ST. JOHN–S, NEWFOUNDLAND AND LABRADOR — (Marketwire) — 11/01/12 — Fortis Inc. (“Fortis” or the “Corporation”) (TSX: FTS) achieved third quarter net earnings attributable to common equity shareholders of $45 million, or $0.24 per common share, compared to $56 million, or $0.30 per common share, for the third quarter of 2011. Year-to-date net earnings attributable to common equity shareholders were $228 million, or $1.20 per common share, compared to $229 million, or $1.28 per common share, for the same period last year.
In 2012 earnings for the third quarter and year to date were reduced by $3.5 million and $10 million, respectively, related to foreign exchange and CH Energy Group, Inc. (“CH Energy Group”) acquisition-related expenses. In 2011 earnings for the third quarter and year to date were favourably impacted by a one-time $11 million after-tax merger termination fee paid to Fortis and $2.5 million of foreign exchange.
Excluding the above impacts, improved performance at the western Canadian regulated electric utilities for the quarter was partially offset by decreased non-regulated hydroelectric generation and a higher loss incurred at the regulated gas utilities.
Canadian Regulated Electric Utilities, led by FortisAlberta and FortisBC Electric, contributed earnings of $54 million, up $11 million from the third quarter of 2011. At FortisAlberta, higher net transmission revenue, growth in energy infrastructure investment and timing of operating expenses during 2012 were partially offset by a lower allowed rate of return on common shareholder–s equity. At FortisBC Electric, performance was driven by growth in energy infrastructure investment, higher pole-attachment revenue and lower-than-expected finance charges.
FortisBC Electric has offered to purchase the City of Kelowna–s electrical utility assets for approximately $55 million. FortisBC Electric has operated and maintained the City of Kelowna–s electrical utility assets, which currently serve approximately 15,000 customers, since 2000. Closing of the transaction is subject to certain conditions and receipt of certain approvals, including regulatory approval. FortisBC Electric and the City of Kelowna are working towards closing the transaction by the end of the first quarter of 2013.
Canadian Regulated Gas Utilities incurred a loss of $6 million compared to a loss of $4 million for the third quarter of 2011. The third quarter is normally a period of lower customer demand due to warmer temperatures. The higher loss largely related to the unfavourable impact of the difference in the timing of recognition of revenue associated with seasonal gas consumption and certain increased regulator-approved expenses in 2012, lower capitalized allowance for funds used during construction, and lower-than-expected customer additions in 2012. The above items were partially offset by higher gas transportation volumes to industrial customers and the timing of certain operating and maintenance expenses during 2012.
Year-to-date 2012, regulatory decisions have been received for: (i) 2012-2013 revenue requirements at the FortisBC Energy companies; (ii) 2012 distribution revenue requirements at FortisAlberta; and (iii) 2012-2013 revenue requirements at FortisBC Electric. The Alberta Utilities Commission issued a generic decision in September 2012 on its Performance-Based Regulation (“PBR”) Initiative, outlining the PBR framework applicable to distribution utilities in Alberta for a five-year term commencing January 1, 2013. FortisAlberta will file the required PBR-compliance application in November 2012. A Generic Cost of Capital (“GCOC”) Proceeding to finalize 2013 cost of capital for distribution utilities in Alberta is expected to commence late 2012 or early 2013. In British Columbia, the GCOC Proceeding to determine cost of capital, effective January 1, 2013, continues with an oral hearing scheduled for December 2012. Newfoundland Power filed a general rate application in September 2012 for 2013 customer rates and cost of capital.
Caribbean Regulated Electric Utilities contributed $7 million of earnings, compared to $6 million for the third quarter of 2011. Fortis Turks and Caicos acquired Turks and Caicos Utilities Limited (“TCU”) in August 2012 for an aggregate purchase price of approximately $13 million (US$13 million), inclusive of debt assumed. TCU serves more than 2,000 customers on Grand Turk and Salt Cay with a diesel-fired generating capacity of approximately 9 megawatts (“MW”). The utility currently operates pursuant to a 50-year licence that expires in 2036.
Non-Regulated Fortis Generation contributed $5 million to earnings compared to $8 million for the same quarter last year. The decrease mainly related to lower production in Belize due to lower rainfall.
Fortis Properties delivered earnings of $8 million, compared to $9 million for the third quarter of 2011, reflecting lower occupancy at hotel operations in Atlantic Canada and central Canada, partially offset by earnings contribution from the Hilton Suites Winnipeg Airport hotel, which was acquired in October 2011. In October 2012 Fortis Properties acquired the 126-room StationPark All Suite Hotel in London, Ontario for approximately $13 million.
Corporate and other expenses were $23 million compared to $6 million for the third quarter of 2011. Excluding the $11 million after-tax termination fee paid to Fortis in July 2011, corporate and other expenses increased quarter over quarter, mainly as a result of a $3 million after-tax foreign exchange loss recognized in the third quarter of 2012 compared to a $2.5 million after-tax net foreign exchange gain recognized in the same quarter last year. Acquisition-related expenses associated with the CH Energy Group transaction were approximately $0.5 million after-tax for the third quarter of 2012.
Consolidated capital expenditures, before customer contributions, were approximately $794 million year-to-date 2012. At FortisBC Gas, the Customer Care Enhancement Project came into service at the beginning of January 2012. Construction of the $900 million, 335-MW Waneta Expansion hydroelectric generating facility (“Waneta Expansion”) in British Columbia continues on time and on budget. Approximately $380 million in total has been spent on the Waneta Expansion since construction began in late 2010.
Cash flow from operating activities was $804 million year-to-date 2012, up $120 million from the same period last year, driven by favourable changes in regulatory deferral accounts and receivables and the collection of increased depreciation and amortization expense in customer rates.
Fortis announced in February 2012 that it had entered into an agreement to acquire CH Energy Group 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–s main business, Central Hudson Gas & Electric Corporation (“Central Hudson”), serves approximately 375,000 electric and gas customers in 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. 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. The transaction remains subject to approval by the New York State Public Service Commission (“NYSPSC”). The acquisition is expected to close by the end of the first quarter of 2013 and be immediately accretive to earnings per common share of Fortis, excluding acquisition-related expenses.
Fortis raised gross proceeds of approximately $601 million in June 2012, upon issuance of 18,500,000 Subscription Receipts at $32.50 each, to finance a portion of the purchase price of CH Energy Group. The proceeds are being held by an escrow agent, pending satisfaction of closing conditions, including receipt of regulatory approvals, contained in the agreement to acquire CH Energy Group. Each Subscription Receipt will entitle the holder thereof to receive, on satisfaction of the closing conditions, one common share of Fortis.
In October 2012 FortisAlberta raised $125 million 40-year 3.98% unsecured debentures, largely in support of its capital expenditure program.
Fortis corporate debt is rated A- by Standard & Poor–s and A(low) by DBRS.
Fortis retroactively adopted accounting principles generally accepted in the United States (“US GAAP”), effective January 1, 2012, with the restatement of prior periods. The adoption of US GAAP did not have a material impact on the Corporation–s earnings per common share for the third quarter of 2012 or 2011.
“Our utilities are focused on completing their remaining capital projects for 2012. Our capital expenditures for the year are expected to reach $1.3 billion,” says Stan Marshall, President and Chief Executive Officer, Fortis Inc. “Over the five-year period to 2016, our capital program is expected to total $5.5 billion; Central Hudson–s capital program from 2013 through 2016 will add a further approximate $0.5 billion,” he explains.
“Our largest utilities are busy with significant regulatory processes, including those related to the determination of 2013 allowed returns,” says Marshall.
“Also on the regulatory front, we are focused on closing the CH Energy Group transaction by the end of the first quarter of 2013. Approval of the transaction by the NYSPSC is the one remaining significant regulatory matter,” concludes Marshall.
FORWARD-LOOKING STATEMENT
The following Fortis Inc. (“Fortis” or the “Corporation”) Management Discussion and Analysis (“MD&A”) has been prepared in accordance with National Instrument 51-102 – Continuous Disclosure Obligations. Financial information for 2012 and comparative periods contained in the MD&A has been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and is presented in Canadian dollars unless otherwise specified. The MD&A should be read in conjunction with the following: (i) the interim unaudited consolidated financial statements and notes thereto for the three and nine months ended September 30, 2012, prepared in accordance with US GAAP; (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2011, prepared in accordance with US GAAP and voluntarily filed on the System for Electronic Document Analysis and Retrieval (“SEDAR”) by Fortis on March 16, 2012; (iii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2011, prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”); (iv) the “Supplemental Interim Consolidated Financial Statements for the Year Ended December 31, 2011 (Unaudited)” contained in the above-noted voluntary filing, which provides a detailed reconciliation between the Corporation–s interim unaudited consolidated 2011 Canadian GAAP financial statements and interim unaudited consolidated 2011 US GAAP financial statements; and (v) the MD&A for the year ended December 31, 2011 included in the Corporation–s 2011 Annual Report.
Fortis includes forward-looking information in the MD&A within the meaning of applicable securities laws in Canada (“forward-looking information”). The purpose of the forward-looking information is to provide management–s expectations regarding the Corporation–s future growth, results of operations, performance, business prospects and opportunities, and it may not be appropriate for other purposes. All forward-looking information is given pursuant to the safe harbour provisions of applicable Canadian securities legislation. The words “anticipates”, “believes”, “budgets”, “could”, “estimates”, “expects”, “forecasts”, “intends”, “may”, “might”, “plans”, “projects”, “schedule”, “should”, “will”, “would” and similar expressions are often intended to identify forward-looking information, although not all forward-looking information contains these identifying words. The forward-looking information reflects management–s current beliefs and is based on information currently available to the Corporation–s management. The forward-looking information in the MD&A includes, but is not limited to, statements regarding: the Corporation–s consolidated forecast gross capital expenditures for 2012 and in total over the five-year period 2012 through 2016; the nature, timing and amount of certain capital projects and their expected costs and time to complete; the expectation that the Corporation–s significant capital expenditure program should support continuing growth in earnings and dividends; forecast midyear rate base; the expectation that cash required to complete subsidiary capital expenditure programs will be sourced from a combination of cash from operations, borrowings under credit facilities, equity injections from Fortis and long-term debt offerings; the expected consolidated long-term debt maturities and repayments on average annually over the next five years; except for debt at the Exploits River Hydro Partnership (“Exploits Partnership”), the expectation that the Corporation and its subsidiaries will remain compliant with debt covenants throughout the remainder of 2012; the expected timing of filing regulatory applications and of receipt of regulatory decisions; the expected timing of the closing of the acquisition of CH Energy Group, Inc. (“CH Energy Group”) by Fortis and the expectation that the acquisition will be immediately accretive to earnings per common share, excluding acquisition-related expenses; an expected favourable impact on the Corporation–s earnings in future periods upon final enactment of legislative changes to Part VI.1 taxes; the expectation of greater risk under Performance-Based Regulation (“PBR”) that FortisAlberta–s earnings may be negatively impacted; and the expectation that FortisBC Electric and the City of Kelowna will work towards closing the proposed acquisition of the City of Kelowna–s electrical utility assets by FortisBC Electric by the end of the first quarter of 2013.
The forecasts and projections that make up the forward-looking information are based on assumptions which include, but are not limited to: the receipt of applicable regulatory approvals and requested rate orders; no significant variability in interest rates; no significant operational disruptions or environmental liability due to a catastrophic event or environmental upset caused by severe weather, other acts of nature or other major events; the continued ability to maintain the gas and electricity systems to ensure their continued performance; no severe and prolonged downturn in economic conditions; no significant decline in capital spending; no material capital project and financing cost overrun related to the construction of the Waneta Expansion hydroelectric generating facility; sufficient liquidity and capital resources; the expectation that the Corporation will receive appropriate compensation from the Government of Belize (“GOB”) for fair value of the Corporation–s investment in Belize Electricity that was expropriated by the GOB; the expectation that Belize Electric Company Limited (“BECOL”) will not be expropriated by the GOB; the expectation that the Corporation will receive fair compensation from the Government of Newfoundland and Labrador related to the expropriation of the Exploits Partnership–s hydroelectric assets and water rights; the continuation of regulator-approved mechanisms to flow through the commodity cost of natural gas and energy supply costs in customer rates; the ability to hedge exposures to fluctuations in foreign exchange rates, natural gas commodity prices and fuel prices; no significant counterparty defaults;
The continued competitiveness of natural gas pricing when compared with electricity and other alternative sources of energy; the continued availability of natural gas, fuel and electricity supply; continuation and regulatory approval of power supply and capacity purchase contracts; the receipt of regulatory approval from the New York State Public Service Commission, absent material conditions imposed, required in connection with the acquisition of CH Energy Group; the ability to fund defined benefit pension plans, earn the assumed long-term rates of return on the related assets and recover net pension costs in customer rates; the absence of significant changes in government energy plans and environmental laws that may materially negatively affect the operations and cash flows of the Corporation and its subsidiaries; maintenance of adequate insurance coverage; the ability to obtain and maintain licences and permits; retention of existing service areas; the ability to report under US GAAP beyond 2014 or the adoption of International Financial Reporting Standards (“IFRS”) after 2014 that allows for the recognition of regulatory assets and liabilities; the continued tax-deferred treatment of earnings from the Corporation–s Caribbean operations; continued maintenance of information technology (“IT”) infrastructure; continued favourable relations with First Nations; favourable labour relations; and sufficient human resources to deliver service and execute the capital program.
The forward-looking information is subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. Factors which could cause results or events to differ from current expectations include, but are not limited to: regulatory risk, including increased risk at FortisAlberta associated with the adoption of PBR under a five-year term commencing in 2013; interest rate risk, including the uncertainty of the impact a continuation of a low interest rate environment may have on allowed rates of return on common shareholders– equity of the Corporation–s regulated utilities; operating and maintenance risks; risk associated with changes in economic conditions; capital project budget overrun, completion and financing risk in the Corporation–s non-regulated business; capital resources and liquidity risk; risk associated with the amount of compensation to be paid to Fortis for its investment in Belize Electricity that was expropriated by the GOB; the timeliness of the receipt of the compensation and the ability of the GOB to pay the compensation owing to Fortis; risk that the GOB may expropriate BECOL; an ultimate resolution of the expropriation of the hydroelectric assets and water rights of the Exploits Partnership that differs from that which is currently expected by management; weather and seasonality risk; commodity price risk; the continued ability to hedge foreign exchange risk; counterparty risk;
Competitiveness of natural gas; natural gas, fuel and electricity supply risk; risk associated with the continuation, renewal, replacement and/or regulatory approval of power supply and capacity purchase contracts; risks relating to the ability to close the acquisition of CH Energy Group, the timing of such closing and the realization of the anticipated benefits of the acquisition; risk of having to raise alternative capital to finance the acquisition of CH Energy Group if the closing of the acquisition occurs subsequent to June 30, 2013; the risk associated with defined benefit pension plan performance and funding requirements; risks related to FortisBC Energy (Vancouver Island) Inc.; environmental risks; insurance coverage risk; risk of loss of licences and permits; risk of loss of service area; risk of not being able to report under US GAAP beyond 2014 or risk that IFRS does not have an accounting standard for rate-regulated entities by the end of 2014 allowing for the recognition of regulatory assets and liabilities; risks related to changes in tax legislation; risk of failure of IT infrastructure; risk of not being able to access First Nations lands; labour relations risk; human resources risk; and risk of unexpected outcomes of legal proceedings currently against the Corporation. For additional information with respect to the Corporation–s risk factors, reference should be made to the Corporation–s continuous disclosure materials filed from time to time with Canadian securities regulatory authorities and to the heading “Business Risk Management” in the MD&A for the three and nine months ended September 30, 2012 and for the year ended December 31, 2011.
All forward-looking information in the MD&A is qualified in its entirety by the above cautionary statements and, except as required by law, the Corporation undertakes no obligation to revise or update any forward-looking information as a result of new information, future events or otherwise after the date hereof.
CORPORATE OVERVIEW
Fortis is the largest investor-owned distribution utility in Canada, serving more than 2,000,000 gas and electricity customers. Its regulated holdings include electric utilities in five Canadian provinces and two Caribbean countries and a natural gas utility in British Columbia, Canada. Fortis owns non-regulated generation assets, primarily hydroelectric, across Canada and in Belize and Upstate New York, and hotels and commercial office and retail space in Canada. Year-to-date September 30, 2012, the Corporation–s electricity distribution systems met a combined peak demand of approximately 5,225 megawatts (“MW”) and its gas distribution system met a peak day demand of 1,335 terajoules (“TJ”). For additional information on the Corporation–s business segments, refer to Note 1 to the Corporation–s interim unaudited consolidated financial statements for the three and nine months ended September 30, 2012 and to the “Corporate Overview” section of the 2011 Annual MD&A.
The key goals of the Corporation–s regulated utilities are to operate sound gas and electricity distribution systems, deliver gas and electricity safely and reliably at the lowest reasonable cost and conduct business in an environmentally responsible manner. The Corporation–s main business, utility operations, is highly regulated and the earnings of the Corporation–s regulated utilities are primarily determined under cost of service (“COS”) regulation.
Generally under COS regulation, the respective regulatory authority sets customer gas and/or electricity rates to permit a reasonable opportunity for the utility to recover, on a timely basis, estimated costs of providing service to customers, including a fair rate of return on a regulatory deemed or targeted capital structure applied to an approved regulatory asset value (“rate base”). The ability of a regulated utility to recover prudently incurred costs of providing service and earn the regulator-approved rate of return on common shareholders– equity (“ROE”) and/or rate of return on rate base assets (“ROA”) depends on the utility achieving the forecasts established in the rate-setting processes. As such, earnings of regulated utilities are generally impacted by: (i) changes in the regulator-approved allowed ROE and/or ROA; (ii) changes in rate base; (iii) changes in energy sales or gas delivery volumes; (iv) changes in the number and composition of customers; (v) variances between actual expenses incurred and forecast expenses used to determine revenue requirements and set customer rates; and (vi) timing differences within an annual financial reporting period, between when actual expenses are incurred and when they are recovered from customers in rates. When forward test years are used to establish revenue requirements and set base customer rates, these rates are not adjusted as a result of actual COS being different from that which was estimated, other than for certain prescribed costs that are eligible to be deferred on the balance sheet. In addition, the Corporation–s regulated utilities, where applicable, are permitted by their respective regulatory authority to flow through to customers, without markup, the cost of natural gas, fuel and/or purchased power through base customer rates and/or the use of rate stabilization and other mechanisms.
SIGNIFICANT ITEMS
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, 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.
The transaction remains subject to approval by the New York State Public Service Commission (“NYSPSC”) and satisfaction of customary closing conditions. The application for approval of the transaction by the NYSPSC was jointly filed by Fortis and CH Energy Group in April 2012. The acquisition is expected to close by the end of the first quarter of 2013 and be immediately accretive to earnings per common share, excluding acquisition-related expenses.
During the third quarter and year-to-date 2012, the Corporation–s earnings were reduced by $0.5 million and $7.5 million, respectively, associated with CH Energy Group after-tax acquisition-related expenses.
Subscription Receipts Offering: In June 2012, to finance a portion of the pending acquisition of CH Energy Group, Fortis sold 18,500,000 Subscription Receipts at $32.50 each through a bought-deal offering underwritten by a syndicate of underwriters led by CIBC World Markets Inc., Scotia Capital Inc. and TD Securities Inc., 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”.
Each Subscription Receipt will entitle the holder thereof to receive, on satisfaction of the Release Conditions and without payment of additional consideration, one common share of Fortis and a cash payment equal to the dividends declared on Fortis common shares to holders of record during the period from June 27, 2012 to the date of issuance of the common shares in respect of the Subscription Receipts.
If the Release Conditions are not satisfied by June 30, 2013, or if the agreement and plan of merger relating to the acquisition of CH Energy Group is terminated prior to such time, holders of Subscription Receipts shall be entitled to receive from the escrow agent an amount equal to the full subscription price thereof plus their pro rata share of the interest earned on such amount.
For further information on the pending acquisition and the related Subscription Receipts offering, refer to the “Business Risk Management” section of this MD&A.
Receipt of Regulatory Decisions: Year-to-date 2012, regulatory decisions have been received for 2012-2013 revenue requirements at the FortisBC Energy companies, 2012 distribution revenue requirements at FortisAlberta and, recently in August, for 2012-2013 revenue requirements at FortisBC Electric. The Alberta Utilities Commission (“AUC”) issued a generic decision in September 2012 on its Performance-Based Regulation (“PBR”) Initiative outlining the PBR framework applicable to distribution utilities in Alberta, including FortisAlberta, for a five-year term commencing January 1, 2013. For further information on these regulatory decisions, refer to the “Regulatory Highlights” and “Business Risk Management” sections of this MD&A.
Part VI.1 Tax: Under the terms of the Corporation–s first preference shares, the Corporation is subject to tax under Part VI.1 of the Income Tax Act (Canada) associated with dividends on its first preference shares. For corporations subject to Part VI.1 tax, there is an equivalent Part I tax deduction. As permitted under the Income Tax Act (Canada), a corporation may allocate its Part VI.1 tax liability and equivalent Part I tax deduction to its related subsidiaries. In the past, Fortis has allocated these items to Maritime Electric, Newfoundland Power and FortisOntario.
Upon transition to US GAAP, the Corporation reduced its consolidated opening 2012 retained earnings by $20 million to reflect the impact of differences between enacted and substantively enacted tax legislation associated with prior assessments and payments of Part VI.1 taxes, and the recovery of Part I taxes. The adjustment was done as US GAAP requires tax provisions to be based on enacted legislation versus substantively enacted legislation. A number of legislative amendments to Part VI.1 tax in Canada have yet to be enacted. The above-noted transitional US GAAP adjustment will reverse through the Corporation–s earnings in future periods when the legislation is finally enacted, which is expected in 2013, or as reassessment of corporate taxation years, upon which the enacted versus the substantively enacted rates were used to calculate taxes payable under US GAAP, become statute barred. The statute-barred reversals will occur between 2012 and 2016 and will increase earnings during these years. During the third quarter of 2012, Newfoundland Power recorded a favourable $2.5 million adjustment to income taxes associated with statute-barred Part VI.1 taxes.
Purchase of the Electricity Distribution Assets in Port Colborne: In April 2012 FortisOntario exercised its option to purchase all of the assets previously leased by the Company under an operating lease agreement with the City of Port Colborne for the purchase option price of approximately $7 million. The exercise of the purchase option, which qualifies as a business combination, provides ownership and legal title to all of the assets, including equipment, real property and distribution assets, which constitute the electricity distribution system in Port Colborne.
Acquisition of Turks and Caicos Utilities Limited: In August 2012 Fortis Turks and Caicos acquired Turks and Caicos Utilities Limited (“TCU”) for an aggregate purchase price of approximately $13 million (US$13 million), inclusive of debt assumed of $5 million (US$5 million). TCU is a regulated electric utility operating pursuant to a 50-year licence expiring in 2036. The utility serves more than 2,000 residential and commercial customers on Grand Turk and Salt Cay with a diesel-fired generating capacity of approximately 9 MW.
Hotel Acquisition: In October 2012 Fortis Properties acquired the 126-room StationPark All Suite Hotel (“StationPark Hotel”) in London, Ontario for approximately $13 million.
Pending Acquisition of the Electrical Utility Assets from the City of Kelowna: FortisBC Electric has offered to purchase the City of Kelowna–s electrical utility assets, which currently serve approximately 15,000 customers, for approximately $55 million. FortisBC Electric provides the City of Kelowna with electricity under a wholesale tariff and has operated and maintained the City of Kelowna–s electrical utility assets since 2000. Closing of the transaction is subject to certain conditions and receipt of certain approvals, including regulatory approval. The parties are working towards closing the transaction by the end of the first quarter of 2013.
Expropriation of Shares in Belize Electricity: The Government of Belize (“GOB”) expropriated the Corporation–s common share ownership in Belize Electricity in June 2011. The Corporation is challenging the legality of the expropriation in the Belize Courts. Although the GOB initiated contact with Fortis, there have been no settlement negotiations to date on the fair value compensation owing to Fortis as a result of the expropriation. For further information, refer to the “Business Risk Management” section of this MD&A.
Transition to US GAAP: Effective January 1, 2012, Fortis retroactively adopted US GAAP with the restatement of comparative reporting periods. For further information, refer to the “New Accounting Standards and Policies” section of this MD&A.
Re-Organization of Non-Regulated Generation Operations: Effective July 1, 2012, the legal ownership of the six small non-regulated hydroelectric generating facilities in eastern Ontario, with a combined generating capacity of 8 MW, was transferred from Fortis Properties to a limited partnership directly held by Fortis. FortisBC Holdings Inc. (“FHI”) assumed management responsibility for the operations of the above-noted facilities, as well as for the four non-regulated hydroelectric generating facilities in Upstate New York, with a combined generating capacity of 23 MW, owned by FortisUS Energy Corporation (“FortisUS Energy”).
FINANCIAL HIGHLIGHTS
Fortis has adopted a strategy of profitable growth with earnings per common share as the primary measure of performance. The Corporation–s business is segmented by franchise area and, depending on regulatory requirements, by the nature of the assets. Key financial highlights for the third quarter and year-to-date periods ended September 30, 2012 and September 30, 2011 are provided in the following table.
Favourable
Unfavourable
Favourable
Unfavourable
Unfavourable
Favourable
Unfavourable
Favourable
Unfavourable
Unfavourable
Favourable
Favourable
Unfavourable
Favourable
Unfavourable
Favourable
SEGMENTED RESULTS OF OPERATIONS
For a discussion of the nature of regulation and material regulatory decisions and applications pertaining to the Corporation–s regulated utilities, refer to the “Regulatory Highlights” section of this MD&A. A discussion of the financial results of the Corporation–s reporting segments is as follows.
REGULATED GAS UTILITIES – CANADIAN
FORTISBC ENERGY COMPANIES (1)
Favourable
Unfavourable
Favourable
With the implementation of the new Customer Care Enhancement Project on January 1, 2012, the FortisBC Energy companies changed their definition of a customer. As a result of this change, the FortisBC Energy companies adjusted their combined customer count downwards by approximately 18,000, effective January 1, 2012. As at September 30, 2012, the total number of customers served by the FortisBC Energy companies was approximately 938,000.
The FortisBC Energy companies earn approximately the same margin regardless of whether a customer contracts for the purchase and delivery of natural gas or only for the delivery of natural gas. As a result of the operation of regulator-approved deferral mechanisms, changes in consumption levels and the commodity cost of natural gas from those forecast to set residential and commercial customer gas rates do not materially affect earnings.
Seasonality has a material impact on the earnings of the FortisBC Energy companies as a major portion of the gas distributed is used for space heating. Most of the annual earnings of the FortisBC Energy companies are realized in the first and fourth quarters.
Unfavourable
Favourable
Unfavourable
Favourable
Unfavourable
Favourable
Favourable
Unfavourable
REGULATED ELECTRIC UTILITIES – CANADIAN
FORTISALBERTA
Favourable
Favourable
As a significant portion of FortisAlberta–s distribution revenue is derived from fixed or largely fixed billing determinants, changes in quantities of energy delivered are not entirely correlated with changes in revenue. Revenue is a function of numerous variables, many of which are independent of actual energy deliveries.
Favourable
Unfavourable
Favourable
Unfavourable
Favourable
Unfavourable
Favourable
Unfavourable
FORTISBC ELECTRIC (1)
Favourable
Favourable
Favourable
Favourable
Unfavourable
NEWFOUNDLAND POWER
Favourable
Unfavourable
Unfavourable
Favourable
Favourable
Unfavourable
Favourable
Unfavourable
OTHER CANADIAN ELECTRIC UTILITIES (1)
Favourable
Favourable
Unfavourable
Favourable
Favourable
Unfavourable
REGULATED ELECTRIC UTILITIES – CARIBBEAN (1)
Favourable
Unfavourable
Unfavourable
Favourable
Unfavourable
Favourable
Unfavourable
Favourable
Favourable
Unfavourable
Favourable
Unfavourable
Fortis Turks and Caicos acquired TCU in August 2012 for an aggregate purchase price of approximately $13 million (US$13 million), inclusive of debt assumed of $5 million (US$5 million). For further information refer to the “Significant Items” section of this MD&A.
NON-REGULATED – FORTIS GENERATION (1)
Unfavourable
Unfavourable
Favourable
Unfavourable
Favourable
Unfavourable
In May 2011 the generator at Moose River–s hydroelectric generating facility in Upstate New York sustained electrical damage. Repairs to the generator were completed in the second quarter of 2012 but another repair continues to keep the generating facility offline. Revenue for the first half of 2012 reflected insurance amounts received related to the loss of earnings during the period in the first half of 2012 when the generator was being repaired due to the electrical damage. The generating facility is expected to be online by the end of 2012.
NON-REGULATED – FORTIS PROPERTIES (1)
Favourable
Unfavourable
Favourable
Unfavourable
Favourable
CORPORATE AND OTHER (1)
Unfavourable
Unfavourable
Favourable
REGULATORY HIGHLIGHTS
The nature of regulation and material regulatory decisions and applications associated with each of the Corporation–s regulated gas and electric utilities year-to-date 2012 are summarized as follows.
CONSOLIDATED FINANCIAL POSITION
The following table outlines the significant changes in the consolidated balance sheets between September 30, 2012 and December 31, 2011.
Significant Changes in the Consolidated Balance Sheets (Unaudited) between September 30, 2012 and December 31, 2011
LIQUIDITY AND CAPITAL RESOURCES
The table below outlines the Corporation–s consolidated sources and uses of cash for the third quarter and year-to-date 2012, as compared to the same periods in 2011, followed by a discussion of the nature of the variances in cash flows.
Operating Activities: Cash flow from operating activities was $70 million higher quarter over quarter. The increase was primarily due to: (i) favourable changes in working capital; (ii) the collection from customers of regulator-approved increased depreciation and amortization expense, mainly at the FortisBC Energy companies; and (iii) favourable changes in long-term regulatory deferral accounts. The favourable changes in working capital were associated with changes in inventories, accounts payable and other current liabilities, and current regulatory deferral accounts, partially offset by unfavourable changes in accounts receivable. The increase was partially offset by lower earnings.
Cash flow from operating activities was $120 million higher year to date compared to the same period last year. The increase was primarily due to favourable changes in working capital and the collection from customers of regulator-approved increased depreciation and amortization expense, mainly at the FortisBC Energy companies. Favourable changes in working capital were associated with changes in current regulatory deferral accounts and accounts receivable. The above increase was partially offset by unfavourable changes in long-term regulatory deferral accounts and a defined benefit pension solvency deficit funding payment made by Newfoundland Power during the second quarter of 2012.
Investing Activities: Cash used in investing activities was $12 million higher for the quarter and $13 million higher year to date. The increases reflected the acquisition of TCU in August 2012 for a net cash purchase price of approximately $7 million (US$7 million), net of cash acquired. The increase year to date also reflected the acquisition of the remaining assets of Port Colborne Hydro by FortisOntario in April 2012 for approximately $7 million.
For the quarter, lower capital spending related to the non-regulated Waneta Expansion and at FortisBC Electric and the Caribbean Regulated Electric Utilities was largely offset by an increase in capital spending at FortisAlberta. Year to date, lower capital spending at the FortisBC Energy companies and FortisBC Electric was largely offset by an increase in capital spending at FortisAlberta and capital spending related to the non-regulated Waneta Expansion. Capital expenditures for the first half of 2011 included those of Belize Electricity up to June 20, 2011, when the utility was expropriated by the GOB.
Financing Activities: Cash used in financing activities was $49 million lower quarter over quarter. The decrease was primarily due to lower net repayments under committed credit facilities classified as long term, partially offset by lower net proceeds from short-term borrowings and lower proceeds from the issuance of common shares.
Cash provided by financing activities was $45 million lower year to date compared to the same period last year. The decrease was primarily due to: (i) lower proceeds from the issuance of common shares; (ii) lower proceeds from long-term debt; (iii) higher repayments of long-term debt; (iv) higher common share dividends paid; and (v) issue costs related to the June 2012 Subscription Receipts offering. The decrease was partially offset by higher net borrowings under committed credit facilities classified as long term and lower net repayments of short-term borrowings.
Net proceeds from short-term borrowings were $69 million lower quarter over quarter, driven by the FortisBC Energy companies. Net repayments of short-term borrowings were $53 million lower year to date compared to same period last year, driven by Caribbean Utilities.
Proceeds from long-term debt, net of issue costs, repayments of long-term debt and capital lease and finance obligations, and net (repayments) borrowings under committed credit facilities for the quarter and year to date compared to the same periods last year are summarized in the following tables.
Borrowings under credit facilities by the utilities are primarily in support of their capital expenditure programs and/or for working capital requirements. Repayments are primarily financed through the issuance of long-term debt, cash from operations and/or equity injections from Fortis. From time to time, proceeds from preference share, common share and long-term debt offerings are used to repay borrowings under the Corporation–s committed credit facility. The borrowings under the Corporation–s committed credit facility during 2012 were largely in support of the construction of the Waneta Expansion and for other general corporate purposes.
Advances of approximately $14 million for the quarter and $70 million year to date were received from non-controlling interests in the Waneta Partnership to finance capital spending related to the Waneta Expansion, compared to $20 million received for the third quarter of 2011 and $76 million received year-to-date 2011. In January 2012 advances of approximately $12 million were received from two First Nations bands representing their 15% equity investment in the LNG storage facility on Vancouver Island.
In June 2011 Fortis publicly issued 9.1 million common shares for gross proceeds of $300 million. In July 2011 an additional 1.2 million common shares were publicly issued upon the exercise of an over-allotment option, resulting in gross proceeds of approximately $41 million. The total net proceeds of $327 million from the common share offering were used to repay borrowings under credit facilities and finance equity injections into the regulated utilities in western Canada and the Waneta Partnership in support of infrastructure investment, and for other general corporate purposes.
Common share dividends paid during the third quarter of 2012 were $42 million, net of $15 million of dividends reinvested, compared to $38 million, net of $16 million of dividends reinvested, paid during the same quarter of 2011. Common share dividends paid year-to-date 2012 were $128 million, net of $43 million of dividends reinvested, compared to $109 million, net of $47 million of dividends reinvested, paid year-to-date 2011. The dividend paid per common share for each of the first, second and third quarters of 2012 was $0.30 compared to $0.29 for each of the first, second and third quarters of 2011. The weighted average number of common shares outstanding for the third quarter and year to date was 190.2 million and 189.6 million, respectively, compared to 186.5 million and 179.5 million for the third quarter and year to date, respectively, in 2011.
CONTRACTUAL OBLIGATIONS
As at September 30, 2012, consolidated contractual obligations of Fortis over the next five years and for periods thereafter are outlined in the following table. A detailed description of the nature of the obligations is provided in the 2011 Annual MD&A and below, where applicable. The presentation of certain contractual obligations has changed from that provided in the 2011 Annual MD&A, due to the adoption of US GAAP. For further information concerning these changes, refer to the 2011 audited consolidated financial statements prepared in accordance with US GAAP and voluntarily filed on SEDAR.
Other contractual obligations, which are not reflected in the above table, did not materially change from those disclosed in the 2011 Annual MD&A, except as described as follows.
In January 2012 two First Nations bands each invested approximately $6 million in equity in the Mount Hayes LNG storage facility, representing a 15% equity interest in the Mount Hayes Limited Partnership, with FEVI holding the controlling 85% ownership interest. The non-controlling interests hold put options, which, if exercised, would require FEVI to repurchase the 15% ownership interest for cash, in accordance with the terms of the partnership agreement.
In September 2012 Caribbean Utilities entered into primary and secondary fuel supply contracts with two different suppliers and is committed to purchasing approximately 60% and 40% of the Company–s diesel fuel requirements under each of the contracts, respectively, for the operation of Caribbean Utilities– diesel-powered generating plant. The approximate combined quantities under the contracts, expressed in millions of imperial gallons, on an annual basis by fiscal year are: 2012 – 10.8, 2013 – 32.4 and 2014 – 18.9. The contracts expire in July 2014 with the option to renew for two additional 18-month terms. The renewal options can be exercised only within six months of the expiry dates of the existing contracts.
In February 2012 Fortis entered into an agreement to acquire CH Energy Group for US$1.5 billion, including the assumption of approximately US$500 million in debt on closing. The acquisition is expected to close by the end of the first quarter of 2013. In June 2012, to finance a portion of the purchase price of CH Energy Group, Fortis sold 18,500,000 Subscription Receipts at $32.50 each, realizing gross proceeds of approximately $601 million. Each Subscription Receipt will entitle the holder thereof to receive, on satisfaction of the Release Conditions and without payment of additional consideration, one common share of Fortis and a cash payment equal to the dividends declared on Fortis common shares to holders of record during the period from June 27, 2012 to the date of issuance of the common shares in respect of the Subscription Receipts. For further information on the pending acquisition of CH Energy Group and the Subscription Receipts offering, refer to the “Significant Items” and “Business Risk Management” sections of this MD&A.
FortisBC Electric has offered to purchase the City of Kelowna–s electrical utility assets for approximately $55 million. Closing of the transaction is subject to certain conditions and approvals. For further information, refer to the “Significant Items” section of this MD&A.
For a discussion of the nature and amount of the Corporation–s consolidated capital expenditure program, which is not included in the preceeding Contractual Obligations table, refer to the “Capital Expenditure Program” section of this MD&A.
CAPITAL STRUCTURE
The Corporation–s principal businesses of regulated gas and electricity distribution require ongoing access to capital to enable the utilities to fund maintenance and expansion of infrastructure. Fortis raises debt at the subsidiary level to ensure regulatory transparency, tax efficiency and financing flexibility. Fortis generally finances a significant portion of acquisitions at the corporate level with proceeds from common share, preference share and long-term debt offerings. To help ensure access to capital, the Corporation targets a consolidated long-term capital structure containing approximately 40% equity, including preference shares, and 60% debt, as well as investment-grade credit ratings. Each of the Corporation–s regulated utilities maintains its own capital structure in line with the deemed capital structure reflected in each of the utility–s customer rates.
The consolidated capital structure of Fortis is presented in the following table.
The improvement in the capital structure was primarily due to: (i) lower short-term borrowings; (ii) an increase in cash; (iii) common shares issued, mainly under the Corporation–s dividend reinvestment and stock option plans; and (iv) net earnings attributable to common equity shareholders, net of dividends. The capital structure was also impacted by an increase in long-term debt, mainly due to higher borrowings under the Corporation–s committed credit facility, largely in support of the construction of the Waneta Expansion and for other general corporate purposes, partially offset by regularly scheduled debt repayments.
CREDIT RATINGS
The Corporation–s credit ratings are as follows:
In May 2012 and July 2012, S&P and DBRS, respectively, affirmed the Corporation–s debt credit ratings. Due to the Corporation–s financing plans for the pending acquisition of CH Energy Group and the expected completion of the Waneta Expansion on time and on budget, S&P and DBRS also removed the ratings from credit watch with negative implications and under review with developing implications, respectively, where the ratings had been placed in February 2012.
The above-noted credit ratings reflect the Corporation–s low business-risk profile and diversity of its operations, the stand-alone nature and financial separation of each of the regulated subsidiaries of Fortis, management–s commitment to maintaining low levels of debt at the holding company level, the Corporation–s reasonable credit metrics and its demonstrated ability and continued focus on acquiring and integrating stable regulated utility businesses financed on a conservative basis.
CAPITAL EXPENDITURE PROGRAM
Capital investment in infrastructure is required to ensure continued and enhanced performance, reliability and safety of the gas and electricity systems and to meet customer growth. All costs considered to be maintenance and repairs are expensed as incurred. Costs related to replacements, upgrades and betterments of capital assets are capitalized as incurred.
A breakdown of the $794 million in gross capital expenditures by segment year-to-date 2012 is provided in the following table.
Planned capital expenditures are based on detailed forecasts of energy demand, weather, cost of labour and materials, as well as other factors, including economic conditions, which could change and cause actual expenditures to differ from forecasts.
There have been no material changes in the overall expected level, nature and timing of the Corporation–s significant capital projects from those that were disclosed in the 2011 Annual MD&A. Gross consolidated capital expenditures for 2012 are forecasted at approximately $1.3 billion.
FEI–s Customer Care Enhancement Project, at an estimated total project cost of $110 million, came into service at the beginning of January 2012.
Construction progress on the $900 million Waneta Expansion is going well and the project is currently on schedule and on budget. Major construction activities on-site include the completion of the excavation of the intake, powerhouse and power tunnels. Approximately $380 million in total has been spent on the Waneta Expansion since construction began late in 2010.
Over the five-year period 2012 through 2016, consolidated gross capital expenditures are expected to be approximately $5.5 billion, consistent with that disclosed in the 2011 Annual MD&A. The addition of CH Energy Group is expected to add approximately $0.5 billion to the Corporation–s consolidated capital expenditure program from 2013 through 2016. Approximately 64% of the $5.5 billion capital program is expected to be incurred at the regulated electric utilities, driven by FortisAlberta and FortisBC Electric. Approximately 23% and 13% of the capital program is expected to be incurred at the regulated gas utilities and non-regulated operations, respectively. Capital expenditures at the regulated utilities are subject to regulatory approval. Over the five-year period, excluding CH Energy Group, on average annually, 39% of utility capital spending is expected to be incurred to meet customer growth; 38% is expected to be incurred to ensure continued and enhanced performance, reliability and safety of generation and T&D assets (i.e., sustaining capital expenditures); and 23% is expected to be incurred for facilities, equipment, vehicles, information technology and other assets.
CASH FLOW REQUIREMENTS
At the subsidiary level, it is expected that operating expenses and interest costs will generally be paid out of subsidiary operating cash flows, with varying levels of residual cash flow available for subsidiary capital expenditures and/or dividend payments to Fortis. Borrowings under credit facilities may be required from time to time to support seasonal working capital requirements. Cash required to complete subsidiary capital expenditure programs is also expected to be financed from a combination of borrowings under credit facilities, equity injections from Fortis and long-term debt offerings.
The Corporation–s ability to service its debt obligations and pay dividends on its common shares and preference shares is dependent on the financial results of the operating subsidiaries and the related cash payments from these subsidiaries. Certain regulated subsidiaries may be subject to restrictions that may limit their ability to distribute cash to Fortis.
Cash required of Fortis to support subsidiary capital expenditure programs and finance acquisitions is expected to be derived from a combination of borrowings under the Corporation–s committed credit facility and proceeds from the issuance of common shares, preference shares and long-term debt. Depending on the timing of cash payments from the subsidiaries, borrowings under the Corporation–s committed credit facility may be required from time to time to support the servicing of debt and payment of dividends.
As at September 30, 2012, management expects consolidated long-term debt maturities and repayments to average approximately $295 million annually over the next five years. The combination of available credit facilities and relatively low annual debt maturities and repayments provide the Corporation and its subsidiaries with flexibility in the timing of access to capital markets.
In May 2012 Fortis filed a base shelf prospectus under which Fortis may, from time to time during the 25-month period from May 10, 2012, offer, by way of a prospectus supplement, common shares, preference shares, subscription receipts and/or unsecured debentures in the aggregate amount of up to $1.3 billion (or the equivalent in US dollars or other currencies). The base shelf prospectus provides the Corporation with flexibility to access securities markets in a timely manner. The nature, size and timing of any offering of securities under the Corporation–s base shelf prospectus will be consistent with the past capital raising practices of the Corporation and continue to be dependant upon the Corporation–s assessment of its requirements for funding and general market conditions.
To finance a portion of the Corporation–s pending acquisition of CH Energy Group, Fortis offered and sold, by way of a prospectus supplement, approximately $601 million in Subscription Receipts under a bought-deal offering with a syndicate of underwriters. For further information refer to the “Significant Items” and “Business Risk Management” sections of this MD&A.
As the hydroelectric assets and water rights of the Exploits River Hydro Partnership (“Exploits Partnership”) had been provided as security for the Exploits Partnership term loan, the expropriation of such assets and rights by the Government of Newfoundland and Labrador constituted an event of default under the loan. The term loan is without recourse to Fortis and was approximately $55 million as at September 30, 2012 (December 31, 2011 – $56 million). The lenders of the term loan have not demanded accelerated repayment. The scheduled repayments under the term loan are being made by Nalcor Energy, a Crown corporation, acting as agent for the Government of Newfoundland and Labrador with respect to expropriation matters. For further information refer to Note 19 to the Corporation–s interim unaudited consolidated financial statements for the three and nine months ended September 30, 2012.
Except for the debt at the Exploits Partnership, as discussed above, Fortis and its subsidiaries were in compliance with debt covenants as at September 30, 2012 and are expected to remain compliant throughout the remainder of 2012.
CREDIT FACILITIES
As at September 30, 2012, the Corporation and its subsidiaries had consolidated credit facilities of approximately $2.5 billion, of which $2.0 billion was unused, including $764 million unused under the Corporation–s $1 billion committed revolving corporate credit facility. The credit facilities are syndicated mostly with the seven largest Canadian banks, with no one bank holding more than 20% of these facilities. Approximately $2.3 billion of the total credit facilities are committed facilities with maturities ranging from 2013 through 2017.
The following summary outlines the credit facilities of the Corporation and its subsidiaries.
As at September 30, 2012 and December 31, 2011, certain borrowings under the Corporation–s and subsidiaries– credit facilities were classified as long-term debt. These borrowings are under long-term committed credit facilities and management–s intention is to refinance these borrowings with long-term permanent financing during future periods.
In March 2012 Newfoundland Power renegotiated and amended its $100 million unsecured committed revolving credit facility, obtaining an extension to the maturity of the facility from August 2015 to August 2017. The amended credit facility agreement reflects a decrease in pricing but, otherwise, contains substantially similar terms and conditions as the previous credit facility agreement.
In April 2012 FortisBC Electric renegotiated and amended its credit facility agreement resulting in an extension to the maturity of the Company–s $150 million unsecured committed revolving credit facility with $100 million now maturing in May 2015 and $50 million now maturing in May 2013.
In May 2012 FHI extended its $30 million operating credit facility to mature in May 2013 from May 2012. The new agreement contains substantially similar terms and conditions as the previous credit facility agreement.
In May 2012 Fortis increased the amount available for borrowing under its unsecured committed revolving corporate credit facility from $800 million to $1 billion, as permitted under the credit facility agreement.
In May 2012 Caribbean Utilities renegotiated and increased the amount available for borrowing under its unsecured credit facilities to US$47 million from US$33 million.
In June 2012 FortisOntario entered into a new short-term credit facility agreement for $30 million, replacing two short-term credit facilities totaling $20 million. The new credit facility agreement reflects a decrease in pricing and improved terms and conditions. In July 2012 the former credit facilities were terminated.
In July 2012 FEI entered into a one-year extension of its $500 million unsecured committed revolving credit facility, extending the maturity date from August 2013 to August 2014. The amended credit facility agreement reflects an increase in pricing but, otherwise, contains substantially similar terms and conditions as the previous credit facility agreement.
In July 2012 FortisAlberta renegotiated and amended its $250 million unsecured committed revolving credit facility, obtaining an extension to the maturity of the facility from September 2015 to August 2016. The amended credit facility agreement reflects a decrease in pricing but, otherwise, contains substantially similar terms and conditions as the previous credit facility agreement.
FINANCIAL INSTRUMENTS
The carrying values of the Corporation–s consolidated financial instruments approximate their fair values, reflecting the short-term maturity, normal trade credit terms and/or nature of these instruments, except as follows.
The fair value of long-term debt is calculated using quoted market prices when available. When quoted market prices are not available, the fair value is determined by discounting the future cash flows of the specific debt instrument 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. Since the Corporation does not intend to settle the long-term debt or promissory note prior to maturity, the fair value estimate does not represent an actual liability and, therefore, does not include exchange or settlement costs.
The financial instruments table above excludes the long-term other asset associated with the Corporation–s expropriated investment in Belize Electricity. The fair value of the Corporation–s expropriated investment in Belize Electricity determined under the GOB–s valuation is significantly lower than the fair value determined under the Corporation–s independent valu