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 the utility a reasonable opportunity to recover prudent COS and earn its allowed ROE.
UPDATE ON SIGNIFICANT ITEMS
Pending Acquisition of CH Energy Group, Inc.: In February 2012 Fortis announced that it had entered into an agreement to acquire 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 approximately US$500 million of debt on closing. 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 75,000 natural gas customers in eight counties of New York State's Mid-Hudson River Valley. The transaction received CH Energy Group shareholder approval in June 2012 and regulatory approval from the Federal Energy Regulatory Commission and the Committee on Foreign Investment in the United States in July 2012. In addition, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired in October 2012, satisfying another condition necessary for consummation of the transaction.
Approval by the New York State Public Service Commission ("NYSPSC") of the Corporation's acquisition of CH Energy Group is the last significant regulatory matter required to close the transaction. Closing of the transaction is now anticipated during the second quarter of 2013. The transaction is expected to be accretive to the Corporation's earnings per common share within the first full year of ownership of CH Energy Group, excluding acquisition-related expenses. A Settlement Agreement, among Fortis, CH Energy Group, NYSPSC staff, registered interveners, and other parties was filed with the NYSPSC in January 2013. The Settlement Agreement provides almost $50 million to fund customer and community benefits, including: (i) $35 million to cover expenses that normally would be recovered in customer rates, for example, storm-restoration expenses; (ii) guaranteed savings to customers of more than $9 million over five years resulting from the elimination of costs Central Hudson now incurs as a public company; and (iii) the establishment of a $5 million Customer Benefit Fund for economic development and low-income assistance programs for communities and residents of the Mid-Hudson River Valley. Another benefit provided under the Settlement Agreement is an electric and natural gas customer delivery rate freeze until July 1, 2014. The Settlement Agreement also contains customer protections, including the continuation of Central Hudson as a stand-alone utility. The parties to the Settlement Agreement have concluded that, based on the terms of the Settlement Agreement, the acquisition is in the public interest and have recommended approval by the NYSPSC.
During 2012 the Corporation's earnings were reduced by the incurrence of $7.5 million of after-tax CH Energy Group acquisition-related expenses, largely incurred in the first half of 2012.
Subscription Receipts Offering: To finance a portion of the pending acquisition of CH Energy Group, Fortis sold 18.5 million Subscription Receipts at $32.50 each in June 2012 through a bought deal offering underwritten by a syndicate of underwriters, realizing gross proceeds of approximately $601 million. The gross proceeds from the sale of the Subscription Receipts are being held by an escrow agent, pending satisfaction of closing conditions, including receipt of regulatory approvals, included in the agreement to acquire CH Energy Group (the "Release Conditions"). The Subscription Receipts began trading on the Toronto Stock Exchange on June 27, 2012 under the symbol "FTS.R".
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