EX-99.2 3 a992fortis2017annualfs.htm EXHIBIT 99.2 Exhibit

Exhibit 99.2

 
 
 










FORTIS INC.


Audited Consolidated Financial Statements
As at and for the years ended December 31, 2017 and 2016


 
 
 



 
 
 

TABLE OF CONTENTS
Management's Report on Internal Control Over Financial Reporting

 
NOTE 12
Goodwill
Report of Independent Registered Public
  Accounting Firm Deloitte LLP - Opinion
  on the Consolidated Financial Statements
 
NOTE 13

Accounts Payable and Other Current Liabilities

Report of Independent Registered Public
  Accounting Firm Deloitte LLP - Opinion
  on Internal Control over Financial Reporting
 
NOTE 14
Long-Term Debt
Independent Auditors' Report of Registered
  Public Accounting Firm Ernst & Young LLP
 
NOTE 15
Capital Lease and Finance Obligations
Consolidated Balance Sheets
 
NOTE 16
Other Liabilities
Consolidated Statements of Earnings
 
NOTE 17
Earnings per Common Share
Consolidated Statements of Comprehensive
  Income

 
NOTE 18
Preference Shares
Consolidated Statements of Cash Flows
 
NOTE 19

Accumulated Other Comprehensive Income
Consolidated Statements of Changes in Equity
 
NOTE 20
Non-Controlling Interests
Notes to Consolidated Financial Statements
 
NOTE 21
Stock-Based Compensation Plans
NOTE 1
Description of Business
 
NOTE 22
Other Income, Net
NOTE 2
Nature of Regulation and Regulatory Matters

 
NOTE 23
Income Taxes
NOTE 3

Summary of Significant Accounting Policies
 
NOTE 24
Employee Future Benefits
NOTE 4
Future Accounting Pronouncements
 
NOTE 25
Business Acquisitions
NOTE 5
Segmented Information
 
NOTE 26
Dispositions
NOTE 6

Accounts Receivable and Other Current Assets

 
NOTE 27


Supplementary Information to Consolidated Statements of Cash Flows
NOTE 7
Inventories
 
NOTE 28

Fair Value Measurements and Financial Instruments
NOTE 8
Regulatory Assets and Liabilities
 
NOTE 29
Variable Interest Entity
NOTE 9
Other Assets
 
NOTE 30
Commitments and Contingencies
NOTE 10
Property, Plant and Equipment
 
NOTE 31
Comparative Figures
NOTE 11
Intangible Assets
 
 
 
 

 
 
 



 
 
 

Management's Report on Internal Control over Financial Reporting


Management of Fortis Inc. and its subsidiaries (the "Corporation") is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is designed by, or under the supervision of, the Corporation's President and Chief Executive Officer ("CEO") and Executive Vice President and Chief Financial Officer ("CFO") and effected by the Corporation's board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Corporation's management, including the Corporation's CEO and CFO, assessed the effectiveness of the Corporation's internal control over financial reporting as at December 31, 2017, based on the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that, as at December 31, 2017, the Corporation's internal control over financial reporting was effective.

Deloitte LLP, an Independent Registered Public Accounting Firm, as auditors of the Corporation's consolidated financial statements for the year ended December 31, 2017, has also audited the effectiveness of the Corporation's internal control over financial reporting as at December 31, 2017. As stated in the Report of Independent Registered Public Accounting Firm, Deloitte LLP expressed an unqualified opinion on the effectiveness of the Corporation's internal control over financial reporting as at December 31, 2017.


February 14, 2018


/s/ Barry V. Perry

Barry V. Perry
President and Chief Executive Officer, Fortis Inc.



/s/ Karl W. Smith

Karl W. Smith
Executive Vice President, Chief Financial Officer, Fortis Inc.

St. John's, Canada

 
i
 



 
 
 

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Fortis Inc.


Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of Fortis Inc. and subsidiaries (the "Corporation"), which comprise the consolidated balance sheet as at December 31, 2017, the consolidated statement of earnings, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and the related notes, including a summary of significant accounting policies and other explanatory information (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Corporation as at December 31, 2017, and its financial performance and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Predecessor Auditor on Prior Period
The consolidated financial statements of the Corporation for the year ended December 31, 2016, were audited by another auditor who expressed an unmodified/unqualified opinion on those financial statements on February 15, 2017, except as to Note 31, which is as of February 14, 2018.

Report on Internal Control over Financial Reporting
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Corporation's internal control over financial reporting as at December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 14, 2018 expressed an unqualified opinion on the Corporation's internal control over financial reporting.

Basis for Opinion
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards and the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether due to fraud or error. Those standards also require that we comply with ethical requirements. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. Further, we are required to be independent of the Corporation in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and to fulfill our other ethical responsibilities in accordance with these requirements.

An audit includes performing procedures to assess the risks of material misstatement of the financial statements, whether due to fraud or error, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Corporation's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies and principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 
ii
 



 
 
 

We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a reasonable basis for our audit opinion.




/s/ Deloitte LLP
Chartered Professional Accountants

St. John's, Canada
February 14, 2018

We have served as the Corporation's auditor since 2017.

 
iii
 



 
 
 

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Fortis Inc.


Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Fortis Inc. and subsidiaries (the "Corporation") as at December 31, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). In our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as at December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB") and Canadian generally accepted auditing standards, the Corporation's consolidated financial statements as at and for the year ended December 31, 2017, and our report dated February 14, 2018, expressed an unmodified/unqualified opinion on those financial statements.

Basis for Opinion
The Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ Deloitte LLP
Chartered Professional Accountants

St. John's, Canada
February 14, 2018


 
iv
 



 
 
 

Independent Auditors' Report of Registered Public Accounting Firm

To the Shareholders of Fortis Inc.


We have audited the accompanying consolidated financial statements of Fortis Inc., which comprise the consolidated balance sheet as at December 31, 2016, and the consolidated statement of earnings, comprehensive income, cash flows and changes in equity for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management's responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors' responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits in accordance with Canadian generally accepted auditing standards and with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Fortis Inc. as at December 31, 2016, and its financial performance and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States.




/s/ Ernst & Young LLP
Chartered Professional Accountants

St. John's, Canada
February 15, 2017, except as to Note 31, which is as of February 14, 2018


 
v
 


Fortis Inc.
Consolidated Balance Sheets
As at December 31
(in millions of Canadian dollars)
 
2017

 
2016

 
 
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
327

 
$
269

Accounts receivable and other current assets (Note 6)
1,131

 
1,127

Prepaid expenses
79

 
85

Inventories (Note 7)
367

 
372

Regulatory assets (Note 8)
303

 
313

Total current assets
2,207

 
2,166

Other assets (Note 9)
480

 
406

Regulatory assets (Note 8)
2,742

 
2,620

Property, plant and equipment, net (Note 10)
29,668

 
29,337

Intangible assets, net (Note 11)
1,081

 
1,011

Goodwill (Note 12)
11,644

 
12,364

Total assets
$
47,822

 
$
47,904

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Short-term borrowings (Note 14)
$
209

 
$
1,155

Accounts payable and other current liabilities (Note 13)
2,053

 
1,970

Regulatory liabilities (Note 8)
490

 
492

Current installments of long-term debt (Note 14)
705

 
251

Current installments of capital lease and finance obligations (Note 15)
47

 
76

Total current liabilities
3,504

 
3,944

Other liabilities (Note 16)
1,210

 
1,279

Regulatory liabilities (Note 8)
2,956

 
1,691

Deferred income taxes (Note 23)
2,298

 
3,263

Long-term debt (Note 14)
20,691

 
20,817

Capital lease and finance obligations (Note 15)
414

 
460

Total liabilities
31,073

 
31,454

Commitments and Contingencies (Note 30)

 

Equity
 
 
 
Common shares (1) 
11,582

 
10,762

Preference shares (Note 18)
1,623

 
1,623

Additional paid-in capital
10

 
12

Accumulated other comprehensive income (Note 19)
61

 
745

Retained earnings
1,727

 
1,455

Shareholders' equity
15,003

 
14,597

Non-controlling interests (Note 20)
1,746

 
1,853

Total equity
16,749

 
16,450

Total liabilities and equity
$
47,822

 
$
47,904

 
 
 
 
(1) No par value. Unlimited authorized shares; 421.1 million and 401.5 million
issued and outstanding as at December 31, 2017 and 2016, respectively
Approved on Behalf of the Board
 
/s/ Douglas J. Haughey
 
/s/ Tracey C. Ball
 
 
 
Douglas J. Haughey,
Tracey C. Ball,
 
See accompanying Notes to Consolidated Financial Statements
Director
 
Director

1


Fortis Inc.
Consolidated Statements of Earnings
For the years ended December 31
(in millions of Canadian dollars, except per share amounts)
 
 
 
 
 
 
 
2017

 
2016

 
 
 
 
 
Revenue
$
8,301

 
$
6,838

 
 
 
 
 
Expenses
 
 
 
 
Energy supply costs
2,361

 
2,341

 
Operating expenses
2,261

 
2,031

 
Depreciation and amortization
1,179

 
983

Total expenses
5,801

 
5,355

Operating income
2,500

 
1,483

Other income, net (Note 22)
127

 
53

Finance charges
914

 
678

Earnings before income tax expense
1,713

 
858

Income tax expense (Note 23)
588

 
145

Net earnings
$
1,125

 
$
713

 
 
 
 
 
Net earnings attributable to:
 
 
 
 
Non-controlling interests
$
97

 
$
53

 
Preference equity shareholders
65

 
75

 
Common equity shareholders
963

 
585

 
 
$
1,125

 
$
713

 
 
 
 
 
Earnings per common share (Note 17)
 
 
 
 
Basic
$
2.32

 
$
1.89

 
Diluted
$
2.31

 
$
1.89

 
 
 
 
 
See accompanying Notes to Consolidated Financial Statements
Fortis Inc.
Consolidated Statements of Comprehensive Income
For the years ended December 31
(in millions of Canadian dollars)
 
 
2017

 
2016

 
 
 
 
 
Net earnings
$
1,125

 
$
713

 
 
 
 
 
Other comprehensive (loss) income (Note 19)
 
 
 
Unrealized foreign currency translation losses, net of hedging activities and income tax expense of $2 and $nil, respectively
(781
)
 
(50
)
Available-for-sale investment, net of income tax expense, of $nil and $nil, respectively

 
2

Cash flow hedges, net of income tax expense, of $nil and $2, respectively
2

 
3

Employee future benefits, net of income tax expense, of $nil and $nil, respectively
(4
)
 
(1
)
 
(783
)
 
(46
)
Comprehensive income
$
342

 
$
667

Comprehensive income attributable to:
 
 
 
 
Non-controlling interests
$
(2
)
 
$
53

 
Preference equity shareholders
65

 
75

 
Common equity shareholders
279

 
539

 
$
342

 
$
667

 
 
 
See accompanying Notes to Consolidated Financial Statements
 
 
 

2


Fortis Inc.
Consolidated Statements of Cash Flows
For the years ended December 31
(in millions of Canadian dollars)
 
 
 
2017

 
2016

 
 
 
 
 
 
Operating activities
 
 
 
Net earnings
$
1,125

 
$
713

Adjustments to reconcile net earnings to net cash provided by
 
 
 
operating activities:
 
 
 
 
 
Depreciation - property, plant and equipment
1,055

 
873

 
 
Amortization - intangible assets
97

 
79

 
 
Amortization - other
27

 
31

 
 
Deferred income tax expense (Note 23)
544

 
98

 
 
Accrued employee future benefits
27

 
58

 
 
Equity component of allowance for funds used during construction
    (Note 22)
(74
)
 
(37
)
 
 
Other
(16
)
 
64

Change in long-term regulatory assets and liabilities
68

 
(17
)
Change in working capital (Note 27)
(97
)
 
22

Cash from operating activities
2,756

 
1,884

Investing activities
 
 
 
Capital expenditures - property, plant and equipment
(2,813
)
 
(1,912
)
Capital expenditures - intangible assets
(211
)
 
(149
)
Contributions in aid of construction
102

 
50

Proceeds on sale of assets
6

 
50

Business acquisitions, net of cash acquired (Note 25)

 
(4,841
)
Other
(109
)
 
(89
)
Cash used in investing activities
(3,025
)
 
(6,891
)
Financing activities
 
 
 
Proceeds from long-term debt, net of issuance costs (Note 14)
2,538

 
4,136

Repayments of long-term debt and capital lease and finance obligations
(952
)
 
(336
)
Borrowings under committed credit facilities (Note 31)
2,085

 
668

Repayments under committed credit facilities (Note 31)
(2,039
)
 
(499
)
Net repayments and borrowings under committed credit facilities (Note 31)
(365
)
 
(76
)
Net change in short-term borrowings
(892
)
 
392

Advances from non-controlling interests
4

 
1,361

Issue of common shares to an institutional investor
500

 

Issue of common shares, net of costs, and dividends reinvested
61

 
45

Redemption of preference shares (Note 18)

 
(200
)
Dividends
 
 
 
 
Common shares, net of dividends reinvested
(419
)
 
(316
)
 
Preference shares
(65
)
 
(72
)
 
Subsidiary dividends paid to non-controlling interests
(109
)
 
(53
)
Other
(8
)
 

Cash from financing activities
339

 
5,050

Effect of exchange rate changes on cash and cash equivalents
(12
)
 
(16
)
Change in cash and cash equivalents
58

 
27

Cash and cash equivalents, beginning of year
269

 
242

Cash and cash equivalents, end of year
$
327

 
$
269

 
 
 
 
 
 
Supplementary Information to Consolidated Statements of Cash Flows (Note 27)
 
 
 
 
 
 
See accompanying Notes to Consolidated Financial Statements

3


Fortis Inc.
Consolidated Statements of Changes in Equity
For the years ended December 31, 2017 and 2016
(in millions of Canadian dollars, except share numbers)
 
Common Shares
Common Shares
 
Preference Shares
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Non-Controlling Interests
 
Total Equity
 
(# millions)
 
 
(Note 18)
 
 
 
(Note 19)
 
 
 
(Note 20)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As at December 31, 2016
401.5

$
10,762

 
$
1,623

 
$
12

 
$
745

 
$
1,455

 
$
1,853

 
$
16,450

Net earnings


 

 

 

 
1,028

 
97

 
1,125

Other comprehensive loss


 

 

 
(684
)
 

 
(99
)
 
(783
)
Common shares issued under private offering (Note 14)
12.2

500

 

 

 

 

 

 
500

Common shares issued under dividend reinvestment
   plan and other
7.4

320

 

 
(5
)
 

 

 

 
315

Stock-based compensation


 

 
3

 

 

 

 
3

Advances from non-controlling interests


 

 

 

 

 
4

 
4

Subsidiary dividends paid to non-controlling interests


 

 

 

 

 
(109
)
 
(109
)
Dividends declared on common shares ($1.65 per share)


 

 

 

 
(691
)
 

 
(691
)
Dividends declared on preference shares


 

 

 

 
(65
)
 

 
(65
)
As at December 31, 2017
421.1

$
11,582

 
$
1,623

 
$
10

 
$
61

 
$
1,727

 
$
1,746

 
$
16,749

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As at December 31, 2015
281.6

$
5,867

 
$
1,820

 
$
14

 
$
791

 
$
1,388

 
$
473

 
$
10,353

Net earnings


 

 

 

 
660

 
53

 
713

Other comprehensive loss


 

 

 
(46
)
 

 

 
(46
)
Common shares issued under public offering
   (Notes 25 and 27)
114.4

4,684

 

 

 

 

 

 
4,684

Common shares issued under dividend reinvestment
    plan and other
5.5

211

 

 
(4
)
 

 

 

 
207

Stock-based compensation


 

 
2

 

 

 

 
2

Advances from non-controlling interests


 

 

 

 

 
1,361

 
1,361

Foreign currency translation impacts


 

 

 

 

 
19

 
19

Subsidiary dividends paid to non-controlling interests


 

 

 

 

 
(53
)
 
(53
)
Redemption of preference shares


 
(197
)
 

 

 

 

 
(197
)
Dividends declared on common shares ($1.55 per share)


 

 

 

 
(534
)
 

 
(534
)
Dividends declared on preference shares


 

 

 

 
(75
)
 

 
(75
)
Adoption of new accounting policy


 

 

 

 
16

 

 
16

As at December 31, 2016
401.5

$
10,762

 
$
1,623

 
$
12

 
$
745

 
$
1,455

 
$
1,853

 
$
16,450

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying Notes to Consolidated Financial Statements
 
 
 
 
 
 
 


4



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016


1. DESCRIPTION OF BUSINESS

Fortis Inc. ("Fortis" or the "Corporation") is principally an international electric and gas utility holding company. Fortis segments its business based on regulatory status and service territory, as well as the information used by the chief operating decision maker in deciding how to allocate resources and evaluate the performance of the segment. The Corporation's reporting segments allow senior management to evaluate the operational performance and assess the overall contribution of each segment to the long-term objectives of Fortis. Each entity within the reporting segments operates with substantial autonomy, assumes responsibility for net earnings and its own resource allocation.

The following summary describes the operations included in each of the Corporation's reportable segments.

Regulated Utilities - United States

a.
ITC: Primarily comprised of ITC Holdings Corp. and the electric transmission operations of its regulated operating subsidiaries, which include International Transmission Company ("ITCTransmission"), Michigan Electric Transmission Company, LLC ("METC"), ITC Midwest LLC ("ITC Midwest"), and ITC Great Plains, LLC, (collectively "ITC"). ITC was acquired by Fortis in October 2016, with Fortis owning 80.1% of ITC and an affiliate of GIC Private Limited ("GIC") owning a 19.9% minority interest (Notes 20 and 25). Also included in the ITC segment is the net corporate expenses and activity of ITC Investment Holdings.

ITC owns and operates high-voltage transmission lines, in Michigan's lower peninsula and portions of Iowa, Minnesota, Illinois, Missouri, Kansas and Oklahoma, that transmit electricity from generating stations to local distribution facilities connected to ITC's systems.

b.
UNS Energy: Primarily comprised of Tucson Electric Power Company ("TEP"), UNS Electric, Inc. ("UNS Electric") and UNS Gas, Inc. ("UNS Gas"), (collectively "UNS Energy").

UNS Energy's largest operating subsidiary, TEP, is a vertically integrated regulated electric utility. TEP generates, transmits and distributes electricity to retail customers in southeastern Arizona, including the greater Tucson metropolitan area in Pima County, as well as parts of Cochise County. TEP also sells wholesale electricity to other entities in the western United States. UNS Electric is a vertically integrated regulated electric utility, which generates, transmits and distributes electricity to retail customers in Arizona's Mohave and Santa Cruz counties. TEP and UNS Electric currently own generation resources with an aggregate capacity of 2,834 megawatts ("MW"), including 64 MW of solar capacity. Several of the generating assets in which TEP and UNS Electric have an interest are jointly owned.

UNS Gas is a regulated gas distribution utility, serving retail customers in Arizona's Mohave, Yavapai, Coconino, Navajo and Santa Cruz counties.

c.
Central Hudson: Primarily comprised of Central Hudson Gas & Electric Corporation ("Central Hudson"), which is a regulated electric and gas transmission and distribution utility, serving portions of New York State's Mid-Hudson River Valley. The Company owns gas-fired and hydroelectric generating capacity totalling 64 MW. Also included in the Central Hudson segment is the net corporate expenses and activity of CH Energy Group, Inc. ("CH Energy Group").

Regulated Utilities - Canada

a.
FortisBC Energy: FortisBC Energy Inc. ("FortisBC Energy") is the largest regulated distributor of natural gas in British Columbia, serving more than 135 communities. FortisBC Energy provides transmission and distribution services to customers, and obtains natural gas supplies on behalf of most residential, commercial and industrial customers. Gas supplies are sourced primarily from northeastern British Columbia and, through FortisBC Energy's Southern Crossing pipeline, from Alberta.


 
5
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

b.
FortisAlberta: FortisAlberta Inc. ("FortisAlberta") is a regulated electricity distribution utility operating in a substantial portion of southern and central Alberta. The Company does not own or operate generation or transmission assets and is not involved in the direct sale of electricity.

c.
FortisBC Electric: Includes FortisBC Inc. ("FortisBC Electric"), an integrated regulated electric utility operating in the southern interior of British Columbia. FortisBC Electric owns four hydroelectric generating facilities with a combined capacity of 225 MW. Also included in the FortisBC Electric segment are the operating, maintenance and management services relating to five hydroelectric generating facilities in British Columbia primarily owned by third parties, one of which is the 335-MW Waneta Expansion hydroelectric generating facility ("Waneta Expansion"), owned by Fortis and Columbia Power Corporation and Columbia Basin Trust ("CPC/CBT").

d.
Eastern Canadian: Comprised of Newfoundland Power Inc. ("Newfoundland Power"), Maritime Electric Company, Limited ("Maritime Electric"), FortisOntario Inc. ("FortisOntario"), and the Corporation's 49% equity investment in Wataynikaneyap Power Limited Partnership ("Wataynikaneyap Partnership") (Note 9).

Newfoundland Power is an integrated regulated electric utility and the principal distributor of electricity on the island portion of Newfoundland and Labrador. Newfoundland Power has an installed generating capacity of 139 MW, of which 97 MW is hydroelectric generation. Maritime Electric is an integrated regulated electric utility and the principal distributor of electricity on Prince Edward Island ("PEI"). Maritime Electric also maintains on-Island generating facilities with a combined capacity of 145 MW. FortisOntario is comprised of three regulated electric utilities that provide service to customers in Fort Erie, Cornwall, Gananoque, Port Colborne and the District of Algoma in Ontario. Wataynikaneyap Partnership is a partnership between 22 First Nation communities and Fortis with a mandate of connecting remote First Nation communities to the electricity grid in Ontario through the development of new transmission lines (the "Wataynikaneyap Power Project"). The Wataynikaneyap Power Project is in the development stage.

Regulated Utilities – Caribbean

Caribbean: Includes the Corporation's approximate 60% controlling ownership interest in Caribbean Utilities Company, Ltd. ("Caribbean Utilities") (December 31, 2016 - 60%), Fortis Turks and Caicos, and the Corporation's 33% equity investment in Belize Electricity Limited ("Belize Electricity") (Note 9). Caribbean Utilities is an integrated regulated electric utility and the sole provider of electricity on Grand Cayman, Cayman Islands. Caribbean Utilities has an installed diesel-powered generating capacity of 161 MW. Fortis Turks and Caicos is comprised of two integrated regulated electric utilities that provide electricity to certain islands in Turks and Caicos. Fortis Turks and Caicos has a combined diesel-powered generating capacity of 84 MW. Belize Electricity is an integrated electric utility and the principal distributor of electricity in Belize.

Non-Regulated - Energy Infrastructure

Energy Infrastructure: Primarily comprised of long-term contracted generation assets in British Columbia and Belize, and the Aitken Creek natural gas storage facility ("Aitken Creek"). Generating assets in British Columbia include the Corporation's 51% controlling ownership interest in the 335-MW Waneta Expansion, conducted through the Waneta Expansion Limited Partnership ("Waneta Partnership"), with CPC/CBT holding the remaining 49% interest. The output is sold to BC Hydro and FortisBC Electric under 40-year contracts. Generating assets in Belize are comprised of three hydroelectric generating facilities with a combined capacity of 51 MW, conducted through the Corporation's indirectly wholly owned subsidiary Belize Electric Company Limited ("BECOL"). The output is sold to Belize Electricity under 50-year power purchase agreements ("PPAs"). Aitken Creek Gas Storage ULC, acquired by Fortis in April 2016, owns 93.8% of Aitken Creek, with the remaining share owned by BP Canada Energy Company (Note 25). Aitken Creek is the only underground natural gas storage facility in British Columbia and has a total working gas capacity of 77 billion cubic feet.

In 2016 the Corporation sold its 16-MW run-of-river Walden hydroelectric generating facility ("Walden") (Note 26).

 
6
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

Non-Regulated - Corporate and Other

Corporate and Other: Captures expense and revenue items not specifically related to any reportable segment and those business operations that are below the required threshold for reporting as separate segments. The Corporate and Other segment includes net corporate expenses of Fortis and non-regulated holding company expenses of FortisBC Holdings Inc. ("FHI").


2. NATURE OF REGULATION AND REGULATORY MATTERS

The earnings of the Corporation's utilities are primarily determined under cost of service ("COS") regulation. Generally, under COS regulation the respective regulatory authority sets customer electricity and/or gas rates to permit a reasonable opportunity for the utility to recover, on a timely basis, estimated costs of providing service to customers, including a fair rate of return on a regulatory deemed or targeted capital structure applied to an approved regulatory asset value ("rate base"). The ability of a regulated utility to recover prudently incurred costs of providing service and earn the regulator‑approved rate of return on common shareholders' equity ("ROE") and/or rate of return on rate base assets ("ROA") may depend on the utility achieving the forecasts established in the rate-setting processes. If a historical test year is used to set customer rates, there may be regulatory lag between when costs are incurred and when they are reflected in customer rates. When performance-based rate setting ("PBR") mechanisms are utilized in determining annual revenue requirements and resulting customer rates, a formula is generally applied that incorporates inflation and assumed productivity improvements. The use of PBR mechanisms should allow a utility a reasonable opportunity to recover prudently incurred costs and earn its allowed ROE or ROA.

The Corporation's regulated utilities, where applicable, are permitted by their respective regulatory authority to flow through to customers, without markup, the cost of natural gas, fuel and/or purchased power through base customer rates and/or the use of rate stabilization and other mechanisms (Note 8).

The nature of regulation at the Corporation's utilities and their significant regulatory matters are as follows.

ITC
ITC is regulated by the Federal Energy Regulatory Commission ("FERC") under the Federal Power Act (United States). Rates are set annually, using FERC-approved cost-based formula rate templates, and remain in effect for one year, which provides timely cost recovery and reduces regulatory lag. The formula rates include an annual true-up mechanism, that compares actual revenue requirements to billed revenues and any over- or under-collections are accrued and reflected in future rates within a two-year period. The formula rates do not require annual FERC approvals, although inputs remain subject to legal challenge with FERC. The common equity component of capital structure for ITC was 60% for 2017 and 2016.

ROE Complaints
Two third-party complaints are pending before FERC requesting that the Midcontinent Independent System Operator ("MISO") regional base ROE of 12.38% for MISO transmission owners, including ITCTransmission, METC and ITC Midwest, be found to no longer be just or reasonable. The complaints cover two consecutive 15-month periods from November 2013 through February 2015 (the "Initial Refund Period" or "Initial Complaint") and February 2015 through May 2016 (the "Second Refund Period" or "Second Complaint"). The FERC orders on the complaints will also set the ROE that will be in effect prospectively from the date that the FERC orders are issued. In September 2016 FERC issued an order setting the base ROE for the Initial Refund Period at 10.32%, with a maximum ROE of 11.35%. These rates apply prospectively from September 2016 until a new approved rate is established for the Second Refund Period. The MISO transmission owners have sought rehearing of the September 2016 order.

In June 2016 the presiding Administrative Law Judge ("ALJ") issued an initial decision on the Second Complaint, recommending a base ROE of 9.70%, with a maximum ROE of 10.68%. The base ROE for the three effected utilities for the period of May 2016 through September 2016 was 12.38% and any authorized adders that were approved prior to the filing of the complaints were collected during this time, up to a maximum of 13.88%.


 
7
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

The initial decision of the ALJ is a non-binding recommendation to FERC and FERC has yet to issue its order on the Second Complaint. In September 2017 certain MISO transmission owners filed a motion for FERC to dismiss the Second Complaint. If the Second Complaint is not dismissed, it is expected that FERC will establish a new going-forward base ROE and range of reasonableness, which will also be used to calculate the refund liability for the Second Refund Period.

As at December 31, 2017, the estimated range of refunds for the Second Refund Period was between US$106 million and US$145 million and ITC has recognized an aggregate estimated regulatory liability of $182 million (US$145 million) (December 31, 2016 - $188 million (US$140 million)) (Note 8 (xiii)). The total estimated refund for the Initial Complaint was $158 million (US$118 million), including interest, as at December 31, 2016, which was paid in 2017.

The estimated regulatory liabilities were accrued by ITC before its acquisition by Fortis. There is uncertainty regarding the final outcome of the Initial and Second Complaints and the timing of the completion of these matters. This is due, in part, to an April 2017 court decision requiring FERC to further justify the methodology used to establish new ROEs. It is possible that the outcome of these matters could differ materially from the estimated range of refunds.

UNS Energy
UNS Energy is regulated by the Arizona Corporation Commission ("ACC") and certain activities are subject to regulation by FERC under the Federal Power Act (United States). UNS Energy uses a historical test year in the establishment of retail electric and gas rates. Retail electric and gas rates are set to provide the utilities with an opportunity to recover their COS and earn a reasonable rate of return on rate base, including an adjustment for the fair value of rate base as required under the laws of the State of Arizona.

General Rate Application
In February 2017 the ACC issued a rate order for new rates for TEP that took effect February 27, 2017 (“2017 Rate Order”). Provisions of the 2017 Rate Order include: (i) an increase in non-fuel base revenue of approximately $108 million (US$81.5 million), including approximately $20 million (US$15 million) of operating costs related to the 50.5% undivided interest in Unit 1 of Springerville Generating Station purchased by TEP in September 2016; (ii) a 7.04% return on original cost rate base, including a cost of equity of 9.75% and an embedded cost of long-term debt of 4.32%; (iii) a common equity component of capital structure of approximately 50%; and (iv) the adoption of proposed depreciation rates which reflect a reduction in the depreciable life for Unit 1 of San Juan Generating Station. Prior to the 2017 Rate Order, effective from July 1, 2013, TEP's allowed ROE was set at 10.0% on a capital structure of 43.5% common equity.

UNS Electric's allowed ROE is set at 9.50% on a capital structure of 52.8% common equity, effective from August 1, 2016, prior to which its allowed ROE was set at 9.50% on a capital structure of 52.6%, effective from January 1, 2014. UNS Gas' allowed ROE is set at 9.75% on a capital structure of 50.8% common equity, effective from May 1, 2012.

FERC Order
In 2015 and 2016 TEP reported to FERC that it had not filed on a timely basis certain FERC jurisdictional agreements and, at that time, TEP made compliance filings, including the filing of several TEP transmission service agreements, the majority of which were entered into before the acquisition of UNS Energy by Fortis in 2014, that contained certain deviations from TEP’s standard form of service agreement. In 2016 FERC issued orders relating to the late-filed transmission service agreements, which directed TEP to issue time value refunds to the counterparties of the agreements. In 2016 TEP accrued time value refunds of $29 million, of which $22 million had been paid, and as at December 31, 2016 $7 million was accrued related to time-value refunds.

In June 2016, to preserve its rights, TEP petitioned the District of Columbia Circuit Court of Appeals to review the refund order. In January 2017 TEP and one of the counterparties to the late-filed transmission service agreements entered into a settlement regarding the time value refunds. Under the settlement, in January 2017, the counterparty paid TEP $11 million and TEP dismissed its appeal with prejudice.

In May 2017 FERC informed TEP that no further enforcement actions were necessary regarding TEP’s transmission refunds and closed the related investigation. As a result, TEP reversed the remaining $7 million provision related to potential time-value refunds.

 
8
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

Central Hudson
Central Hudson is regulated by the New York State Public Service Commission ("PSC") and certain activities are subject to regulation by FERC under the Federal Power Act (United States). Central Hudson uses a future test year in the establishment of rates. Central Hudson's allowed ROE is set at 9.0% on a capital structure of 48% common equity, effective July 1, 2015 for a three-year term.

Effective July 1, 2015, Central Hudson is also subject to an earnings sharing mechanism, whereby the Company and customers share equally earnings in excess of 50 basis points above the allowed ROE up to an achieved ROE that is 100 basis points above the allowed ROE. Earnings in excess of 100 basis points above the allowed ROE are shared primarily with the customer.

General Rate Application
In July 2017 Central Hudson filed a rate case with the PSC requesting an increase in electric and natural gas rates of $55 million (US$43 million) and $23 million (US$18 million), respectively. Included in the rate case was a request to increase Central Hudson's allowed ROE to 9.5% from 9.0% and the equity component of its capital structure to 50% from 48%. An order from the PSC is expected in August 2018 with the new rates to become effective no later than September 1, 2018, with a provision allowing the recovery of revenue as if approved rates went into effect July 1, 2018.

FortisBC Energy and FortisBC Electric
FortisBC Energy and FortisBC Electric are regulated by the British Columbia Utilities Commission ("BCUC") pursuant to the Utilities Commission Act (British Columbia), and are subject to Multi-Year PBR Plans for 2014 through 2019. FortisBC Energy is the benchmark utility in British Columbia, as designated by the BCUC, and the established allowed ROE for the benchmark utility is set at 8.75% on a 38.5% common equity component of capital structure, effective January 1, 2016. FortisBC Electric's allowed ROE of 9.15% on a 40% common equity component of capital structure, effective since January 1, 2013, remained unchanged, effective January 1, 2016.

The PBR Plans, as approved by the BCUC, incorporate incentive mechanisms for improving operating and capital expenditure efficiencies. Operation and maintenance expenses and base capital expenditures during the PBR period are subject to an incentive formula reflecting incremental costs for inflation and half of customer growth, less a fixed productivity adjustment factor of 1.1% for FortisBC Energy and 1.03% for FortisBC Electric each year. The approved PBR Plans also include a 50%/50% sharing of variances from the formula‑driven operation and maintenance expenses and capital expenditures over the PBR period, and a number of service quality measures designed to ensure FortisBC Energy and FortisBC Electric maintain specified service levels. It also sets out the requirements for an annual review process which provides a forum for discussion between the utilities and interested parties regarding current performance and future activities.

FortisAlberta
FortisAlberta is regulated by the Alberta Utilities Commission ("AUC") pursuant to the Electric Utilities Act (Alberta), the Public Utilities Act (Alberta), the Hydro and Electric Energy Act (Alberta) and the Alberta Utilities Commission Act (Alberta). FortisAlberta is subject to a Multi-Year PBR plan for 2013 through 2017. Under PBR, each year the prescribed formula is applied to the preceding year's distribution rates, with 2012 used as the going-in distribution rates.

The PBR plan includes mechanisms for the recovery or settlement of items determined to flow through directly to customers ("Y factor") and the recovery of costs related to capital expenditures that are not being recovered through the formula ("K factor" or "capital tracker"). The AUC also approved a Z factor, a PBR re-opener and an ROE efficiency carry-over mechanism. The Z factor permits an application for recovery of costs related to significant unforeseen events. The PBR re-opener permits an application to re-open and review the PBR plan to address specific problems with the design or operation of the PBR plan. The use of the Z factor and PBR re-opener mechanisms is associated with certain thresholds. The ROE efficiency carry-over mechanism provides an efficiency incentive by permitting the Company to continue to benefit from any efficiency gains achieved during the PBR term for two years following the end of that term.

 
9
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

Generic Cost of Capital
In October 2016 the AUC issued its decision related to the 2016 and 2017 Generic Cost of Capital Proceeding, establishing that FortisAlberta's allowed ROE remain unchanged at 8.30%, for 2016 and increase to 8.50% for 2017. The decision also set the common equity component of capital structure at 37%, effective January 1, 2016. Changes in FortisAlberta's allowed ROE and common equity component of capital structure impact only the portion of rate base that is funded by capital tracker revenue.

In July 2017 the AUC established a proceeding to determine the ROE and capital structure for 2018, 2019 and 2020. The proceeding commenced in October 2017, with an oral hearing expected to commence in March 2018. The ROE and capital structure approved for 2017 will remain in effect on an interim basis pending the finalization of this proceeding. A decision is expected in the third quarter of 2018.

Eastern Canadian
Newfoundland Power is regulated by the Newfoundland and Labrador Board of Commissioners of Public Utilities ("PUB") under the Public Utilities Act (Newfoundland and Labrador). Newfoundland Power uses a future test year in the establishment of rates. In June 2016 the PUB set the allowed ROE at 8.50%, effective January 1, 2016 and established that Newfoundland Power's common equity component of capital structure of 45% remain unchanged. The June 2016 rate order will remain in effect for 2016 through 2018. Newfoundland Power is required to file its next General Rate Application on or before June 1, 2018.

Maritime Electric is regulated by the Island Regulatory and Appeals Commission ("IRAC") under the provisions of the Electric Power Act (PEI), the Renewable Energy Act (PEI), the Electric Power (Electricity Rate-Reduction) Amendment Act (PEI), and the former Electric Power (Energy Accord Continuation) Amendment Act (PEI), which expired in February 2016. Maritime Electric uses a future test year for the establishment of rates. In March 2016 IRAC set the Company's allowed ROE at 9.35%, effective March 1, 2016 for a three-year period, down from 9.75% in effect since March 1, 2013, and established that Maritime Electric's targeted capital structure of 40% remain unchanged.

FortisOntario's three electric utilities operate under the Electricity Act (Ontario) and the Ontario Energy Board Act (Ontario), as administered by the Ontario Energy Board ("OEB"). Fortis Ontario's utilities use a future test year in the establishment of rates. Earnings are regulated on the basis of rate of return on rate base, plus a recovery of allowable distribution costs. In non-rebasing years, customer electricity distribution rates are set using inflationary factors less an efficiency target as prescribed by the OEB. The allowed ROE for distribution assets for FortisOntario's utilities ranged from 8.78% to 9.30% for 2017 and 8.93% to 9.30% for 2016, both on a deemed capital structure of 40% common equity, with the exception of one of its utilities which is subject to a rate-setting mechanism under a 35-year Franchise Agreement expiring in 2033, based on a price cap with commodity cost flow through. The base revenue requirement is adjusted annually for inflation, load growth and customer growth.

Regulated Utilities - Caribbean
Caribbean Utilities operates under transmission and distribution and generation licences from the Government of the Cayman Islands. The exclusive transmission and distribution licence is for an initial period of 20 years, expiring April 2028, with a provision for automatic renewal. A non-exclusive generation licence was issued for a term of 25 years, expiring November 2039. The licences detail the role of the Cayman Islands Utility Regulation and Competition Office ("OfReg"), which oversees all licences, establishes and enforces licence standards, reviews the rate‑cap adjustment mechanism ("RCAM"), and annually approves capital expenditures. The licences contain the provision for an RCAM based on published consumer price indices. Caribbean Utilities' targeted allowed ROA for 2017 and 2016 was in the range of 6.75% to 8.75%. In January 2017 a merger of regulatory bodies in the Cayman Islands, including the Electricity Regulatory Authority, resulted in the establishment of OfReg and this merger did not impact the terms and conditions of the licenses.


 
10
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

Fortis Turks and Caicos operates under two 50-year licences expiring in 2036 and 2037. Among other matters, the licences describe how electricity rates are set by the Government of the Turks and Caicos Islands, using a historical test year, in order to provide the utilities with an allowed ROA of between 15.0% and 17.5% (the "Allowable Operating Profit"). The Allowable Operating Profit is based on a calculated rate base, including interest on the amounts by which actual operating profits fall short of the Allowable Operating Profits on a cumulative basis (the "Cumulative Shortfall"). Annual submissions are made to the Government of the Turks and Caicos Islands calculating the amount of the Allowable Operating Profit and the Cumulative Shortfall. The recovery of the Cumulative Shortfall is dependent on future sales volumes and expenses. The achieved ROAs at the utilities have been significantly lower than those allowed under the licences as a result of the inability, due to economic and political factors, to increase base electricity rates associated with significant capital investment in recent years.


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"), which for regulated utilities include specific accounting guidance for regulated operations, as outlined in Note 2, and the following summary of significant accounting policies.

All amounts presented are in Canadian dollars unless otherwise stated.

Basis of Presentation

The consolidated financial statements reflect the Corporation's investments in its subsidiaries and variable interest entity, where Fortis is the primary beneficiary, on a consolidated basis, with the equity method used for entities in which Fortis has significant influence, but not control, and proportionate consolidation for generation and transmission assets that are jointly owned with non-affiliated entities. Intercompany transactions have been eliminated in the consolidated financial statements, except for transactions between non-regulated and regulated entities in accordance with accounting standards for rate-regulated entities. For further details on the Corporation's variable interest entity refer to Note 29.

Cash and Cash Equivalents

Cash and cash equivalents include cash, cash held in margin accounts, and short-term deposits with initial maturities of three months or less from the date of deposit.

Allowance for Doubtful Accounts

Fortis and each of its subsidiaries, with the exception of ITC, maintain an allowance for doubtful accounts that is estimated based on a variety of factors including accounts receivable aging, historical experience and other currently available information, including events such as customer bankruptcy and economic conditions. ITC recognizes losses for uncollectible accounts based upon specific identification of such items. Accounts receivable are written-off in the period in which the receivable is deemed uncollectible.

Inventories

Inventories, consisting of materials and supplies, gas, fuel and coal in storage, are measured at the lower of weighted average cost and net realizable value. The cost of inventory at the Corporation's utilities is expected to be recovered in customer rates.


 
11
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

Regulatory Assets and Liabilities

Regulatory assets and liabilities arise as a result of the rate-setting process at the Corporation's utilities. Regulatory assets represent future revenues and/or receivables associated with certain costs incurred that will be, or are expected to be, recovered from customers in future periods through the rate-setting process. Regulatory liabilities represent future reductions or limitations of increases in revenue associated with amounts that will be, or are expected to be, refunded to customers through the rate-setting process.

All amounts deferred as regulatory assets and liabilities are subject to regulatory approval. As such, the regulatory authorities could alter the amounts subject to deferral, at which time the change would be reflected in the consolidated financial statements. Certain remaining recovery and settlement periods are those expected by management and the actual recovery or settlement periods could differ based on regulatory approval.

Investments

Investments in which the Corporation exercises significant influence are accounted for on the equity basis. The Corporation reviews its investments on an annual basis for potential impairment in investment value. Any impairment will be recognized in the period in which such impairment is identified.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost less accumulated depreciation. Contributions in aid of construction represent amounts contributed by customers and governments for the cost of property, plant and equipment. These contributions are recorded as a reduction in the cost of property, plant and equipment and are being amortized annually by an amount equal to the charge for depreciation provided on the related assets.

Depreciation rates of the Corporation's regulated utilities include an estimate for future asset removal costs that have not been identified as a legal obligation, with the amount provided for in depreciation expense recorded as a long-term regulatory liability (Note 8 (xii)). Actual asset removal costs are recorded against the regulatory liability when incurred.

For the majority of the Corporation's regulated utilities, property, plant and equipment are derecognized on disposal or when no future economic benefits are expected from their use. Upon retirement or disposal, any difference between the cost and accumulated depreciation of the asset, net of salvage proceeds, is charged to accumulated depreciation, with no gain or loss recognized in earnings. It is expected that any gains or losses charged to accumulated depreciation will be reflected in future depreciation expense when they are refunded or collected in customer rates.

The majority of the Corporation's regulated utilities capitalize overhead costs that are not directly attributable to specific property, plant and equipment but relate to the overall capital expenditure program. The methodology for calculating and allocating capitalized overhead costs to property, plant and equipment is established by the respective regulator.

The majority of the Corporation's regulated utilities include in the cost of property, plant and equipment both a debt and an equity component of the allowance for funds used during construction ("AFUDC"). The debt component of AFUDC totalling $38 million (2016 - $29 million) is reported as a reduction of finance charges and the equity component of AFUDC is reported as other income (Note 22). Both components of AFUDC are charged to earnings through depreciation expense over the estimated service lives of the applicable asset. AFUDC is calculated in a manner as prescribed by the respective regulator.

At FortisAlberta the cost of property, plant and equipment also includes Alberta Electric System Operator ("AESO") contributions, which are investments required by FortisAlberta to partially fund the construction of transmission facilities.


 
12
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

Property, plant and equipment include inventories held for the development, construction and betterment of other assets, with the exception of UNS Energy. As required by its regulator, UNS Energy recognizes inventories held for the development and construction of other assets in inventories until consumed. When put into service, the inventories are reclassified to property, plant and equipment.

Maintenance and repairs of property, plant and equipment are charged to earnings in the period incurred, while replacements and betterments that extend the useful lives are capitalized.

Property, plant and equipment is depreciated using the straight-line method based on the estimated service lives of the asset. Depreciation rates for regulated property, plant and equipment are approved by the respective regulator. Depreciation rates for 2017 ranged from 0.9% to 34.6% (2016 - 0.9% to 34.6%). The weighted average composite rate of depreciation, before reduction for amortization of contributions in aid of construction, for 2017 was 2.6% (20162.8%).

The service life ranges and weighted average remaining service life of the Corporation's distribution, transmission, generation and other assets as at December 31 were as follows.

 
 
2017
2016
(Years)
Service Life Ranges
Weighted Average Remaining Service Life
 
Service Life Ranges
Weighted Average Remaining Service Life
Distribution
 
 
 
 
 
 
Electric
5-80
33
 
5-80
32
 
Gas
14-95
34
 
7-95
33
Transmission
 
 
 
 
 
 
Electric
20-80
41
 
20-80
41
 
Gas
5-80
34
 
7-80
34
Generation
5-85
28
 
5-85
26
Other
3-70
14
 
3-70
14
Leases

Leases that transfer to the Corporation substantially all of the risks and benefits incidental to ownership of the leased item are capitalized at the present value of the minimum lease payments. Capital leases are depreciated over the lease term, except where ownership of the asset is transferred at the end of the lease term, in which case capital leases are depreciated over the estimated service life of the underlying asset. Where the regulator has approved recovery of the arrangements as operating leases for rate-setting purposes that would otherwise qualify as capital leases for financial reporting purposes, the timing of the expense recognition related to the lease is modified to conform with the rate-setting process.

Operating lease payments are recognized as an expense in earnings on a straight-line basis over the lease term.

Intangible Assets

Intangible assets are recorded at cost less accumulated amortization. The useful lives of intangible assets are assessed to be either indefinite or finite. Intangible assets with indefinite useful lives are tested for impairment annually, either individually or at the reporting unit level. Such intangible assets are not amortized. An intangible asset with an indefinite useful life is reviewed annually to determine whether the indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis.

Intangible assets with finite lives are amortized using the straight-line method based on the estimated service lives of the assets. Amortization rates for regulated intangible assets are approved by the respective regulator. Amortization rates for 2017 ranged from 1.0% to 50.0% (20161.0% to 50.0%).


 
13
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

The service life ranges and weighted average remaining service life of finite-life intangible assets as at December 31 were as follows.
 
 
2017
 
2016
(Years)
Service Life Ranges
Weighted Average Remaining Service Life
 
Service Life Ranges
Weighted Average Remaining Service Life
Computer software
3-10
4
 
3-10
4
Land, transmission and water rights
36-80
57
 
30-80
57
Other
10-100
10
 
10-104
15
For the majority of the Corporation's regulated utilities, intangible assets are derecognized on disposal or when no future economic benefits are expected from their use. Upon retirement or disposal of intangible assets, any difference between the cost and accumulated amortization of the asset, net of salvage proceeds, is charged to accumulated amortization, with no gain or loss recognized in earnings. It is expected that any gains or losses charged to accumulated amortization will be reflected in future amortization costs when they are refunded or collected in customer rates.

The majority of indefinite-lived intangible assets are held in the Corporation's regulated utilities that also have goodwill. For its annual testing of impairment for indefinite-lived intangible assets, Fortis includes these assets as part of the respective reporting units, which are tested on an annual basis for goodwill impairment, as disclosed in this Note under "Goodwill".

Impairment of Long-Lived Assets

The Corporation reviews the valuation of property, plant and equipment, intangible assets with finite lives, and other long-term assets when events or changes in circumstances indicate that the assets' carrying value may not be recoverable. If the carrying amount of the asset exceeds the expected total undiscounted cash flows generated by the asset, the asset is written down to estimated fair value and an impairment loss is recognized in earnings in the period in which it is identified.

Asset-impairment testing is carried out at the reporting unit level to determine if assets are impaired. The net cash flows for reporting units are not asset-specific but are pooled for the entire reporting unit. The recovery of regulated assets' carrying value, including a fair rate of return, is provided through customer rates approved by the respective regulatory authority.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired relating to business acquisitions.  The Corporation performs an annual impairment test for goodwill as at October 1, or more frequently if any event occurs or if circumstances change that would indicate that the fair value of a reporting unit was below its carrying value.

Fortis performs an annual internal qualitative and quantitative assessment for each reporting unit to which goodwill has been allocated. The Corporation has a total of 11 reporting units that were allocated goodwill at the respective dates of acquisition by Fortis. For those reporting units where: (i) management's assessment of qualitative and quantitative factors indicates that fair value is not 50% or more likely to be greater than carrying value; or (ii) the excess of estimated fair value over carrying value, as of the date of the immediately preceding impairment test, was not significant, then fair value of the reporting unit will be estimated by an external consultant in the current year.

In calculating goodwill impairment, the estimated fair value of the reporting unit is compared to its carrying value. If the fair value of the reporting unit is less than the carrying value, the excess of the carrying amount over fair value is recorded as goodwill impairment, not to exceed the total amount of goodwill allocated to the reporting unit.

 
14
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

The primary method for estimating fair value of the reporting units is the income approach, whereby net cash flow projections for the reporting units are discounted using an enterprise value method. The income approach uses several underlying estimates and assumptions with varying degrees of uncertainty, including the amount and timing of expected future cash flows, growth rates, and the determination of appropriate discount rates. A secondary valuation method, the market approach, as well as a reconciliation of the total estimated fair value of all reporting units to the Corporation's market capitalization, is also performed as an assessment of the conclusions reached under the income approach.

As a result of the Corporation's annual assessment for impairment of goodwill, the fair value of all of the reporting units that were allocated goodwill exceeded their respective carrying value and, therefore, no impairment provision was required in 2017 or 2016.

Deferred Financing Costs

Any costs, debt discounts and premiums related to the issuance of long-term debt are recognized against long-term debt and are amortized over the life of the related long-term debt.

Employee Future Benefits

Defined Benefit and Defined Contribution Pension Plans
The Corporation and its subsidiaries each maintain one or a combination of defined benefit pension plans, including retirement allowances and supplemental retirement plans for certain executive employees, and defined contribution pension plans, including group Registered Retirement Savings Plans and group 401(k) plans for employees. The projected benefit obligation and the value of pension cost associated with the defined benefit pension plans are actuarially determined using the projected benefits method prorated on service and management's best estimate of expected plan investment performance, salary escalation and expected retirement ages of employees. Discount rates reflect market interest rates on high‑quality bonds with cash flows that match the timing and amount of expected pension payments.

With the exception of FortisBC Energy and Newfoundland Power, pension plan assets are valued at fair value for the purpose of determining pension cost. At FortisBC Energy and Newfoundland Power, pension plan assets are valued using the market-related value for the purpose of determining pension cost, where investment returns in excess of, or below, expected returns are recognized in the asset value over a period of three years.

The excess of any cumulative net actuarial gain or loss over 10% of the greater of the projected benefit obligation and the fair value of plan assets (the market-related value of plan assets at FortisBC Energy and Newfoundland Power) at the beginning of the fiscal year, along with unamortized past service costs, are deferred and amortized over the average remaining service period of active employees.

The net funded or unfunded status of defined benefit pension plans, measured as the difference between the fair value of the plan assets and the projected benefit obligation, is recognized on the Corporation's consolidated balance sheet.

For the majority of the Corporation's regulated utilities, any difference between pension cost recognized under US GAAP and that recovered from customers in current rates for defined benefit pension plans, which is expected to be recovered from, or refunded to, customers in future rates, is subject to deferral account treatment (Note 8 (ii)).

With the exception of Fortis and FHI, any unamortized balances related to net actuarial gains and losses, past service costs and transitional obligations associated with defined benefit pension plans, which would otherwise be recognized in accumulated other comprehensive income, are subject to deferral account treatment (Note 8 (ii)). At Fortis and FHI, any unamortized balances related to net actuarial gains and losses, past service costs and transitional obligations associated with defined benefit pension plans are recognized in accumulated other comprehensive income.

The costs of the defined contribution pension plans are expensed as incurred.

 
15
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

Other Post-Employment Benefits Plans
The Corporation and its subsidiaries also offer other post-employment benefits ("OPEB") plans, including certain health and dental coverage and life insurance benefits, for qualifying members. The accumulated benefit obligation and the cost associated with OPEB plans are actuarially determined using the projected benefits method prorated on service and management's best estimate of expected plan performance, salary escalation, expected retirement ages of employees and health care costs. Discount rates reflect market interest rates on high-quality bonds with cash flows that match the timing and amount of expected OPEB payments.

The excess of any cumulative net actuarial gain or loss over 10% of the accumulated benefit obligation and the fair value of plan assets at the beginning of the fiscal year, along with unamortized past service costs, are deferred and amortized over the average remaining service period of active employees.

The net funded or unfunded status of OPEB plans, measured as the difference between the fair value of the plan assets and the accumulated benefit obligation, is recognized on the Corporation's consolidated balance sheet.

For the majority of the Corporation's regulated utilities, any difference between the cost of OPEB plans recognized under US GAAP and that recovered from customers in current rates, which is expected to be recovered from, or refunded to, customers in future rates, is subject to deferral account treatment (Note 8 (ii)).

Stock-Based Compensation

The Corporation records compensation expense related to stock options granted under its stock option plans (Note 21). Compensation expense is measured at the date of grant using the Black-Scholes fair value option-pricing model and each grant is amortized as a single award evenly over the four-year vesting period of the options granted. The offsetting entry is an increase to additional paid-in capital for an amount equal to the annual compensation expense related to the issuance of stock options. The stock options become exercisable once time-vesting requirements have been met. Upon exercise, the proceeds of the options are credited to capital stock at the option prices and the fair value of the options, as previously recognized, is reclassified from additional paid-in capital to capital stock. An exercise of options below the current market price of the Corporation's common shares has a dilutive effect on the Corporation's consolidated capital stock and shareholders' equity. Fortis satisfies stock option exercises by issuing common shares from treasury.

The Corporation also records liabilities associated with its Directors' Deferred Share Unit ("DSU"), Performance Share Unit ("PSU") and Restricted Share Unit ("RSU") Plans, all representing cash-settled awards, at fair value at each reporting date until settlement. Compensation expense is recognized on a straight-line basis over the vesting period, which for the PSU and RSU Plans is over the shorter of three years or the period to retirement eligibility and for the DSU Plan is at the time of grant. Forfeitures are accounted for as they occur. The fair value of the DSU, PSU and RSU liabilities is based on the five-day volume weighted average price ("VWAP") of the Corporation's common shares at the end of each reporting period. The VWAP of the Corporation's common shares as at December 31, 2017 was $46.01 (December 31, 2016 - $41.46). The fair value of the PSU liability is also based on the expected payout probability, based on historical performance in accordance with the defined metrics of each grant and management's best estimate.

Foreign Currency Translation

The assets and liabilities of the Corporation's foreign operations, all of which have a US dollar functional currency, are translated at the exchange rate in effect as at the balance sheet date. The exchange rate in effect as at December 31, 2017 was US$1.00=CAD$1.25 (December 31, 2016 – US$1.00=CAD$1.34). The resulting unrealized translation gains and losses are excluded from the determination of earnings and are recognized in accumulated other comprehensive income until the foreign subsidiary is sold, substantially liquidated or evaluated for impairment in anticipation of disposal. Revenue and expenses of the Corporation's foreign operations are translated at the average exchange rate in effect during the reporting period, which was US$1.00=CAD$1.30 for 2017 (2016 – US$1.00=CAD$1.33).

 
16
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

Foreign exchange translation gains and losses on foreign currency-denominated long-term debt that is designated as an effective hedge of foreign net investments are accumulated as a separate component of shareholders' equity within accumulated other comprehensive income and the current period change is recorded in other comprehensive income.

Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate prevailing at the balance sheet date. Revenue and expenses denominated in foreign currencies are translated at the exchange rate prevailing at the transaction date. Gains and losses on translation are recognized in earnings.

Derivative Instruments and Hedging Activities

Non-Designated Derivatives
Derivatives not designated as hedging contracts are used by Fortis to manage cash flow risk associated with forecasted US dollar cash inflows and forecasted future cash settlements of DSU and RSU obligations; UNS Energy to meet forecast load and reserve requirements; and Aitken Creek to manage exposure to commodity price risk, to capture natural gas price spreads, and to manage the financial risk posed by physical transactions. These non-designated derivatives are measured at fair value with changes in fair value recognized in earnings.

Derivatives not designated as hedging contracts are also used by UNS Energy, Central Hudson and FortisBC Energy to reduce exposure to energy price risk associated with purchased power and gas requirements. The settled amounts of these derivatives are generally included in regulated rates, as permitted by the respective regulators. These non-designated derivatives are measured at fair value and the net unrealized gains and losses associated with changes in fair value of the derivative contracts are recorded as regulatory assets or liabilities for recovery from, or refund to, customers in future rates (Note 8 (viii)).

Derivative instruments that meet the normal purchase or normal sale scope exception are not measured at fair value and settled amounts are recognized as energy supply costs on the consolidated statements of earnings.

Derivatives in Designated Hedging Relationships
For derivatives designated as hedging contracts, the Corporation and its utilities formally assess, at inception and thereafter, whether the hedging contract is highly effective in offsetting changes in the hedged item. The hedging strategy by transaction type and risk management strategy is formally documented. As at December 31, 2017, the Corporation's hedging relationships primarily consisted of cash flow hedges and net investment hedges.

The Corporation, ITC and UNS Energy use cash flow hedges to manage its exposure to interest rate risk. Unrealized gains or losses on these derivatives are initially recognized in accumulated other comprehensive income and reclassified to earnings when the underlying hedged transaction affects earnings. Any hedge ineffectiveness is recognized in net earnings immediately at the time the gain or loss on the derivatives is calculated.

The Corporation's earnings from, and net investments in, foreign subsidiaries and equity method investments are exposed to fluctuations in the US dollar-to-Canadian dollar exchange rate. The Corporation has decreased a portion of the above-noted exposure through the use of US dollar-denominated borrowings at the corporate level. The Corporation has designated its corporately issued US dollar long-term debt as a hedge of a portion of the foreign exchange risk related to its foreign net investments. Foreign currency exchange rate fluctuations associated with the translation of the Corporation's corporately issued US dollar-denominated borrowings designated as hedges are recognized in accumulated other comprehensive income and help offset unrealized foreign currency exchange gains and losses on the foreign net investments, which gains and losses are also recognized in accumulated other comprehensive income.


 
17
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

Presentation of Derivatives
The fair value of derivative instruments are recognized on the Corporation's consolidated balance sheet as current or long-term assets and liabilities depending on the timing of the settlements and the resulting cash flows associated with the instruments. Derivative contracts under master netting agreements and collateral positions are presented on a gross basis. Cash flows associated with the settlement of all derivative instruments are included in operating activities on the Corporation's consolidated statement of cash flows.

Income Taxes

The Corporation and its subsidiaries follow the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for temporary differences between the tax and accounting basis of assets and liabilities, as well as for the benefit of losses available to be carried forward to future years for tax purposes that are more likely than not to be realized. Valuation allowances are recognized against deferred tax assets when it is more likely than not that a portion of, or the entire amount of, the deferred income tax asset will not be realized. Deferred income tax assets and liabilities are measured using enacted income tax rates and laws in effect when the temporary differences are expected to be recovered or settled. The effect of a change in income tax rates on deferred income tax assets and liabilities is recognized in earnings in the period that the change occurs. Current income tax expense or recovery is recognized for the estimated income taxes payable or receivable in the current year.

As approved by the respective regulator, ITC, UNS Energy, Central Hudson and Maritime Electric recover current and deferred income tax expense in customer rates. As approved by the regulator, FortisAlberta recovers income tax expense in customer rates based only on income taxes that are currently payable. FortisBC Energy, FortisBC Electric, Newfoundland Power and FortisOntario recover income tax expense in customer rates based only on income taxes that are currently payable, except for certain regulatory balances for which deferred income tax expense is recovered from, or refunded to, customers in current rates, as prescribed by the respective regulator. Deferred income taxes that are expected to be collected from or refunded to customers in rates once income taxes become payable or receivable are recognized as a regulatory asset or liability (Note 8 (i)).

For regulatory reporting purposes, the capital cost allowance pool for certain property, plant and equipment at FortisAlberta is different from that for legal entity corporate income tax filing purposes. In a future reporting period, yet to be determined, the difference may result in higher income tax expense than that recognized for regulatory rate-setting purposes and collected in customer rates.

Caribbean Utilities and Fortis Turks and Caicos are not subject to income tax as they operate in tax-free jurisdictions. BECOL is not subject to income tax as it was granted tax-exempt status by the Government of Belize for the terms of its 50-year PPAs.

Any difference between the income tax expense recognized under US GAAP and that recovered from customers in current rates that is expected to be recovered from customers in future rates, is subject to deferral account treatment (Note 8 (i)).

The Corporation intends to indefinitely reinvest earnings from certain foreign operations. Accordingly, the Corporation does not provide for deferred income taxes on temporary differences related to investments in foreign subsidiaries. The difference between the carrying values of these foreign investments and their tax bases, resulting from unrepatriated earnings and currency translation adjustments, is approximately $561 million as at December 31, 2017 (December 31, 2016$525 million). If such earnings are repatriated, in the form of dividends or otherwise, the Corporation may be subject to income taxes and foreign withholding taxes. The determination of the amount of unrecognized deferred income tax liabilities on such amounts is impractical.

Tax benefits associated with income tax positions taken, or expected to be taken, in an income tax return are recognized only when the more likely than not recognition threshold is met. The tax benefits are measured at the largest amount of benefit that is greater than 50% likely to be realized upon settlement. The difference between a tax position taken, or expected to be taken, and the benefit recognized and measured pursuant to this guidance represents an unrecognized tax benefit.

Income tax interest and penalties are expensed as incurred and included in income tax expense.

 
18
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

Sales Taxes

In the course of its operations, the Corporation's subsidiaries collect sales taxes from their customers. When customers are billed, a current liability is recognized for the sales taxes included on customers' bills. The liability is settled when the taxes are remitted to the appropriate government authority. The Corporation's revenue excludes sales taxes.

Revenue Recognition

Revenue from the sale and delivery of electricity and gas by the Corporation's regulated utilities is generally recognized on an accrual basis. Electricity and gas consumption is metered upon delivery to customers and is recognized as revenue using approved rates when consumed. Revenue at the regulated utilities is billed at rates approved by the applicable regulatory authority. Meters are read periodically and bills are issued to customers based on these readings. At the end of each reporting period, a certain amount of consumed electricity and gas will not have been billed, which is estimated and accrued as revenue.

ITC's transmission revenue is recognized as services are provided based on FERC-approved cost-based formula rate templates. A reserve for revenue subject to refund is recognized as a reduction to revenue when such refund is probable and can be reasonably estimated (Note 8 (vi)).

In certain circumstances, UNS Energy and Aitken Creek enter into purchased power and wholesale sales contracts that are not settled with energy. The net sales contracts and power purchase contracts are reflected at the net amount in revenue.

As stipulated by the regulator, FortisAlberta is required to arrange and pay for transmission services with the AESO and collect transmission revenue from its customers, which is achieved through invoicing the customers' retailers through FortisAlberta's transmission component of its regulator-approved rates. FortisAlberta is solely a distribution company and, as such, does not operate or provide any transmission or generation services. The Company is a conduit for the flow through of transmission costs to end-use customers, as the transmission provider does not have a direct relationship with these customers. As a result, FortisAlberta reports revenue and expenses related to transmission services on a net basis. The rates collected are based on forecast transmission expenses. FortisAlberta is not subject to any forecast risk with respect to transmission costs, as all differences between actual expenses related to transmission services and actual revenue collected from customers are deferred to be recovered from, or refunded to, customers in future rates.

FortisBC Electric has entered into contracts to sell surplus capacity that may be available after it meets its load requirements. This revenue is recognized on an accrual basis at rates established in the sales contract.

All of the Corporation's non-regulated generation operations record revenue on an accrual basis and revenue is recognized on delivery of output at rates fixed under contract or based on observed market prices as stipulated in contractual arrangements.

Revenue at Aitken Creek is generated from long-term lease storage, park and loan activities, and storage optimization activities and is generally recognized on an accrual basis over the term of the related contracts. Optimization revenue results from the purchase of natural gas and its forward sale through financial and physical trading contracts and consists of realized and unrealized gains and losses on the financial and physical energy trading contracts, not designated as derivatives, used to manage commodity price risk (Note 28).


 
19
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

Asset Retirement Obligations

A conditional asset retirement obligation ("ARO") is a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the Corporation's control. AROs are recorded as a liability at fair value and are classified as long-term other liabilities, with a corresponding increase to property, plant and equipment. The Corporation recognizes AROs in the periods in which they are incurred if a reasonable estimate of fair value can be determined. Fair value is based on an estimate of the present value of expected future cash outlays, discounted at a credit-adjusted risk-free interest rate. The increase in the liability due to the passage of time is recorded through accretion, and the capitalized cost is depreciated over the useful life of the asset. Actual costs incurred upon the settlement of AROs are recorded as a reduction in the liabilities.

The Corporation's subsidiaries have AROs associated with the remediation of generation facilities, interconnection facilities, wholesale energy supply agreements, and certain electricity distribution system assets. While each of the foregoing will have legal AROs, including land and environmental remediation and/or removal of assets, the final date and cost of remediation and/or removal of the related assets cannot be reasonably determined at this time. These assets are reasonably expected to operate in perpetuity due to the nature of their operations. The licences, permits, interconnection facilities agreements, wholesale energy supply agreements and rights-of-way are reasonably expected to be renewed or extended indefinitely to maintain the integrity of the assets and ensure the continued provision of service to customers. In the event that environmental issues are identified, assets are decommissioned or the applicable licences, permits or agreements are terminated, AROs will be recognized at that time provided the costs can be reasonably estimated.

Contingencies

Reserves for specific legal proceedings are established when the likelihood of an unfavourable outcome is probable and the amount of loss can be reasonably estimated. Significant judgment is required in predicting the outcome of these claims. The Corporation identifies certain other legal matters where the Corporation believes an unfavourable outcome is reasonably possible or no estimate of possible losses can be made. All contingencies are regularly reviewed to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of loss can be made.

New Accounting Policies

Simplifying the Test for Goodwill Impairment
Effective January 1, 2017, the Corporation adopted Accounting Standards Update ("ASU") No. 2017-04, Simplifying the Test for Goodwill Impairment. The amendments in this update simplify the subsequent measurement of goodwill by eliminating step two in the current two-step goodwill impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The above-noted ASU was applied prospectively and did not impact the Corporation's consolidated financial statements.

Inventories
Effective January 1, 2017, the Corporation's utilities adopted ASU No. 2015-11, Inventory, which requires the measurement of inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The adoption of this update did not impact the Corporation's consolidated financial statements as the cost of inventory at the Corporation's utilities is recovered in customer rates.


 
20
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

Use of Accounting Estimates

The preparation of the consolidated financial statements in accordance with US GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Estimates and judgments are based on historical experience, current conditions and various other assumptions believed to be reasonable under the circumstances.

Additionally, certain estimates and judgments are necessary since the regulatory environments in which the Corporation's utilities operate often require amounts to be recorded at estimated values until these amounts are finalized pursuant to regulatory decisions or other regulatory proceedings. Due to changes in facts and circumstances, and the inherent uncertainty involved in making estimates, actual results may differ significantly from current estimates. Estimates and judgments are reviewed periodically and, as adjustments become necessary, they are recognized in earnings in the period in which they become known. In the event that a regulatory decision is received after the balance sheet date but before the consolidated financial statements are issued, the facts and circumstances are reviewed to determine whether or not it is a recognized subsequent event.

The Corporation's critical accounting estimates are described above in Note 3 under the headings Regulatory Assets and Liabilities; Property, Plant and Equipment; Intangible Assets; Goodwill; Employee Future Benefits; Income Taxes; Revenue Recognition; and Contingencies, and in the respective notes to the consolidated financial statements.


4. FUTURE ACCOUNTING PRONOUNCEMENTS

The Corporation considers the applicability and impact of all ASUs issued by the Financial Accounting Standards Board ("FASB"). The following updates have been issued by FASB, but have not yet been adopted by Fortis. Any ASUs not included below were assessed and determined to be either not applicable to the Corporation or not expected to have a material impact on the consolidated financial statements.

Revenue from Contracts with Customers
ASU No. 2014-09 was issued in May 2014 and the amendments in this update, along with additional ASUs issued in 2016 and 2017 to clarify implementation guidance, create Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements in ASC Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the codification. This standard clarifies the principles for recognizing revenue and enables users of financial statements to better understand and consistently analyze an entity's revenues across industries and transactions. The new guidance permits two methods of adoption: (i) the full retrospective method; and (ii) the modified retrospective method, under which comparative periods would not be restated and the cumulative impact of applying the standard would be recognized at the date of initial adoption supplemented by additional disclosures. This standard is effective for annual and interim periods beginning after December 15, 2017. Fortis adopted this ASU on January 1, 2018 using the modified retrospective approach and there have been no material adjustments identified to opening retained earnings.

Fortis has reviewed the final assessments and conclusions of its utilities on tariff-based sales to retail and wholesale customers, which represents more than 90% of the Corporation's consolidated revenue, and has concluded that the adoption of this standard will not affect revenue recognition for tariff-based sales and, therefore, will not have an impact on earnings. Fortis' subsidiaries have completed their final assessments and conclusions on less material revenue streams, and Fortis is reviewing these final assessments, particularly for consistency of implementation and accounting policy selection, and does not expect any adjustments.


 
21
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

The Corporation will add additional disclosures to address the requirement to provide more information regarding the nature, amount, timing and uncertainty of revenue and cash flows, which will result in revenues that fall outside the scope of the new standard, including alternative revenue programs, being presented separately. The Corporation will present revenue in three categories: (i) revenue from contracts with customers which will include retail and wholesale tariff revenue; (ii) alternative revenue programs; and (iii) other revenue. The Corporation's revenue is currently disaggregated by: (i) geography; and (ii) substantially autonomous utility operations. This level of disaggregation will not change upon implementation of the new guidance as it is: (i) used by the Corporation's chief operating decision maker for evaluating the financial performance of operating subsidiaries and to make resource allocation decisions; (ii) used by external stakeholders for evaluating the Corporation's financial performance; and (iii) consistent with other externally reported documents of the Corporation.

Fortis continues to monitor its adoption process under its existing internal control over financial reporting, including accounting processes and the gathering and evaluation of information used in assessing the required disclosures. As the Corporation finalizes its implementation in the first quarter of 2018, it will continue to assess any necessary changes to internal control over financial reporting.

Recognition and Measurement of Financial Assets and Financial Liabilities
ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, was issued in January 2016 and the amendments in this update address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Most notably, the amendments require the following: (i) equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) to be measured at fair value through earnings; and (ii) financial assets and financial liabilities to be presented separately in the notes to the consolidated financial statements, grouped by measurement category and form of financial instrument. This update is effective for annual and interim periods beginning after December 15, 2017. Fortis will adopt this standard in the first quarter of 2018, with an effective date of January 1, 2018, however, it is not expected that this standard will have a material impact on its consolidated financial statements.

Leases
ASU No. 2016-02 was issued in February 2016 and the amendments in this update create ASC Topic 842, Leases, and supersede lease requirements in ASC Topic 840, Leases. The main provision of ASC Topic 842 is the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases that were previously classified as operating leases. For operating leases, a lessee is required to do the following: (i) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, on the balance sheet; (ii) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and (iii) classify all cash payments within operating activities in the statement of cash flows. These amendments also require qualitative disclosures along with specific quantitative disclosures. This update is effective for annual and interim periods beginning after December 15, 2018 and is to be applied using a modified retrospective approach with practical expedient options. Early adoption is permitted. Fortis is assessing the impact that the adoption of this update will have on its consolidated financial statements.

Measurement of Credit Losses on Financial Instruments
ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, was issued in June 2016 and the amendments in this update require entities to use an expected credit loss methodology and to consider a broader range of reasonable and supportable information to inform credit loss estimates. This update is effective for annual and interim periods beginning after December 15, 2019 and is to be applied on a modified retrospective basis. Fortis is assessing the impact that the adoption of this update will have on its consolidated financial statements.


 
22
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, was issued in March 2017 and the amendments in this update require that an employer disaggregate the current service cost component of net benefit cost and present it in the same statement of earnings line item(s) as other employee compensation costs arising from services rendered. The other components of net benefit cost are required to be presented separately from the service cost component and outside of operating income. Additionally, the amendments allow only the service cost component to be eligible for capitalization when applicable. The amendments in this update should be applied retrospectively for the presentation of the net periodic benefit costs and prospectively, on and after the effective date, for the capitalization in assets of only the service cost component of net periodic benefit costs. This update is effective for annual and interim periods beginning after December 15, 2017. Fortis adopted this standard on January 1, 2018 and concluded that this standard will not materially impact its consolidated financial statements.

Targeted Improvements to Accounting for Hedging Activities
ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, was issued in August 2017 and the amendments in this update better align risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. This update is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The amendments in this update should be reflected as of the beginning of the fiscal year of adoption. For cash flow and net investment hedges existing at the date of adoption, the amendments should be applied as a cumulative effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings. Amended presentation and disclosure guidance is required only prospectively. Fortis is assessing the impact that the adoption of this update will have on its consolidated financial statements.


5.    SEGMENTED INFORMATION

Fortis segments its business based on regulatory status and service territory, as well as the information used by the chief operating decision maker in deciding how to allocate resources and evaluate the performance of each segment. Segment performance is evaluated based on net earnings attributable to common equity shareholders.

A detailed description of each reportable segment is provided in Note 1.



 
23
 


FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016


 
REGULATED
 
NON-REGULATED
 
 
Year Ended
United States
 
Canada
 
 
Energy

 
Inter-
 
December 31, 2017
 
UNS

Central

 
FortisBC

Fortis

FortisBC

Eastern

 
 
 
Infra-

Corporate

segment
 
($ millions)
ITC

Energy

Hudson

 
Energy

Alberta

Electric

Canadian

Caribbean

Total

 
structure

and Other

eliminations
Total

Revenue
1,575

2,080

872

 
1,198

600

398

1,062

301

8,086

 
226

1

(12
)
8,301

Energy supply costs

711

260

 
411


142

692

144

2,360

 
2


(1
)
2,361

Operating expenses
436

609

402

 
298

198

89

134

44

2,210

 
49

13

(11
)
2,261

Depreciation and amortization
220

260

65

 
198

190

62

95

55

1,145

 
32

2


1,179

Operating income
919

500

145

 
291

212

105

141

58

2,371

 
143

(14
)

2,500

Other income, net
40

19

8

 
20

2

1

1

7

98

 
1

29

(1
)
127

Finance charges
259

101

41

 
116

93

37

56

18

721

 
5

189

(1
)
914

Income tax expense
371

148

42

 
40

1

14

22


638

 
19

(69
)

588

Net earnings
329

270

70

 
155

120

55

64

47

1,110

 
120

(105
)

1,125

Non-controlling interests
57



 
1




13

71

 
26



97

Preference share dividends



 






 

65


65

Net earnings attributable
to common equity shareholders
272

270

70

 
154

120

55

64

34

1,039

 
94

(170
)

963

Goodwill
7,698

1,733

566

 
913

227

235

67

178

11,617

 
27



11,644

Total assets
17,581

8,596

3,188

 
6,418

4,454

2,197

2,489

1,325

46,248

 
1,605

76

(107
)
47,822

Capital expenditures 
982

534

220

 
446

414

105

156

146

3,003

 
21



3,024

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 


December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 


($ millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Revenue
334

2,002

849

 
1,151

572

377

1,063

301

6,649

 
193

9

(13
)
6,838

Energy supply costs

740

253

 
347


132

698

137

2,307

 
35


(1
)
2,341

Operating expenses
151

605

387

 
295

189

88

136

45

1,896

 
39

108

(12
)
2,031

Depreciation and amortization
46

264

61

 
198

180

57

91

54

951

 
28

4


983

Operating income
137

393

148

 
311

203

100

138

65

1,495

 
91

(103
)

1,483

Other income, net
9

7

5

 
17

3


2

9

52

 
2


(1
)
53

Finance charges
54

102

40

 
125

85

37

55

15

513

 
4

162

(1
)
678

Income tax expense
20

99

43

 
51


9

21


243

 
3

(101
)

145

Net earnings
72

199

70

 
152

121

54

64

59

791

 
86

(164
)

713

Non-controlling interests
13



 
1




13

27

 
26



53

Preference share dividends



 






 

75


75

Net earnings attributable
to common equity shareholders
59

199

70

 
151

121

54

64

46

764

 
60

(239
)

585

Goodwill
8,246

1,854

605

 
913

227

235

67

190

12,337

 
27



12,364

Total assets
18,000

8,935

3,214

 
6,230

4,057

2,143

2,394

1,344

46,317

 
1,502

130

(45
)
47,904

Capital expenditures
223

524

233

 
336

375

74

161

106

2,032

 
19

10


2,061


 
24
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

Related-party and inter-company transactions

Related-party transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. There were no material related-party transactions in 2017 or 2016.

Inter-company balances and inter-company transactions, including any related inter-company profit, are eliminated on consolidation, except for certain inter-company transactions between non-regulated and regulated entities in accordance with accounting standards for rate-regulated entities. The significant inter-company transactions for 2017 and 2016 are summarized in the following table.

(in millions)
2017

2016

Sale of capacity from Waneta Expansion to FortisBC Electric
$
46

$
45

Sale of energy from BECOL to Belize Electricity
35

33

Lease of gas storage capacity and gas sales from Aitken Creek to
 FortisBC Energy
24

17


As at December 31, 2017, accounts receivable on the Corporation's consolidated balance sheet included approximately $20 million due from Belize Electricity (December 31, 2016 - $16 million).

From time to time, the Corporation provides short-term financing to certain subsidiaries to support capital expenditure programs, acquisitions and seasonal working capital requirements. There were no inter-segment loans outstanding as at December 31, 2017 and December 31, 2016.


6. ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS

(in millions)
2017

2016

Trade accounts receivable
$
492

$
507

Unbilled accounts receivable
575

551

Allowance for doubtful accounts
(31
)
(33
)
Income tax receivable
8

26

Other
87

76

 
$
1,131

$
1,127


Other consisted of customer billings for non-core services, collateral deposits for gas purchases at FortisBC Energy, advances on coal purchases at UNS Energy, and the fair value of derivative instruments (Note 28).


7. INVENTORIES
(in millions)
2017

2016

Materials and supplies
$
238

$
244

Gas and fuel in storage
97

98

Coal inventory
32

30

 
$
367

$
372




 
25
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

8. REGULATORY ASSETS AND LIABILITIES
Based on previous, existing or expected regulatory orders or decisions, the Corporation's regulated utilities have recognized the following amounts that are expected to be recovered from, or refunded to, customers in future periods.
 
 
 
Remaining recovery period
(in millions)
2017

2016

(Years)
Regulatory assets
 
 
 
Deferred income taxes (i)
$
1,403

$
1,260

To be determined
Employee future benefits (ii)
510

576

Various
Deferred energy management costs (iii)
200

178

1-10
Generation early retirement costs (iv)
105


11-13
Deferred lease costs (v)
104

97

Various
Rate stabilization accounts (vi)
95

183

Various
Deferred operating overhead costs (vii)
91

78

Various
Derivative instruments (viii)
87

19

Various
Manufactured gas plant ("MGP") site remediation deferral (ix)
75

107

To be determined
Greenhouse gas reduction regulatory incentives (x)
35

40

10
Other regulatory assets (xi)
340

395

Various
Total regulatory assets
3,045

2,933

 
Less: current portion
(303
)
(313
)
1
Long-term regulatory assets
$
2,742

$
2,620

 
 
 
 
 
Regulatory liabilities
 
 
 
Deferred income taxes (i)
$
1,484

$

To be determined
Asset removal cost provision (xii)
1,095

1,194

To be determined
Rate stabilization accounts (vi)
254

230

Various
ROE refund liability (xiii)
182

346

1
Energy efficiency liability (xiv)
82

49

Various
Renewable energy surcharge (xv)
66

53

To be determined
Electric and gas moderator account (xvi)
58

71

To be determined
Employee future benefits (ii)
47

42

Various
Other regulatory liabilities (xvii)
178

198

Various
Total regulatory liabilities
3,446

2,183

 
Less: current portion
(490
)
(492
)
1
Long-term regulatory liabilities
$
2,956

$
1,691

 


 
26
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

Description of the Nature of Regulatory Assets and Liabilities

(i)
Deferred Income Taxes
    
The Corporation’s regulated utilities recognize deferred income tax assets and liabilities and related regulatory liabilities and assets for the amount of deferred income taxes expected to be refunded to, or recovered from, customers in future rates. As at December 31, 2017, regulatory assets of approximately $754 million associated with deferred income taxes were not subject to a regulatory return (December 31, 2016 - $596 million). As at December 31, 2017, regulatory liabilities of approximately $1,481 million associated with deferred taxes were not subject to a regulatory return.

The balances for ITC, UNS Energy and Central Hudson reflect the effects of the significant changes to tax legislation signed into law in the United States in December 2017 ("U.S. Tax Reform"). As part of U.S. Tax Reform, utilities were required to remeasure their deferred income tax assets and liabilities (Note 23). Included in regulatory liabilities is $1,453 million related to U.S. Tax reform, reflecting the reduction in deferred income tax expense expected to be refunded to customers.

(ii)
Employee Future Benefits

The regulatory asset and liability associated with employee future benefits includes the actuarially determined unamortized net actuarial losses, past service costs and credits, and transitional obligations associated with defined benefit pension and OPEB plans maintained by the Corporation's regulated utilities (Note 24), which are expected to be recovered from, or refunded to, customers in future rates. At the Corporation's regulated utilities, as approved by the respective regulators, differences between defined benefit pension and OPEB plan costs recognized under US GAAP and those which are expected to be recovered from, or refunded to, customers in future rates are subject to deferral account treatment and have been recognized as a regulatory asset or liability. These amounts would otherwise be recognized in accumulated other comprehensive income on the consolidated balance sheet.

As at December 31, 2017, regulatory assets of approximately $291 million associated with employee future benefits were not subject to a regulatory return (December 31, 2016 - $346 million). As at December 31, 2017, regulatory liabilities of approximately $45 million associated with employee future benefits were not subject to a regulatory return (December 31, 2016 - $31 million).

(iii)
Deferred Energy Management Costs

FortisBC Energy, FortisBC Electric, Central Hudson and Newfoundland Power provide energy management services to promote energy efficiency programs to their customers. As required by their respective regulator, these regulated utilities have capitalized related expenditures and are amortizing these expenditures on a straight-line basis over periods ranging from 1 to 10 years. This regulatory asset represents the unamortized balance of the energy management costs.

UNS Energy is required to implement cost-effective Demand-Side Management ("DSM") programs to comply with the ACC's energy efficiency standards. The energy efficiency standards provide for a DSM surcharge to recover the costs of implementing DSM programs, as well as an annual performance incentive. The existing rate orders provide for a lost fixed-cost recovery mechanism to recover certain non-fuel costs that were previously unrecoverable, due to reduced electricity sales as a result of energy efficiency programs and distributed generation.

As at December 31, 2017, $41 million of the regulatory asset balance associated with deferred energy management costs was not subject to a regulatory return (December 31, 2016 - $42 million).

 
27
 



FORTIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016

(iv)
Generation Early Retirement Costs

UNS Energy holds an undivided interest in the jointly owned Navajo Generating Station ("Navajo"), located on a site leased from the Navajo Nation with an initial lease term through December 2019. In June 2017 the Navajo Nation approved a land-lease extension that allows TEP and the co-owners of Navajo to continue operations through December 2019 and begin decommissioning activities thereafter. Retirement costs related to Navajo are currently being recovered through to 2030.

UNS Energy owns the Sundt Generating Facility ("Sundt") and in August 2017 TEP submitted an application related to a generation modernization project at the facility, which will add generation capacity in the form of gas-fired reciprocating engines. As part of the application, TEP plans to early retire Sundt Units 1 and 2 by the end of 2020. Capital and operating costs related to Sundt Units 1 and 2 are currently being recovered through to 2028 and 2030, respectively.

As a result of the planned early retirement of Navajo and Sundt Units 1 and 2, the net book value and other related retirement costs were reclassified from property, plant and equipment to regulatory assets, and as at December 31, 2017 the net book value of these assets was $105 million (US$84 million). UNS Energy's generation early retirement costs are not subject to regulatory return.

(v)
Deferred Lease Costs

Deferred lease costs at FortisBC Electric primarily relate to the Brilliant Power Purchase Agreement ("BPPA"), which ends in 2056. The depreciation of the asset under capital lease and interest expense associated with the capital lease obligation are not being fully recovered in current customer rates, since those rates include only the cash payments set out under the BPPA (Note 15). The deferred lease costs are expected to be recovered from customers in future rates over the term of the lease and are not subject to a regulatory return.

In 2017, of the $31 million (2016 - $31 million) of interest expense related to the capital lease obligations and the $6 million (2016 - $6 million) of depreciation expense related to the assets under capital lease, $27 million (2016 - $27 million) was recognized in energy supply costs and $3 million (2016 - $3 million) was recognized in operating expenses, as approved by the regulator, with the balance of $7 million (2016 - $7 million) deferred as a regulatory asset.

(vi)
Rate Stabilization Accounts

Rate stabilization accounts associated with the Corporation's regulated utilities are recovered from, or refunded to, customers in future rates, as approved by the respective regulators. Electric rate stabilization accounts primarily mitigate the effect on earnings of variability in the cost of fuel and/or purchased power above or below a forecast or predetermined level and, at certain utilities, revenue decoupling mechanisms minimize the earnings impact resulting from reduced energy consumption as energy efficiency programs are implemented. Gas rate stabilization accounts primarily mitigate the effect on earnings of unpredictable and uncontrollable factors, namely volume volatility caused principally by weather, and natural gas cost volatility.

At ITC, transmission revenue requirements are set annually using cost-based formula rates that remain in effect for a one-year period. The formula rates include a true-up mechanism, whereby the actual revenue requirement is compared to billed revenue for each year to determine any over- or under-collection of revenue requirement. Revenue is recognized based on the actual revenue requirement, and revenue accrual and deferral accounts represent the difference between the actual revenue requirement and billed revenue, and are collected from, or refunded to, customers within a two-year period.