Fortis Earns Record First Quarter Earnings of $91 Million
Posted on: Thursday, 1 May 2008, 09:00 CDT
Fortis Inc. ("Fortis" or the "Corporation") (TSX: FTS) achieved record first quarter net earnings applicable to common shares of $91 million, or $0.58 per common share, up $49 million from earnings of $42 million, or $0.38 per common share, for the first quarter of 2007.
Growth in earnings was primarily attributable to the contribution from the Terasen Gas companies and also reflected improved performance at Caribbean Utilities. The growth was partially offset by higher corporate costs associated with the Terasen acquisition and lower earnings at Newfoundland Power associated with a shift in the quarterly distribution of annual purchased power expense. Newfoundland Power's annual earnings are not expected to be impacted by the shift in quarterly earnings distribution; however, earnings are expected to be lower in the first and fourth quarters and higher in the second and third quarters compared to the same periods last year.
"The Terasen acquisition became accretive to earnings per common share of Fortis in the first quarter," says Stan Marshall, President and Chief Executive Officer, Fortis. "The integration is progressing well," he adds.
The Terasen Gas companies contributed $58 million to earnings in the first quarter. Due to the seasonality of the business, virtually all of the earnings of the Terasen Gas companies are generated in the first and fourth quarters. Fortis acquired Terasen for $3.7 billion on May 17, 2007.
Canadian Regulated Electric Utilities contributed earnings of $33 million for the first quarter compared to $39 million for the first quarter last year. The decrease reflected a shift in the quarterly distribution of annual purchased power expense at Newfoundland Power, which reduced earnings during the first quarter of 2008 by $6 million.
The 2008 allowed rates of return on common shareholders' equity for Terasen Gas Inc., FortisAlberta, FortisBC and Newfoundland Power have been set at 8.62 per cent, 8.75 per cent, 9.02 per cent and 8.95 per cent, respectively. In February 2008, FortisAlberta received regulatory approval of a Negotiated Settlement Agreement for its 2008 and 2009 electricity rates.
Caribbean Regulated Electric Utilities contributed $7 million to earnings in the first quarter compared to $4 million in the first quarter of 2007. Excluding a one-time loss of approximately $2 million, associated with the disposal of steam-turbine assets at Caribbean Utilities in the first quarter of 2007, earnings were $1 million higher than the first quarter last year. The higher earnings were driven by electricity sales growth, partially offset by the impact of unfavourable foreign exchange rates associated with the strengthening Canadian dollar compared to the same period last year.
In April 2008, the Government of the Cayman Islands granted a new exclusive 20-year transmission and distribution licence and a new non-exclusive 21.5-year generation licence to Caribbean Utilities. "With new licences and a new regulatory regime in place, Caribbean Utilities can focus on meeting its obligation to serve customers," adds Marshall.
In March 2008, the newly elected Government of Belize repealed regulations that had previously settled outstanding matters relating to the regulator's decision on customer rates, effective July 1, 2007. "The recovery of costs in rates is critical to ensuring the current and future energy needs of customers are met. Belize Electricity is working to resolve this issue," says Marshall.
Non-Regulated Fortis Generation contributed earnings of $6 million in the first quarter compared to $7 million in the same quarter last year. Results reflected decreased hydroelectric production due to lower rainfall in Belize.
Fortis Properties contributed earnings of $3 million in the first quarter compared to $2 million in the first quarter of 2007. Results reflected contributions from the Delta Regina in Saskatchewan acquired on August 1, 2007.
Corporate and other expenses were $16 million in the first quarter compared to $10 million in the same quarter last year. The increase in corporate and other expenses was primarily driven by Terasen acquisition-related finance charges.
"Our utilities have raised more than $400 million in the debt capital markets so far this year, providing long-term funding for capital programs that enhance reliability of gas and electricity service and meet customer growth," explains Marshall. The debt issues included $250 million 6.05% 30-year debentures by Terasen Gas (Vancouver Island) Inc., $100 million 5.85% 30-year debentures by FortisAlberta and $60 million 6.05% 30-year bonds by Maritime Electric.
Shareholders of Fortis received a dividend of 25 cents per common share in the first quarter of 2008, up from 21 cents in the fourth quarter of 2007. The increase extends the Corporation's record of annual common share dividend increases to 35 consecutive years, the longest record of any public corporation in Canada.
Utility capital expenditures, before customer contributions, were approximately $162 million in the first quarter of 2008 and are expected to be approximately $900 million for the year. Much of the Corporation's consolidated capital program is being driven by the Terasen Gas companies, FortisAlberta, FortisBC, and regulated and non-regulated electric utility operations in the Caribbean.
"The significant consolidated capital expenditure program, planned at more than $4 billion over the next five years, is expected to drive earnings growth going forward," says Marshall.
"With Terasen delivering as expected, Fortis is well positioned going forward," concludes Marshall.
Fortis Inc. Interim Management Discussion and Analysis For the three months ended March 31, 2008 Dated May 1, 2008
The following analysis should be read in conjunction with the Fortis Inc. ("Fortis" or the "Corporation") interim unaudited consolidated financial statements and notes thereto for the three months ended March 31, 2008 and the Management Discussion and Analysis ("MD&A) and audited consolidated financial statements for the year ended December 31, 2007 included in the Corporation's 2007 Annual Report. This material has been prepared in accordance with National Instrument 51-102 - Continuous Disclosure Obligations relating to MD&As. Financial information in this release has been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") and is presented in Canadian dollars unless otherwise specified.
Fortis includes forward-looking information in the MD&A within the meaning of applicable securities laws in Canada ("forward-looking information"). The purpose of the forward-looking information is to provide management's expectations regarding the Corporation's future growth, results of operations, performance, business prospects and opportunities and may not be appropriate for other purposes. All forward-looking information is given pursuant to the "safe harbour" provisions of applicable Canadian securities legislation. The words "anticipates", "believes", "budgets", "could", "estimates", "expects", "forecasts", "intends", "may", "might", "plans", "projects", "schedule", "should", "will", "would" and similar expressions are often intended to identify forward-looking information, although not all forward-looking information contains these identifying words. The forward-looking information reflects management's current beliefs and is based on information currently available to the Corporation's management. The forward-looking information in the MD&A includes, but is not limited to, statements regarding: that cash required to complete capital spending and to finance acquisitions is expected to be derived from a combination of borrowings under credit facilities and the issuance of common shares, preference shares and long-term debt; the belief of the Corporation and its subsidiaries that they do not anticipate any difficulties in accessing required capital on reasonable market terms; the Corporation's consolidated forecasted gross utility capital expenditures for 2008 and in total over the next five years and the Corporation's belief that its capital program should drive growth in earnings. The forecasts and projections that make up the forward-looking information are based on assumptions which include, but are not limited to: the receipt of applicable regulatory approvals and requested rate orders; no significant operational disruptions or environmental liability due to a catastrophic event or environmental upset caused by severe weather, other acts of nature or other major events; the Corporation's ability to maintain its gas and electricity systems to ensure their continued performance; the competitiveness of natural gas pricing when compared with electricity and other alternative sources of energy; the availability of natural gas supply; favourable economic conditions; the level of interest rates; the ability to
hedge certain risks; access to capital; maintenance of adequate insurance coverage; the ability to obtain licences and permits; the level of energy prices; retention of existing service areas; favourable labour relations; and sufficient human resources to deliver service and execute the capital program. The forward-looking information is subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. The factors which could cause results or events to differ from current expectations include, but are not limited to: regulation; integration of Terasen Inc. and management of expanded operations; operating and maintenance risks; natural gas prices and supply; economic conditions; weather and seasonality; interest rates; changes in tax legislation; derivative financial instruments and hedging; risks related to Terasen Gas (Vancouver Island) Inc.; capital resources; environment; insurance; licences and permits; energy prices and the cessation of the Niagara Exchange Agreement; loss of service area; First Nations Lands; counterparty risk; labour relations; human resources; and liquidity risk. For additional information with respect to the Corporation's risk factors, reference should be made to the Corporation's continuous disclosure materials filed from time to time with Canadian securities regulatory authorities and to the heading "Business Risk Management" in the MD&A for the three-months ended March 31, 2008 and for the year ended December 31, 2007. All forward-looking information in the MD&A is qualified by its entirety by the above cautionary statements and, except as required by law, the Corporation undertakes no obligation to revise or update any forward-looking information as a result of new information, future events or otherwise after the date hereof.
COMPANY OVERVIEW AND FINANCIAL HIGHLIGHTS
Fortis is the largest investor-owned distribution utility in Canada serving almost 2,000,000 gas and electricity customers. Its regulated holdings include a natural gas utility in British Columbia and electric utilities in five Canadian provinces and three Caribbean countries. Fortis owns non-regulated generation assets across Canada and in Belize and Upper New York State, and hotels and commercial real estate in Canada. In 2007, the Corporation's electricity distribution systems met a combined peak electricity demand of approximately 5,700 megawatts ("MW") and its gas distribution systems met a peak day demand of 1,360 terajoules ("TJ"). For additional information on the Corporation's business segments, refer to Note 1 to the Corporation's interim unaudited consolidated financial statements for the three months ended March 31, 2008.
The key goals of the Corporation's regulated utilities are to operate sound gas and electricity distribution systems, deliver gas and electricity safely and reliably to customers at reasonable rates, and conduct business in an environmentally responsible manner. The Corporation's core utility business is highly regulated. It is segmented by franchise area and, depending on regulatory requirements, by the nature of the assets.
Fortis has adopted a strategy of profitable growth with earnings per common share as the primary measure of performance. Key financial highlights, including earnings by reportable segment, for the first quarter ended March 31, 2008 and March 31, 2007, are provided in the table below.
----------------------------------------------------------------------- -- -------------------------------------------------------------------- ----- Financial Highlights (Unaudited) Quarter Ended March 31 ------------------------------------------------------------------------- ($ millions, except earnings per common share and common shares outstanding) 2008 2007 Variance ------------------------------------------------------------------------- Revenue 1,146 483 663 ------------------------------------------------------------------------- Cash flow from operating activities 188 94 94 ------------------------------------------------------------------------- Net earnings applicable to common shares 91 42 49 ------------------------------------------------------------------------- Basic earnings per common share ($) 0.58 0.38 0.20 ------------------------------------------------------------------------- Diluted earnings per common share ($) 0.55 0.35 0.20 ------------------------------------------------------------------------- Weighted average number of common shares outstanding (millions) 156.6 109.4 47.2 ------------------------------------------------------------------------- Segmented Net Earnings ------------------------------------------------------------------------- Regulated Gas Utilities - Canadian ------------------------------------------------------------------------- Terasen Gas Companies (1) 58 - 58 ------------------------------------------------------------------------- Regulated Electric Utilities - Canadian ------------------------------------------------------------------------- FortisAlberta 11 12 (1) ------------------------------------------------------------------------- FortisBC (2) 12 12 - ------------------------------------------------------------------------- Newfoundland Power 6 11 (5) ------------------------------------------------------------------------- Other Canadian (3) 4 4 - ------------------------------------------------------------------------- 33 39 (6) ------------------------------------------------------------------------- Regulated Electric Utilities - Caribbean (4) 7 4 3 ------------------------------------------------------------------------- Non-Regulated - Fortis Generation (5) 6 7 (1) ------------------------------------------------------------------------- Non-Regulated - Fortis Properties (6) 3 2 1 ------------------------------------------------------------------------- Corporate and Other (7) (16) (10) (6) ------------------------------------------------------------------------- Net Earnings Applicable to Common Shares 91 42 49 ------------------------------------------------------------------------- (1) Comprised of Terasen Gas Inc. ("TGI"), Terasen Gas (Vancouver Island) Inc. ("TGVI") and Terasen Gas (Whistler) Inc. ("TGWI"). Financial results are from May 17, 2007, the date of acquisition. (2) Includes the regulated operations of FortisBC Inc. and operating, maintenance and management services related to the Waneta, Brilliant and Arrow Lakes hydroelectric generating plants and the distribution system owned by the City of Kelowna. Also includes the former Princeton Light and Power Company, Limited, but excludes the non- regulated generation operations of FortisBC Inc.'s wholly owned partnership, Walden Power Partnership. (3) Includes Maritime Electric and FortisOntario. FortisOntario includes Canadian Niagara Power and Cornwall Electric. (4) Includes Belize Electricity, in which Fortis holds a 70.1 per cent controlling interest; Caribbean Utilities on Grand Cayman, Cayman Islands, in which Fortis holds an approximate 54 per cent controlling interest; and wholly owned Fortis Turks and Caicos. Caribbean Utilities has an April 30 fiscal year end; therefore, Caribbean Utilities' financial statements are consolidated in the financial statements of Fortis on a two-month lag basis. (5) Includes the operations of non-regulated generating assets in Belize, Ontario, central Newfoundland, British Columbia and Upper New York State, with a combined generating capacity of 195 MW, mainly hydroelectric. (6) Includes 19 hotels with more than 3,500 rooms in eight Canadian provinces and approximately 2.8 million square feet of commercial real estate primarily in Atlantic Canada. (7) Includes Fortis net corporate expenses and, from May 17, 2007, the net expenses of non-regulated Terasen Inc. ("Terasen") corporate-related activities and the financial results of Terasen's 30 per cent ownership interest in CustomerWorks Limited Partnership ("CWLP"). ------------------------------------------------------------------------- ------------------------------------------------------------------------- SEGMENTED RESULTS OF OPERATIONS
REGULATED GAS UTILITIES - CANADIAN
Terasen Gas Companies
----------------------------------------------------------------------- -- -------------------------------------------------------------------- ----- Terasen Gas Companies Financial Highlights (Unaudited) Quarter Ended March 31 ------------------------------------------------------------------------- 2008 ------------------------------------------------------------------------- Gas Volumes (TJ) 78,184 ------------------------------------------------------------------------- ($ millions) ------------------------------------------------------------------------- Revenue 635 ------------------------------------------------------------------------- Energy Supply Costs 437 ------------------------------------------------------------------------- Operating Expenses 61 ------------------------------------------------------------------------- Amortization 24 ------------------------------------------------------------------------- Finance Charges 33 ------------------------------------------------------------------------- Corporate Taxes 22 ------------------------------------------------------------------------- Earnings 58 ------------------------------------------------------------------------- -------------------------------------------------------------------------
On May 17, 2007, Fortis acquired all of the issued and outstanding common shares of Terasen. Terasen owns and operates a gas distribution business carried on by TGI, TGVI and TGWI, collectively referred to as the Terasen Gas companies, and is the principal distributor of natural gas in British Columbia.
Gas volumes: Gas volumes at the Terasen Gas companies were 78,184 TJ during the first quarter of 2008, up 2.9 per cent from 75,949 TJ during the same quarter last year. The increase was driven by higher consumption due to cooler weather compared to the same quarter last year. During the first quarter of 2008, net customer additions at TGI and TGVI totalled 2,494 compared to 3,157 during the same quarter last year. Favourable economic conditions and housing activity in British Columbia continue to positively impact customer growth in the region. Revenue: Revenue was $635 million for the first quarter of 2008. Factors favourably impacting revenue included increased consumption and higher customer rates effective January 1, 2008, reflecting an increase in the 2008 allowed rates of return on common shareholders' equity ("ROE") for TGI and TGVI to 8.62 per cent and 9.32 per cent, respectively, from 8.37 per cent and 9.07 per cent, respectively.
Earnings: The Terasen Gas companies contributed $58 million in earnings for the first quarter of 2008. Seasonality materially impacts the earnings of the Terasen Gas companies as a major portion of the gas distributed is used for space heating. Virtually all of the earnings of the Terasen Gas companies are generated in the first and fourth quarters. Performance was consistent with that expected to be achieved by the Terasen Gas companies during the first quarter.
As a result of the operation of British Columbia Utilities Commission ("BCUC")-approved regulatory deferral mechanisms, changes in consumption levels and the commodity cost of natural gas do not materially impact earnings of the Terasen Gas companies.
For a discussion of the nature of regulation and material regulatory decisions and applications pertaining to the Terasen Gas companies, refer to "Regulatory Highlights".
REGULATED ELECTRIC UTILITIES - CANADIAN
FortisAlberta
----------------------------------------------------------------------- -- -------------------------------------------------------------------- ----- FortisAlberta Financial Highlights (Unaudited) Quarter Ended March 31 ------------------------------------------------------------------------- 2008 2007 Variance ------------------------------------------------------------------------- Energy Deliveries (GWh) 4,138 3,945 193 ------------------------------------------------------------------------- ($ millions) ------------------------------------------------------------------------- Revenue 73 64 9 ------------------------------------------------------------------------- Operating Expenses 33 29 4 ------------------------------------------------------------------------- Amortization 20 18 2 ------------------------------------------------------------------------- Finance Charges 9 9 - ------------------------------------------------------------------------- Corporate Tax Recovery - (4) 4 ------------------------------------------------------------------------- Earnings 11 12 (1) ------------------------------------------------------------------------- -------------------------------------------------------------------------
Energy Deliveries: Energy deliveries at FortisAlberta increased 193 gigawatt hours ("GWh"), or 4.9 per cent, quarter over quarter due to increased energy demand related to customer growth. The number of customers at FortisAlberta increased by approximately 3,200 to approximately 451,300 during the first quarter of 2008.
Revenue: Revenue was $9 million higher quarter over quarter reflecting customer growth; a 6.8 per cent increase in distribution rates billed to customers, effective January 1, 2008; the accrual of the impact, effective January 1, 2008 for collection in future customer rates, of the increase in the 2008 allowed ROE to 8.75 per cent from 8.51 per cent; and higher net transmission revenue associated with increased rates.
Earnings: FortisAlberta's earnings were $1 million lower quarter over quarter. The impact of customer growth and the distribution rate increase was more than offset by: (i) lower corporate tax recoveries driven by a decrease in deductions taken for tax purposes compared to accounting purposes; (ii) higher labour and employee-benefit costs associated with increased salaries and number of employees, combined with increased general operating expenses; and (iii) increased amortization costs associated with continued investment in capital assets and higher amortization rates provided for in the 2008/2009 Negotiated Settlement Agreement ("NSA").
For a discussion of the nature of regulation and material regulatory decisions and applications pertaining to FortisAlberta, refer to "Regulatory Highlights".
FortisBC
----------------------------------------------------------------------- -- -------------------------------------------------------------------- ----- FortisBC Financial Highlights (Unaudited) Quarter Ended March 31 ------------------------------------------------------------------------- 2008 2007 Variance ------------------------------------------------------------------------- Electricity Sales (GWh) 875 879 (4) ------------------------------------------------------------------------- ($ millions) ------------------------------------------------------------------------- Revenue 66 64 2 ------------------------------------------------------------------------- Energy Supply Costs 21 20 1 ------------------------------------------------------------------------- Operating Expenses 16 16 - ------------------------------------------------------------------------- Amortization 9 8 1 ------------------------------------------------------------------------- Finance Charges 7 6 1 ------------------------------------------------------------------------- Corporate Taxes 1 2 (1) ------------------------------------------------------------------------- Earnings 12 12 - ------------------------------------------------------------------------- -------------------------------------------------------------------------
Electricity Sales: Electricity sales at FortisBC decreased 4 GWh, or 0.5 per cent, quarter over quarter. Reduced industrial and wholesale customer loads, impacted by a general slowdown in the forestry sector, were partially offset by residential and general service customer growth, primarily in the Okanagan region.
Revenue: Revenue was $2 million higher quarter over quarter. The increase was driven by a 2.9 per cent increase in customer rates, effective January 1, 2008, which included, among other things, the impact of an increase in the 2008 allowed ROE to 9.02 per cent from 8.77 per cent.
Earnings: FortisBC's earnings of $12 million during the quarter were comparable to earnings for the same quarter last year. Factors increasing earnings included a customer rate increase and lower effective corporate taxes associated with increased deductions taken for tax purposes compared to accounting purposes and a reduction in the federal corporate income tax rate. Offsetting the above factors were increased energy supply costs, driven by higher average power purchase prices, and higher amortization costs and finance charges reflective of the Company's significant capital expenditure program.
For a discussion of the nature of regulation and material regulatory decisions and applications pertaining to FortisBC, refer to "Regulatory Highlights".
Newfoundland Power
----------------------------------------------------------------------- -- -------------------------------------------------------------------- ----- Newfoundland Power Financial Highlights (Unaudited) Quarter Ended March 31 ------------------------------------------------------------------------- 2008 2007 Variance ------------------------------------------------------------------------- Electricity Sales (GWh) 1,716 1,663 53 ------------------------------------------------------------------------- ($ millions) ------------------------------------------------------------------------- Revenue 164 154 10 ------------------------------------------------------------------------- Energy Supply Costs 122 106 16 ------------------------------------------------------------------------- Operating Expenses 14 14 - ------------------------------------------------------------------------- Amortization 10 10 - ------------------------------------------------------------------------- Finance Charges 8 8 - ------------------------------------------------------------------------- Corporate Taxes 4 5 (1) ------------------------------------------------------------------------- Earnings 6 11 (5) ------------------------------------------------------------------------- -------------------------------------------------------------------------
Electricity Sales: Electricity sales at Newfoundland Power increased 53 GWh, or 3.2 per cent, quarter over quarter, principally due to customer growth and increased average consumption. Revenue: Revenue was $10 million higher quarter over quarter, driven by electricity sales growth and an average increase in customer rates of 2.8 per cent, effective January 1, 2008, which included, among other things, the impact of an increase in the 2008 allowed ROE to 8.95 per cent from 8.60 per cent.
Earnings: Newfoundland Power's earnings were $5 million lower quarter over quarter, reflecting a quarterly shift in the distribution of annual purchased power expense, which reduced earnings by approximately $6 million during the first quarter of 2008. Excluding this $6 million shift in earnings, earnings increased $1 million due to higher electricity sales and the increase in customer rates. Under the regulated rate structure, annual purchased power expense per kilowatt hour ("kWh") is higher in the winter months and lower in the summer months. During 2007, Newfoundland Power estimated and recognized monthly purchased power expense based on forecast annual average cost per kWh. Differences between the estimated monthly purchased power expense and that based on the actual cost per kWh were adjusted to a regulatory reserve. The Newfoundland and Labrador Board of Commissioners of Public Utilities ("PUB") ordered that the regulatory reserve be discontinued, effective January 1, 2008. Monthly purchased power expense is now being recorded at actual cost per kWh. As a result of this change in 2008, earnings will be lower in the first and fourth quarters and higher in the second and third quarters compared to the same periods in 2007. Annual earnings will not be impacted by the shift in quarterly earnings.
For a discussion of the nature of regulation and material regulatory decisions and applications pertaining to Newfoundland Power, refer to "Regulatory Highlights".
Other Canadian Electric Utilities
----------------------------------------------------------------------- -- -------------------------------------------------------------------- ----- Other Canadian Electric Utilities (Unaudited) (1) Financial Highlights Quarter Ended March 31 ------------------------------------------------------------------------- 2008 2007 Variance ------------------------------------------------------------------------- Electricity Sales (GWh) 599 602 (3) ------------------------------------------------------------------------- ($ millions) ------------------------------------------------------------------------- Revenue 70 70 - ------------------------------------------------------------------------- Energy Supply Costs 49 48 1 ------------------------------------------------------------------------- Operating Expenses 7 7 - ------------------------------------------------------------------------- Amortization 4 4 - ------------------------------------------------------------------------- Finance Charges 4 4 - ------------------------------------------------------------------------- Corporate Taxes 2 3 (1) ------------------------------------------------------------------------- Earnings 4 4 - ------------------------------------------------------------------------- (1) Includes Maritime Electric and FortisOntario ------------------------------------------------------------------------- -------------------------------------------------------------------------
Electricity Sales: Electricity sales at Other Canadian Electric Utilities decreased slightly by 3 GWh, or 0.5 per cent, quarter over quarter, driven by lower average consumption due to warmer-than-normal weather conditions experienced in Ontario and the impact of the loss of a major industrial customer and a temporary shutdown of operations of another industrial customer in Ontario.
Revenue and Earnings: Revenue and earnings were comparable quarter over quarter, reflecting stable operating conditions. Corporate taxes were slightly lower quarter over quarter reflecting lower federal corporate income tax rates.
For a discussion of the nature of regulation and material regulatory decisions and applications pertaining to Maritime Electric and FortisOntario, refer to "Regulatory Highlights".
REGULATED ELECTRIC UTILITIES - CARIBBEAN
----------------------------------------------------------------------- -- -------------------------------------------------------------------- ----- Regulated Electric Utilities - Caribbean (1) Financial Highlights (Unaudited) Quarter Ended March 31 ------------------------------------------------------------------------- 2008 2007 Variance ------------------------------------------------------------------------- Average US:CDN Exchange Rate (2) 1.01 1.17 (0.16) ------------------------------------------------------------------------- Electricity Sales (GWh) 258 241 17 ------------------------------------------------------------------------- ($ millions) ------------------------------------------------------------------------- Revenue 75 77 (2) ------------------------------------------------------------------------- Energy Supply Costs 40 44 (4) ------------------------------------------------------------------------- Operating Expenses 11 17(3) (6) ------------------------------------------------------------------------- Amortization 7 7 - ------------------------------------------------------------------------- Finance Charges 5 4 1 ------------------------------------------------------------------------- Corporate Taxes 1 - 1 ------------------------------------------------------------------------- Non-Controlling Interest 4 1 3 ------------------------------------------------------------------------- Earnings 7 4 3 ------------------------------------------------------------------------- (1) Includes Belize Electricity, Caribbean Utilities and Fortis Turks and Caicos. (2) The reporting currency of Belize Electricity is the Belizean dollar which is pegged to the US dollar at BZ$2.00 equals US$1.00. The reporting currency of Caribbean Utilities and Fortis Turks and Caicos is the US dollar. (3) Operating expenses during the first quarter of 2007 included a $4.4 million (US$3.7 million) charge on the disposal of steam-turbine assets at Caribbean Utilities. ------------------------------------------------------------------------- -------------------------------------------------------------------------
Electricity Sales: Regulated Electric Utilities - Caribbean electricity sales increased 17 GWh, or 7.1 per cent, quarter over quarter. The increase was primarily due to higher demand driven by customer growth. Electricity sales growth experienced in the first quarter is expected to continue throughout 2008.
Revenue: Revenue decreased $2 million quarter over quarter. Excluding the $12 million unfavourable impact of foreign exchange associated with the translation of foreign currency-denominated revenue, due to the strengthening of the Canadian dollar against the US dollar, revenue increased $10 million quarter over quarter.
Excluding foreign exchange impacts, factors increasing revenue were strong electricity sales growth and the full flow through of fuel and oil costs to customers at Caribbean Utilities under the terms of the Company's new transmission and distribution ("T&D") licence. Partially offsetting the above factors was a 3.25 per cent reduction in basic customer rates and the elimination of the hurricane cost recovery surcharge ("CRS") at Caribbean Utilities, effective January 1, 2008, under the terms of the Company's new T&D licence.
Earnings: Earnings' contribution from Regulated Electric Utilities - Caribbean was $3 million higher quarter over quarter; however, earnings during the first quarter last year were reduced by approximately $2 million as a result of a charge on the disposal of steam-turbine assets at Caribbean Utilities. Excluding this item, earnings' contribution increased $1 million quarter over quarter.
Higher earnings were due to revenue growth (excluding the impact of foreign exchange) and the favourable impact on energy supply costs (excluding the impact of foreign exchange) associated with the movement in deferred fuel costs at Caribbean Utilities, due to a change in the basis for calculating such costs under the Company's new T&D licence.
The above factors were partially offset by: (i) increased finance charges (excluding the impact of foreign exchange) associated with increased borrowings in support of capital spending, and the high cost of power and fuel at Belize Electricity; (ii) increased amortization costs (excluding the impact of foreign exchange) associated with continued investment in capital assets; and (iii) the $1 million unfavourable impact of foreign exchange associated with the translation of foreign currency-denominated earnings, due to the strengthening of the Canadian dollar against the US dollar. In April 2008, Caribbean Utilities and the Government of the Cayman Islands entered into a new exclusive 20-year T&D licence and a new non-exclusive 21.5-year generation licence. Under the new T&D licence, customer rates will be set using an initial targeted rate of return on rate base assets ("ROA") of 10 per cent, down from 15 per cent as allowed under the previous licence.
Following the receipt of the new licences, Standard & Poor's ("S&P") affirmed its 'A' credit ratings on Caribbean Utilities' long-term corporate credit and senior unsecured debt and removed the ratings from credit watch.
For additional information on the impact of the new licences and the nature of regulation and material regulatory decisions and applications pertaining to Caribbean Utilities, Belize Electricity and Fortis Turks and Caicos, refer to "Regulatory Highlights".
NON-REGULATED - FORTIS GENERATION
----------------------------------------------------------------------- -- -------------------------------------------------------------------- ----- Non-Regulated - Fortis Generation (1) Financial Highlights (Unaudited) Quarter Ended March 31 ------------------------------------------------------------------------- 2008 2007 Variance ------------------------------------------------------------------------- Energy Sales (GWh) 288 291 (3) ------------------------------------------------------------------------- ($ millions) ------------------------------------------------------------------------- Revenue 19 21 (2) ------------------------------------------------------------------------- Energy Supply Costs 2 2 - ------------------------------------------------------------------------- Operating Expenses 4 4 - ------------------------------------------------------------------------- Amortization 2 3 (1) ------------------------------------------------------------------------- Finance Charges 2 3 (1) ------------------------------------------------------------------------- Corporate Taxes 3 2 1 ------------------------------------------------------------------------- Earnings 6 7 (1) ------------------------------------------------------------------------- (1) Includes the operations of non-regulated generating assets in Belize, Ontario, central Newfoundland, British Columbia and Upper New York State. ------------------------------------------------------------------------- -------------------------------------------------------------------------
Energy Sales: Energy sales from Non-Regulated - Fortis Generation decreased 3 GWh, or 1.0 per cent, quarter over quarter, reflecting lower production in Belize due to decreased rainfall.
Revenue: Revenue was $2 million lower quarter over quarter. Factors decreasing revenue were: (i) lower production; (ii) reduced average wholesale energy prices per megawatt hour ("MWh") in Ontario of $49.93 during the first quarter of 2008 compared to $52.61 for the same quarter last year; and (iii) the approximate $1 million unfavourable impact of foreign exchange associated with the translation of foreign currency-denominated revenue, due to the strengthening of the Canadian dollar against the US dollar compared to the same quarter last year. Partially offsetting the above factors were higher average wholesale energy prices per MWh in Upper New York State of US$72.91 for the first quarter of 2008 compared to US$56.87 for the same quarter last year.
Earnings: Earnings from Non-Regulated - Fortis Generation were $1 million lower quarter over quarter, driven by decreased production and the approximate $0.5 million unfavourable impact of foreign exchange associated with the translation of foreign currency-denominated earnings.
NON-REGULATED - FORTIS PROPERTIES
----------------------------------------------------------------------- -- -------------------------------------------------------------------- ----- Non-Regulated - Fortis Properties Financial Highlights (Unaudited) Quarter Ended March 31 ------------------------------------------------------------------------- ($ millions) 2008 2007 Variance ------------------------------------------------------------------------- Real Estate Revenue 16 14 2 ------------------------------------------------------------------------- Hospitality Revenue 29 26 3 ------------------------------------------------------------------------- Total Revenue 45 40 5 ------------------------------------------------------------------------- Operating Expenses 31 28 3 ------------------------------------------------------------------------- Amortization 4 3 1 ------------------------------------------------------------------------- Finance Charges 6 6 - ------------------------------------------------------------------------- Corporate Taxes 1 1 - ------------------------------------------------------------------------- Earnings 3 2 1 ------------------------------------------------------------------------- -------------------------------------------------------------------------
Revenue: Fortis Properties' Real Estate revenue was $2 million higher quarter over quarter. Revenue grew throughout the real estate portfolio and was significantly impacted by the real estate operations acquired on August 1, 2007 as part of the Delta Regina acquisition. The occupancy rate of the Real Estate Division was 96.6 per cent as at March 31, 2008, up from 94.9 per cent as at March 31, 2007.
Hospitality Revenue was $3 million higher quarter over quarter, reflecting revenue contribution from the Delta Regina.
On August 1, 2007, Fortis Properties purchased the Delta Regina in Saskatchewan for approximately $50 million, including acquisition costs. Delta Regina is comprised of 274 hotel rooms, the Saskatchewan Trade and Convention Centre, 52,000 square feet of Class A commercial office space and a parking garage.
Revenue per available room for the first quarter of 2008 was $67.82 compared to $65.46 for the same quarter last year, due primarily to higher average room rates at the Delta Regina.
Earnings: Fortis Properties' earnings were $1 million higher quarter over quarter, primarily due to the impact of the Delta Regina acquisition.
CORPORATE AND OTHER
----------------------------------------------------------------------- -- -------------------------------------------------------------------- ----- Corporate and Other (1) Financial Highlights (Unaudited) Quarter Ended March 31 ------------------------------------------------------------------------- ($ millions) 2008 2007 Variance ------------------------------------------------------------------------- Total Revenue 7 3 4 ------------------------------------------------------------------------- Operating Expenses 3 2 1 ------------------------------------------------------------------------- Amortization 3 1 2 ------------------------------------------------------------------------- Finance Charges (2) 21 11 10 ------------------------------------------------------------------------- Corporate Tax Recovery (5) (2) (3) ------------------------------------------------------------------------- Preference share dividends 1 1 - ------------------------------------------------------------------------- Net Corporate and Other Expenses (16) (10) (6) ------------------------------------------------------------------------- (1) Includes non-regulated Terasen corporate-related activities and financial results of CWLP from May 17, 2007, the date of acquisition (2) Includes dividends on preference shares classified as long-term liabilities ------------------------------------------------------------------------- -------------------------------------------------------------------------
The Corporate and Other segment captures expense and revenue items not specifically related to any other reportable segment. Included in this segment are finance charges including interest on debt incurred directly by Fortis and Terasen Inc. and dividends on preference shares classified as long-term liabilities; dividends on preference shares classified as equity; other corporate expenses, including Fortis and Terasen corporate operating costs, net of recoveries from subsidiaries; interest and miscellaneous revenues; and corporate income taxes. Also included in the Corporate and Other segment are the financial results of CWLP. CWLP is a non-regulated shared-service business in which Terasen holds a 30 per cent interest. CWLP operates in partnership with Enbridge Inc. and provides customer service, meter reading, billing, credit, support and collection services to the Terasen Gas companies and several smaller third parties. CWLP's financial results are recorded using the proportionate consolidation method of accounting. Revenue: Revenue was $4 million higher quarter over quarter, primarily due to the inclusion of revenue from CWLP of $2.5 million for the first quarter of 2008 and higher inter-company interest revenue due to increased inter-corporate lending.
Net Corporate and Other expenses: Net corporate and other expenses were $6 million higher quarter over quarter, reflecting approximately $9.5 million ($6.5 million after-tax) of Terasen acquisition-related finance charges, approximately $1.5 million ($1.0 million after-tax) of Terasen corporate and CWLP amortization costs and operating expenses, and higher Fortis corporate operating expenses, partially offset by increased revenue for the reasons described above.
REGULATORY HIGHLIGHTS
The nature of regulation and summary of material regulatory decisions and applications for the Corporation's regulated utilities is summarized as follows:
----------------------------------------------------------------------- ---- ------------------------------------------------------------------ --------- Nature of Regulation --------------------------------------------------------------------------- Allowed Supportive Features Common Allowed Future or Regulated Regulatory Equity Returns (%) Historical Test Year Utility Authority (%) 2006 2007 2008 Used to Set Rates --------------------------------------------------------------------------- ROE Cost of Service ("COS")/ROE --------------------------------------------------------------------------- TGI BCUC 35 8.80 8.37 8.62 PBR mechanisms through 2009: TGI: 50/50 sharing of earnings above or below the allowed ROE. TGVI BCUC 40 9.50 9.07 9.32 TGVI: 100 per cent retention of earnings from lower-than- forecasted operating and maintenance costs but no relief from increased operating and maintenance costs ROE automatic adjustment formula tied to long-term Canada bond yields --------------------------------------------------------------------------- Future Test Year --------------------------------------------------------------------------- FortisBC BCUC 40 9.20 8.77 9.02 COS/ROE PBR mechanism through 2008, with option to continue in 2009 - 50/50 sharing of earnings above or below the allowed ROE up to an achieved ROE that is 200 basis points above or below the allowed ROE - excess to deferral account ROE automatic adjustment formula tied to long-term Canada bond yields --------------------------------------------------------------------------- Future Test Year --------------------------------------------------------------------------- FortisAlberta Alberta 37 8.93 8.51 8.75 COS/ROE Utilities Commission ROE automatic ("AUC") adjustment formula tied to long-term Canada bond yields --------------------------------------------------------------------------- Future Test Year --------------------------------------------------------------------------- Newfoundland PUB 45 9.24 8.60 8.95 COS/ROE Power +/- +/- +/- 50 50 50 ROE automatic bps bps bps adjustment formula tied to long-term Canada bond yields --------------------------------------------------------------------------- Future Test Year --------------------------------------------------------------------------- Maritime Island 40 10.25 10.25 10.00 COS/ROE Electric Regulatory and Appeals Future Test Year Commission ("IRAC") --------------------------------------------------------------------------- Fortis- Ontario 46.7 9.00 9.00 9.00 Canadian Niagara Power Ontario Energy - COS/ROE Board ("OEB") (Canadian Niagara Power) Franchise Cornwall Electric - Agreement Price cap with (Cornwall commodity cost Electric) flow through Historical Test Year --------------------------------------------------------------------------- Belize Public ROA Four-year COS/ROA Electricity Utilities N/A 10.00 10.00 10.00 agreements with Commission - - - market-based returns ("PUC") 15.00 15.00 15.00 Future Test Year --------------------------------------------------------------------------- Caribbean Electricity N/A 15.00 15.00 9.00 COS/ROA Utilities Regulatory - Authority 11.00 Rate-cap adjustment ("ERA") mechanism ("RCAM") based on consumer price indices --------------------------------------------------------------------------- Historical Test Year --------------------------------------------------------------------------- Fortis Utilities N/A 17.50 17.50 17.50 COS/ROA Turks make annual and filings with Future Test Year Caicos the Energy Commission --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- Material Regulatory Decisions and Applications --------------------------------------------------------------------------- Regulated Utility Summary Description --------------------------------------------------------------------------- TGI - In December 2007, the BCUC approved various rates at TGVI TGI, including those for mid-stream and delivery for residential customers in several service areas, effective January 1, 2008. Increased mid-stream costs are flowed through to customers without mark-up. The approved rates also reflect the impact of an increase in the allowed ROE for 2008 to 8.62 per cent. - Effective April 1, 2008, the BCUC approved an increase in the commodity rates charged to customers for natural gas and propane. The commodity cost of natural gas and propane are flowed through to customers without markup. Every three months TGI and TGVI review natural gas and propane commodity prices with the BCUC in order to ensure the flow through rates charged to customers are sufficient to cover the cost of purchasing gas and propane. - On April 1, 2008, final regulatory approval for the construction of the 1.5 billion-cubic foot liquefied natural gas ("LNG") facility on Vancouver Island was received for a total estimated cost of approximately $200 million. --------------------------------------------------------------------------- FortisBC - In December 2007, regulatory approval was received of the NSA associated with 2008 revenue requirements resulting in a customer rate increase of 2.9 per cent, effective January 1, 2008. The rate increase is primarily the result of the Company's capital investment program. Rates for 2008 reflect an allowed ROE of 9.02 per cent. - In April 2008, the BCUC approved an interim increase of 0.8 per cent to FortisBC's customer rates, effective May 1, 2008, as a result of BC Hydro's recent interim rate increase, which has increased FortisBC's cost to purchase power from BC Hydro by 5.06 per cent. - FortisBC intends on filing a 2009 and 2010 Capital Plan and a 2009 Revenue Requirements Application with the BCUC in the second half of 2008. --------------------------------------------------------------------------- FortisAlberta - Effective January 1, 2008, FortisAlberta is regulated by the AUC due to the separation of the Alberta Energy and Utilities Board into two separate regulatory bodies. - In February 2008, regulatory approval was received of the NSA associated with 2008/2009 revenue requirements resulting in distribution rate increases of 6.8 per cent, effective January 1, 2008, and 7.3 per cent, effective January 1, 2009. The approved NSA includes forecast gross capital expenditures of approximately $264 million for 2008 and $296 million for 2009, primarily to meet customer growth and improve system reliability. The 2008 revenue requirements included in the 2008/2009 NSA were determined using the 2007 ROE of 8.51 per cent. The impact of the increase in the ROE to 8.75 per cent for 2008 is subject to deferral-account treatment and, as such, is being recognized as earned in 2008 and is expected to be collected in future customer rates. - In February 2008, the AUC initiated a Generic Cost of Capital Preliminary Questions Proceeding to address whether the cost of capital adjustment formula continues to yield a fair ROE and whether capital structures for all applicable utilities in Alberta should be addressed on a generic basis. FortisAlberta has submitted a response to these questions and anticipates that a more formal regulatory review process will follow. --------------------------------------------------------------------------- Newfoundland - In December 2007, the PUB approved the Company's NSA Power associated with the 2008 general rate application resulting in an average 2.8 per cent increase in customer rates, effective January 1, 2008. The rate increase is largely driven by higher amortization costs. The rate increase also reflects the impact of an increase in the allowed ROE to 8.95 per cent for 2008. - The PUB-approved NSA will also result in, among other things: (i) the amortization of $7.2 million in 2008 and $4.6 million in each of 2009 and 2010 of the remaining $16.4 million balance of the original December 2005 unbilled revenue liability; (ii) amortization of approximately $3.9 million in each of 2008, 2009 and
Source: MARKET WIRE
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