Fortis Achieves Record Earnings of $90.9 Million in 2004.ST. JOHN'S, Newfoundland And Labrador -- "Over the past decade, Fortis (TSX:FTS) has grown rapidly in Canada and in the Caribbean," says Stan Marshall, President and Chief Executive Officer, Fortis Inc."In 2004, Fortis acquired electric utilities with substantial service territories in Alberta and British Columbia.Our Canadian utilities now provide electric distribution in 5 provinces, making us the leader in our business segment in Canada.It has been profitable growth and, in 2004, we delivered record earnings to our shareholders for the fifth consecutive year." Annual earnings were $90.9 million, or $4.29 per common share, in 2004 compared to $73.6 million, or $4.25 per common share in 2003. Earnings for the fourth quarter were $21.2 million, or $0.89 per common share compared to $14.7 million, or $0.85 per common share in the fourth quarter of 2003.In the fourth quarter, Fortis incurred a charge of $8.2 million associated with the damage to Caribbean Utilities in Grand Cayman from Hurricane Ivan. The Corporation's earnings excluding the impact of Hurricane Ivan, although not a measure under generally accepted accounting principles, would have been $99.1 million in 2004, or $4.68 per common share, 34.6 per cent higher than earnings of $73.6 million last year and 10.1 per cent higher than earnings per common share of $4.25 last year. "Our expansion into western Canada was accretive to earnings in 2004.The long-term financing plan, executed within 6 months of closing the acquisition, contributed to the positive results delivered by FortisAlberta and FortisBC.These financings were completed at attractive rates reflecting a positive response by financial markets to our strategic initiative," says Marshall.On November 30, 2004, FortisBC closed a $140 million public debenture offering representing the last step in the financing plan for the acquisition. "The acquisition of FortisAlberta and FortisBC significantly improves the diversification of earnings, thereby reducing our business risk profile," says Marshall.In 2004, the total assets of Fortis grew to $3.8 billion, up 73 per cent over assets of $2.2 billion reported last year.Regulated utility assets comprise approximately 80 per cent of total operating assets while regulated assets in Canada comprise approximately 70 per cent of total operating assets. "In December 2004, Fortis reached an agreement to acquire Princeton Light and Power, an electric utility which serves approximately 3,200 customers and which has a rate base of approximately $6.2 million.It is another step for Fortis in growing our utility assets in British Columbia," says Marshall. "In early December, the third and final rotation of crews from Fortis utilities returned home to Canada and Belize from Grand Cayman following completion of service restoration in the aftermath of Hurricane Ivan.We were pleased that our assistance helped Caribbean Utilities restore service within 3 months to customers ready to receive such service," says Marshall. "In the fourth quarter, Fortis increased its quarterly dividend to common shareholders to $0.57 per common share from $0.54 per common share," says Marshall."Fortis has now raised its annual dividend to common shareholders for 32 consecutive years, a remarkable record." "We are well on the way to establishing FortisAlberta and FortisBC as separate operations," explains Marshall.In December, Fortis announced organizational changes as part of its commitment to separate management groups of these utilities.Effective April 1, 2005, John Walker, President and Chief Executive Officer, Fortis Properties will become President and Chief Executive Officer, FortisBC while Philip Hughes continues as President and Chief Executive Officer, FortisAlberta.Earl Ludlow, Senior Vice President, FortisBC and Vice President Operations, FortisAlberta will become President and Chief Executive Officer, Fortis Properties, effective June 1, 2005. "We remain focused on serving our customers well while growing our business profitably and delivering good returns to our shareholders," says Marshall. Subsequent to year end, Fortis Properties acquired 3 hotels located in western Canada for $62.6 million.The acquisition expands the hospitality operations of Fortis Properties by 650 rooms. "Consistent with the vision of Fortis and our long-term growth strategy, this investment is expected to be accretive to Fortis shareholders immediately.Over the longer term, it is expected to provide returns above those generated by utility investments," concludes Stan Marshall, President and Chief Executive Officer, Fortis Inc. INTERIM MANAGEMENT DISCUSSION & ANALYSIS The following material should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in the Fortis Inc. 2003 Annual Report and Interim Consolidated Financial Statements.This material has been prepared in accordance with National Instrument 51-102 relating to Management Discussion and Analysis. Fortis Inc. ("Fortis" or the "Corporation") includes forward-looking statements in this material. By their very nature, forward-looking statements are based on underlying assumptions and are subject to inherent risks and uncertainties surrounding future expectations generally.Such events include, but are not limited to, general economic, market and business conditions, regulatory developments, weather and competition.Fortis cautions readers that should certain events or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary significantly from those expected. For additional information with respect to certain of these risks or factors, reference should be made to the Corporation's continuous disclosure materials filed from time to time with Canadian Securities Regulatory Authorities.The Corporation disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
---------------------------------------------------------------------
---------------------------------------------------------------------
Fortis Inc.
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
($ millions, except
per common share
amounts) Quarter Annual
---------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------------
Revenue and Equity Income 337.2 210.6 1,146.1 843.1
---------------------------------------------------------------------
Cash flow from operations 90.6 43.3 271.3 156.7
---------------------------------------------------------------------
Net earnings applicable
to common shares 21.2 14.7 90.9 73.6
---------------------------------------------------------------------
Basic earnings per
common share ($) 0.89 0.85 4.29 4.25
---------------------------------------------------------------------
Diluted earnings per
common share ($) 0.85 0.83 4.04 4.10
---------------------------------------------------------------------
---------------------------------------------------------------------
Segmented Earnings Contribution
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------------
Regulated Utilities
- Canadian (1) 25.1 8.7 79.8 43.1
---------------------------------------------------------------------
Regulated Utilities
- Caribbean (2) (4.2) 5.0 8.0 17.2
---------------------------------------------------------------------
Non-regulated - Fortis
Generation (3) 4.7 2.8 12.8 10.9
---------------------------------------------------------------------
Non-regulated - Fortis
Properties 2.8 2.5 11.8 11.0
---------------------------------------------------------------------
Corporate (7.2) (4.3) (21.5) (8.6)
---------------------------------------------------------------------
Net earnings applicable
to common shares 21.2 14.7 90.9 73.6
---------------------------------------------------------------------
(1) Includes the operations of Newfoundland Power, Maritime Electric,
FortisOntario (comprised of Canadian Niagara Power and Cornwall
Electric), FortisAlberta and FortisBC
(2) Includes the operations of Belize Electricity and the
Corporation's 37.3 per cent equity investment in Caribbean
Utilities Company, Ltd.
(3) Includes the operations of non-regulated generating assets in
British Columbia, Ontario, central Newfoundland, Upper New York
State and Belize
---------------------------------------------------------------------
---------------------------------------------------------------------
Note: Financial information in this release is presented in Canadian
dollars unless otherwise specified.
Significant One-Time Item
Hurricane Ivan
In September 2004, Grand Cayman was struck by Hurricane Ivan, a
Category V hurricane that significantly affected the distribution
system of Caribbean Utilities Company, Ltd. ("Caribbean Utilities").
The total uninsured cost of the hurricane for Caribbean Utilities was
approximately US$17.8 million which the Company expensed for its
quarter ended October 31, 2004. Fortis accounts for its 37.3 per cent
interest in Caribbean Utilities on an equity basis. Equity earnings
are recorded on a lag basis and, therefore, the Corporation's portion
of the uninsured hurricane-related costs, totaling approximately $8.2
million, has reduced its equity earnings for the fourth quarter of
2004.
The Corporation's earnings excluding the impact of Hurricane Ivan,
although not a measure under generally accepted accounting principles
("GAAP"), would have been $99.1 million, $8.2 million higher than
actual earnings of $90.9 million reported in 2004, or $4.68 per
common share, 10.1 per cent higher than earnings per common share of
$4.25 last year. The Corporation believes that it is useful
supplemental information as it provides an indication of the results
excluding the impact of the Hurricane Ivan. Readers should be
cautioned however that this information should not be confused with
or used as an alternative for net earnings determined in accordance
with GAAP.
REGULATED UTILITIES - CANADIAN (1)
---------------------------------------------------------------------
---------------------------------------------------------------------
Regulated Utilities - Canadian
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Earnings
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
($ millions) 2004 2003 2004 2003
---------------------------------------------------------------------
Newfoundland Power 3.3 4.9 31.1 29.5
---------------------------------------------------------------------
Maritime Electric 1.8 1.7 8.2 7.2
---------------------------------------------------------------------
FortisOntario 0.9 2.1 4.2 6.4
---------------------------------------------------------------------
FortisAlberta (1) 7.5 - 18.6 -
---------------------------------------------------------------------
FortisBC (1) 11.6 - 17.7 -
---------------------------------------------------------------------
Earnings 25.1 8.7 79.8 43.1
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Regulated Utilities in Canada include the operations of
Newfoundland Power, Maritime Electric, FortisOntario (comprised
of Canadian Niagara Power and Cornwall Electric), FortisAlberta
and FortisBC. On May 31, 2004, Fortis completed the transaction
to acquire Aquila, Inc.'s 2 utilities in western Canada (renamed
FortisAlberta and FortisBC). Financial results for FortisAlberta
and FortisBC are since June 1, 2004 only.
Earnings from Regulated Utilities in Canada were $25.1 million for
the fourth quarter compared to $8.7 million for the same quarter last
year. The increase in quarterly earnings from Regulated Utilities in
Canada related to the acquisition of the utilities in western Canada
on May 31, 2004, partially mitigated by lower earnings at
Newfoundland Power and FortisOntario.
Annual earnings from Regulated Utilities in Canada were $79.8 million
compared to $43.1 million last year. Annual earnings from Regulated
Utilities in Canada represented over 70 per cent of the Corporation's
earnings from its operating segments. The substantial increase in
annual earnings from Regulated Utilities in Canada related to the
acquisition of the utilities in western Canada on May 31, 2004.
Newfoundland Power and Maritime Electric also delivered improved
financial results, partially offset by lower earnings at
FortisOntario. The lower earnings at FortisOntario were primarily
related to increased finance charges associated with the $52 million
of long-term debt issued in August 2003 and the lower effective
corporate income tax rate in 2003.
On December 15, 2004, Fortis reached an agreement to acquire
Princeton Light and Power, an electric utility which serves
approximately 3,200 customers in British Columbia and has a rate base
of approximately $6.2 million. The closing of the transaction is
subject to approval of securities authorities, final due diligence
and regulatory approval by the British Columbia Utilities Commission
("BCUC"). The specific purchase price will be adjusted depending on
the time of closing but is expected to result in a premium over rate
base of approximately 14 per cent.
Newfoundland Power
---------------------------------------------------------------------
---------------------------------------------------------------------
Newfoundland Power
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------------
Electricity Sales (GWh) 1,236 1,181 4,979 4,882
---------------------------------------------------------------------
($ millions)
---------------------------------------------------------------------
Revenue 104.3 94.3 404.4 384.2
---------------------------------------------------------------------
Energy Supply Costs 71.9 62.8 244.0 228.0
---------------------------------------------------------------------
Operating Expenses 14.0 13.0 51.8 51.8
---------------------------------------------------------------------
Amortization 6.4 5.2 31.0 29.4
---------------------------------------------------------------------
Finance Charges 7.6 7.6 30.4 30.0
---------------------------------------------------------------------
Corporate Taxes 1.0 0.7 15.5 14.9
---------------------------------------------------------------------
Non-controlling Interest 0.1 0.1 0.6 0.6
---------------------------------------------------------------------
Earnings 3.3 4.9 31.1 29.5
---------------------------------------------------------------------
---------------------------------------------------------------------
Newfoundland Power's earnings for the fourth quarter were $3.3 million compared to $4.9 million for the same quarter last year. The $1.6 million decrease in quarterly earnings was a result of timing differences related to operating expenses, higher pension expense and increased amortization, partially offset by higher electricity sales and pole rental revenues. Annual earnings were $31.1 million compared to $29.5 million last year. The $1.6 million increase in annual earnings was due to a combination of increased electricity sales and continued focus on cost management, partially offset by increased amortization and finance charges associated with Newfoundland Power's ongoing capital program. Electricity sales for the fourth quarter increased to 1,236 gigawatt hours ("GWh") from 1,181 GWh for the same quarter last year. Annual electricity sales increased 2.0 per cent to 4,979 GWh from 4,882 GWh for 2003. Residential sales increased 2.2 per cent and commercial sales increased 1.7 per cent compared to last year. The increase in residential electricity sales was primarily due to higher average usage levels and an increase in the number of customers. The increase in commercial sales was attributed to growth in the service sector of the economy and activity related to the White Rose offshore oil project. Revenue for the fourth quarter was $104.3 million compared to $94.3 million for the same quarter last year. Annual revenue was $404.4 million compared to $384.2 million last year. The primary reason for the increase was a 5.4 per cent increase in electricity rates charged to Newfoundland Power's customers effective July 1, 2004.This rate increase resulted from a flow through of increased purchase power rates charged by Newfoundland and Labrador Hydro ("Newfoundland Hydro") and had no impact on Newfoundland Power's earnings.Increased electricity sales and pole rental revenue also contributed to quarterly revenue growth. In addition to the 5.4 per cent electricity rate increase, Newfoundland Power's customers also experienced a 4.5 per cent increase in electricity rates on July 1, 2004 associated with the operation of Newfoundland Hydro's Rate Stabilization Plan. While the 4.5 per cent rate increase does increase Newfoundland Power's customer bills, it does not impact revenues as it flows directly through Newfoundland Power's Rate Stabilization Account on the Company's balance sheet. Energy supply costs for the fourth quarter were $71.9 million compared to $62.8 million for the same quarter last year. Annual energy supply costs were $244 million compared to $228 million last year. The increase primarily related to the increase in Newfoundland Hydro's rates, effective July 1, 2004, and increased power purchases related to increased electricity sales. In December 2004, the Newfoundland and Labrador Board of Commissioners of Public Utilities ("PUB") ordered the restructuring of Newfoundland Hydro's purchase power rates charged to Newfoundland Power to include both a demand and energy rate component effective January 1, 2005. Under this rate structure, Newfoundland Power will be billed based on its highest demand from the previous winter season. The use of a demand-energy rate is common to utilities, however increases the risk of volatility in purchased power expense. A purchased power cost variance reserve was approved by the PUB which should limit the impact of variances from forecast purchased power costs on the Company's financial performance. Operating expenses for the fourth quarter increased $1.0 million over the same quarter last year. This increase was primarily a result of timing differences of operating expenses as well as higher pension costs.Annual operating expenses were consistent with last year. Inflationary increases and an increase in annual pension costs were offset by lower costs associated with reduced regulatory activity and a continued focus on operating cost management and control. During the fourth quarter of 2004, Newfoundland Power offered a voluntary early retirement program to 131 eligible employees.This program will reduce future operating costs as well as address challenges associated with an aging workforce. The PUB has granted approval to amortize the pension costs associated with the early retirement program over a 10-year period commencing on the retirement date, expected to be April 1, 2005, and to amortize the retirement allowances associated with the program over a 24-month period from the date the allowances are paid in 2005. Amortization for the fourth quarter increased $1.2 million over the same quarter last year.Annual amortization increased $1.6 million over last year. The increase was attributable to continued investment in Newfoundland Power's electricity system assets. Newfoundland Power's earnings are regulated on the basis of rate of return on rate base.The automatic adjustment formula, which was originally adopted in 1998 by the PUB, has been applied to determine the cost of capital to be included in Newfoundland Power's electricity rates for 2005.The formula uses observed long Canada bond yields to estimate the cost of common equity to be used in setting customer rates. In accordance with this formula, Newfoundland Power's allowed rate of return on common equity, for the purpose of setting rates for 2005, was reduced from 9.75 per cent in 2004 to 9.24 per cent for 2005.This change resulted in a 0.5 per cent reduction in electricity rates to customers effective January 1, 2005.
Maritime Electric
---------------------------------------------------------------------
---------------------------------------------------------------------
Maritime Electric
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------------
Electricity Sales (GWh) 242 234 977 958
---------------------------------------------------------------------
($ millions)
---------------------------------------------------------------------
Revenue 27.8 25.0 115.4 96.3
---------------------------------------------------------------------
Energy Supply Costs 16.8 13.7 71.3 53.4
---------------------------------------------------------------------
Operating Expenses 3.4 3.8 12.4 12.2
---------------------------------------------------------------------
Amortization 2.3 2.4 9.2 9.1
---------------------------------------------------------------------
Finance Charges 2.2 2.2 8.7 9.0
---------------------------------------------------------------------
Corporate Taxes 1.3 1.2 5.6 5.4
---------------------------------------------------------------------
Earnings 1.8 1.7 8.2 7.2
---------------------------------------------------------------------
---------------------------------------------------------------------
Maritime Electric's earnings for the fourth quarter were $1.8 million compared to $1.7 million for the same quarter last year. Annual earnings were $8.2 million compared to $7.2 million last year. The increase in earnings related to higher electricity sales, the 2.1 per cent basic rate increase implemented on April 1, 2003 and changes to its regulated structure effective January 1, 2004. In December 2003, the Government of Prince Edward Island proclaimed legislation to return Maritime Electric to a traditional cost of service regulatory model.Under this model, Maritime Electric's rates, which since 1994 could be no greater than 110 percent of rates of New Brunswick Power Corporation ("NB Power"), are now based on actual costs.The Electric Power Act, which became effective January 1, 2004, provides for an orderly transition from the previous regulatory model and allows the Company to collect the $20.8 million in energy costs deferred until December 31, 2003 under terms and conditions to be set out by the Island Regulatory and Appeals Commission ("IRAC"). On April 30, 2004, Maritime Electric filed its General Rate Application ("GRA") to set rates including the establishment of an appropriate capital structure and rate of return on equity. On January 6, 2005, IRAC issued an interim order allowing Maritime Electric to establish an energy cost adjustment mechanism ("ECAM") with application for the period commencing January 1, 2004 and to commence amortization of the $20.8 million in recoverable energy costs, with $1.5 million to be recovered from customers in 2004 and a further $2.5 million to be recovered from customers in 2005. Electricity sales for the fourth quarter were 242 GWh, 3.4 per cent higher than the same quarter last year.Residential sales were up 6.0 per cent and commercial sales were up 1.6 per cent compared to the same quarter last year.Annual electricity sales were 977 GWh, an increase of 2.0 per cent over last year.The increase in electricity sales was largely due to an expanding customer base and an increase in average use. Revenue for the fourth quarter was $27.8 million compared to $25.0 million for the same quarter last year. Annual revenue was $115.4 million compared to $96.3 million last year. Increased electricity sales and the 2.1 per cent increase in basic rates effective April 1, 2003, coupled with the changes associated with the new legislation effective January 1, 2004, contributed to higher revenues. As of December 31, 2003, Maritime Electric maintained an ECAM to adjust for the effect of variations in energy costs above or below $0.05 per kilowatt hour ("kWh"). The new legislation, effective January 1, 2004, allows Maritime Electric to fully collect these costs, thus increasing both energy supply costs and revenues. Energy supply costs for the fourth quarter were $16.8 million compared to $13.7 million for the same quarter last year. Annual energy supply costs were $71.3 million compared to $53.4 million last year. The increase related to higher electricity sales and changes to the legislation effective January 1, 2004, as discussed above. Maritime Electric has received all necessary approvals for the construction of a 50-megawatt ("MW") generating facility on Prince Edward Island.This facility is designed to operate on light oil or natural gas and is expected to address submarine cable loading issues and will reduce the Company's reliance on imported electricity.The targeted in-service date is late 2005. Operating expenses for the fourth quarter decreased $0.4 million compared to the same quarter last year.Annual operating expenses increased $0.2 million compared to last year.The increase in annual operating expenses was primarily due to increased regulatory costs including the expenses associated with the application for approval of the 50-MW generating facility and the GRA.
FortisOntario
---------------------------------------------------------------------
---------------------------------------------------------------------
FortisOntario
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------------
Electricity Sales (GWh) 300 325 1,198 1,242
---------------------------------------------------------------------
($ millions)
---------------------------------------------------------------------
Revenue 31.9 28.5 125.2 119.8
---------------------------------------------------------------------
Energy Supply Costs 25.5 20.9 96.5 89.7
---------------------------------------------------------------------
Operating Expenses 3.1 3.5 12.3 12.6
---------------------------------------------------------------------
Amortization 1.0 1.2 4.8 5.0
---------------------------------------------------------------------
Finance Charges 1.3 1.3 5.2 4.0
---------------------------------------------------------------------
Corporate Taxes 0.1 (0.5) 2.2 2.1
---------------------------------------------------------------------
Earnings 0.9 2.1 4.2 6.4
---------------------------------------------------------------------
---------------------------------------------------------------------
FortisOntario's earnings for the fourth quarter were $0.9 million compared to $2.1 million for the same quarter last year. The decrease in earnings primarily related to adjustments to future taxes in the fourth quarter of 2003. Annual earnings were $4.2 million compared to $6.4 million last year. The primary reason for the decrease related to higher finance charges associated with the $52 million of long-term debt issued in August 2003 and a lower effective income tax rate in 2003. Electricity sales for the fourth quarter were 300 GWh compared to 325 GWh for the same quarter last year. Annual electricity sales were 1,198 GWh compared to 1,242 GWh in 2003.The decrease was primarily related to Cornwall Electric's loss of an industrial customer representing approximately 40 GWh in annual electricity sales. Less air conditioning load associated with cooler temperatures in Ontario also contributed to the decrease. This decrease was partially mitigated by sales from the Gananoque Gananoque (gănənŏk`wē, –wə), town (1991 pop. 5,209), SE Ont., Canada, on the St. Lawrence River. It has steel- and copperworks. A summer resort, it is a starting point for excursions to the Thousand Islands and Rideau Lakes. area associated with the acquisition of the operating subsidiaries of Granite Power Corporation ("Granite Power") in April 2003. Granite Power's operations are now amalgamated with Canadian Niagara Power Inc. Revenue for the fourth quarter was $31.9 million compared to $28.5 million for the same quarter last year. Annual revenue was $125.2 million compared to $119.8 million last year. The decline in electricity sales was more than offset by increases in Cornwall Electric rates effective July 2003 and July 2004. Energy supply costs for the fourth quarter were $25.5 million compared to $20.9 million for the same quarter last year. Annual energy supply costs were $96.5 million compared to $89.7 million last year. The increase primarily related to increased wholesale cost of power at Cornwall Electric. The fourth quarter and annual operating expenses were slightly below the same periods last year. The decrease in operating expenses associated with operational efficiencies achieved from the ongoing integration of Cornwall Electric was partially offset by operating expenses associated with the acquisition of the operating subsidiaries of Granite Power in April 2003. Annual finance charges increased $1.2 million compared to last year. The increase in finance charges was primarily related to issuance of long-term debt in August 2003.
FortisAlberta (2)
---------------------------------------------------------------------
---------------------------------------------------------------------
FortisAlberta
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
2004 2004
---------------------------------------------------------------------
Electricity Sales (GWh) 3,537 7,964
---------------------------------------------------------------------
($ millions)
---------------------------------------------------------------------
Revenue 57.3 129.7
---------------------------------------------------------------------
Operating Expenses 27.7 60.2
---------------------------------------------------------------------
Amortization 13.7 31.3
---------------------------------------------------------------------
Finance Charges 5.9 10.8
---------------------------------------------------------------------
Corporate Taxes 2.5 8.8
---------------------------------------------------------------------
Earnings 7.5 18.6
---------------------------------------------------------------------
---------------------------------------------------------------------
(2) On May 31, 2004, Fortis completed the transaction to acquire
Aquila, Inc.'s 2 utilities in western Canada (renamed
FortisAlberta and FortisBC). Financial results for FortisAlberta
and FortisBC are since June 1, 2004 only.
On May 31, 2004, Fortis, through a wholly owned subsidiary, acquired all of the issued and outstanding shares of Aquila Networks Canada (Alberta) Ltd. (renamed "FortisAlberta").FortisAlberta owns and operates the electricity distribution system in a substantial portion of southern and central Alberta. The Company distributes electricity to over 400,000 customers using approximately 103,000 kilometers of power lines. FortisAlberta is regulated by the Alberta Energy and Utilities Board ("AEUB AEUB - Alberta Energy and Utilities Board") under traditional cost of service regulation. At December 31, 2004, the Company had a rate base of approximately $638 million. FortisAlberta's earnings for the fourth quarter were $7.5 million and earnings for the 7 months ended December 31, 2004 were $18.6 million. The earnings were positively impacted by lower interest expense primarily related to more favorable short-term borrowing rates experienced by FortisAlberta for the period between May 31, 2004 and October 31, 2004. Concurrent with the Company's purchase by Fortis on May 31, 2004, FortisAlberta borrowed $393 million on a short-term basis from a syndicate of Canadian chartered banks.These funds were used to repay amounts owed to the Company's former parent. The interest rate on the new debt was substantially less than the interest rate paid by FortisAlberta on the debt owed to its former parent.On October 25, 2004, FortisAlberta closed its $400 million public debenture offering equally divided between 5.33 per cent Senior Unsecured Debentures due October 31, 2014 and 6.22 per cent Senior Unsecured Debentures due October 31, 2034. The proceeds from this offering were used to repay FortisAlberta's short-term debt previously noted. Electricity sales for the fourth quarter were 3,537 GWh compared to 3,444 GWh for the same quarter last year.Electricity sales for the 7 months ended December 31, 2004 were 7,964 GWh compared to 7,857 GWh for the same period last year. FortisAlberta's electricity sales continue to benefit from Alberta's growing economy. The AEUB issued its Generic Cost of Capital Decision on July 2, 2004.The regulated capital structure for FortisAlberta was set at 63 per cent debt and 37 per cent equity and the rate of return on common equity, which is established using an automatic adjustment formula, was set at 9.6 per cent.On November 30, 2004, as a result of the operation of the automatic adjustment formula, the AEUB issued its Return on Equity Decision which set the rate of return on common equity at 9.5 per cent for 2005. In order to establish 2005 rates, FortisAlberta filed a GRA with the AEUB in November 2004 using the 9.5 per cent rate of return and the 37 per cent equity in its regulated capital structure. The 2005 GRA is seeking a 4.5 per cent increase in distribution rates. The GRA includes forecasted capital expenditures of $135 million for 2005. Fortis continues to progress forward with plans to separate management and operations at FortisAlberta and FortisBC, as committed to stakeholders during the consultation process leading to the purchase of the businesses. The separation is expected to result in more effective and productive companies and will lend itself to improved customer service and reliable electricity service at reasonable costs.
FortisBC (3)
---------------------------------------------------------------------
---------------------------------------------------------------------
FortisBC
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
2004 2004
---------------------------------------------------------------------
Electricity Sales (GWh) 789 1,662
---------------------------------------------------------------------
($ millions)
---------------------------------------------------------------------
Revenue 55.1 109.5
---------------------------------------------------------------------
Energy Supply Costs 16.1 32.9
---------------------------------------------------------------------
Operating Expenses 15.4 33.4
---------------------------------------------------------------------
Amortization 4.2 9.9
---------------------------------------------------------------------
Finance Charges 3.1 8.5
---------------------------------------------------------------------
Corporate Taxes 4.7 7.1
---------------------------------------------------------------------
Earnings 11.6 17.7
---------------------------------------------------------------------
---------------------------------------------------------------------
(3) On May 31, 2004, Fortis completed the transaction to acquire
Aquila, Inc.'s 2 utilities in western Canada (renamed
FortisAlberta and FortisBC). Financial results for
FortisAlberta and FortisBC are since June 1, 2004 only.
On May 31, 2004, Fortis, through a wholly owned subsidiary, acquired all of the issued and outstanding shares of Aquila Networks Canada (British Columbia) Ltd. (renamed "FortisBC").FortisBC is an integrated utility operating in the southern interior of British Columbia, serving directly and indirectly over 140,000 customers. FortisBC is regulated by the BCUC. It has about 7,100 kilometers of transmission and distribution power lines and 4 hydroelectric generating plants with a combined capacity of 205 MW.The Company operates other power plants under contract with a combined capacity of 700 MW.FortisBC generates approximately 50 per cent of its power needs with the remaining requirements obtained through power purchase agreements.FortisBC has virtually no commodity exposure. At December 31, 2004, FortisBC had a rate base of approximately $530 million. FortisBC's earnings for the fourth quarter of 2004 were $11.6 million and earnings for the 7 months ended December 31, 2004 were $17.7 million. The 4.3 per cent general rate increase effective May 1, 2004 and a refinement of the process of estimating unbilled electricity revenue, which resulted in a $3.7 million after-tax increase to earnings, contributed to favorable earnings for the period. In addition, lower finance charges as a result of more favorable short-term borrowing rates for the period between May 31, 2004 and November 30, 2004 contributed to favorable earnings for the period. Concurrent with the Company's purchase by Fortis on May 31, 2004, FortisBC borrowed on a short-term basis $155 million by way of demand note from Fortis.These funds were used to repay amounts owed to the Company's former parent. The interest rate on the new debt was substantially less than the interest rate paid by FortisBC on the debt owed to its former parent. On November 30, 2004, FortisBC issued $140 million of 5.48 per cent Senior Unsecured Debentures due November 28, 2014. FortisBC also converted $100 million of the outstanding aggregate principal of its previously existing Senior Secured Debentures into Unsecured Debentures ranking pari passu with the new 5.48 per cent Senior Unsecured Debentures. The net proceeds of the offering were primarily used to repay the Fortis demand note. FortisBC's revenue and rates are based on traditional cost of service regulation.However, the Company is also subject to a performance-based rate ("PBR") mechanism that is used in establishing annual rate adjustments. On April 26, 2004, the BCUC approved a 4.3 per cent rate increase, effective May 1, 2004. An interim rate increase of 3.6 per cent was put in place on January 1, 2004. Electricity sales for the fourth quarter were 789 GWh compared to 778 GWh for the same quarter last year.Electricity sales for the 7 months ended December 31, 2004 were 1,662 GWh compared to 1,637 GWh for the same period last year. The increase in electricity sales is consistent with customer growth for the period. In order to establish 2005 rates, FortisBC filed a 2005 GRA with the BCUC on November 26, 2004.FortisBC's application seeks approval of a 4.4 per cent rate increase effective January 1, 2005. The GRA requests approval of a 9.78 per cent cost of capital for rate making purposes and a common equity component of 40 per cent. FortisBC also filed with its application its $121.6 million capital expenditure plan for 2005.The BCUC by way of Order approved an interim rate increase for FortisBC of 3.7 per cent effective January 1, 2005. FortisBC has committed to the BCUC that the Company will establish itself as a stand-alone business by June 2006. By establishing itself as a separate business, FortisBC believes it will provide improved customer service, greater operational efficiency and better regulatory transparency. The Corporation has appointed a management team located in British Columbia that is solely dedicated to managing the affairs of FortisBC. Some FortisBC functions, such as operations and regulatory affairs, have already been transitioned to British Columbia. Other functions such as customer service, finance, human resources and corporate services are currently being transferred. Most of the employees needed to carry out all of the functions of the Company will be located in British Columbia by June 2005.
REGULATED UTILITIES - CARIBBEAN (4)
---------------------------------------------------------------------
---------------------------------------------------------------------
Regulated Utilities - Caribbean
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------------
Average US Exchange Rate 1.22 1.32 1.30 1.40
---------------------------------------------------------------------
($ millions)
---------------------------------------------------------------------
Belize Electricity 1.6 1.9 7.2 6.7
---------------------------------------------------------------------
Caribbean Utilities
- Equity Income (5.8) 3.1 0.8 10.5
---------------------------------------------------------------------
Earnings (4.2) 5.0 8.0 17.2
---------------------------------------------------------------------
---------------------------------------------------------------------
(4) Regulated Utilities in the Caribbean include the operations of
Belize Electricity and the Corporation's 37.3 per cent equity
investment in Caribbean Utilities.
For the fourth quarter, Regulated Utilities - Caribbean reported a
loss of $4.2 million compared to earnings of $5.0 million for the
same quarter last year. Annual earnings were $8.0 million compared to
$17.2 million last year. Increased earnings from Belize Electricity
were offset by lower equity income from Caribbean Utilities. The
earnings for Caribbean Utilities were impacted by Hurricane Ivan. The
Corporation's portion of the uninsured hurricane-related costs, which
approximate $8.2 million, have reduced the equity earnings from
Caribbean Utilities for the fourth quarter of 2004 and year ended
2004.
Belize Electricity
---------------------------------------------------------------------
---------------------------------------------------------------------
Belize Electricity
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------------
Electricity Sales (GWh) 84 78 330 308
---------------------------------------------------------------------
($ millions)
---------------------------------------------------------------------
Revenue 17.1 16.9 71.9 72.5
---------------------------------------------------------------------
Energy Supply Costs 9.0 8.8 37.7 37.2
---------------------------------------------------------------------
Operating Expenses 2.6 2.8 11.0 11.6
---------------------------------------------------------------------
Amortization 1.3 0.6 6.1 6.1
---------------------------------------------------------------------
Finance Charges 1.2 1.4 5.3 6.0
---------------------------------------------------------------------
Foreign Exchange Loss 0.4 0.3 0.3 0.8
---------------------------------------------------------------------
Corporate Taxes and
Non-controlling Interest 1.0 1.1 4.3 4.1
---------------------------------------------------------------------
Earnings 1.6 1.9 7.2 6.7
---------------------------------------------------------------------
---------------------------------------------------------------------
Belize Electricity's earnings contribution for the fourth quarter was $1.6 million (BZ$2.6 million) compared to $1.9 million (BZ$2.8 million) for the same quarter last year. The decrease in quarterly earnings was primarily related to higher amortization and higher foreign exchange loss recognized on the Company's euro-denominated debt. The decrease in quarterly earnings was partially mitigated by higher electricity sales. Annual earnings contribution was $7.2 million (BZ$10.7 million) compared to $6.7 million (BZ$9.6 million) last year. The $0.5 million (BZ$1.1 million) increase in annual earnings was the result of higher electricity sales as well as a lower foreign exchange loss recognized on the Company's euro-denominated debt. The foreign exchange loss recognized on the Company's euro-denominated debt for the fourth quarter was $0.4 million (BZ$0.7 million) compared to $0.3 million (BZ$0.4 million) for the same quarter last year. The annual foreign exchange loss was $0.3 million (BZ$0.4 million) compared to $0.8 million (BZ$1.1 million) for 2003.The increase in earnings was partially mitigated by the depreciation of the US dollar relative to the Canadian dollar compared to 2003. Electricity sales for the fourth quarter were 84 GWh, 7.7 per cent higher than the same quarter last year. Annual electricity sales were 330 GWh, 7.1 per cent higher than 2003. The increase was driven by growth in the residential and commercial segments as a result of expansion of electricity service to rural and new housing projects, as well as continued economic growth in the tourism and commercial sectors. Revenue for the fourth quarter was $17.1 million (BZ$27.9 million) compared to $16.9 million (BZ$26.3 million) for the same quarter last year. Annual revenue was $71.9 million (BZ$110.1 million) compared to $72.5 million (BZ$105.3 million) last year. Excluding foreign exchange impacts, annual revenue increased 4.6 per cent compared to last year. The increase related to higher electricity sales, partially offset by a final reduction in electricity rates of BZ$0.01 per kWh implemented in July 2004. Rates have been reduced by BZ$0.05 per kWh, equal to the commitment provided by Fortis when it acquired Belize Electricity in October 1999. Energy supply costs for the fourth quarter were $9.0 million (BZ$14.7 million) compared to $8.8 million (BZ$13.6 million) for the same quarter last year. Annual energy supply costs were $37.7 million (BZ$57.7 million) compared to $37.2 million (BZ$53.9 million) last year. The increase in energy costs was associated with higher electricity sales. Operating expenses are slightly lower compared to the previous year which reflects management's focus on improving operating efficiencies and productivity. Amortization expense for the fourth quarter was $1.3 million compared to $0.6 million for the same quarter last year. Annual amortization expense was $6.1 million, comparable to last year. During the fourth quarter of 2003, Belize Electricity completed a review of its amortization records and updated its annual amortization expense for assets previously retired. In 2004, Belize Electricity began applying an estimated annual rate of 3.44 per cent to depreciate its assets that is similar to the composite depreciation method adopted by the other Fortis regulated utilities. The decrease in finance charges compared to last year is a result of regular repayments on its long-term debt facilities.
Caribbean Utilities
---------------------------------------------------------------------
---------------------------------------------------------------------
Caribbean Utilities
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
($ millions) 2004 2003 2004 2003
---------------------------------------------------------------------
Equity Income (5.8) 3.1 0.8 10.5
---------------------------------------------------------------------
---------------------------------------------------------------------
Fortis accounts for its 37.3 per cent interest in Caribbean Utilities on an equity basis. Equity earnings are recorded on a lag basis and, therefore, the quarterly earning noted above represent the Corporation's share of Caribbean Utilities' earnings for the quarter ended October 31, 2004. The $8.9 million decrease in quarterly earnings was primarily the result of Hurricane Ivan. The $9.7 million decrease in annual earnings compared to last year was a result of Hurricane Ivan as well as a 3 per cent rate reduction implemented November 2003. To date, the total uninsured hurricane-related costs for Caribbean Utilities were approximately US$17.8 million. The Corporation's portion of the uninsured hurricane-related costs, which approximate $8.2 million, have reduced the equity earnings from Caribbean Utilities for the fourth quarter of 2004. The terms of Caribbean Utilities' Licence permit the recovery of hurricane-related costs through rate adjustment. At the appropriate time, Caribbean Utilities will make proposals to Government on how best to implement rate adjustments and recover these costs. Caribbean Utilities expects that earnings will improve as service restoration, which is expected to reach 75 per cent of pre-Ivan load by April 2005, continues and proceeds from the Company's business interruption insurance claims are received. As of November 30, 2004, Caribbean Utilities had completed the restoration of service to all customers able to receive such service. Caribbean Utilities has made a claim for its business interruption loss. Typically, the ultimate recovery under a business interruption policy is judgmental and subject to negotiations between the insured and the insurance company. Given the subjectivity of the ultimate settlement and the lengthy claim coverage period, many contingencies may exist in the ultimate settlement. Caribbean Utilities' cash flow has been severely impacted by the hurricane and the Board of Directors of Caribbean Utilities elected not to declare a dividend for the quarter ended October 31, 2004. Caribbean Utilities submitted a proposal to the Cayman Islands Government in July 2002 to extend its current License and replace the 15 per cent return on rate base mechanism for adjusting consumer rates with a price cap mechanism. The non-binding tentative agreement signed by Caribbean Utilities and the Government in June 2004 has expired following Hurricane Ivan.The Company will meet with Government at the appropriate time to assess the status of the License renewal negotiations.It continues to operate under its existing License which expires in 2011.
NON-REGULATED - FORTIS GENERATION (5)
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-Regulated - Fortis Generation
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
Energy Sales (GWh) 2004 2003 2004 2003
---------------------------------------------------------------------
Central Newfoundland 63 17 152 17
---------------------------------------------------------------------
Ontario 184 185 721 705
---------------------------------------------------------------------
Belize 21 26 63 61
---------------------------------------------------------------------
British Columbia (5) 8 - 23 -
---------------------------------------------------------------------
Upper New York State 23 31 69 86
---------------------------------------------------------------------
Total 299 259 1,028 869
---------------------------------------------------------------------
---------------------------------------------------------------------
Quarter Annual
---------------------------------------------------------------------
($ millions) 2004 2003 2004 2003
---------------------------------------------------------------------
Revenue 20.0 15.8 69.2 57.1
---------------------------------------------------------------------
Energy Supply Costs 1.7 0.5 5.8 2.5
---------------------------------------------------------------------
Operating Expenses 3.6 3.6 16.1 14.0
---------------------------------------------------------------------
Amortization 2.7 2.2 10.2 7.7
---------------------------------------------------------------------
Finance Charges 3.9 3.5 15.4 13.2
---------------------------------------------------------------------
Corporate Taxes 1.7 3.1 7.0 8.5
---------------------------------------------------------------------
Non-controlling Interest 1.7 0.1 1.9 0.3
---------------------------------------------------------------------
Earnings 4.7 2.8 12.8 10.9
---------------------------------------------------------------------
---------------------------------------------------------------------
(5) Fortis Generation includes the operations of non-regulated
generating assets in central Newfoundland, Ontario, British
Columbia, Belize and Upper New York State. The British Columbia
energy sales represent 7-month energy sales from the 16-MW run-
of-river Walden hydroelectric power plant which was acquired on
May 31, 2004 as part of FortisBC.
The earnings contribution from the Corporation's non-regulated generation assets for the fourth quarter was $4.7 million compared to $2.8 million for the same quarter last year. The increase in quarterly earnings was primarily due to increased production in central Newfoundland and a lower effective quarterly income corporate tax rate in Ontario as a result of adjustments to future taxes in the fourth quarter of 2003. The increase in earnings was partially offset by decreased production in Belize associated with lower rainfall levels. Annual earnings were $12.8 million compared to $10.9 million last year.Increased earnings associated with slightly higher rainfall levels in Belize and the first full-year of operations in central Newfoundland were partially offset by lower wholesale energy prices in Ontario. Energy sales for the fourth quarter were 299 GWh compared to 259 GWh for the same quarter last year.The increase was primarily related to the first full-year of operations in central Newfoundland, partially offset by lower production in Belize and Upper New York State. Annual energy sales were 1,028 GWh compared to 869 GWh last year. Increased sales in central Newfoundland were associated with the commencement of the Exploits River Hydro Partnership ("Exploits Partnership") Project in November 2003. Energy sales in Ontario increased as a result of the acquisition of the operating subsidiaries of Granite Power in April 2003. The slightly higher energy sales in Belize were a direct result of higher rainfall levels compared to last year. The Corporation's acquisition of FortisBC, on May 31, 2004, included the 16-MW run-of-river Walden hydroelectric power plant near Lillooet, British Columbia. This plant is a non-regulated operation that sells its entire output to BC Hydro under a long-term contract.The increased energy sales were partially offset by a decrease in energy sales from the hydroelectric plants in Upper New York State due to the Dolgeville unit being out of service. Dolgeville returned to service on June 29, 2004.Over the first 6 months of 2003, Dolgeville contributed 11.4 GWh to energy sales. The Chalillo Project in Belize commenced construction in May 2003. The US$30 million development is an upstream storage and hydroelectric generating facility that is expected to increase average annual energy production from the Macal River by approximately 90 GWh. Construction is scheduled for completion during the last half of 2005. Generation revenue for the fourth quarter was $20.0 million compared to $15.8 million for the same quarter last year. The primary reason for the $4.2 million increase related to commencement of production in central Newfoundland partially offset by lower rainfall levels in Belize. Annual revenue was $69.2 million compared to $57.1 million last year. The $12.1 million increase in revenue related to the start of production in central Newfoundland and addition of generation in British Columbia in 2004. The increase was partially offset by a 7.7 per cent decline in market prices in Ontario associated with the energy provided by the Rankine Generating Plant. For 2004, the average market price in Ontario was $49.95 per megawatt hour ("MWh") compared to $54.09 per MWh for 2003. Operating expenses for the fourth quarter were $3.6 million, comparable to the same quarter last year. Annual operating expenses were $16.1 million compared to $14.0 million last year. The increase in annual operating expenses was primarily caused by the addition of generation in central Newfoundland and British Columbia. Increases in amortization and finance charges were primarily associated with the start of production in central Newfoundland in November 2003.
NON-REGULATED - FORTIS PROPERTIES
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-Regulated - Fortis Properties
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
($ millions) Quarter Annual
---------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------------
Real Estate Revenue 13.7 13.0 52.8 51.0
---------------------------------------------------------------------
Hospitality Revenue 19.5 20.0 81.5 62.7
---------------------------------------------------------------------
Total Revenue 33.2 33.0 134.3 113.7
---------------------------------------------------------------------
Operating Expenses 21.9 22.5 87.2 72.6
---------------------------------------------------------------------
Amortization 2.6 1.3 9.7 4.5
---------------------------------------------------------------------
Finance Charges 4.5 4.9 18.1 17.1
---------------------------------------------------------------------
Corporate Taxes 1.4 1.8 7.5 8.5
---------------------------------------------------------------------
Earnings 2.8 2.5 11.8 11.0
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings for the fourth quarter were $2.8 million compared to $2.5 million for the same quarter last year. Annual earnings were $11.8 million compared to $11.0 million last year. Higher earnings from operations, including contributions from the acquisition of 4 hotels in Ontario purchased in October 2003, were partially offset by increased amortization related to a change in amortization policy. Real estate revenue for the fourth quarter was $13.7 million compared to $13.0 million for the same quarter last year.Annual real estate revenue was $52.8 million compared to $51.0 million last year. The occupancy level in the Real Estate Division was 95.0 per cent at December 31, 2004 compared to 94.5 per cent at December 31, 2003. Hospitality revenue for the fourth quarter was $19.5 million, comparable to the same quarter last year.Revenue per available room ("REVPAR") for the fourth quarter was $61.43 compared to $64.10 for the same quarter last year. The 4.2 per cent decrease in REVPAR was attributable mainly to a 6.0 per cent decrease in occupancy, partially offset by a 2 per cent increase in average rate compared to the prior year. Annual hospitality revenue was $81.5 million compared to $62.7 million last year. The growth was primarily attributable to the acquisition of the hotels in Ontario in October 2003.REVPAR for 2004 was $70.72 compared to $69.98 last year. The 1.1 per cent increase in REVPAR was attributable mainly to an increase in average rate of 2.1 per cent, partially offset by a 1.1 per cent decrease in occupancy compared to the prior year. Operating expenses for the fourth quarter were $21.9 million compared to $22.5 million for the same period last year. Annual operating expenses were $87.2 million compared to $72.6 million last year. The increase primarily related to hotel properties acquired in 2003. Effective January 1, 2004, new recommendations by the Canadian Institute of Chartered Accountants ("CICA") effectively eliminated certain industry specific accounting practices which previously qualified as Canadian GAAP.As a result, effective January 1, 2004, amortization of Fortis Properties' income producing properties is being recorded on a straight-line basis, whereas it was recorded on the sinking fund method up to and including December 31, 2003. The impact of the amortization policy change for the quarter was an approximately $0.7 million after tax increase to amortization expense and the annual after-tax increase was approximately $2.7 million. Finance charges for the fourth quarter were $4.5 million compared to $4.9 million for the same quarter last year. The decrease relates to both lower principal balances and finance rates. Annual finance charges were $18.1 million compared to $17.1 million last year.The increase in finance charges related primarily to the first full-year of financing costs for the Ontario hotels, partially offset by lower principal balances of scheduled debt and lower finance rates. Subsequent to year end, Fortis Properties acquired 3 hotels located in western Canada for $62.6 million.The acquisition expands the hospitality operations of Fortis Properties by 650 rooms.
CORPORATE
---------------------------------------------------------------------
---------------------------------------------------------------------
Corporate
Financial Highlights (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
($ millions) Quarter Annual
---------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------------
Total Revenue 2.6 2.1 10.2 11.2
---------------------------------------------------------------------
Operating Expenses 2.1 2.3 8.7 5.0
---------------------------------------------------------------------
Amortization 0.6 0.1 1.5 0.5
---------------------------------------------------------------------
Finance Charges 6.2 2.6 18.7 12.6
---------------------------------------------------------------------
Foreign Exchange Gain (1.5) - (1.5) -
---------------------------------------------------------------------
Corporate Taxes (1.7) (0.2) (7.8) (2.1)
---------------------------------------------------------------------
Preference Share Dividends 4.1 1.7 12.3 4.0
---------------------------------------------------------------------
Non-controlling Interest - (0.1) (0.2) (0.2)
---------------------------------------------------------------------
Net Corporate Expenses (7.2) (4.3) (21.5) (8.6)
---------------------------------------------------------------------
---------------------------------------------------------------------
The Corporate segment captures a number of expense and revenue items not specifically related to any operating segment.Included in the Corporate segment are finance costs related to debt incurred directly by Fortis, including foreign exchange gains or losses, preference share dividends, other corporate expenses net of recoveries from subsidiaries, miscellaneous revenues and corporate income taxes. Net corporate expenses for the fourth quarter totaled $7.2 million, $2.9 million higher than the same quarter last year. Annual net corporate expenses totaled $21.5 million, $12.9 million higher than last year. The increase primarily related to higher finance charges, operating expenses and preference share dividends. The increase in finance charges primarily related to the acquisition of the utilities in western Canada. On October 28, 2004, Fortis issued by way of private placement to US-based institutional investors US$150 million of 10-year, 5.74 per cent Senior Unsecured Notes due October 31, 2014. The proceeds were used to repay the Corporation's short-term acquisition facility.The increase in operating expenses primarily related to higher salary and pension costs. The increase in preference share dividends was associated with the 5.45 per cent Series C First Preference Shares issued in June 2003, the 4.9 per cent First Preference Units issued in January 2004 and the subsequent conversion of the First Preference Units to the 4.9 per cent Series E First Preference Shares in the last half of 2004. The overall increase in annual net corporate expenses was partially offset by a $1.8 million corporate income tax recovery recorded in the first quarter related to the tax benefit associated with non-capital losses. As well, during the fourth quarter of 2004, Fortis recorded a $0.9 million after-tax unrealized foreign exchange gain related to foreign currency exchange rate fluctuations associated with US$80 million of the Corporation's US-denominated long-term debt.
CONSOLIDATED FINANCIAL POSITION
The following table outlines the significant changes in the
consolidated balance sheets between December 31, 2004 and December
31, 2003.
---------------------------------------------------------------------
---------------------------------------------------------------------
Fortis Inc.
Significant Changes in the Consolidated Balance Sheets
between December 31st, 2004 and December 31st, 2003
---------------------------------------------------------------------
($ millions) Increase
(Decrease) Explanation
---------------------------------------------------------------------
Cash and cash held (31.6) The decrease primarily related to in
escrow payment of costs associated with the
acquisition of FortisAlberta and
FortisBC and Chalillo Project
construction costs, partially offset
by cash positions of FortisAlberta,
FortisBC and FortisOntario.
---------------------------------------------------------------------
Accounts receivable 75.8 The increase primarily related to
accounts receivable balances acquired
with the purchase of FortisAlberta
and FortisBC in May 2004.
---------------------------------------------------------------------
Regulatory assets 13.0 The increase primarily related to
regulatory assets acquired with the
purchase of FortisAlberta and
FortisBC combined with an increase in
the rate stabilization account at
Newfoundland Power.
---------------------------------------------------------------------
Materials and supplies 13.8 The increase primarily related to
materials and supplies acquired with
the purchase of FortisAlberta and
FortisBC.
---------------------------------------------------------------------
Deferred charges 32.6 Approximately $22 million related to
deferred charges acquired with the
purchase of FortisAlberta and
FortisBC in May 2004. During the
fourth quarter, deferred charges
increased approximately $14 million
related to the cancellation of an
interest rate swap agreement.
Deferred costs at Newfoundland Power
also increased as a result of funding
of the pension plan in excess of
pension expense and deferral of
operating expenses under Newfoundland
Power's weather normalization account
in accordance with PUB regulation.
The increase was partially offset
upon reallocation of acquisition-
related costs from deferred charges
to purchase price as well as
amortization of deferred charges
during the year.
---------------------------------------------------------------------
Utility capital 1,118.0 Approximately $1,069.4 million
assets - net related to capital assets acquired in
regulatory tax the purchase of FortisAlberta and
base adjustment FortisBC and utility capital
expenditures of $262.5 million offset
by amortization for the period. There
was also a decrease in the value of
assets denominated in US dollars as a
result of the depreciation of the US
dollar since December 31, 2003.
---------------------------------------------------------------------
Goodwill 448.6 The increase related to the purchase
of FortisAlberta and FortisBC in May
2004.
---------------------------------------------------------------------
Short-term 88.4 The increase primarily related to
borrowings the short-term borrowings associated
with the acquisition of FortisAlberta
and FortisBC combined with increased
short-term borrowing levels at
Newfoundland Power and FortisBC
primarily related to interim
financing of capital projects.
---------------------------------------------------------------------
Accounts payable, 135.1 The increase primarily related to
accruals and accounts payable and accrued charges
dividends payable acquired with the purchase of
FortisAlberta and FortisBC in May
2004 and increased dividends payable
at Fortis for both common and
preference shares.
---------------------------------------------------------------------
Regulatory 21.3 The increase primarily related to
liabilities regulatory liabilities acquired with
the purchase of FortisAlberta.
---------------------------------------------------------------------
Deferred credits 9.7 The increase primarily related to
higher pension costs at Fortis as
well as recognition of a deferred
gain on the cancellation of the
Corporation's foreign exchange swap
agreement.
---------------------------------------------------------------------
Future income taxes (12.3) Approximately $6.5 million related to
(including current a future income tax asset acquired
portion) with the purchase of FortisAlberta.
The remainder of the decrease related
to future income tax recorded on
issuance costs associated with the
First Preference Unit issue in
January 2004 and Common Share issue
upon conversion of Subscription
Receipts in May 2004.
---------------------------------------------------------------------
Long-term debt 845.1 The increase was primarily associated
(including current with approximately $154 million in
portion) long-term debt assumed with the
acquisition of FortisBC, issuance of
$400 million in public debentures at
FortisAlberta, issuance of $140
million in Senior Unsecured
Debentures at FortisBC, the private
placement of US$150 million in Senior
Unsecured Notes at Fortis, the draw
down of approximately $8 million on
existing facilities and the $15.6
million financing of the Four Points
by Sheraton Halifax. This increase
was partially offset by regular debt
repayments of $38.5 million.
---------------------------------------------------------------------
Equity preference 196.5 The increase related to the issuance
shares of Series E First Preference Shares
which resulted in gross proceeds of
approximately $200 million.
---------------------------------------------------------------------
Shareholders' equity 385.4 The increase primarily related to the
conversion of Subscription Receipts
to Common Shares in May 2004 which
resulted in gross proceeds of
approximately $350 million.
---------------------------------------------------------------------
---------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The following table outlines the summary of cash flow.
---------------------------------------------------------------------
---------------------------------------------------------------------
Fortis Inc.
Summary of Cash Flow (Unaudited)
Period Ended December 31st
---------------------------------------------------------------------
($ millions) Quarter Annual
---------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------------
Cash, beginning of period 40.1 79.2 65.1 26.3
---------------------------------------------------------------------
Cash provided by (used in)
Operating activities 90.6 43.3 271.3 156.7
---------------------------------------------------------------------
Investing activities (146.6) (93.8) (1,042.4) (308.0)
---------------------------------------------------------------------
Financing activities 53.1 37.4 743.6 193.5
---------------------------------------------------------------------
Foreign currency impact
on cash balances - (1.0) (0.4) (3.4)
---------------------------------------------------------------------
Cash, end of period 37.2 65.1 37.2 65.1
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating Activities:Cash flow from operations for the fourth quarter, after working capital adjustments, was $90.6 million compared to $43.3 million for the same quarter last year. Cash flow from operations for 2004, after working capital adjustments, was $271.3 million compared to $156.7 million last year. Operating cash flow from FortisAlberta and FortisBC primarily contributed to this increase. The increase was partially mitigated by higher corporate finance charges associated with the acquisition. Investing Activities:Cash used in investing activities for the fourth quarter was $146.6 million compared to $93.8 million for the same quarter last year. Utility capital expenditures of $124.7 million were up $79.9 million over the same quarter last year. The increase in utility capital expenditures primarily related to capital spending at FortisAlberta and FortisBC. Capital expenditures of $4.9 million associated with income producing properties decreased $40.5 million compared to the same quarter last year as Fortis Properties acquired 4 hotels in Ontario in October 2003. The remaining change in investing activities related to change in deferred charges. On an annual basis, cash used in investing activities was $1,042.4 million, $734.4 million higher than 2003. Fortis acquired FortisAlberta and FortisBC for a net purchase price of $747.8 million (aggregate consideration of $1.476 billion less assumption of debt and cash). On May 20, 2004, Fortis also acquired the remaining 5 per cent interest in Belize Electric Company Limited ("BECOL") from the Social Security Board of the Government of Belize for $4.8 million (US$3.5 million), making it a wholly owned indirect subsidiary of the Corporation.Total capital expenditures of $278.7 million increased $70.9 million over last year which primarily related to capital spending at FortisAlberta and FortisBC. The remaining investing activities of $11.1 million were primarily associated with the cash settlement upon cancellation of both the US dollar currency swap agreement and the forward interest rate swap agreement. Both swap agreements were cancelled upon completion of US borrowings and long-term acquisition financings in 2004. Financing Activities:Cash provided from financing activities in the fourth quarter was $53.1 million compared to $37.4 million for the same quarter last year. Cash provided from annual financing activities was $743.6 million compared to $193.5 million last year. The increase in cash from financing activities primarily related to financings associated with the acquisition of FortisAlberta and FortisBC. During 2004, approximately $1,281.4 million in net proceeds were secured from the issuance of preference shares, common shares and long-term debt of which $557.4 million was used to repay assumed acquisition debt. The remaining financing activities primarily related to change in short-term borrowings and regular repayment of long-term debt and payment of common share dividends. Acquisition Financing On May 31, 2004, Fortis completed the acquisition of FortisAlberta and FortisBC for gross proceeds of approximately $1.5 billion. At close, the acquisition was financed with short-term facilities, equity issuance and assumption of certain debt obligations at FortisBC. Fortis was required to fund $1.3 billion ($1.5 billion less assumption of debt at FortisBC) of the purchase price at close. On May 31, 2004, approximately $1.0 billion was drawn on the Corporation's short-term acquisition facilities and the remainder was financed with the net cash proceeds from the conversion of Subscription Receipts to 6,310,000 common shares of the Corporation. The short-term acquisition financing was fully repaid by December 31, 2004 primarily with proceeds from the long-term financings noted below.As well, on August 6, 2004, FortisAlberta returned $15 million of share capital to Fortis in order to maintain its regulated capital structure at 37 per cent equity. In January 2004, Fortis issued 8,000,000 First Preference Units of the Corporation. Each First Preference Unit consisted of one Series D First Preference Share and one Series E First Preference Share Purchase Warrant. The purchase price of $6.25 per First Preference Share Unit resulted in initial gross proceeds of approximately $50 million in January 2004. During 2004, Fortis received approximately $150 million gross proceeds from the conversion of 7,993,500 of the First Preference Units. The Series E First Preference Shares will yield 4.9 per cent per annum for a 12-year term. The quarterly cash dividend payable with respect to the Series D First Preference Shares that were not converted has been reduced to $0.01 per share, being equivalent to 0.64 per cent per annum per Series D First Preference Share. On October 28, 2004, Fortis issued by way of private placement to US-based institutional investors US$150 million of 10-year, 5.74 per cent Senior Unsecured Notes due October 31, 2014.On October 25, 2004, FortisAlberta closed its $400 million public debenture offering equally divided between 5.33 per cent Senior Unsecured Debentures due October 31, 2014 and 6.22 per cent Senior Unsecured Debentures due October 31, 2034.On November 30, 2004, FortisBC issued $140 million of 5.48 per cent Senior Unsecured Debentures due November 28, 2014. To reduce exposure to interest rate risk on the issuance of long-term debt associated with the acquisition, Fortis entered into a forward interest rate Forward interest rate Interest rate fixed today on a loan to be made at some future date. swap agreement in December 2003 that swapped
90-day banker acceptance interest rate payments on $200 million of
long-term debt to 5.6 per cent. The swap agreement was designated as a
hedge against the planned issuance of long-term acquisition financing.
During the quarter, as a result of the completion of the long-term
acquisition financing, the forward interest rate swap agreement was
terminated and the cash payment of $14.1 million made upon termination
of the swap will be amortized on a straight-line basis over 10-years.Other Financing Fortis Properties completed a $15.6 million financing of the Four Points by Sheraton Halifax. The proceeds were used to partially repay a short-term loan to Fortis. Belize Electricity and the Exploits Partnership also drew down approximately $4.3 million and $3.7 million, respectively, on their existing facilities. Foreign Currency Impact:The decrease in cash in 2004 of $0.4 million as a result of foreign currency impact was a direct result of the appreciation of the Canadian dollar relative to the US dollar. Contractual Obligations:The consolidated contractual obligations over the next 5 years and for periods thereafter are outlined in the following table.
---------------------------------------------------------------------
---------------------------------------------------------------------
Fortis Inc.
Contractual Obligations
as at December 31st, 2004
---------------------------------------------------------------------
greater
less than than
($ millions) Total 1 year 1-3 years 4-5 years 5 years
---------------------------------------------------------------------
Long-term Debt 1,909.3 34.5 102.1 108.2 1,664.5
---------------------------------------------------------------------
Capital Lease
Obligations 5.4 1.6 2.4 1.4 -
---------------------------------------------------------------------
Power Purchase
Obligations
FortisBC (1) 3,102.7 38.7 115.9 75.9 2,872.2
FortisOntario (2) 367.3 23.0 63.7 45.1 235.5
Maritime
Electric (3) 26.8 22.9 3.9 - -
---------------------------------------------------------------------
Capital Cost (4) 224.1 16.5 45.6 30.0 132.0
---------------------------------------------------------------------
Brilliant Terminal
Station (BTS) (5) 65.3 2.4 7.1 4.7 51.1
---------------------------------------------------------------------
Joint-use Asset
Agreements (6) 48.8 3.7 6.7 6.0 32.4
---------------------------------------------------------------------
Operating Lease
Obligations (7) 36.8 6.9 14.0 10.4 5.5
---------------------------------------------------------------------
Office Lease -
FortisBC (8) 22.7 0.9 2.8 2.7 16.3
---------------------------------------------------------------------
Purchase of Joint-use
Poles from Aliant
Telecom Inc. (9) 4.8 4.8 - - -
---------------------------------------------------------------------
Other 1.8 0.1 0.2 0.1 1.4
---------------------------------------------------------------------
Total 5,815.8 156.0 364.4 284.5 5,010.9
---------------------------------------------------------------------
(1) Power purchase obligations of FortisBC include the Brilliant
Power Purchase Contract as well as Firm Power Purchase Contracts.
On May 3, 1996, an Order was granted by the BCUC approving a 60-
year power purchase contract for the output of the Brilliant
hydroelectric plant located near Castlegar, BC. The Brilliant
plant is owned by the Brilliant Power Corporation ("BPC"), a
corporation owned as to 50 per cent by each of the Columbia Power
Corporation and the Columbia Basin Trust. FortisBC operates and
maintains the Brilliant plant for the BPC in return for a
management fee. The contract requires fixed monthly payments
based on specified natural flow take-or-pay amounts of energy.
The contract includes a market-related price adjustment after 30
years of the 60-year term. FortisBC is accounting for the
contract as an operating lease as directed by the BCUC. In
addition, FortisBC has a long-term, minimum-payment, firm power
purchase contract with BC Hydro. This contract includes a take-
or-pay provision based on a 5-year rolling nomination of capacity
requirements.
(2) Power purchases primarily include a long-term contract with Hydro
Quebec Energy Marketing for the supply of electricity and
capacity. The contract provides approximately 237 GWh of energy
per year and up to 45 MW of capacity at any one time. The
contract, which expires December 31, 2019, provides approximately
one-third of Cornwall Electric's load.
(3) Maritime Electric has one take-or-pay contract for the purchase
of either capacity or energy. The obligation is subjected to
force majeure provisions that impact the ability of the supplier
to deliver or Maritime Electric to receive the energy contracted
for. This contract totals approximately $27 million through
October 2006.
(4) Maritime Electric has entitlement to approximately 6.7 per cent
of the output from the NB Power Dalhousie Generating Station and
approximately 4.7 per cent from the NB Power Point Lepreau
Generating Station for the life of each unit. As part of its
participation agreement, Maritime Electric is required to pay its
share of the capital costs of these units.
(5) Under the BTS Facilities Interconnection and Investment Agreement
dated January 31, 2002 with Columbia Power Corporation and the
Columbia Basin Trust, which relates to the engineering, design,
procurement, construction, maintenance and ownership of the BTS,
the utility in B.C. has an exclusive license to operate and
maintain the BTS and is subject to a 30-year obligation (the "BTS
Obligation") to pay the BPC a charge related to the recovery of
the capital cost of the BTS and related operating costs.
FortisBC is accounting for the BTS Obligation as an operating
lease, as directed by the BCUC.
(6) FortisAlberta and an Alberta transmission provider have entered
into a number of service agreements to ensure operational
efficiencies are maintained through coordinated operations. The
agreements have minimum expiry terms of 20 years and are subject
to extension based on mutually agreeable terms.
(7) Operating lease obligations include certain office, vehicle, and
equipment leases as well as the lease of electricity distribution
assets of Port Colborne Hydro Inc. On April 15, 2002, Canadian
Niagara Power entered into a 10-year operating agreement to lease
the electricity distribution assets of Port Colborne Hydro Inc.
Minimum annual lease payments under the agreement, which runs
until April 2012, amount to $1.6 million.
(8) Under a sale-leaseback agreement, on September 29, 1993, the
utility in B.C. began leasing its Trail, BC office building for a
term of 30 years. The terms of the agreement grant FortisBC
repurchase options at year 20 and year 30 of the lease term.
FortisBC is accounting for the lease as an operating lease, as
directed by the BCUC. On December 1, 2004, FortisBC also entered
into a 5-year lease for the Kelowna head office. The terms of
the lease allow for termination without penalty after 3 years.
(9) On September 13, 2001, Newfoundland Power and Fortis closed a $46
million transaction to purchase 102,000 poles and related
infrastructure from Aliant Telecom Inc. in Newfoundland. On
February 7, 2002 the Corporation closed a $2.2 million
transaction to purchase 5,586 poles and related infrastructure
from Aliant Telecom Inc. in Newfoundland. A final payment of
$4.8 million is required in 2005 under the purchase agreements.
---------------------------------------------------------------------
---------------------------------------------------------------------
CAPITAL RESOURCES
The Corporation's principal business of regulated electric utilities
requires Fortis to have ongoing access to capital to allow it to
build and maintain the electricity systems in its service
territories. In order to ensure that this access to capital is
maintained, the Corporation targets a long-term capital structure
that includes a minimum of 40 per cent equity and 60 per cent debt as
well as investment grade credit ratings. The Corporation targets the
equity component of its capital structure to consist of at least 75
per cent common share equity. The capital structure of Fortis is
presented in the following table.
---------------------------------------------------------------------
---------------------------------------------------------------------
Fortis Inc.
Capital Structure
---------------------------------------------------------------------
December 31, 2004 December 31, 2003
---------------------------------------------------------------------
($ millions) Per cent ($ millions) Per cent
---------------------------------------------------------------------
Total Debt (net of cash) 2,070.3 61.1 1,105.1 60.0
---------------------------------------------------------------------
Equity Preference Shares 319.5 9.4 123.0 6.7
---------------------------------------------------------------------
Shareholders' Equity 1,000.1 29.5 614.7 33.3
---------------------------------------------------------------------
Total 3,389.9 100.0 1,842.8 100.0
---------------------------------------------------------------------
---------------------------------------------------------------------
The change in capital structure results primarily from the
acquisition of FortisAlberta and FortisBC. The growth in earnings in
2004 allowed the Corporation to increase its common share dividends
to $48.8 million, or $2.16 per common share, compared to $36.4
million, or $2.08 per common share, in 2003. Fortis has increased
its dividends paid per common share for 32 consecutive years. The
dividend payout ratio was 50.3 per cent compared to 48.9 per cent in
2003.
As at December 31, 2004, the Corporation's credit ratings were as
follows:
Standard & Poors ("S&P") BBB(+)
Dominion Bond Rating Service ("DBRS") BBB (high)
In December 2004, S&P confirmed its corporate credit rating on the
Corporation at BBB(+). S&P is maintaining a negative outlook on
Fortis reflecting the Corporation's financial profile combined with
execution risks associated with a large capital expenditure program.
In January 2005, DBRS confirmed the rating on the Corporation's bonds
at BBB(high). Fortis will continue to update both S&P and DBRS on the
progress of the integration of FortisAlberta and FortisBC.
2005 Capital Program: The Corporation's principal business of
regulated electric utilities is capital intensive and consolidated
capital expenditures for 2005 are expected to be over $400 million.
The cash needed to complete the 2005 capital program is expected to
be supplied by a combination of long-term and short-term borrowings,
common equity issuance and internally generated funds. Fortis does
not anticipate any issues with accessing the required capital.
Cash Flows: The Corporation's ability to service debt obligations as
well as dividends on its common and preference shares is dependent on
the financial results of the operating subsidiaries and the related
cash payments from these subsidiaries. Certain regulated subsidiaries
may be subject to restrictions which may limit their ability to
distribute cash to Fortis.
As outlined in the Fortis Inc. 2003 Annual Report, Belize Electricity
remains non-compliant with its debt service coverage ratio related to
its BZ$13.0 million loan with the International Bank for
Reconstruction and Development ("IBRD"). The IBRD has acknowledged
this non-compliance and has encouraged the Company to continue to
improve its debt service ratio. Fortis does not expect any change in
the regular debt repayment schedule relating to this loan.
The Walden Power Partnership ("WPP") was not in compliance with its
debt service ratio of 1.2 times as required by the loan covenant
related to a $6.9 million mortgage. As at December 31, 2004, WPP's
debt service ratio was 0.41 times. A waiver was obtained for December
2004. Compliance with the debt service covenant is required at the
end of each fiscal year. Fortis does not expect any change in the
regular debt repayment schedule relating to this mortgage.
The Corporation and its subsidiaries had consolidated authorized
lines of credit of $543.2 million of which $259.3 million was unused
at December 31, 2004. The following summary outlines the short-term
credit facilities by the Corporation's reporting segments.
---------------------------------------------------------------------
---------------------------------------------------------------------
Fortis Inc.
Short-term Credit Facilities
---------------------------------------------------------------------
Regulated Fortis Fortis
($ millions) Corporate Utilities Generation Properties Total
---------------------------------------------------------------------
Total short-term
facilities 145.0 374.7 11.0 12.5 543.2
---------------------------------------------------------------------
Utilized at
December 31, 2004 (68.5) (111.6) (4.4) (8.4) (192.9)
---------------------------------------------------------------------
Letters of credit
outstanding (7.6) (80.9) - (2.5) (91.0)
---------------------------------------------------------------------
Short-term
facilities
available 68.9 182.2 6.6 1.6 259.3
---------------------------------------------------------------------
---------------------------------------------------------------------
On January 25, 2005, Fortis entered into a $50 million unsecured revolving/non-revolving term credit facility for its general corporate purposes, including acquisitions. 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 has no such off-balance sheet arrangements. BUSINESS RISK MANAGEMENT The following is a summary of the Corporation's significant business risks. Regulation: The Corporation's key business risk is regulation. With the acquisition of FortisAlberta and FortisBC, total regulated assets were approximately 80 per cent of total operating assets at December 31, 2004. Each of the Corporation's utilities is subject to some form of regulation which can impact future revenues and earnings.Management at each operating utility is responsible to work closely with the regulators and local governments to ensure both compliance with existing regulations and the proactive management of regulatory issues. Approximately 80 per cent of the Corporation's operating revenue and earnings are derived from regulated utilities operations.These regulated operations, Newfoundland Power, Maritime Electric, FortisOntario, FortisAlberta, FortisBC and Belize Electricity, are subject to the normal uncertainties faced by regulated companies. These uncertainties include approvals by the PUB, IRAC, the Ontario Energy Board ("OEB"), AEUB, BCUC and the Public Utilities Commission of Belize ("PUC") as applicable, of customer rates that permit a reasonable opportunity to recover on a timely basis the estimated costs of providing services, including a fair return on rate base. The ability of the utilities to recover the actual costs of providing services and to earn the approved rates of return depends on achieving the forecasts established in the rate-setting process. Upgrades of existing facilities and the addition of new facilities require the approval of the regulators. There is no assurance that capital projects perceived as required by the management of the utilities will be approved or that conditions to such approvals will not be imposed. Capital cost overruns relative to such approvals granted might not be recoverable. Rate applications that establish revenue requirements may be subject to negotiated settlement procedures as well as pursued through public hearing processes. On November 26, 2004, FortisAlberta and FortisBC each filed rate applications for 2005. As well, Maritime Electric has filed for rates for 2004 and 2005 and FortisOntario and Belize Electricity are expected to file rate applications in 2005. There can be no assurance that the rate orders issued will permit these utilities to recover all costs actually incurred and to earn the expected rates of return. A failure to obtain acceptable rate orders may adversely affect the business carried on by each of these utilities, the undertaking or timing of proposed expansion projects, the issue and sale of securities, ratings assigned by rating agencies and other matters which may, in turn, negatively impact the Corporation's results of operations or financial position. Although Fortis considers the regulatory frameworks in each of the jurisdictions to be fair and balanced, uncertainties do exist at the present time. Regulatory frameworks in Ontario and Alberta have undergone significant changes since the deregulation of new generation and the introduction of retail competition. The regulations and market rules in these jurisdictions which govern the competitive wholesale and retail electricity markets are relatively new and there may be significant changes in these regulations and market rules that could adversely affect the ability of FortisOntario and FortisAlberta to recover their costs or to earn reasonable returns on their capital. Currently, although all of the Corporation's regulated utilities operate under traditional cost of service methodologies, their regulators are utilizing, to varying degrees, performance-based and other rate-setting mechanisms such as automatic rate of return formulas which could adversely affect the ability of the utilities to earn reasonable returns on their capital. Generally, allowed returns for regulated utilities are exposed to changes in the general level of interest rates. Earnings of regulated utilities are exposed to changes in interest rates associated with rate-setting mechanisms.The rate of return is either directly impacted through automatic adjustment mechanisms or indirectly through regulatory determinations of what constitutes appropriate returns on investment.
The following table provides a summary of the key regulatory
highlights.
---------------------------------------------------------------------
---------------------------------------------------------------------
Fortis Inc.
Regulatory Highlights
---------------------------------------------------------------------
Regulated Regulated Material Regulatory
Subsidiary Returns Decisions and Applications
---------------------------------------------------------------------
Newfoundland Power 9.24 per cent - GRA approved June 2003 for rates
on equity up through 2004. Automatic
to 45 per cent adjustment formula for 2005
through 2007. The allowed ROE at
Newfoundland Power is calculated
using an automatic adjustment
formula tied to observed long
Canada bond yield. The operation
of the automatic adjustment
formula has decreased the 2005
allowed ROE by 50 basis points
and has resulted in a rate
decrease, effective January 1,
2005, of 0.5 per cent.
- Application by Newfoundland
Hydro, supplier of 90 per cent
of energy requirement, for
increase in rates was approved
on July 11, 2004. The decision
resulted in a 9.3 per cent
increase in the rate
Newfoundland Hydro charges
Newfoundland Power for purchased
power. The PUB subsequently
approved an average 5.4 per cent
increase in the rates
Newfoundland Power charges its
customers effective July 1,
2004. In addition, as a result
of the review of Newfoundland
Hydro's Rate Stabilization Plan,
customer electricity rates
increased approximately 4.5 per
cent on July 1, 2004.
Newfoundland Power will not gain
any financial benefit nor suffer
any direct financial detriment
from the rate change.
- In December 2004, the PUB
approved a revised wholesale
rate for the power Newfoundland
Hydro sells Newfoundland Power.
The new wholesale rate reflects
a movement from billing solely
on energy usage to billing based
on both peak demand and energy
usage, effective January 1,
2005. The inclusion of peak
demand as a billing determinant
in the wholesale rate increases
the risk of volatility of
purchased power costs due to
difficulty in forecasting peak
demand. A purchased power cost
variance reserve was approved by
the PUB to limit the impact of
variances from forecast
purchased power costs on the
Company's financial performance.
---------------------------------------------------------------------
Maritime Electric Pending - Change in legislation in 2003
general rate resulted in a reversion to
order traditional cost of service
regulation from price cap
regulation, effective January 1,
2004. Interim rates became
effective January 1, 2004.
- GRA filed April 2004 to set
rates including the
establishment of an appropriate
capital structure and ROE. On
January 6, 2005, IRAC issued an
interim Order allowing Maritime
Electric to establish an ECAM
with application to the period
commencing January 1, 2004 and
to commence amortization of the
$20.8 million in recoverable
costs to December 31, 2003 with
$1.5 million to be amortized in
2004 and a further $2.5 million
to be amortized in 2005.
- Maritime Electric received
regulatory approval for the
construction of a 50-MW
generating facility on Prince
Edward Island.
---------------------------------------------------------------------
Canadian Niagara 9.88 per cent - On December 9, 2002, the Ontario
Power return on government enacted Bill 210,
deemed equity the Electricity Pricing,
up to 50 per Conservation and Supply Act,
cent 2002, which implemented a freeze
on transmission and distribution
rate increases until May 1,
2006.
- Effective April 1, 2004, certain
transition costs are allowed to
be recovered in rates over a 4-
year period and, effective April
1, 2005, rates can be further
adjusted to provide for a full
recovery of the market ROE. As
such, Canadian Niagara Power
applied for and received a Board
Decision and Interim Rate
Schedule to recover its
regulatory assets in Fort Erie
and Port Colborne. There were no
such costs in Gananoque for the
period prior to December 31,
2002. The Interim Rate Order is
subject to future review by the
OEB. In early 2005, Canadian
Niagara Power will apply for the
second installment of the 4-year
recovery of regulatory assets.
Cornwall Electric N/A (Price - Cornwall Electric is granted an
Cap) exemption under the Ontario
Electricity Act. Cornwall
Electric's rates are subject to
an annual adjustment mechanism
that flows through the actual
cost of power and increases
rates by an inflationary factor
to cover other costs.
- Cornwall Electric's rates were
increased by 11.98 per cent
effective July 1, 2004 as a
result of rising wholesale
supply costs from Hydro Quebec.
---------------------------------------------------------------------
FortisAlberta 9.50 per cent - GRA and final rates were
return on 37 approved July 2003 and became
per cent deemed effective August 2003.
equity - The AEUB issued its Generic Cost
of Capital Decision on July 2,
2004. The regulated capital
structure for FortisAlberta was
set at 63 per cent debt and 37
per cent equity. The same order
set FortisAlberta's regulated
ROE for establishing electricity
rates as 9.6 per cent based on a
forecast long Canada bond of
5.68 per cent. On November, 30,
2004, the AEUB issued its Return
on Equity Decision which set the
generic rate of return on common
equity at 9.5 per cent for 2005.
- FortisAlberta filed a GRA in
2004 using this rate of return
and regulated capital structure.
FortisAlberta is seeking a 4.5
per cent increase in
distribution rates. Effective
January 1, 2005, existing rates
are interim and refundable until
the AEUB is completed with
FortisAlberta's 2005 GRA and
sets final rates.
---------------------------------------------------------------------
FortisBC 9.55 per cent - On April 26, 2004, the BCUC
return on 40 approved a 4.3 per cent rate
per cent increase, effective May 1, 2004.
deemed equity An interim rate increase of 3.6
per cent was put in place on
January 1, 2004.
- FortisBC's revenue and rates are
based on traditional cost of
service regulation. However, the
Company is also subject to a PBR
mechanism that is used in
establishing annual rate
adjustments.
- FortisBC filed a GRA in 2004 to
set rates for 2005. FortisBC is
seeking a 4.4 per cent rate
increase effective January 1,
2005. The BCUC approved an
interim rate increase for
FortisBC of 3.7 per cent
effective January 1, 2005.
- In May 2004, FortisBC applied to
the BCUC for approval to amend
its electric tariff and terms
and conditions of service for
residential customers. The
application sought to replace a
prompt payment discount with a
1.5 per cent monthly charge for
late-paying customers. The net
impact is a 1.45 per cent
increase in rates to most
residential customers and is
neutral to the Company's
revenues. In October 2004, the
BCUC approved FortisBC's
application with an effective
date of November 1, 2004.
---------------------------------------------------------------------
Belize Electricity N/A (Price - Electricity rates are comprised
Cap) of 2 components. The first,
Value Added Delivery ("VAD"), is
subject to price cap and the
second is the cost of fuel and
purchase power, including the
variable cost of generation,
which is a flow through in
customer rates.
- A new 4-year VAD tariff setting
arrangement will be required by
July 1, 2005.
---------------------------------------------------------------------
Caribbean Utilities 15 per cent - On June 16, 2004, Caribbean
return on rate Utilities and the Cayman Islands
base Government reached a tentative
agreement to extend the
Company's operating License to
2024 from 2011. The License
extension includes a change in
the rate-setting regulation that
will now provide for a price cap
based on an inflation index. The
price of fuel and government
levies will be a flow through in
rates. Generation will be priced
on a marginal price based on
long-term competitively bid
contracts for new energy
increments.
- The non-binding tentative
agreement signed by Caribbean
Utilities and the Government in
June 2004 has expired following
Hurricane Ivan. The Company will
meet with Government at the
appropriate time to assess the
status of the License renewal
negotiations. It continues to
operate under its existing
License which expires in 2011.
---------------------------------------------------------------------
---------------------------------------------------------------------
Integration of FortisAlberta and FortisBC: Fortis has appointed an executive team to lead the successful integration of FortisAlberta and FortisBC. In December, Fortis announced organizational changes as part of its commitment to establish separate management groups for each utility.Effective April 1, 2005, John Walker, President and Chief Executive Officer, Fortis Properties will become President and Chief Executive Officer, FortisBC.Philip Hughes continues as President and Chief Executive Officer, FortisAlberta.Fortis is also moving forward with plans to separate the operations at the 2 companies. The separation is expected to result in more efficient and productive organizations and will lend itself to improved customer service and more reliable electricity service at reasonable costs. Hedging: The Corporation manages its financial exposures in accordance with its risk management policy and procedures. Derivative instruments are used only to manage risk and not for trading purposes. The derivative instruments currently in place are interest rate swaps. The Corporation designates each derivative instrument as a hedge of specific assets or liabilities on the balance sheet. The Corporation also assesses, both at the hedge's inception and on an ongoing basis, whether the hedging transactions are effective in offsetting changes in cash flows of the hedged items. Payments or receipts on derivative instruments that are designated and effective as hedges are recognized concurrently with, and in the same financial category as, the hedged item. If a derivative instrument is terminated or ceases to be effective as a hedge prior to maturity, the gain or loss at that date is deferred and recognized in income concurrently with the hedged item. Subsequent changes in the value of the financial instrument are reflected in income. If the designated hedged item is sold, extinguished or matures prior to the termination of the related derivative instrument, the gain or loss at that date on such derivative instrument is recognized in income. The Corporation's foreign investments are exposed to changes in US exchange rates.The Corporation has effectively decreased its exposure to foreign currency exchange rate fluctuations on a substantial portion of its foreign investments through the use of US dollar debentures. Including the US$150 million Notes which were issued on October 28, 2004, Fortis now has US$170 million in US-denominated debt. Approximately US$90 million has been designated as a hedge against the Corporation's net foreign investments. Net foreign investments of Fortis exclude its investment in Caribbean Utilities as the earnings of Caribbean Utilities are accounted for by the equity method of accounting and do not qualify for accounting purposes as a net foreign investment. As a result, the remaining US$80 million has not been designated as a hedge and the fluctuations in the carrying value of this debt as a result of foreign currency exchange rate fluctuations will be recorded in income each reporting period. As a result of the Corporation's hedging strategy, the estimated annual sensitivity to each 2-cent increase in the US exchange rate will result in a 1-cent increase in the Corporation's earnings per common share. Earnings of Fortis will also be impacted by foreign currency exchange rate fluctuations associated with the US$80 million long-term debt as discussed above.At the end of each reporting period, the estimated sensitivity to each 1-cent increase in the US exchange rate will result in a 2-cent decrease in the Corporation's earnings per common share. Fortis manages interest rate risk by locking in interest rates for long periods through fixed rate debt.The Corporation also utilizes interest rate swaps.Approximately 87 per cent of the Corporation's long-term debt facilities have maturities beyond 5 years. The Corporation's exposure to interest rate risk is associated with short-term debt.The amount of short-term debt at December 31, 2004 was $192.9 million or 9.2 per cent of total debt. Energy Prices: The Corporation's primary exposure to changes in energy prices relates to its non-regulated generation sales in Ontario. Electricity is sold to the Independent Market Operator at market prices. The sensitivity of the Corporation's earnings to each $1 per MWh change in the annual wholesale market price of electricity is expected to be $0.4 million in 2004. Energy sales from the non-regulated generation assets in central Newfoundland, British Columbia and Belize are sold under long-term, fixed-price contracts. Economic Conditions:Typical of electric utilities, the general economic conditions of the Corporation's service territory influence electricity sales.Electricity sales are influenced by economic factors such as changes in employment levels, personal disposable income, energy prices and housing starts. Fortis also holds investments in both commercial real estate and hotel properties.The hotel properties, in particular, are subject to operating risks associated with industry fluctuations and possible downturns.The high quality of the Corporation's assets, strength of its brands and commitment to productivity improvement reduce the exposure to industry fluctuations and possible downturns.Fortis Properties' real estate investments are also anchored by high-quality tenants with long-term leases.Exposure to lease renewals averages 10.1 per cent per annum over the next 5 years.With the addition of the hotels in western Canada in January 2005, approximately 50 per cent of Fortis Properties operating earnings are expected to be derived from hotel investments. Management believes that, based on the nature of its business, the Corporation is not exposed to a significant reduction in revenues. A 5 per cent decrease in revenues from the Hospitality Division would reduce earnings by approximately $1.0 million. Loss of Service Area: FortisAlberta serves a number of direct customers that reside within various municipalities throughout its service areas. From time to time, municipal governments in Alberta give consideration to creating their own electric distribution utilities by purchasing the assets of FortisAlberta that are located within their municipal boundaries. Upon the termination of its franchise agreement, a municipality has the right, subject to AEUB approval, to purchase FortisAlberta's assets within its municipal boundaries pursuant to the Municipal Act. Under the Hydro Act, if a municipality that owns an electric utility expands its boundaries, such a municipality can acquire FortisAlberta's assets in the annexed area. The consequence to FortisAlberta of a municipality purchasing its distribution assets would be an erosion of its rate base which would reduce the capital upon which FortisAlberta could earn a regulated return. The City of Airdrie Airdrie (âr`drē), town (1991 pop. 45,320), North Lanarkshire, S central Scotland. Chemicals and electrical and electronic equipment are produced. There are facilities for electronic research. Airdrie's free library was the first established in Scotland. recently provided notice under the Municipal Act to the Corporation of its intention to purchase FortisAlberta's assets within its jurisdiction. The AEUB has subsequently made a determination that the value of such assets is approximately $20.4 million before customer contributions and adjustments. FortisAlberta is not aware of whether the City of Airdrie intends to continue the process of purchasing these assets from the Company. Except for a current initiative involving the City of Airdrie, there have been no transactions pursuant to the Municipal Act to date. Environmental: The Corporation is subject to numerous laws, regulations and guidelines governing the management, transportation and disposal of hazardous substances and other waste materials and otherwise relating to the protection of the environment and health and safety. The costs arising from compliance with such laws, regulations and guidelines may be material to the Corporation. Potential environmental damage and costs could arise due to a variety of events, including severe weather, human error or misconduct, or equipment failure. However, there can be no assurance that such costs will be recoverable through rates and, if substantial, unrecovered costs may have a material effect on the business, results of operations, financial condition and prospects of the Corporation. Insurance: While the Corporation maintains insurance, the insurance is subject to coverage limits as well as time-sensitive claims discovery and reporting provisions and there can be no assurance that the possible types of liabilities that may be incurred by the Corporation will be covered by its insurance. The Corporation's utilities would likely apply to the regulator to recover the loss (or liability) through increased rates. However, there can be no assurance that the regulator would approve any such application, in whole or in part. Any major damage to the Corporation's facilities could result in repair costs and customer claims that are substantial in amount and which could have an adverse effect on the Corporation's business, results of operations, financial position and prospects. It is anticipated that such insurance coverage will be maintained. However, there can be no assurance that the Corporation will be able to obtain or maintain adequate insurance in the future at rates it considers reasonable or that insurance will continue to be available on terms as favourable as the Corporation's existing arrangements. Labour Relations Approximately 54 per cent of the employees of the Corporation are members of labour unions which have entered into collective bargaining agreements with the Corporation. The provisions of such collective bargaining agreements affect the flexibility and efficiency of the business carried on by the Corporation. The Corporation considers its relationships with its labour unions to be satisfactory but there can be no assurance that current relations will continue in future negotiations or that the terms under the present collective bargaining agreements will be renewed. The inability to maintain, or to renew, the collective bargaining agreements on acceptable terms could result in increased labour costs or service interruptions arising from labour disputes for the Corporation that are not provided for in approved rate orders and which could have an adverse effect on the results of operations, cash flow and net income of the Corporation. Weather: The facilities of the Corporation are exposed to the effects of severe weather conditions and other acts of nature. Although the Corporation's facilities have been constructed, operated and maintained to withstand severe weather, there is no assurance that they will successfully do so in all circumstances. Fortis utilities' exposure to climatic factors are generally addressed by regulatory mechanisms. In particular, the PUB has approved the operation of a weather normalization reserve at Newfoundland Power which mitigates year-over-year volatility in earnings that would otherwise be caused by variations in weather conditions. Despite preparation for severe weather, extraordinary conditions, like Hurricane Ivan, and other natural disasters will always remain a risk to utilities.Except for Caribbean Utilities, the Corporation uses a centralized insurance management function to create a higher level of insurance expertise and to reduce its liability exposure. The assets and earnings of Belize Electricity and Caribbean Utilities are subject to hurricane risk.Similar to other Fortis utilities, these companies manage weather risks through insurance on generation assets and self-insurance on transmission and distribution assets.The PUC provides for recovery of certain costs arising from hurricanes through a surcharge on electricity rates, thereby mitigating the financial impact to Belize Electricity. Earnings from non-regulated generating assets are sensitive to rainfall levels; however, the geographic diversity of the Corporation's generation assets mitigates the risk associated with rainfall levels. Liquidity Risks:Earnings from Belize Electricity and BECOL are denominated in Belizean dollars, earnings from Caribbean Utilities are denominated in Cayman Island dollars and earnings from FortisUS Energy are denominated in US dollars.As at December 31, 2004, both the Cayman Island dollar and the Belizean dollar are pegged to the US dollar: CI$1.00equalsUS$1.20; BZ$1.00equalsUS$0.50.Foreign earnings derived in currencies other than a US dollar must be converted into US dollars before repatriation, presenting temporary liquidity risks.Due to the small size and cyclical nature of the economy in Belize, conversion of local currency into US dollars may be subject to restrictions from time to time. CHANGES IN ACCOUNTING POLICIES During 2004, a number of accounting policies evolved. Fortis has reviewed the applicable accounting policies as well as consulted with the Corporation's independent auditors about the appropriate interpretation and application of these policies. The following accounting policy changes occurred during 2004. Amortization Policy: Effective January 1, 2004, new recommendations by the CICA effectively eliminated certain industry-specific accounting practices, which previously qualified as Canadian GAAP.To comply with these new recommendations, the Corporation's non-utility investment, Fortis Properties, has changed from a sinking fund method of amortization to the straight-line method. This change, as required under the recommendations, has been adopted with no restatement of prior period amounts. The change in accounting policy from the sinking fund method to the straight-line method has negatively impacted after-tax earnings by approximately $2.7 million in 2004. FortisOntario has also changed from a sinking fund method of amortization on intangibles to the straight-line method. The change in accounting policy from the sinking fund method of depreciation to the straight-line method had no material impact on the financial statements. Asset Retirement Obligations: Effective January 1, 2004, the Corporation retroactively adopted the recommendations of the CICA on accounting for asset retirement obligations. The recommendations require total retirement costs to be recorded as a liability at fair value, with a corresponding increase to property, plant and equipment. The Corporation recognizes asset retirement obligations in the period in which they are incurred if a reasonable estimate of a fair value can be determined. While some of the Corporation's utility long-lived tangible assets will have future legal retirement obligations, no asset retirement obligations have been recognized upon adoption of the new recommendations.The final date of removal of the long-lived tangible assets that carry asset retirement obligations cannot be reasonably determined at this time.An asset retirement obligation and offsetting capital asset will be recognized when the timing and amount can be reasonably estimated. Valuation of Property, Plant and Equipment: Effective January 1, 2004, the Corporation prospectively adopted the recommendations of the CICA on accounting for asset impairment. The recommendations require an impairment of property, plant and equipment, intangible assets with finite lives, deferred operating costs and long-term prepaid expenses to be recognized in income when the asset's carrying value exceeds the total cash flows expected from its use and eventual disposition. The impairment loss is calculated as the difference between the asset's carrying value and its fair value, which is determined using present value techniques. There has been no impact on the financial statements resulting from the adoption of the recommendations. Liabilities and Equity: Effective December 31, 2004, the Corporation implemented the recommendations of the CICA on the classification of financial instruments as liabilities or equity. The recommendations require that certain financial instruments that are ultimately convertible into a variable number of common shares at the holders' option be classified as liabilities.As a result, the Corporation has reclassified all of its First Preference Shares from shareholders' equity to liabilities on December 31, 2004. The dividends on the First Preference Shares have also been reclassified as a deduction to arrive at net earnings. The change does not impact net earnings applicable to common shares as the dividends on the First Preference Shares were previously deducted to arrive at net earnings applicable to common shares.This change has been adopted retroactively with restatement of comparative figures. Accounting for rate regulated operations: The Accounting Standards Board ("AcSB") of the CICA is reviewing Canadian GAAP applicable to enterprises with rate-regulated operations. Potential future changes in this area could have a material impact on the Corporation's financial statements.The AcSB has released a draft guideline on disclosures as an interim measure pending completion of the full project. The final disclosure guideline is expected to be effective for interim periods beginning on or after April 1, 2005. Hedging Relationships: Effective January 1, 2004, the Corporation implemented the recommendations of the CICA Accounting Guideline 13 which outlines the requirements for identification, designation, documentation and effectiveness testing of hedging relationships in order to meet the conditions for applying hedge accounting to certain financial instruments.Implementation of this Guideline did not have an impact on the Corporation's earnings or financial position as at December 31, 2004. CRITICAL ACCOUNTING ESTIMATES The preparation of the Corporation's 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 year. Estimates are based on historical experience, current conditions and various other assumptions believed to be reasonable under the circumstances. Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates. The Corporation's critical accounting estimates are discussed below. Useful Life of Property, Plant and Equipment: Amortization, by its nature, is an estimate based primarily on the useful life of assets. The Corporation's consolidated capital assets represented approximately 70 per cent of total consolidated assets at December 31, 2004. Estimated useful lives are based on current facts and historical information and take into consideration the anticipated physical life of the assets. The amortization periods used are reviewed on an ongoing basis to ensure they continue to be appropriate. Goodwill Valuation: Goodwill represents the excess at the dates of acquisition of the purchase price over the fair values of the net amounts assigned to individual assets acquired and liabilities assumed relating to business acquisitions. The Corporation is required to perform an annual impairment test or if any event occurs or if circumstances change that would indicate that the fair value of a reporting unit was below its carrying value. In July of each year, the Corporation reviews for impairment which is based on current information of the reporting unit being reviewed. There was no impairment provision required on the $514 million in goodwill recorded on the Corporation's balance sheet as at December 31, 2004. Employee Future Benefits: The Corporation's defined benefit pension plan expense is subject to judgments utilized in the actuarial determination of the expense. The main assumptions utilized by management in determining pension expense were the discount rate for the accrued benefit obligation, expected long-term rate of return on plan assets, average rate of compensation increase, average remaining service life of the active employee group and employee and retiree mortality rates. Changes to the provisions of the plans may also affect current and future pension costs. Contingencies: The Corporation is party to a number of disputes and lawsuits in the normal course of business as outlined in the 2003 Fortis Inc. Annual Consolidated Financial Statements. Contingent liabilities as of December 31, 2004 are consistent with disclosures in the annual audited financial statements except as noted below. In a statement of claim filed on August 18, 2003 in the Court of the Queen's Bench of Alberta, EPCOR See Equal percentage contribution rule. Energy Services (Alberta) Inc. is pursuing damages of $83 million against the utility in Alberta for alleged breaches of contract, common law duties and distribution tariff terms and conditions of service relating to the provision of the Regulated Rate Option to customers.Management has not, to date, made a definitive assessment of potential liability with respect to this claim; however, management believes that these allegations are without merit. FortisBC has been advised of a pending inquiry by the BC Ministry of Forests into fire suppression costs associated with certain forest fires in the Company's service territory in 2003.FortisBC is in the preliminary stages of collecting and analyzing information and evidence surrounding these fires. Revenue Recognition: Utility accounting policies of Fortis include both recognition of sales on a meter reading basis and on an accrual basis whereby the estimated amount of power consumed between the meter reading and the end of the reporting period is used to establish an accrual of unbilled revenue in the Corporation's financial statements. SELECTED ANNUAL FINANCIAL INFORMATION The following table sets forth the annual financial information for the years ended December 31, 2004, 2003 and 2002. The financial information has been prepared in accordance with Canadian GAAP and as required by utility regulators. The timing of the recognition of certain assets, liabilities, revenues and expenses as a result of regulation may differ from that otherwise expected using Canadian GAAP for non-regulated entities. All amounts presented are in Canadian dollars unless otherwise stated.
---------------------------------------------------------------------
---------------------------------------------------------------------
Fortis Inc.
Selected Annual Financial Information
Year Ended December 31st
---------------------------------------------------------------------
($ thousands except per
share amounts) 2004 2003 2002
---------------------------------------------------------------------
Operating revenue and
equity income (1) 1,146,129 843,080 715,465
---------------------------------------------------------------------
Earnings before
non-controlling
interest 108,848 81,451 67,481
---------------------------------------------------------------------
Net Earnings applicable
to common shares 90,855 73,630 63,252
---------------------------------------------------------------------
---------------------------------------------------------------------
Total assets 3,837,996 2,163,797 1,941,110
---------------------------------------------------------------------
Long-term debt (net of
current portion) 1,878,639 1,031,358 940,910
---------------------------------------------------------------------
Non-controlling interest 37,487 36,770 39,955
---------------------------------------------------------------------
Preference shares 319,530 122,992 - (2)
---------------------------------------------------------------------
Common shareholders'
equity 1,000,112 614,665 585,843
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings per common share 4.29 4.25 3.89
---------------------------------------------------------------------
Diluted earnings per
common share 4.04 4.10 3.85
---------------------------------------------------------------------
Dividends declared per
common share 2.19 2.10 1.99
---------------------------------------------------------------------
Dividends declared per
Series B First
Preference Share - - 1.4916 (2)
---------------------------------------------------------------------
Dividends declared per
Series C First
Preference Share 1.3625 1.0173 (3) -
---------------------------------------------------------------------
Dividends declared per
Series D First
Preference Share 0.1706 (4) - -
---------------------------------------------------------------------
Dividends declared per
Series E First
Preference Share 0.7733 (4) - -
---------------------------------------------------------------------
(1) Operating revenue reflects weather-adjusted values related to
Newfoundland Power's Weather Normalization Reserve.
(2) The Series B $50 million First Preference Shares were redeemed
December 2002.
(3) The Series C $125 million First Preference Shares were issued
June 2003.
(4) The Series D and E First Preference Shares were issued at various
times during 2004 based on the exercise of warrants under the
issuance of First Preference Units in January 2004.
---------------------------------------------------------------------
---------------------------------------------------------------------
Revenue and net earnings in 2004 grew 35.9 per cent and 23.4 per
cent, respectively, over 2003. Revenue and net earnings in 2003 grew
17.8 per cent and 16.4 per cent, respectively, over 2002. The growth
in both revenue and net earnings was associated with the
Corporation's acquisitions in Alberta, British Columbia and Ontario
as well as its increased investment in Caribbean Utilities. The
growth in total assets and long-term liabilities was also associated
with the acquisitions as well as the completion of the $65 million
Exploits Partnership Project in November 2003.
Dividends declared per common share have increased for 32 consecutive
years. The Corporation's dividend payout ratio was 50.3 per cent in
2004 compared to 48.9 per cent in 2003. In December 2004, Fortis
declared an increase in the regular quarterly dividend to $0.57 from
$0.54, payable on March 1, 2005.
QUARTERLY RESULTS
The following table sets forth unaudited quarterly information for
each of the 8 quarters ended March 31, 2003 through December 31,
2004. This information has been obtained from the Corporation's
unaudited Interim Financial Statements which, in the opinion of
management, have been prepared in accordance with Canadian GAAP and
as required by utility regulators. The timing of the recognition of
certain assets, liabilities, revenues and expenses as a result of
regulation may differ from that otherwise expected using Canadian
GAAP for non-regulated entities. These operating results are not
necessarily indicative of results for any future period and should
not be relied upon to predict future performance. All amounts
presented are in Canadian dollars unless otherwise stated.
---------------------------------------------------------------------
---------------------------------------------------------------------
Fortis Inc.
Summary of Quarterly Results (Unaudited)
---------------------------------------------------------------------
Quarter Ended Net
Operating Earnings
Revenue applicable Earnings
and to per
Equity Common Common Earnings per
Income Shares Shares Common Shares
($000's) ($000's) Basic ($) Diluted ($)(1)
---------------------------------------------------------------------
December 31, 2004 337,170 21,176 0.89 0.85
---------------------------------------------------------------------
September 30, 2004 303,653 25,452 1.07 1.00
---------------------------------------------------------------------
June 30, 2004 254,513 23,946 1.22 1.15
---------------------------------------------------------------------
March 31, 2004 250,793 20,281 1.16 1.12
---------------------------------------------------------------------
December 31, 2003 210,624 14,760 0.85 0.82
---------------------------------------------------------------------
September 30, 2003 191,445 18,114 1.05 0.99
---------------------------------------------------------------------
June 30, 2003 205,582 20,796 1.20 1.15
---------------------------------------------------------------------
March 31, 2003 235,429 19,961 1.16 1.14
---------------------------------------------------------------------
(1) The diluted earnings per common share for 2003 have been restated
to reflect the issuance of convertible preference shares in June
2003.
---------------------------------------------------------------------
---------------------------------------------------------------------
A summary of the past 8 quarters reflects the Corporation's continued growth as well as the seasonality associated with its businesses. Most of the Corporation's utility investments produce their highest earnings in the first quarter. The June 2003 financial results were impacted by the 2003 general rate order ("GRO" at Newfoundland Power.From June 2004 to December 2004, financial results were impacted by the acquisition of FortisAlberta and FortisBC. The Corporation's non-utility investment, Fortis Properties, generally produces its highest earnings in the second and third quarters. Given the diversified group of companies, seasonality may vary.Each of the comparative quarterly earnings has increased as a result of both the Corporation's acquisition strategy as well as improved operating earnings at most subsidiaries. December 2003/December 2004 - For the quarter ended December 2004, earnings applicable to common shares were 43.5 per cent higher than the same quarter in 2003.Earnings per common share increased 4.7 per cent over the same quarter in 2003. The increase in earnings was primarily associated with the acquisition of FortisAlberta and FortisBC as well as improved operating income at most subsidiaries. The increase in quarterly earnings was affected by Hurricane Ivan. In September 2004, Grand Cayman was struck by Hurricane Ivan, a Category V hurricane that significantly affected Caribbean Utilities' distribution system. Equity earnings of Caribbean Utilities are recorded on a lag basis and, therefore, the Corporation's portion of the uninsured hurricane-related costs, which approximate $8.2 million, reduced the Corporation's equity earnings from Caribbean Utilities for the fourth quarter of 2004. The Corporation's fourth quarter earnings in 2004 excluding the impact of Hurricane Ivan, although not a measure under GAAP, would have been $29.4 million, $8.2 million higher than actual fourth quarter earnings of $21.2 million, or $1.23 per common share, 44.7 per cent higher than earnings per common share of $0.85 for the fourth quarter last year.The Corporation believes that it is useful supplemental information as it provides an indication of the results excluding the impact of the Hurricane Ivan. Readers should be cautioned however that this information should not be confused with or used as an alternative for net earnings determined in accordance with GAAP. September 2003/September 2004 - For the quarter ended September 2004, earnings applicable to common shares were 40.5 per cent higher than the same quarter last year. Earnings per common share increased 1.9 per cent over the same quarter last year. The increase in earnings was primarily associated with the acquisition of FortisAlberta and FortisBC as well as improved operating income at most subsidiaries. The increase was partially offset by lower production in Belize and timing of expenditures associated with production in Ontario. June 2003/June 2004 - For the quarter ended June 2004, earnings applicable to common shares were 15.1 per cent higher than the same quarter in 2003.Earnings per common share increased 1.7 per cent over the same quarter in 2003. The increase in earnings was primarily associated with the acquisition of the utilities in western Canada as well as improved operating income at most subsidiaries. In particular, operations in Belize delivered improved results due to increased production associated with higher rainfall levels. March 2003/March 2004 - For the quarter ended March 2004, earnings applicable to common shares were 1.6 per cent higher than the same quarter in 2003. Earnings per common share remained consistent with the same quarter last year. Newfoundland Power and Maritime Electric were the major drivers of performance compared to the same quarter last year. Operations in Belize also delivered improved results due to increased production associated with higher rainfall levels. The increased quarterly earnings from Newfoundland Power over the first quarter of 2003 largely resulted from timing differences related to the implementation of the decisions contained in the 2003 GRO received in June 2003. The increase in quarterly earnings was partially mitigated by lower wholesale energy prices in Ontario. PROPOSED ACQUSITION On December 15, 2004, Fortis and Princeton Light and Power ("PLP") entered into an agreement in which Fortis will purchase all issued common and preferred shares of PLP. Fortis, upon closing, will transfer ownership of PLP to Fortis Pacific Holdings. The PLP shareholders have the option of receiving cash or common shares of Fortis or a combination thereof. The closing of the transaction is subject to approval of securities authorities, final due diligence and regulatory approval by the BCUC. The specific purchase price will be adjusted depending on the time of closing but is expected to result in a premium over rate base of approximately 14 per cent. The regulated rate base of PLP was approximately $6.2 million, as of March 31, 2004. PLP is an electric utility that serves approximately 3,200 customers in Princeton, British Columbia and surrounding areas. PLP also provides utility service to customers of FortisBC in the Similkameen and Tulameen regions. PLP presently purchases its wholesale power from FortisBC under a long-term contract. OUTLOOK The Corporation's principal business of regulated electric utilities is capital intensive and Fortis expects that most of its capital expenditures for the next 5 years will relate primarily to FortisAlberta and FortisBC.Consolidated capital expenditures for 2005 are expected to be over $400 million. Fortis also expects to focus its capital on funding further acquisitions of electric utility assets. Fortis will continue to pursue acquisition opportunities both in Canada and outside of Canada. Fortis will also pursue growth in its non-regulated businesses including hydroelectric generation, hotels and real estate. OUTSTANDING SHARE DATA At February 8, 2005, the Corporation had issued and outstanding 23,908,122 common shares, 5,000,000 Series C First Preference Shares, 7,993,500 Series E First Preference Shares, and 6,500 Series D First Preference Shares. Dated February 8, 2005
Fortis Inc.
Consolidated Balance Sheets (Unaudited)
As at December 31
(in thousands)
December 31 December 31
2004 2003
---------------------------------------------------------------------
---------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $37,203 $65,094
Accounts receivable 169,649 93,822
Other regulatory assets 15,245 17,146
Materials and supplies 30,235 16,470
Future income taxes 4,204 -
---------------------------------------------------------------------
256,536 192,532
---------------------------------------------------------------------
Corporate income tax deposit 6,949 6,949
Cash held in escrow 103 3,810
Deferred charges 144,698 112,051
Other regulatory assets 45,309 30,436
Utility capital assets 2,347,067 1,229,089
Income producing properties 341,069 333,604
Investments 163,769 167,752
Intangibles, net of amortization 18,455 22,139
Goodwill 514,041 65,435
---------------------------------------------------------------------
$3,837,996 $2,163,797
---------------------------------------------------------------------
---------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $192,858 $104,452
Accounts payable and accrued charges 270,055 139,996
Dividends payable 14,997 9,953
Other regulatory liabilities 23,657 2,396
Current installments of long-term debt 36,062 38,197
Future income taxes - 1,062
Subscription Receipts issue - 350,205
Restricted cash-Subscription Receipts issue - (350,205)
---------------------------------------------------------------------
537,629 296,056
Deferred credits 29,828 20,105
Future income taxes 34,771 41,851
Long-term debt 1,878,639 1,031,358
Non-controlling interest 37,487 36,770
Equity preference shares 319,530 122,992
---------------------------------------------------------------------
2,837,884 1,549,132
---------------------------------------------------------------------
Shareholders' equity
Capital stock 675,215 329,660
Contributed surplus 1,831 862
Equity portion of convertible debentures 1,550 1,672
Foreign currency translation adjustment (15,497) (12,515)
Retained earnings 337,013 294,986
---------------------------------------------------------------------
1,000,112 614,665
---------------------------------------------------------------------
$3,837,996 $2,163,797
---------------------------------------------------------------------
---------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Fortis Inc.
Consolidated Statements of Earnings (Unaudited)
For the period ended December 31
(in thousands, except per share amounts)
Quarter Ended Year Ended
2004 2003 2004 2003
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues $342,958 $207,498 $1,145,287 $832,585
Equity income (5,788) 3,126 842 10,495
---------------------------------------------------------------------
337,170 210,624 1,146,129 843,080
---------------------------------------------------------------------
Expenses
Operating 231,023 153,591 766,628 578,731
Amortization 34,831 12,986 113,672 62,327
---------------------------------------------------------------------
265,854 166,577 880,300 641,058
---------------------------------------------------------------------
Operating income 71,316 44,047 265,829 202,022
Finance charges
Interest 33,233 19,925 111,283 81,555
Foreign exchange (gain)
loss on long-term debt (1,035) 268 (1,229) 780
---------------------------------------------------------------------
32,198 20,193 110,054 82,335
---------------------------------------------------------------------
Earnings before
income taxes 39,118 23,854 155,775 119,687
Corporate income taxes 11,241 6,243 46,927 38,236
---------------------------------------------------------------------
Net earnings before
non-controlling
interest and
preference share
dividends 27,877 17,611 108,848 81,451
Non-controlling interest 2,605 1,147 5,674 3,869
Preference share dividends 4,096 1,704 12,319 3,952
---------------------------------------------------------------------
Net earnings applicable
to common shares $21,176 $14,760 $90,855 $73,630
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted average common
shares outstanding 23,865 17,362 21,184 17,309
---------------------------------------------------------------------
Net earnings and earnings
per common share
Basic $0.89 $0.85 $4.29 $4.25
Diluted $0.85 $0.82 $4.04 $4.10
---------------------------------------------------------------------
---------------------------------------------------------------------
Consolidated Statements of Retained Earnings (Unaudited)
For the period ended December 31
(in thousands)
2004 2003 2004 2003
---------------------------------------------------------------------
---------------------------------------------------------------------
Balance at beginning
of period $329,495 $289,627 $294,986 $257,776
Net earnings applicable
to common shares 21,176 14,760 90,855 73,630
---------------------------------------------------------------------
350,671 304,387 385,841 331,406
Dividends on common shares (13,658) (9,401) (48,828) (36,420)
---------------------------------------------------------------------
Balance at end of period $337,013 $294,986 $337,013 $294,986
---------------------------------------------------------------------
---------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Fortis Inc.
Consolidated Statements of Cash Flows (Unaudited)
For the period ended December 31
(in thousands)
Quarter Ended Year Ended
2004 2003 2004 2003
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating Activities
Net earnings applicable
to common shares $21,176 $14,760 $90,855 $73,630
Items not affecting cash
Amortization-capital
assets, net of
contributions in aid
of construction 32,801 10,139 105,817 55,988
Amortization-intangibles 921 1,201 3,684 3,684
Amortization-other 1,109 1,646 4,171 2,655
Future income taxes 4,874 1,917 9,006 5,127
Accrued employee
future benefits 286 (609) (1,841) (4,477)
Equity income,
net of dividends 4,505 (1,096) 3,962 (2,922)
Stock-based compensation 271 197 969 642
Unrealized foreign
exchange (gain) loss
on long-term debt (1,035) 268 (1,229) 780
Non-controlling interest 2,605 1,147 5,674 3,869
Other 2,024 524 (97) 1,179
---------------------------------------------------------------------
69,537 30,094 220,971 140,155
Change in non-cash
operating working
capital 21,107 13,259 50,348 16,527
---------------------------------------------------------------------
90,644 43,353 271,319 156,682
---------------------------------------------------------------------
Investing Activities
Change in deferred
charges and credits (17,692) (2,165) (11,724) (19,486)
Purchase of utility
capital assets (124,688) (44,783) (262,546) (159,843)
Purchase of income
producing properties (4,922) (45,457) (16,123) (47,897)
Proceeds on sale of
utility capital assets 662 699 702 1,204
Business acquisitions,
net of cash acquired - (2,125) (752,735) (10,955)
Increase in investments - - (8) (71,029)
---------------------------------------------------------------------
(146,640) (93,831) (1,042,434) (308,006)
---------------------------------------------------------------------
Financing Activities
Change in short-term
borrowings (657,705) 18,464 90,821 (50,934)
Subscription
Receipts issue - 350,205 - 350,205
Restricted
cash-Subscription
Receipts issue - (350,205) - (350,205)
Proceeds from
long-term debt,
net of cash held
in escrow 723,440 39,063 746,646 194,729
Repayment of
long-term debt (12,412) (12,368) (38,533) (48,885)
Repayment of assumed
acquisition debt - - (557,381) -
Contributions in aid
of construction 6,309 (79) 17,127 4,231
Advances from
non-controlling
interest 292 683 722 1,578
Issue of preference shares 5,315 - 194,709 121,861
Issue of common shares 1,904 1,760 340,060 9,431
Dividends
Common shares (13,658) (9,401) (48,828) (36,420)
Subsidiary dividends
paid to
non-controlling
interest (413) (742) (1,686) (2,036)
---------------------------------------------------------------------
53,072 37,380 743,657 193,555
---------------------------------------------------------------------
Effect of exchange rate
changes on cash 76 (958) (433) (3,395)
---------------------------------------------------------------------
Change in cash and
cash equivalents (2,848) (14,056) (27,891) 38,836
Cash and cash equivalents,
beginning of period 40,051 79,150 65,094 26,258
---------------------------------------------------------------------
Cash and cash equivalents,
end of period $37,203 $65,094 $37,203 $65,094
---------------------------------------------------------------------
---------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
FORTIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2004
1. Basis of Presentation These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") for interim financial statements and do not include all of the disclosures normally found in the Fortis Inc. ("Fortis" or the "Corporation") annual consolidated financial statements.These interim consolidated financial statements should be read in conjunction with the Corporation's consolidated financial statements for the year ended December 31, 2003. Fortis is principally a diversified, international electric utility holding company. The Corporation segments its utility operations by franchise area and, depending on regulatory requirements, by the nature of the assets. Fortis also holds investments in commercial real estate and hotel properties which are treated as a separate segment. The operating segments allow senior management to evaluate the operational performance and assess the overall contribution of each segment to the Corporation's long-term objectives. Effective for the quarter ended June 30, 2004, the Corporation began reporting non-regulated generating assets as one reportable segment. Prior to June 30, 2004, non-regulated generating assets were either combined with other regulated utility operations in the same jurisdiction or reported as stand-alone operations. The reportable segments for the prior periods have been restated to reflect this change in segmented reporting. The following summary briefly describes the operations included in each of the Corporation's operating and reportable segments. Regulated Utilities - Canadian The following summary describes the Corporation's interest in Regulated Utilities in Canada by subsidiary: a. Newfoundland Power: Newfoundland Power is the principal distributor of electricity in Newfoundland. b. Maritime Electric: Maritime Electric is the principal distributor of electricity on Prince Edward Island. c. FortisOntario: FortisOntario provides an integrated electric utility service to customers in Fort Erie, Cornwall, Gananoque and Port Colborne.FortisOntario operations include Canadian Niagara Power Inc. ("Canadian Niagara Power") and Cornwall Street Railway, Light and Power Company, Limited ("Cornwall Electric"). Included in Canadian Niagara Power's accounts is the operation of the electricity distribution business of Port Colborne Hydro Inc. which has been leased from the City of Port Colborne under a 10-year lease agreement entered into in April 2002. FortisOntario also owns a 10 per cent interest in each of Westario Power and Rideau St. Lawrence. d. FortisAlberta: On May 31, 2004, Fortis, through its wholly owned subsidiaries, acquired all of the issued and outstanding shares of Aquila Networks Canada (Alberta) Ltd. (renamed "FortisAlberta"). FortisAlberta owns and operates the distribution system in a substantial portion of southern and central Alberta. e. FortisBC: On May 31, 2004, Fortis, through its wholly owned subsidiaries, acquired all of the issued and outstanding shares of Aquila Networks Canada (British Columbia) Ltd. (renamed "FortisBC"). FortisBC is an integrated utility operating in the southern interior of British Columbia.FortisBC also provides unregulated operating, maintenance and management services relating to the 400 MW Waneta hydroelectric generation facility owned by Teck-Cominco, the 150 MW Brilliant Hydroelectric Plant owned by Columbia Power Corporation and the Columbia Basin Trust ("CPC/CBT"), the 150 MW Arrow Lakes Hydroelectric Plant owned by CPC/CBT and the distribution system owned by the City of Kelowna. Regulated Utilities - Caribbean The following summary describes the Corporation's interest in Regulated Utilities in the Caribbean by subsidiary: a. Belize Electricity: Belize Electricity is the principal distributor of electricity in Belize, Central America. b. Caribbean Utilities: Caribbean Utilities is the sole provider of electricity on Grand Cayman, Cayman Islands. The Corporation's 37.3 per cent interest in the Company is accounted for on the equity basis of accounting. Non-regulated - Fortis Generation The following summary describes the Corporation's non-regulated generation assets by location: a. Ontario: Operations include the 75-megawatt ("MW") Rankine hydroelectric generating station at Niagara Falls, the 5-MW Cornwall District Heating cogeneration plant and 6 small hydroelectric generating stations in eastern Ontario with a combined capacity of 8 MW.Non-regulated generating operations in Ontario are conducted through FortisOntario Inc. and FortisOntario Generation Corporation. b. Belize: Includes the 25-MW Mollejon hydroelectric facility in Belize. All of its electricity output is sold to Belize Electricity under a 50-year Power Purchase Agreement. Hydroelectric generation operations in Belize are conducted through the Corporation's wholly owned indirect subsidiary, Belize Electric Company Limited ("BECOL"), under a Franchise Agreement with the Government of Belize. c. Central Newfoundland: Through the Exploits River Hydro Partnership ("Exploits Partnership"), a partnership between the Corporation and Abitibi-Consolidated Company of Canada ("Abitibi-Consolidated"), additional capacity was developed and installed at 2 of Abitibi-Consolidated's hydroelectric plants in central Newfoundland. The Corporation holds a 51 per cent interest in the Exploits Partnership and Abitibi-Consolidated holds the remaining 49 per cent interest. The Exploits Partnership commenced operations in November 2003 and sells its output to Newfoundland and Labrador Hydro Corporation under a 25-year Power Purchase Agreement. d. Upper New York State: Includes the operations of 4 hydroelectric generating stations in Upper New York State with a combined capacity of 23 MW operating under a license from the U.S. Federal Energy Regulatory Commission.Hydroelectric generation operations in Upper New York State are conducted through the Corporation's wholly owned indirect subsidiary, FortisUS Energy Corporation. e. British Columbia: Includes a 16-MW run-of-river hydroelectric power plant near Lillooet, British Columbia. This plant sells its entire output to BC Hydro under a long-term contract.Hydroelectric generating operations in British Columbia are conducted through the Walden Power Partnership ("WPP"), a wholly owned subsidiary of FortisBC. Non-regulated - Fortis Properties Fortis Properties includes the operations of the commercial real estate in Atlantic Canada and hotel properties in eastern Canada. Subsequent to year end, Fortis Properties acquired 3 hotels in western Canada. Corporate Corporate includes finance costs associated with corporate debt, preference securities and other corporate expenses net of recoveries from subsidiaries, interest and miscellaneous revenues and related income taxes. 2. Summary of Significant Accounting Policies These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"), including 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 are described under other regulatory assets and liabilities accounting policy. All amounts are presented in Canadian dollars unless otherwise stated. Regulation Newfoundland Power is regulated by the Newfoundland and Labrador Board of Commissioners of Public Utilities ("PUB"). Newfoundland Power operates under traditional cost of service regulation as prescribed by orders of the PUB.Earnings are regulated on the basis of rate of return on rate base. In December 2003, the Government of Prince Edward Island proclaimed legislation returning Maritime Electric to a traditional cost of service regulatory model.Under this model, Maritime Electric's basic rates, which since 1994 have been based on 110 per cent of New Brunswick Power's rates, are now based on actual costs. The new legislation, which provided for an orderly transition from the previous regulatory model became effective January 1, 2004 and will allow Maritime Electric to collect the $20.8 million in costs recoverable from customers deferred as at December 31, 2003 under terms and conditions to be set by the Island Regulatory and Appeals Commission ("IRAC"). Canadian Niagara Power and Cornwall Electric operate under the Electricity Act (Ontario) and the Ontario Energy Board Act (Ontario). Canadian Niagara Power operates under a cost of service basis. Cornwall Electric has been given legislative exemption from many aspects of these Acts. Cornwall Electric is subject to a 35-year Franchise Agreement signed with the Corporation of the City of Cornwall, dated July 31, 1998. FortisAlberta is regulated by the Alberta Energy and Utilities Board ("AEUB").FortisAlberta operates under cost of service regulation as prescribed by the AEUB.Earnings are determined on the basis of rate of return on rate base. FortisBC is regulated by the British Columbia Utilities Commission ("BCUC").FortisBC is regulated on a cost of service basis with a performance-based rate ("PBR") setting mechanism for annual rate adjustments.The PBR mechanism provides for a sharing of achieved savings or, in some cases, increased expenditures with ratepayers.Sharing applies only on certain components of operating expenditures and is subject to change as the regulatory framework evolves. Belize Electricity operates under the Electricity Act (Belize) and is monitored by the Public Utilities Commission of Belize ("PUC").Electricity rates of Belize Electricity are comprised of 2 components.The first, Value Added Delivery, is subject to a price cap mechanism and the second is the cost of fuel and purchase power, including the variable cost of generation, which is a flow through in customer rates. Cash and Cash Equivalents Cash and cash equivalents include cash and short-term deposits with maturities of 3 months or less. Materials and Supplies Materials and supplies are valued at the lower of cost and market, determined on the basis of estimated net realizable value. Deferred Charges and Deferred Credits Deferred charges and credits include deferred pension costs, deferred financing expenses and other deferred costs.Deferred financing expenses are amortized on a straight-line basis over the term of the related debt.Other deferred charges are recorded at cost and are amortized over their estimated useful lives. Deferred charges and credits also include deferred gains and losses on the cancellation of swap contracts.In December 2003, Fortis entered into a forward interest rate swap agreement that swapped 90-day banker acceptance interest rate payments on $200 million of long-term debt to 5.6 per cent. Upon the completion of the long-term financing for the acquisition of FortisAlberta and FortisBC, the forward interest rate swap agreement was terminated and the cash payment of $14.1 million made upon termination of the swap is being amortized on a straight-line basis over 10-years. In October 2004, Fortis cancelled its US dollar currency swap agreement under which the interest payments on the Corporation's $100 million Senior Unsecured Debentures were converted into US dollar interest payments.The cancellation of the US dollar currency swap agreement resulted in a gain of $4.7 million which is being amortized on a straight-line basis over the remaining life of the $100 million Senior Unsecured Debentures. Other Regulatory Assets and Liabilities Other regulatory assets and liabilities arise as a result of the rate-setting process.Other regulatory assets represent future revenues associated with certain costs, incurred in the current period or in prior periods, that will be recovered from customers in future periods through the rate-setting process.Other regulatory liabilities represent future reductions or limitations of increases in revenues associated with amounts that are to be refunded to customers through the rate-setting process.Specific regulatory assets and liabilities are described below. Newfoundland Power has a Rate Stabilization Account ("RSA") which passes through to customers fluctuations in the cost and quantity of fuel and municipal taxes.On July 1 of each year, rates charged to customers are recalculated to reflect changes in this account from year to year.The RSA has been included in current regulatory assets. As of December 31, 2003, Maritime Electric maintained an energy cost adjustment mechanism to adjust for the effect of variations in energy costs above or below $0.05 per kilowatt hour. Maritime Electric also maintained a cost of capital adjustment account to adjust earnings based on a target return on average common equity. Under the new legislation effective January 1, 2004, IRAC issued a regulatory order which allows Maritime Electric to collect $1.5 million and $2.5 million of these recoverable costs in the fiscal years 2004 and 2005, respectively.In addition, IRAC has ordered that $2.7 million of 2004 energy costs be deferred for future recovery. The PUC has allowed Belize Electricity to defer excess fuel costs, power purchases, and diesel operating and maintenance expenses, plus interest on the account balances, to be recovered from or rebated to customers.The Cost of Power Rate Stabilization Account ("CPRSA") was established to regulate the manner in which these excess costs of power and changes in the CPRSA are passed on to customers.Similarly, the PUC has allowed a Hurricane Cost Rate Stabilization Account ("HCRSA") to regulate the manner in which hurricane costs are passed on to the customers.Recovery of the balances in the CPRSA and the HCRSA will be re-addressed in Belize Electricity's first full tariff review submission for the period July 1, 2005 to June 1, 2009. The PUB has ordered provision of a weather normalization account for Newfoundland Power to adjust for the effect of variations in weather and streamflow when compared to long-term averages.This reduces Newfoundland Power's year-to-year earnings volatility that would otherwise result from such fluctuations in revenue and purchased power.The balance in the weather normalization account is subject to annual approval by the PUB. In 2003, the PUB approved the amortization of $5.6 million of the balance in the account over a 5-year period, commencing January 1, 2003, on the basis that this balance would not reduce over time.Excluding this non-reversing portion, the remaining recovery period is not determinable because it is dependent on weather and streamflow conditions in the future.The weather normalization account has been included in long-term regulatory assets. Other regulatory assets primarily consist of costs incurred with respect to transmission services that exceeded the level of revenue received from customers as well as costs associated with rate applications, system planning and negotiations of agreements.These costs are being deferred and amortized as required by the regulators. In addition, FortisBC provides energy management services to promote energy efficiency programs for its customers.As required by a BCUC order, all expenditures are capitalized, except for certain defined costs, and are amortized on a straight-line basis. Other regulatory liabilities include amounts that are expected to be refunded to customers through the rate-setting process. FortisOntario maintains regulatory accounts to adjust for the effect of cost of power and related costs above or below amounts billed to consumers at approved rates as approved by the Ontario Energy Board or allowed under franchise agreements.FortisAlberta has made estimates for certain expenses and electricity load that have not yet been finalized with the AEUB or with customers.FortisBC is regulated under a PBR mechanism that set targets for various costs and the final disposition of costs is determined by a cost sharing mechanism with customers as approved by the BCUC. Utility Capital Assets and Income Producing Properties Utility capital assets of Newfoundland Power are stated at values approved by the PUB as at June 30, 1966 with subsequent additions at cost.Capital assets of all other utility operations are stated at cost.Contributions in aid of construction represent the cost of utility capital assets contributed by customers and governments. These contributions are recorded as a reduction in the cost of capital assets and are being reduced annually by an amount equal to the charge for amortization provided on the related assets. The cost of utility capital assets retired, less net salvage, is charged to accumulated amortization. Maintenance and repairs are charged to operations while renewals and betterments are capitalized. Regulated entities are also permitted to include an allowance for funds used during construction ("AFUDC AFUDC - Accumulated Funds Used During Construction AFUDC - Allowance for Funds Used During Construction") as capital assets.Since AFUDC includes both an interest component and an equity component, it exceeds the amount allowed to be capitalized in similar circumstances by entities not subject to rate regulation. FortisAlberta maintains a regulatory tax basis adjustment account which represents the excess of the deemed tax basis of the Company's property, plant and equipment for regulatory rate making purposes as compared to the Company's tax basis for income tax purposes. The regulatory tax basis adjustment is being amortized over the estimated service life of the Company's property, plant and equipment by an off-set against the provision for depreciation and amortization. The regulatory tax base adjustment is recorded as a reduction in capital assets. Amortization on utility capital assets is provided on a straight-line method based on the estimated service life of capital assets. Income producing properties, which include office buildings, shopping malls, hotels and land, are recorded at cost.Effective January 1, 2004, new recommendations by the Canadian Institute of Chartered Accountants ("CICA") effectively eliminated certain industry-specific accounting practices, which previously qualified as Canadian GAAP. To comply with these new recommendations, the Corporation's non-utility investment, Fortis Properties, has changed from a sinking fund method of amortization to the straight-line method. This change, as required under the recommendations, has been adopted with no restatement of prior period amounts. The change had a negative impact on after-tax earnings of approximately $2.7 million in 2004. Fortis Properties amortizes tenant inducements over the initial terms of the lease to which they relate, except where a write-down is required to reflect impairment.The lease terms vary to a maximum of 20 years. Amortization of capital construction projects and related equipment commences when the project has been substantially completed. Equipment is recorded at cost and is amortized on a straight-line basis over a range of 1 to 15 years. Investments Portfolio investments are accounted for on the cost basis. Declines in value considered to be other than temporary are recorded in the period in which such determinations are made. Effective January 30, 2003, the Corporation commenced accounting for its investment in Caribbean Utilities on the equity basis. Prior to January 30, 2003, the Corporation accounted for this investment on the cost basis of accounting, including in its results only dividend income received.The Corporation reviews its equity investment on an annual basis for potential impairment in the investment value. Should an impairment be identified, it will be recorded in the period such impairment is recognized. Intangibles Intangibles represent the estimated fair value of water rights associated with the Rankine Generating Station in Ontario, which were acquired upon the acquisition of the remaining 50 per cent of Canadian Niagara Power Company, Limited. Effective January 1, 2004, new recommendations by the CICA effectively eliminated certain industry-specific accounting practices, which previously qualified as Canadian GAAP. To comply with these new recommendations, FortisOntario has changed from a sinking fund method of amortization to the straight-line method. This change, as required under the recommendations, has been adopted with no restatement of prior period amounts.The change had no material impact on the financial statements. The Corporation evaluates the carrying value of intangibles for potential impairment through ongoing review and analysis of fair market value and expected earnings.Should an impairment in the value of intangibles be identified, it will be recorded in the period such impairment is recognized. Goodwill Goodwill represents the excess at the dates of acquisition of the purchase price over the fair values of the net amounts assigned to individual assets acquired and liabilities assumed relating to business acquisitions. In accordance with CICA recommendations, the Corporation is required to perform an annual impairment test and any impairment provision is charged to income.In addition to the annual impairment test, the Corporation also performs an impairment test if any event occurs or if circumstances change that would indicate that the fair value of a reporting unit was below its carrying value. No goodwill impairment provision has been determined for the year ended December 31, 2004. Employee Future Benefits The Corporation maintains defined benefit and defined contribution pension plans and group Registered Retirement Savings Plans ("RRSPs") for its employees.The pension costs of the defined benefit plans are actuarially determined using the projected benefits method prorated on service and management's best estimate of expected plan investment performance, salary escalation and retirement of employees. With the exception of Newfoundland Power, pension plan assets are valued at fair value.The excess of any cumulative net actuarial gain (loss) over 10 per cent of the greater of the benefit obligation and the fair value of plan assets is deferred and amortized over the average remaining service period of active employees.At Newfoundland Power, the plan assets are valued using the market-related value where investment returns in excess of or below expected returns are recognized in the asset value over a period of three years. The costs of the defined contribution pension plans and group RRSPs are expensed as incurred. The AEUB has ordered FortisAlberta to fund its contributions to the Company's defined benefit and defined contribution pension plans from the surplus of its pension plan and as such, FortisAlberta does not collect any amounts for these expenses in customer rates. FortisAlberta did not recognize any pension expense in 2004. At Newfoundland Power, with the adoption of the recommendations of Section 3461 of the CICA Handbook on January 1, 2000, a one-time transitional obligation of $23.2 million was created to record the difference between the surplus in the plan and the deferred pension asset recorded as of December 31, 1999. This transitional obligation is being amortized on a straight-line basis over 18 years. Post Retirement Benefits The Corporation also offers other non-pension post-retirement benefits to employees through defined benefit plans.The costs associated with these other future benefits are actuarially determined using the projected benefits method prorated on service and best estimate assumptions, except for such costs incurred by Newfoundland Power, FortisAlberta and FortisBC which, in accordance with regulatory requirements, are expensed in the year incurred. Entities not subject to rate regulation generally account for these costs on an accrual basis. Liabilities and Equity Effective December 31, 2004, the Corporation implemented the recommendations of the CICA on the classification of financial instruments as liabilities or equity.The recommendations require that certain financial instruments that are ultimately convertible into a variable number of common shares at the holders' option be classified as liabilities.As a result, the Corporation has reclassified all of its First Preference Shares from shareholders' equity to liabilities on December 31, 2004. The dividends on the First Preference Shares have also been reclassified as a deduction to arrive at net earnings. The change does not impact net earnings applicable to common shares as the dividends on the First Preference Shares were previously deducted to arrive at net earnings applicable to common shares.This change has been adopted retroactively with restatement of comparative figures. Stock-based Compensation The Corporation accounts for its grants under stock-based plans using the fair value method and the compensation expense is amortized over the vesting period of the options. Under the fair value method, $0.3 million and $1.0 million were recorded as compensation expense for the 3 months ended and year ended December 31, 2004, respectively.For the 3 months ended and year ended December 31, 2003, $0.2 million and $0.6 million were recorded as compensation expense. Foreign Currency Translation The assets and liabilities of foreign operations, all of which are self-sustaining, are translated at the exchange rates in effect at the balance sheet dates.The resulting unrealized translation gains and losses are accumulated as a separate component of common shareholders' equity under the foreign currency translation adjustment heading. Revenue and expense items are translated at the average exchange rate for the year. Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rate prevailing on the balance sheet date.Revenue and expense items denominated in foreign currencies are translated into Canadian dollars at the exchange rate prevailing on the transaction date. Gains and losses on translation are included in the statement of earnings. Hedging Relationships Effective January 1, 2004, the Corporation implemented the recommendations of the CICA Accounting Guideline 13 which outlines the requirements for identification, designation, documentation and effectiveness testing of hedging relationships in order to meet the conditions for applying hedge accounting to certain financial instruments.Implementation of this Guideline did not have an impact on the Corporation's earnings or financial position at December 31, 2004. Income Taxes Except as modified and described below for Newfoundland Power, FortisAlberta and FortisBC, the Corporation and its subsidiaries follow the asset and liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are recognized for differences between the tax and accounting bases of assets and liabilities, as well as for the benefit of losses available to be carried forward to future years for tax purposes that are likely to be realized. The future income tax assets and liabilities are measured using the enacted and substantively enacted tax rates and laws that will be in effect when the differences are expected to be recovered or settled. The effect of a change in income tax rates on future income tax assets and liabilities is recognized in income in the period that the change occurs. Current income tax expense is recognized for the estimated income taxes payable in the current year. The PUB specifies Newfoundland Power's method of accounting for income taxes. The PUB has ordered the Company not to recognize future income taxes on differences between the tax and accounting bases of depreciable assets prior to January 1, 1981. The AEUB and the BCUC specifies FortisAlberta's and FortisBC's method of accounting for income taxes, respectively. The regulated operations follow the taxes payable method of accounting for income taxes. Future income taxes are generally recognized only to the extent they will not be recoverable in future rates charged to customers. Revenue Recognition Revenue from the sale of electricity by Newfoundland Power and Belize Electricity is recognized as monthly billings are rendered to customers as required by utility regulatory authorities.Revenue from the sale of electricity by Maritime Electric, FortisOntario, FortisAlberta and FortisBC is recognized on the accrual basis.For FortisAlberta, transmission revenue and expenses are recorded on a net basis in revenue. All of the Corporation's non-regulated generating operations record revenue on an accrual basis. Real estate revenue is derived from leasing retail and office space to tenants for varying periods of time.The leases are primarily of a net nature with tenants paying basic rental plus a pro rata share of defined overhead expenses.Certain retail tenants pay additional rent based on a percentage of the tenants' sales. Expenses recovered from tenants are recorded as revenue.Hospitality revenue is recognized when the service is provided. Effective January 1, 2004, Fortis Properties adopted the new recommendations by the CICA which eliminated certain industry-specific accounting practices, which previously qualified as Canadian GAAP.To comply with these recommendations, for the year ended December 31, 2004, Fortis Properties recognized escalation of lease rates included in long-term leases in income on a straight line basis over the term of the lease.This change in revenue recognition did not have a material impact on the 2004 financial statements. Asset Retirement Obligations Effective January 1, 2004, the Corporation has retroactively adopted the recommendations of the CICA on accounting for asset retirement obligations. The recommendations require total retirement costs to be recorded as a liability at fair value, with a corresponding increase to property, plant and equipment. The Corporation recognizes asset retirement obligations in the periods in which they are incurred if a reasonable estimate of a fair value can be determined. The Corporation has assessed the impact of the adoption of the accounting recommendations and, while some of the Corporation's long-lived tangible assets will have future legal retirement obligations, the final date of removal of the Corporation's long-lived tangible assets that carry asset retirement obligations cannot be reasonably determined at this time. No asset retirement obligations have been recognized upon adoption of the new recommendations.An asset retirement obligation and offsetting capital asset will be recognized when the timing and amount can be reasonably estimated. Asset Impairment Effective January 1, 2004, the Corporation prospectively adopted the recommendations of the CICA on accounting for asset impairment. The recommendations require an impairment of property, plant and equipment, intangible assets with finite lives, deferred operating costs and long-term prepaid expenses to be recognized in income when the asset's carrying value exceeds the total cash flows expected from its use and eventual disposition. The impairment loss is calculated as the difference between the assets' carrying value and its fair value, which is determined using present value techniques. There has been no impact on the financial statements resulting from the adoption of the recommendations. Use of Accounting Estimates The preparation of financial statements in conformity 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 revenues and expenses during the reporting periods.Actual results may differ from the current estimates. These estimates are reviewed periodically and, as adjustments become necessary, are reported in earnings in the period in which they become known. 3. Seasonal Nature of Operations Interim results will fluctuate due to the seasonal nature of electricity demand and water flows as well as the timing and recognition of regulatory decisions.Consequently, interim results are not necessarily indicative of annual results.
4. Equity 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, 2004 December 31, 2003
---------------------------------------------------------------------
---------------------------------------------------------------------
Number of Amount Number of Amount
Shares (in thousands) Shares (in thousands)
---------------------------------------------------------------------
---------------------------------------------------------------------
Series C First
Preference Shares 5,000,000 $122,992 5,000,000 $122,992
Series D First
Preference Shares 6,500 38 - -
Series E First
Preference Shares 7,993,500 196,500 - -
---------------------------------------------------------------------
---------------------------------------------------------------------
13,000,000 $319,530 5,000,000 $122,992
---------------------------------------------------------------------
---------------------------------------------------------------------
Series D and Series E First Preference Shares
On January 29, 2004, Fortis issued 8,000,000 First Preference Units
of the Corporation. Each First Preference Unit consisted of one
Series D First Preference Share and one Series E First Preference
Share Purchase Warrant (a "Warrant"). Upon close of the acquisition
of FortisAlberta and FortisBC, which occurred May 31, 2004, each
Warrant entitled the holder to acquire 0.75 of a Series E First
Preference Share upon payment of $18.75 per Warrant. Holders of
Series D First Preference Shares had the right to convert each Series
D First Preference Share into 0.25 of a Series E First Preference
Share and to exercise a Warrant (in conjunction with the payment of
$18.75) on July 15, 2004, September 1, 2004 and December 1, 2004.
The purchase price of $6.25 per First Preference Share Unit resulted
in initial gross proceeds to the Corporation of approximately $50
million. During the remainder of 2004, Fortis received additional
gross proceeds of approximately $149.9 million from the conversion of
7,993,500 of the First Preference Units. On December 1, 2004, the
remaining 6,500 First Preference Units were cancelled and replaced
with the issuance of 6,500 Series D First Preference Shares.
The Series E First Preference Shares yield 4.9 per cent per annum for
a 12-year term. The quarterly cash dividend payable with respect to
the Series D First Preference Shares that were not converted has been
reduced to $0.01 per share, being equivalent to 0.64 per cent per
annum per Series D First Preference Share.
5. Capital Stock
Authorized: an unlimited number of Common Shares without nominal or
par value;
December 31, 2004 December 31, 2003
a) Issued and Number of Amount Number of Amount
Outstanding Shares (in thousands) Shares (in thousands)
---------------------------------------------------------------------
---------------------------------------------------------------------
Common Shares 23,882,323 $675,215 17,380,419 $329,660
---------------------------------------------------------------------
---------------------------------------------------------------------
Common shares issued for cash during the period is as follows:
Quarter Ended Year Ended
December 31, 2004 December 31, 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Number of Amount Number of Amount
Shares (in thousands) Shares (in thousands)
---------------------------------------------------------------------
---------------------------------------------------------------------
Balance, beginning
of period 23,851,835 $673,311 17,380,419 $329,660
Conversion of
Subscription
Receipts - - 6,310,000 335,793
Consumer Share
Purchase Plan 6,255 420 26,558 1,640
Dividend
Reinvestment Plan 11,189 750 49,794 3,074
Employee Share
Purchase Plan 6,941 466 35,431 2,184
Director and
Executive Stock
Option Plans 6,103 268 80,121 2,864
---------------------------------------------------------------------
---------------------------------------------------------------------
23,882,323 $675,215 23,882,323 $675,215
---------------------------------------------------------------------
---------------------------------------------------------------------
On May 31, 2004, upon closing of the acquisition of FortisAlberta and
FortisBC, the Subscription Receipts were cancelled and automatically
exchanged, without payment of additional consideration, for one
common share of Fortis and a cash payment of $1.60 per common share,
which is an amount equal to the dividends declared on a common share
by Fortis during the period from the closing date of the Subscription
Receipts offering to May 31, 2004. The net after-tax proceeds to
Fortis upon conversion of the Subscription Receipts were $335.8
million.
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 common shares outstanding were 21,184,383 and 17,308,850 at
December 31, 2004 and 2003, respectively.
The quarter ended weighted average common shares outstanding were
23,864,586 and 17,361,565 at December 31, 2004 and 2003,
respectively. Diluted earnings per common share are calculated using
the treasury stock method for options and the "if-converted" method
for convertible securities.
c) Stock Options
On March 10, 2004, the Corporation issued 182,699 options on common
shares under its 2002 Stock Option Plan at the 5-day average trading
price of $61.12. 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 $8.20 per option.
On May 12, 2004, the Corporation issued 3,000 options on common
shares under its 2002 Stock Option Plan at the 5-day average trading
price of $60.91. 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 $8.87 per option.
On July 7, 2004, the Corporation issued 23,540 options on common
shares under its 2002 Stock Option Plan at the 5-day average trading
price of $58.20. 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 $8.41 per option.
The fair value was estimated on the date of grant using the Black-
Scholes fair value option-pricing model and the following
assumptions:
March 10, 2004 May 12, 2004 July 7, 2004
---------------------------------------------------------------------
Dividend yield (%) 3.48 3.55 3.71
Expected volatility (%) 14.0 13.8 14.8
Risk-free interest rate (%) 4.24 4.85 4.75
Weighted-average expected
life (years) 7.5 7.5 7.5
The Corporation records compensation expense upon the issuance of
stock options under its Stock Option Plans. Using the fair value
method, the compensation expense is amortized over the 4-year vesting
period of the options granted. Upon exercise, the proceeds of the
options are credited to capital stock at the option price. Therefore,
an exercise of options below the current market price has a dilutive
effect on capital stock and shareholders' equity. Under the fair
value method, $0.3 million and $1.0 million were recorded as
compensation expense for the quarter ended and year ended, December
31, 2004, respectively.
The Corporation is authorized to grant certain key employees and
directors of Fortis and its subsidiaries options to purchase common
shares of the Corporation. At December 31, 2004, the Corporation had
the following stock-based compensation plans: Executive Stock Option
Plan, Directors' Stock Option Plan, 2002 Stock Option Plan and
Employee Share Purchase Plan. The 2002 Stock Option Plan was adopted
at the Annual and Special General Meeting on May 15, 2002 to
ultimately replace the Executive and Directors' Stock Option Plans.
The Executive and Directors' Stock Options Plans will cease to exist
when all outstanding options are exercised or expire in or before
2011. At December 31, 2004, 1,761,645 common shares remained in the
reserve for issue under the terms of the above plans.
Quarter Ended Year Ended
December 31, 2004 December 31, 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted Weighted
Number of Average Number of Average
Options Price Options Price
---------------------------------------------------------------------
---------------------------------------------------------------------
Outstanding at
beginning of period 729,900 $48.36 602,213 $44.67
Granted - $- 209,239 $60.79
Cancelled (3,150) $52.56 (10,684) $48.72
Exercised (6,103) $43.97 (80,121) $35.74
---------------------------------------------------------------------
Outstanding at end
of period 720,647 $50.28 720,647 $50.28
---------------------------------------------------------------------
---------------------------------------------------------------------
Details of stock options Number of Exercise Expiry
outstanding are as follows: Options Price Date
---------------------------------------------------------------------
10,660 $29.15 2005
15,000 $38.27 2006
131,957 $38.27 2011
172,366 $48.14 2012
182,562 $51.24 2013
181,562 $61.12 2014
3,000 $60.91 2014
23,540 $58.20 2014
---------------------------------------------------------------------
---------------------------------------------------------------------
720,647
---------------------------------------------------------------------
---------------------------------------------------------------------
Options vested at end
of period 251,212
---------------------------------------------------------------------
---------------------------------------------------------------------
6. Segmented Information
Information by reportable segment is as follows:
Quarter ended
(in thousands of dollars)
Regulated Utilities
-------------------------------------------------------------
Mari-
time Fortis Fortis Total Total
December Nfld Elec- Onta- Al- Fortis Cana- Carib-
31, 2004 Power tric rio berta BC dian bean
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating
reve-
nues 104,380 27,825 31,835 57,316 55,111 276,467 17,126
Equity
income - - - - - - (5,788)
Energy
supply
costs 71,945 16,785 25,471 - 16,123 130,324 9,048
Operating
ex-
penses 13,995 3,450 3,050 27,730 15,392 63,617 2,620
Amortiza-
tion 6,385 2,295 1,025 13,720 4,238 27,663 1,253
---------------------------------------------------------------------
Operating
income 12,055 5,295 2,289 15,866 19,358 54,863 (1,583)
Interest 7,593 2,232 1,291 5,865 3,083 20,064 1,157
Foreign
exchange
loss
(gain) - - - - - - 445
Corporate
income
taxes 998 1,268 138 2,528 4,665 9,597 235
Non-contro-
lling
interest 150 - - - - 150 754
Preference
share
dividends - - - - - - -
---------------------------------------------------------------------
Earnings
(loss) 3,314 1,795 860 7,473 11,610 25,052 (4,174)
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - 19,858 45,577 229,097 219,509 514,041 -
---------------------------------------------------------------------
---------------------------------------------------------------------
Identifi-
able
assets 784,065 240,268 118,326 603,565 580,843 2,327,067 196,699
---------------------------------------------------------------------
---------------------------------------------------------------------
Equity
invest-
ment
assets - - - - - - 161,292
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expen-
ditures 15,799 11,357 2,153 35,162 47,723 112,194 3,656
---------------------------------------------------------------------
---------------------------------------------------------------------
December 31, 2003
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating
reven-
ues 94,268 24,993 28,489 - - 147,750 16,874
Equity
income - - - - - - 3,126
Energy
supply
costs 62,772 13,653 20,889 - - 97,314 8,849
Operating
exp-
enses 12,979 3,789 3,483 - - 20,251 2,746
Amortiza-
tion 5,235 2,363 1,219 - - 8,817 597
---------------------------------------------------------------------
Operating
income 13,282 5,188 2,898 - - 21,368 7,808
Interest 7,576 2,179 1,329 - - 11,084 1,417
Foreign
exchange
loss - - - - - - 268
Corporate
income
taxes 670 1,256 (514) - - 1,412 232
Non-
control-
ling
interest 148 - (2) - - 146 882
Preference
share
dividends - - - - - - -
---------------------------------------------------------------------
Earnings
(loss) 4,888 1,753 2,085 - - 8,726 5,009
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - 19,858 45,577 - - 65,435 -
---------------------------------------------------------------------
---------------------------------------------------------------------
Identifi-
able
assets 741,978 223,896 110,594 - - 1,076,468 214,041
---------------------------------------------------------------------
---------------------------------------------------------------------
Equity
invest-
ment
assets - - - - - - 165,213
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expen-
ditures 20,990 6,578 3,147 - - 30,715 5,697
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-Regulated
-------------------------
Inter-
Fortis segment
December Gene- Proper- Corpo- elimi- Conso-
31, 2004 ration ties rate nation lidated
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues 20,033 33,199 2,584 (6,451) 342,958
Equity income - - - - (5,788)
Energy supply costs 1,692 - - (2,924) 138,140
Operating expenses 3,637 21,910 2,088 (989) 92,883
Amortization 2,685 2,645 585 - 34,831
---------------------------------------------------------------------
Operating income 12,019 8,644 (89) (2,538) 71,316
Interest 3,833 4,481 6,236 (2,538) 33,233
Foreign exchange loss
(gain) - - (1,480) - (1,035)
Corporate income taxes 1,741 1,365 (1,697) - 11,241
Non-controlling interest 1,741 - (40) - 2,605
Preference share dividends - - 4,096 - 4,096
---------------------------------------------------------------------
Earnings (loss) 4,704 2,798 (7,204) - 21,176
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - - - - 514,041
---------------------------------------------------------------------
---------------------------------------------------------------------
Identifiable assets 267,758 354,223 39,356 (22,440) 3,162,663
---------------------------------------------------------------------
---------------------------------------------------------------------
Equity investment
assets - - - - 161,292
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital expenditures 8,730 4,922 108 - 129,610
---------------------------------------------------------------------
---------------------------------------------------------------------
December 31, 2003
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues 15,811 33,012 2,145 (8,094) 207,498
Equity income - - - - 3,126
Energy supply costs 550 - - (4,052) 102,661
Operating expenses 3,634 22,496 2,293 (490) 50,930
Amortization 2,182 1,255 135 - 12,986
---------------------------------------------------------------------
Operating income 9,445 9,261 (283) (3,552) 44,047
Interest 3,470 4,941 2,565 (3,552) 19,925
Foreign exchange loss - - - - 268
Corporate income taxes 3,019 1,795 (215) - 6,243
Non-controlling interest 163 - (44) - 1,147
Preference share dividends - - 1,704 - 1,704
---------------------------------------------------------------------
Earnings (loss) 2,793 2,525 (4,293) - 14,760
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - - - - 65,435
---------------------------------------------------------------------
---------------------------------------------------------------------
Identifiable assets 254,928 344,374 64,942 (21,604) 1,933,149
---------------------------------------------------------------------
---------------------------------------------------------------------
Equity investment assets - - - - 165,213
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital expenditures 8,043 45,457 328 - 90,240
---------------------------------------------------------------------
---------------------------------------------------------------------
Year ended
(in thousands of dollars)
Regulated Utilities
-------------------------------------------------------------
Mari-
time Fortis Fortis Total Total
December Nfld Elec- Onta- Al- Fortis Cana- Carib-
31, 2004 Power tric rio berta BC dian bean
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating
reve-
nues 404,447 115,407 125,250 129,738 109,522 884,364 71,945
Equity
income - - - - - - 842
Energy
supply
costs 244,012 71,345 96,543 - 32,901 444,801 37,711
Operating
ex-
penses 51,755 12,459 12,273 60,177 33,432 170,096 11,033
Amortiza-
tion 30,987 9,176 4,751 31,356 9,893 86,163 6,127
---------------------------------------------------------------------
Operating
income 77,693 22,427 11,683 38,205 33,296 183,304 17,916
Interest 30,394 8,656 5,233 10,782 8,531 63,596 5,320
Foreign
exchange
loss
(gain) - - - - - - 251
Corporate
income
taxes 15,586 5,591 2,197 8,856 7,058 39,288 982
Non-contro-
lling
interest 591 - - - - 591 3,358
Preference
share
dividends - - - - - - -
---------------------------------------------------------------------
Earnings
(loss) 31,122 8,180 4,253 18,567 17,707 79,829 8,005
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - 19,858 45,577 229,097 219,509 514,041 -
---------------------------------------------------------------------
---------------------------------------------------------------------
Identifi-
able
assets 784,065 240,268 118,326 603,565 580,843 2,327,067 196,699
---------------------------------------------------------------------
---------------------------------------------------------------------
Equity
invest-
ment
assets - - - - - - 161,292
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expen-
ditures 60,315 26,806 9,631 73,564 57,111 227,427 16,661
---------------------------------------------------------------------
---------------------------------------------------------------------
December 31, 2003
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating
reven-
ues 384,150 96,270 119,826 - - 600,246 72,491
Equity
income - - - - - - 10,495
Energy
supply
costs 227,964 53,371 89,696 - - 371,031 37,162
Operating
exp-
enses 51,799 12,183 12,620 - - 76,602 11,632
Amortiza-
tion 29,372 9,147 5,011 - - 43,530 6,088
---------------------------------------------------------------------
Operating
income 75,015 21,569 12,499 - - 109,083 28,104
Interest 30,009 9,021 3,982 - - 43,012 5,946
Foreign
exchange
loss - - - - - - 780
Corporate
income
taxes 14,945 5,370 2,049 - - 22,364 975
Non-
control-
ling
interest 601 - 9 - - 610 3,159
Preference
share
dividends - - - - - - -
---------------------------------------------------------------------
Earnings
(loss) 29,460 7,178 6,459 - - 43,097 17,244
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - 19,858 45,577 - - 65,435 -
---------------------------------------------------------------------
---------------------------------------------------------------------
Identifi-
able
assets 741,978 223,896 110,594 - - 1,076,468 214,041
---------------------------------------------------------------------
---------------------------------------------------------------------
Equity
invest-
ment
assets - - - - - - 165,213
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital
expen-
ditures 64,750 16,530 9,068 - - 90,348 37,260
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-Regulated
-------------------------
Inter-
Fortis segment
December Gene- Proper- Corpo- elimi- Conso-
31, 2004 ration ties rate nation lidated
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues 69,170 134,363 10,175 (24,730) 1,145,287
Equity income - - - - 842
Energy supply costs 5,849 - - (11,011) 477,350
Operating expenses 16,083 87,237 8,691 (3,862) 289,278
Amortization 10,189 9,711 1,482 - 113,672
---------------------------------------------------------------------
Operating income 37,049 37,415 2 (9,857) 265,829
Interest 15,418 18,080 18,726 (9,857) 111,283
Foreign exchange loss
(gain) - - (1,480) - (1,229)
Corporate income taxes 6,977 7,519 (7,839) - 46,927
Non-controlling interest 1,891 - (166) - 5,674
Preference share dividends - - 12,319 - 12,319
---------------------------------------------------------------------
Earnings (loss) 12,763 11,816(21,558) - 90,855
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - - - - 514,041
---------------------------------------------------------------------
---------------------------------------------------------------------
Identifiable assets 267,758 354,223 39,356 (22,440) 3,162,663
---------------------------------------------------------------------
---------------------------------------------------------------------
Equity investment
assets - - - - 161,292
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital expenditures 17,290 16,123 1,168 - 278,669
---------------------------------------------------------------------
---------------------------------------------------------------------
December 31, 2003
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenues 57,087 113,685 11,166 (22,090) 832,585
Equity income - - - - 10,495
Energy supply costs 2,525 - - (10,065) 400,653
Operating expenses 13,993 72,614 4,963 (1,726) 178,078
Amortization 7,644 4,533 532 - 62,327
---------------------------------------------------------------------
Operating income 32,925 36,538 5,671 (10,299) 202,022
Interest 13,224 17,117 12,555 (10,299) 81,555
Foreign exchange loss - - - - 780
Corporate income taxes 8,515 8,454 (2,072) - 38,236
Non-controlling interest 251 - (151) - 3,869
Preference share dividends - - 3,952 - 3,952
---------------------------------------------------------------------
Earnings (loss) 10,935 10,967 (8,613) - 73,630
---------------------------------------------------------------------
---------------------------------------------------------------------
Goodwill - - - - 65,435
---------------------------------------------------------------------
---------------------------------------------------------------------
Identifiable assets 254,928 344,374 64,942 (21,604) 1,933,149
---------------------------------------------------------------------
---------------------------------------------------------------------
Equity investment assets - - - - 165,213
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital expenditures 30,665 47,897 1,570 - 207,740
---------------------------------------------------------------------
---------------------------------------------------------------------
7. Business Acquisitions Acquisition of the Alberta and British Columbia Utilities On May 31, 2004, Fortis, through its wholly owned subsidiary, Fortis West Inc., acquired all of the issued and outstanding shares of Aquila Networks Canada (Alberta) Ltd. (renamed "FortisAlberta") and Aquila Networks Canada (British Columbia) Ltd. (renamed "FortisBC") for aggregate consideration of $1,476 million. The net purchase price paid, including acquisition costs, was based on the estimated balance sheets of both utilities at May 31, 2004. During the third quarter of 2004, the balance sheets of both utilities at May 31, 2004 were finalized and the net purchase price adjustments were settled.The net settlement combined with adjustments to the purchase price allocation resulted in a $1.6 million reduction to the net purchase price. The purchase price allocation is still under review by management and is subject to final adjustments. FortisAlberta owns and operates the distribution system in a substantial portion of southern and central Alberta and FortisBC is an integrated utility operating in the southern interior of British Columbia. The acquisition is accounted for using the purchase method, whereby the results of full operations have been included in the consolidated financial statements commencing May 31, 2004. The book value of these assets and liabilities has been assigned as fair value for purchase price allocation.FortisAlberta and FortisBC are regulated under traditional cost of service.The regulated nature of these businesses and the determination of revenues and earnings are based on the historic values and do not change with market conditions or change of ownership. Therefore, no fair market value increments were recorded as part of purchase price on individual assets and liabilities because all economic benefits and obligations associated with them will accrue to the customers.The purchase price allocation to net assets based on their fair values is as follows:
(in thousands of
dollars) FortisAlberta FortisBC Total
---------------------------------------------------------------------
---------------------------------------------------------------------
Fair value assigned to
net assets:
Utility capital assets
- net regulatory tax
base adjustment $499,592 $488,865 $988,457
Current assets 82,680 38,243 120,923
Goodwill 229,097 219,509 448,606
Other assets 8,094 13,239 21,333
Current liabilities (57,110) (33,063) (90,173)
Assumed long-term debt - (154,709) (154,709)
Debt & accrued interest,
subsequently refinanced (1) (402,343) (155,038) (557,381)
Future income taxes 13,145 (1,600) 11,545
Other regulatory liabilities (40,849) - (40,849)
---------------------------------------------------------------------
332,306 415,446 747,752
Cash 16,067 12,818 28,885
---------------------------------------------------------------------
$348,373 $428,264 $776,637
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Subsequent to the close of the acquisition, the debt and accrued
interest associated with the utility in Alberta were replaced
with the FortisAlberta short-term debt facility and the debt and
accrued interest associated with the utility in B.C. were
replaced with a short-term advance from Fortis. Both short-term
facilities have been repaid with long-term financing.
Acquisition of Remaining 5 per cent Interest in BECOL On May 20, 2004, Fortis acquired the remaining 5 per cent interest in BECOL from the Social Security Board of the Government of Belize for $4.8 million (US$3.5 million), making it a wholly owned indirect subsidiary of the Corporation.In January 2001, Fortis purchased Duke Energy Group, Inc.'s 95 per cent interest in BECOL for an aggregate purchase price of US$62 million. The acquisition is accounted for using the purchase method, whereby the remaining 5 per cent interest in BECOL has been included in the consolidated financial statements commencing May 20, 2004. The $4.8 million purchase price has been allocated to the fair values of the assets and liabilities as at May 20, 2004. 8. Long-term Debt FortisAlberta On October 25, 2004, FortisAlberta issued $200 million in Senior Unsecured Debentures bearing interest at 5.33% to be paid semi-annually, maturing October 31, 2014, and $200 million in Senior Unsecured Debentures bearing interest at 6.22% to be paid semi-annually, maturing on October 31, 2034. The net proceeds of the offering were used to repay short-term indebtedness. FortisBC On November 30, 2004, FortisBC issued $140 million, 5.48% Unsecured Debentures, due November 28, 2014.Upon issuance of the $140 million Unsecured Debentures, the Series H, I and J Secured Debentures were converted to Unsecured Debentures pursuant to the terms of the Unsecured Trust Deed.The net proceeds of the offering were primarily used to repay the short-term advance from Fortis as a result of the recent acquisition by Fortis.
The outstanding debt at FortisBC, as at December 31, 2004, consists
of the following:
(in thousands of dollars) 2004
----------------------------------------------------------
Secured Debentures
Series E 11.00% due December 1, 2009 $6,750
Series F 9.65% due October 16, 2012 15,000
Series G 8.80% due August 28, 2023 25,000
Series H 8.77% due February 1, 2016 -
Series I 7.81% due December 1, 2021 -
Series J 6.75% due July 31, 2009 -
WPP mortgage 9.44% due October 31, 2013 6,923
----------------------------------------------------------
53,673
----------------------------------------------------------
Unsecured Debentures
Series H 8.77% due February 1, 2016 25,000
Series I 7.81% due December 1, 2021 25,000
Series J 6.75% due July 31, 2009 50,000
Series 1-04 5.48% due November 28, 2014 140,000
----------------------------------------------------------
$240,000
----------------------------------------------------------
The Secured Series E, F and G Debentures are collaterized by a fixed and floating first charge on the assets of FortisBC.The Secured Trust Deed provides for sinking fund payments of $0.75 million per year for Series E Secured Debentures. The WPP mortgage is secured by a fixed and floating charge over the assets of WPP, FortisBC's wholly owned subsidiary. Belize Electricity Year to date, Belize Electricity drew down approximately $4.3 million on its existing long-term debt facilities. Exploits Partnership Year to date, Exploits Partnership drew down approximately $3.7 million on its existing long-term debt facilities. Fortis Properties In September 2004, Fortis Properties completed a $15.6 million financing of the Four Points by Sheraton Halifax. The proceeds were used to partially repay a short-term loan to Fortis. Subsequently, the Corporation used the proceeds to partially repay its short-term borrowings. Fortis On October 28, 2004, Fortis issued, by way of private placement, US$150 million of 10-year 5.74 per cent Senior Unsecured Notes due October 31, 2014.The proceeds were used to reduce the Corporation's short-term acquisition facility. 9. Contingent Liabilities Contingent liabilities as of December 31, 2004 are consistent with disclosures in the annual audited financial statements except as noted below. FortisAlberta FortisAlberta is subject to various legal proceedings and claims that arise in the ordinary course of business operations. FortisAlberta believes that the amount of liability, if any, from these actions would not have a material effect on the Company's financial position or results of operations. In a statement of claim filed on August 18, 2003 in the Court of the Queen's Bench of Alberta, EPCOR Energy Services (Alberta) Inc. is pursuing damages of approximately $83 million against FortisAlberta for alleged breaches of certain agreements between it and FortisAlberta, distribution tariff terms and conditions and fiduciary duty as well as for negligence.FortisAlberta has not, to date, made a definitive assessment of potential liability with respect to this claim; however, management believes that these allegations are without merit. FortisBC FortisBC is subject to various legal proceedings and claims that arise in the ordinary course of business operations.FortisBC believes that the amount of liability, if any, from these actions would not have a material effect on the Company's financial position or results of operations. FortisBC has been advised of a pending inquiry by the BC Ministry of Forests into fire suppression costs associated with certain forest fires in the Company's service territory in 2003.FortisBC is in the preliminary stages of collecting and analyzing information and evidence surrounding these fires.
10. Commitments
The Corporation's commitments over the next 5 years and for periods
thereafter are outlined in the following table.
---------------------------------------------------------------------
---------------------------------------------------------------------
greater
less than than
($ millions) Total 1 year 1-3 years 4-5 years 5 years
---------------------------------------------------------------------
Power Purchase
Obligations
FortisBC (a) 3,102.7 38.7 115.9 75.9 2,872.2
FortisOntario (b) 367.3 23.0 63.7 45.1 235.5
Maritime
Electric (C) 26.8 22.9 3.9 - -
---------------------------------------------------------------------
Capital Cost (d) 224.1 16.5 45.6 30.0 132.0
---------------------------------------------------------------------
Brilliant Terminal
Station (BTS) (e) 65.3 2.4 7.1 4.7 51.1
---------------------------------------------------------------------
Joint-use Asset
Agreements (f) 48.8 3.7 6.7 6.0 32.4
---------------------------------------------------------------------
Operating Lease
Obligations (g) 36.8 6.9 14.0 10.4 5.5
---------------------------------------------------------------------
Office Lease -
FortisBC (h) 22.7 0.9 2.8 2.7 16.3
---------------------------------------------------------------------
Purchase of Joint-use
Poles from Aliant
Telecom Inc. (Aliant
Telecom) (i) 4.8 4.8 - - -
---------------------------------------------------------------------
Other 1.8 0.1 0.2 0.1 1.4
---------------------------------------------------------------------
Total 3,901.1 119.9 259.9 174.9 3,346.4
---------------------------------------------------------------------
---------------------------------------------------------------------
(a) Power purchase obligations of FortisBC include the Brilliant Power Purchase Contract as well as Firm Power Purchase Contracts.On May 3, 1996, an Order was granted by the BCUC approving a 60-year power purchase contract for the output of the Brilliant hydroelectric plant located near Castlegar, BC.The Brilliant plant is owned by the Brilliant Power Corporation ("BPC"), a corporation owned as to 50 per cent by each of the Columbia Power Corporation and the Columbia Basin Trust.FortisBC operates and maintains the Brilliant plant for the BPC in return for a management fee.The contract requires fixed monthly payments based on specified natural flow take-or-pay amounts of energy.The contract includes a market-related price adjustment after 30 years of the 60-year term.FortisBC is accounting for the contract as an operating lease as directed by the BCUC.In addition, FortisBC has a long-term, minimum-payment, firm power purchase contract with BC Hydro.This contract includes a take-or-pay provision based on a 5-year rolling nomination of capacity requirements. (b) Power purchases primarily include a long-term contract with Hydro Quebec Energy Marketing for the supply of electricity and capacity.The contract provides approximately 237 gigawatt hours 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. (C) Maritime Electric has one take-or-pay contract for the purchase of either capacity or energy. The obligation is subjected to force majeure provisions that impact the ability of the supplier to deliver or Maritime Electric to receive the energy contracted for. This contract totals approximately $27 million through October 2006. (d) Maritime Electric has entitlement to approximately 6.7 per cent of the output from the New Brunswick Power ("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. (e) Under the BTS Facilities Interconnection and Investment Agreement, dated January 31, 2002, with Columbia Power Corporation and the Columbia Basin Trust, which relates to the engineering, design, procurement, construction, maintenance and ownership of the BTS, the utility in B.C. has an exclusive license to operate and maintain the BTS and is subject to a 30-year obligation (the "BTS Obligation") to pay the BPC a charge related to the recovery of the capital cost of the BTS and related operating costs.FortisBC is accounting for the BTS Obligation as an operating lease, as directed by the BCUC. (f) FortisAlberta and an Alberta transmission provider have entered into a number of service agreements to ensure operational efficiencies are maintained through coordinated operations.The agreements have minimum expiry terms of 20 years and are subject to extension based on mutually agreeable terms. (g) Operating lease obligations include certain office, vehicle, and equipment leases as well as the lease of electricity distribution assets of Port Colborne Hydro Inc.On April 15, 2002, Canadian Niagara Power entered into a 10-year operating agreement to lease the electricity distribution assets of Port Colborne Hydro Inc.Minimum annual lease payments under the agreement, which runs until April 2012, amount to $1.6 million. (h) Under a sale-leaseback agreement, on September 29, 1993, the utility in B.C. began leasing its Trail, BC office building for a term of 30 years.The terms of the agreement grant FortisBC repurchase options at year 20 and year 30 of the lease term. FortisBC is accounting for the lease as an operating lease, as directed by the BCUC.On December 1, 2004, FortisBC also entered into a 5-year lease for the Kelowna head office.The terms of the lease allow for termination without penalty after 3 years. (i) On September 13, 2001, Newfoundland Power and Fortis closed a $46 million transaction to purchase 102,000 poles and related infrastructure from Aliant Telecom in Newfoundland. On February 7, 2002 the Corporation closed a $2.2 million transaction to purchase 5,586 poles and related infrastructure from Aliant Telecom in Newfoundland.A final payment of $4.8 million is required in 2005 under the purchase agreements. (j) On December 15, 2004, Fortis and Princeton Light and Power Company ("PLP") entered into an agreement in which Fortis will purchase all issued common and preferred shares of PLP. The PLP shareholders have the option of receiving cash or Fortis common shares or a combination thereof. The closing of the transaction is subject to approval of securities authorities, final due diligence and regulatory approval by the BCUC. The specific purchase price will be adjusted depending on the time of closing but is expected to result in a premium over rate base of approximately 14 per cent. The regulated rate base of PLP was approximately $6.2 million, as of March 31, 2004. PLP is an electric utility that serves approximately 3,200 customers in Princeton, BC and surrounding areas. PLP also provides utility service to customers of FortisBC in the Similkameen and Tulameen regions. PLP presently purchases its wholesale power from FortisBC under a long-term contract.This commitment has not been included in the summary table shown previously. 11.Comparative Figures Certain comparative figures have been reclassified to comply with current year's classifications. 12.Subsequent Events a) On January 25, 2005, Fortis entered into a $50 million unsecured revolving/non-revolving term credit facility for its general corporate purposes, including acquisitions. b) On February 1, 2005, Fortis Properties acquired 3 hotels in western Canada from True North Properties Ltd. for an aggregate purchase price of $62.6 million.The hotels, which were constructed between 1997 and 2000, operate under the independent brand of Greenwood Inn and are located in Edmonton, Calgary and Winnipeg.The properties have approximately 650 rooms and 27,000 square feet of banquet space. The acquisition was financed on an interim basis by an advance from Fortis. CORPORATE INFORMATION Fortis Inc. is a diversified, international electric utility holding company with assets of $3.8 billion and annual revenues of approximately $1.2 billion.The Corporation holds investments in regulated distribution utilities, non-regulated generation operations and a non-utility company with investments in real estate and hotels. The Common Shares, Series C First Preference Shares and Series E First Preference Shares of Fortis Inc. are traded on the Toronto Stock Exchange under the symbols FTS, FTS.PR.C, and FTS.PR.E, respectively.Fortis Inc. information can be accessed at www.fortisinc.com. Share Transfer Agent and Registrar: Computershare Trust Company of Canada 9th Floor, 100 University Avenue Toronto, ON M5J 2Y1 T: 514.982.7555 or 1.866.586.7638 F: 416.263.9394 or 1.888.453.0330 W: www.computershare.com E: service@computershare.com For the year ended December 31, 2004, Fortis Inc. will be filing the Internal Certification of Annual Filings during Transition Period (Form 52-109FT1) on SEDAR. Additional information including the Annual Information Form, Management Information Circular and Annual Report are available on SEDAR at www.sedar.com. FORTIS INC. (TSX:FTS) |
|
||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion