Quantcast

Fortis Earns $49 Million in the Third Quarter

October 31, 2008

Fortis Inc. (“Fortis” or the “Corporation”) (TSX: FTS) recorded third quarter net earnings applicable to common shares of $49 million, or $0.31 per common share, compared to earnings of $31 million, or $0.20 per common share, for the third quarter of 2007. Third quarter 2008 results included a tax reduction of approximately $7.5 million ($5.5 million at the Terasen Gas companies and $2 million at Terasen Inc.) associated with the settlement of historical corporate tax matters at Terasen. Excluding the tax reduction at Terasen, earnings for the third quarter were $41.5 million, or $0.26 per common share. Year-to-date earnings were $169 million, or $1.08 per common share, compared to earnings of $114 million, or $0.86 per common share, for the same period last year. Year-to-date 2007 financial results only reflected 4 1/2 months of earnings at Terasen, which was acquired on May 17, 2007.

Excluding the approximate $5.5 million tax reduction, the Terasen Gas companies incurred a loss of $4.5 million in the third quarter which was comparable to the same quarter last year. Due to seasonality of the business, virtually all of the annual earnings of the Terasen Gas companies are generated in the first and fourth quarters.

Earnings at Canadian Regulated Electric Utilities were $38 million for the third quarter, $10 million higher than earnings for the same quarter last year. The growth in earnings was driven primarily by the favourable impact of a shift in the quarterly distribution of annual purchased power expense at Newfoundland Power, which increased earnings during the third quarter of 2008 by approximately $5.5 million, lower energy supply costs at FortisBC and higher corporate tax recoveries at FortisAlberta.

Newfoundland Power’s annual earnings are not expected to be impacted by the shift in the quarterly distribution of annual purchased power expense; 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.

In September, FortisBC filed its 2009 rate application requesting a general rate increase, effective January 1, 2009, reflecting the impact of ongoing investment in infrastructure and increasing power purchases driven by customer growth and increased electricity demand. In October, Maritime Electric filed for a basic rate increase, effective April 1, 2009, reflecting an increase in the amount of energy-related costs to be collected from customers through the basic rate component of customer billings.

Earnings at Caribbean Regulated Electric Utilities were $7 million for the third quarter compared to $10 million for the same quarter last year. The decrease related to the 3.25 per cent reduction in basic electricity rates at Caribbean Utilities, effective January 1, 2008; the lower allowed rate of return on rate base assets (“ROA”) at Belize Electricity; and a loss of revenue at Fortis Turks and Caicos due to the impact of Hurricane Ike, partially offset by overall growth in electricity sales.

Belize Electricity’s targeted allowed ROA was reduced to 10 per cent from 12 per cent as a result of the regulator’s Final Decision on the utility’s 2008/2009 Rate Application. On July 25, 2008, Belize Electricity filed applications with the Supreme Court of Belize for leave to apply for judicial review of 2008 amended bylaws upon which the Final Decision was premised, and appeal of the Final Decision. Leave was granted on October 3, 2008. It is expected that the judicial review will be heard in late 2008.

In September, Hurricane Ike struck the Turks and Caicos Islands causing damage to the distribution system of Fortis Turks and Caicos. The Category 4 hurricane did not cause any significant damage to the utility’s generating facilities. By late October, electricity service had been restored to all customers of Fortis Turks and Caicos that were ready to receive service. Earnings for the third quarter at Fortis Turks and Caicos were reduced by approximately $1 million due to a loss of revenue as a result of damage caused by Hurricane Ike. The utility has business interruption insurance with a 30-day deductible period and is in the preliminary stage of determining its business interruption insurance claim. A large portion of the costs associated with re-connecting customers and restoring electricity service were capital in nature and, therefore, did not impact earnings.

Earnings at Non-Regulated Fortis Generation were $9 million for the third quarter, up $4 million from the same quarter last year, mainly due to increased hydroelectric production in Belize and upper New York State as a result of higher rainfall. Hydroelectric production in Belize was 22 per cent higher year to date compared to the same period last year. At the end of October, the Chalillo reservoir in Belize was at its full supply level.

Earnings at Fortis Properties were $9 million for the third quarter compared to $8 million for the same quarter last year. The increase was due to improved performance at the Hospitality and Real Estate Divisions, including contributions from the Delta Regina which was acquired on August 1, 2007.

Corporate and other expenses were $15 million for the third quarter compared to $16 million for the same quarter last year. The decrease was primarily driven by the approximate $2 million favourable impact of the tax settlement at Terasen Inc.

Year to date, cash flow from operating activities was $449 million compared to $221 million for the same period last year, primarily due to the contributions from the Terasen Gas companies for nine months in 2008 compared to 4 1/2 months in 2007.

Consolidated capital expenditures, before customer contributions, were $623 million year to date and are expected to exceed $900 million in 2008. The consolidated capital program is being driven by the utilities in western Canada and regulated and non-regulated electric utility operations in the Caribbean.

As at September 30, 2008, Fortis had consolidated credit facilities of $2.2 billion, of which $1.5 billion was unused. Over the next five years, average annual long-term debt maturities are expected to be approximately $180 million.

To the end of October, Fortis and its utilities have raised almost $900 million in preferred equity and 30-year debt in 2008, including $230 million 5.25% Five-Year Fixed Rate Reset First Preference Shares, Series G, at Fortis Inc., $250 million 5.80% debentures at Terasen Gas Inc., $250 million 6.05% debentures at Terasen Gas (Vancouver Island) Inc., $100 million 5.85% debentures at FortisAlberta, and $60 million 6.05% bonds at Maritime Electric.

In August, Caribbean Utilities completed a Rights Offering, raising gross proceeds of approximately US$28 million of which Fortis contributed US$24 million as a result of its participation in the Rights Offering. The proceeds are being used to repay credit facility borrowings and to finance capital expenditures.

In October, Standard & Poor’s removed Fortis from the S&P/TSX Completion and Equity Completion indices and placed Fortis in the S&P/TSX 60, 60 Capped and Equity 60 indices.

“Our utilities remain focused on executing their remaining capital projects for 2008. Over the next five years, our consolidated capital program is expected to surpass $4.5 billion, substantially all of which will be funded at the subsidiary level. This capital investment, which will mainly be in western Canada and the Caribbean, will add value for our customers and shareholders and fortify our position as a leading owner of energy infrastructure in Canada,” says Stan Marshall, President and Chief Executive Officer, Fortis Inc.

Interim Management Discussion and Analysis

For the three and nine months ended September 30, 2008

Dated October 31, 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 and nine months ended September 30, 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”, “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 the consolidated capital expenditure program 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 Corporation’s consolidated forecasted gross 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 expected average annual long-term debt maturities over the next five years; the expectation that counterparties to the Terasen Gas companies’ derivative financial instruments will continue to meet their obligations; the expected timing of receipt of regulatory rate decisions; the expected timing of the judicial review of 2008 amended bylaws relating to Belize Electricity; and the expected impact of Hurricane Ike on fourth quarter 2008 revenue of Fortis Turks and Caicos. 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; no counterparty defaults; 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; 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; counterparty risk; 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; 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 and nine months ended September 30, 2008 and for the year ended December 31, 2007.

All forward-looking information in the MD&A is qualified in 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 more than 2,000,000 gas and electricity customers. Its regulated holdings include electric utilities in five Canadian provinces and three Caribbean countries and a natural gas utility in British Columbia. Fortis owns non-regulated generation assets across Canada and in Belize and upper New York State and hotels and commercial real estate in Canada. Year-to-date 2008, the Corporation’s electricity distribution systems met a combined peak electricity demand of approximately 5,600 megawatts (“MW”) and its gas distribution systems met a peak day demand of 1,313 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 and nine months ended September 30, 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 third quarter and year-to-date periods ended September 30, 2008 and September 30, 2007, are provided in the table below.

 ----------------------------------------------------------------------- -- -------------------------------------------------------------------- -----                      Financial Highlights (Unaudited)                         Periods Ended September 30 -------------------------------------------------------------------------                                   Quarter               Year-to-date ------------------------------------------------------------------------- ($ millions, except  earnings per common  share and common shares  outstanding)             2008   2007   Variance   2008   2007   Variance ------------------------------------------------------------------------- Revenue                    727    651         76  2,721  1,700      1,021 ------------------------------------------------------------------------- Cash flow from operating  activities                 17     59        (42)   449    221        228 ------------------------------------------------------------------------- Net earnings applicable  to common shares           49     31         18    169    114         55 ------------------------------------------------------------------------- Basic earnings per  common share ($)         0.31   0.20       0.11   1.08   0.86       0.22 ------------------------------------------------------------------------- Diluted earnings per  common share ($)         0.31   0.20       0.11   1.06   0.79       0.27 ------------------------------------------------------------------------- Weighted average number  of common shares  outstanding (millions)  157.2  154.5        2.7  156.9  131.6       25.3 -------------------------------------------------------------------------                                   Segmented Net Earnings -------------------------------------------------------------------------                                   Quarter               Year-to-date -------------------------------------------------------------------------                           2008   2007   Variance   2008   2007   Variance ------------------------------------------------------------------------- Regulated Gas  Utilities - Canadian -------------------------------------------------------------------------   Terasen Gas    Companies (1)             1     (4)         5     71     (3)        74 ------------------------------------------------------------------------- Regulated Electric  Utilities - Canadian -------------------------------------------------------------------------   FortisAlberta             17     15          2     35     42         (7) -------------------------------------------------------------------------   FortisBC (2)               8      6          2     27     24          3 -------------------------------------------------------------------------   Newfoundland Power         8      2          6     24     21          3 -------------------------------------------------------------------------   Other Canadian (3)         5      5          -     11     13         (2) -------------------------------------------------------------------------                             38     28         10     97    100         (3) ------------------------------------------------------------------------- Regulated Electric  Utilities  - Caribbean (4)             7     10         (3)     9     22        (13) ------------------------------------------------------------------------- Non-Regulated - Fortis  Generation (5)              9      5          4     22     17          5 ------------------------------------------------------------------------- Non-Regulated - Fortis  Properties (6)              9      8          1     19     16          3 ------------------------------------------------------------------------- Corporate and Other (7)    (15)   (16)         1    (49)   (38)       (11) ------------------------------------------------------------------------- Net Earnings Applicable  to Common Shares           49     31         18    169    114         55 ------------------------------------------------------------------------- (1) Comprised of Terasen Gas Inc. ("TGI"), Terasen Gas (Vancouver Island)     Inc. ("TGVI") and Terasen Gas (Whistler) Inc. ("TGWI").  Financial     results are reported 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.  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 an approximate 70     per cent controlling interest; Caribbean Utilities on Grand Cayman,     Cayman Islands, in which Fortis holds an approximate 57 per cent     controlling interest; and wholly owned Fortis Turks and Caicos.     Caribbean Utilities had an April 30 fiscal year end whereby, up to and     including the third quarter of 2008, Caribbean Utilities' financial     statements were consolidated in the financial statements of Fortis on a     two-month lag basis.  Caribbean Utilities has changed its fiscal year     end to December 31 which will result in the Corporation consolidating     five months of financial results of Caribbean Utilities during the     fourth quarter of 2008.  Going forward, this will eliminate the     previous two-month lag in consolidating Caribbean Utilities' financial     results. (5) Includes the operations of non-regulated generation 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") and of Terasen's     non-regulated wholly owned subsidiary Terasen Energy Services Inc.     ("TES"). ------------------------------------------------------------------------- ------------------------------------------------------------------------- 

SEGMENTED RESULTS OF OPERATIONS

REGULATED GAS UTILITIES – CANADIAN

Terasen Gas Companies

 ----------------------------------------------------------------------- -- -------------------------------------------------------------------- -----                               Terasen Gas Companies                          Financial Highlights (Unaudited)                             Periods Ended September 30 -------------------------------------------------------------------------                              Quarter                  Year-to-date -------------------------------------------------------------------------                       2008   2007(1) Variance     2008   2007(1) Variance ------------------------------------------------------------------------- Gas Volumes (TJ)    30,798   31,441      (643) 154,306   49,185   105,121 ------------------------------------------------------------------------- ($ millions) ------------------------------------------------------------------------- Revenue                271      227        44    1,296      357       939 ------------------------------------------------------------------------- Energy Supply Costs    157      118        39      850      191       659 ------------------------------------------------------------------------- Operating Expenses      59       56         3      182       84        98 ------------------------------------------------------------------------- Amortization            24       23         1       73       35        38 ------------------------------------------------------------------------- Finance Charges         33       33         -       96       48        48 ------------------------------------------------------------------------- Corporate Taxes  (Recoveries)           (3)       1        (4)      24        2        22 ------------------------------------------------------------------------- Earnings (Loss)          1       (4)        5       71       (3)       74 ------------------------------------------------------------------------- (1) Financial results are reported from May 17, 2007, the date of      acquisition. ------------------------------------------------------------------------- ------------------------------------------------------------------------- 

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 decreased 643 TJ, or 2.0 per cent, quarter over quarter. The decrease was primarily due to lower transportation volumes to customers sourcing their own gas supplies, partially offset by higher sales volumes to residential customers as a result of increased consumption due to cooler weather compared to the same quarter last year and customer growth, and increased sales volumes to customers under fixed price contracts. Gas volumes were 154,306 TJ year to date, up 2,437 TJ, or 1.6 per cent, from 151,869 TJ reported by the Terasen Gas companies for the full year-to-date period last year. The increase was driven by higher sales volumes to residential customers as a result of increased consumption due to cooler weather compared to the same period last year and customer growth, and increased sales volumes to customers under fixed price contracts. The increase was partially offset by lower transportation volumes to customers sourcing their own gas supplies.

Changes in consumption levels and energy supply costs, from those forecasted to set gas distribution rates, do not materially impact earnings as a result of the operation of British Columbia Utilities Commission (“BCUC”)-approved regulatory deferral mechanisms.

During the third quarter of 2008, net customer additions at TGI and TGVI totalled 2,244, bringing the total customer count to 924,204 at September 30, 2008. Year-to-date 2008, net customer additions of 5,573, compared to net customer additions of 6,323 for the same period last year, were in line with expectations. Favourable economic conditions and housing activity in British Columbia continue to positively impact customer growth in the region.

Revenue: Revenue was $44 million higher quarter over quarter mainly due to: (i) increased residential customer consumption; (ii) higher gas commodity costs charged to customers; and (iii) an increase in gas distribution rates, effective January 1, 2008, associated with an increase in the 2008 allowed rate of return on common shareholder’s 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.

Revenue was approximately $1.3 billion year to date compared to $357 million for the partial year-to-date period last year. In addition to the impact of revenue contribution for the full year-to-date period in 2008, revenue also increased period over period due to the same factors as described above for the quarter.

Earnings: Earnings were $5 million higher quarter over quarter, driven by a tax reduction associated with the settlement of historical corporate tax matters. During the third quarter, Terasen reached a settlement with Revenu Quebec and Canada Revenue Agency related to amounts owing as a result of amended Quebec tax legislation. The legislation was passed in 2006 for the purpose of challenging certain inter-provincial Canadian tax structures. As a result of the settlement, the Terasen Gas companies recorded an approximate $5.5 million tax reduction in the third quarter of 2008. Excluding the tax reduction, the Terasen Gas companies incurred a loss of approximately $4.5 million in the third quarter, which is comparable to the same quarter last year. 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 annual earnings of the Terasen Gas companies are generated in the first and fourth quarters. Quarter over quarter, the impact of the increase in gas distribution rates, effective January 1, 2008, customer growth and a lower effective corporate tax rate was offset by higher operating expenses driven by increased labour costs and increased amortization costs associated with the continued investment in capital assets.

Earnings were $71 million year to date compared to a loss of $3 million for the partial year-to-date period last year. In addition to earnings’ contribution for the full year-to-date period in 2008 and the impact of the tax reduction described above, earnings year to date were favourably impacted by the increase in gas distribution rates, effective January 1, 2008, customer growth and a lower effective corporate tax rate. The increase was partially offset by higher operating expenses and amortization costs, for the same reasons as described above for the quarter, in addition to higher finance charges reflective of higher borrowing rates and increased credit facility borrowings.

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)                           Periods Ended September 30 -------------------------------------------------------------------------                            Quarter                    Year-to-date -------------------------------------------------------------------------                      2008    2007    Variance    2008    2007    Variance ------------------------------------------------------------------------- Energy Deliveries  (GWh)              3,748   3,781         (33) 11,654  11,376         278 ------------------------------------------------------------------------- ($ millions) ------------------------------------------------------------------------- Revenue                74      70           4     222     202          20 ------------------------------------------------------------------------- Operating Expenses     31      31           -      96      90           6 ------------------------------------------------------------------------- Amortization           22      19           3      63      56           7 ------------------------------------------------------------------------- Finance Charges        10       8           2      30      26           4 ------------------------------------------------------------------------- Corporate Tax  Recoveries            (6)     (3)         (3)     (2)    (12)         10 ------------------------------------------------------------------------- Earnings               17      15           2      35      42          (7) -------------------------------------------------------------------------------------------------------------------------------------------------- 

Energy Deliveries: Energy deliveries at FortisAlberta decreased 33 gigawatt hours (“GWh”), or 0.9 per cent, quarter over quarter. Lower average consumption quarter over quarter more than offset the impact of customer growth. Average consumption during the third quarter last year was high due to a hotter-than-normal July. Energy deliveries increased 278 GWh, or 2.4 per cent, year to date compared to the same period last year, mainly due to customer growth. Year-to-date 2008, the number of customers at FortisAlberta had increased by approximately 8,800 to 456,800. As a significant portion of the Company’s distribution revenue is derived from fixed or largely fixed billing determinants, changes in energy deliveries are not directly correlated with changes in revenue.

Revenue: Revenue was $4 million higher quarter over quarter and $20 million higher year to date compared to the same period last year. The increases were mainly due to a 6.8 per cent increase in customer distribution rates, effective January 1, 2008; the impact of customer and load growth; the accrual of the impact for collection in future customer distribution rates of the increase in the 2008 allowed ROE to 8.75 per cent from 8.51 per cent, effective January 1, 2008; and increased franchise fee revenue. The increases were partially offset by lower net transmission and miscellaneous revenue.

Earnings: Earnings were $2 million higher quarter over quarter, driven by increased future income tax recoveries primarily associated with the regulator-approved Alberta Electric System Operator (“AESO”) charges deferral account. Quarter over quarter, the impact of the increase in customer distribution rates, customer and load growth, and a higher allowed ROE was more than offset by increased amortization costs associated with continued investment in capital assets and higher amortization rates provided for in the 2008/2009 Negotiated Settlement Agreement (“NSA”), and increased finance charges due to higher debt levels in support of the Company’s significant capital expenditure program.

Earnings were $7 million lower year to date compared to the same period last year, driven by lower future income tax recoveries primarily associated with the regulator-approved AESO charges deferral account. Additionally, the impact of the increase in customer distribution rates, customer and load growth, and a higher allowed ROE was partially offset by: (i) higher operating expenses due to increased contracted manpower costs, higher labour and employee-benefit costs associated with increased salaries and number of employees, and higher general operating expenses; and (ii) increased amortization costs and finance charges for the reasons as described above for the quarter.

FortisAlberta’s AESO charges deferral account captures variances between amounts charged by the AESO to FortisAlberta for transmission tariffs and amounts collected by FortisAlberta from customers through the transmission tariff component of basic customer rates. Subject to regulatory approval, amounts charged by the AESO in excess of amounts collected from customers are deferred as a regulatory asset for future recovery from customers and amounts collected from customers in excess of amounts charged are deferred as a regulatory liability for future refund to customers. Generally, there is a two-year lag between the deferral of amounts in the AESO charges deferral account and when they are collected from, or refunded to, customers in rates.

FortisAlberta records income taxes on the cash taxes payable method, as approved by its regulator, except for certain deferral accounts, including the AESO charges deferral account, whereby income taxes are recorded using the liability method. During the third quarter of 2008, FortisAlberta identified that taxable income from operations, before considering impacts associated with the AESO charges deferral account, could be fully offset by utilizing capital cost allowance deductions. Then, by applying the tax deductions related to transmission tariff payments made to the AESO, a tax loss carryforward could be created and a future income tax recovery could be recorded. Under the liability method of recording income taxes, a future income tax asset associated with the tax loss carryforward is not recorded unless there is certainty of recovery. The transmission tariff payments made to the AESO are recoverable from customers in the future; therefore, a future income tax asset has been recorded in the third quarter of 2008 which has been offset against FortisAlberta’s long-term future income tax liability.

Prior to the third quarter of 2008, FortisAlberta was not deducting transmission tariff payments made to the AESO to create tax loss carryforwards and was not recording the associated future income tax recovery. This, in effect, resulted in a two-year lag of recording the future income tax impacts between the payments of transmission tariff amounts to the AESO and the timing of their collection from customers. Going forward, fluctuations in corporate income taxes associated with the operation of the AESO charges deferral account are not expected to occur.

FortisAlberta recorded a $4.5 million recovery of future income taxes during the third quarter of 2008 that were previously expensed during the first half of 2008. For the third quarter and year-to-date period in 2007, future income tax recoveries of approximately $3 million and $10 million, respectively, were recorded primarily due to the expedited collection of amounts deferred to the AESO charges deferral account. In September 2007 and December 2007, the 2006 deferred AESO charges receivable balance of $28 million and approximately $38 million of the 2007 deferred AESO charges receivable balance, respectively, were sold to a Canadian chartered bank and, as a result, the proceeds were recognized in 2007.

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)                           Periods Ended September 30 -------------------------------------------------------------------------                              Quarter                  Year-to-date -------------------------------------------------------------------------                        2008    2007   Variance    2008    2007   Variance ------------------------------------------------------------------------- Electricity Sales  (GWh)                  697     703         (6)  2,245   2,252         (7) ------------------------------------------------------------------------- ($ millions) ------------------------------------------------------------------------- Revenue                  52      52          -     171     167          4 ------------------------------------------------------------------------- Energy Supply Costs      12      15         (3)     45      48         (3) ------------------------------------------------------------------------- Operating Expenses       16      16          -      49      49          - ------------------------------------------------------------------------- Amortization              8       7          1      25      23          2 ------------------------------------------------------------------------- Finance Charges           7       7          -      21      19          2 ------------------------------------------------------------------------- Corporate Taxes           1       1          -       4       4          - ------------------------------------------------------------------------- Earnings                  8       6          2      27      24          3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 

Electricity Sales: Electricity sales at FortisBC decreased 6 GWh, or 0.9 per cent, quarter over quarter and decreased 7 GWh, or 0.3 per cent, year to date compared to the same period last year. The impact of reduced industrial customer loads, as a result of a general slowdown in the forestry sector, was partially offset by residential, general service and wholesale customer growth, primarily in the Okanagan region.

Revenue: Revenue was comparable quarter over quarter. The favourable impact of: (i) a 2.9 per cent increase in electricity rates, effective January 1, 2008, which included the impact of an increase in the 2008 allowed ROE to 9.02 per cent from 8.77 per cent; (ii) a 0.8 per cent increase in electricity rates, effective May 1, 2008, as a result of the flow through to customers of increased purchased power costs from BC Hydro; and (iii) a shift in sales mix from lower-rate customer classes to higher-rate customer classes was offset by: (i) lower revenue contributions from non-regulated operating, maintenance and management services; (ii) decreased electricity sales; and (iii) increased performance-based rate setting (“PBR”) incentive adjustments owing to customers, which reduced revenue.

Revenue was $4 million higher year to date compared to the same period last year, driven by the increases in electricity rates and the shift in sales mix, partially offset by the same factors as described above for the quarter.

Earnings: FortisBC’s earnings were $2 million higher quarter over quarter. The increase was mainly due to decreased energy supply costs, partially offset by higher amortization costs reflective of the Company’s significant capital expenditure program. The decrease in energy supply costs was driven by a higher proportion of energy generated from Company-owned hydroelectric generating plants compared to purchased power over the reporting periods, decreased electricity sales and lower average market power purchase prices, partially offset by higher prices charged by BC Hydro that were flowed through to customers in rates. Earnings were $3 million higher year to date compared to the same period last year. The increase was primarily due to the 2.9 per cent increase in electricity rates and decreased energy supply costs, partially offset by higher amortization costs and finance charges related to the Company’s significant capital expenditure program. Energy supply costs decreased for the reasons as described above for the quarter combined with the impact of the receipt of $0.6 million in insurance proceeds during the second quarter of 2008 associated with a turbine generator failure in 2006.

Operating expenses were comparable quarter over quarter and year to date compared to the same period last year. The impact of the timing in 2008 of certain operating and maintenance projects combined with higher labour costs and general inflationary cost increases was offset by lower operating expenses associated with non-regulated operating, maintenance and management services.

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)                        Periods Ended September 30 -------------------------------------------------------------------------                              Quarter                 Year-to-date -------------------------------------------------------------------------                        2008    2007   Variance    2008    2007   Variance ------------------------------------------------------------------------- Electricity Sales  (GWh)                  897     874         23   3,796   3,709         87 ------------------------------------------------------------------------- ($ millions) ------------------------------------------------------------------------- Revenue                  94      90          4     378     359         19 ------------------------------------------------------------------------- Energy Supply Costs      51      59         (8)    243     239          4 ------------------------------------------------------------------------- Operating Expenses       11      12         (1)     38      39         (1) ------------------------------------------------------------------------- Amortization             11       6          5      33      25          8 ------------------------------------------------------------------------- Finance Charges           8      10         (2)     25      26         (1) ------------------------------------------------------------------------- Corporate Taxes           5       1          4      15       9          6 ------------------------------------------------------------------------- Earnings                  8       2          6      24      21          3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 

Electricity Sales: Electricity sales at Newfoundland Power increased 23 GWh, or 2.6 per cent, quarter over quarter and increased 87 GWh, or 2.3 per cent, year to date compared to the same period last year. The increases were largely due to the combined impact of customer growth and higher average consumption.

Revenue: Revenue was $4 million higher quarter over quarter and $19 million higher year to date compared to the same period last year. The increases were driven by an average increase in customer rates of 2.8 per cent, effective January 1, 2008, which included the impact of an increase in the 2008 allowed ROE to 8.95 per cent from 8.60 per cent, and electricity sales growth. The increase in revenue also reflected higher amortization of regulatory liabilities in accordance with prescribed regulatory orders.

Earnings: Newfoundland Power’s earnings were $6 million higher quarter over quarter, reflecting a shift in the quarterly distribution of annual purchased power expense which increased earnings by approximately $5.5 million during the third quarter of 2008. 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 that was discontinued for use effective January 1, 2008. Monthly purchased power expense is now being recorded at actual cost per kWh. As a result of this change, earnings in 2008 are expected to 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 the quarterly distribution of annual purchased power expense. Excluding the approximate $5.5 million favourable impact of the shift in the quarterly distribution of annual purchased power expense, as described above, earnings were comparable quarter over quarter.

Newfoundland Power’s earnings were $3 million higher year to date compared to the same period last year, reflecting the shift in the quarterly distribution of annual purchased power expense which increased year-to-date earnings by approximately $2 million.

Amortization costs are allocated quarterly based on gross margin. Amortization costs increased due to the shift in the quarterly distribution of annual purchased power expense and the regulator-approved recovery of previously deferred amortization costs in customer rates, effective January 1, 2008. Corporate tax expense increased quarter over quarter and year to date compared to the same period last year as a result of higher earnings before corporate taxes, combined with higher effective corporate income tax rates. Higher effective corporate income tax rates were driven by decreased deductions taken for tax purposes compared to accounting purposes.

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 (1)                       Financial Highlights (Unaudited)                          Periods Ended September 30 -------------------------------------------------------------------------                              Quarter                  Year-to-date -------------------------------------------------------------------------                        2008    2007   Variance    2008    2007   Variance ------------------------------------------------------------------------- Electricity  Sales (GWh)            532     537         (5)  1,639   1,655        (16) ------------------------------------------------------------------------- ($ millions) ------------------------------------------------------------------------- Revenue                  66      63          3     197     198         (1) ------------------------------------------------------------------------- Energy Supply Costs      44      41          3     133     132          1 ------------------------------------------------------------------------- Operating Expenses        7       7          -      21      21          - ------------------------------------------------------------------------- Amortization              4       4          -      13      12          1 ------------------------------------------------------------------------- Finance Charges           4       4          -      13      13          - ------------------------------------------------------------------------- Corporate Taxes           2       2          -       6       7         (1) ------------------------------------------------------------------------- Earnings                  5       5          -      11      13         (2) ------------------------------------------------------------------------- (1) Includes Maritime Electric and FortisOntario ------------------------------------------------------------------------- ------------------------------------------------------------------------- 

Electricity Sales: Electricity sales at Other Canadian Electric Utilities decreased 5 GWh, or 0.9 per cent, quarter over quarter, driven by lower average consumption in Ontario, partially offset by the impact of an increase in the number of residential customers on Prince Edward Island. Electricity sales decreased 16 GWh, or 1.0 per cent, year to date compared to the same period last year, driven by lower average consumption in Ontario, the loss of a major industrial customer in Ontario in the first quarter of 2007, and the shutdown of operations of another industrial customer in Ontario from May 2007.

Revenue: Revenue was $3 million higher quarter over quarter, driven by a 1.8 per cent increase in basic electricity rates at Maritime Electric, effective April 1, 2008; an average 1.1 per cent increase in basic electricity distribution rates at FortisOntario, effective May 1, 2008; and the flow through to customers of higher energy supply costs at FortisOntario. The increase was partially offset by the impact of lower electricity sales.

Year to date, revenue was $197 million compared to $198 million for the same period last year. The decrease was due to the impact of lower electricity sales and the repayment, during the second quarter of 2008, of an approximate $3 million refund that FortisOntario had received during the fourth quarter of 2007, partially offset by the increase in basic electricity rates, as described above for the quarter, and the flow through of higher energy supply costs at FortisOntario. In April 2008, the US Federal Energy Regulatory Commission (“FERC”) issued an order stating that the one-time refund of approximately $3 million ($2 million after-tax) received by FortisOntario in December 2007 from Niagara Mohawk Power Corporation (“NIMO”), associated with cross-border transmission interconnection agreements, should not have been originally ordered as FERC does not have jurisdiction over the interconnection agreements in question and, therefore, did not have jurisdiction to order the refund. In May 2008, FortisOntario repaid the refunded amounts to NIMO. Earnings: Earnings were comparable quarter over quarter and $2 million lower year to date compared to the same period last year. Excluding the one-time $2 million after-tax repayment during the second quarter of 2008 by FortisOntario of the refund described above, earnings were comparable year to date compared to the same period last year. The impact of increased basic electricity rates was offset largely by the impact of decreased electricity sales.

In October 2008, FortisOntario entered into a definitive agreement to acquire a 10 per cent minority interest in Grimsby Power Inc.’s electricity distribution business for a cash payment of approximately $1.1 million plus the provision of services to migrate Grimsby Power Inc.’s customer information system with FortisOntario’s system. Grimsby Power Inc. serves approximately 10,000 customers in a service territory that is in close proximity to FortisOntario’s operations in Fort Erie. The closing of this transaction is subject to the receipt of regulatory approvals.

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)                        Periods Ended September 30 -------------------------------------------------------------------------                               Quarter                Year-to-date -------------------------------------------------------------------------                         2008    2007   Variance    2008    2007  Variance ------------------------------------------------------------------------- Average US:CDN  Exchange Rate (2)      1.04    1.04          -    1.02    1.10     (0.08) ------------------------------------------------------------------------- Electricity  Sales (GWh)             304     283         21     838     782        56 ------------------------------------------------------------------------- ($ millions) ------------------------------------------------------------------------- Revenue                   96      80         16     249     231        18 ------------------------------------------------------------------------- Energy Supply Costs       60      42         18     164(3)  127        37 ------------------------------------------------------------------------- Operating Expenses        12      11          1      35      39(4)     (4) ------------------------------------------------------------------------- Amortization               8       7          1      23      21         2 ------------------------------------------------------------------------- Finance Charges            4       4          -      11      11         - ------------------------------------------------------------------------- Corporate Taxes            1       -          1       1       1         - ------------------------------------------------------------------------- Non-Controlling Interest   4       6         (2)      6      10        (4) ------------------------------------------------------------------------- Earnings                   7      10         (3)      9      22       (13) ------------------------------------------------------------------------- (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.  The Cayman Islands dollar is pegged to the US dollar     at CI$1.00  equals  US$1.20. (3) Energy supply costs during the second quarter of 2008 included an $18     million (BZ$36 million) charge as a result of a regulatory rate     decision by the Public Utilities Commission ("PUC") in Belize in June     2008. (4) 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 21 GWh, or 7.4 per cent, quarter over quarter and increased 56 GWh, or 7.2 per cent, year to date compared to the same period last year. The increases were primarily due to customer growth, higher average usage associated with increased air conditioning load at Caribbean Utilities, and the impact of general economic growth. The increase was tempered by the loss of electricity sales at Fortis Turks and Caicos as a result of Hurricane Ike, a Category 4 hurricane which struck the Turks and Caicos Islands in early September 2008.

Despite the impact of Hurricane Ike, electricity sales at Fortis Turks and Caicos increased approximately 4 per cent quarter over quarter and 12 per cent year to date compared to the same period last year. Revenue losses, as a result of damage caused by Hurricane Ike, are estimated at approximately $1 million for each of the third and fourth quarters of 2008. Fortis Turks and Caicos has business interruption insurance coverage with a 30-day deductible period and is in the preliminary stage of determining its business interruption insurance claim. A large portion of the costs of reconnecting customers and restoring electricity service were capital in nature and, therefore, did not impact earnings. By late October, electricity service had been restored to all customers of Fortis Turks and Caicos that were ready to receive service who were impacted by Hurricane Ike.

Annual electricity sales growth at Regulated Electric Utilities – Caribbean segment for 2008 is expected to be between 6 per cent and 7 per cent. While still strong, electricity sales growth at Caribbean Utilities and Fortis Turks and Caicos is expected to be slightly lower than originally forecasted, reflecting a weakening US economy that may negatively affect the tourism industry, and the impact of Hurricane Ike including the delayed re-opening for the fall tourist season of several large hotels on the Turks and Caicos Islands.

Revenue: Revenue increased $16 million quarter over quarter and $18 million year to date compared to the same period last year. Excluding the 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 year-to-date September 2008 compared to the same period last year, revenue increased approximately $38 million year to date compared to the same period last year.

Excluding the impact of foreign currency translation, factors increasing revenue were: (i) strong electricity sales growth; (ii) the full flow through of higher fuel and oil costs to customers at Caribbean Utilities under the terms of the Company’s new transmission and distribution (“T&D”) licence; and (iii) an increase in the cost of power component of the average electricity rate at Belize Electricity, effective July 1, 2008. Partially offsetting the above factors were: (i) a 3.25 per cent reduction in basic electricity 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; (ii) a decrease in the value-added (“VAD”) component of the average electricity rate at Belize Electricity, effective July 1, 2008; and (iii) revenue losses due to Hurricane Ike.

Earnings: Earnings’ contribution was $3 million lower quarter over quarter, mainly due to: (i) a reduction in the VAD component of the average electricity rate at Belize Electricity; (ii) the 3.25 per cent reduction in basic electricity rates and the elimination of the CRS at Caribbean Utilities; (iii) higher amortization costs; (iv) increased operating expenses; and (v) revenue losses due to Hurricane Ike. The decrease was partially offset by the impact of electricity sales growth.

Earnings’ contribution was $13 million lower year to date compared to the same period last year. Earnings’ contribution during the second quarter of 2008 was reduced by $13 million, representing the Corporation’s approximate 70 per cent share of $18 million of disallowed previously incurred fuel and purchased power costs at Belize Electricity. The $18 million (BZ$36 million) charge was the result of the PUC’s decision on Belize Electricity’s 2008/2009 rate application. Also, earnings’ contribution year-to-date 2007 was reduced by approximately $2 million as a result of the Corporation’s share of a charge on the disposal of steam-turbine assets at Caribbean Utilities.

Excluding the one-time items in 2008 and 2007, as described above, and an approximate $2 million unfavourable impact of foreign currency translation, earnings’ contribution year to date was comparable to the same period last year. Electricity sales growth and the favourable impact on energy supply costs associated with the movement in deferred fuel costs at Caribbean Utilities were offset by: (i) the impact of the 3.25 per cent reduction in basic electricity rates and the elimination of the CRS at Caribbean Utilities; (ii) the reduction in the VAD component of the average electricity rate at Belize Electricity; (iii) higher amortization costs; (iv) increased operating expenses; and (v) revenue losses due to Hurricane Ike. The movement in deferred fuel costs at Caribbean Utilities was the result of a change in the basis for calculating those costs under Caribbean Utilities’ new T&D licence. Excluding the impact of foreign currency translation and the charge on the disposal of steam-turbine assets during the first quarter of 2007, operating expenses increased quarter over quarter and year to date compared to the same period last year, reflecting the impact of hiring additional employees at Fortis Turks and Caicos and increased general and administrative expenses. Amortization costs increased as a result of continued investment in capital assets.

In addition to the $18 million charge described above, Belize Electricity’s target allowed rate of return on rate base assets (“ROA”) has been reduced to 10 per cent from 12 per cent, which is reflected through a reduction in the VAD component of the average electricity rate, effective July 1, 2008.

In August 2008, Caribbean Utilities completed a Rights Offering, raising gross proceeds of approximately US$28 million. The proceeds are being used to repay credit facility borrowings and to finance capital expenditures. Fortis acquired 2.1 million shares of Caribbean Utilities under the Rights Offering for approximately $25 million (US$24 million), including shares acquired pursuant to a stand-by purchase commitment in connection with the Rights Offering. In October 2008, Fortis acquired an additional 267,669 shares of Caribbean Utilities for approximately $3 million (US$3 million) pursuant to a private agreement. As a result of this acquisition and the shares acquired under the Rights Offering, the Corporation’s ownership position in Caribbean Utilities increased from approximately 54 per cent to 57 per cent.

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 ROA of 10 per cent, down from 15 per cent as allowed under the previous licence, which is reflected through a reduction in basic electricity rates, effective January 1, 2008.

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.

Caribbean Utilities has changed its fiscal year end from April 30 to December 31 which will result in the Corporation consolidating five months of financial results of Caribbean Utilities during the fourth quarter of 2008.

For additional information on the impact of the new licences and the nature of regulation and material regulatory decisions and applications pertaining to Belize Electricity, Caribbean Utilities and Fortis Turks and Caicos, refer to “Regulatory Highlights”.

NON-REGULATED – FORTIS GENERATION

 ----------------------------------------------------------------------- -- -------------------------------------------------------------------- -----                 Non-Regulated - Fortis Generation (1)                   Financial Highlights (Unaudited)                     Periods Ended September 30 -------------------------------------------------------------------------                              Quarter                Year-to-date -------------------------------------------------------------------------




comments powered by Disqus