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Unfavourable
-- Increased operating expenses, primarily due to a $3 million non- recurring provision recognized in the fourth quarter of 2012 associated with the Corporation's investment in CWLP-- Lower effective income tax recoveries, due to higher Part VI.1 taxes, partially offset by the release of income tax provisions at FortisBC Holdings Inc. ("FHI") in 2012-- Higher preference share dividends, due to the issuance of First Preference Shares, Series J in November 2012Favourable
-- Increased other income, net of expenses, primarily due to a foreign exchange gain of approximately $1 million recognized in the fourth quarter of 2012 compared to a net foreign exchange loss of $0.5 million ($1 million after tax) recognized in the same quarter last year, associated with the translation of the US dollar-denominated long-term other asset representing the book value of the Corporation's expropriated investment in Belize Electricity-- Lower finance charges, primarily due to higher capitalized interest associated with the financing of the construction of the Corporation's 51% controlling ownership interest in the Waneta Expansion and the impact of the conversion of the Corporation's US$40 million convertible debentures into common shares in November 2011. The above items were partially offset by higher interest on credit facility borrowings, due to higher average credit facility borrowings. Factors Contributing to Annual Net Corporate and Other Expenses Variance
Unfavourable
-- Increased other expenses, net of other income, primarily due to: (i) the favourable impact in 2011 of the $17 million (US$17.5 million) ($11 million after-tax) fee paid to Fortis in July 2011 following the termination of a Merger Agreement between Fortis and CVPS; (ii) approximately $9 million ($7.5 million after tax) of costs, incurred largely in the first half of 2012, related to the pending acquisition of CH Energy Group; and (iii) a foreign exchange loss of approximately $2 million recognized in 2012 compared to a net foreign exchange gain of approximately $1 million ($1.5 million after tax) recognized in 2011, associated with the translation of the US dollar-denominated long-term other asset representing the book value of the Corporation's expropriated investment in Belize Electricity-- Increased operating expenses, for the reason as discussed above for the quarter, as well as increased employee compensation-related expenses-- Excluding income tax expense associated with the merger termination fee paid to Fortis in July 2011, effective income tax recoveries decreased, primarily due to the same reason discussed above for the quarter-- Higher preference share dividends, for the same reason discussed above for the quarter
Favourable
-- Lower finance charges, for the same reasons discussed above for the quarter. However, higher fees associated with the increase in the Corporation's committed revolving credit facility to $1 billion in May 2012 had an unfavourable impact on finance charges year over year.
REGULATORY HIGHLIGHTS
The following provides an update on material regulatory decisions and applications associated with the Corporation's regulated gas and electric utilities from that disclosed in the interim MD&A for the three and nine months ended September 30, 2012.
MATERIAL REGULATORY DECISIONS AND APPLICATIONS----------------------------------------------------------------------------Regulated Summary DescriptionUtility----------------------------------------------------------------------------FEI/FEVI/FEWI - Following the announcement by the Government of British Columbia of the Greenhouse Gas Reductions (Clean Energy Regulation) ("GHG Regulation") under the Clean Energy Act, which was promulgated in May 2012, FEI announced an incentive funding program to assist eligible vehicle operators in purchasing liquefied natural gas ("LNG")-fuelled vehicles. The incentive program funding includes up to $62 million, over a period of several years, to offset a percentage of the incremental capital cost for eligible operators in purchasing qualifying LNG-fuelled vehicles. The eligible applicants for the incentive program are commercial return-to-base fleet operators of heavy-duty trucks, buses, vocational vehicles and marine vessels. Awarding of the incentives commenced in late 2012 and will cover up to 75% of the eligible operators' incremental capital costs. Additionally, the GHG Regulation allows FEI to invest up to $30 million for LNG fuelling stations and up to $12 million for compressed natural gas ("CNG") fuelling stations. In October 2012 the BCUC approved the rate treatment of the above expenditures being made under the GHG Regulation. - In December 2012 the British Columbia Utilities Commission ("BCUC") issued its decision regarding the BCUC-initiated public process, which commenced in May 2011, inquiring into whether FEI should be able to provide alternative energy services as regulated utility services and to establish guidelines that would apply to the provision of such services. The BCUC determined that CNG and LNG refuelling services are regulated when they are provided by a public utility such as FEI. The BCUC recommended, however, that FEI undertake such services in the future through a separate non- regulated affiliate, with the exception of expenditures permitted under the GHG Regulation in British Columbia. Similarly, the BCUC determined that biomethane services are part of FEI's regulated service offering, but that ownership of any biogas upgrading systems will be determined on a case by case basis. Moreover, district energy systems and other geo-exchange systems are regulated, and should continue to be carried out through FEI's affiliate, FortisBC Alternative Energy Services Inc. ("FAES"), although an exemption from regulation can be sought for discrete energy systems. FEI is considering the findings of the decision and its impact on its provision of alternative energy services. - A public oral hearing for the first phase of a Generic Cost of Capital ("GCOC") Proceeding in British Columbia occurred in December 2012. The BCUC has determined that a second, subsequent phase be added to the GCOC Proceeding to determine an appropriate allowed ROE and capital structure for all other regulated utilities in British Columbia once the benchmark utility has been established in the first phase of the GCOC Proceeding. FEI has been designated as the benchmark utility. FEVI, FEWI and FortisBC Electric will have their allowed ROEs and capital structures determined in the second phase of the GCOC Proceeding. A decision on the benchmark utility, FEI, is expected mid-2013. Effective January 1, 2013, as ordered by the BCUC in December 2012, the current allowed ROE and capital structure for FEI and all other regulated entities in British Columbia that rely on the benchmark utility to establish rates are to be maintained and made interim. The results of the GCOC Proceeding could materially impact the earnings of the FortisBC Energy companies and FortisBC Electric. - FAES has filed applications for approval of various thermal-energy projects. These projects and their status are as follows: (i) Delta School District - approval has been granted by the BCUC; (ii) Tsawwassen Springs Development - approval has been granted by the BCUC; (iii) PCI Marine Gateway - approval has been granted by the BCUC for the capital expenditures, but approval of revisions to the rate design and rates are pending; (iv) Telus Garden - a BCUC decision is expected in early 2013; and (v) Kelowna District Energy System - the regulatory process is ongoing and a BCUC decision is expected in the second quarter of 2013.----------------------------------------------------------------------------FortisBC - In November 2012 FortisBC Electric filed an applicationElectric with the BCUC requesting approval for FortisBC Electric to acquire the City of Kelowna's electrical utility assets and to include the assets in FortisBC Electric's rate base.----------------------------------------------------------------------------FortisAlberta - In September 2012 the AUC issued a generic PBR Decision outlying the PBR framework applicable to distribution utilities in Alberta, including FortisAlberta, for a five- year term commencing January 1, 2013. In the PBR Decision, a formula that estimates inflation annually and assumes productivity improvements is to be used by the distribution utilities to determine customer rates on an annual basis. The PBR Decision raises concerns and uncertainties for FortisAlberta regarding the treatment of certain capital expenditures. While the PBR Decision did provide for a capital tracker mechanism for the recovery of certain capital expenditures, FortisAlberta sought further clarification regarding this mechanism in its required Compliance Application filed in November 2012 and a Review and Variance Application currently before the AUC. FortisAlberta has also sought leave to appeal the issue to the Alberta Court of Appeal. In December 2012 FortisAlberta filed a 2013 Capital Tracker Application with the AUC for specific categories of capital expenditures. A decision on the Compliance Application is expected in the first quarter of 2013. Decisions on the Review and Variance and Capital Tracker Applications are expected in the third quarter of 2013. The outcome of the outstanding applications, including the impact on financial results, if any, and the timing of recognition of such financial results are currently unknown. However, the implementation of PBR does not alter a utility's right to a reasonable opportunity to recover prudent COS and the right to earn a reasonable ROE. - In its Compliance Application, FortisAlberta requested a 1.71% increase in customer distribution rates, effective January 1, 2013, reflecting the determination of the inflationary and productivity factors in accordance with the PBR Decision. FortisAlberta also requested customer distribution rate adjustments for flow-through costs and transitional adjustments. In December 2012 the AUC issued a decision setting 2012 customer distribution rates as interim rates for 2013, pending AUC decisions on FortisAlberta's Compliance and Capital Tracker Applications. - In October 2012 the AUC initiated a GCOC Proceeding, which includes the determination of: (i) the allowed ROE for 2013; (ii) whether a formulaic ROE automatic mechanism should be re-established; and (iii) whether the PBR Decision or other decisions require the adjustment of the allowed ROE or equity component of total capital structure as a result of any changes in risk. - In November 2012 the AUC reinitiated a Utility Asset Disposition ("UAD") Proceeding which will address, among other things, cost responsibility for stranded assets. FortisAlberta is fully participating in the UAD Proceeding and common-utility evidence has been filed and experts have been engaged. The UAD Proceeding is expected to continue through the first quarter of 2013 with a decision expected by the second quarter of 2013. Any decision by the AUC regarding the treatment of stranded assets does not alter a utility's right to a reasonable opportunity to recover prudent COS and the right to earn a reasonable ROE. - In June 2012 AESO filed with the AUC a Customer Contribution Policy Application and an Amortized Construction Contribution Rider I Application. The first application proposed a reduction in the level of AESO contributions that transmission customers, including FortisAlberta, would pay versus what the transmission facility owner would pay. The second application proposed that transmission customers be given the option to make the required AESO contributions as a series of payments over a number of years, rather than as an up-front payment. Effectively, this would result in the transmission facility owner financing the AESO contributions. In December 2012 the AUC issued a decision that denied both applications and directed AESO to bring forward its proposals as part of its next comprehensive AESO tariff application. As a result, the current contribution policy and the manner in which contributions are paid remain in effect. - In January 2013 the Government of Alberta responded to the recommendations of the Retail Market Review Committee and, as part of that response, requested that the AUC begin the process to remove the electricity rate increase limitations that have been in effect since February 2012. As the AUC proceeds with the process of removing the electricity rate increase limitations, it is expected that FortisAlberta's interim 2013 customer distribution rates will be adjusted to reflect the AUC's rulings with respect to the Company's Compliance and Capital Tracker Applications.----------------------------------------------------------------------------Newfoundland - In September 2012 Newfoundland Power filed a 2013/2014Power General Rate Application for the purpose of setting customer electricity rates and cost of capital. Newfoundland Power is proposing an overall average increase in customer electricity rates of 6%, effective March 1, 2013. The Company is also proposing the discontinuance of the ROE automatic adjustment formula. A public hearing on the application is expected to conclude in February 2013.----------------------------------------------------------------------------Maritime - In February 2012 the PEI Energy Commission ("PEIElectric Commission") released its Discussion Paper, Charting Our Electricity Future, which outlined discussion points on which the PEI Commission should seek input through a consultative process with stakeholders and the general public. Maritime Electric participated in public forums and stakeholder consultations held in early 2012. In January 2013 the PEI Commission released a Final Report of its recommendations to the Government of PEI, which included the following: (i) Maritime Electric should continue as PEI's primary electric utility; however, the PEI Energy Corporation should acquire Maritime Electric's generation assets over a reasonable period of time, thereby reducing the utility's rate base and equity; (ii) the equity component of Maritime Electric's capital structure should be maintained at no less than 35% and no more than 40% of total capital structure; (iii) the current COS regulatory model should be maintained but responsibility for the Electric Power Act (PEI) should be assigned to a new three-person panel of commissioners that deals only with electric utility regulation and oversight and will operate independently of the Island Regulatory Appeals Commission; (iv) a consumer advocate for electricity should be appointed to better facilitate the participation of interested parties at regulatory hearings; (v) the Government of PEI should assume the responsibility for financing the existing $47.5 million of deferred incremental replacement energy costs at Maritime Electric associated with the refurbishment of the New Brunswick Power Point Lepreau nuclear generating station ("Point Lepreau"); (vi) a new cable interconnection with New Brunswick should be pursued immediately and ownership of the cable should reside with the Government of PEI; and (vii) responsibility for demand-side management programming, currently with the Government of PEI, should transfer back to Maritime Electric. - In December 2012 the Electric Power (Energy Accord Continuation) Amendment Act (PEI) ("Accord Continuation Act") was enacted which sets out the inputs, rates and other terms for the continuation of the PEI Energy Accord ("Accord") for an additional three years covering the period March 1, 2013 through February 29, 2016. Over the three-year period, increases in electricity costs for a typical residential customer have been set at 2.2% annually and Maritime Electric's allowed ROE has been capped at 9.75% each year. Under the terms of the Accord Continuation Act and the Accord, the Government of PEI assumed responsibility, effective March 1, 2011, for the cost of incremental replacement energy and monthly operating and maintenance costs related to Point Lepreau during its refurbishment period, which ended in fall 2012. - In December 2012 Maritime Electric's 2013 Capital Budget Application totaling approximately $26 million, before customer contributions, was approved, as filed, with the exception of approximately $1 million related to preparatory work for a third submarine-cable interconnection, which has been deferred for additional consideration by the regulator.----------------------------------------------------------------------------FortisOntario - In November 2012 the Ontario Energy Board approved, as filed, a settlement agreement pertaining to FortisOntario's COS Application for electricity distribution rates in Fort Erie, Port Colborne and Gananoque, effective January 1, 2013, using a 2013 forward test year. The allowed ROE for 2013, as determined under the ROE automatic adjustment formula, has been calculated at 8.93%, down from the 9.12% that was estimated in the COS Application. In November 2012 the OEB also determined that most of a $1 million income tax-related regulatory deferral is not required to be dispersed to customers. The result of the above decisions, including the impact of the decrease in the allowed ROE effective January 1, 2013, was an average 6.8% increase in residential customer rates in Fort Erie; an average 5.9% increase in residential customer rates in Gananoque; and an average 7.4% increase in residential customer rates in Port Colborne. - In October 2012 Algoma Power filed a Third-Generation Incentive Rate Mechanism application for customer electricity distribution rates effective January 1, 2013. The application was prepared in a manner consistent with the OEB's decision on the utility's 2012 rate application; however, the 2013 rate application has been complicated by the requirement to dispose of smart meter costs. Since distribution rates for Algoma Power's residential customers are governed by separate regulation, recovery of smart meter investments will impact the determination of Rural and Remote Rate Protection Program funding for 2013. The OEB has scheduled a written hearing for the application. - In December 2012 the OEB issued an order making Algoma Power's customer rates for 2012 interim rates for 2013, until a final rate order is issued on 2013 customer rates.----------------------------------------------------------------------------Fortis Turks - Negotiations between Fortis Turks and Caicos and theand Caicos Interim Government of the Turks and Caicos Islands ("Interim Government") occurred during the third quarter of 2012 with Fortis Turks and Caicos presenting a new regulatory framework proposal to the Interim Government. A third-party consultant was engaged by the Interim Government to review the proposal and provide recommendations. No agreement was reached with the Interim Government; however, management expects to continue dialogue on regulatory reform with the newly elected government.----------------------------------------------------------------------------
