0001666175-18-000024.txt : 20180731 0001666175-18-000024.hdr.sgml : 20180731 20180731060900 ACCESSION NUMBER: 0001666175-18-000024 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 77 CONFORMED PERIOD OF REPORT: 20180630 FILED AS OF DATE: 20180731 DATE AS OF CHANGE: 20180731 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Fortis Inc. CENTRAL INDEX KEY: 0001666175 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 980352146 STATE OF INCORPORATION: A4 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-37915 FILM NUMBER: 18979319 BUSINESS ADDRESS: STREET 1: 5 SPRINGDALE STREET STREET 2: FORTIS PLACE, SUITE 1100 CITY: ST. JOHN'S STATE: A4 ZIP: A1B 3T2 BUSINESS PHONE: 709 737-2800 MAIL ADDRESS: STREET 1: 5 SPRINGDALE STREET STREET 2: FORTIS PLACE, SUITE 1100 CITY: ST. JOHN'S STATE: A4 ZIP: A1B 3T2 6-K 1 form6kq22018.htm 6-K Document


 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
 
 

FORM 6-K
 
 
 

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
OF THE SECURITIES EXCHANGE ACT OF 1934

For the month of July, 2018

Commission File Number: 001-37915
 
 
 

Fortis Inc.

 
 
 

Fortis Place, Suite 1100
5 Springdale Street
St. John's, Newfoundland and Labrador
Canada, A1E 0E4
(Address of Principal Executive Office)
 
 
 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40F: Form 20-F o Form 40-F þ
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o






INCORPORATION BY REFERENCE
The registrant's unaudited condensed consolidated interim financial statements as at and for the three and six months ended June 30, 2018, together with the notes thereto, furnished as Exhibit 99.2 to this report on Form 6-K, and the registrant's management discussion and analysis of financial condition and results of operations for the same periods furnished as Exhibit 99.3 to this report on Form 6-K, are incorporated by reference into the following registration statements of the Registrant, as amended or supplemented: Registration Statement on Form S-8 (File No. 333-215777) and Registration Statement on Form F-10 (File No. 333-214787) and Registration Statement on Form F-3 (File No. 333-218032).





EXHIBITS









SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
 
 
 
 
Fortis Inc.
(Registrant)

 
Date: July 31, 2018
/s/ Jocelyn H.Perry
 
By:
Jocelyn H. Perry
 
Title:
Executive Vice President, Chief Financial Officer
 
 
 




EX-99.1 2 exhibit991q22018pressrelea.htm EXHIBIT 99.1 Exhibit

Exhibit 99.1
a2015annualmdafsnotes_image1.jpg

a2015annualmdafsnotes_image1.jpg
July 31, 2018

Fortis Inc. Reports Second Quarter 2018 Earnings

ST. JOHN'S, NEWFOUNDLAND AND LABRADOR - Fortis Inc. (TSX/NYSE:FTS)


Fortis Inc. ("Fortis" or the "Corporation") (TSX/NYSE:FTS), a leader in the North American regulated electric and gas utility industry, released its second quarter results today. The Corporation reported second quarter 2018 net earnings of $240 million, or $0.57 per common share.

"Our performance in the first half of 2018 positions us well for the year. With capital expenditures on track, we are executing on our growth strategy, and yielding quality operational and financial results from our utility businesses," said Barry Perry, President and Chief Executive Officer, Fortis.

Reported Net Earnings
The Corporation reported second quarter net earnings attributable to common equity shareholders of $240 million, or $0.57 per common share, compared to $257 million, or $0.62 per common share, for the same period in 2017. On a year-to-date basis, net earnings attributable to common equity shareholders were $563 million, or $1.33 per common share, compared to $551 million, or $1.34 per common share, for the same period in 2018.

Utility operations performed as expected during the quarter.
Growth quarter over quarter was tempered by unrealized net losses of $14 million on mark-to-market of derivatives at the Aitken Creek natural gas storage facility. Second quarter earnings have also been negatively impacted by U.S. tax reform.
Other factors impacting the quarter-over-quarter performance included higher operating costs at UNS associated with planned plant outages, unfavourable foreign exchange and a higher number of weighted average shares outstanding.
The settlement of Fortis Turks and Caicos' business interruption insurance claim, related to the impact of the hurricanes last fall, increased earnings in the quarter. As expected, the revenue that was lower than normal during the post-hurricane period was substantially recouped as a result of this settlement.

Adjusted Net Earnings1 
Second quarter adjusted net earnings attributable to common equity shareholders were $240 million, or $0.57 per common share, compared to $253 million, or $0.61 per common share for the same period in 2017. This adjusts for the recognition, in the second quarter of 2017, of a $4 million favourable settlement of matters pertaining to FERC-ordered transmission refunds.

Year-to-date adjusted net earnings attributable to common equity shareholders were $533 million, or $1.26 per common share, compared to $540 million, or $1.31 per common share for the same period in 2017. This adjusts for a one-time $30 million tax remeasurement in 2018 and an $11 million favourable settlement of matters pertaining to FERC-ordered transmission refunds in 2017.










__________________________
1 Non-US GAAP Measures
Fortis uses financial measures that do not have a standardized meaning under generally accepted accounting principles in the United States of America ("US GAAP") and may not be comparable to similar measures presented by other entities. Fortis calculated the non-US GAAP measures by adjusting certain US GAAP measures for specific items that management believes are not reflective of normal, ongoing operations of the business. Refer to the Financial Highlights section of the Corporation's Management Discussion and Analysis for further discussion of these items.

 
i
 



a2015annualmdafsnotes_image1.jpg

Regulatory Proceedings
Fortis is focused on maintaining constructive regulatory relationships and outcomes across its North American utility group.

In June 2018 the New York Public Service Commission approved Central Hudson's three-year rate settlement agreement, establishing new rates effective July 1, 2018, reflecting an allowed return on common shareholder's equity of 8.8% on a common equity level of 48% in year one, 49% in year two, and 50% in year three. This approval was aligned with the settlement filed in May 2018.

Execution of Growth Strategy and Outlook
Consolidated capital expenditures were $1.5 billion during the first half of 2018 and are expected to reach $3.2 billion in 2018.

Progress continued in the second quarter on the Wataynikaneyap Transmission Power Project. In June a leave‑to‑construct application was filed with the Ontario Energy Board ("OEB"), providing details on project timing, design and costs. Approval of this application is expected from the OEB in early 2019.

The Corporation expects rate base to reach approximately $33 billion by 2022, driven by the five-year $15.1 billion capital plan, resulting in a five-year compound annual growth rate of 5.4%. Opportunities to grow the current five-year capital expenditure plan in the existing regulated subsidiaries are driven by projects that improve the transmission grid, address natural gas system capacity and gas line network integrity, increase cyber protection and allow the grid to deliver cleaner energy.
"Our utilities are at the forefront of the changes occurring in our industry driven by increased customer expectations that focus on delivering cleaner energy, ensuring the resiliency of our energy networks and reducing greenhouse gas emissions in transportation by encouraging the use of natural gas. Investments in these initiatives are driving growth in our business and support our 6% average annual dividend growth target," said Mr. Perry.

This media release should be read in conjunction with the Corporation's Management Discussion and Analysis and Consolidated Financial Statements. This and additional information can be accessed at www.fortisinc.com, www.sedar.com, or www.sec.gov.

About Fortis
Fortis is a leader in the North American regulated electric and gas utility industry with 2017 revenue of $8.3 billion and total assets of $50 billion as at June 30, 2018. The Corporation's 8,500 employees serve utility customers in five Canadian provinces, nine U.S. states and three Caribbean countries.

Fortis shares are listed on the TSX and NYSE and trade under the symbol FTS.



Teleconference to Discuss Second Quarter 2018 Results

A teleconference and webcast will be held on July 31 at 8:30 a.m. (Eastern). Barry Perry, President and Chief Executive Officer, and Jocelyn Perry, Executive Vice President, Chief Financial Officer, will discuss the Corporation's second quarter 2018 results.

Analysts, members of the media and other interested parties in North America are invited to participate by calling 1.877.223.4471. International participants may participate by calling 647.788.4922. Please dial in 10 minutes prior to the start of the call. No pass code is required.

A live and archived audio webcast of the teleconference will be available on the Corporation's website, www.fortisinc.com.

A replay of the conference will be available two hours after the conclusion of the call until August 31, 2018. Please call 1.800.585.8367 or 416.621.4642 and enter pass code 9765325.







 
ii
 



a2015annualmdafsnotes_image1.jpg

Forward-Looking Information
Fortis includes forward-looking information in this media release within the meaning of applicable Canadian securities laws and forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (collectively referred to as "forward-looking information"). Forward-looking information included in this media release reflect expectations of Fortis management regarding future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as "anticipates", "believes", "budgets", "could", "estimates", "expects", "forecasts", "intends", "may", "might", "plans", "projects", "schedule", "should", "target", "will", "would" and the negative of these terms and other similar terminology or expressions have been used to identify the forward-looking information, which includes, without limitation: targeted average annual dividend growth through 2022; the Corporation's forecast consolidated capital spending for 2018 and the five-year period from 2018 through 2022; the Corporation's consolidated forecast rate base for 2022; and the nature, timing, benefits, expected costs and potential funding sources of capital projects and additional opportunities beyond the base capital plan.

Forward-looking information involves significant risk, uncertainties and assumptions. Certain material factors or assumptions have been applied in drawing the conclusions contained in the forward‑looking information. These factors or assumptions are subject to inherent risks and uncertainties surrounding future expectations generally, including those identified from time to time in the forward-looking information. Such risk factors or assumptions include, but are not limited to: reasonable decisions by utility regulators and the expectation of regulatory stability; the implementation of the Corporation's five-year capital expenditure plan; no material capital project and financing cost overrun related to any of the Corporation's capital projects; sufficient human resources to deliver service and execute the capital program; the realization of additional opportunities; the impact of fluctuations in foreign exchange; and the Board exercising its discretion to declare dividends, taking into account the business performance and financial condition of the Corporation. Fortis cautions readers that a number of factors could cause actual results, performance or achievements to differ materially from the results discussed or implied in the forward-looking information. These factors should be considered carefully and undue reliance should not be placed on the forward-looking information. For additional information with respect to certain of these risks or factors, reference should be made to the continuous disclosure materials filed from time to time by the Corporation with Canadian securities regulatory authorities and the Securities and Exchange Commission. Fortis disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise.


For more information, please contact:

Investor Enquiries:
Media Enquiries:
Ms. Stephanie Amaimo
Ms. Karen McCarthy
Vice President, Investor Relations
Vice President, Communications & Corporate Affairs
Fortis Inc.
Fortis Inc.
709.737.2900
709.737.5323
investorrelations@fortisinc.com
media@fortisinc.com





 
iii
 
EX-99.2 3 exhibit992q22018fs.htm EXHIBIT 99.2 Exhibit

Exhibit 99.2
 
 
 












FORTIS INC.

Condensed Consolidated Interim Financial Statements
For the three and six months ended June 30, 2018 and 2017
(Unaudited)

 
F - 1
 


Fortis Inc.
Condensed Consolidated Interim Balance Sheets (Unaudited)
As at
(in millions of Canadian dollars)
 
June 30,
 
December 31,
 
2018
 
2017
 
 
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
197

 
$
327

Accounts receivable and other current assets (Note 6)
1,133

 
1,131

Prepaid expenses
62

 
79

Inventories
346

 
367

Regulatory assets (Note 7)
331

 
303

Total current assets
2,069

 
2,207

Other assets
526

 
480

Regulatory assets (Note 7)
2,780

 
2,742

Property, plant and equipment, net
31,559

 
29,668

Intangible assets, net
1,165

 
1,081

Goodwill
12,150

 
11,644

Total assets
$
50,249

 
$
47,822

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Short-term borrowings (Note 8)
$
69

 
$
209

Accounts payable and other current liabilities
1,769

 
2,053

Regulatory liabilities (Note 7)
587

 
490

Current installments of long-term debt (Note 8)
1,037

 
705

Current installments of capital lease and finance obligations
46

 
47

Total current liabilities
3,508

 
3,504

Other liabilities
1,234

 
1,210

Regulatory liabilities (Note 7)
2,990

 
2,956

Deferred income taxes
2,465

 
2,298

Long-term debt (Note 8)
21,572

 
20,691

Capital lease and finance obligations (Note 15)
616

 
414

Total liabilities
32,385

 
31,073

Commitments and Contingencies (Note 15)

 

Equity
 
 
 
Common shares (1) 
11,731

 
11,582

Preference shares
1,623

 
1,623

Additional paid-in capital
10

 
10

Accumulated other comprehensive income
540

 
61

Retained earnings
2,110

 
1,727

Shareholders' equity
16,014

 
15,003

Non-controlling interests
1,850

 
1,746

Total equity
17,864

 
16,749

Total liabilities and equity
$
50,249

 
$
47,822

 
 
 
 
(1) No par value. Unlimited authorized shares; 424.8 million and 421.1 million issued and outstanding as at June 30, 2018 and December 31, 2017, respectively
 
 
 
 
See accompanying Notes to Condensed Consolidated Interim Financial Statements

 
F - 2
 


Fortis Inc.
Condensed Consolidated Interim Statements of Earnings (Unaudited)
For the periods ended June 30
(in millions of Canadian dollars, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
Quarter Ended
 
Year-to-Date
 
 
2018

2017

2018

2017
 
 
 
 
 
 
 
 
 
Revenue (Note 6)
$
1,947

 
$
2,015

 
$
4,144

 
$
4,289

 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Energy supply costs
507

 
524

 
1,236

 
1,278

 
Operating expenses
553

 
567

 
1,106

 
1,146

 
Depreciation and amortization
309

 
298

 
611

 
595

Total expenses
1,369

 
1,389

 
2,953

 
3,019

Operating income
578

 
626

 
1,191

 
1,270

Other income, net (Note 10)
18

 
20

 
27

 
48

Finance charges
243

 
232

 
479

 
461

Earnings before income taxes
353

 
414

 
739

 
857

Income tax expense
61

 
102

 
83

 
208

Net earnings
$
292

 
$
312

 
$
656

 
$
649

 
 
 
 
 
 
 
 
 
Net earnings attributable to:
 
 
 
 
 
 
 
 
Non-controlling interests
$
35

 
$
38

 
$
60

 
$
65

 
Preference equity shareholders
17

 
17

 
33

 
33

 
Common equity shareholders
240

 
257

 
563

 
551

 
 
$
292

 
$
312

 
$
656

 
$
649

 
 
 
 
 
 
 
 
 
Earnings per common share (Note 12)
 
 
 
 
 
 
 
 
Basic
$
0.57

 
$
0.62

 
$
1.33

 
$
1.34

 
Diluted
$
0.57

 
$
0.62

 
$
1.33

 
$
1.34

 
 
 
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Interim Financial Statements
Fortis Inc.
Condensed Consolidated Interim Statements of Comprehensive Income (Unaudited)
For the periods ended June 30
(in millions of Canadian dollars)
 
 
Quarter Ended
 
Year-to-Date
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Net earnings
$
292

 
$
312

 
$
656

 
$
649

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
Unrealized foreign currency translation gains (losses), net of hedging activities and tax
244

 
(244
)
 
550

 
(336
)
Other, net of tax
1

 
(2
)
 
1

 
(2
)
 
245

 
(246
)
 
551

 
(338
)
Comprehensive income
$
537

 
$
66

 
$
1,207

 
$
311

Comprehensive income attributable to:
 
 
 
 
 
 
 
 
Non-controlling interests
$
68

 
$
38

 
$
132

 
$
65

 
Preference equity shareholders
17

 
17

 
33

 
33

 
Common equity shareholders
452

 
11

 
1,042

 
213

 
$
537

 
$
66

 
$
1,207

 
$
311

 
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Interim Financial Statements

 
F - 3
 


Fortis Inc.
Condensed Consolidated Interim Statements of Cash Flows (Unaudited)
For the periods ended June 30
(in millions of Canadian dollars)
 
 
 
 
 
 
 
 
 
Quarter Ended
 
Year-to-Date
 
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
Operating activities
 
 
 
 
 
 
 
Net earnings
$
292

 
$
312

 
$
656

 
$
649

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation - property, plant and equipment
276

 
267

 
545

 
533

 
 
Amortization - intangible assets
25

 
24

 
51

 
48

 
 
Amortization - other
8

 
7

 
15

 
14

 
 
Deferred income tax expense
76

 
102

 
61

 
174

 
 
Accrued employee future benefits
7

 
9

 
3

 
10

 
 
Equity component of allowance for funds used during construction (Note 10)
(15
)
 
(19
)
 
(30
)
 
(36
)
 
 
Other
41

 
(33
)
 
59

 
(11
)
Change in long-term regulatory assets and liabilities
(38
)
 
(2
)
 
2

 
(9
)
Change in working capital (Note 13)
10

 
(18
)
 
(91
)
 
(182
)
Cash from operating activities
682

 
649

 
1,271

 
1,190

Investing activities
 
 
 
 
 
 
 
Capital expenditures - property, plant and equipment
(724
)
 
(654
)
 
(1,379
)
 
(1,323
)
Capital expenditures - intangible assets
(68
)
 
(65
)
 
(98
)
 
(105
)
Contributions in aid of construction
33

 
24

 
60

 
37

Other
(33
)
 
(46
)
 
(53
)
 
(69
)
Cash used in investing activities
(792
)
 
(741
)
 
(1,470
)
 
(1,460
)
Financing activities
 
 
 
 
 
 
 
Proceeds from long-term debt, net of issuance costs
32

 
368

 
352

 
756

Repayments of long-term debt and capital lease and finance obligations
(85
)
 
(19
)
 
(231
)
 
(35
)
Borrowings under committed credit facilities (Note 16)
1,196

 
1,658

 
2,362

 
3,624

Repayments under committed credit facilities (Note 16)
(1,079
)
 
(1,881
)
 
(2,185
)
 
(4,397
)
Net change in short-term borrowings (Note 16)
25

 
8

 
23

 
10

Issue of common shares, net of costs, and dividends reinvested
5

 
30

 
20

 
544

Dividends
 
 
 
 
 
 
 
 
 
Common shares, net of dividends reinvested
(114
)
 
(104
)
 
(230
)
 
(202
)
 
 
Preference shares
(17
)
 
(17
)
 
(33
)
 
(33
)
 
 
Subsidiary dividends paid to non-controlling interests
(16
)
 
(22
)
 
(40
)
 
(39
)
Other
22

 
6

 
20

 
7

Cash (used in) from financing activities
(31
)
 
27

 
58

 
235

Effect of exchange rate changes on cash and cash equivalents
5

 
(2
)
 
11

 
(3
)
Change in cash and cash equivalents
(136
)
 
(67
)
 
(130
)
 
(38
)
Cash and cash equivalents, beginning of period
333

 
298

 
327

 
269

Cash and cash equivalents, end of period
$
197

 
$
231

 
$
197

 
$
231

 
 
 
 
 
 
 
 
 
 
Supplementary Information to Condensed Consolidated Interim Statements of Cash Flows (Note 13)
 
 
 
 
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Interim Financial Statements

 
F - 4
 


Fortis Inc.
Condensed Consolidated Interim Statements of Changes in Equity (Unaudited)
For the periods ended June 30
(in millions of Canadian dollars)
 
Common Shares
Common Shares
 
Preference Shares
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Non-Controlling Interests
 
Total Equity
 
(# millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As at December 31, 2017
421.1

$
11,582

 
$
1,623

 
$
10

 
$
61

 
$
1,727

 
$
1,746

 
$
16,749

Net earnings


 

 

 

 
596

 
60

 
656

Other comprehensive income


 

 

 
479

 

 
72

 
551

Common shares issued
3.7

149

 

 
(1
)
 

 

 

 
148

Subsidiary dividends paid to non-controlling interests


 

 

 

 

 
(40
)
 
(40
)
Dividends declared on common shares ($0.425 per share)


 

 

 

 
(180
)
 

 
(180
)
Dividends declared on preference shares


 

 

 

 
(33
)
 

 
(33
)
Other


 

 
1

 

 

 
12

 
13

As at June 30, 2018
424.8

$
11,731

 
$
1,623

 
$
10

 
$
540

 
$
2,110

 
$
1,850

 
$
17,864

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As at December 31, 2016
401.5

$
10,762

 
$
1,623

 
$
12

 
$
745

 
$
1,455

 
$
1,853

 
$
16,450

Net earnings


 

 

 

 
584

 
65

 
649

Other comprehensive loss


 

 

 
(338
)
 

 

 
(338
)
Common shares issued
16.4

673

 

 
(4
)
 

 

 

 
669

Foreign currency translation impacts


 

 

 

 

 
(52
)
 
(52
)
Subsidiary dividends paid to non-controlling interests


 

 

 

 

 
(39
)
 
(39
)
Dividends declared on common shares ($0.40 per share)


 

 

 

 
(166
)
 

 
(166
)
Dividends declared on preference shares


 

 

 

 
(33
)
 

 
(33
)
Other


 

 
1

 

 

 
3

 
4

As at June 30, 2017
417.9

$
11,435

 
$
1,623

 
$
9

 
$
407

 
$
1,840

 
$
1,830

 
$
17,144

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Interim Financial Statements
 
 
 
 
 
 
 


 
F - 5

 




FORTIS INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and six months ended June 30, 2018 and 2017 (unaudited)

1. DESCRIPTION OF BUSINESS

Nature of Operations

Fortis Inc. ("Fortis" or the "Corporation") is principally an international electric and gas utility holding company.

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

Each entity within the reporting segments that follow operates with substantial autonomy.

Regulated Utilities

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

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

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

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

FortisAlberta: Represents FortisAlberta Inc., operating in Canada.

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

Other Electric: Comprised of utilities in Eastern Canada and the Caribbean as follows: Newfoundland Power Inc. ("Newfoundland Power"); Maritime Electric Company, Limited ("Maritime Electric"); FortisOntario Inc. ("FortisOntario"); the Corporation's 49% equity investment in Wataynikaneyap Power Limited Partnership; Caribbean Utilities Company, Ltd. ("Caribbean Utilities"), in which Fortis holds an approximate 60% controlling interest; FortisTCI Limited and Turks and Caicos Utilities Limited (collectively "FortisTCI"); and a 33% equity investment in Belize Electricity Limited ("BEL").

Non-Regulated

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

Corporate and Other: Captures expenses and revenues not specifically related to any reportable segment and those business operations that are below the required threshold for segmented reporting, including net expenses of Fortis and non-regulated holding companies.


 
F - 6
 




FORTIS INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and six months ended June 30, 2018 and 2017 (unaudited)

2. REGULATORY MATTERS

Regulation of the Corporation's utilities is generally consistent with that disclosed in its 2017 annual audited consolidated financial statements. A summary of significant regulatory developments in the first six months of 2018 follows.

U.S. Tax Reform

The Corporation's U.S. utilities are working with their respective regulators to return to customers the net income tax savings resulting from U.S. tax reform.

ITC: In April 2018 ITC reposted formula rates charged to customers of its Midcontinent Independent System Operator ("MISO") regulated subsidiaries retroactive to January 1, 2018, as approved by the Federal Energy Regulatory Commission ("FERC"). As at June 30, 2018, the amounts owing had been substantially returned to customers.

UNS Energy: In April 2018 the Arizona Corporation Commission ("ACC") approved TEP's application to return ongoing income tax savings through a combination of customer bill credits and regulatory liabilities. Customer bill credits became effective in May 2018. As at June 30, 2018, a regulatory liability of $10 million (US$8 million) was recognized for amounts to be returned to customers in the remainder of 2018. In 2019 and beyond, TEP will continue to return savings to customers using the same approach. Regulatory liabilities will be returned to customers as part of TEP's next rate case.

In March 2018 FERC issued an order directing TEP to either: (i) submit proposed revisions to its transmission rates or transmission revenue requirement to reflect the reduction in the federal corporate income tax rate; or (ii) show why a rate adjustment is not required. In May 2018 TEP proposed an overall customer rate reduction, to be effective March 2018, reflecting the lower federal corporate income tax rate. The proposal is currently being reviewed by FERC.

Central Hudson: In June 2018, as part of its approval of a joint proposal, discussed below, the New York Public Service Commission ("PSC") also approved Central Hudson's recommendation to reflect the recovery of lower federal corporate income tax in customer rates effective July 1, 2018. As at June 30, 2018, a regulatory liability of $14 million (US$10 million) was recognized related to the income tax savings realized in the first six months of 2018. As approved by the PSC, the refund of this regulatory liability to customers will be determined as part of a future regulatory proceeding.

ITC

In April 2018 a third-party complaint was filed with FERC challenging independence incentive adders that are included in transmission rates charged by ITC's MISO-regulated operating subsidiaries. Independence incentive adders were established to encourage transmission investment and recognize that ITC's operating subsidiaries are independent, dedicated transmission-only operations, with no affiliation to market participants in their regions. The adder allows 0.50% or 1.00% to be added to the authorized return on equity ("ROE"), subject to any ROE cap established by FERC. The outcome of this matter cannot be predicted at this time; however, ITC believes it has a strong position in respect of this complaint.

Central Hudson

In June 2018 the PSC issued an order approving a three-year rate plan, or joint proposal, that had been filed by Central Hudson along with multiple stakeholders and intervenors, pursuant to the July 2017 general rate application. The order included an allowed ROE of 8.8% and common equity ratios of 48%, 49% and 50% in rate years one, two and three, respectively, and is effective July 1, 2018 through June 30, 2021. Also included is an earnings sharing mechanism whereby the Company and customers share equally earnings between 50 and 100 basis points above the allowed ROE. Earnings beyond this are primarily returned to customers.


 
F - 7
 




FORTIS INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and six months ended June 30, 2018 and 2017 (unaudited)

FortisAlberta

Generic Cost of Capital Proceeding: Oral hearings to determine the ROE and capital structure for 2018, 2019 and 2020 were completed in March 2018. The ROE and capital structure approved for 2017 will remain in effect on an interim basis pending a final decision by the Alberta Utilities Commission ("AUC"), which is expected in the third quarter of 2018.

Next Generation Performance-Based Rate Setting Proceeding: In March 2018 the AUC approved the Company’s 2018 distribution rates, on an interim basis, until true-up amounts are finalized. New rates are effective January 1, 2018 with collection from customers effective April 1, 2018. Key provisions included an increase of approximately 5.5% in the distribution component of rates.

FortisAlberta is pursuing options to appeal certain elements of the rate-setting design for the second term of performance-based rate setting ("PBR").


3. ACCOUNTING POLICIES

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

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

These Interim Financial Statements do not include all of the disclosures required in the annual financial statements and should be read in conjunction with the Corporation's 2017 annual audited consolidated financial statements. In management's opinion, these Interim Financial Statements include all adjustments that are of a normal recurring nature, necessary for fair presentation.

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

The accounting policies applied herein are consistent with those outlined in the Corporation's 2017 annual audited consolidated financial statements, except as described below.

New Accounting Policies

Revenue
Effective January 1, 2018, Fortis adopted Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, which clarifies the principles for recognizing revenue and requires additional disclosures. Fortis adopted the new standard using the modified retrospective approach, under which comparative periods are not restated and the cumulative impact is recognized at the date of adoption supplemented by additional disclosures (Note 6). Upon adoption, there were no adjustments to the opening balance of retained earnings.

Most of the Corporation's revenue is derived from energy sales and the provision of transmission services to customers based on regulator-approved tariff rates. Most contracts have a single performance obligation, being the delivery of energy or the provision of transmission services. Revenue is generally measured in kilowatt hours, gigajoules, or transmission load delivered. The billing of energy sales is based on customer meter readings, which occur systematically throughout each month. The billing of transmission services at ITC is based on peak monthly load.


 
F - 8
 




FORTIS INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and six months ended June 30, 2018 and 2017 (unaudited)

FortisAlberta is a distribution company and is required by its regulator to arrange and pay for transmission services with the Alberta Electric System Operator. These services include the collection of transmission revenue from its customers, which is achieved through invoicing the customers' retailers through the transmission component of its regulator-approved rates. FortisAlberta reports revenue and expenses related to transmission services on a net basis.

Electricity, gas and transmission service revenue includes an unbilled revenue estimate for energy consumed or services provided since the last meter reading that have not been billed at the end of the accounting period. Sales estimates generally reflect an analysis of historical consumption in relation to key inputs, such as current energy prices, population growth, economic activity, weather conditions and system losses. Unbilled revenue accruals are adjusted in the periods actual consumption becomes known.

Generation revenue from non-regulated operations is recognized on delivery at contracted rates.

The Corporation estimates variable consideration at the most likely amount and reassesses its estimate at each reporting date until the amount is known. Variable consideration, including amounts subject to a future regulatory decision, is recognized as a refund liability until the Corporation is certain that it will be entitled to the consideration.

The Corporation's revenue excludes sales and municipal taxes collected from customers. Prior to the adoption of ASC Topic 606, Central Hudson recognized sales tax and FortisAlberta recognized municipal tax on a gross basis, in both revenue and expense. Effective January 1, 2018, the exclusion of these taxes from revenue resulted in a decrease in revenue of $12 million and $26 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017.

The Corporation has elected not to assess or account for any significant financing components associated with revenue billed in accordance with equal payment plans as the period between the transfer of energy to customers and the customers' payment will be less than one year.

The Corporation disaggregates revenue by regulatory status, service territory and substantially autonomous utility operations (Note 5). This represents the level of disaggregation used by the Corporation's President and Chief Executive Officer ("CEO") in allocating resources and evaluating performance.

Financial Instruments
Effective January 1, 2018, the Corporation adopted Accounting Standards Update ("ASU") No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. Principally, it requires: (i) equity investments in unconsolidated entities not accounted for using the equity method to be measured at fair value through earnings; however, entities may elect to record equity investments without readily determinable fair values at cost, less impairment, and plus or minus subsequent adjustments for observable price changes; and (ii) financial assets and liabilities to be presented separately in these financial statement notes, grouped by measurement category and form. Adoption of this ASU did not impact the Interim Financial Statements.

Pension and Postretirement Benefit Costs
Effective January 1, 2018, the Corporation adopted ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires current service costs to be disaggregated and grouped in the statement of earnings with other employee compensation costs arising from services rendered. The other components of net periodic benefit costs must be presented separately and outside of operating income. Additionally, only the service cost component is eligible for capitalization. On adoption, the Corporation applied the presentation guidance retrospectively and the capitalization guidance prospectively. This resulted in a retrospective $4 million and $7 million reclassification from Operating Expenses to Other Income, Net for the three and six months ended June 30, 2017, respectively, in these Interim Financial Statements.


 
F - 9
 




FORTIS INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and six months ended June 30, 2018 and 2017 (unaudited)

4. FUTURE ACCOUNTING PRONOUNCEMENTS

Leases
ASU No. 2016-02, Leases (ASC Topic 842), was issued in February 2016, is effective for Fortis January 1, 2019 with earlier adoption permitted, and is to be applied using a modified retrospective approach with implementation options, referred to as practical expedients. Principally, it requires balance sheet recognition of a right-of-use asset and a lease liability by lessees for those leases that are classified as operating leases along with additional disclosures. Based on Fortis' assessment to date, leasing activities accounted for as operating leases primarily relate to office facilities and utility plant and equipment.

Fortis expects to elect a package of practical expedients that will allow it to not reassess whether any expired or existing contract is a lease or contains a lease, the lease classification of any expired or existing leases, and the initial direct costs for any existing leases. Fortis also expects to elect an additional practical expedient that permits entities to not evaluate existing land easements that were not previously accounted for as leases.

Fortis continues to assess the impact of adoption and monitor standard-setting activities that may affect transition requirements.

Hedging
ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, was issued in August 2017, is effective for Fortis January 1, 2019 with earlier adoption permitted and is to be applied as of the beginning of the fiscal year of adoption. Principally, it better aligns risk management activities and financial reporting for hedging relationships through changes to designation, measurement, presentation and disclosure guidance. 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 opening retained earnings. Amended presentation and disclosure guidance is to be applied prospectively. Fortis is assessing the impact of adoption.

Financial Instruments
ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, was issued in June 2016, is effective for Fortis January 1, 2020 and is to be applied on a modified retrospective basis. Principally, it requires entities to use an expected credit loss methodology and to consider a broader range of reasonable and supportable information to estimate credit losses. Fortis is assessing the impact of adoption.


5. SEGMENTED INFORMATION

Fortis segments its business based on regulatory status, service territory and substantially autonomous utility operations. This represents the information used by the Corporation's President and CEO in deciding how to allocate resources and evaluate performance. Segment performance is evaluated based on net earnings attributable to common equity shareholders.

Effective January 1, 2018 the former Eastern Canadian and Caribbean segments are aggregated as Other Electric as they individually do not meet the quantitative threshold for separate reporting.


 
F - 10
 


FORTIS INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and six months ended June 30, 2018 and 2017 (unaudited)


 
REGULATED
 
NON-REGULATED
 
 
Quarter Ended
 
 
 
 
 
 
Energy
 
Inter-
 
June 30, 2018
 
UNS
Central
 
FortisBC
Fortis
FortisBC
Other
Sub
 
Infra-
Corporate
segment
 
($ millions)
ITC
Energy
Hudson
 
Energy
Alberta
Electric
Electric
Total
 
structure
and Other
eliminations
Total
Revenue
374

530

201

 
226

143

89

336

1,899

 
49


(1
)
1,947

Energy supply costs

186

63

 
50


19

189

507

 



507

Operating expenses
109

157

97

 
75

39

24

43

544

 
6

4

(1
)
553

Depreciation and amortization
57

67

18

 
55

48

15

40

300

 
8

1


309

Operating income
208

120

23

 
46

56

31

64

548


35

(5
)

578

Other income, net
11

4

3

 
1



1

20

 

(2
)

18

Finance charges
70

25

11

 
34

24

10

19

193

 
2

48


243

Income tax expense
45

18

3

 
6


6

7

85

 

(24
)

61

Net earnings
104

81

12

 
7

32

15

39

290


33

(31
)

292

Non-controlling interests
18



 



4

22

 
13



35

Preference share dividends



 





 

17


17

Net earnings attributable to common equity shareholders
86

81

12

 
7

32

15

35

268


20

(48
)

240

Goodwill
8,082

1,819

594

 
913

227

235

253

12,123

 
27



12,150

Total assets
18,786

9,451

3,376

 
6,347

4,550

2,210

3,930

48,650


1,566

84

(51
)
50,249

Capital expenditures 
245

144

59

 
114

104

25

72

763

 
29



792

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ millions)
 
 
 
 
 
 
 
 
 
 
 
 
 


Revenue
408

552

206

 
227

148

85

331

1,957

 
59

1

(2
)
2,015

Energy supply costs

175

64

 
72


21

193

525

 


(1
)
524

Operating expenses
114

150

99

 
73

48

21

44

549

 
10

9

(1
)
567

Depreciation and amortization
56

67

17

 
50

46

15

38

289

 
8

1


298

Operating income
238

160

26

 
32

54

28

56

594


41

(9
)

626

Other income, net
10

3

1

 
6

1


(1
)
20

 

1

(1
)
20

Finance charges
67

26

11

 
29

24

9

19

185

 
1

47

(1
)
232

Income tax expense
67

48

6

 
3


3

5

132

 
2

(32
)

102

Net earnings
114

89

10

 
6

31

16

31

297


38

(23
)

312

Non-controlling interests
21



 



4

25

 
13



38

Preference share dividends



 





 

17


17

Net earnings attributable to common equity shareholders
93

89

10

 
6

31

16

27

272


25

(40
)

257

Goodwill
7,960

1,793

585

 
913

227

235

251

11,964

 
27



11,991

Total assets
17,885

8,696

3,089

 
6,175

4,241

2,155

3,731

45,972


1,581

93

(65
)
47,581

Capital expenditures
244

121

53

 
103

102

25

68

716

 
3



719


 
F - 11

 


FORTIS INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and six months ended June 30, 2018 and 2017 (unaudited)



 
REGULATED
 
NON-REGULATED
 
 
Year-to-Date
 
 
 
 
 
 
Energy
 
Inter-
 
June 30, 2018
 
UNS
Central
 
FortisBC
Fortis
FortisBC
Other
Sub
 
Infra-
Corporate
segment
 
($ millions)
ITC
Energy
Hudson
 
Energy
Alberta
Electric
Electric
Total
 
structure
and Other
eliminations
Total
Revenue
728

974

476

 
655

284

201

733

4,051

 
97


(4
)
4,144

Energy supply costs

348

182

 
184


62

459

1,235

 
1



1,236

Operating expenses
212

296

202

 
151

81

50

88

1,080

 
19

11

(4
)
1,106

Depreciation and amortization
113

132

35

 
110

95

30

79

594

 
16

1


611

Operating income
403

198

57

 
210

108

59

107

1,142

 
61

(12
)

1,191

Other income, net
21

6

5

 
2


1


35

 

(8
)

27

Finance charges
138

50

21

 
67

49

20

38

383

 
3

93


479

Income tax expense
77

23

8

 
40


9

11

168

 
2

(87
)

83

Net earnings
209

131

33

 
105

59

31

58

626

 
56

(26
)

656

Non-controlling interests
37



 



5

42

 
18



60

Preference share dividends



 





 

33


33

Net earnings attributable to common equity shareholders
172

131

33

 
105

59

31

53

584

 
38

(59
)

563

Goodwill
8,082

1,819

594

 
913

227

235

253

12,123

 
27



12,150

Total assets
18,786

9,451

3,376

 
6,347

4,550

2,210

3,930

48,650

 
1,566

84

(51
)
50,249

Capital expenditures 
468

269

107

 
200

223

54

125

1,446

 
31



1,477

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year-to-Date
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
803

1,010

464

 
676

295

198

733

4,179

 
115

1

(6
)
4,289

Energy supply costs

346

149

 
254


67

462

1,278

 
1


(1
)
1,278

Operating expenses
226

297

208

 
145

100

44

87

1,107

 
23

21

(5
)
1,146

Depreciation and amortization
110

133

34

 
100

95

31

75

578

 
16

1


595

Operating income
467

234

73

 
177

100

56

109

1,216

 
75

(21
)

1,270

Other income, net
20

15

2

 
10

2


(1
)
48

 

1

(1
)
48

Finance charges
130

52

21

 
58

46

18

38

363

 
2

97

(1
)
461

Income tax expense
132

67

21

 
26


7

11

264

 
7

(63
)

208

Net earnings
225

130

33

 
103

56

31

59

637

 
66

(54
)

649

Non-controlling interests
41



 



6

47

 
18



65

Preference share dividends



 





 

33


33

Net earnings attributable to common equity shareholders
184

130

33

 
103

56

31

53

590

 
48

(87
)

551

Goodwill
7,960

1,793

585

 
913

227

235

251

11,964

 
27



11,991

Total assets
17,885

8,696

3,089

 
6,175

4,241

2,155

3,731

45,972

 
1,581

93

(65
)
47,581

Capital expenditures
512

248

103

 
197

195

46

120

1,421

 
7



1,428



 
F - 12

 




FORTIS INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three and six months ended June 30, 2018 and 2017 (unaudited)

Related-Party and Inter-Company Transactions

Related-party transactions are in the normal course of operations and are measured at the amount of consideration agreed to by the related parties. There were no material related-party transactions for the three and six months ended June 30, 2018 and 2017.

Inter-company balances, transactions and profit are eliminated on consolidation, except for certain inter-company transactions between non-regulated and regulated entities in accordance with accounting standards for rate-regulated entities. Inter-company transactions are summarized below.
 
Quarter Ended
Year-to-Date
 
June 30
June 30
($ millions)
2018

2017

2018

2017

Sale of capacity from Waneta Expansion to FortisBC Electric
4

3

19

19

Sale of energy from Belize Electric Company Limited to BEL
9

7

18

14

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

5

13

13


As at June 30, 2018 accounts receivable included approximately $10 million due from BEL (December 31, 2017 - $20 million).

The Corporation periodically provides short-term financing to subsidiaries to support capital expenditure programs, acquisitions and seasonal working capital requirements. There were no inter-segment loans outstanding as at June 30, 2018 and December 31, 2017.


6. REVENUE
 
Quarter Ended
Year-to-Date
June 30
June 30
($ millions)
2018

2017

2018

2017

Electric and gas revenue
 
 
 
 
United States
 
 
 
 
ITC
400

411

741

775

UNS Energy
475

502

862

907

Central Hudson
208

186

496

422

Canada
 
 
 
 
FortisBC Energy
204

231

634

718

FortisAlberta
139

149

276

293

FortisBC Electric
80

74

180

173

Newfoundland Power
147

154

367

381

Maritime Electric
48

47

102

98

FortisOntario
48

50

97

101

Caribbean
 
 
 
 
Caribbean Utilities
62

57

114

107

FortisTCI
20

20

37

38

Total electric and gas revenue
1,831

1,881

3,906

4,013

Other services revenue (1)
111

106

209

199

Revenue from contracts with customers
1,942

1,987

4,115

4,212