------------------------------------------------------------
March 31, Nfld Maritime Fortis Fortis Fortis Total Total
2005 Power Electric Ont. Alta. BC Canadian Caribbean
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating
revenues 58,595 55,374 135,436 29,286 38,160 316,851 15,387
Equity
income - - - - - - 2,511
Energy
supply
costs - 18,555 83,098 18,143 30,624 150,420 8,134
Operating
expenses 26,921 16,043 14,201 2,998 3,143 63,306 2,784
Amorti-
zation 13,846 4,635 10,587 2,399 1,243 32,710 1,612
---------------------------------------------------------------------
Operating
income 17,828 16,141 27,550 5,746 3,150 70,415 5,368
Finance
charges 5,970 4,541 7,692 2,214 1,288 21,705 1,240
Preference
share
divi-
dends - - - - - - -
Gain on
settlement
of contract-
ual
matters - - - - - - -
Corporate
income
taxes 4,012 2,652 6,761 1,414 757 15,596 215
Non-
control-
ling
interest - - 145 - - 145 440
--------------------------------------------------------------------
Net Earn-
ings
(loss) 7,846 8,948 12,952 2,118 1,105 32,969 3,473
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill 229,097 219,509 - 19,858 45,577 514,041 -
Identifi-
able
assets 623,279 632,163 841,461 244,649 121,308 2,462,860 202,090
Equity
invest-
ment
assets - - - - - - 161,325
---------------------------------------------------------------------
Total
assets 852,376 851,672 841,461 264,507 166,885 2,976,901 363,415
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expendi-
tures 33,825 22,927 14,540 8,958 944 81,194 2,463
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-Regulated
---------------------------------------------------------------------
Inter-
Fortis Fortis segment Consoli
Generation Properties Corporate elimination -dated
---------------------------------------------------------------------
Operating
revenues 16,970 33,038 2,572 (5,540) 379,278
Equity
income - - - - 2,511
Energy
supply
costs 1,860 - - (1,882) 158,532
Operating
expenses 4,846 22,831 2,213 (1,199) 94,781
Amorti-
zation 2,555 2,600 699 - 40,176
---------------------------------------------------------------------
Operating
income 7,709 7,607 (340) (2,459) 88,300
Finance
charges 3,875 4,924 6,613 (2,459) 35,898
Preference
share
divi-
dends - - 4,152 - 4,152
Gain on
settlement
of contract-
ual
matters (10,000) - - - (10,000)
Corporate
income
taxes 3,535 1,182 (2,326) - 18,202
Non-
control-
ling
interest 308 - (41) - 852
--------------------------------------------------------------------
Net Earn-
ings
(loss) 9,991 1,501 (8,738) - 39,196
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - - - - 514,041
Identifi-
able
assets 279,046 422,867 68,790 (21,922) 3,413,731
Equity
invest-
ment
assets - - - - 161,325
---------------------------------------------------------------------
Total
assets 279,046 422,867 68,790 (21,922) 4,089,097
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expendi-
tures 6,573 67,392 1,141 - 158,763
---------------------------------------------------------------------
---------------------------------------------------------------------
b) Inter-Company Transactions
Inter-company transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. The significant inter-company transactions primarily related to the sale of energy from BECOL to Belize Electricity, electricity sales from Newfoundland Power to Fortis Properties and finance charges on inter-company borrowings. The significant inter-company transactions for the quarters ended March 31, 2006 and 2005 are detailed below.
Quarter Ended
Inter-company transactions March 31
(in thousands) 2006 2005
------------------------------------------------------------------
------------------------------------------------------------------
Sales from BECOL to Belize Electricity $ 3,148 $ 895
Sales from Newfoundland Power to
Fortis Properties 1,091 1,009
Inter-company finance charges on
borrowings from:
Corporate to Fortis Properties 933 1,070
Corporate to BECOL - 650
BECOL to Belize Electricity 405 466
------------------------------------------------------------------
------------------------------------------------------------------
12. CONTINGENT LIABILITIES AND COMMITMENTS
Contingent liabilities and commitments are consistent with disclosures in the Fortis annual audited consolidated financial statements for the year ended December 31, 2005 except as described below.
(a) Maritime Electric
In April 2006, the Canada Revenue Agency ("CRA") reassessed Maritime Electric's 1997-2004 taxation years. The reassessment encompasses the Company's tax treatment, specifically the Company's timing of deductions, with respect to: (i) the ECAM in the 2001-2004 taxation years, (ii) customer rebate adjustments in the 2001-2003 taxation years, and (iii) the Company's payment of approximately $6 million on January 2, 2001 associated with a settlement with New Brunswick Power Corporation regarding its $450 million write down of the Point Lepreau Nuclear Generating Station in 1998.
The Company believes it has reported its tax position appropriately in all aspects of the reassessment and intends to file a Notice of Objection with the Chief of Appeals at CRA. Should the Company be unsuccessful in defending all aspects of the reassessment, the Company would be required to pay approximately $11.6 million in taxes and accrued interest. The Company has provided for, through future and current income taxes payable, approximately $10 million and, therefore, an additional liability of $1.6 million would arise. In this event, the Company would apply to the Island Regulatory and Appeals Commission to include this amount in the regulatory rate-making process. The provisions of the Income Tax Act require the Company to deposit one half of the assessment under objection with CRA and the Company intends to deposit approximately $5.8 million with CRA by the end of June 2006.
(b) FortisAlberta
On March 24, 2006, Her Majesty the Queen in Right of Alberta filed a statement of claim in the Court of Queen's Bench of Alberta in the Judicial District of Edmonton against FortisAlberta. The Crown's claim is that the Company is responsible for a fire that occurred in October of 2003 in an area of the Province of Alberta commonly referred to as "Poll Haven Community Pasture". The Crown is seeking approximately $2.7 million in fire fighting and suppression costs and approximately $2.4 million in timber losses, as well as interest and other costs. Given the preliminary stage of the proceedings, FortisAlberta has not made any definitive assessment of potential liability with respect to the litigation. However, management does not believe that the Company contributed to, or is responsible for, the fire and, therefore, management is of the view that the allegations are without merit.
13. SUBSEQUENT EVENT
On April 21, 2006, FortisAlberta closed a $100 million unsecured debenture offering. The net proceeds of the offering will primarily be used to refinance drawings on FortisAlberta's term syndicated credit facility and to fund operating and capital expenditures. The debentures will bear interest at an interest rate of 5.40 per cent per annum, payable semi-annually on April 21 and October 21, and mature on April 21, 2036.
14. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to comply with current period classifications.
CORPORATE INFORMATION
Fortis Inc. is primarily a diversified, international electric utility holding company with assets exceeding $4.3 billion and annual revenues of more than $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, First Preference Shares Series C and First Preference Shares Series E of Fortis Inc. are traded on the Toronto Stock Exchange under the symbols FTS, FTS.PR.C, and FTS.PR.E, respectively. Fortis Inc. information can be accessed at www.fortisinc.com.
Share Transfer Agent and Registrar: Computershare Trust Company of Canada 9th Floor, 100 University Avenue Toronto, ON M5J 2Y1 T: 514.982.7555 or 1.866.586.7638 F: 416.263.9394 or 1.888.453.0330 W: www.computershare.com E: service@computershare.com
For the quarter ended March 31, 2006, Fortis Inc. will be filing the Certification of Interim Filings (Form 52-109F2) on SEDAR. Additional information including the Fortis 2005 Annual Information Form, Management Information Circular and Annual Report are available on SEDAR at www.sedar.com and on Corporation's web site at www.fortisinc.com.
FOR FURTHER INFORMATION PLEASE CONTACT:
Fortis Inc.
Mr. Barry V. Perry
Vice President Finance and Chief Financial Officer
(709) 737-2800
www.fortisinc.com.
