EX-99.2 3 exhibit992q12019fs.htm EXHIBIT 99.2 Exhibit

Exhibit 99.2
 
 
 












FORTIS INC.

Condensed Consolidated Interim Financial Statements
For the three months ended March 31, 2019 and 2018
(Unaudited)

 
F - 1
 

FORTIS INC.
Condensed Consolidated Interim Balance Sheets (Unaudited)
As at
(in millions of Canadian dollars)
 
 
 
 
 
March 31,
 
December 31,
 
2019
 
2018
 
 
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
233

 
$
332

Accounts receivable and other current assets
1,452

 
1,357

Prepaid expenses
85

 
84

Inventories
368

 
398

Regulatory assets (Note 6)
330

 
324

Assets held for sale (Note 7)
757

 
766

Total current assets
3,225

 
3,261

Other assets
609

 
552

Regulatory assets (Note 6)
2,902

 
2,854

Property, plant and equipment, net
32,593

 
32,654

Intangible assets, net
1,178

 
1,200

Goodwill
12,298

 
12,530

Total assets
$
52,805

 
$
53,051

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Short-term borrowings (Note 8)
$
169

 
$
60

Accounts payable and other current liabilities
2,220

 
2,289

Regulatory liabilities (Note 6)
657

 
656

Current installments of long-term debt (Note 8)
1,237

 
926

Current installments of finance leases (Note 9)
236

 
252

Liabilities associated with assets held for sale (Note 7)
69

 
69

Total current liabilities
4,588

 
4,252

Other liabilities
1,220

 
1,138

Regulatory liabilities (Note 6)
2,907

 
2,970

Deferred income taxes
2,720

 
2,686

Long-term debt (Note 8)
22,611

 
23,159

Finance leases (Note 9)
339

 
390

Total liabilities
34,385

 
34,595

Commitments and contingencies (Note 16)

 

Equity
 
 
 
Common shares (1) 
11,997

 
11,889

Preference shares
1,623

 
1,623

Additional paid-in capital
12

 
11

Accumulated other comprehensive income
695

 
928

Retained earnings
2,200

 
2,082

Shareholders' equity
16,527

 
16,533

Non-controlling interests
1,893

 
1,923

Total equity
18,420

 
18,456

Total liabilities and equity
$
52,805

 
$
53,051

 
 
 
 
(1) No par value. Unlimited authorized shares; 430.9 million and 428.5 million issued and outstanding as at March 31, 2019 and December 31, 2018, respectively
 
 
 
 
See accompanying Notes to Condensed Consolidated Interim Financial Statements

 
F - 2
 

FORTIS INC.
Condensed Consolidated Interim Statements of Earnings (Unaudited)
For the quarter ended March 31
(in millions of Canadian dollars, except per share amounts)
 
 
 
 
 
 
 
Quarter Ended
 
 
2019

2018
 
 
 
 
 
Revenue
$
2,436

 
$
2,197

 
 
 
 
 
Expenses
 
 
 
Energy supply costs
833

 
729

Operating expenses
616

 
553

Depreciation and amortization
334

 
302

Total expenses
1,783

 
1,584

Operating income
653

 
613

Other income, net (Note 11)
38

 
9

Finance charges
269

 
236

Earnings before income tax expense
422

 
386

Income tax expense
66

 
22

Net earnings
$
356

 
$
364

 
 
 
 
 
Net earnings attributable to:
 
 
 
Non-controlling interests
$
28

 
$
25

Preference equity shareholders
17

 
16

Common equity shareholders
311

 
323

 
 
$
356

 
$
364

 
 
 
 
 
Earnings per common share (Note 13)
 
 
 
Basic
$
0.72

 
$
0.77

Diluted
$
0.72

 
$
0.76

 
 
 
 
 
See accompanying Notes to Condensed Consolidated Interim Financial Statements
FORTIS INC.
Condensed Consolidated Interim Statements of Comprehensive Income (Unaudited)
For the quarter ended March 31
(in millions of Canadian dollars)
 
 
Quarter Ended
 
 
2019
 
2018
 
 
 
 
 
Net earnings
$
356

 
$
364

 
 
 
 
 
Other comprehensive income (loss)
 
 
 
Unrealized foreign currency translation (losses) gains, net of hedging activities and income tax expense of $5 million and $nil, respectively
(266
)
 
306

Comprehensive income
$
90

 
$
670

 
 
 
 
Comprehensive income (loss) attributable to:
 
 
 
Non-controlling interests
 
$
(5
)
 
$
64

Preference equity shareholders
 
17

 
16

Common equity shareholders
 
78

 
590

 
$
90

 
$
670

 
 
 
 
 
See accompanying Notes to Condensed Consolidated Interim Financial Statements

 
F - 3
 

FORTIS INC.
Condensed Consolidated Interim Statements of Cash Flows (Unaudited)
For the quarter ended March 31
(in millions of Canadian dollars)
 
 
 
 
 
 
 
Quarter Ended
 
 
 
2019
 
2018
 
 
 
 
 
 
Operating activities
 
 
 
Net earnings
$
356

 
$
364

Adjustments to reconcile net earnings to cash from operating activities:
 
 
 
 
 
Depreciation - property, plant and equipment
298

 
269

 
 
Amortization - intangible assets
30

 
26

 
 
Amortization - other
6

 
7

 
 
Deferred income tax expense (recovery)
23

 
(15
)
 
 
Equity component of allowance for funds used during construction (Note 11)
(18
)
 
(15
)
 
 
Other
34

 
14

Change in long-term regulatory assets and liabilities
(50
)
 
40

Change in working capital (Note 14)
(138
)
 
(101
)
Cash from operating activities
541

 
589

Investing activities
 
 
 
Capital expenditures - property, plant and equipment
(712
)
 
(655
)
Capital expenditures - intangible assets
(28
)
 
(30
)
Contributions in aid of construction
26

 
27

Other
(18
)
 
(20
)
Cash used in investing activities
(732
)
 
(678
)
Financing activities
 
 
 
Proceeds from long-term debt, net of issuance costs
72

 
320

Repayments of long-term debt and finance leases
(17
)
 
(146
)
Borrowings under committed credit facilities
1,463

 
1,166

Repayments under committed credit facilities
(1,418
)
 
(1,106
)
Net change in short-term borrowings
117

 
(2
)
Issue of common shares, net of costs and dividends reinvested
32

 
15

Dividends
 
 
 
 
 
Common shares, net of dividends reinvested
(118
)
 
(116
)
 
 
Preference shares
(17
)
 
(16
)
 
 
Subsidiary dividends paid to non-controlling interests
(32
)
 
(24
)
Other
12

 
(2
)
Cash from financing activities
94

 
89

Effect of exchange rate changes on cash and cash equivalents
(8
)
 
6

Change in cash and cash equivalents
(105
)
 
6

Change in cash associated with assets held for sale (Note 7)
6

 
—

Cash and cash equivalents, beginning of period
332

 
327

Cash and cash equivalents, end of period
$
233

 
$
333

 
 
 
 
 
 
Supplementary Cash Flow Information (Note 14)
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Interim Financial Statements

 
F - 4
 

FORTIS INC.
Condensed Consolidated Interim Statements of Changes in Equity (Unaudited)
For the quarter ended March 31
(in millions of Canadian dollars, except share numbers)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Shares
(# millions)
 
Common Shares
 
Preference Shares
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Non-Controlling Interests
 
Total Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As at December 31, 2018
428.5

 
$
11,889

 
$
1,623

 
$
11

 
$
928

 
$
2,082

 
$
1,923

 
$
18,456

Net earnings
—

 
—

 
—

 
—

 
—

 
328

 
28

 
356

Other comprehensive loss
—

 
—

 
—

 
—

 
(233
)
 
—

 
(33
)
 
(266
)
Common shares issued
2.4

 
108

 
—

 
(2
)
 
—

 
—

 
—

 
106

Subsidiary dividends paid to non-controlling interests
—

 
—

 
—

 
—

 
—

 
—

 
(32
)
 
(32
)
Dividends declared on common shares ($0.45 per share)
—

 
—

 
—

 
—

 
—

 
(193
)
 
—

 
(193
)
Dividends declared on preference shares
—

 
—

 
—

 
—

 
—

 
(17
)
 
—

 
(17
)
Other
—

 
—

 
—

 
3

 
—

 
—

 
7

 
10

As at March 31, 2019
430.9

 
$
11,997

 
$
1,623

 
$
12

 
$
695

 
$
2,200

 
$
1,893

 
$
18,420

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As at December 31, 2017
421.1

 
$
11,582

 
$
1,623

 
$
10

 
$
61

 
$
1,727

 
$
1,746

 
$
16,749

Net earnings
—

 
—

 
—

 
—

 
—

 
339

 
25

 
364

Other comprehensive income
—

 
—

 
—

 
—

 
267

 
—

 
39

 
306

Common shares issued
1.9

 
77

 
—

 
(1
)
 
—

 
—

 
—

 
76

Subsidiary dividends paid to non-controlling interests
—

 
—

 
—

 
—

 
—

 
—

 
(24
)
 
(24
)
Dividends declared on common shares ($0.425 per share)
—

 
—

 
—

 
—

 
—

 
(180
)
 
—

 
(180
)
Dividends declared on preference shares
—

 
—

 
—

 
—

 
—

 
(16
)
 
—

 
(16
)
Other
—

 
—

 
—

 
—

 
—

 
—

 
1

 
1

As at March 31, 2018
423.0

 
$
11,659

 
$
1,623

 
$
9

 
$
328

 
$
1,870

 
$
1,787

 
$
17,276

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Interim Financial Statements
 
 
 
 
 
 
 


 
F - 5

 



FORTIS INC.
Notes to Condensed Consolidated Interim Financial Statements
For the three months ended March 31, 2019 and 2018 (Unaudited)

1. DESCRIPTION OF BUSINESS

Nature of Operations

Fortis Inc. ("Fortis" or the "Corporation") is principally a North American regulated electric and gas utility holding company.

Earnings for interim periods may not be indicative of annual results due to the impact of seasonal weather conditions on customer demand and market pricing and the timing and recognition of regulatory decisions. Most of the annual earnings of the gas utilities are realized in the first and fourth quarters due to space-heating requirements. Earnings for the electric distribution utilities in the United States are generally highest in the second and third quarters due to the use of air conditioning and other cooling equipment.

Entities within the reporting segments that follow operate with substantial autonomy.

Regulated Utilities

ITC: Comprised of ITC Holdings Corp., ITC Investment Holdings Inc. and the electric transmission operations of its regulated operating subsidiaries, which include International Transmission Company, Michigan Electric Transmission Company, LLC, ITC Midwest LLC and ITC Great Plains, LLC, all operating in the United States. Fortis owns 80.1% of ITC and an affiliate of GIC Private Limited owns a 19.9% minority interest.

UNS Energy: Comprised of UNS Energy Corporation, which primarily includes Tucson Electric Power Company ("TEP"), UNS Electric, Inc. and UNS Gas, Inc., all operating in the United States.

Central Hudson: Represents Central Hudson Gas & Electric Corporation, operating in the United States.

FortisBC Energy: Represents FortisBC Energy Inc., operating in Canada.

FortisAlberta: Represents FortisAlberta Inc., operating in Canada.

FortisBC Electric: Represents FortisBC Inc., operating in Canada.

Other Electric: Comprised of utilities in Eastern Canada and the Caribbean as follows: Newfoundland Power Inc.; Maritime Electric Company, Limited; FortisOntario Inc.; a 39% equity investment in Wataynikaneyap Power Limited Partnership; an approximate 60% controlling interest in Caribbean Utilities Company, Ltd. ("Caribbean Utilities"); FortisTCI Limited and Turks and Caicos Utilities Limited (collectively "FortisTCI"); and a 33% equity investment in Belize Electricity Limited ("BEL").

Non-Regulated

Energy Infrastructure: Primarily comprised of long-term contracted generation assets in British Columbia and Belize, and the Aitken Creek natural gas storage facility ("Aitken Creek") in British Columbia.

Corporate and Other: Captures expenses and revenues not specifically related to any reportable segment and those business operations that are below the required threshold for segmented reporting, including net corporate expenses of Fortis and the non-regulated holding company FortisBC Holdings Inc ("FHI") of FortisBC Energy.


 
F - 6
 



FORTIS INC.
Notes to Condensed Consolidated Interim Financial Statements
For the three months ended March 31, 2019 and 2018 (Unaudited)

2. REGULATORY MATTERS

Regulation of the Corporation's utilities is generally consistent with that disclosed in its 2018 annual audited consolidated financial statements ("2018 Annual Financial Statements"). A summary of significant regulatory developments year-to-date 2019 follows.

ITC
In March 2019 the Federal Energy Regulatory Commission ("FERC") issued a notice of inquiry seeking comments on whether and how to improve its electric transmission incentives policy. The outcome may impact the existing incentive adders that are included in transmission rates charged by transmission owners, including ITC.

In March 2019 FERC issued a second notice of inquiry seeking comments on whether and how recent policies concerning the determination of the base rate of return on common equity ("ROE") for electric utilities should be modified. The outcome may impact ITC’s future base ROE.

Refer to the Corporation's 2018 Annual Financial Statements for further information on ITC’s incentive adders and ROE complaints.

UNS Energy
In April 2019 TEP filed a general rate application with the Arizona Corporation Commission requesting an increase in non-fuel revenue of US$115 million effective May 1, 2020 with electricity rates based on a 2018 test year. The filing includes a request to increase TEP's allowed ROE to 10.35% from 9.75% and the equity component of its capital structure to 53% from 50% on a rate base of US$2.7 billion. A decision is expected in 2020.

FortisBC Energy and FortisBC Electric
In March 2019 FortisBC Energy and FortisBC Electric filed applications with the British Columbia Utilities Commission requesting approval of a multi-year rate plan and rate-setting methodology for 2020 through 2024. A decision is expected in 2020.

FortisAlberta
In December 2018 the Alberta Utilities Commission ("AUC") initiated a generic cost of capital proceeding to consider a formula-based approach to setting the allowed ROE beginning in 2021 and whether any process changes are necessary for determining capital structure in years in which a ROE formula is in place. In April 2019 the AUC determined that a traditional non-formulaic approach for assessing ROE and deemed capital structure would be used in 2021, with consideration of a formula-based approach for determining the allowed ROE for 2022 and subsequent years.


3. ACCOUNTING POLICIES

The condensed consolidated interim financial statements ("Interim Financial Statements") have been prepared in accordance with accounting principles generally accepted in the United States of America and are in Canadian dollars unless otherwise noted.

The Interim Financial Statements are comprised of the accounts of Fortis and its wholly-owned subsidiaries and controlling ownership interests. All inter-company balances and transactions have been eliminated on consolidation, except as disclosed in Note 5.

These Interim Financial Statements do not include all of the disclosures required in the annual financial statements and should be read in conjunction with the Corporation's 2018 Annual Financial Statements. In management's opinion, these Interim Financial Statements include all adjustments that are of a normal recurring nature, necessary for fair presentation.


 
F - 7
 



FORTIS INC.
Notes to Condensed Consolidated Interim Financial Statements
For the three months ended March 31, 2019 and 2018 (Unaudited)

The preparation of the Interim Financial Statements requires management to make estimates and judgments, including those related to regulatory decisions, that affect the reported amounts of, and disclosures related to, assets, liabilities, revenues and expenses. Actual results could differ from estimates.

The accounting policies applied herein are consistent with those outlined in the Corporation's 2018 Annual Financial Statements, except as described below.

New Accounting Policies

Leases
Effective January 1, 2019, the Corporation adopted Accounting Standards Update ("ASU") 2016-02, Leases, that requires lessees to recognize a right-of-use asset and lease liability for all leases with a lease term greater than 12 months, along with additional disclosures (Note 9).

At lease inception, the right-of-use asset and liability are both measured at the present value of future lease payments, excluding variable payments that are based on usage or performance. Future lease payments include both lease components (e.g., rent, real estate taxes and insurance costs) and non-lease components (e.g., common area maintenance costs), which Fortis accounts for as a single lease component. The present value is calculated using the rate implicit in the lease or a lease-specific secured interest rate based on the remaining lease term. Renewal options are included in the lease term when it is reasonably certain that the option will be exercised.

Leases with a term of 12 months or less are not recorded on the balance sheet but are recognized as lease expense on a straight-line basis over the lease term.

Fortis applied the transition provisions of the new standard as of the adoption date and did not retrospectively adjust prior periods in accordance with the modified retrospective approach. Fortis elected a package of implementation options, referred to as practical expedients, that allowed it to not reassess: (i) whether existing contracts, including land easements, are or contain a lease; (ii) the classification of existing leases; or (iii) the initial direct costs for existing leases. Fortis also utilized the hindsight practical expedient to determine the lease term. Upon adoption, Fortis did not identify or record an adjustment to the opening balance of retained earnings, and there was no impact on net earnings or cash flows.

Hedging
Effective January 1, 2019, the Corporation adopted ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, which better aligns risk management activities and financial reporting for hedging relationships through changes to designation, measurement, presentation and disclosure guidance. Adoption did not have a material impact on the Interim Financial Statements and related disclosures.

Fair Value Measurement Disclosures
Effective January 1, 2019, the Corporation adopted elements of ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement, that are allowed to be early adopted. This ASU improves the effectiveness of financial statement note disclosures by clarifying what is required and important to users of the financial statements. The partial adoption of this update removed the following disclosures: (a) the amount of, and reasons for, transfers between level 2 and level 3 of the fair value hierarchy; (b) the policy for timing of transfers between levels; and (c) the valuation processes for level 3 fair value measurements.



 
F - 8
 



FORTIS INC.
Notes to Condensed Consolidated Interim Financial Statements
For the three months ended March 31, 2019 and 2018 (Unaudited)

4. FUTURE ACCOUNTING PRONOUNCEMENTS

Financial Instruments
ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, issued in June 2016, is effective for Fortis January 1, 2020 and is to be applied on a modified retrospective basis. Principally, it requires entities to use an expected credit loss methodology and to consider a broader range of reasonable and supportable information to estimate credit losses. Adoption is not expected to have a material impact on the consolidated financial statements and related disclosures.

Pensions and Other Post-Retirement Plan Disclosures
ASU No. 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans, issued in August 2018, is effective for Fortis January 1, 2021 and is to be applied on a retrospective basis for all periods presented. Principally, it modifies the disclosure requirements for employers with defined pension or other post-retirement plans and clarifies disclosure requirements. In particular, it removes the following disclosures: (a) the amounts in accumulated other comprehensive income expected to be recognized as components of net period benefit costs over the next fiscal period; (b) the amount and timing of plan assets expected to be returned to the employer; and (c) the effects of a one-percentage-point change on the assumed health care costs and the change in rates on service cost, interest cost and the benefit obligation for post-retirement health care benefits.


5. SEGMENTED INFORMATION

General

Fortis segments its business based on regulatory status and service territory, as well as the information used by its President and Chief Executive Officer in deciding how to allocate resources. Segment performance is evaluated based on net earnings attributable to common equity shareholders.

Related-party and inter-company transactions

Related-party transactions are in the normal course of operations and are measured at the amount of consideration agreed to by the related parties. There were no material related-party transactions for the quarters ended March 31, 2019 and 2018.

Inter-company balances, transactions and profit are eliminated on consolidation, except for certain inter-company transactions between non-regulated and regulated entities in accordance with accounting standards for rate-regulated entities. Inter-company transactions are summarized below.
 
Quarter Ended
 
March 31
($ millions)
2019

2018

Sale of capacity from Waneta Expansion to FortisBC Electric
16

15

Lease of gas storage capacity and gas sales from Aitken Creek to FortisBC Energy
6

7


As at March 31, 2019, accounts receivable included approximately $14 million due from BEL (December 31, 2018 - $16 million).

The Corporation periodically provides short-term financing to subsidiaries to support capital expenditure programs, acquisitions and seasonal working capital requirements. There were no material inter-segment loans outstanding as at March 31, 2019 and December 31, 2018.



 
F - 9
 

FORTIS INC.
Notes to Condensed Consolidated Interim Financial Statements
For the three months ended March 31, 2019 and 2018 (unaudited)


 
REGULATED
 
NON-REGULATED
 
 
Quarter Ended
 
 
 
 
 
 
Energy
 
Inter-
 
March 31, 2019
 
UNS
Central
 
FortisBC
Fortis
FortisBC
Other
Sub
 
Infra-
Corporate
segment
 
($ millions)
ITC
Energy
Hudson
 
Energy
Alberta
Electric
Electric
Total
 
structure
and Other
eliminations
Total
Revenue
408

543

277

 
485

145

119

426

2,403

 
36

—

(3
)
2,436

Energy supply costs
—

232

92

 
181

—

40

287

832

 
1

—

—

833

Operating expenses
124

152

118

 
83

41

25

47

590

 
14

15

(3
)
616

Depreciation and amortization
63

74

20

 
59

52

16

42

326

 
8

—

—

334

Operating income
221

85

47

 
162

52

38

50

655


13

(15
)
—

653

Other income, net
10

9

4

 
3

1

1

1

29

 
1

8

—

38

Finance charges
77

33

11

 
35

25

18

20

219

 
1

49

—

269

Income tax expense
42

6

8

 
30

1

5

5

97

 
—

(31
)
—

66

Net earnings
112

55

32

 
100

27

16

26

368


13

(25
)
—

356

Non-controlling interests
20

—

—

 
—

—

—

3

23

 
5

—

—

28

Preference share dividends
—

—

—

 
—

—

—

—

—

 
—

17

—

17

Net earnings attributable to common equity shareholders
92

55

32

 
100

27

16

23

345


8

(42
)
—

311

Goodwill
8,193

1,844

602

 
913

228

235

256

12,271

 
27

—

—

12,298

Total assets
19,603

10,007

3,601

 
6,962

4,700

2,271

4,121

51,265


1,466

141

(67
)
52,805

Capital expenditures 
236

167

64

 
70

107

25

56

725

 
6

9

—

740

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ millions)
 
 
 
 
 
 
 
 
 
 
 
 
 


Revenue
354

444

275

 
429

141

112

397

2,152

 
48

—

(3
)
2,197

Energy supply costs
—

162

119

 
134

—

43

270

728

 
1

—

—

729

Operating expenses
103

139

105

 
76

42

26

45

536

 
13

7

(3
)
553

Depreciation and amortization
56

65

17

 
55

47

15

39

294

 
8

—

—

302

Operating income
195

78

34

 
164

52

28

43

594


26

(7
)
—

613

Other income, net
10

2

2

 
1

—

1

(1
)
15

 
—

(6
)
—

9

Finance charges
68

25

10

 
33

25

10

19

190

 
1

45

—

236

Income tax expense
32

5

5

 
34

—

3

4

83

 
2

(63
)
—

22

Net earnings
105

50

21

 
98

27

16

19

336


23

5

—

364

Non-controlling interests
19

—

—

 
—

—

—

1

20

 
5

—

—

25

Preference share dividends
—

—

—

 
—

—

—

—

—

 
—

16

—

16

Net earnings attributable to common equity shareholders
86

50

21

 
98

27

16

18

316


18

(11
)
—

323

Goodwill
7,913

1,781

582

 
913

227

235

249

11,900

 
27

—

—

11,927

Total assets
18,291

8,875

3,312

 
6,426

4,462

2,224

3,888

47,478


1,559

106

(60
)
49,083

Capital expenditures
223

125

48

 
86

119

29

53

683

 
2

—

—

685


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
F - 10

 



FORTIS INC.
Notes to Condensed Consolidated Interim Financial Statements
For the three months ended March 31, 2019 and 2018 (Unaudited)

6. REGULATORY ASSETS AND LIABILITIES

Detailed information about the Corporation's regulatory assets and liabilities is provided in Note 9 to the 2018 Annual Financial Statements. A summary follows.
 
As at
 
March 31,

December 31,

($ millions)
2019

2018

Regulatory assets
 
 
Deferred income taxes
1,543

1,532

Employee future benefits
470

485

Deferred energy management costs
239

230

Rate stabilization and related accounts
128

90

Deferred lease costs
119

110

Deferred operating overhead costs
108

103

Generation early retirement costs
93

98

Manufactured gas plant site remediation deferral
68

73

Derivatives
65

57

Other regulatory assets
399

400

Total regulatory assets
3,232

3,178

Less: Current portion
(330
)
(324
)
Long-term regulatory assets
2,902

2,854

 
 
 
Regulatory liabilities
 
 
Deferred income taxes
1,534

1,574

Asset removal cost provision
1,166

1,169

ROE complaints liability
204

206

Rate stabilization and related accounts
191

220

Energy efficiency liability
101

106

Renewable energy surcharge
87

85

Electric and gas moderator account
55

60

Other regulatory liabilities
226

206

Total regulatory liabilities
3,564

3,626

Less: Current portion
(657
)
(656
)
Long-term regulatory liabilities
2,907

2,970

 
 
 


 
F - 11
 



FORTIS INC.
Notes to Condensed Consolidated Interim Financial Statements
For the three months ended March 31, 2019 and 2018 (Unaudited)

7. ASSETS HELD FOR SALE

In 2018 Fortis solicited offers to sell its 51% ownership interest in the 335-megawatt Waneta Expansion hydroelectric generating facility ("Waneta Expansion"). In January 2019 the Corporation entered into a definitive agreement with Columbia Power Corporation ("CPC") and Columbia Basin Trust ("CBT") to sell its interest for approximately $1 billion. CPC and CBT, both 100% owned by the Government of British Columbia, are the Corporation's partners and together owned 49% of the Waneta Expansion. The related assets and liabilities were classified as held for sale and are detailed below.

On April 16, 2019, the sale was completed as expected (Note 17). FortisBC Electric will continue to operate the Waneta Expansion facility and purchase its surplus capacity.
 
As at
 
March 31,

December 31,

($ millions)
2019

2018

Cash
$
9

$
15

Accounts receivable and other current assets
5

3

Property, plant and equipment
713

718

Intangible assets
30

30

Total assets held for sale
$
757

$
766

 
 
 
Accounts payable and other current liabilities
$
1

$
2

Other liabilities
68

67

Total liabilities associated with assets held for sale
$
69

$
69


The non-controlling interest of $320 million (December 31, 2018 - $324 million) was classified in equity.

For the three months ended March 31, 2019, the Waneta Expansion contributed $10 million (for the year ended December 31, 2018 - $54 million) to earnings before income tax expense, of which 51% was attributable to common equity shareholders.


8. LONG-TERM DEBT
 
 
As at
 
 
March 31,

December 31,

($ millions)
2019

2018

Long-term debt
22,894

23,165

Credit facility borrowings
1,095

1,066

Total long-term debt
23,989

24,231

Less: Deferred financing costs and debt discounts
(141
)
(146
)
Less: Current installments of long-term debt
(1,237
)
(926
)
 
22,611

23,159


The long-term debt issuances for the three months ended March 31, 2019 are summarized below.
 
Month
Interest Rate

 
 
Use of
($ millions, except %)
Issued
(%)

Maturity
Amount
 
Proceeds
ITC - Secured Notes
January
4.55

2049
 
US
50

(1)(2)(3) 
FortisTCI - Unsecured non-revolving term loan (4)
February
(5 
) 
2025
 
US
5

(2)(3) 
(1) 
Repay credit facility borrowings
(2) 
Finance capital expenditures
(3) 
General corporate purposes
(4) 
Maximum amount of borrowings under this agreement of US$10 million has been withdrawn.
(5) 
Floating rate of a one-month LIBOR plus a spread of 1.75%

 
F - 12
 



FORTIS INC.
Notes to Condensed Consolidated Interim Financial Statements
For the three months ended March 31, 2019 and 2018 (Unaudited)

Credit Facilities

As at March 31, 2019, the Corporation and its subsidiaries had consolidated credit facilities of approximately $5.2 billion, of which approximately $3.8 billion was unused, including $1.1 billion unused under the Corporation's committed revolving corporate credit facility, as follows.
 
 
 
As at
 
Regulated

Corporate

March 31,

December 31,

($ millions)
Utilities

and Other

2019

2018

Total credit facilities
3,836

1,381

5,217

5,165

Credit facilities utilized:








Short-term borrowings (1)
(169
)
—

(169
)
(60
)
Long-term debt (including
current portion) (2)
(851
)
(244
)
(1,095
)
(1,066
)
Letters of credit outstanding
(65
)
(53
)
(118
)
(119
)
Credit facilities unutilized
2,751

1,084

3,835

3,920

(1) 
The weighted average interest rate was approximately 3.2% (December 31, 2018 - 4.2%).
(2) 
The weighted average interest rate was approximately 2.9% (December 31, 2018 - 3.3%). The current portion was $776 million (December 31, 2018 - $735 million).

Credit facilities are syndicated primarily with large banks in Canada and the United States, with no one bank holding more than 20% of the total facilities. Approximately $4.9 billion of the total credit facilities are committed facilities with maturities ranging from 2019 through 2024.

There were no material changes in credit facilities, other than the amounts utilized, from that disclosed in the Corporation's 2018 Annual Financial Statements.


9. LEASES

The Corporation and its subsidiaries lease office facilities, utility equipment, land, and communication tower space with remaining terms of up to 23 years, with optional renewal terms. Certain lease agreements include rental payments adjusted periodically for inflation or require the payment of real estate taxes, insurance, maintenance, or other operating expenses associated with the lease premises.

The Corporation's subsidiaries also have finance leases related to generating facilities with remaining terms of up to 37 years.

Leases were presented on the balance sheet as follows.
 
As at
($ millions)
March 31, 2019

Operating Leases
 
Other assets
45

Accounts payable and other current liabilities
7

Other liabilities
37

 
 
Finance Leases
 
Regulatory assets
119

Property, plant and equipment, net
442

Current installments of finance leases
236

Finance leases
339



 
F - 13
 



FORTIS INC.
Notes to Condensed Consolidated Interim Financial Statements
For the three months ended March 31, 2019 and 2018 (Unaudited)

The components of lease expense were as follows.
Quarter Ended
($ millions)
March 31, 2019

Operating lease cost
2

Finance lease cost:
 
Amortization
4

Interest
12

Variable lease cost
9

Total lease cost
27


For the three months ended March 31, 2018, operating lease cost was $2 million.

As of March 31, 2019, the present value of minimum lease payments was as follows.
($ millions)
Operating Leases

Finance
Leases

Total

April - December 2019
7

263

270

2020
8

59

67

2021
7

32

39

2022
6

33

39

2023
5

33

38

Thereafter
23

1,109

1,132

 
56

1,529

1,585

Less: Imputed interest
(12
)
(954
)
(966
)
Total lease obligations
44

575

619

Less: Current installments
(7
)
(236
)
(243
)
 
37

339

376


As at December 31, 2018, the present value of minimum lease payments was as follows.
($ millions)
 
 
Total

2019
 
 
313

2020
 
 
77

2021
 
 
80

2022
 
 
49

2023
 
 
47

Thereafter
 
 
1,885

 
 
 
2,451

Less: Imputed interest and executory costs
 
 
(1,809
)
Total capital lease and finance obligations
 
 
642

Less: Current installments
 
 
(252
)
 
 
 
390



 
F - 14
 



FORTIS INC.
Notes to Condensed Consolidated Interim Financial Statements
For the three months ended March 31, 2019 and 2018 (Unaudited)

Supplemental lease information was as follows.
As at
 
March 31, 2019

Weighted-Average Remaining Lease Term (years)
 
Operating leases
10

Finance leases
22

Weighted-Average Discount Rate (%)
 
Operating leases
4.2

Finance leases
5.4


 
Quarter ended

($ millions)
March 31, 2019

Cash Payments Included in Lease Liabilities
 
Operating cash flows used in operating leases
(2
)
Operating cash flows used in finance leases
(5
)
Financing cash flows used in finance leases
(15
)
Right-of-Use Assets Obtained in Exchange for New Lease Liabilities
 
Operating leases
46



10. EMPLOYEE FUTURE BENEFITS

The Corporation and its subsidiaries each maintain one or a combination of defined benefit pension plans and defined contribution pension plans, including group Registered Retirement Savings Plans and group 401(k) plans, for employees. The Corporation and certain subsidiaries also offer other post‑employment benefit ("OPEB") plans for qualifying employees. The net benefit cost is detailed below.
 
Defined Benefit
Pension Plans
OPEB Plans
($ millions)
2019

2018

2019

2018

Quarter Ended March 31
 
 
 
 
Components of net benefit cost
 
 
 
 
Service costs
19

21

7

8

Interest costs
31

28

6

6

Expected return on plan assets
(40
)
(40
)
(4
)
(4
)
Amortization of actuarial losses (gains)
6

12

(1
)
—

Amortization of past service credits/plan amendments
—

—

(2
)
(3
)
Regulatory adjustments
1

—

2

1

Net benefit cost
17

21

8

8


Defined contribution pension plan expense for the three months ended March 31, 2019 was $12 million (three months ended March 31, 2018 - $11 million).



 
F - 15
 



FORTIS INC.
Notes to Condensed Consolidated Interim Financial Statements
For the three months ended March 31, 2019 and 2018 (Unaudited)

11. OTHER INCOME, NET
 
Quarter ended
March 31
($ millions)
2019

2018

Equity component of allowance for funds used during construction
18

15

Derivative gains (losses)
7

(4
)
Interest income
4

4

Other
9

(6
)
 
38

9



12. INCOME TAXES

For the three months ended March 31, 2019 and 2018, the Corporation’s effective tax rates were 16% and 6%, respectively. The increase in the effective tax rate was driven primarily by a one-time $30 million remeasurement of the Corporation's deferred income tax liabilities in 2018, which resulted from an election to file a consolidated state income tax return.


13. EARNINGS PER COMMON SHARE

Diluted earnings per share ("EPS") was calculated using the treasury stock method for stock options.
 
2019
2018
 
Net Earnings

Weighted

 
Net Earnings

Weighted

 
 
to Common

Average

 
to Common

Average

 
 
Shareholders

Shares

EPS

Shareholders

Shares

EPS

 
($ millions)

(# millions)

($)

($ millions)

(# millions)

($)

Quarter Ended March 31
 
 
 
 
 
 
Basic EPS
311

429.5

0.72

323

422.0

0.77

Potential dilutive effect of stock options
—

0.6

 
—

0.5

 
Diluted EPS
311

430.1

0.72

323

422.5

0.76




 
F - 16
 



FORTIS INC.
Notes to Condensed Consolidated Interim Financial Statements
For the three months ended March 31, 2019 and 2018 (Unaudited)

14. SUPPLEMENTARY CASH FLOW INFORMATION
 
Quarter Ended
 
March 31
($ millions)
2019

2018

Change in working capital
 
 
Accounts receivable and other current assets
(102
)
(16
)
Prepaid expenses
(3
)
3

Inventories
23

52

Regulatory assets - current portion
(6
)
10

Accounts payable and other current liabilities
(57
)
(107
)
Regulatory liabilities - current portion
7

(43
)
 
(138
)
(101
)
 
 
 
Non-cash investing and financing activities
 
 
Accrued capital expenditures
298

272

Right-of-use assets obtained in exchange for operating lease liabilities
46

—

Contributions in aid of construction
13

(19
)
Common share dividends reinvested
75

63

Exercise of stock options into common shares
2

1



15. FAIR VALUE OF FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Derivatives

The Corporation generally limits the use of derivatives to those that qualify as accounting, economic or cash flow hedges, or those that are approved for regulatory recovery.

The Corporation records all derivatives at fair value, with certain exceptions including those derivatives that qualify for the normal purchase and normal sale exception. Fair values reflect estimates based on current market information about the derivatives as at the balance sheet dates. The estimates cannot be determined with precision as they involve uncertainties and matters of judgment and, therefore, may not be relevant in predicting the Corporation's future consolidated earnings or cash flows.

Cash flows associated with the settlement of all derivatives are included in operating activities on the consolidated statements of cash flows.

Energy contracts subject to regulatory deferral
UNS Energy holds electricity power purchase contracts and gas swap contracts to reduce its exposure to energy price risk. Fair values were measured primarily under the market approach using independent third-party information, where possible. When published prices are not available, adjustments are applied based on historical price curve relationships, transmission costs and line losses.

Central Hudson holds swap contracts for electricity and natural gas to minimize price volatility by fixing the effective purchase price. Fair values were measured using forward pricing provided by independent third-party information.

FortisBC Energy holds gas supply contracts to fix the effective purchase price of natural gas. Fair values reflect the present value of future cash flows based on published market prices and forward natural gas curves.


 
F - 17
 



FORTIS INC.
Notes to Condensed Consolidated Interim Financial Statements
For the three months ended March 31, 2019 and 2018 (Unaudited)

Unrealized gains or losses associated with changes in the fair value of these energy contracts are deferred as a regulatory asset or liability for recovery from, or refund to, customers in future rates, as permitted by the regulators. As at March 31, 2019, unrealized losses of $65 million (December 31, 2018 - $57 million) were recognized as regulatory assets and unrealized gains of $16 million (December 31, 2018 - $9 million) were recognized as regulatory liabilities.

Energy contracts not subject to regulatory deferral
UNS Energy holds wholesale trading contracts to fix power prices and realize potential margin, of which 10% of any realized gains are shared with customers through rate stabilization accounts. Fair values were measured using a market approach using independent third-party information, where possible.

Aitken Creek holds gas swap contracts to manage its exposure to changes in natural gas prices, capture natural gas price spreads, and manage the financial risk posed by physical transactions. Fair values were measured using forward pricing from published market sources.

Unrealized gains or losses associated with changes in the fair value of these energy contracts are recognized in revenue and were not material for the three months ended March 31, 2019 and 2018.

Total return swaps
The Corporation holds total return swaps to manage the cash flow risk associated with forecasted future cash settlements of certain stock-based compensation obligations. The swaps have a combined notional amount of $36 million and terms of two and three years expiring in January 2020 and 2021. Fair value was measured using an income valuation approach based on forward pricing curves. Unrealized gains and losses associated with changes in the fair value of the total return swaps are recognized in other income, net and were not material for the three months ended March 31, 2019 and 2018.

Foreign exchange contracts
The Corporation holds US dollar foreign exchange contracts to help mitigate exposure to volatility of foreign exchange rates. The contracts expire in 2019 and 2020, and have a combined notional amount of $163 million. Fair value was measured using independent third-party information. Unrealized gains and losses associated with changes in fair value are recognized in other income, net and were not material for the three months ended March 31, 2019 and 2018.

Other investments
ITC, UNS Energy and Central Hudson hold investments in trust associated with supplemental retirement benefit plans for select employees. These investments consist of mutual funds and money market accounts, which are recorded at fair value based on quoted market prices in active markets. Gains and losses on these funds are recognized in other income, net and were not material for the three months ended March 31, 2019 and 2018.


 
F - 18
 



FORTIS INC.
Notes to Condensed Consolidated Interim Financial Statements
For the three months ended March 31, 2019 and 2018 (Unaudited)

Recurring Fair Value Measures

The following table presents the fair value of assets and liabilities that are accounted for at fair value on a recurring basis.
($ millions)
Level 1 (1)
Level 2 (1)

Level 3 (1)

Total

As at March 31, 2019
 
 
 
 
Assets
 
 
 
 
Energy contracts subject to regulatory deferral (2) (3)
—

38

12

50

Energy contracts not subject to regulatory deferral (2)
—

8

2

10

Total return swaps (2)
4

—

—

4

Other investments (4)
131

—

—

131

 
135

46

14

195

 
 
 
 
 
Liabilities
 
 
 
 
Energy contracts subject to regulatory deferral (3) (5)
—

(84
)
(15
)
(99
)
Energy contracts not subject to regulatory deferral (5)
—

(4
)
—

(4
)
Foreign exchange contracts (5)
(4
)
—

—

(4
)
 
(4
)
(88
)
(15
)
(107
)
As at December 31, 2018
 
 
 
 
Assets
 
 
 
 
Energy contracts subject to regulatory deferral (2) (3)
—

33

8

41

Energy contracts not subject to regulatory deferral (2)
—

13

3

16

Other investments (4)
155

—

—

155

 
155

46

11

212

 
 
 
 
 
Liabilities
 
 
 
 
Energy contracts subject to regulatory deferral (3) (5)
—

(86
)
(3
)
(89
)
Energy contracts not subject to regulatory deferral (5)
—

(1
)
—

(1
)
Foreign exchange contracts, interest rate and total return swaps (5)
(8
)
(1
)
—

(9
)
 
(8
)
(88
)
(3
)
(99
)
(1) 
Under the hierarchy, fair value is determined using: (i) level 1 - unadjusted quoted prices in active markets; (ii) level 2 - other pricing inputs directly or indirectly observable in the marketplace; and (iii) level 3 - unobservable inputs, used when observable inputs are not available. Classifications reflect the lowest level of input that is significant to the fair value measurement. The change in level 3 from December 31, 2018 was immaterial.
(2) 
Included in accounts receivable and other current assets or other assets
(3) 
Unrealized gains and losses arising from changes in fair value of these contracts are deferred as a regulatory asset or liability for recovery from, or refund to, customers in future rates as permitted by the regulators, with the exception of long-term wholesale trading contracts and certain gas swap contracts.  
(4) 
Included in other assets
(5) 
Included in accounts payable and other current liabilities or other liabilities

The Corporation has elected gross presentation for its derivative contracts under master netting agreements and collateral positions, which applies only to its energy contracts. The following table presents the potential offset of counterparty netting.

 
F - 19
 



FORTIS INC.
Notes to Condensed Consolidated Interim Financial Statements
For the three months ended March 31, 2019 and 2018 (Unaudited)

Energy Contracts
Gross Amount Recognized in Balance Sheet


Counterparty Netting of Energy Contracts



Cash Collateral Received/
Posted





Net Amount

($ millions)
As at March 31, 2019
 
 
 
 
Derivative assets
60

35

56

(31
)
Derivative liabilities
(103
)
(35
)
—

(68
)
As at December 31, 2018
 
 
 
 
Derivative assets
57

28

16

13

Derivative liabilities
(90
)
(28
)
—

(62
)

Volume of Derivative Activity

As at March 31, 2019, the Corporation had various energy contracts that will settle on various dates through 2029. The volumes related to electricity and natural gas derivatives are outlined below.
 
As at
 
March 31,

December 31,

 
2019

2018

Energy contracts subject to regulatory deferral (1)
 
 
Electricity swap contracts (GWh)
407

774

Electricity power purchase contracts (GWh)
2,838

651

Gas swap contracts (PJ)
190

203

Gas supply contract premiums (PJ)
245

266

Energy contracts not subject to regulatory deferral (1)




Wholesale trading contracts (GWh)
706

1,440

Gas swap contracts (PJ)
35

37

(1) 
GWh means gigawatt hours and PJ means petajoules.

Credit Risk

For cash equivalents, accounts receivable and other current assets, and long-term other receivables, credit risk is generally limited to the carrying value on the consolidated balance sheets. The Corporation's subsidiaries generally have a large and diversified customer base, which minimizes the concentration of credit risk. Policies in place to minimize credit risk include requiring customer deposits, prepayments and/or credit checks for certain customers, performing disconnections and/or using third-party collection agencies for overdue accounts.

ITC has a concentration of credit risk as approximately 65% of its revenue is derived from three customers. Credit risk is limited as such customers have investment-grade credit ratings. ITC further reduces credit risk by requiring a letter of credit or cash deposit equal to the credit exposure, which is determined by a credit-scoring model and other factors.

FortisAlberta has a concentration of credit risk as distribution service billings are to a relatively small group of retailers. The Company reduces its exposure by obtaining from the retailers either a cash deposit, bond, letter of credit, an investment-grade credit rating from a major rating agency, or a financial guarantee from an entity with an investment-grade credit rating.

UNS Energy, Central Hudson, FortisBC Energy, Aitken Creek and the Corporation may be exposed to credit risk in the event of non‑performance by counterparties to derivatives. Credit risk is limited by net settling payments when possible and dealing only with counterparties that have investment‑grade credit ratings. At UNS Energy and Central Hudson, certain contractual arrangements require counterparties to post collateral.

 
F - 20
 



FORTIS INC.
Notes to Condensed Consolidated Interim Financial Statements
For the three months ended March 31, 2019 and 2018 (Unaudited)

The value of derivatives in net liability positions under contracts with credit risk-related contingent features that, if triggered, could require the posting of a like amount of collateral was $116 million as of March 31, 2019 (December 31, 2018 - $75 million).

Foreign Exchange Hedge

The reporting currency of ITC, UNS Energy, Central Hudson, Caribbean Utilities, FortisTCI and Belize Electric Company Limited is the US dollar. The Corporation's earnings from, and net investments in, foreign subsidiaries are exposed to fluctuations in the US dollar-to-Canadian dollar exchange rate. The Corporation has decreased this exposure by designating US dollar-denominated borrowings at the corporate level as a hedge of its net investment in foreign subsidiaries. The foreign exchange gain or loss on the translation of US dollar-denominated interest expense partially offsets the foreign exchange gain or loss on the translation of US dollar-denominated subsidiary earnings.

As at March 31, 2019, US$3,363 million (December 31, 2018 - US$3,441 million) of net investment in foreign subsidiaries was hedged by the Corporation's corporately issued US dollar-denominated long-term debt and approximately US$8,102 million (December 31, 2018 - US$7,970 million) was unhedged. Exchange rate fluctuations associated with the hedged net investment in foreign subsidiaries and the debt serving as the hedge are recognized in accumulated other comprehensive income.

Financial Instruments Not Carried at Fair Value

Excluding long-term debt, the consolidated carrying value of the Corporation's remaining financial instruments approximates fair value, reflecting their short-term maturity, normal trade credit terms and/or nature.

As at March 31, 2019, the carrying value of long-term debt, including current portion, was $23,989 million (December 31, 2018 - $24,231 million) compared to an estimated fair value of $25,822 million (December 31, 2018 - $25,110 million). Long-term debt is fair valued using level 2 inputs.

The fair value of long-term debt is calculated using quoted market prices or, when unavailable, by either: (i) discounting the associated future cash flows at an estimated yield to maturity equivalent to benchmark government bonds or treasury bills with similar terms to maturity, plus a credit risk premium equal to that of issuers of similar credit quality; or (ii) obtaining from third parties indicative prices for the same or similarly rated issues of debt with similar maturities. Since the Corporation does not intend to settle the long-term debt prior to maturity, the excess of the estimated fair value above the carrying value does not represent an actual liability.


16. COMMITMENTS AND CONTINGENCIES

Commitments

There were no material changes in commitments from that disclosed in the Corporation's 2018 Annual Financial Statements, except as follows.

In the first quarter of 2019, FortisBC Energy entered into two separate agreements to purchase pipeline capacity on the Westcoast Pipeline over a 42-year term, beginning in the fourth quarter of 2020, increasing gas purchases obligations by a total of approximately $338 million.

In March 2019 UNS Energy entered into an agreement to develop a wind-powered electric generation facility, the Oso Grande Wind Project, which is expected to be completed by December 2020. UNS Energy expects to make payments under the agreement of US$259 million in 2019 and US$111 million in 2020, contingent upon certain performance obligations.


 
F - 21
 



FORTIS INC.
Notes to Condensed Consolidated Interim Financial Statements
For the three months ended March 31, 2019 and 2018 (Unaudited)

Contingencies

In April 2013 FHI and Fortis were named as defendants in an action in the Supreme Court of British Columbia by the Coldwater Indian Band ("Band") regarding interests in a pipeline right of way on reserve lands. The pipeline was transferred by FHI (then Terasen Inc.) to Kinder Morgan Inc. in April 2007. The Band seeks cancellation of the right of way and damages for wrongful interference with the Band's use and enjoyment of reserve lands. In May 2016 the Federal Court dismissed the Band's application for judicial review of the ministerial consent. In September 2017 the Federal Court of Appeal set aside the minister's consent and returned the matter to the minister for redetermination. No amount has been accrued in the Interim Financial Statements as the outcome cannot yet be reasonably determined.


17. SUBSEQUENT EVENTS

On April 16, 2019, Fortis completed the sale of the Waneta Expansion (Note 7) for gross proceeds of approximately $1 billion. Fortis estimates a net after-tax gain on sale of approximately $450 million. A portion of the net proceeds were used to repay credit facility borrowings and repurchase, via a tender offer, US$400 million of its outstanding 3.055% unsecured senior notes due in 2026.


 
F - 22