ST. JOHN–S, NEWFOUNDLAND AND LABRADOR — (Marketwired) — 11/07/14 — Fortis Inc. (“Fortis” or the “Corporation”) (TSX: FTS) released its third quarter results today. “The third quarter was a period of significant transition for Fortis,” says Barry Perry, President, Fortis. “We closed the acquisition of UNS Energy, announced a strategic review of Fortis Properties and implemented our new organizational structure.”
Net earnings attributable to common equity shareholders for the third quarter were $14 million, or $0.06 per common share, compared to $48 million, or $0.23 per common share, for the third quarter of 2013. Results for the third quarter of 2014 were impacted by a number of non-recurring expenses associated with the acquisition of UNS Energy Corporation (“UNS Energy”). Earnings for the third quarter were reduced by $35 million, or $0.16 per common share, due to one-time acquisition-related expenses and customer benefits offered to obtain regulatory approval of the acquisition of UNS Energy. Interest expense of $23 million after tax, or $0.11 per common share, including the make-whole payment, associated with convertible debentures issued to finance a portion of the acquisition of UNS Energy was recognized in the third quarter. Excluding the above-noted impacts, net earnings attributable to common equity shareholders for the third quarter of 2014 were $72 million, or $0.33 per common share, an increase of $24 million, or $0.10 per common share, from the same period last year.
On August 15, 2014, Fortis acquired UNS Energy for US$60.25 per common share in cash, for a purchase price of approximately US$4.5 billion, including the assumption of approximately US$2.0 billion of debt. UNS Energy, headquartered in Tucson, Arizona, is engaged through its primary subsidiaries in the regulated electric generation and energy delivery business, primarily in the State of Arizona, and serves approximately 658,000 electricity and gas customers. The net cash purchase price of approximately $2.7 billion (US$2.5 billion) was initially financed through: (i) drawings of $2 billion under the Corporation–s acquisition credit facilities, consisting of a $1.7 billion short-term bridge facility, repayable in full nine months following its advance, and a $300 million medium-term bridge facility, repayable in full on the second anniversary of its advance (together, the “Acquisition Credit Facilities”); (ii) available cash on hand; and (iii) drawings of US$265 million under the Corporation–s revolving credit facility.
“Closing the acquisition of UNS Energy was a major milestone for Fortis. It further diversifies regulated assets and enhances our presence significantly in the United States,” says Stan Marshall, Chief Executive Officer, Fortis.
The Corporation–s regulated utilities contributed earnings of $89 million, an increase of $34 million from the third quarter of 2013. The increase was driven by earnings contribution of $37 million at UNS Energy from the date of acquisition. Earnings for UNS Energy–s electric utilities are generally highest in the second and third quarters due to the use of air conditioning and other cooling equipment. FortisAlberta–s earnings were $2 million higher quarter over quarter mainly due to restoration costs of approximately $1.5 million recognized in the third quarter of 2013 related to flooding in southern Alberta in June 2013. Earnings at Caribbean Regulated Electric Utilities were $2 million higher than the third quarter of 2013, driven by electricity sales growth. The increases were partially offset by lower earnings at Central Hudson, due to the impact of higher depreciation and operating expenses during the two-year rate freeze period post acquisition in June 2013, and at FortisBC Electric, due to the impact of lower-than-expected finance charges in 2013, which were not subject to regulatory deferral mechanisms last year.
“Fortis regulated utilities performed well during the quarter. The expedited closing of the UNS Energy transaction contributed significantly during the quarter. Excluding the one-time acquisition-related expenses, the acquisition of UNS Energy was immediately accretive to earnings per common share,” states Perry.
Non-Regulated Fortis Generation contributed $4 million to earnings, compared to $8 million for the third quarter of 2013. The decrease was associated with decreased production in Belize, due to lower rainfall.
Non-Utility operations contributed earnings of $9 million, an increase of $3 million from the third quarter of 2013. Earnings for the third quarter of 2013 reflected a net loss of approximately $2.5 million at non-regulated Griffith Energy Services, Inc., which was sold in March 2014. In September 2014 the Corporation announced that it will engage in a review of strategic options for its hotel and commercial real estate business, operating as Fortis Properties. Strategic options may include, but are not limited to, a sale of all or a portion of the assets, a sale of shares of Fortis Properties or an initial public offering. This review process commenced in October 2014 and is expected to continue through the balance of 2014 and into 2015.
Corporate and Other expenses were $9 million higher quarter over quarter, excluding the impacts of interest expense on the convertible debentures and acquisition-related expenses. The increase for the quarter was primarily due to higher finance charges, largely due to the acquisition of UNS Energy, and higher operating expenses. The increase in operating expenses was mainly due to employee-related expenses, including approximately $8 million in after-tax retirement expenses recognized in the third quarter of 2014 and share-based compensation expenses as a result of share price appreciation, combined with higher legal and consulting fees and general inflationary increases. The increase in Corporate and Other expenses was partially offset by a $5 million foreign exchange gain in the third quarter of 2014 compared to a $2 million foreign exchange loss in the same quarter last year, a higher income tax recovery and interest income.
A decision on multi-year performance-based rate-setting applications in British Columbia was received in September 2014 and did not have a material impact on earnings in the quarter. A generic cost of capital proceeding is continuing in Alberta and the outcome is expected in the fourth quarter of 2014. A hearing related to FortisAlberta–s combined capital tracker application for 2013 through 2015, which is an application for revenue increases related to its capital expenditure program, was held in October 2014. FortisAlberta continues to recognize capital tracker revenue based on the interim regulatory decision granting 60% of the applied for capital tracker amounts. A decision on the combined capital tracker application is expected in the first quarter of 2015. In July 2014 Central Hudson filed a general rate application to establish rates effective mid-2015.
The financing associated with the acquisition of UNS Energy is substantially complete. Fortis completed the sale of $1.8 billion 4% convertible unsecured subordinated debentures represented by Installment Receipts. Proceeds from the first installment of approximately $599 million were received in January 2014. A significant portion of these cash proceeds were used to finance a portion of the UNS Energy acquisition. Proceeds from the final installment of approximately $1.2 billion were received on October 28, 2014 and were used to repay borrowings under the Corporation–s Acquisition Credit Facilities initially used to finance a portion of the UNS Energy acquisition. Following the receipt of the final installment, on October 28, 2014, approximately 58.2 million common shares of Fortis were issued on conversion of the debentures. In September 2014 Fortis issued 24 million 4.1% Cumulative Redeemable Fixed Rate Reset First Preference Shares, Series M for gross proceeds of $600 million. The net proceeds were used to repay a portion of borrowings under the Acquisition Credit Facilities used to initially finance the acquisition of UNS Energy.
The Corporation and its regulated utilities raised over $1 billion in long-term debt year-to-date 2014. In March 2014 Fortis priced a private placement of US$500 million in senior unsecured notes. The notes were issued in multiple tranches with terms to maturity ranging from 5 years to 30 years and coupon rates ranging from 2.92% to 5.03%. On June 30, 2014, Fortis issued US$213 million of the senior unsecured notes, the net proceeds of which were used to repay US-dollar denominated borrowings on the Corporation–s credit facility and for general corporate purposes. The remaining US$287 million of the senior unsecured notes were issued on September 15, 2014. Net proceeds were used to refinance existing indebtedness, including the US$150 million 5.74% senior unsecured notes of Fortis that matured in October 2014 and $125 million 5.56% unsecured debentures of a subsidiary that matured in September 2014, and for general corporate purposes. In September 2014 FortisAlberta issued $275 million unsecured debentures in two tranches, comprised of 10-year $150 million unsecured debentures at 3.30% and 30-year $125 million unsecured debentures at 4.11%. Net proceeds were used to repay $200 million 5.33% unsecured debentures that matured in October 2014, to finance capital expenditures and for general corporate purposes. In October 2014 FortisBC Electric issued 30-year $200 million unsecured debentures at 4.00%. Net proceeds will be used to repay $140 million 5.48% unsecured debentures maturing in November 2014, to finance capital expenditures and for general corporate purposes.
Cash flow from operating activities was $648 million year-to-date 2014 compared to $666 million for the same period last year. The decrease was primarily due to unfavourable changes in working capital.
Consolidated capital expenditures were approximately $875 million year-to-date 2014. Construction of the $900 million, 335-megawatt (“MW”) 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 $648 million has been invested in the Waneta Expansion since construction began in late 2010. In October 2014 FortisBC started construction of its Tilbury liquefied natural gas (“LNG”) facility expansion in British Columbia. The Tilbury expansion will be included in regulated rate base and is estimated to cost approximately $400 million. It will include a second LNG tank and a new liquefier, both to be in service in the second half of 2016.
The Corporation–s capital program is expected to total $1.8 billion in 2014, which includes capital spending of approximately $450 million (US$400 million) at UNS Energy from the date of acquisition. In December 2014 UNS Energy is expected to purchase Unit 3 of the Gila River generating station, which is a gas-fired combined-cycle unit with a capacity of 550 MW, for US$219 million. Over the five-year period 2014 through 2018, the Corporation–s capital program is expected to exceed $9 billion.
“Following a decade of strong growth, primarily achieved through acquisitions, Fortis is now entering a period of significant organic growth, with a four-year compound annual growth rate in rate base through 2018 estimated at 7%,” says Perry. “Fortis is also pursuing significant natural gas investment opportunities, particularly in British Columbia. Two new regulated projects – further expansion of the Tilbury LNG facility and the Woodfibre pipeline expansion, could increase the four-year compound annual growth rate in rate base through 2018 to 8.5%,” he concludes.
Teleconference to Discuss Third Quarter 2014 Results
A teleconference and webcast will be held on November 7 at 10:00 a.m. (Eastern). Barry Perry, President and incoming Chief Executive Officer, Fortis, and Karl Smith, Executive Vice President, Chief Financial Officer, Fortis, will discuss the Corporation–s third quarter 2014 results.
Analysts, members of the media and other interested parties in North America are invited to participate by calling 1.877.223.4471. International participants may participate by calling 647.788.4922. Please dial in 10 minutes prior to the start of the call. No pass code is required.
A live and archived audio webcast of the teleconference will be available on the Corporation–s website, .
A replay of the conference will be available two hours after the conclusion of the call until November 17, 2014. Please call 1.800.585.8367 or 416.621.4642 and enter pass code 22025223.
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 nine months ended September 30, 2014 and the MD&A and audited consolidated financial statements for the year ended December 31, 2013 included in the Corporation–s 2013 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 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 intent to engage in a review of strategic options for its hotel and commercial real estate business; the expectation that UNS Energy Corporation (“UNS Energy”) is able to satisfy the requirements of its customer base and meet future peak demand requirements; the expectation that there will be a significant reduction in the use of coal in certain of UNS Energy–s generating facilities by 2020; the expectation that the amalgamation of the FortisBC Energy companies will be effective on December 31, 2014 and upon amalgamation the allowed capital structure and allowed rate of return on common shareholders– equity (“ROE”) of the amalgamated entity will be consistent with FortisBC Energy Inc.;
the expected timing of filing of regulatory applications and receipt and outcome of regulatory decisions; the Corporation–s forecast gross consolidated capital expenditures for 2014 and total capital spending over the five-year period 2014 through 2018; the nature, timing and amount of certain capital projects and their expected costs and time to complete; the expectation that the Corporation–s significant capital expenditure program will support continuing growth in earnings and dividends; 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 Corporation–s subsidiaries will be able to source the cash required to fund their 2014 capital expenditure programs, operating and interest costs, and dividend payments; the expected consolidated long-term debt maturities and repayments in 2014 and on average annually over the next five years; management–s intention to refinance borrowings under long-term committed credit facilities with long-term permanent financing; the expectation that long-term debt will not be settled prior to maturity; the expectation that the Corporation and its subsidiaries will continue to have reasonable access to capital in the near to medium terms; 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 expectation that the Corporation and its subsidiaries will remain compliant with debt covenants during 2014; the intent of management to hedge future exchange rate fluctuations and monitor its foreign currency exposure; the expectation that economic conditions in the State of Arizona will improve; the impact of advances in technology and new energy efficiency standards on the Corporation–s results of operations; the impact of new or revised environmental laws and regulations on the Corporation–s results of operations; the expectation that any liability from current legal proceedings would not have a material adverse effect on the Corporation–s consolidated financial position and results of operations; the belief that the Corporation has a strong, well-positioned case supporting the unconstitutionality of the expropriation of the Corporation–s investment in Belize; the expectation that ongoing labour negotiations will be settled in 2014; and the expectation that the adoption of future accounting pronouncements will not have a material impact on the Corporation–s consolidated financial statements.
The forecasts and projections that make up the forward-looking information are based on assumptions which include, but are not limited to: a favorable outlook for the potential sale of assets or shares in the hotel and commercial real estate market; the receipt of applicable regulatory approvals and requested rate orders, no material adverse regulatory decisions being received, and the expectation of regulatory stability; FortisAlberta–s continued recovery of its cost of service and ability to earn its allowed ROE under performance-based rate-setting (“PBR”), 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 electricity and gas 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 non-regulated Waneta Expansion hydroelectric generating facility; sufficient liquidity and capital resources;
the expectation that the Corporation will receive appropriate compensation from the Government of Belize (“GOB”) for 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 cost of natural gas and energy supply costs in customer rates; the ability to hedge exposures to fluctuations in foreign exchange rates, natural gas prices and electricity 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; new or revised environmental laws and regulations will not severely affect the results of operations; maintenance of adequate insurance coverage; the ability to obtain and maintain licences and permits; retention of existing service areas; the ability to report under US GAAP beyond 2018 or the adoption of International Financial Reporting Standards after 2018 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, 2013 and in continuous disclosure materials filed from time to time with Canadian securities regulatory authorities. Key risk factors for 2014 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 the Corporation–s regulated utilities; uncertainty regarding the treatment of certain capital expenditures at FortisAlberta under the newly implemented PBR mechanism; 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 the 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 a leader in the North American electric and gas utility business, with total assets of more than $25 billion and fiscal 2013 revenue exceeding $4 billion. Its regulated utilities account for approximately 90% of total assets and serve more than 3 million customers across Canada and in the United States and the Caribbean. Fortis owns non-regulated hydroelectric generation assets in Canada, Belize and Upstate New York. The Corporation–s non-utility investment is comprised of hotels and commercial real estate in Canada.
Year-to-date September 30, 2014, the Corporation–s electricity distribution systems met a combined peak demand of 9,054 megawatts (“MW”) and its gas distribution system met a peak day demand of 1,541 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, 2014 and to the “Corporate Overview” section of the 2013 Annual MD&A.
The Corporation–s main business, utility operations, is highly regulated and the earnings of the Corporation–s regulated utilities are generally determined under cost of service (“COS”) regulation and, in certain circumstances, performance-based rate-setting (“PBR”) mechanisms. 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 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. When 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.
Earnings of regulated utilities are generally impacted by: (i) changes in the regulator-approved allowed ROE and/or ROA and common 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 forecast 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.
SIGNIFICANT ITEMS
Acquisition of UNS Energy Corporation: On August 15, 2014, Fortis acquired all of the outstanding common shares of UNS Energy Corporation (“UNS Energy”) for US$60.25 per common share in cash, for an aggregate purchase price of approximately US$4.5 billion, including the assumption of US$2.0 billion of debt on closing. The net cash purchase price of approximately $2.7 billion (US$2.5 billion) was initially financed through: (i) drawings of $2 billion under the Corporation–s acquisition credit facilities, consisting of a $1.7 billion short-term bridge facility, repayable in full nine months following its advance, and a $300 million medium-term bridge facility, repayable in full on the second anniversary of its advance (together, the “Acquisition Credit Facilities”); (ii) available cash on hand; and (iii) drawings of US$265 million under the Corporation–s revolving credit facility.
UNS Energy is a vertically integrated utility services holding company, headquartered in Tucson, Arizona, engaged through its primary subsidiaries in the regulated electric generation and energy delivery business, primarily in the State of Arizona, serving approximately 658,000 electricity and gas customers. UNS Energy has three regulated utility subsidiaries: Tucson Electric Power Company (“TEP”), UNS Electric, Inc. (“UNS Electric”) and UNS Gas, Inc. (“UNS Gas”) (collectively, the “UNS Utilities”). UNS Energy–s utility operations are vertically integrated with generation, transmission and distribution being regulated by the Arizona Corporation Commission (“ACC”) and the U.S. Federal Energy Regulatory Commission (“FERC”). For further information on UNS Energy, refer to the “Segmented Results of Operations – Regulated Electric & Gas Utilities – United States” section of this MD&A.
As part of the regulatory approvals required in connection with the acquisition, Fortis has committed to provide UNS Energy–s customers with certain benefits, including but not limited to: (i) providing the retail consumers of the UNS Utilities with bill credits totalling US$30 million over five years (US$10 million in year one and US$5 million annually in years two through five); (ii) UNS Energy and the UNS Utilities adopting certain ring-fencing and corporate governance provisions; (iii) limiting dividends paid from the UNS Utilities to UNS Energy to 60% of the UNS Utilities– respective net income for a period of five years or until such time that their respective equity capitalization reaches 50% of total capital as accounted for in accordance with US GAAP; and (iv) Fortis making an equity infusion totalling US$220 million through UNS Energy into the UNS Utilities after the closing of the acquisition, which was completed within 60 days of the acquisition.
The above-noted commitments of $33 million (US$30 million), or $20 million (US$18 million) after tax, associated with customer benefits offered by the Corporation to close the acquisition of UNS Energy were recognized in the Corporation–s earnings for the third quarter of 2014. Acquisition-related expenses of approximately $20 million ($15 million after tax) and $24 million ($18 million after tax) were recognized for the third quarter and year-to-date 2014, respectively.
The acquisition is consistent with the Corporation–s strategy of investing in quality regulated utility assets in Canada and the United States and is immediately accretive to earnings per common share of Fortis, excluding one-time acquisition-related costs. The Corporation–s consolidated midyear rate base increased by approximately US$3 billion as a result of the acquisition of UNS Energy. In addition, the acquisition has further mitigated business risk for Fortis by enhancing the geographic diversification of the Corporation–s regulated assets, resulting in no more than one-third of total assets being located in any one regulatory jurisdiction.
Convertible Debentures Represented by Installment Receipts: To finance a portion of the acquisition of UNS Energy, in January 2014, Fortis, through a direct wholly owned subsidiary, completed the sale of $1.8 billion aggregate principal amount of 4% convertible unsecured subordinated debentures, represented by Installment Receipts (the “Convertible Debentures”).
The Convertible Debentures were sold on an installment basis at a price of $1,000 per Convertible Debenture, of which $333 was paid on closing in January 2014 and the remaining $667 was paid on October 27, 2014 (the “Final Installment Date”). Prior to the Final Installment Date, the Convertible Debentures were represented by Installment Receipts, which were traded on the Toronto Stock Exchange (“TSX”) under the symbol “FTS.IR” from January 9, 2014 to October 27, 2014. The Convertible Debentures are not listed. The Convertible Debentures will mature on January 9, 2024 and accrued interest at an annual rate of 4% per $1,000 principal amount of Convertible Debentures from January 9, 2014 to and including the Final Installment Date, after which the interest rate is 0%.
Since the Final Installment Date occurred prior to the first anniversary of the closing of the offering, holders of Convertible Debentures who paid the final installment in October 2014 received, in addition to the payment of accrued and unpaid interest, a make-whole payment, representing the interest that would have accrued from the day following the Final Installment Date to and including January 9, 2015. Approximately $33 million ($23 million after tax) and $67 million ($47 million after tax) in interest expense associated with the Convertible Debentures, including the make-whole payment, was recognized in the third quarter and year-to-date 2014, respectively. An additional $5 million ($4 million after tax) in interest expense will be recognized in the fourth quarter of 2014 representing interest on the Convertible Debentures from October 1, 2014 to and including the Final Installment Date, for a total of approximately $72 million ($51 million after tax) recognized in 2014.
At the option of the holders, each fully paid Convertible Debenture is convertible into common shares of Fortis at any time after the Final Installment Date but prior to maturity or redemption by the Corporation at a conversion price of $30.72 per common share, being a conversion rate of 32.5521 common shares per $1,000 principal amount of Debentures. On October 28, 2014, approximately 58.2 million common shares of Fortis were issued, representing conversion into common shares of more than 99% of the Convertible Debentures. After the Final Installment Date, any Convertible Debentures not converted may be redeemed by Fortis at a price equal to their principal amount. At maturity, Fortis will have the right to pay the principal amount due in common shares, which will be valued at 95% of the weighted average trading price on the TSX for the 20 consecutive trading days ending five trading days preceding the maturity date.
The proceeds of the first installment payment of the Convertible Debentures received on January 9, 2014 were approximately $599 million, or $561 million net of issue costs, which were used to partially finance the acquisition of UNS Energy and for general corporate purposes. The proceeds of the final installment payment received on October 28, 2014 were approximately $1.2 billion, or $1.165 billion net of issue costs. The net proceeds of the final installment were used to repay a portion of borrowings under the Acquisition Credit Facilities used to initially finance the acquisition of UNS Energy.
First Preference Shares: In September 2014 Fortis issued 24 million 4.1% Cumulative Redeemable Fixed Rate Reset First Preference Shares, Series M for gross proceeds of $600 million. The net proceeds were used to repay a portion of borrowings under the Acquisition Credit Facilities used to initially finance the acquisition of UNS Energy.
Review of Strategic Options for Fortis Properties: In September 2014 the Corporation announced that it will engage in a review of strategic options for its hotel and commercial real estate business, operating as Fortis Properties. Strategic options may include, but are not limited to, a sale of all or a portion of the assets, a sale of shares of Fortis Properties or an initial public offering. This review process commenced in October 2014 and is expected to continue through the balance of 2014 and into 2015.
Long-Term Debt Offerings: In March 2014 Fortis priced a private placement to US-based institutional investors of US$500 million in senior unsecured notes. The notes were issued in June and September in multiple tranches with terms to maturity ranging from 5 years to 30 years and coupon rates ranging from 2.92% to 5.03%. The weighted average term to maturity is approximately 11 years and the weighted average coupon rate is 3.85%.
In June 2014 Fortis issued US$213 million of the senior unsecured notes. Net proceeds were used to repay US-dollar denominated borrowings on the Corporation–s committed credit facility and for general corporate purposes. In September 2014 Fortis issued the remaining US$287 million of the senior unsecured notes. Net proceeds were used to refinance existing indebtedness, including the US$150 million 5.74% senior unsecured notes of Fortis that matured in October 2014 and $125 million 5.56% unsecured debentures of a subsidiary that matured in September 2014, and for general corporate purposes.
In September 2014 FortisAlberta issued $275 million unsecured debentures in two tranches, comprised of 10-year $150 million unsecured debentures at 3.30% and 30-year $125 million unsecured debentures at 4.11%. Net proceeds were used to repay $200 million 5.33% unsecured debentures that matured in October 2014, to finance capital expenditures and for general corporate purposes.
In October 2014 FortisBC Electric issued 30-year $200 million unsecured debentures at 4.00%. Net proceeds will be used to repay $140 million 5.48% unsecured debentures maturing in November 2014, to finance capital expenditures and for general corporate purposes.
Sale of Griffith: In March 2014 Griffith Energy Services, Inc. (“Griffith”) was sold for proceeds of approximately $105 million (US$95 million). The results of operations have been presented as discontinued operations on the consolidated statements of earnings for the three and nine months ended September 30, 2014. Earnings for the first quarter of 2014 included $5 million associated with Griffith from normal operations to the date of sale.
FINANCIAL HIGHLIGHTS
Fortis has adopted a strategy of profitable growth with earnings per common share and total shareholder return as the primary measures 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 third quarter and year-to-date periods ended September 30, 2014 and 2013 are provided in the following table.
Revenue
The increase in revenue for the quarter was driven by the acquisition of UNS Energy in August 2014. An increase in the commodity cost of natural gas charged to customers at the FortisBC Energy companies, an increase in the base component of rates at most of the regulated utilities, higher electricity sales, and favourable foreign exchange associated with the translation of US dollar-denominated revenue also contributed to the increase in revenue.
The increase year to date was primarily due to the same factors discussed above for the quarter, combined with the acquisition of Central Hudson Gas & Electric Corporation (“Central Hudson”) in June 2013 and higher gas volumes.
Energy Supply Costs
The increase in energy supply costs for the quarter was driven by the acquisition of UNS Energy. A higher commodity cost of natural gas at the FortisBC Energy companies and higher electricity sales also contributed to the increase in fuel, power and natural gas purchases.
The increase in energy supply costs year to date was primarily due to the same factors discussed above for the quarter, combined with the acquisition of Central Hudson and higher gas volumes.
Operating Expenses
The increase in operating expenses for the quarter was primarily due to the acquisition of UNS Energy and general inflationary and employee-related cost increases, including approximately $9 million ($8 million after tax) in retirement expenses recognized in the third quarter of 2014.
The increase year to date was primarily due to the same factors discussed above for the quarter, combined with the acquisition of Central Hudson.
Depreciation and Amortization
The increase in depreciation and amortization for the quarter was primarily due to the acquisition of UNS Energy and continued investment in energy infrastructure at the Corporation–s regulated utilities.
The increase year to date was primarily due to the same factors discussed above for the quarter, combined with the acquisition of Central Hudson.
Other Income (Expenses), Net
The decrease in other income, net of expenses, for the quarter was mainly due to higher acquisition-related expenses associated with UNS Energy, including customer benefits offered by the Corporation to close the acquisition. The decrease was partially offset by favourable foreign exchange on the translation into Canadian dollars of the Corporation–s US dollar-denominated long-term other asset representing the book value of the Corporation–s expropriated investment in Belize Electricity.
Other income, net of expenses, year to date was comparable with the same period last year. Total acquisition-related expenses associated with UNS Energy in 2014 and an increase in interest income were comparable to acquisition-related expenses associated with Central Hudson in 2013.
Finance Charges
The increase in finance charges for the quarter and year to date was primarily due to approximately $33 million ($23 million after tax) and $67 million ($47 million after tax) in interest expense, including the make-whole payment, associated with Convertible Debentures issued to finance a portion of the acquisition of UNS Energy. The increase was also due to the UNS Energy and Central Hudson acquisitions, including interest expense on debt issued to complete the financing of the acquisitions.
Income Tax (Recovery) Expense
The increase in income tax recovery for the quarter was mainly due to a decrease in earnings before income taxes.
The increase in income tax expense year to date was primarily due to the impact of an income tax recovery of $23 million in 2013, due to the enactment of higher deductions associated with Part VI.1 tax, and the release of income tax provisions of $7 million in 2013.
(Loss) Earnings from Discontinued Operations, Net of Tax
Earnings for the third quarter and year-to-date 2013 included a net loss from discontinued operations of approximately $2.5 million at Griffith. Approximately $5 million in earnings from discontinued operations, net of tax, was recognized in the first quarter of 2014 associated with Griffith, which was sold in March 2014, from normal operations to the date of sale.
Extraordinary Gain, Net of Tax
An approximate $22 million after-tax extraordinary gain was recognized in the first quarter of 2013 on the settlement of expropriation matters associated with the Exploits River Hydro Partnership (“Exploits Partnership”).
Net Earnings Attributable to Common Equity Shareholders
Earnings were impacted by a number of non-recurring items. Earnings for the third quarter and year-to-date 2014 were reduced by $35 million and $38 million, respectively, due to acquisition-related expenses and customer benefits offered to obtain regulatory approval of the acquisition of UNS Energy, compared to $32 million in acquisition-related expenses associated with Central Hudson in the second quarter and year-to-date 2013. Earnings for the quarter and year-to-date 2014 were reduced by $23 million and $47 million, respectively, in after-tax interest expense associated with the Convertible Debentures, including the make-whole payment. Earnings year-to-date 2013 were favourably impacted by an income tax recovery of $23 million, due to the enactment of higher deductions associated with Part VI.1 tax on the Corporation–s preference share dividends. Earnings year-to-date 2014 included $5 million from discontinued operations associated with Griffith, compared to a net loss of approximately $2.5 million for the third quarter and year-to-date 2013. Earnings year-to-date 2013 included an approximate $22 million extraordinary gain associated with the Exploits Partnership.
Excluding the above-noted impacts of acquisition-related expenses, interest expense on the Convertible Debentures and Griffith, net earnings attributable to common equity shareholders for the third quarter were $72 million compared to $51 million for the same period last year. The increase was driven by earnings contribution of $37 million at UNS Energy from the date of acquisition. The increase was partially offset by higher Corporate and Other expenses, primarily due to higher finance charges, largely due to the acquisition of UNS Energy, and higher operating expenses. The increase in operating expenses was mainly due to employee-related expenses, including approximately $8 million in after-tax retirement expenses recognized in the third quarter of 2014 and share-based compensation expenses as a result of share price appreciation, combined with higher legal and consulting fees and general inflationary increases. The increase in Corporate and Other expenses was partially offset by a $5 million foreign exchange gain in the third quarter of 2014, compared to a $2 million foreign exchange loss in the same quarter last year, a higher income tax recovery and interest income.
Excluding the above-noted impacts of acquisition-related expenses, interest expense on the Convertible Debentures, Part VI.1 tax impacts, the Exploits Partnership and Griffith, net earnings attributable to common equity shareholders year to date were $284 million compared to $243 million for the same period last year. The increase was mainly due to the same reasons discussed above for the quarter, combined with earnings contribution from Central Hudson and higher earnings at Caribbean Regulated Electric Utilities, driven by electricity sales growth. The increase was partially offset by higher finance charges associated with the acquisition of Central Hudson in June 2013 and the impact of the release of income tax provisions of $7 million in 2013.
SEGMENTED RESULTS OF OPERATIONS
The basis of segmentation of the Corporation–s reportable segments is consistent with that disclosed in the 2013 Annual MD&A, except as follows as a result of the acquisition of UNS Energy. UNS Energy is reported as part of the segment “Regulated Electric & Gas Utilities – United States” and the former “Other Canadian Electric Utilities” segment is now “Eastern Canadian Electric Utilities” and now includes Newfoundland Power, Maritime Electric and FortisOntario.
The following is a discussion of the financial results of the Corporation–s reporting segments. A discussion of the nature of regulation and material regulatory decisions and applications pertaining to the Corporation–s regulated utilities is provided in the “Regulatory Highlights” section of this MD&A.
REGULATED ELECTRIC & GAS UTILITIES – UNITED STATES
UNS ENERGY
UNS Energy is primarily comprised of three regulated utilities: TEP, UNS Electric and UNS Gas. TEP is a vertically integrated regulated electric utility and UNS Energy–s largest operating subsidiary, representing approximately 85% of UNS Energy–s total assets at September 30, 2014. The Company generates, transmits and distributes electricity to approximately 415,000 retail electric customers in southeastern Arizona. TEP–s service territory covers 2,991 square kilometres and includes a population of approximately 1,000,000 people in the greater Tucson metropolitan area in Pima County, as well as parts of Cochise County. The Company has sufficient generating capacity which, together with existing power purchase agreements and expected generation plant additions, should satisfy the requirements of its customer base and meet expected future peak demand requirements. TEP also sells wholesale electricity to other entities in the western United States.
UNS Electric is a vertically integrated regulated electric utility, representing approximately 9% of UNS Energy–s total assets at September 30, 2014. The Company generates, transmits and distributes electricity to approximately 93,000 retail electric customers in Arizona–s Mohave and Santa Cruz counties, which have a combined population of approximately 250,000.
UNS Gas is a regulated gas distribution company, representing approximately 6% of UNS Energy–s total assets at September 30, 2014. The Company serves approximately 150,000 retail customers in Arizona–s Mohave, Yavapai, Coconino, Navajo and Santa Cruz counties, which have a combined population of approximately 700,000.
TEP and UNS Electric currently own or lease generation resources with an aggregate capacity of 2,392 MW, including 18 MW of solar capacity. Several of the generating assets in which UNS Energy has an interest are jointly owned. As at September 30, 2014, approximately 70% of UNS Energy–s generating capacity is fuelled by coal. UNS Energy has a long-term energy resource diversification strategy to provide long-term rate stability for customers, mitigate environmental impacts, comply with regulatory requirements and leverage existing utility infrastructure. TEP is reducing its reliance on coal over the next few years by replacing portions of existing coal generation with efficient combined-cycle gas turbines and renewables, particularly by adding solar generating capacity, and expects coal to represent less than 50% of generating capacity by the year 2020.
UNS Energy–s electric utilities met a combined peak demand of 2,620 MW year-to-date 2014, which occurred in the third quarter. Earnings for the electric utilities are generally highest in the second and third quarters due to the use of air conditioning and other cooling equipment. UNS Gas met a peak day demand of 79 TJ year-to-date 2014, which occurred in the first quarter. Earnings for UNS Gas are generally highest in the first and fourth quarters due to space-heating requirements.
Regulation
The UNS Utilities are regulated by the ACC regarding such matters as retail electric and gas rates, construction, operations, financing, accounting, transactions with affiliated parties and issuance of securities. Certain activities of the utilities are subject to regulation by FERC under the Federal Power Act (United States), including such matters as the terms and prices of transmission services and wholesale electricity sales.
The UNS Utilities operate under COS regulation as administered by the ACC. The ACC provides for the use of a historical test year in the establishment of retail electric and gas rates for the utilities and, pursuant to this method, the determination of the approved rate of return on original cost rate base and capital structure and all reasonable and prudently incurred costs establishes the revenue requirement upon which the Company–s customer rates are determined. Retail electric and gas rates are set to provide the utilities with an opportunity to recover their costs of service and earn a reasonable rate of return on rate base, including an adjustment for the fair value of rate base as required under the laws of the State of Arizona. Once rates are approved, they are not adjusted as a result of actual COS being different from that which was estimated, other than for certain prescribed costs that are eligible for deferral account treatment.
Rates charged to retail customers include flow-through mechanisms that allow the utilities to recover the prudently incurred actual costs of its fuel, transmission, and energy purchases, and the prudent cost of contracts for hedging fuel and purchased power costs. The difference between costs recovered through rates and actual fuel, transmission and energy costs prudently incurred to provide retail electric and gas service is subject to deferral account treatment.
TEP and UNS Electric are required to comply with the ACC–s Renewable Energy Standard (“RES”), which requires the utilities to increase their use of renewable energy each year until it represents at least 15% of their total annual retail energy requirements in 2025. The utilities must file annual RES implementation plans for review and approval by the ACC. The approved cost of carrying out those plans is recovered from retail customers through the RES surcharge. The ACC has also approved recovery of operating costs, depreciation, property taxes, and a return on investments on certain company-owned solar projects through the RES tariff until such costs are reflected in retail customer rates.
TEP, UNS Electric and UNS Gas are required to implement cost-effective Demand-Side Management (“DSM”) programs to comply with the ACC–s Energy Efficiency (“EE”) Standards. The EE Standards provide for a DSM surcharge to recover, from retail customers, the costs of implementing DSM programs. The existing rate orders provide for a Lost Fixed Cost Recovery mechanism to recover certain non-fuel costs that were previously unrecoverable, due to reduced electricity sales as a result of energy efficiency programs and distributed generation.
TEP–s allowed ROE is set at 10.0% on a capital structure of 43.5% common equity, effective from July 1, 2013. The existing rate order at TEP also provides for an Environmental Compliance Adjustor mechanism that allows for recovery of the costs of complying with environmental standards required by federal or other government agencies between rate cases. UNS Electric–s allowed ROE is set at 9.50% on a capital structure of 52.6% common equity, effective from January 1, 2014. UNS Gas– allowed ROE is set at 9.75% on a capital structure of 50.8% common equity, effective from May 1, 2012.
Financial Highlights
Electricity Sales & Gas Volumes
Electricity sales for the third quarter from the date of acquisition were 2,070 GWh. Electricity sales for the full third quarter were 4,219 GWh compared to 4,123 GWh for the same period last year. The increase was primarily due to higher short-term wholesale sales.
Gas volumes for the third quarter from the date of acquisition were approximately 0.5 PJ. Gas volumes for the full third quarter were 1 PJ, consistent with the same period last year.
Revenue
Revenue for the third quarter from the date of acquisition was US$227 million. Revenue for the full third quarter was US$457 million compared to US$437 million for the same period last year. The increase was primarily due to higher electricity sales and increases associated with the fuel recovery mechanism.
Earnings
Earnings for the third quarter from the date of acquisition were US$34 million. Earnings for the full third quarter, excluding acquisition-related expenses recognized by UNS Energy, were US$66 million, comparable to US$68 million for the same period last year.
CENTRAL HUDSON (1)
Electricity Sales & Gas Volumes
The decrease in electricity sales for the quarter was primarily due to lower average consumption as a result of cooler temperatures, which reduced the use of air conditioning and other cooling equipment. Year-to-date electricity sales were 3,899 GWh compared to 3,950 GWh for the same period last year. The decrease was mainly due to lower average consumption in the third quarter of 2014, partially offset by higher average consumption in the first quarter of 2014 due to colder temperatures.
Gas volumes for the quarter and year-to-date were comparable with the same periods last year.
Seasonality impacts delivery revenue at Central Hudson, as electricity sales are highest during the summer months, primarily due to the use of air conditioning and other cooling equipment, and gas volumes are highest during the winter months, primarily due to space-heating usage.
Revenue
The increase in revenue for the quarter was mainly due to approximately $8 million of favourable foreign exchange associated with the translation of US dollar-denominated revenue. The increase was partially offset by the recovery from customers of lower commodity costs.
Revenue year to date was US$579 million compared to US$511 million for the same period last year. The increase in revenue was primarily due to the recovery from customers of overall higher commodity costs, mainly in the first half of 2014, which were driven by higher wholesale prices. Foreign exchange associated with the translation of US dollar-denominated revenue also had a favourable impact on revenue year to date, as discussed above for the quarter.
Changes in electricity sales and gas volumes at Central Hudson are subject to regulatory revenue decoupling mechanisms and, as a result, do not have a material impact on revenue and earnings.
Earnings
The decrease in earnings for the quarter was primarily due to the impact of higher depreciation and operating expenses during the two-year rate freeze period post acquisition in June 2013.
Earnings year to date were US$30 million compared to US$34 million for the same period last year. The decrease was due to the same factors discussed above for the quarter, partially offset by the impact of US$2 million in expenses recognized in the first quarter of 2013 as a result of a regulatory order denying the deferral of certain storm-restoration costs.
REGULATED GAS UTILITIES – CANADIAN
FORTISBC ENERGY COMPANIES (1)
Gas Volumes
Gas volumes for the quarter were consistent with the same period last year. The year-to-date increase in gas volumes was primarily due to higher average consumption as a result of colder temperatures in the first quarter of 2014.
As at September 30, 2014, the total number of customers served by the FortisBC Energy companies was approximately 960,000, an increase of 4,000 customers from December 31, 2013.
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 regulatory deferral mechanisms, changes in consumption levels and the commodity cost of natural gas from those forecast to set customer 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.
Revenue
The increase in revenue for the quarter and year to date was primarily due to a higher commodity cost of natural gas charged to customers and an increase in the delivery component of customer rates, effective January 1, 2014. Higher gas volumes also contributed to the increase in revenue year to date.
Earnings
Earnings for the quarter and year to date were comparable with the same periods last year.
In September 2014 the regulatory decision on FortisBC Energy Inc.–s Multi-Year PBR Plan was received. The outcome of the decision did not have a material impact on earnings at the FortisBC Energy companies year-to-date 2014. In March 2014 the regulatory decision on the second stage of the Generic Cost of Capital Proceeding (“GCOC”) Proceeding in British Columbia was received, resulting in an increase in the allowed ROE at FortisBC Energy (Whistler) Inc. (“FEWI”) and an increase in the common equity component of capital structure at FortisBC Energy (Vancouver Island) Inc. (“FEVI”) and FEWI, effective January 1, 2013. The cumulative impact of this regulatory decision was recognized in the first quarter of 2014, when the decision was received, and did not have a material impact on earnings. For further details on the Multi-Year PBR Plan and the GCOC Proceeding, refer to the “Material Regulatory Decisions and Applications” section of the MD&A.
REGULATED ELECTRIC UTILITIES – CANADIAN
FORTISALBERTA
Energy Deliveries
The increase in energy deliveries for the quarter and year to date was driven by growth in the number of customers. The total number of customers increased by approximately 12,000 year over year as at September 30, 2014, as a result of strong economic growth in the Province of Alberta. Higher average consumption by residential, commercial and farm and irrigation customers for the quarter and year to date also contributed to the increase, mainly due to changes in temperatures. Lower levels of precipitation also had a favorable impact on energy deliveries for farm and irrigation customers. Increased consumption by oilfield customers for the quarter was mainly due to improved commodity prices for oil and gas.
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.
Revenue
The increase in revenue for the quarter and year to date was primarily due to an interim increase in customer distribution rates, effective January 1, 2014, growth in the number of customers and an increase in revenue related to flow-through costs to customers. The increase in revenue year to date was partially offset by lower net transmission revenue, of which approximately $2 million was recognized in the first quarter of 2013 associated with the finalization of 2012 net transmission volume variances.
Earnings
The increase in earnings for the quarter and year to date was mainly due to restoration costs of approximately $1.5 million recognized in the third quarter of 2013 related to flooding in southern Alberta in June 2013. Higher income tax recoveries, rate base growth and growth in the number of customers were partially offset by the timing of certain operating expenses. The increase in earnings year to date was also partially offset by lower net transmission revenue, as discussed above.
Earnings associated with rate base growth continue to be tempered by the interim regulatory decision granting 60% of the revenue requirement associated with the capital tracker component of the PBR mechanism. For further details on FortisAlberta–s Capital Tracker Application, refer to the “Material Regulatory Decisions and Applications” section of this MD&A.
FORTISBC ELECTRIC (1)
Electricity Sales
The decrease in electricity sales for the quarter was mainly due to lower average consumption due to cooler temperatures.
The increase in electricity sales year to date was driven by customer growth and higher average consumption as a result of colder temperatures in the first quarter of 2014.
Revenue
The increase in revenue for the quarter was primarily due to higher amortization of flow-through adjustments owing to customers and an interim refundable increase in base electricity rates, effective January 1, 2014, partially offset by a decrease in electricity sales.
The increase in revenue year to date was primarily due to the same factors discussed above for the quarter, however, was favourably impacted by an increase in electricity sales.
Earnings
The decrease in earnings for the quarter and year to date was primarily due to the impact of lower-than-expected finance charges in 2013, which were not subject to regulatory deferral mechanisms last year, and the timing of operating expenses. Effective January 1, 2014, variances in finance charges from those used to establish customer rates are subject to regulatory deferral mechanisms. The decrease in earnings year to date was partially offset by the favourable impact related to the timing of recognition of regulatory deferrals.
The outcome of the GCOC Proceeding in British Columbia did not have an impact on earnings variances for the quarter and year-to-date periods. For further details on the GCOC Proceeding, refer to the “Material Regulatory Decisions and Applications” section of this MD&A.
EASTERN CANADIAN ELECTRIC UTILITIES (1)
Electricity Sales
Electricity sales for the quarter were comparable with the same period last year. The increase in electricity sales year to date was driven by higher average consumption by residential and commercial customers in all regions, due to colder temperatures in the first half of 2014, and customer growth in Newfoundland and Prince Edward Island, including an increase in the number of customers using electricity for home heating.
Revenue
The decrease in revenue for the quarter was mainly due to the flow through in customer electricity rates of lower energy supply costs at FortisOntario.
The increase in revenue year to date was driven by electricity sales growth and an increase in base electricity rates at Newfoundland Power, effective July 1, 2013. The increase was partially offset by the flow through in customer electricity rates of lower energy supply costs at FortisOntario, as discussed above for the quarter, and a higher regulatory rate of return adjustment at Maritime Electric year-to-date 2014