ST. JOHN–S, NEWFOUNDLAND AND LABRADOR — (Marketwired) — 08/01/13 — Fortis Inc. (“Fortis” or the “Corporation”) (TSX: FTS) achieved second quarter net earnings attributable to common equity shareholders of $54 million, or $0.28 per common share, compared to $62 million, or $0.33 per common share, for the second quarter of 2012. For the first half of 2013, net earnings attributable to common equity shareholders were $205 million, or $1.06 per common share, compared to $183 million, or $0.97 per common share, for the first half of last year.
On June 27, 2013, Fortis closed the acquisition of CH Energy Group, Inc. (“CH Energy Group”) for approximately US$1.5 billion, including the assumption of US$518 million of debt on closing. The net purchase price of the acquisition was financed using proceeds from a $601 million common equity offering and drawings under the Corporation–s committed credit facility. Central Hudson Gas & Electric Corporation (“Central Hudson”), the main business of CH Energy Group, is a regulated transmission and distribution utility that serves 377,000 electric and gas customers in New York State–s Mid-Hudson River Valley. Earnings for the quarter were reduced by $32 million, or $0.17 per common share, due to acquisition-related expenses and customer and community benefits offered to obtain regulatory approval of the acquisition compared to $3 million of acquisition-related expenses for the same period last year.
Earnings for the quarter were favourably impacted by an income tax recovery of $25 million, or $0.13 per common share, due to the enactment of higher deductions associated with Part VI.1 tax on the Corporation–s preference share dividends. In the second quarter of 2012, earnings were reduced by income tax expenses of $3 million associated with Part VI.1 tax.
Excluding the above-noted acquisition-related and Part VI.1 tax impacts, net earnings attributable to common equity shareholders for the second quarter of 2013 were $61 million, or $0.32 per common share, compared to $68 million, or $0.36 per common share, for the second quarter of 2012.
“The integration of Central Hudson into the Fortis Group is progressing well,” says Stan Marshall, President and Chief Executive Officer, Fortis Inc. “The acquisition is expected to be accretive to earnings per common share of Fortis beginning in 2015.”
Regulated utilities, including Central Hudson, comprise approximately 90% of total assets and serve approximately 2.4 million gas and electricity customers across Canada and in New York State and the Caribbean. Regulated rate base assets of Fortis exceed $10 billion.
Canadian Regulated Gas Utilities contributed earnings of $6 million compared to $13 million for the second quarter of 2012. The $7 million decrease in earnings reflects the $8 million unfavourable impact for the first half of 2013 of the regulatory decision related to the first phase of the Generic Cost of Capital (“GCOC”) Proceeding in British Columbia, described more fully below, which was recognized in the second quarter of 2013 when the decision was received. Earnings contribution from growth in energy infrastructure investment was largely offset by lower gas transportation volumes to industrial customers and lower-than-expected customer additions.
Canadian Regulated Electric Utilities contributed earnings of $66 million, up $15 million from the second quarter of 2012. For the second quarter, earnings at Newfoundland Power and Maritime Electric were favourably impacted by income tax recoveries of $13 million and $4 million, respectively, associated with Part VI.1 tax. FortisAlberta–s earnings decreased $1 million, due to lower net transmission revenue and timing of the recognition of a regulatory decision in 2012 impacting depreciation, partially offset by timing of operating expenses, growth in energy infrastructure investment and customer growth. The utility–s depreciation rates were reduced, effective January 1, 2012, as a result of the decision related to FortisAlberta–s 2012 revenue requirements, the impact of which was not recognized until the second quarter of 2012 when the decision was received. FortisBC Electric–s earnings were $1 million lower quarter over quarter, due to the $2 million unfavourable impact for the first half of 2013 of the regulatory decision related to the first phase of the GCOC Proceeding, which was recognized in the second quarter of 2013 when the decision was received, partially offset by lower-than-expected finance charges, growth in energy infrastructure investment and higher capitalized allowance for funds used during construction.
In May 2013 the British Columbia Utilities Commission issued its decision on the first phase of its GCOC Proceeding. As a result, the allowed rate of return on common shareholders– equity (“ROE”) for FortisBC Energy Inc. has been set at 8.75%, as compared to 9.50% for 2012, and the common equity component of capital structure has been reduced from 40.0% to 38.5% for 2013 through 2015. The interim allowed ROEs for the other FortisBC Energy companies, FortisBC Energy (Vancouver Island) Inc. (“FEVI”) and FortisBC Energy (Whistler) Inc. (“FEWI”), and for FortisBC Electric were also reduced by 75 basis points for 2013 as a result of the first phase of the GCOC Proceeding, while the common equity components of the capital structures remain unchanged. Final allowed ROEs and capital structures for FEVI, FEWI and FortisBC Electric will be determined in the second phase of the GCOC Proceeding, which is currently underway.
In April 2013 Newfoundland Power received a cost of capital decision maintaining the utility–s allowed ROE and common equity component of capital structure at 8.8% and 45%, respectively, for 2013 through 2015. FortisAlberta–s allowed ROE and capital structure for 2013 remain to be determined.
Caribbean Regulated Electric Utilities contributed $6 million of earnings, comparable with the second quarter of 2012.
Non-Regulated Fortis Generation contributed $3 million of earnings compared to $6 million for the second quarter of 2012. The $3 million decrease in earnings is mainly related to lower production in Belize due to lower rainfall.
Non-Utility operations contributed earnings of $9 million, $1 million higher than earnings for the second quarter of 2012, largely related to performance at Fortis Properties– hotels in western Canada.
Corporate and other expenses were $36 million compared to $22 million for the second quarter of 2012. Corporate and other expenses for the second quarter of 2013 included $32 million in CH Energy Group transaction expenses, compared to $3 million for the same quarter last year. An approximate $8 million income tax recovery, associated with Part VI.1 tax, reduced Corporate and other expenses in the second quarter of 2013, compared to income tax expense of $3 million associated with Part VI.1 tax for the same quarter last year. Excluding the above-noted impacts, Corporate and other expenses were $4 million lower, quarter over quarter, mainly due to the favourable impact of the release of income tax provisions in the second quarter of 2013, a higher foreign exchange gain and lower finance charges, partially offset by higher preference share dividends.
Consolidated capital expenditures, before customer contributions, were approximately $548 million for the first half of 2013 and are expected to total approximately $1.3 billion for the year. Construction of the $900 million, 335-megawatt Waneta Expansion hydroelectric generating facility (“Waneta Expansion”) in British Columbia continues on time and on budget, with completion of the facility expected in spring 2015. Approximately $513 million in total has been invested in the Waneta Expansion since construction began in late 2010.
Cash flow from operating activities was $571 million for the first half of 2013 compared to $583 million for the first half of 2012.
Fortis has consolidated credit facilities of $2.7 billion, of which $1.7 billion was unused as at June 30, 2013. Credit facility borrowings as at June 30, 2013 include $605 million in drawings under the Corporation–s committed credit facility. In July 2013 Fortis issued 10 million Cumulative Redeemable Fixed Rate Reset First Preference Shares, Series K for gross proceeds of $250 million, the proceeds of which were used to redeem all of the Corporation–s First Preference Shares, Series C in July 2013 for $125 million, to repay a portion of credit facility borrowings and for other general corporate purposes. In July 2013 the Corporation also priced a private placement of 10-year US$285 million unsecured notes at 3.84% and 30-year US$40 million unsecured notes at 5.08%. The offering is scheduled to close on October 1, 2013. Proceeds from the offering will be used to repay a portion of US dollar-denominated committed credit facility borrowings incurred to initially finance a portion of the CH Energy Group acquisition.
“The second half of 2013 will continue to be very busy for Fortis, with significant regulatory proceedings in British Columbia and Alberta and with work continuing on capital projects for the year to ensure we continue to meet our customers– energy needs. Our five-year capital program, including Central Hudson, is projected to total $6 billion, which is expected to drive growth in earnings and dividends,” explains Marshall.
“We welcome the employees of Central Hudson to the Fortis team, now some 8,400 individuals strong. The addition of this well-run U.S. utility and its proven track record for providing customers with quality service will further enhance the positioning of Fortis as a leader in the North American utility industry,” concludes Marshall.
FORWARD-LOOKING INFORMATION
The following Fortis Inc. (“Fortis” or the “Corporation”) Management Discussion and Analysis (“MD&A”) has been prepared in accordance with National Instrument 51-102 – Continuous Disclosure Obligations. The MD&A should be read in conjunction with the interim unaudited consolidated financial statements and notes thereto for the three and six months ended June 30, 2013 and the MD&A and audited consolidated financial statements for the year ended December 31, 2012 included in the Corporation–s 2012 Annual Report. Financial information contained in the MD&A has been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and is presented in Canadian dollars unless otherwise specified.
Fortis includes forward-looking information in the Management Discussion and Analysis (“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 it 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: the Corporation–s forecasted gross consolidated capital expenditures for 2013 and total capital spending over the five-year period 2013 through 2017; the expectation that capital investment over the above-noted five-year period will allow utility rate base and hydroelectric investment to increase at a combined compound annual growth rate of approximately 6%; the expected nature, timing and capital cost related to the construction of the Waneta Expansion hydroelectric generating facility (“Waneta Expansion”); the expectation that, based on current tax legislation, future earnings will not be materially impacted by Part VI.1 tax; the expectation that cash required to complete subsidiary capital expenditure programs will be sourced from a combination of cash from operations, borrowings under credit facilities, equity injections from Fortis and long-term debt offerings; the expectation that the combination of available credit facilities and relatively low annual debt maturities and repayments will provide the Corporation and its subsidiaries with flexibility in the timing of access to capital markets; the expected consolidated long-term debt maturities and repayments on average annually over the next five years; the expectation that the Corporation and its subsidiaries will remain compliant with debt covenants during 2013; the expected timing of filing of regulatory applications and of receipt of regulatory decisions; the expectation that the acquisition of CH Energy Group, Inc. (“CH Energy Group”) will be accretive to earnings per common share of Fortis beginning in 2015; and the expectation that the Corporation–s capital expenditure program will support continuing growth in earnings and dividends.
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 material adverse regulatory decisions being received and the expectation of regulatory stability; FortisAlberta continues to recover its cost of service and earn its allowed rate of return on common shareholders– equity (“ROE”) under performance-based rate-setting, which commenced for a five-year term effective January 1, 2013; no significant variability in interest rates; 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 continued ability to maintain the gas and electricity systems to ensure their continued performance; no severe and prolonged downturn in economic conditions; no significant decline in capital spending; no material capital project and financing cost overrun related to the construction of the Waneta Expansion; sufficient liquidity and capital resources; the expectation that the Corporation will receive appropriate compensation from the Government of Belize (“GOB”) for the fair value of the Corporation–s investment in Belize Electricity that was expropriated by the GOB;
the expectation that Belize Electric Company Limited will not be expropriated by the GOB; the continuation of regulator-approved mechanisms to flow through the commodity cost of natural gas and energy supply costs in customer rates; the ability to hedge exposures to fluctuations in foreign exchange rates, natural gas commodity prices, electricity prices and fuel prices; no significant counterparty defaults; the continued competitiveness of natural gas pricing when compared with electricity and other alternative sources of energy; the continued availability of natural gas, fuel and electricity supply; continuation and regulatory approval of power supply and capacity purchase contracts; the ability to fund defined benefit pension plans, earn the assumed long-term rates of return on the related assets and recover net pension costs in customer rates; no significant changes in government energy plans and environmental laws that may materially negatively affect the operations and cash flows of the Corporation and its subsidiaries; no material change in public policies and directions by governments that could materially negatively affect the Corporation and its subsidiaries; maintenance of adequate insurance coverage; the ability to obtain and maintain licences and permits; retention of existing service areas; the ability to report under accounting principles generally accepted in the United States beyond 2014 or the adoption of International Financial Reporting Standards after 2014 that allows for the recognition of regulatory assets and liabilities; the continued tax-deferred treatment of earnings from the Corporation–s Caribbean operations; continued maintenance of information technology infrastructure; continued favourable relations with First Nations; 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. Risk factors which could cause results or events to differ from current expectations are detailed under the heading “Business Risk Management” in this MD&A, the Corporation–s MD&A for the year ended December 31, 2012 and in continuous disclosure materials filed from time to time with Canadian securities regulatory authorities. Key risk factors for 2013 include, but are not limited to: uncertainty of the impact a continuation of a low interest rate environment may have on the allowed ROE at each of the Corporation–s regulated utilities in western Canada; risk associated with the amount of compensation to be paid to Fortis for its investment in Belize Electricity that was expropriated by the GOB; and the timeliness of the receipt of compensation and the ability of the GOB to pay the compensation owing to Fortis.
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.
CORPORATE OVERVIEW
Fortis is the largest investor-owned gas and electric distribution utility in Canada. Its regulated utilities account for 90% of total assets and serve approximately 2.4 million gas and electricity customers across Canada and in New York State and the Caribbean. Fortis owns non-regulated hydroelectric generation assets in Canada, Belize and Upstate New York. The Corporation–s non-utility investments are comprised of hotels and commercial real estate in Canada and petroleum supply operations in the Mid-Atlantic Region of the United States.
Year-to-date June 30, 2013, the Corporation–s electricity distribution systems met a combined peak demand of approximately 5,159 megawatts (“MW”) and its gas distribution system met a peak day demand of 1,113 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 six months ended June 30, 2013 and to the “Corporate Overview” section of the 2012 Annual MD&A.
The Corporation–s main business, utility operations, is highly regulated and the earnings of the Corporation–s regulated utilities are primarily determined under cost of service (“COS”) regulation. Generally under COS regulation, the respective regulatory authority sets customer gas and/or electricity rates to permit a reasonable opportunity for the utility to recover, on a timely basis, estimated costs of providing service to customers, including a fair rate of return on a regulatory deemed or targeted capital structure applied to an approved regulatory asset value (“rate base”). The ability of a regulated utility to recover prudently incurred costs of providing service and earn the regulator-approved rate of return on common shareholders– equity (“ROE”) and/or rate of return on rate base assets (“ROA”) depends on the utility achieving the forecasts established in the rate-setting processes. As such, earnings of regulated utilities are generally impacted by: (i) changes in the regulator-approved allowed ROE and/or ROA and equity component of capital structure; (ii) changes in rate base; (iii) changes in energy sales or gas delivery volumes; (iv) changes in the number and composition of customers; (v) variances between actual expenses incurred and forecasted expenses used to determine revenue requirements and set customer rates; and (vi) timing differences within an annual financial reporting period between when actual expenses are incurred and when they are recovered from customers in rates. When forward test years are used to establish revenue requirements and set base customer rates, these rates are not adjusted as a result of actual COS being different from that which is estimated, other than for certain prescribed costs that are eligible to be deferred on the balance sheet. In addition, the Corporation–s regulated utilities, where applicable, are permitted by their respective regulatory authority to flow through to customers, without markup, the cost of natural gas, fuel and/or purchased power through base customer rates and/or the use of rate stabilization and other mechanisms.
When performance-based rate-setting (“PBR”) mechanisms are utilized in determining annual revenue requirements and resulting customer rates, a formula is generally applied that incorporates inflation and assumed productivity improvements. The use of PBR mechanisms should allow a utility a reasonable opportunity to recover prudent COS and earn its allowed ROE.
SIGNIFICANT ITEMS
Acquisition of CH Energy Group, Inc.: On June 27, 2013, Fortis acquired all of the outstanding common shares of CH Energy Group, Inc. (“CH Energy Group”) for US$65.00 per common share in cash, for an aggregate purchase price of approximately US$1.5 billion, including the assumption of US$518 million of debt on closing. The net purchase price of approximately $1,019 million (US$972 million) was financed through proceeds from the issuance of 18.5 million common shares of Fortis pursuant to the conversion of Subscription Receipts on closing of the acquisition for proceeds of approximately $567 million, net of after-tax expenses, with the balance being initially funded through drawings under the Corporation–s $1 billion committed credit facility.
CH Energy Group is an energy delivery company headquartered in Poughkeepsie, New York. Its main business, Central Hudson Gas & Electric Corporation (“Central Hudson”), is a regulated transmission and distribution (“T&D”) utility serving approximately 300,000 electric and 77,000 natural gas customers in eight counties of New York State–s Mid-Hudson River Valley. Central Hudson accounts for approximately 93% of the total assets of CH Energy Group and is subject to regulation by the New York State Public Service Commission (“PSC”) under a traditional COS model. CH Energy Group–s non-regulated operations mainly consist of Griffith Energy Services, Inc. (“Griffith”), which is primarily a fuel delivery business serving approximately 56,000 customers in the Mid-Atlantic Region of the United States.
To obtain regulatory approval of the acquisition, Fortis committed to provide Central Hudson–s customers and community with approximately US$50 million in financial benefits. These incremental benefits outlined in the PSC order approving the acquisition include: (i) US$35 million to cover expenses that would normally be recovered in customer rates, including certain storm-restoration expenses; (ii) guaranteed savings to customers of more than US$9 million over five years resulting from the elimination of costs CH Energy Group would otherwise incur as a public company; and (iii) the establishment of a US$5 million Community Benefit Fund to be used for low-income customer and economic development programs for communities and residents of the Mid-Hudson River Valley. In addition, electric and natural gas customers of Central Hudson will benefit from a delivery rate freeze through to June 30, 2015. The Company is committed to invest US$215 million in capital expenditures over the same two-year period, including an estimated US$50 million which will have a “storm-hardening” effect on its infrastructure.
The above-noted commitments of US$35 million and US$5 million, together with acquisition-related expenses of approximately US$8 million, have been recognized in the Corporation–s earnings for the second quarter of 2013. The acquisition is expected to be accretive to earnings per common share of Fortis beginning in 2015.
For further information on Central Hudson, refer to the “Segmented Results of Operation -Regulated Gas & Electric Utility – United States” section of this MD&A.
Part VI.1 Tax: In June 2013 the Government of Canada enacted changes associated with Part VI.1 tax on the Corporation–s preference share dividends. In accordance with US GAAP, income taxes are required to be recognized based on enacted tax legislation. In the second quarter of 2013, the Corporation recognized an approximate $25 million income tax recovery due to the enactment of higher deductions associated with Part VI.1 tax. The income tax recovery impacted earnings at Newfoundland Power, Maritime Electric and the Corporation as a result of the allocation of Part VI.1 tax in previous years. Currently, all legislative changes associated with Part VI.1 tax are enacted and, as a result, future earnings are not expected to be materially impacted by Part VI.1 tax.
Receipt of Regulatory Decisions: In March 2013 FortisAlberta received a decision from its regulator approving an interim increase in customer distribution rates, effective January 1, 2013.
In April 2013 Newfoundland Power received a cost of capital decision maintaining the utility–s allowed ROE and common equity component of capital structure at 8.8% and 45%, respectively, for 2013 through 2015.
In May 2013 the British Columbia Utilities Commission (“BCUC”) issued its decision on the first phase of its Generic Cost of Capital (“GCOC”) Proceeding for British Columbia utilities. As a result, the allowed ROE for FortisBC Energy Inc. (“FEI”), which is the benchmark utility for calculating the allowed ROE for certain utilities in British Columbia, has been set at 8.75%, as compared to 9.50% for 2012, and the common equity component of capital structure has been reduced from 40.0% to 38.5% for 2013 through 2015. The interim allowed ROEs for the other FortisBC Energy companies, FortisBC Energy (Vancouver Island) Inc. (“FEVI”) and FortisBC Energy (Whistler) Inc. (“FEWI”), and FortisBC Electric were also reduced by 75 basis points for 2013 as a result of the first phase of the GCOC Proceeding, while the common equity components of the capital structures remain unchanged. Final allowed ROEs and capital structures for FEVI, FEWI and FortisBC Electric will be determined in the second phase of the GCOC Proceeding, which is currently underway.
For a further discussion on the nature of the above regulatory decisions, refer to the “Material Regulatory Decisions and Applications” section of this MD&A.
Settlement of Expropriation Matters – Exploits River Hydro Partnership: In March 2013 the Corporation and the Government of Newfoundland and Labrador (“Government”) settled all matters, including release from all debt obligations, pertaining to the Government–s December 2008 expropriation of non-regulated hydroelectric generating assets and water rights in central Newfoundland, then owned by Exploits River Hydro Partnership (“Exploits Partnership”), in which Fortis held an indirect 51% interest. As a result of the settlement, an extraordinary after-tax gain of approximately $22 million was recognized in the first quarter of 2013.
Acquisition of the Electrical Utility Assets from the City of Kelowna: FortisBC Electric acquired the electrical utility assets of the City of Kelowna (the “City”) for approximately $55 million in March 2013, which now allows FortisBC Electric to directly serve some 15,000 customers formerly served by the City. FortisBC Electric had provided the City with electricity under a wholesale tariff and had operated and maintained the City–s electrical utility assets under contract since 2000.
FINANCIAL HIGHLIGHTS
Fortis has adopted a strategy of profitable growth with earnings per common share as the primary measure of performance. The Corporation–s business is segmented by franchise area and, depending on regulatory requirements, by the nature of the assets. Key financial highlights for the second quarter and year-to-date periods ended June 30, 2013 and June 30, 2012 are provided in the following table.
Factors Contributing to Quarterly and Year-to-Date Revenue Variances
Unfavourable
Favourable
Factors Contributing to Quarterly and Year-to-Date Energy Supply Costs Variances
Favourable
Unfavourable
Factor Contributing to Quarterly and Year-to-Date Operating Expenses Variances
Unfavourable
Factors Contributing to Quarterly and Year-to-Date Depreciation and Amortization Expense Variances
Unfavourable
Factors Contributing to Quarterly and Year-to-Date Other Income (Expenses), Net Variances
Unfavourable
Favourable
Factors Contributing to Quarterly and Year-to-Date Finance Charges Variances
Favourable
Unfavourable
Factors Contributing to Quarterly and Year-to-Date Income Tax (Recovery) Expense Variances
Favourable
Unfavourable
Factor Contributing to Year-to-Date Extraordinary Gain, Net of Tax Variance
Favourable
Factors Contributing to Quarterly Earnings Variance
Unfavourable
Favourable
Factors Contributing to Year-to-Date Earnings Variance
Favourable
Unfavourable
SEGMENTED RESULTS OF OPERATIONS
The basis of segmentation of the Corporation–s reportable segments is consistent with that disclosed in the 2012 Annual MD&A, except as follows as a result of the acquisition of CH Energy Group. Central Hudson is reported in a new segment “Regulated Gas & Electric Utility – United States”; and the former “Non-Regulated – Fortis Properties” segment is now “Non Regulated – Non-Utility” and is comprised of Fortis Properties and Griffith, the non-regulated operations of CH Energy Group.
For a discussion of the nature of regulation and material regulatory decisions and applications pertaining to the Corporation–s regulated utilities, refer to the “Regulatory Highlights” section of this MD&A. A discussion of the financial results of the Corporation–s reporting segments follows.
REGULATED GAS UTILITIES – CANADIAN
FORTISBC ENERGY COMPANIES (1)
Factors Contributing to Quarterly and Year-to-Date Gas Volumes Variances
Unfavourable
As at June 30, 2013, the total number of customers served by the FortisBC Energy companies was approximately 947,000. Net customer additions for the first half of 2013 were approximately 2,000, comparable to the first half of 2012.
The FortisBC Energy companies earn approximately the same margin regardless of whether a customer contracts for the purchase and delivery of natural gas or only for the delivery of natural gas. As a result of the operation of regulator-approved deferral mechanisms, changes in consumption levels and the commodity cost of natural gas from those forecast to set residential and commercial customer gas rates do not materially affect earnings.
Seasonality has a material impact on the earnings of the FortisBC Energy companies as a major portion of the gas distributed is used for space heating. Most of the annual earnings of the FortisBC Energy companies are realized in the first and fourth quarters.
Factors Contributing to Quarterly and Year-to-Date Revenue Variances
Unfavourable
Favourable
Factors Contributing to Quarterly and Year-to-Date Earnings Variances
Unfavourable
Favourable
REGULATED GAS & ELECTRIC UTILITY – UNITED STATES
CENTRAL HUDSON
Central Hudson is a regulated T&D utility serving approximately 300,000 electric and 77,000 natural gas customers in eight counties of New York State–s Mid-Hudson River Valley. The Company–s electric assets, which comprise approximately 77% of its total assets as at June 30, 2013, include over 11,700 kilometres of distribution lines and approximately 2,300 kilometres of transmission lines. The electric business met a peak demand of 1,168 MW in 2012. Central Hudson–s natural gas assets, which comprise the remaining 23% of its total assets as at June 30, 2013, include approximately 1,900 kilometres of distribution pipelines and more than 264 kilometres of transmission pipelines. The gas business met a peak day demand of 115 TJ in 2012.
Central Hudson primarily relies on electricity purchases from third-party providers and the New York Independent System Operator (“NYISO”)-administered energy and capacity markets to meet the demands of its full-service electricity customers. It also generates a small portion of its electricity requirements. Central Hudson purchases its gas supply requirements from a number of suppliers at various receipt points on pipelines that it has contracted with for firm transport capacity.
Regulation
Central Hudson is regulated by the PSC regarding such matters as rates, construction, operations, financing and accounting. Certain activities of the Company are subject to regulation by the U.S. Federal Energy Regulatory Commission under the Federal Power Act (United States). Central Hudson is also subject to regulation by the North American Electric Reliability Corporation.
Central Hudson operates under COS regulation as administered by the PSC. The PSC provides for the use of a future test year in the establishment of rates for the utility and, pursuant to this method, the determination of the approved rate of return on forecast rate base and deemed capital structure, together with the forecast of all reasonable and prudent costs, establishes the revenue requirement upon which the Company–s customer rates are determined. Once rates are approved, they are not adjusted as a result of actual COS being different from that which was applied for, other than for certain prescribed costs that are eligible for deferral account treatment.
Central Hudson–s allowed ROE is set at 10% on a deemed capital structure of 48% common equity. The Company began operating under a three-year rate order issued by the PSC effective July 1, 2010. As approved by the PSC in June 2013, the original three-year rate order has been extended for two years, through June 30, 2015, as a condition required to close the acquisition of CH Energy Group by Fortis. Effective July 1, 2013, Central Hudson is also subject to a modified earnings sharing mechanism, whereby the Company and customers share equally earnings in excess of the allowed ROE up to an achieved ROE that is 50 basis points above the allowed ROE, and share 10%/90% (Company/customers) earnings in excess of 50 basis points above the allowed ROE.
Central Hudson–s approved regulatory regime also allows for full recovery of purchased electricity and natural gas costs. The Company–s rates also include Revenue Decoupling Mechanisms (“RDMs”) which are intended to minimize the earnings impact resulting from reduced energy consumption as energy-efficiency programs are implemented. The RDMs allow the Company to recognize electric delivery revenue and gas revenue at the levels approved in rates for most of Central Hudson–s customer base. Deferral account treatment is approved for certain other specified costs, including provisions for manufactured gas plant (“MGP”) site remediation, pension and other post-employment benefit (“OPEB”) costs.
Financial Highlights
The financial statements of Central Hudson have been included in the consolidated financial statements of Fortis commencing June 27, 2013, the date of acquisition. Other than expenses associated with customer and community benefits offered by the Corporation to close the acquisition of CH Energy Group reported in the Corporate and Other segment, financial performance for Central Hudson from the date of acquisition through June 30, 2013 did not have a material impact on the Corporation–s consolidated statement of earnings.
Seasonality impacts the delivery revenues of Central Hudson, as sales of electricity are highest during the summer months, primarily due to the use of air conditioning and other cooling equipment, and sales of natural gas are highest during the winter months, primarily due to space heating usage.
REGULATED ELECTRIC UTILITIES – CANADIAN
FORTISALBERTA
Factors Contributing to Quarterly and Year-to-Date Energy Deliveries Variances
Favourable
Unfavourable
As a significant portion of FortisAlberta–s distribution revenue is derived from fixed or largely fixed billing determinants, changes in quantities of energy delivered are not entirely correlated with changes in revenue. Revenue is a function of numerous variables, many of which are independent of actual energy deliveries.
Factors Contributing to Quarterly and Year-to-Date Revenue Variances
Favourable
Unfavourable
Factors Contributing to Quarterly Earnings Variance
Unfavourable
Favourable
Factors Contributing to Year-to-Date Earnings Variance
Favourable
Unfavourable
In June 2013 parts of FortisAlberta–s service territory were impacted by the flooding in southern Alberta. Restoration efforts related to the flood did not have a material impact on the consolidated financial statements for the three and six months ended June 30, 2013. Restoration efforts are ongoing and the final impact on FortisAlberta–s operations, assets, earnings and cash flow is not fully determinable at this time.
FORTISBC ELECTRIC (1)
Factor Contributing to Quarterly Electricity Sales Variance
Favourable
Factor Contributing to Year-to-Date Electricity Sales Variance
Unfavourable
Factors Contributing to Quarterly and Year-to-Date Revenue Variances
Favourable
Unfavourable
Factors Contributing to Quarterly and Year-to-Date Earnings Variances
Unfavourable
Favourable
NEWFOUNDLAND POWER
Factors Contributing to Quarterly and Year-to-Date Electricity Sales Variances
Favourable
Factors Contributing to Quarterly and Year-to-Date Revenue Variances
Favourable
Unfavourable
Factors Contributing to Quarterly and Year-to-Date Earnings Variances
Favourable
OTHER CANADIAN ELECTRIC UTILITIES (1)
Factors Contributing to Quarterly and Year-to-Date Electricity Sales Variances
Unfavourable
Favourable
Factors Contributing to Quarterly and Year-to-Date Revenue Variances
Favourable
Unfavourable
Factors Contributing to Quarterly and Year-to-Date Earnings Variances
Favourable
Unfavourable
REGULATED ELECTRIC UTILITIES – CARIBBEAN (1)
Factors Contributing to Quarterly and Year-to-Date Electricity Sales Variances
Favourable
Factors Contributing to Quarterly and Year-to-Date Revenue Variances
Favourable
Factors Contributing to Quarterly and Year-to-Date Earnings Variances
Favourable
Unfavourable
NON-REGULATED – FORTIS GENERATION (1)
Factors Contributing to Quarterly and Year-to-Date Energy Sales Variances
Unfavourable
Favourable
Factor Contributing to Quarterly and Year-to-Date Revenue Variances
Unfavourable
Factors Contributing to Quarterly and Year-to-Date Earnings Variances
Unfavourable
Favourable
Since the end of the second quarter of 2013, a tropical depression that passed over Belize provided enough precipitation to fill the Chalillo reservoir. The hydroelectric generating facilities in Belize are currently running at full capacity.
NON-REGULATED – NON-UTILITY
The Non-Utility segment is comprised of Fortis Properties and Griffith. Fortis Properties owns and operates 23 hotels, comprised of more than 4,400 rooms, in eight Canadian provinces, and owns and operates approximately 2.7 million square feet of commercial office and retail space, primarily in Atlantic Canada. Non-regulated operations of CH Energy Group mainly consist of Griffith, which is primarily a fuel delivery business serving approximately 56,000 customers in the Mid-Atlantic Region of the United States.
Fortis Properties
Factors Contributing to Quarterly RevPar Variance
Favourable
Factor Contributing to Year-to-Date RevPar Variance
Favourable
Factor Contributing to Quarterly and Year-to-Date Revenue Variances
Favourable
Factors Contributing to Quarterly and Year-to-Date Earnings Variances
Favourable
Unfavourable
Griffith
Griffith is an indirect wholly owned subsidiary of CH Energy Group, which supplies heating oil, gasoline, diesel fuel, kerosene and propane to approximately 56,000 customers in Maryland, Delaware, Washington D.C. and Virginia in the United States. Griffith also installs and maintains heating, ventilating and air conditioning equipment in these markets, which includes a customer base of an additional 12,000.
The financial statements of Griffith have been included in the consolidated financial statements of Fortis commencing June 27, 2013, the date of acquisition. Financial performance for Griffith from the date of acquisition through June 30, 2013 did not have a material impact on the Corporation–s consolidated statement of earnings.
A considerable portion of the sales volume for Griffith is derived directly or indirectly from usage in space heating and air conditioning and, as a result, seasonality impacts Griffith–s earnings.
CORPORATE AND OTHER (1)
Factors Contributing to Quarterly and Year-to-Date Net Corporate and Other Expenses Variances
Unfavourable
Favourable
REGULATORY HIGHLIGHTS
The nature of regulation and material regulatory decisions and applications associated with each of the Corporation–s regulated gas and electric utilities for the first half of 2013 are summarized as follows.
CONSOLIDATED FINANCIAL POSITION
The following table outlines the significant changes in the consolidated balance sheet between June 30, 2013 and December 31, 2012. The changes in the consolidated balance sheet as at June 30, 2013 associated with the acquisition of CH Energy Group are itemized separately below.
LIQUIDITY AND CAPITAL RESOURCES
The table below outlines the Corporation–s sources and uses of cash for the three and six months ended June 30, 2013, as compared to the same periods in 2012, followed by a discussion of the nature of the variances in cash flows.
Operating Activities: Cash flow from operating activities was $36 million higher quarter over quarter. The increase was primarily due to: (i) cash proceeds received, in the second quarter of 2013, as a result of the March 2013 settlement of the expropriation of the non-regulated hydroelectric generating assets and water rights of the Exploits Partnership; and (ii) favourable changes in working capital associated with accounts payable and other current liabilities.
Cash flow from operating activities was $12 million lower year to date compared to the same period last year. The decrease was mainly due to unfavourable changes in working capital, primarily at FortisAlberta and the FortisBC Energy companies, partially offset by favourable changes in working capital at Maritime Electric. The decrease was partially offset by: (i) cash proceeds received, in the second quarter of 2013, as a result of the March 2013 settlement of expropriation matters of the Exploits Partnership; and (ii) the collection from customers of regulator-approved increases in depreciation and amortization expense.
Investing Activities: Cash used in investing activities was $1,016 million higher for the quarter and $1,094 million higher year to date compared to the same periods last year. The increases were primarily due to the acquisition of CH Energy Group on June 27, 2013 for a net cash purchase price of $1,019 million and FortisBC Electric–s acquisition of electrical utility assets of the City of Kelowna in March 2013 for approximately $55 million.
Higher capital spending at FortisAlberta and the FortisBC Energy companies for the quarter and year to date was partially offset by lower capital spending related to the non-regulated Waneta Expansion.
Financing Activities: Cash provided by financing activities was $958 million higher for the quarter and $1,075 million higher year to date compared to the same periods last year. The increases were primarily due to the issuance of common shares and borrowings under the Corporation–s committed credit facility in connection with the acquisition of CH Energy Group.
Net repayments of short-term borrowings were $35 million higher quarter over quarter, driven by Caribbean Utilities, partially offset by the FortisBC Energy companies.
In May 2013 Caribbean Utilities issued 15-year US$10 million 3.34% and 20-year US$40 million 3.54% senior unsecured notes. The proceeds were used to repay short-term borrowings and to finance capital expenditures.
Repayments of long-term debt and capital lease and finance obligations and net borrowings under committed credit facilities for the quarter and year to date compared to the same periods last year are summarized in the following tables.
Borrowings under credit facilities by the utilities are primarily in support of their capital expenditure programs and/or for working capital requirements. Repayments are primarily financed through the issuance of long-term debt, cash from operations and/or equity injections from Fortis. From time to time, proceeds from preference share, common share and long-term debt offerings are used to repay borrowings under the Corporation–s committed credit facility. The borrowings under the Corporation–s committed credit facility in 2013 were incurred to finance a portion of the acquisition of CH Energy Group, to support the construction of the Waneta Expansion and to finance an equity injection into FortisAlberta in support of energy infrastructure investment.
Advances of approximately $20 million during the quarter and $42 million year to date were received from non-controlling interests in the Waneta Partnership to finance capital spending related to the Waneta Expansion, compared to $27 million received during the second quarter of 2012 and $56 million received year-to-date 2012. In January 2012 advances of approximately $12 million were received from two First Nations bands, representing their 15% equity investment in the LNG storage facility on Vancouver Island.
Proceeds from the issuance of common shares were $575 million higher for the quarter and $583 million higher year to date compared to the same periods in 2012. The increases were primarily due to the issuance of 18.5 million common shares, as a result of the conversion of the Subscription Receipts on closing of the CH Energy Group acquisition, for proceeds of approximately $567 million, net of after-tax expenses. Higher proceeds from the issuance of common shares for the quarter and year to date also reflected a higher number of common shares issued under the Corporation–s stock option and employee share purchase plans.
Common share dividends paid during the second quarter of 2013 were $44 million, net of $15 million of dividends reinvested, compared to $42 million, net of $15 million of dividends reinvested, paid during the same quarter of 2012. Common share dividends paid in the first half of 2013 were $85 million, net of $34 million in dividends reinvested, compared to $86 million, net of $28 million in dividends reinvested, paid in the first half of 2012. The dividend paid per common share for the first and second quarters of 2013 was $0.31 compared to $0.30 for the first and second quarters of 2012. The weighted average number of common shares outstanding for the second quarter and year to date was 193.4 million and 192.7 million, respectively, compared to 189.6 million and 189.3 million, respectively, for the same periods in 2012.
CONTRACTUAL OBLIGATIONS
The Corporation–s consolidated contractual obligations with external third parties in each of the next five years and for periods thereafter, as at June 30, 2013, are outlined in the following table. A detailed description of the nature of the obligations is provided in the 2012 Annual MD&A and below, where applicable.
Other contractual obligations, which are not reflected in the above table, did not materially change from those disclosed in the 2012 Annual MD&A, except as follows.
In May 2013 FortisBC Electric entered into a new PPA with BC Hydro to purchase up to 200 MW of capacity and 1,752 GWh of associated energy annually for a 20-year term beginning October 1, 2013. This new PPA does not change the basic parameters of the BC Hydro PPA, which expires on September 30, 2013. An executed version of the PPA was submitted by BC Hydro to the BCUC in May 2013 and is pending regulatory approval. Power purchases from the new PPA are expected to be recovered in customer rates.
For a discussion of the nature and amount of the Corporation–s consolidated capital expenditure program, that is not included in the preceding Contractual Obligations table, refer to the “Capital Expenditure Program” section of this MD&A.
CAPITAL STRUCTURE
The Corporation–s principal businesses of regulated gas and electricity distribution require ongoing access to capital to enable the utilities to fund maintenance and expansion of infrastructure. Fortis raises debt at the subsidiary level to ensure regulatory transparency, tax efficiency and financing flexibility. Fortis generally finances a significant portion of acquisitions at the corporate level with proceeds from common share, preference share and long-term debt offerings. To help ensure access to capital, the Corporation targets a consolidated long-term capital structure containing approximately 40% equity, including preference shares, and 60% debt, as well as investment-grade credit ratings. Each of the Corporation–s regulated utilities maintains its own capital structure in line with the deemed capital structure reflected in each of the utility–s customer rates.
The consolidated capital structure of Fortis is presented in the following table.
The change in the capital structure was primarily due to the financing of the acquisition of CH Energy Group, including: (i) the conversion of Subscription Receipts into common shares for $567 million, net of after-tax expenses; (ii) debt assumed upon acquisition; and (iii) higher borrowings under the Corporation–s committed credit facility, to initially finance the remaining portion of the acquisition. The capital structure was also impacted by an increase in total debt, mainly in support of energy infrastructure investment, net earnings attributable to common equity shareholders for the six months ended June 30, 2013, less dividends declared on common shares, and the issuance of common shares under the Corporation–s Dividend Reinvestment Plan.
Excluding capital lease and finance obligations, the Corporation–s capital structure as at June 30, 2013 was 54.7% debt, 8.7% preference shares and 36.6% common shareholders– equity (December 31, 2012 – 53.6% debt, 10.1% preference shares and 36.3% common shareholders– equity).
CREDIT RATINGS
The Corporation–s credit ratings are as follows:
In February 2013 S&P and DBRS affirmed the Corporation–s debt credit ratings. The above-noted credit ratings reflect the Corporation–s business-risk profile and diversity of its operations, the stand-alone nature and financial separation of each of the regulated subsidiaries of Fortis, management–s commitment to maintaining low levels of debt at the holding company level, the Corporation–s reasonable credit metrics and its demonstrated ability and continued focus on acquiring and integrating stable regulated utility businesses financed on a conservative basis. The credit ratings also reflect the Corporation–s financing plans for the acquisition of CH Energy Group and the expected completion of the Waneta Expansion on time and on budget.
CAPITAL EXPENDITURE PROGRAM
A breakdown of the $548 million in gross consolidated capital expenditures by segment for the first half of 2013 is provided in the following table.
Planned capital expenditures are based on detailed forecasts of energy demand, weather, cost of labour and materials, as well as other factors, including economic conditions, which could change and cause actual expenditures to differ from those forecast.
Gross consolidated capital expenditures for 2013 are forecast at approximately $1.3 billion. There have been no material changes in the overall expected level, nature and timing of the Corporation–s significant capital projects from those that were disclosed in the 2012 Annual MD&A, with the exception of those noted below for the Waneta Expansion, FAES and Central Hudson.
Capital expenditures related to the Waneta Expansion for 2013 are expected to be lower than the original forecast of $227 million, primarily due to the timing of payments. Due to the uncertainty of the timing of alternative energy projects, capital expenditures for 2013 at FAES are delayed and are expected to be lower than the original forecast of $43 million. Capital expenditures for 2013 now include approximately $50 million in capital spending forecast at Central Hudson for the second half of 2013.
Construction of the $900 million Waneta Expansion is ongoing, with an additional $77 million invested in the first half of 2013. To date, approximately $513 million has been invested in the Waneta Expansion since construction began late in 2010. Key construction activities in the first half of 2013 include the ongoing civil construction of the powerhouse and intake, installation of the turbine components, installation of ancillary mechanical and electrical powerhouse services, and most notably, the substantial completion of the intake channel excavation. The key offsite activity in the first half of 2013 was the successful completion of the factory acceptance testing of the generator step-up transformers.
Over the five-year period 2013 through 2017, gross consolidated capital expenditures are expected to be approximately $6 billion. The approximate breakdown of the capital spending expected to be incurred is as follows: 55% at Canadian Regulated Electric Utilities, driven by FortisAlberta; 20% at Canadian Regulated Gas Utilities; 11% at Central Hudson; 4% at Caribbean Regulated Electric Utilities; and the remaining 10% at non-regulated operations. Capital expenditures at the regulated utilities are subject to regulatory approval. Over the five-year period, on average annually, the approximate breakdown of the total capital spending to be incurred is as follows: 36% to meet customer growth, 41% for sustaining capital expenditures, and 23% for facilities, equipment, vehicles, information technology and other assets.
CASH FLOW REQUIREMENTS
At the subsidiary level, it is expected that operating expenses and interest costs will generally be paid out of subsidiary operating cash flows, with varying levels of residual cash flows available for subsidiary capital expenditures and/or dividend payments to Fortis. Borrowings under credit facilities may be required from time to time to support seasonal working capital requirements. Cash required to complete subsidiary capital expenditure programs is also expected to be financed from a combination of borrowings under credit facilities, equity injections from Fortis and long-term debt offerings.
The Corporation–s ability to service its debt obligations and pay dividends on its common shares and preference shares is dependent on the financial results of the operating subsidiaries and the related cash payments from these subsidiaries. Certain regulated subsidiaries may be subject to restrictions that may limit their ability to distribute cash to Fortis.
Cash required of Fortis to support subsidiary capital expenditure programs and finance acquisitions is expected to be derived from a combination of borrowings under the Corporation–s committed corporate credit facility and proceeds from the issuance of common shares, preference shares and long-term debt. Depending on the timing of cash payments from the subsidiaries, borrowings under the Corporation–s committed corporate credit facility may be required from time to time to support the servicing of debt and payment of dividends.
As at June 30, 2013, management expects consolidated long-term debt maturities and repayments to average approximately $310 million annually over the next five years, excluding borrowings under the Corporation–s committed credit facility which are expected to be replaced with long-term financing. The combination of available credit facilities and relatively low annual debt maturities and repayments will provide the Corporation and its subsidiaries with flexibility in the timing of access to capital markets.
In May 2012 Fortis filed a short-form base shelf prospectus under which Fortis may offer, from time to time during the 25-month period from May 10, 2012, by way of a prospectus supplement, common shares, preference shares, subscription receipts and/or unsecured debentures in the aggregate amount of up to $1.3 billion (or the equivalent in US dollars or other currencies). The base shelf prospectus provides the Corporation with flexibility to access securities markets in a timely manner.
Through prospectus supplements filed under its base shelf prospectus, Fortis offered and sold: (i) approximately $601 million of Subscription Receipts in June 2012 (refer to the “Significant Items” section in this MD&A); (ii) $200 million First Preference Shares, Series J in November 2012; and (iii) $250 million First Preference Shares, Series K in July 2013 (refer to the “Subsequent Events” section in this MD&A). The remaining room under the base shelf prospectus is approximately $250 million.
In July 2013 FortisBC Electric filed a short-form base shelf prospectus to establish a Medium-Term Note (“MTN”) Debentures Program and entered into a dealer agreement with certain affiliates of a group of Canadian Chartered Banks. Upon filing the shelf prospectus, the Company may from time to time during the 25-month life of the base shelf prospectus, issue MTN Debentures in an aggregate principal amount of up to $300 million. The establishment of the MTN Debentures Program has been approved by the BCUC.
Fortis and its subsidiaries were compliant with debt covenants as at June 30, 2013 and are expected to remain compliant throughout 2013.
CREDIT FACILITIES
As at June 30, 2013, the Corporation and its subsidiaries had consolidated credit facilities of approximately $2.7 billion, of which $1.7 billion was unused, including $395 million unused under the Corporation–s $1 billion committed revolving corporate credit facility. The credit facilities are syndicated mostly with the seven largest Canadian banks, with no one bank holding more than 20% of these facilities. Approximately $2.6 billion of the total credit facilities are committed facilities with maturities ranging from 2013 through 2018.
The following summary outlines the credit facilities of the Corporation and its subsidiaries.
As at June 30, 2013 and December 31, 2012, certain borrowings under the Corporation–s and subsidiaries– credit facilities were classified as long-term debt. These borrowings are under long-term committed credit facilities and management–s intention is to refinance these borrowings with long-term permanent financing during future periods.
In January 2013 FEVI–s $20 million unsecured committed non-revolving credit facility matured and was not replaced.
In April 2013 FortisBC Electric renegotiated and amended its credit facility agreement, resulting in an extension to the maturity of the Company–s $150 million unsecured committed revolving credit facility with $100 million now maturing in May 2016 and $50 million now maturing in May 2014. The amended credit facility agreement contains substantially similar terms and conditions as the previous credit facility agreement.
In April 2013 FHI extended its $30 million unsecured committed revolving credit facility to mature in May 2014 from May 2013.
In May 2013 FortisOntario extended its $30 million unsecured revolving credit facility to mature in June 2014 from June 2013.
In June 2013 Fortis Turks and Caicos entered into new short-term unsecured demand credit facilities for US$31 million ($33 million), replacing its previous US$21 million ($22 million) facilities. The new facilities are comprised of a revolving operating credit facility of US$12 million ($13 million), a capital expenditure line of credit of US$10 million ($11 million) and a US$9 million ($9 million) emergency standby loan. The capital expenditure line of credit matures in December 2013. The remaining facilities mature in June 2014. The new credit facilities reflect a decrease in pricing but otherwise contain terms and conditions substantially similar to the previous facilities.
As at June 30, 2013, CH Energy Group had a US$100 million ($105 million) unsecured revolving credit facility maturing in October 2015, and Central Hudson had a US$150 million ($158 million) unsecured committed revolving credit facility maturing in October 2016.
In July 2013 FEI, FEVI and FortisAlberta amended their $500 million, $200 million and $250 million committed revolving credit facilities, resulting in extensions to the maturity dates to August 2015, December 2015 and August 2018, respectively, from August 2014, December 2013 and August 2016, respectively. The new agreements contain substantially similar terms and conditions as the previous credit facility agreements.
FINANCIAL INSTRUMENTS
The carrying values of the Corporation–s consolidated financial instruments approximate their fair values, reflecting the short-term maturity, normal trade credit terms and/or nature of these instruments, except as follows.
The fair value of long-term debt is calculated using quoted market prices when available. When quoted market prices are not available, as is the case with the Waneta Partnership promissory note and certain long-term debt, the fair value is determined by either: (i) discounting the future cash flows of the specific debt instrument at an estimated yield to maturity equivalent to benchmark government bonds or treasury bills, with similar terms to maturity, plus a credit risk premium equal to that of issuers of similar credit quality; or (ii) by obtaining from third parties indicative prices for the same or similarly rated issues of debt of the same remaining maturities. Since the Corporation does not intend to settle the long-term debt or promissory note prior to maturity, the excess of the estimated fair value above the carrying value does not represent an actual liability.
The Financial Instruments table above excludes the long-term other asset associated with the Corporation–s expropriated investment in Belize Electricity. Due to uncertainty in the ultimate amount and ability of the Government of Belize (“GOB”) to pay appropriate fair value compensation owing to Fortis for the expropriation of Belize Electricity, the Corporation ha