6-K
Fortis Inc. (FTS)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
OF THE SECURITIES EXCHANGE ACT OF 1934
For the month of October 2022
Commission File Number: 001-37915
Fortis Inc.
Fortis Place, Suite 1100
5 Springdale Street
St. John's, Newfoundland and Labrador
Canada, A1E 0E4
(Address of Principal Executive Office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40F: Form 20-F o Form 40-F þ
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o
INCORPORATION BY REFERENCE
The registrant's unaudited condensed consolidated interim financial statements as at and for the nine months ended September 30, 2022, together with the notes thereto, furnished as Exhibit 99.2 to this report on Form 6-K, and the registrant's management discussion and analysis of financial condition and results of operations for the same periods furnished as Exhibit 99.3 to this report on Form 6-K, are incorporated by reference into the following Registration Statements of the Registrant, as amended or supplemented: Form S-8 (File No. 333-264838); Form S-8 (File No. 333-226663); Form S-8 (File No. 333-236213); Form F-3 (File No. 333-249039); and Form F-10 (File No. 333-250996).
EXHIBITS
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Fortis Inc.<br><br>(Registrant) | ||
|---|---|---|
| Date: October 28, 2022 | /s/ Jocelyn H. Perry | |
| By: | Jocelyn H. Perry | |
| Title: | Executive Vice President, Chief Financial Officer |
Document
Exhibit 99.1
St. John's, NL - October 28, 2022
FORTIS INC. RELEASES THIRD QUARTER 2022 RESULTS
AND NEW FIVE-YEAR CAPITAL OUTLOOK
Fortis Inc. ("Fortis" or the "Corporation") (TSX/NYSE: FTS), a well-diversified leader in the North American regulated electric and gas utility industry, released its third quarter results1 and 2023-2027 capital investment plan.
Highlights
•Third quarter net earnings of $326 million, or $0.68 per common share, up from $295 million, or $0.63 per common share in 2021
•Adjusted third quarter net earnings per common share2 of $0.71, up from $0.64 in 2021
•Invested capital expenditures2 of $2.9 billion through September; $4.0 billion annual capital plan on track
•Released 2023-2027 capital plan of $22.3 billion, representing 6.2% rate base growth; no discrete equity funding required
•Increased fourth quarter common share dividend by approximately 6%, marking 49 years of consecutive increases
•Announced annual dividend growth guidance of 4-6%; guidance period extended through 2027
"Over the past month, several of our utilities performed significant restoration efforts following the historic devastation caused by Hurricane Fiona," said David Hutchens, President and Chief Executive Officer, Fortis. "I want to thank our employees for their dedication, government and industry partners for their cooperation, and customers for their patience as we worked through the recovery."
"During the third quarter, our utilities delivered earnings growth in line with our expectations, and continued to execute capital investments consistent with plan," continued Mr. Hutchens. "Our low-risk organic growth strategy remains a key fundamental during these volatile macroeconomic times."
"Today we are unveiling our largest five-year capital plan of $22.3 billion, an increase of $2.3 billion over our prior plan, and announcing annual dividend growth guidance of 4-6% through 2027. Together, our regulated growth strategy and long-term dividend growth guidance are expected to produce premium North American utility returns over the long run," said Mr. Hutchens. "The new five-year capital plan includes $5.9 billion of cleaner energy investments to connect renewables to the grid at ITC, transition to renewable generation in Arizona and the Caribbean, and deliver cleaner fuel solutions in British Columbia."
Net Earnings
The Corporation reported net earnings attributable to common equity shareholders ("Net Earnings") of $326 million for the third quarter, or $0.68 per common share, compared to $295 million, or $0.63 per common share in the third quarter of 2021. The increase was driven by rate base growth, mainly at ITC, as well as higher retail sales, transmission revenue and earnings associated with the Oso Grande generating facility in Arizona. New customer rates at Central Hudson and the mark-to-market accounting of natural gas derivatives at Aitken Creek also favourably contributed to results.
Growth in earnings was tempered by the timing of expenses in Alberta and a favourable adjustment recognized in 2021 related to interest rate swaps at ITC. Results for the third quarter of 2022 were also impacted by significant items at ITC, including costs associated with the suspension of the Lake Erie Connector project, and the revaluation of deferred income tax assets due to a reduction in the corporate income tax rate in the state of Iowa. The impact of mark-to-market losses associated with hedging activities was more than offset by lower stock-based compensation costs and the translation of U.S. dollar-denominated subsidiary earnings at the higher U.S.-to-Canadian dollar foreign exchange rate.
An increase in the weighted average number of common shares outstanding, largely associated with the Corporation's dividend reinvestment plan, also impacted earnings per share for the quarter.
____________________
1 Financial information is presented in Canadian dollars unless otherwise specified.
2 Non-U.S. GAAP Financial Measures - Fortis uses financial measures that do not have a standardized meaning under generally accepted accounting principles in the United States of America and may not be comparable to similar measures presented by other entities. Fortis presents these non-U.S. GAAP measures because management uses them in evaluating the Corporation's financial performance and prospects. Refer to the Non-U.S. GAAP Reconciliation provided herein.
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On a year-to-date basis, Net Earnings were $960 million, or $2.01 per common share, compared to $903 million, or $1.92 per common share for the nine-month period of 2021. The increase in Net Earnings and earnings per common share was due to the same factors discussed for the quarter but also reflected higher long-term wholesale sales at UNS Energy. Losses on investments that support retirement benefits at UNS Energy and ITC, and higher operating costs at Central Hudson related to the implementation of a new customer information system, unfavourably impacted year-to-date results. The operation of the Oso Grande generating facility did not impact year-to-date earnings as compared to 2021.
Adjusted Net Earnings2
Adjusted net earnings attributable to common equity shareholders ("Adjusted Net Earnings") excludes non-recurring items and the impact of mark-to-market accounting of natural gas derivatives at Aitken Creek. Adjusted Net Earnings of $341 million for the third quarter, or $0.71 per common share, were $41 million, or $0.07 per common share higher than the same period in 2021. On a year-to-date basis, Adjusted Net Earnings were $982 million, or $2.06 per common share, an increase of $63 million, or $0.10 per common share compared to the same period in 2021. The increase in adjusted earnings for the quarter and year-to-date periods was driven by the same factors discussed for Net Earnings.
| Non-U.S. GAAP Reconciliation | Quarter | Year-to-Date | ||||
|---|---|---|---|---|---|---|
| ($ millions, except earnings per share) | 2022 | 2021 | Variance | 2022 | 2021 | Variance |
| Periods ended September 30 | ||||||
| Adjusted Net Earnings | ||||||
| Net Earnings | 326 | 295 | 31 | 960 | 903 | 57 |
| Adjusting items: | ||||||
| Unrealized (gain) loss on mark-to-market of derivatives3 | (4) | 5 | (9) | 3 | 16 | (13) |
| Lake Erie Connector project suspension costs4 | 10 | — | 10 | 10 | — | 10 |
| Revaluation of deferred income tax assets5 | 9 | — | 9 | 9 | — | 9 |
| Adjusted Net Earnings | 341 | 300 | 41 | 982 | 919 | 63 |
| Adjusted net earnings per share ($) | 0.71 | 0.64 | 0.07 | 2.06 | 1.96 | 0.10 |
| Capital Expenditures: | ||||||
| Additions to property, plant and equipment | 907 | 777 | 130 | 2,600 | 2,292 | 308 |
| Additions to intangible assets | 44 | 41 | 3 | 151 | 120 | 31 |
| Adjusting item: | ||||||
| Wataynikaneyap Transmission Power Project6 | 41 | 17 | 24 | 135 | 143 | (8) |
| Capital Expenditures | 992 | 835 | 157 | 2,886 | 2,555 | 331 |
2022 Capital Expenditures & New Five-Year Capital Plan
Fortis' $4.0 billion annual capital plan remains on track with $2.9 billion invested through September.
Today the Corporation announced its new 2023-2027 capital plan of $22.3 billion, the largest in the Corporation’s history, and $2.3 billion higher than the previous five-year plan. The increase is driven by organic growth, largely reflecting regional transmission projects associated with the Midcontinent Independent System Operator ("MISO") long-range transmission plan ("LRTP") at ITC, additional cleaner energy investments in Arizona to support Tucson Electric Power's exit from coal by 2032, and enhancements to distribution reliability and capacity, as well as investments to support customer growth, across the Corporation's regulated utilities. Approximately $500 million of the increase is driven by a higher assumed U.S.-to-Canadian dollar exchange rate over the five-year period.
_______________________
3 Represents timing differences related to the accounting of natural gas derivatives at Aitken Creek, net of income tax (expense) recovery of $(2) million and $1 million for the three and nine months ended September 30, 2022, respectively (income tax recovery of $2 million and $6 million for the three and nine months ended September 30, 2021, respectively)
4 Represents costs incurred upon the suspension of the Lake Erie Connector project, net of income tax recovery of $4 million for the three and nine months ended September 30, 2022
5 Represents the revaluation of deferred income tax assets resulting from the reduction in the corporate income tax rate in the state of Iowa
6 Represents Fortis' 39% share of capital spending for the Wataynikaneyap Transmission Power Project
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In total, Fortis expects to invest $5.9 billion in cleaner energy over the next five-years, with investments focused on connecting renewables to the grid, including Tranche 1 of MISO’s LRTP, renewable and storage investments in Arizona and the Caribbean, and cleaner fuel solutions in British Columbia. The plan incorporates key customer affordability considerations, as the Corporation recognizes the impacts of inflation and elevated commodity costs on customer rates, while ensuring reliable and resilient energy delivery service as we transition to a cleaner energy future.
The five-year capital plan is expected to be funded primarily by cash from operations, debt issued at the regulated utilities and common equity from the Corporation's dividend reinvestment plan.
Regulatory Updates
In August 2022, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision vacating certain Federal Energy Regulatory Commission ("FERC") orders that had established the methodology for setting the base rate of return on common equity ("ROE") for transmission owners operating in the MISO region, including ITC. This matter dates back to complaints filed at FERC in 2013 and 2015 challenging the MISO base ROE then in effect. The court has remanded the matter to FERC for further process, the timing and outcome of which is unknown. Although any potential impact to Fortis is uncertain, every 10-basis point change in ROE at ITC impacts Fortis' annual EPS by approximately $0.01.
In July 2022, the Alberta Utilities Commission ("AUC") issued a decision largely accepting the forecast in FortisAlberta's 2023 cost of service application. The AUC directed FortisAlberta to update and refile its 2023 revenue requirement, which was filed in September 2022. A final decision on this filing is expected in the fourth quarter of 2022.
Outlook
Fortis continues to enhance shareholder value through the execution of its capital plan, the balance and strength of its diversified portfolio of utility businesses, and growth opportunities within and proximate to its service territories. While energy price volatility, global supply chain constraints and rising inflation are issues of potential concern that continue to evolve, the Corporation does not currently expect there to be a material impact on its operations or financial results in 2022.
Fortis is executing on the transition to a cleaner energy future and is on track to achieve its corporate-wide target to reduce greenhouse gas ("GHG") emissions by 75% by 2035. Upon achieving this target, 99% of the Corporation's assets will support energy delivery and renewable, carbon-free generation. The Corporation's additional 2050 net-zero direct GHG emissions target reinforces Fortis' commitment to decarbonize over the long-term, while preserving customer reliability and affordability.
The Corporation's $22.3 billion five-year capital plan is expected to increase midyear rate base from $34.0 billion in 2022 to $46.1 billion by 2027, translating into a five-year compound annual growth rate of 6.2%.
Beyond the five-year capital plan, additional opportunities to expand and extend growth include: further expansion of the electric transmission grid in the United States to facilitate the interconnection of cleaner energy including infrastructure investments associated with the Inflation Reduction Act of 2022 and the MISO LRTP; climate adaptation and grid resiliency investments; renewable gas solutions as well as liquefied natural gas infrastructure in British Columbia; and the acceleration of cleaner energy infrastructure investments across our jurisdictions.
Fortis expects its long-term growth in rate base will drive earnings that support dividend growth and reduce the Corporation's dividend payout ratio over time to be in line with historical levels. The dividend growth guidance of 4-6% annually through 2027 will also provide the flexibility to fund more capital with internally generated funds and is premised on the assumptions listed under "Forward-Looking Information".
About Fortis
Fortis is a well-diversified leader in the North American regulated electric and gas utility industry with 2021 revenue of $9.4 billion and total assets of $64 billion as at September 30, 2022. The Corporation's 9,100 employees serve utility customers in five Canadian provinces, nine U.S. states and three Caribbean countries.
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Forward-Looking Information
Fortis includes forward-looking information in this media release within the meaning of applicable Canadian securities laws and forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 (collectively referred to as "forward-looking information"). Forward-looking information reflects expectations of Fortis management regarding future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as anticipates, believes, budgets, could, estimates, expects, forecasts, intends, may, might, plans, projects, schedule, should, target, will, would, and the negative of these terms, and other similar terminology or expressions have been used to identify the forward-looking information, which includes, without limitation: forecast capital expenditures for 2022 and 2023-2027, including cleaner energy investments; forecast rate base and rate base growth for 2022 through 2027; targeted annual dividend growth through 2027; the expectation that the regulated growth strategy and long-term dividend guidance will produce premium North American utility returns and provide capital funding flexibility; the nature, timing, benefits and expected costs of certain capital projects, including ITC's transmission projects associated with the MISO LRTP, renewable energy and storage investments at UNS Energy and investments in cleaner fuel solutions in British Columbia; the expectation to exit coal by 2032; additional opportunities beyond the capital plan including investments associated with the Inflation Reduction Act of 2022, the MISO LRTP, climate adaptation and grid resiliency, and renewable gas solutions and liquefied natural gas infrastructure in British Columbia; the expected sources of funding for the 2023-2027 capital plan; the expected timing, outcome and impact of regulatory proceedings and decisions; the expectation that volatility in energy prices, global supply chain constraints and rising inflation will not have a material impact on operations or financial results in 2022; the 2035 GHG emissions reduction target and projected asset mix; the 2050 net-zero direct GHG emissions target; and the expectation that long-term growth in rate base will drive earnings, support dividend growth and reduce the dividend payout ratio over time to be in line with historical levels.
Forward-looking information involves significant risks, uncertainties and assumptions. Certain material factors or assumptions have been applied in drawing the conclusions contained in the forward-looking information, including, without limitation: no material impact from volatility in energy prices, global supply chain constraints and rising inflation; reasonable outcomes for regulatory proceedings and the expectation of regulatory stability; the successful execution of the five-year capital plan; no material capital project and financing cost overrun; sufficient human resources to deliver service and execute the capital plan; the realization of additional opportunities; no material changes in the assumed U.S. dollar to Canadian dollar exchange rate; no significant variability in interest rates; and the Board exercising its discretion to declare dividends, taking into account the business performance and financial condition of the Corporation. Fortis cautions readers that a number of factors could cause actual results, performance or achievements to differ materially from the results discussed or implied in the forward-looking information. For additional information with respect to certain risk factors, reference should be made to the continuous disclosure materials filed from time to time by the Corporation with Canadian securities regulatory authorities and the Securities and Exchange Commission. All forward-looking information herein is given as of the date of this media release. Fortis disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise.
Teleconference to Discuss Third Quarter 2022 Results
A teleconference and webcast will be held on October 28, 2022 at 8:30 a.m. (Eastern). David Hutchens, President and Chief Executive Officer and Jocelyn Perry, Executive Vice President and Chief Financial Officer, will discuss the Corporation's third quarter results.
Shareholders, analysts, members of the media and other interested parties in North America are invited to participate by calling 1.416.764.8646. International participants may participate by calling 1.888.396.8049. Please dial in 10 minutes prior to the start of the call. No passcode is required.
A live and archived audio webcast of the teleconference will be available on the Corporation's website, www.fortisinc.com. A replay of the teleconference will be available two hours after the conclusion of the call until November 28, 2022. Please call 1.416.764.8692 or 1.877.674.7070 and enter passcode 327938#.
Additional Information
This media release should be read in conjunction with the Corporation's September 30, 2022 Interim Management Discussion and Analysis and Condensed Consolidated Financial Statements. This and additional information can be accessed at www.fortisinc.com, www.sedar.com, or www.sec.gov.
For more information, please contact:
| Investor Enquiries | Media Enquiries | ||
|---|---|---|---|
| Ms. Stephanie Amaimo | Ms. Karen McCarthy | ||
| Vice President, Investor Relations | Vice President, Communications & Corporate Affairs | ||
| Fortis Inc. | Fortis Inc. | ||
| 248.946.3572 | 709.737.5323 | ||
| investorrelations@fortisinc.com | media@fortisinc.com | iv | |
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Document
Exhibit 99.2
| Interim Financial Statements |
|---|
FORTIS INC.
Condensed Consolidated Interim Financial Statements
For the three and nine months ended September 30, 2022 and 2021
(Unaudited)
| 1 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT | ||||
|---|---|---|---|---|---|---|
| Interim Financial Statements | ||||||
| --- | CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS (Unaudited) | |||||
| --- | --- | --- | --- | --- | ||
| FORTIS INC. | ||||||
| September 30, | December 31, | |||||
| As at (in millions of Canadian dollars) | 2022 | 2021 | ||||
| ASSETS | ||||||
| Current assets | ||||||
| Cash and cash equivalents | $ | 395 | $ | 131 | ||
| Accounts receivable and other current assets (Note 5) | 1,808 | 1,511 | ||||
| Prepaid expenses | 195 | 116 | ||||
| Inventories | 690 | 478 | ||||
| Regulatory assets (Note 6) | 739 | 492 | ||||
| Total current assets | 3,827 | 2,728 | ||||
| Other assets | 1,253 | 955 | ||||
| Regulatory assets (Note 6) | 3,291 | 3,097 | ||||
| Property, plant and equipment, net | 41,549 | 37,816 | ||||
| Intangible assets, net | 1,477 | 1,343 | ||||
| Goodwill | 12,687 | 11,720 | ||||
| Total assets | $ | 64,084 | $ | 57,659 | ||
| LIABILITIES AND EQUITY | ||||||
| Current liabilities | ||||||
| Short-term borrowings (Note 7) | $ | 232 | $ | 247 | ||
| Accounts payable and other current liabilities | 2,832 | 2,570 | ||||
| Regulatory liabilities (Note 6) | 509 | 357 | ||||
| Current installments of long-term debt (Note 7) | 2,570 | 1,628 | ||||
| Total current liabilities | 6,143 | 4,802 | ||||
| Regulatory liabilities (Note 6) | 3,281 | 2,865 | ||||
| Deferred income taxes | 4,009 | 3,627 | ||||
| Long-term debt (Note 7) | 25,929 | 23,707 | ||||
| Finance leases | 341 | 333 | ||||
| Other liabilities | 1,430 | 1,409 | ||||
| Total liabilities | 41,133 | 36,743 | ||||
| Commitments and contingencies (Note 13) | ||||||
| Equity | ||||||
| Common shares (1) | 14,558 | 14,237 | ||||
| Preference shares | 1,623 | 1,623 | ||||
| Additional paid-in capital | 8 | 10 | ||||
| Accumulated other comprehensive income (loss) | 1,300 | (40) | ||||
| Retained earnings | 3,635 | 3,458 | ||||
| Shareholders' equity | 21,124 | 19,288 | ||||
| Non-controlling interests | 1,827 | 1,628 | ||||
| Total equity | 22,951 | 20,916 | ||||
| Total liabilities and equity | $ | 64,084 | $ | 57,659 |
(1) No par value. Unlimited authorized shares. 480.3 million and 474.8 million issued and outstanding as at September 30, 2022 and December 31, 2021, respectively.
See accompanying Notes to Condensed Consolidated Interim Financial Statements
| 2 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Interim Financial Statements | ||||||||||
| --- | CONDENSED CONSOLIDATED INTERIM STATEMENTS OF EARNINGS (Unaudited) | |||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | ||
| FORTIS INC. | ||||||||||
| Quarter | Year-to-Date | |||||||||
| For the periods ended September 30 (in millions of Canadian dollars, except per share amounts) | 2022 | 2021 | 2022 | 2021 | ||||||
| Revenue | $ | 2,553 | $ | 2,196 | $ | 7,875 | $ | 6,865 | ||
| Expenses | ||||||||||
| Energy supply costs | 804 | 624 | 2,684 | 2,066 | ||||||
| Operating expenses | 630 | 594 | 1,958 | 1,855 | ||||||
| Depreciation and amortization | 422 | 380 | 1,246 | 1,121 | ||||||
| Total expenses | 1,856 | 1,598 | 5,888 | 5,042 | ||||||
| Operating income | 697 | 598 | 1,987 | 1,823 | ||||||
| Other income, net (Note 9) | 19 | 37 | 96 | 129 | ||||||
| Finance charges | 280 | 244 | 804 | 751 | ||||||
| Earnings before income tax expense | 436 | 391 | 1,279 | 1,201 | ||||||
| Income tax expense | 65 | 49 | 185 | 167 | ||||||
| Net earnings | $ | 371 | $ | 342 | $ | 1,094 | $ | 1,034 | ||
| Net earnings attributable to: | ||||||||||
| Non-controlling interests | $ | 29 | $ | 31 | $ | 86 | $ | 83 | ||
| Preference equity shareholders | 16 | 16 | 48 | 48 | ||||||
| Common equity shareholders | 326 | 295 | 960 | 903 | ||||||
| $ | 371 | $ | 342 | $ | 1,094 | $ | 1,034 | |||
| Earnings per common share (Note 10) | ||||||||||
| Basic | $ | 0.68 | $ | 0.63 | $ | 2.01 | $ | 1.92 | ||
| Diluted | $ | 0.68 | $ | 0.62 | $ | 2.01 | $ | 1.92 | ||
| See accompanying Notes to Condensed Consolidated Interim Financial Statements | ||||||||||
| CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | ||
| Quarter | Year-to-Date | |||||||||
| For the periods ended September 30 (in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 | ||||||
| Net earnings | $ | 371 | $ | 342 | $ | 1,094 | $ | 1,034 | ||
| Other comprehensive income (loss) | ||||||||||
| Unrealized foreign currency translation gains (losses) (1) | 1,165 | 337 | 1,452 | (40) | ||||||
| Other (2) | 25 | (7) | 49 | (3) | ||||||
| 1,190 | 330 | 1,501 | (43) | |||||||
| Comprehensive income | $ | 1,561 | $ | 672 | $ | 2,595 | $ | 991 | ||
| Comprehensive income attributable to: | ||||||||||
| Non-controlling interests | $ | 154 | $ | 64 | $ | 247 | $ | 76 | ||
| Preference equity shareholders | 16 | 16 | 48 | 48 | ||||||
| Common equity shareholders | 1,391 | 592 | 2,300 | 867 | ||||||
| $ | 1,561 | $ | 672 | $ | 2,595 | $ | 991 |
(1)Net of hedging activities and income tax recovery of $37 million and $40 million for the three and nine months ended September 30, 2022, respectively (three and nine months ended September 30, 2021 - income tax recovery (expense) of $3 million and $(1) million, respectively).
(2)Net of income tax expense of $11 million and $21 million for the three and nine months ended September 30, 2022, respectively (three and nine months ended September 30, 2021 - income tax recovery of $2 million and $1 million, respectively )
See accompanying Notes to Condensed Consolidated Interim Financial Statements
| 3 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Interim Financial Statements | |||||||||||||||||||
| --- | CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS (Unaudited) | ||||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | ||||||||||
| FORTIS INC. | |||||||||||||||||||
| Quarter | Year-to-Date | ||||||||||||||||||
| For the periods ended September 30 (in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||
| Operating activities | |||||||||||||||||||
| Net earnings | $ | 371 | $ | 342 | $ | 1,094 | $ | 1,034 | |||||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||||||||||
| Depreciation - property, plant and equipment | 369 | 332 | 1,091 | 978 | |||||||||||||||
| Amortization - intangible assets | 37 | 34 | 108 | 102 | |||||||||||||||
| Amortization - other | 16 | 14 | 47 | 41 | |||||||||||||||
| Deferred income tax expense | 64 | 44 | 119 | 109 | |||||||||||||||
| Equity component, allowance for funds used during construction (Note 9) | (19) | (18) | (54) | (57) | |||||||||||||||
| Other | 66 | 26 | 120 | 93 | |||||||||||||||
| Change in long-term regulatory assets and liabilities | 80 | 15 | 94 | 15 | |||||||||||||||
| Change in working capital (Note 11) | (351) | (78) | (414) | (125) | |||||||||||||||
| Cash from operating activities | 633 | 711 | 2,205 | 2,190 | |||||||||||||||
| Investing activities | |||||||||||||||||||
| Additions to property, plant and equipment | (907) | (777) | (2,600) | (2,292) | |||||||||||||||
| Additions to intangible assets | (44) | (41) | (151) | (120) | |||||||||||||||
| Contributions in aid of construction | 24 | 21 | 85 | 55 | |||||||||||||||
| Contributions to equity-accounted investees | (100) | — | (100) | — | |||||||||||||||
| Other | (46) | (48) | (141) | (146) | |||||||||||||||
| Cash used in investing activities | (1,073) | (845) | (2,907) | (2,503) | |||||||||||||||
| Financing activities | |||||||||||||||||||
| Proceeds from long-term debt, net of issuance costs | 936 | 92 | 2,581 | 1,218 | |||||||||||||||
| Repayments of long-term debt and finance leases | (670) | (440) | (1,506) | (562) | |||||||||||||||
| Borrowings under committed credit facilities | 1,674 | 1,209 | 4,660 | 3,477 | |||||||||||||||
| Repayments under committed credit facilities | (1,066) | (881) | (4,218) | (3,453) | |||||||||||||||
| Net change in short-term borrowings | (204) | (32) | (46) | 112 | |||||||||||||||
| Issue of common shares, net of costs and dividends reinvested | 6 | 8 | 46 | 52 | |||||||||||||||
| Dividends | |||||||||||||||||||
| Common shares, net of dividends reinvested | (168) | (152) | (492) | (449) | |||||||||||||||
| Preference shares | (16) | (16) | (48) | (48) | |||||||||||||||
| Subsidiary dividends paid to non-controlling interests | (21) | (18) | (52) | (46) | |||||||||||||||
| Other | — | (19) | 7 | (24) | |||||||||||||||
| Cash from (used in) financing activities | 471 | (249) | 932 | 277 | |||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 26 | 9 | 34 | 12 | |||||||||||||||
| Change in cash and cash equivalents | 57 | (374) | 264 | (24) | |||||||||||||||
| Cash and cash equivalents, beginning of period | 338 | 599 | 131 | 249 | |||||||||||||||
| Cash and cash equivalents, end of period | $ | 395 | $ | 225 | $ | 395 | $ | 225 | |||||||||||
| Supplementary Cash Flow Information (Note 11) | |||||||||||||||||||
| See accompanying Notes to Condensed Consolidated Interim Financial Statements | |||||||||||||||||||
| 4 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT | |||||||||||||||||
| --- | --- | --- | |||||||||||||||||
| Interim Financial Statements | |||||||||||||||||||
| --- | CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY (Unaudited) | ||||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | ||||
| FORTIS INC. | |||||||||||||||||||
| For the three months ended September 30<br>(in millions of Canadian dollars, except share numbers) | Common Shares<br><br>(# millions) | Common Shares | Preference Shares | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Non-Controlling Interests | Total Equity | |||||||||||
| As at June 30, 2022 | 478.7 | $ | 14,465 | $ | 1,623 | $ | 8 | $ | 235 | $ | 3,837 | $ | 1,692 | $ | 21,860 | ||||
| Net earnings | — | — | — | — | — | 342 | 29 | 371 | |||||||||||
| Other comprehensive income | — | — | — | — | 1,065 | — | 125 | 1,190 | |||||||||||
| Common shares issued | 1.6 | 93 | — | — | — | — | — | 93 | |||||||||||
| Subsidiary dividends paid to non-controlling interests | — | — | — | — | — | — | (21) | (21) | |||||||||||
| Dividends declared on common shares ($1.10 per share) | — | — | — | — | — | (528) | — | (528) | |||||||||||
| Dividends on preference shares | — | — | — | — | — | (16) | — | (16) | |||||||||||
| Other | — | — | — | — | — | — | 2 | 2 | |||||||||||
| As at September 30, 2022 | 480.3 | $ | 14,558 | $ | 1,623 | $ | 8 | $ | 1,300 | $ | 3,635 | $ | 1,827 | $ | 22,951 | ||||
| As at June 30, 2021 | 471.2 | $ | 14,040 | $ | 1,623 | $ | 8 | $ | (299) | $ | 3,581 | $ | 1,569 | $ | 20,522 | ||||
| Net earnings | — | — | — | — | — | 311 | 31 | 342 | |||||||||||
| Other comprehensive income | — | — | — | — | 297 | — | 33 | 330 | |||||||||||
| Common shares issued | 1.7 | 95 | — | — | — | — | — | 95 | |||||||||||
| Subsidiary dividends paid to non-controlling interests | — | — | — | — | — | — | (18) | (18) | |||||||||||
| Dividends declared on common shares ($1.04 per share) | — | — | — | — | — | (491) | — | (491) | |||||||||||
| Dividends on preference shares | — | — | — | — | — | (16) | — | (16) | |||||||||||
| Other | — | — | — | 1 | — | — | 1 | 2 | |||||||||||
| As at September 30, 2021 | 472.9 | $ | 14,135 | $ | 1,623 | $ | 9 | $ | (2) | $ | 3,385 | $ | 1,616 | $ | 20,766 | ||||
| See accompanying Notes to Condensed Consolidated Interim Financial Statements | 5 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT | ||||||||||||||||
| --- | --- | --- | Interim Financial Statements | ||||||||||||||||
| --- | CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY (Unaudited) | ||||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | ||||
| FORTIS INC. | |||||||||||||||||||
| For the nine months ended September 30<br>(in millions of Canadian dollars, except share numbers) | Common Shares<br><br>(# 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, 2021 | 474.8 | $ | 14,237 | $ | 1,623 | $ | 10 | $ | (40) | $ | 3,458 | $ | 1,628 | $ | 20,916 | ||||
| Net earnings | — | — | — | — | — | 1,008 | 86 | 1,094 | |||||||||||
| Other comprehensive income | — | — | — | — | 1,340 | — | 161 | 1,501 | |||||||||||
| Common shares issued | 5.5 | 321 | — | (2) | — | — | — | 319 | |||||||||||
| Subsidiary dividends paid to non-controlling interests | — | — | — | — | — | — | (52) | (52) | |||||||||||
| Dividends declared on common shares ($1.635 per share) | — | — | — | — | — | (783) | — | (783) | |||||||||||
| Dividends on preference shares | — | — | — | — | — | (48) | — | (48) | |||||||||||
| Other | — | — | — | — | — | — | 4 | 4 | |||||||||||
| As at September 30, 2022 | 480.3 | $ | 14,558 | $ | 1,623 | $ | 8 | $ | 1,300 | $ | 3,635 | $ | 1,827 | $ | 22,951 | ||||
| As at December 31, 2020 | 466.8 | $ | 13,819 | $ | 1,623 | $ | 11 | $ | 34 | $ | 3,210 | $ | 1,587 | $ | 20,284 | ||||
| Net earnings | — | — | — | — | — | 951 | 83 | 1,034 | |||||||||||
| Other comprehensive loss | — | — | — | — | (36) | — | (7) | (43) | |||||||||||
| Common shares issued | 6.1 | 316 | — | (2) | — | — | — | 314 | |||||||||||
| Subsidiary dividends paid to non-controlling interests | — | — | — | — | — | — | (46) | (46) | |||||||||||
| Dividends declared on common shares ($1.545 per share) | — | — | — | — | — | (728) | — | (728) | |||||||||||
| Dividends on preference shares | — | — | — | — | — | (48) | — | (48) | |||||||||||
| Other | — | — | — | — | — | — | (1) | (1) | |||||||||||
| As at September 30, 2021 | 472.9 | $ | 14,135 | $ | 1,623 | $ | 9 | $ | (2) | $ | 3,385 | $ | 1,616 | $ | 20,766 | ||||
| See accompanying Notes to Condensed Consolidated Interim Financial Statements | |||||||||||||||||||
| 6 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT | |||||||||||||||||
| --- | --- | --- | |||||||||||||||||
| Notes to Condensed Consolidated Interim Financial Statements (Unaudited) | |||||||||||||||||||
| --- | |||||||||||||||||||
| For the three and nine months ended September 30, 2022 and 2021 | |||||||||||||||||||
| --- |
- DESCRIPTION OF BUSINESS
Nature of Operations
Fortis Inc. ("Fortis" or the "Corporation") is a well-diversified 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, changes in foreign exchange rates and the timing and recognition of regulatory decisions. Earnings of the gas utilities tend to be highest in the first and fourth quarters due to space-heating requirements. Earnings of the electric distribution utilities in the U.S. tend to be 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: ITC Investment Holdings Inc., ITC Holdings Corp. and the electric transmission operations of its regulated operating subsidiaries, which include International Transmission Company, Michigan Electric Transmission Company, LLC, ITC Midwest LLC ("ITC Midwest") and ITC Great Plains, LLC. Fortis owns 80.1% of ITC and an affiliate of GIC Private Limited owns a 19.9% minority interest.
UNS Energy: UNS Energy Corporation, which primarily includes Tucson Electric Power Company ("TEP"), UNS Electric, Inc. and UNS Gas, Inc.
Central Hudson: CH Energy Group, Inc., which primarily includes Central Hudson Gas & Electric Corporation.
FortisBC Energy: FortisBC Energy Inc.
FortisAlberta: FortisAlberta Inc.
FortisBC Electric: FortisBC Inc.
Other Electric: Eastern Canadian and Caribbean utilities, 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 ("Belize Electricity").
Non-Regulated
Energy Infrastructure: Long-term contracted generation assets in 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 non-regulated holding company expenses.
- REGULATORY DEVELOPMENTS
Regulation of the Corporation's utilities is generally consistent with that disclosed in Note 2 of the Corporation's annual audited consolidated financial statements ("2021 Annual Financial Statements"). A summary of significant regulatory developments year-to-date 2022 follows.
ITC
ITC Midwest Capital Structure Complaint: In May 2022, the Iowa Coalition for Affordable Transmission filed a complaint with the Federal Energy Regulatory Commission ("FERC") under Section 206 of the Federal Power Act requesting that ITC Midwest's common equity component of capital structure be reduced from 60% to 53%. The complaint alleges that ITC Midwest does not meet FERC's three-part test for authorizing the use of the utility's actual capital structure for rate-making purposes. ITC Midwest filed a response to the complaint in June 2022. As at September 30, 2022, ITC Midwest has not recorded a regulatory liability related to the complaint. The timing and outcome of this proceeding remain unknown.
MISO Base ROE: In August 2022, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision vacating certain FERC orders that had established the methodology for setting the base return on equity (“ROE”) for transmission owners operating in the Midcontinent Independent System Operator, Inc. (“MISO”) region, including ITC. This matter dates back to complaints filed at FERC in 2013 and 2015 challenging the MISO base ROE then in effect. The court has remanded the matter to FERC for further process, the timing and outcome of which is unknown.
| 7 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Notes to Condensed Consolidated Interim Financial Statements (Unaudited) | ||
| --- | ||
| For the three and nine months ended September 30, 2022 and 2021 | ||
| --- |
- REGULATORY DEVELOPMENTS (cont'd)
UNS Energy
TEP General Rate Application: In June 2022, TEP filed a general rate application with the Arizona Corporation Commission requesting new rates effective September 1, 2023 using a December 31, 2021 test year. The application reflects a US$136 million net increase in non-fuel and fuel-related revenue, as well as proposals to eliminate certain adjustor mechanisms, and modify an existing adjustor to provide more timely recovery of clean energy investments. The timing and outcome of this proceeding is unknown.
FERC Rate Case: In March 2022, FERC approved the settlement agreement for formula transmission rates at TEP, including an ROE of 9.79%.
FortisBC Energy and FortisBC Electric
Generic Cost of Capital ("GCOC") Proceeding: In 2021, the British Columbia Utilities Commission ("BCUC") initiated a proceeding including a review of the common equity component of capital structure and the allowed ROE. FortisBC filed evidence with the BCUC in the first quarter of 2022 and the proceeding remains ongoing. The timing and outcome of this proceeding, including the effective date of any change in the cost of capital in 2023, remain unknown.
FortisAlberta
2023 GCOC Proceeding: In March 2022, the Alberta Utilities Commission ("AUC") issued a decision extending the existing allowed ROE of 8.5% using a 37% equity component of capital structure through 2023.
2023 Cost of Service ("COS") Application: In July 2022, the AUC issued a decision largely accepting the forecast requested in FortisAlberta's COS application. The AUC directed FortisAlberta to update and refile its 2023 revenue requirement, which was filed in September 2022. A final decision on this filing is expected in the fourth quarter of 2022.
- ACCOUNTING POLICIES
These condensed consolidated interim financial statements ("Interim Financial Statements") have been prepared and presented in accordance with accounting principles generally accepted in the United States of America for rate-regulated entities and are in Canadian dollars unless otherwise indicated.
The Interim Financial Statements include the accounts of the Corporation and its subsidiaries and reflect the equity method of accounting for entities in which Fortis has significant influence, but not control, and proportionate consolidation for assets that are jointly owned with non-affiliated entities.
Intercompany transactions have been eliminated, except for transactions between non-regulated and regulated entities in accordance with U.S. GAAP for rate-regulated entities.
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 2021 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.
The preparation of the Interim Financial Statements required 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, expenses, gains, losses and contingencies. Actual results could differ materially from estimates.
The accounting policies applied herein are consistent with those outlined in the Corporation's 2021 Annual Financial Statements.
Future Accounting Pronouncements
The Corporation considers the applicability and impact of all Accounting Standards Updates ("ASUs") issued by the Financial Accounting Standards Board. Any ASUs not included in these Interim Financial Statements were assessed and determined to be either not applicable to the Corporation or are not expected to have a material impact on the Interim Financial Statements.
| 8 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Notes to Condensed Consolidated Interim Financial Statements (Unaudited) | ||
| --- | ||
| For the three and nine months ended September 30, 2022 and 2021 | ||
| --- |
- SEGMENTED INFORMATION
Fortis segments its business based on regulatory jurisdiction 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 principally 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 three and nine months ended September 30, 2022 and 2021.
The lease of gas storage capacity and gas sales from Aitken Creek to FortisBC Energy of $7 million and $27 million for the three and nine months ended September 30, 2022, respectively (three and nine months ended September 30, 2021 - $6 million and $21 million, respectively) are inter-company transactions between non-regulated and regulated entities, which were not eliminated on consolidation.
As at September 30, 2022, accounts receivable included approximately $14 million due from Belize Electricity (December 31, 2021 - $22 million).
Fortis periodically provides short-term financing to subsidiaries to support capital expenditures and seasonal working capital requirements, the impacts of which are eliminated on consolidation. As at September 30, 2022, inter-segment loans of $35 million were outstanding (December 31, 2021 - $126 million). Interest charged on inter-segment loans was not material for the three and nine months ended September 30, 2022 and 2021.
| 9 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Notes to Condensed Consolidated Interim Financial Statements (Unaudited) | ||
| --- | ||
| For the three and nine months ended September 30, 2022 and 2021 | ||
| --- |
- SEGMENTED INFORMATION (cont'd)
| Regulated | Non-Regulated | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Energy | Inter- | |||||||||||||||
| UNS | Central | FortisBC | Fortis | FortisBC | Other | Sub | Infra- | Corporate | segment | |||||||
| ($ millions) | ITC | Energy | Hudson | Energy | Alberta | Electric | Electric | Total | structure | and Other | eliminations | Total | ||||
| Quarter ended September 30, 2022 | ||||||||||||||||
| Revenue | 478 | 856 | 273 | 269 | 175 | 114 | 361 | 2,526 | 27 | — | — | 2,553 | ||||
| Energy supply costs | — | 380 | 84 | 104 | — | 35 | 200 | 803 | 1 | — | — | 804 | ||||
| Operating expenses | 120 | 168 | 133 | 88 | 38 | 30 | 52 | 629 | 9 | (8) | — | 630 | ||||
| Depreciation and amortization | 97 | 95 | 26 | 74 | 61 | 17 | 48 | 418 | 4 | — | — | 422 | ||||
| Operating income | 261 | 213 | 30 | 3 | 76 | 32 | 61 | 676 | 13 | 8 | — | 697 | ||||
| Other income, net | 11 | 6 | 13 | 7 | 1 | 2 | 2 | 42 | — | (23) | — | 19 | ||||
| Finance charges | 90 | 32 | 13 | 37 | 28 | 19 | 18 | 237 | — | 43 | — | 280 | ||||
| Income tax expense | 55 | 24 | 6 | (11) | 3 | 2 | 4 | 83 | 3 | (21) | — | 65 | ||||
| Net earnings | 127 | 163 | 24 | (16) | 46 | 13 | 41 | 398 | 10 | (37) | — | 371 | ||||
| Non-controlling interests | 22 | — | — | 1 | — | — | 6 | 29 | — | — | — | 29 | ||||
| Preference share dividends | — | — | — | — | — | — | — | — | — | 16 | — | 16 | ||||
| Net earnings attributable to common equity shareholders | 105 | 163 | 24 | (17) | 46 | 13 | 35 | 369 | 10 | (53) | — | 326 | ||||
| Additions to property, plant and equipment and intangible assets | 313 | 139 | 83 | 150 | 126 | 32 | 98 | 941 | 10 | — | — | 951 | ||||
| As at September 30, 2022 | ||||||||||||||||
| Goodwill | 8,487 | 1,911 | 624 | 913 | 228 | 235 | 262 | 12,660 | 27 | — | — | 12,687 | ||||
| Total assets | 23,704 | 12,892 | 5,156 | 8,474 | 5,464 | 2,636 | 4,773 | 63,099 | 861 | 179 | (55) | 64,084 | ||||
| Quarter ended<br><br>September 30, 2021 | ||||||||||||||||
| Revenue | 429 | 716 | 225 | 220 | 168 | 107 | 331 | 2,196 | — | — | — | 2,196 | ||||
| Energy supply costs | — | 289 | 63 | 62 | — | 33 | 177 | 624 | — | — | — | 624 | ||||
| Operating expenses | 115 | 157 | 127 | 80 | 35 | 26 | 49 | 589 | 6 | (1) | — | 594 | ||||
| Depreciation and amortization | 74 | 88 | 22 | 70 | 58 | 17 | 45 | 374 | 5 | 1 | — | 380 | ||||
| Operating income | 240 | 182 | 13 | 8 | 75 | 31 | 60 | 609 | (11) | — | — | 598 | ||||
| Other income, net | 11 | 6 | 9 | 3 | — | 1 | 3 | 33 | — | 4 | — | 37 | ||||
| Finance charges | 65 | 32 | 11 | 36 | 27 | 18 | 18 | 207 | — | 37 | — | 244 | ||||
| Income tax expense | 44 | 25 | 2 | (7) | 1 | 2 | 5 | 72 | — | (23) | — | 49 | ||||
| Net earnings | 142 | 131 | 9 | (18) | 47 | 12 | 40 | 363 | (11) | (10) | — | 342 | ||||
| Non-controlling interests | 25 | — | — | 1 | — | — | 5 | 31 | — | — | — | 31 | ||||
| Preference share dividends | — | — | — | — | — | — | — | — | — | 16 | — | 16 | ||||
| Net earnings attributable to common equity shareholders | 117 | 131 | 9 | (19) | 47 | 12 | 35 | 332 | (11) | (26) | — | 295 | ||||
| Additions to property, plant and equipment and intangible assets | 230 | 177 | 76 | 125 | 87 | 34 | 80 | 809 | 9 | — | — | 818 | ||||
| As at September 30, 2021 | ||||||||||||||||
| Goodwill | 7,782 | 1,752 | 572 | 913 | 228 | 235 | 246 | 11,728 | 27 | — | — | 11,755 | ||||
| Total assets | 20,865 | 11,318 | 4,125 | 7,893 | 5,201 | 2,506 | 4,291 | 56,199 | 772 | 217 | (51) | 57,137 | 10 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT | |
| --- | --- | --- | ||||||||||||||
| Notes to Condensed Consolidated Interim Financial Statements (Unaudited) | ||||||||||||||||
| --- | ||||||||||||||||
| For the three and nine months ended September 30, 2022 and 2021 | ||||||||||||||||
| --- |
- SEGMENTED INFORMATION (cont'd)
| Regulated | Non-Regulated | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Energy | Inter- | |||||||||||
| UNS | Central | FortisBC | Fortis | FortisBC | Other | Sub | Infra- | Corporate | segment | |||
| ($ millions) | ITC | Energy | Hudson | Energy | Alberta | Electric | Electric | Total | structure | and Other | eliminations | Total |
| Year-to-date September 30, 2022 | ||||||||||||
| Revenue | 1,406 | 2,042 | 929 | 1,359 | 511 | 351 | 1,204 | 7,802 | 73 | — | — | 7,875 |
| Energy supply costs | — | 862 | 347 | 639 | — | 96 | 736 | 2,680 | 4 | — | — | 2,684 |
| Operating expenses | 363 | 497 | 425 | 259 | 122 | 96 | 157 | 1,919 | 29 | 10 | — | 1,958 |
| Depreciation and amortization | 283 | 276 | 77 | 224 | 182 | 51 | 139 | 1,232 | 12 | 2 | — | 1,246 |
| Operating income | 760 | 407 | 80 | 237 | 207 | 108 | 172 | 1,971 | 28 | (12) | — | 1,987 |
| Other income, net | 30 | 12 | 43 | 16 | 2 | 5 | 5 | 113 | — | (17) | — | 96 |
| Finance charges | 253 | 93 | 39 | 108 | 82 | 56 | 55 | 686 | — | 118 | — | 804 |
| Income tax expense | 137 | 43 | 18 | 25 | 10 | 7 | 15 | 255 | 5 | (75) | — | 185 |
| Net earnings | 400 | 283 | 66 | 120 | 117 | 50 | 107 | 1,143 | 23 | (72) | — | 1,094 |
| Non-controlling interests | 72 | — | — | 1 | — | — | 13 | 86 | — | — | — | 86 |
| Preference share dividends | — | — | — | — | — | — | — | — | — | 48 | — | 48 |
| Net earnings attributable to common equity shareholders | 328 | 283 | 66 | 119 | 117 | 50 | 94 | 1,057 | 23 | (120) | — | 960 |
| Additions to property, plant and equipment and intangible assets | 920 | 460 | 212 | 414 | 356 | 92 | 276 | 2,730 | 21 | — | — | 2,751 |
| As at September 30, 2022 | ||||||||||||
| Goodwill | 8,487 | 1,911 | 624 | 913 | 228 | 235 | 262 | 12,660 | 27 | — | — | 12,687 |
| Total assets | 23,704 | 12,892 | 5,156 | 8,474 | 5,464 | 2,636 | 4,773 | 63,099 | 861 | 179 | (55) | 64,084 |
| Year-to-date September 30, 2021 | ||||||||||||
| Revenue | 1,273 | 1,794 | 717 | 1,123 | 488 | 335 | 1,097 | 6,827 | 38 | — | — | 6,865 |
| Energy supply costs | — | 693 | 203 | 424 | — | 94 | 650 | 2,064 | 2 | — | — | 2,066 |
| Operating expenses | 347 | 487 | 374 | 252 | 113 | 89 | 146 | 1,808 | 24 | 23 | — | 1,855 |
| Depreciation and amortization | 216 | 254 | 67 | 211 | 173 | 49 | 135 | 1,105 | 13 | 3 | — | 1,121 |
| Operating income | 710 | 360 | 73 | 236 | 202 | 103 | 166 | 1,850 | (1) | (26) | — | 1,823 |
| Other income, net | 32 | 33 | 26 | 8 | 1 | 4 | 4 | 108 | 1 | 20 | — | 129 |
| Finance charges | 222 | 91 | 34 | 109 | 80 | 54 | 54 | 644 | — | 107 | — | 751 |
| Income tax expense | 126 | 43 | 11 | 27 | 5 | 8 | 16 | 236 | 2 | (71) | — | 167 |
| Net earnings | 394 | 259 | 54 | 108 | 118 | 45 | 100 | 1,078 | (2) | (42) | — | 1,034 |
| Non-controlling interests | 71 | — | — | 1 | — | — | 11 | 83 | — | — | — | 83 |
| Preference share dividends | — | — | — | — | — | — | — | — | — | 48 | — | 48 |
| Net earnings attributable to common equity shareholders | 323 | 259 | 54 | 107 | 118 | 45 | 89 | 995 | (2) | (90) | — | 903 |
| Additions to property, plant and equipment and intangible assets | 776 | 514 | 209 | 317 | 273 | 92 | 218 | 2,399 | 13 | — | — | 2,412 |
| As at September 30, 2021 | ||||||||||||
| Goodwill | 7,782 | 1,752 | 572 | 913 | 228 | 235 | 246 | 11,728 | 27 | — | — | 11,755 |
| Total assets | 20,865 | 11,318 | 4,125 | 7,893 | 5,201 | 2,506 | 4,291 | 56,199 | 772 | 217 | (51) | 57,137 |
| 11 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT | ||||||||||
| --- | --- | --- | ||||||||||
| Notes to Condensed Consolidated Interim Financial Statements (Unaudited) | ||||||||||||
| --- | ||||||||||||
| For the three and nine months ended September 30, 2022 and 2021 | ||||||||||||
| --- |
- ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses balance, which is recorded in accounts receivable and other current assets, changed as follows.
| Quarter | Year-to-Date | |||
|---|---|---|---|---|
| ($ millions) | 2022 | 2021 | 2022 | 2021 |
| Periods ended September 30 | ||||
| Balance, beginning of period | (53) | (62) | (53) | (64) |
| Credit loss expense | (6) | (1) | (16) | (9) |
| Credit loss deferral | (4) | — | (4) | — |
| Write-offs, net of recoveries | 10 | 5 | 21 | 13 |
| Foreign exchange | (2) | (2) | (3) | — |
| Balance, end of period | (55) | (60) | (55) | (60) |
See Note 12 for disclosure on the Corporation's credit risk.
- REGULATORY ASSETS AND LIABILITIES
Detailed information about the Corporation's regulatory assets and liabilities is provided in Note 8 to the 2021 Annual Financial Statements. A summary follows.
| As at | ||
|---|---|---|
| September 30, | December 31, | |
| ($ millions) | 2022 | 2021 |
| Regulatory assets | ||
| Deferred income taxes | 1,869 | 1,806 |
| Rate stabilization and related accounts | 535 | 339 |
| Deferred energy management costs | 413 | 384 |
| Employee future benefits | 397 | 388 |
| Deferred lease costs | 139 | 127 |
| Manufactured gas plant site remediation deferral | 99 | 96 |
| Generation early retirement costs | 85 | 48 |
| Deferred storm costs (1) | 67 | 17 |
| Derivatives | 40 | 20 |
| Other regulatory assets | 386 | 364 |
| Total regulatory assets | 4,030 | 3,589 |
| Less: Current portion | (739) | (492) |
| Long-term regulatory assets | 3,291 | 3,097 |
| Regulatory liabilities | ||
| Deferred income taxes | 1,399 | 1,289 |
| Future cost of removal | 1,284 | 1,217 |
| Derivatives | 232 | 52 |
| Rate stabilization and related accounts | 220 | 116 |
| Employee future benefits | 208 | 196 |
| Renewable energy surcharge | 126 | 107 |
| Energy efficiency liability | 102 | 83 |
| Electric and gas moderator account | 41 | 37 |
| Other regulatory liabilities | 178 | 125 |
| Total regulatory liabilities | 3,790 | 3,222 |
| Less: Current portion | (509) | (357) |
| Long-term regulatory liabilities | 3,281 | 2,865 |
(1) Includes incremental costs incurred at Central Hudson associated with restoration activities due to significant storm events. Incremental costs incurred in excess of that collected in customer rates are recovered through Central Hudson's rate stabilization account.
| 12 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT | |||||
|---|---|---|---|---|---|---|---|
| Notes to Condensed Consolidated Interim Financial Statements (Unaudited) | |||||||
| --- | |||||||
| For the three and nine months ended September 30, 2022 and 2021 | |||||||
| --- | |||||||
| 7. LONG-TERM DEBT | As at | ||||||
| --- | --- | --- | |||||
| September 30, | December 31, | ||||||
| ($ millions) | 2022 | 2021 | |||||
| Long-term debt | 26,810 | 24,177 | |||||
| Credit facility borrowings | 1,856 | 1,305 | |||||
| Total long-term debt | 28,666 | 25,482 | |||||
| Less: Deferred financing costs and debt discounts | (167) | (147) | |||||
| Less: Current installments of long-term debt | (2,570) | (1,628) | |||||
| 25,929 | 23,707 | ||||||
| Long-Term Debt Issuances | Interest | ||||||
| --- | --- | --- | --- | --- | --- | --- | --- |
| Year-to-Date September 30, 2022 | Month | Rate | Use of | ||||
| ($ millions, except as noted) | Issued | (%) | Maturity | Amount | Proceeds | ||
| ITC | |||||||
| Secured first mortgage bonds | January | 2.93 | 2052 | US | 150 | (1) (2) (3) (4) | |
| Secured senior notes | May | 3.05 | 2052 | US | 75 | (1) (3) (4) | |
| Unsecured senior notes | September | 4.95 | 2027 | US | 600 | (1) (4) (5) | |
| UNS Energy | |||||||
| Unsecured senior notes | February | 3.25 | 2032 | US | 325 | (4) (5) | |
| Central Hudson | |||||||
| Unsecured senior notes | January | 2.37 | 2027 | US | 50 | (4) (5) | |
| Unsecured senior notes | January | 2.59 | 2029 | US | 60 | (4) (5) | |
| Unsecured senior notes | September | 5.07 | 2032 | US | 100 | (1) (4) | |
| Unsecured senior notes | September | 5.42 | 2052 | US | 10 | (1) (4) | |
| FortisBC Electric | |||||||
| Unsecured debentures | March | 4.16 | 2052 | 100 | (1) | ||
| Newfoundland Power | |||||||
| First mortgage sinking fund bonds | April | 4.20 | 2052 | 75 | (1) (4) (5) | ||
| FortisAlberta | |||||||
| Senior unsecured debentures | May | 4.62 | 2052 | 125 | (1) | ||
| Fortis | |||||||
| Unsecured senior notes | May | 4.43 | (6) | 2029 | 500 | (4) (7) |
(1) Repay short-term and/or credit facility borrowings
(2) US$20 million to fund or refinance a portfolio of eligible green projects
(3) Fund capital expenditures
(4) General corporate purposes
(5) Repay maturing long-term debt
(6) The Corporation entered into cross-currency interest rate swaps to effectively convert the debt into US$391 million with an interest rate of 4.34% (Note 12)
(7) Fund the June 2022 redemption of the Corporations $500 million, 2.85% senior unsecured notes due December 2023
In October 2022, ITC issued 5-year US$75 million and 30-year US$75 million secured first mortgage bonds at 3.87% and 4.53%, respectively. The net proceeds are expected to be used to fund or refinance a portfolio of eligible renewable energy projects.
In December 2020, Fortis filed a short-form base shelf prospectus with a 25-month life under which it may issue common or preference shares, subscription receipts or debt securities in an aggregate principal amount of up to $2.0 billion. As at September 30, 2022, $1.0 billion remained available under the short-form base shelf prospectus.
| 13 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Notes to Condensed Consolidated Interim Financial Statements (Unaudited) | ||
| --- | ||
| For the three and nine months ended September 30, 2022 and 2021 | ||
| --- |
- LONG-TERM DEBT (cont'd)
| As at | ||||
|---|---|---|---|---|
| Credit facilities | Regulated | Corporate | September 30, | December 31, |
| ($ millions) | Utilities | and Other | 2022 | 2021 |
| Total credit facilities | 3,748 | 2,068 | 5,816 | 4,846 |
| Credit facilities utilized: | ||||
| Short-term borrowings (1) | (232) | — | (232) | (247) |
| Long-term debt (including current portion) (2) | (1,144) | (712) | (1,856) | (1,305) |
| Letters of credit outstanding | (68) | (52) | (120) | (115) |
| Credit facilities unutilized | 2,304 | 1,304 | 3,608 | 3,179 |
(1) The weighted average interest rate was 3.6% (December 31, 2021 - 0.6%).
(2) The weighted average interest rate was 3.7% (December 31, 2021 - 0.9%). The current portion was $1,451 million (December 31, 2021 - $888 million).
Credit facilities are syndicated primarily with large banks in Canada and the U.S., with no one bank holding more than approximately 20% of the Corporation's total revolving credit facilities. Approximately $5.6 billion of the total credit facilities are committed with maturities ranging from 2023 through 2027.
See Note 14 in the 2021 Annual Financial Statements for a description of the credit facilities as at December 31, 2021.
In April 2022, Central Hudson increased its total credit facilities available from US$200 million to US$250 million.
In May 2022, the Corporation amended its unsecured $1.3 billion revolving term committed credit facility agreement to extend the maturity to July 2027, and to establish a sustainability-linked loan structure based on the Corporation’s achievement of targets for diversity on the Board of Directors and Scope 1 greenhouse gas emissions for 2022 through 2025. Maximum potential annual margin pricing adjustments are +/- 5 basis points and +/- 1 basis point for drawn and undrawn funds, respectively.
Also in May 2022, the Corporation entered into an unsecured US$500 million non-revolving term credit facility. The facility has an initial one-year term and is repayable at any time without penalty.
| 14 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Notes to Condensed Consolidated Interim Financial Statements (Unaudited) | ||
| --- | ||
| For the three and nine months ended September 30, 2022 and 2021 | ||
| --- |
- EMPLOYEE FUTURE BENEFITS
Fortis and each subsidiary maintain one or a combination of defined benefit pension plans and defined contribution pension plans, as well as other post-employment benefit ("OPEB") plans, including health and dental coverage and life insurance benefits, for qualifying members. The net benefit cost is detailed below.
| Defined Benefit<br><br>Pension Plans | OPEB Plans | |||
|---|---|---|---|---|
| ($ millions) | 2022 | 2021 | 2022 | 2021 |
| Quarter ended September 30 | ||||
| Service costs | 27 | 27 | 9 | 8 |
| Interest costs | 28 | 24 | 5 | 5 |
| Expected return on plan assets | (50) | (45) | (6) | (5) |
| Amortization of actuarial losses (gains) | — | 9 | (2) | (1) |
| Amortization of past service credits/plan amendments | — | — | — | (1) |
| Regulatory adjustments | (2) | (1) | 1 | 1 |
| Net benefit cost | 3 | 14 | 7 | 7 |
| Year-to-date September 30 | ||||
| Service costs | 79 | 82 | 26 | 26 |
| Interest costs | 84 | 73 | 16 | 14 |
| Expected return on plan assets | (147) | (133) | (17) | (14) |
| Amortization of actuarial losses (gains) | 2 | 27 | (7) | (2) |
| Amortization of past service credits/plan amendments | (1) | (1) | (1) | (1) |
| Regulatory adjustments | (7) | (2) | 3 | 2 |
| Net benefit cost | 10 | 46 | 20 | 25 |
Defined contribution pension plan expense for the three and nine months ended September 30, 2022 was $11 million and $37 million, respectively (three and nine months ended September 30, 2021 - $11 million and $34 million, respectively).
- OTHER INCOME, NET
| Quarter | Year-to-Date | |||
|---|---|---|---|---|
| ($ millions) | 2022 | 2021 | 2022 | 2021 |
| Periods ended September 30 | ||||
| Non-service component of net periodic benefit cost | 19 | 14 | 68 | 37 |
| Equity component, allowance for funds used during construction | 19 | 18 | 54 | 57 |
| (Loss) gain on retirement investments (1) | (4) | (2) | (21) | 4 |
| (Loss) gain on derivatives, net | (27) | 3 | (25) | 16 |
| Other | 12 | 4 | 20 | 15 |
| 19 | 37 | 96 | 129 |
(1) Includes investments that support supplemental retirement benefits at ITC, UNS Energy and Central Hudson
| 15 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Notes to Condensed Consolidated Interim Financial Statements (Unaudited) | ||
| --- | ||
| For the three and nine months ended September 30, 2022 and 2021 | ||
| --- |
- EARNINGS PER COMMON SHARE
Diluted earnings per share ("EPS") was calculated using the treasury stock method for stock options.
| 2022 | 2021 | |||||
|---|---|---|---|---|---|---|
| Net Earnings | Weighted | Net Earnings | Weighted | |||
| to Common | Average | to Common | Average | |||
| Shareholders | Shares | EPS | Shareholders | Shares | EPS | |
| ($ millions) | (# millions) | ($) | ($ millions) | (# millions) | ($) | |
| Quarter ended September 30 | ||||||
| Basic EPS | 326 | 479.4 | 0.68 | 295 | 472.0 | 0.63 |
| Potential dilutive effect of stock options | — | 0.5 | — | 0.5 | ||
| Diluted EPS | 326 | 479.9 | 0.68 | 295 | 472.5 | 0.62 |
| Year-to-date September 30 | ||||||
| Basic EPS | 960 | 477.7 | 2.01 | 903 | 470.0 | 1.92 |
| Potential dilutive effect of stock options | — | 0.5 | — | 0.5 | ||
| Diluted EPS | 960 | 478.2 | 2.01 | 903 | 470.5 | 1.92 |
- SUPPLEMENTARY CASH FLOW INFORMATION
| Quarter | Year-to-Date | |||
|---|---|---|---|---|
| ($ millions) | 2022 | 2021 | 2022 | 2021 |
| Periods ended September 30 | ||||
| Change in working capital | ||||
| Accounts receivable and other current assets | (73) | 31 | (119) | 73 |
| Prepaid expenses | (91) | (80) | (69) | (57) |
| Inventories | (129) | (108) | (174) | (108) |
| Regulatory assets - current portion | (139) | 26 | (182) | (43) |
| Accounts payable and other current liabilities | 74 | 65 | 91 | 54 |
| Regulatory liabilities - current portion | 7 | (12) | 39 | (44) |
| (351) | (78) | (414) | (125) | |
| Non-cash investing and financing activities | ||||
| Accrued capital expenditures | 401 | 361 | 401 | 361 |
| Common share dividends reinvested | 88 | 86 | 274 | 262 |
| Contributions in aid of construction | 11 | — | 11 | — |
- 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.
Derivatives are recorded 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 flow.
Cash flow associated with the settlement of all derivatives is included in operating activities on the condensed consolidated interim statements of cash flows.
| 16 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Notes to Condensed Consolidated Interim Financial Statements (Unaudited) | ||
| --- | ||
| For the three and nine months ended September 30, 2022 and 2021 | ||
| --- |
- FAIR VALUE OF FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (cont'd)
Energy Contracts Subject to Regulatory Deferral
UNS Energy holds electricity power purchase contracts, customer supply contracts and gas swap contracts to reduce its exposure to energy price risk. Fair values are 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 are 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.
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 September 30, 2022, unrealized losses of $40 million (December 31, 2021 - $20 million) were recognized as regulatory assets and unrealized gains of $232 million (December 31, 2021 - $52 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 is shared with customers through rate stabilization accounts. Fair values are measured using a market approach incorporating, where possible, independent third-party information.
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 are 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. For the three and nine months ended September 30, 2022, unrealized gains of $2 million and $4 million, respectively were recognized in revenue (three and nine months ended September 30, 2021 - unrealized losses of $1 million and $14 million, respectively).
Total Return Swaps
The Corporation holds total return swaps to manage the cash flow risk associated with forecast future cash settlements of certain stock-based compensation obligations. The swaps have a combined notional amount of $114 million and terms of one to three years expiring at varying dates through January 2025. Fair value is measured using an income valuation approach based on forward pricing curves. Unrealized gains and losses associated with changes in fair value are recognized in other income, net. During the three and nine months ended September 30, 2022, unrealized losses of $17 million and $25 million, respectively were recognized in other income, net (three and nine months ended September 30, 2021 - unrealized gains of $3 million and $6 million, respectively).
Foreign Exchange Contracts
The Corporation holds U.S. dollar denominated foreign exchange contracts to help mitigate exposure to foreign exchange rate volatility. The contracts expire at varying dates through February 2024 and have a combined notional amount of $342 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. During the three and nine months ended September 30, 2022, unrealized losses recognized in other income, net were $11 million and $13 million, respectively (three and nine months ended September 30, 2021 - unrealized losses of $7 million and $9 million, respectively).
Interest Rate Swaps
ITC entered into forward-starting interest rate swaps to manage the interest rate risk associated with planned borrowings. The swaps, which had a combined notional value of US$450 million, were terminated in September 2022 with the issuance of US$600 million senior notes and realized gains of $52 million (US$39 million) were recognized in other comprehensive income, which will be reclassified to earnings as a component of interest expense over five years.
Cross-Currency Interest Rate Swaps
In May 2022, the Corporation entered into cross-currency interest rate swaps with a 7-year term to effectively convert its $500 million, 4.43% unsecured senior notes to US$391 million, 4.34% debt (Note 7). The Corporation designated this notional U.S. debt as an effective hedge of its foreign net investments and unrealized gains and losses associated with exchange rate fluctuations on the notional U.S. debt are recognized in other comprehensive income, consistent with the translation adjustment related to the net investments. Other changes in the fair value of the swaps are also recognized in other comprehensive income but are excluded from the assessment of hedge effectiveness. Fair value is measured using a discounted cash flow method based on SOFR rates. Unrealized losses of $14 million and $26 million were recorded in other comprehensive income for the three and nine months ended September 30, 2022, respectively.
| 17 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Notes to Condensed Consolidated Interim Financial Statements (Unaudited) | ||
| --- | ||
| For the three and nine months ended September 30, 2022 and 2021 | ||
| --- |
- FAIR VALUE OF FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (cont'd)
Other Investments
UNS Energy holds investments in money market accounts, and ITC and Central Hudson hold investments in trust associated with supplemental retirement benefit plans for select employees, which include mutual funds and money market accounts. These investments are recorded at fair value based on quoted market prices in active markets. Gains and losses are recognized in other income, net. During the three and nine months ended September 30, 2022 losses on these funds of $2 million and $11 million, respectively, were recognized in other income, net (three and nine months ended September 30, 2021 - losses of $2 million and gains of $4 million, respectively).
Recurring Fair Value Measures
The following table presents assets and liabilities that are accounted for at fair value on a recurring basis.
| ($ millions) | Level 1 (1) | Level 2 (1) | Level 3 (1) | Total |
|---|---|---|---|---|
| As at September 30, 2022 | ||||
| Assets | ||||
| Energy contracts subject to regulatory deferral (2) (3) | — | 250 | — | 250 |
| Energy contracts not subject to regulatory deferral (2) | — | 27 | — | 27 |
| Other investments (4) | 241 | — | — | 241 |
| 241 | 277 | — | 518 | |
| Liabilities | ||||
| Energy contracts subject to regulatory deferral (3) (5) | — | (59) | — | (59) |
| Energy contracts not subject to regulatory deferral (5) | — | (14) | — | (14) |
| Foreign exchange contracts, total return and cross-currency interest rate swaps (5) | — | (41) | — | (41) |
| — | (114) | — | (114) | |
| As at December 31, 2021 | ||||
| Assets | ||||
| Energy contracts subject to regulatory deferral (2) (3) | — | 78 | — | 78 |
| Energy contracts not subject to regulatory deferral (2) | — | 16 | — | 16 |
| Foreign exchange contracts, total return, and interest rate swaps (2) | 23 | 2 | — | 25 |
| Other investments (4) | 137 | — | — | 137 |
| 160 | 96 | — | 256 | |
| Liabilities | ||||
| Energy contracts subject to regulatory deferral (3) (5) | — | (46) | — | (46) |
| Energy contracts not subject to regulatory deferral (5) | — | (3) | — | (3) |
| — | (49) | — | (49) |
(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.
(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 cash and cash equivalents and other assets
(5)Included in accounts payable and other current liabilities or other liabilities
| 18 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Notes to Condensed Consolidated Interim Financial Statements (Unaudited) | ||
| --- | ||
| For the three and nine months ended September 30, 2022 and 2021 | ||
| --- |
- FAIR VALUE OF FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (cont'd)
Energy Contracts
The Corporation has elected gross presentation for its derivative contracts under master netting agreements and collateral positions, which apply only to its energy contracts. The following table presents the potential offset of counterparty netting.
| Gross Amount | Counterparty | |||
|---|---|---|---|---|
| Recognized in | Netting of | Cash Collateral | ||
| ($ millions) | Balance Sheet | Energy Contracts | Received/Posted | Net Amount |
| As at September 30, 2022 | ||||
| Derivative assets | 277 | 33 | 52 | 192 |
| Derivative liabilities | (73) | (33) | — | (40) |
| As at December 31, 2021 | ||||
| Derivative assets | 94 | 25 | 7 | 62 |
| Derivative liabilities | (49) | (25) | — | (24) |
Volume of Derivative Activity
As at September 30, 2022, 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 | ||
|---|---|---|
| September 30, | December 31, | |
| 2022 | 2021 | |
| Energy contracts subject to regulatory deferral (1) | ||
| Electricity swap contracts (GWh) | 663 | 509 |
| Electricity power purchase contracts (GWh) | 122 | 731 |
| Gas swap contracts (PJ) | 175 | 151 |
| Gas supply contract premiums (PJ) | 184 | 144 |
| Energy contracts not subject to regulatory deferral (1) | ||
| Wholesale trading contracts (GWh) | 3,211 | 1,886 |
| Gas swap contracts (PJ) | 38 | 29 |
(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 70% of its revenue is derived from three customers. The customers have investment-grade credit ratings and credit risk is further managed by MISO 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. Credit risk is managed by obtaining from the retailers either a cash deposit, letter of credit, an investment-grade credit rating, 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 managed 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.
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 $63 million as at September 30, 2022 (December 31, 2021 - $59 million).
| 19 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Notes to Condensed Consolidated Interim Financial Statements (Unaudited) | ||
| --- | ||
| For the three and nine months ended September 30, 2022 and 2021 | ||
| --- |
- FAIR VALUE OF FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (cont'd)
Hedge of Foreign Net Investments
The reporting currency of ITC, UNS Energy, Central Hudson, Caribbean Utilities, FortisTCI, Fortis Belize Limited (formerly Belize Electric Company Limited), and Belize Electricity is, or is pegged to, the U.S. dollar. The earnings and cash flow from, and net investments in, these entities are exposed to fluctuations in the U.S. dollar-to-Canadian dollar exchange rate. The Corporation has limited this exposure through hedging.
As at September 30, 2022, US$2.9 billion (December 31, 2021 - US$2.2 billion) of corporately issued U.S. dollar-denominated long-term debt has been designated as an effective hedge of net investments, leaving approximately US$10.6 billion (December 31, 2021 - US$10.8 billion) 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 September 30, 2022, the carrying value of long-term debt, including current portion, was $28.7 billion (December 31, 2021 - $25.5 billion) compared to an estimated fair value of $25.8 billion (December 31, 2021 - $28.8 billion).
- COMMITMENTS AND CONTINGENCIES
Commitments
There were no material changes in commitments from that disclosed in the Corporation's 2021 Annual Financial Statements except that in 2022, FortisBC Energy signed new long-term biomethane purchase agreements to acquire renewable natural gas. The 20-year agreements allow FortisBC Energy to purchase a maximum annual volume of 9.3 PJs of renewable natural gas and has increased gas purchase obligations from those disclosed as at December 31, 2021 as follows.
| As at September 30, 2022<br><br>($ millions) | Total | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Thereafter |
|---|---|---|---|---|---|---|---|
| Gas purchase obligations | 2,723 | 18 | 58 | 106 | 151 | 151 | 2,239 |
Contingencies
In April 2013, FortisBC Holdings Inc. ("FHI") and Fortis were named as defendants in an action in the British Columbia Supreme Court 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 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 2016, the Federal Court dismissed the Band's application for judicial review of the ministerial consent. In 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.
| 20 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|
Document
Exhibit 99.3
| Interim Management Discussion and Analysis | |||
|---|---|---|---|
| Contents | |||
| --- | --- | --- | --- |
| About Fortis | 1 | Liquidity and Capital Resources | 12 |
| Key Developments | 1 | Cash Flow Requirements | 12 |
| Performance at a Glance | 2 | Cash Flow Summary | 13 |
| Business Unit Performance | 5 | Contractual Obligations | 15 |
| ITC | 5 | Capital Structure and Credit Ratings | 15 |
| UNS Energy | 6 | Capital Plan | 16 |
| Central Hudson | 6 | Business Risks | 18 |
| FortisBC Energy | 7 | Accounting Matters | 18 |
| FortisAlberta | 7 | Financial Instruments | 18 |
| FortisBC Electric | 8 | Long-Term Debt and Other | 18 |
| Other Electric | 8 | Derivatives | 18 |
| Energy Infrastructure | 8 | Summary of Quarterly Results | 19 |
| Corporate and Other | 9 | Related-Party and Inter-Company Transactions | 20 |
| Non-U.S. GAAP Financial Measures | 9 | Outlook | 20 |
| Focus on Sustainability | 10 | Forward-Looking Information | 21 |
| Regulatory Highlights | 10 | Glossary | 22 |
| Financial Position | 11 | Condensed Consolidated Interim Financial Statements (Unaudited) | F-1 |
Dated October 27, 2022
This Interim MD&A has been prepared in accordance with National Instrument 51-102 - Continuous Disclosure Obligations. It should be read in conjunction with the Interim Financial Statements, the 2021 Annual Financial Statements and the 2021 Annual MD&A and is subject to the cautionary statement and disclaimer provided under "Forward-Looking Information" on page 21. Further information about Fortis, including its Annual Information Form filed on SEDAR, can be accessed at www.fortisinc.com, www.sedar.com, or www.sec.gov.
Financial information herein has been prepared in accordance with U.S. GAAP (except for indicated Non-U.S. GAAP Financial Measures) and, unless otherwise specified, is presented in Canadian dollars based, as applicable, on the following U.S. dollar-to-Canadian dollar exchange rates: (i) average of 1.31 and 1.26 for the quarters ended September 30, 2022 and 2021, respectively; (ii) average of 1.28 and 1.25 year-to-date September 30, 2022 and 2021, respectively; (iii) 1.38 and 1.27 as at September 30, 2022 and 2021, respectively; (iv) 1.26 as at December 31, 2021; and (v) 1.30 for all forecast periods. Certain terms used in this Interim MD&A are defined in the "Glossary" on page 22.
ABOUT FORTIS
Fortis (TSX/NYSE: FTS) is a well-diversified leader in the North American regulated electric and gas utility industry, with 2021 revenue of $9.4 billion and total assets of $64 billion as at September 30, 2022. The Corporation's 9,100 employees serve 3.4 million utility customers in five Canadian provinces, nine U.S. states and three Caribbean countries.
For additional information on the Corporation's operations, reportable segments and strategy, refer to the "About Fortis" section of the 2021 Annual MD&A and Note 1 to the Interim Financial Statements.
KEY DEVELOPMENTS
New Five-Year Capital Plan
The Corporation's new 2023-2027 Capital Plan totals $22.3 billion, the largest in the Corporation’s history, and is $2.3 billion higher than the previous five-year plan. The increase is driven by organic growth, largely reflecting regional transmission projects associated with the MISO LRTP at ITC, additional cleaner energy investments in Arizona to support TEP's exit from coal by 2032, and enhancements to distribution reliability and capacity, as well as investments to support customer growth, across the Corporation's regulated utilities. Approximately $500 million of the increase is driven by a higher assumed U.S.-to-Canadian dollar exchange rate over the five-year period.
See "Capital Plan" on page 16 for further information.
| 1 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Interim Management Discussion and Analysis | ||
| --- |
Regulatory Updates
ITC
In August 2022, the D.C. Circuit Court issued a decision vacating certain FERC orders that had established the methodology for setting the base ROE for transmission owners operating in the MISO region, including ITC. The court has remanded the matter to FERC for further process, the timing and outcome of which is unknown.
In May 2022, the Iowa Coalition for Affordable Transmission filed a complaint with FERC requesting that ITC Midwest's common equity component of capital structure be reduced from 60% to 53%. We believe the complaint is without merit. The timing and outcome of this proceeding is unknown.
TEP
In June 2022, TEP filed a general rate application with the ACC requesting new rates effective September 1, 2023 using a December 31, 2021 test year. The application includes a US$136 million net increase in non-fuel and fuel-related revenue, as well as proposals to eliminate certain adjustor mechanisms, and modify an existing adjustor to provide more timely recovery of clean energy investments. The timing and outcome of this proceeding is unknown.
FortisAlberta
In July 2022, the AUC issued a decision largely accepting FortisAlberta's COS application and directed FortisAlberta to update and refile its 2023 revenue requirement, which was filed in September 2022. A final decision on this filing is expected in the fourth quarter of 2022.
See "Regulatory Highlights" on page 10 for further information on these regulatory developments.
Inflation Reduction Act of 2022
In August 2022, the IRA was passed into U.S. law which included, among other items, a focus on energy security and climate change programs. With incentives and clean energy tax credits encouraging investments in clean energy, energy storage, electric vehicles and manufacturing, the IRA aligns with Fortis' cleaner energy goals and provides an opportunity for continued investment in a cleaner energy future.
The legislation will be funded, in part, by the introduction of a new 15% corporate alternative minimum income tax, effective for tax years beginning after December 31, 2022. While this tax is expected to be applicable to Fortis, the Corporation does not currently expect it to have a material impact on its financial results, Operating Cash Flow or credit ratings.
| PERFORMANCE AT A GLANCE | |||||
|---|---|---|---|---|---|
| Key Financial Metrics | |||||
| Periods ended September 30 | Year-to-Date | ||||
| ( millions, except as indicated) | 2021 | Variance | 2022 | 2021 | Variance |
| Revenue | 2,196 | 357 | 7,875 | 6,865 | 1,010 |
| Common Equity Earnings | |||||
| Actual | 295 | 31 | 960 | 903 | 57 |
| Adjusted (1) | 300 | 41 | 982 | 919 | 63 |
| Basic EPS () | |||||
| Actual | 0.63 | 0.05 | 2.01 | 1.92 | 0.09 |
| Adjusted (1) | 0.64 | 0.07 | 2.06 | 1.96 | 0.10 |
| Dividends paid per common share () | 0.505 | 0.03 | 1.605 | 1.515 | 0.09 |
| Weighted average number of common shares outstanding (# millions) | 472.0 | 7.4 | 477.7 | 470.0 | 7.7 |
| Operating Cash Flow | 711 | (78) | 2,205 | 2,190 | 15 |
| Capital Expenditures (1) | 835 | 157 | 2,886 | 2,555 | 331 |
All values are in US Dollars.
(1)See "Non-U.S. GAAP Financial Measures" on page 9
Revenue
The increase in revenue for the quarter and year-to-date periods was due primarily to: (i) higher flow-through costs in customer rates, driven by higher commodity prices; (ii) Rate Base growth; (iii) higher retail and wholesale electricity sales, as well as transmission revenue, at UNS Energy; and (iv) favourable foreign exchange of $54 million and $100 million, respectively.
| 2 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Interim Management Discussion and Analysis | ||
| --- |
Earnings and EPS
Common Equity Earnings increased by $31 million in comparison to the third quarter of 2021. The increase was driven by: (i) Rate Base growth, mainly at ITC; (ii) higher retail electricity sales, transmission revenue and earnings associated with the Oso Grande generating facility in Arizona; (iii) higher earnings from the energy infrastructure segment mainly due to mark-to-market accounting of natural gas derivatives and higher hydroelectric production in Belize; and (iv) the impact of new customer rates and the timing of operating costs at Central Hudson.
Growth in earnings was tempered by the timing of expenses in Alberta and a favourable adjustment recognized in 2021 related to interest rate swaps at ITC. Results for the third quarter of 2022 were also impacted by significant items at ITC, including costs associated with the suspension of the Lake Erie Connector project, and the revaluation of deferred income tax assets due to a reduction in the corporate income tax rate in the state of Iowa. The impact of mark-to-market losses associated with hedging activities was more than offset by lower stock-based compensation costs and the translation of U.S. dollar-denominated subsidiary earnings at the higher U.S.-to-Canadian dollar foreign exchange rate.
On a year-to-date basis, Common Equity Earnings increased by $57 million. The increase was due to the same factors discussed above for the quarter but also reflected higher long-term wholesale electricity sales at UNS Energy. Losses on investments that support retirement benefits at UNS Energy and ITC, and higher operating costs at Central Hudson related to the implementation of a new customer information system unfavourably impacted results. The operation of the Oso Grande generating facility did not impact year-to-date earnings as compared to 2021.
In addition to the above-noted items impacting earnings, the change in EPS for the quarter and year-to-date periods reflected an increase in the weighted average number of common shares outstanding, largely associated with the Corporation's DRIP.
For the quarter and year-to-date periods: (i) Adjusted Common Equity Earnings increased by $41 million and $63 million, respectively; and (ii) Adjusted Basic EPS increased by $0.07 and $0.10, respectively. Refer to "Non-U.S. GAAP Financial Measures" on page 9 for a reconciliation of these measures. The changes in Adjusted Basic EPS for the quarter and year-to-date periods are illustrated in the following charts.
(1) Includes UNS Energy and Central Hudson. Reflects higher earnings at UNS Energy, due to higher transmission revenue and retail electricity sales, as well as higher earnings associated with the recognition of PTCs related to the Oso Grande generating facility, partially offset by higher costs associated with Rate Base growth not yet included in customer rates. Also reflects higher earnings at Central Hudson driven by new customer rates due to the conclusion of the general rate application in 2021 and the timing of operating costs
(2) Reflects higher hydroelectric production in Belize associated with rainfall levels, and lower realized losses on natural gas contracts at Aitken Creek reflecting market conditions
(3) Reflects Rate Base growth and lower non-recoverable stock-based compensation costs, partially offset by a favourable adjustment related to interest rate swaps in 2021
(4) Average foreign exchange rate of 1.31 in 2022 compared to 1.26 in 2021
(5) Primarily reflects market conditions, including mark-to-market losses on total return swaps and foreign exchange contracts, as well as higher finance charges
(6) Weighted average shares of 479.4 million in 2022 compared to 472.0 million in 2021
| 3 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Interim Management Discussion and Analysis | ||
| --- |
(1) Includes UNS Energy and Central Hudson. Reflects higher earnings at UNS Energy, due to higher transmission revenue, long-term wholesale electricity sales and retail electricity sales, partially offset by losses on investments that support retirement benefits and Rate Base growth not yet included in customer rates. Also reflects higher earnings at Central Hudson, driven by new customer rates due to the conclusion of the general rate application in 2021 and the timing of operating expenses, partially offset by higher operating costs associated with the implementation of a new customer information system
(2) Reflects Rate Base growth and lower non-recoverable stock-based compensation costs, partially offset by a favourable adjustment related to interest rate swaps in 2021 and losses on investments that support retirement benefits
(3) Includes FortisBC Energy, FortisAlberta and FortisBC Electric. Largely reflects Rate Base growth, partially offset by the timing of expenses at FortisAlberta
(4) Reflects higher hydroelectric production in Belize associated with rainfall levels, and lower realized losses on natural gas contracts at Aitken Creek reflecting market conditions
(5) Primarily reflects Rate Base growth and higher electricity sales
(6) Average foreign exchange rate of 1.28 in 2022 compared to 1.25 in 2021
(7) Primarily reflects market conditions, including mark-to-market losses on total return swaps and foreign exchange contracts, as well as higher finance charges
(8) Weighted average shares of 477.7 million in 2022 compared to 470.0 million in 2021
Dividends and TSR
Fortis paid a dividend of $0.535 in the third quarter of 2022, up 5.9% from the third quarter of 2021.
In September 2022, the Corporation declared a fourth quarter common share dividend of $0.565, up 5.6% from its third quarter common share dividend. This marked the Corporation's 49th consecutive year of dividend increases.
Fortis is targeting annual dividend growth of approximately 4-6% through 2027. See "Outlook" on page 20.
Growth of dividends and the market price of the Corporation's common shares have together yielded the following TSR.
| TSR (1) (%) | 1-Year | 5-Year | 10-Year | 20-Year |
|---|---|---|---|---|
| Fortis | (3.2) | 7.1 | 8.5 | 11.4 |
(1)Annualized TSR per Bloomberg as at September 30, 2022
Operating Cash Flow
Operating Cash Flow for the third quarter of 2022 was $78 million lower than the same period in 2021 due to the timing of flow-through of commodity costs in customer rates at Central Hudson and FortisBC Energy, as well as higher natural gas purchase costs and related inventory levels at Aiken Creek. The decrease was partially offset by proceeds received at ITC upon the settlement of interest rate swaps.
On a year-to-date basis, Operating Cash Flow was $15 million higher than the same period in 2021. The increase was due to (i) higher cash earnings, reflecting Rate Base growth and higher long-term wholesale electricity sales and transmission revenue in Arizona; (ii) collateral deposits received at UNS Energy related to derivative energy contracts; (iii) proceeds received at ITC upon the settlement of interest rate swaps; and (iv) the higher U.S.-to-Canadian dollar exchange rate. The timing of flow-through of commodity costs, as well as transmission payments at FortisAlberta, in customer rates, also favourably impacted Operating Cash Flow on a year-to-date basis. The increase was partially offset by higher natural gas purchase costs and inventory levels at Aitken Creek, discussed above, as well as storm restoration costs incurred in the first quarter of 2022, to be recovered in future customer rates, and higher accounts receivable at Central Hudson.
Capital Expenditures
Capital Expenditures were approximately $2.9 billion year-to-date September 2022, representing 73% of the Corporation's annual $4.0 billion Capital Plan, and up $0.3 billion compared to year-to-date September 2021.
| 4 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Interim Management Discussion and Analysis | ||
| --- |
While global supply chain constraints and rising inflation remain issues of potential concern that continue to evolve, the Corporation does not expect a material impact on its 2022 or 2023-2027 Capital Plan, although certain planned expenditures may shift within the five years. See "Capital Plan" on page 16. The Corporation continues to proactively work to mitigate supply chain constraints by identifying high priority materials and consolidating buying power to improve outcomes, increasing inventory levels, and closely working with suppliers to ensure material availability.
Capital Expenditures and Capital Plan reflect Non-U.S. GAAP Financial Measures. Refer to "Non-U.S. GAAP Financial Measures" on page 9 and the "Glossary" on page 22.
| BUSINESS UNIT PERFORMANCE | ||||||||
|---|---|---|---|---|---|---|---|---|
| Common Equity Earnings | Quarter | Year-to-Date | ||||||
| Periods ended September 30 | Variance | Variance | ||||||
| ($ millions) | 2022 | 2021 | FX (1) | Other | 2022 | 2021 | FX (1) | Other |
| Regulated Utilities | ||||||||
| ITC | 105 | 117 | 3 | (15) | 328 | 323 | 7 | (2) |
| UNS Energy | 163 | 131 | 5 | 27 | 283 | 259 | 9 | 15 |
| Central Hudson | 24 | 9 | 1 | 14 | 66 | 54 | 1 | 11 |
| FortisBC Energy | (17) | (19) | — | 2 | 119 | 107 | — | 12 |
| FortisAlberta | 46 | 47 | — | (1) | 117 | 118 | — | (1) |
| FortisBC Electric | 13 | 12 | — | 1 | 50 | 45 | — | 5 |
| Other Electric (2) | 35 | 35 | 1 | (1) | 94 | 89 | 1 | 4 |
| 369 | 332 | 10 | 27 | 1,057 | 995 | 18 | 44 | |
| Non-Regulated | ||||||||
| Energy Infrastructure (3) | 10 | (11) | — | 21 | 23 | (2) | — | 25 |
| Corporate and Other (4) | (53) | (26) | (2) | (25) | (120) | (90) | (2) | (28) |
| Common Equity Earnings | 326 | 295 | 8 | 23 | 960 | 903 | 16 | 41 |
(1) The reporting currency of ITC, UNS Energy, Central Hudson, Caribbean Utilities, FortisTCI and Fortis Belize (formerly known as BECOL) is the U.S. dollar. The reporting currency of Belize Electricity is the Belizean dollar, which is pegged to the U.S. dollar at BZ$2.00=US$1.00. The Corporate and Other segment includes certain transactions denominated in U.S. dollars.
(2) Consists of the utility operations in eastern Canada and the Caribbean: Newfoundland Power; Maritime Electric; FortisOntario; Wataynikaneyap Power; Caribbean Utilities; FortisTCI; and Belize Electricity
(3) Primarily consists of long-term contracted generation assets in Belize and Aitken Creek in British Columbia
(4) Includes Fortis net corporate expenses and non-regulated holding company expenses
| ITC | Quarter | Year-to-Date | ||||||
|---|---|---|---|---|---|---|---|---|
| Periods ended September 30 | Variance | Variance | ||||||
| ($ millions) | 2022 | 2021 | FX | Other | 2022 | 2021 | FX | Other |
| Revenue (1) | 478 | 429 | 15 | 34 | 1,406 | 1,273 | 30 | 103 |
| Earnings (1) | 105 | 117 | 3 | (15) | 328 | 323 | 7 | (2) |
(1)Revenue represents 100% of ITC. Earnings represent the Corporation's 80.1% controlling ownership interest in ITC and reflect consolidated purchase price accounting adjustments
Revenue
The increase in revenue, net of foreign exchange, for the quarter and year-to-date periods was due primarily to higher flow-through costs in customer rates and Rate Base growth.
Earnings
The decrease in earnings, net of foreign exchange, for the quarter and year-to-date periods was due to costs incurred upon the suspension of the Lake Erie Connector project (see "Capital Plan - Lake Erie Connector Project Update" on page 18), and the revaluation of deferred income tax assets resulting from a reduction in the corporate income tax rate in the state of Iowa. Excluding these items, earnings, net of foreign exchange, for the quarter and year-to-date periods increased by $4 million and $17 million, respectively, reflecting: (i) Rate Base growth; and (ii) a reduction in non-recoverable operating expenses due to lower stock-based compensation costs; partially offset by: (iii) a favourable adjustment related to the amortization of interest rate swaps in the third quarter of 2021; and (iv) on a year-to-date basis, losses on certain investments that support retirement benefits.
| 5 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT | ||||||
|---|---|---|---|---|---|---|---|---|
| Interim Management Discussion and Analysis | ||||||||
| --- | ||||||||
| UNS Energy | Quarter | Year-to-Date | ||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Periods ended September 30 | Variance | Variance | ||||||
| ($ millions, except as indicated) | 2022 | 2021 | FX | Other | 2022 | 2021 | FX | Other |
| Retail electricity sales (GWh) | 3,426 | 3,383 | — | 43 | 8,394 | 8,353 | — | 41 |
| Wholesale electricity sales (GWh) (1) | 1,350 | 1,490 | — | (140) | 4,154 | 4,534 | — | (380) |
| Gas sales (PJ) | 2 | 2 | — | — | 11 | 11 | — | — |
| Revenue | 856 | 716 | 27 | 113 | 2,042 | 1,794 | 49 | 199 |
| Earnings | 163 | 131 | 5 | 27 | 283 | 259 | 9 | 15 |
(1) Primarily short-term wholesale sales
Sales
The increase in retail electricity sales for the quarter and year-to-date periods was due primarily to higher cooling load associated with warmer temperatures in the third quarter of 2022, as well as customer growth.
The decrease in wholesale electricity sales for the quarter and year-to-date periods was driven by lower short-term wholesale electricity sales, partially offset by higher long-term wholesale electricity sales. Revenue from short-term wholesale electricity sales is primarily credited to customers through regulatory deferral mechanisms and, therefore, does not materially impact earnings.
Gas sales were consistent with the comparable periods in 2021.
Revenue
The increase in revenue, net of foreign exchange, for the quarter and year-to-date periods was due primarily to: (i) the recovery of overall higher fuel and non-fuel costs through the normal operation of regulatory mechanisms; (ii) higher revenue from short-term wholesale electricity sales due to favourable pricing; (iii) higher long-term wholesale electricity sales; (iv) higher transmission revenue; and (v) higher retail electricity sales, discussed above. The increase in revenue for the quarter and year-to-date periods was partially offset by lower short-term wholesale electricity sales.
Earnings
The increase in earnings, net of foreign exchange, for the quarter was due primarily to higher transmission revenue and retail electricity sales, discussed above, as well as higher earnings associated with the recognition of PTCs related to the Oso Grande generating facility. The increase in earnings was partially offset by higher costs associated with Rate Base growth not yet reflected in customer rates.
The increase in earnings, net of foreign exchange, for the year-to-date period was due primarily to higher transmission revenue, long-term wholesale electricity sales and retail electricity sales, discussed above. The increase in earnings was partially offset by losses on certain investments that support retirement benefits, as well as higher costs associated with Rate Base growth not yet reflected in customer rates.
| Central Hudson | Quarter | Year-to-Date | ||||||
|---|---|---|---|---|---|---|---|---|
| Periods ended September 30 | Variance | Variance | ||||||
| ($ millions, except as indicated) | 2022 | 2021 | FX | Other | 2022 | 2021 | FX | Other |
| Electricity sales (GWh) | 1,327 | 1,356 | — | (29) | 3,844 | 3,797 | — | 47 |
| Gas sales (PJ) | 3 | 3 | — | — | 17 | 17 | — | — |
| Revenue | 273 | 225 | 8 | 40 | 929 | 717 | 14 | 198 |
| Earnings | 24 | 9 | 1 | 14 | 66 | 54 | 1 | 11 |
Sales
The decrease in electricity sales for the quarter was due primarily to lower average consumption by residential customers. The increase in electricity sales year to date was due to overall higher average consumption by commercial and industrial customers.
Gas sales were consistent with the comparable periods in 2021.
Changes in electricity and gas sales at Central Hudson are subject to regulatory revenue decoupling mechanisms and, therefore, do not materially impact revenue and earnings.
| 6 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Interim Management Discussion and Analysis | ||
| --- |
Revenue
The increase in revenue, net of foreign exchange, for the quarter and year-to-date periods was due primarily to: (i) the flow through of higher energy supply costs driven by commodity prices; and (ii) an increase in gas and electricity delivery rates, reflecting a return on increased Rate Base assets and the recovery of higher operating and finance expenses, associated with the conclusion of Central Hudson's general rate application in the fourth quarter of 2021.
Earnings
The increase in earnings, net of foreign exchange, for the quarter and year-to-date periods was due primarily to new customer rates approved in Central Hudson's general rate application, discussed above, as well as the timing of operating costs. The increase year to date was partially offset by higher operating expenses associated with the implementation of a new customer information system.
| FortisBC Energy | ||||||
|---|---|---|---|---|---|---|
| Periods ended September 30 | Quarter | Year-to-Date | ||||
| ($ millions, except as indicated) | 2022 | 2021 | Variance | 2022 | 2021 | Variance |
| Gas sales (PJ) | 28 | 32 | (4) | 156 | 154 | 2 |
| Revenue | 269 | 220 | 49 | 1,359 | 1,123 | 236 |
| Earnings | (17) | (19) | 2 | 119 | 107 | 12 |
Sales
The decrease in gas sales for the quarter was due primarily to lower average consumption by transportation customers.
The increase in gas sales year to date was due primarily to higher average consumption by residential and commercial customers, partially offset by lower average consumption by transportation customers.
Revenue
The increase in revenue for the quarter and year-to-date periods was due primarily to a higher cost of natural gas recovered from customers and Rate Base growth, partially offset by the normal operation of regulatory deferrals.
Earnings
The increase in earnings for the quarter and year-to-date periods was due primarily to Rate Base growth, as well as the timing of expenditures for the year-to-date period.
FortisBC Energy earns approximately the same margin regardless of whether a customer contracts for the purchase and delivery of natural gas or only for delivery. Due to regulatory deferral mechanisms, changes in consumption levels and commodity costs do not materially impact earnings.
| FortisAlberta | ||||||
|---|---|---|---|---|---|---|
| Periods ended September 30 | Quarter | Year-to-Date | ||||
| ($ millions, except as indicated) | 2022 | 2021 | Variance | 2022 | 2021 | Variance |
| Electricity deliveries (GWh) | 4,345 | 4,307 | 38 | 12,723 | 12,496 | 227 |
| Revenue | 175 | 168 | 7 | 511 | 488 | 23 |
| Earnings | 46 | 47 | (1) | 117 | 118 | (1) |
Deliveries
The increase in electricity deliveries for the quarter and year-to-date periods was due to higher load from industrial customers, higher average consumption by commercial customers, and customer additions. The increase was partially offset by lower average consumption by residential customers due to milder weather in 2022 as compared to the same periods in 2021.
As approximately 85% of FortisAlberta's 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. Significant variations in weather conditions, however, can impact revenue and earnings.
Revenue
The increase in revenue for the quarter and year-to-date periods was due to Rate Base growth.
Earnings
The decrease in earnings for the quarter and year-to-date periods was due primarily to the timing of expenses, as well as a higher effective income tax rate, partially offset by Rate Base growth.
| 7 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT | ||||
|---|---|---|---|---|---|---|
| Interim Management Discussion and Analysis | ||||||
| --- | ||||||
| FortisBC Electric | ||||||
| --- | --- | --- | --- | --- | --- | --- |
| Periods ended September 30 | Quarter | Year-to-Date | ||||
| ($ millions, except as indicated) | 2022 | 2021 | Variance | 2022 | 2021 | Variance |
| Electricity sales (GWh) | 845 | 829 | 16 | 2,575 | 2,533 | 42 |
| Revenue | 114 | 107 | 7 | 351 | 335 | 16 |
| Earnings | 13 | 12 | 1 | 50 | 45 | 5 |
Sales
The increase in electricity sales for the quarter and year-to-date periods was due primarily to higher average consumption by industrial customers, partially offset by lower average consumption by commercial customers. Electricity sales for the quarter were also favourably impacted by higher average consumption by residential customers due to warmer temperatures as compared to the same period in 2021.
Revenue
The increase in revenue for the quarter and year-to-date periods was due to higher electricity sales, an increase in third-party contract work, Rate Base growth, and higher surplus power sales, partially offset by the normal operation of regulatory deferrals.
Earnings
The increase in earnings for the quarter and year-to-date periods was due primarily to Rate Base growth, as well as the timing of expenditures for the year-to-date period.
Due to regulatory deferral mechanisms, changes in consumption levels do not materially impact earnings.
| Other Electric | Quarter | Year-to-Date | ||||||
|---|---|---|---|---|---|---|---|---|
| Periods ended September 30 | Variance | Variance | ||||||
| ($ millions, except as indicated) | 2022 | 2021 | FX | Other | 2022 | 2021 | FX | Other |
| Electricity sales (GWh) | 1,826 | 1,811 | — | 15 | 7,027 | 6,817 | — | 210 |
| Revenue | 361 | 331 | 4 | 26 | 1,204 | 1,097 | 7 | 100 |
| Earnings | 35 | 35 | 1 | (1) | 94 | 89 | 1 | 4 |
Sales
The increase in electricity sales for the quarter and year-to-date periods was due to overall higher average consumption by residential and commercial customers in Eastern Canada, as well as higher sales in the Caribbean, due to increased tourism-related activities.
Revenue
The increase in revenue, net of foreign exchange, for the quarter and year-to-date periods was due primarily to the flow through of higher energy supply costs and higher electricity sales, discussed above. The normal operation of regulatory mechanisms at Newfoundland Power also favourably impacted revenue year to date.
Earnings
The decrease in earnings, net of foreign exchange, for the quarter was due to lower equity income from Belize Electricity.
The increase in earnings, net of foreign exchange, year to date was due primarily to Rate Base growth and higher electricity sales, partially offset by lower equity income from Belize Electricity.
| Energy Infrastructure | ||||||
|---|---|---|---|---|---|---|
| Periods ended September 30 | Quarter | Year-to-Date | ||||
| ($ millions, except as indicated) | 2022 | 2021 | Variance | 2022 | 2021 | Variance |
| Electricity sales (GWh) | 88 | 55 | 33 | 142 | 134 | 8 |
| Revenue | 27 | — | 27 | 73 | 38 | 35 |
| Earnings | 10 | (11) | 21 | 23 | (2) | 25 |
Sales
The increase in electricity sales for the quarter and year-to-date periods reflected an increase in hydroelectric production in Belize associated with higher rainfall levels.
| 8 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Interim Management Discussion and Analysis | ||
| --- |
Revenue and Earnings
The increase in revenue and earnings for the quarter and year-to-date periods was due primarily to the favourable impact of mark-to-market accounting of natural gas derivatives at Aitken Creek, which resulted in unrealized gains of $4 million in the third quarter of 2022 compared to unrealized losses of $5 million for the same period in 2021, and unrealized losses of $3 million year to date compared to $16 million for the same period in 2021.
Excluding the impact of mark-to-market accounting, revenue and earnings for the quarter increased by $14 million and $12 million, respectively, and for the year-to-date period increased by $18 million and $12 million, respectively. The increases were due to higher hydroelectric production in Belize and lower realized losses on natural gas contracts at Aitken Creek. Natural gas contracts are occasionally settled in consideration of market prices and favourable forward curves, with realized losses upon settlement to be offset by incremental value to be realized in future periods. Higher margins and volumes of gas sold at Aitken Creek also favourably impacted revenue and earnings year to date.
Aitken Creek is subject to commodity price risk, as it purchases and holds natural gas in storage to earn a profit margin from its ultimate sale. Aitken Creek mitigates this risk by using derivatives to materially lock in the profit margin that will be realized upon the sale of natural gas. The fair value accounting of these derivatives creates timing differences and the resultant earnings volatility can be significant.
| Corporate and Other | ||||||||
|---|---|---|---|---|---|---|---|---|
| Periods ended September 30 | Quarter | Year-to-Date | ||||||
| Variance | Variance | |||||||
| ($ millions) | 2022 | 2021 | FX | Other | 2022 | 2021 | FX | Other |
| Net expenses | (53) | (26) | (2) | (25) | (120) | (90) | (2) | (28) |
The increase in net expenses for the quarter and year-to-date periods, net of foreign exchange, largely reflected market conditions, including mark-to-market losses on total return swaps and foreign exchange contracts, as well as higher finance charges. A lower income tax recovery also contributed to results. The increase in net expenses was partially offset by a reduction in operating expenses reflecting lower stock-based compensation costs.
Results for the Corporate segment reflected the impact of hedging activities associated with share-based compensation and foreign exchange, and therefore can fluctuate depending on market conditions. On a consolidated basis, these impacts have been more than offset by lower stock-based compensation costs at other segments, particularly at ITC, and the translation of U.S. dollar-denominated subsidiary earnings at the higher U.S.-to-Canadian dollar foreign exchange rate.
NON-U.S. GAAP FINANCIAL MEASURES
Adjusted Common Equity Earnings, Adjusted Basic EPS and Capital Expenditures are Non-U.S. GAAP Financial Measures and may not be comparable with similar measures used by other entities. They are presented because management and external stakeholders use them in evaluating the Corporation's financial performance and prospects.
Net earnings attributable to common equity shareholders (i.e., Common Equity Earnings) and basic EPS are the most directly comparable U.S. GAAP measures to Adjusted Common Equity Earnings and Adjusted Basic EPS, respectively. These adjusted measures reflect the removal of items that management excludes in its key decision-making processes and evaluation of operating results.
Capital Expenditures include additions to property, plant and equipment and additions to intangible assets, as shown on the condensed consolidated statements of cash flows. It also includes Fortis' 39% share of capital spending for the Wataynikaneyap Transmission Power Project, consistent with Fortis' evaluation of operating results and its role as project manager during the construction of this Major Capital Project.
| 9 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT | ||||
|---|---|---|---|---|---|---|
| Interim Management Discussion and Analysis | ||||||
| --- | ||||||
| Non-U.S. GAAP Reconciliation | ||||||
| --- | --- | --- | --- | --- | --- | --- |
| Periods ended September 30 | Quarter | Year-to-Date | ||||
| ($ millions, except as indicated) | 2022 | 2021 | Variance | 2022 | 2021 | Variance |
| Adjusted Common Equity Earnings and Adjusted Basic EPS | ||||||
| Common Equity Earnings | 326 | 295 | 31 | 960 | 903 | 57 |
| Adjusting items: | ||||||
| Unrealized (gain) loss on mark-to-market of derivatives (1) | (4) | 5 | (9) | 3 | 16 | (13) |
| Lake Erie Connector project suspension costs (2) | 10 | — | 10 | 10 | — | 10 |
| Revaluation of deferred income tax assets(3) | 9 | — | 9 | 9 | — | 9 |
| Adjusted Common Equity Earnings | 341 | 300 | 41 | 982 | 919 | 63 |
| Adjusted Basic EPS ($) | 0.71 | 0.64 | 0.07 | 2.06 | 1.96 | 0.10 |
| Capital Expenditures | ||||||
| Additions to property, plant and equipment | 907 | 777 | 130 | 2,600 | 2,292 | 308 |
| Additions to intangible assets | 44 | 41 | 3 | 151 | 120 | 31 |
| Adjusting item: | ||||||
| Wataynikaneyap Transmission Power Project (4) | 41 | 17 | 24 | 135 | 143 | (8) |
| Capital Expenditures | 992 | 835 | 157 | 2,886 | 2,555 | 331 |
(1) Represents timing differences related to the accounting of natural gas derivatives at Aitken Creek, net of income tax (expense) recovery of $(2) million and $1 million for the three and nine months ended September 30, 2022, respectively (income tax recovery of $2 million and $6 million for the three and nine months ended September 30, 2021, respectively), included in the Energy Infrastructure segment
(2)Represents costs incurred upon the suspension of the Lake Erie Connector project, net of income tax recovery of $4 million for the three and nine months ended September 30, 2022, included in the ITC segment. See "Capital Plan - Lake Erie Connector Project Update" on page 18.
(3)Represents the revaluation of deferred income tax assets resulting from the reduction in the corporate income tax rate in the state of Iowa, included in the ITC segment
(4)Represents Fortis' 39% share of capital spending for the Wataynikaneyap Transmission Power Project, included in the Other Electric segment
FOCUS ON SUSTAINABILITY
Fortis' focus on sustainability is outlined in its 2021 Annual MD&A. During 2022, the Corporation has continued to advance work on a range of important sustainability initiatives. In March 2022, the Corporation made progress on its commitment as a TCFD supporter, with the release of its first TCFD and Climate Assessment Report. As well, in May 2022, Fortis set a 2050 net-zero direct GHG emissions target. The establishment of this additional target reinforces the Corporation's commitment to decarbonize over the long-term, while preserving customer reliability and affordability. Consistent with our pathway to net-zero, in June 2022, TEP retired 170-MW of coal-fired generation through the planned closure of the San Juan Generating Station.
In May 2022, the Corporation amended its unsecured $1.3 billion revolving term committed credit facility agreement to include, amongst other things, the establishment of a sustainability-linked loan structure based on the Corporation's achievement of targets for diversity on the Board of Directors and Scope 1 GHG emissions for 2022 through 2025.
In July 2022, Fortis released its 2022 Sustainability Report, highlighting progress on a number of sustainability priorities, including adding more renewable energy, reducing GHG emissions and improving diversity. The report also provides enhanced information on the Corporation's sustainability strategy, significantly expands the scope of performance indicators, and is fully aligned with applicable Sustainability Accounting Standards Board standards.
REGULATORY HIGHLIGHTS
ITC
ITC Midwest Capital Structure Complaint: In May 2022, the Iowa Coalition for Affordable Transmission filed a complaint with FERC under Section 206 of the Federal Power Act requesting that ITC Midwest's common equity component of capital structure be reduced from 60% to 53%. The complaint alleges that ITC Midwest does not meet FERC's three-part test for authorizing the use of the utility's actual capital structure for rate-making purposes which requires that ITC Midwest: (i) issue its own debt without guarantees; (ii) have its own credit rating; and (iii) have a capital structure within the range of approved structures. We believe the complaint is without merit as it does not demonstrate that ITC Midwest fails to meet FERC's three-part test. ITC Midwest filed a response to the complaint in June 2022. As at September 30, 2022, ITC Midwest has not recorded a regulatory liability related to the complaint. Although the timing and outcome of this proceeding remain unknown, a decrease in ITC Midwest's equity component to 53% would impact Fortis' annual EPS by approximately $0.05.
| 10 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Interim Management Discussion and Analysis | ||
| --- |
MISO Base ROE: In August 2022, the D.C. Circuit Court issued a decision vacating certain FERC orders that had established the methodology for setting the base ROE for transmission owners operating in the MISO region, including ITC. This matter dates back to complaints filed at FERC in 2013 and 2015 challenging the MISO base ROE then in effect. The court has remanded the matter to FERC for further process, the timing and outcome of which is unknown. Although any potential impact to Fortis is uncertain, every 10-basis point change in ROE at ITC impacts Fortis' annual EPS by approximately $0.01.
Transmission Incentives: In 2021, FERC issued a supplemental NOPR on transmission incentives modifying the proposal in the initial NOPR released by FERC in 2020. The supplemental NOPR proposes to eliminate the 50-basis point RTO ROE incentive adder for RTO members that have been members for longer than 3 years. The timeline for FERC to issue a final rule in this proceeding as well as the likely outcome remain unknown.
UNS Energy
TEP General Rate Application: In June 2022, TEP filed a general rate application with the ACC requesting new rates effective September 1, 2023 using a December 31, 2021 test year. The application reflects a US$136 million net increase in non-fuel and fuel-related revenue, as well as proposals to eliminate certain adjustor mechanisms, and modify an existing adjustor to provide more timely recovery of clean energy investments. The timing and outcome of this proceeding is unknown.
FERC Rate Case: In March 2022, FERC approved the settlement agreement for formula transmission rates at TEP, including an ROE of 9.79%.
PPFAC Mechanism: TEP's PPFAC mechanism allows for the timely recovery or return of purchased power and fuel costs as compared to that collected in customer rates. TEP's purchased power and fuel costs increased in 2021, reflecting higher commodity prices. On April 13, 2022, the ACC approved a rate adjustment to recover a PPFAC balance of US$108 million over an 18-month period.
FortisBC Energy and FortisBC Electric
GCOC Proceeding: In 2021, the BCUC initiated a proceeding including a review of the common equity component of capital structure and the allowed ROE. FortisBC filed evidence with the BCUC in the first quarter of 2022 and the proceeding remains ongoing. The timing and outcome of this proceeding, including the effective date of any change in the cost of capital in 2023, remain unknown.
FortisAlberta
2023 GCOC Proceeding: In March 2022, the AUC issued a decision extending the existing allowed ROE of 8.5% using a 37% equity component of capital structure through 2023.
2023 COS Application: In July 2022, the AUC issued a decision largely accepting the forecast requested in FortisAlberta's COS application. The AUC directed FortisAlberta to update and refile its 2023 revenue requirement, which was filed in September 2022. A final decision on this filing is expected in the fourth quarter of 2022.
FINANCIAL POSITION
| Significant Changes between September 30, 2022 and December 31, 2021 | |||
|---|---|---|---|
| Balance Sheet Account | Increase (Decrease) | ||
| ($ millions) | FX | Other | Explanation |
| Cash and cash equivalents | 9 | 255 | Reflects the timing of debt issuances and the related reinvestment in capital and operating requirements, primarily at UNS Energy. |
| Accounts receivable and other current assets | 73 | 224 | Due to: (i) the flow through of higher energy supply costs, as well as transmission payments at FortisAlberta; (ii) higher wholesale electricity sales and an increase in the fair value of energy contracts at UNS Energy; and (iii) slower collections at Central Hudson, partially offset by (iv) the seasonality of sales in Canada. |
| Inventories | 33 | 179 | Due primarily to an increase in the cost and amount of natural gas in storage in British Columbia. |
| Regulatory assets (current and long-term) | 114 | 327 | Due primarily to: (i) the normal operation of rate stabilization accounts; (ii) the deferral of incremental storm costs at Central Hudson; (iii) retirement costs associated with the closure of the San Juan Generating Station at UNS Energy; and (iv) deferred taxes. |
| 11 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT | |
| --- | --- | --- | |
| Interim Management Discussion and Analysis | |||
| --- | |||
| Significant Changes between September 30, 2022 and December 31, 2021 | |||
| --- | --- | --- | --- |
| Balance Sheet Account | Increase (Decrease) | ||
| ($ millions) | FX | Other | Explanation |
| Other assets | 75 | 223 | Reflects an increase in the fair value of energy contracts at UNS Energy and equity contributions associated with the Wataynikaneyap Power project. |
| Property, plant and equipment, net | 2,238 | 1,495 | Due to capital expenditures, partially offset by depreciation. |
| Intangible assets | 93 | 41 | Reflects additions, partially offset by amortization. |
| Goodwill | 967 | — | |
| Accounts payable and other current liabilities | 117 | 145 | Due to higher energy supply costs and collateral deposits received related to energy contracts at UNS Energy. |
| Regulatory liabilities (current and long-term) | 204 | 364 | Reflects unrealized gains on energy contracts at UNS Energy, which are utilized to reduce exposure to changes in energy prices, and the normal operation of rate stabilization accounts. |
| Deferred income tax liabilities | 201 | 181 | Due to higher temporary differences associated with ongoing capital investment. |
| Long-term debt (including current portion) | 1,547 | 1,617 | Reflects debt issuances, partially offset by debt repayments, at Corporate and the regulated utilities, as well as higher borrowings under committed credit facilities. |
| Shareholders' equity | 1,299 | 537 | Due primarily to: (i) Common Equity Earnings for the nine months ended September 30, 2022, less dividends declared on common shares; and (ii) the issuance of common shares, largely under the DRIP. |
| Non-controlling interests | 153 | 46 | Reflects net earnings for the nine months ended September 30, 2022, less dividends declared by the Corporation's subsidiaries, attributable to non-controlling interests. |
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Requirements
At the subsidiary level, it is expected that operating expenses and interest costs will be paid from Operating Cash Flow, with varying levels of residual cash flow available for capital expenditures and/or dividend payments to Fortis. Remaining capital expenditures are expected to be financed primarily from borrowings under credit facilities, long-term debt offerings and equity injections from Fortis. Borrowings under credit facilities may be required periodically to support seasonal working capital requirements.
Cash required of Fortis to support subsidiary growth is generally derived from borrowings under the Corporation's committed credit facility, the operation of the DRIP and issuances of common shares, preference equity and long-term debt. The subsidiaries pay dividends to Fortis and receive equity injections from Fortis when required. Both Fortis and its subsidiaries initially borrow through their committed credit facilities and periodically replace these borrowings with long-term financing. Financing needs also arise to refinance maturing debt.
Credit facilities are syndicated primarily with large banks in Canada and the U.S., with no one bank holding more than approximately 20% of the Corporation's total revolving credit facilities. Approximately $5.6 billion of the total credit facilities are committed with maturities ranging from 2023 through 2027. Available credit facilities are summarized in the following table.
| 12 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT | |
|---|---|---|---|
| Interim Management Discussion and Analysis | |||
| --- | |||
| Credit Facilities | |||
| --- | --- | --- | --- |
| As at | Corporate<br>and Other | September 30,<br>2022 | December 31,<br>2021 |
| ( millions) | |||
| Total credit facilities (1) | 2,068 | 5,816 | 4,846 |
| Credit facilities utilized: | |||
| Short-term borrowings | — | (232) | (247) |
| Long-term debt (including current portion) | (712) | (1,856) | (1,305) |
| Letters of credit outstanding | (52) | (120) | (115) |
| Credit facilities unutilized | 1,304 | 3,608 | 3,179 |
All values are in US Dollars.
(1) See Note 14 in the 2021 Annual Financial Statements for a description of the credit facilities as at December 31, 2021.
In April 2022, Central Hudson increased its total credit facilities available from US$200 million to US$250 million.
In May 2022, the Corporation amended its unsecured $1.3 billion revolving term committed credit facility agreement to extend the maturity to July 2027, and to establish a sustainability-linked loan structure based on the Corporation's achievement of targets for diversity on the Board of Directors and Scope 1 GHG emissions for 2022 through 2025. Maximum potential annual margin pricing adjustments are +/- 5 basis points and +/- 1 basis point for drawn and undrawn funds, respectively.
Also in May 2022, the Corporation entered into an unsecured US$500 million non-revolving term credit facility. The facility has an initial one-year term, is repayable at any time without penalty, provides the Corporation with additional, cost effective short-term financing and liquidity, and enhances financial flexibility.
The Corporation's ability to service debt and pay dividends is dependent on the financial results of, and the related cash payments from, its subsidiaries. Certain regulated subsidiaries are subject to restrictions that limit their ability to distribute cash to Fortis, including restrictions by certain regulators limiting annual dividends and restrictions by certain lenders limiting debt to total capitalization. There are also practical limitations on using the net assets of the regulated subsidiaries to pay dividends, based on management's intent to maintain the subsidiaries' regulator-approved capital structures. Fortis does not expect that maintaining such capital structures will impact its ability to pay dividends in the foreseeable future.
As at September 30, 2022, consolidated fixed-term debt maturities/repayments are expected to average $1,292 million annually over the next five years and approximately 76% of the Corporation's consolidated long-term debt, excluding credit facility borrowings, had maturities beyond five years.
In December 2020, Fortis filed a short-form base shelf prospectus with a 25-month life under which it may issue common or preference shares, subscription receipts or debt securities in an aggregate principal amount of up to $2.0 billion. As at September 30, 2022, $1.0 billion remained available under the short-form base shelf prospectus.
Fortis is well positioned with strong liquidity. This combination of available credit facilities and manageable annual debt maturities/repayments provides flexibility in the timing of access to capital markets. Given current credit ratings and capital structures, the Corporation and its subsidiaries currently expect to continue to have reasonable access to long-term capital in 2022.
Fortis and its subsidiaries were in compliance with debt covenants as at September 30, 2022 and are expected to remain compliant in 2022.
| Cash Flow Summary | ||||||
|---|---|---|---|---|---|---|
| Summary of Cash Flows | ||||||
| Periods ended September 30 | Quarter | Year-to-Date | ||||
| ($ millions) | 2022 | 2021 | Variance | 2022 | 2021 | Variance |
| Cash and cash equivalents, beginning of period | 338 | 599 | (261) | 131 | 249 | (118) |
| Cash from (used in): | ||||||
| Operating activities | 633 | 711 | (78) | 2,205 | 2,190 | 15 |
| Investing activities | (1,073) | (845) | (228) | (2,907) | (2,503) | (404) |
| Financing activities | 471 | (249) | 720 | 932 | 277 | 655 |
| Effect of exchange rate changes on cash and cash equivalents | 26 | 9 | 17 | 34 | 12 | 22 |
| Cash and cash equivalents, end of period | 395 | 225 | 170 | 395 | 225 | 170 |
Operating Activities
See "Performance at a Glance - Operating Cash Flow" on page 4.
| 13 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Interim Management Discussion and Analysis | ||
| --- |
Investing Activities
The Corporation's Capital Plan for 2022 is estimated to be $4.0 billion, an increase of 11% from $3.6 billion in 2021. The increase in cash used in investing activities for the quarter and year-to-date periods reflects higher capital investments planned for 2022, as well as a higher U.S.-to-Canadian dollar exchange rate. See "Capital Plan" on page 16. Planned equity contributions associated with the Wataynikaneyap Power project in the third quarter of 2022 also impacted the use of cash as compared to the prior year.
Financing Activities
Cash flows related to financing activities will fluctuate largely as a result of changes in the subsidiaries' capital expenditures and the amount of Operating Cash Flow available to fund those capital expenditures, which together impact the amount of funding required from debt and common equity issuances. See "Cash Flow Requirements" on page 12.
| Debt Financing | |||||||
|---|---|---|---|---|---|---|---|
| Long-Term Debt Issuances | Interest | ||||||
| Year-to-date September 30, 2022 | Month | Rate | Use of Proceeds | ||||
| ($ millions, except as noted) | Issued | (%) | Maturity | Amount | |||
| ITC | |||||||
| Secured first mortgage bonds | January | 2.93 | 2052 | US | 150 | (1) (2) (3) (4) | |
| Secured senior notes | May | 3.05 | 2052 | US | 75 | (1) (3) (4) | |
| Unsecured senior notes | September | 4.95 | 2027 | US | 600 | (1) (4) (5) | |
| UNS Energy | |||||||
| Unsecured senior notes | February | 3.25 | 2032 | US | 325 | (4) (5) | |
| Central Hudson | |||||||
| Unsecured senior notes | January | 2.37 | 2027 | US | 50 | (4) (5) | |
| Unsecured senior notes | January | 2.59 | 2029 | US | 60 | (4) (5) | |
| Unsecured senior notes | September | 5.07 | 2032 | US | 100 | (1) (4) | |
| Unsecured senior notes | September | 5.42 | 2052 | US | 10 | (1) (4) | |
| FortisBC Electric | |||||||
| Unsecured debentures | March | 4.16 | 2052 | 100 | (1) | ||
| Newfoundland Power | |||||||
| First mortgage sinking fund bonds | April | 4.20 | 2052 | 75 | (1) (4) (5) | ||
| FortisAlberta | |||||||
| Senior unsecured debentures | May | 4.62 | 2052 | 125 | (1) | ||
| Fortis | |||||||
| Unsecured senior notes | May | 4.43 | (6) | 2029 | 500 | (4) (7) |
(1) Repay short-term and/or credit facility borrowings
(2) US$20 million to fund or refinance a portfolio of eligible green projects
(3) Fund capital expenditures
(4) General corporate purposes
(5) Repay maturing long-term debt
(6) The Corporation entered into cross-currency interest rate swaps to effectively convert the debt into US$391 million with an interest rate of 4.34%. See Note 12 to the Interim Financial Statements
(7) Fund the June 2022 redemption of the Corporation's $500 million, 2.85% senior unsecured notes due December 2023
In October 2022, ITC issued 5-year US$75 million and 30-year US$75 million secured first mortgage bonds at 3.87% and 4.53%, respectively. The net proceeds are expected to be used to fund or refinance a portfolio of eligible renewable energy projects.
| 14 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT | ||||
|---|---|---|---|---|---|---|
| Interim Management Discussion and Analysis | ||||||
| --- | ||||||
| Common Equity Financing | ||||||
| --- | --- | --- | --- | --- | --- | --- |
| Common Equity Issuances and Dividends Paid | ||||||
| Periods ended September 30 | Quarter | Year-to-Date | ||||
| ($ millions, except as indicated) | 2022 | 2021 | Variance | 2022 | 2021 | Variance |
| Common shares issued: | ||||||
| Cash (1) | 6 | 8 | (2) | 46 | 52 | (6) |
| Non-cash (2) | 87 | 87 | — | 275 | 264 | 11 |
| Total common shares issued | 93 | 95 | (2) | 321 | 316 | 5 |
| Number of common shares issued (# millions) | 1.6 | 1.7 | (0.1) | 5.5 | 6.1 | (0.6) |
| Common share dividends paid: | ||||||
| Cash | (168) | (152) | (16) | (492) | (449) | (43) |
| Non-cash (3) | (88) | (86) | (2) | (274) | (262) | (12) |
| Total common share dividends paid | (256) | (238) | (18) | (766) | (711) | (55) |
| Dividends paid per common share ($) | 0.535 | 0.505 | 0.030 | 1.605 | 1.515 | 0.090 |
(1) Includes common shares issued under stock option and employee share purchase plans
(2) Common shares issued under the DRIP and stock option plan
(3) Common share dividends reinvested under the DRIP
On February 10, 2022 and July 27, 2022, Fortis declared a dividend of $0.535 per common share paid on June 1, 2022 and September 1, 2022, respectively. On September 28, 2022, Fortis declared a dividend of $0.565 per common share payable on December 1, 2022. The payment of dividends is at the discretion of the board of directors and depends on the Corporation's financial condition and other factors.
Contractual Obligations
There were no material changes to the contractual obligations disclosed in the 2021 Annual MD&A, except issuances of long-term debt and credit facility utilization (see "Cash Flow Summary" on page 13) and new gas purchase obligations at FortisBC Energy.
In 2022, FortisBC Energy signed new long-term biomethane purchase agreements to acquire renewable natural gas. The 20-year agreements allow FortisBC Energy to purchase a maximum annual volume of 9.3 PJs of renewable natural gas and has increased gas purchase obligations from those disclosed as at December 31, 2021 as follows.
| As at September 30, 2022<br><br>($ millions) | Total | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Thereafter |
|---|---|---|---|---|---|---|---|
| Gas purchase obligations | 2,723 | 18 | 58 | 106 | 151 | 151 | 2,239 |
Off-Balance Sheet Arrangements
There were no material changes to off-balance sheet arrangements from those disclosed in the 2021 Annual MD&A.
Capital Structure and Credit Ratings
Fortis requires ongoing access to capital and, therefore, targets a consolidated long-term capital structure that will enable it to maintain investment-grade credit ratings. The regulated utilities maintain their own capital structures in line with those reflected in customer rates.
| Consolidated Capital Structure | September 30, 2022 | December 31, 2021 | ||
|---|---|---|---|---|
| As at | ($ millions) | (%) | ($ millions) | (%) |
| Debt (1) | 28,677 | 55.6 | 25,784 | 55.2 |
| Preference shares | 1,623 | 3.1 | 1,623 | 3.5 |
| Common shareholders' equity and non-controlling interests (2) | 21,328 | 41.3 | 19,293 | 41.3 |
| 51,628 | 100.0 | 46,700 | 100.0 |
(1) Includes long-term debt and finance leases, including current portion, and short-term borrowings, net of cash
(2) Includes shareholders' equity, net of preference shares, and non-controlling interests. Non-controlling interests represented 3.5% as at September 30, 2022 (December 31, 2021 - 3.5%)
| 15 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Interim Management Discussion and Analysis | ||
| --- |
Outstanding Share Data
As at October 27, 2022, the Corporation had issued and outstanding 480.3 million common shares and the following First Preference Shares: 5.0 million Series F; 9.2 million Series G; 7.7 million Series H; 2.3 million Series I; 8.0 million Series J; 10.0 million Series K; and 24.0 million Series M.
Only the common shares of the Corporation have voting rights. The Corporation's first preference shares do not have voting rights unless and until Fortis fails to pay eight quarterly dividends, whether or not consecutive or declared.
If all outstanding stock options were converted as at October 27, 2022, an additional 2.3 million common shares would be issued and outstanding.
Credit Ratings
The Corporation's credit ratings shown below reflect its low risk profile, diversity of operations, the stand-alone nature and financial separation of each regulated subsidiary, and the level of holding company debt.
| As at September 30, 2022 | Rating | Type | Outlook |
|---|---|---|---|
| S&P | A- | Corporate | Stable |
| BBB+ | Unsecured debt | ||
| DBRS Morningstar | A (low) | Corporate | Stable |
| A (low) | Unsecured debt | ||
| Moody's | Baa3 | Issuer | Stable |
| Baa3 | Unsecured debt |
In January 2022, S&P revised Central Hudson's outlook to negative from stable in consideration of the PSC's order in November 2021 on the company's general rate application, projected elevated capital expenditures, and the resulting impact on the company's financial measures.
In October 2022, S&P confirmed the Corporation's 'A-' issuer and 'BBB+' senior unsecured debt credit ratings and stable outlook.
In May 2022, DBRS Morningstar confirmed the Corporation's A (low) issuer and senior unsecured debt credit ratings and stable outlook.
Capital Plan
Year-to-date Capital Expenditures of $2.9 billion are consistent with expectations and on track with the Corporation's annual $4.0 billion Capital Plan.
While global supply chain constraints and rising inflation remain issues of potential concern that continue to evolve, the Corporation does not expect a material impact on its 2022 or 2023-2027 Capital Plan, although certain planned expenditures may shift within the five years. The Corporation continues to proactively work to mitigate supply chain constraints by identifying high priority materials and consolidating buying power to improve outcomes, increasing inventory levels, and closely working with suppliers to ensure material availability.
| Capital Expenditures (1) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year-to-date September 30, 2022 | Regulated Utilities | |||||||||||
| UNS Energy | Central Hudson | FortisBC Energy | Fortis Alberta | FortisBC Electric | Other Electric | Total Regulated Utilities | Non-<br>Regulated | |||||
| ($ millions, except as indicated) | ITC | (2) | Total | |||||||||
| Total | 920 | 460 | 212 | 414 | 356 | 92 | 411 | 2,865 | 21 | 2,886 |
(1) See "Non-U.S. GAAP Financial Measures" on page 9
(2) Energy Infrastructure segment
New Five-Year Capital Plan
The Corporation's five-year 2023-2027 Capital Plan is targeted at $22.3 billion.
| ($ billions) | 2023 | 2024 | 2025 | 2026 | 2027 | Total (1) (2) |
|---|---|---|---|---|---|---|
| Five-Year Capital Plan | 4.3 | 4.2 | 4.5 | 4.5 | 4.8 | 22.3 |
(1) Capital Plan is a forward-looking non-GAAP financial measure calculated in the same manner as Capital Expenditures. See "Non-U.S. GAAP Financial Measures" on page 9
(2) Reflects an assumed U.S.:CAD foreign exchange rate of 1.30. On average, Fortis estimates that a five-cent increase or decrease in the U.S. dollar relative to the Canadian dollar would increase or decrease Capital Expenditures by approximately $500 million over the five-year planning period
| 16 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Interim Management Discussion and Analysis | ||
| --- |
The 2023-2027 Capital Plan is $2.3 billion higher than the prior five-year plan that totalled $20.0 billion. The increase is driven by organic growth, largely reflecting regional transmission projects associated with the MISO LRTP at ITC, additional cleaner energy investments in Arizona to support TEP's exit from coal by 2032, and enhancements to distribution reliability and capacity, as well as investments to support customer growth, across the Corporation's regulated utilities. Approximately $500 million of the increase is driven by a higher assumed U.S.-to-Canadian dollar exchange rate over the five-year period.
In total, Fortis expects to invest $5.9 billion in cleaner energy over the next five-years, with investments focused on connecting renewables to the grid, including Tranche 1 of MISO’s LRTP, renewable and storage investments in Arizona and the Caribbean, and cleaner fuel solutions in British Columbia. The plan incorporates key customer affordability considerations, as the Corporation recognizes the impacts of inflation and elevated commodity costs on customer rates, while ensuring reliable and resilient energy delivery service as we transition to a cleaner energy future.
The investments included in the Capital Plan are summarized as follows.
(1) Includes clean generation and battery storage
(2) Includes renewable natural gas and liquified natural gas
The Capital Plan is low risk and highly executable, with 99% of planned expenditures to occur at the regulated utilities and only 17% relating to Major Capital Projects. Geographically, 55% of planned expenditures are expected in the U.S., including 26% at ITC, with 41% in Canada and the remaining 4% in the Caribbean.
Planned Capital Expenditures are based on detailed forecasts of energy demand as well as labour and material costs, including inflation, supply chain availability, general economic conditions, foreign exchange rates and other factors. These could change and cause actual expenditures to differ from forecast.
Major Capital Project Updates
ITC
In July 2022, the MISO board approved the first tranche of projects associated with the LRTP, representing 18 transmission projects across the MISO Midwest subregion with total associated costs estimated at US$10 billion. Six of these projects run through ITC's MISO operating companies' service territories, including Michigan and Iowa, where right of first refusal provisions exist for incumbent transmission owners. ITC estimates transmission investments of US$1.4 billion to US$1.8 billion through 2030 associated with six of the 18 projects, with capital expenditures of approximately $900 million (US$700 million) associated with these projects included in the Corporation's 2023-2027 Capital Plan. Other projects within ITC's MISO service territory may be subject to competitive bidding, depending on the state in which they are located.
UNS Energy
Planned renewable generation investments of approximately $400 million are included in the 2023-2027 Capital Plan, supporting the transition to cleaner energy as outlined in TEP's 2020 IRP. In February 2022, the ACC acknowledged TEP's 2020 IRP, and found it to be reasonable and in the public interest.
| 17 | FORTIS INC. | SEPTEMBER 30, 2022 QUARTER REPORT |
|---|---|---|
| Interim Management Discussion and Analysis | ||
| --- |
FortisBC Energy
In September 2022, the CPCN application for the interior transmission system component of the Transmission Integrity Management Capabilities project was filed with the BCUC. In May 2022, the CPCN application for the coastal transmission system section of the project was approved by the BCUC. This project will improve gas line safety and transmission integrity, including gas line modifications and looping.
With respect to the proposed Eagle Mountain Woodfibre Gas Pipeline project, in April 2022, Woodfibre LNG Limited issued a Notice to Proceed to its prime contractor for the proposed LNG site in Squamish, British Columbia. This project, however, remains contingent on certain conditions of Woodfibre LNG Limited and on FortisBC Energy receiving the remaining regulatory and permitting approvals.
With respect to further Tilbury expansion, in July 2022, FortisBC Energy's parent company, FortisBC Holdings Inc., entered into an agreement with an Indigenous community to provide the ability to participate, through equity ownership, in certain future regulated LNG investments if the parties are able to satisfy certain obligations. Any proposed transaction is subject to regulatory approvals and certain conditions precedent.
Lake Erie Connector Project Update
In July 2022, ITC suspended development activities and commercial negotiations relating to the $1.7 billion Lake Erie Connector project. ITC determined that there was no viable path to conclude certain key commercial negotiations and other requirements within the required timelines, in part due to recent macroeconomic conditions, including rising inflation, interest rates, and fluctuations in the U.S.-to-Canadian dollar foreign exchange rate. This project was never in the Corporation’s five-year Capital Plan.
BUSINESS RISKS
The Corporation's business risks remain substantially unchanged from those disclosed in its 2021 Annual MD&A. See "Regulatory Highlights" on page 10 and "Outlook" on page 20 for applicable updates.
ACCOUNTING MATTERS
Accounting Policies
The Interim Financial Statements have been prepared following the same accounting policies and methods as those used to prepare the 2021 Annual Financial Statements.
Critical Accounting Estimates
The preparation of the Interim Financial Statements required 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, expenses, gains, losses and contingencies. Actual results could differ materially from estimates.
There were no material changes to the nature of the Corporation's critical accounting estimates or contingencies from that disclosed in the 2021 Annual MD&A.
FINANCIAL INSTRUMENTS
Long-Term Debt and Other
As at September 30, 2022, the carrying value of long-term debt, including the current portion, was $28.7 billion (December 31, 2021 - $25.5 billion) compared to an estimated fair value of $25.8 billion (December 31, 2021 - $28.8 billion). Since Fortis does not intend to settle long-term debt prior to maturity, any excess of fair value over carrying value does not represent an actual liability.
The consolidated carrying value of the remaining financial instruments, other than derivatives, approximates fair value, reflecting their short-term maturity, normal trade credit terms and/or nature.
Derivatives
Derivatives are recorded at fair value with certain exceptions including those derivatives that qualify for the normal purchase and normal sale exception.
There were no material changes with respect to the nature and purpose, methodologies for fair value determination, and portfolio of the Corporation's derivatives from that disclosed in the 2021 Annual MD&A, except that: (i) in May 2022, the Corporation entered into cross-currency interest rate swaps with a 7-year term to effectively convert its $500 million, 4.43% unsecured senior notes to US$391 million, 4.34% debt; and (ii) in September 2022, ITC terminated its forward-starting interest rate swaps, which had a combined notional value of US$450 million, upon the issuance of US$600 million senior notes. Additional details are provided in Note 12 to the Interim Financial Statements.
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| Interim Management Discussion and Analysis | ||||
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| SUMMARY OF QUARTERLY RESULTS | ||||
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| Common Equity | ||||
| Revenue | Earnings | Basic EPS | Diluted EPS | |
| Quarter ended | ($ millions) | ($ millions) | ($) | ($) |
| September 30, 2022 | 2,553 | 326 | 0.68 | 0.68 |
| June 30, 2022 | 2,487 | 284 | 0.59 | 0.59 |
| March 31, 2022 | 2,835 | 350 | 0.74 | 0.74 |
| December 31, 2021 | 2,583 | 328 | 0.69 | 0.69 |
| September 30, 2021 | 2,196 | 295 | 0.63 | 0.62 |
| June 30, 2021 | 2,130 | 253 | 0.54 | 0.54 |
| March 31, 2021 | 2,539 | 355 | 0.76 | 0.76 |
| December 31, 2020 | 2,346 | 331 | 0.71 | 0.71 |
Generally, within each calendar year, quarterly results fluctuate primarily in accordance with seasonality. Given the diversified nature of the Corporation's subsidiaries, seasonality varies. 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 U.S. are generally highest in the second and third quarters due to the use of air conditioning and other cooling equipment.
Generally, from one calendar year to the next, quarterly results reflect: (i) continued organic growth driven by the Corporation's Capital Plan; (ii) any significant temperature fluctuations from seasonal norms; (iii) the timing and significance of any regulatory decisions; (iv) changes in the U.S.-to-Canadian dollar exchange rate; (v) for revenue, the flow through in customer rates of commodity costs; and (vi) for EPS, increases in the weighted average number of common shares outstanding.
September 2022/September 2021
See "Performance at a Glance" on page 2.
June 2022/June 2021
Common Equity Earnings increased by $31 million and basic EPS increased by $0.05 in comparison to the second quarter of 2021 due to: (i) Rate Base growth; (ii) higher earnings from the energy infrastructure segment, largely reflecting favourable changes in the mark-to-market accounting of natural gas derivatives at Aitken Creek; and (iii) a higher U.S.-to-Canadian dollar foreign exchange rate. Growth in earnings was partially offset by losses on investments that support retirement benefits at UNS Energy and ITC, reflecting market conditions, and the timing of quarterly earnings from Arizona and Alberta. In comparison to the second quarter of 2021, results from UNS Energy were tempered, as expected, by the timing of earnings related to the Oso Grande generating facility, and earnings from FortisAlberta were lower due to the timing of operating expenses. The change in EPS also reflected an increase in the weighted average number of common shares outstanding, largely associated with the Corporation's DRIP.
March 2022/March 2021
Common Equity Earnings decreased by $5 million and basic EPS decreased by $0.02 in comparison to the first quarter of 2021 due to higher unrealized losses of $14 million on the mark-to-market accounting of natural gas derivatives at Aitken Creek. Excluding this impact, the Corporation delivered earnings growth driven by Rate Base growth at ITC and the western Canadian utilities, and higher sales in the Caribbean. Growth was partially offset by lower hydroelectric production in Belize, and lower earnings at Central Hudson mainly due to the costs of implementing a new customer information system.
Earnings in Arizona were broadly consistent with the first quarter of 2021. The impact of higher electricity sales and lower planned generation maintenance costs was offset by the timing of earnings related to the Oso Grande generating facility, as expected. Losses on retirement investments also unfavourably impacted earnings at UNS Energy in the quarter.
The change in EPS also reflected an increase in the weighted average number of common shares outstanding, largely associated with the Corporation's DRIP.
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| Interim Management Discussion and Analysis | ||
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December 2021/December 2020
Common Equity Earnings decreased by $3 million and basic EPS decreased by $0.02 due primarily to: (i) lower earnings in Arizona, due to lower retail electricity sales resulting from milder weather and lower wholesale electricity sales, as well as lower gains on certain investments that support retirement benefits, partially offset by higher transmission revenue; (ii) the timing of earnings at FortisAlberta, due the reversal of income tax expense in the fourth quarter of 2020; (iii) the operation of regulatory mechanisms at Central Hudson; and, (iv) higher non-recoverable costs at ITC. Lower earnings in Belize and the impact of foreign exchange also unfavourably impacted earnings. The decrease in earnings was partially offset by growth in Rate Base, the finalization of Central Hudson's rate application with retroactive application to July 1, 2021, and the favourable impact of mark-to-market accounting of derivatives at Aitken Creek.
The decrease in basic EPS reflects lower Common Equity Earnings and an increase in the weighted average number of common shares outstanding, largely associated with the Corporation's DRIP.
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 three and nine months ended September 30, 2022 and 2021.
Inter-company transactions between non-regulated and regulated entities not eliminated on consolidation include the lease of gas storage capacity and gas sales by Aitken Creek to FortisBC Energy. These transactions did not have a material impact on consolidated earnings, financial position or cash flows.
As at September 30, 2022, accounts receivable included approximately $14 million due from Belize Electricity (December 31, 2021 - $22 million).
Fortis periodically provides short-term financing to subsidiaries to support capital expenditures and seasonal working capital requirements, the impacts of which are eliminated on consolidation. As at September 30, 2022, inter-segment loans of $35 million were outstanding (December 31, 2021 - $126 million). Interest charged on inter-segment loans was not material for the three and nine months ended September 30, 2022 and 2021.
OUTLOOK
Fortis continues to enhance shareholder value through the execution of its Capital Plan, the balance and strength of its diversified portfolio of utility businesses, and growth opportunities within and proximate to its service territories. While energy price volatility, global supply chain constraints and rising inflation are issues of potential concern that continue to evolve, the Corporation does not currently expect there to be a material impact on its operations or financial results in 2022.
Fortis is executing on the transition to a cleaner energy future and is on track to achieve its corporate-wide target to reduce GHG emissions by 75% by 2035. Upon achieving this target, 99% of the Corporation's assets will support energy delivery and renewable, carbon-free generation. The Corporation's additional 2050 net-zero direct GHG emissions target reinforces Fortis' commitment to decarbonize over the long-term, while preserving customer reliability and affordability.
The Corporation's $22.3 billion five-year Capital Plan is expected to increase midyear Rate Base from $34.0 billion in 2022 to $46.1 billion by 2027, translating into a five-year CAGR of 6.2%.
Beyond the five-year Capital Plan, additional opportunities to expand and extend growth include: further expansion of the electric transmission grid in the U.S. to facilitate the interconnection of cleaner energy including infrastructure investments associated with the IRA and the MISO LRTP, climate adaptation and grid resiliency investments; renewable gas solutions as well as LNG infrastructure in British Columbia, and the acceleration of cleaner energy infrastructure investments across our jurisdictions.
Fortis expects its long-term growth in Rate Base will drive earnings that support dividend growth and reduce the Corporation's dividend payout ratio over time to be in line with historical levels. The dividend growth guidance of 4-6% annually through 2027 will also provide the flexibility to fund more capital with internally generated funds and is premised on the assumptions listed under "Forward-Looking Information".
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FORWARD-LOOKING INFORMATION
Fortis includes forward-looking information in the MD&A within the meaning of applicable Canadian securities laws and forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, (collectively referred to as "forward-looking information"). Forward-looking information reflects expectations of Fortis management regarding future growth, results of operations, performance, business prospects and opportunities. Wherever possible, words such as anticipates, believes, budgets, could, estimates, expects, forecasts, intends, may, might, plans, projects, schedule, should, target, will, would, and the negative of these terms, and other similar terminology or expressions have been used to identify the forward-looking information, which includes, without limitation: forecast capital expenditures for 2022 and 2023-2027, including cleaner energy investments; the expectation to exit coal by 2032; the expected timing, outcome and impact of regulatory proceedings and decisions; the expectation that the introduction of a corporate alternative minimum income tax will not have a material impact on financial results, Operating Cash Flow or credit ratings; targeted average annual dividend growth through 2027; the expectation that volatility in energy prices, global supply chain constraints and rising inflation will not have a material impact on operations or financial results in 2022 or the 2023-2027 capital plan; forecast Rate Base and Rate Base growth for 2022 through 2027; the nature, timing, benefits and expected costs of certain capital projects, including ITC's transmission projects associated with the MISO LRTP, renewable energy and storage projects at UNS Energy, investments in cleaner fuel solutions in British Columbia; FortisBC Energy's Eagle Mountain Woodfibre Gas Pipeline project, FortisBC Energy's Transmission Integrity Management Capabilities project, further Tilbury expansion, and additional opportunities beyond the capital plan, including investments associated with the IRA, the MISO LRTP, climate adaptation and grid resiliency, and renewable gas solutions and LNG infrastructure in British Columbia; the 2050 net-zero direct GHG emissions target; the 2035 GHG emissions reduction target and projected asset mix; the expected funding sources for operating expenses, interest costs and capital expenditures; the expectation that maintaining the capital structures of the regulated operating subsidiaries will not have an impact on the Corporation's ability to pay dividends in the foreseeable future; the expected consolidated fixed-term debt maturities and repayments over the next five years; the expectation that the Corporation and its subsidiaries will continue to have access to long-term capital and will remain compliant with debt covenants in 2022; and the expectation that long-term growth in Rate Base will drive earnings, support dividend growth and reduce the dividend payout ratio over time to be in line with historical levels.
Forward-looking information involves significant risks, uncertainties and assumptions. Certain material factors or assumptions have been applied in drawing the conclusions contained in the forward-looking information including, without limitation: no material impact from volatility in energy prices, global supply chain constraints and rising inflation; reasonable regulatory decisions and the expectation of regulatory stability; the successful execution of the five-year capital plan; no material capital project or financing cost overrun; no material changes in the assumed U.S. dollar to Canadian dollar exchange rate; sufficient human resources to deliver service and execute the capital plan; the realization of additional opportunities beyond the capital plan; the Board exercising its discretion to declare dividends, taking into account the financial performance and condition of the Corporation; no significant variability in interest rates; no significant operational disruptions or environmental liability or upset; the continued ability to maintain the performance of the electricity and gas systems; no severe and prolonged economic downturn; sufficient liquidity and capital resources; the ability to hedge exposures to fluctuations in foreign exchange rates, natural gas prices and electricity prices; the continued availability of natural gas, fuel, coal and electricity supply; continuation of power supply and capacity purchase contracts; no significant changes in government energy plans, environmental laws and regulations that could have a material negative impact; maintenance of adequate insurance coverage; the ability to obtain and maintain licences and permits; retention of existing service areas; no significant changes in tax laws and the continued tax deferred treatment of earnings from the Corporation's foreign operations; continued maintenance of information technology infrastructure and no material breach of cybersecurity; continued favourable relations with Indigenous Peoples; and favourable labour relations.
Fortis cautions readers that a number of factors could cause actual results, performance or achievements to differ materially from those discussed or implied in the forward-looking information. These factors should be considered carefully and undue reliance should not be placed on the forward-looking information. Risk factors which could cause results or events to differ from current expectations are detailed under the heading "Business Risks" in the 2021 Annual MD&A and in other continuous disclosure materials filed from time to time with Canadian securities regulatory authorities and the Securities and Exchange Commission. Key risk factors for 2022 include, but are not limited to: uncertainty regarding the outcome of regulatory proceedings at the Corporation's utilities; risks associated with climate change, physical risks and service disruption, including cybersecurity risk; risks related to environmental laws and regulations; the impact of weather variability and seasonality on heating and cooling loads, gas distribution volumes and hydroelectric generation; risks associated with the competitiveness of natural gas; the impact of pandemics and public health crises, including the COVID-19 Pandemic; risks associated with capital projects and the impact on the Corporation's continued growth; risks associated with commodity price volatility and supply of purchased power; and interest rate and foreign exchange risks.
All forward-looking information herein is given as of October 27, 2022. Fortis disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise.
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GLOSSARY
2021 Annual Financial Statements: the Corporation's audited consolidated financial statements and notes thereto for the year ended December 31, 2021
2021 Annual MD&A: the Corporation's management discussion and analysis for the year ended December 31, 2021
ACC: Arizona Corporation Commission
Adjusted Basic EPS: Adjusted Common Equity Earnings divided by the basic weighted average number of common shares outstanding
Adjusted Common Equity Earnings: net earnings attributable to common equity shareholders adjusted as shown under "Non-U.S. GAAP Financial Measures" on page 9
AFUDC: allowance for funds used during construction
Aitken Creek: Aitken Creek Gas Storage ULC, a direct 93.8% owned subsidiary of FortisBC Holdings Inc.
AUC: Alberta Utilities Commission
BECOL: Belize Electric Company Limited, an indirect wholly owned subsidiary of Fortis (now known as Fortis Belize)
Belize Electricity: Belize Electricity Limited, in which Fortis indirectly holds a 33% equity interest
BCUC: British Columbia Utilities Commission
CAGR(s): compound average growth rate of a particular item. CAGR = (EV/BV)1-N-1, where: (i) EV is the ending value of the item; (ii) BV is the beginning value of the item; and (iii) N is the number of periods. Calculated on a constant U.S. dollar-to-Canadian dollar exchange rate
Capital Expenditures: cash outlay for additions to property, plant and equipment and intangible assets as shown in the Interim Financial Statements, as well as Fortis' 39% share of capital spending for the Wataynikaneyap Transmission Power Project. See "Non-U.S. GAAP Financial Measures" on page 9
Capital Plan: forecast Capital Expenditures. Represents a non-U.S. GAAP financial measure calculated in the same manner as Capital Expenditures
Caribbean Utilities: Caribbean Utilities Company, Ltd., an indirect approximately 60%-owned (as at December 31, 2021) subsidiary of Fortis, together with its subsidiary
Central Hudson: CH Energy Group Inc., an indirect wholly owned subsidiary of Fortis, together with its subsidiaries, including Central Hudson Gas & Electric Corporation
Common Equity Earnings: net earnings attributable to common equity shareholders
Corporation: Fortis Inc.
COS: cost of service
COVID-19 Pandemic: declared by the World Health Organization in March 2020 as a result of a novel coronavirus
CPCN: Certificate of Public Convenience and Necessity
D.C. Circuit Court: U.S. Court of Appeals for the District of Columbia Circuit
DBRS Morningstar: DBRS Limited
DRIP: dividend reinvestment plan
EPS: earnings per common share
FERC: Federal Energy Regulatory Commission
Fortis: Fortis Inc.
FortisAlberta: FortisAlberta Inc., an indirect wholly owned subsidiary of Fortis
FortisBC Electric: FortisBC Inc., an indirect wholly owned subsidiary of Fortis, together with its subsidiaries
FortisBC Energy: FortisBC Energy Inc., an indirect wholly owned subsidiary of Fortis, together with its subsidiaries
FortisOntario: FortisOntario Inc., a direct wholly owned subsidiary of Fortis, together with its subsidiaries
FortisTCI: FortisTCI Limited, an indirect wholly owned subsidiary of Fortis, together with its subsidiary
Fortis Belize: Fortis Belize Limited, an indirect wholly owned subsidiary of Fortis (formerly known as BECOL)
FX: foreign exchange associated with the translation of U.S. dollar-denominated amounts. Foreign exchange is calculated by applying the change in the U.S. dollar-to-Canadian dollar FX rates to the prior period U.S. dollar balance
GCOC: generic cost of capital
GHG: greenhouse gas
GWh: gigawatt hour(s)
Interim Financial Statements: the Corporation's unaudited condensed consolidated interim financial statements and notes thereto for the three and nine months ended September 30, 2022
Interim MD&A: the Corporation's management discussion and analysis for the three and nine months ended September 30, 2022
IRA: Inflation Reduction Act of 2022
IRP: Integrated Resource Plan
ITC: ITC Investment Holdings Inc., an indirect 80.1%-owned subsidiary of Fortis, together with its subsidiaries, including International Transmission Company, Michigan Electric Transmission Company, LLC, ITC Midwest LLC, and ITC Great Plains, LLC
ITC Midwest: ITC Midwest LLC
LNG: liquefied natural gas
LRTP: long-range transmission plan
Major Capital Projects: projects, other than ongoing maintenance projects, individually costing $200 million or more in the forecast/planning period
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Maritime Electric: Maritime Electric Company, Limited, an indirect wholly owned subsidiary of Fortis
MISO: Midcontinent Independent System Operator, Inc
Moody's: Moody's Investor Services, Inc.
Newfoundland Power: Newfoundland Power Inc., a direct wholly owned subsidiary of Fortis
Non-U.S. GAAP Financial Measures: financial measures that do not have a standardized meaning prescribed by U.S. GAAP
NOPR: notice of proposed rulemaking
NYSE: New York Stock Exchange
Operating Cash Flow: cash from operating activities
PJ: petajoule(s)
PPFAC: Purchased Power and Fuel Adjustment Clause
PSC: New York State Public Service Commission
PTCs: Production tax credits
Rate Base: the stated value of property on which a regulated utility is permitted to earn a specified return in accordance with its regulatory construct
ROE: rate of return on common equity
RTO: regional transmission organization
S&P: Standard & Poor's Financial Services LLC
SEDAR: Canadian System for Electronic Document Analysis and Retrieval
TCFD: Task Force for Climate-Related Financial Disclosures
TEP: Tucson Electric Power Company, a direct wholly owned subsidiary of UNS Energy
TSR: total shareholder return, which is a measure of the return to common equity shareholders in the form of share price appreciation and dividends (assuming reinvestment) over a specified time period in relation to the share price at the beginning of the period
TSX: Toronto Stock Exchange
UNS Energy: UNS Energy Corporation, an indirect wholly owned subsidiary of Fortis, together with its subsidiaries, including TEP, UNS Electric, Inc. and UNS Gas, Inc.
U.S.: United States of America
U.S. GAAP: accounting principles generally accepted in the U.S.
Woodfibre LNG: Woodfibre LNG Limited
Wataynikaneyap Power: Wataynikaneyap Power Limited Partnership, in which Fortis indirectly holds a 39% equity interest
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