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Fortis Earns $45 Million in Third Quarter

ST. JOHN'S, NEWFOUNDLAND AND LABRADOR--(Marketwire - Nov 1, 2012) - Fortis Inc. ("Fortis" or the "Corporation") (FTS.TO) achieved third quarter net earnings attributable to common equity shareholders of $45 million, or $0.24 per common share, compared to $56 million, or $0.30 per common share, for the third quarter of 2011. Year-to-date net earnings attributable to common equity shareholders were $228 million, or $1.20 per common share, compared to $229 million, or $1.28 per common share, for the same period last year. 

In 2012 earnings for the third quarter and year to date were reduced by $3.5 million and $10 million, respectively, related to foreign exchange and CH Energy Group, Inc. ("CH Energy Group") acquisition-related expenses. In 2011 earnings for the third quarter and year to date were favourably impacted by a one-time $11 million after-tax merger termination fee paid to Fortis and $2.5 million of foreign exchange.

Excluding the above impacts, improved performance at the western Canadian regulated electric utilities for the quarter was partially offset by decreased non-regulated hydroelectric generation and a higher loss incurred at the regulated gas utilities.

Canadian Regulated Electric Utilities, led by FortisAlberta and FortisBC Electric, contributed earnings of $54 million, up $11 million from the third quarter of 2011. At FortisAlberta, higher net transmission revenue, growth in energy infrastructure investment and timing of operating expenses during 2012 were partially offset by a lower allowed rate of return on common shareholder''s equity. At FortisBC Electric, performance was driven by growth in energy infrastructure investment, higher pole-attachment revenue and lower-than-expected finance charges.

FortisBC Electric has offered to purchase the City of Kelowna''s electrical utility assets for approximately $55 million. FortisBC Electric has operated and maintained the City of Kelowna''s electrical utility assets, which currently serve approximately 15,000 customers, since 2000. Closing of the transaction is subject to certain conditions and receipt of certain approvals, including regulatory approval. FortisBC Electric and the City of Kelowna are working towards closing the transaction by the end of the first quarter of 2013.

Canadian Regulated Gas Utilities incurred a loss of $6 million compared to a loss of $4 million for the third quarter of 2011. The third quarter is normally a period of lower customer demand due to warmer temperatures. The higher loss largely related to the unfavourable impact of the difference in the timing of recognition of revenue associated with seasonal gas consumption and certain increased regulator-approved expenses in 2012, lower capitalized allowance for funds used during construction, and lower-than-expected customer additions in 2012. The above items were partially offset by higher gas transportation volumes to industrial customers and the timing of certain operating and maintenance expenses during 2012.

Year-to-date 2012, regulatory decisions have been received for: (i) 2012-2013 revenue requirements at the FortisBC Energy companies; (ii) 2012 distribution revenue requirements at FortisAlberta; and (iii) 2012-2013 revenue requirements at FortisBC Electric. The Alberta Utilities Commission issued a generic decision in September 2012 on its Performance-Based Regulation ("PBR") Initiative, outlining the PBR framework applicable to distribution utilities in Alberta for a five-year term commencing January 1, 2013. FortisAlberta will file the required PBR-compliance application in November 2012. A Generic Cost of Capital ("GCOC") Proceeding to finalize 2013 cost of capital for distribution utilities in Alberta is expected to commence late 2012 or early 2013. In British Columbia, the GCOC Proceeding to determine cost of capital, effective January 1, 2013, continues with an oral hearing scheduled for December 2012. Newfoundland Power filed a general rate application in September 2012 for 2013 customer rates and cost of capital.

Caribbean Regulated Electric Utilities contributed $7 million of earnings, compared to $6 million for the third quarter of 2011. Fortis Turks and Caicos acquired Turks and Caicos Utilities Limited ("TCU") in August 2012 for an aggregate purchase price of approximately $13 million (US$13 million), inclusive of debt assumed. TCU serves more than 2,000 customers on Grand Turk and Salt Cay with a diesel-fired generating capacity of approximately 9 megawatts ("MW"). The utility currently operates pursuant to a 50-year licence that expires in 2036.

Non-Regulated Fortis Generation contributed $5 million to earnings compared to $8 million for the same quarter last year. The decrease mainly related to lower production in Belize due to lower rainfall.

Fortis Properties delivered earnings of $8 million, compared to $9 million for the third quarter of 2011, reflecting lower occupancy at hotel operations in Atlantic Canada and central Canada, partially offset by earnings contribution from the Hilton Suites Winnipeg Airport hotel, which was acquired in October 2011. In October 2012 Fortis Properties acquired the 126-room StationPark All Suite Hotel in London, Ontario for approximately $13 million. 

Corporate and other expenses were $23 million compared to $6 million for the third quarter of 2011. Excluding the $11 million after-tax termination fee paid to Fortis in July 2011, corporate and other expenses increased quarter over quarter, mainly as a result of a $3 million after-tax foreign exchange loss recognized in the third quarter of 2012 compared to a $2.5 million after-tax net foreign exchange gain recognized in the same quarter last year. Acquisition-related expenses associated with the CH Energy Group transaction were approximately $0.5 million after-tax for the third quarter of 2012.

Consolidated capital expenditures, before customer contributions, were approximately $794 million year-to-date 2012. At FortisBC Gas, the Customer Care Enhancement Project came into service at the beginning of January 2012. Construction of the $900 million, 335-MW Waneta Expansion hydroelectric generating facility ("Waneta Expansion") in British Columbia continues on time and on budget. Approximately $380 million in total has been spent on the Waneta Expansion since construction began in late 2010.

Cash flow from operating activities was $804 million year-to-date 2012, up $120 million from the same period last year, driven by favourable changes in regulatory deferral accounts and receivables and the collection of increased depreciation and amortization expense in customer rates.

Fortis announced in February 2012 that it had entered into an agreement to acquire CH Energy Group for an aggregate purchase price of approximately US$1.5 billion, including the assumption of approximately US$500 million of debt on closing. CH Energy Group''s main business, Central Hudson Gas & Electric Corporation ("Central Hudson"), serves approximately 375,000 electric and gas customers in New York State''s Mid-Hudson River Valley. The transaction received CH Energy Group shareholder approval in June 2012 and regulatory approval from the Federal Energy Regulatory Commission and the Committee on Foreign Investment in the United States in July 2012. The waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired in October 2012, satisfying another condition necessary for consummation of the transaction. The transaction remains subject to approval by the New York State Public Service Commission ("NYSPSC"). The acquisition is expected to close by the end of the first quarter of 2013 and be immediately accretive to earnings per common share of Fortis, excluding acquisition-related expenses. 

Fortis raised gross proceeds of approximately $601 million in June 2012, upon issuance of 18,500,000 Subscription Receipts at $32.50 each, to finance a portion of the purchase price of CH Energy Group. The proceeds are being held by an escrow agent, pending satisfaction of closing conditions, including receipt of regulatory approvals, contained in the agreement to acquire CH Energy Group. Each Subscription Receipt will entitle the holder thereof to receive, on satisfaction of the closing conditions, one common share of Fortis.

In October 2012 FortisAlberta raised $125 million 40-year 3.98% unsecured debentures, largely in support of its capital expenditure program.

Fortis corporate debt is rated A- by Standard & Poor''s and A(low) by DBRS.

Fortis retroactively adopted accounting principles generally accepted in the United States ("US GAAP"), effective January 1, 2012, with the restatement of prior periods. The adoption of US GAAP did not have a material impact on the Corporation''s earnings per common share for the third quarter of 2012 or 2011.

"Our utilities are focused on completing their remaining capital projects for 2012. Our capital expenditures for the year are expected to reach $1.3 billion," says Stan Marshall, President and Chief Executive Officer, Fortis Inc. "Over the five-year period to 2016, our capital program is expected to total $5.5 billion; Central Hudson''s capital program from 2013 through 2016 will add a further approximate $0.5 billion," he explains.

"Our largest utilities are busy with significant regulatory processes, including those related to the determination of 2013 allowed returns," says Marshall.

"Also on the regulatory front, we are focused on closing the CH Energy Group transaction by the end of the first quarter of 2013. Approval of the transaction by the NYSPSC is the one remaining significant regulatory matter," concludes Marshall.

Interim Management Discussion and Analysis
For the three and nine months ended September 30, 2012
Dated November 1, 2012

FORWARD-LOOKING STATEMENT

The following Fortis Inc. ("Fortis" or the "Corporation") Management Discussion and Analysis ("MD&A") has been prepared in accordance with National Instrument 51-102 - Continuous Disclosure Obligations. Financial information for 2012 and comparative periods contained in the MD&A has been prepared in accordance with accounting principles generally accepted in the United States ("US GAAP") and is presented in Canadian dollars unless otherwise specified. The MD&A should be read in conjunction with the following: (i) the interim unaudited consolidated financial statements and notes thereto for the three and nine months ended September 30, 2012, prepared in accordance with US GAAP; (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2011, prepared in accordance with US GAAP and voluntarily filed on the System for Electronic Document Analysis and Retrieval ("SEDAR") by Fortis on March 16, 2012; (iii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2011, prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"); (iv) the "Supplemental Interim Consolidated Financial Statements for the Year Ended December 31, 2011 (Unaudited)" contained in the above-noted voluntary filing, which provides a detailed reconciliation between the Corporation''s interim unaudited consolidated 2011 Canadian GAAP financial statements and interim unaudited consolidated 2011 US GAAP financial statements; and (v) the MD&A for the year ended December 31, 2011 included in the Corporation''s 2011 Annual Report.

Fortis includes forward-looking information in the MD&A within the meaning of applicable securities laws in Canada ("forward-looking information"). The purpose of the forward-looking information is to provide management''s expectations regarding the Corporation''s future growth, results of operations, performance, business prospects and opportunities, and it may not be appropriate for other purposes. All forward-looking information is given pursuant to the safe harbour provisions of applicable Canadian securities legislation. The words "anticipates", "believes", "budgets", "could", "estimates", "expects", "forecasts", "intends", "may", "might", "plans", "projects", "schedule", "should", "will", "would" and similar expressions are often intended to identify forward-looking information, although not all forward-looking information contains these identifying words. The forward-looking information reflects management''s current beliefs and is based on information currently available to the Corporation''s management. The forward-looking information in the MD&A includes, but is not limited to, statements regarding: the Corporation''s consolidated forecast gross capital expenditures for 2012 and in total over the five-year period 2012 through 2016; the nature, timing and amount of certain capital projects and their expected costs and time to complete; the expectation that the Corporation''s significant capital expenditure program should support continuing growth in earnings and dividends; forecast midyear rate base; the expectation that cash required to complete subsidiary capital expenditure programs will be sourced from a combination of cash from operations, borrowings under credit facilities, equity injections from Fortis and long-term debt offerings; the expected consolidated long-term debt maturities and repayments on average annually over the next five years; except for debt at the Exploits River Hydro Partnership ("Exploits Partnership"), the expectation that the Corporation and its subsidiaries will remain compliant with debt covenants throughout the remainder of 2012; the expected timing of filing regulatory applications and of receipt of regulatory decisions; the expected timing of the closing of the acquisition of CH Energy Group, Inc. ("CH Energy Group") by Fortis and the expectation that the acquisition will be immediately accretive to earnings per common share, excluding acquisition-related expenses; an expected favourable impact on the Corporation''s earnings in future periods upon final enactment of legislative changes to Part VI.1 taxes; the expectation of greater risk under Performance-Based Regulation ("PBR") that FortisAlberta''s earnings may be negatively impacted; and the expectation that FortisBC Electric and the City of Kelowna will work towards closing the proposed acquisition of the City of Kelowna''s electrical utility assets by FortisBC Electric by the end of the first quarter of 2013.

The forecasts and projections that make up the forward-looking information are based on assumptions which include, but are not limited to: the receipt of applicable regulatory approvals and requested rate orders; no significant variability in interest rates; no significant operational disruptions or environmental liability due to a catastrophic event or environmental upset caused by severe weather, other acts of nature or other major events; the continued ability to maintain the gas and electricity systems to ensure their continued performance; no severe and prolonged downturn in economic conditions; no significant decline in capital spending; no material capital project and financing cost overrun related to the construction of the Waneta Expansion hydroelectric generating facility; sufficient liquidity and capital resources; the expectation that the Corporation will receive appropriate compensation from the Government of Belize ("GOB") for fair value of the Corporation''s investment in Belize Electricity that was expropriated by the GOB; the expectation that Belize Electric Company Limited ("BECOL") will not be expropriated by the GOB; the expectation that the Corporation will receive fair compensation from the Government of Newfoundland and Labrador related to the expropriation of the Exploits Partnership''s hydroelectric assets and water rights; the continuation of regulator-approved mechanisms to flow through the commodity cost of natural gas and energy supply costs in customer rates; the ability to hedge exposures to fluctuations in foreign exchange rates, natural gas commodity prices and fuel prices; no significant counterparty defaults;

The continued competitiveness of natural gas pricing when compared with electricity and other alternative sources of energy; the continued availability of natural gas, fuel and electricity supply; continuation and regulatory approval of power supply and capacity purchase contracts; the receipt of regulatory approval from the New York State Public Service Commission, absent material conditions imposed, required in connection with the acquisition of CH Energy Group; the ability to fund defined benefit pension plans, earn the assumed long-term rates of return on the related assets and recover net pension costs in customer rates; the absence of significant changes in government energy plans and environmental laws that may materially negatively affect the operations and cash flows of the Corporation and its subsidiaries; maintenance of adequate insurance coverage; the ability to obtain and maintain licences and permits; retention of existing service areas; the ability to report under US GAAP beyond 2014 or the adoption of International Financial Reporting Standards ("IFRS") after 2014 that allows for the recognition of regulatory assets and liabilities; the continued tax-deferred treatment of earnings from the Corporation''s Caribbean operations; continued maintenance of information technology ("IT") infrastructure; continued favourable relations with First Nations; favourable labour relations; and sufficient human resources to deliver service and execute the capital program.

The forward-looking information is subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. Factors which could cause results or events to differ from current expectations include, but are not limited to: regulatory risk, including increased risk at FortisAlberta associated with the adoption of PBR under a five-year term commencing in 2013; interest rate risk, including the uncertainty of the impact a continuation of a low interest rate environment may have on allowed rates of return on common shareholders'' equity of the Corporation''s regulated utilities; operating and maintenance risks; risk associated with changes in economic conditions; capital project budget overrun, completion and financing risk in the Corporation''s non-regulated business; capital resources and liquidity risk; risk associated with the amount of compensation to be paid to Fortis for its investment in Belize Electricity that was expropriated by the GOB; the timeliness of the receipt of the compensation and the ability of the GOB to pay the compensation owing to Fortis; risk that the GOB may expropriate BECOL; an ultimate resolution of the expropriation of the hydroelectric assets and water rights of the Exploits Partnership that differs from that which is currently expected by management; weather and seasonality risk; commodity price risk; the continued ability to hedge foreign exchange risk; counterparty risk;

Competitiveness of natural gas; natural gas, fuel and electricity supply risk; risk associated with the continuation, renewal, replacement and/or regulatory approval of power supply and capacity purchase contracts; risks relating to the ability to close the acquisition of CH Energy Group, the timing of such closing and the realization of the anticipated benefits of the acquisition; risk of having to raise alternative capital to finance the acquisition of CH Energy Group if the closing of the acquisition occurs subsequent to June 30, 2013; the risk associated with defined benefit pension plan performance and funding requirements; risks related to FortisBC Energy (Vancouver Island) Inc.; environmental risks; insurance coverage risk; risk of loss of licences and permits; risk of loss of service area; risk of not being able to report under US GAAP beyond 2014 or risk that IFRS does not have an accounting standard for rate-regulated entities by the end of 2014 allowing for the recognition of regulatory assets and liabilities; risks related to changes in tax legislation; risk of failure of IT infrastructure; risk of not being able to access First Nations lands; labour relations risk; human resources risk; and risk of unexpected outcomes of legal proceedings currently against the Corporation. For additional information with respect to the Corporation''s risk factors, reference should be made to the Corporation''s continuous disclosure materials filed from time to time with Canadian securities regulatory authorities and to the heading "Business Risk Management" in the MD&A for the three and nine months ended September 30, 2012 and for the year ended December 31, 2011.

All forward-looking information in the MD&A is qualified in its entirety by the above cautionary statements and, except as required by law, the Corporation undertakes no obligation to revise or update any forward-looking information as a result of new information, future events or otherwise after the date hereof.

CORPORATE OVERVIEW

Fortis is the largest investor-owned distribution utility in Canada, serving more than 2,000,000 gas and electricity customers. Its regulated holdings include electric utilities in five Canadian provinces and two Caribbean countries and a natural gas utility in British Columbia, Canada. Fortis owns non-regulated generation assets, primarily hydroelectric, across Canada and in Belize and Upstate New York, and hotels and commercial office and retail space in Canada. Year-to-date September 30, 2012, the Corporation''s electricity distribution systems met a combined peak demand of approximately 5,225 megawatts ("MW") and its gas distribution system met a peak day demand of 1,335 terajoules ("TJ"). For additional information on the Corporation''s business segments, refer to Note 1 to the Corporation''s interim unaudited consolidated financial statements for the three and nine months ended September 30, 2012 and to the "Corporate Overview" section of the 2011 Annual MD&A.

The key goals of the Corporation''s regulated utilities are to operate sound gas and electricity distribution systems, deliver gas and electricity safely and reliably at the lowest reasonable cost and conduct business in an environmentally responsible manner. The Corporation''s main business, utility operations, is highly regulated and the earnings of the Corporation''s regulated utilities are primarily determined under cost of service ("COS") regulation. 

Generally under COS regulation, the respective regulatory authority sets customer gas and/or electricity rates to permit a reasonable opportunity for the utility to recover, on a timely basis, estimated costs of providing service to customers, including a fair rate of return on a regulatory deemed or targeted capital structure applied to an approved regulatory asset value ("rate base"). The ability of a regulated utility to recover prudently incurred costs of providing service and earn the regulator-approved rate of return on common shareholders'' equity ("ROE") and/or rate of return on rate base assets ("ROA") depends on the utility achieving the forecasts established in the rate-setting processes. As such, earnings of regulated utilities are generally impacted by: (i) changes in the regulator-approved allowed ROE and/or ROA; (ii) changes in rate base; (iii) changes in energy sales or gas delivery volumes; (iv) changes in the number and composition of customers; (v) variances between actual expenses incurred and forecast expenses used to determine revenue requirements and set customer rates; and (vi) timing differences within an annual financial reporting period, between when actual expenses are incurred and when they are recovered from customers in rates. When forward test years are used to establish revenue requirements and set base customer rates, these rates are not adjusted as a result of actual COS being different from that which was estimated, other than for certain prescribed costs that are eligible to be deferred on the balance sheet. In addition, the Corporation''s regulated utilities, where applicable, are permitted by their respective regulatory authority to flow through to customers, without markup, the cost of natural gas, fuel and/or purchased power through base customer rates and/or the use of rate stabilization and other mechanisms. 

SIGNIFICANT ITEMS

Pending Acquisition of CH Energy Group, Inc.: In February 2012 Fortis announced that it had entered into an agreement to acquire CH Energy Group, Inc. ("CH Energy Group") for US$65.00 per common share in cash, for an aggregate purchase price of approximately US$1.5 billion, including the assumption of approximately US$500 million of debt on closing. CH Energy Group is an energy delivery company headquartered in Poughkeepsie, New York. Its main business, Central Hudson Gas & Electric Corporation, is a regulated transmission and distribution ("T&D") utility serving approximately 300,000 electric and 75,000 natural gas customers in eight counties of New York State''s Mid-Hudson River Valley. The transaction received CH Energy Group shareholder approval in June 2012 and regulatory approval from the Federal Energy Regulatory Commission and the Committee on Foreign Investment in the United States in July 2012. In addition, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired in October 2012, satisfying another condition necessary for consummation of the transaction.

The transaction remains subject to approval by the New York State Public Service Commission ("NYSPSC") and satisfaction of customary closing conditions. The application for approval of the transaction by the NYSPSC was jointly filed by Fortis and CH Energy Group in April 2012. The acquisition is expected to close by the end of the first quarter of 2013 and be immediately accretive to earnings per common share, excluding acquisition-related expenses. 

During the third quarter and year-to-date 2012, the Corporation''s earnings were reduced by $0.5 million and $7.5 million, respectively, associated with CH Energy Group after-tax acquisition-related expenses.

Subscription Receipts Offering: In June 2012, to finance a portion of the pending acquisition of CH Energy Group, Fortis sold 18,500,000 Subscription Receipts at $32.50 each through a bought-deal offering underwritten by a syndicate of underwriters led by CIBC World Markets Inc., Scotia Capital Inc. and TD Securities Inc., realizing gross proceeds of approximately $601 million. The gross proceeds from the sale of the Subscription Receipts are being held by an escrow agent, pending satisfaction of closing conditions, including receipt of regulatory approvals, included in the agreement to acquire CH Energy Group (the "Release Conditions"). The Subscription Receipts began trading on the Toronto Stock Exchange on June 27, 2012 under the symbol "FTS.R".

Each Subscription Receipt will entitle the holder thereof to receive, on satisfaction of the Release Conditions and without payment of additional consideration, one common share of Fortis and a cash payment equal to the dividends declared on Fortis common shares to holders of record during the period from June 27, 2012 to the date of issuance of the common shares in respect of the Subscription Receipts. 

If the Release Conditions are not satisfied by June 30, 2013, or if the agreement and plan of merger relating to the acquisition of CH Energy Group is terminated prior to such time, holders of Subscription Receipts shall be entitled to receive from the escrow agent an amount equal to the full subscription price thereof plus their pro rata share of the interest earned on such amount.

For further information on the pending acquisition and the related Subscription Receipts offering, refer to the "Business Risk Management" section of this MD&A.

Receipt of Regulatory Decisions: Year-to-date 2012, regulatory decisions have been received for 2012-2013 revenue requirements at the FortisBC Energy companies, 2012 distribution revenue requirements at FortisAlberta and, recently in August, for 2012-2013 revenue requirements at FortisBC Electric. The Alberta Utilities Commission ("AUC") issued a generic decision in September 2012 on its Performance-Based Regulation ("PBR") Initiative outlining the PBR framework applicable to distribution utilities in Alberta, including FortisAlberta, for a five-year term commencing January 1, 2013. For further information on these regulatory decisions, refer to the "Regulatory Highlights" and "Business Risk Management" sections of this MD&A.

Part VI.1 Tax: Under the terms of the Corporation''s first preference shares, the Corporation is subject to tax under Part VI.1 of the Income Tax Act (Canada) associated with dividends on its first preference shares. For corporations subject to Part VI.1 tax, there is an equivalent Part I tax deduction. As permitted under the Income Tax Act (Canada), a corporation may allocate its Part VI.1 tax liability and equivalent Part I tax deduction to its related subsidiaries. In the past, Fortis has allocated these items to Maritime Electric, Newfoundland Power and FortisOntario.

Upon transition to US GAAP, the Corporation reduced its consolidated opening 2012 retained earnings by $20 million to reflect the impact of differences between enacted and substantively enacted tax legislation associated with prior assessments and payments of Part VI.1 taxes, and the recovery of Part I taxes. The adjustment was done as US GAAP requires tax provisions to be based on enacted legislation versus substantively enacted legislation. A number of legislative amendments to Part VI.1 tax in Canada have yet to be enacted. The above-noted transitional US GAAP adjustment will reverse through the Corporation''s earnings in future periods when the legislation is finally enacted, which is expected in 2013, or as reassessment of corporate taxation years, upon which the enacted versus the substantively enacted rates were used to calculate taxes payable under US GAAP, become statute barred. The statute-barred reversals will occur between 2012 and 2016 and will increase earnings during these years. During the third quarter of 2012, Newfoundland Power recorded a favourable $2.5 million adjustment to income taxes associated with statute-barred Part VI.1 taxes.

Purchase of the Electricity Distribution Assets in Port Colborne: In April 2012 FortisOntario exercised its option to purchase all of the assets previously leased by the Company under an operating lease agreement with the City of Port Colborne for the purchase option price of approximately $7 million. The exercise of the purchase option, which qualifies as a business combination, provides ownership and legal title to all of the assets, including equipment, real property and distribution assets, which constitute the electricity distribution system in Port Colborne. 

Acquisition of Turks and Caicos Utilities Limited: In August 2012 Fortis Turks and Caicos acquired Turks and Caicos Utilities Limited ("TCU") for an aggregate purchase price of approximately $13 million (US$13 million), inclusive of debt assumed of $5 million (US$5 million). TCU is a regulated electric utility operating pursuant to a 50-year licence expiring in 2036. The utility serves more than 2,000 residential and commercial customers on Grand Turk and Salt Cay with a diesel-fired generating capacity of approximately 9 MW.

Hotel Acquisition: In October 2012 Fortis Properties acquired the 126-room StationPark All Suite Hotel ("StationPark Hotel") in London, Ontario for approximately $13 million.

Pending Acquisition of the Electrical Utility Assets from the City of Kelowna: FortisBC Electric has offered to purchase the City of Kelowna''s electrical utility assets, which currently serve approximately 15,000 customers, for approximately $55 million. FortisBC Electric provides the City of Kelowna with electricity under a wholesale tariff and has operated and maintained the City of Kelowna''s electrical utility assets since 2000. Closing of the transaction is subject to certain conditions and receipt of certain approvals, including regulatory approval. The parties are working towards closing the transaction by the end of the first quarter of 2013.

Expropriation of Shares in Belize Electricity: The Government of Belize ("GOB") expropriated the Corporation''s common share ownership in Belize Electricity in June 2011. The Corporation is challenging the legality of the expropriation in the Belize Courts. Although the GOB initiated contact with Fortis, there have been no settlement negotiations to date on the fair value compensation owing to Fortis as a result of the expropriation. For further information, refer to the "Business Risk Management" section of this MD&A.

Transition to US GAAP:  Effective January 1, 2012, Fortis retroactively adopted US GAAP with the restatement of comparative reporting periods. For further information, refer to the "New Accounting Standards and Policies" section of this MD&A.

Re-Organization of Non-Regulated Generation Operations: Effective July 1, 2012, the legal ownership of the six small non-regulated hydroelectric generating facilities in eastern Ontario, with a combined generating capacity of 8 MW, was transferred from Fortis Properties to a limited partnership directly held by Fortis. FortisBC Holdings Inc. ("FHI") assumed management responsibility for the operations of the above-noted facilities, as well as for the four non-regulated hydroelectric generating facilities in Upstate New York, with a combined generating capacity of 23 MW, owned by FortisUS Energy Corporation ("FortisUS Energy").

FINANCIAL HIGHLIGHTS

Fortis has adopted a strategy of profitable growth with earnings per common share as the primary measure of performance. The Corporation''s business is segmented by franchise area and, depending on regulatory requirements, by the nature of the assets. Key financial highlights for the third quarter and year-to-date periods ended September 30, 2012 and September 30, 2011 are provided in the following table. 

Consolidated Financial Highlights (Unaudited)  
Periods Ended September 30 Quarter   Year-to-Date  
($ millions, except for common share data) 2012 2011 Variance   2012   2011 Variance  
Revenue 714 699 15   2,655   2,704 (49 )
Energy Supply Costs 235 246 (11 ) 1,092   1,207 (115 )
Operating Expenses 203 200 3   621   619 2  
Depreciation and Amortization 118 104 14   351   309 42  
Other Income (Expenses), Net 1 22 (21 ) (2 ) 34 (36 )
Finance Charges 93 89 4   276   274 2  
Income Taxes 7 12 (5 ) 44   59 (15 )
Net Earnings 59 70 (11 ) 269   270 (1 )
Net Earnings Attributable to:                  
  Non-Controlling Interests 3 3 -   7   7 -  
  Preference Equity Shareholders 11 11 -   34   34 -  
  Common Equity Shareholders 45 56 (11 ) 228   229 (1 )
  Net Earnings 59 70 (11 ) 269   270 (1 )
Basic Earnings per Common Share ($) 0.24 0.30 (0.06 ) 1.20   1.28 (0.08 )
Diluted Earnings per Common Share ($) 0.24 0.30 (0.06 ) 1.19   1.27 (0.08 )
Weighted Average Number of Common Shares Outstanding (# millions) 190.2 186.5 3.7   189.6   179.5 10.1  
Cash Flow from Operating Activities 221 151 70   804   684 120  
                   
                   
Factors Contributing to Quarterly and Year-to-Date
Revenue Variances

Favourable

  • An increase in gas delivery rates and the base component of electricity rates at most of the regulated utilities, consistent with rate decisions, reflecting ongoing investment in energy infrastructure and forecasted certain higher expenses recoverable from customers
  • Net transmission revenue of approximately $3.5 million recognized for the quarter and $6.5 million recognized year to date at FortisAlberta, as a result of the 2012 distribution revenue requirements decision received in April 2012
  • Higher gas transportation volumes to industrial customers
  • Increased electricity sales at FortisBC Electric, Newfoundland Power, Maritime Electric and Fortis Turks and Caicos for the quarter and year to date and at FortisOntario for the quarter
  • The flow through in customer electricity rates of higher energy supply costs, where applicable, at most of the regulated electric utilities
  • Growth in the number of customers, driven by FortisAlberta
  • Differences in the amount of PBR incentives refunded, and flow-through adjustments owing, to FortisBC Electric''s customers period over period
  • Higher Hospitality revenue at Fortis Properties, driven by revenue from the Hilton Suites Winnipeg Airport hotel ("Hilton Suites Hotel"), which was acquired in October 2011
  • Increased non-regulated hydroelectric production in Belize year to date, due to higher rainfall
  • Approximately $1 million for the quarter and $5 million year to date of favourable foreign exchange associated with the translation of US dollar-denominated revenue, due to the strengthening of the US dollar relative to the Canadian dollar period over period

Unfavourable

  • Lower commodity cost of natural gas charged to customers
  • The expropriation of Belize Electricity and the resulting discontinuance of the consolidation method of accounting for the utility, effective June 20, 2011, which reduced revenue year to date
  • The flow through in customer electricity rates of lower energy supply costs at Caribbean Utilities for the quarter, due to a decrease in the cost of fuel period over period
  • Lower average gas consumption by residential and commercial customers year to date
  • Revenue at Newfoundland Power in 2011 reflected the favourable impact of support structure arrangements with Bell Aliant Inc. ("Bell Aliant")
  • Decreased non-regulated hydroelectric production in Belize for the quarter, due to lower rainfall
  • Decreased electricity sales at Caribbean Utilities for the quarter and year to date and at FortisOntario year to date
 
Factors Contributing to Quarterly and Year-to-Date
Energy Supply Costs Variances

Favourable

  • Lower commodity cost of natural gas
  • The expropriation of Belize Electricity and the resulting discontinuance of the consolidation method of accounting for the utility, effective June 20, 2011, which reduced energy supply costs year to date
  • Lower average gas consumption by residential and commercial customers year to date, which reduced natural gas purchases
  • Decreased fuel prices at Caribbean Utilities for the quarter
  • Decreased electricity sales at Caribbean Utilities for the quarter and year to date and at FortisOntario year to date, which reduced fuel and power purchases

Unfavourable

  • Increased fuel prices at Caribbean Utilities year to date and increased purchased power costs at FortisBC Electric and FortisOntario for the quarter and year to date
  • An increase in the base amount of energy supply costs expensed at Maritime Electric in accordance with the operation of the Energy Cost Adjustment Mechanism
  • Increased electricity sales at FortisBC Electric, Newfoundland Power, Maritime Electric and Fortis Turks and Caicos for the quarter and year to date and at FortisOntario for the quarter, which increased fuel and power purchases
  • Approximately $1 million for the quarter and $3 million year to date associated with unfavourable foreign currency translation
 
Factors Contributing to Quarterly and Year-to-Date
Operating Expenses Variances

Unfavourable

  • General inflationary and employee-related cost increases at the Corporation''s regulated utilities, and timing of certain expenses at FortisBC Electric during 2012
  • Operating expenses associated with the Hilton Suites Hotel, which was acquired in October 2011

Favourable

  • Reduced operating expenses at the FortisBC Energy companies during 2012, mainly due to the accrual of non-asset retirement obligation ("non-ARO") removal costs in depreciation, effective January 1, 2012, the timing of certain expenditures during 2012 and lower customer care-related costs as a result of insourcing the customer care function, effective January 1, 2012. Non-ARO removal costs were recorded in operating expenses in 2011.
  • The expropriation of Belize Electricity and the resulting discontinuance of the consolidation method of accounting for the utility, effective June 20, 2011, which decreased operating expenses year to date
 
Factors Contributing to Quarterly and Year-to-Date
Depreciation and Amortization Expense Variances

Unfavourable

  • Continued investment in energy infrastructure
  • Increased depreciation at the FortisBC Energy companies, mainly due to the accrual of non-ARO removal costs in depreciation, effective January 1, 2012, as discussed above

Favourable

  • The expropriation of Belize Electricity and the resulting discontinuance of the consolidation method of accounting for the utility, effective June 20, 2011, which decreased depreciation year to date
  • Lower depreciation rates at FortisAlberta and FortisBC Electric, effective January 1, 2012, as a result of the 2012 revenue requirements decisions received in April 2012 and August 2012, respectively
 
Factors Contributing to Quarterly and Year-to-Date
Other Income (Expenses), Net Variances

Unfavourable

  • The favourable impact in 2011 of the $17 million (US$17.5 million) ($11 million after tax) fee paid to Fortis in July 2011 following the termination of a Merger Agreement between Fortis and Central Vermont Public Service Corporation ("CVPS")
  • Approximately $0.5 million ($0.5 million after tax) and $8.5 million ($7.5 million after tax) of costs incurred in the third quarter and year-to-date 2012, respectively, related to the pending acquisition of CH Energy Group
  • Foreign exchange losses of approximately $3 million and $2.5 million for the third quarter and year-to-date 2012, respectively, associated with the translation of the US dollar-denominated long-term other asset representing the book value of the Corporation''s expropriated investment in Belize Electricity. A net foreign exchange gain of approximately $1.5 million ($2.5 million after tax) was recognized for the third quarter and year-to-date 2011 related to the above item.
  • Lower capitalized equity component of allowance for funds used during construction ("AFUDC"), mainly at the FortisBC Energy companies
  • An approximate $1 million gain on the sale of property at FortisAlberta during the first quarter of 2011
 
Factors Contributing to Quarterly and Year-to-Date
Finance Charges Variances

Unfavourable

  • Higher long-term debt levels in support of the utilities'' capital expenditure programs
  • Lower capitalized debt component of AFUDC at the regulated utilities, mainly at the FortisBC Energy companies

Favourable

  • Higher capitalized interest associated with the financing of the construction of the Corporation''s 51% controlling ownership interest in the Waneta Expansion hydroelectric generating facility ("Waneta Expansion")
  • The expropriation of Belize Electricity and the resulting discontinuance of the consolidation method of accounting for the utility, effective June 20, 2011, which decreased finance charges year to date
  • Lower short-term borrowings at the regulated utilities year to date, driven by the FortisBC Energy companies
 
Factors Contributing to Quarterly and Year-to-Date
Income Taxes Variances

Favourable

  • Lower statutory corporate income tax rates and lower earnings before income taxes
  • Differences in the deductions for income tax purposes compared to accounting purposes period over period
 
Factors Contributing to Quarterly Earnings Variance

Unfavourable

  • Higher corporate expenses, due to the favourable impact in 2011 of the $11 million after-tax fee paid to Fortis in July 2011 following the termination of a Merger Agreement between Fortis and CVPS, and a foreign exchange loss of approximately $3 million after tax recognized in the third quarter of 2012 compared to a net foreign exchange gain of approximately $2.5 million after tax recognized in the third quarter of 2011
  • Decreased non-regulated hydroelectric production in Belize, due to lower rainfall
  • A higher loss at the FortisBC Energy companies, largely related to the unfavourable impact of the difference in the timing of the recognition of revenue associated with seasonal gas consumption and certain increased regulator-approved expenses in 2012, lower capitalized AFUDC and lower-than-expected customer additions in 2012. The above items were partially offset by higher gas transportation volumes to industrial customers and the timing of certain operating and maintenance expenses during 2012.

Favourable

  • Increased earnings at FortisAlberta, mainly due to higher net transmission revenue, rate base growth and the timing of operating expenses during 2012, partially offset by a lower allowed ROE
  • Increased earnings at FortisBC Electric, due to rate base growth, higher pole-attachment revenue and lower-than-expected finance charges in 2012
  • Increased earnings at Newfoundland Power, mainly due to lower effective income taxes and a higher allowed ROE, partially offset by the impact of the support structure arrangements with Bell Aliant during 2011
 
Factors Contributing to Year-to-Date Earnings Variance

Unfavourable

  • Higher corporate expenses due to: (i) the favourable impact in 2011 of the $11 million after-tax fee paid to Fortis in July 2011 following the termination of a Merger Agreement between Fortis and CVPS; (ii) approximately $7.5 million, after tax, of costs incurred year-to-date 2012 related to the pending acquisition of CH Energy Group; and (iii) a foreign exchange loss of approximately $2.5 million after tax recognized year-to-date 2012 compared to a net foreign exchange gain of approximately $2.5 million after tax recognized year-to-date 2011. The increase in corporate expenses was partially offset by lower finance charges, primarily due to higher capitalized interest associated with financing of the construction of the Corporation''s 51% controlling ownership interest in the Waneta Expansion.

Favourable

  • Increased earnings at FortisAlberta, due to rate base growth, higher net transmission revenue, the timing of operating expenses during 2012, lower effective income taxes and lower-than-expected finance charges, partially offset by a lower allowed ROE and an approximate $1 million gain on the sale of property during the first quarter of 2011
  • Increased earnings at Newfoundland Power, for the same reasons discussed above for the quarter, in addition to increased electricity sales year to date
  • Increased earnings at the FortisBC Energy companies, mainly due to rate base growth, higher gas transportation volumes to industrial customers and timing of certain operating and maintenance expenses during 2012, partially offset by lower-than-expected customer additions in 2012, lower capitalized AFUDC and the unfavourable impact of the difference in the timing of recognition of revenue associated with seasonal gas consumption and certain increased regulator-approved expenses in 2012
  • Increased non-regulated hydroelectric production in Belize, due to higher rainfall

SEGMENTED RESULTS OF OPERATIONS

Segmented Net Earnings Attributable to Common Equity Shareholders (Unaudited)  
Periods Ended September 30 Quarter   Year-to-Date  
($ millions) 2012   2011   Variance   2012   2011   Variance  
Regulated Gas Utilities - Canadian                        
  FortisBC Energy Companies (6 ) (4 ) (2 ) 89   86   3  
Regulated Electric Utilities -                        
Canadian                        
  FortisAlberta 26   19   7   73   58   15  
  FortisBC Electric 13   10   3   38   38   -  
  Newfoundland Power 9   8   1   28   24   4  
  Other Canadian Electric Utilities 6   6   -   18   18   -  
  54   43   11   157   138   19  
Regulated Electric Utilities - Caribbean 7   6   1   16   16   -  
Non-Regulated - Fortis Generation 5   8   (3 ) 15   13   2  
Non-Regulated - Fortis Properties 8   9   (1 ) 17   18   (1 )
Corporate and Other (23 ) (6 ) (17 ) (66 ) (42 ) (24 )
Net Earnings Attributable to Common Equity Shareholders 45   56   (11 ) 228   229   (1 )

For a discussion of the nature of regulation and material regulatory decisions and applications pertaining to the Corporation''s regulated utilities, refer to the "Regulatory Highlights" section of this MD&A. A discussion of the financial results of the Corporation''s reporting segments is as follows.

REGULATED GAS UTILITIES - CANADIAN

FORTISBC ENERGY COMPANIES (1)

Financial Highlights (Unaudited) Quarter   Year-to-Date  
Periods Ended September 30 2012   2011   Variance   2012 2011 Variance  
Gas Volumes (petajoules ("PJ")) 26   23   3   138 140 (2 )
Revenue ($ millions) 192   197   (5 ) 1,004 1,090 (86 )
(Loss) Earnings ($ millions) (6 ) (4 ) (2 ) 89 86 3  
                     
(1) Includes FortisBC Energy Inc. ("FEI"), FortisBC Energy (Vancouver Island) Inc. ("FEVI") and FortisBC Energy (Whistler) Inc. ("FEWI")
   
Factors Contributing to Quarterly Gas Volumes Variance

Favourable

  • Higher gas transportation volumes to industrial customers, due to certain customers switching to natural gas from alternative sources of fuel as a result of lower natural gas prices
 
Factors Contributing to Year-to-Date Gas Volumes Variance

Unfavourable

  • Lower average gas consumption by residential and commercial customers, driven by overall warmer temperatures

Favourable

  • Higher gas transportation volumes to industrial customers, for the same reason discussed above for the quarter

With the implementation of the new Customer Care Enhancement Project on January 1, 2012, the FortisBC Energy companies changed their definition of a customer. As a result of this change, the FortisBC Energy companies adjusted their combined customer count downwards by approximately 18,000, effective January 1, 2012. As at September 30, 2012, the total number of customers served by the FortisBC Energy companies was approximately 938,000.

The FortisBC Energy companies earn approximately the same margin regardless of whether a customer contracts for the purchase and delivery of natural gas or only for the delivery of natural gas. As a result of the operation of regulator-approved deferral mechanisms, changes in consumption levels and the commodity cost of natural gas from those forecast to set residential and commercial customer gas rates do not materially affect earnings.

Seasonality has a material impact on the earnings of the FortisBC Energy companies as a major portion of the gas distributed is used for space heating. Most of the annual earnings of the FortisBC Energy companies are realized in the first and fourth quarters. 

 
Factors Contributing to Quarterly Revenue Variance

Unfavourable

  • Lower commodity cost of natural gas charged to customers
  • Lower-than-expected customer additions in 2012

Favourable

  • A net increase in the delivery component of customer rates, effective January 1, 2012, mainly due to ongoing investment in energy infrastructure and forecasted certain higher expenses recoverable from customers as reflected in the 2012-2013 revenue requirements decision received in April 2012
  • Higher gas transportation volumes to industrial customers
 
Factors Contributing to Year-to-Date Revenue Variance

Unfavourable

  • The same factors discussed above for the quarter
  • Lower average gas consumption by residential and commercial customers

Favourable

  • The same factors discussed above for the quarter
 
Factors Contributing to Quarterly Earnings Variance

Unfavourable

  • The difference in the timing of recognition of revenue and certain expenses in 2012. Revenue is recognized based on seasonal gas consumption while certain expenses are generally incurred evenly throughout the year, which, combined with an approved increase in those expenses in 2012, has resulted in timing differences contributing to lower earnings quarter over quarter
  • Lower capitalized AFUDC, due to lower assets under construction period over period
  • Lower-than-expected customer additions in 2012

Favourable

  • Higher gas transportation volumes to industrial customers
  • The timing of certain operating and maintenance expenses during 2012
 
Factors Contributing to Year-to-Date Earnings Variance

Favourable

  • Rate base growth, due to continued investment in energy infrastructure
  • The same factors discussed above for the quarter

Unfavourable

  • Lower-than-expected customer additions in 2012
  • Lower capitalized AFUDC, for the same reason discussed above for the quarter
  • The difference in the timing of recognition of revenue and certain expenses in 2012, for the reasons discussed above for the quarter, which reduced earnings year to date compared to the same period last year

REGULATED ELECTRIC UTILITIES - CANADIAN

FORTISALBERTA

Financial Highlights (Unaudited) Quarter Year-to-Date
Periods Ended September 30 2012 2011 Variance 2012 2011 Variance
Energy Deliveries (gigawatt hours ("GWh")) 4,099 3,911 188 12,434 12,135 299
Revenue ($ millions) 117 103 14 335 306 29
Earnings ($ millions) 26 19 7 73 58 15
             
             
Factors Contributing to Quarterly Energy Deliveries Variance

Favourable

  • Higher average consumption by oilfield and commercial customers, due to increased activity mainly as a result of higher market prices for oil
  • Higher average consumption by residential customers, due to warmer temperatures which increased air conditioning load
  • Growth in the number of customers, with the total number of customers increasing by approximately 9,000 year over year as at September 30, 2012, driven by favourable economic conditions
  • Higher average consumption by farm and irrigation customers, due to warmer temperatures and lower precipitation levels
 
Factors Contributing to Year-to-Date Energy Deliveries Variance

Favourable

  • Higher average consumption by oilfield and commercial customers, for the same reason discussed above for the quarter
  • Growth in the number of customers, for the same reason discussed above for the quarter

As a significant portion of FortisAlberta''s distribution revenue is derived from fixed or largely fixed billing determinants, changes in quantities of energy delivered are not entirely correlated with changes in revenue. Revenue is a function of numerous variables, many of which are independent of actual energy deliveries.

 
Factors Contributing to Quarterly Revenue Variance

Favourable

  • An increase in customer electricity distribution rates, effective January 1, 2012, driven primarily by ongoing investment in energy infrastructure and forecasted certain higher expenses recoverable from customers
  • Net transmission revenue of approximately $3.5 million recognized for the quarter and $6.5 million recognized year to date. In its April 2012 distribution revenue requirements decision, the regulator did not approve the continuation of the deferral of transmission volume variances associated with FortisAlberta''s Alberta Electric System Operator ("AESO") charges deferral account. In the absence of full deferral, FortisAlberta is subject to volume risk on actual transmission costs relative to those charged to customers based on forecast volumes and price. Net transmission revenue is influenced by many factors, which may result in actual transmission volumes varying from those forecasted.
  • Growth in the number of customers
  • An increase in franchise fee revenue of approximately $1 million for the quarter and $3 million year to date

Unfavourable

  • A lower allowed ROE. The cumulative impact on revenue, from January 1, 2011, of the decrease in the allowed ROE to 8.75%, effective for both 2011 and 2012, from 9.00% for 2010 was recognized during the fourth quarter of 2011, when the regulatory decision was received.
 
Factors Contributing to Year-to-Date Revenue Variance

Favourable

  • The same factors discussed above for the quarter

Unfavourable

  • The recognition in the second quarter of 2011 of accrued revenue related to the cumulative 2010 and year-to-date 2011 allowed debt return and recovery of depreciation on the additional $22 million in capital expenditures approved by the regulator to be included in rate base associated with the Automated Metering Project, which had the impact of reducing revenue by approximately $2 million period over period.
  • The same factor discussed above for the quarter
 
Factors Contributing to Quarterly Earnings Variance

Favourable

  • Net transmission revenue of approximately $3.5 million recognized for the quarter and $6.5 million recognized year to date, as a result of the distribution revenue requirements decision received in April 2012
  • Rate base growth, due to continued investment in energy infrastructure
  • The timing of operating expenses during 2012

Unfavourable

  • A lower allowed ROE, as discussed above
 
Factors Contributing to Year-to-Date Earnings Variance

Favourable

  • The same factors discussed above for the quarter
  • Lower effective income taxes, primarily due to additional loss carryforwards being utilized in FortisAlberta''s 2011 income tax return filed in 2012, which decreased income tax expense in 2012, and higher income taxes in 2011 related to the sale of property
  • Lower-than-expected finance charges in 2012

Unfavourable

  • The same factor discussed above for the quarter
  • An approximate $1 million gain on the sale of property during the first quarter of 2011

FORTISBC ELECTRIC (1)

Financial Highlights (Unaudited) Quarter Year-to-Date
Periods Ended September 30 2012 2011 Variance 2012 2011 Variance
Electricity Sales (GWh) 728 713 15 2,313 2,300 13
Revenue ($ millions) 71 67 4 225 215 10
Earnings ($ millions) 13 10 3 38 38 -
(1) Includes the regulated operations of FortisBC Inc. and operating, maintenance and management services related to the Waneta, Brilliant and Arrow Lakes hydroelectric generating plants and the electrical utility assets owned by the City of Kelowna. Excludes the non-regulated generation operations of FortisBC Inc.''s wholly owned partnership, Walden Power Partnership
   
Factors Contributing to Quarterly and Year-to-Date
Electricity Sales Variances

Favourable

  • Growth in the number of customers
  • Higher average consumption, due to differences in weather conditions period over period
 
Factors Contributing to Quarterly and Year-to-Date
Revenue Variances

Favourable

  • A net increase in customer electricity rates, effective January 1, 2012, mainly due to ongoing investment in energy infrastructure and forecasted certain higher expenses recoverable from customers as reflected in the 2012-2013 revenue requirements decision received in August 2012
  • A 1.4% increase in customer electricity rates, effective June 1, 2011, as a result of the flow through to customers of increased purchased power costs charged to FortisBC Electric by BC Hydro, which increased revenue year to date
  • Higher pole-attachment revenue
  • Differences in the amount of PBR incentives refunded, and flow-through adjustments owing, to customers period over period
  • The 2.1% and 0.6% increase in electricity sales for the quarter and year to date, respectively
 
Factors Contributing to Quarterly Earnings Variance

Favourable

  • Rate base growth, due to continued investment in energy infrastructure
  • Higher pole-attachment revenue
  • Lower-than-expected finance charges in 2012. As approved in the 2012-2013 revenue requirements decision received in August 2012, variances between actual finance charges and those forecasted in determining customer electricity rates, beginning January 1, 2012, are no longer permitted deferral account treatment and, therefore, favourably impacted earnings in 2012
 
Factors Contributing to Year-to-Date Earnings Variance

Favourable

  • The same factors discussed above for the quarter

Unfavourable

  • The expiry of the PBR mechanism on December 31, 2011. Year-to-date 2011, lower-than-expected costs, primarily purchased power costs, were shared equally between customers and FortisBC Electric under the PBR mechanism. Pursuant to the Company''s 2012-2013 revenue requirements decision received in August 2012, variances between actual electricity revenue and purchased power costs and those used in determining customer electricity rates are subject to full deferral account treatment and, therefore, did not impact earnings year-to-date 2012. 

NEWFOUNDLAND POWER

Financial Highlights (Unaudited) Quarter   Year-to-Date
Periods Ended September 30 2012 2011 Variance   2012 2011 Variance
Electricity Sales (GWh) 940 923 17   4,113 4,026 87
Revenue ($ millions) 100 101 (1 ) 422 417 5
Earnings ($ millions) 9 8 1   28 24 4
               
Factors Contributing to Quarterly and Year-to-Date
Electricity Sales Variances

Favourable

  • Growth in the number of customers
  • Higher concentration of electric-versus-oil heating in new home construction combined with economic growth, which increased consumption

Unfavourable

  • Sunnier weather conditions, which reduced average consumption
 
Factors Contributing to Quarterly Revenue Variance

Unfavourable

  • Revenue for 2011 included amounts related to support structure arrangements, which were in place with Bell Aliant during 2011, associated with the joint-use poles held for sale to Bell Aliant. The joint-use poles were sold in October 2011.

Favourable

  • The 1.8% increase in electricity sales
 
Factors Contributing to Year-to-Date Revenue Variance

Favourable

  • The 2.2% increase in electricity sales

Unfavourable

  • The impact of the support structure arrangements with Bell Aliant during 2011, as discussed above for the quarter
 
Factors Contributing to Quarterly and Year-to-Date
Earnings Variances

Favourable

  • Lower effective income taxes, primarily due to lower Part VI.1 taxes, including the favourable impact of reversals of statute-barred Part VI.1 taxes period over period, and a lower statutory income tax rate. For further information on Part VI.1 tax, refer to the "Significant Items" section of this MD&A.
  • A higher allowed ROE, effective January 1, 2012, which is being accrued in 2012, as approved by the regulator, as a decrease in operating expenses for deferred recovery from customers
  • Electricity sales growth year to date

Unfavourable

  • The impact of the support structure arrangements with Bell Aliant during 2011, as discussed above
  • Approximately $1 million in additional operating labour and maintenance costs incurred as a result of Tropical Storm Leslie in September 2012
  • Higher depreciation expense, due to continued investment in energy infrastructure

OTHER CANADIAN ELECTRIC UTILITIES (1)

Financial Highlights (Unaudited) Quarter Year-to-Date
Periods Ended September 30 2012 2011 Variance 2012 2011 Variance
Electricity Sales (GWh) 595 582 13 1,803 1,798 5
Revenue ($ millions) 91 87 4 264 256 8
Earnings ($ millions) 6 6 - 18 18 -
(1) Includes Maritime Electric and FortisOntario. FortisOntario mainly includes Canadian Niagara Power, Cornwall Electric and Algoma Power.
   
Factors Contributing to Quarterly Electricity Sales Variance

Favourable

  • Higher average consumption by commercial customers in the agricultural processing sector on Prince Edward Island ("PEI")
  • Higher average consumption by residential customers and several large commercial customers in Ontario
 
Factors Contributing to Year-to-Date Electricity Sales Variance

Favourable

  • Higher average consumption by commercial customers in the agricultural processing sector on PEI
  • Growth in the number of, and higher average consumption by, residential customers on PEI and an increase in the number of such customers using electricity for home heating

Unfavourable

  • Lower average consumption by residential and industrial customers in Ontario, primarily during the first quarter of 2012, reflecting more moderate temperatures and weak economic conditions in the region
 
Factors Contributing to Quarterly and Year-to-Date
Revenue Variances

Favourable

  • The overall 2.2% and 0.3% increase in electricity sales for the quarter and year to date, respectively, for the reasons discussed above
  • An increase in the basic component of customer rates at Maritime Electric, effective March 1, 2012, associated with the higher flow through and recovery of energy supply costs
  • The flow through in customer electricity rates of higher energy supply costs at FortisOntario
  • Increased customer rates at FortisOntario
 
Factors Contributing to Quarterly and Year-to-Date
Earnings Variances

Favourable

  • Lower operating expenses at FortisOntario for the quarter, largely due to the timing of certain operating expenses during 2012
  • Electricity sales growth
  • Increased customer rates at FortisOntario

Unfavourable

  • Increased depreciation expense and finance charges at Maritime Electric, due to continued investment in energy infrastructure and increased short-term borrowings, respectively
  • Higher operating expenses at FortisOntario year to date, largely due to an increase in employee-related costs and the timing of certain operating expenses during 2012

REGULATED ELECTRIC UTILITIES - CARIBBEAN (1)

Financial Highlights (Unaudited) Quarter   Year-to-Date  
Periods Ended September 30 2012 2011 Variance   2012 2011 Variance  
Average US:CDN Exchange Rate (2) 1.00 0.98 0.02   1.00 0.98 0.02  
Electricity Sales (GWh) 197 197 -   547 744 (197 )
Revenue ($ millions) 72 74 (2 ) 202 234 (32 )
Earnings ($ millions) 7 6 1   16 16 -  
(1) Includes Caribbean Utilities on Grand Cayman, Cayman Islands, in which Fortis holds an approximate 60% controlling interest; three small wholly owned utilities in the Turks and Caicos Islands, which include Turks and Caicos Utilities Ltd., acquired in August 2012, FortisTCI Limited and Atlantic Equipment & Power (Turks and Caicos) Ltd. (collectively "Fortis Turks and Caicos"); and the financial results of the Corporation''s approximate 70% controlling interest in Belize Electricity up to June 20, 2011. Effective June 20, 2011, the Government of Belize expropriated the Corporation''s investment in Belize Electricity. As a result of no longer controlling the operations of the utility, Fortis discontinued the consolidation method of accounting for Belize Electricity, effective June 20, 2011. For further information, refer to the "Significant Items" and "Business Risk Management" sections of this MD&A.
   
(2) The reporting currency of Caribbean Utilities and Fortis Turks and Caicos is the US dollar. The reporting currency of Belize Electricity was the Belizean dollar, which is pegged to the US dollar at BZ$2.00=US$1.00.
   
Factors Contributing to Quarterly Electricity Sales Variance

Favourable

  • Growth in the number of customers
  • Warmer temperatures experienced in the Turks and Caicos Islands, which increased air conditioning load
  • Higher tourism activity in the Turks and Caicos Islands
  • Electricity sales in the Turks and Caicos Islands during the third quarter of 2011 were reduced, due to the early and extended closure of a certain hotel and other commercial customers resulting from a hurricane

Unfavourable

  • Higher rainfall experienced on Grand Cayman, which decreased air conditioning load
 
Factors Contributing to Year-to-Date Electricity Sales Variance

Unfavourable

  • The expropriation of Belize Electricity and the resulting discontinuance of the consolidation method of accounting for the utility, effective June 20, 2011. Excluding Belize Electricity, electricity sales decreased approximately 0.5% year to date.
  • The same factor discussed above for the quarter

Favourable

  • The same factors discussed above for the quarter
 
Factors Contributing to Quarterly Revenue Variance

Unfavourable

  • The flow through in customer electricity rates of lower energy supply costs at Caribbean Utilities, due to a decrease in the cost of fuel period over period
  • Decreased electricity sales at Caribbean Utilities
  • The discontinuance of government subsidization of Fortis Turks and Caicos'' South Caicos operations, effective April 1, 2012, in accordance with a rate decision received in February 2012

Favourable

  • Increased electricity sales at Fortis Turks and Caicos
  • An increase in electricity rates for Fortis Turks and Caicos'' large hotel customers, effective April 1, 2012, in accordance with a rate decision received in February 2012
  • Approximately $1 million for the quarter and $5 million year to date of favourable foreign exchange associated with the translation of US dollar-denominated revenue, due to the strengthening of the US dollar relative to the Canadian dollar period over period
  • An increase in base electricity rates at Caribbean Utilities, effective June 1, 2012
 
Factors Contributing to Year-to-Date Revenue Variance

Unfavourable

  • The expropriation of Belize Electricity and the resulting discontinuance of the consolidation method of accounting for Belize Electricity, effective June 20, 2011, which decreased revenue by approximately $45 million period over period
  • Decreased electricity sales at Caribbean Utilities
  • The discontinuance of government subsidization of Fortis Turks and Caicos'' South Caicos operations, as discussed above for the quarter

Favourable

  • The flow through in customer electricity rates of higher energy supply costs at Caribbean Utilities, due to an increase in the cost of fuel period over period
  • The same factors discussed above for the quarter
 
Factors Contributing to Quarterly Earnings Variance

Favourable

  • Lower finance charges at Caribbean Utilities
  • Increased electricity sales at Fortis Turks and Caicos

Unfavourable

  • Overall higher depreciation expense, and higher finance charges at Fortis Turks and Caicos, largely due to investment in utility capital assets
  • Decreased electricity sales at Caribbean Utilities
 
Factors Contributing to Year-to-Date Earnings Variance

Favourable

  • Lower energy supply costs at Fortis Turks and Caicos, mainly due to more fuel-efficient production realized with the commissioning of new generation units at the utility
  • Lower operating expenses at Caribbean Utilities, driven by the timing of capital projects
  • Increased electricity sales at Fortis Turks and Caicos

Unfavourable

  • Overall higher depreciation expense and finance charges, for the same reason discussed above for the quarter
  • Increased operating expenses at Fortis Turks and Caicos, mainly associated with the timing of capital projects

Fortis Turks and Caicos acquired TCU in August 2012 for an aggregate purchase price of approximately $13 million (US$13 million), inclusive of debt assumed of $5 million (US$5 million). For further information refer to the "Significant Items" section of this MD&A. 

NON-REGULATED - FORTIS GENERATION (1)

Financial Highlights (Unaudited) Quarter   Year-to-Date  
Periods Ended September 30 2012 2011 Variance   2012 2011 Variance  
Energy Sales (GWh) 81 111 (30 ) 256 277 (21 )
Revenue ($ millions) 8 11 (3 ) 26 25 1  
Earnings ($ millions) 5 8 (3 ) 15 13 2  
(1) Includes the financial results of non-regulated generation assets in Belize, Ontario, central Newfoundland, British Columbia and Upstate New York, with a combined generating capacity of 139 MW, mainly hydroelectric
   
Factor Contributing to Quarterly Energy Sales Variance

Unfavourable

  • Decreased production in Belize and Upstate New York, due to lower rainfall
 
Factors Contributing to Year-to-Date Energy Sales Variance

Unfavourable

  • Decreased production in Upstate New York, due to a generating facility being out of service and lower rainfall
  • Decreased production in Ontario, due to lower rainfall

Favourable

  • Increased production in Belize, driven by higher rainfall during the first half of 2012
 
Factor Contributing to Quarterly Revenue and Earnings Variances

Unfavourable

  • Decreased production in Belize
 
Factors Contributing to Year-to-Date Revenue and Earnings Variances

Favourable

  • Increased production in Belize

Unfavourable

  • Decreased production in Upstate New York

In May 2011 the generator at Moose River''s hydroelectric generating facility in Upstate New York sustained electrical damage. Repairs to the generator were completed in the second quarter of 2012 but another repair continues to keep the generating facility offline. Revenue for the first half of 2012 reflected insurance amounts received related to the loss of earnings during the period in the first half of 2012 when the generator was being repaired due to the electrical damage. The generating facility is expected to be online by the end of 2012.

NON-REGULATED - FORTIS PROPERTIES (1)

Financial Highlights (Unaudited) Quarter   Year-to-Date  
Periods Ended September 30 2012 2011 Variance   2012 2011 Variance  
Hospitality - Revenue per Available Room ("RevPAR") ($) 94.04 94.83 (0.79 ) 82.09 80.54 1.55  
Real Estate - Occupancy Rate (as at, %) (2) 91.8 94.2 (2.4 ) 91.8 94.2 (2.4 )
Hospitality Revenue ($ millions) 48 47 1   130 123 7  
Real Estate Revenue ($ millions) 17 16 1   51 50 1  
  Total Revenue ($ millions) 65 63 2   181 173 8  
Earnings ($ millions) 8 9 (1 ) 17 18 (1 )
(1) Fortis Properties owns and operates 23 hotels, collectively representing more than 4,400 rooms, in eight Canadian provinces, including the acquisition of the StationPark Hotel in London, Ontario, which was acquired in October 2012 for approximately $13 million. Fortis Properties also owns and operates approximately 2.7 million square feet of commercial office and retail space primarily in Atlantic Canada.
   
(2) Reduced occupancy rate is primarily due to increased vacancy in New Brunswick.
   
Factors Contributing to Quarterly Revenue Variance

Favourable

  • Increased Hospitality Division revenue, driven by contribution from the Hilton Suites Hotel, which was acquired in October 2011

Unfavourable

  • A 0.8% decrease in RevPar at the Hospitality Division. Excluding the impact of the Hilton Suites Hotel, RevPAR was $93.20 for the third quarter of 2012, a decrease of 1.7% quarter over quarter. The decrease in RevPAR was due to an overall 2.0% decrease in hotel occupancy, partially offset by an overall 0.3% increase in the average daily room rate. Hotel occupancy in Atlantic Canada and central Canada decreased, while occupancy in western Canada increased. The average daily room rate increased in western Canada and central Canada, and decreased in Atlantic Canada. 
 
Factors Contributing to Year-to-Date Revenue Variance

Favourable

  • A 1.9% increase in RevPAR at the Hospitality Division, driven by contribution from the Hilton Suites Hotel
  • Excluding the impact of the Hilton Suites Hotel, RevPAR was $80.80 year-to-date 2012, an increase of 0.3% period over period. The increase in RevPAR was due to an overall 1.7% increase in the average daily room rate, partially offset by an overall 1.4% decrease in hotel occupancy. The average daily room rate increased in all regions. Hotel occupancy in Atlantic Canada and central Canada decreased, while occupancy in western Canada increased. 
 
Factors Contributing to Quarterly and Year-to-Date
Earnings Variances

Unfavourable

  • Lower performance at the Hospitality Division, excluding the Hilton Suites Hotel, primarily due to the impact of decreased occupancy at hotel operations in Atlantic Canada and central Canada, and increased depreciation due to capital additions and improvements
  • A $0.5 million gain on the sale of the Viking Mall during the first quarter of 2011

Favourable

  • Contribution from the Hilton Suites Hotel

CORPORATE AND OTHER (1)

Financial Highlights (Unaudited)  
Periods Ended September 30 Quarter   Year-to-Date  
($ millions) 2012   2011   Variance   2012   2011   Variance  
Revenue 5   4   1   18   17   1  
Operating Expenses 2   4   (2 ) 8   9   (1 )
Depreciation and Amortization -   -   -   1   1   -  
Other Income (Expenses), Net (3 ) 20   (23 ) (11 ) 20   (31 )
Finance Charges 13   12   1   36   38   (2 )
Income Tax (Recovery) Expense (1 ) 3   (4 ) (6 ) (3 ) (3 )
  (12 ) 5   (17 ) (32 ) (8 ) (24 )
Preference Share Dividends 11   11   -   34   34   -  
Net Corporate and Other Expenses (23 ) (6 ) (17 ) (66 ) (42 ) (24 )
(1) Includes Fortis net corporate expenses, net expenses of non-regulated FortisBC Holdings Inc. ("FHI") corporate-related activities and the financial results of FHI''s wholly owned subsidiary FortisBC Alternative Energy Services Inc. and FHI''s 30% ownership interest in CustomerWorks Limited Partnership ("CWLP"). The contracts between CWLP and the FortisBC Energy companies ended on December 31, 2011.
   
Factors Contributing to Quarterly
Net Corporate and Other Expenses Variance

Unfavourable

  • Increased other expenses, net of other income, primarily due to: (i) the favourable impact in 2011 of the $17 million (US$17.5 million) ($11 million after tax) fee paid to Fortis in July 2011 following the termination of a Merger Agreement between Fortis and CVPS; (ii) approximately $0.5 million ($0.5 million after tax) and $8.5 million ($7.5 million after tax) of costs incurred during the third quarter and year-to-date 2012, respectively, related to the pending acquisition of CH Energy Group; and (iii) foreign exchange losses of approximately $3 million and $2.5 million for the third quarter and year-to-date 2012, respectively, associated with the translation of the US dollar-denominated long-term other asset representing the book value of the Corporation''s expropriated investment in Belize Electricity. During the third quarter of 2011, a foreign exchange gain of $7 million associated with the translation of the above-noted US dollar-denominated long-term other asset was partially offset by a $5.5 million ($4.5 million after tax) foreign exchange loss associated with the translation of previously hedged US dollar-denominated long-term debt. The favourable net impact to earnings during the third quarter of 2011 of the above-noted foreign exchange impacts was approximately $2.5 million.
  • Excluding income tax expense associated with the merger termination fee paid to Fortis in July 2011, income tax recovery decreased, primarily due to higher Part VI.1 taxes
 
Factors Contributing to Year-to-Date
Net Corporate and Other Expenses Variance

Unfavourable

  • The same factors discussed above for the quarter

Favourable

  • Lower finance charges, primarily due to higher capitalized interest associated with the financing of the construction of the Corporation''s 51% controlling ownership interest in the Waneta Expansion and the impact of the conversion of the Corporation''s US$40 million convertible debentures into common shares in November 2011. The above decreases were partially offset by higher interest on credit facility borrowings in 2012, due to higher average credit facility borrowings and higher fees associated with the increase in the Corporation''s committed revolving credit facility to $1 billion in May 2012. During the third quarter of 2011, credit facility borrowings were repaid with a portion of the proceeds from the common share offering in June and July 2011.

REGULATORY HIGHLIGHTS

The nature of regulation and material regulatory decisions and applications associated with each of the Corporation''s regulated gas and electric utilities year-to-date 2012 are summarized as follows.

NATURE OF REGULATION
 
 
Regulated
Utility
 
 
 
 
 
 
Regulatory
Authority
Allowed
Common
Equity
(%)
   
Allowed Returns (%)
 
 
 
 
 
Supportive Features
 
2010
 
2011
 
2012
Future or Historical Test Year
Used to Set Customer Rates
          ROE     COS/ROE
FEI
 
 
 
 
 
 
 
 
 
British Columbia
Utilities Commission
("BCUC")
 
 
40
 
 
 
 
9.50
 
 
 
 
9.50
 
 
 
 
9.50
 
 
 
 
 
 
 
 
 
FEI: Prior to January 1, 2010, 50/50
sharing of earnings above or below
the allowed ROE under a PBR
mechanism that expired on
December 31, 2009 with a two-year
phase-out
FEVI   BCUC 40 10.00 10.00 10.00  
                 
FEWI   BCUC 40 10.00 10.00 10.00   ROEs established by the BCUC
                Future Test Year
FortisBC
Electric
 
 
BCUC
 
40
 
9.90
 
9.90
 
9.90
 
 
 
COS/ROE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PBR mechanism for 2009 through
2011: 50/50 sharing of earnings
above or below the allowed ROE up
to an achieved ROE that is 200 basis
points above or below the allowed
ROE - excess to deferral account
                 
                ROE established by the BCUC
                Future Test Year
FortisAlberta   AUC 41 9.00 8.75 8.75   COS/ROE
                 
                ROE established by the AUC
                Future Test Year
Newfoundland
Power
 
 
 
 
 
 
 
 
Newfoundland and
Labrador Board of
Commissioners of
Public Utilities
("PUB")
45
 
 
 
 
9.00 +/-
50 bps
 
 
 
8.38 +/-
50 bps
 
 
 
8.80 +/-
50 bps
 
 
 
 
 
 
 
 
COS/ROE
 
The allowed ROE had been set using
an automatic adjustment formula tied
to long-term Canada bond yields. The
formula was suspended for 2012.
               
                Future Test Year
Maritime
Electric
 
 
 
 
 
 
Island Regulatory
and Appeals
Commission
("IRAC")
40
 
 
 
9.75
 
 
 
9.75
 
 
 
9.75
 
 
 
 
 
 
 
COS/ROE
Future Test Year
 
 
FortisOntario
 
 
 
Ontario Energy
Board ("OEB")
 
 
 
 
 
 
 
 
 
 
Canadian Niagara Power - COS/ROE
 
 
 
 
 
Canadian Niagara
Power
40
 
8.01
 
8.01
 
8.01 (1)
 
 
 
Algoma Power - COS/ROE and
subject to Rural and Remote Rate
 
 
 
 
Algoma Power
 
40
 
8.57
 
9.85
 
9.85 (1)
 
 
 
Protection ("RRRP") Program
 
 
 
 
 
Franchise Agreement
Cornwall Electric
 
 
 
 
 
 
 
 
 
 
Cornwall Electric - Price cap with
commodity cost flow through
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Canadian Niagara Power - 2009
historical test year for 2010, 2011
and 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Algoma Power - 2007 historical test
year for 2010; 2011 test year for 2011
and 2012
          ROA     COS/ROA
Caribbean
Utilities
 
 
 
 
 
 
Electricity
Regulatory
Authority ("ERA")
 
N/A
 
 
 
7.75 -
9.75
 
 
7.75 -
9.75
 
 
7.25 -
9.25
 
 
 
 
 
 
 
Rate-cap adjustment mechanism
based on published consumer
price indices
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
...