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Factor Contributing to Earnings Variance
Unfavourable
-- Lower performance at the Hospitality Division, primarily due to the impact of decreased occupancy levels at hotel operations in central Canada
CORPORATE AND OTHER (1)
----------------------------------------------------------------------------Financial Highlights (Unaudited) Quarter Ended March 31($ millions) 2013 2012 Variance--------------------------------------------------------------------------------------------------------------------------------------------------------Revenue 6 6 -Operating Expenses 3 3 -Depreciation and Amortization 1 1 -Other Income (Expenses), Net 2 (5) 7Finance Charges 10 11 (1)Income Tax Recovery (2) (4) 2---------------------------------------------------------------------------- (4) (10) 6Preference Share Dividends 14 11 3----------------------------------------------------------------------------Net Corporate and Other Expenses (18) (21) 3--------------------------------------------------------------------------------------------------------------------------------------------------------(1) Includes Fortis net corporate expenses, net expenses of non-regulated FortisBC Holdings Inc. ("FHI") corporate-related activities, and the financial results of FHI's wholly owned subsidiary FortisBC Alternative Energy Services Inc. and FHI's 30% ownership interest in CustomerWorks Limited Partnership.Factors Contributing to Net Corporate and Other Expenses Variance
Favourable
-- Increased other income, net of other expenses, primarily due to: (i) a foreign exchange gain of approximately $2 million recognized in the first quarter of 2013, compared to a foreign exchange loss of $1.5 million recognized in the first quarter of 2012, 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; and (ii) approximately $0.5 million of costs incurred during the first quarter of 2013, compared to $4 million of costs incurred during the first quarter of 2012, related to the pending acquisition of CH Energy Group-- 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
Unfavourable
-- Higher preference share dividends, due to the issuance of First Preference Shares, Series J in November 2012-- Lower income tax recovery, due to higher Part VI.1 taxes and the release of an income tax provision at FHI in the first quarter of 2012
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 quarter of 2013 are summarized as follows.
NATURE OF REGULATION---------------------------------------------------------------------------- Allowed Returns (%) Supportive Features ------------------------------------------ Future or Allowed Historical Test Common YearRegulated Regulatory Equity Used to SetUtility Authority (%) 2011 2012 2013 Customer Rates---------------------------------------------------------------------------- ROE COS/ROE ---------------------------FEI British 40(1) 9.50 9.50 9.50(1) FEI: Prior to Columbia January 1, Utilities 2010, 50/50 Commission sharing of ("BCUC") earnings above or below the allowed ROE under a PBR mechanism that expired on December 31, 2009 with a two-year phase- outFEVI BCUC 40(1) 10.00 10.00 10.00(1)FEWI BCUC 40(1) 10.00 10.00 10.00(1) ROEs established by the BCUC - 2013 ROEs are under review --------------- Future Test Year----------------------------------------------------------------------------FortisBC- BCUC 40(1) 9.90 9.90 9.90(1) COS/ROEElectric PBR mechanism for 2009 through 2011: 50/50 sharing of earnings above or below the allowed ROE up to an achieved ROE that is 200 basis points above or below the allowed ROE - excess to deferral account ROE established by the BCUC - 2013 ROE is under review --------------- Future Test Year----------------------------------------------------------------------------Fortis- Alberta 41(1) 8.75 8.75 8.75(1) COS/ROEAlberta Utilities Commission ("AUC") PBR mechanism for 2013 through 2017 with capital tracker account and other supportive features ROE established by the AUC - 2013 ROE is under review --------------- 2012 test year with 2013 through 2017 rates set using PBR mechanism----------------------------------------------------------------------------Newfound- Newfoundland 45 8.38 +/- 8.80 +/- 8.80 +/- COS/ROEland Power and 50 bps 50 bps 50 bps Labrador The allowed ROE Board of was set using Commissioners an of automatic Public adjustment Utilities formula tied ("PUB") to long-term Canada bond yields for 2011. ROE established by the PUB for 2012 through 2015 --------------- Future Test Year----------------------------------------------------------------------------Maritime- Island 40 9.75 9.75 9.75 COS/ROEElectric Regulatory and Appeals Commission --------------- Future Test Year----------------------------------------------------------------------------Fortis- Ontario CanadianOntario Energy Board Niagara Power - ("OEB") 40 8.01 8.01 8.93(2) COS/ROE Canadian Niagara Power Algoma Power - COS/ROE and subject to Rural and Remote Rate Algoma Power 40 9.85 9.85 9.85(2) Protection ("RRRP") program Franchise Cornwall Agreement Electric - Cornwall Price cap with Electric commodity cost flow through --------------- Canadian Niagara Power - 2009 test year for 2011 and 2012; 2013 test year for 2013 Algoma Power - 2011 test year for 2011, 2012 and 2013---------------------------------------------------------------------------- ROA COS/ROA ---------------------------Caribbean- Electricity N/A 7.75 - 7.25 - 7.25 -Utilities Regulatory 9.75 9.25 9.25(3) Rate-cap Authority adjustment ("ERA") mechanism ("RCAM") based on published consumer price indices The Company may apply for a special additional rate to customers in the event of a disaster, including a hurricane. --------------- Historical Test Year----------------------------------------------------------------------------Fortis Utilities N/A 17.50(4) 17.50(4) 17.50(4) COS/ROA Turks and make annual Caicos filings to If the actual the ROA is lower Government of than the the allowed ROA, Turks and due to Caicos additional Islands costs resulting from a hurricane or other event, the utilities may apply for an increase in customer rates in the following year. --------------- Future Test Year----------------------------------------------------------------------------(1) Capital structures and allowed ROEs for 2013 are interim and are subject to change based on the outcomes of cost of capital proceedings(2) Based on the ROE automatic adjustment formula, the allowed ROE for regulated electric utilities in Ontario is 8.93% for 2013. This ROE is not applicable to the regulated electric utilities until they are scheduled to file full COS rate applications. As a result, the allowed ROE of 8.93% is not applicable to Algoma Power in 2013.(3) Subject to change in June 2013 based on the annual operation of the RCAM(4) Amount provided under licences as it relates to FortisTCI and Atlantic. Amount provided under licence for TCU is 15%. Achieved ROAs at the utilities were significantly lower than those allowed under licences as a result of the inability, due to economic and political factors, to increase base electricity rates associated with significant capital investment in recent years.MATERIAL REGULATORY DECISIONS AND APPLICATIONS----------------------------------------------------------------------------Regulated Summary Description Utility----------------------------------------------------------------------------FEI/FEVI/FEWI - Effective January 1, 2013, rates increased by approximately 1.6% for typical residential customers at FEI in the Lower Mainland, as a result of an increase in delivery rates in accordance with the BCUC's decision in April 2012 pertaining to the FortisBC Energy companies' 2012/2013 Revenue Requirements Application ("RRA"), partially offset by a decrease in midstream rates. Natural gas commodity rates remained unchanged for customers at FEI, effective January 1, 2013. - Effective January 1, 2013, rates increased approximately 5% for typical customers at FEWI, as a result of an increase in delivery rates, in accordance with the BCUC's decision in April 2012 pertaining to the FortisBC Energy companies' 2012/2013 RRA, and an increase in natural gas commodity rates. - In February 2012 the BCUC approved FEI's amended application for a general tariff for the provision of compressed natural gas and liquefied natural gas ("LNG") refuelling services for transportation vehicles. FEI's application for changing its LNG sales and dispensing service rate schedule from a pilot program to a permanent program is pending before the BCUC. A decision on the application is expected in the second quarter of 2013. - In August 2011 FEI received a BCUC decision on the use of Energy Efficiency and Conservation ("EEC") funds as incentives for natural gas-fuelled vehicles ("NGVs"). FEI had made these funds available to assist large customers in purchasing NGVs in lieu of vehicles fuelled by diesel. The decision determined that it was not appropriate to use EEC funds for the above-noted purpose and the BCUC requested that FEI provide further submissions to determine the prudency of the EEC incentives. In August 2012 an application was filed with the BCUC to review the prudency of the EEC incentives totalling approximately $6 million. A decision was received in April 2013 in which the BCUC determined that the EEC incentives for NGVs were prudently incurred and can be recovered from customers in rates. - During the first quarter of 2013, the BCUC approved the capital expenditures for the Telus Garden project at FortisBC Alternative Energy Services Inc. ("FAES"); however, approval of revisions to the rate design and rates is pending. There has been no change in the status of the other projects at FAES from that disclosed in the Corporation's 2012 Annual MD&A. - In April 2012 the FortisBC Energy companies applied to the BCUC for the necessary approvals to amalgamate the three utilities and implement common rates across the service territories served by the amalgamated entity, effective January 1, 2014. The BCUC issued its decision in February 2013 denying the request to implement common rates. The FortisBC Energy companies filed a leave to appeal the decision to the British Columbia Court of Appeal in March 2013 and filed an Application for Reconsideration with the BCUC in April 2013. - The public oral hearing for the first phase of a Generic Cost of Capital ("GCOC") Proceeding to determine the allowed ROE and appropriate capital structure for FEI, the designated low-risk benchmark utility in British Columbia, occurred in December 2012. A decision on the proceeding 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. FEVI, FEWI and FortisBC Electric will have their allowed ROEs and capital structures determined in the second phase of the GCOC Proceeding. In March 2013 the BCUC initiated the second phase of the GCOC Proceeding by establishing a procedural conference, which took place in April 2013. The results of the GCOC Proceeding could materially impact the earnings of the FortisBC Energy companies and FortisBC Electric. For further discussion on the nature of the GCOC Proceeding, refer to the "Material Regulatory Decisions and Applications" section of the Corporation's 2012 Annual MD&A.----------------------------------------------------------------------------FortisBC - Effective January 1, 2013, as approved by the BCUC in its Electric August 2012 decision pertaining to FortisBC Electric's 2012/2013 RRA, customer electricity rates increased 4.2%. - In July 2012 FortisBC Electric filed its Advanced Metering Infrastructure ("AMI") Application, which was updated in early 2013. A regulatory review by the BCUC and various interveners concluded with an oral hearing in March 2013. A decision on the application is expected in the second half of 2013. The AMI project proposes to improve and modernize FortisBC Electric's grid by exchanging its manually read meters with advanced meters. The AMI project is expected to cost approximately $52 million. - In March 2013 the BCUC approved the acquisition by FortisBC Electric of the City of Kelowna's electrical utility assets and allowed for approximately $38 million of the $55 million purchase price to be included in FortisBC Electric's rate base, resulting in the recognition of approximately $14 million of goodwill. The transaction closed in March 2013, which now allows FortisBC Electric to directly serve some 15,000 customers formerly served by the City. Prior to the acquisition, 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. - In March 2012 the BCUC issued an order establishing a written hearing process to review the prudency of approximately $29 million in capital expenditures already incurred related to the Kettle Valley Distribution Source Project, which was substantially completed in 2009. In April 2013 the BCUC issued a decision approving substantially all of the $29 million to be included in rate base, effective from January 1, 2012.----------------------------------------------------------------------------FortisAlberta - In September 2012 the AUC issued a generic PBR Decision outlining the PBR framework applicable to distribution utilities in Alberta, including FortisAlberta, for a five- year term, which commenced 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 framework also includes mechanisms for the recovery or settlement of items determined to flow through directly to customers and the recovery of costs related to capital expenditures that are not being recovered through the inflationary factor of the formula. The AUC also approved: (i) a Z factor permitting an application for recovery of costs related to significant unforeseen events; (ii) a PBR re-opener mechanism permitting an application to re-open and review the PBR plan to address specific problems with the design or operation of the PBR plan; and (iii) an ROE efficiency carry-over mechanism permitting an efficiency incentive by allowing the utility to continue to benefit from any efficiency gains achieved during the PBR term for two years following the end of the term. The PBR formula does, however, raise some concern and uncertainty for FortisAlberta regarding the treatment of certain capital expenditures. While the PBR Decision did provide for a capital tracker mechanism for the recovery of costs related to certain capital expenditures, FortisAlberta sought further clarification regarding this mechanism in a Review and Variance ("R&V") Application and a Capital Tracker Application and sought leave to appeal the issue to the Alberta Court of Appeal. - In March 2013 the AUC issued a decision denying the R&V Application. FortisAlberta has filed a leave to appeal the decision on similar grounds as the leave to appeal the 2012 PBR Decision. Both appeals have been adjourned pending further determinations in outstanding PBR-related proceedings. - In March 2013 the AUC issued an interim decision regarding the Compliance Applications filed by the distribution utilities in Alberta. The interim decision approved a combined inflation and productivity factor of 1.71%, certain adjustments to the Company's going-in rates, including specific flow-through amounts, and the recovery, on an interim basis, of 60% of the revenue requirement associated with the 2013 capital tracker expenditures applied for to provide a reasonable balance between the utilities' forecasted 2013 customer rate adjustments related to the capital trackers and potential customer rate-shock implications. For FortisAlberta, the AUC approved approximately $14.5 million of the $24 million in revenue requested in its 2013 Capital Tracker Application. The decision resulted in an interim increase in FortisAlberta's distribution rates of approximately 4%, effective January 1, 2013, with collection from customers commencing April 1, 2013. A final decision on the Compliance Application, with any subsequent adjustments to 2013 customer distribution rates, is expected in the third quarter of 2013. A hearing on the Capital Tracker Application is expected in June 2013, with a decision expected in the second half of 2013. - In October 2012 the AUC initiated a 2013 GCOC Proceeding to establish the final allowed ROE for 2013 and determine whether a formulaic ROE automatic adjustment mechanism should be re-established. In November 2012 the 2013 GCOC Proceeding was suspended until other regulatory matters were resolved. In April 2013 the AUC recommenced the 2013 GCOC Proceeding to set the allowed ROE and capital structure for distribution utilities in Alberta for 2013 as well as the allowed ROE for 2014. In addition, an interim allowed ROE for 2015 will be established. The AUC does not intend to consider the possibility of re-establishing a formulaic ROE automatic adjustment mechanism at this time. The process for the 2013 GCOC Proceeding is scheduled to commence in the second quarter of 2013 with a hearing scheduled for early 2014. The expected outcome of this proceeding is currently unknown. - In its 2011 GCOC Decision, the AUC made statements regarding cost responsibility for stranded assets, which FortisAlberta and other utilities challenged as being incorrectly made. As a result, FortisAlberta together with other Alberta utilities filed an R&V Application with the AUC. In June 2012 the AUC decided it would not permit an R&V of the decision in question but would examine the issue in the Utility Asset Disposition ("UAD") Proceeding, which was reinitiated in November 2012. FortisAlberta and the other Alberta utilities had also sought leave to appeal the stranded asset pronouncements to the Alberta Court of Appeal and temporarily adjourned that court process pending the AUC's follow-up proceeding. 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 2013 FortisAlberta, together with other Alberta utilities, will file reply arguments in the UAD Proceeding, after which time the AUC will commence deliberations with a decision expected in the third quarter of 2013.----------------------------------------------------------------------------Newfound- - In April 2013 the PUB issued its decision related toland Power Newfoundland Power's 2013/2014 General Rate Application ("GRA"), which was filed in September 2012, to establish the Company's cost of capital for rate-making purposes. In its decision, the PUB ordered that the allowed ROE and common equity component of capital structure remain at 8.8% and 45%, respectively, for 2013 through 2015. The PUB also ordered: (i) the recognition of pension expense for regulatory purposes in accordance with US GAAP and the related regulatory asset to be recovered from customers over 15 years; (ii) a decrease in the overall composite depreciation rate to 3.42% from 3.47%; (iii) the deferral of annual customer energy conservation program costs to be recovered from customers over the subsequent seven-year period; and (iv) the approval of various regulatory amortizations over a three-year period, including cost-recovery deferrals recognized in 2011 and 2012, costs associated with the GRA and the December 31, 2011 balance in the Weather Normalization Account. The impact of the decision is expected to increase customer electricity rates, effective January 1, 2013, by an overall average of approximately 5%, with collection from customers commencing July 1, 2013. The cumulative impact of the decision will be recorded in the second quarter of 2013, when the decision was received, with the impact of the decision related to the first quarter of 2013 determined to be immaterial. - Through the annual operation of Newfoundland Hydro's Rate Stabilization Plan, variances in the cost of fuel used to generate electricity that Newfoundland Hydro sells to Newfoundland Power are captured and flowed through to customers through the operation of Newfoundland Power's Rate Stabilization Account ("RSA"). Customer electricity rates are expected to decrease approximately 8%, effective July 1, 2013, due to a decrease in the forecasted cost of oil to be used to generate electricity at Newfoundland Hydro. The RSA also captures variances in certain of Newfoundland Power's costs, such as pension and energy supply costs. The above- noted expected decrease in customer rates is not expected to impact Newfoundland Power's earnings in 2013. - Newfoundland Power plans to file an application with the PUB in May 2013 to reduce customer electricity rates by an overall average of approximately 3%, effective July 1, 2013, as a result of the net impact of the GRA decision and annual operation of the RSA. - Newfoundland Power is required to file its GRA for 2016 on or before June 1, 2015.----------------------------------------------------------------------------Maritime - In December 2012 the Electric Power (Energy Accord Electric Continuation) Amendment Act ("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. Under the terms of the Accord Continuation Act, Maritime Electric received, in March 2013, proceeds of approximately $47 million from the Government of PEI upon its assumption of Maritime Electric's $47 million regulatory asset related to certain deferred incremental replacement energy costs during the refurbishment of Point Lepreau. Over the above-noted three-year period, increases in electricity costs for a typical residential customer have been set at 2.2%, effective March 1 annually, and Maritime Electric's allowed ROE has been capped at 9.75% each year. The resulting customer rate increases are due to the collection from customers by Maritime Electric, acting as an agent on behalf of the Government of PEI, of Point Lepreau- related costs assumed by the Government of PEI and higher COS. The proceeds were used by Maritime Electric to repay short-term borrowings, pay a special dividend to Fortis to maintain the utility's capital structure and to finance its capital expenditure program.----------------------------------------------------------------------------FortisOntario - Effective January 1, 2013, residential customer rates in Fort Erie, Gananoque and Port Colborne increased by an average 6.8%, 5.9% and 7.4%, respectively. The rate increases were the result of the OEB's decision pertaining to FortisOntario's 2013 COS Application using a 2013 forward test year and the recovery of smart meter costs and stranded assets related to conventional meters and reflect an allowed ROE of 8.93%. - In March 2013 the OEB issued its decision on Algoma Power's Third-Generation Incentive-Rate Mechanism Application for customer electricity distribution rates and smart meter cost recovery, effective January 1, 2013, resulting in an overall increase in residential and commercial customer distribution rates of 3.75%. Residential and commercial customer distribution rates are adjusted by the average increase in customer rates of all other distributor rate changes in Ontario in the most recent rate year. The difference in the recovery of COS in residential and commercial customer distribution rates and the revenue requirement is compensated from RRRP program funding. Recovery of smart meter costs allocated to residential customers will also be recovered from RRRP program funding as ordered by the OEB. Total RRRP program funding for 2013 is expected to be approximately $12 million.----------------------------------------------------------------------------Caribbean - A Certificate of Need was filed with the ERA by Caribbean Utilities Utilities in November 2011. In March 2012 proposals for the installation of new generation units from six qualified bidders, including Caribbean Utilities, was requested by the ERA and Caribbean Utilities' proposal was submitted in July 2012. In February 2013 the ERA awarded the bid to develop, install and operate two new 18-MW generation units to a third party. In April 2013 the ERA announced that it will be engaging an independent party to conduct an investigation of irregularities in the bid process. The details of the investigation have not yet been disclosed. Caribbean Utilities is continuing its review of the ERA's analysis of the bids.----------------------------------------------------------------------------Fortis Turks - In March 2013 the Fortis Turks and Caicos utilities and Caicos submitted their 2012 annual regulatory filings outlining performance in 2012. Included in the filings were the calculations, in accordance with the utilities' licences, of rate base of US$195 million for 2012 and cumulative shortfall in achieving allowable profits of US$105 million as at December 31, 2012.----------------------------------------------------------------------------
