ST. JOHN'S, NEWFOUNDLAND AND LABRADOR--(CCNMatthews - Feb. 8, 2007) - Fortis Inc. (TSX:FTS) "For the seventh consecutive year, Fortis has delivered record earnings to shareholders. Significant capital investments in electrical infrastructure, growth from acquisitions and lower corporate taxes were the major drivers of performance," says Stan Marshall, President and Chief Executive Officer, Fortis Inc.
Fortis Inc., ("Fortis" or the "Corporation") (TSX:FTS), realized net earnings applicable to common shares of $147.2 million, 7.4 per cent higher than earnings of $137.1 million last year. Earnings per common share were $1.42 compared to $1.35 last year. Earnings in 2005 included a $7.9 million after-tax gain resulting from the settlement of contractual matters between FortisOntario and Ontario Power Generation Inc. (the "Ontario Settlement"). Growth in annual earnings was primarily driven by the performance of FortisAlberta and FortisBC, hydroelectric generation in Belize, Fortis Properties, Belize Electricity and contributions from recently acquired utilities in the Turks and Caicos Islands ("Fortis Turks and Caicos").
Earnings for the fourth quarter were $33.9 million, or $0.33 per common share, compared to $22.3 million, or $0.22 cents per common share, for the fourth quarter last year. The increase in earnings was driven by Newfoundland Power, due to a change in the Company's revenue recognition policy to the accrual method, effective January 1, 2006, earnings growth at FortisAlberta and the contribution from Fortis Turks and Caicos.
"Our history of profitable growth has enabled Fortis to increase annual dividend payments for 33 consecutive years, the longest record of any public corporation in Canada," says Marshall. Dividends paid to common shareholders grew to 67 cents in 2006, up from 59 cents per common share last year. Commencing with the fourth quarter dividend paid on December 1, 2006, Fortis increased its quarterly dividend 18.75 per cent to 19 cents from 16 cents.
Canadian Regulated Utilities contributed $112.7 million to earnings, $7.9 million higher than earnings of $104.8 million last year. The increase was primarily driven by earnings derived from the significant investments in electrical infrastructure made by FortisAlberta and FortisBC and lower corporate income taxes at FortisAlberta.
"Our western utilities, especially FortisAlberta, continue to maintain, enhance and expand their electricity systems at an unprecedented pace to accommodate new customers and to improve system reliability," explains Marshall.
The western Canadian utilities invested approximately $354 million, before customer contributions, in capital projects, up 26 per cent from 2005. The rate bases of FortisAlberta and FortisBC have increased approximately 29 per cent and 36 per cent, respectively, since the utilities were acquired in May 2004. Over the next two years, each utility's rate base is expected to grow approximately 30 per cent.
The allowed rate of return on common equity ("ROE") for each of the Corporation's three largest utilities, FortisAlberta, FortisBC and Newfoundland Power, is formula based and tied to long-term Canada bond yields. Due to declining bond yields, the allowed ROEs for 2007 for these utilities have been lowered. "Strong rate base growth at our western utilities is expected to more than offset the impact of the lower allowed ROEs while earnings at Newfoundland Power are expected to be slightly lower," says Marshall.
"Fortis achieved a new milestone this year when we expanded our utility business to a third Caribbean country, the Turks and Caicos Islands," says Marshall. In August, Fortis acquired two electric utilities in the Turks and Caicos Islands for an aggregate purchase price of approximately US$90 million, including assumed debt. Fortis Turks and Caicos serves approximately 7,700 customers, or 80 per cent of electricity customers, in the Turks and Caicos Islands.
"The Turks and Caicos Islands is experiencing rapid growth in electricity demand, driven by a strong developing economy. With well-established electric utilities in Belize and Grand Cayman, Fortis has considerable experience meeting the electricity needs of growing communities in the Caribbean region. Our customers in the Turks and Caicos Islands will benefit from the expertise of Fortis in delivering reliable electricity service.
"In November, Fortis increased its investment in Caribbean Utilities Company, Ltd. to approximately 54 per cent to become controlling shareholder. This investment was immediately accretive to earnings and reflects our confidence in the future of Grand Cayman and the ability of Caribbean Utilities to meet the existing and future electricity needs of its customers. Fortis is the leading operator of electric distribution utilities in Canada. Our increased investment in Caribbean Utilities, combined with our investments in Belize Electricity and Fortis Turks and Caicos, positions Fortis as a leading utility operator in the Caribbean region," explains Marshall.
Caribbean Regulated Utilities delivered earnings of $23.6 million this year, 21.6 per cent higher than earnings of $19.4 million last year. Earnings growth was primarily attributable to $3.5 million of contribution from Fortis Turks and Caicos and improved earnings at Belize Electricity due to lower finance charges, growth in electricity sales and an overall 11 per cent increase in electricity rates, effective July 1, 2005.
Non-regulated Fortis Generation contributed earnings of $26.7 million compared to $29.6 million last year. Excluding the $7.9 million after-tax Ontario Settlement gain in 2005, earnings were $5.0 million higher year over year. Improved performance in Belize, driven by increased hydroelectric production and lower finance charges, was partially offset by the impact of lower average wholesale energy prices in Ontario. Hydroelectric production in Belize was 178 gigawatt hours ("GWh"), more than two-and-a-half times the level of production in 2005 due to the first full year of operations for the Chalillo storage facility. Energy sales in Ontario, which on an annual basis remains relatively consistent at approximately 700 GWh, were sold at an average annual wholesale energy price per megawatt hour of $46.38 compared to $68.49 last year.
Fortis Properties delivered earnings of $18.7 million, 32.6 percent higher than earnings of $14.1 million last year. The increase in earnings was largely driven by a $1.6 million after-tax gain on the sale of the Days Inn Sydney hotel, reduced corporate income taxes and growth at hotel operations in western Canada.
In November, Fortis Properties purchased four internationally branded hotels in Alberta and British Columbia for approximately $52 million, including assumed debt. The addition of these hotels increased the Company's portfolio to 18 hotels, operating more than 3,200 rooms, in seven provinces across Canada.
Corporate expenses were $34.5 million in 2006 compared to $30.8 million last year. The increase was largely due to higher finance charges primarily associated with interim borrowings on credit facilities, and dividends on preference shares issued to fund recent acquisitions.
"Investors continue to demonstrate confidence in our strategy of profitable growth. The Corporation raised approximately $300 million in the capital markets since the beginning of 2006," explains Marshall. In September, Fortis issued 5,000,000 4.90% First Preference Shares, Series F for gross proceeds of $125.0 million. In January 2007, the Corporation issued 5,170,000 Common Shares for gross proceeds of $149.9 million. Net proceeds from these equity issues were used to repay indebtedness incurred for recent acquisitions, to support the capital expenditure programs of the regulated utilities in western Canada and for general corporate purposes.
"Going forward, organic earnings growth will be driven by significant electricity infrastructure investment at our regulated utilities in western Canada and at our regulated and non-regulated utilities in the Caribbean. Investment in all our utilities is expected to exceed $600 million in 2007 and surpass $2.6 billion over the next five years. We remain focused on doing what we do best - operating efficient utilities while meeting the growing needs of our customers. Fortis will continue to seek regulated utility acquisitions in Canada, the Caribbean and the United States that provide opportunities to continue to grow our business profitably. We will also pursue growth in our non-regulated businesses in support of our regulated utility growth strategy," concludes Marshall.
Fortis Inc.
Interim Management Discussion and Analysis
For the three and twelve months ended December 31, 2006
Dated February 8, 2007
The following analysis should be read in conjunction with the Fortis Inc. ("Fortis" or the "Corporation") interim unaudited consolidated financial statements for the three and twelve months ended December 31, 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. Financial information in this release has been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") and is presented in Canadian dollars unless otherwise specified.
Fortis includes forward-looking statements in this material which reflect management's expectations regarding the Corporation's future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as "anticipate", "believe", "expects", "intend" and similar expressions have been used to identify the forward-looking statements. These statements reflect management's current beliefs and are based on information currently available to the Corporation's management. Certain material factors or assumptions have been applied in drawing the conclusions, forecasts or projections contained in the forward-looking statements. These factors or assumptions are subject to inherent risks and uncertainties surrounding future expectations. Such risk factors or assumptions include, but are not limited to, regulation, energy prices, general economic conditions, weather, derivative instruments and hedging, capital resources, loss of service area, licences and permits, environment, insurance, labour relations, human resources and liquidity risk. Fortis cautions readers that should certain events or uncertainties materialize, or should underlying assumptions prove incorrect, actual results could differ materially from a conclusion, forecast or projection in the forward-looking statements. For additional information with respect to these risk factors or assumptions, reference should be made to the Corporation's continuous disclosure materials filed from time to time with Canadian securities regulatory authorities including those factors described under the heading "Business Risk Management" in the Management Discussion and Analysis for the year ended December 31, 2005 and in the Management Discussion and Analysis for the three and twelve months ended December 31, 2006. The Corporation disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Fortis is principally a diversified, international electric utility holding company with investments primarily in regulated electric utilities in Canada and the Caribbean region. The Corporation serves more than 1,000,000 electricity customers and meets a peak demand of approximately 5,100 megawatts ("MW"). Fortis also owns and operates non-regulated generation assets, commercial real estate and hotels.
The key goals of the Corporation's regulated utilities are to operate sound electricity systems and delivering safe, reliable electricity to customers at reasonable rates. The Corporation's core business is highly regulated. It is segmented by franchise area and, depending on regulatory requirements, by the nature of the assets. The operating and reporting segments of the Corporation are: (i) Regulated Utilities - Canadian, (ii) Regulated Utilities - Caribbean, (iii) Non-Regulated - Fortis Generation, (iv) Non-Regulated - Fortis Properties, and (v) Corporate. The Corporation's Canadian regulated utilities operate in 5 provinces, making Fortis the leader in its business segment in Canada. The utility operations comprising the Corporation's Regulated Utilities - Canadian operating segment are FortisAlberta, FortisBC, Newfoundland Power, FortisOntario and Maritime Electric on Prince Edward Island ("PEI"). The Corporation's Regulated Utilities - Caribbean operating segment is comprised of Belize Electricity, in which Fortis holds a 70.1 per cent controlling interest; Caribbean Utilities, the sole provider of electricity on Grand Cayman, in which Fortis holds an approximate 54 per cent controlling interest; and Fortis Turks and Caicos, in which Fortis holds a 100 per cent interest. The earnings of the Corporation's regulated utilities are primarily determined under traditional cost of service and rate of return methodologies. Earnings of the Canadian regulated utilities are generally exposed to changes in interest rates associated with the rate-setting mechanisms.
The Corporation's non-regulated generation assets operate in 3 countries with a combined generating capacity of 195 MW, principally hydroelectric. The Corporation, through its non-regulated subsidiary Fortis Properties, owns and operates 18 hotels with more than 3,200 rooms in 7 Canadian provinces and 2.7 million square feet of commercial real estate in Atlantic Canada.
FINANCIAL HIGHLIGHTS
Fortis has adopted a strategy of profitable growth with earnings per common share as the primary measure of performance. Key financial highlights, including segmented earnings, for the fourth quarter and year ended December 31, 2006 and December 31, 2005 are provided in the table below. The table is followed by a detailed discussion of the financial results of the Corporation's segments.
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Financial Highlights (Unaudited)
Periods Ended December 31st
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Quarter Annual
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($ millions, except
earnings per common
share amounts and
common shares
outstanding) 2006 2005 Variance 2006 2005 Variance
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Revenue and equity
income 393.1 353.1 40.0 1,471.7 1,441.5 30.2
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Cash flow from
operations 59.5 76.1 (16.6) 263.1 303.6 (40.5)
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Net earnings
applicable to
common shares 33.9 22.3 11.6 147.2 137.1 10.1
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Basic earnings
per common
share ($) 0.33 0.22 0.11 1.42 1.35 0.07
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Diluted earnings
per common
share ($) 0.32 0.21 0.11 1.37 1.24 0.13
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Weighted
average # of
common shares
outstanding
(millions) 104.0 103.1 0.9 103.6 101.8 1.8
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Segmented Net Earnings
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Quarter Annual
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2006 2005 Variance 2006 2005 Variance
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FortisAlberta 8.3 4.2 4.1 41.4 36.1 5.3
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FortisBC (1) 6.4 5.7 0.7 27.4 24.6 2.8
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Newfoundland Power 8.8 2.9 5.9 30.1 30.7 (0.6)
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Maritime Electric 2.4 1.7 0.7 9.8 9.1 0.7
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FortisOntario (2) 1.0 0.2 0.8 4.0 4.3 (0.3)
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Regulated Utilities
- Canadian 26.9 14.7 12.2 112.7 104.8 7.9
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Belize Electricity 2.8 2.0 0.8 10.4 8.0 2.4
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Caribbean
Utilities (3) 2.8 2.8 - 9.7 11.4 (1.7)
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Fortis Turks and
Caicos (4) 2.8 - 2.8 3.5 - 3.5
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Regulated Utilities
- Caribbean 8.4 4.8 3.6 23.6 19.4 4.2
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Total Regulated
Utilities 35.3 19.5 15.8 136.3 124.2 12.1
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Non-Regulated
- Fortis
Generation (5) 6.8 8.5 (1.7) 26.7 29.6 (2.9)
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Non-Regulated
- Fortis Properties 2.8 2.9 (0.1) 18.7 14.1 4.6
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Corporate (11.0) (8.6) (2.4) (34.5) (30.8) (3.7)
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Net earnings
applicable to
common shares 33.9 22.3 11.6 147.2 137.1 10.1
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(1) Includes the regulated operations of FortisBC Inc. and non-
regulated operating, maintenance and management services related to
the Waneta, Brilliant and the Arrow Lakes hydroelectric plants and
the distribution system owned by the City of Kelowna. Also includes
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. Effective January 1, 2007, PLP was amalgamated
with FortisBC Inc. as part of an internal reorganization.
(2) FortisOntario includes Canadian Niagara Power Inc. ("Canadian
Niagara Power") and Cornwall Street Railway, Light and Power Company,
Limited ("Cornwall Electric").
(3) On November 7, 2006, Fortis acquired an additional 16 per cent
ownership interest in Caribbean Utilities and now owns approximately
54 per cent of the Company. Caribbean Utilities' balance sheet as at
November 7, 2006 has been consolidated in the December 31, 2006
balance sheet of Fortis. During 2006 and 2005, the statements of
earnings of Fortis reflected the Corporation's previous approximate
37 per cent ownership interest in Caribbean Utilities, previously
accounted for on a 2-month equity lag basis.
(4) On August 28, 2006, Fortis, through a wholly owned subsidiary,
acquired all of the issued and outstanding shares of P.P.C. Limited
and Atlantic Equipment & Power (Turks and Caicos) Ltd., (collectively
referred to as "Fortis Turks and Caicos"), 2 utilities serving
approximately 7,700 customers in the Turks and Caicos Islands.
Financial results for Fortis Turks and Caicos are from August 28,
2006.
(5) Includes the operations of non-regulated generating assets in
Belize, Ontario, central Newfoundland, British Columbia and upper New
York State.
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REGULATED UTILITIES - CANADIAN
FortisAlberta
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FortisAlberta
Financial Highlights (Unaudited)
Periods Ended December 31st
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Quarter Annual
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2006 2005 Variance 2006 2005 Variance
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Energy Deliveries
(GWh) 3,901 3,833 68 14,851 14,445 406
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($ millions)
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Revenue 65.8 58.7 7.1 250.8 259.8 (9.0)
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Operating Expenses 30.8 30.0 0.8 115.2 113.0 2.2
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Amortization 17.6 15.8 1.8 68.8 61.4 7.4
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Finance Charges 8.1 6.3 1.8 30.1 24.2 5.9
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Corporate Taxes 1.0 2.4 (1.4) (4.7) 25.1 (29.8)
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Earnings 8.3 4.2 4.1 41.4 36.1 5.3
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Regulation: On June 29, 2006, FortisAlberta received approval from the Alberta Energy and Utilities Board ("AEUB") of the 2006/2007 Negotiated Settlement Agreement associated with the Company's 2006/2007 Distribution Access Tariff Application. The 2006/2007 Negotiated Settlement Agreement, effective January 1, 2006 and based on an allowed rate of return on common equity ("ROE") of 8.93 per cent for 2006, provided for distribution revenue requirements, excluding miscellaneous revenue and adjustment riders, of $217.1 million for 2006 and $228.2 million for 2007. These items translated into a 1.9 per cent reduction in distribution rates in 2006 and a 0.7 per cent increase in distribution rates in 2007. The revenue requirements reflect AEUB-approved forecast operating expenses of $100.8 million for 2006 and $100.1 million for 2007. Additional operating expenses of $13.0 million in 2006 and $13.5 million in 2007 will be collected by separate rate riders during those years. The revenue requirements also reflect AEUB-approved forecast capital expenditures of approximately $184.5 million, before customer contributions of $23.3 million, for 2006, and approximately $191.2 million, before customer contributions of $24.0 million, for 2007. Additionally, the AEUB-approved 2006/2007 Negotiated Settlement Agreement included contributions to Alberta Electric System Operator ("AESO") projects of $10.7 million in 2006 and $10.0 million in 2007. The AESO contributions represent payments made to the AESO for investment in transmission facilities that are needed for reliability or contingency planning in accordance with the AESO Terms and Conditions of Service.
During the second quarter of 2006, FortisAlberta recorded the impact of the AEUB-approved 2006/2007 Negotiated Settlement Agreement. During 2006, the AEUB-approved 2006/2007 Negotiated Settlement Agreement resulted in a $4.2 million reduction in revenue as a result of providing for the difference between interim rates and those in the AEUB-approved 2006/2007 Negotiated Settlement Agreement, which will be refunded to customers in 2007 as ordered by the AEUB.
The AEUB-approved 2006/2007 Negotiated Settlement Agreement also resulted in changes in amortization rates and pension and income tax methodologies. The move to the taxes payable method for federal income taxes simplified FortisAlberta's accounting for income taxes and reduced the Company's revenue requirements for 2006 and 2007, as future income tax expenses are no longer recovered in current customer distribution rates, rather they are recovered in customer distribution rates when they become payable.
The Company's 2007 distribution revenue requirement, as approved in the 2006/2007 Negotiated Settlement Agreement, was based upon using the 2006 allowed ROE of 8.93 per cent. FortisAlberta's allowed ROE has been reduced to 8.51 per cent, effective January 1, 2007, due to the impact of lower long-term Canada bond yields on the automatic adjustment formula used to calculate the allowed ROE. As a result of the lower allowed ROE, FortisAlberta expects it will have to refund approximately $1.9 million of the revenue collected in base rates in 2007 to customers in future rates by including this refund in its 2008/2009 Distribution Access Tariff Application.
FortisAlberta expects gross capital expenditures during 2007 to increase to $255.6 million, up from $191.2 million as previously forecasted. The increase is primarily driven by customer growth and will be included in FortisAlberta's 2008 rate application for the purpose of setting customer rates for that year.
FortisAlberta intends on filing its 2008/2009 Distribution Access Tariff Application during the second quarter of 2007 for AEUB approval of customer rates and capital expenditures for 2008 and 2009.
Earnings: FortisAlberta's earnings were $4.1 million higher quarter over quarter, driven by reduced revenue deferrals, increased energy deliveries and lower corporate income taxes, partially offset by higher amortization costs, finance charges and operating expenses and the impact of the 1.9 per cent decrease in distribution rates, effective January 1, 2006. Annual earnings were $5.3 million higher than last year, driven by lower corporate income taxes, increased energy deliveries and reduced revenue deferrals, partially offset by higher amortization costs, finance charges and operating expenses, and the impact of the 1.9 per cent decrease in distribution rates. Also, last year's results included earnings related to the resolution of tax-related matters pertaining to prior years and the finalization of load settlement amounts and billing adjustments.
Energy Deliveries: Energy deliveries were 68 gigawatt hours ("GWh"), or 1.8 per cent, higher quarter over quarter, and 406 GWh, or 2.8 per cent, higher year over year. The increases were primarily due to growth in the number of customers in the residential, commercial, industrial and oilfield sectors as a result of a strong provincial economy. The Company added approximately 15,000 customers during the year bringing the total number of customers at FortisAlberta to approximately 430,000.
Revenue: Revenue was $7.1 million higher quarter over quarter. The increase was largely driven by reduced revenue deferrals of $3.3 million, the $2.5 million impact of increased energy deliveries, increased net transmission revenue of $0.8 million, increased franchise fee revenue of $0.7 million and increased miscellaneous revenue of $0.8 million. These increases were partially offset by $1.1 million related to the 1.9 per cent decrease in distribution rates, effective January 1, 2006. As a result of the AEUB-approved 2005 Negotiated Settlement Agreement, approximately $3.0 million of revenue related to future income taxes collected in customer rates was deferred during the fourth quarter last year. No similar revenue deferral was recorded in 2006.
Annual revenue was $9.0 million lower than last year; however, revenue last year included approximately $19.7 million related largely to the resolution of tax-related matters pertaining to prior years and the finalization of load settlement amounts and billing adjustments. Revenue also decreased $4.2 million related to the 1.9 per cent decrease in distribution rates, effective January 1, 2006. These items were partially offset by the $7.8 million impact of increased energy deliveries, reduced revenue deferrals of $4.6 million, increased franchise fee revenue of $1.7 million, and the recognition of $1.0 million of revenue during the first quarter of 2006 upon AEUB approval of the Company's 2004 AESO Charges Deferral Account Application.
Expenses: Operating expenses were $0.8 million and $2.2 million higher quarter over quarter and year over year, respectively, primarily due to higher labour, and employee benefit and contracted manpower costs, partially offset by an increase in the amount of labour and overhead costs charged to capital projects as a result of FortisAlberta's intensive capital program. Labour costs increased due to higher salaries and additional employees. Employee benefit costs increased primarily due to the expensing of employer contributions associated with the defined benefit pension plan, partially offset by the recording of other post-employment benefit and supplemental pension plan expenses on a cash basis in 2006 compared to the accrual basis in 2005. This change in pension methodology resulted from the AEUB-approved 2006/2007 Negotiated Settlement Agreement. Contracted manpower costs associated with brushing and meter reading activities increased as a result of higher contracted labour rates due to Alberta's inflationary economy. An increase in corporate governance activities during 2006, related to compliance with Multilateral Instrument 52-109, also contributed to higher contracted manpower costs.
Amortization costs were $1.8 million and $7.4 million higher quarter over quarter and year over year, respectively, primarily due to an increase in capital assets, largely the result of load growth within FortisAlberta's service territory, combined with the impact of higher overall amortization rates that resulted from the AEUB-approved 2006/2007 Negotiated Settlement Agreement.
Finance charges were $1.8 million and $5.9 million higher quarter over quarter and year over year, respectively, primarily due to higher debt levels arising from increased drawings under the Company's committed unsecured credit facility and the issuance of long-term debt to finance capital projects required to satisfy FortisAlberta's obligations to serve its customers. On April 21, 2006, FortisAlberta issued $100 million of unsecured debentures bearing interest at 5.40% per annum, due April 21, 2036. The net proceeds of the offering were used primarily to repay existing indebtedness on FortisAlberta's committed unsecured credit facility.
Corporate taxes were $1.4 million lower during the quarter compared to the same quarter last year. The decrease was primarily due to increased deductions taken for corporate income tax purposes in excess of amounts taken for accounting purposes in 2006 as compared to 2005. The impact of higher deductions for tax purposes was partially offset by the impact of higher earnings before corporate income taxes. Annual corporate taxes were $29.8 million lower than last year. The decrease was due to the impact of higher deductions for tax purposes and the impact of lower annual earnings before corporate income taxes. The difference in the deductions taken for income tax purposes and those taken for accounting purposes in 2006 was accounted for entirely on the taxes payable method compared to the use in 2005 of the tax liability method for federal income taxes and the taxes payable method for provincial income taxes. The change in the income tax methodology, as a result of the AEUB-approved 2006/2007 Negotiated Settlement Agreement, resulted in the cessation of recognizing future income tax expense for federal income tax which would have partially offset the effects of these timing differences.
FortisBC
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FortisBC
Financial Highlights (Unaudited)
Periods Ended December 31st
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Quarter Annual
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2006 2005 Variance 2006 2005 Variance
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Electricity
Sales (GWh) 842 820 22 3,038 2,968 70
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($ millions)
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Revenue 58.3 50.2 8.1 215.6 194.7 20.9
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Energy Supply Costs 20.2 15.9 4.3 67.6 60.4 7.2
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Operating Expenses 16.9 16.8 0.1 63.1 64.8 (1.7)
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Amortization 6.9 4.9 2.0 27.3 19.0 8.3
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Finance Charges 6.0 5.4 0.6 23.4 18.5 4.9
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Corporate Taxes 1.9 1.5 0.4 6.8 7.4 (0.6)
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Earnings 6.4 5.7 0.7 27.4 24.6 2.8
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Regulation: On May 23, 2006, FortisBC received approval from the British Columbia Utilities Commission ("BCUC") of the 2006 Negotiated Settlement Agreement associated with the Company's 2006 Revenue Requirements Application. The 2006 Negotiated Settlement Agreement, effective January 1, 2006 and based on an approved ROE of 9.20 per cent, resulted in a 5.9 per cent increase in electricity rates, an increase in the Company's composite amortization rate from 2.6 per cent to 3.2 per cent and an increase in the amount of capitalized overhead from approximately 9 per cent of BCUC-approved 2005 forecast gross operating and maintenance expenses to 20 per cent of BCUC-approved 2006 forecast gross operating and maintenance expenses. Additionally, a new performance-based rate-setting ("PBR") mechanism for the years 2006 through 2008, and optionally for 2009, was approved to allow a 2 percentage point band around the allowed ROE whereby variances (adjusted for certain cost variances which flow through to customer rates) as a result of actual financial performance, positive or negative, will be shared equally between customers and the Company. If the variance exceeds the 2 percentage point band, the excess will be placed in a deferral account for review and disposition during the next rate-setting process. The 5.9 per cent electricity rate increase was primarily driven by the Company's ongoing capital expenditure program and was the same as the refundable interim electricity rate increase previously approved by the BCUC.
On September 29, 2006, FortisBC filed its 2007 Preliminary Revenue Requirements Application requesting a 2.9 per cent increase in electricity rates, effective January 1, 2007. The proposed rate increase was primarily driven by FortisBC's ongoing capital expenditure program. Additionally, the rate increase was calculated using the new PBR mechanism described above. On December 19, 2006, an updated 2007 Revenue Requirements Application was filed requesting a 1.2 per cent rate increase which was approved by the BCUC on December 20, 2006. The difference in the revenue requirements between the 2 filings largely related to increased incentives owing to customers and reduced power purchase costs. Under separate consideration by the BCUC is a change in the treatment of allowance for funds used during construction for utility capital assets for the purpose of setting rates. This change in treatment may increase 2007 customer rates further.
FortisBC's allowed ROE for 2007 has been reduced to 8.77 per cent, from 9.20 percent for 2006, due to the impact of lower long-term Canada bond yields on the automatic adjustment formula used to calculate the allowed ROE.
On November 24, 2006, the BCUC approved FortisBC's 2007 and 2008 Capital Expenditure Plan ("Capital Plan"), filed on July 26, 2006, to spend approximately $135.8 million, before customer contributions of $7.2 million, in 2007 and $119.6 million, before customer contributions of $8.0 million, in 2008. The 2-year Capital Plan was approved with 6 projects totaling $61.2 million subject to further approval processes. The capital expenditures address the expansion and upgrade of the transmission and distribution systems to keep pace with load growth while improving customer service, and the continuation of the life-extension program of the Company's generating plants.
On April 12, 2006, the amended and restated Canal Plant Agreement ("CPA") between BC Hydro, FortisBC, Teck Cominco, and Columbia Power Corporation and Columbia Basin Trust became effective and continues in force until terminated by any of the parties upon giving no less than 5 years notice at any time on or after December 31, 2030. The CPA governs the coordinated operations of 7 major hydroelectric plants owned by the 4 parties to the CPA.
Earnings: FortisBC's earnings were $0.7 million higher quarter over quarter, driven by the 5.9 per cent increase in electricity rates, effective January 1, 2006, and electricity sales growth, partially offset by higher energy supply costs, higher amortization costs and increased finance charges. Annual earnings were $2.8 million higher than last year. The increase was due to the 5.9 per cent increase in electricity rates, effective January 1, 2006, electricity sales growth, lower operating expenses and lower corporate income taxes, partially offset by increased amortization costs, higher finance charges and lower other revenue.
Electricity Sales: Electricity sales were 22 GWh, or 2.7 per cent, higher quarter over quarter, and 70 GWh, or 2.4 per cent, higher year over year. Sales growth was primarily attributable to continued customer growth in the Okanagan area.
Revenue: Revenue was $8.1 million higher quarter over quarter, primarily due to the 5.9 per cent increase in electricity rates, effective January 1, 2006, customer growth, and higher revenue contributions of $1.1 million from non-regulated operating, maintenance and management services and Princeton Light and Power Company, Limited ("PLP"). Annual revenue was $20.9 million higher than last year, primarily due to the 5.9 per cent increase in electricity rates, effective January 1, 2006, customer growth, higher revenue contributions of $3.1 million from non-regulated operating, maintenance and management services and PLP, and increased management fees on third-party contracts of $0.9 million. The increase was partially offset by lower other revenue due to increased PBR-incentive adjustments owing to customers of $3.7 million as a result of the new PBR mechanism approved by the BCUC, effective January 1, 2006.
Expenses: Energy supply costs were $4.3 million and $7.2 million higher quarter over quarter and year over year, respectively, primarily as a result of increased electricity sales, higher average power purchase prices and a higher proportion of purchased energy versus energy generated from Company-owned plants. Energy supply costs for 2006 included an accrual of $1.2 million to recognize expected insurance proceeds, which directly offset the incremental power purchase costs incurred in 2006 due to a turbine failure at the Lower Bonnington generation plant. Hydroelectric facilities owned by FortisBC generate approximately 45 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 comparable quarter over quarter. A decline in operating expenses associated with increased capitalized overhead costs of $1.4 million, as a result of the BCUC-approved 2006 Negotiated Settlement Agreement, effective January 1, 2006, was offset by increased water fees and wheeling charges of $0.4 million, and increased PLP operating expenses and expenses related to non-regulated operating, maintenance and management services totalling approximately $1.0 million. Annual operating expenses were $1.7 million lower than last year, primarily due to increased capitalized overhead costs of $5.0 million and operating cost efficiencies of approximately $0.3 million, partially offset by increased water fees and property taxes of $0.9 million, higher PLP operating expenses and expenses related to non-regulated operating, maintenance and management services totalling approximately $2.2 million, and a $0.5 million provincial capital tax appeal refund recorded during the second quarter of 2005.
Amortization costs were $2.0 million and $8.3 million higher quarter over quarter and year over year, respectively. Additional amortization costs were primarily due to the increase in the Company's composite amortization rate from 2.6 per cent to 3.2 per cent, as a result of the BCUC-approved 2006 Negotiated Settlement Agreement, effective January 1, 2006, and an increase in FortisBC's capital assets due to its capital expenditure program.
Finance charges were $0.6 million and $4.9 million higher quarter over quarter and year over year, respectively, primarily due to the cost of increased borrowings to finance the Company's capital expenditure program and a decrease in the amount of interest capitalized as a result of fewer assets under construction compared to the same periods last year.
Corporate taxes increased $0.4 million quarter over quarter, primarily due to increased earnings before corporate income taxes, partially offset by the impact of the elimination of the Federal Large Corporations' Tax, effective January 1, 2006. Annual corporate taxes decreased $0.6 million from last year, primarily due to the impact of the elimination of the Federal Large Corporations' Tax, effective January 1, 2006, partially offset by increased earnings before corporate income taxes.
Newfoundland Power
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Newfoundland Power
Financial Highlights (Unaudited)
Periods Ended December 31st
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Quarter Annual
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2006 2005 Variance 2006 2005 Variance
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Electricity
Sales (GWh) 1,353 1,191 162 4,995 5,004 (9)
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($ millions)
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Revenue 113.7 101.4 12.3 421.3 420.0 1.3
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Energy Supply Costs 69.2 69.1 0.1 257.2 256.0 1.2
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Operating Expenses 14.8 13.9 0.9 54.0 53.8 0.2
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Amortization 8.9 6.3 2.6 33.1 32.1 1.0
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Finance Charges 8.3 7.9 0.4 32.7 31.4 1.3
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Corporate Taxes 3.6 1.2 2.4 13.6 15.4 (1.8)
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Non-Controlling
Interest 0.1 0.1 - 0.6 0.6 -
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Earnings 8.8 2.9 5.9 30.1 30.7 (0.6)
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Regulation: In January 2006, Newfoundland Power received approval from the Newfoundland and Labrador Board of Commissioners of Public Utilities (the "PUB") of its final 2006 electricity rates. The rates were based on an allowed ROE of 9.24 per cent, which remained 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. The use of the accrual method for revenue recognition better matches revenue and expenses and is consistent with mainstream Canadian utility practice. Adoption of the accrual method for revenue recognition gave rise to a $23.6 million balance sheet accrual for unbilled revenue at December 31, 2005 (the "2005 Unbilled Revenue"). Pursuant to an Order by the PUB, Newfoundland Power recorded $3.1 million of the 2005 Unbilled Revenue as revenue in 2006 to offset the income tax impact of changing to the accrual method for revenue recognition. The PUB also ordered that the Company defer recovery of a $5.8 million increase in 2006 capital asset amortization. The deferral establishes a regulatory asset to be recovered in a future period. During the fourth quarter, the remaining $1.6 million of the $5.8 million deferral was recognized, offsetting what would otherwise have been an increase in amortization costs during the quarter.
On December 5, 2006, the PUB approved, as filed on September 13, 2006, Newfoundland Power's 2007 Amortization and Cost Deferral Application (the "2007 Application"). The approved 2007 Application allows for amortization of $2.7 million of the 2005 Unbilled Revenue to offset the 2007 income tax impact of changing to the accrual method for revenue recognition, and the deferred recovery of capital asset amortization of $5.8 million similar to 2006. The approval also allows for the deferred recovery of $1.1 million related to the cost of replacement energy while the Company's Rattling Brook hydroelectric generating facility is being refurbished. The approved 2007 Application will provide the Company an opportunity to achieve a fair and reasonable ROE in 2007 without the need to increase customer electricity rates in 2007. Disposition of the remaining 2005 Unbilled Revenue will be determined by future orders of the PUB. During 2007, Newfoundland Power expects to file a general rate application with the PUB for the purpose of setting customer rates for 2008.
Newfoundland Power's allowed ROE has been reduced to 8.60 per cent, effective January 1, 2007, due to the impact of lower long-term Canada bond yields on the automatic adjustment formula used to calculate the allowed ROE.
On December 14, 2006, the PUB approved, on an interim basis, an average 0.07 per cent increase in customer electricity rates, effective January 1, 2007. The increase is the result of the flow-through of increased costs from Newfoundland and Labrador Hydro Corporation, which will have no impact on Newfoundland Power's earnings, partially offset by a 0.5 per cent decrease due to the reduction in Newfoundland Power's allowed ROE to 8.60 per cent, effective January 1, 2007. The decrease in the allowed ROE is anticipated to reduce Newfoundland Power's revenue by approximately $2.5 million in 2007.
In September 2006, the PUB approved Newfoundland Power's $62.2 million 2007 Capital Program, which will focus on the replacement of aging equipment to strengthen the electricity system and the Company's obligation to meet the demands of customer and electricity sales growth. Approximately $18.8 million of the 2007 Capital Program will be spent to refurbish the Company's Rattling Brook hydroelectric generating plant in central Newfoundland.
Earnings: Newfoundland Power's earnings were $5.9 million higher quarter over quarter, primarily due to the adoption of the accrual method for revenue recognition, effective January 1, 2006. Had revenue continued to be recognized on the billed basis during 2006, earnings during the fourth quarter would have been $3.1 million, $0.2 million higher than earnings of $2.9 million during the fourth quarter last year. Annual earnings were $0.6 million lower than last year due to lower electricity sales, lower interest revenue and increased costs associated with purchased power, amortization and finance charges, partially offset by the impact of a lower effective income tax rate. Adoption of the accrual method for revenue recognition did not have a material impact on 2006 annual earnings.
Electricity Sales: Electricity sales were 162 GWh, or 13.6 per cent, higher quarter over quarter. Electricity sales increased 149 GWh due to the adoption of the accrual method for revenue recognition, effective January 1, 2006, representing the difference between electricity delivered to customers during the latter half of September 2006 and the latter half of December 2006. The remaining 13 GWh increase in electricity sales was due to a normal variance in the meter reading schedule and an increase in the number of customers in 2006, partially offset by lower average consumption.
Annual electricity sales were 9 GWh, or 0.2 per cent, lower than last year, primarily due to a decrease in average consumption, partially offset by an increase in the number of customers. Adoption of the accrual method for revenue recognition did not have a material impact on 2006 annual electricity sales.
Revenue: Revenue was $12.3 million higher quarter over quarter, primarily due to a $10.7 million increase related to the adoption of the accrual method for revenue recognition, the recognition of $0.9 million of 2005 Unbilled Revenue, as approved by the PUB, and the impact of increased electricity sales. Annual revenue was $1.3 million higher than last year, primarily due to the recognition of $3.1 million of 2005 Unbilled Revenue, partially offset by lower electricity sales and lower interest revenue. Interest revenue during the second quarter of 2005 included $2.1 million ($1.4 million after-tax) as a result of an income tax settlement with the Canada Revenue Agency ("CRA"). Adoption of the accrual method for revenue recognition did not have a material impact on 2006 annual revenue.
Expenses: Energy supply costs were comparable quarter over quarter. Annual energy supply costs were $1.2 million higher than last year, primarily due to an increase in demand charges under the wholesale demand and energy rate structure. As a result, the unit cost of purchased power increased to 5.289 cents per kilowatt hour ("kWh") compared to 5.261 cents per kWh last year.
Operating expenses were $0.9 million higher quarter over quarter, primarily due to higher pension and early retirement program costs. Annual operating expenses were $0.2 million higher than last year. Higher pension and early retirement program costs of approximately $0.9 million were partially offset by lower labour costs resulting from a 2005 early retirement program, a reduction in PUB assessments in 2006 and the reduction of other non-labour costs due to the Company's ongoing focus on initiatives to reduce operating expenses. Annual and quarterly pension costs increased primarily due to a reduction in the discount rate used in 2006 to determine annual pension expense.
Amortization costs increased $2.6 million quarter over quarter, largely due to the allocation of amortization costs to quarters based on contribution margin, in addition to the impact of continued investment in capital assets. Annual amortization costs increased $1.0 million over last year, primarily due to the impact of continued investment in capital assets.
Finance charges were $0.4 million higher quarter over quarter due to higher borrowings on credit facilities used to finance the Company's capital expenditure program. Annual finance charges were $1.3 million higher than last year due to the replacement in August 2005 of lower-cost revolving credit facility borrowings with 30-year 5.441% first mortgage sinking fund bonds in the amount of $60 million, and additional credit facility borrowings used to finance the Company's capital expenditure program.
Corporate taxes increased $2.4 million quarter over quarter, primarily due to the quarterly shift in revenue as a result of the adoption of the accrual method for revenue recognition. Annual corporate taxes were $1.8 million lower than last year, primarily due to the elimination of the Federal Large Corporations' Tax, effective January 1, 2006, increased capital cost allowance rates and the income tax treatment of regulatory amortizations and deferrals.
Maritime Electric
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Maritime Electric (Unaudited)
Financial Highlights
Periods Ended December 31st
---------------------------------------------------------------------
Quarter Annual
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2006 2005 Variance 2006 2005 Variance
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Electricity
Sales (GWh) 248 242 6 999 989 10
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($ millions)
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Revenue 31.2 28.9 2.3 122.4 116.7 5.7
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Energy Supply Costs 19.0 18.3 0.7 73.0 71.6 1.4
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Operating Expenses 3.3 3.4 (0.1) 12.8 12.5 0.3
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Amortization 2.5 2.4 0.1 10.1 9.7 0.4
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Finance Charges 2.5 1.8 0.7 10.3 7.6 2.7
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Corporate Taxes 1.5 1.3 0.2 6.4 6.2 0.2
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Earnings 2.4 1.7 0.7 9.8 9.1 0.7
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Regulation: On June 27, 2006, The Island Regulatory and Appeals Commission ("IRAC") issued its Order with respect to Maritime Electric's general rate application filed on January 31, 2006. The impact was an overall average decrease in customer electricity rates of 1.2 per cent, effective July 1, 2006. The 1.2 per cent decrease was the result of the impact of the refund to customers of energy-related costs associated with the operation of the energy cost adjustment mechanism ("ECAM"), partially offset by a 3.35 per cent increase in basic electricity rates. IRAC also approved Maritime Electric's maximum allowed ROE at 10.25 per cent for 2006 and 2007. IRAC also approved continuation of the amortization of the $20.8 million in deferred costs recoverable from customers accumulated as at December 31, 2003 in the amount of $1.5 million in 2006. IRAC ordered the continuation of the interim and transitional ECAM currently in effect, with the amortization period contained in the ECAM to decrease from 18 months to 12 months, effective January 1, 2007.
On August 22, 2006, Maritime Electric received approval from IRAC of a 39-MW Wind Power Purchase Agreement (the "Agreement") with PEI Energy Corporation. The Agreement took 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. The Agreement, in conjunction with the existing wind-energy purchase agreements, will enable the Company to reach this 15 per cent target. Energy from the Agreement is subject to the operation of the ECAM.
In November 2006, IRAC approved a new Energy Purchase Agreement ("EPA") with New Brunswick Power ("NB Power") covering the period November 2006 to March 2008. The cost of energy under the new EPA is subject to the operation of the ECAM.
In November 2006, the Company filed its 2007 Capital Budget Application for approximately $20.5 million, before customer contributions of $2.7 million. A decision on the Application is expected in February 2007.
In December 2006, IRAC approved the amortization of $1.3 million of the deferred costs recoverable from customers accumulated as at December 31, 2003 and increased the amortization to $2.0 million in 2008 and each year thereafter. Deferred costs recoverable from customers totalled $15.3 million at the end of 2006.
Maritime Electric expects to file a rate application with IRAC in the fall of 2007, for the purpose for setting rates for 2008.
Earnings: Maritime Electric's earnings were $0.7 million higher quarter over quarter and $0.7 million higher year over year, primarily due to the 3.35 per cent increase in basic electricity rates, effective July 1, 2006, and higher electricity sales, partially offset by increased finance charges.
Electricity Sales: Electricity sales were 6 GWh, or 2.5 per cent, higher quarter over quarter, and 10 GWh, or 1.0 per cent, higher year over year. The increase was driven by customer growth in the residential sector. Customer energy conservation practices have tempered sales growth during 2006 with average consumption remaining stable period over period.
Revenue: Revenue increased $2.3 million quarter over quarter, primarily due to increased electricity sales, a 3.35 per cent increase in basic electricity rates, effective July 1, 2006, and a $0.2 million decrease in the amortization of pre-2004 deferred costs recoverable from customers. Annual revenue increased $5.7 million over last year, primarily as a result of increased electricity sales, the 3.35 per cent increase in basic electricity rates, effective July 1, 2006, and a $1.0 million decrease in the amortization of pre-2004 deferred costs recoverable from customers.
Expenses: Energy supply costs (adjusted for the ECAM) were $0.7 million and $1.4 million higher quarter over quarter and year over year, respectively, primarily due to increased electricity sales. Gross energy supply costs, before ECAM adjustments, however, were $6.2 million and $4.0 million higher quarter over quarter and year over year, respectively, primarily due to increased electricity sales and higher prices paid for energy under the new EPA with NB Power that came into effect in November 2006. During 2006 and 2005, Maritime Electric purchased the majority of its energy from NB Power under several energy purchase agreements.
Operating expenses were comparable quarter over quarter and $0.3 million higher year over year. The increase year over year was driven by costs associated with an extensive tree trimming program during 2006 and increased insurance and regulatory costs.
Amortization costs were $0.4 million higher than last year. The increase reflected the addition of the 50-MW combustion turbine generating facility and expenditures associated with the Company's ongoing capital program, partially offset by a $0.5 million reduction in the amortization of the deferred charge related to the Point Lepreau Nuclear Generating Station as the expected life of the Station will be extended to 2034 upon its refurbishment by NB Power.
Finance charges increased $0.7 million and $2.7 million quarter over quarter and year over year, respectively, primarily due to financing associated with the Company's capital expenditure program.
FortisOntario
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FortisOntario
Financial Highlights (Unaudited)
Periods Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
2006 2005 Variance 2006 2005 Variance
---------------------------------------------------------------------
Electricity
Sales (GWh) 281 296 (15) 1,163 1,195 (32)
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($ millions)
---------------------------------------------------------------------
Revenue 31.8 32.9 (1.1) 130.0 139.7 (9.7)
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Energy Supply Costs 23.8 25.7 (1.9) 97.7 110.2 (12.5)
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Operating Expenses 3.7 4.1 (0.4) 14.7 14.5 0.2
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Amortization 1.4 1.3 0.1 5.4 5.1 0.3
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Finance Charges 1.3 1.3 - 5.1 5.1 -
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Corporate Taxes 0.6 0.3 0.3 3.1 0.5 2.6
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Earnings 1.0 0.2 0.8 4.0 4.3 (0.3)
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Regulation: On April 28, 2006, the Ontario Energy Board ("OEB") issued its Decision and Order concerning Canadian Niagara Power's application for new electricity rates, effective May 1, 2006. The Decision and Order also approved the final recovery from customers of regulatory assets including the transitional costs incurred in preparation for the open market in May 2002. The impact of the Decision and Order on a typical residential customer with average monthly consumption of 1,000 kWhs in Fort Erie, Port Colbourne and Gananoque was an increase in customer rates, effective May 1, 2006, of 17.5 per cent, 17.5 per cent, and 10.8 per cent, respectively. The rate increases also included the impact associated with the flow through to specified low-volume customers of increased power prices paid to the Independent Electricity System Operator as set under the OEB's Regulated Price Plan. The new distribution electricity rates were based on 2004 costs using a deemed capital structure at 50 per cent long-term debt and 50 per cent common equity, with an allowed ROE of 9.0 per cent.
On January 26, 2007, Canadian Niagara Power filed applications with the OEB requesting a 0.2 per cent average increase in electricity distribution rates, effective May 1, 2007, associated with its operations in Fort Erie, Port Colbourne and Gananoque. Canadian Niagara Power also applied to the OEB to recover in customer rates extraordinary costs incurred as a result of an early winter storm that occurred in October 2006.
Earnings: Earnings were $0.8 million higher quarter over quarter, primarily due to increased distribution electricity rates, effective May 1, 2006, and lower operating expenses, partially offset by reduced electricity sales. Annual earnings were $0.3 million lower than last year. Earnings for the third quarter of 2005 included $1.6 million related to the recognition of a future tax asset associated with the favourable resolution of a CRA reassessment related to Cornwall Electric. Excluding this item, annual earnings were $1.3 million higher than last year, primarily due to increased distribution electricity rates, effective May 1, 2006, partially offset by increased effective corporate taxes and reduced electricity sales.
Electricity Sales: Electricity sales were 15 GWh, or 5.1 per cent, and 32 GWh, or 2.7 per cent, lower during the quarter and the year, respectively, compared to the same periods last year, primarily due to the impact of moderate weather conditions and the loss in December 2005 of an industrial customer.
Revenue: Revenue was $1.1 million and $9.7 million lower during the quarter and the year, respectively, compared to the same periods last year, primarily due to decreased market energy costs billed to customers and lower electricity sales, partially offset by higher distribution electricity rates, effective May 1, 2006, and increased other revenue. An increase in other revenue of $0.2 million and $0.8 million quarter over quarter and year over year, respectively, was associated with street lighting maintenance and other miscellaneous customer billings and interest revenue.
Expenses: Energy supply costs decreased $1.9 million and $12.5 million during the quarter and the year, respectively, compared to the same periods last year, primarily due to lower market energy prices and reduced electricity sales, partially offset by the impact of increased power purchases rates under the OEB's Regulated Price Plan.
Operating expenses were $0.4 million lower during the quarter compared to the same period last year; however, operating expenses during the fourth quarter last year included approximately $0.8 million in costs associated with an early retirement program. The higher operating expenses in the fourth quarter of 2006 largely related to increased internal labour costs associated with repairing damage to a portion of the distribution system caused by an early winter storm. Annual operating expenses were $0.2 million higher than last year. Operating expenses last year included approximately $0.8 million in costs associated with the early retirement program. Annual operating expenses increased primarily due to higher payroll and benefit costs as a result of the transferring of certain former Rankine Generating Station employees to Canadian Niagara Power, increased internal labour costs associated with the early winter storm, and other miscellaneous cost increases.
Corporate taxes were $0.3 million higher quarter over quarter, primarily due to increased earnings before corporate taxes. Annual corporate taxes were $2.6 million higher than last year. During the third quarter last year, a $1.6 million future tax asset and corresponding decrease in corporate income taxes were recorded in connection with the favourable resolution of a CRA assessment of a tax asset created when Cornwall Electric was acquired by a previous owner. Excluding this item, annual corporate taxes were higher than last year because of higher earnings before corporate taxes and the impact of the reduction of future income tax asset balances during the second quarter of 2006 resulting from enacted future Federal income tax rate reductions.
REGULATED UTILITIES - CARIBBEAN
Belize Electricity
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Belize Electricity
Financial Highlights (Unaudited)
Periods Ended December 31st
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Quarter Annual
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2006 2005 Variance 2006 2005 Variance
---------------------------------------------------------------------
Average
US:CDN Exchange
Rate 1.14 1.17 (0.03) 1.13 1.21 (0.08)
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Electricity
Sales (GWh) 91 87 4 360 350 10
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($ millions)
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Revenue 22.2 19.8 2.4 88.5 75.8 12.7
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Energy Supply Costs 13.0 10.8 2.2 51.7 40.8 10.9
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Operating Expenses 3.0 2.8 0.2 10.8 10.7 0.1
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Amortization 1.2 1.2 - 5.4 5.8 (0.4)
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Finance Charges 0.5 1.7 (1.2) 3.8 6.0 (2.2)
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Foreign Exchange
Loss (Gain) 0.1 0.1 - 0.4 (0.4) 0.8
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Corporate Taxes and
Non-Controlling
Interest 1.6 1.2 0.4 6.0 4.9 1.1
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Earnings 2.8 2.0 0.8 10.4 8.0 2.4
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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 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 excess deferrals to the Cost of Power Rate Stabilization Account ("CPRSA") and a BZ4.5 cent 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 Public Utilities Commission's ("PUC's") Final Decision on Belize Electricity's Threshold Event Review Application filed on December 20, 2005 and had no impact on the Company's earnings due to the flow through of cost of power to customers.
On May 9, 2006, the PUC issued its Final Decision approving, as filed, Belize Electricity's Annual Tariff Review Application for the annual tariff period July 1, 2006 through June 30, 2007. The Final Decision confirmed that the average mean electricity rate of BZ44.1 cents per kWh would remain unchanged from that in effect at January 1, 2006. The COP component of rates, however, decreased slightly from BZ25.5 cents per kWh to BZ25.3 cents per kWh, while an Annual Correction Rate, at BZ0.2 cents per kWh, was introduced to collect from customers the differences between actual expenses and revenues from original forecasts for the immediately preceding annual tariff period. The tariff can only be reviewed prior to June 30, 2007 by way of a Threshold Event Review Proceeding based on fluctuations in the cost of power and fuel.
Earnings: Belize Electricity's earnings were $0.8 million (BZ$1.4 million) higher quarter over quarter. Excluding the impact of foreign currency exchange upon the translation of Belize Electricity's results into Canadian dollars, Belize Electricity's earnings increased primarily due to lower finance charges and growth in electricity sales, partially offset by increased operating expenses. Annual earnings were $2.4 million (BZ$5.4 million) higher than last year. Excluding foreign currency translation impacts, the increase in annual earnings was driven by the overall 11 per cent increase in electricity rates, effective July 1, 2005, as a result of the new 4-year tariff agreement, electricity sales growth and lower finance charges, partially offset by the foreign exchange impact associated with the Company's Euro and Canadian dollar-denominated debt and increased operating expenses. The translation of Belize Electricity's annual results was unfavourably impacted by the weakening of the US dollar against the Canadian dollar compared to the same periods last year.
Electricity Sales: Electricity sales were 4 GWh, or 4.6 per cent, higher quarter over quarter, driven by growth in sales in the commercial sector. Annual electricity sales were 10 GWh, or 2.9 per cent, higher than last year, driven by growth in sales in the commercial and industrial sectors. The rate of sales growth for 2006 was lower than the rate of sales growth for last year, due to a slowdown in economic growth and customer energy-conservation efforts as a result of the rate increases in July 2005 and January 2006.
Revenue: Revenue was $2.4 million (BZ$5.5 million) higher quarter over quarter. Excluding foreign currency translation impacts, revenue increased 16.5 per cent, primarily due to the increase in the COP component of electricity rates, effective January 1, 2006, and electricity sales growth. Annual revenue was $12.7 million (BZ$30.7 million) higher than last year. Excluding foreign currency translation impacts, revenue increased 24.5 per cent, largely driven by 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 $2.2 million (BZ$4.7 million) higher quarter over quarter. Excluding foreign currency translation impacts, energy supply costs increased 25.8 per cent, primarily due to the increase in the COP component of electricity rates from BZ21 cents per kWh, effective July 1, 2005 to BZ25.3 cents per kWh, effective July 1, 2006, and electricity sales growth. Annual energy supply costs were $10.9 million (BZ$23.7 million) higher than last year. Excluding foreign currency translation impacts, energy supply costs increased 35.1 per cent, primarily due to increases in the COP component of electricity rates, effective July 1, 2005 and January 1, 2006, and electricity sales growth. On July 1, 2006, the COP component of electricity rates decreased BZ0.2 cents per kWh from BZ25.5 cents per kWh to BZ25.3 cents per kWh. The decrease did not have a significant impact on energy supply costs year over year.
Operating expenses were $0.2 million (BZ$0.4 million) higher quarter over quarter and $0.1 million (BZ$1.2 million) higher year over year. Excluding foreign currency translation impacts, operating expenses increased primarily due to increased licences and fees, increased line maintenance activities, new customer service and loss reduction initiatives, higher employee costs and general increases in the cost of goods and services.
Amortization costs were comparable quarter over quarter and, excluding foreign exchange impacts, annual amortization costs were comparable year over year. Year over year, the impact of capital asset growth was offset by the recovery of all generation equipment amortization through cost of power, as a result of the July 1, 2005 Final Tariff Decision.
Finance charges were $1.2 million (BZ$1.9 million) lower during the quarter compared to the same quarter last year. Annual finance charges were $2.2 million (BZ$3.2 million) lower than last year. The decreases were primarily due to the repayment, with proceeds from a recent share offering, of certain trade payables, inter-company and external loans, and overdraft facilities incurred primarily to finance the CPRSA for the cost of power and fuel. Additionally, during the last half of 2006, excess funds from the share offering were invested on a short-term basis.
In June 2006, Belize Electricity received gross proceeds of approximately $37.2 million (US$33.4 million) upon the closing of a share offering in which approximately 97 per cent of the share purchase rights issued to shareholders were exercised. Under the offering, Belize Electricity issued a right to acquire one Ordinary Share of the Company at par value BZ$2.00 for every issued and outstanding Ordinary Share. The ownership level of Belize Electricity by Fortis increased slightly from 68.5 per cent to 70.1 per cent as a result of Fortis purchasing all of the Ordinary Shares on which it had rights, and acquiring shares under rights purchased from other shareholders. The result was a $26.8 million increase in the Corporation's investment in Ordinary Shares of Belize Electricity. The proceeds from the rights offering will allow Belize Electricity to continue its capital projects to improve service reliability and meet growing energy demand.
The foreign exchange losses and gains primarily related to foreign currency exchange rate fluctuations associated with Belize Electricity's Euro and Canadian dollar-denominated debt. During 2006, net foreign exchange losses were $0.4 million (BZ$0.6 million) compared to net foreign exchange gains of $0.4 million (BZ$0.6 million) last year. During 2006, the US dollar weakened relative to the Euro and Canadian dollar.
Belize Electricity signed a new Power Purchase Agreement ("PPA") with Comision Federal de Electricidad ("CFE") of Mexico following the expiration of the previous agreement with CFE on August 20, 2006. The PPA is effective until August 20, 2008 for the provision of up to 15 MW of firm energy and up to a maximum of 40 MW on an economic basis if no firm energy is utilized. Under the PPA, the cost of power to Belize Electricity is based on international fuel prices which increased the average cost of power from CFE by approximately 59 per cent. As a result, Belize Electricity has reduced its supply of power from CFE from 25 MW to 15 MW of firm energy. Increased power purchases from Belize Electric Company Limited ("BECOL") have offset the increased cost of power from CFE and stabilized rates during the latter part of 2006. Any decreases or increases in the cost of power above the reference cost of power, currently set at BZ25.3 cents per kWh, flows through to customers through the operation of the CPRSA. The balance in the CPRSA declined from BZ$28.2 million at the beginning of 2006 to BZ$18.4 million at the end of 2006.
Caribbean Utilities
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Caribbean Utilities
Financial Highlights (Unaudited)
Periods Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
2006 2005 Variance 2006 2005 Variance
---------------------------------------------------------------------
Average
US:CDN Exchange
Rate 1.14 1.19 (0.05) 1.14 1.22 (0.08)
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Electricity
Sales (GWh) (1) 135 123 12 485 402 83
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($ millions)
---------------------------------------------------------------------
Equity Income 2.8 2.8 - 9.7 11.4 (1.7)
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(1) As reported by Caribbean Utilities for the three- and twelve-
month periods ended October 31, 2006 and October 31, 2005,
respectively.
During 2006 and 2005, Fortis accounted for its approximate 37 per cent ownership interest in Caribbean Utilities on an equity basis. Equity income was recorded on a 2-month lag basis and, as a result, the quarterly and annual equity income noted above represented the Corporation's share of Caribbean Utilities earnings for the three- and twelve-month periods ended October 31, 2006 and October 31, 2005, respectively. On November 7, 2006, Fortis acquired an additional 16 per cent ownership interest in Caribbean Utilities for $55.7 million (US$49.0 million), including acquisition costs, and now owns approximately 54 per cent of the Company. Caribbean Utilities' balance sheet as at November 7, 2006 has been consolidated in the December 31, 2006 balance sheet of Fortis. Beginning with the first quarter of 2007, Fortis will consolidate Caribbean Utilities' financial statements on a 2-month lag basis.
Regulation: Licence renewal negotiations between Caribbean Utilities and the Government of the Cayman Islands recommenced in November 2005. The Company's Licence remains in full force and effect until January 2011 or until replaced with a new licence by mutual agreement. Pursuant to the Licence, Caribbean Utilities is permitted to set electricity rates to allow the Company to earn a 15 per cent rate of return on capital employed. Under its current Licence, Caribbean Utilities was entitled to a 2.0 per cent basic electricity rate increase, effective August 1, 2006, primarily as a result of increased operating expenses and investment in fixed assets. Caribbean Utilities did not implement this basic electricity rate increase, as it had agreed with the Government of the Cayman Islands that it would freeze basic rates during the period of the hurricane cost-recovery surcharge ("CRS").
Equity Income: Equity income from Caribbean Utilities was comparable quarter over quarter. The impact of strong electricity sales growth and lower maintenance costs was largely offset by increased amortization costs and finance charges. On a comparative basis, the Company's second quarter ended October 31, 2005 results included US$1.8 million of business interruption insurance revenue. There was no business interruption insurance revenue during the second quarter ended October 31, 2006. The final impact of business interruption insurance loss claims was recorded during Caribbean Utilities' fourth quarter ended April 30, 2006. During the second quarter ended October 31, 2006, electricity sales at Caribbean Utilities were 135 GWh, approximately 10 per cent higher than electricity sales of 123 GWh reported in the same quarter last year, due to strong residential and commercial sales growth. In June 2006, the number of customers at Caribbean Utilities surpassed pre-Hurricane Ivan levels, with total customers at October 31, 2006 of 22,052. Also, at the end of July 2006, the Company's total owned generating capacity reached 120 MW compared to 123 MW pre-Hurricane Ivan. During its second quarter ended October 31, 2006, Caribbean Utilities recorded US$1.2 million in revenue associated with the CRS, comparable with the same quarter last year. As at October 31, 2006, approximately US$8.0 million of direct uninsured Hurricane Ivan losses remained to be collected from customers through the CRS. The CRS is expected to remain in place until 2008.
Equity income from Caribbean Utilities during 2006 was $1.7 million lower than last year. Excluding the $1.1 million positive adjustment to equity income last year related to a change in Caribbean Utilities' accounting practice for recognizing unbilled revenue, equity income from Caribbean Utilities decreased $0.6 million due to foreign currency translation impacts associated with the weakening of the US dollar against the Canadian dollar compared to the same period last year. The impact of strong electricity sales growth, revenue associated with the CRS and lower maintenance costs was offset largely by higher insurance premiums, amortization costs and finance charges. During the twelve-month period ended October 31, 2006, electricity sales at Caribbean Utilities were 485 GWh, approximately 21 per cent higher than electricity sales of 402 GWh reported in the same period last year, due to strong residential and commercial sales growth post-Hurricane Ivan. Business interruption insurance revenue during the twelve-month period ended October 31, 2006 was US$10 million lower than the same period last year, due to the final impact of business interruption insurance loss claims being recorded during the fourth quarter ended April 30, 2006. Revenue associated with the CRS was US$3.3 million higher period over period due to the CRS becoming effective August 1, 2005.
In May 2006, Caribbean Utilities entered into a project agreement with its strategic alliance partner, MAN B&W Diesel AG of Germany, for the purchase of a 16-MW diesel generating unit and auxiliary equipment to be commissioned in the summer of 2007 for a total project cost of approximately US$22.2 million. As at October 31, 2006, approximately US$5.7 million had been spent related to this project.
Fortis Turks and Caicos
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Fortis Turks and Caicos (1)
Financial Highlights (Unaudited)
Periods Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
2006 2006
---------------------------------------------------------------------
Average US:CDN Exchange Rate 1.14 1.13
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Electricity Sales (GWh) 33 44
---------------------------------------------------------------------
($ millions)
---------------------------------------------------------------------
Revenue 9.5 12.6
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Energy Supply Costs 3.7 5.1
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Operating Expenses 1.5 2.0
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Amortization 1.1 1.4
---------------------------------------------------------------------
Finance Charges 0.4 0.6
---------------------------------------------------------------------
Earnings 2.8 3.5
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(1) Annual financial data is from August 28, 2006, the date of
acquisition of Fortis Turks and Caicos.
On August 28, 2006, Fortis, through a wholly owned subsidiary, acquired all of the outstanding shares of P.P.C. Limited and Atlantic Equipment & Power (Turks and Caicos) Ltd. (collectively referred to as "Fortis Turks and Caicos") for aggregate consideration of approximately $97.7 million (US$87.8 million). The purchase price net of assumed debt and acquisition costs was $75.6 million (US$68.0 million). The acquisition was initially financed through borrowings under the Corporation's credit facilities. A portion of such borrowings was repaid with partial proceeds of a preference share offering that was completed by the Corporation on September 28, 2006. The acquisition was immediately accretive to earnings. Fortis Turks and Caicos serves approximately 7,700 customers, or 80 per cent of electricity customers, in the Turks and Caicos Islands pursuant to 50-year licences that expire in 2036 and 2037. Fortis Turks and Caicos is regulated under a traditional rate of return on rate base approach, with a fixed rate of return of 17.5 per cent on a defined asset base of approximately US$50 million.
Earnings: Earnings from Fortis Turks and Caicos are from August 28, 2006 and were $2.8 million (US$2.4 million) during the quarter and $3.5 million (US$3.0 million) for the 4-month period ended December 31, 2006. Earnings from Fortis Turks and Caicos are being driven by economic growth throughout the utility's service territories. Electricity sales were 33 GWh during the quarter, up approximately 32 per cent, or 8 GWh, from electricity sales of 25 GWh during the same quarter last year. Electricity sales were 44 GWh during the 4-month period ended December 31, 2006, up approximately 26 per cent, or 9 GWh, from electricity sales of 35 GWh during the same period last year. Most of the growth in electricity sales was due to new construction taking place primarily on the island of Providenciales. Electricity sales growth at Fortis Turks and Caicos is expected to average in excess of 15 per cent annually over the next 5 years with investment in capital assets expected to average approximately US$15 million annually over the same time period.
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NON-REGULATED - FORTIS GENERATION
Non-Regulated - Fortis Generation
Financial Highlights (Unaudited)
Periods Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
Energy Sales (GWh) 2006 2005 Variance 2006 2005 Variance
---------------------------------------------------------------------
Belize 53 36 17 178 68 110
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Ontario 186 182 4 722 708 14
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Central Newfoundland 59 50 9 168 159 9
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British Columbia 4 8 (4) 30 39 (9)
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Upper New York State 38 35 3 105 75 30
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Total 340 311 29 1,203 1,049 154
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---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
($ millions) 2006 2005 Variance 2006 2005 Variance
---------------------------------------------------------------------
Revenue 20.2 26.0 (5.8) 79.4 84.0 (4.6)
---------------------------------------------------------------------
Energy Supply Costs 1.5 1.6 (0.1) 6.2 6.2 -
---------------------------------------------------------------------
Operating Expenses 4.0 6.1 (2.1) 15.2 17.8 (2.6)
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Amortization 2.6 2.6 - 10.5 10.4 0.1
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Finance Charges 2.3 2.7 (0.4) 10.0 14.0 (4.0)
---------------------------------------------------------------------
Gain on Settlement
of Contractual
Matters - - - - (10.0) 10.0
---------------------------------------------------------------------
Corporate Taxes 1.4 3.5 (2.1) 8.1 13.8 (5.7)
---------------------------------------------------------------------
Non-Controlling
Interest 1.6 1.0 0.6 2.7 2.2 0.5
---------------------------------------------------------------------
Earnings 6.8 8.5 (1.7) 26.7 29.6 (2.9)
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings: Earnings from Non-Regulated - Fortis Generation were $1.7 million lower during the quarter compared to the same quarter last year. The decrease was primarily due to lower average wholesale energy prices in Ontario, a lower contracted price for energy sales in Belize, partially offset by increased production, lower operating expenses and lower effective corporate income taxes. Annual earnings from Non-Regulated - Fortis Generation were $2.9 million lower than last year. Earnings last year included the $10.0 million ($7.9 million after-tax) Ontario Settlement gain. Excluding the impact of the Ontario Settlement gain, annual earnings were $5.0 million higher than last year. The increase was primarily due to higher production and decreased finance charges largely in Belize, lower operating expenses and lower effective corporate income taxes, partially offset by the impact of lower average wholesale energy prices in Ontario.
Energy Sales: Energy sales were 29 GWh, or 9.3 per cent, higher quarter over quarter, driven by higher hydroelectric production at the Mollejon and Chalillo generating facilities in Belize, due to the operation of the Chalillo storage facility and higher rainfall levels, and increased production in central Newfoundland due to higher rainfall levels. Annual energy sales were 154 GWh, or 14.7 per cent, higher than last year, largely driven by higher hydroelectric production in Belize and upper New York State. The annual increase in production in Belize was due to the factors described for the quarter, with production in 2006 more than two-and-a-half times that experienced in 2005. Production in upper New York State increased primarily due to nearly 9 months of operations of the Dolgeville plant in 2006 compared to almost 4 months last year, and higher production at the Moose River plant. In late January 2005, the Dolgeville plant went out of service as a result of flooding and did not resume production until October 2005. In late June 2006, the Dolgeville plant experienced a disruption in water supply due to flooding and resumed production late in the third quarter of 2006.
Revenue: Revenue was $5.8 million lower during the quarter compared to the same quarter last year, primarily due to lower average wholesale energy prices in Ontario and a lower contracted price for energy sales in Belize, partially offset by increased production. The average wholesale energy price per megawatt hour ("MWh") in Ontario was $42.69 compared to $71.46 for the same quarter last year, resulting in a decrease in revenue of approximately $4.6 million during the quarter compared to the same quarter last year. As stipulated in the power sales agreement, annual production in Belize above 100 GWh is sold at a price that is approximately 45 per cent below the price at which production below 100 GWh is sold. All of the production in Belize during the fourth quarter was sold at the lower price while all production in the same period last year was sold at the higher price.
Annual revenue was $4.6 million lower than last year, driven by lower average wholesale energy prices in Ontario, partially offset by increased production largely in Belize and the receipt of $1.2 million in insurance proceeds. The average annual wholesale energy price per MWh in Ontario was $46.38 compared to $68.49 last year, resulting in a decrease in annual revenue of approximately $14.2 million. The insurance proceeds related to the Dolgeville plant in upper New York State as a result of the 2005 flood and represented the final amounts received related to property damage and business interruption loss insurance claims.
Expenses: Operating expenses were $2.1 million lower during the quarter compared to the same quarter last year; however, operating expenses during the fourth quarter last year included a $1.7 million write down of assets associated with the lay-up of the Rankine Generating Station and $0.5 million of costs associated with an early retirement program at FortisOntario, partially offset by a $0.8 million insurance gain related to the involuntary disposition of assets associated with the 2005 Dolgeville flood. During the fourth quarter of 2006, operating expenses were favourably impacted by cost savings of approximately $0.6 million associated with the cessation of operations at the Rankine Generating Station, upon implementation of the Niagara Exchange Agreement in late 2005. Annual operating expenses were $2.6 million lower than last year, largely due to the factors described for the quarter in addition to operating expenses at FortisOntario last year including $0.3 million related to business development activities. Additionally, annual operating expenses in 2006 were favourably impacted by cost savings of approximately $1.0 million associated with the cessation of operations at the Rankine Generating Station.
Finance charges were $0.4 million lower during the quarter compared to the same quarter last year, largely due to the reduction in loan balances associated with regular principal repayments. Annual finance charges were $4.0 million lower than last year, primarily due to the reduction of inter-company finance charges in the Belizean operations and the early repayment of a $22.5 million term loan in the second quarter of 2005 associated with the Ontario operations.
Corporate taxes were $2.1 million lower during the quarter compared to the same quarter last year, primarily due to lower earnings before corporate income taxes and the recording of the impact of certain tax deductions finalized in 2006 associated with the current and prior taxation years. Annual corporate taxes were $5.7 million lower than last year, primarily due to lower earnings before corporate income taxes at the taxable jurisdictions and an increase in the proportion of tax-exempt Belizean operation earnings.
NON-REGULATED - FORTIS PROPERTIES
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-Regulated - Fortis Properties
Financial Highlights (Unaudited)
Periods Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
($ millions) 2006 2005 Variance 2006 2005 Variance
---------------------------------------------------------------------
Real Estate Revenue 13.8 13.2 0.6 54.8 52.9 1.9
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Hospitality Revenue 28.1 25.1 3.0 108.1 101.5 6.6
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Total Revenue 41.9 38.3 3.6 162.9 154.4 8.5
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Operating Expenses 28.3 25.7 2.6 105.3 100.0 5.3
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Amortization 3.6 3.1 0.5 12.4 11.2 1.2
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Finance Charges 5.6 5.2 0.4 21.0 20.0 1.0
---------------------------------------------------------------------
Gain on Sale of
Income Producing
Property - - - (2.1) - (2.1)
---------------------------------------------------------------------
Corporate Taxes 1.6 1.4 0.2 7.6 9.1 (1.5)
---------------------------------------------------------------------
Earnings 2.8 2.9 (0.1) 18.7 14.1 4.6
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings: Fortis Properties' earnings were comparable quarter over quarter. Growth in the Company's hotel operations in western Canada, including contributions from the 4 hotels acquired on November 1, 2006, and contributions from the operations of several expanded properties were offset by higher amortization costs and finance charges. Annual earnings were $4.6 million higher than last year, primarily due to a $2.1 million ($1.6 million after-tax) gain on the sale of Days Inn Sydney during the second quarter of 2006, lower corporate income taxes, growth in the Company's hotel operations in western Canada driven by the Greenwood Inns and contributions from the operations of several expanded properties. The increase was partially offset by higher amortization costs and finance charges.
On November 1, 2006, Fortis Properties purchased 4 hotels in Alberta and British Columbia from Lodge Motel (Kelowna) Ltd. for an aggregate purchase price of approximately $52.0 million, including assumed debt. The 4 acquired hotels were the Holiday Inn Express and Suites, and Best Western in Medicine Hat, Alberta; Ramada Hotel and Suites in Lethbridge, Alberta; and Holiday Inn Express in Kelowna, British Columbia. The acquisition increased the hospitality operations of Fortis Properties by 454 rooms.
During the second quarter of 2006, Fortis Properties completed the expansion of the Holiday Inn Sarnia, with a new 5-storey tower increasing rooms by 70 and an additional 3,000 square feet of banquet space, and the 11,000-square foot expansion of the conference facilities at the Holiday Inn Kitchener-Waterloo. The 57,000-square foot expansion of the Blue Cross Centre in Moncton was completed during the third quarter of 2006. Total capital expenditures related to these projects were approximately $16.3 million, with approximately $9.3 million spent in 2006.
Revenue: Real estate revenue was $0.6 million and $1.9 million higher quarter over quarter and year over year, respectively, due to the leasing of the Blue Cross Centre expansion and growth experienced in most of the Company's operating regions.
The occupancy rate in the Real Estate Division was 94.9 per cent as at December 31, 2006, down from 95.9 per cent as at December 31, 2005. The decrease in occupancy was primarily attributable to vacancies at the rural Newfoundland mall properties and recent lease expiries at the Brunswick Square property in New Brunswick.
Hospitality revenue was $3.0 million higher quarter over quarter, primarily due to growth in the Company's operations in western Canada and additional revenue received from the expanded Ontario hotels, partially offset by the elimination of revenue following the sale of Days Inn Sydney. Revenue per available room ("REVPAR") for the fourth quarter of 2006 was $67.84 compared to $63.38 for the same quarter last year. The 7.0 per cent increase in REVPAR was attributable to increases in both average occupancy and average room rates.
Annual hospitality revenue was $6.6 million higher than last year, driven by growth experienced in the Company's hotel operations in western Canada, the first full year of operations of the expanded Delta St. John's Hotel and the impact of the expanded Ontario hotels, partially offset by the elimination of revenue following the sale of Days Inn Sydney. REVPAR for 2006 was $72.67 compared to $70.95 for 2005. The 2.4 per cent increase in REVPAR was due to increases in both average occupancy and average room rates.
Expenses: Operating expenses were $2.6 million and $5.3 million higher quarter over quarter and year over year, respectively. The increases were driven primarily by the Company's hotel operations in western Canada and the impact of the expanded hotel properties. The increases were partially offset by the elimination of operating expenses following the sale of Days Inn Sydney.
Amortization costs were $0.5 million and $1.2 million higher quarter over quarter and year over year, respectively, due to the Company's capital program, including property expansions, and acquisition of hotels.
Finance charges were $0.4 million and $1.0 million higher quarter over quarter and year over year, respectively, primarily due to financing associated with the 4 newly acquired hotels and property expansions.
Annual corporate taxes were $1.5 million lower than last year, largely due to the reduction of future income tax liability balances resulting from enacted future Federal income tax rate reductions and the elimination of the Federal Large Corporations' Tax, effective January 1, 2006.
CORPORATE
---------------------------------------------------------------------
---------------------------------------------------------------------
Corporate
Financial Highlights (Unaudited)
Periods Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
($ millions) 2006 2005 Variance 2006 2005 Variance
---------------------------------------------------------------------
Total Revenue 2.7 1.9 0.8 9.0 10.0 (1.0)
---------------------------------------------------------------------
Operating Expenses 3.1 3.0 0.1 10.6 9.5 1.1
---------------------------------------------------------------------
Amortization 0.7 0.8 (0.1) 3.0 2.9 0.1
---------------------------------------------------------------------
Finance Charges (1) 10.9 9.6 1.3 40.5 38.9 1.6
---------------------------------------------------------------------
Foreign Exchange
Gain - - - (2.1) (2.0) (0.1)
---------------------------------------------------------------------
Corporate Tax
Recovery (2.6) (2.9) 0.3 (9.9) (8.3) (1.6)
---------------------------------------------------------------------
Non-Controlling
Interest - - - (0.2) (0.2) -
---------------------------------------------------------------------
Preference share
dividends 1.6 - 1.6 1.6 - 1.6
---------------------------------------------------------------------
Net Corporate
Expenses (11.0) (8.6) (2.4) (34.5) (30.8) (3.7)
---------------------------------------------------------------------
(1) Includes dividends on preference shares classified as long-term
liabilities.
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---------------------------------------------------------------------
The Corporate segment captures expense and revenue items not specifically related to any operating segment. Included in the Corporate segment are finance charges, including interest on debt incurred directly by Fortis and dividends on preference shares classified as long-term liabilities, foreign exchange gains or losses, dividends on preference shares classified as equity, other corporate expenses, net of recoveries from subsidiaries, interest and miscellaneous revenues, and corporate income taxes.
Net corporate expenses were $2.4 million higher quarter over quarter, primarily due to higher preference share dividends associated with the issue of the First Preference Shares, Series F, increased finance charges, and a lower corporate income tax recovery, partially offset by higher inter-company interest revenue. Finance charges increased due to higher drawings on corporate credit facilities and interest on US$40 million of unsecured subordinated convertible debentures issued in November 2006. The corporate income tax recovery was lower during the quarter compared to the same quarter last year, primarily due to the difference in the timing of recognition of items for income tax purposes compared to accounting purposes. Operating expenses were comparable quarter over quarter. Operating expenses during the fourth quarter last year included $1.2 million of charges resulting from restructuring costs associated with the western utilities which had not been provided for in the acquisition purchase price. This impact on quarterly comparison of operating expenses was offset primarily by increased pension and compensation expenses during the fourth quarter of 2006.
Annual net corporate expenses were $3.7 million higher than last year, primarily due to increased finance charges, higher preference share dividends associated with the issue of the First Preference Shares, Series F, higher operating expenses, and lower inter-company interest revenue. Annual finance charges were higher than last year due to increased drawings on corporate credit facilities and interest on US$40 million of unsecured subordinated convertible debentures issued in November 2006, partially offset by lower interest costs of $0.8 million on US dollar-denominated debt as a result of the weakening of the US dollar against the Canadian dollar during 2006. Operating expenses last year included $1.8 million of charges resulting from restructuring and related costs associated with the western utilities as described above for the quarter. The increase in annual operating expenses was driven by business development costs of $1.7 million incurred in 2006 and an increase in pension and compensation expenses of $1.8 million, partially offset by miscellaneous credits recorded during 2006 that reduced operating expenses by approximately $0.6 million.
Quarterly and annual pension expense increased compared to the same periods last year, largely due to pension plan changes and a decrease in the assumed discount rate used to calculate pension expense. Compensation expense increased due to the impact of the appreciation of the Corporation's Common Shares on the measurement and expensing of Restricted Share Units ("RSUs") and Directors' Deferred Share Units ("DSUs") issued under the Corporation's RSU and DSU Plans.
On September 28, 2006, Fortis issued 5,000,000 4.90% First Preference Shares, Series F for gross proceeds of $125 million, or approximately $122.5 million net of after-tax expenses. The net proceeds were largely used to partially fund the recent acquisition of Fortis Turks and Caicos and to fund equity injections into FortisAlberta and FortisBC in support of their extensive capital expenditure programs. The First Preference Shares, Series F are classified as equity on the balance sheet as they are not redeemable at the option of the shareholder. The Corporation's previously issued First Preference Shares, Series C and First Preference Shares, Series E, however, are redeemable at the option of the shareholder and, therefore, are classified as long-term liabilities on the balance sheet.
CONSOLIDATED FINANCIAL POSITION
The following table outlines the significant changes in the consolidated balance sheets between December 31, 2006 and December 31, 2005.
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Fortis Inc.
Significant Changes in the Consolidated Balance Sheets (Unaudited)
between December 31, 2006 and December 31, 2005
---------------------------------------------------------------------
Increase
($ millions) (Decrease) Explanation
---------------------------------------------------------------------
Accounts receivable 73.9 The increase primarily related to
accounts receivable of $21.3 million
at Caribbean Utilities and $10.3
million at Fortis Turks and Caicos,
higher transmission revenue accruals
at FortisAlberta as a result of costs
previously paid by generators now
being paid by load customers, and
higher accounts receivable balances
at most of the regulated utilities
due to higher revenues.
---------------------------------------------------------------------
Materials and 14.1 The increase primarily related to
supplies materials and supplies of $6.1
million at Caribbean Utilities and
$5.0 million at Fortis Turks and
Caicos.
---------------------------------------------------------------------
Deferred charges and 26.7 The increase primarily related to the
other assets undepreciated balance of
contributions made by FortisAlberta
to the AESO for investment in
transmission facilities, pension
funding in excess of pension expense
at Newfoundland Power, an investment
at Fortis Properties required as
collateral for debt associated with
Days Inn Sydney, and $1.9 million of
deferred charges and other assets at
Caribbean Utilities. The increase
was partially offset by amortization
during 2006.
---------------------------------------------------------------------
Regulatory assets 50.7 The increase primarily related to
- long-term an increase in AESO charges deferrals
at FortisAlberta, the deferred
recovery of utility capital asset
amortization at Newfoundland Power,
an increase in regulatory assets
associated with other post-employment
benefits at Newfoundland Power,
FortisAlberta and FortisBC, combined
with $13.7 million of regulatory
assets at Caribbean Utilities. The
increase was partially offset by a
$6.1 million reduction in the cost of
power rate stabilization account at
Belize Electricity.
---------------------------------------------------------------------
Future income (51.8) The decrease primarily related to
tax asset - long-term the conversion to the taxes payable
method of accounting for federal
income taxes from the tax liability
method for regulatory purposes at
FortisAlberta. As a result, the
future income tax asset and the
corresponding offsetting regulatory
liability at FortisAlberta were each
reduced by approximately
$50.7 million during the second
quarter of 2006.
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Utility capital 674.5 The increase primarily related to
assets $483.1 million invested in
electricity systems, $45.8 million of
utility capital assets acquired upon
the acquisition of Fortis Turks and
Caicos and $318.6 million of utility
assets acquired upon the acquisition
of a controlling interest in
Caribbean Utilities. The increase was
partially offset by customer
contributions and amortization for
2006.
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Income producing 54.4 On November 1, 2006, Fortis
properties Properties acquired 4 hotels in
Alberta and British Columbia for an
aggregate purchase price of
approximately $52 million. The
remainder of the increase related to
the expansions of Holiday Inn Sarnia,
Holiday Inn Kitchener-Waterloo and
the Blue Cross Centre, partially
offset by the sale of Days Inn Sydney
and amortization.
---------------------------------------------------------------------
Investments (164.9) The decrease related to the
Corporation's investment in Caribbean
Utilities which, upon acquiring a
controlling interest in November
2006, has been consolidated in the
financial statements of the
Corporation. Previously, the
Corporation's investment in Caribbean
Utilities was accounted for on the
equity basis.
---------------------------------------------------------------------
Goodwill 149.2 The increase related to US$34.8
million of goodwill recorded upon the
acquisition of Fortis Turks and
Caicos in August 2006, US$93.2
million of goodwill recorded upon the
acquisition of a controlling interest
in Caribbean Utilities in November
2006 and the impact of foreign
exchange on the translation of the US
dollar-denominated goodwill amounts.
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Short-term borrowings 48.8 The increase related to short-term
borrowings at Maritime Electric,
FortisBC and FortisAlberta, primarily
to fund utility capital expenditures
and operating activities and to fund
Maritime Electric's $5.9 million
corporate income tax deposit. The
increase also related to short-term
borrowings of $9.3 million at
Caribbean Utilities. The increase was
partially offset by repayment of
short-term borrowings at Belize
Electricity, Fortis Generation and
the Corporation.
---------------------------------------------------------------------
Accounts payable and 68.5 The increase primarily related to
accrued charges accounts payable and accrued charges
of $29.5 million at Caribbean
Utilities and $6.6 million at Fortis
Turks and Caicos. The increase also
related to higher accounts payable
and accrued charges at FortisAlberta
as a result of the Company's capital
expenditure program and costs
previously paid by generators now
being paid by load customers, and the
impact of higher purchased power
costs at Newfoundland Power.
---------------------------------------------------------------------
Income taxes payable (22.8) The decrease primarily related to the
payment of income taxes at
FortisAlberta, Newfoundland Power,
FortisOntario and Maritime Electric
during 2006.
---------------------------------------------------------------------
Deferred credits 14.7 The increase primarily related to the
accrual of post-employment benefits
at Newfoundland Power, FortisBC and
the Corporation, combined with
customer deposits associated with
Fortis Turks and Caicos.
---------------------------------------------------------------------
Regulatory (28.8) The decrease related to the
liabilities conversion to the taxes
- long-term payable method of accounting for
federal income taxes from the tax
liability method for regulatory
purposes at FortisAlberta. As a
result, both the future income tax
asset and the corresponding
offsetting regulatory liability at
FortisAlberta were each reduced by
approximately $50.7 million during
the second quarter of 2006. The
decrease was partially offset by an
increase in the future removal and
site restoration provision at
FortisAlberta, FortisBC, Newfoundland
Power and Maritime Electric.
---------------------------------------------------------------------
Future income tax 13.0 The increase primarily related to
liability a taxable temporary difference
- long-term related to the AESO charges deferrals
at FortisAlberta.
---------------------------------------------------------------------
Long-term debt and 476.2 The increase related to
capital lease long-term debt of $173.4 million
obligations at Caribbean Utilities and
(including current $23.2 million at Fortis Turks and
portion) Caicos, combined with increased net
drawings on long-term credit
facilities of $66.1 million, $39.2
million, $23.4 million and $21.0
million by the Corporation,
FortisAlberta, Newfoundland Power and
FortisBC, respectively.
The increase also related to $100
million of unsecured public
debentures issued by FortisAlberta on
April 21, 2006, US$40 million of
unsecured subordinated convertible
debentures issued by the Corporation
on November 7, 2006, $11.6 million in
long-term debt assumed by Fortis
Properties upon the acquisition of
the 4 hotels on November 1, 2006 and
approximately $8.5 million in new
long-term debt at Belize Electricity.
The increase was partially offset by
regular debt repayments during the
year.
---------------------------------------------------------------------
Non-controlling 90.9 The increase primarily related to
interest the 46 per cent non-controlling
interest in Caribbean Utilities
recognized upon consolidation of the
financial results of Caribbean
Utilities upon Fortis acquiring
controlling interest in the Company
in November 2006, combined with the
non-controlling proceeds related to
Belize Electricity's share offering
in June 2006.
---------------------------------------------------------------------
Shareholders' equity 184.7 The increase primarily related to the
$125 million preference share issue,
$122.5 million net of after-tax
expenses, combined with net earnings
reported for 2006, less common share
dividends. The remainder of the
increase primarily related to the
issuance of common shares under the
Corporation's share purchase,
dividend reinvestment and stock
option plans, combined with an
increase in the equity portion of
convertible debentures associated
with the Corporation's US$40 million
of unsecured subordinated convertible
debentures issued on November 7,
2006.
The increase was partially offset by
a foreign currency translation
adjustment of $39.3 million upon
consolidation of the previously
reported equity investment in
Caribbean Utilities.
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LIQUIDITY
The following table outlines the summary of cash flows.
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Fortis Inc.
Summary of Cash Flows (Unaudited)
Periods Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
($ millions) 2006 2005 Variance 2006 2005 Variance
---------------------------------------------------------------------
Cash, beginning
of period 61.4 18.6 42.8 33.4 37.2 (3.8)
---------------------------------------------------------------------
Cash provided by
(used in)
---------------------------------------------------------------------
Operating
activities 59.5 76.1 (16.6) 263.1 303.6 (40.5)
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Investing
activities (243.3)(125.3) (118.0)(634.1)(467.1) (167.0)
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Financing
activities 162.8 64.0 98.8 378.4 159.9 218.5
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Foreign currency
impact on cash
balances 0.5 - 0.5 0.1 (0.2) 0.3
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Cash, end of
period 40.9 33.4 7.5 40.9 33.4 7.5
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Operating Activities: Cash flow from operations, after working capital adjustments, decreased $16.6 million during the quarter compared to the same period last year. Cash flow from working capital adjustments decreased $24.2 million primarily due to the timing of amounts due from customers, income taxes payable and accounts payable at FortisAlberta, FortisOntario, Newfoundland Power and Maritime Electric. This decrease was partially offset by earnings contribution from Fortis Turks and Caicos and increased earnings at most subsidiaries, partially offset by the timing differences between when transmission costs were paid and when transmission revenues were collected at FortisAlberta.
Annual cash flow from operations, after working capital adjustments, was $40.5 million lower than last year. Cash flow from operations, after working capital adjustments, last year included the $10 million Ontario Settlement gain and the corporate income tax refund and related interest at Newfoundland Power of approximately $9.0 million. The decrease in cash flow from operations, after working capital adjustments, was primarily due to timing differences between when transmission costs were paid and when transmission revenues were collected at FortisAlberta, higher cash taxes paid at FortisAlberta related to the previous taxation year, the payment of a $5.9 million corporate income tax deposit at Maritime Electric, the impact of lower average wholesale energy prices in Ontario and the timing of amounts due from customers, income taxes payable and accounts payable at Maritime Electric and FortisOntario. The decrease was partially offset by the recovery of higher amortization expense through customer rates at FortisBC, the impact of increased electricity rates at Belize Electricity, higher earnings at BECOL due to the operation of the Chalillo storage facility and improved hydrology and earnings contribution from Fortis Turks and Caicos.
Investing Activities: Cash used in investing activities was $118.0 million higher during the quarter compared to the same period last year. The increase was primarily due to the acquisition of an additional 16 per cent ownership interest in Caribbean Utilities in November 2006 for a net purchase price of $53.0 million, the purchase of 4 hotels in Alberta and British Columbia in November 2006 for a net purchase price of $40.4 million, increased utility capital expenditures and increased deferred charges at FortisAlberta related to payments made to the AESO associated with transmission capital projects, partially offset by higher contributions in aid of construction.
Cash used in investing activities during 2006 was $167.0 million higher than last year. The increase was primarily due to the acquisition of Fortis Turks and Caicos in August 2006 for a net purchase price of $75.6 million, the acquisition of an additional 16 per cent ownership interest in Caribbean Utilities in November 2006 for a net purchase price of $53.0 million, the purchase of 4 hotels in Alberta and British Columbia in November 2006 for a net purchase price of $40.4 million, increased utility capital expenditures, and increased deferred charges at FortisAlberta related to payments made to the AESO associated with transmission capital projects. The increase was partially offset by lower capital expenditures associated with income producing properties, increased contributions in aid of construction, and proceeds from the sale of Days Inn Sydney in June 2006.
Gross utility capital expenditures were $152.5 million for the fourth quarter of 2006, $18.5 million higher than gross utility capital expenditures for the same quarter last year. The increase was primarily related to capital spending at FortisAlberta, largely driven by customer growth and facilities costs, and capital spending at Fortis Turks and Caicos. Annual gross utility capital expenditures were $483.1 million, $58.3 million higher than last year. The increase primarily related to capital spending at FortisAlberta, largely driven by customer growth, rising material and labour costs, capacity increases, system improvements and substation upgrades. The increase was partially offset by decreased utility capital expenditures at Maritime Electric and BECOL 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, respectively.
Capital expenditures associated with income-producing properties were $5.8 million lower during the quarter compared to the same period last year. Capital expenditures for income producing properties during the fourth quarter of 2005 included expenditures largely related to the expansions of Holiday Inn Sarnia and the Blue Cross Centre in Moncton.
Annual capital expenditures associated with income producing properties were $4.4 million lower than last year. During 2006 and 2005, capital expenditures associated with income producing properties included expenditures related to the expansions of Holiday Inn Sarnia, Holiday Inn Kitchener-Waterloo and the Blue Cross Centre in Moncton, which were completed in 2006. Capital expenditures associated with income producing properties during 2005 also included expenditures related to the completion of the expansion of Delta St. John's Hotel.
Contributions received in aid of construction were $2.0 million and $8.4 million higher quarter over quarter and year over year, respectively, primarily due to increased contributions associated with FortisAlberta's capital expenditure program.
Financing Activities: Cash provided from financing activities was $162.8 million during the quarter, $98.8 million higher than last year.
During the fourth quarter, the Corporation issued, by way of private placement, US$40 million of unsecured subordinated convertible debentures to fund, in part, the acquisition in November 2006 of an additional 16 per cent ownership interest in Caribbean Utilities. Additionally, the Corporation drew approximately $33.6 million under long-term credit facilities primarily to finance, in part, the acquisition, on an interim basis, of the 4 hotels in Alberta and British Columbia in November 2006 and to finance, in part, the acquisition of the additional 16 per cent ownership interest in Caribbean Utilities. The remaining borrowings under long-term credit facilities during the quarter largely related to FortisAlberta, Newfoundland Power and FortisBC at $62.0 million, $14.7 million and $11.0 million, respectively, to primarily fund their respective capital expenditure programs. During the fourth quarter last year, FortisBC issued 30-year 5.6% $100 million senior unsecured debentures of which $70 million was used to repay borrowings under its long-term credit facilities. Additionally, FortisAlberta drew $35.8 million under long-term credit facilities primarily to fund its capital expenditure program and the Corporation drew $18.0 million under long-term credit facilities primarily to fund equity injections into subsidiaries.
Cash provided from financing activities during 2006 of $378.4 million was $218.5 million higher than last year.
In September 2006, the Corporation issued preference shares for net proceeds of approximately $121.1 million. A portion of the proceeds were used to repay certain indebtedness under Corporate long-term credit facilities as outlined below. In March 2005, the Corporation issued 6.9 million common shares for net proceeds of approximately $123.9 million which were used, in part, to repay short-term indebtedness associated with the acquisition of FortisAlberta and FortisBC in 2004.
During 2006, the Corporation issued, by way of private placement, US$40 million of unsecured subordinated convertible debentures to fund, in part, the acquisition in November 2006 of an additional 16 per cent ownership interest in Caribbean Utilities. Additionally, the Corporation drew approximately $135.3 million under long-term credit facilities to finance, on an interim basis, the acquisition of Fortis Turks and Caicos; to finance, in part, the acquisition by Fortis Properties of 4 hotels in Alberta and British Columbia in November 2006 and the acquisition of an additional 16 per cent ownership interest in Caribbean Utilities in November 2006; to fund an equity injection into one of the Corporation's western utilities; and for general corporate purposes. Additionally, FortisAlberta issued $100 million in unsecured debentures in April 2006. The net proceeds of the debenture offering were used primarily to repay existing indebtedness on FortisAlberta's long-term credit facility. Belize Electricity also issued approximately $8.5 million in debentures during 2006. During 2006, an aggregate of $176.3 million was drawn under long-term credit facilities at FortisAlberta, FortisBC and Newfoundland Power, primarily to fund their respective capital expenditure programs. During 2005, proceeds from long-term debt primarily related to the issue by FortisBC of 30-year 5.6% $100 million senior unsecured debentures, the proceeds of which were primarily used to repay borrowings under its long-term credit facilities, a $60 million bond issue at Newfoundland Power, $41.9 million of financing related to the acquisition of the Greenwood Inns and approximately $126.8 million of drawings under long-term credit facilities at FortisAlberta and FortisBC primarily to fund their respective capital expenditure programs. The Corporation also drew $18.0 million under long-term credit facilities during 2005 for the reason described for the fourth quarter of 2005.
During 2006, significant repayments of long-term debt and capital lease obligations primarily related to the repayment by the Corporation of approximately $71.5 million previously borrowed under long-term credit facilities with partial proceeds from the preference share offering, and the repayment by FortisAlberta of approximately $97.1 million of indebtedness under its long-term credit facility primarily with proceeds from the $100 million unsecured debenture issue. During 2005, long-term debt and capital lease repayments included the early repayment by FortisOntario of a $22.5 million term loan in May 2005.
During the second quarter of 2006, the Corporation received approximately $10.6 million in advances from non-controlling shareholders related to Belize Electricity's share offering in June 2006.
The remaining financing activities during the fourth quarter and annual periods in 2006 and 2005 largely related to dividend payments, normal course issuance of common shares through the Corporation's share purchase and stock option plans, regularly scheduled long-term debt repayments and normal course changes in short-term borrowings.
Contractual Obligations: The consolidated contractual obligations over the next 5 years and for periods thereafter, as at December 31, 2006, are outlined in the following table.
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Fortis Inc.
Contractual Obligations (Unaudited)
as at December 31, 2006
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lower than/ greater greater
equals than 4-5 than
($ millions) Total 1 year 1-3 years years 5 years
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Long-term debt 2,614.1 83.6 205.6 392.8 1,932.1
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Brilliant Terminal
Station
("BTS") (1) 68.2 2.6 5.1 5.1 55.4
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Power purchase
obligations
FortisBC (2) 2,884.6 38.6 74.1 76.0 2,695.9
FortisOntario (3) 310.7 21.9 42.7 44.5 201.6
Maritime
Electric (4) 38.7 30.1 8.6 - -
Belize
Electricity (5) 20.2 2.7 3.4 2.3 11.8
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Capital cost (6) 426.5 15.7 27.9 35.4 347.5
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Joint-use asset
and shared
service
agreements (7) 64.5 3.8 7.7 6.7 46.3
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Office lease
- FortisBC (8) 21.7 1.1 2.6 2.4 15.6
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Caribbean
Utilities (9) 19.2 7.7 11.5 - -
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Operating lease
obligations (10) 18.0 4.5 7.6 5.2 0.7
---------------------------------------------------------------------
Other 4.2 1.4 1.6 0.1 1.1
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Total 6,490.6 213.7 398.4 570.5 5,308.0
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(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 the
Owners a charge related to the recovery of the capital cost of the
BTS and related operating costs.
(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 Brilliant
hydroelectric plant 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 2-year contract in
place with Hydro-Quebec Energy Marketing which expires June 30, 2008.
This take-or-pay contract provides energy on an as-needed basis but
charges for 100 MW of capacity at $0.14 million per month.
(4) Maritime Electric has 1 take-or-pay contract for the purchase of
either capacity or energy. This contract totals approximately $38.7
million through March 31, 2008.
(5) Power purchase obligations for Belize Electricity include a 15-
year power purchase agreement between Belize Electricity and Hydro
Maya for the supply of 3 MW of capacity, which is scheduled to
commence early in 2007, and a 2-year power purchase agreement between
Belize Electricity and CFE of Mexico, expiring August 2008, for the
supply of 15 MW of firm energy. Belize Electricity has also signed a
15-year power purchase agreement with Belize Cogeneration Energy
Limited ("Belcogen") that provides for the supply of approximately 14
MW of capacity, which is scheduled to commence in the second half of
2008. Belcogen has not yet commenced construction of the related
bagasse-fired electric generating facility; therefore, the obligation
related to the purchase power agreement with Belcogen has not been
included in the Corporation's contractual obligations.
(6) 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.
(7) 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 2011 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 extensions
based on mutually agreeable terms.
(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.
(9) During 2006, Caribbean Utilities entered into a project agreement
for the purchase and turnkey installation of one 16-MW medium-speed
diesel generating unit and auxiliary equipment. This unit is
scheduled for installation to meet the summer 2007 demand. The
contract cost is US$18.4 million and the total estimated cost for
completion of the project is US$22.2 million. As at October 31, 2006,
approximately US$5.7 million had been spent related to this project.
(10) Operating lease obligations include certain office, vehicle and
equipment leases and the lease of electricity distribution assets of
Port Colborne Hydro Inc.
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CAPITAL RESOURCES
The Corporation's principal business of regulated electric utilities requires Fortis to have ongoing access to capital to allow it to build and maintain its electricity systems. In order to ensure access to capital is maintained, the Corporation targets a long-term capital structure that includes a minimum of 40 per cent equity and 60 per cent debt as well as investment grade credit ratings. The Corporation targets the equity component of its capital structure to consist of at least 75 per cent common share equity. The capital structure of Fortis is presented in the following table.
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Fortis Inc.
Capital Structure (Unaudited)
---------------------------------------------------------------------
December 31, 2006 December 31, 2005
---------------------------------------------------------------------
($ millions) (%) ($ millions) (%)
---------------------------------------------------------------------
Total debt and capital
lease obligations
(net of cash) 2,700.0 61.1 2,182.5 58.7
---------------------------------------------------------------------
Preference shares (1) 442.0 10.0 319.5 8.6
---------------------------------------------------------------------
Common shareholders' equity (2) 1,275.6 28.9 1,213.4 32.7
---------------------------------------------------------------------
Total 4,417.6 100.0 3,715.4 100.0
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(1) Includes preference shares classified as both long-term
liabilities and equity
(2) On January 18, 2007, Fortis issued 5,170,000 Common Shares for
proceeds of $149.9 million, $145.6 million net of after-tax expenses,
improving the common shareholders' equity component of capital
structure to approximately 32 per cent and total equity to
approximately 42 per cent.
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The change in the Corporation's capital structure is primarily the result of the issue in September 2006 of 5,000,000, 4.90% First Preference Shares, Series F for proceeds of $122.5 million, net of after-tax expenses, increased debt primarily to finance the consolidated capital program of Fortis and debt associated with Fortis Turks and Caicos and Caribbean Utilities, combined with net earnings, less common share dividends, of $74.6 million during 2006.
As at December 31, 2006, the Corporation's unsecured debt credit ratings were as follows:
Standard & Poor's ("S&P") BBB
Dominion Bond Rating Service ("DBRS") BBB(high)
Capital Program: The Corporation's principal business of regulated electric utilities is capital intensive. Capital investment in electrical infrastructure (also known as rate base) is required to ensure continued and enhanced performance, reliability and safety of the electricity systems, and to meet customer growth. All costs that are maintenance and repairs in nature are expensed as incurred. Costs related to replacements, upgrades and betterments of capital assets are capitalized as incurred. During 2006, gross consolidated utility capital expenditures of Fortis were $483.1 million. Approximately 38 per cent of these expenditures were incurred to ensure the continued and enhanced performance, reliability and safety of the Corporation's generation, transmission and distribution assets; 45 per cent was incurred to meet customer growth with the remaining 17 per cent related to facilities, equipment, vehicles and information technology systems. Gross consolidated utility capital expenditures for 2007 are expected to be approximately $610 million. Approximately 33 per cent of these expenditures are expected to be incurred to ensure the continued and enhanced performance, reliability and safety of the Corporation's generation, transmission and distribution assets; 46 per cent is expected to meet customer growth with the remaining 21 per cent expected to relate to facilities, equipment, vehicles and information technology systems. Planned capital expenditures are based on detailed forecasts such as customer demand, weather, cost of labour and material, as well as other factors which could change and cause actual expenditures to differ from forecasts.
Capital investment at FortisAlberta and FortisBC represented approximately 73 per cent of gross consolidated utility capital expenditures in 2006 and is expected to represent approximately 65 per cent of gross consolidated utility capital expenditures in 2007. The rate bases of FortisAlberta and FortisBC have increased approximately 29 per cent and 36 per cent, respectively, since the utilities were acquired in May 2004. Over the next 2 years, each utility's rate base is expected to grow approximately 30 per cent.
Gross consolidated utility capital expenditures over the next 5 years are expected to surpass $2.6 billion. The Corporation's total utility capital assets are expected to grow at an average annual rate of approximately 7 per cent over the next 5 years. Growth in utility capital assets is expected to be driven by FortisAlberta and FortisBC and their need to enhance electrical system reliability and meet strong customer 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 the issuance of common and preference shares. Fortis does not anticipate any difficulties with accessing the required capital.
Cash Flows: The Corporation's ability to service debt obligations as well as dividends on its common and preference shares is dependent on the financial results of the operating subsidiaries and the related cash payments from these subsidiaries. Certain regulated subsidiaries may be subject to restrictions which may limit their ability to distribute cash to Fortis.
At December 31, 2005, as outlined in the Fortis Inc. 2005 Annual Report, Belize Electricity was non-compliant with its debt service coverage ratio of 1.5 times related to its loans with the International Bank for Reconstruction and Development and with the Caribbean Development Bank. Belize Electricity's debt service coverage ratio improved during 2006 and, at December 31, 2006, Belize Electricity was compliant with its debt service coverage ratio of 1.5 times.
The Corporation and its subsidiaries had consolidated authorized lines of credit of $952.0 million, of which $546.7 million was unused at December 31, 2006. The following summary outlines the Corporation's credit facilities by reporting segments.
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Fortis Inc.
Credit Facilities (Unaudited)
---------------------------------------------------------------------
Total Total
Regulated as at as at
($ Utili- Fortis Fortis December December
millions) Corporate ties Generation Properties 31, 2006 31, 2006
---------------------------------------------------------------------
Total
credit
facilities 315.0 622.2 2.3 12.5 952.0 747.1
---------------------------------------------------------------------
Credit
facilities
utilized
Short-term
borrowings - (94.3) - (3.4) (97.7) (48.9)
---------------------------------------------------------------------
Long-term
debt (84.1) (151.4) - - (235.5) (85.8)
---------------------------------------------------------------------
Letters of
credit
outstanding (4.6) (65.3) - (2.2) (72.1) (73.6)
---------------------------------------------------------------------
Credit
facilities
available 226.3 311.2 2.3 6.9 546.7 538.8
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At December 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 $100 million committed credit facility extending the term from 1 year to 3 years, with maturity now in January 2009.
In January 2006, Maritime Electric's $25 million non-revolving unsecured short-term bridge financing was extended until July 2007. In August 2006, the amount available on Maritime Electric's operating credit facilities was increased to $30 million from $25 million.
In March 2006, FortisAlberta amended its committed unsecured 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, with the consent of the lenders, 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. In July 2006, FortisAlberta entered into a demand credit facility for $10 million increasing the amount available to the Company under unsecured demand credit facilities to $20 million.
In May 2006, the maturity date of FortisBC's $50 million 364-day operating credit facility was extended to May 2007.
In June 2006, Fortis renegotiated and amended its $145 million and $50 million unsecured credit facilities extending the maturity dates of these facilities from May 2008 and January 2009 to May 2010 and January 2011, respectively. Additionally, in July 2006, the amount available under the committed unsecured $145 million facility was increased to $250 million. These credit facilities can be used for general corporate purposes, including acquisitions.
At December 31, 2006, Regulated Utilities' credit facilities included both a US$2.0 million overdraft facility and a US$9.0 million standby credit facility for hurricane damage at Fortis Turks and Caicos. No drawings were made on these facilities as at December 31, 2006.
At December 31, 2006, Regulated Utilities' credit facilities included a total of US$22.7 million related to Caribbean Utilities, consisting of a US$10.0 million capital expenditures line of credit, a US$5.0 million operating line of credit, a US$5.0 million catastrophe standby loan, and US$2.7 million in letters of credit and corporate credit card line. On November 27, 2006, Caribbean Utilities renegotiated its credit facilities, increasing its capital expenditures line of credit to US$17.0 million and increasing both its US$5.0 million operating line of credit and US$5.0 million catastrophe standby loan to US$7.5 million each, for total credit facilities of US$34.7 million. These changes to the credit facilities in November 2006 have not been reflected in the table above as the Corporation has consolidated the balance sheet of Caribbean Utilities as at November 7, 2006.
OFF-BALANCE SHEET ARRANGEMENTS
Disclosure is required of all off-balance sheet arrangements such as transactions, agreements or contractual arrangements with unconsolidated entities, structured finance entities, special purpose entities or variable interest entities that are reasonably likely to materially affect liquidity or the availability of, or requirements for, capital resources. The Corporation had no such off-balance sheet arrangements as at December 31, 2006.
BUSINESS RISK MANAGEMENT
There were no material changes to the Corporation's significant business risks for the year ended December 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: As required by the respective regulators, the allowed ROE for each of the Corporation's 3 largest utilities, FortisAlberta, FortisBC and Newfoundland Power, is formula based and tied to long-term Canada bond yields. Due to declining bond yields, the allowed ROEs for these utilities have been reset. The 2006 allowed ROEs for FortisAlberta, FortisBC and Newfoundland Power were 8.93 per cent, 9.20 per cent and 9.24 per cent, respectively. Effective January 1, 2007, the allowed ROEs for FortisAlberta, FortisBC and Newfoundland Power have been lowered to 8.51 per cent, 8.77 per cent and 8.60 per cent, respectively. Strong rate base growth at the western utilities is expected to more than offset the impact of the lower allowed ROEs while earnings at Newfoundland Power are expected to be slightly lower in 2007.
Hedging: With the acquisition of Fortis Turks and Cacois and of a controlling ownership interest in Caribbean Utilities in 2006, the impact on future earnings of foreign currency exchange rate fluctuations associated with the translation of US dollar borrowings has been reduced as all of the Corporation's US dollar borrowings have been designated as hedges against the Corporation's net investment in these and other foreign subsidiaries.
Weather: Upon acquiring a controlling ownership interest in Caribbean Utilities and upon the acquisition of Fortis Turks and Caicos, the Corporation's exposure to risks from natural disasters in the Caribbean region has increased. Specifically, the assets and earnings of Belize Electricity, Caribbean Utilities and Fortis Turks and Caicos are subject to hurricane risk. Similar to other Fortis utilities, these companies manage weather risks through insurance on generation assets, business interruption insurance and self insurance on transmission and distribution assets.
Capital Resources: The Corporation's financial position could be adversely affected if it or its operating subsidiaries fail to arrange sufficient and cost-effective financing to fund, among other things, capital expenditures and the repayment of maturing debt. Funds generated from operations after payment of expected expenses (including interest payments on any outstanding debt) will not be sufficient to fund the repayment of all outstanding liabilities when due and anticipated capital expenditures. The ability to arrange sufficient and cost-effective financing is subject to numerous factors including the results of operations and financial position of the Corporation and its subsidiaries, conditions in the capital and bank credit markets, ratings assigned by rating agencies and general economic conditions. There can be no assurance that sufficient capital will be available on acceptable terms to fund such capital expenditures and to repay existing debt.
Generally, the Corporation and its regulated utilities are subject to financial risk associated with changes to the credit ratings assigned to them by credit rating agencies. A change in the credit ratings could potentially increase or decrease finance charges of the Corporation.
Licences and Permits: The acquisition, ownership and operation of electric utilities and assets require numerous licences, permits, approvals and certificates from various levels of government and government agencies. The Corporation's regulated utilities and non-regulated generation operations may not be able to obtain or maintain all required regulatory approvals. If there is a delay in obtaining any required regulatory approval or if there is failure to maintain or obtain any required approval or failure to comply with any applicable law, regulation or condition of an approval, the operation of the assets and the sale of electricity could be prevented or become subject to additional costs, any of which could have a material adverse effect on the Corporation.
Separation of FortisBC from FortisAlberta: The final step required in the separation of FortisBC operations from FortisAlberta operations was completed during 2006 upon the repatriation of FortisBC's information technology systems from FortisAlberta.
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 areas of generation, transmission and distribution. The Company and 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. The Company and COPE reached an agreement which was ratified in early July 2006. The agreement expires on January 31, 2011.
The majority of employees at FortisAlberta are represented by the United Utility Workers' Association ("UUWA"). There were 2 collective agreements with UUWA. The Dispatch/Contact Centre Collective Agreement expired December 31, 2004 and the main collective agreement expired December 31, 2005. A new combined agreement was reached with UUWA during the second quarter of 2006. The new agreement expires on December 31, 2007 and FortisAlberta plans to initiate bargaining with the union in the fall of 2007.
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. Union negotiations commenced during the third quarter of 2006 for a new collective agreement and are ongoing.
CHANGE IN PRESENTATION
Prior to December 31, 2006, the regulatory provision at FortisAlberta, FortisBC, Newfoundland Power and Maritime Electric for future removal and site restoration costs was part of amortization expense and was recorded in accumulated amortization, as these costs were recoverable in amortization rates from customers. Actual costs of removal and site restoration incurred, net of salvage proceeds, were recorded against this provision in accumulated amortization. In accordance with Canadian GAAP, FortisOntario, Belize Electricity, Caribbean Utilities and Fortis Turks and Caicos are recording removal and site restoration costs in earnings when incurred. In the absence of rate regulation, removal and site restoration costs, net of salvage proceeds, at FortisAlberta, FortisBC, Newfoundland Power and Maritime Electric would be recognized as incurred rather than over the life of the asset through amortization expense. The Corporation has changed the presentation of the provision for future removal and site restoration to a regulatory liability rather than including it with accumulated amortization. This change in presentation has been applied retroactively, with restatement of 2005 comparative balances, and has had no impact on earnings. The effect of this change in presentation at December 31, 2006 was a $306.5 million (2005 - $280.9 million) increase in long-term regulatory liabilities and a $306.5 million (2005 - $280.9 million) increase in net utility capital assets resulting from a decrease in accumulated amortization.
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 transition to recording revenue on an accrual basis had no material impact on Newfoundland Power's annual earnings, but resulted in a shift in the Company's 2006 quarterly earnings compared to 2005. Adoption of the accrual method for revenue recognition gave rise to a $23.6 million balance sheet accrual for unbilled revenue at December 31, 2005. The PUB approved the recognition of $3.1 million in 2006 and $2.7 million in 2007 of the 2005 unbilled revenue as revenue in these years to offset the income tax impact of changing to the accrual method for revenue recognition. The disposition of the remaining 2005 unbilled revenue balance will be determined by future orders of the PUB.
Conditional Asset Retirement Obligations: On April 1, 2006, Fortis retroactively adopted EIC 159, Conditional Asset Retirement Obligations ("EIC 159"). EIC 159 requires an entity to recognize a liability for the fair value of an asset retirement obligation ("ARO") even though the timing and/or method of settlement are conditional on future events. While conditional AROs have been identified, no amounts have been recorded as they are immaterial to the Corporation's results of operations and financial position. The Corporation also has AROs which cannot be reasonably estimated at this time as the final date of removal of the related assets and the costs to do so cannot be reasonably determined as the assets are reasonably expected to operate in perpetuity due to the nature of their operation.
Corporate Income Taxes: Effective January 1, 2006, FortisAlberta is following the taxes payable method of accounting for federal income taxes. As prescribed by the 2006/2007 Negotiated Settlement Agreement, approved by the AEUB on June 29, 2006, corporate income tax expenses are now recovered through customer rates based only on income taxes that are currently payable for regulatory purposes. Therefore, current rates do not include the recovery of future income taxes related to certain temporary differences between the tax basis of assets and liabilities and their carrying amounts for regulatory purposes, as these taxes are expected to be collected in customer rates when they become payable. Accordingly, FortisAlberta no longer recognizes income taxes deferred to future years as a result of the specified temporary differences. The Company only recognizes future income taxes for certain deferral amounts where the future income taxes will not be collected in future customer rates.
In 2005, FortisAlberta followed the taxes payable method of accounting only for provincial income taxes because federal income tax expenses were recovered through customer rates based on a modified liability method. Under the modified liability method, customer rates included the recovery of future federal income taxes related to specified temporary differences between the tax basis of assets and liabilities and their carrying amounts for regulatory purposes. As a result, FortisAlberta previously recognized future federal income taxes and set up a regulatory liability equal to the amount of future federal income taxes recognized that had not yet been reflected in customer rates. However, due to the 2006/2007 Negotiated Settlement Agreement, the future income tax asset and offsetting regulatory liability were no longer recognized which resulted in a $50.7 million reduction in the Corporation's future income tax assets and regulatory liabilities during the second quarter of 2006. Had FortisAlberta accounted for its regulated operations using the liability method in 2006, the Corporation would have had additional future income tax assets of approximately $56.3 million at December 31, 2006 and would have recognized additional future income tax expense of approximately $3.9 million and $17.7 million for the quarter ended and year ended December 31, 2006, respectively.
Employee Future Benefits: Effective January 1, 2006, as prescribed by the AEUB-approved 2006/2007 Negotiated Settlement Agreement, FortisAlberta is recovering in customer rates other post-employment benefits and supplemental pension plan costs based on the cash payments made. However, any difference between the expense recognized under Canadian GAAP and that recovered from customers in current customer rates for other post-employment and pension plans, which is expected to be recovered or refunded in future customer rates, is subject to deferral treatment and is recorded as a regulatory asset on the balance sheet. The change in how other post-employment benefits and supplemental pension plan costs are recovered in customer rates had no impact on the Corporation's earnings during 2006.
FUTURE ACCOUNTING PRONOUNCEMENTS
Comprehensive Income, Financial Instruments and Hedges: New accounting standards for comprehensive income, financial instruments (recognition, measurement, presentation and disclosure) and hedges have been issued by the Canadian Institute of Chartered Accountants ("CICA") and are effective for the Corporation for the fiscal year beginning January 1, 2007. These standards were intended to harmonize Canadian GAAP with US GAAP and with International Financial Reporting Standards.
The new comprehensive income standard provides guidance for the reporting and display of other comprehensive income. Comprehensive income represents the change in equity of an enterprise during a period from transactions and other events arising from non-owner sources including unrealized foreign currency translation amounts, net of hedging arising from self-sustaining foreign operations, and changes in the fair value of the effective portion of cash flow hedging instruments. The Corporation expects to report a Statement of Comprehensive Income upon adoption of this new standard.
The financial instruments standards address the criteria for recognition and presentation of financial instruments on the balance sheet and the measurement of financial instruments according to prescribed classifications. The standards also address how the financial instruments are measured subsequent to initial recognition and how the gains and losses are recognized. All financial instruments, including derivatives and derivative features embedded in financial instrument or other contracts but which are not considered closely related to the host financial instrument or contract, are required to be initially recorded at fair value. The classification of financial instruments determines whether they are to be remeasured at each balance sheet date at fair value or at amortized cost and whether any resulting gains or losses are recognized in earnings or in other comprehensive income. Based on the expected classification of the Corporation's financial assets and liabilities, these financial assets and liabilities would be recorded at amortized cost, which is not expected to be materially different than the carrying value of these items. Under the new standards, deferred financing costs are no longer recognized as a deferred charge and Fortis expects to recognize unamortized deferred financing costs as part of its debt balances. These costs are required to be amortized using the effective interest method versus the straight line method. This change in methodology is not expected to have a material impact on the Corporation's earnings. Currently, the Corporation limits the use of free-standing derivative financial instruments and, therefore, does not expect that the recognition of derivatives at fair value upon adoption of the new financial instrument standards will have a material impact on the Corporation. The Corporation is in the process of finalizing its assessment of contracts for embedded derivatives, including debt prepayment options, to determine whether or not they are considered closely related to the host contract and require fair value recognition.
The new accounting standard for hedges specifies the criteria under which hedge accounting is applied, how hedge accounting should be performed under permitted hedging strategies, and the required disclosures. The Corporation expects its 3 existing interest rate swaps will continue to qualify for hedge accounting as cash flow hedges under the new standard. Gains or losses on the interest rate swaps would be recorded in other comprehensive income and reclassified to earnings in the periods in which earnings are effected by the variable-rate interest payments. Under the new standard, the Corporation expects that foreign exchange gains or losses on its US-dollar borrowings designated as hedges of the Corporation's net investment in US-dollar denominated self-sustaining foreign operations will be recognized in other comprehensive income.
Rate-Regulated Operations: The Canadian Accounting Standards Board ("AcSB") recently considered the effects on its rate-regulated operations project of its recently adopted Strategic Plan and decided that the project, as originally planned, should be discontinued. It further decided, subject to exposure of its proposals, that: (i) the temporary exemption in Section 1100 of the CICA Handbook providing relief to entities subject to rate regulation from the requirement to apply the Section to the recognition and measurement of assets and liabilities arising from rate regulation should be removed; (ii) the explicit guidance for rate-regulated operations provided in Section 1600, Consolidated Financial Statements, Section 3061, Property, Plant and Equipment, Section 3465, Income Taxes, and Section 3475, Disposal of Long-Lived Assets and Discontinued Operations, should be removed; and (iii) Accounting Guideline 19, Disclosures by Entities Subject to Rate Regulation, should be retained as is. The Canadian AcSB also observed that relying on US Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation ("FAS 71"), as another source of Canadian GAAP in the absence of CICA Handbook guidance addressing the specific circumstances of entities subject to rate regulation, is consistent with Section 1100 when the qualifying criteria of FAS 71 are met.
The Corporation is following these developments closely and is in the process of assessing the potential impact on its financial statements. No Exposure Draft for public comment based on these preliminary decisions has been issued to date.
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 year ended December 31, 2006 from those disclosed in the Corporation's Management Discussion and Analysis for the year ended December 31, 2005, except as discussed below.
Rates: At FortisAlberta, the AEUB approved a 1.9 per cent decrease in distribution rates, effective January 1, 2006. FortisAlberta has been charging interim rates which are the same as those charged in 2005. The impact of the decrease in rates at FortisAlberta, effective January 1, 2006, was a reduction of revenue of $1.1 million and $4.2 million in the Corporation's fourth quarter and annual consolidated financial statements, respectively, compared to the same periods last year, which will be refunded to customers during 2007 as ordered by the AEUB.
Amortization and Capitalized Overhead: FortisBC recently completed a depreciation study on the estimated useful life of its utility capital assets recommending an increase in the Company's composite amortization rate. The BCUC-approved 2006 Negotiated Settlement Agreement resulted in an increase in the composite amortization rate from 2.6 per cent to 3.2 per cent, effective January 1, 2006, the impact of which increased amortization costs in the Corporation's fourth quarter and annual consolidated financial statements by approximately $1.2 million and $4.6 million, respectively, compared to the same periods last year.
FortisBC also recently completed an analysis of its capitalized overhead allocation method. This analysis supported a change in the estimate of capitalized overhead. The changed estimate calculates capitalized overhead as a percentage of all corporate overhead, whereas previously the percentage was applied to a limited pool of corporate costs. The BCUC-approved 2006 Negotiated Settlement Agreement resulted in an increase in the amount of capitalized overhead, effective January 1, 2006, from approximately 9 per cent of BCUC-approved 2005 forecast gross operating and maintenance expenses to 20 per cent of BCUC-approved 2006 forecast gross operating and maintenance expenses. The impact of this change in estimate has decreased operating expenses in the Corporation's fourth quarter and annual consolidated financial statements by approximately $1.4 million and $5.0 million, respectively, compared to the same periods last year.
Contingencies: Fortis is a party to a number of disputes and lawsuits in the normal course of business. The following describes the nature of the Corporation's contingent liabilities.
Maritime Electric
In April 2006, CRA reassessed Maritime Electric's 1997-2004 taxation years. The reassessment encompasses the Company's tax treatment, specifically the Company's timing of deductions, with respect to: (i) the 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. Maritime Electric believes it has reported its tax position appropriately in all aspects of the reassessment and filed a Notice of Objection with the Chief of Appeals at CRA. Should the Company be unsuccessful in defending all aspects of the reassessment, the Company would be required to pay approximately $12.1 million in taxes and accrued interest. As at December 31, 2006, Maritime Electric has provided for, through future and current income taxes payable, approximately $11.6 million and, therefore, an additional liability of $0.5 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 made a payment on deposit of $5.9 million with CRA on June 29, 2006.
FortisAlberta
On March 24, 2006, Her Majesty the Queen in Right of Alberta (the "Crown") filed a statement of claim in the Court of Queen's Bench of Alberta in the Judicial District of Edmonton against FortisAlberta. The Crown's claim is that the Company is responsible for a fire that occurred in October 2003 in an area of the Province of Alberta commonly referred to as Poll Haven Community Pasture. The Crown is seeking approximately $2.7 million in fire-fighting and suppression costs and approximately $2.4 million in timber losses, as well as interest and other costs. FortisAlberta and the Crown have exchanged several investigation and expert reports. Both the factual evidence and expert opinion received to date lead management to believe that FortisAlberta is not responsible for the cause of the fire and has no liability for the damages. However, given the preliminary stage of the proceedings, FortisAlberta has not made any definitive assessment of potential liability with respect to the claim. No amount, therefore, has been accrued in the consolidated financial statements.
FortisBC
The B.C. Ministry of Forests (the "Ministry") has alleged breaches of the Forest Practices Code and negligence relating to a fire near Vaseux Lake and has filed and served a writ and statement of claim against FortisBC. The Company is currently communicating with the Ministry and its insurers. In addition, FortisBC has been served with 2 filed writs and statements of claim by private land owners in relation to the same matter. The outcome cannot be reasonably determined and estimated at this time and, accordingly, no amount has been accrued in the consolidated financial statements.
On January 5, 2006, FortisBC was served a writ and statement of claim filed with the B.C. Supreme Court under the Class Proceedings Act, 1995 on behalf of a class consisting of all persons who are or were customers of FortisBC and who paid or have been charged FortisBC's late payment penalties at any time between April 1, 1981 and the date of any judgment in this action. The claim is that forfeitures of the prompt payment discount offered to customers constitute "interest" within the meaning of section 347 of the Criminal Code and, since the effective annual rate of such interest exceeds 60 per cent, they are illegal and void. In the action, the Plaintiff seeks damages and restitution of all late payment penalties which were forfeited. On December 13, 2006, the application to certify the action as a class action was heard in the B.C. Supreme Court. In a decision delivered on January 11, 2007, the B.C. Supreme Court dismissed the application to certify the action as a class suit. Any appeal by the Plaintiff must be filed within 30 days of the decision. The final outcome cannot be reasonably determined and estimated at this time and, accordingly, no amount has been accrued in the consolidated financial statements.
FortisUS Energy
Legal proceedings were initiated against FortisUS Energy by the Village of Philadelphia (the "Village"), New York. The Village claimed that FortisUS Energy should honour a series of current and future payments set out in an agreement between the Village and a former owner of the hydro site, located in the Village of Philadelphia municipality, now owned by FortisUS Energy, totalling approximately US$7.1 million (CDN$8.0 million). The First American Title Insurance Company is defending the action on behalf of FortisUS Energy. A memorandum Decision and Order was filed by the State of New York Supreme Court of Jefferson County on December 21, 2006 granting summary judgment to FortisUS Energy dismissing the action by the Village. The Village, however, filed a notice of appeal in January 2007. Management believes that the appeal will not be successful and, therefore, no provision has been made in these consolidated financial statements.
QUARTERLY RESULTS
The following table sets forth unaudited quarterly information for each of the 8 quarters ended March 31, 2005 through December 31, 2006. The quarterly information has been obtained from the Corporation's interim unaudited consolidated financial statements which, in the opinion of management, have been prepared in accordance with Canadian GAAP and as required by utility regulators. The timing of the recognition of certain assets, liabilities, revenues and expenses, as a result of regulation, may differ from that otherwise expected using Canadian GAAP for non-regulated entities. These differences are disclosed in Notes 2 and 4 to the Corporation's 2005 annual audited consolidated financial statements. These operating results are not necessarily indicative of results for any future period and should not be relied upon to predict future performance.
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Fortis Inc.
Summary of Quarterly Results (Unaudited)
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Net Earnings
Revenue and Applicable to Earnings per
Equity Income Common Shares Common Share
Quarter Ended ($ thousands) ($ thousands) Basic ($) Diluted ($)
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December 31, 2006 393,111 33,886 0.33 0.32
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September 30, 2006 341,947 38,750 0.37 0.36
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June 30, 2006 345,851 37,946 0.37 0.35
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March 31, 2006 390,827 36,605 0.35 0.34
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December 31, 2005 353,084 22,263 0.22 0.21
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September 30, 2005 341,650 37,450 0.36 0.33
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June 30, 2005 364,948 38,188 0.37(1) 0.34(1)
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March 31, 2005 381,789 39,196 0.40(1) 0.36(1)
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(1) Earnings per common share data have been restated to reflect the
4-for-1 stock split completed in October 2005.
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A summary of the past 8 quarters reflects the Corporation's continued growth as well as the seasonality associated with its businesses. 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. The Corporation's non-utility investment, Fortis Properties, generally produces its highest earnings in the second and third quarters. Financial results from February 1, 2005 were impacted by the acquisition of 3 Greenwood Inns. Also, 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 for revenue recognition from the billed basis. Each of the comparative quarterly earnings, except for the comparative quarters ended March 31, 2006 and March 31, 2005 and comparative quarters ended June 30, 2006 and June 30, 2005, have 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 gain. Revenue and equity income and earnings were higher during the second quarter ended June 30, 2005 compared to the same quarter in 2006, primarily due to a $7.0 million positive after-tax adjustment to FortisAlberta's earnings driven largely by the resolution of tax-related matters pertaining to prior years.
December 2006/December 2005 - Net earnings applicable to common shares were $33.9 million, or $0.33 per common share, for the fourth quarter of 2006 compared to earnings of $22.3 million, or $0.22 per common share, for the fourth quarter of 2005. The increase in earnings was largely driven by Newfoundland Power due to a change in the Company's revenue recognition policy to the accrual method effective January 1, 2006, earnings growth at FortisAlberta and contributions from Fortis Turks and Caicos acquired on August 28, 2006, partially offset by the impact of lower wholesale energy prices in Ontario and increased corporate costs. The change in the revenue recognition policy did not have a material impact on Newfoundland Power's annual earnings.
September 2006/September 2005 - Net earnings applicable to common shares were $38.8 million, or $0.37 per common share, for the third quarter of 2006 compared to earnings of $37.4 million, or $0.36 per common share, for the third quarter of 2005. Excluding $1.6 million of earnings during the third quarter of 2005 associated with the favourable resolution of a corporate income tax reassessment at FortisOntario, earnings were $3.0 million higher quarter over quarter The increase was largely driven by improved hydroelectric production in Belize, lower corporate taxes at FortisAlberta, increased electricity rates at FortisBC, higher earnings from Fortis Properties, higher earnings from Regulated Utilities - Caribbean due, in part, to the recent acquisition of Fortis Turks and Caicos and increased electricity rates at FortisOntario. The increase in quarterly earnings was partially offset by higher corporate expenses and lower average wholesale energy prices in Ontario. Corporate expenses during the third quarter of 2005 were reduced by a $3.8 million ($3.1 million after-tax) unrealized foreign currency translation gain associated with unhedged US dollar-denominated debt.
June 2006/June 2005 - Net earnings applicable to common shares were $37.9 million, or $0.37 per common share, for the second quarter of 2006 compared to earnings of $38.2 million, or $0.37 per common share, for the second quarter of 2005. Earnings for the second quarter last year included a $7.0 million positive after-tax adjustment to FortisAlberta's earnings, driven largely by the resolution of tax-related matters pertaining to prior years, which favourably impacted revenue. Earnings for the second quarter last year also included a $1.1 million positive adjustment to equity income from Caribbean Utilities related to a change in accounting practice for recognizing unbilled revenue. Excluding these items, the Corporation's earnings were $7.8 million higher in the second quarter of 2006 compared to the second quarter of 2005. The increase was driven by lower corporate income taxes largely at FortisAlberta, improved hydroelectric production in Belize, higher earnings at Fortis Properties and an unrealized foreign exchange gain on the translation of US dollar-denominated long-term corporate debt. The increase was partially offset by lower earnings at Newfoundland Power related to the shifting of revenue from the first half of 2006 to the second half of 2006 upon adopting the accrual method of recognizing revenue, effective January 1, 2006, and the impact of recording the cumulative effects of the regulator-approved Negotiated Settlement Agreements during the second quarter of 2006 at FortisAlberta and FortisBC.
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 gain. Excluding the Ontario Settlement gain 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 overall 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.
SUBSEQUENT EVENTS
On January 3, 2007, FortisAlberta closed a $110 million senior unsecured debenture offering. The debentures bear interest at a rate of 4.99 per cent, to be paid semi-annually and mature on January 3, 2047. The proceeds of the offering were used to repay existing indebtedness incurred under the Company's committed unsecured credit facility, which was incurred primarily to fund capital expenditures, and for general corporate purposes.
On January 18, 2007, Fortis issued 5,170,000 Common Shares of the Corporation for $29.00 per Common Share. The common share issue resulted in gross proceeds of $149.9 million, or approximately $145.6 million net of after-tax expenses. The net proceeds of the offering were used by Fortis to repay indebtedness incurred for recent acquisitions, to support the capital expenditure programs of the Corporation's regulated utilities in western Canada and for general corporate purposes.
OUTLOOK
The Corporation's principal business of regulated electric utilities is capital intensive and Fortis expects that most of its utility capital expenditures of more than $2.6 billion over the next 5 years will be driven by FortisAlberta and FortisBC. Gross consolidated utility capital expenditures for 2007 are expected to be more than $600 million, approximately $256 million and $139 million of which is expected to be invested in FortisAlberta and FortisBC, respectively. Capital expenditures related to income producing properties are expected to be approximately $13 million in 2007. Upward pressure on future capital expenditures may be experienced by FortisAlberta in 2007 in response to expected continued robust economic growth in Alberta, driven by the oil and gas industry in that province.
Organic earnings growth at Fortis will be driven by significant electricity infrastructure investment at the regulated utilities in western Canada and at the regulated and non-regulated utilities in the Caribbean.
Fortis also expects to focus its capital on funding further acquisitions of utility assets. Fortis will continue to pursue regulated utility acquisition opportunities in Canada, the Caribbean and the United States that provide opportunities to continue to grow its business profitably. Fortis will also pursue growth in its non-regulated businesses in support of its regulated utility growth strategy.
OUTSTANDING SHARE DATA
At February 7, 2007, the Corporation had issued and outstanding 109,273,401 Common Shares, 5,000,000 First Preference Shares, Series C; 7,993,500 First Preference Shares, Series E; and 5,000,000 First Preference Shares, Series F. As at December 31, 2006, the number of Common Shares that would be issued upon conversion of share options, convertible debt and First Preference Shares, Series C and First Preference Shares, Series E is described in the Notes to the interim unaudited consolidated financial statements for the three and twelve months ended December 31, 2006.
FORTIS INC.
Interim Consolidated Financial Statements
For the three and twelve months ended December 31, 2006 and 2005
(Unaudited)
Fortis Inc.
Consolidated Balance Sheets (Unaudited)
As at December 31
(in thousands)
2006 2005
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(Note 4)
ASSETS
Current assets
Cash and cash equivalents $ 40,921 $ 33,416
Accounts receivable 278,114 204,169
Income taxes receivable 7,505 -
Prepaid expenses 14,255 9,786
Regulatory assets 35,669 33,289
Materials and supplies 32,675 18,614
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409,139 299,274
Corporate income tax deposit (Note 17 (a)) 5,922 -
Deferred charges and other assets 174,835 148,140
Regulatory assets 132,991 82,315
Future income taxes 7,053 58,815
Utility capital assets 3,574,851 2,900,393
Income producing properties 468,984 414,608
Investments 2,536 167,393
Intangibles, net of amortization 9,819 14,027
Goodwill 661,311 512,139
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$ 5,447,441 $ 4,597,104
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings (Note 6) $ 97,669 $ 48,868
Accounts payable and accrued charges 333,755 265,223
Dividends payable 21,705 17,924
Income taxes payable - 22,785
Regulatory liabilities 26,380 19,392
Current instalments of long-term
debt and capital lease obligations 84,786 31,392
Future income taxes 959 6,714
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565,254 412,298
Deferred credits 78,987 64,261
Regulatory liabilities 338,901 367,693
Future income taxes 57,737 44,718
Long-term debt and capital
lease obligations (Note 6) 2,558,463 2,135,674
Non-controlling interest 130,505 39,555
Preference shares (Note 9 (i) and (ii)) 319,492 319,492
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4,049,339 3,383,691
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Shareholders' equity
Common shares (Note 7) 828,985 813,304
Preference shares (Note 9 (iii)) 122,466 -
Contributed surplus 4,687 3,179
Equity portion of convertible debentures 7,175 1,500
Foreign currency translation adjustment (51,508) (16,312)
Retained earnings 486,297 411,742
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1,398,102 1,213,413
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$ 5,447,441 $ 4,597,104
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Contingent liabilities and commitments (Note 17)
See accompanying notes to interim consolidated financial statements.
Fortis Inc.
Consolidated Statements of Earnings (Unaudited)
For the periods ended December 31
(in thousands, except per share amounts)
Quarter Ended Year Ended
2006 2005 2006 2005
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Operating revenues $ 390,273 $ 350,230 $ 1,461,998 $ 1,430,005
Equity income 2,838 2,854 9,738 11,466
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393,111 353,084 1,471,736 1,441,471
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Expenses
Energy supply costs 146,455 136,345 540,485 533,915
Operating 108,279 104,774 398,587 392,380
Amortization 46,597 38,454 177,511 157,622
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301,331 279,573 1,116,583 1,083,917
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Operating income 91,780 73,511 355,153 357,554
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Finance charges
(Note 11) 43,937 40,175 168,329 153,825
Gain on sale of
income producing
property (Note 12) - - (2,088) -
Gain on settlement
of contractual
matters (Note 13) - - - (10,000)
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43,937 40,175 166,241 143,825
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Earnings before
corporate taxes 47,843 33,336 188,912 213,729
Corporate taxes
(Note 14) 9,490 9,036 32,538 70,416
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Net earnings
before non-
controlling interest 38,353 24,300 156,374 143,313
Non-controlling interest 2,882 2,037 7,602 6,216
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Net earnings 35,471 22,263 148,772 137,097
Preference share
dividends 1,585 - 1,585 -
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Net earnings
applicable to
common shares $ 33,886 $ 22,263 $ 147,187 $ 137,097
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Weighted average
common shares
outstanding (Note 7) 103,958 103,119 103,578 101,750
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Earnings per common
share (Note 7)
Basic $ 0.33 $ 0.22 $ 1.42 $ 1.35
Diluted $ 0.32 $ 0.21 $ 1.37 $ 1.24
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Consolidated Statements of Retained Earnings (Unaudited)
For the periods ended December 31
(in thousands)
Quarter Ended Year Ended
2006 2005 2006 2005
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Balance at
beginning
of period $ 472,211 $ 406,020 $ 411,742 $ 337,013
Net earnings
applicable to
common shares 33,886 22,263 147,187 137,097
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506,097 428,283 558,929 474,110
Dividends on
common shares (19,800) (16,541) (72,632) (62,368)
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Balance at
end of period $ 486,297 $ 411,742 $ 486,297 $ 411,742
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See accompanying notes to interim consolidated financial statements.
Fortis Inc.
Consolidated Statements of Cash Flows (Unaudited)
For the periods ended December 31
(in thousands)
Quarter Ended Year Ended
2006 2005 2006 2005
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Operating Activities
Net earnings $ 35,471 $ 22,263 $ 148,772 $ 137,097
Items not
affecting cash
Amortization -
capital assets,
net of
contributions
in aid of
construction 43,778 35,822 166,954 147,222
Amortization -
intangibles 1,052 1,665 4,208 4,428
Amortization - other 1,767 967 6,349 5,972
Future income taxes 15,615 3,040 10,257 12,322
Accrued employee
future benefits (253) 4,817 (2,738) 1,915
Equity income,
net of dividends (1,034) (1,039) (2,635) (3,426)
Stock-based
compensation 806 392 1,965 1,569
Unrealized foreign
exchange loss
(gain) on long-term
debt (Note 11) 83 71 (1,725) (2,335)
Non-controlling
interest 2,882 2,037 7,602 6,216
Gain on sale of
income producing
property (Note 12) - - (2,088) -
Other 62 1,339 (681) 1,653
Change in long-term
regulatory assets
and liabilities (19,625) 1,593 (30,594) (3,160)
Increase in corporate
income tax deposit
(Note 17 (a)) - - (5,922) -
---------------------------------------------------------------------
80,604 72,967 299,724 309,473
Change in non-cash
operating working
capital (21,106) 3,112 (36,587) (5,888)
---------------------------------------------------------------------
59,498 76,079 263,137 303,585
---------------------------------------------------------------------
Investing Activities
Change in deferred
charges and credits (12,316) 2,670 (25,028) (1,550)
Purchase of utility
capital assets (152,482) (133,950) (483,103) (424,754)
Purchase of income
producing properties (1,538) (7,375) (16,887) (21,275)
Contributions in
aid of construction 14,934 12,921 53,564 45,130
Proceeds on sale
of capital assets 1,666 574 8,196 1,556
Business acquisitions,
net of cash
acquired (Note 15) (93,574) 40 (168,931) (66,018)
Increase in investments - (193) (1,893) (193)
---------------------------------------------------------------------
(243,310) (125,313) (634,082) (467,104)
---------------------------------------------------------------------
Financing Activities
Change in short-
term borrowings 17,669 4,774 37,557 (132,818)
Proceeds from
long-term debt 168,511 154,321 468,823 348,698
Repayment of long-
term debt and capital
lease obligations (7,107) (81,261) (197,270) (126,411)
Redemption of
preference shares - - - (38)
Advances from (to)
non-controlling
interest - 257 9,535 (596)
Issue of common shares 6,083 2,926 15,224 135,253
Issue of
preference shares - - 121,117 -
Dividends
Common shares (19,800) (16,541) (72,632) (62,368)
Preference shares (1,585) - (1,585) -
Subsidiary dividends
paid to non-
controlling interest (930) (441) (2,407) (1,803)
---------------------------------------------------------------------
162,841 64,035 378,362 159,917
---------------------------------------------------------------------
Effect of exchange
rate changes on cash 498 (7) 88 (185)
---------------------------------------------------------------------
Change in cash and
cash equivalents (20,473) 14,794 7,505 (3,787)
Cash and cash equivalents,
beginning of period 61,394 18,622 33,416 37,203
---------------------------------------------------------------------
Cash and cash
equivalents, end
of period $ 40,921 $ 33,416 $ 40,921 $ 33,416
---------------------------------------------------------------------
---------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements.
FORTIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the three and twelve months ended December 31, 2006
and 2005 (unless otherwise stated)
(Unaudited)
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 serving approximately 430,000 customers.
b. FortisBC: Includes FortisBC Inc., an integrated electric utility operating in the southern interior of British Columbia serving more than 152,000 customers. FortisBC Inc. owns 4 hydroelectric generation plants with a combined capacity of 235 megawatts ("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-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. FortisBC's assets also include the regulated electric utility formerly operated as Princeton Light and Power Company, Limited ("PLP"). PLP was purchased by Fortis through an indirect subsidiary on May 31, 2005. Effective January 1, 2007, PLP was amalgamated with FortisBC Inc. as part of an internal reorganization.
c. Newfoundland Power: Newfoundland Power is the principal distributor of electricity in Newfoundland serving approximately 230,000 customers. Newfoundland Power has an installed generating capacity of 136 MW of which 92 MW is hydroelectric generation.
d. Maritime Electric: Maritime Electric is the principal distributor of electricity on Prince Edward Island serving approximately 71,000 customers. Maritime Electric also maintains on-Island generating facilities at Charlottetown and Borden-Carleton with a combined capacity of 150 MW.
e. FortisOntario: FortisOntario provides an integrated electric utility service to approximately 52,000 customers in Fort Erie, Cornwall, Gananoque and Port Colborne in Ontario. FortisOntario operations include Canadian Niagara Power Inc. ("Canadian Niagara Power") and Cornwall Street Railway, Light and Power Company, Limited ("Cornwall Electric"). Included in Canadian Niagara Power's accounts is the operation of the electricity distribution business of Port Colborne Hydro Inc., which has been leased from the City of Port Colborne under a 10-year lease agreement entered into in April 2002. FortisOntario also owns a 10 per cent interest in each of Westario Power Holdings Inc. and Rideau St. Lawrence Holdings Inc., 2 regional electrical distribution companies formed in 2000 serving more than 27,000 customers.
Regulated Utilities - Caribbean
The following summary describes the Corporation's interest in
Regulated Utilities in the Caribbean by utility:
a. Belize Electricity Limited ("Belize Electricity"): Belize
Electricity is the principal distributor of electricity in Belize,
Central America serving more than 71,000 customers. The Company
has an installed generating capacity of 37 MW. Fortis holds a 70.1
per cent controlling interest in Belize Electricity.
b. Caribbean Utilities Company, Ltd. ("Caribbean Utilities"):
Caribbean Utilities is the sole provider of electricity on Grand
Cayman, Cayman Islands serving more than 22,000 customers. The
Company has an installed generating capacity of 120 MW. On
November 7, 2006, Fortis acquired an additional 16 per cent
ownership interest in Caribbean Utilities and now owns
approximately 54 per cent of the Company. Caribbean Utilities is a
public company traded on the Toronto Stock Exchange and has an
April 30th year end. Caribbean Utilities' balance sheet as at
November 7, 2006 has been consolidated in the December 31, 2006
balance sheet of Fortis. Beginning with the first quarter of 2007,
Fortis will consolidate Caribbean Utilities' financial statements
on a 2-month lag basis and will include Caribbean Utilities'
January 31, 2007 balance sheet and statement of earnings and cash
flows for the three-month period ended January 31, 2007. During
2006 and 2005, the statements of earnings of Fortis reflected the
Corporation's previous approximate 37 per cent ownership interest
in Caribbean Utilities, previously accounted for on a 2-month
equity lag basis.
c. P.P.C. Limited and Atlantic Equipment & Power (Turks and Caicos)
Ltd. (collectively referred to as "Fortis Turks and Caicos"):
Fortis Turks and Caicos was acquired on August 28, 2006 by Fortis
through a wholly owned subsidiary. Fortis Turks and Caicos serves
approximately 7,700 customers, or 80 per cent of electricity
customers, in the Turks and Caicos Islands and has an installed
generating capacity of approximately 37 MW. The Company is the
principal distributor of electricity in the Turks and Caicos
Islands pursuant to 50-year licences that expire in 2036 and 2037.
Fortis Turks and Caicos is regulated under a traditional rate of
return on rate base approach, with a fixed rate of return of 17.5
per cent on a defined asset base of approximately US$50 million.
Non-Regulated - Fortis Generation
The following summary describes the Corporation's non-regulated
generation assets by location:
a. Belize: Operations consist of the 25-MW Mollejon and 7-MW Chalillo
hydroelectric facilities in Belize. All of the electricity output
is sold to Belize Electricity under a 50-year power purchase
agreement expiring in 2055. Hydroelectric generation operations in
Belize are conducted through the Corporation's wholly owned
indirect subsidiary, Belize Electric Company Limited ("BECOL"),
under a Franchise Agreement with the Government of Belize.
b. Ontario: Includes 75 MW of water right entitlement associated with
the Niagara Exchange Agreement, a 5-MW 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 Fortis
Properties. On January 1, 2006 the former FortisOntario Generation
Corporation was amalgamated with CNE Energy Inc. and, effective
January 1, 2007, CNE Energy Inc. was amalgamated with Fortis
Properties.
c. Central Newfoundland: Through the Exploits River Hydro Partnership
("Exploits Partnership"), a partnership between the Corporation,
through an indirect wholly owned subsidiary, Fortis Properties,
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. On January 1, 2007, CNE Energy Inc. was
amalgamated with Fortis Properties, which now holds directly the
51 per cent interest in the Exploits Partnership. The Exploits
Partnership sells its output to Newfoundland and Labrador Hydro
Corporation under a 30-year power purchase agreement.
d. British Columbia: Includes the 16-MW run-of-river Walden
hydroelectric power plant near Lillooet, British Columbia. This
plant sells its entire output to BC Hydro under a long-term
contract expiring in 2013. Hydroelectric generating operations in
British Columbia are conducted through the Walden Power
Partnership, a wholly owned partnership of FortisBC Inc.
e. Upper New York State: Includes the operations of 4 hydroelectric
generating stations in upper New York State with a combined
capacity of approximately 23 MW operating under licences from the
US Federal Energy Regulatory Commission. Hydroelectric generation
operations in upper New York State are conducted through the
Corporation's indirect wholly owned subsidiary, FortisUS Energy
Corporation.
Non-Regulated - Fortis Properties
Fortis Properties owns and operates 18 hotels with more than 3,200 rooms in 7 Canadian provinces and approximately 2.7 million square feet of commercial real estate in Atlantic Canada.
Corporate
The Corporate segment captures expense and revenue items not specifically related to any operating segment. Included in the Corporate segment are finance charges, including interest on debt incurred directly by Fortis and dividends on preference shares classified as long-term liabilities, foreign exchange gains or losses, dividends on preference shares classified as equity, other corporate expenses, 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. 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 (the "PUB"). The transition to recording revenue on an accrual basis, while having no material impact on Newfoundland Power's annual revenue and earnings, resulted in a shift in the Company's 2006 quarterly revenue and earnings compared to 2005. The change in the revenue recognition policy resulted in a $10.7 million increase in revenue quarter over quarter. Pursuant to an Order by the PUB, during 2006 Newfoundland Power recorded as revenue $3.1 million of $23.6 million of 2005 unbilled revenue to offset the income tax impact in 2006 of changing to the accrual method for revenue recognition. The PUB also approved the recognition as revenue of $2.7 million of the 2005 unbilled revenue in 2007. The disposition of the remaining 2005 unbilled revenue will be determined by future orders of the PUB. The change in the revenue recognition policy, including the impact of the recognition of a portion of 2005 unbilled revenue, resulted in an increase in earnings of $5.7 million quarter over quarter.
Conditional Asset Retirement Obligations
On April 1, 2006, Fortis retroactively adopted EIC 159, Conditional Asset Retirement Obligations ("EIC 159"). EIC 159 requires an entity to recognize a liability for the fair value of an asset retirement obligation ("ARO") even though the timing and/or method of settlement are conditional on future events. While conditional AROs have been identified, no amounts have been recorded as they are immaterial to the Corporation's results of operations and financial position. The Corporation also has asset retirement obligations which cannot be reasonably estimated at this time as the final date of removal of the related assets and the costs to do so cannot be reasonably determined as the assets are reasonably expected to operate in perpetuity due to the nature of their operation.
Corporate Income Taxes
Effective January 1, 2006, FortisAlberta is following the taxes payable method of accounting for federal income taxes. As prescribed by the 2006/2007 Negotiated Settlement Agreement, approved by the Alberta Electric Utility Board ("AEUB") on June 29, 2006, corporate income tax expenses are now recovered through customer rates based only on income taxes that are currently payable for regulatory purposes. Therefore, current rates do not include the recovery of future income taxes related to certain temporary differences between the tax basis of assets and liabilities and their carrying amounts for regulatory purposes, as these taxes are expected to be collected in customer rates when they become payable. Accordingly, FortisAlberta no longer recognizes income taxes deferred to future years as a result of the specified temporary differences. The Company only recognizes future income taxes for certain deferral amounts where the future income taxes will not be collected in future customer rates.
In 2005, FortisAlberta followed the taxes payable method of accounting only for provincial income taxes because federal income tax expenses were recovered through customer rates based on a modified liability method. Under the modified liability method, customer rates included the recovery of future federal income taxes related to specified temporary differences between the tax basis of assets and liabilities and their carrying amounts for regulatory purposes. As a result, FortisAlberta previously recognized future federal income taxes and set up a regulatory liability equal to the amount of future federal income taxes recognized that had not yet been reflected in customer rates. However, due to the 2006/2007 Negotiated Settlement Agreement, the future income tax asset and offsetting regulatory liability were no longer recognized which resulted in a $50.7 million reduction in the Corporation's future income tax assets and regulatory liabilities during the second quarter of 2006. Had FortisAlberta accounted for its regulated operations using the liability method in 2006, the Company would have had additional future income tax assets of approximately $56.3 million at December 31, 2006 and would have recognized additional future income tax expense of approximately $3.9 million and $17.7 million for the quarter ended and year ended December 31, 2006, respectively (Note 14). Had the liability method been used during 2006, there would have been no net earnings impact associated with the additional future income tax expense as FortisAlberta would have recorded an offsetting regulatory asset for future recovery in customer rates.
Employee Future Benefits
Effective January 1, 2006, as prescribed by the AEUB-approved 2006/2007 Negotiated Settlement Agreement, FortisAlberta is recovering in customer rates other post-employment benefits and supplemental pension plan costs based on the cash payments made. However, any difference between the expense recognized under Canadian GAAP and that recovered from customers in current customer rates for other post-employment and pension plans, which is expected to be recovered or refunded in future customer rates, is subject to deferral treatment and is recorded as a regulatory asset on the balance sheet. The change in how other post-employment benefits and supplemental pension plan costs are recovered in customer rates had no impact on the Corporation's earnings during 2006.
4. CHANGE IN PRESENTATION
Prior to December 31, 2006, the regulatory provision at FortisAlberta, FortisBC, Newfoundland Power and Maritime Electric for future removal and site restoration costs was part of amortization expense and was recorded in accumulated amortization, as these costs were recoverable in amortization rates from customers. Actual costs of removal and site restoration incurred, net of salvage proceeds, were recorded against this provision in accumulated amortization. In accordance with Canadian GAAP, FortisOntario, Belize Electricity, Caribbean Utilities and Fortis Turks and Caicos are recording removal and site restoration costs in earnings when incurred. In the absence of rate regulation, removal and site restoration costs, net of salvage proceeds, would be recognized as incurred rather than over the life of the asset through amortization expense. The Corporation has changed the presentation of the provision for future removal and site restoration to a regulatory liability rather than including it with accumulated amortization. This change in presentation has been applied retroactively, with restatement of 2005 comparative balances, and has had no impact on earnings. The effect of this change in presentation at December 31, 2006 was a $306.5 million (2005 - $280.9 million) increase in long-term regulatory liabilities and a $306.5 million (2005 - $280.9 million) increase in net utility capital assets resulting from a decrease in accumulated amortization.
5. 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 year ended December 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 17 to these interim consolidated financial statements.
Rates
At FortisAlberta, the AEUB approved a 1.9 per cent decrease in distribution rates, effective January 1, 2006. FortisAlberta has been charging interim rates which are the same as those charged in 2005. The impact of the decrease in rates at FortisAlberta, effective January 1, 2006, was a reduction of revenue of $1.1 million and $4.2 million in the Corporation's fourth quarter and annual consolidated financial statements, respectively, compared to the same periods last year, which will be refunded to customers during 2007 as ordered by the AEUB.
Amortization and Capitalized Overhead
FortisBC recently completed a depreciation study on the estimated useful life of its utility capital assets recommending an increase in the Company's composite amortization rate. The BCUC-approved 2006 Negotiated Settlement Agreement resulted in an increase in the composite amortization rate from 2.6 per cent to 3.2 per cent, effective January 1, 2006, the impact of which increased amortization costs in the Corporation's fourth quarter and annual consolidated financial statements by approximately $1.2 million and $4.6 million, respectively, compared to the same periods last year.
FortisBC also recently completed an analysis of its capitalized overhead allocation method. This analysis supported a change in the estimate of capitalized overhead. The changed estimate calculates capitalized overhead as a percentage of all corporate overhead, whereas previously the percentage was applied to a limited pool of corporate costs. The BCUC-approved 2006 Negotiated Settlement Agreement resulted in an increase in the amount of capitalized overhead, effective January 1, 2006, from approximately 9 per cent of BCUC-approved 2005 forecast gross operating and maintenance expenses to 20 per cent of BCUC-approved 2006 forecast gross operating and maintenance expenses. The impact of this change in estimate has decreased operating expenses in the Corporation's fourth quarter and annual consolidated financial statements by approximately $1.4 million and $5.0 million, respectively, compared to the same periods last year.
6. CREDIT FACILITIES AND LONG-TERM DEBT
Credit Facilities
The Corporation and its subsidiaries had consolidated authorized lines of credit of $952.0 million, of which $546.7 million was unused at December 31, 2006. The following summary outlines the Corporation's credit facilities by reporting segments.
Total Total
Regu- as at as at
Credit Facilities lated Fortis Fortis December December
Utili- Gene- Proper- 31, 31,
($ millions) Corporate ties ration ties 2006 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Total credit
facilities 315.0 622.2 2.3 12.5 952.0 747.1
Credit facilities
utilized
Short-term
borrowings - (94.3) - (3.4) (97.7) (48.9)
Long-term debt (84.1) (151.4) - - (235.5) (85.8)
Letters of
credit outstanding (4.6) (65.3) - (2.2) (72.1) (73.6)
---------------------------------------------------------------------
Credit facilities
available 226.3 311.2 2.3 6.9 546.7 538.8
---------------------------------------------------------------------
---------------------------------------------------------------------
At December 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 $100 million committed term credit facility extending the term from 1 year to 3 years, with maturity now in January 2009.
In January 2006, Maritime Electric's $25 million non-revolving unsecured short-term bridge financing was extended until July 2007. In August 2006, the amount available on Maritime Electric's operating credit facilities was increased to $30 million from $25 million.
In March 2006, FortisAlberta amended its committed unsecured 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, with the consent of the lenders, 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. In July 2006, FortisAlberta entered into a demand credit facility for $10 million increasing the amount available to the Company under unsecured demand credit facilities to $20 million.
In May 2006, the maturity date of FortisBC's $50 million 364-day operating credit facility was extended to May 2007.
In June 2006, Fortis renegotiated and amended its $145 million and $50 million unsecured credit facilities extending the maturity dates of these facilities from May 2008 and January 2009 to May 2010 and January 2011, respectively. Additionally, in July 2006, the amount available under the committed unsecured $145 million facility was increased to $250 million. These credit facilities can be used for general corporate purposes, including acquisitions.
At December 31, 2006, Regulated Utilities' credit facilities included both a US$2.0 million overdraft facility and a US$9.0 million standby credit facility for hurricane damage at Fortis Turks and Caicos. No drawings were made on these facilities as at December 31, 2006.
At December 31, 2006, Regulated Utilities' credit facilities included a total of US$22.7 million related to Caribbean Utilities, consisting of a US$10.0 million capital expenditures line of credit, a US$5.0 million operating line of credit, a US$5.0 million catastrophe standby loan, and US$2.7 million in letters of credit and corporate credit card line. On November 27, 2006, Caribbean Utilities renegotiated its credit facilities, increasing its capital expenditures line of credit to US$17.0 million and increasing both its US$5.0 million operating line of credit and US$5.0 million catastrophe standby loan to US$7.5 million each, for total credit facilities of US$34.7 million. These changes to the credit facilities in November 2006 have not been reflected in the table above as the Corporation has consolidated the balance sheet of Caribbean Utilities as at November 7, 2006.
Long-term Debt
On April 21, 2006, FortisAlberta issued $100 million in unsecured debentures bearing interest at 5.40 per cent per annum, due April 21, 2036. The net proceeds of the offering were used primarily to repay existing indebtedness on FortisAlberta's committed unsecured credit facility.
On August 28, 2006, the Corporation assumed approximately $22.1 million in long-term debt obligations upon the acquisition of Fortis Turks and Caicos (Note 15).
On November 1, 2006, the Corporation assumed approximately $11.6 million in long-term debt obligations upon the purchase of the 4 hotels by Fortis Properties (Note 15).
On November 7, 2006, the Corporation issued, by way of private placement, US$40 million of unsecured subordinated convertible debentures bearing interest at 5.50 per cent per annum, due November 7, 2016. The proceeds of the offering were used to finance a portion of the acquisition of the additional 16 per cent ownership in Caribbean Utilities.
Upon the acquisition of a controlling interest in Caribbean Utilities on November 7, 2006, the Corporation's long-term debt obligations included approximately $178.1 million related to Caribbean Utilities (Note 15).
7. COMMON SHARES
Authorized: an unlimited number of Common Shares without nominal or
par value.
December 31, 2006 December 31, 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
a) Issued and Number of Amount Number of Amount
Outstanding Shares (in thousands) Shares (in thousands)
---------------------------------------------------------------------
---------------------------------------------------------------------
Common Shares 104,091,542 $ 828,985 103,203,981 $ 813,304
---------------------------------------------------------------------
---------------------------------------------------------------------
Common Shares issued during the period were as follows:
---------------------------------------------------------------------
---------------------------------------------------------------------
Quarter Ended Year Ended
December 31, 2006 December 31, 2006
---------------------------------------------------------------------
---------------------------------------------------------------------
Number of Amount Number of Amount
Shares (in thousands) Shares (in thousands)
---------------------------------------------------------------------
---------------------------------------------------------------------
Opening
balance 103,706,052 $ 822,518 103,203,981 $ 813,304
Consumer
Share
Purchase
Plan 18,010 509 77,213 1,896
Dividend
Reinvestment
Plan 43,241 1,223 176,264 4,342
Employee
Share
Purchase
Plan 25,162 712 135,502 3,279
Directors'
and
Executive
Stock
Option
Plans 299,077 4,023 498,582 6,164
---------------------------------------------------------------------
104,091,542 $ 828,985 104,091,542 $ 828,985
---------------------------------------------------------------------
---------------------------------------------------------------------
At December 31, 2006, 10,958,906 Common Shares remained reserved for issuance under the terms of the above-noted share purchase, dividend reinvestment and stock option plans.
On January 18, 2007, Fortis issued 5,170,000 Common Shares of the Corporation for $29.00 per Common Share. The common share issue resulted in gross proceeds of $149.9 million, or approximately $145.6 million net of after-tax expenses. The net proceeds of the offering were used by Fortis to repay indebtedness incurred from recent acquisitions, to support the capital expenditure program of the Corporation's regulated utilities in western Canada and for general corporate purposes.
b) Earnings per Common Share
The Corporation calculates earnings per common share on the weighted average number of common shares outstanding. The annual weighted average number of common shares outstanding was 103,578,222 and 101,749,758 at December 31, 2006 and December 31, 2005, respectively. The weighted average number of common shares outstanding was 103,958,476 and 103,119,468 for the quarters ended December 31, 2006 and December 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 December 31
---------------------------------------------------------------------
---------------------------------------------------------------------
2006
---------------------------------------------------------------------
Weighted
Average
Earnings Shares Earnings per
(in thousands) (in thousands) Common Share
---------------------------------------------------------------------
---------------------------------------------------------------------
Net earnings applicable
to common shares $ 33,886
Weighted average
shares outstanding 103,958
---------------------------------------------------------------------
Basic Earnings per
Common Share $ 0.33
---------------------------------------------------------------------
Effect of dilutive
securities:
Stock options - 1,160
Preference Shares
(Note 9 (i) and (ii)) 4,151 14,096
Convertible debentures 590 2,738
---------------------------------------------------------------------
Diluted Earnings per
Common Share $ 38,627 121,952 $ 0.32
---------------------------------------------------------------------
Quarter Ended December 31
---------------------------------------------------------------------
---------------------------------------------------------------------
2006
---------------------------------------------------------------------
Weighted Earnings
Average per
Earnings Shares Common
(in thousands) (in thousands) Share
---------------------------------------------------------------------
---------------------------------------------------------------------
Net earnings
applicable to
common shares $ 22,263
Weighted average
shares outstanding 103,119
---------------------------------------------------------------------
Basic Earnings per
Common Share $ 0.22
---------------------------------------------------------------------
Effect of dilutive
securities:
Stock options - 1,046
Preference Shares
(Note 9 (i) and (ii)) 4,151 19,689
Convertible debentures 268 1,925
---------------------------------------------------------------------
Diluted Earnings per
Common Share $ 26,682 125,779 $ 0.21
---------------------------------------------------------------------
Quarter Ended December 31
---------------------------------------------------------------------
---------------------------------------------------------------------
2006
---------------------------------------------------------------------
Weighted
Average
Earnings Shares Earnings per
(in thousands) (in thousands) Common Share
---------------------------------------------------------------------
---------------------------------------------------------------------
Net earnings applicable
to common shares $ 147,187
Weighted average
shares outstanding 103,578
---------------------------------------------------------------------
Basic Earnings per
Common Share $ 1.42
---------------------------------------------------------------------
Effect of dilutive
securities:
Stock options - 1,160
Preference Shares
(Note 9 (i) and (ii)) 16,606 14,096
Convertible debentures 1,364 2,128
---------------------------------------------------------------------
Diluted Earnings per
Common Share $ 165,157 120,962 $ 1.37
---------------------------------------------------------------------
Quarter Ended December 31
---------------------------------------------------------------------
---------------------------------------------------------------------
2006
---------------------------------------------------------------------
Weighted Earnings
Average per
Earnings Shares Common
(in thousands) (in thousands) Share
---------------------------------------------------------------------
---------------------------------------------------------------------
Net earnings applicable
to common shares $ 137,097
Weighted average
shares outstanding 101,750
---------------------------------------------------------------------
Basic Earnings per
Common Share $1.35
---------------------------------------------------------------------
Effect of dilutive
securities:
Stock options - 1,046
Preference Shares
(Note 9 (i) and (ii)) 16,606 19,689
Convertible debentures 1,104 1,925
---------------------------------------------------------------------
Diluted Earnings per
Common Share $ 154,807 124,410 $ 1.24
---------------------------------------------------------------------
---------------------------------------------------------------------
8. STOCK OPTIONS
The Corporation is authorized to grant certain key employees of Fortis Inc. and its subsidiaries options to purchase Common Shares of the Corporation. At December 31, 2006, the Corporation had the following stock-based compensation plans: 2006 Stock Option Plan, 2002 Stock Option Plan and Executive 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. A 2006 Stock Option Plan ("2006 Plan") was approved at the May 2, 2006 Annual Meeting at which Special Business was conducted. The 2006 Plan will ultimately replace the Executive Stock Option Plan and the 2002 Stock Option Plan. The Corporation has ceased to grant options under the Executive Stock Option Plan and 2002 Stock Option Plan and all new options to be granted by Fortis will be granted under the 2006 Plan. Options granted under the 2006 Plan will have a maximum term of 7 years, which is reduced from 10 years under the 2002 Stock Option Plan, and will expire no later than 3 years after the termination, death or retirement of the optionee. Directors are not eligible to receive grants of options under the 2006 Plan.
Quarter Ended Year Ended
December 31, 2006 December 31, 2006
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted Weighted
Number of Average Number of Average
Options Price Options Price
---------------------------------------------------------------------
---------------------------------------------------------------------
Options outstanding at
beginning of period 3,849,132 $ 15.80 3,421,876 $ 14.18
Granted - $ - 626,761 $ 22.94
Cancelled - $ - - $ -
Exercised (299,077) $ 12.17 (498,582) $ 11.45
---------------------------------------------------------------------
Options outstanding
at end of period 3,550,055 $ 16.11 3,550,055 $ 16.11
---------------------------------------------------------------------
---------------------------------------------------------------------
Details of stock options Number of Exercise Expiry
outstanding are as follows: Options Price Date
---------------------------------------------------------------------
---------------------------------------------------------------------
209,984 $ 9.57 2011
515,148 $ 12.03 2012
627,500 $ 12.81 2013
675,648 $ 15.28 2014
12,000 $ 15.23 2014
68,557 $ 14.55 2014
752,717 $ 18.40 2015
28,000 $ 18.11 2015
33,740 $ 20.82 2015
626,761 $ 22.94 2016
---------------------------------------------------------------------
3,550,055
---------------------------------------------------------------------
---------------------------------------------------------------------
Details of stock options
vested as at December 31,
2006 are as follows: Number of Exercise Expiry
Options Price Date
--------------------------------------------------------------------
--------------------------------------------------------------------
209,984 $ 9.57 2011
515,148 $ 12.03 2012
453,020 $ 12.81 2013
329,628 $ 15.28 2014
6,000 $ 15.23 2014
29,467 $ 14.55 2014
181,077 $ 18.40 2015
7,000 $ 18.11 2015
8,435 $ 20.82 2015
--------------------------------------------------------------------
1,739,759
--------------------------------------------------------------------
--------------------------------------------------------------------
The weighted average exercise price of stock options vested as at
December 31, 2006 was $13.34.
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. Beginning in 2007, all new stock options will be granted under the Corporation's 2006 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, $0.8 million and $2.0 million were recorded as compensation expense for the quarter ended and year ended December 31, 2006, respectively ($0.4 million and $1.6 million for the quarter ended and year ended December 31, 2005, respectively).
9. PREFERENCE SHARES
Authorized
(a) an unlimited number of First Preference Shares, without nominal or par value
(b) an unlimited number of Second Preference Shares, without nominal or par value
---------------------------------------------------------------------
---------------------------------------------------------------------
December 31, 2006 December 31, 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Balance
Sheet Number Amount Number Amount
Issued and Classifi- of (in of (in
Outstanding cation Shares thousands) Shares thousands)
---------------------------------------------------------------------
(i) First Preference Debt
Shares, Series C 5,000,000 $122,992 5,000,000 $122,992
(ii) First Preference Debt
Shares, Series E 7,993,500 196,500 7,993,500 196,500
---------------------------------------------------------------------
Total classified
as debt 12,993,500 $319,492 12,993,500 $319,492
---------------------------------------------------------------------
(iii) First
Preference
Shares,
Series F Equity 5,000,000 $122,466 - -
---------------------------------------------------------------------
(i) First Preference Shares, Series C
The First Preference Shares, Series C are entitled to fixed cumulative preferential cash dividends at a rate of $1.3625 per share per annum. On or after June 1, 2010, the Corporation may, at its option, redeem for cash the First Preference Shares, Series C, in whole at any time or in part from time to time, at $25.75 per share if redeemed before June 1, 2011, at $25.50 per share if redeemed on or after June 1, 2011 but before June 1, 2012, at $25.25 per share if redeemed on or after June 1, 2012 but before June 1, 2013 and at $25.00 per share if redeemed on or after June 1, 2013 plus, in each case, all accrued and unpaid dividends up to but excluding the date fixed for redemption.
On or after June 1, 2010, the Corporation may, at its option, convert all, or from time to time any part of the outstanding First Preference Shares, Series C into fully paid and freely tradable common shares of the Corporation. The number of common shares into which each Preference Share may be so converted will be determined by dividing the then-applicable redemption price per Preference Share, together with all accrued and unpaid dividends up to but excluding the date fixed for conversion, by the greater of $1.00 and 95 per cent of the then-current market price of the common shares at such time.
On or after September 1, 2013, each First Preference Share, Series C will be convertible at the option of the holder on the first day of September, December, March and June of each year into freely tradable common shares determined by dividing $25.00, together with all accrued and unpaid dividends up to but excluding the date fixed for conversion, by the greater of $1.00 and 95 per cent of the then-current market price of the common shares.
If a holder of First Preference Shares, Series C elects to convert any of such shares into common shares, the Corporation can redeem such First Preference Shares, Series C for cash or arrange for the sale of those shares to substitute purchasers.
As the First Preference Shares, Series C are redeemable at the option of the shareholder, they meet the definition of a financial liability and, therefore, are classified as long-term liabilities with associated dividends classified as finance charges.
(ii) First Preference Shares, Series E
The First Preference Shares, Series E are entitled to receive fixed cumulative preferential cash dividends in the amount of $1.2250 per share per annum.
On or after June 1, 2013, the Corporation may, at its option, redeem all, or from time to time any part of, the outstanding First Preference Shares, Series E by the payment in cash of a sum per redeemed share equal to $25.75 if redeemed during the 12 months commencing June 1, 2013, $25.50 if redeemed during the 12 months commencing June 1, 2014, $25.25 if redeemed during the 12 months commencing June 1, 2015, and $25.00 if redeemed on or after June 1, 2016 plus, in each case, all accrued and unpaid dividends up to but excluding the date fixed for redemption.
On or after June 1, 2013, the Corporation may, at its option, convert all, or from time to time any part of the outstanding First Preference Shares, Series E into fully paid and freely tradable common shares of the Corporation. The number of common shares into which each Preference Share may be so converted will be determined by dividing the then-applicable redemption price per First Preference Share, Series E, together with all accrued and unpaid dividends up to but excluding the date fixed for conversion, by the greater of $1.00 and 95 per cent of the then-current market price of the common shares at such time.
On or after September 1, 2016, each First Preference Share, Series E will be convertible at the option of the holder on the first business day of September, December, March and June of each year, into fully paid and freely tradable common shares determined by dividing $25.00, together with all accrued and unpaid dividends up to but excluding the date fixed for conversion, by the greater of $1.00 and 95 per cent of the then-current market price of the common shares. If a holder of Preference Shares, Series E elects to convert any of such shares into common shares, the Corporation can redeem such Preference Shares, Series E for cash or arrange for the sale of those shares to other purchasers.
As the First Preference Shares, Series E are redeemable at the option of the shareholder, they meet the definition of a financial liability and, therefore, are classified as long-term liabilities with associated dividends classified as finance charges.
(iii) First Preference Shares, Series F
On September 28, 2006, the Corporation issued 5,000,000 First Preference Shares, Series F at $25.00 per share for net after-tax proceeds of $122.5 million.
The First Preference Shares, Series F are entitled to receive fixed cumulative preferential cash dividends in the amount of $1.2250 per share per annum.
On or after December 1, 2011, the Corporation may, at its option, redeem for cash the First Preference Shares, Series F, in whole at any time or in part from time to time, at $26.00 per share if redeemed before December 1, 2012, at $25.75 per share if redeemed on or after December 1, 2012 but before December 1, 2013, at $25.50 per share if redeemed on or after December 1, 2013 but before December 1, 2014, at $25.25 per share if redeemed on or after December 1, 2014 but before December 1, 2015, and at $25.00 per share if redeemed on or after December 1, 2015 plus, in each case, all accrued and unpaid dividends up to but excluding the date fixed for redemption.
As the First Preference Shares, Series F are not redeemable at the option of the shareholder, they are classified as equity and the associated dividends are deducted on the income statement immediately before arriving at net earnings applicable to common shares.
10. 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 $5.6 million and $19.7 million for the quarter ended and year ended December 31, 2006, respectively ($5.5 million and $16.2 million for the quarter ended and year ended December 31, 2005, respectively). The cost of providing the defined contribution arrangements for the quarter ended and year ended December 31, 2006 was $1.5 million and $4.0 million, respectively ($1.2 million and $3.5 million for the quarter ended and year ended December 31, 2005, respectively).
11. FINANCE CHARGES
Quarter Ended Year Ended
December 31 December 31
---------------------------------------------------------------------
---------------------------------------------------------------------
(in thousands) 2006 2005 2006 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Amortization of debt and
stock issue expenses $ 216 $ 600 $ 683 $ 1,093
Interest - Long-term debt
and capital
lease obligations 39,490 36,173 154,308 142,710
- Short-term
borrowings 1,852 1,771 6,339 5,912
Interest charged
to construction (1,310) (2,043) (4,389) (6,727)
Interest earned (545) (548) (3,493) (3,434)
Unrealized foreign exchange
loss (gain) on long-term debt 83 71 (1,725) (2,335)
Dividends on
preference shares 4,151 4,151 16,606 16,606
---------------------------------------------------------------------
$ 43,937 $ 40,175 $168,329 $153,825
---------------------------------------------------------------------
---------------------------------------------------------------------
12. GAIN ON SALE OF INCOME PRODUCING PROPERTY
On June 28, 2006, Fortis Properties sold the Days Inn Sydney for gross proceeds of $4.5 million resulting in a gain of $2.1 million ($1.6 million after-tax).
13. GAIN ON SETTLEMENT OF CONTRACTUAL MATTERS
In the first quarter of 2005, Fortis recorded a $10.0 million ($7.9 million after-tax) gain resulting from the settlement of contractual matters between FortisOntario and Ontario Power Generation Inc.
14. CORPORATE TAXES
Corporate taxes differ from the amount that would be expected by applying the enacted Canadian federal and provincial statutory tax rates to earnings before corporate taxes. The following is a reconciliation of the consolidated statutory tax rate to the consolidated effective tax rate:
Quarter Ended Year Ended
December 31 December 31
(%) (%)
---------------------------------------------------------------------
---------------------------------------------------------------------
2006 2005 2006 2005
---------------------------------------------------------------------
Statutory tax rate 35.3 35.5 35.2 35.3
Preference share dividends 3.1 4.5 3.2 2.8
Large corporations' tax - 3.0 - 2.1
Differences between Canadian
statutory rates and those
applicable to foreign subsidiaries (7.9) (8.0) (6.8) (3.6)
Items capitalized for accounting
but expensed for income tax purposes (5.8) (0.7) (10.7) (0.1)
Other timing differences (0.2) (5.3) (1.2) (1.6)
Impact of reduction in income tax
rates on future income tax balances (1.3) - (2.4) -
Change in revenue recognition
policy at Newfoundland
Power (Note 3) 0.9 - 0.8 -
Maritime Electric tax
reassessment (Note 17) - - 0.9 -
Cornwall Electric tax reassessment - (0.5) - (0.8)
Pension costs (0.3) (0.2) (0.4)(0.8)
Other (4.0) (1.2) (1.4)(0.4)
---------------------------------------------------------------------
Effective tax rate 19.8 27.1 17.2 32.9
---------------------------------------------------------------------
---------------------------------------------------------------------
The AEUB-approved 2006/2007 Negotiated Settlement Agreement, effective January 1, 2006, resulted in a change in the income tax methodology used at FortisAlberta whereby future income tax expense for federal income tax, associated with specified timing differences, is no longer being recognized. The effect of the change in income tax methodology has been a decrease in income tax expense during the quarter and year compared to the same periods last year, primarily associated with the timing of recognition for income tax purposes of those items capitalized for accounting purposes (Note 3).
15. BUSINESS ACQUISITIONS
Caribbean Utilities
On November 7, 2006, Fortis, through a wholly owned subsidiary, acquired an aggregate of 4,113,116 of the outstanding Class A Ordinary Shares of Caribbean Utilities for US$11.89 per share under a private agreement with International Power Holdings Ltd. ("IPHL") and 4 other vendors affiliated with IPHL. The aggregate purchase price of $55.7 million (US$49.0 million), including acquisition costs, was financed through cash consideration from the issuance of US$40 million unsecured subordinated convertible debentures, combined with drawings on the Corporation's credit facilities.
Following this acquisition, Fortis controls Caribbean Utilities by beneficially owning 13,565,511, or approximately 54 per cent, of the outstanding Class A Ordinary Shares of Caribbean Utilities.
The acquisition has been accounted for using the purchase method. Caribbean Utilities' balance sheet as at November 7, 2006, has been consolidated in the December 31, 2006 balance sheet of Fortis. Beginning with the first quarter of 2007, Fortis will consolidate Caribbean Utilities' financial statements on a 2-month lag basis and will include Caribbean Utilities' January 31, 2007 balance sheet and statement of earnings and cash flows for the three-month period ended January 31, 2007. During 2006 and 2005, the statements of earnings of Fortis reflected the Corporation's previous approximate 37 per cent ownership interest in Caribbean Utilities, previously accounted for on a 2-month equity lag basis. Caribbean Utilities' financial results are reported in the Corporation's Regulated Utilities - Caribbean operating segment.
The regulated nature of Caribbean Utilities and the determination of revenues and earnings are based on historic values and do not change with market conditions or change of ownership. Therefore, no fair market value increments were recorded as part of the purchase price on those net assets included in the defined asset base upon which the Company is permitted to earn a regulated rate of return, as all economic benefits associated with them will accrue to customers. The book value of the net assets included in the defined asset base has been assigned as fair value for purchase price allocation. The book value of net assets not included in the defined asset base approximate fair value. Therefore, no fair market value increments have been recorded as part of the purchase price associated with these items.
The Corporation has accounted for the acquisition of the controlling interest in Caribbean Utilities as a 2-step acquisition for the purpose of purchase price allocation and the assigning of costs to identifiable assets, goodwill and intangible assets, if any.
Upon acquiring additional Class A Ordinary Shares in Caribbean Utilities in January 2003, the Corporation's ownership interest in Caribbean Utilities increased to approximately 37 per cent. As of January 2003, this investment was accounted for on an equity basis and, therefore, was considered the first step in the 2-step acquisition process. Previous to January 2003, the Corporation's approximate 22 per cent ownership interest in Caribbean Utilities was accounted for on a cost basis. On November 7, 2006, the Corporation increased its ownership interest in Caribbean Utilities to approximately 54 per cent representing a controlling interest in the Company and, therefore, was considered the second step in the 2-step acquisition process.
The total purchase price allocation, subject to final adjustment to be made by September 30, 2007, is estimated as follows:
(in thousands) Total
----------------------------------------------------------------
----------------------------------------------------------------
Fair value assigned to net assets:
Utility capital assets $ 318,587
Current assets 29,704
Goodwill 105,859
Regulatory assets 13,367
Other assets 1,850
Current liabilities (28,764)
Long-term debt (including current portion) (Note 6) (178,146)
Non-controlling interest (76,836)
Other liabilities (190)
----------------------------------------------------------------
185,431
Cash 2,676
----------------------------------------------------------------
$ 188,107
----------------------------------------------------------------
----------------------------------------------------------------
Fortis Turks and Caicos
On August 28, 2006, Fortis, through a wholly owned subsidiary, acquired all issued and outstanding common shares of P.P.C. Limited and Atlantic Equipment & Power (Turks and Caicos) Ltd. (collectively referred to as "Fortis Turks and Caicos") for aggregate consideration of approximately $97.7 million (US$87.8 million). The purchase price net of assumed debt and acquisition costs of $75.6 million (US$68.0 million) was initially financed, through cash consideration, by way of drawings on the Corporation's credit facilities that were repaid in part, with partial proceeds from the issuance of First Preference Share, Series F of Fortis on September 28, 2006.
The acquisition has been accounted for using the purchase method, whereby the results of full operations of Fortis Turks and Caicos have been included in the consolidated financial statements of Fortis in the Regulated Utilities - Caribbean segment, commencing August 28, 2006. The regulated nature of Fortis Turks and Caicos and the determination of revenues and earnings are based on historic values and do not change with market conditions or change of ownership. Therefore, no fair market value increments were recorded as part of the purchase price on those net assets included in the defined asset base upon which the Company is permitted to earn a regulated rate of return, as all economic benefits associated with them will accrue to customers. The book value of the net assets included in the defined asset base has been assigned as fair value for purchase price allocation. The book value of net assets not included in the defined asset base approximate fair value. Therefore, no fair market value increments have been recorded as part of the purchase price associated with these items.
The purchase price allocation, subject to final adjustments to be made by June 30, 2007, is estimated as follows:
(in thousands) PPC Atlantic Total
-------------------------------------------------------------------
-------------------------------------------------------------------
Fair value assigned to net assets:
Utility capital assets $ 45,196 $ 605 $ 45,801
Current assets 17,787 815 18,602
Goodwill 38,747 - 38,747
Other assets 905 - 905
Current liabilities (3,162) (105) (3,267)
Assumed debt (including
current portion) (Note 6) (22,072) - (22,072)
Other liabilities (2,057) (1,075) (3,132)
-------------------------------------------------------------------
$ 75,344 $ 240 $ 75,584
-------------------------------------------------------------------
-------------------------------------------------------------------
Fortis Properties
On November 1, 2006, Fortis Properties purchased assets comprising of 4 hotels in Alberta and British Columbia for an aggregate cash purchase price of $51.9 million, including assumed debt and acquisition costs. The 4 hotels are Holiday Inn Express and Suites, and Best Western, in Medicine Hat, Alberta; Ramada Hotel and Suites, in Lethbridge, Alberta; and Holiday Inn Express, in Kelowna, British Columbia.
The acquisition has been accounted for using the purchase method, whereby the results of full operations have been included in the consolidated financial statements of Fortis from the date of acquisition, commencing November 1, 2006.
The purchase price allocation to net assets based on their fair values is as follows:
(in thousands)
-------------------------------------------------------------------
-------------------------------------------------------------------
Fair value assigned to net assets:
Income producing properties $ 51,803
Other assets 362
Other liabilities (245)
Long-term debt (Note 6) (11,571)
-------------------------------------------------------------------
$ 40,349
-------------------------------------------------------------------
-------------------------------------------------------------------
16. SEGMENTED INFORMATION
a) Information by reportable segment is as follows:
Quarter ended Regulated Utilities
---------------------------------------------------------------------
(in thousands of Fortis Fortis NF Maritime Fortis
December 31, 2006 Alberta BC Power Electric Ontario
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues 65,792 58,327 113,663 31,204 31,810
Equity income - - - - -
Energy supply costs - 20,151 69,177 18,998 23,801
Operating expenses 30,833 16,941 14,747 3,314 3,732
Amortization 17,615 6,894 8,938 2,506 1,393
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating income 17,344 14,341 20,801 6,386 2,884
Finance charges 8,074 6,026 8,229 2,494 1,303
Corporate taxes 986 1,894 3,611 1,550 565
Non-controlling
interest - - 146 - -
---------------------------------------------------------------------
---------------------------------------------------------------------
Net earnings (loss) 8,284 6,421 8,815 2,342 1,016
---------------------------------------------------------------------
Preference share
dividends - - - - -
---------------------------------------------------------------------
---------------------------------------------------------------------
Net earnings (loss)
applicable to
common shares 8,284 6,421 8,815 2,342 1,016
---------------------------------------------------------------------
Goodwill 228,615 220,719 - 19,858 42,947
Identifiable
assets 1,158,546 809,923 936,300 317,331 128,653
---------------------------------------------------------------------
---------------------------------------------------------------------
Total assets 1,387,161 1,030,642 936,300 337,189 171,600
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expenditures 67,221 37,930 19,004 8,824 4,026
---------------------------------------------------------------------
---------------------------------------------------------------------
December 31, 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues 58,668 50,164 101,411 28,882 32,905
Equity income - - - - -
Energy supply costs - 15,934 69,054 18,268 25,750
Operating expenses 29,987 16,781 13,953 3,380 4,079
Amortization 15,788 4,924 6,267 2,433 1,337
---------------------------------------------------------------------
Operating income 12,893 12,525 12,137 4,801 1,739
Finance charges 6,325 5,350 7,925 1,829 1,254
Corporate taxes 2,397 1,487 1,176 1,275 323
Non-controlling
interest - - 147 - -
---------------------------------------------------------------------
Net earnings (loss)
applicable to
common shares 4,171 5,688 2,889 1,697 162
---------------------------------------------------------------------
Goodwill 228,615 220,719 - 19,858 42,947
Identifiable assets 970,738 722,392 895,892 290,356 120,867
Equity investment
assets - - - - -
---------------------------------------------------------------------
---------------------------------------------------------------------
Total assets 1,199,353 943,111 895,892 310,214 163,814
---------------------------------------------------------------------
Capital
expenditures 58,210 38,885 17,571 6,628 5,265
---------------------------------------------------------------------
Quarter ended
(in thousands of dollars) Total Total
December 31, 2006 Canadian Caribbean 1
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues 300,796 31,643
Equity income - 2,838
Energy supply costs 132,127 16,750
Operating expenses 69,567 4,401
Amortization 37,346 2,325
---------------------------------------------------------------------
Operating income 61,756 11,005
Finance charges 26,126 1,035
Corporate taxes 8,606 374
Non-controlling interest 146 1,175
---------------------------------------------------------------------
Net earnings (loss) 26,878 8,421
---------------------------------------------------------------------
Preference share dividends - -
---------------------------------------------------------------------
Net earnings (loss)
applicable to common shares 26,878 8,421
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill 512,139 149,172
Identifiable assets 3,350,753 678,803
---------------------------------------------------------------------
Total assets 3,862,892 827,975
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital expenditures 137,005 15,099
---------------------------------------------------------------------
---------------------------------------------------------------------
December 31, 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues 272,030 19,836
Equity income - 2,854
Energy supply costs 129,006 10,789
Operating expenses 68,180 2,850
Amortization 30,749 1,228
---------------------------------------------------------------------
Operating income 44,095 7,823
Finance charges 22,683 1,741
Corporate taxes 6,658 342
Non-controlling interest 147 904
---------------------------------------------------------------------
Net earnings (loss)
applicable to common shares 14,607 4,836
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill 512,139 -
Identifiable assets 3,000,245 212,157
Equity investment assets - 164,808
---------------------------------------------------------------------
---------------------------------------------------------------------
Total assets 3,512,384 376,965
---------------------------------------------------------------------
Capital expenditures 126,559 3,580
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-Regulated
---------------------------------------------------------------------
(in thousands of dollars) Fortis Fortis
December 31, 2006 Generation Properties Corporate
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues 20,236 41,902 2,656
Equity income - - -
Energy supply costs 1,466 - -
Operating expenses 3,985 28,342 3,044
Amortization 2,619 3,578 729
---------------------------------------------------------------------
Operating income 12,166 9,982 (1,117)
Finance charges 2,341 5,568 10,879
Corporate taxes 1,474 1,606 (2,570)
Non-controlling interest 1,602 - (41)
---------------------------------------------------------------------
Net earnings (loss) 6,749 2,808 (9,385)
---------------------------------------------------------------------
Preference share dividends - - 1,585
---------------------------------------------------------------------
Net earnings (loss)
applicable to common shares 6,749 2,808 (10,970)
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - - -
Identifiable assets 245,854 485,732 43,368
---------------------------------------------------------------------
Total assets 245,854 485,732 43,368
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital expenditures 353 1,538 25
---------------------------------------------------------------------
---------------------------------------------------------------------
December 31, 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues 26,043 38,287 1,884
Equity income - - -
Energy supply costs 1,635 - -
Operating expenses 6,093 25,683 3,027
Amortization 2,623 3,069 785
---------------------------------------------------------------------
Operating income 15,692 9,535 (1,928)
Finance charges 2,681 5,188 9,588
Corporate taxes 3,499 1,430 (2,893)
Non-controlling interest 1,027 - (41)
---------------------------------------------------------------------
Net earnings (loss)
applicable to common shares 8,485 2,917 (8,582)
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - - -
Identifiable assets 267,049 427,753 41,655
Equity investment assets - - -
---------------------------------------------------------------------
Total assets 267,049 427,753 41,655
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital expenditures 3,178 7,375 633
---------------------------------------------------------------------
---------------------------------------------------------------------
Inter-
(in thousands of dollars) segment
December 31, eliminations Consolidated
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues (6,960) 390,273
Equity income - 2,838
Energy supply costs (3,888) 146,455
Operating expenses (1,060) 108,279
Amortization - 46,597
---------------------------------------------------------------------
Operating income (2,012) 91,780
Finance charges (2,012) 43,937
Corporate taxes - 9,490
Non-controlling interest - 2,882
---------------------------------------------------------------------
Net earnings (loss) - 35,471
---------------------------------------------------------------------
Preference share dividends - 1,585
---------------------------------------------------------------------
Net earnings (loss)
applicable to common shares - 33,886
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - 661,311
Identifiable assets (18,380) 4,786,130
---------------------------------------------------------------------
Total assets (18,380) 5,447,441
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital expenditures - 154,020
---------------------------------------------------------------------
---------------------------------------------------------------------
December 31, 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues (7,850) 350,230
Equity income - 2,854
Energy supply costs (5,085) 136,345
Operating expenses (1,059) 104,774
Amortization - 38,454
---------------------------------------------------------------------
Operating income (1,706) 73,511
Finance charges (1,706) 40,175
Corporate taxes - 9,036
Non-controlling interest - 2,037
---------------------------------------------------------------------
Net earnings (loss)
applicable to common shares - 22,263
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - 512,139
Identifiable assets (28,702) 3,920,157
Equity investment assets - 164,808
---------------------------------------------------------------------
Total assets (28,702) 4,597,104
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital expenditures - 141,325
---------------------------------------------------------------------
---------------------------------------------------------------------
1 Includes Belize Electricity, Fortis Turks and Caicos, and Caribbean
Utilities in Grand Cayman.
Year ended Regulated Utilities
---------------------------------------------------------------------
(in thousands of
dollars) Fortis Fortis NF Maritime Fortis
December 31, 2006 Alberta BC Power Electric Ontario
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues 250,776 215,618 421,264 122,407 130,034
Equity income - - - - -
Energy supply costs - 67,576 257,157 72,980 97,762
Operating expenses 115,230 63,103 53,996 12,828 14,642
Amortization 68,766 27,333 33,129 10,148 5,407
---------------------------------------------------------------------
Operating income 66,780 57,606 76,982 26,451 12,223
Finance charges 30,118 23,423 32,677 10,255 5,074
Gain on sale of
income producing
property - - - - -
Corporate taxes (4,734) 6,767 13,639 6,429 3,082
Non-controlling
interest - - 588 - -
---------------------------------------------------------------------
Net earnings (loss) 41,396 27,416 30,078 9,767 4,067
Preference share
dividends - - - - -
---------------------------------------------------------------------
Net earnings (loss)
applicable to
common shares 41,396 27,416 30,078 9,767 4,067
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill 228,615 220,719 - 19,858 42,947
Identifiable
assets 1,158,546 809,923 936,300 317,331 128,653
---------------------------------------------------------------------
Total assets 1,387,161 1,030,642 936,300 337,189 171,600
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expenditures 243,151 110,914 60,235 26,853 10,357
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---------------------------------------------------------------------
December 31, 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues 259,775 194,765 419,963 116,693 139,668
Equity income - - - - -
Energy supply costs - 60,412 255,954 71,568 110,164
Operating expenses 113,006 64,738 53,812 12,535 14,520
Amortization 61,395 19,038 32,143 9,670 5,100
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Operating income 85,374 50,577 78,054 22,920 9,884
Finance charges 24,198 18,513 31,369 7,614 5,058
Gain on settlement
of contractual
matters - - - - -
Corporate taxes 25,105 7,424 15,368 6,224 493
Non-controlling
interest - - 588 - -
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Net earnings (loss)
applicable to
common shares 36,071 24,640 30,729 9,082 4,333
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Goodwill 228,615 220,719 - 19,858 42,947
Identifiable
assets 970,738 722,392 895,892 290,356 120,867
Equity investment
assets - - - - -
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Total assets 1,199,353 943,111 895,892 310,214 163,814
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---------------------------------------------------------------------
Capital
expenditures 164,962 115,989 55,399 40,369 10,913
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---------------------------------------------------------------------
Year Ended
(in thousands of dollars) Total Total
December 31, 2006 Canadian Caribbean 1
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues 1,140,099 101,039
Equity income - 9,738
Energy supply costs 495,475 56,823
Operating expenses 259,799 12,778
Amortization 144,783 6,807
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Operating income 240,042 34,369
Finance charges 101,547 4,742
Gain on sale of income producing property - -
Corporate taxes 25,183 1,525
Non-controlling interest 588 4,490
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Net earnings (loss) 112,724 23,612
Preference share dividends - -
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Net earnings (loss)
applicable to common shares 112,724 23,612
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---------------------------------------------------------------------
Goodwill 512,139 149,172
Identifiable assets 3,350,753 678,803
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Total assets 3,862,892 827,975
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Capital expenditures 451,510 26,764
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December 31, 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues 1,130,864 75,790
Equity income - 11,466
Energy supply costs 498,098 40,845
Operating expenses 258,611 10,725
Amortization 127,346 5,770
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Operating income 246,809 29,916
Finance charges 86,752 5,614
Gain on settlement of contractual matters - -
Corporate taxes 54,614 1,261
Non-controlling interest 588 3,610
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Net earnings (loss)
applicable to common shares 104,855 19,431
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Goodwill 512,139 -
Identifiable assets 3,000,245 212,157
Equity investment assets - 164,808
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Total assets 3,512,384 376,965
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Capital expenditures 387,632 15,197
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1 Includes Belize Electricity, Fortis Turks and Caicos, and Caribbean
Utilities in Grand Cayman.
Year Ended Non-Regulated
---------------------------------------------------------------------
(in thousands of dollars) Fortis Fortis
December 31, 2006 Generation Properties Corporate
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues 79,387 162,928 9,037
Equity income - - -
Energy supply costs 6,233 - -
Operating expenses 15,150 105,323 10,592
Amortization 10,496 12,456 2,969
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Operating income 47,508 45,149 (4,524)
Finance charges 10,013 20,973 38,445
Gain on sale of
income producing property - (2,088) -
Corporate taxes 8,125 7,563 (9,858)
Non-controlling interest 2,690 - (166)
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Net earnings (loss) 26,680 18,701 (32,945)
Preference share dividends - - 1,585
---------------------------------------------------------------------
Net earnings (loss)
applicable to common shares 26,680 18,701 (34,530)
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - - -
Identifiable assets 245,854 485,732 43,368
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Total assets 245,854 485,732 43,368
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Capital expenditures 3,153 16,887 1,676
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---------------------------------------------------------------------
December 31, 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues 83,955 154,403 9,977
Equity income - - -
Energy supply costs 6,204 - -
Operating expenses 17,812 99,967 9,490
Amortization 10,380 11,244 2,882
Operating income 49,559 43,192 (2,395)
Finance charges 14,051 19,988 36,947
Gain on settlement
of contractual matters (10,000) - -
Corporate taxes 13,811 9,077 (8,347)
Non-controlling interest 2,183 - (165)
---------------------------------------------------------------------
Net earnings (loss)
applicable to common shares 29,514 14,127 (30,830)
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - - -
Identifiable assets 267,049 427,753 41,655
Equity investment assets - - -
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Total assets 267,049 427,753 41,655
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital expenditures 19,310 21,275 2,615
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Year Ended Inter-
(in thousands of dollars) segment
December 31, 2006 eliminations Consolidated
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues (30,492) 1,461,998
Equity income - 9,738
Energy supply costs (18,046) 540,485
Operating expenses (5,055) 398,587
Amortization - 177,511
---------------------------------------------------------------------
Operating income (7,391) 355,153
Finance charges (7,391) 168,329
Gain on sale of income producing property - (2,088)
Corporate taxes - 32,538
Non-controlling interest - 7,602
---------------------------------------------------------------------
Net earnings (loss) - 148,772
Preference share dividends - 1,585
---------------------------------------------------------------------
Net earnings (loss) applicable to common shares - 147,187
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - 661,311
Identifiable assets (18,380) 4,786,130
---------------------------------------------------------------------
Total assets (18,380) 5,447,441
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital expenditures - 499,990
---------------------------------------------------------------------
---------------------------------------------------------------------
December 31, 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues (24,984) 1,430,005
Equity income - 11,466
Energy supply costs (11,232) 533,915
Operating expenses (4,225) 392,380
Amortization - 157,622
---------------------------------------------------------------------
Operating income (9,527) 357,554
Finance charges (9,527) 153,825
Gain on settlement of contractual matters - (10,000)
Corporate taxes - 70,416
Non-controlling interest - 6,216
---------------------------------------------------------------------
Net earnings (loss) applicable to common shares - 137,097
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - 512,139
Identifiable assets (28,702) 3,920,157
Equity investment assets - 164,808
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Total assets (28,702) 4,597,104
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital expenditures - 446,029
---------------------------------------------------------------------
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b) Inter-Segment Transactions
Inter-segment transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. The significant inter-segment transactions primarily related to the sale of energy from Fortis Generation to Belize Electricity and FortisOntario, electricity sales from Newfoundland Power to Fortis Properties and finance charges on inter-segment borrowings. The significant inter-segment transactions for the three and twelve months ended December 31, 2006 and 2005 are detailed below.
Inter-segment transactions Quarter Ended Year Ended
December 31 December 31
---------------------------------------------------------------------
(in thousands) 2006 2005 2006 2005
---------------------------------------------------------------------
Sales from Fortis
Generation to Belize
Electricity $3,449 $4,335 $16,629 $8,217
Sales from Fortis
Generation to
FortisOntario 459 527 1,481 2,032
Sales from Newfoundland
Power to Fortis
Properties 644 874 3,422 3,474
Inter-segment finance
charges on borrowings
from:
Corporate to Fortis
Properties 1,548 926 4,751 3,763
Corporate to Fortis
Generation - - - 2,222
Fortis Generation to
Belize Electricity - 478 742 2,266
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17. CONTINGENT LIABILITIES AND COMMITMENTS
Contingent liabilities
Fortis is a party to a number of disputes and lawsuits in the normal course of business. The following describes the nature of the Corporation's contingent liabilities.
(a) 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 New Brunswick Power regarding its $450 million write-down of the Point Lepreau Nuclear Generating Station in 1998.
Maritime Electric believes it has reported its tax position appropriately in all aspects of the reassessment and filed a Notice of Objection with the Chief of Appeals at CRA. Should the Company be unsuccessful in defending all aspects of the reassessment, the Company would be required to pay approximately $12.1 million in taxes and accrued interest. As at December 31, 2006, Maritime Electric has provided for, through future and current income taxes payable, approximately $11.6 million and, therefore, an additional liability of $0.5 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 made a payment on deposit of $5.9 million with CRA on June 29, 2006.
(b) FortisAlberta
On March 24, 2006, Her Majesty the Queen in Right of Alberta (the "Crown") filed a statement of claim in the Court of Queen's Bench of Alberta in the Judicial District of Edmonton against FortisAlberta. The Crown's claim is that the Company is responsible for a fire that occurred in October 2003 in an area of the Province of Alberta commonly referred to as Poll Haven Community Pasture. The Crown is seeking approximately $2.7 million in fire-fighting and suppression costs and approximately $2.4 million in timber losses, as well as interest and other costs. FortisAlberta and the Crown have exchanged several investigation and expert reports. Both the factual evidence and expert opinion received to date leads management to believe that FortisAlberta is not responsible for the cause of the fire and has no liability for the damages. However, given the preliminary stage of the proceedings, FortisAlberta has not made any definitive assessment of potential liability with respect to the claim. No amount, therefore, has been accrued in the consolidated financial statements.
(c) FortisBC
The B.C. Ministry of Forests (the "Ministry") has alleged breaches of the Forest Practices Code and negligence relating to a fire near Vaseux Lake and has filed and served a writ and statement of claim against FortisBC. The Company is currently communicating with the Ministry and its insurers. In addition, FortisBC has been served with 2 filed writs and statements of claim by private land owners in relation to the same matter. The outcome cannot be reasonably determined and estimated at this time and, accordingly, no amount has been accrued in the consolidated financial statements.
On January 5, 2006, FortisBC was served a writ and statement of claim filed with the B.C. Supreme Court under the Class Proceedings Act, 1995 on behalf of a class consisting of all persons who are or were customers of FortisBC and who paid or have been charged FortisBC's late payment penalties at any time between April 1, 1981 and the date of any judgment in this action. The claim is that forfeitures of the prompt payment discount offered to customers constitute "interest" within the meaning of section 347 of the Criminal Code and, since the effective annual rate of such interest exceeds 60 per cent, they are illegal and void. In the action, the Plaintiff seeks damages and restitution of all late payment penalties which were forfeited. On December 13, 2006, the application to certify the action as a class action was heard in the B.C. Supreme Court. In a decision delivered on January 11, 2007, the B.C. Supreme Court dismissed the application to certify the action as a class suit. Any appeal by the Plaintiff must be filed within 30 days of the decision. The final outcome cannot be reasonably determined and estimated at this time and, accordingly, no amount has been accrued in the consolidated financial statements.
(d) FortisUS Energy
Legal proceedings were initiated against FortisUS Energy by the Village of Philadelphia (the "Village"), New York. The Village claimed that FortisUS Energy should honour a series of current and future payments set out in an agreement between the Village and a former owner of the hydro site, located in the Village of Philadelphia municipality, now owned by FortisUS Energy, totalling approximately US$7.1 million (CDN$8.0 million). The First American Title Insurance Company is defending the action on behalf of FortisUS Energy. A memorandum Decision and Order was filed by the State of New York Supreme Court of Jefferson County on December 21, 2006 granting summary judgment to FortisUS Energy dismissing the action by the Village. The Village, however, filed a notice of appeal in January 2007. Management believes that the appeal will not be successful and, therefore, no provision has been made in these consolidated financial statements.
Commitments
The Corporation's commitments are consistent with disclosures in its annual audited consolidated financial statements for the year ended December 31, 2005, except as described below.
Belize Electricity has a 15-year power purchase agreement with Hydro Maya for the supply of 3 MW of capacity, which is scheduled to commence early in 2007. Additionally, Belize Electricity has entered into a 2-year power purchase agreement, expiring August 2008, with Comision Federal de Electricidad of Mexico for the supply of 15 MW of firm energy. Commitments under these power purchase agreements total approximately $20.2 million.
During 2006, Caribbean Utilities entered into a project agreement for the purchase and turnkey installation of one 16-MW medium-speed diesel generating unit and auxiliary equipment. This unit is scheduled for installation to meet the summer 2007 demand. The contract cost is US$18.4 million and the total estimated cost for completion of the project is US$22.2 million. As at October 31, 2006, approximately US$5.7 million had been spent related to this project.
18. SUBSEQUENT EVENTS
(a) On January 3, 2007, FortisAlberta closed a $110 million senior unsecured debenture offering. The debentures bear interest at a rate of 4.99 per cent, to be paid semi-annually and mature on January 3, 2047. The proceeds of the offering were used to repay existing indebtedness incurred under the Company's committed unsecured credit facility, which was incurred primarily to fund capital expenditures, and for general corporate purposes.
(b) On January 18, 2007, Fortis issued 5,170,000 Common Shares of the Corporation for $29.00 per Common Share. The common share issue resulted in gross proceeds of $149.9 million, or approximately $145.6 million net of after-tax expenses. The net proceeds of the offering were used by Fortis to repay indebtedness incurred for recent acquisitions, to support the capital expenditure programs of the Corporation's regulated utilities in western Canada and for general corporate purposes.
19. 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 $5.4 billion and annual revenues of approximately $1.5 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; First Preference Shares, Series E; and First Preference Shares, Series F of Fortis Inc. are traded on the Toronto Stock Exchange under the symbols FTS, FTS.PR.C, FTS.PR.E and FTS.PR.F, respectively. Fortis Inc. information can be accessed at www.fortisinc.com.
Share Transfer Agent and Registrar: Computershare Trust Company of Canada 9th Floor, 100 University Avenue Toronto, ON M5J 2Y1 T: 514.982.7555 or 1.866.586.7638 F: 416.263.9394 or 1.888.453.0330 W: www.computershare.com E: service@computershare.com
For the year ended December 31, 2006, Fortis Inc. will be filing the Certification of Annual Filings (Form 52-109F1) 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 the 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
