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Strength in
Connections
Fortis Place | Suite 1100, 5 Springdale Street | PO Box 8837 | St. John’s, NL, Canada A1B 3T2
T: 709.737.2800 | F: 709.737.5307 | www.fortisinc.com | TSX NYSE: FTS
info@fortisinc.com | @Fortis_NA | Fortis Inc.
2020 ANNUAL REPORT
Fortis Inc. Executive
David G. Hutchens
President and Chief Executive Officer
Jocelyn H. Perry
Executive Vice President, Chief Financial Officer
Nora M. Duke
Executive Vice President, Sustainability and Chief Human Resource Officer
James P. Laurito
Executive Vice President, Business Development and Chief Technology Officer
James R. Reid
Executive Vice President, Chief Legal Officer and Corporate Secretary
Gary J. Smith
Executive Vice President, Eastern Canadian and Caribbean Operations
Stephanie A. Amaimo
Vice President, Investor Relations
Karen J. Gosse
Vice President, Treasury and Planning
Ronald J. Hinsley
Vice President, Chief Information Officer
Karen M. McCarthy
Vice President, Communications and Corporate Affairs
Regan P. O’Dea
Vice President, General Counsel
James D. Roberts
Vice President, Controller
Photography:
David Howells, St. John’s, NL
David Sanders, Tucson, AZ
Design and Production:
m5 Marketing Communications, St. John’s, NL www.m5.ca
Moveable Inc., Toronto, ON www.moveable.com
Printer:
The Lowe-Martin Group, Ottawa, ON
Board of Directors
Douglas J. Haughey Q X H
Chair of the Board, Fortis Inc.
Calgary, Alberta
Tracey C. Ball Q H
Corporate Director
Victoria, British Columbia
Pierre J. Blouin X H
Corporate Director
Montreal, Quebec
Paul J. Bonavia X H
Corporate Director
Dallas, Texas
Lawrence T. Borgard Q X
Corporate Director
Naples, Florida
Maura J. Clark Q H
Corporate Director
New York, New York
Margarita K. Dilley Q X
Corporate Director
Washington, D.C.
Julie A. Dobson X H
Corporate Director
Potomac, Maryland
David G. Hutchens
President and CEO, Fortis Inc.
Tucson, Arizona
Jo Mark Zurel Q X
Corporate Director
St. John’s, Newfoundland and Labrador
Q Audit Committee X Human Resources Committee
H Governance and Sustainability Committee
For Board of Directors’ biographies,
please visit www.fortisinc.com.
P U R P O S E
Delivering a cleaner
energy future
V A L U E S
We never
compromise
on safety
Nothing matters more to us than
protecting the health and safety
of our employees, customers
and contractors. Our pursuit of
safety is relentless.
We value
our people
Our employees are dedicated.
We take pride in working hard
and doing the right thing.
We seek and develop diverse
talent and offer an inclusive
work environment.
We keep
it local
We believe in local
decision-making. Our teams
understand the communities
we serve. Our companies operate
independently, but together as a
family of companies we do more
than any of us could do alone.
We act with
courage and
integrity
We make the right decisions
for the long term, even when
it’s a tough call. We keep our
promises and hold ourselves to
the highest ethical standards.
We are
community
champions
We make our communities
stronger by nurturing local
partnerships and giving
back to the places we
proudly serve.
We aim for
excellence
every day
We are energy delivery experts,
dedicated to service, performance
and growth. We respect the
environment and drive innovation
to provide energy solutions for
our customers.
1
REPORT TO SHAREHOLDERS Quick Facts
3.3
million
customers
9,000
employees strong
Corporate-wide emissions
reduction target of 75%
by 2035 compared to 2019 levels
Fortis delivered its
best safety
performance
ever in 2020
$55 billion
in total assets
47
consecutive
years
of dividend
payment
increases
10
utilities in Canada,
the U.S. and
the Caribbean
TSX/NYSE: FTS
60% of Fortis utilities have either a
female CEO or Board Chair
Community investment
of more than $15 million in 2020
Unless otherwise specified, all financial information is referenced in
Canadian dollars and all numbers are as at December 31, 2020.
2
FORTIS INC. 2020 ANNUAL REPORT REPORT TO SHAREHOLDERS
Connected to Our People
and Communities
Leading with Strength
We are proud of what we have accomplished as a family
of companies in 2020. Our accomplishments were
many despite the new and unusual ways the pandemic
required us to approach our work.
The COVID-19 response at Fortis utilities is grounded in
our commitment to employee safety and supporting
our
local communities. Approximately half of our
9,000 employees quickly and efficiently transitioned
to working from home while our teams working in
field operations adapted to work safely to keep the
lights on and the natural gas flowing
for our
3.3 million customers.
Throughout the pandemic we are seeing
our resilience and values shine bright
and, while we are physically distant, in
many ways we have never been
more connected.
Jason Milne, Journeyperson
On behalf of our Board, we extend our sincerest
thanks and gratitude to our employees and their
families for the commitment and care they have
consistently demonstrated.
Melissa Hardy, Investor Relations Analyst,
and Bernard Young, Internal Auditor
3
REPORT TO SHAREHOLDERS 2 0 2 0 CO M M U N IT Y I N V ESTM E N T A R E AS
Biodiversity
5%
Environment
and Safety
6%
Education
14%
Social
Development
23%
COVID-19
Support
33%
Small Business
and Other Support
7%
Arts and Culture
4%
Health and
Wellness
8%
$15 million community
investment in 2020.
The Fortis Community
Matters Project
In May 2020, Fortis donated $500,000 to
20 non-profit organizations to provide
immediate financial support to frontline
COVID-19 community response efforts in
the headquarter province of Newfoundland
and Labrador.
“Thank you, thank you, we are truly
humbled. From all those children
and families who will have food,
because of Fortis, what an impact
you are making.”
– Fortis Community Matters Project recipient
Rodel Nacion, Customer Service Leader
Our local operating model remains at the forefront,
with our teams maintaining close connections to
their customers and communities throughout the
pandemic. This facilitated our timely, decisive and agile
response to COVID-19. Our management teams stay
focused on what matters most to their employees,
customers and local communities, while tapping into
the vast network of expertise across the Fortis group
to collaborate and create innovative ways to deliver
excellent customer service.
We understand the pandemic has been very difficult
for so many of our customers. Our utilities have been
supporting customers by suspending service disconnects,
waiving late fees and offering flexible payment options.
The Fortis group of companies also invested more than
$15 million in our communities in 2020. This amount
includes approximately $5 million specifically for COVID-19
community support, such as food banks, mental health
agencies and organizations providing personal protective
equipment for essential workers.
4
FORTIS INC. 2020 ANNUAL REPORT Scott Hutton, Lead Powerline Technician Construction
Record Safety Results
Safety of our employees is crucial and in 2020 Fortis
delivered the best safety performance in its history.
We track our all-injury frequency rate (“AIFR”) as an
indicator of safety performance, which represents the
number of injuries for every 200,000 hours worked.
Our AIFR for 2020 was 1.09, an improvement of
approximately 25% in comparison to the prior three-year
average. Achieving these results in such a challenging
year is a testament to our focus and commitment to
safety, especially since historically we perform better
than the industry average.
Reliable Service to Customers
in the top quartile
Fortis consistently remains
relative to our industry peers in terms of reliable
energy delivery. We track electricity reliability using
the average hours of interruption per customer.
In 2020 our average outage duration was 1.9 hours,
outperforming both Canadian and U.S. industry
average outage durations.
ALL-INJURY FREQUENCY RATE (1)
ELECTRICITY CUSTOMER
AVERAGE OUTAGE DURATION (2)
2 . 0
1 . 0
0 . 0
1.78
1.50
H O U R S
4 . 0
3 . 0
2 . 0
1 . 0
0 . 0
Year over year
top quartile
reliability
performance.
2 0 1 6
2 0 1 7
2 0 1 8
2 0 1 9
2 0 2 0
2 0 1 6
2 0 1 7
2 0 1 8
2 0 1 9
2 0 2 0
Fortis
Fortis
USA Bureau of Labor Statistics (2016-2019 Average)
Canadian Electricity Association (2016-2019 Average)
Canadian Electricity Association and
U.S. Energy Information Administration Average
(1) Injuries per 200,000 hours worked.
(2) Based on weighted average of Fortis’ customer count in each jurisdiction.
5
REPORT TO SHAREHOLDERS
Strong Financial Performance
In 2020 net earnings attributable to common equity
shareholders were $1,209 million, or $2.60 per common
share, compared to $1,655 million, or $3.79 per common
share, for 2019. The change in net earnings reflects
significant one-time items including a $484 million
gain on the disposition of the Waneta Expansion and
a $56 million year over year impact associated with a
U.S. federal regulatory decision. Notwithstanding these
one-time items, earnings grew by $94 million in 2020.
We achieved adjusted net earnings of $1,195 million,
or $2.57 per common share, in 2020 compared to
$1,115 million, or $2.55 per common share, in 2019.
Fortis is well positioned in terms of liquidity due in
part to a $1.2 billion common equity offering and the
$1.0 billion sale of the Waneta Expansion hydroelectric
generating facility in 2019. Together, these actions
generated a significant portion of the equity funding
required to execute our five-year capital plan and
significantly strengthened our liquidity. At the end of
2020 total consolidated credit facilities were $5.6 billion
with $4.3 billion unutilized.
Over a 20-year period, Fortis has delivered a
total shareholder return of 1,107%.
Over the same 20-year period, the S&P/TSX Composite
and S&P/TSX Capped Utilities indices delivered total
returns of 231% and 541%, respectively.
SU PERI O R 20 -YEAR TOTAL S HAREH O LD ER RETU RN
FTS
S&P/TSX Capped Utilities Index
S&P/TSX Composite Index
1 , 4 0 0
1 , 2 0 0
1 , 0 0 0
8 0 0
6 0 0
4 0 0
2 0 0
0
1 , 1 07 %
5 41%
2 3 1%
(2 0 0)
2 0 0 0
2 0 0 5
2 0 1 0
2 0 1 5
2 0 2 0
Note: Cumulative 20-year total shareholder return as at December 31, 2020.
6
FORTIS INC. 2020 ANNUAL REPORT In aggregate, we paid dividends per common share
of $1.94 in 2020, an increase of 6% compared to 2019.
This increase marked 47 consecutive years of dividend
increases, one of the longest records for annual common
share dividend increases by a Canadian public corporation.
With confidence in the growth profile of our low-risk,
geographically diversified group of utilities, we extended
our average annual dividend growth guidance of 6%
to 2025.
47 YEARS O F CO N S ECUTIVE D IVI D EN D I N CREAS ES
6% Average Annual Dividend Growth Guidance to 2025
47 years is one of the longest
records for annual common
share dividend increases by a
Canadian public corporation.
$2 . 0
$1 . 5
$1 . 0
$ 0 . 5
74
76
7 8
8 0
8 2
8 4
8 6
8 8
9 0
9 2
9 4
9 6
9 8
0 0
0 2
0 4
0 6
0 8
1 0
1 2
1 4
1 6
1 8
2 0
Kealey Martin, Director, Sustainability,
and Andy Morgans, Sustainability Analyst
Pete Cox, Fleet Services
7
REPORT TO SHAREHOLDERS Record Capital Investments of
$4.2 billion
We deployed record capital expenditures of $4.2 billion
in 2020, resulting in annual rate base growth of 8.2%.
Our utilities executed our largest capital plan ever while
also managing through the pandemic and delivering
record safety performance. Several Fortis utilities also
experienced significant storm events in 2020. Central
Hudson, FortisTCI, ITC Holdings Corp., Maritime Electric
and Newfoundland Power experienced extreme
weather events that required a rapid response to restore
service to customers. This performance speaks to the
operational expertise and strength of the leadership
teams across Fortis.
Alison Fitzgerald, Manager, Financial Reporting
2 0 2 0 $4 . 2 B I L L I O N CA P ITA L P L A N
Resiliency and
Modernization
52%
Customer Growth
14%
IT and Cyber
7%
Other
7%
Cleaner Energy
20%
8
FORTIS INC. 2020 ANNUAL REPORT With 93% of our assets associated
with the delivery of electricity
and natural gas, one of the best ways
we can support decarbonization is to ensure
our infrastructure can deliver cleaner energy
to customers.
A Capital Plan Focused on Resiliency,
Modernization and Delivery of
Cleaner Energy
The $4.2 billion 2020 capital plan included $2.2 billion
spent on resiliency and modernization and $0.9 billion on
projects that reduce emissions, water usage or increase
customer energy efficiency. Resiliency, modernization
and cleaner energy capital investments increased by
approximately 20% in comparison to 2019.
Five-Year Capital Plan
Our $19.6 billion five-year capital plan for the period
2021 to 2025 reflects a $0.8 billion increase over the
prior plan. Capital investments are expected to average
approximately $4 billion annually over the five-year
period, increasing rate base by approximately $10 billion
to $40.3 billion and supporting a compound annual
growth in rate base of approximately 6%. With virtually
all regulated investments consisting of a diverse mix of
highly executable and low-risk projects, we are focused
on delivering safe, reliable, cleaner and cost-effective
service to customers.
R ES I L I E N CY A N D M O D E R N I Z ATI O N CA P ITA L
$ 2 . 2 B
$ 1 . 9 B
Spending on resiliency
and modernization
increased by $0.3 billion
in 2020.
2 0 1 9
2 0 2 0
C L E A N E R E N E RGY CA P ITA L
$ 8 5 3 M
$ 6 5 3 M
Cleaner energy spending
increased by $200 million
in 2020.
2 0 1 9
2 0 2 0
9
REPORT TO SHAREHOLDERS Delivering a
Cleaner Energy Future
In 2020 we increased our focus on supporting a
low-carbon future with an aggressive corporate-
wide target to reduce carbon emissions by 75% by
2035 from a 2019 base year. This carbon reduction
target builds on our existing low-emissions profile
and substantially reduces carbon emissions over a
relatively short timeframe. The pace of our planned
emissions reduction is well below the two-degree
Celsius pathway and is aligned with the goals of the
Paris Agreement.
To achieve this target, we expect to add 2,400 MW of
wind and solar power systems and approximately 1,400
MW of energy storage systems at Tucson Electric Power
(“TEP”) by 2035. Although generating electricity is only
a small part of our business, the renewable generation
capacity planned at TEP alone will lead to an almost
five-fold increase in renewable generation capacity at
Fortis. Clean energy initiatives at our other utilities will
also contribute to achieving this goal.
An aggressive corporate-wide target
was established to reduce carbon
emissions by 75% by 2035 from
a 2019 base year.
Additionally, FortisBC has committed to reduce customer
emissions by 30% by 2030, one of the most ambitious
targets in the Canadian utility sector. ITC Holdings Corp.,
the largest independent transmission company in the
U.S., is strategically located in the U.S. Midwest and has
already connected approximately 6,800 MW of wind
energy to its systems, with plans for more renewable
interconnection in the years ahead.
1 0
F O R T I S I N C . 2 0 2 0 A N N U A L R E P O R T
By 2035 virtually all of Fortis assets will be comprised of
energy delivery and renewable, carbon-free generation.
2 0 2 0 TOTA L AS S E TS
P RO J ECTE D 2 0 3 5 TOTA L AS S E TS
Fossil-Fuel
Generation
5%
Renewable
Generation
2%
Other
Generation(1)
1%
Renewable
Generation
7%
Energy
Delivery
93%
Energy
Delivery
92%
(1) Predominantly natural gas generation
A Continuing Focus on Inclusion
and Diversity
We recognize that an inclusive and diverse workplace
inspires innovation, attracts bright minds and supports
employee well-being. Our approach to inclusion and
diversity is grounded in respect, our eagerness to listen
and learn and our drive for change.
In 2020 we created an Inclusion and Diversity Council
that
lived
includes representatives with diverse
experiences from across our utilities. The purpose of
the Council is to guide our inclusion and diversity
strategy and its implementation.
During a year where our communities experienced social
unrest and protests for equality, empowerment and dignity,
we reaffirmed our commitment to doing what is right and
influencing positive actions. Fortis signed the BlackNorth
Initiative pledge in 2020, joining other senior leaders from
public corporations to end systemic anti-Black racism.
Our focus on gender diversity
continued in 2020. Women represent
40% of Fortis Inc. Board members elected
in 2020, 42% of executives at head office
and 60% of Fortis utilities have either
a female CEO or Board Chair.
R E P O R T T O S H A R E H O L D E R S
1 1
Leadership Succession
On December 31, 2020, Barry Perry retired as President and CEO
of Fortis. Barry spent over 20 years of his career with the company,
assuming the role of President and CEO in 2015.
His vision for Fortis resulted in the company’s strategic expansion in the U.S., doubling its size and
becoming a North American utility leader. During his leadership, Fortis total shareholder return was
104%, or approximately 12% per year.
We thank Barry for his leadership, integrity and drive to grow Fortis into the company it is today.
His accomplishments were extraordinary and his guidance, commitment to excellence and humble
nature have left a lasting impression on the culture of Fortis.
1 2
F O R T I S I N C . 2 0 2 0 A N N U A L R E P O R T
A Premium North American
Energy Delivery Company
2020 demonstrated the depth of our talent and what we can achieve when we come
together as one strong company. Employee safety and local community needs will continue
to guide our pandemic response in 2021 as Fortis utilities maintain reliable energy delivery
for our customers.
Our long-term strategy leverages our unique operating model, sustainability profile,
geographic and regulatory diversity, operating expertise, reputation and financial strength.
We see tremendous potential in our industry and we are well positioned to drive innovation
and take advantage of exciting new opportunities.
Our growth platform is stronger than ever, and it supports our efforts to deliver a cleaner
energy future as well as dividend growth and stability to shareholders. As we look back on
2020, we want to express our gratitude to our shareholders who have invested in our future.
Thank you for your confidence in Fortis.
On behalf of the Board of Directors,
Douglas J. Haughey
Chair of the Board
Fortis Inc.
David G. Hutchens
President and CEO
Fortis Inc.
1 3
REPORT TO SHAREHOLDERS
Financial Highlights
N E T E AR N I N G S AT TR I B UTAB L E TO
COM MO N EQU IT Y S HAR E H O L DE RS
($M)
1,655
BAS I C E A R N I N G S PE R
CO M M O N S HAR E ($)
3.79
1,027
963
1,100
1,066
1,115
1,209 1,195
721
585
2.47
2.59
2.51
2.55
2.60
2.57
2.33
2.32
1.89
2 0 1 6 (1)
2 0 1 7 (2) 2 0 1 8 (3) 2 0 1 9 (4)
2 0 2 0 (5)
2 0 1 6 (1)
2 0 1 7 (2) 2 0 1 8 (3) 2 0 1 9 (4)
2 0 2 0 (5)
As Reported
Adjusted
(6)
As Reported
Adjusted
(6)
CAP ITAL EXPE N D ITU R ES ($B)
R E V E N U E ($B)
4.2
3.8
3.0
3.2
2.1
8.8
8.9
2 0 1 6
2 0 1 7
2 0 1 8
2 0 1 9
2 0 2 0
2 0 1 6
2 0 1 7
2 0 1 8
2 0 1 9
2 0 2 0
AS S E TS ($B)
M I DY E A R R ATE BAS E ($B)
47.9
47.8
53.1
53.4
55.5
30.5
28.0
26.1
23.5
24.6
2 0 1 6
2 0 1 7
2 0 1 8
2 0 1 9
2 0 2 0
2 0 1 6
2 0 1 7
2 0 1 8
2 0 1 9
2 0 2 0
(1) Results were impacted by accretion associated with the acquisition of ITC in October 2016 and Aitken Creek in April 2016, as well as associated acquisition-related costs.
Adjusted net earnings exclude acquisition-related costs and other non-operating items.
(2)
Results were impacted by a full year’s contribution from ITC and Aitken Creek. Adjusted net earnings exclude the impact of U.S. tax reform and other non-operating items.
(3) Results were tempered by the ongoing impact of U.S. tax reform and a reduced independence incentive adder at ITC. Adjusted net earnings exclude certain non-operating items.
(4)
Results were impacted by a gain on disposition of the Waneta Expansion and a favourable adjustment associated with a regulatory order at ITC. Adjusted net earnings exclude the gain on
disposition, the favourable regulatory adjustment and other non-operating items.
(5) Results were impacted by a favourable adjustment associated with a regulatory order at ITC. Adjusted net earnings exclude the favourable regulatory adjustment and certain non-operating items.
(6) Non-GAAP measure
All financial information is presented in Canadian dollars. Information is for the fiscal years ended December 31.
1 4
FORTIS INC. 2020 ANNUAL REPORT Highly Regulated, Low-Risk and
Diversified Utility Business
R EG U L ATE D
CUSTOMERS
PEAK DEMAND
ELECTRIC
GAS
TOTAL
MIDYEAR CAPITAL
ELECTRIC
(#)
GAS
(#)
EMPLOYEES
(#)
ELECTRIC
(MW)
GAS
(TJ)
SALES
(GWh)
VOLUMES
(PJ)
EARNINGS
($M)
ASSETS
($B)
RATE BASE
($B)
PROGRAM
($M)
2 021F (1)
ITC (2)
–
–
699
23,364
–
–
UNS Energy
532,000
163,000
2,057
3,309
107
16,763
–
15
449
20.4
9.9
1,000
302
10.8
6.2
749
Central Hudson
300,000
80,000
1,061
1,1 42
121
4,969
23
FortisBC (3)
182,000
1,048,000
2,514
740
1,555
3,291
219
FortisAlberta
572,000
Other Electric (4)
468,000
–
–
1,085
2,770
1,422
2,050
–
–
16,092
9,175
–
–
91
231
133
112
3.9
10.1
5.1
4.3
2.3
6.7
3.8
3.3
306
620
346
721
2,054,000
1,291,000
8,838
33,375
1,783
50,290
257
1,318
54.6
32.2
3,742
(1)
Forecast
(2) Data reflects 100% of ITC’s operations except for earnings, which represent the Corporation’s 80.1% ownership interest. ITC has no retail customers.
(3)
Includes FortisBC Energy and FortisBC Electric.
(4) Data reflects 100% of Caribbean Utilities’ operations except earnings, which represent the Corporation’s 60% ownership interest. Also includes Newfoundland Power,
Maritime Electric, FortisOntario, a 39% equity investment in Wataynikaneyap Power Limited Partnership, Fortis Turks and Caicos, and a 33% equity investment in Belize Electricity.
99% R EG U L ATE D U TI L ITI ES
Electric
82%
Gas
17%
Non-Regulated (1)
1%
Total Assets of $55 billion
as of December 31, 2020.
ASSETS
(1) Comprising of energy infrastructure investments in British Columbia and Belize.
1 5
REPORT TO SHAREHOLDERS
Management Discussion and Analysis
Dated February 11, 2021
This MD&A has been prepared
in accordance with National
Instrument 51-102 – Continuous Disclosure Obligations. It should be
read in conjunction with the 2020 Annual Financial Statements
is subject to the cautionary statement and disclaimer
and
provided under “Forward-Looking Information” on page 56.
Further information about Fortis, including its Annual Information
Form filed on SEDAR, can be accessed at www.fortisinc.com,
www.sedar.com, or www.sec.gov.
Financial information herein has been prepared in accordance with
US GAAP (except for indicated Non-US GAAP Financial Measures)
and, unless otherwise specified, is presented in Canadian dollars
based, as applicable, on the following US dollar-to-Canadian dollar
exchange rates: (i) average of 1.34 and 1.33 for the years ended
December 31, 2020 and 2019, respectively; (ii) 1.27 and 1.30 as
at December 31, 2020 and 2019, respectively; (iii) average of 1.30
and 1.32 for the quarters ended December 31, 2020 and 2019,
respectively; and (iv) 1.32 for all forecast periods. Certain terms used
in this MD&A are defined in the “Glossary” on page 57.
ABOUT FORTIS
Fortis (TSX/NYSE: FTS) is
a well-diversified
leader
in the North American
regulated electric
and
gas utility industry, with
revenue of $8.9 billion and
total assets of $55 billion as
at December 31, 2020.
Regulated utilities account
for 99% of the Corporation’s
assets with the remainder
primarily attributable to non-
regulated energy infrastructure.
The Corporation’s 9,000
employees serve 3.3 million
utility customers in five Canadian provinces, nine US states and
three Caribbean countries. As at December 31, 2020, 66% of the
Corporation’s assets were located outside Canada and 59% of 2020
revenue was derived from foreign operations.
Jocelyn Perry, EVP, CFO, Fortis
Contents
About Fortis ....................................................................................................................... 16
Significant Items.............................................................................................................. 18
Performance at a Glance ........................................................................................... 19
The Industry ....................................................................................................................... 22
Operating Results ........................................................................................................... 23
Business Unit Performance ...................................................................................... 24
ITC ...................................................................................................................................... 24
UNS Energy .................................................................................................................. 25
Central Hudson ......................................................................................................... 25
FortisBC Energy ......................................................................................................... 26
FortisAlberta ................................................................................................................ 26
FortisBC Electric ........................................................................................................ 27
Other Electric .............................................................................................................. 27
Energy Infrastructure ............................................................................................. 27
Corporate and Other ............................................................................................. 28
Non-US GAAP Financial Measures ....................................................................... 28
Regulatory Highlights .................................................................................................. 29
Financial Position ............................................................................................................ 31
Liquidity and Capital Resources ............................................................................ 32
Cash Flow Requirements .................................................................................... 32
Cash Flow Summary .............................................................................................. 33
Contractual Obligations....................................................................................... 35
Capital Structure and Credit Ratings ........................................................... 36
Capital Plan .................................................................................................................. 36
Business Risks .................................................................................................................... 39
Accounting Matters ...................................................................................................... 46
Financial Instruments ................................................................................................... 49
Long-Term Debt and Other ............................................................................... 49
Derivatives .................................................................................................................... 49
Selected Annual Financial Information ............................................................ 51
Fourth Quarter Results ................................................................................................ 52
Summary of Quarterly Results ............................................................................... 53
Related-Party and Inter-Company Transactions ......................................... 54
Management’s Evaluation of Controls and Procedures ......................... 55
Outlook ................................................................................................................................. 55
Forward-Looking Information ................................................................................ 56
Glossary ................................................................................................................................ 57
Annual Consolidated Financial Statements................................................... 59
1 6
FORTIS INC. 2020 ANNUAL REPORT
TOTA L AS S E TS AT D EC E M B E R 31 , 2 0 2 0
Electric
82%
US
63%
Gas
17%
Non-Regulated
1%
Canada
34%
Caribbean
3%
Fortis is principally an energy delivery company, with 93% of its assets related to transmission and distribution. The business is characterized
by low-risk, stable and predictable earnings and cash flows. Earnings, EPS and TSR are the primary measures of financial performance.
Fortis’ regulated utility businesses are: ITC (electric transmission – Michigan, Iowa, Minnesota, Illinois, Missouri, Kansas and Oklahoma);
UNS Energy (integrated electric and natural gas distribution – Arizona); Central Hudson (electric transmission and distribution, and natural
gas distribution – New York); FortisBC Energy (natural gas transmission and distribution – British Columbia); FortisAlberta (electric distribution
– Alberta); FortisBC Electric (integrated electric – British Columbia); Newfoundland Power (integrated electric – Newfoundland and
Labrador); Maritime Electric (integrated electric – Prince Edward Island); FortisOntario (integrated electric – Ontario); Caribbean Utilities
(integrated electric – Grand Cayman); and FortisTCI (integrated electric – Turks and Caicos Islands). Fortis also holds equity investments in
the Wataynikaneyap Partnership (electric transmission – Ontario) and Belize Electricity (integrated electric – Belize).
Non-regulated energy infrastructure consists of Aitken Creek (natural gas storage facility – British Columbia), BECOL (three hydroelectric
generation facilities – Belize) and the Waneta Expansion up to its disposition in April 2019.
Fortis has a unique operating model with a small head office in St. John’s, Newfoundland and Labrador and business units that operate on a
substantially autonomous basis. Each utility has its own management team and most have a board of directors with a majority of independent
members, which provides effective oversight within the broad parameters of Fortis policies and best practices. Subsidiary autonomy supports
constructive relationships with regulators, policy makers, customers and communities. Fortis believes this model enhances accountability,
opportunity and performance across the Corporation’s businesses, and positions Fortis well for future investment opportunities.
Fortis strives to provide safe, reliable and cost-effective energy service to customers using sustainable practices while delivering long-term
profitable growth to shareholders. Management is focused on achieving growth through the execution of its capital plan and the pursuit
of investment opportunities within and proximate to its service territories.
Additional information about the Corporation’s business and reporting units is provided in Note 1 in the 2020 Annual Financial Statements.
1 7
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT SIGNIFICANT ITEMS
COVID-19 Pandemic
The Corporation’s utilities continue to reliably and safely deliver an essential service during the COVID-19 Pandemic. Developments are
continuously monitored with commensurate measures being taken. The Corporation’s utilities have assessed supply chain risk and other
potential impacts of the pandemic to ensure that they can continue to provide safe, reliable service while supporting public health.
Excluding the impact of the delay in TEP’s general rate application (see “Regulatory Highlights” on page 29), the COVID-19 Pandemic did not
have a material impact on the Corporation’s capital expenditures, revenue or earnings in 2020. The financial impact to Fortis approximated
$0.05 per common share and reflected: (i) reduced sales in the Caribbean; and (ii) higher net operational expenses, including increased credit
loss expense, largely at Central Hudson and UNS Energy.
Further information regarding the key impact areas for Fortis with respect to the pandemic is summarized below.
Revenue
Energy sales across all of the Corporation’s utilities have been impacted by the closure and reopening of non-essential businesses along with
stay-at-home orders and other economic impacts related to the COVID-19 Pandemic. Generally, work-from-home practices have resulted in
an increase in residential sales while commercial and industrial sales have decreased.
Regulatory mechanisms function to protect approximately 62% of the Corporation’s annual revenue from changes in sales. Of the remaining
38%, principally at UNS Energy and the Other Electric segment, approximately 21% is residential and 17% is commercial and industrial. Overall,
approximately 83% of revenues are either protected by regulatory mechanisms or derived from residential sales.
Since the start of the COVID-19 Pandemic in 2020, as compared to the same period in 2019, residential electricity sales at UNS Energy
increased by 17%, due mainly to warmer temperatures and work-from-home practices. Commercial and industrial electricity sales decreased
by 2%, resulting in an overall sales increase of 7%. Excluding weather, retail electricity sales increased 2%.
Sales at the Other Electric segment decreased by 2% since the start of the COVID-19 Pandemic, as compared to the same period in 2019. This
was comprised of a 3% increase in residential sales and an 8% decrease in commercial sales, due largely to reduced tourism-related activities
in the Caribbean.
Overall, variations in 2020 sales associated with the COVID-19 Pandemic at UNS Energy and the Other Electric segment did not have a
material impact on Fortis. While the Corporation does not expect the COVID-19 Pandemic to materially impact Fortis in 2021, the residential
and commercial sales mix, particularly for UNS Energy and the Other Electric segment, will continue to be evaluated. Overall, the estimated
annual impact on EPS of a 1% change in sales at each of UNS Energy and the Other Electric segment is approximately $0.01.
Capital Expenditures
Capital expenditures were not materially impacted by the COVID-19 Pandemic. Total expenditures of $4.2 billion were broadly consistent with
the 2020 capital plan. The Corporation does not expect the COVID-19 Pandemic to impact its overall five-year capital plan, although certain
planned expenditures may shift within the five years depending on the length and severity of the pandemic.
Liquidity
Fortis is well positioned with strong liquidity due, in part, to a $1.2 billion common equity offering and the sale of the Waneta Expansion
in 2019. As at December 31, 2020, total consolidated credit facilities were $5.6 billion with $4.3 billion unutilized.
Fortis and its utilities continue to be successful in accessing capital markets. See “Liquidity and Capital Resources” on page 32.
The economic impact of the COVID-19 Pandemic has affected customers’ ability to pay their energy bills with commensurate short-term
working capital impacts. The Corporation’s utilities have instituted various customer relief initiatives, including the temporary suspension
of non-payment disconnects and late fees, delayed customer rate increases and the deferred recovery of costs. The Corporation has seen
an increase in accounts receivable and, accordingly, its allowance for credit losses in 2020. While not material to Fortis, UNS Energy and
Central Hudson, in particular, experienced an increase in credit loss expense in 2020 associated with slower customer collections largely due
to the COVID-19 Pandemic. See Note 6 in the 2020 Annual Financial Statements.
The unfavourable impact on cash flow in 2020 associated with slower collection of customer balances was offset by other changes in
Operating Cash Flow (see “Performance at a Glance – Operating Cash Flow” on page 21).
1 8
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT Regulatory Matters
Regulator and other stakeholder work schedule disruptions caused delays and postponements for certain regulatory proceedings in 2020.
See “Regulatory Highlights” on page 29. The Corporation’s significant regulatory proceedings, as discussed below, were concluded by the
end of 2020.
Pension Plans
The Corporation’s exposure to changes in pension expense is limited by regulatory mechanisms which cover approximately 80% of defined
benefit pension plans. The remaining 20% relates primarily to UNS Energy and its exposure is largely attributable to the use of a historical test
year in setting rates.
Based upon pension plan valuations as at December 31, 2020, the change in pension expense at UNS Energy in 2021, as compared to 2020, is
not material to Fortis.
Outlook
The continued uncertainty surrounding the evolution of the pandemic makes it difficult to predict the ultimate operational and financial
impacts on Fortis. Potential impacts are discussed under “Business Risks” on page 39.
Significant Regulatory Decisions
TEP Rate Order
In December 2020, the ACC issued a rate order on TEP’s general rate application establishing new customer rates effective January 1, 2021,
including: (i) an increase in non-fuel revenue of $77 million (US$58 million); (ii) an allowed ROE of 9.15%, with a 0.20% return on the fair value
increment and a capital structure of 53% common equity; and (iii) a Rate Base of approximately $3.5 billion (US$2.7 billion) which includes
post-test year investments in Gila River Unit 2 and 10 RICE Units.
FortisAlberta 2021 GCOC
In October 2020, the AUC concluded the 2021 GCOC proceeding and set the ROE for 2021 at 8.50% using a capital structure of 37% common
equity, consistent with 2020.
November 2020 AUC Decision
In November 2020, the AUC issued a decision with respect to the 2018 Independent System Operator Tariff Application reversing proposed
changes to the AESO’s customer contribution policy. This resulted in FortisAlberta retaining approximately $400 million of unamortized
customer contributions in its Rate Base.
See “Regulatory Highlights” on page 29 for further information on these significant regulatory developments.
PERFORMANCE AT A GLANCE
Key Financial Metrics
($ millions, except as indicated)
Common Equity Earnings
Actual
Adjusted (1)
Basic EPS ($)
Actual
Adjusted (1)
Dividends
Paid per Common Share ($)
Actual Payout Ratio (%)
Adjusted Payout Ratio (%) (1)
Weighted Average Number of Common Shares Outstanding (millions)
Operating Cash Flow
Capital Expenditures (2)
2020
1,209
1,195
2.60
2.57
1.9375
74.5
75.4
464.8
2,701
4,177
2019
1,655
1,115
3.79
2.55
1.8275
48.2
71.7
436.8
2,663
3,818
Variance
(446)
80
(1.19)
0.02
0.11
26.3
3.7
28
38
359
(1) See “Non-US GAAP Financial Measures” on page 28
(2) Includes Fortis’ $138 million share of development costs and capital spending for the Wataynikaneyap Transmission Power Project
TSR (1) (%)
Fortis
1-Year
–
3-Year
8.0
5-Year
10.9
10-Year
8.3
20-Year
13.3
(1) Annualized TSR per Bloomberg, as at December 31, 2020
1 9
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
Earnings and EPS
The $446 million decrease in Common Equity Earnings reflected significant one-time items: (i) a $484 million gain on the disposition of
the Waneta Expansion in April 2019; and (ii) the $56 million net impact associated with the reversal of prior period liabilities as a result of
the November 2019 and May 2020 FERC decisions at ITC (see “Regulatory Highlights” on page 29).
Excluding the significant one-time items, the Corporation delivered higher earnings of $94 million in 2020 reflecting: (i) Rate Base growth of
8.2%; (ii) increased retail electricity sales at UNS Energy, driven largely by weather; and (iii) higher earnings from Belize, mainly from increased
hydroelectric production. Earnings were also favourably impacted by mark-to-market accounting of natural gas derivatives at Aitken Creek
which resulted in unrealized losses of $15 million in 2019 compared to unrealized gains of less than $1 million in 2020. This growth was
tempered by: (i) the delay in TEP’s general rate application, resulting in approximately $1 billion of Rate Base not reflected in customer rates in
2020; and (ii) the impact of the COVID-19 Pandemic, reflecting lower sales in the Caribbean and higher net operational expenses, including
increased credit loss expense, largely at Central Hudson and UNS Energy.
In addition to the above-noted items impacting earnings, the change in EPS reflected an increase in the weighted average number of
common shares outstanding, largely associated with the Corporation’s $1.2 billion common equity issuance in the fourth quarter of 2019.
Adjusted Common Equity Earnings and Adjusted Basic EPS increased by $80 million and $0.02, respectively. Refer to “Non-US GAAP Financial
Measures” on page 28 for a reconciliation of these measures. The changes in Adjusted Basic EPS are illustrated in the chart below.
CHANGES IN ADJUSTED BASIC EP S
$0.03
$0.01
$0.01
$0.03
$0.03
$0.06
$2.55
$2.57
$(0.15)
2019
Adjusted
EPS
ITC
Transmission
(1)
Western
Canadian
Electric
and Gas
(2)
US Electric
and Gas
(3)
Energy
Infrastructure
(4)
Other
Electric
(5)
Foreign
Exchange
(6)
Weighted
Average
Shares
(7)
2020
Adjusted
EPS
(1) Primarily reflects Rate Base growth and an increase in the base ROE
(2) FortisBC Energy, FortisBC Electric and FortisAlberta. Primarily reflects Rate Base and customer growth, partially offset by the elimination of the PBR efficiency carry-over
mechanism at FortisAlberta
(3) UNS Energy and Central Hudson. Increase at UNS Energy reflects higher retail sales driven by favourable weather, partially offset by higher costs associated with Rate Base
growth not yet reflected in customer rates and higher net operational costs associated with the COVID-19 Pandemic. Increase at Central Hudson reflects Rate Base growth,
partially offset by higher net operational expenses associated with the COVID-19 Pandemic.
(4) Primarily reflects increased hydroelectric production in Belize due to higher rainfall. Excludes the impact of the disposition of the Waneta Expansion, which was neutral on
consolidated earnings
(5) Primarily reflects higher equity income from Belize Electricity and Rate Base growth, partially offset by the impacts of the COVID-19 Pandemic, particularly in the Caribbean
(6) Average foreign exchange rate of $1.34 in 2020 compared to $1.33 in 2019
(7) Weighted average shares of 464.8 million in 2020 compared to 436.8 million in 2019
2 0
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT Dividends and TSR
Fortis paid a dividend of $0.505 per common share in the fourth quarter of 2020, up from $0.4775 paid in each of the previous four quarters.
The total 2020 dividend paid per common share was $1.9375, up $0.11 or 6.0% from 2019 and in line with the Corporation’s dividend
guidance. The Actual Payout Ratio was 74.5% in 2020 compared to 48.2% in 2019 and an annual average of 65.5% over the five-year period of
2016 through 2020. The lower Actual Payout Ratio in 2019 was driven by the gain on the disposition of the Waneta Expansion.
Fortis has increased its common share dividend for 47 consecutive years. The one-year TSR was flat reflecting market conditions in 2020.
Growth of dividends and the market price of the Corporation’s common shares have together yielded a three-year, five-year, 10-year and
20-year TSR of 8.0%, 10.9%, 8.3% and 13.3%, respectively.
In September 2020 Fortis extended its targeted average annual dividend growth of approximately 6% through 2025.
47 Y E ARS O F CO M M O N S H AR E D I V I D E N D I N C R E AS ES
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
Dividend Payments
Operating Cash Flow
The $38 million increase in Operating Cash Flow was driven by higher cash earnings reflecting Rate Base growth, higher retail sales and fuel
and non-fuel cost recoveries at UNS Energy, and an upfront payment received by FortisAlberta associated with a long-term energy retailer
agreement. These were partially offset by: (i) higher transmission cost payments at FortisAlberta; (ii) the timing of recovery of higher gas costs
at FortisBC Energy; and (iii) slower collections from customers due to the COVID-19 Pandemic.
Capital Expenditures
Capital expenditures in 2020 were $4.2 billion, $0.4 billion higher than in 2019 and broadly consistent with the 2020 capital plan. For a detailed
discussion of the Corporation’s capital expenditure program, see “Capital Plan” on page 36.
The Corporation’s five-year 2021–2025 capital plan is targeted at $19.6 billion, $0.8 billion higher than the 2020–2024 capital plan of
$18.8 billion disclosed in the 2019 MD&A. The increase is largely due to: (i) two new major capital projects at FortisBC Energy including
the Tilbury LNG Resiliency Tank project and the AMI project, with total expected capital spend of approximately $500 million;
(ii) $200 million of additional investment in information technology systems and storm hardening at Central Hudson; and (iii) $100 million
of interconnections and system rebuilds to provide additional capacity and other improvements at ITC.
The Corporation currently does not expect the COVID-19 Pandemic to impact its overall five-year capital plan. Funding of the capital plan is
expected to be primarily through Operating Cash Flow, regulated utility debt and common equity from the Corporation’s DRIP.
The five-year capital plan is expected to increase midyear Rate Base from $30.5 billion in 2020 to $36.4 billion by 2023 and $40.3 billion by
2025, representing three- and five-year CAGRs of approximately 6.5% and 6.0%, respectively. Fortis expects this growth in Rate Base will
support earnings and dividend growth.
2 1
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT P RO J ECTE D R ATE BAS E G ROW TH
30.5
32.2
34.3
36.4
38.3
40.3
s
n
o
i
l
l
i
B
$
2020A
2021F
2022F
2023F
2024F
2025F
Canadian and Caribbean
US
Beyond the five-year capital plan, Fortis continues to pursue additional energy infrastructure opportunities including: further expansion
of LNG infrastructure in British Columbia; the fully permitted, cross-border, Lake Erie Connector electric transmission project in Ontario; and
the acceleration of cleaner energy infrastructure investments across our jurisdictions.
THE INDUSTRY
The North American energy industry continues to transform. There is an understanding of the impacts of climate change and the need for
an energy future with reduced carbon emissions. This creates the need for cleaner energy and energy conservation initiatives to preserve
the environment for future generations. The trend toward carbon reduction creates the need for further technological advancements and
has heightened customer expectations for cleaner energy. Renewable generation is key to a decarbonized future, with natural gas continuing
as a key part of the energy mix. Over the long term, the use of hydrogen may also contribute to carbon reduction. Each of these factors, as
well as the increasing affordability of cleaner energy, is driving significant investment opportunity in the utility sector.
Energy policies at the federal, state and provincial levels also reflect the rising focus on climate change, with clean energy and carbon
reduction initiatives at the forefront. The regulatory and compliance operating environment is also evolving and becoming increasingly
complex. These changes are creating additional opportunities to expand investment in new generation sources, including solar and wind,
as well as transmission infrastructure to interconnect renewable energy sources to the grid. Investment opportunities in storage are also
growing with the proliferation of various renewable generation sources and decreasing costs of energy storage technology. The electrification
of the transportation sector is a significant opportunity for reducing GHG emissions. The Corporation’s utilities are well positioned and
actively involved in pursuing these opportunities.
New technology is driving change across all service territories. Energy delivery systems are being upgraded with advanced meters,
additional grid automation, improved controls and more capable operational technology, providing utilities with detailed usage data.
Energy management capabilities are expanding through emerging storage and demand response systems, and customers have been
enabled with options to manage and reduce energy usage and access more affordable distributed generation technology. Grid hardening
and resiliency technology investments are increasing in importance due to climate volatility resulting from more frequent and severe storms,
hurricanes and wildfires.
While some of these new technologies challenge the traditional role of utilities as one-way service providers, they also offer strategic
investment opportunities for improving and expanding service. The proliferation of information and operational technology, along with the
exponential growth in data and grid interconnections, is driving the need for increased investment in cyber- and physical security systems.
The COVID-19 Pandemic has created a number of challenges for the industry, including the need for remote and socially-distanced work
environments. Technological advances in communications, videoconferencing, and information sharing have enabled Fortis, and the industry,
to maintain productivity and safe, reliable service to customers.
2 2
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
Meaningful customer engagement is increasingly important for utilities as customer expectations change and competition for customer
attention becomes more intense. Customers want to make informed energy choices and become active participants in the delivery of their
energy services. They also expect personalized service, customized service offerings and more real-time, digital communication. Our utilities
are capitalizing on this as an investment opportunity to provide enhanced customer information systems and digital technologies to
improve customer service.
Fortis is well positioned to capitalize on evolving industry opportunities. Its decentralized structure and customer-focused business culture
support the efforts required to meet changing customer expectations, to work with regulators on energy and service solutions, and to be an
industry leader in clean energy. Fortis’ culture of innovation underlies a continuous drive to find a better way to safely, reliably and affordably
deliver the energy and services that customers want and need. To further advance innovation, Fortis is a strategic partner in the Energy
Impact Partners utility coalition, which is a strategic private equity fund that invests in emerging technologies, products, services and
business models that are transforming the industry. By leveraging these strengths and partnerships, Fortis expects to remain at the forefront
of this ever-changing industry.
OPERATING RESULTS
($ millions)
Revenue
Energy Supply Costs
Operating Expenses
Depreciation and Amortization
Gain on Disposition
Other Income, Net
Finance Charges
Income Tax Expense
Net Earnings
Net Earnings Attributable to:
Non-Controlling Interests
Preference Equity Shareholders
Common Equity Shareholders
Net Earnings
Revenue
2020
8,935
2,562
2,437
1,428
–
154
1,042
231
1,389
115
65
1,209
1,389
2019
8,783
2,520
2,452
1,350
577
138
1,035
289
1,852
130
67
1,655
1,852
Variance
FX
59
14
19
8
–
(2)
8
–
8
1
–
7
8
Other
93
28
(34)
70
(577)
18
(1)
(58)
(471)
(16)
(2)
(453)
(471)
The increase in revenue was due primarily to: (i) overall higher flow-through costs in customer rates; (ii) Rate Base growth; (iii) higher retail
electricity sales driven by favourable weather in Arizona; and (iv) a $40 million favourable base ROE adjustment at ITC related to prior periods
as a result of the May 2020 FERC decision. The increase was partially offset by: (i) a $91 million favourable base ROE adjustment at ITC in 2019
related to prior periods as a result of the November 2019 FERC decision; and (ii) lower short-term wholesale sales at UNS Energy. See
“Regulatory Highlights” on page 29 for further details on the November 2019 and May 2020 FERC decisions.
Energy Supply Costs
The increase in energy supply costs was due primarily to overall higher commodity costs, partially offset by the impact of lower wholesale
sales at UNS Energy.
Operating Expenses
The decrease in operating expenses was due primarily to: (i) lower recoverable operating expenses at ITC due to temporary cost saving
measures implemented in response to the COVID-19 Pandemic; and (ii) lower flow-through costs at TEP associated with Springerville Units 3
and 4. The decrease was partially offset by higher operating expenses at Central Hudson associated with general inflationary increases and
storm events. UNS Energy and Central Hudson also had higher expenses in 2020 related to the COVID-19 Pandemic including an increase in
credit loss expense.
Depreciation and Amortization
The increase in depreciation and amortization was due to continued investment in energy infrastructure at the Corporation’s regulated utilities.
Gain on Disposition
The gain recorded in 2019 reflects the April 2019 disposition of the Waneta Expansion.
Other Income, Net
The increase in other income, net was due primarily to: (i) higher equity income from Belize Electricity; and (ii) the impact of non-service
pension costs, partially offset by; (iii) an $11 million gain recognized in 2019 on the repayment of US$400 million of debt via tender offer.
2 3
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
Finance Charges
Finance charges were comparable to 2019. An increase in finance charges associated with continued capital investment was offset mainly by
lower finance charges at Corporate due to the repayment of debt in 2019 using proceeds from the Waneta Expansion disposition and the
$1.2 billion common equity offering.
Income Tax Expense
The decrease in income tax expense was driven by tax recorded in 2019 upon the disposition of the Waneta Expansion, partially offset by the
impact of higher valuation allowances released in 2019.
Net Earnings
See “Performance at a Glance – Earnings and EPS” on page 20.
BUSINESS UNIT PERFORMANCE
Common Equity Earnings
($ millions)
Regulated Utilities
ITC
UNS Energy
Central Hudson
FortisBC Energy
FortisAlberta
FortisBC Electric
Other Electric (2)
Non-Regulated
Energy Infrastructure (3)
Corporate and Other (4)
Common Equity Earnings
2020
449
302
91
175
133
56
112
1,318
39
(148)
1,209
2019
471
292
85
165
131
54
106
1,304
18
333
1,655
Variance
FX (1)
8
4
–
–
–
–
–
12
–
(5)
7
Other
(30)
6
6
10
2
2
6
2
21
(476)
(453)
(1)
The reporting currency of ITC, UNS Energy, Central Hudson, Caribbean Utilities, FortisTCI and BECOL is the US dollar. The reporting currency of Belize Electricity is the Belizean dollar,
which is pegged to the US dollar at BZ$2.00=US$1.00. The Corporate and Other segment includes certain transactions denominated in US dollars.
(2) Consists of the utility operations in eastern Canada and the Caribbean: Newfoundland Power; Maritime Electric; FortisOntario; Caribbean Utilities; FortisTCI; and Belize Electricity
(3) Primarily consists of long-term contracted generation assets in Belize, Aitken Creek in British Columbia and, until its April 16, 2019 disposition, the Waneta Expansion
(4) Includes Fortis net corporate expenses and non-regulated holding company expenses
ITC
($ millions)
Revenue (1)
Earnings (1)
2020
1,744
449
2019
1,761
471
Variance
FX
22
8
Other
(39)
(30)
(1) Revenue represents 100% of ITC. Earnings represent the Corporation’s 80.1% controlling ownership interest in ITC and reflect consolidated purchase price accounting
adjustments.
Revenue
The decrease in revenue, net of foreign exchange, was due primarily to: (i) a $91 million favourable base ROE adjustment recorded in 2019
related to prior periods as a result of the November 2019 FERC decision; and (ii) lower recoverable operating expenses due to cost saving
measures implemented in response to the COVID-19 Pandemic. The decrease was partially offset by: (i) a $40 million favourable base ROE
adjustment recorded in 2020 related to prior periods as a result of the May 2020 FERC decision; (ii) Rate Base growth; and (iii) an increase in
the base ROE compared to 2019.
Earnings
The decrease in earnings, net of foreign exchange, was due to significant one-time items related to the reversal of prior period liabilities
as a result of the base ROE decisions made by FERC in November 2019 and May 2020. The year over year impact of these one-time items
was $56 million reflecting the net of: (i) an $83 million favourable adjustment in 2019; and (ii) a $27 million favourable adjustment in 2020.
Excluding this impact, earnings from ITC grew by $26 million in 2020 reflecting growth in Rate Base, an increase in the base ROE compared
to 2019, and lower business development costs.
See “Regulatory Highlights” on page 29 for further information on the November 2019 and May 2020 FERC decisions.
2 4
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
UNS Energy
Retail electricity sales (GWh)
Wholesale electricity sales (GWh) (1)
Gas sales (PJ)
Revenue ($ millions)
Earnings ($ millions)
(1) Primarily short-term wholesale sales
Sales
2020
10,920
5,843
15
2,260
302
2019
10,431
7,923
16
2,212
292
Variance
FX
–
–
–
24
4
Other
489
(2,080)
(1)
24
6
The increase in retail electricity sales was due primarily to higher air conditioning load as a result of warmer temperatures in 2020 as
compared to unseasonably cool temperatures in 2019. The COVID-19 Pandemic has not had a material impact on sales as the decrease in
consumption by commercial and industrial customers, due to the temporary closure of non-essential businesses, was offset by an increase
in consumption by residential customers, due to work-from-home practices.
The decrease in wholesale electricity sales was due primarily to the expiration of a short-term capacity sales transaction, which was
established to offset costs associated with a Gila River Unit 2 tolling PPA during 2019. The capacity sales transaction ended in December 2019
with the purchase of Gila River Unit 2. Revenue from short-term wholesale sales is primarily credited to customers through regulatory deferral
mechanisms and, therefore, does not materially impact earnings.
Gas sales were comparable to 2019.
Revenue
The increase in revenue, net of foreign exchange, was due primarily to higher revenue related to the recovery of fuel and non-fuel costs
through the normal operation of regulatory mechanisms and higher retail sales mainly driven by weather. The increase was partially offset by
lower short-term wholesale sales and a decrease in flow-through costs related to Springerville Units 3 and 4.
Earnings
The increase in earnings, net of foreign exchange, was due primarily to higher retail electricity sales, partially offset by higher costs associated
with Rate Base growth not reflected in customer rates in 2020. Beginning January 1, 2021, new customer rates are in effect following the
conclusion of TEP’s general rate application (see “Regulatory Highlights” on page 29). Higher net operational expenses associated with the
COVID-19 Pandemic, including an increase in credit loss expense, also unfavourably impacted earnings.
Central Hudson
Electricity sales (GWh)
Gas sales (PJ)
Revenue ($ millions)
Earnings ($ millions)
Sales
2020
4,969
23
953
91
2019
4,963
22
917
85
Variance
FX
–
–
9
–
Other
6
1
27
6
Electricity sales were comparable to 2019. Higher average consumption by residential customers was largely offset by lower average
consumption by commercial customers, both as a result of the COVID-19 Pandemic.
Gas sales were comparable to 2019.
Changes in electricity and gas sales at Central Hudson are subject to regulatory revenue decoupling mechanisms and, therefore, do not
materially impact earnings.
Revenue
The increase in revenue, net of foreign exchange, was due primarily to an increase in gas and electricity delivery rates effective July 1, 2019
and July 1, 2020, reflecting a return on increased Rate Base assets as well as the recovery of higher operating and financing expenses (see
“Regulatory Highlights” on page 29 for information on the July 1, 2020 rate increase). The increase was partially offset by the flow through of
lower energy supply costs.
Earnings
The increase in earnings was due primarily to Rate Base growth, partially offset by higher net operational expenses associated with the
COVID-19 Pandemic, including an increase in credit loss expense.
2 5
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
FortisBC Energy
Gas sales (PJ)
Revenue ($ millions)
Earnings ($ millions)
Sales
2020
219
1,385
175
2019
227
1,331
165
Variance
(8)
54
10
The decrease in gas sales was due primarily to lower consumption by transportation customers, partially offset by higher consumption from
residential customers, due partly to work-from-home practices as a result of the COVID-19 Pandemic.
Revenue
The increase in revenue was due primarily to a higher cost of natural gas to be recovered from customers and Rate Base growth.
Earnings
The increase in earnings was due primarily to Rate Base growth.
FortisBC Energy earns approximately the same margin regardless of whether a customer contracts for the purchase and delivery of natural
gas or only for delivery. Due to regulatory deferral mechanisms, changes in consumption levels and commodity costs do not materially
impact earnings.
FortisAlberta
Electricity deliveries (GWh)
Revenue ($ millions)
Earnings ($ millions)
Deliveries
2020
16,092
596
133
2019
16,887
598
131
Variance
(795)
(2)
2
The decrease in electricity deliveries was due to lower average consumption by oil and gas and commercial customers, largely associated
with the COVID-19 Pandemic and the downturn in the oil and gas sector. The decrease was partially offset by customer additions and higher
average consumption by residential customers reflecting work-from-home practices as a result of the COVID-19 Pandemic.
As more than 85% of FortisAlberta’s revenue is derived from fixed or largely fixed billing determinants, changes in quantities of energy
delivered are not entirely correlated with changes in revenue. Revenue is a function of numerous variables, many of which are independent
of actual energy deliveries.
Revenue
The decrease in revenue was due primarily to: (i) the impact of the AUC’s November 2020 decision with respect to the 2018 Independent
System Operator Tariff Application reflecting the flow through of lower depreciation costs with no material impact on earnings (see
“Regulatory Highlights” on page 29); and (ii) the recognition of revenue in 2019 associated with the PBR efficiency carry-over mechanism.
The decrease was partially offset by Rate Base growth and customer additions.
Earnings
The increase in earnings was due primarily to Rate Base growth, customer additions and a lower deferred tax expense due to the utilization
of tax loss carryforwards in 2019. The increase was partially offset by higher operating expenses and the impact of the PBR efficiency
carry-over mechanism.
2 6
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
FortisBC Electric
Electricity sales (GWh)
Revenue ($ millions)
Earnings ($ millions)
Sales
2020
3,291
424
56
2019
3,326
418
54
Variance
(35)
6
2
The decrease in electricity sales was due to lower average consumption by commercial and industrial customers, partially offset by higher
average residential consumption, both due to the impact of the COVID-19 Pandemic.
Revenue
The increase in revenue was due primarily to higher third-party contract work and Rate Base growth, partially offset by the absence of revenue
associated with the provision of operating, maintenance and management services to the Waneta Expansion, which was sold in April 2019.
Earnings
The increase in earnings was due primarily to Rate Base growth, partially offset by the sale of the Waneta Expansion, discussed above.
Due to regulatory deferral mechanisms, changes in consumption levels do not materially impact earnings.
Other Electric
Electricity sales (GWh)
Revenue ($ millions)
Earnings ($ millions)
Sales
2020
9,175
1,485
112
2019
9,366
1,467
106
Variance
FX
–
4
–
Other
(191)
14
6
The decrease in electricity sales was due primarily to overall lower average consumption driven by the COVID-19 Pandemic, largely reflecting
the temporary closure of non-essential businesses and border closures affecting tourism-related sales in the Caribbean.
Revenue
The increase in revenue, net of foreign exchange, was due primarily to the flow through of overall higher energy supply costs and Rate Base
growth, partially offset by lower sales.
Earnings
The increase in earnings was due to higher equity income from Belize Electricity and Rate Base growth, partially offset by the impact of the
COVID-19 Pandemic, largely reflecting lower sales in the Caribbean.
Energy Infrastructure
Electricity sales (GWh)
Revenue ($ millions)
Earnings ($ millions)
Sales
2020
229
88
39
2019
144
82
18
Variance
85
6
21
The increase in electricity sales reflected increased hydroelectric production in Belize due to higher rainfall levels, partially offset by the
Waneta Expansion disposition in 2019, which contributed sales of 80 GWh in that year.
Revenue and Earnings
The increases in revenue and earnings reflected: (i) higher hydroelectric production in Belize; and (ii) the favourable impact of mark-to-market
accounting of natural gas derivatives at Aitken Creek which resulted in unrealized losses of $15 million in 2019 compared to unrealized gains
of less than $1 million in 2020. The increases in revenue and earnings were partially offset by the Waneta Expansion disposition in 2019.
Aitken Creek is subject to commodity price risk, as it purchases and holds natural gas in storage to earn a profit margin from its ultimate sale.
Aitken Creek mitigates this risk by using derivatives to materially lock in the profit margin that will be realized upon the sale of natural gas.
The fair value accounting of these derivatives creates timing differences and the resultant earnings volatility can be significant.
2 7
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
Corporate and Other
($ millions)
Net (expenses) income
2020
(148)
2019
333
Variance
FX
(5)
Other
(476)
The increase in net expenses was due to one-time items: (i) the net after-tax gain of $484 million on the April 2019 disposition of the
Waneta Expansion; and (ii) a $7 million gain on the repayment of debt recognized in 2019. Excluding these one-time items, Corporate
expenses, net of foreign exchange, decreased by $10 million. The decrease was driven by lower finance charges, due to the repayment of
debt using proceeds from the Waneta Expansion disposition and the $1.2 billion common equity offering, and lower operating expenses,
partially offset by an increase in tax expense due to valuation allowances released in 2019.
NON-US GAAP FINANCIAL MEASURES
Adjusted Common Equity Earnings, Adjusted Basic EPS and Adjusted Payout Ratio are Non-US GAAP Financial Measures and may not be
comparable with similar measures used by other entities. They are presented because management and external stakeholders use them in
evaluating the Corporation’s financial performance and prospects.
Net earnings attributable to common equity shareholders (i.e., Common Equity Earnings) and basic EPS are the most directly comparable
US GAAP measures to Adjusted Common Equity Earnings and Adjusted Basic EPS, respectively. The Actual Payout Ratio calculated using
Common Equity Earnings is the most comparable US GAAP measure to the Adjusted Payout Ratio.
Adjusted Common Equity Earnings and Adjusted Basic EPS reflect the removal of items that management excludes in its key decision-making
processes and evaluation of operating results, and are reconciled as follows.
Non-US GAAP Reconciliation
($ millions, except as shown)
Common Equity Earnings
Adjusting items:
FERC base ROE decisions (1)
US tax reform (2)
Unrealized loss on mark-to-market of derivatives (3)
Gain on disposition (4)
Adjusted Common Equity Earnings
Adjusted Basic EPS ($)
2020
1,209
(27)
13
–
–
1,195
2.57
2019
1,655
(83)
12
15
(484)
1,115
2.55
Variance
(446)
56
1
(15)
484
80
0.02
(1) Represents prior period impacts of the May 2020 and November 2019 FERC base ROE decisions, respectively (see “Regulatory Highlights” below), included in the ITC segment
(2)
The finalization of US tax reform regulations associated with anti-hybrid regulations in 2020 and base-erosion and anti-abuse tax in 2019, included in the Corporate and
Other segment
(3) Represents timing differences related to the accounting of natural gas derivatives at Aitken Creek, included in the Energy Infrastructure segment
(4) Gain on sale of the Waneta Expansion, net of expenses, in April 2019, included in the Corporate and Other segment
2 8
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
REGULATORY HIGHLIGHTS
General
The earnings of the Corporation’s regulated utilities are determined under COS Regulation, with some using PBR mechanisms.
Under COS Regulation, the regulator sets customer rates to permit a reasonable opportunity for the timely recovery of the estimated costs
of providing service, including a fair rate of return on a regulatory deemed or targeted capital structure applied to an approved Rate Base.
PBR mechanisms generally apply a formula that incorporates inflation and assumed productivity improvements for a set term.
The ability to recover prudently incurred costs of providing service and earn the regulator-approved ROE or ROA generally depends on
achieving the forecasts established in the rate-setting process. There can be varying degrees of regulatory lag between when costs are
incurred and when they are reflected in customer rates.
Transmission operations in the US are regulated federally by FERC. Remaining utility operations in the US and Canada are regulated by state
or provincial regulators. Utility operations in the Caribbean are regulated by governmental authorities.
Additional information about regulation and the regulatory matters discussed below is provided in Note 2 in the 2020 Annual Financial
Statements. Also refer to “Business Risks – Regulation” on page 40.
COVID-19 Pandemic Impacts
The COVID-19 Pandemic resulted in several customer relief initiatives as well as the delay and postponement of several regulatory
proceedings in 2020, as described below. The Corporation’s significant regulatory proceedings, including TEP’s general rate application as
well as FortisAlberta’s 2021 GCOC and AESO customer contribution proceedings, were concluded by the end of 2020.
Customer Relief Initiatives
UNS Energy
Pursuant to the ACC’s approval of the utility’s customer relief initiatives, TEP refunded to customers approximately $11 million of collected
demand side management funds in excess of program costs.
In December 2020, the ACC enacted a bill credit and payment program for residential electric customers who are behind on their electric bills
as a result of the COVID-19 Pandemic, including automatic enrollment into an eight-month payment plan for qualified customers. TEP
voluntarily created payment arrangements for commercial customers.
Central Hudson
In March 2020, as agreed with the PSC, Central Hudson postponed the collection in customer rates of approximately $4 million of deferred
costs related mainly to environmental remediation until July 1, 2021.
FortisBC Energy and FortisBC Electric
In April 2020, pursuant to the BCUC’s approval of the utilities’ customer relief initiatives, FortisBC Energy and FortisBC Electric implemented
three-month bill deferrals for certain customer classes, the repayment of which commenced in the third quarter of 2020. The BCUC also
authorized the deferral of otherwise uncollectible revenue from customers, the recovery of which will be determined through a future rate
filing once the financial impact of the pandemic is known.
Delayed and Postponed Regulatory Proceedings
UNS Energy
General Rate Application: TEP filed a rate application in April 2019 based on a 2018 test year. In December 2020 the ACC issued a rate order
including new customer rates effective January 1, 2021. Provisions of the order include: (i) an increase in non-fuel revenue of $77 million
(US$58 million); (ii) an allowed ROE of 9.15%, with a 0.20% return on the fair value increment and a capital structure of 53% common
equity; and (iii) a Rate Base of approximately $3.5 billion (US$2.7 billion) which includes post-test year investments in Gila River Unit 2 and
10 RICE Units.
2 9
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT Central Hudson
2020 Rates: In June 2020, the PSC approved Central Hudson’s request to postpone scheduled electric and gas delivery rate increases,
reflecting an increase in the equity component of its capital structure from 49% to 50%, from July 1, 2020 to October 1, 2020. The deferred
revenue associated with the delay is being collected over the nine-month period to June 30, 2021.
COVID-19 Proceeding: In June 2020, the PSC initiated a generic proceeding to identify and address the effects of the COVID-19 Pandemic. The
outcome of this proceeding and potential impacts, if any, are unknown at this time.
FortisAlberta
Generic Cost of Capital Proceeding: In December 2018, the AUC initiated a GCOC proceeding to consider a formula-based approach to
setting the allowed ROE beginning in 2021 and whether any process changes were necessary for determining capital structure in years in
which a ROE formula is in place. In October 2020, given the time that had passed since initiation of the proceeding and ongoing economic
uncertainty, the AUC concluded the proceeding and set the ROE for 2021 at 8.50% using a capital structure of 37% common equity,
consistent with 2020. In December 2020, the AUC initiated a new GCOC proceeding to establish the cost of capital parameters for 2022 and
possibly one or more future years. This proceeding is expected to be ongoing throughout 2021.
Other Electric
Caribbean Utilities: In August 2020, the Utility Regulation and Competition Office approved the postponement of Caribbean Utilities’
scheduled June 1, 2020 annual rate adjustment to January 1, 2021 to provide customer relief from the economic effects of the COVID-19
Pandemic. The deferred revenue associated with the delay is being collected over a two-year period beginning January 2021.
FortisTCI: In February 2020, the Government of the Turks and Caicos Islands approved a 6.8% average increase in FortisTCI’s electricity rates,
effective April 1, 2020, including the recovery of hurricane-related costs incurred in 2017. In March 2020, to provide customer relief from the
economic effects of the COVID-19 Pandemic, the effective date was postponed and new rates became effective July 22, 2020.
FortisTCI sought regulatory approval to defer its incremental operating expenses associated with the COVID-19 Pandemic. Approval was
granted in December 2020 to allow the deferral of approximately $1.5 million in costs, to be amortized over the remaining 15-year life of
FortisTCI’s licence.
Significant Regulatory Developments
ITC
ROE Complaints: In May 2020, FERC issued an order on the rehearing of its November 2019 decision on the MISO transmission owner ROE
complaints and set the base ROE for the periods from November 2013 through February 2015 and from September 2016 onward at 10.02%,
up to a maximum of 12.62% with incentive adders. This represents an increase from the base ROE of 9.88%, up to a maximum of 12.24% with
incentive adders, determined in FERC’s November 2019 decision. Including incentive adders, the May 2020 FERC decision implies an all-in ROE
for ITC’s subsidiaries operating in the MISO region of 10.77%, up from 10.63% as set in the November 2019 decision.
Net regulatory liabilities of $6 million and $91 million were recorded at December 31, 2020 and 2019, respectively, reflecting: (i) the terms
of the May 2020 and November 2019 decisions; and (ii) $42 million refunded to customers in 2020. The May 2020 FERC decision resulted in
an increase in Fortis’ net earnings of $29 million in 2020, including $27 million related to the reversal of liabilities established in prior periods
(2019 – November 2019 FERC decision increased Fortis’ net earnings by $63 million, including $83 million related to the reversal of liabilities
established in prior periods).
Review of Transmission Incentives Policy: In March 2020, FERC issued a NOPR proposing to update its transmission incentives policy for
transmission owners, including ITC, to grant incentives to projects based upon benefits to customers regarding reliability and cost savings
through the reduction of transmission congestion. FERC proposed total ROE incentives of up to 250 basis points that would not be limited by
the upper end of the base ROE zone of reasonableness. The NOPR also proposed, among other things, to eliminate the ROE adder for
independent transmission ownership, and to increase the ROE adder for regional transmission owner participation. Comments from
stakeholders, including ITC, were provided to FERC through July 2020. The outcome of these proceedings may impact future incentive
adders that are included in transmission rates charged by transmission owners, including ITC.
Central Hudson
General Rate Application: In August 2020, Central Hudson filed a rate application with the PSC requesting an increase in electric and natural
gas delivery revenue of $44 million and $19 million, respectively, effective July 1, 2021. An order from the PSC is expected in 2021.
3 0
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT FortisBC Energy and FortisBC Electric
Multi-Year Rate Plan Applications: In June 2020, the BCUC issued a decision on FortisBC Energy’s and FortisBC Electric’s MRP for 2020 to 2024.
The decision sets the rate-setting framework for the five-year period including: (i) the level of operation and maintenance expense and
growth capital to be included in customer rates, indexed for inflation less a fixed productivity adjustment factor; (ii) a forecast approach to
sustainment capital; (iii) an innovation fund recognizing the need to accelerate investment in clean energy innovation; and (iv) a 50/50
sharing between customers and the utilities of variances from the allowed ROE. In the fourth quarter of 2020, the BCUC approved: (i) the
January 1, 2020 delivery rate increase; and (ii) an increase in 2021 delivery rates, effective January 1, 2021, reflecting the terms of this decision.
Generic Cost of Capital Proceeding: In January 2021, the BCUC issued a notice that a GCOC proceeding will be initiated in the second quarter of
2021 and will include a review of the common equity component of capital structure and the allowed ROE effective January 1, 2022.
FortisAlberta
2018 Independent System Operator Tariff Application: In September 2019, the AUC issued a decision that addressed, among other things, a
proposal to change how the AESO’s customer contribution policy (“ACCP”) is accounted for between distribution facility owners, such as
FortisAlberta, and TFOs. The decision prevented any future investment by FortisAlberta under the policy and directed unamortized customer
contributions of approximately $400 million as at December 31, 2017, which form part of FortisAlberta’s Rate Base, be transferred to the
incumbent TFO in FortisAlberta’s service area.
In November 2020, the AUC issued a decision: (i) reversing the proposed changes to the ACCP resulting in FortisAlberta retaining its
unamortized customer contributions; and (ii) directing a change in the depreciation rate for AESO contributions to reflect the parameters of
the underlying transmission facilities. FortisAlberta has adjusted the estimated service life and the associated depreciation rate of the
unamortized AESO contributions resulting in a decrease in depreciation expense and an associated decrease in revenue in 2020.
The AUC initiated a new proceeding in November 2020 to consider whether the ACCP should be modified on a prospective basis. A decision
is expected in the second quarter of 2021.
FINANCIAL POSITION
Significant Changes between December 31, 2020 and 2019
Balance Sheet Account
Cash and cash equivalents
Regulatory assets
(current and long-term)
Increase (Decrease)
FX
($ millions)
(3)
Other
($ millions)
(118)
(25)
230
Property, plant and equipment, net
Goodwill
Short-term borrowings
(425)
(212)
(10)
2,435
–
(370)
Other liabilities
(16)
169
Regulatory liabilities
(current and long-term)
Deferred income tax liabilities
Long-term debt
(including current portion)
(48)
(207)
(34)
(296)
409
2,472
Shareholders’ equity
(279)
445
Explanation
Related to the timing of debt and equity issuances, and the related reinvestment in
capital and operating requirements.
Due primarily to deferred income taxes, and the operation of energy management
cost and employee future benefits deferrals, partially offset by lower derivative loss
deferrals at UNS Energy.
Due to capital expenditures, partially offset by depreciation.
Reflects the repayment of short-term borrowings at UNS Energy and commercial
paper at ITC.
Reflects employee future benefits, refundable deposits received by ITC for transmission
network upgrades, and an upfront payment received by FortisAlberta associated with
a long-term energy retailer agreement.
Due to ROE complaints liability at ITC, deferred income taxes, and the normal operation
of rate stabilization and related accounts.
Due to higher temporary differences associated with ongoing capital investment.
Reflects debt issuances, partially offset by debt repayments at the regulated utilities,
largely at ITC and UNS Energy.
Due primarily to: (i) Common Equity Earnings for 2020, less dividends declared on
common shares; and (ii) the issuance of common shares.
3 1
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Requirements
At the subsidiary level, it is expected that operating expenses and interest costs will be paid from Operating Cash Flow, with varying levels of
residual cash flow available for capital expenditures and/or dividend payments to Fortis. Capital expenditures are expected to be financed
primarily from borrowings under credit facilities, long-term debt offerings and equity injections from Fortis. Borrowings under credit facilities
may be required periodically to support seasonal working capital requirements and there could be higher-than-normal working capital
deficiencies in the short term, as the ongoing impacts of the COVID-19 Pandemic affect customers’ ability to pay their energy bills. See
“Business Risks” on page 39.
Cash required of Fortis to support subsidiary growth is generally derived from borrowings under the Corporation’s committed credit facility,
proceeds from the DRIP and issuances of common shares, preference equity and long-term debt. The subsidiaries pay dividends to Fortis and
receive equity injections from Fortis when required. Both Fortis and its subsidiaries initially borrow through their committed credit facilities
and periodically replace these borrowings with long-term debt. Financing needs also arise periodically for acquisitions and to refinance
maturing debt.
Although Fortis and its utilities continue to be successful in accessing capital markets, the ability to access cash through capital markets may
be impacted by the COVID-19 Pandemic.
Credit facilities are syndicated primarily with large banks in Canada and the US, with no one bank holding more than approximately 25%
of the total facilities. Approximately $5.3 billion of the total credit facilities are committed with maturities ranging from 2021 through 2025.
Available credit facilities are summarized in the following table.
Credit Facilities
As at December 31
($ millions)
Total credit facilities (1)
Credit facilities utilized:
Short-term borrowings
Long-term debt (including current portion)
Letters of credit outstanding
Credit facilities unutilized
Regulated
Utilities
3,700
(132)
(714)
(77)
2,777
Corporate
and Other
1,881
–
(266)
(53)
1,562
2020
5,581
(132)
(980)
(130)
4,339
2019
5,590
(512)
(640)
(114)
4,324
(1) Additional information about these credit facilities is provided in Note 14 in the 2020 Annual Financial Statements.
The Corporation’s ability to service debt and pay dividends is dependent on the financial results of, and the related cash payments from, its
subsidiaries. Certain regulated subsidiaries are subject to restrictions that limit their ability to distribute cash to Fortis, including restrictions by
certain regulators limiting annual dividends and restrictions by certain lenders limiting debt to total capitalization. There are also practical
limitations on using the net assets of the regulated subsidiaries to pay dividends, based on management’s intent to maintain the subsidiaries’
regulator-approved capital structures. Fortis does not expect that maintaining such capital structures will impact its ability to pay dividends
in the foreseeable future.
As at December 31, 2020, consolidated fixed-term debt maturities/repayments are expected to average $891 million annually over the next
five years and approximately 81% of the Corporation’s consolidated long-term debt, excluding credit facility borrowings, had maturities
beyond five years.
In December 2020, Fortis filed a short-form base shelf prospectus with a 25-month life under which it may issue common or preference
shares, subscription receipts or debt securities in an aggregate principal amount of up to $2.0 billion. As at December 31, 2020, $2.0 billion
remained available under the short-form base shelf prospectus.
Fortis is well positioned with strong liquidity due, in part, to its $1.2 billion common equity offering and sale of the Waneta Expansion in 2019.
See “Cash Flow Summary – Financing Activities” on page 33.
3 2
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
This combination of available credit facilities and manageable annual debt maturities/repayments provides flexibility in the timing of access
to capital markets. Given current credit ratings and capital structures, the Corporation and its subsidiaries currently expect to continue to
have reasonable access to long-term capital in 2021.
Fortis and its subsidiaries were in compliance with debt covenants as at December 31, 2020 and are expected to remain compliant in 2021.
Cash Flow Summary
Summary of Cash Flows
Years ended December 31
($ millions)
Cash, beginning of year
Cash provided from (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash and cash equivalents
Cash and change in cash associated with assets held for sale
Cash, end of year
Operating Activities
See “Performance at a Glance – Operating Cash Flow” on page 21.
Investing Activities
2020
370
2,701
(4,132)
1,327
(17)
–
249
2019
332
2,663
(2,768)
154
(26)
15
370
Variance
38
38
(1,364)
1,173
9
(15)
(121)
Cash used in investing activities reflects higher capital expenditures in 2020. See “Performance at a Glance – Capital Expenditures” on page 21
and “Capital Plan” on page 36. Cash used in investing activities in 2019 was partially offset by proceeds from the Waneta Expansion disposition.
Financing Activities
Cash flow related to financing activities will fluctuate largely as a result of changes in the subsidiaries’ capital expenditures and the amount of
Operating Cash Flow available to fund those capital expenditures, which together impact the amount of funding required from debt and
common equity issuances. See “Cash Flow Requirements” on page 32.
In the fourth quarter of 2019, the Corporation issued approximately 22.8 million common shares at a price of $52.15 per share for gross
proceeds of $1,190 million ($1,167 million net of commissions). The net proceeds were used to redeem US$500 million of its outstanding
2.10% unsecured senior notes due October 4, 2021, to repay credit facility borrowings and for general corporate purposes. Also in 2019, net
proceeds of $995 million from the April 2019 Waneta Expansion disposition were used to repay credit facility borrowings and repurchase,
via a tender offer, US$400 million of its outstanding 3.055% unsecured senior notes due in 2026.
3 3
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
Debt Financing
Long-Term Debt Issuances
Year ended December 31, 2020
($ millions, except %)
ITC
Unsecured term loan credit agreement
Unsecured term loan credit agreement (4)
Unsecured senior notes
First mortgage bonds
Secured senior notes
UNS Energy
Unsecured senior notes
Unsecured senior notes
Unsecured senior notes
Central Hudson
Unsecured senior notes
Unsecured senior notes
Unsecured senior notes
Unsecured senior notes
FortisBC Energy
Unsecured debentures
FortisAlberta
Unsecured senior debentures
FortisBC Electric
Unsecured debentures
Newfoundland Power
First mortgage sinking fund bonds
FortisTCI
Unsecured senior notes
Unsecured senior notes
Month
Issued
January
January
May
July
October
April
August
September
May
July
September
November
July
December
May
April
June/October
October/December
Interest
Rate
(%)
Maturity
Amount
(1)
(5)
2.95
3.13
3.02
4.00
1.50
2.17
3.42
3.62
2.03
2.03
2.54
2.63
3.12
3.61
5.30
3.25
2021
2021
2030
2051
2055
2050
2030
2032
2050
2060
2030
2030
2050
2051
2050
2060
2035
2030
US 75
US 200
US 700
US 180
US 150
US 350
US 300
US 50
US 30
US 30
US 40
US 30
200
175
75
100
US 30
US 10
Use of
Proceeds
(2) (3)
(4)
(2) (3) (6)
(2) (3) (7)
(2) (3) (7) (8)
(2) (3)
(7)
(2) (3)
(3)
(3) (7)
(8)
(3) (7)
(7)
(2)
(2)
(2) (3)
(7) (8)
(3)
(1) Floating rate of a one-month LIBOR plus a spread of 0.45%
(2) Repay credit facility borrowings
(3) General corporate purposes
(4) Maximum amount of borrowings under this agreement of US$400 million has been drawn; current period borrowings were used to repay an outstanding commercial
paper balance.
(5) Floating rate of a two-month LIBOR plus a spread of 0.60%
(6) Early redemption of unsecured term loan borrowing of US$400 million
(7) Finance capital expenditures
(8) Repay maturing long-term debt
Common Equity Financing
Common Equity Issuances and Dividends Paid
Years ended December 31
($ millions, except as indicated)
Common shares issued:
Cash (1)
Non-cash (2)
Total common shares issued
Number of common shares issued (# millions)
Common share dividends paid:
Cash
Non-cash (3)
Total common share dividends paid
Dividends paid per common share ($)
2020
58
116
174
3.5
(786)
(114)
(900)
1.9375
2019
1,442
314
1,756
34.8
(494)
(299)
(793)
1.8275
Variance
(1,384)
(198)
(1,582)
(31.3)
(292)
185
(107)
0.1100
(1) Includes common shares issued under stock option and employee share purchase plans. For 2019, mainly reflects the issuance of shares in December 2019 and through the
ATM Program.
(2) Common shares issued under the DRIP and stock option plan. Effective March 1, 2020, the 2% discount offered on common share issuances under the DRIP was terminated and
effective December 1, 2020 was reinstated. See “Cash Flow Requirements” on page 32 for further information.
(3) Common share dividends reinvested under the DRIP
On February 11, 2021, Fortis declared a dividend of $0.505 per common share payable on June 1, 2021. The payment of dividends is at the
discretion of the board of directors and depends on the Corporation’s financial condition and other factors.
3 4
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
Contractual Obligations
Contractual Obligations
As at December 31, 2020
($ millions)
Long-term debt:
Principal (1)
Interest
Finance leases (2)
Other obligations
Other commitments: (3)
Waneta Expansion capacity agreement
Gas and fuel purchase obligations
Power purchase obligations
Renewable PPAs
ITC easement agreement
Debt collection agreement
Renewable energy credit purchase agreements
Other
Total
Year 1
Year 2
Year 3
Year 4
Year 5 Thereafter
Due
24,514
16,113
1,225
557
2,576
2,355
1,867
1,380
381
112
97
116
1,254
980
33
184
52
679
249
102
13
3
15
48
823
949
34
112
53
453
208
102
13
3
14
5
1,786
919
34
97
54
312
188
101
13
3
16
4
1,088
859
34
37
55
192
191
101
13
3
9
4
484
824
34
37
56
124
180
101
13
3
7
3
19,079
11,582
1,056
90
2,306
595
851
873
316
97
36
52
51,293
3,612
2,769
3,527
2,586
1,866
36,933
(1) Amounts not reduced by unamortized deferred financing and discount costs of $147 million. Additional information is provided in Note 14 in the 2020 Annual Financial Statements.
(2) Additional information is provided in Note 15 in the 2020 Annual Financial Statements.
(3) Additional information is provided in Note 28 in the 2020 Annual Financial Statements.
Other Contractual Obligations
The Corporation’s regulated utilities are obligated to provide service to customers within their respective service territories. Consolidated
capital expenditures are forecast to be approximately $3.8 billion for 2021 and approximately $19.6 billion over the five-year 2021–2025 capital
plan. See “Capital Plan” on page 36.
Under a funding framework with the Governments of Ontario and Canada, Fortis will contribute a minimum of approximately $155 million of
equity capital to the Wataynikaneyap Partnership based on Fortis’ proportionate 39% ownership interest and the final regulatory-approved
capital cost of the related project. In October 2019 the Wataynikaneyap Partnership entered into loan agreements to finance the project
during construction. In the event a lender under the loan agreements realizes security on the loans, Fortis may be required to accelerate
its equity capital contributions, which may be in excess of the amount otherwise required of Fortis under the funding framework, to a
maximum total funding of $235 million.
UNS Energy has joint generation performance guarantees with participants at San Juan, Four Corners, and Luna, with agreements expiring in
2022 through 2046, and at Navajo through decommissioning. The participants have guaranteed that in the event of payment default, each
non-defaulting participant will bear its proportionate share of expenses otherwise payable by the defaulting participant. In exchange, the
non-defaulting participants are entitled to receive their proportionate share of the generation capacity of the defaulting participant. In the
case of Navajo, participants would seek financial recovery from the defaulting party. There is no maximum amount under these guarantees,
except for a maximum of $318 million for Four Corners. As at December 31, 2020, there was no obligation under these guarantees.
Central Hudson is a participant in an investment with other utilities to jointly develop, own and operate electric transmission projects
in New York State. Central Hudson’s maximum commitment is $94 million, for which it has issued a parental guarantee. As at
December 31, 2020, there was no obligation under this guarantee.
As at December 31, 2020, FortisBC Holdings Inc., a non-regulated holding company, had $69 million of parental guarantees outstanding to
support storage optimization activities at Aitken Creek.
Off-Balance Sheet Arrangements
With the exception of letters of credit outstanding of $130 million as at December 31, 2020 and the unrecorded commitments in the table
above, the Corporation had no off-balance sheet arrangements.
3 5
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
Capital Structure and Credit Ratings
Fortis requires ongoing access to capital and, therefore, targets a consolidated long-term capital structure that will enable it to maintain
investment-grade credit ratings. The regulated utilities maintain their own capital structures in line with those reflected in customer rates.
Consolidated Capital Structure (%)
As at December 31
Debt (1)
Preference shares
Common shareholders’ equity and minority interest (2)
2020
54.8
3.6
41.6
100.0
2019
53.1
3.8
43.1
100.0
(1) Includes long-term debt and finance leases, including current portion, and short-term borrowings, net of cash
(2) Includes minority interest of 3.5% as at December 31, 2020 (2019 – 3.7%)
Outstanding Share Data
As at February 11, 2021, the Corporation had issued and outstanding 466.8 million common shares and the following First Preference Shares:
5.0 million Series F; 9.2 million Series G; 7.7 million Series H; 2.3 million Series I; 8.0 million Series J; 10.0 million Series K; and 24.0 million Series M.
Only the common shares of the Corporation have voting rights. The Corporation’s first preference shares do not have voting rights unless and
until Fortis fails to pay eight quarterly dividends, whether or not consecutive or declared.
If all outstanding stock options were converted as at February 11, 2021, an additional 3.3 million common shares would be issued and
outstanding.
Credit Ratings
The Corporation’s credit ratings shown below reflect its low risk profile, diversity of operations, the stand-alone nature and financial
separation of each regulated subsidiary, and the level of holding company debt.
Credit Ratings
As at December 31, 2020
S&P
DBRS Morningstar
Moody’s
Rating
A–
BBB+
BBB (high)
BBB (high)
Baa3
Baa3
Type
Corporate
Unsecured debt
Corporate
Unsecured debt
Issuer
Unsecured debt
Outlook
Negative
Positive
Stable
Capital Plan
Capital investment in energy infrastructure is required to ensure the continued and enhanced performance, reliability and safety of the
electricity and gas systems, and to meet customer growth.
The COVID-19 Pandemic did not have a material impact on capital expenditures in 2020. Capital expenditures of $4.2 billion were broadly
consistent with the 2020 capital plan as disclosed in the 2019 MD&A.
2020 Capital Expenditures (1)
($ millions, except %)
Generation
Transmission
Distribution
Other (3)
Total
(%)
Regulated Utilities
ITC
–
1,070
–
112
1,182
29
UNS
Energy
639
84
330
147
1,200
29
Central
Hudson
–
48
188
103
339
8
FortisBC
Energy
–
138
207
126
471
11
Fortis
Alberta
–
–
333
87
420
10
FortisBC
Electric
26
34
46
29
135
3
Total
Other Regulated
Non-
Electric
42
165
167
37
411
10
Utilities Regulated (2)
707
1,539
1,271
641
4,158
100
5
–
–
14
19
–
Total
712
1,539
1,271
655
4,177
100
(%)
17
37
30
16
100
(1) Reflects cash outlay for property, plant and equipment and intangible assets as shown on the Consolidated Statements of Cash Flows in the 2020 Annual Financial Statements,
as well as Fortis’ $138 million share of development costs and capital spending for the Wataynikaneyap Transmission Power Project included in the Other Electric segment.
(2) Includes Energy Infrastructure and Corporate and Other segments
(3) Includes facilities, equipment, vehicles and information technology assets, as well as AESO transmission-related capital expenditures at FortisAlberta
3 6
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
Planned capital expenditures are based on detailed forecasts of energy demand, labour and material costs, general economic conditions,
foreign exchange rates and other factors. These could change and cause actual expenditures to differ from forecast or plan. The impact of
the COVID-19 Pandemic on forecast capital expenditures will continue to be evaluated and, depending on the length and severity of the
pandemic, certain planned expenditures may shift within the 2021–2025 capital plan.
Forecast 2021 Capital Expenditures (1)
($ millions, except %)
Generation
Transmission
Distribution
Other
Total
(%)
Regulated Utilities
ITC
–
949
–
51
1,000
26
UNS
Energy
117
191
270
171
749
20
Central
Hudson
1
41
167
97
306
8
FortisBC
Energy
–
168
184
115
467
12
Fortis
Alberta
–
–
266
80
346
9
FortisBC
Electric
24
23
81
25
153
4
Total
Other Regulated
Electric
189
310
173
49
721
19
Non-
Utilities Regulated
53
–
–
18
331
1,682
1,141
588
3,742
98
71
2
Total
384
1,682
1,141
606
3,813
100
(%)
10
44
30
16
100
(1) Excludes the non-cash equity component of AFUDC. Includes Fortis’ share of development costs and capital spending for the Wataynikaneyap Transmission Power Project
included in the Other Electric segment
Five-Year Capital Plan (1)
($ billions)
2021
3.8
2022
3.9
2023
3.9
2024
4.0
2025
4.0
Total
19.6
(1) Excludes the non-cash equity component of AFUDC. Includes Fortis’ share of development costs and capital spending for the Wataynikaneyap Transmission Power Project
included in the Other Electric segment.
The $19.6 billion five-year capital plan is $0.8 billion higher than the $18.8 billion five-year plan for 2020–2024, as disclosed in the 2019 MD&A.
The increase is largely due to: (i) two new major capital projects at FortisBC Energy including the Tilbury LNG Resiliency Tank project and the
AMI project, with total expected capital spend of approximately $500 million; (ii) $200 million of additional investment in information
technology systems and storm hardening at Central Hudson; and (iii) $100 million of interconnections and system rebuilds to provide
additional capacity and other improvements at ITC.
The capital plan is low risk and highly executable, with 99% of planned expenditures to occur at the regulated utilities and only 15% related
to Major Capital Projects. Geographically, 55% of planned expenditures are expected in the US, including 26% at ITC, with 41% in Canada and
the remaining 4% in the Caribbean.
Nature of Capital Expenditures
(%)
Growth (1)
Sustaining (2)
Other (3)
Total
Actual
2020
21
65
14
100
Forecast
2021
Five-Year Plan
2021–2025
31
54
15
100
26
58
16
100
(1) Relates to the connection of new customers and infrastructure upgrades required to meet load growth, including AESO transmission-related investment at FortisAlberta
(2) Relates to the continued and enhanced performance, reliability and safety of generation, transmission and distribution assets
(3) Facilities, equipment, vehicles, information technology and other assets
Midyear Rate Base (1)
($ billions)
ITC
UNS Energy
Central Hudson
FortisBC Energy
FortisAlberta
FortisBC Electric
Other Electric
Total
2020
9.5
5.7
2.1
5.1
3.7
1.4
3.0
30.5
2021
9.9
6.2
2.3
5.2
3.8
1.5
3.3
32.2
2025
12.5
7.6
3.2
6.8
4.2
1.7
4.3
40.3
(1) Simple average of Rate Base at beginning and end of the year
Total midyear Rate Base is forecast to grow to $40.3 billion by 2025 under the five-year capital plan, representing a CAGR of approximately
6.0%, which is supportive of continuing growth in earnings and dividends.
3 7
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
Major Capital Projects (1)
($ millions)
ITC (2)
UNS Energy
FortisBC Energy
Other Electric
Total
Project
Multi-Value Regional Transmission Projects
34.5 to 69 kV Transmission Conversion Project
Vail-to-Tortolita Project
Oso Grande Wind Project
Lower Mainland Intermediate Pressure System Upgrade
Eagle Mountain Woodfibre Gas Line Project (3)
Transmission Integrity Management Capabilities Project
Inland Gas Upgrades Project
Tilbury 1B
Tilbury LNG Resiliency Tank
AMI Project
Wataynikaneyap Transmission Power Project (4)
Pre-
2020
625
352
–
65
388
–
13
9
8
–
–
40
Actual
2020
Forecast
2021
2022–2025
17
93
–
509
23
–
8
50
12
10
–
138
860
75
41
54
24
18
–
7
53
1
11
4
330
618
186
107
190
–
–
350
434
177
375
198
243
206
2,466
Expected
Completion
2023
Post-2025
2023
2021
2021
2025
Post-2025
2025
2025
Post-2025
Post-2025
2023
(1) Includes applicable AFUDC
(2) Pre-2020 capital expenditures are from the date of the ITC acquisition on October 14, 2016
(3) Net of forecast customer contributions
(4) Fortis’ share of estimated capital spending, including deferred development costs. Under the funding framework, Fortis will be funding its equity component only.
Multi-Value Regional Transmission Projects
Four regional electric transmission projects that have been identified by MISO to address system capacity needs and reliability in various
states. Three projects were completed pre-2020. The fourth project is expected to be placed in service in 2023.
34.5 to 69 kV Transmission Conversion Project
Multiple capital initiatives designed to construct new 69 kV lines, upgrade existing 34.5 kV lines to 69 kV, and complete substation
conversions with in-service dates ranging from pre-2020 to post-2025.
Vail-to-Tortolita Project
A phase of the Southline Transmission Project that consists of new construction and upgrades to connect existing TEP substations. The
project includes the construction of a new 230 kV line within TEP’s service territory. Construction is expected to begin in early 2022 with an
in-service date of 2023.
Oso Grande Wind Project
Construction of a 750 MW wind-powered electric generating facility that complements UNS Energy’s existing renewable solar generation
portfolio, of which UNS Energy owns 250 MW. Construction is expected to be completed and the facility placed in service in the first
half of 2021.
Lower Mainland Intermediate Pressure System Upgrade
Addresses system capacity and pipeline condition issues for the gas supply system in the Lower Mainland of British Columbia. The project is
substantially complete, with one pipeline segment to be replaced in 2021. Final allowable project costs are subject to review by the BCUC.
Eagle Mountain Woodfibre Gas Line Project
Gas line expansion to a proposed LNG site in Squamish, British Columbia. In March 2020 Woodfibre LNG Limited, the owner of the proposed
LNG facility, requested an extension to its British Columbia Environmental Assessment Certificate due to production and supply chain
disruptions resulting, in part, from the COVID-19 Pandemic. In October 2020, the BC Environmental Assessment Certificate was extended for
another five years.
FortisBC Energy’s proposed pipeline expansion remains contingent on Woodfibre LNG Limited making a final decision to proceed with
construction of the LNG facility. At this time, should the project proceed, the earliest construction start date expected is late-2021.
Transmission Integrity Management Capabilities Project
This project improves gas line safety and transmission system integrity, including gas line modifications and looping. A CPCN application is
expected to be filed with the BCUC in the first quarter of 2021.
3 8
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
Inland Gas Upgrades Project
Gas line modifications and replacements to enable in-line integrity inspection capabilities. In January 2020 the CPCN application was
approved by the BCUC.
Tilbury 1B Project
Construction of additional liquefaction and dispensing, including on-shore piping, in support of marine bunkering and to further optimize
the Tilbury Phase 1A Expansion Project. The project received an Order in Council from the Government of British Columbia in 2017. In
February 2020 an initial project scope was filed with regulators to begin the federal impact assessment and provincial environmental
assessment required to further expand the Tilbury site. Engineering design and related studies will continue in 2021.
Tilbury LNG Resiliency Tank
This project replaces the original LNG storage tank at the Tilbury site and increases the available regasification capacity to provide backup
gas supply for lower mainland customers. In December 2020 FortisBC Energy filed a CPCN application for this project with the BCUC.
AMI Project
Replacement of residential and small commercial meters and installation of bypass valves to avoid future interruption of gas service. The
project will assist in load management by allowing remote meter reading on a near real-time basis and remote shutoff of gas flow. FortisBC
Energy plans to file a CPCN application for this project with the BCUC in the first half of 2021.
Wataynikaneyap Transmission Power Project
Construction of a 1,800 kilometre, Ontario Energy Board regulated transmission line to connect 17 remote First Nations communities in
Northwestern Ontario to the main electricity grid, in which Fortis holds a 39% equity interest. FortisOntario is responsible for construction
management and operation of the transmission line. The project is on track with completion expected in 2023.
Additional Investment Opportunities
Fortis is pursuing additional investment opportunities within existing service territories that are not yet included in the five-year capital plan.
ITC – Lake Erie Connector
Proposed 1,000 MW, bi-directional, high-voltage direct current underwater transmission line to directly link the markets of the Ontario
Independent Electricity System Operator and PJM Interconnection, LLC. The project would enable transmission customers to more efficiently
access energy, capacity and renewable energy credit opportunities in both markets. The major permits have been approved. The project
continues to advance through regulatory, operational and economic milestones. Ongoing activities include completing project cost
refinements and securing transmission service agreements. Completion would take approximately four years from the commencement of
construction.
FortisBC Energy – LNG
Pursuit of additional LNG infrastructure opportunities in British Columbia, including further expansion of the Tilbury LNG facility, which is
uniquely positioned to meet customer demand for clean-burning natural gas. The site is scalable and can accommodate additional storage
and liquefaction equipment and is relatively close to international shipping lanes. FortisBC Energy continues to have discussions with
potential export customers.
Other Opportunities
Includes incremental regulated transmission investment, contracted transmission and grid modernization projects at ITC; renewable energy
investments, energy storage projects, grid modernization, infrastructure resiliency, and transmission investments at UNS Energy; further gas
infrastructure opportunities at FortisBC Energy; and cleaner energy infrastructure investments across our jurisdictions.
BUSINESS RISKS
Fortis has established an ERM process to help identify and evaluate risks by both severity of impact and probability of occurrence. Materiality
thresholds are reviewed and, if necessary, updated annually. Non-financial risks that may impact the safety of employees, customers or
the general public, as well as reputational risks, are also evaluated. Systems of internal controls are established to monitor and manage
identified risks. The ERM process at the subsidiary level is overseen by each subsidiary’s board of directors and any material risks identified
are communicated to Fortis management and form part of Fortis’ ERM program. The Fortis board of directors, through the audit committee,
oversees Fortis’ ERM program, ensuring strategic objectives are achieved.
3 9
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT A summary of the Corporation’s current significant business risks follows.
Regulation
Regulated utility assets represented approximately 99% of the Corporation’s total assets as at December 31, 2020. Regulatory jurisdictions
include five Canadian provinces, nine US states and three Caribbean countries, as well FERC regulation for transmission assets in the US.
Regulators administer legislation covering material aspects of the utilities’ business, including: customer rates and the underlying allowed
ROEs and deemed capital structures; capital expenditures; the terms and conditions for the provision of energy and capacity, ancillary
services and affiliate services; securities issuances; and certain accounting matters. Regulatory or legislative changes and decisions, and delays
in the recovery of costs in rates due to regulatory lag, could have a Material Adverse Effect. The risk of regulatory lag is particularly significant
for UNS Energy given the use of historical test years in setting rates.
The ability to recover the actual cost of service and earn the approved ROE or ROA typically depends on achieving the forecasts established
in the rate-setting process. Failure to do so could have a Material Adverse Effect. For those utilities subject to PBR mechanisms, rates reflect
assumed inflation rates and productivity improvement factors, and variances therefrom could have a Material Adverse Effect. Under FortisAlberta’s
PBR mechanism there is an added risk that incremental incurred capital expenditures may not be approved for recovery in rates.
For transmission operations, the underlying elements of FERC-established formula rates can be, and have been, challenged by third parties
which could result in, and has resulted in, lowered rates and customer refunds. These underlying elements include the assumed ROE,
ROE adders for independent transmission ownership and deemed capital structure as well as operating and capital expenditures. These
challenges could have a Material Adverse Effect.
Additionally, the US Congress periodically considers enacting energy legislation that could assign new responsibilities to FERC, modify provisions
of the U.S. Federal Power Act or the Natural Gas Act, or provide FERC or another entity with increased authority to regulate US federal energy
matters. Such changes could have a Material Adverse Effect.
The political and economic environments as well as their effect on energy laws and governmental energy policies have had, and may
continue to have, negative impacts on regulatory decisions. While Fortis is well positioned to maintain constructive regulatory relationships
through local management teams and boards comprised mostly of independent local members, it cannot predict future legislative or
regulatory changes, whether caused by economic, political or other factors, or its ability to respond thereto in an effective and timely
manner, or the resulting compliance costs. These dynamics could have a Material Adverse Effect.
Climate Change and Physical Risks
The provision of electric and gas service is subject to customary industry risks, including severe weather and natural disasters, wars, terrorism,
critical equipment failure and other catastrophic events within and outside the Corporation’s service territories. Resultant service disruption
and repair and replacement costs could have a Material Adverse Effect if not resolved in a timely and effective manner and/or mitigated
through insurance policies or regulatory cost recovery.
Climate change is predicted to lead to more frequent and intense weather events, changing air temperatures, changing seasonal variations,
and regulatory responses (see “Environmental Matters” on page 41), each of which could have a Material Adverse Effect. Severe weather
impacts the Corporation’s service territories, primarily when thunderstorms, flooding, wildfires, hurricanes and snow or ice storms occur.
Increased frequency of extreme weather events could increase the cost of providing service. Changes in precipitation that result in droughts
could increase the risk of wildfire caused by the Corporation’s electricity assets or may cause water shortages that could adversely affect
operations. Extreme weather conditions in general require system backup and can contribute to increased system stress, including service
interruptions. Changing air temperatures could also result in system stress and decreased efficiencies to operating facilities over time.
Longer-term climate change impacts, such as sustained higher temperatures, higher sea levels and larger storm surges, could result in
service disruption, repair and replacement costs, and costs associated with strengthened design standards and systems, each of which
could have a Material Adverse Effect if not resolved in a timely and effective manner and/or mitigated through insurance policies or
regulatory cost recovery.
Generating equipment and facilities are subject to risks, including equipment breakdown and flood and fire damage, that may result in the
uncontrolled release of water, interruption of fuel supply, lower-than-expected operational efficiency or performance, and service disruption.
There is no assurance that generating equipment and facilities will continue to operate in accordance with expectations.
The operation of transmission and distribution assets is subject to risks, including the potential to cause fires, mainly as a result of equipment
failure, falling trees and lightning strikes to lines or equipment. Certain utilities operate in remote and mountainous terrain that can be
difficult to access for timely repairs and maintenance, or otherwise face risk of loss or damage from forest fires, floods, washouts, landslides,
earthquakes, avalanches and other acts of nature with a potential Material Adverse Effect.
4 0
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT The gas utilities are exposed to operational risks associated with natural gas, including fires, explosions, pipeline corrosion and leaks,
accidental damage to mains and service lines, equipment failure, damage and destruction from earthquakes, fires, floods and other natural
disasters, and other accidents and issues that can lead to service disruption, spills and commensurate environmental liability, or other liability
with a Material Adverse Effect.
Risks associated with fire damage vary depending on weather, forestation, the proximity of habitation and third-party facilities to utility
facilities, and other factors. The utilities may become liable for fire-suppression costs, regeneration and timber value costs, and third-party
claims if their facilities are held responsible for a fire, and such claims, if successful, could have a Material Adverse Effect.
Electricity and gas systems require ongoing maintenance, improvement and replacement. Service disruption, other effects and liability
caused by the failure to properly implement or complete approved maintenance and capital expenditures, the occurrence of significant
unforeseen equipment failures, or the inability to recover requisite costs in customer rates, could have a Material Adverse Effect.
The electricity and gas systems are designed to service customers under various contingencies in accordance with good utility practice. The
utilities are responsible for operating and maintaining their assets in a safe manner, including the development and application of
appropriate standards, system processes and/or procedures to ensure the safety of employees, contractors and the general public. The
impacts of climate change may necessitate the acceleration of these standards, processes and procedures. Failure to do so may disrupt the
ability of the utilities to safely provide service, which could cause reputational harm and other impacts with a Material Adverse Effect.
Pandemics and Public Health Crises, including the COVID-19 Pandemic
The Corporation could be negatively impacted by a widespread outbreak of communicable diseases or other public health crises that cause
economic and/or other disruptions. The COVID-19 Pandemic continues to be an evolving situation that has adversely impacted economic
activity and conditions around the world, including the Corporation’s service territories (see “General Economic Conditions” on page 46 and
“Access to Capital” on page 45). The virus and efforts to reduce the health impacts and control its spread have led many jurisdictions around
the world, including Canada, the US and the Caribbean, to institute restrictions on travel, gatherings and business operations. The
Corporation and its utilities have been subjected to government and regulatory action in response to the COVID-19 Pandemic, including
restrictions on business operations, customer deferrals and suspension of disconnections. Other potential impacts on the Corporation’s
operations may include reduced labour availability and productivity, disruptions to capital markets leading to share price volatility and
liquidity issues, supply chain disruptions, project construction delays and a prolonged reduction in economic activity. An extended
economic slowdown could reduce energy sales and adversely impact the ability of customers, contractors and suppliers to fulfill their
obligations and could disrupt operations and capital expenditure programs or cause impairment of goodwill.
The overall impact will depend on the duration and severity of the pandemic, potential government actions to mitigate public health effects
or aid economic recovery, and other factors beyond the Corporation’s control. An extended period of economic disruption could have a
Material Adverse Effect.
Environmental Matters
The Corporation’s businesses are subject to environmental risks and environmental laws and regulations, including those which: (i) impose
limitations or restrictions on the discharge of pollutants into the air, soil and water; (ii) establish standards for the management, treatment,
storage, transportation and disposal of hazardous wastes; and/or (iii) impose obligations to investigate and remediate contamination.
The risk of contamination of air, soil and water at the electric businesses primarily relates to: (i) the transportation, handling, storage and
combustion of fuel; (ii) the use of petroleum-based products, mainly transformer and lubricating oil; (iii) the management and disposal of
coal combustion residuals and other wastes; and (iv) accidents resulting in hazardous release at or from coal mines that supply generating
facilities. Contamination risks at the gas businesses primarily relate to leaks and other accidents involving gas systems. The key environmental
risks for hydroelectric generation operations include dam failures and the creation of artificial water flows that may disrupt natural habitats.
Liabilities relating to contamination investigation and remediation, and claims for personal injury or property damage, may arise at many
locations, including formerly and currently owned/operated properties and waste treatment or disposal sites, regardless of whether such
contamination was caused by the business at the time it owned the property or whether it resulted from non-compliance with applicable
environmental laws. Under some environmental laws, such liabilities may be joint and several, meaning that a party can be held responsible
for more than its share of the liability involved or even the entire liability. These liabilities could lead to litigation and administrative
proceedings that could result in substantial monetary judgments for clean-up costs, damages, fines and/or penalties. To the extent not fully
covered by insurance, these costs could have a Material Adverse Effect.
The Corporation’s businesses have incurred substantial expenses for environmental compliance, and they anticipate continuing to do so in
the future. In particular, the management of GHG emissions is a major concern due to new and emerging federal, state and provincial GHG
laws, regulations and guidelines.
4 1
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT The Corporation’s businesses continue to develop compliance strategies and assess the impact of emerging legislative changes, but
significant uncertainties remain. Increased compliance costs or additional operating restrictions from revised or additional regulation could
have a Material Adverse Effect.
Growth
Fortis has a history of growth through acquisitions and organic growth from capital investment in existing service territories. Acquisitions
include inherent risks that some or all of the expected benefits may fail to materialize, or may not occur within the time periods anticipated,
and material unexpected costs may arise.
The Corporation’s dividend growth guidance is significantly dependent upon achieving the Rate Base growth expected from the execution
of the five-year capital plan described under “Capital Plan” on page 36. Projects, particularly Major Capital Projects, are subject to risks of delay
and cost overruns during construction caused by inflation, supply and labour costs, supplier non-performance, weather, geologic conditions
or other factors beyond the Corporation’s control. There is no assurance that regulators will approve: (i) all of the planned projects or their
amounts or timing; (ii) permits in a timely manner, or with reasonable terms and conditions; or (iii) the recovery of cost overruns in customer
rates. These risks could impact the successful execution of a project by preventing the project from proceeding, delaying its completion,
increasing its projected costs or negatively impacting its financing.
Weather Variability and Seasonality
Electricity consumption varies significantly in response to climate change and seasonal weather changes (see “Climate Change and Physical
Risks” on page 40). In central and western Canada, Arizona and New York State, cool summers may reduce the use of air conditioning and
other cooling equipment, while less severe winters may reduce heating load. Alternatively, severe weather could unexpectedly increase
heating and cooling loads, negatively impacting system reliability.
Weather and seasonality have a significant impact on gas distribution volumes as a major portion of the gas is used for space heating by
residential customers. The earnings of the Corporation’s gas utilities and Aitken Creek are typically highest in the first and fourth quarters.
Hydroelectric generation is sensitive to rainfall levels.
Regulatory deferral and revenue decoupling mechanisms are in place at certain of the Corporation’s utilities to minimize the volatility in
earnings that would otherwise be caused by variations in weather conditions. Both the discontinuance of key regulatory mechanisms and
their absence at other Fortis entities could result in significant and prolonged weather variations from seasonal norms having a Material
Adverse Effect.
Natural Gas Competitiveness
Approximately 19% of the Corporation’s revenue is derived from the delivery of natural gas. A decrease in the competitiveness of natural gas
due to pricing or other factors could have a Material Adverse Effect.
In British Columbia, which accounts for 80% of the Corporation’s natural gas revenue, natural gas primarily competes with electricity for space
and hot water heating. Upfront capital costs for gas service continue to present competitive challenges for natural gas compared to
electricity service. If gas becomes less competitive, the ability to add new customers could be impaired. Existing customers could also reduce
their consumption or switch to electricity, placing further pressure on rates, whereby system costs must be recovered from a smaller
customer and sales base, leading to further reductions in competitiveness.
Government policy could also impact the competitiveness of natural gas in British Columbia. The provincial government has introduced
changes to energy policy, including GHG emission reduction targets and a tax on carbon-based fuels which is expected to increase in the
future. However, the Government of British Columbia has yet to introduce a carbon tax on imported electricity generated through the
combustion of carbon-based fuels. As all levels of government become more active in the development of policies to address climate
change, any resultant changes to energy policy may have a material impact on the competitiveness of natural gas relative to non-carbon
based energy sources or other energy sources.
There are other competitive challenges that are impacting the penetration of natural gas into new housing stock such as green attributes of
the energy source, and type of housing stock being built. In addition, as part of their own climate change policy plans, local governments
may use various tools at their disposal such as franchise agreements, permits, building codes and zoning bylaws to impose limitations on
energy sources permitted in new and existing developments. The municipalities can also provide incentives, such as higher density
allowance, to builders to adopt carbon free options for their developments. These actions and policies may hinder the Corporation’s ability to
attract new customers or retain existing customers.
4 2
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT Commodity Price Volatility
Purchased power and generation fuel costs are subject to commodity price volatility, which is managed through regulator-approved:
(i) mechanisms that permit the flow through in customer rates of commodity price changes and/or that provide for rate-stabilization and
other deferral accounts (see “Business Unit Performance” on page 24); and (ii) price-risk management strategies such as the use of derivative
contracts that effectively fix costs (see “Financial Instruments – Derivatives” on page 49).
There is no assurance that current regulator-approved mechanisms will continue to exist in the future. Additionally, despite these mechanisms,
severe and prolonged commodity price increases could result in rates that customers are unable to pay and/or could affect consumption and
sales growth. These could have a Material Adverse Effect.
Purchased Power Supply
A significant portion of electricity and gas sold by the Corporation’s utilities is purchased through the wholesale energy markets or pursuant to
contracts with energy suppliers rather than being generated. A disruption in the wholesale energy markets, or a failure on the part of energy
or fuel suppliers or operators of energy delivery systems that connect to the Corporation’s utilities, could have a Material Adverse Effect.
Required Approvals
The acquisition, ownership and operation of electric and gas businesses require numerous licences, permits, agreements, orders, certificates
and other approvals from various levels of government, regulators, government agencies, Indigenous Peoples and/or third parties. The
external environment has become more complex with heightened expectations from permitting agencies, local municipalities and
Indigenous Peoples to be able to review and provide feedback on projects, largely driven by policy responses to climate change. There is no
assurance that: (i) all of these approvals will be obtained, continuously maintained or renewed without delay; and (ii) the terms and
conditions thereof will be fully complied with at all times and will not change in a material adverse manner. Significant failures in these
regards could prevent the operation of the businesses and have a Material Adverse Effect.
Reliability Standards
The Energy Policy Act requires owners, operators and users of the bulk electric system in the US to meet mandatory reliability standards
developed by the North American Electric Reliability Corporation and its regional entities, which are approved and enforced by FERC. Many
of these, or similar, standards have been adopted in certain Canadian provinces including British Columbia, Alberta and Ontario. The failure
to develop, implement and maintain appropriate operating practices/systems and capital plans to address reliability obligations could lead
to compliance violations and a Material Adverse Effect, such as the exclusion from customer rates of related costs including potentially
significant penalties.
Indigenous Peoples’ Land Claims
In British Columbia, the Corporation’s utilities provide service to customers on Indigenous Peoples’ lands and maintain facilities on lands that
are subject to Indigenous Peoples’ land claims. Various treaty negotiation processes involving Indigenous Peoples and the Governments of
British Columbia and Canada are underway, but the basis for potential settlements is unclear and not all Indigenous Peoples are participating
in the processes. To date, the policy of the Government of British Columbia has been to structure settlements without prejudicing existing
third-party rights. However, there is no assurance that the settlement processes will not have a Material Adverse Effect.
FortisAlberta has distribution assets on Indigenous Peoples’ lands in Alberta with access permits held by TransAlta Utilities Corporation. To
acquire these permits, FortisAlberta requires approval from First Nations and Crown-Indigenous Relations and Northern Affairs Canada.
FortisAlberta may be unable to obtain such approvals or negotiate land-use agreements with reasonable terms. Significant failures in these
regards could have a Material Adverse Effect.
Joint-Ownership Interests and Third-Party Operators
Certain generating facilities from which TEP receives power are jointly owned with, or are operated by, third parties. TEP may not have sole
discretion or any ability to affect the management or operations of such facilities, including how to best address changing economic
conditions or environmental requirements. A divergence in the interests of TEP and those of the joint owners or operators could have a
Material Adverse Effect.
Wataynikaneyap Partnership, which is owned 51% by 24 First Nations communities and 49% by a partnership between Fortis (80%) and
Algonquin Power & Utilities Corp. (20%), is responsible for the Wataynikaneyap Transmission Power Project. Fortis does not have sole
discretion on decisions for the project and divergence in the interest of Fortis and the other partners could delay the project’s completion,
increase its anticipated cost, or adversely affect the reputation of Fortis.
4 3
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT Counterparty Credit Risk
ITC has a concentration of credit risk as approximately 70% of its revenue is derived from three customers. These customers have investment-
grade credit ratings and credit risk is further managed by MISO by requiring a letter of credit or cash deposit equal to the credit exposure,
which is determined by a credit-scoring model and other factors.
FortisAlberta has a concentration of credit risk as its distribution service billings are to a relatively small group of retailers. Credit risk is
managed by obtaining from the retailers either a cash deposit, letter of credit, an investment-grade credit rating, or a financial guarantee
from an entity with an investment-grade credit rating.
UNS Energy, Central Hudson, FortisBC Energy, Aitken Creek and Fortis may be exposed to credit risk from non-performance by counterparties
to derivatives. Credit risk is managed by net settling payments, when possible, and dealing only with counterparties that have investment-
grade credit ratings. At UNS Energy and Central Hudson, certain contractual arrangements require counterparties to post collateral.
There is no assurance that management strategies will continue to be effective. Significant counterparty defaults could have a Material
Adverse Effect.
Cybersecurity
As operators of critical energy infrastructure, the Corporation’s utilities face the risk of cybercrime, which has increased in frequency, scope
and potential impact in recent years. Their ability to operate effectively is dependent upon developing and maintaining complex information
systems and infrastructure that: (i) support the operation of electric generation, transmission and distribution facilities, including gas
facilities; (ii) provide customers with billing, consumption and load settlement information, where applicable; and (iii) support financial
and general operations.
Information and operations technology systems may be vulnerable to unauthorized access due to hacking, viruses, acts of war or terrorism,
acts of vandalism and other causes. This can result in the disruption of energy service and other business operations, system failures and
grid disturbances, property damage, corruption or unavailability of critical data, and the misappropriation and/or disclosure of sensitive,
confidential and proprietary business, customer and employee information.
A material breach could adversely affect the financial performance of the Corporation, its reputation and standing with customers, regulators
and financial markets, and expose it to claims for third-party damage. The resultant financial impacts may not be fully covered by insurance
policies or, in the case of utilities, through regulatory cost recovery, and could have a Material Adverse Effect.
Technology Advances
The emergence of initiatives designed to reduce GHG emissions and control or limit the effects of climate change has increased the incentive
for the development of new technologies that produce power, enable more efficient storage of energy or reduce power consumption.
New technology developments in distributed generation, particularly solar, and energy efficiency products and services, as well as the
implementation of renewable energy and energy efficiency standards, will continue to impact retail sales. Heightened awareness of energy
costs and environmental concerns have increased demand for products that reduce energy consumption. The Corporation’s utilities are also
promoting demand-side management programs.
New technologies include energy derived from renewable sources, customer-owned generation, energy-efficient appliances, battery
storage and control systems. Advances in these or other technologies could have a significant impact on retail sales with a potential Material
Adverse Effect.
Interest Rates
Generally, the market price of the Corporation’s common shares is inversely sensitive to interest rate changes. Additionally, allowed ROEs are
exposed to changes in long-term interest rates. A low interest rate environment could reduce allowed ROEs. Alternatively, if interest rates rise,
regulatory lag may cause delays in any compensatory ROE increases. Borrowings under variable-rate credit facilities and long-term debt, as
well as new debt issuances, are also exposed to interest rate changes.
Tax Laws
Fortis and its subsidiaries are subject to changes in income tax rates and other tax legislation in Canada, the US and other international
jurisdictions. The nature, timing or impact of changes in future tax laws cannot be predicted and could have a Material Adverse Effect.
Although income taxes at the regulated utilities are generally recovered in customer rates, regulatory lag can result in recovery delays or
non-recovery for certain periods. A variety of other impacts are also possible. At the non-regulated level, changes in income tax rates and
other tax legislation could materially affect the after-tax cost of existing and future debt which is not recoverable in customer rates.
4 4
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT Foreign Exchange Exposure
The reporting currency of ITC, UNS Energy, Central Hudson, Caribbean Utilities, FortisTCI, BECOL and Belize Electricity is, or is pegged to, the
US dollar. The earnings and cash flow from, and net investments in, these entities are exposed to fluctuations in the US dollar-to-Canadian
dollar exchange rate.
Fortis has limited this exposure through hedging. As at December 31, 2020, US$2.3 billion (2019 – US$2.2 billion) of corporately issued
US dollar-denominated long-term debt had been designated as an effective hedge of foreign net investments, leaving US$10.2 billion
(2019 – US$9.7 billion) in foreign net investments unhedged. Fortis has also entered into foreign exchange contracts to manage a portion of
its exposure to foreign currency risk.
Given only partial hedging, consolidated earnings and cash flow continue to be impacted by exchange rate fluctuations. On average, Fortis
estimates that a five-cent increase or decrease in the US dollar relative to the Canadian dollar exchange rate of US$1.00=CA$1.34 as at
December 31, 2020 would increase or decrease annual EPS by approximately six cents, which reflects the Corporation’s hedging program.
The Corporation’s $19.6 billion five-year capital plan for 2021 through 2025 also includes exposure to foreign exchange. On average, Fortis
estimates that a five-cent increase or decrease in the US dollar relative to the Canadian dollar would increase or decrease capital expenditures
by $400 million over the five-year planning period.
There is no assurance that existing hedging strategies will continue to be effective and the resultant financial impacts could have a Material
Adverse Effect.
Access to Capital
Ongoing access to cost-effective capital is required to fund, among other things, capital expenditures and the repayment of maturing debt.
Operating Cash Flow may not be sufficient to fund the repayment of all outstanding liabilities when due or anticipated capital expenditures.
The ability to meet long-term debt repayments is dependent upon obtaining sufficient and cost-effective financing to replace maturing
indebtedness.
The ability to arrange such financing is subject to numerous factors, including the results of operations and financial condition of Fortis and
its subsidiaries, the regulatory environments including regulatory decisions regarding capital structure and allowed ROEs, capital market
conditions, general economic conditions and credit ratings. Changes in credit ratings could affect credit risk spreads on new long-term debt
and credit facilities, as well as their availability.
There is no assurance that sufficient capital will continue to be available on acceptable terms. For further information see “Liquidity and
Capital Resources” on page 32.
Insurance
Insurance is maintained with reputable industry insurers for property damage, potential liabilities and business interruption for coverage
considered appropriate and in accordance with industry practice.
A significant portion of transmission and distribution assets is uninsured, as is customary in North America, as the cost is prohibitive.
Insurance is subject to coverage limits and deductibles as well as time-sensitive claims discovery and reporting provisions. There is no
assurance that: (i) the amounts and types of actual damage, liabilities or business interruption will be fully covered; (ii) regulatory relief would
be obtained for coverage shortfalls; (iii) adequate insurance at reasonable rates will continue to be available; or (iv) insurers will fulfill their
obligations. Significant actual shortfalls could have a Material Adverse Effect.
Talent Management
The delivery of safe, reliable and cost-effective service depends on the attraction, development and retention of skilled workforces. Like its
peers, Fortis faces demographic challenges and competitive markets relating to trades, technical and professional staff, particularly
considering its significant capital plan. ITC relies heavily on agreements with third parties to provide services for the construction,
maintenance and operation of certain aspects of its business. Significant failures in attracting or retaining a skilled workforce could have a
Material Adverse Effect.
4 5
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT Labour Relations
Most of the Corporation’s utilities employ members of labour unions or associations under collective bargaining agreements. Fortis considers
its labour relationships to be satisfactory but there is no assurance that this will continue or that existing collective bargaining agreements
will be renewed on reasonable terms without work disruption or other job action. Significant failures in these regards could cause service
interruptions and/or labour cost increases for which the regulator disallows full recovery in rates, and could have a Material Adverse Effect.
Post-Retirement Obligations
Fortis and most of its subsidiaries maintain a combination of defined benefit pension and/or OPEB plans for certain employees and retirees.
The most significant cost drivers for these plans are investment performance and interest rates, which are affected by global financial
markets. Market disruptions, significant declines in the market values of investments held to meet plan obligations, discount rate changes,
participant demographics, and changes in laws and regulations may require additional plan funding. Significant increases in plan expenses
and funding requirements could have a Material Adverse Effect.
General Economic Conditions
Fluctuations in general economic conditions, energy prices, employment levels, personal disposable incomes, housing starts, industrial
activity and other factors may lower energy demand and reduce sales both directly and through reduced capital spending, particularly that
related to new customer growth, which would affect Rate Base growth. A severe and prolonged economic downturn could have a Material
Adverse Effect, including making it more difficult for customers to pay their bills.
Reputation, Relationships and Stakeholder Activism
The Corporation’s operations and growth prospects require strong relationships with key stakeholders, including regulators, governments
and agencies, Indigenous communities, landowners, and environmental organizations. Inadequately managing expectations and issues
important to stakeholders, including those arising during construction, could affect the Corporation’s reputation as well as have a significant
impact on its operations and infrastructure development.
Additionally, external stakeholders are increasingly challenging utilities regarding climate change, sustainability, diversity, returns including
ROEs, executive compensation and other matters. Public opposition to larger infrastructure projects is becoming increasingly common,
which can challenge capital plans and resultant organic growth. While the Corporation actively monitors such activism and is committed to
developing stronger relationships with its external stakeholders, failure to effectively maintain or respond to stakeholder activism could have
a Material Adverse Effect.
Legal, Administrative and Other Proceedings
These proceedings arise in the ordinary course of business and may include environmental claims, employment-related claims, securities-
based litigation, contractual disputes, personal injury or property damage claims, actions by regulatory or tax authorities, and other matters.
Unfavourable outcomes such as judgments or settlements for monetary or other damages, injunctions, denial or revocation of permits,
reputational harm, and other results could have a Material Adverse Effect.
ACCOUNTING MATTERS
New Accounting Policies
Financial Instruments
Effective January 1, 2020, the Corporation adopted ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which requires the
use of reasonable and supportable forecasts in the estimation of credit losses and the recognition of expected losses upon initial recognition
of a financial instrument, in addition to using past events and current conditions. The new guidance also requires quantitative and qualitative
disclosures regarding the activity in the allowance for credit losses for financial assets within the scope of the guidance. Adoption did
not have a material impact on the 2020 Annual Financial Statements and related disclosures. Further information is provided in Note 3 in the
2020 Annual Financial Statements.
Critical Accounting Estimates
General
The preparation of the 2020 Annual Financial Statements required management to make estimates and judgments that affect the reported
amounts of, and disclosures related to, assets, liabilities, revenues, expenses, gains, losses and contingencies. Management evaluates these
estimates on an ongoing basis based upon historical experience, current conditions, and assumptions believed to be reasonable at the time
they are made, with any adjustments recognized in the period they become known. Actual results may differ significantly from these estimates.
4 6
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT Regulatory Assets and Liabilities
As at December 31, 2020, Fortis recognized regulatory assets of $3.6 billion (2019 – $3.4 billion) and regulatory liabilities of $3.1 billion
(2019 – $3.4 billion).
Regulatory assets represent future revenues and/or receivables associated with certain costs incurred that will be, or are expected to
be, recovered from customers in future periods through the rate-setting process. Regulatory liabilities represent: (i) future reductions
or limitations of increases in revenue associated with amounts that will be, or are expected to be, refunded to customers through the
rate-setting process; or (ii) obligations to provide future service that customers have paid for in advance.
The recognition of regulatory assets and liabilities and the period(s) of settlement are often estimates based on past, existing or expected
regulatory orders in relation to the nature of the underlying amounts, and are subject to regulatory approval. There is no assurance that
actual settlement amounts and the related settlement periods will not be materially different from those estimated. Differences arising from
the regulator’s orders would be recognized in accordance with those orders, whereby any amounts disallowed would be immediately
recognized in earnings with the remainder recognized in earnings in accordance with their inclusion in customer rates.
Employee Future Benefits
Key Estimates and Assumptions
Years ended December 31
Funded status: (1) ($ millions)
Benefit obligation (2)
Plan assets
Net benefit cost (2) ($ millions)
Key assumptions: (weighted average %)
Discount rate: (3)
During the year
As at December 31
Expected long-term rate of return on plan assets (4)
Rate of compensation increase
Health care cost trend increase rate (5)
Defined Benefit
Pension Plans
OPEB Plans
2020
(3,995)
3,528
(467)
67
3.16
2.63
5.52
3.34
–
2019
(3,632)
3,208
(424)
65
4.05
3.20
5.78
3.33
–
2020
(789)
391
(398)
32
3.22
2.64
5.28
–
4.61
2019
(712)
343
(369)
28
4.10
3.25
5.50
–
4.62
(1) Periodic actuarial valuations determine funding contributions for the pension plans and US OPEB plans, while Canadian OPEB plans are unfunded
(2) Actuarially determined using the projected benefits method prorated on service and management’s best estimate of expected plan investment performance, salary escalation,
average remaining service life of employees, mortality rates and, for OPEB plans, expected health care costs
(3) Reflects market interest rates on high-quality bonds with cash flows that match the timing and amount of expected pension payments
(4) Developed using best estimates of expected returns, volatilities and correlations for each class of asset. Estimates are based on historical performance, future expectations and
periodic portfolio rebalancing among the diversified asset classes.
(5) Actuarially determined, the projected 2021 rate is 5.91% and is assumed to decrease over the next 11 years to the ultimate rate of 4.61% in 2031 and thereafter.
Sensitivity Analysis
Year ended December 31, 2020
($ millions)
Defined benefit pension plans:
Net benefit cost
Projected benefit obligation
OPEB plans:
Net benefit cost
Accumulated benefit obligation
Rate of Return –
1% change
Discount Rate –
1% change
Health Care Costs
Trend Rate –
1% change
Increase
Decrease
Increase
Decrease
Increase
Decrease
(30)
44
(4)
–
25
(82)
4
–
(45)
(541)
(9)
(113)
63
691
13
144
n/a
n/a
29
106
n/a
n/a
(21)
(84)
At the regulated utilities, changes in net benefit cost are generally expected to be reflected in customer rates, subject to regulatory lag and
forecast risk at certain utilities.
At FortisAlberta, cash contributions are expensed and reflected in customer rates with any difference between the cash contributions and
the net benefit cost deferred as a regulatory asset/liability. ITC, Central Hudson, FortisBC Energy, FortisBC Electric and Newfoundland Power
have regulator-approved mechanisms to defer variations between actual net pension cost and that forecast and reflected in customer rates.
There is no assurance that these deferral mechanisms will continue in the future.
4 7
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
Depreciation and Amortization
As at December 31, 2020, Fortis recognized property, plant and equipment and intangible assets of $37.3 billion (2019 – $35.2 billion)
representing 67% of total assets (2019 – 66%). Depreciation and amortization totalled $1.4 billion for 2020 (2019 – $1.4 billion).
Depreciation and amortization reflect the estimated useful lives of the underlying assets, which consider historical experience,
manufacturers’ ratings and specifications, the past and expected future pattern and nature of usage, and other factors.
At the regulated utilities, depreciation rates require regulatory approval and include a provision for estimated future asset removal costs not
identified as a legal obligation. Estimates primarily reflect historical experience and expected cost trends. The provision is recognized as a
long-term regulatory liability against which actual removal costs are netted when incurred. As at December 31, 2020, this regulatory liability
was $1.2 billion (2019 – $1.2 billion).
Depreciation rates at the regulated utilities are typically determined through periodic depreciation studies performed by external experts.
Where actual experience differs from previous estimates, resultant differences are generally reflected in future depreciation rates and thereby
recovered or refunded through customer rates in the manner prescribed by the regulator.
Goodwill Impairment
As at December 31, 2020, Fortis recognized goodwill of $11.8 billion (2019 – $12.0 billion), representing 21% of total assets (2019 – 22%). The
decrease in goodwill was due to the impact of foreign exchange associated with the translation of US dollar-denominated goodwill.
Goodwill at each of the Corporation’s 11 reporting units is tested for impairment annually and whenever an event or change in circumstances
indicates that fair value may be below carrying value. If so determined, goodwill is written down to estimated fair value and an impairment
loss is recognized.
The Corporation performs a qualitative assessment on each reporting unit and if it is determined that it is not likely that fair value is less than
carrying value, then a quantitative estimate of fair value is not required. When a quantitative assessment is necessary, the primary method for
estimating fair value of the reporting units is the income approach, whereby net cash flow projections are discounted. Underlying estimates
and assumptions, with varying degrees of uncertainty, include the amount and timing of expected future cash flows, growth rates, and
discount rates. A secondary valuation, the market approach along with a reconciliation of the total estimated fair value of all the reporting
units to the Corporation’s market capitalization, is also performed and evaluated.
The recognition of impairment losses could have a Material Adverse Effect. Such losses are not recoverable in regulated utility rates. To the
extent impairment losses signal lower expected future cash flows to support interest payments on unregulated holding company debt and
dividends on common shares, they could adversely affect the future cost of such capital, expressed as higher interest rates on such debt,
which is not recoverable in regulated utility rates, and lower common share market prices.
Although the macro-economic impact of the COVID-19 Pandemic is pervasive throughout each reporting unit’s service territory, it is
expected to be short term in nature and therefore not expected to have a material impact on long-term sustaining cash flows. No goodwill
impairment was recognized in 2020 or 2019, pursuant to the annual assessments.
Income Tax
As at December 31, 2020, deferred income tax liabilities, current income tax receivable included in accounts receivable, deferred income taxes
included in regulatory assets, and deferred income taxes included in regulatory liabilities totalled $3.3 billion, $72 million, $1.7 billion and
$1.4 billion, respectively (2019 – $3.0 billion, $35 million, $1.6 billion and $1.4 billion, respectively). Income tax expense was $231 million in 2020
(2019 – $289 million).
Current income taxes reflect the estimated taxes payable/receivable in the current year based on enacted tax rates and laws, and the
estimated proportion of taxable earnings/loss attributable to various jurisdictions.
Deferred income tax assets/liabilities reflect temporary differences between the tax and accounting basis of assets/liabilities. A deferred
income tax asset or liability is determined for each temporary difference based on enacted income tax rates and laws in effect when the
temporary differences are expected to be recovered or settled. A valuation allowance is recognized in earnings to the extent that future tax
recovery is not assessed as “more likely than not”.
At the regulated utilities, differences between the tax expense/recovery normally recognized under US GAAP and that reflected in customer
rates, which is expected to be recovered from/refunded to customers in future rates, are recognized as regulatory assets/liabilities. These are
subsequently amortized to earnings in accordance with their inclusion in customer rates pursuant to the regulator’s orders. Otherwise,
changes in expectations and resultant estimates arising from changes in tax rates, tax laws, jurisdictional earnings allocations and other
factors are recognized in earnings upon occurrence.
4 8
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT Derivatives
The fair values of derivatives are based on estimates that cannot be determined with precision as they involve uncertainties and matters of
judgment and, therefore, may not be relevant in predicting future earnings or cash flows. See “Financial Instruments – Derivatives” on page 49.
Contingencies
The Corporation and its subsidiaries are subject to various legal proceedings and claims arising in the ordinary course of business,
including those generally described under “Business Risks – Indigenous Peoples’ Land Claims” on page 43, for which no amounts have
been accrued because the outcomes currently cannot be reasonably determined. Further information is provided in Note 28 in the
2020 Annual Financial Statements.
While Fortis currently believes that these matters are unlikely to have a Material Adverse Effect, there is no assurance that this will be the case.
FINANCIAL INSTRUMENTS
Long-Term Debt and Other
As at December 31, 2020, the carrying value of long-term debt, including the current portion, was $24.5 billion (2019 – $22.3 billion) compared
to an estimated fair value of $29.1 billion (2019 – $25.3 billion). Since Fortis does not intend to settle long-term debt prior to maturity, the
excess of fair value over carrying value does not represent an actual liability.
The consolidated carrying value of the remaining financial instruments, other than derivatives, approximates fair value, reflecting their short-
term maturity, normal trade credit terms and/or nature.
Derivatives
The Corporation generally limits the use of derivatives to those that qualify as accounting, economic or cash flow hedges, or those that are
approved for regulatory recovery. Derivatives are recorded at fair value, with certain exceptions, including those derivatives that qualify for
the normal purchase and normal sale exception.
Energy contracts subject to regulatory deferral
UNS Energy holds electricity power purchase contracts, customer supply contracts and gas swap contracts to reduce its exposure to energy
price risk. Fair values are measured primarily under the market approach using independent third-party information, where possible. When
published prices are not available, adjustments are applied based on historical price curve relationships, transmission costs and line losses.
Central Hudson holds swap contracts for electricity and natural gas to minimize price volatility by fixing the effective purchase price. Fair
values are measured using forward pricing provided by independent third-party information.
FortisBC Energy holds gas supply contracts to fix the effective purchase price of natural gas. Fair values reflect the present value of future
cash flows based on published market prices and forward natural gas curves.
Unrealized gains or losses associated with changes in the fair value of these energy contracts are deferred as a regulatory asset or liability for
recovery from, or refund to, customers in future rates, as permitted by the regulators. As at December 31, 2020, unrealized losses of
$73 million (2019 – $119 million) were recognized as regulatory assets and unrealized gains of $17 million (2019 – $2 million) were recognized
as regulatory liabilities.
Energy contracts not subject to regulatory deferral
UNS Energy holds wholesale trading contracts to fix power prices and realize potential margin, of which 10% of any realized gains is shared
with customers through rate stabilization accounts. Fair values are measured using a market approach incorporating, where possible,
independent third-party information.
Aitken Creek holds gas swap contracts to manage its exposure to changes in natural gas prices, capture natural gas price spreads, and
manage the financial risk posed by physical transactions. Fair values are measured using forward pricing from published market sources.
Unrealized gains or losses associated with changes in the fair value of these energy contracts are recognized in revenue and were not material
for 2020 and 2019.
4 9
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT Total return swaps
The Corporation holds total return swaps to manage the cash flow risk associated with forecast future cash settlements of certain stock-based
compensation obligations. The swaps have a combined notional amount of $113 million and terms of one to three years expiring at varying
dates through January 2023. Fair value is measured using an income valuation approach based on forward pricing curves. Unrealized gains
and losses associated with changes in fair value are recognized in other income, net and were not material for 2020 and 2019.
Foreign exchange contracts
The Corporation holds US dollar-denominated foreign exchange contracts to help mitigate exposure to foreign exchange rate volatility. The
contracts expire at varying dates through February 2022 and have a combined notional amount of $245 million. Fair value was measured
using independent third-party information. Unrealized gains and losses associated with changes in fair value are recognized in other income,
net and were not material for 2020 and 2019.
Interest rate swaps
ITC entered into forward-starting interest rate swaps to manage the interest rate risk associated with planned borrowings. The swaps, which
had a combined notional value of $611 million, were terminated in May 2020 with the issuance of US$700 million senior notes. Realized losses
of $31 million were recognized in other comprehensive income and are being reclassified to earnings as a component of interest expense
over five years.
Other investments
ITC, UNS Energy and Central Hudson hold investments in trust associated with supplemental retirement benefit plans for select employees.
These investments consist of mutual funds and money market accounts, which are recorded at fair value based on quoted market prices in
active markets. Gains and losses are recognized in other income, net and were not material for 2020 and 2019.
Derivative Fair Values
The following table presents derivative assets and liabilities that are accounted for at fair value on a recurring basis.
($ millions)
As at December 31, 2020
Assets (2)
Energy contracts subject to regulatory deferral
Energy contracts not subject to regulatory deferral
Foreign exchange contracts and total return swaps
Other investments
Liabilities (3)
Energy contracts subject to regulatory deferral
Energy contracts not subject to regulatory deferral
As at December 31, 2019
Assets (2)
Energy contracts subject to regulatory deferral
Energy contracts not subject to regulatory deferral
Foreign exchange contracts, interest rate and total
return swaps
Other investments
Liabilities (3)
Energy contracts subject to regulatory deferral
Energy contracts not subject to regulatory deferral
Level 1(1)
Level 2(1)
Level 3(1)
Total
–
–
16
126
142
–
–
–
–
–
14
121
135
(1)
–
(1)
38
6
–
–
44
(94)
(12)
(106)
22
8
4
–
34
(138)
(12)
(150)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
38
6
16
126
186
(94)
(12)
(106)
22
8
18
121
169
(139)
(12)
(151)
(1) Under the hierarchy, fair value is determined using: (i) Level 1 – unadjusted quoted prices in active markets; (ii) Level 2 – other pricing inputs directly or indirectly observable in
the marketplace; and (iii) Level 3 – unobservable inputs, used when observable inputs are not available. Classifications reflect the lowest level of input that is significant to the
fair value measurement.
(2) Current portion is included in accounts receivable and other current assets, with the remainder included in other assets
(3) Current portion is included in accounts payable and other current liabilities, with the remainder included in other liabilities
5 0
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
Derivative Volumes
As at December 31
Energy contracts subject to regulatory deferral (1)
Electricity swap contracts (GWh)
Electricity power purchase contracts (GWh)
Gas swap contracts (PJ)
Gas supply contract premiums (PJ)
Energy contracts not subject to regulatory deferral (1)
Wholesale trading contracts (GWh)
Gas swap contracts (PJ)
(1) Energy contracts settle on various dates through 2029
SELECTED ANNUAL FINANCIAL INFORMATION
Years ended December 31
($ millions, except as indicated)
Revenue
Net earnings
Common Equity Earnings
EPS: ($)
Basic
Diluted
Total assets
Long-term debt (excluding current portion)
Dividends declared: ($)
Per common share
Per first preference share:
Series F
Series G (1)
Series H (2)
Series I (3)
Series J
Series K (4)
Series M (5)
2020
522
2,781
156
203
1,588
36
2019
8,783
1,852
1,655
3.79
3.78
53,404
21,501
1.855
1.2250
1.0983
0.6250
0.7771
1.1875
0.9823
1.0133
2019
628
3,198
168
241
1,855
43
2018
8,390
1,286
1,100
2.59
2.59
53,051
23,159
1.750
1.2250
1.0345
0.6250
0.7116
1.1875
1.0000
1.0250
2020
8,935
1,389
1,209
2.60
2.60
55,481
23,113
1.965
1.2250
1.0983
0.5003
0.4987
1.1875
0.9823
0.9783
(1)
The annual dividend per share was reset to $1.0983 for the five-year period from September 1, 2018 up to but excluding September 1, 2023.
(2) The annual dividend per share was reset to $0.4588 for the five-year period from June 1, 2020 up to but excluding June 1, 2025.
(3) Floating quarterly dividend rate is reset every quarter based on the then current three-month Government of Canada Treasury Bill rate plus the applicable reset dividend yield.
(4) The annual dividend per share was reset to $0.9823 for the five-year period from March 1, 2019 up to but excluding March 1, 2024.
(5) The annual dividend per share was reset to $0.9783 for the five-year period from December 1, 2019 up to but excluding December 1, 2024.
2020/2019
For a discussion of the changes in revenue, net earnings, Common Equity Earnings, EPS, total assets and long-term debt see “Performance at
a Glance” on page 19, “Operating Results” on page 23, and “Financial Position” on page 31.
2019/2018
The increase in revenue reflected: (i) Rate Base growth, led by ITC; (ii) overall higher flow-through costs in customer rates; (iii) favourable
foreign exchange; and (iv) a $91 million favourable adjustment associated with the November 2019 FERC decision at ITC. The increase was
partially offset by: (i) lower revenue contribution from the Energy Infrastructure segment due primarily to the disposition of the Waneta
Expansion and reduced hydroelectric production in Belize due to lower rainfall; and (ii) lower retail sales at UNS Energy due to weather.
The increase in Common Equity Earnings reflected the following significant one-time items: (i) a $484 million gain on the disposition of the
Waneta Expansion; and (ii) an $83 million favourable adjustment resulting from the November 2019 FERC decision at ITC, discussed above.
Excluding the significant one-time items, the increase in Common Equity Earnings was primarily due to Rate Base growth; lower operating
expenses, primarily at FortisAlberta; and favourable foreign exchange. The increase was partially offset by the impact of weather in Belize and
Arizona, higher costs associated with Rate Base growth not reflected in customer rates at UNS Energy, regulatory decisions at ITC, and lower
realized margins at Aitken Creek. One-time positive tax adjustments, primarily recognized in 2018, also contributed to the increase in
earnings, as discussed below.
5 1
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
The one-time positive tax adjustments recognized in 2018 related to an election to file a consolidated state tax return and the designation
of net assets related to the Waneta Expansion as held for sale totalling $30 million and $14 million, respectively. In addition, the finalization
of US tax reform regulations associated with base-erosion and anti-abuse tax resulted in the recognition of income tax expense of
$12 million in 2019.
The increase in EPS reflects the above-noted earnings increases, partially offset by a 12.1 million increase in the weighted average number
of common shares outstanding associated with the Corporation’s: (i) $1.2 billion common equity issuance in the fourth quarter of 2019;
(ii) ATM Program; and (iii) DRIP and share purchase plan.
The increase in total assets was due to 2019 capital expenditures, partially offset by unfavourable foreign exchange on the translation of
US dollar-denominated assets.
FOURTH QUARTER RESULTS
Sales
Regulated utilities
UNS Energy
Retail Electricity (GWh)
Wholesale Electricity (GWh)
Gas (PJ)
Central Hudson
Electricity (GWh)
Gas (PJ)
FortisBC Energy (PJ)
FortisAlberta (GWh)
FortisBC Electric (GWh)
Other Electric (GWh)
Non-regulated
Energy Infrastructure (GWh)
2020
2019
Variance
2,345
1,871
5
1,200
7
67
4,138
894
2,362
103
2,223
1,814
5
1,188
6
71
4,279
888
2,427
14
122
57
–
12
1
(4)
(141)
6
(65)
89
The increase in electricity sales was driven by: (i) higher retail electricity sales at UNS Energy due to favourable weather; and (ii) increased
hydroelectric production in Belize due to higher rainfall levels. The increase was tempered by lower average consumption by oil and gas and
commercial customers at FortisAlberta, largely associated with the COVID-19 Pandemic and the downturn in the oil and gas sector.
Gas volumes were slightly lower than 2019 due to lower consumption by transportation customers at FortisBC Energy.
Revenue and Common Equity Earnings
($ millions, except as indicated)
Regulated utilities
ITC
UNS Energy
Central Hudson
FortisBC Energy
FortisAlberta
FortisBC Electric
Other Electric
Non-regulated
Energy Infrastructure
Corporate and Other
Total
Revenue
Earnings
2020
2019
Variance
2020
2019
Variance
419
525
242
476
139
117
381
47
–
500
510
226
428
150
112
381
19
–
2,346
2,326
(81)
15
16
48
(11)
5
–
28
–
20
109
45
35
74
33
13
32
27
(37)
331
171
38
30
77
33
12
22
6
(43)
346
(62)
7
5
(3)
–
1
10
21
6
(15)
Weighted average number of common shares outstanding (millions)
Basic EPS ($)
465.8
0.71
447.1
0.77
18.7
(0.06)
The increase in revenue was driven by: (i) overall higher flow-through costs, mainly at FortisBC Energy; (ii) Rate Base growth; and (iii) the impact
of favourable weather including higher retail sales in Arizona and hydroelectric production in Belize. The increase was partially offset by
the $91 million favourable ROE adjustment recorded in the fourth quarter of 2019 by ITC associated with the November 2019 FERC decision
(see “Regulatory Highlights” on page 29).
5 2
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
The decrease in Common Equity Earnings was due primarily to the implementation of the November 2019 FERC decision in the fourth
quarter of 2019 including the reversal of prior period liabilities. This impact was partially offset by Rate Base growth, the favourable impact
of mark-to-market accounting of natural gas derivatives at Aitken Creek, and higher hydroelectric production in Belize.
The decrease in basic EPS reflects lower Common Equity Earnings and an increase in the weighted average number of common shares
outstanding associated with the Corporation’s December 2019 common equity offering.
Cash Flows
($ millions)
Cash, beginning of period
Cash from (used in):
Operating activities
Investing activities
Financing activities
Foreign exchange
Cash, end of period
Operating Activities
2020
494
700
(1,235)
308
(18)
249
2019
228
634
(1,104)
627
(15)
370
Variance
266
66
(131)
(319)
(3)
(121)
The variance largely reflects the upfront payment received by FortisAlberta in the fourth quarter of 2020 associated with a long-term energy
retailer agreement. An increase in Operating Cash Flow associated with higher energy sales was largely offset by the timing of the recovery of
flow-through costs and slower collections from customers associated with the COVID-19 Pandemic.
Investing Activities
The variance reflects higher capital expenditures in accordance with the Corporation’s capital plan.
Financing Activities
See “Cash Flow Summary” on page 33.
SUMMARY OF QUARTERLY RESULTS
Quarter Ended
December 31, 2020
September 30, 2020
June 30, 2020
March 31, 2020
December 31, 2019
September 30, 2019
June 30, 2019
March 31, 2019
Revenue
($ millions)
2,346
2,121
2,077
2,391
2,326
2,051
1,970
2,436
Common Equity
Earnings
($ millions)
331
292
274
312
346
278
720
311
Basic EPS
($)
0.71
0.63
0.59
0.67
0.77
0.64
1.66
0.72
Diluted EPS
($)
0.71
0.63
0.59
0.67
0.77
0.63
1.66
0.72
Generally, within each calendar year, quarterly results fluctuate primarily in accordance with seasonality. Given the diversified nature of the
Corporation’s subsidiaries, seasonality varies. Most of the annual earnings of the gas utilities are realized in the first and fourth quarters due to
space-heating requirements. Earnings for the electric distribution utilities in the US are generally highest in the second and third quarters due
to the use of air conditioning and other cooling equipment.
Generally, from one calendar year to the next, quarterly results reflect: (i) continued organic growth driven by the Corporation’s capital plan;
(ii) any acquisitions and dispositions; (iii) any significant temperature fluctuations from seasonal norms; (iv) the timing and significance of any
regulatory decisions; (v) for revenue, the flow through in customer rates of commodity costs; and (vi) for EPS, increases in the weighted
average number of common shares outstanding.
5 3
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT
December 2020/December 2019
See “Fourth Quarter Results” on page 52.
September 2020/September 2019
Common Equity Earnings increased by $14 million due mainly to: (i) Rate Base growth; (ii) increased retail sales at UNS Energy, driven largely
by weather; and (iii) higher earnings from Belize, mainly from increased hydroelectric production. This growth was tempered by: (i) the delay
in TEP’s general rate application, resulting in approximately $1 billion of Rate Base not reflected in customer rates; and (ii) lower contributions
from ITC, due to the timing of earnings associated with the FERC ROE decisions, and a lower effective tax rate in 2019. The $0.01 decrease
in EPS was due primarily to an increase in the weighted average number of common shares outstanding, mainly associated with the
Corporation’s $1.2 billion common equity issuance in the fourth quarter of 2019, partially offset by the above noted factors.
June 2020/June 2019
Common Equity Earnings decreased by $446 million and basic EPS decreased by $1.07. Earnings for the quarter reflected significant one-time
items: (i) a $484 million gain on the disposition of the Waneta Expansion in April 2019; and (ii) the reversal of a $13 million tax recovery,
originally recognized in 2019, due to the finalization in April 2020 of anti-hybrid regulations associated with US tax reform, partially offset
by; (iii) a $27 million favourable base ROE adjustment at ITC as a result of the May 2020 FERC decision reflecting the reversal of liabilities
accrued in prior years. Notwithstanding the significant one-time items, the regulated utilities delivered improved financial results reflecting:
(i) Rate Base growth; (ii) increased retail sales at UNS Energy, driven largely by weather; (iii) favourable foreign exchange; and (iv) timing of
operating expenses at FortisBC Energy. This growth was tempered by lower sales in the Caribbean due to a decline in tourism-related
activities and higher COVID-related expenses, driven by Central Hudson.
March 2020/March 2019
Common Equity Earnings were comparable with 2019. Rate Base growth, lower non-recoverable operating expenses at ITC, and lower
expenses in the Corporate and Other segment were tempered by: (i) higher costs associated with Rate Base growth at UNS Energy not yet
reflected in rates; (ii) financial market volatility that caused a decline in the market value of certain investments that support retirement
benefits at UNS Energy; and (iii) unrealized losses on foreign exchange contracts in the Corporate and Other segment. The decrease in EPS
was due primarily to an increase in the weighted average number of common shares outstanding, mainly associated with the Corporation’s
$1.2 billion common equity issuance in the fourth quarter of 2019.
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 in 2020 or 2019. Inter-company balances, transactions and profit between
non-regulated and regulated entities are not eliminated on consolidation. These related-party transactions include: (i) the lease of gas
storage capacity and gas sales by Aitken Creek to FortisBC Energy; and (ii) the sale of capacity by the Waneta Expansion to FortisBC Electric
up to the April 16, 2019 disposition of the Waneta Expansion. These transactions, which are not eliminated on consolidation, did not have
a material impact on consolidated earnings, financial position or cash flows.
As at December 31, 2020, accounts receivable included approximately $28 million due from Belize Electricity (2019 – $8 million).
Fortis periodically provides short-term financing to its subsidiaries to support capital expenditures, acquisitions and seasonal working capital
requirements. As at December 31, 2020, there were no material inter-segment loans outstanding (2019 – $279 million). The interest charged
on inter-segment loans in 2020 and 2019 was not material.
5 4
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT MANAGEMENT’S EVALUATION OF CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
DCP are designed to provide reasonable assurance that information required to be disclosed in reports filed with, or submitted to, securities
regulatory authorities is recorded, processed, summarized and reported within the time periods specified under Canadian and US securities
laws. As of December 31, 2020, an evaluation was carried out under the supervision of, and with the participation of, the Corporation’s
management, including the CEO and CFO, of the effectiveness of the Corporation’s DCP, as defined in the applicable Canadian and
US securities laws. Based on that evaluation, the CEO and CFO concluded that such DCP are effective as of December 31, 2020.
Internal Controls over Financial Reporting
ICFR is designed by, or under the supervision of, the Corporation’s CEO and CFO and effected by the Corporation’s board of directors,
management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with US GAAP. Because of its inherent limitations, ICFR may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Corporation’s management, including the Corporation’s CEO and CFO, assessed the effectiveness of the Corporation’s ICFR as of
December 31, 2020, based on the criteria set forth in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2020, the
Corporation’s ICFR was effective.
During the year ended December 31, 2020, there have been no changes in the Corporation’s ICFR that have materially affected, or are
reasonably likely to materially affect, the Corporation’s ICFR.
OUTLOOK
The Corporation maintains its positive long-term outlook. Fortis continues to enhance shareholder value through the execution of its capital
plan, the balance and strength of its diversified portfolio of utility businesses, and growth opportunities within and proximate to its service
territories. While uncertainty exists due to the COVID-19 Pandemic, the Corporation does not currently expect it to have a material financial
impact in 2021.
The Corporation’s $19.6 billion five-year capital plan is expected to increase Rate Base from $30.5 billion in 2020 to $36.4 billion by 2023
and $40.3 billion by 2025, translating into three- and five-year CAGRs of approximately 6.5% and 6.0%, respectively. Beyond the five-year
capital plan, Fortis continues to pursue additional energy infrastructure opportunities including: further expansion of LNG infrastructure
in British Columbia; the fully permitted, cross-border, Lake Erie Connector electric transmission project in Ontario; and the acceleration of
cleaner energy infrastructure investments across our jurisdictions.
Fortis expects long-term growth in Rate Base will support earnings and dividend growth. Fortis is targeting average annual dividend
growth of approximately 6% through 2025. This dividend growth guidance is premised on the assumptions listed under “Forward-Looking
Information” on page 56, including no material impact from the COVID-19 Pandemic, the expectation of reasonable outcomes for regulatory
proceedings, and the successful execution of the five-year capital plan.
5 5
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT FORWARD-LOOKING INFORMATION
Fortis includes forward-looking information in the MD&A within the meaning of applicable Canadian securities laws and forward-looking statements
within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, (collectively referred to as “forward-looking information”). Forward-
looking information reflects expectations of Fortis management regarding future growth, results of operations, performance, business prospects
and opportunities. Wherever possible, words such as anticipates, believes, budgets, could, estimates, expects, forecasts, intends, may, might, plans,
projects, schedule, should, target, will, would and the negative of these terms and other similar terminology or expressions have been used to identify
the forward-looking information, which includes, without limitation: the expectation that the COVID-19 Pandemic will not have a material financial
impact in 2021 and will not impact the five-year capital plan; targeted average annual dividend growth through 2025; forecast capital expenditures
for 2021–2025 and expected funding sources; forecast Rate Base and Rate Base growth for 2023 and 2025; the expectation that long-term growth in
Rate Base will support earnings and dividend growth; the expectation that Fortis will remain at the forefront of the industry and is well positioned to
capitalize on evolving industry opportunities; expected timing, outcome and impact of regulatory decisions; expected or potential funding sources
for operating expenses, interest costs and capital plans; the expectation that maintaining the targeted capital structure of the regulated operating
subsidiaries will not have an impact on its ability to pay dividends in the foreseeable future; expected consolidated fixed-term debt maturities and
repayments over the next five years; the expectation that the Corporation and its subsidiaries will continue to have access to long-term capital and
will remain compliant with debt covenants in 2021; the nature, timing, benefits and expected costs of certain capital projects including the Multi-Value
Regional Transmission Projects, Transmission Conversion Project, Vail-to-Tortolita Project, Oso Grande Wind Project, Lower Mainland Intermediate
Pressure System Upgrade, Eagle Mountain Woodfibre Gas Line Project, Transmission Integrity Management Capabilities Project, Inland Gas Upgrades
Project, Tilbury 1B Project, Tilbury LNG Resiliency Tank, AMI Project, Wataynikaneyap Transmission Power Project and additional opportunities beyond
the capital plan, including the Lake Erie Connector Project; and the expectation that the adoption of future accounting pronouncements will not have
a Material Adverse Impact.
Forward-looking information involves significant risks, uncertainties and assumptions. Certain material factors or assumptions have been applied
in drawing the conclusions contained in the forward-looking information including, without limitation: no material impact from the COVID-19
Pandemic; reasonable regulatory decisions and the expectation of regulatory stability; the successful execution of the five-year capital plan; no
material capital project or financing cost overrun; sufficient human resources to deliver service and execute the capital plan; the realization of
additional opportunities; the Board exercising its discretion to declare dividends, taking into account the financial performance and condition of the
Corporation; no significant variability in interest rates; no significant operational disruptions or environmental liability or upset; the continued ability to
maintain the performance of the electricity and gas systems; no severe and prolonged economic downturn; sufficient liquidity and capital resources;
the ability to hedge exposures to fluctuations in foreign exchange rates, natural gas prices and electricity prices; the continued availability of natural
gas, fuel, coal and electricity supply; continuation of power supply and capacity purchase contracts; no significant changes in government energy
plans, environmental laws and regulations that could have a material negative impact; maintenance of adequate insurance coverage; the ability
to obtain and maintain licences and permits; retention of existing service areas; no significant changes in tax laws and the continued tax deferred
treatment of earnings from the Corporation’s foreign operations; continued maintenance of information technology infrastructure and no material
breach of cybersecurity; continued favourable relations with Indigenous Peoples; and favourable labour relations.
Fortis cautions readers that a number of factors could cause actual results, performance or achievements to differ materially from those discussed or
implied in the forward-looking information. These factors should be considered carefully and undue reliance should not be placed on the forward-
looking information. Risk factors which could cause results or events to differ from current expectations are detailed under the heading “Business Risks”
in this MD&A and in other continuous disclosure materials filed from time to time with Canadian securities regulatory authorities and the Securities
and Exchange Commission. Key risk factors for 2021 include, but are not limited to: uncertainty regarding the outcome of regulatory proceedings at
the Corporation’s utilities; risks associated with climate change, physical risks and service disruption; the impact of pandemics and public health crises,
including the COVID-19 Pandemic; risks related to environmental laws and regulations; risks associated with capital projects and the impact on the
Corporation’s continued growth; and the impact of weather variability and seasonality on heating and cooling loads, gas distribution volumes and
hydroelectric generation.
All forward-looking information herein is given as of February 11, 2021. 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.
5 6
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT GLOSSARY
2020 Annual Financial Statements: the Corporation’s audited
consolidated financial statements and notes thereto for the year
ended December 31, 2020
Central Hudson: CH Energy Group, Inc., an indirect wholly owned
subsidiary of Fortis, together with its subsidiaries, including Central
Hudson Gas & Electric Corporation
ACC: Arizona Corporation Commission
CEO: Chief Executive Officer of Fortis
ACCP: AESO customer contribution policy
CFO: Chief Financial Officer of Fortis
Actual Payout Ratio: dividends per common share divided by
basic EPS
Common Equity Earnings: net earnings attributable to common
equity shareholders
Adjusted Basic EPS: Adjusted Common Equity Earnings divided by
the basic weighted average number of common shares outstanding
Corporation: Fortis Inc.
Adjusted Common Equity Earnings: net earnings attributable to
common equity shareholders adjusted as shown under “Non-US
GAAP Financial Measures” on page 28
COVID-19 Pandemic: declared by the World Health Organization
in March 2020 as a result of a novel coronavirus
COS Regulation: cost of service regulation
Adjusted Payout Ratio: dividends per common share divided by
Adjusted Basic EPS as shown under “Non-US GAAP Financial
Measures” on page 28
CPCN: Certificate of Public Convenience and Necessity
DBRS Morningstar: DBRS Limited
AESO: Alberta Electric System Operator
DCP: disclosure controls and procedures
AFUDC: allowance for funds used during construction
DRIP: dividend reinvestment plan
Aitken Creek: Aitken Creek Gas Storage ULC, a direct 93.8%-owned
subsidiary of FortisBC Holdings Inc.
EPS: earnings per common share
ERM: enterprise risk management
AMI: Advanced Metering Infrastructure
ASU: Accounting Standards Update
ATM Program: at-the-market common equity program
AUC: Alberta Utilities Commission
BCUC: British Columbia Utilities Commission
BECOL: Belize Electric Company Limited, an indirect wholly owned
subsidiary of Fortis
Belize Electricity: Belize Electricity Limited,
indirectly holds a 33% equity interest
in which Fortis
CAGR(s): compound average growth rate of a particular item.
CAGR = (EV/BV)1–N–1, where: (i) EV is the ending value of the item;
(ii) BV is the beginning value of the item; and (iii) N is the number
of periods. Calculated on a constant US dollar to Canadian dollar
exchange rate
FERC: Federal Energy Regulatory Commission
Fortis: Fortis Inc.
FortisAlberta: FortisAlberta
subsidiary of Fortis
Inc., an
indirect wholly owned
FortisBC Electric: FortisBC Inc., an indirect wholly owned subsidiary
of Fortis, together with its subsidiaries
FortisBC Energy: FortisBC Energy Inc., an indirect wholly owned
subsidiary of Fortis, together with its subsidiaries
FortisOntario: FortisOntario Inc., a direct wholly owned subsidiary
of Fortis, together with its subsidiaries
FortisTCI: FortisTCI Limited, an indirect wholly owned subsidiary of
Fortis, together with its subsidiary
Four Corners: Four Corners Generating Station, Units 4 and 5
Caribbean Utilities: Caribbean Utilities Company, Ltd., an indirect
approximately 60%-owned (as at December 31, 2020) subsidiary of
Fortis, together with its subsidiary
FX: foreign exchange associated with the translation of US dollar-
denominated amounts
GCOC: generic cost of capital
5 7
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT GHG: greenhouse gas
Operating Cash Flow: cash from operating activities
Gila River Unit 2: UNS Energy’s Gila River natural gas generation
station Unit 2
PBR: performance-based rate-setting
GWh: gigawatt hour(s)
ICFR: internal controls over financial reporting
Investment Holdings
ITC: ITC
indirect 80.1%-owned
including
subsidiary of Fortis, together with
International Transmission Company, Michigan Electric Transmission
Company, LLC, ITC Midwest LLC, and ITC Great Plains, LLC
its subsidiaries,
Inc., an
LIBOR: London Interbank Offered Rate
LNG: liquefied natural gas
Luna: Luna Energy Facility
kV: kilovolt
PJ: petajoule(s)
PPA: power purchase agreement
PSC: New York State Public Service Commission
Rate Base: the stated value of property on which a regulated
utility is permitted to earn a specified return in accordance with its
regulatory construct
RICE Units: natural gas reciprocating internal combustion engine
units
ROA: rate of return on Rate Base
ROE: rate of return on common equity
S&P: Standard & Poor’s Financial Services LLC
Major Capital Projects: projects, other than ongoing maintenance
projects, individually costing $200 million or more
San Juan: San Juan Generating Station Unit 1
Maritime Electric: Maritime Electric Company, Limited, an indirect
wholly owned subsidiary of Fortis
SEDAR: Canadian System for Electronic Document Analysis and
Retrieval
Material Adverse Effect: a material adverse effect on the
Corporation’s business, results of operations, financial position or
liquidity, on a consolidated basis
MD&A: the Corporation’s management discussion and analysis for
the year ended December 31, 2020
MISO: Midcontinent Independent System Operator, Inc.
MRP: Multi-Year Rate Plan
TEP: Tucson Electric Power Company, a direct wholly owned
subsidiary of UNS Energy
TFO: transmission facility owners
TSR: total shareholder return, which is a measure of the return
in the form of share price
to common equity shareholders
appreciation and dividends
reinvestment) over a
specified time period in relation to the share price at the beginning
of the period
(assuming
Moody’s: Moody’s Investor Services, Inc.
TSX: Toronto Stock Exchange
MW: megawatt(s)
Newfoundland Power: Newfoundland Power Inc., a direct wholly
owned subsidiary of Fortis
UNS Energy: UNS Energy Corporation, an indirect wholly owned
subsidiary of Fortis, together with its subsidiaries, including TEP, UNS
Electric, Inc. and UNS Gas, Inc.
Non-US GAAP Financial Measures: financial measures that do
not have a standardized meaning prescribed by US GAAP
US GAAP: accounting principles generally accepted in the US
US: United States of America
NOPR: notice of proposed rulemaking
NYSE: New York Stock Exchange
OEB: Ontario Energy Board
OPEB: other post-employment benefits
Waneta Expansion: Waneta Expansion hydroelectric generation
facility, in which Fortis held a 51% controlling interest prior to
April 2019
Wataynikaneyap Partnership: Wataynikaneyap Power Limited
Partnership
5 8
Management Discussion and AnalysisFORTIS INC. 2020 ANNUAL REPORT Financials
Table of Contents
Management’s Report on Internal Control
NOTE 10 Property, Plant and Equipment ............................................................84
over Financial Reporting ..............................................................................................59
Report of Independent Registered Public Accounting Firm –
Opinion on the Financial Statements ..................................................................60
Report of Independent Registered Public Accounting Firm –
Opinion on Internal Control over Financial Reporting .............................62
NOTE 11
Intangible Assets ............................................................................................86
NOTE 12 Goodwill ..............................................................................................................86
NOTE 13 Accounts Payable and Other Current Liabilities ........................86
NOTE 14 Long-Term Debt .............................................................................................87
Consolidated Balance Sheets ..........................................................................................63
NOTE 15 Leases ....................................................................................................................90
Consolidated Statements of Earnings ........................................................................64
NOTE 16 Other Liabilities ...............................................................................................92
Consolidated Statements of Comprehensive Income ....................................64
NOTE 17 Common Shares.............................................................................................92
Consolidated Statements of Cash Flows ..................................................................65
NOTE 18 Earnings Per Common Share .................................................................92
Consolidated Statements of Changes in Equity ..................................................66
NOTE 19 Preference Shares ..........................................................................................93
Notes to Consolidated Financial Statements
NOTE 20 Accumulated Other Comprehensive Income .............................94
NOTE 1
Description of Business .............................................................................67
NOTE 21 Stock-Based Compensation Plans ......................................................95
NOTE 2
Regulation ..........................................................................................................68
NOTE 22 Disposition .........................................................................................................97
NOTE 3
Summary of Significant Accounting Policies ...............................72
NOTE 23 Other Income, Net ........................................................................................97
NOTE 4
Segmented Information............................................................................78
NOTE 24
Income Taxes ....................................................................................................98
NOTE 5
Revenue ...............................................................................................................80
NOTE 25 Employee Future Benefits .....................................................................100
NOTE 6
Accounts Receivable and Other Current Assets ........................81
NOTE 26 Supplementary Cash Flow Information .......................................104
NOTE 7
Inventories .........................................................................................................81
NOTE 27 Fair Value of Financial Instruments
NOTE 8
Regulatory Assets and Liabilities .........................................................82
NOTE 9 Other Assets ......................................................................................................84
and Risk Management ......................................................................104
NOTE 28 Commitments and Contingencies ..................................................108
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Fortis Inc. and its subsidiaries (the “Corporation”) is responsible for establishing and maintaining adequate internal control over
financial reporting (“ICFR”). The Corporation’s ICFR is designed by, or under the supervision of, the Corporation’s President and Chief Executive Officer
(“CEO”) and Executive Vice President, Chief Financial Officer (“CFO”) and effected by the Corporation’s board of directors, management and other
personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, ICFR may
not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Corporation’s management, including its CEO and CFO, assessed the effectiveness of the Corporation’s ICFR as of December 31, 2020, based on
the criteria set forth in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management concluded that, as of December 31, 2020, the Corporation’s ICFR was effective.
The Corporation’s ICFR as of December 31, 2020 has been audited by Deloitte LLP, an Independent Registered Public Accounting Firm, which also
audited the Corporation’s consolidated financial statements for the year ended December 31, 2020. Deloitte LLP issued an unqualified opinion for
both audits.
February 11, 2021
David G. Hutchens
President and Chief Executive Officer, Fortis Inc.
Jocelyn H. Perry
Executive Vice President, Chief Financial Officer, Fortis Inc.
St. John’s, Canada
5 9
FORTIS INC. 2020 ANNUAL REPORT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Fortis Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Fortis Inc. and subsidiaries (the “Corporation”) as of December 31, 2020 and
2019, the related consolidated statements of earnings, comprehensive income, cash flows and changes in equity for each of the two years in the
period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Corporation as of December 31, 2020 and 2019, and the results of its operations
and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted
in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the
Corporation’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 11, 2021, expressed an
unqualified opinion on the Corporation’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on the Corporation’s
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial
statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter
in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing
separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Assessment for Impairment of Goodwill – Refer to Notes 3 and 12 to the financial statements
Critical Audit Matter Description
The Corporation assesses goodwill for impairment annually as well as whenever any event or other change indicates that the fair value of a reporting
unit may be below its carrying value. Management has determined that there is no impairment based on its current annual assessment.
Management’s assessment utilizes the income approach which is based on underlying estimates and assumptions with varying degrees of
uncertainty. Those with the highest degree of subjectivity and impact are the assumed growth rates and discount rates. Auditing these estimates
and assumptions required a high degree of audit judgment and effort, including the need to involve a fair value specialist.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the growth rate and discount rate used by management to estimate the fair value of more recently acquired
reporting units included the following:
• Evaluating the effectiveness of controls over the estimated fair value of the reporting units, including the review and approval of the growth rate
and discount rate selected by management.
• Evaluating management’s ability to accurately forecast the growth rate by:
• Assessing the methodology used in management’s determination of the growth rate; and
• Comparing management’s assumptions to historical data and available market trends.
• With the assistance of a fair value specialist, evaluating the reasonableness of the discount rate by:
• Testing the source information underlying the determination of the discount rate; and
• Developing a range of independent estimates and comparing those to the discount rate selected by management.
6 0
FinancialsFORTIS INC. 2020 ANNUAL REPORT Impact of Rate Regulation on the financial statements – Refer to Notes 2, 3 and 8 to the financial statements
Critical Audit Matter Description
The Corporation’s regulated utilities are subject to rate regulation and annual earnings oversight by various federal, state and provincial regulatory
authorities who have jurisdiction in the United States and Canada. Rates and resultant earnings of the Corporation’s regulated utilities are determined
under cost of service regulation, with some using performance-based rate-setting mechanisms. The regulation of rates is premised on the full
recovery of prudently incurred costs and a reasonable rate of return on asset value (“ROA”) or common shareholders’ equity (“ROE”). Regulatory
decisions can have an impact on the timely recovery of costs and the regulator-approved ROE and/or ROA. Accounting for the economics of rate
regulation impacts multiple financial statement line items and disclosures, such as property, plant, and equipment; regulatory assets and liabilities;
operating revenues and expenses; income taxes; and depreciation expense.
We identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions
about impacted account balances and disclosures and the high degree of subjectivity involved in assessing the potential impact of future regulatory
orders on the financial statements. Management judgments include assessing the likelihood of recovery of costs incurred or a refund to customers
through the rate-setting process. While the Corporation’s regulated utilities have indicated they expect to recover costs from customers through
regulated rates, there is a risk that the respective regulatory authority will not approve full recovery of the costs incurred and a reasonable ROE and/or
ROA. Auditing these matters required especially subjective judgment and specialized knowledge of accounting for rate regulation due to its inherent
complexities across different jurisdictions.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the likelihood of recovery of costs incurred or a refund to customers through the rate-setting process, included the
following, among others:
• Evaluating the effectiveness of controls over the monitoring and evaluation of regulatory developments that may affect the likelihood of
recovering costs in future rates or of a future reduction in rates.
• Assessing relevant regulatory orders, regulatory statutes and interpretations as well as procedural memorandums, utility and intervener filings, and
other publicly available information to evaluate the likelihood of recovery in future rates or of a future reduction in rates and the ability to earn a
reasonable ROA or ROE.
• For regulatory matters in progress, inspecting the regulated utilities’ filings for any evidence that might contradict management’s assertions. We
obtained an analysis from management and letters from internal and external legal counsel, as appropriate, regarding cost recoveries or a future
reduction in rates.
• Evaluating the Corporation’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.
Deloitte LLP
Chartered Professional Accountants
St. John’s, Canada
February 11, 2021
We have served as the Corporation’s auditor since 2017.
6 1
FinancialsFORTIS INC. 2020 ANNUAL REPORT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Fortis Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Fortis Inc. and subsidiaries (the “Corporation”) as of December 31, 2020, based
on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). In our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated financial statements as of and for the year ended December 31, 2020, of the Corporation and our report dated February 11, 2021,
expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit. We are
a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
Deloitte LLP
Chartered Professional Accountants
St. John’s, Canada
February 11, 2021
6 2
FinancialsFORTIS INC. 2020 ANNUAL REPORT CONSOLIDATED BALANCE SHEETS
FORTIS INC.
As at December 31 (in millions of Canadian dollars)
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable and other current assets (Note 6)
Prepaid expenses
Inventories (Note 7)
Regulatory assets (Note 8)
Total current assets
Other assets (Note 9)
Regulatory assets (Note 8)
Property, plant and equipment, net (Note 10)
Intangible assets, net (Note 11)
Goodwill (Note 12)
Total assets
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings (Note 14)
Accounts payable and other current liabilities (Note 13)
Regulatory liabilities (Note 8)
Current installments of long-term debt (Note 14)
Total current liabilities
Other liabilities (Note 16)
Regulatory liabilities (Note 8)
Deferred income taxes (Note 24)
Long-term debt (Note 14)
Finance leases (Note 15)
Total liabilities
Commitments and contingencies (Note 28)
Equity
Common shares (Note 17) (1)
Preference shares (Note 19)
Additional paid-in capital
Accumulated other comprehensive income (Note 20)
Retained earnings
Shareholders’ equity
Non-controlling interests
Total equity
Total liabilities and equity
$
2020
249
1,369
102
422
470
2,612
670
3,118
35,998
1,291
11,792
$
2019
370
1,297
88
394
425
2,574
620
2,958
33,988
1,260
12,004
$ 55,481
$
53,404
$
132
2,321
441
1,254
4,148
1,599
2,662
3,344
23,113
331
35,197
13,819
1,623
11
34
3,210
18,697
1,587
20,284
$
512
2,402
572
690
4,176
1,446
2,786
2,969
21,501
413
33,291
13,645
1,623
11
336
2,916
18,531
1,582
20,113
$ 55,481
$
53,404
(1) No par value. Unlimited authorized shares. 466.8 million and 463.3 million
issued and outstanding as at December 31, 2020 and 2019, respectively
Approved on Behalf of the Board
See accompanying Notes to Consolidated Financial Statements
Douglas J. Haughey,
Director
Tracey C. Ball,
Director
6 3
FinancialsFORTIS INC. 2020 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF EARNINGS
FORTIS INC.
For the years ended December 31 (in millions of Canadian dollars, except per share amounts)
Revenue (Note 5)
Expenses
Energy supply costs
Operating expenses
Depreciation and amortization
Total expenses
Gain on disposition (Note 22)
Operating income
Other income, net (Note 23)
Finance charges
Earnings before income tax expense
Income tax expense (Note 24)
Net earnings
Net earnings attributable to:
Non-controlling interests
Preference equity shareholders
Common equity shareholders
Earnings per common share (Note 18)
Basic
Diluted
2020
$
8,935
2,562
2,437
1,428
6,427
–
2,508
154
1,042
1,620
231
$
1,389
$
115
65
1,209
$
1,389
$
$
2.60
2.60
See accompanying Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FORTIS INC.
For the years ended December 31 (in millions of Canadian dollars)
Net earnings
Other comprehensive loss
Unrealized foreign currency translation losses, net of hedging activities
and income tax expense of $3 million and $13 million, respectively
Other, net of income tax recovery of $9 million and $5 million, respectively
Comprehensive income
Comprehensive income attributable to:
Non-controlling interests
Preference equity shareholders
Common equity shareholders
See accompanying Notes to Consolidated Financial Statements
2020
$
1,389
(311)
(27)
(338)
$
1,051
$
79
65
907
$
1,051
2019
8,783
2,520
2,452
1,350
6,322
577
3,038
138
1,035
2,141
289
1,852
130
67
1,655
1,852
3.79
3.78
2019
1,852
(660)
(7)
(667)
1,185
55
67
1,063
1,185
$
$
$
$
$
$
$
$
$
$
6 4
FinancialsFORTIS INC. 2020 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
FORTIS INC.
For the years ended December 31 (in millions of Canadian dollars)
2020
2019
Operating activities
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation – property, plant and equipment
Amortization – intangible assets
Amortization – other
Deferred income tax expense (Note 24)
Equity component, allowance for funds used during construction (Note 23)
Gain on disposition (Note 22)
Other
Change in long-term regulatory assets and liabilities
Change in working capital (Note 26)
Cash from operating activities
Investing activities
Capital expenditures – property, plant and equipment
Capital expenditures – intangible assets
Contributions in aid of construction
Proceeds on disposition (Note 22)
Other
Cash used in investing activities
Financing activities
Proceeds from long-term debt, net of issuance costs (Note 14)
Repayments of long-term debt, net of extinguishment costs, and finance leases
Borrowings under committed credit facilities
Repayments under committed credit facilities
Net change in short-term borrowings
Issue of common shares, net of costs, and dividends reinvested (Note 17)
Dividends
Common shares, net of dividends reinvested
Preference shares
Subsidiary dividends paid to non-controlling interests
Other
Cash from financing activities
Effect of exchange rate changes on cash and cash equivalents
Change in cash and cash equivalents
Cash and change in cash associated with assets held for sale
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplementary Cash Flow Information (Note 26)
See accompanying Notes to Consolidated Financial Statements
$
1,389
$
1,852
1,282
131
15
226
(78)
–
165
5
(434)
2,701
(3,857)
(182)
68
–
(161)
(4,132)
3,470
(1,251)
5,648
(5,299)
(413)
58
(786)
(65)
(65)
30
1,327
(17)
(121)
–
370
$
249
$
1,199
125
26
247
(74)
(583)
145
(106)
(168)
2,663
(3,499)
(221)
102
995
(145)
(2,768)
937
(1,676)
5,892
(6,290)
472
1,442
(494)
(67)
(73)
11
154
(26)
23
15
332
370
6 5
FinancialsFORTIS INC. 2020 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FORTIS INC.
For the years ended December 31, 2020 and 2019
(in millions of Canadian dollars, except share numbers)
Shares
(# millions)
Shares
(Note 17)
Non-
Income (Loss) Retained Controlling
Interests
(Note 20) Earnings
Total
Equity
Accumulated
Other
Common Common Preference Additional Comprehensive
As at December 31, 2019
Net earnings
Other comprehensive loss
Common shares issued
Advances to non-controlling interests
Subsidiary dividends paid to
non-controlling interests
Dividends declared on common shares
($1.965 per share)
Dividends on preference shares
Other
As at December 31, 2020
As at December 31, 2018
Net earnings
Other comprehensive loss
Common shares issued
Advances to non-controlling interests
Subsidiary dividends paid to
non-controlling interests
Dividends declared on common shares
($1.855 per share)
Dividends on preference shares
Disposition (Note 22)
Other
463.3 $ 13,645
–
–
174
–
–
–
3.5
–
–
–
–
–
–
–
–
–
Shares
(Note 19)
$ 1,623
–
–
–
–
–
–
–
–
466.8 $ 13,819
$ 1,623
428.5 $ 11,889
–
–
1,756
–
–
–
34.8
–
$ 1,623
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Paid-In
Capital
$
$
$
11
–
–
(3)
–
–
–
–
3
11
11
–
–
(5)
–
–
–
–
–
5
$
336 $ 2,916
1,274
–
–
–
–
(302)
–
–
$ 1,582 $ 20,113
1,389
(338)
171
(13)
115
(36)
–
(13)
–
–
–
–
–
(65)
(65)
(915)
(65)
–
–
–
4
(915)
(65)
7
$
$
34 $ 3,210
$ 1,587 $ 20,284
928 $ 2,082
1,722
–
–
–
–
(592)
–
–
$ 1,923 $ 18,456
1,852
(667)
1,751
(8)
130
(75)
–
(8)
–
–
–
–
–
–
(73)
(73)
(821)
(67)
–
–
–
–
(318)
3
(821)
(67)
(318)
8
As at December 31, 2019
463.3 $ 13,645
$ 1,623
$
11
$
336 $ 2,916
$ 1,582 $ 20,113
See accompanying Notes to Consolidated Financial Statements
6 6
FinancialsFORTIS INC. 2020 ANNUAL REPORT
Notes to Consolidated Financial Statements
For the years ended December 31, 2020 and 2019
1. DESCRIPTION OF BUSINESS
Fortis Inc. (“Fortis” or the “Corporation”) is a well-diversified North American regulated electric and gas utility holding company. Entities within the
reporting segments that follow operate with substantial autonomy.
Regulated Utilities
ITC
ITC Investment Holdings Inc., ITC Holdings Corp. and the electric transmission operations of its regulated operating subsidiaries, which include
International Transmission Company (“ITCTransmission”), Michigan Electric Transmission Company, LLC (“METC”), ITC Midwest LLC (“ITC Midwest”),
and ITC Great Plains, LLC. Fortis owns 80.1% of ITC and an affiliate of GIC Private Limited owns a 19.9% minority interest.
ITC owns and operates high-voltage transmission lines in Michigan’s lower peninsula and portions of Iowa, Minnesota, Illinois, Missouri, Kansas
and Oklahoma.
UNS Energy
UNS Energy Corporation, which primarily includes Tucson Electric Power Company (“TEP”), UNS Electric, Inc. (“UNS Electric”) and UNS Gas, Inc.
(“UNS Gas”).
UNS Energy’s largest operating subsidiary, TEP, and UNS Electric are vertically integrated regulated electric utilities. They generate, transmit and
distribute electricity to retail customers in southeastern Arizona, including the greater Tucson metropolitan area in Pima County and parts of Cochise
County, as well as in Santa Cruz and Mohave counties. TEP also sells wholesale electricity to other entities in the western United States. Together they
own generating capacity of 3,233 megawatts (“MW”), including 54 MW of solar capacity. Several generating assets in which they have an interest are
jointly owned.
UNS Gas is a regulated gas distribution utility serving retail customers in Arizona’s Mohave, Yavapai, Coconino, Navajo and Santa Cruz counties.
Central Hudson
CH Energy Group, Inc., which includes primarily Central Hudson Gas & Electric Corporation. Central Hudson is a regulated electric and gas
transmission and distribution utility that serves portions of New York State’s Mid-Hudson River Valley and owns gas-fired and hydroelectric
generating capacity totalling 65 MW.
FortisBC Energy
FortisBC Energy Inc., which is the largest regulated distributor of natural gas in British Columbia, provides transmission and distribution services
in over 135 communities. FortisBC Energy obtains natural gas supplies primarily from northeastern British Columbia and Alberta on behalf of
most customers.
FortisAlberta
FortisAlberta Inc. is a regulated electricity distribution utility operating in a substantial portion of southern and central Alberta. It is not involved in
the direct sale of electricity.
FortisBC Electric
FortisBC Inc. is an integrated regulated electric utility operating in the southern interior of British Columbia. It owns four hydroelectric generating
facilities with a combined capacity of 225 MW. It also provides operating, maintenance and management services relating to five hydroelectric
generating facilities in British Columbia that are owned by third parties.
Other Electric
Eastern Canadian and Caribbean utilities, as follows: Newfoundland Power Inc. (“Newfoundland Power”); Maritime Electric Company, Limited
(“Maritime Electric”); FortisOntario Inc. (“FortisOntario”); a 39% equity investment in Wataynikaneyap Power Limited Partnership (“Wataynikaneyap
Partnership”); an approximate 60% controlling interest in Caribbean Utilities Company, Ltd. (“Caribbean Utilities”); FortisTCI Limited and Turks and
Caicos Utilities Limited (collectively, “FortisTCI”); and a 33% equity investment in Belize Electricity Limited (“Belize Electricity”).
6 7
FORTIS INC. 2020 ANNUAL REPORT 1.
DESCRIPTION OF BUSINESS (cont’d)
Regulated Utilities (cont’d)
Other Electric (cont’d)
Newfoundland Power is an integrated regulated electric utility and the principal distributor of electricity on the island portion of Newfoundland and
Labrador with a generating capacity of 143 MW, of which 97 MW is hydroelectric. Maritime Electric is an integrated regulated electric utility and the
principal distributor of electricity on Prince Edward Island (“PEI”) with on-Island generating capacity of 130 MW. FortisOntario consists of three
regulated electric utilities that provide service to customers in Fort Erie, Cornwall, Gananoque, Port Colborne and the District of Algoma in Ontario
with a generating capacity of 5 MW. Wataynikaneyap Partnership is a partnership between 24 First Nations communities, Fortis and Algonquin Power
& Utilities Corp. with a mandate to connect remote First Nations communities to the electricity grid in Ontario through the development of new
transmission lines.
Caribbean Utilities is an integrated regulated electric utility and the sole electricity provider on Grand Cayman with a diesel-powered generating
capacity of 161 MW. FortisTCI consists of two integrated regulated electric utilities that provide electricity to certain Turks and Caicos Islands and has
a diesel-powered generating capacity of 91 MW. Belize Electricity is an integrated electric utility and the principal distributor of electricity in Belize.
Non-Regulated
Energy Infrastructure
Long-term contracted generation assets in Belize and the Aitken Creek natural gas storage facility (“Aitken Creek”) in British Columbia. Generation
assets in Belize consist of three hydroelectric generating facilities with a combined generating capacity of 51 MW, held through the Corporation’s
indirectly wholly owned subsidiary Belize Electric Company Limited (“BECOL”). The output is sold to Belize Electricity under 50-year power purchase
agreements (“PPAs”). Fortis indirectly owns 93.8% of Aitken Creek, with the remainder owned by BP Canada Energy Company. Aitken Creek is the only
underground natural gas storage facility in British Columbia and has a working gas capacity of 77 billion cubic feet. The long-term contracted
generation assets in British Columbia, the Waneta Expansion hydroelectric generating facility (“Waneta Expansion”), were sold on April 16, 2019.
Corporate and Other
Captures expenses and revenues not specifically related to any reportable segment and those business operations that are below the required
threshold for segmented reporting, including net corporate expenses of Fortis.
2. REGULATION
General
The earnings of the Corporation’s regulated utilities are determined under cost of service (“COS”) regulation, with some using performance-based
rate setting (“PBR”) mechanisms.
Under COS regulation, the regulator sets customer rates to permit a reasonable opportunity for the timely recovery of the estimated costs of
providing service, including a fair rate of return on a regulatory deemed or targeted capital structure applied to an approved regulatory asset value
(“rate base”). PBR mechanisms generally apply a formula that incorporates inflation and assumed productivity improvements for a set term.
The ability to recover prudently incurred costs of providing service and earn the regulator-approved rate of return on common shareholders’ equity
(“ROE”) and/or rate of return on rate base assets (“ROA”) may depend on achieving the forecasts established in the rate-setting process. There can be
varying degrees of regulatory lag between when costs are incurred and when they are reflected in customer rates.
The Corporation’s regulated utilities, where applicable, are permitted by their respective regulators to flow through to customers, without markup,
the cost of natural gas, fuel and/or purchased power through base customer rates and/or the use of rate stabilization and other mechanisms (Note 8).
6 8
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT Nature of Regulation
Regulated Utility
Regulatory Authority
ITC (2) (3)
Federal Energy Regulatory Commission
(“FERC”)
TEP
Arizona Corporation Commission (“ACC”) (5)
UNS Electric
UNS Gas
Central Hudson (7)
FortisBC Energy
FERC (6)
ACC
ACC
New York State Public Service
Commission (“PSC”)
British Columbia Utilities
Commission (“BCUC”)
FortisBC Electric
BCUC
FortisAlberta
Alberta Utilities Commission (“AUC”)
Newfoundland Power Newfoundland and Labrador Board
of Commissioners of Public Utilities
Allowed
Common
Equity
(%)
60.0
Allowed ROE (1)
(%)
2020
10.77
2019 Significant Features
10.63 Cost-based formula rates, with annual true-up
mechanism (4)
Incentive adders
50.0
54.0
52.8
50.8
50.0
38.5
40.0
37.0
45.0
9.75
9.75 COS regulation
Historical test year
10.40
10.40 Formula transmission rates
9.50
9.75
8.80
8.75
9.15
8.50
8.50
9.50
9.75
8.80 COS regulation
Future test year
8.75 COS regulation with formula components and
incentives (8)
9.15 Future test year
8.50 PBR (9)
8.50 COS regulation
Future test year
9.35 COS regulation
Future test year
Maritime Electric
Island Regulatory and Appeals Commission
40.0
9.35
FortisOntario (10)
Ontario Energy Board
Caribbean Utilities (11)
Utility Regulation and Competition Office
40.0
N/A
8.52–9.30
8.78–9.30 COS regulation with incentive mechanisms
6.75–8.75
7.50–9.50 COS regulation
Rate-cap adjustment mechanism based on
published consumer price indices
FortisTCI (12)
Government of the Turks and Caicos Islands
N/A 15.00–17.50
15.00–17.50 COS regulation
Historical test year
(1) ROA for Caribbean Utilities and FortisTCI
(2) Includes the allowed common equity and base ROE plus incentive adders for ITCTransmission, METC, and ITC Midwest
(3) Including incentive adders, the May 2020 FERC decision implies an all-in ROE for ITC’s subsidiaries operating in the Midcontinent Independent System Operator (“MISO”) region
of 10.77%, up from 10.63% as set in the November 2019 decision. See “Significant Regulatory Developments” below
(4) Annual true-up reflected in rates within a two-year period
(5) Effective January 1, 2021, 53% allowed common equity and 9.15% ROE with 0.20% return on the fair value increment. See “COVID-19 Pandemic Impacts – Delayed and
Postponed Regulatory Proceedings” below
(6) Approved effective August 1, 2019, subject to refund following hearing and settlement procedures. As at December 31, 2020, $19 million (2019 – $5 million) has been reserved
as a regulatory liability
(7) Pursuant to a three-year settlement agreement arising from a 2017 general rate application, Central Hudson’s rates reflect a capital structure of 48%, 49% and 50% common
equity as of July 1, 2018, 2019 and 2020, respectively. See “COVID-19 Pandemic Impacts – Delayed and Postponed Regulatory Proceedings” below
(8) Formula and incentives have been set through 2024. See “Significant Regulatory Developments” below
(9) FortisAlberta is subject to PBR including mechanisms for flow-through costs and capital expenditures not otherwise recovered through customer rates. FortisAlberta’s current
PBR term expires as of December 31, 2022
(10) Two of FortisOntario’s utilities follow COS regulation with incentive mechanisms, while the remaining utility is subject to a 35-year franchise agreement expiring in 2033
(11) Operates under licences from the Government of the Cayman Islands. Its exclusive transmission and distribution licence is for an initial 20-year period, expiring in April 2028,
with a provision for automatic renewal. Its non-exclusive generation licence is for a 25-year term, expiring in November 2039
(12) Operates under 50-year licences from the Government of the Turks and Caicos Islands, which expire in 2036 and 2037
6 9
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT 2.
REGULATION (cont’d)
COVID-19 Pandemic Impacts
The novel coronavirus (“COVID-19”) pandemic resulted in several customer relief initiatives as well as the delay and postponement of several
regulatory proceedings in 2020, as described below. The Corporation’s significant regulatory proceedings, including TEP’s general rate application as
well as FortisAlberta’s 2021 generic cost of capital (“GCOC”) and Alberta Electric System Operator (“AESO”) customer contribution proceedings, were
concluded by the end of 2020.
Customer Relief Initiatives
UNS Energy
Pursuant to the ACC’s approval of the utility’s customer relief initiatives, TEP refunded to customers approximately $11 million of collected demand
side management funds in excess of program costs.
In December 2020, the ACC enacted a bill credit and payment program for residential electric customers who are behind on their electric bills as a
result of the COVID-19 pandemic, including automatic enrollment into an eight-month payment plan for qualified customers. TEP voluntarily created
payment arrangements for commercial customers.
Central Hudson
In March 2020, as agreed with the PSC, Central Hudson postponed the collection in customer rates of approximately $4 million of deferred costs
related mainly to environmental remediation until July 1, 2021.
FortisBC Energy and FortisBC Electric
In April 2020, pursuant to the BCUC’s approval of the utilities’ customer relief initiatives, FortisBC Energy and FortisBC Electric implemented three-
month bill deferrals for certain customer classes, the repayment of which commenced in the third quarter of 2020. The BCUC also authorized the
deferral of otherwise uncollectible revenue from customers, the recovery of which will be determined through a future rate filing once the financial
impact of the pandemic is known.
Delayed and Postponed Regulatory Proceedings
UNS Energy
General Rate Application: TEP filed a rate application in April 2019 based on a 2018 test year. In December 2020 the ACC issued a rate order including
new customer rates effective January 1, 2021 (“2020 Rate Order”). Provisions of the 2020 Rate Order include: (i) an increase in non-fuel revenue of
$77 million (US$58 million); (ii) an allowed ROE of 9.15%, with a 0.20% return on the fair value increment and a capital structure of 53% common
equity; and (iii) a rate base of approximately $3.5 billion (US$2.7 billion) which includes post-test year investments in Gila River natural gas generation
station Unit 2 and 10 natural gas reciprocating internal combustion engine units.
Central Hudson
2020 Rates: In June 2020, the PSC approved Central Hudson’s request to postpone scheduled electric and gas delivery rate increases, reflecting an
increase in the equity component of its capital structure from 49% to 50%, from July 1, 2020 to October 1, 2020. The deferred revenue associated with
the delay is being collected over the nine-month period to June 30, 2021.
COVID-19 Proceeding: In June 2020, the PSC initiated a generic proceeding to identify and address the effects of the COVID-19 pandemic. The
outcome of this proceeding and potential impacts, if any, are unknown at this time.
FortisAlberta
Generic Cost of Capital Proceeding: In December 2018, the AUC initiated a GCOC proceeding to consider a formula-based approach to setting the
allowed ROE beginning in 2021 and whether any process changes were necessary for determining capital structure in years in which a ROE formula is
in place. In October 2020, given the time that had passed since initiation of the proceeding and ongoing economic uncertainty, the AUC concluded
the proceeding and set the ROE for 2021 at 8.5% using a capital structure of 37% common equity, consistent with 2020. In December 2020, the AUC
initiated a new GCOC proceeding to establish the cost of capital parameters for 2022 and possibly one or more future years. This proceeding is
expected to be ongoing throughout 2021.
Other Electric
Caribbean Utilities: In August 2020, the Utility Regulation and Competition Office approved the postponement of Caribbean Utilities’ scheduled
June 1, 2020 annual rate adjustment to January 1, 2021 to provide customer relief from the economic effects of the COVID-19 pandemic. The deferred
revenue associated with the delay is being collected over a two-year period beginning January 2021.
FortisTCI: In February 2020, the Government of the Turks and Caicos Islands approved a 6.8% average increase in FortisTCI’s electricity rates, effective
April 1, 2020, including the recovery of hurricane-related costs incurred in 2017. In March 2020, to provide customer relief from the economic effects
of the COVID-19 pandemic, the effective date was postponed and new rates became effective July 22, 2020.
FortisTCI sought regulatory approval to defer its incremental operating expenses associated with the COVID-19 pandemic. Approval was granted in
December 2020 to allow the deferral of approximately $1.5 million in costs, to be amortized over the remaining 15-year life of FortisTCI’s licence.
7 0
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT Significant Regulatory Developments
ITC
ROE Complaints: In May 2020, FERC issued an order on the rehearing of its November 2019 decision on the MISO transmission owner ROE complaints
and set the base ROE for the periods from November 2013 through February 2015 and from September 2016 onward at 10.02%, up to a maximum of
12.62% with incentive adders. This represents an increase from the base ROE of 9.88%, up to a maximum of 12.24% with incentive adders, determined
in FERC’s November 2019 decision. Including incentive adders, the May 2020 FERC decision implies an all-in ROE for ITC’s subsidiaries operating in the
MISO region of 10.77%, up from 10.63% as set in the November 2019 decision.
Net regulatory liabilities of $6 million and $91 million were recorded at December 31, 2020 and 2019, respectively, reflecting: (i) the terms of the May
2020 and November 2019 decisions; and (ii) $42 million refunded to customers in 2020. The May 2020 FERC decision resulted in an increase in Fortis’
net earnings of $29 million in 2020, including $27 million related to the reversal of liabilities established in prior periods (2019 – November 2019 FERC
decision increased Fortis’ net earnings by $63 million, including $83 million related to the reversal of liabilities established in prior periods).
Review of Transmission Incentives Policy: In March 2020, FERC issued a notice of proposed rulemaking (“NOPR”) that included a proposal to update its
transmission incentives policy for transmission owners, including ITC, to grant incentives to projects based upon benefits to customers regarding
reliability and cost savings through the reduction of transmission congestion. FERC proposed total ROE incentives of up to 250 basis points that
would not be limited by the upper end of the base ROE zone of reasonableness. The NOPR also proposed, among other things, to eliminate the ROE
adder for independent transmission ownership, and to increase the ROE adder for regional transmission owner participation. Comments from
stakeholders, including ITC, were provided to FERC through July 2020. The outcome of these proceedings may impact future incentive adders that
are included in transmission rates charged by transmission owners, including ITC.
Central Hudson
General Rate Application: In August 2020, Central Hudson filed a rate application with the PSC requesting an increase in electric and natural gas
delivery revenue of $44 million and $19 million, respectively, effective July 1, 2021. An order from the PSC is expected in 2021.
FortisBC Energy and FortisBC Electric
Multi-Year Rate Plan Applications: In June 2020, the BCUC issued a decision on FortisBC Energy’s and FortisBC Electric’s multi-year rate plan applications
for 2020 to 2024. The decision sets the rate-setting framework for the five-year period, including: (i) the level of operation and maintenance expense
and growth capital to be included in customer rates, indexed for inflation less a fixed productivity adjustment factor; (ii) a forecast approach to
sustainment capital; (iii) an innovation fund recognizing the need to accelerate investment in clean energy innovation; and (iv) a 50/50 sharing
between customers and the utilities of variances from the allowed ROE. In the fourth quarter of 2020, the BCUC approved: (i) the January 1, 2020
delivery rate increase; and (ii) an increase in 2021 delivery rates, effective January 1, 2021, reflecting the terms of this decision.
Generic Cost of Capital Proceeding: In January 2021, the BCUC issued a notice that a GCOC proceeding will be initiated in the second quarter of 2021
and will include a review of the common equity component of capital structure and the allowed ROE effective January 1, 2022.
FortisAlberta
2018 Independent System Operator Tariff Application: In September 2019, the AUC issued a decision that addressed, among other things, a proposal to
change how the AESO customer contribution policy (“ACCP”) is accounted for between distribution facility owners, such as FortisAlberta, and
transmission facility owners (“TFOs”). The decision prevented any future investment by FortisAlberta under the policy and directed that unamortized
customer contributions of approximately $400 million as at December 31, 2017, which form part of FortisAlberta’s rate base, be transferred to the
incumbent TFO in FortisAlberta’s service area.
In November 2020, the AUC issued a decision: (i) reversing the proposed changes to the ACCP resulting in FortisAlberta retaining its unamortized
customer contributions; and (ii) directing a change in the depreciation rate for AESO contributions to reflect the parameters of the underlying
transmission facilities. FortisAlberta has adjusted the estimated service life and the associated depreciation rate of the unamortized AESO
contributions resulting in a decrease in depreciation expense and an associated decrease in revenue in 2020.
The AUC initiated a new proceeding in November 2020 to consider whether the ACCP should be modified on a prospective basis. A decision is
expected in the second quarter of 2021.
7 1
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These consolidated financial statements have been prepared and presented in accordance with accounting principles generally accepted in the
United States of America (“US GAAP”) for rate-regulated entities, and are in Canadian dollars unless otherwise indicated.
These consolidated financial statements include the accounts of the Corporation and its subsidiaries, and a controlled variable interest entity up to
the date of its disposition on April 16, 2019 (Note 22). They reflect the equity method of accounting for entities in which Fortis has significant
influence, but not control, and proportionate consolidation for assets that are jointly owned with non-affiliated entities. Intercompany transactions
have been eliminated, except for transactions between non-regulated and regulated entities in accordance with US GAAP for rate-regulated entities.
Cash and Cash Equivalents
Cash and cash equivalents include cash, cash held in margin accounts, and short-term deposits with initial maturities of three months or less from
the date of deposit.
Allowance for Credit Losses
Fortis and its subsidiaries recognize an allowance for credit losses (2019 – allowance for doubtful accounts) to reduce accounts receivable for
amounts estimated to be uncollectible. The allowance for credit losses is estimated based on historical collection patterns, sales, and current and
forecast economic and other conditions. Accounts receivable are written off in the period in which they are deemed uncollectible.
Inventories
Inventories, consisting of materials and supplies, gas, fuel and coal in storage, are measured at the lower of weighted average cost and net
realizable value.
Regulatory Assets and Liabilities
Regulatory assets and liabilities arise as a result of the utility rate-setting process and are subject to regulatory approval. Regulatory assets represent
future revenues and/or receivables associated with certain costs incurred that will be, or are expected to be, recovered from customers in future
periods through the rate-setting process. Regulatory liabilities represent: (i) future reductions or limitations of increases in revenue associated with
amounts that will be, or are expected to be, refunded to customers through the rate-setting process; or (ii) obligations to provide future service that
customers have paid for in advance.
Certain remaining recovery and settlement periods are those expected by management and the actual periods could differ based on
regulatory approval.
Investments
Investments accounted for using the equity method are reviewed annually for potential impairment in value. Impairments are recognized
when identified.
Property, Plant and Equipment
Property, plant and equipment (“PPE”) are recognized at cost less accumulated depreciation. Contributions in aid of construction by customers and
governments are recognized as a reduction in the cost of, and are amortized in a manner consistent with, the related PPE.
Depreciation rates of the Corporation’s regulated utilities include a provision for estimated future asset removal costs not identified as a legal
obligation. The provision is recognized as a long-term regulatory liability (Note 8) against which actual asset removal costs are netted when incurred.
Most of the Corporation’s regulated utilities derecognize PPE on disposal or when no future economic benefits are expected from their use. Upon
derecognition, any difference between cost and accumulated depreciation, net of salvage proceeds, is charged to accumulated depreciation. No
gain or loss is recognized.
Through methodologies established by their respective regulators, the Corporation’s regulated utilities capitalize: (i) overhead costs that are not
directly attributable to specific PPE but relate to the overall capital expenditure plan; and (ii) an allowance for funds used during construction
(“AFUDC”). The debt component of AFUDC for 2020 totalled $41 million (2019 – $40 million) and is reported as a reduction of finance charges and the
equity component is reported as other income (Note 23). Both components are charged to earnings through depreciation expense over the
estimated service lives of the applicable PPE.
At FortisAlberta the cost of PPE includes required contributions to AESO toward funding the construction of transmission facilities.
7 2
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT Excluding UNS Energy and Central Hudson, PPE includes inventory held for the development, construction and betterment of other assets.
As required by its regulator, UNS Energy and Central Hudson recognize such items as inventory until used and reclassifies them to PPE once put
into service.
Repairs and maintenance costs are charged to earnings in the period incurred. Replacements and betterments that extend the useful lives of PPE
are capitalized.
PPE is depreciated using the straight-line method based on the estimated service lives of the assets. Depreciation rates for regulated PPE are
approved by the respective regulators. Depreciation rates for 2020 ranged from 0.9% to 39.8% (2019 – 0.9% to 35.0%). The weighted average
composite rate of depreciation, before reduction for amortization of contributions in aid of construction, was 2.5% for 2020 (2019 – 2.6%).
The service life ranges and weighted average remaining service life of PPE as at December 31 were as follows.
(years)
Distribution
Electric
Gas
Transmission
Electric
Gas
Generation
Other
Intangible Assets
2020
Service Life
Ranges
Weighted Average
Remaining
Service Life
2019
Weighted Average
Remaining
Service Life
Service Life
Ranges
5–80
18–95
20–90
10–85
1–85
2–70
32
38
43
35
24
14
5–80
15–95
20–90
5–85
1–85
3–70
32
36
43
32
25
14
Intangible assets are recorded at cost less accumulated amortization. Their useful lives are assessed to be either indefinite or finite.
Intangible assets with indefinite useful lives are not amortized and are tested for impairment annually, either individually or, where the particular
entity also has goodwill, at the reporting unit level in conjunction with goodwill impairment testing. An annual review is completed to determine
whether the indefinite life assessment continues to be supportable. If not, the resultant changes are made prospectively.
Intangible assets with finite lives are amortized using the straight-line method based on the estimated service lives of the assets. Amortization rates
for regulated intangible assets are approved by the respective regulators and ranged from 1.0% to 33.0% for 2020 (2019 – 1.0% to 33.0%).
The service life ranges and weighted average remaining service life of finite-life intangible assets as at December 31 were as follows.
(years)
Computer software
Land, transmission and water rights
Other
2020
Weighted Average
Remaining
Service Life
4
56
12
Service Life
Ranges
3–15
43–90
10–100
2019
Weighted Average
Remaining
Service Life
4
58
12
Service Life
Ranges
3–10
43–90
10–100
Most of the Corporation’s regulated utilities derecognize intangible assets on disposal or when no future economic benefits are expected from their
use. Upon derecognition any difference between the cost and accumulated amortization of the asset, net of salvage proceeds, is charged to
accumulated amortization. No gain or loss is recognized.
Impairment of Long-Lived Assets
The Corporation reviews the valuation of PPE, intangible assets with finite lives, and other long-term assets when events or changes in circumstances
indicate that the carrying value may not exceed the total undiscounted cash flows expected to be generated by the asset. If that is determined to be
the case, the asset is written down to estimated fair value and an impairment loss is recognized.
7 3
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets related to business acquisitions.
Goodwill at each of the Corporation’s 11 reporting units is tested for impairment annually and whenever an event or change in circumstances
indicates that fair value may be below carrying value. If so determined, goodwill is written down to estimated fair value and an impairment loss
is recognized.
The Corporation performs a qualitative assessment on each reporting unit, and if it is determined that it is not likely that fair value is less than carrying
value, then a quantitative estimate of fair value is not required. When a quantitative assessment is necessary, the primary method for estimating fair
value of the reporting units is the income approach, whereby net cash flow projections are discounted. Underlying estimates and assumptions,
with varying degrees of uncertainty, include the amount and timing of expected future cash flows, growth rates, and discount rates. A secondary
valuation, the market approach along with a reconciliation of the total estimated fair value of all the reporting units to the Corporation’s market
capitalization, is also performed and evaluated.
Deferred Financing Costs
Issue costs, discounts and premiums are recognized against, and amortized over the life of, the related long-term debt.
Employee Future Benefits
Fortis and each subsidiary maintain one or a combination of defined benefit pension plans and defined contribution pension plans, as well as other
post-employment benefit (“OPEB”) plans, including certain health and dental coverage and life insurance benefits, for qualifying members. The costs
of defined contribution pension plans are expensed as incurred.
For defined benefit pension and OPEB plans, the projected or accumulated benefit obligation and net benefit costs are actuarially determined using
the projected benefits method prorated on service and management’s best estimate of expected plan investment performance, salary escalation,
retirement ages of employees and, for OPEB plans, expected health care costs. Discount rates reflect market interest rates on high-quality bonds with
cash flows that match the timing and amount of expected pension or OPEB payments.
Defined benefit pension and OPEB plan assets are recognized at fair value. For the purpose of determining defined benefit pension cost,
FortisBC Energy and Newfoundland Power use the market-related value whereby investment returns in excess of, or below, expected returns are
recognized in the asset value over a period of three years.
The excess of any cumulative net actuarial gain or loss over 10% of the greater of: (i) the projected or accumulated benefit obligation; and (ii) the fair
value or market-related value, as applicable, of plan assets at the beginning of the fiscal year, along with unamortized past service costs, are deferred
and amortized over the average remaining service period of active employees.
The net funded or unfunded status of defined benefit pension and OPEB plans, measured as the difference between the fair value of the plan assets
and the projected or accumulated benefit obligation, is recognized on the Corporation’s consolidated balance sheets.
For most of the Corporation’s regulated utilities, any difference between defined benefit pension or OPEB plan costs ordinarily recognized under
US GAAP and those recovered from customers in current rates is subject to deferral account treatment and is expected to be recovered from, or
refunded to, customers in future rates (Note 8).
For most of the Corporation’s regulated utilities, any unamortized balances related to net actuarial gains and losses, past service costs and transitional
obligations associated with defined benefit pension or OPEB plans, as applicable, which would otherwise be recognized in accumulated other
comprehensive income, are subject to deferral account treatment (Note 8).
Leases
A right-of-use asset and lease liability is recognized for all leases with a lease term greater than 12 months. The right-of-use asset and liability are both
measured at the present value of future lease payments, excluding variable payments that are based on usage or performance. Future lease
payments include both lease components (e.g., rent, real estate taxes and insurance costs) and non-lease components (e.g., common area
maintenance costs), which Fortis accounts for as a single lease component. The present value is calculated using the rate implicit in the lease or a
lease-specific secured interest rate based on the remaining lease term. Renewal options are included in the lease term when it is reasonably certain
that the option will be exercised.
Finance leases are depreciated over the lease term, except where: (i) ownership of the asset is transferred at the end of the lease term, in which
case depreciation is over the estimated service life of the underlying asset; and (ii) the regulator has approved a different recovery methodology for
rate-setting purposes, in which case the timing of the expense recognition will conform to the regulator’s requirements.
7 4
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT Revenue Recognition
Most 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. No component of the
transaction price is allocated to unsatisfied performance obligations. Energy sales are 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.
FortisAlberta is a distribution company and is required by its regulator to arrange and pay for transmission services with the AESO. This includes
the collection of transmission revenue from its customers, which occurs through the transmission component of its regulator-approved rates.
FortisAlberta reports transmission revenue and expenses on a net basis.
Electricity, gas and transmission service revenue includes an estimate for unbilled energy consumed or service provided since the last meter reading
that has not been billed at the end of the reporting 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 fixed or market rates.
Variable consideration is estimated at the most likely amount and reassessed 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 entitlement is certain.
Revenue excludes sales and municipal taxes collected from customers.
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 is less than one year.
Revenue is disaggregated by geography, regulatory status, and substantially autonomous utility operations (Note 5). This represents the level of
disaggregation used by the Corporation’s President and Chief Executive Officer (“CEO”) to allocate resources and evaluate performance.
Stock-Based Compensation
Compensation expense related to stock options is measured at the grant date using the Black-Scholes fair value option-pricing model and each
grant is amortized to compensation expense as a single award evenly over the four-year vesting period, with the offsetting entry to additional
paid-in capital.
Fortis satisfies stock option exercises by issuing common shares from treasury. Upon exercise, proceeds are credited to capital stock at the option
prices and the fair value of the options, as previously recognized, is reclassified from additional paid-in capital to capital stock.
Fortis recognizes liabilities associated with its directors’ Deferred Share Unit (“DSU”), Performance Share Unit (“PSU”) and Restricted Share Unit
(“RSU”) Plans. DSUs, PSUs and RSUs issued pre-2020 represent cash-settled awards and RSUs issued in 2020 represent cash or share-settled awards,
depending on settlement elections and share ownership requirements of the executive. The fair value of these liabilities is based on the five-day
volume weighted average price (“VWAP”) of the Corporation’s common shares at the end of each reporting period. The VWAP as at December 31,
2020 was $52.36 (2019 – $53.97). The fair value of the PSU liability is also based on the expected payout probability, based on historical performance
in accordance with the defined metrics of each grant and management’s best estimate.
Compensation expense is recognized on a straight-line basis over the vesting period, which for the PSU and RSU Plans is over the lesser of three years
or the period to retirement eligibility and for the DSU Plan is at the time of grant. Forfeitures are accounted for as they occur.
Foreign Currency Translation
Assets and liabilities of the Corporation’s foreign operations, all of which have a US dollar functional currency, are translated at the exchange rate in
effect at the balance sheet date and the resultant unrealized translation gains and losses are recognized in accumulated other comprehensive
income. The exchange rate as at December 31, 2020 was US$1.00=CA$1.27 (2019 – US$1.00=CA$1.30).
Revenue and expenses of the Corporation’s foreign operations are translated at the average exchange rate for the reporting period, which was
US$1.00=CA$1.34 for 2020 (2019 – US$1.00=CA$1.33).
Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate prevailing at the balance sheet date. Revenue
and expenses denominated in foreign currencies are translated at the exchange rate prevailing at the transaction date. Translation gains and losses
are recognized in earnings.
Translation gains and losses on foreign currency-denominated debt that is designated as an effective hedge of foreign net investments are
recognized in other comprehensive income.
7 5
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT 3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)
Derivatives and Hedging
Derivatives Not Designated as Hedges
Derivatives not designated as hedges are used by: (i) Fortis, to manage cash flow risk associated with forecast US dollar cash inflows and forecast
future cash settlements of DSU, PSU and RSU obligations; (ii) UNS Energy, to meet forecast load and reserve requirements; and (iii) Aitken Creek,
to manage commodity price risk, capture natural gas price spreads, and manage the financial risk of physical transactions. These derivatives are
measured at fair value with changes thereto recognized in earnings.
Derivatives not designated as hedges are also used by UNS Energy, Central Hudson and FortisBC Energy to reduce energy price risk associated
with purchased power and gas requirements. The settled amounts of these derivatives are generally included in regulated rates, as permitted by
the respective regulators. These derivatives are measured at fair value with changes recognized as regulatory assets or liabilities for recovery from,
or refund to, customers in future rates (Note 8).
Derivatives that meet the normal purchase or normal sale scope exception are not measured at fair value and settled amounts are recognized
in earnings as energy supply costs.
Derivatives Designated as Hedges
Fortis, ITC and UNS Energy use cash flow hedges, from time to time, to manage interest rate risk. Unrealized gains and losses are initially recognized in
accumulated other comprehensive income and reclassified to earnings when the underlying hedged transaction affects earnings. Any hedge
ineffectiveness is immediately recognized in earnings.
The Corporation’s earnings from, and net investments in, foreign subsidiaries and certain equity-accounted investments are exposed to fluctuations
in the US dollar-to-Canadian dollar exchange rate. The Corporation has hedged a portion of this exposure through US dollar-denominated debt at
the corporate level. Exchange rate fluctuations associated with the translation of this debt and the foreign net investments are recognized in
accumulated other comprehensive income.
Presentation of Derivatives
The fair values of derivatives are recognized as current or long-term assets and liabilities depending on the timing of settlements and resulting
cash flows. Derivatives under master netting agreements and collateral positions are presented on a gross basis. Cash flows associated with the
settlement of all derivatives are presented in operating activities in the consolidated statements of cash flows.
Income Taxes
The Corporation and its taxable subsidiaries follow the asset and liability method of accounting for income taxes. Current income tax expense or
recovery is recognized for the estimated income taxes payable or receivable in the current year.
Deferred income tax assets and liabilities are recognized for temporary differences between the tax and accounting basis of assets and liabilities, as
well as for the benefit of losses available to be carried forward to future years for tax purposes that are “more likely than not” to be realized. They are
measured using enacted income tax rates and laws in effect when the temporary differences are expected to be recovered or settled. The effect of
a change in income tax rates on deferred income tax assets and liabilities is recognized in earnings in the period when the change occurs. Valuation
allowances are recognized when it is “more likely than not” that all of, or a portion of, a deferred income tax asset will not be realized.
Customer rates at ITC, UNS Energy, Central Hudson and Maritime Electric reflect current and deferred income tax. Customer rates at FortisAlberta
reflect current income tax. Customer rates at FortisBC Energy, FortisBC Electric, Newfoundland Power and FortisOntario reflect current income tax
and, for certain regulatory balances, deferred income tax. Caribbean Utilities, FortisTCI and BECOL are not subject to income tax.
Differences between the income tax expense or recovery recognized under US GAAP and reflected in current customer rates, which is expected to
be recovered from, or refunded to, customers in future rates, are recognized as regulatory assets or liabilities (Note 8).
At FortisAlberta the capital cost allowance pool for certain PPE for rate-setting purposes is different from that prescribed for Canadian tax filing
purposes. In a future reporting period yet to be determined, the difference may result in reported income tax expense exceeding that reflected
in customer rates.
Fortis does not recognize deferred income taxes on temporary differences related to investments in foreign subsidiaries where it intends to
indefinitely reinvest earnings. The difference between the carrying values of these foreign investments and their tax bases, resulting from
unrepatriated earnings and currency translation adjustments, is approximately $3.4 billion as at December 31, 2020 (2019 – $2.8 billion). If such
earnings are repatriated, the Corporation may be subject to income taxes and foreign withholding taxes. The determination of the amount of
unrecognized deferred income tax liabilities on such amounts is impractical.
7 6
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT Tax benefits associated with actual or expected income tax positions are recognized when the “more likely than not” recognition threshold is met.
The tax benefits are measured at the largest amount of benefit that is greater than 50% likely to be realized upon settlement.
Income tax interest and penalties are recognized as income tax expense when incurred.
Asset Retirement Obligations
The Corporation’s subsidiaries have asset retirement obligations (“AROs”) associated with certain generation, transmission, distribution and
interconnection assets, including land and environmental remediation and/or asset removal. These assets and related licences, permits, rights-of-way
and agreements are reasonably expected to effectively exist and operate in perpetuity due to their nature. Consequently, where the final date and
cost of remediation and/or removal of the noted assets cannot be reasonably determined, AROs have not been recognized.
Otherwise, AROs are recognized at fair value in the period incurred as an increase in PPE and long-term other liabilities (Note 16) if a reasonable
estimate of fair value can be determined. Fair value is estimated as the present value of expected future cash outlays, discounted at a credit-adjusted
risk-free interest rate. The increase in the liability due to the passage of time is recognized through accretion and the capitalized cost is depreciated
over the useful life of the asset. Accretion and depreciation expense are deferred as a regulatory asset or liability based on regulatory recovery of
these costs. Actual settlement costs are recognized as a reduction in the accrued liability.
Contingencies
Fortis and its subsidiaries are subject to various legal proceedings and claims that arise in the normal course of business. Management makes
judgments regarding the future outcome of contingent events and recognizes a loss based on its best estimate when it is determined that such
loss, or range of loss, is probable and can be reasonably estimated. Legal fees are expensed as incurred. When a loss is recoverable in future rates,
a regulatory asset is also recognized.
Management regularly reviews current information to determine whether recognized provisions should be adjusted and new provisions are
required. However, estimating probable losses requires considerable judgment about potential actions by third parties and matters are often
resolved over long periods of time. Actual outcomes may differ materially from the amounts recognized.
New Accounting Policies
Financial Instruments
Effective January 1, 2020, the Corporation adopted Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial
Instruments, which requires the use of reasonable and supportable forecasts in the estimation of credit losses and the recognition of expected losses
upon initial recognition of a financial instrument, in addition to using past events and current conditions. The new guidance also requires
quantitative and qualitative disclosures regarding the activity in the allowance for credit losses for financial assets within the scope of the guidance.
Adoption did not have a material impact on the consolidated financial statements and related disclosures.
Use of Accounting Estimates
The preparation of these consolidated financial statements in accordance with US GAAP requires management to make estimates and judgments,
including those arising from matters dependent upon the finalization of regulatory proceedings, that affect the reported amounts of assets,
liabilities, revenues, expenses, gains and losses. Management evaluates these estimates on an ongoing basis based upon historical experience,
current conditions, and assumptions believed to be reasonable at the time they are made, with any adjustments being recognized in the period
they become known. Actual results may differ significantly from these estimates.
Future Accounting Pronouncements
The Corporation considers the applicability and impact of all ASUs issued by the Financial Accounting Standards Board. Any ASUs not included in
these consolidated financial statements were assessed and determined to be either not applicable to the Corporation or are not expected to have a
material impact on the consolidated financial statements.
7 7
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT 4. SEGMENTED INFORMATION
General
Fortis segments its business based on regulatory jurisdiction and service territory, as well as the information used by its CEO in deciding how to
allocate resources. Segment performance is evaluated principally on net earnings attributable to common equity shareholders.
Related-Party and Inter-Company Transactions
Related-party transactions are in the normal course of operations and are measured at the amount of consideration agreed to by the related parties.
There were no material related-party transactions in 2020 or 2019.
Inter-company balances, transactions and profit between non-regulated and regulated entities, which are not eliminated on consolidation, are
summarized below.
(in millions)
Lease of gas storage capacity and gas sales from Aitken Creek to FortisBC Energy
Sale of capacity from the Waneta Expansion to FortisBC Electric (1)
(1) Reflects amounts to the April 16, 2019 disposition of the Waneta Expansion (Note 22)
$
2020
25
–
$
2019
23
17
As at December 31, 2020, accounts receivable included approximately $28 million due from Belize Electricity (2019 – $8 million).
Fortis periodically provides short-term financing to its subsidiaries to support capital expenditures, acquisitions and seasonal working capital
requirements. As at December 31, 2020, there were no material inter-segment loans outstanding (2019 – $279 million). The interest charged on
inter-segment loans in 2020 and 2019 was not material.
7 8
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
REGULATED
NON-REGULATED
UNS Central FortisBC
Fortis FortisBC
ITC Energy Hudson Energy Alberta Electric
Other
Electric
Energy Corporate
and
Inter-
segment
Other eliminations
Infra-
Sub
total structure
Total
$ 1,744 $ 2,260 $ 953 $ 1,385 $ 596 $ 424 $ 1,485 $ 8,847
2,559
2,368
847
627
893
194
468
341
–
438
119
117
232
503
–
148
$
$ 88
3
30
Year ended
December 31, 2020
(in millions)
Revenue
Energy supply costs
Operating expenses
Depreciation and
amortization
Operating income
Other income, net
Finance charges
Income tax expense
Net earnings
Non-controlling interests
Preference share dividends
Net earnings attributable
to common equity
shareholders
Goodwill
Total assets
Capital expenditures
Year ended
December 31, 2019
(in millions)
Revenue
Energy supply costs
Operating expenses
Depreciation and
amortization
Gain on disposition
Operating income
Other income, net
Finance charges
Income tax expense
Net earnings
Non-controlling interests
Preference share dividends
Net earnings attributable
to common equity
shareholders
Goodwill
Total assets
Capital expenditures
–
–
39
4
(43)
13
150
(97)
(83)
–
65
295
1,011
40
324
179
548
99
–
330
456
40
125
69
302
–
–
90
128
31
48
20
91
–
–
237
339
8
142
29
176
1
–
212
236
2
104
1
133
–
–
61
127
5
72
4
56
–
–
183
1,408
215
10
77
21
127
15
–
2,512
136
892
323
1,433
115
–
16
39
5
–
5
39
–
–
$ 449 $ 302 $
91 $ 175 $ 133 $
56 $ 112 $ 1,318
$ 39
$ (148)
$ 7,810 $ 1,758 $ 574 $ 913 $ 228 $ 235 $ 247 $ 11,765
54,580
20,358
4,020
1,182
7,695
471
5,084
420
4,261
273
10,802
1,200
3,939
339
2,441
135
$ 27
745
19
$
–
209
–
$ 1,761 $ 2,212 $ 917 $ 1,331 $ 598 $ 418 $ 1,467 $
438
333
814
650
890
188
121
107
254
451
–
145
–
489
270
–
1,002
37
290
174
575
104
–
297
–
451
28
130
57
292
–
–
79
–
133
17
46
19
85
–
–
235
–
325
16
136
39
166
1
–
214
–
239
2
104
6
131
–
–
62
–
128
4
72
6
54
–
–
171
–
218
2
77
20
123
17
–
8,704
2,517
2,363
1,328
–
2,496
106
855
321
1,426
122
–
$ 82
3
36
$
–
–
56
20
–
23
2
–
(1)
26
8
–
2
577
519
30
180
(31)
400
–
67
$ 471 $ 292 $
85 $ 165 $ 131 $
54 $ 106 $
1,304
$ 18
$ 333
$ 7,970 $ 1,794 $ 586 $ 913 $ 228 $ 235 $ 251 $ 11,977
52,379
19,799
3,667
1,148
10,205
915
7,305
463
4,185
295
4,831
423
3,726
317
2,328
106
$ 27
711
28
$
–
641
25
$
$
$
$
– $ 8,935
– 2,562
– 2,437
– 1,428
– 2,508
–
154
– 1,042
231
–
– 1,389
115
–
65
–
– $ 1,209
– $ 11,792
(53) 55,481
– 4,039
(3) $ 8,783
2,520
–
2,452
(3)
–
–
–
–
–
–
–
–
–
1,350
577
3,038
138
1,035
289
1,852
130
67
$
$
– $ 1,655
– $ 12,004
(327) 53,404
3,720
–
7 9
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
5. REVENUE
(in millions)
Electric and gas revenue
United States
ITC
UNS Energy
Central Hudson
Canada
FortisBC Energy
FortisAlberta
FortisBC Electric
Newfoundland Power
Maritime Electric
FortisOntario
Caribbean
Caribbean Utilities
FortisTCI
Total electric and gas revenue
Other services revenue (1)
Revenue from contracts with customers
Alternative revenue (2)
Other revenue
Total revenue
$
2020
1,726
2,019
941
1,336
580
358
707
215
222
238
77
8,419
325
8,744
64
127
$
2019
1,697
1,966
894
1,289
576
362
671
209
206
270
85
8,225
374
8,599
116
68
$
8,935
$
8,783
(1) Includes $227 million and $273 million from regulated operations for 2020 and 2019, respectively
(2)
Includes a $40 million and $91 million base ROE adjustment associated with the May 2020 and November 2019 FERC decisions, respectively (Notes 2 and 8)
Revenue from Contracts with Customers
Electric and gas revenue includes revenue from the sale and/or delivery of electricity and gas, transmission revenue, and wholesale electric revenue,
all based on regulator-approved tariff rates including the flow through of commodity costs.
Other services revenue includes: (i) management fee revenue at UNS Energy for the operation of Springerville Units 3 and 4; (ii) revenue from storage
optimization activities at Aitken Creek; and (iii) revenue from other services that reflect the ordinary business activities of Fortis’ utilities.
Alternative Revenue
Alternative revenue programs allow utilities to adjust future rates in response to past activities or completed events if certain criteria are met.
Alternative revenue is recognized on an accrual basis with a corresponding regulatory asset or liability until the revenue is settled. Upon settlement,
revenue is not recognized as revenue from contracts with customers but rather as settlement of the regulatory asset or liability. The significant
alternative revenue programs of Fortis’ utilities are summarized as follows.
ITC’s formula rates include an annual true-up mechanism that compares actual revenue requirements to billed revenue, and any under- or
over-collections are accrued as a regulatory asset or liability and reflected in future rates within a two-year period (Note 8). The formula rates do
not require annual regulatory approvals, although inputs remain subject to legal challenge.
UNS Energy’s lost fixed-cost recovery mechanism (“LFCR”) surcharge recovers lost fixed costs, as measured by a reduction in non-fuel revenue,
associated with energy efficiency savings and distributed generation. To recover the LFCR regulatory asset, UNS Energy is required to file an annual
LFCR adjustment request with the ACC for the LFCR revenue recognized in the prior year. The recovery is subject to a year-over-year cap of 2% of
total retail revenue. UNS Energy’s demand side management surcharge, which is approved by the ACC annually, compensates for the costs to design
and implement cost-effective energy efficiency and demand response programs until such costs, along with a performance incentive, are reflected
in non-fuel base rates.
FortisBC Energy and FortisBC Electric have an earnings sharing mechanism that provides for a 50/50 sharing of variances from the allowed ROE in
2020 (2019 – variances from formula-driven operation and maintenance expenses and capital expenditures). This mechanism is in place until the
expiry of the current multi-year rate plan for 2020 to 2024. Additionally, variances between forecast and actual customer-use rates and industrial and
other customer revenue are captured in a revenue stabilization account and a flow-through deferral account to be refunded to, or received from,
customers in rates within two years.
8 0
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
Other Revenue
Other revenue primarily includes gains or losses on energy contract derivatives and regulatory deferrals at FortisBC Energy and FortisBC Electric
reflecting cost recovery variances from forecast.
6. ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS
(in millions)
Trade accounts receivable
Unbilled accounts receivable
Allowance for credit losses (1)
Income tax receivable
Other (2)
$
2020
595
571
(64)
1,102
72
195
$
1,369
2019
504
601
(35)
1,070
35
192
1,297
$
$
(1) Allowance for doubtful accounts for 2019
(2) Consists mainly of customer billings for non-core services, gas mitigation costs and collateral deposits for gas purchases, and the fair value of derivative instruments (Note 27)
Allowance for Credit Losses
The allowance for credit losses balance changed during 2020 as follows.
(in millions)
Balance, beginning of year
Credit loss expensed
Credit loss deferred (Note 2)
Write-offs, net of recoveries
Foreign exchange
Balance, end of year
The allowance for doubtful accounts balance changed during 2019 as follows.
(in millions)
Balance, beginning of year
Bad debt expensed
Write-offs, net of recoveries
Foreign exchange
Balance, end of year
7.
INVENTORIES
(in millions)
Materials and supplies
Gas and fuel in storage
Coal inventory
2020
297
101
24
422
$
$
2020
(35)
(36)
(6)
14
(1)
(64)
2019
(33)
(21)
18
1
(35)
2019
294
69
31
394
$
$
$
$
$
$
8 1
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
8. REGULATORY ASSETS AND LIABILITIES
(in millions)
Regulatory assets
Deferred income taxes (Notes 3 and 24)
Employee future benefits (Notes 3 and 25)
Deferred energy management costs (1)
Rate stabilization and related accounts (2)
Deferred lease costs (3)
Manufactured gas plant site remediation deferral (Note 16)
Derivatives (Notes 3 and 27)
Generation early retirement costs (4)
Other regulatory assets (5)
Total regulatory assets
Less: Current portion
Long-term regulatory assets
Regulatory liabilities
Deferred income taxes (Notes 3 and 24)
Asset removal cost provision (Note 3)
Rate stabilization and related accounts (2)
Renewable energy surcharge (6)
Energy efficiency liability (7)
Employee future benefits (Notes 3 and 25)
Electric and gas moderator account (8)
ROE complaints liability (Note 2)
Other regulatory liabilities (5)
Total regulatory liabilities
Less: Current portion
Long-term regulatory liabilities
$
2020
1,697
588
334
213
122
107
73
55
399
3,588
(470)
$
3,118
$
1,361
1,206
104
100
83
43
28
16
162
3,103
(441)
$
$
$
2019
1,556
530
279
208
116
81
119
88
406
3,383
(425)
2,958
1,440
1,187
166
94
101
45
45
91
189
3,358
(572)
$
2,662
$
2,786
Deferred Energy Management Costs
Certain regulated subsidiaries provide energy management services to facilitate customer energy efficiency programs where the related
expenditures have been deferred as a regulatory asset and are being amortized, and recovered from customers through rates, on a
straight-line basis over periods ranging from two to 10 years.
Rate Stabilization and Related Accounts
Rate stabilization accounts mitigate the earnings volatility otherwise caused by variability in the cost of fuel, purchased power and natural gas
above or below a forecast or predetermined level, and by weather-driven volume variability. At certain utilities, revenue decoupling
mechanisms minimize the earnings impact of reduced energy consumption as energy efficiency programs are implemented. Resultant
deferrals are recovered from, or refunded to, customers in future rates as approved by the respective regulators.
Related accounts include the annual true-up mechanism at ITC (Note 5).
Deferred Lease Costs
Deferred lease costs at FortisBC Electric primarily relate to the Brilliant Power Purchase Agreement (“BPPA”) (Note 15). The depreciation of the
asset under finance lease and interest expense on the finance lease obligation are not being fully recovered in current customer rates since
these rates only reflect the cash payments required under the BPPA. The annual differences are being deferred as a regulatory asset, which is
expected to be recovered from customers in future rates over the term of the lease, which expires in 2056.
(1)
(2)
(3)
8 2
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
(4)
(5)
(6)
(7)
(8)
Generation Early Retirement Costs
TEP and the co-owners of Navajo Generating Station (“Navajo”) retired Navajo in 2019, with related decommissioning activities continuing
through 2054. TEP also retired Sundt Generating Facility Units 1 and 2 (“Sundt”) in 2019. The ACC approved the recovery of the retirement
costs of Navajo and Sundt over a 10-year period as part of the 2020 Rate Order (Note 2).
Other Regulatory Assets and Liabilities
Comprised of regulatory assets and liabilities individually less than $40 million.
Renewable Energy Surcharge
Under the ACC’s Renewable Energy Standard (“RES”), UNS Energy is required to increase its use of renewable energy each year until it
represents at least 15% of its total annual retail energy requirements by 2025. The cost of carrying out the plan is recovered from retail
customers through a RES surcharge. Any RES surcharge collections above or below the costs incurred to implement the plans are deferred as
a regulatory liability or asset.
The ACC measures RES compliance through Renewable Energy Credits (“RECs”). Each REC represents one kilowatt hour generated from
renewable resources. When UNS Energy purchases renewable energy, the premium paid above the market cost of conventional power equals
the REC recoverable through the RES surcharge. When RECs are purchased, UNS Energy records their cost as long-term other assets (Note 9)
with a corresponding regulatory liability to reflect the obligation to use the RECs for future RES compliance. When RECs are utilized for RES
compliance, energy supply costs and revenue are recognized in an equal amount.
Energy Efficiency Liability
The energy efficiency liability primarily relates to Central Hudson’s Energy Efficiency Program, established to fund environmental policies
associated with energy conservation programs as approved by its regulator.
Electric and Gas Moderator Account
Under Central Hudson’s 2018 three-year rate order certain regulatory assets and liabilities were approved by the PSC for offset, and an electric
and gas moderator account was established, which will be used for future customer rate moderation.
Regulatory assets not earning a return: (i) totalled $1,678 million and $1,510 million as at December 31, 2020 and 2019, respectively; (ii) are primarily
related to deferred income taxes and employee future benefits; and (iii) generally do not represent a past cash outlay as they are offset by
related liabilities that, likewise, do not incur a carrying cost for rate-making purposes. Recovery periods vary or are yet to be determined by the
respective regulators.
8 3
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT 9. OTHER ASSETS
(in millions)
Supplemental Executive Retirement Plan (“SERP”)
Renewable Energy Credits (Note 8)
Equity investment – Belize Electricity
Employee future benefits (Note 25)
Other investments
Operating leases (Note 15)
Deferred compensation plan
Equity Investment – Wataynikaneyap Partnership
Other (1)
(1) Includes the fair value of derivatives (Note 27)
2020
155
106
80
66
66
40
36
12
109
670
$
$
2019
145
99
71
63
43
46
30
12
111
620
$
$
ITC, UNS Energy and Central Hudson provide additional post-employment benefits through SERPs and deferred compensation plans for directors
and officers. The assets held to support these plans are reported separately from the related liabilities (Note 16). Most plan assets are held in trust and
funded mainly through trust-owned life insurance policies and mutual funds. Assets in mutual and money market funds are recorded at fair value on
a recurring basis (Note 27).
10. PROPERTY, PLANT AND EQUIPMENT
Cost
Accumulated
Depreciation
Net Book
Value
$ 11,921
5,546
$
(3,223)
(1,422)
$
8,698
4,124
15,888
2,360
6,441
4,178
2,012
326
(3,413)
(719)
(2,550)
(1,347)
–
–
12,475
1,641
3,891
2,831
2,012
326
$ 48,672
$ (12,674)
$ 35,998
$
11,396
5,277
$
(3,125)
(1,330)
$
8,271
3,947
15,207
2,267
6,380
4,042
1,329
318
(3,293)
(681)
(2,472)
(1,327)
–
–
11,914
1,586
3,908
2,715
1,329
318
$
46,216
$
(12,228)
$
33,988
(in millions)
2020
Distribution
Electric
Gas
Transmission
Electric
Gas
Generation
Other
Assets under construction
Land
2019
Distribution
Electric
Gas
Transmission
Electric
Gas
Generation
Other
Assets under construction
Land
8 4
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
Electric distribution assets are those used to distribute electricity at lower voltages (generally below 69 kilovolts (“kV”)). These assets include poles,
towers and fixtures, low-voltage wires, transformers, overhead and underground conductors, street lighting, meters, metering equipment and other
related equipment. Gas distribution assets are those used to transport natural gas at low pressures (generally below 2,070 kilopascals (“kPa”)) or a
hoop stress of less than 20% of standard minimum yield strength. These assets include distribution stations, telemetry, distribution pipe for mains
and services, meter sets and other related equipment.
Electric transmission assets are those used to transmit electricity at higher voltages (generally at 69 kV and higher). These assets include poles, wires,
switching equipment, transformers, support structures and other related equipment. Gas transmission assets are those used to transport natural gas
at higher pressures (generally at 2,070 kPa and higher) or a hoop stress of 20% or more of standard minimum yield strength. These assets include
transmission stations, telemetry, transmission pipe and other related equipment.
Generation assets are those used to generate electricity. These assets include hydroelectric and thermal generation stations, gas and combustion
turbines, coal-fired generating stations, dams, reservoirs, photovoltaic systems, wind resources and other related equipment.
Other assets include buildings, equipment, vehicles, inventory, information technology assets and Aitken Creek.
As at December 31, 2020, assets under construction were primarily associated with ongoing transmission projects at ITC and the addition of wind-
powered electric generating capacity at UNS Energy.
The cost of PPE under finance lease as at December 31, 2020 was $322 million (2019 – $514 million) and related accumulated depreciation was
$111 million (2019 – $206 million) (Note 15).
Jointly Owned Facilities
UNS Energy and ITC hold undivided interests in jointly owned generating facilities and transmission systems, are entitled to their pro rata share of
the PPE, and are proportionately liable for the associated operating costs and liabilities. As at December 31, 2020, interests in jointly owned facilities
consisted of the following.
(in millions, except as noted)
Transmission Facilities
Springerville Common Facilities (1)
San Juan Unit 1 (“San Juan”)
Springerville Coal Handling Facilities
Four Corners Units 4 and 5 (“Four Corners”)
Gila River Common Facilities
Luna Energy Facility (“Luna”)
Ownership
(%)
1.0–80.0
86.0
50.0
83.0
7.0
50.0
33.3
$
Cost
980
505
370
268
235
108
74
Accumulated
Depreciation
Net Book
Value
$
(381)
(251)
(304)
(121)
(97)
(36)
(2)
$
599
254
66
147
138
72
72
$
2,540
$
(1,192)
$
1,348
(1) In December 2020 TEP purchased an additional 32.2% undivided interest in the Springerville Common Facilities, previously recorded as a finance lease (Note 15). Also in
December 2020, TEP sold a 14% interest in the Springerville Common Facilities.
8 5
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
11. INTANGIBLE ASSETS
(in millions)
2020
Computer software
Land, transmission and water rights
Other
Assets under construction
2019
Computer software
Land, transmission and water rights
Other
Assets under construction
$
Cost
932
898
114
77
$
2,021
$
946
890
115
68
$
2,019
Accumulated
Amortization
$
$
$
$
(524)
(142)
(64)
–
(730)
(576)
(122)
(61)
–
(759)
Net Book
Value
$
408
756
50
77
$
1,291
$
370
768
54
68
$
1,260
Included in the cost of land, transmission and water rights as at December 31, 2020 was $136 million (2019 – $133 million) not subject to amortization.
Amortization expense was $131 million for 2020 (2019 – $125 million). Amortization is estimated to average approximately $81 million for each of the
next five years.
12. GOODWILL
(in millions)
Balance, beginning of year
Foreign currency translation impacts (1)
Balance, end of year
2020
$ 12,004
(212)
$ 11,792
$
2019
12,530
(526)
$
12,004
(1) Relates to the translation of goodwill associated with the acquisitions of ITC, UNS Energy, Central Hudson, Caribbean Utilities and FortisTCI, whose functional currency is
the US dollar
No goodwill impairment was recognized by the Corporation in 2020 or 2019.
13. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
(in millions)
Trade accounts payable
Employee compensation and benefits payable
Dividends payable
Accrued taxes other than income taxes
Interest payable
Customer and other deposits
Gas and fuel cost payable
Fair value of derivatives (Note 27)
Manufactured gas plant site remediation (Note 16)
Employee future benefits (Note 25)
Other
8 6
$
2020
707
248
241
224
215
214
188
56
31
26
171
$
2019
754
229
228
223
212
226
225
83
31
24
167
$
2,321
$
2,402
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
14. LONG-TERM DEBT
(in millions)
Maturity Date
2020
2019
ITC
Secured US First Mortgage Bonds –
4.31% weighted average fixed rate (2019 – 4.46%)
Secured US Senior Notes –
4.00% weighted average fixed rate (2019 – 4.26%)
Unsecured US Senior Notes –
3.61% weighted average fixed rate (2019 – 3.79%)
Unsecured US Shareholder Note –
6.00% fixed rate (2019 – 6.00%)
Unsecured US Term Loan Credit Agreement –
2.35% weighted average fixed rate
UNS Energy
Unsecured US Tax-Exempt Bonds – 4.34% weighted
average fixed and variable rate (2019 – 4.64%)
Unsecured US Fixed Rate Notes –
3.86% weighted average fixed rate (2019 – 4.38%)
Central Hudson
Unsecured US Promissory Notes – 3.94% weighted
average fixed and variable rate (2019 – 4.27%)
FortisBC Energy
Unsecured Debentures –
4.72% weighted average fixed rate (2019 – 4.87%)
FortisAlberta
Unsecured Debentures –
4.49% weighted average fixed rate (2019 – 4.64%)
FortisBC Electric
Secured Debentures –
8.80% fixed rate (2019 – 8.80%)
Unsecured Debentures –
4.87% weighted average fixed rate (2019 – 5.05%)
Other Electric
Secured First Mortgage Sinking Fund Bonds –
5.61% weighted average fixed rate (2019 – 6.14%)
Secured First Mortgage Bonds –
5.66% weighted average fixed rate (2019 – 5.66%)
Unsecured Senior Notes –
4.45% weighted average fixed rate (2019 – 4.45%)
Unsecured US Senior Loan Notes and Bonds –
4.41% weighted average fixed and variable rate (2019 – 4.53%)
Corporate and Other
Unsecured US Senior Notes and Promissory Notes –
3.81% weighted average fixed rate (2019 – 3.80%)
Unsecured Debentures –
6.50% fixed rate (2019 – 6.50%)
Unsecured Senior Notes –
2.85% fixed rate (2019 – 2.85%)
Long-term classification of credit facility borrowings
Fair value adjustment – ITC acquisition
Total long-term debt (Note 27)
Less: Deferred financing costs and debt discounts
Less: Current installments of long-term debt
2024–2055
$
2,755
$
2,624
2040–2055
2022–2043
2028
n/a
2029–2030
2021–2050
923
4,136
253
–
362
2,704
2021–2060
1,078
2026–2050
2,995
2024–2052
2,360
2023
2021–2050
2022–2060
2025–2061
2041–2048
2022–2049
25
785
634
220
152
648
2021–2044
2,685
2039
2023
200
500
980
119
24,514
(147)
(1,254)
747
3,312
258
260
603
1,851
986
2,795
2,185
25
710
571
220
152
645
2,903
200
500
640
133
22,320
(129)
(690)
$ 23,113
$
21,501
8 7
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
14.
LONG-TERM DEBT (cont’d)
Most long-term debt at the Corporation’s regulated utilities is redeemable at the option of the respective utility at the greater of par or a specified
price, together with accrued and unpaid interest. Security, if provided, is typically through a fixed or floating first charge on specific assets of the utility.
The Corporation’s unsecured debentures and senior notes are redeemable at the option of Fortis at the greater of par or a specified price together
with accrued and unpaid interest.
Certain long-term debt agreements have covenants that provide that the Corporation shall not declare, pay or make any dividends or any other
restricted payments if, immediately thereafter, its consolidated debt to consolidated capitalization ratio would exceed 65%.
Long-Term Debt Issuances
(in millions, except as noted)
ITC
Unsecured term loan credit agreement
Unsecured term loan credit agreement (4)
Unsecured senior notes
First mortgage bonds
Secured senior notes
UNS Energy
Unsecured senior notes
Unsecured senior notes
Unsecured senior notes
Central Hudson
Unsecured senior notes
Unsecured senior notes
Unsecured senior notes
Unsecured senior notes
FortisBC Energy
Unsecured debentures
FortisAlberta
Unsecured senior debentures
FortisBC Electric
Unsecured debentures
Newfoundland Power
First mortgage sinking fund bonds
FortisTCI
Unsecured senior notes
Unsecured senior notes
Month
Issued
January
January
May
July
October
April
August
September
May
July
September
November
July
December
May
April
June/October
October/December
Interest
Rate
(%)
Maturity
Amount
($)
Use of
Proceeds
(1)
(5)
2.95
3.13
3.02
4.00
1.50
2.17
3.42
3.62
2.03
2.03
2.54
2.63
3.12
3.61
5.30
3.25
2021
2021
2030
2051
2055
2050
2030
2032
2050
2060
2030
2030
2050
2051
2050
2060
2035
2030
US 75
US 200
US 700
US 180
US 150
US 350
US 300
US 50
US 30
US 30
US 40
US 30
200
175
75
100
US 30
US 10
(2) (3)
(4)
(2) (3) (6)
(2) (3) (7)
(2) (3) (7) (8)
(2) (3)
(7)
(2) (3)
(3)
(3) (7)
(8)
(3) (7)
(7)
(2)
(2)
(2) (3)
(7) (8)
(3)
(1) Floating rate of a one-month LIBOR plus a spread of 0.45%
(2) Repay credit facility borrowings
(3) General corporate purposes
(4) Maximum amount of borrowings under this agreement of US$400 million has been drawn; current period borrowings were used to repay an outstanding commercial
paper balance.
(5) Floating rate of a two-month LIBOR plus a spread of 0.60%
(6) Early redemption of unsecured term loan borrowing of US$400 million
(7) Finance capital expenditures
(8) Repay maturing long-term debt
8 8
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
Long-Term Debt Repayments
The consolidated requirements to meet principal repayments and maturities in each of the next five years and thereafter are as follows.
(in millions)
2021
2022
2023
2024
2025
Thereafter
$
Total
1,254
823
1,786
1,088
484
19,079
$
24,514
In December 2020 Fortis filed a short-form base shelf prospectus with a 25-month life under which it may issue common or preference shares,
subscription receipts or debt securities in an aggregate principal amount of up to $2.0 billion. As at December 31, 2020, $2.0 billion remained
available under the short-form base shelf prospectus.
Credit Facilities
(in millions)
Total credit facilities
Credit facilities utilized:
Short-term borrowings (1)
Long-term debt (including current portion) (2)
Letters of credit outstanding
Credit facilities unutilized
Regulated
Utilities
$
3,700
(132)
(714)
(77)
Corporate
and Other
$
1,881
–
(266)
(53)
2020
$
5,581
2019
$
5,590
(132)
(980)
(130)
(512)
(640)
(114)
$
2,777
$
1,562
$
4,339
$
4,324
(1) The weighted average interest rate was approximately 0.8% (2019 – 3.2%).
(2) The weighted average interest rate was approximately 0.9% (2019 – 2.4%). The current portion was $651 million (2019 – $252 million).
Credit facilities are syndicated primarily with large banks in Canada and the US, with no one bank holding more than approximately 25% of the total
facilities. Approximately $5.3 billion of the total credit facilities are committed facilities with maturities ranging from 2021 through 2025.
8 9
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
14.
LONG-TERM DEBT (cont’d)
Consolidated credit facilities of approximately $5.6 billion as at December 31, 2020 are itemized below.
(in millions)
Unsecured committed revolving credit facilities
Regulated utilities
ITC (1)
UNS Energy
Central Hudson
FortisBC Energy
FortisAlberta
FortisBC Electric
Other Electric
Other Electric
Corporate and Other
Other facilities
Regulated utilities
Central Hudson – uncommitted credit facility
FortisBC Energy – uncommitted credit facility
FortisBC Electric – unsecured demand overdraft facility
Other Electric – unsecured demand facilities
Other Electric – unsecured demand facility and emergency standby loan
Corporate and Other – unsecured non-revolving facility
Amount
($)
US 900
US 500
US 200
700
250
150
190
US 70
1,850
US 30
55
10
20
US 60
30
Maturity
October 2023
October 2022
March 2025
August 2024
August 2024
April 2024
(2)
January 2025
(3)
n/a
March 2022
n/a
n/a
June 2021
n/a
(1) ITC also has a US$400 million commercial paper program, under which US$67 million was outstanding as at December 31, 2020, as reported in short-term borrowings.
(2) $40 million in June 2021, $50 million in February 2022 and $100 million in August 2024
(3) $500 million in April 2021, $50 million in April 2022 and $1.3 billion in July 2024
15. LEASES
The Corporation and its subsidiaries lease office facilities, utility equipment, land, and communication tower space with remaining terms of up to
21 years, with optional renewal terms. Certain lease agreements include rental payments adjusted periodically for inflation or require the payment of
real estate taxes, insurance, maintenance, or other operating expenses associated with the leased premises.
The Corporation’s subsidiaries also have finance leases related to generating facilities with remaining terms of up to 35 years.
Leases were presented on the consolidated balance sheets as follows.
(in millions)
Operating leases
Other assets
Accounts payable and other current liabilities
Other liabilities
Finance leases (1) (2)
Regulatory assets
PPE, net
Accounts payable and other current liabilities
Finance leases
$
$
2020
40
(7)
(33)
122
211
(2)
(331)
$
$
2019
46
(8)
(38)
116
308
(24)
(413)
(1) FortisBC Electric has a finance lease for the BPPA (Note 8), which relates to the sale of the output of the Brilliant hydroelectric plant, and for the Brilliant Terminal Station (“BTS”),
which relates to the use of the station. Both agreements expire in 2056. In exchange for the specified take-or-pay amounts of power, the BPPA requires semi-annual payments
based on a return on capital, which includes the original and ongoing capital cost, and related variable power purchase costs. The BTS requires semi-annual payments based
on a charge related to the recovery of the capital cost of the BTS, and related variable operating costs.
(2) In December 2020 TEP purchased a 32.2% undivided interest in the Springerville Common Facilities, which had previously been leased (Note 10).
9 0
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
The components of lease expense were as follows.
(in millions)
Operating lease cost
Finance lease cost:
Amortization
Interest
Variable lease cost
Total lease cost
As at December 31, 2020, the present value of minimum lease payments was as follows.
2020
10
14
34
20
78
$
$
(in millions)
2021
2022
2023
2024
2025
Thereafter
Less: Imputed interest
Total lease obligations
Less: Current installments
Supplemental lease information was as follows.
(in millions, except as noted)
Weighted average remaining lease term (years)
Operating leases
Finance leases
Weighted average discount rate (%)
Operating leases
Finance leases
Cash payments related to lease liabilities
Operating cash flows used for operating leases
Operating cash flows used for finance leases
Financing cash flows used for finance leases
Investing cash flows used for finance leases
Operating
Leases
Finance
Leases
$
$
8
7
6
4
3
22
50
(10)
40
(7)
33
$
$
33
34
34
34
34
1,056
1,225
(892)
333
(2)
331
2020
10
35
4.0
5.1
(10)
(2)
(25)
(87)
$
See Note 26 for non-cash transactions that resulted in right-of-use assets obtained in exchange for new lease liabilities.
$
2019
10
17
48
39
$
114
$
$
$
Total
41
41
40
38
37
1,078
1,275
(902)
373
(9)
364
2019
10
27
4.1
4.8
(10)
(47)
(16)
(212)
9 1
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
16. OTHER LIABILITIES
(in millions)
Employee future benefits (Note 25)
Customer and other deposits
AROs (Note 3)
Stock-based compensation plans (Note 21)
Manufactured gas plant site remediation (1)
Fair value of derivatives (Note 27)
Mine reclamation obligations (2)
Retail energy contract (3)
Deferred compensation plan (Note 9)
Operating leases
Other
$
2020
905
132
130
86
69
50
47
46
43
33
58
$
2019
832
70
148
83
48
68
43
–
33
38
83
$
1,599
$
1,446
(1)
(2)
(3)
Environmental regulations require Central Hudson to investigate sites at which it or its predecessors once owned and/or operated manufactured
gas plants and, if necessary, remediate those sites. Costs are accrued based on the amounts that can be reasonably estimated. As at
December 31, 2020, an obligation of $96 million was recognized, including a current portion of $27 million recognized in accounts payable
and other current liabilities (Note 13). Central Hudson has notified its insurers that it intends to seek reimbursement where insurance coverage
exists. Differences between actual costs and the associated rate allowances are deferred as a regulatory asset for future recovery (Note 8).
TEP pays ongoing reclamation costs related to two coal mines that supply generating facilities in which it has an ownership interest but
does not operate. Costs are deferred as a regulatory asset and recovered from customers as permitted by the regulator. TEP’s share of the
reclamation costs is estimated to be $61 million upon expiry of the coal agreements between 2022 and 2031. The present value of the
estimated future liability is shown in the table above.
FortisAlberta entered into an eight-year agreement with an existing retail energy provider to continue to act as its default retailer to eligible
customers under the regulated retail option. As part of this agreement FortisAlberta received an upfront payment in 2020 which will be
amortized to earnings over the life of the agreement.
17. COMMON SHARES
During 2019 the Corporation issued approximately 4.1 million common shares under its at-the-market common equity program at an average price
of $52.16 per share. The gross proceeds of $212 million ($209 million net of commissions) were used primarily to fund capital expenditures.
Also during 2019 the Corporation issued approximately 22.8 million common shares representing gross proceeds of $1,190 million ($1,167 million net
of commissions) at a price of $52.15 per share. The net proceeds were used to redeem US$500 million of its outstanding 2.10% unsecured notes due
on October 4, 2021, to repay credit facility borrowings, and for general corporate purposes.
18. EARNINGS PER COMMON SHARE
Diluted earnings per common share (“EPS”) was calculated using the treasury stock method for options.
2020
Net Earnings Weighted
Average
to Common
Shareholders
Shares
(# millions)
($ millions)
EPS
($)
464.8
0.6
$ 2.60
–
Net Earnings
to Common
Shareholders
($ millions)
$ 1,655
–
2019
Weighted
Average
Shares
(# millions)
436.8
0.7
EPS
($)
3.79
–
$
465.4
$ 2.60
$ 1,655
437.5
$
3.78
Basic EPS
Potential dilutive effect of stock options
Diluted EPS
$ 1,209
–
$ 1,209
9 2
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
19. PREFERENCE SHARES
Authorized
An unlimited number of first preference shares and second preference shares, without nominal or par value.
Issued and Outstanding
2020
2019
First Preference Shares
Series F
Series G
Series H
Series I
Series J
Series K
Series M
Number
of Shares
(in thousands)
5,000
9,200
7,665
2,335
8,000
10,000
24,000
66,200
Amount
(in millions)
$
122
225
188
57
196
244
591
$
1,623
Number
of Shares
(in thousands)
5,000
9,200
7,025
2,975
8,000
10,000
24,000
66,200
Amount
(in millions)
$
122
225
172
73
196
244
591
$
1,623
Characteristics of the first preference shares are as follows.
First Preference Shares (1) (2)
Perpetual fixed rate
Series F
Series J (3)
Fixed rate reset (4) (5)
Series G
Series H (6)
Series K
Series M
Floating rate reset (5) (7)
Series I
Series L
Series N
Initial
Yield
(%)
Annual
Dividend
($)
Reset
Dividend
Yield
(%)
Redemption
Right to
and/or Redemption Convert on
a One-For-
Value
One Basis
($)
Conversion
Option Date
4.90
4.75
5.25
4.25
4.00
4.10
2.10
–
–
1.2250
1.1875
1.0983
0.4588
0.9823
0.9783
–
–
–
–
–
Currently Redeemable
Currently Redeemable
2.13
1.45
2.05
2.48
1.45
–
–
September 1, 2023
June 1, 2025
March 1, 2024
December 1, 2024
June 1, 2025
–
–
25.00
25.25
25.00
25.00
25.00
25.00
25.00
–
–
–
–
–
Series I
Series L
Series N
Series H
Series K
Series M
(1) Holders are entitled to receive a fixed or floating cumulative quarterly cash dividend as and when declared by the Board of Directors of the Corporation, payable in equal
installments on the first day of each quarter.
(2) On or after the specified redemption dates, the Corporation has the option to redeem for cash the outstanding first preference shares, in whole or in part, at the specified per
share redemption value plus all accrued and unpaid dividends up to but excluding the dates fixed for redemption, and in the case of the first preference shares that reset, on
every fifth anniversary date thereafter.
(3) First Preference Shares, Series J are redeemable as of December 1, 2021 and thereafter at $25.00 per share.
(4) On the redemption and/or conversion option date, and on each five-year anniversary thereafter, the reset annual dividend per share will be determined by multiplying
$25.00 per share by the annual fixed dividend rate, which is the sum of the five-year Government of Canada Bond Yield on the applicable reset date, plus the applicable reset
dividend yield.
(5) On each conversion option date, the holders have the option, subject to certain conditions, to convert any or all of their shares into an equal number of Cumulative Redeemable
first preference shares of a specified series.
(6) The annual dividend per share for the First Preference Shares, Series H was reset from $0.6250 to $0.4588 for the five-year period from June 1, 2020 up to but excluding
June 1, 2025.
(7) The floating quarterly dividend rate will be reset every quarter based on the then current three-month Government of Canada Treasury Bill rate plus the applicable reset
dividend yield.
On June 1, 2020, 267,341 First Preference Shares, Series H were converted on a one-for-one basis into First Preference Shares, Series I, and 907,577
First Preference Shares, Series I were converted on a one-for-one basis into First Preference Shares, Series H.
On the liquidation, dissolution or winding-up of Fortis, holders of common shares are entitled to participate ratably in any distribution of assets of
Fortis, subject to the rights of holders of first and second preference shares, and any other class of shares of the Corporation entitled to receive the
assets of the Corporation on such a distribution, in priority to or ratably with the holders of the common shares.
9 3
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
20. ACCUMULATED OTHER COMPREHENSIVE INCOME
(in millions)
Opening Balance
Net Change
Ending Balance
2020
Unrealized foreign currency translation gains (losses)
Net investments in foreign operations
Hedges of net investments in foreign operations
Income tax expense
Other
Cash flow hedges (Note 27)
Unrealized employee future benefits losses (Note 25)
Income tax recovery
$
713
(359)
(3)
351
17
(38)
6
(15)
$
(336)
60
(3)
(279)
(21)
(11)
9
(23)
Accumulated other comprehensive income
$
336
$
(302)
2019
Unrealized foreign currency translation gains (losses)
Net investments in foreign operations
Hedges of net investments in foreign operations
Income tax recovery (expense)
Other
Cash flow hedges (Note 27)
Unrealized employee future benefits losses (Note 25)
Income tax recovery
$
1,470
(544)
10
936
11
(20)
1
(8)
$
(757)
185
(13)
(585)
6
(18)
5
(7)
$
$
$
377
(299)
(6)
72
(4)
(49)
15
(38)
34
713
(359)
(3)
351
17
(38)
6
(15)
Accumulated other comprehensive income
$
928
$
(592)
$
336
9 4
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
21. STOCK-BASED COMPENSATION PLANS
Stock Options
Officers and certain key employees of Fortis and its subsidiaries are eligible for grants of options to purchase common shares of the Corporation.
Options are exercisable for a period of 10 years from the grant date, expire no later than three years after the death or retirement of the optionee, and
vest evenly over a four-year period on each anniversary of the grant date.
The following options were granted in 2020 and 2019.
Options granted (in thousands)
Exercise price ($) (1)
Grant date fair value ($)
Valuation assumptions:
Dividend yield (%) (2)
Expected volatility (%) (3)
Risk-free interest rate (%) (4)
Weighted average expected life (years) (5)
2020
686
58.40
4.20
3.7
15.8
1.2
5.2
2019
852
47.57
3.70
3.8
15.2
1.8
5.6
(1) Five-day VWAP immediately preceding the grant date
(2) Reflects average annual dividend yield up to the grant date and the weighted average expected life of the options
(3) Reflects historical experience over a period equal to the weighted average expected life of the options
(4) Government of Canada benchmark bond yield at the grant date that covers the weighted average expected life of the options
(5) Reflects historical experience
The following table summarizes information related to stock options for 2020.
(in thousands, except as noted)
Options outstanding, beginning of year
Granted
Exercised
Vested
Cancelled/Forfeited
Options outstanding, end of year
Options vested, end of year (2)
Total Options
Non-vested Options (1)
Number of
Options
3,418
686
(825)
n/a
(17)
3,262
1,490
Weighted
Average
Exercise
Price
$
$
$
$
$
$
41.18
58.40
39.21
n/a
50.02
45.26
39.40
Weighted
Average
Grant Date
Fair Value
$
$
$
$
$
3.43
4.20
n/a
3.25
3.79
3.81
Number of
Options
1,910
686
n/a
(807)
(17)
1,772
(1) As at December 31, 2020, there was $7 million of unrecognized compensation expense related to stock options not yet vested, which is expected to be recognized over
a weighted average period of approximately three years.
(2) As at December 31, 2020, the weighted average remaining term of vested options was six years with an aggregate intrinsic value of $19 million.
The following table summarizes additional stock option information.
(in millions)
Stock options exercised:
Cash received for exercise price
Intrinsic value realized by employees
2020
$
32
15
2019
51
22
$
9 5
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
21.
STOCK-BASED COMPENSATION PLANS (cont’d)
DSU Plan
Directors of the Corporation who are not officers are eligible for grants of DSUs representing the equity portion of their annual compensation.
Directors can further elect to receive credit for their quarterly cash retainer in a notional account of DSUs in lieu of cash. The Corporation may also
determine that special circumstances justify the grant of additional DSUs to a director.
Each DSU vests at the grant date, has an underlying value equivalent to that of one common share of the Corporation, is entitled to commensurate
notional common share dividends, and is settled in cash.
The following table summarizes information related to DSUs.
Number of units (in thousands)
Beginning of year
Granted
Notional dividends reinvested
Paid out
End of year
2020
165
25
6
(49)
147
2019
177
29
6
(47)
165
The accrued liability has been recognized at the respective December 31st VWAP (Note 3) and included in long-term other liabilities (Note 16). The
accrued liability, compensation expense and cash payout were not material for 2020 or 2019.
PSU Plans
Senior management of the Corporation and its subsidiaries, and all ITC employees, are eligible for grants of PSUs representing a component of their
long-term compensation.
Each PSU vests over a three-year period, has an underlying value equivalent to that of one common share of the Corporation, is entitled to
commensurate notional common share dividends, and is settled in cash. At the end of the three-year vesting period, cash payouts are the product
of: (i) the numbers of units vested; (ii) the VWAP of the Corporation’s common shares for the five trading days prior to the vesting date; and (iii) a
payout percentage that may range from 0% to 200%.
The payout percentage is based on the Corporation’s performance over the three-year vesting period, mainly determined by: (i) the Corporation’s
total shareholder return as compared to a predefined peer group of companies; and (ii) the Corporation’s cumulative EPS, or for certain subsidiaries
the Company’s cumulative net income, as compared to the target established at the time of the grant.
The following table summarizes information related to PSUs.
Number of units (in thousands)
Beginning of year
Granted
Notional dividends reinvested
Paid out
Cancelled/forfeited
End of year
Additional information (in millions)
Compensation expense recognized
Compensation expense unrecognized (1)
Cash payout
Accrued liability as at December 31 (2)
Aggregate intrinsic value as at December 31 (3)
2020
2,118
586
71
(735)
(64)
1,976
58
32
54
108
140
$
2019
1,763
690
73
(357)
(51)
2,118
74
35
16
106
141
$
(1) Relates to unvested PSUs and is expected to be recognized over a weighted average period of two years
(2) Recognized at the respective December 31st VWAP and included in accounts payable and other current liabilities and in long-term other liabilities (Notes 13 and 16)
(3) Relates to outstanding PSUs and reflects a weighted average contractual life of one year
9 6
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
RSU Plans
Senior management of the Corporation and its subsidiaries, and all ITC employees, are eligible for grants of RSUs representing a component of
their long-term compensation.
Each RSU vests over a three-year period or immediately upon retirement eligibility of the holder, has an underlying value equivalent to that of one
common share of the Corporation, is entitled to commensurate notional common share dividends, and is settled in cash or, beginning with the 2020
grant, common shares of the Corporation. RSUs issued in 2020 may be settled in cash, common shares, or an equal proportion of cash and common
shares depending on an executive’s settlement election and whether their share ownership requirements have been met.
The following table summarizes information related to RSUs.
Number of units (in thousands)
Beginning of year
Granted
Notional dividends reinvested
Paid out
Cancelled/forfeited
End of year
Additional information (in millions)
Compensation expense recognized
Compensation expense unrecognized (1)
Cash payout
Accrued liability as at December 31 (2)
Aggregate intrinsic value as at December 31 (3)
2020
1,050
356
37
(355)
(40)
1,048
20
15
19
39
54
$
2019
717
429
35
(92)
(39)
1,050
24
17
4
39
56
$
(1) Relates to unvested RSUs and is expected to be recognized over a weighted average period of two years
(2) Recognized at the respective December 31st VWAP and included in accounts payable and other current liabilities and in long-term other liabilities (Notes 13 and 16)
(3) Relates to outstanding RSUs and reflects a weighted average contractual life of one year
22. DISPOSITION
On April 16, 2019, Fortis sold its 51% ownership interest in the 335 MW Waneta Expansion for proceeds of $995 million. A gain on disposition of
$577 million ($484 million after tax), net of expenses, was recognized in the Corporate and Other segment, and the related non-controlling interest
was removed from equity.
Up to the date of disposition, excluding the gain as noted above, the Waneta Expansion contributed $17 million to earnings before income tax
expense, of which Fortis’ share was 51%.
23. OTHER INCOME, NET
(in millions)
Equity component of AFUDC
Equity income
Derivative gains
Interest income
Gain on repayment of debt
Other
$
2020
78
20
13
13
–
30
$
2019
74
(1)
17
16
11
21
$
154
$
138
9 7
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
24. INCOME TAXES
Deferred Income Tax Assets and Liabilities
The significant components of deferred income tax assets and liabilities consisted of the following.
(in millions)
Gross deferred income tax assets
Regulatory liabilities
Tax loss and credit carryforwards
Employee future benefits
Unrealized foreign exchange losses on long-term debt (1)
Other
Valuation allowance (1)
Net deferred income tax asset
Gross deferred income tax liabilities
PPE
Regulatory assets
Intangible assets
Net deferred income tax liability
$
2020
527
494
175
33
83
1,312
(22)
$
1,290
$
(4,253)
(263)
(118)
(4,634)
$
(3,344)
$
$
$
2019
588
532
165
40
88
1,413
(22)
1,391
(3,986)
(269)
(105)
(4,360)
$
(2,969)
(1) These deferred income tax assets can be utilized only to the extent that the Corporation has capital gains to offset the underlying capital losses. Management believes that it is
more likely than not that a $22 million shortfall exists in this regard and, therefore, the Corporation has recognized a $22 million valuation allowance. Management believes that,
based on its historical pattern of taxable income, Fortis will generate the necessary income in the future to realize all other deferred income tax assets.
Unrecognized Tax Benefits
(in millions)
Beginning of year
Additions related to current year
Adjustments related to prior years
End of year
2020
36
3
(6)
33
$
$
2019
38
5
(7)
36
$
$
Unrecognized tax benefits, if recognized, would reduce income tax expense by $1 million in 2020. Fortis has not recognized interest expense in 2020
and 2019 related to unrecognized tax benefits.
Income Tax Expense
(in millions)
Canadian
Earnings before income tax expense
Current income tax
Deferred income tax
Total Canadian
Foreign
Earnings before income tax expense
Current income tax
Deferred income tax
Total Foreign
Income tax expense
2020
2019
$
333
$
901
20
(16)
4
$
49
42
91
$
$
1,287
$
1,240
(15)
242
227
231
$
$
(7)
205
198
289
$
$
Income tax expense differs from the amount that would be expected to be generated by applying the enacted combined Canadian federal and
provincial statutory income tax rate to earnings before income tax expense.
9 8
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
The following is a reconciliation of consolidated statutory taxes to consolidated effective taxes.
(in millions, except as noted)
Earnings before income tax expense
Combined Canadian federal and provincial statutory income tax rate (%)
Expected federal and provincial taxes at statutory rate
Decrease resulting from:
Foreign and other statutory rate differentials
Difference between gain on sale for accounting and amounts calculated for tax purposes
Release of valuation allowance
AFUDC
Effects of rate-regulated accounting:
Difference between depreciation claimed for income tax and accounting purposes
Items capitalized for accounting purposes but expensed for income tax purposes
Other
Income tax expense
Effective tax rate (%)
Income Tax Carryforwards
(in millions)
Canadian
Capital loss
Non-capital loss
Other tax credits
Unrecognized
Foreign
Federal and state net operating loss
Other tax credits
Total income tax carryforwards recognized
2020
1,620
30.0
486
$
$
(145)
–
–
(20)
(56)
(26)
(8)
231
14.3
$
$
$
$
2019
2,141
28.5
610
(124)
(73)
(33)
(16)
(48)
(17)
(10)
289
13.5
Expiring Year
2020
n/a
2035–2040
2026–2040
$
27
200
2
229
(26)
203
2021–2040
2022–2040
2,971
34
3,005
$
3,208
The Corporation and certain of its subsidiaries are subject to taxation in Canada, the United States and other foreign jurisdictions. The material
jurisdictions in which the Corporation is subject to potential income tax compliance examinations include the United States (Federal, Arizona,
Kansas, Iowa, Michigan, Minnesota and New York) and Canada (Federal and British Columbia). The Corporation’s 2013 to 2020 taxation years are still
open for audit in Canadian jurisdictions, and its 2011 to 2020 taxation years are still open for audit in United States jurisdictions.
9 9
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
25. EMPLOYEE FUTURE BENEFITS
For defined benefit pension and OPEB plans, the benefit obligation and fair value of plan assets are measured as at December 31.
For the Corporation’s Canadian and Caribbean subsidiaries, actuarial valuations to determine funding contributions for pension plans are required
at least every three years. The most recent valuations were as of December 31, 2017 for the Corporation; December 31, 2018 for FortisBC Energy
and FortisBC Electric (plan covering unionized employees); December 31, 2019 for the remaining FortisBC Electric plans, Newfoundland Power,
FortisAlberta and FortisOntario; and December 31, 2020 for Caribbean Utilities.
ITC, UNS Energy and Central Hudson perform annual actuarial valuations as their funding requirements are based on maintaining minimum annual
targets, all of which have been met.
The Corporation’s investment policy is to ensure that the defined benefit pension and OPEB plan assets, together with expected contributions, are
invested in a prudent and cost-effective manner to optimally meet the liabilities of the plans. The investment objective is to maximize returns in
order to manage the funded status of the plans and minimize the Corporation’s cost over the long term, as measured by both cash contributions
and recognized expense.
Allocation of Plan Assets
(weighted average %)
Equities
Fixed income
Real estate
Cash and other
Fair Value of Plan Assets
(in millions)
2020
Equities
Fixed income
Real estate
Private equities
Cash and other
2019
Equities
Fixed income
Real estate
Private equities
Cash and other
2020 Target
Allocation
46
47
6
1
100
2020
48
45
6
1
100
Level 1 (1)
Level 2 (1)
Level 3 (1)
$
$
$
$
713
197
–
–
8
918
622
171
–
–
8
801
$
1,163
1,580
17
–
17
$
2,777
$
1,050
1,445
16
–
10
$
2,521
$
$
$
$
–
–
204
20
–
224
–
–
207
22
–
229
(1) See Note 27 for a description of the fair value hierarchy.
The following table reconciles the changes in the fair value of plan assets that have been measured using Level 3 inputs.
(in millions)
Balance, beginning of year
(Loss) return on plan assets
Foreign currency translation
Purchases, sales and settlements
Balance, end of year
1 0 0
2020
229
(2)
(1)
(2)
224
$
$
2019
47
46
6
1
100
Total
1,876
1,777
221
20
25
$
$
3,919
$
$
$
$
1,672
1,616
223
22
18
3,551
2019
215
19
(2)
(3)
229
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
Funded Status
(in millions)
(1)
Change in benefit obligation
Balance, beginning of year
Service costs
Employee contributions
Interest costs
Benefits paid
Actuarial losses
Past service (credits) costs/plan amendments
Foreign currency translation
Balance, end of year (2) (3)
Change in value of plan assets
Balance, beginning of year
Actual return on plan assets
Benefits paid
Employee contributions
Employer contributions
Foreign currency translation
Balance, end of year (4)
Funded status
Balance sheet presentation
Long-term assets (Note 9)
Current liabilities (Note 13)
Long-term liabilities (Note 16)
Defined Benefit
Pension Plans
$
2020
3,632
98
17
113
(162)
350
–
(53)
$
3,995
$
$
$
$
3,208
444
(155)
17
62
(48)
3,528
(467)
58
(13)
(512)
$
(467)
2019
3,207
77
16
124
(144)
439
1
(88)
3,632
2,830
523
(138)
18
53
(78)
3,208
(424)
46
(12)
(458)
(424)
$
$
$
$
$
$
$
OPEB Plans
2020
2019
$
$
$
$
$
$
712
32
2
22
(27)
62
(3)
(11)
789
343
55
(27)
2
28
(10)
391
(398)
8
(13)
(393)
$
(398)
$
$
$
$
$
$
$
655
27
2
25
(27)
46
4
(20)
712
293
62
(27)
2
28
(15)
343
(369)
17
(12)
(374)
(369)
(1) Amounts reflect projected benefit obligation for defined benefit pension plans and accumulated benefit obligation for OPEB plans.
(2) The accumulated benefit obligation, which excludes assumptions about future salary levels, for defined benefit pension plans was $3,679 million as at December 31, 2020
(2019 – $3,352 million).
(3) The increases in the defined benefit pension and OPEB obligations were driven by the decrease in discount rates due to lower interest rates.
(4) The increases in the defined benefit pension and OPEB plan assets were driven by market returns.
For those defined benefit pension plans for which the projected benefit obligation exceeded the fair value of plan assets as at December 31, 2020,
the obligation was $3,290 million compared to plan assets of $2,777 million (2019 – $2,971 million and $2,511 million, respectively).
For those defined benefit pension plans for which the accumulated benefit obligation exceeded the fair value of plan assets as at December 31, 2020,
the obligation was $3,037 million compared to plan assets of $2,741 million (2019 – $2,752 million and $2,478 million, respectively).
For those OPEB plans for which the accumulated benefit obligation exceeded the fair value of plan assets as at December 31, 2020, the obligation
was $589 million compared to plan assets of $183 million (2019 – $537 million and $151 million, respectively).
1 0 1
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
25.
EMPLOYEE FUTURE BENEFITS (cont’d)
Net Benefit Cost (1)
(in millions)
Service costs
Interest costs
Expected return on plan assets
Amortization of actuarial losses (gains)
Amortization of past service credits/plan amendments
Regulatory adjustments
Defined Benefit
Pension Plans
$
2020
98
113
(176)
33
(1)
–
$
67
2019
77
124
(161)
24
(1)
2
65
$
$
OPEB Plans
2020
2019
$
$
32
22
(19)
(5)
(2)
4
32
$
$
27
25
(16)
(4)
(7)
3
28
(1) The non-service cost components of net periodic benefit cost are included in other income, net in the consolidated statements of earnings.
The following table summarizes the accumulated amounts of net benefit cost that have not yet been recognized in earnings or comprehensive
income and shows their classification on the consolidated balance sheets.
(in millions)
Unamortized net actuarial losses (gains)
Unamortized past service costs
Income tax recovery
Accumulated other comprehensive income
Net actuarial losses (gains)
Past service credits
Other regulatory deferrals
Regulatory assets (Note 8)
Regulatory liabilities (Note 8)
Net regulatory assets (liabilities)
Defined Benefit
Pension Plans
OPEB Plans
2020
2019
2020
2019
$
$
$
$
$
$
42
1
(10)
33
517
(7)
13
523
523
–
523
$
$
$
$
$
$
32
1
(8)
25
486
(9)
15
492
492
–
492
$
$
$
$
$
$
(1)
7
(1)
5
12
(8)
18
22
65
(43)
22
$
$
$
$
$
$
(2)
7
(1)
4
(18)
(8)
19
(7)
38
(45)
(7)
1 0 2
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
The following table summarizes the components of net benefit cost recognized in comprehensive income or as regulatory assets.
(in millions)
Current year net actuarial losses
Past service costs/plan amendments
Amortization of actuarial losses
Foreign currency translation
Income tax recovery
Total recognized in comprehensive income
Current year net actuarial losses
Past service costs (credits)/plan amendments
Amortization of actuarial (losses) gains
Amortization of past service (costs) credits
Foreign currency translation
Regulatory adjustments
Total recognized in regulatory assets
Significant Assumptions
(weighted average %)
Discount rate during the year (1)
Discount rate as at December 31
Expected long-term rate of return on plan assets (2)
Rate of compensation increase
Health care cost trend increase as at December 31 (3)
Defined Benefit
Pension Plans
OPEB Plans
2020
2019
2020
2019
$
$
$
$
9
–
1
–
(2)
8
69
–
(31)
2
(7)
(2)
31
$
$
$
$
Defined Benefit
Pension Plans
2020
3.16
2.63
5.52
3.34
–
11
–
1
1
(5)
8
64
–
(23)
(1)
(10)
–
30
2019
4.05
3.20
5.78
3.33
–
$
$
$
$
1
–
–
–
–
1
25
(3)
5
3
–
(1)
29
OPEB Plans
2020
3.22
2.64
5.28
–
4.61
$
$
$
$
–
5
–
–
–
5
3
–
4
8
–
(8)
7
2019
4.10
3.25
5.50
–
4.62
(1) ITC and UNS use the split discount rate methodology for determining current service and interest costs. All other subsidiaries use the single discount rate approach.
(2) Developed by management using best estimates of expected returns, volatilities and correlations for each class of asset. Best estimates are based on historical performance,
future expectations and periodic portfolio rebalancing among the diversified asset classes.
(3) The projected 2021 weighted average health care cost trend rate is 5.91% and is assumed to decrease over the next 11 years to the weighted average ultimate health care cost
trend rate of 4.61% in 2031 and thereafter.
Expected Benefit Payments
(in millions)
2021
2022
2023
2024
2025
2026–2030
Defined Benefit
Pension Payments
OPEB
Payments
$
163
165
170
174
180
984
$
27
28
30
31
32
174
During 2021 the Corporation expects to contribute $49 million for defined benefit pension plans and $33 million for OPEB plans.
In 2020 the Corporation expensed $42 million (2019 – $39 million) related to defined contribution pension plans.
1 0 3
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
26. SUPPLEMENTARY CASH FLOW INFORMATION
(in millions)
Cash paid (received) for
Interest
Income taxes
Change in working capital
Accounts receivable and other current assets
Prepaid expenses
Inventories
Regulatory assets – current portion
Accounts payable and other current liabilities
Regulatory liabilities – current portion
Non-cash investing and financing activities
Accrued capital expenditures
Common share dividends reinvested
Contributions in aid of construction
Right-of-use assets obtained in exchange for operating lease liabilities
Exercise of stock options into common shares
Finance leases
$
$
$
$
2020
1,027
(26)
(84)
(15)
(36)
(49)
(100)
(150)
(434)
400
114
13
3
3
2
$
$
$
$
2019
1,007
(37)
1
(8)
(13)
(75)
(8)
(65)
(168)
382
299
15
55
5
88
27. FAIR VALUE OF FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Derivatives
The Corporation generally limits the use of derivatives to those that qualify as accounting, economic or cash flow hedges, or those that are approved
for regulatory recovery.
The Corporation records all derivatives at fair value, with certain exceptions including those derivatives that qualify for the normal purchase and
normal sale exception. Fair values reflect estimates based on current market information about the derivatives as at the balance sheet dates.
The estimates cannot be determined with precision as they involve uncertainties and matters of judgment and, therefore, may not be relevant
in predicting the Corporation’s future consolidated earnings or cash flow.
Cash flow associated with the settlement of all derivatives is included in operating activities on the consolidated statements of cash flows.
Energy Contracts Subject to Regulatory Deferral
UNS Energy holds electricity power purchase contracts, customer supply contracts and gas swap contracts to reduce its exposure to energy price
risk. Fair values are measured primarily under the market approach using independent third-party information, where possible. When published
prices are not available, adjustments are applied based on historical price curve relationships, transmission costs and line losses.
Central Hudson holds swap contracts for electricity and natural gas to minimize price volatility by fixing the effective purchase price. Fair values are
measured using forward pricing provided by independent third-party information.
FortisBC Energy holds gas supply contracts to fix the effective purchase price of natural gas. Fair values reflect the present value of future cash flows
based on published market prices and forward natural gas curves.
Unrealized gains or losses associated with changes in the fair value of these energy contracts are deferred as a regulatory asset or liability for recovery
from, or refund to, customers in future rates, as permitted by the regulators. As at December 31, 2020, unrealized losses of $73 million (2019 – $119 million)
were recognized as regulatory assets and unrealized gains of $17 million (2019 – $2 million) were recognized as regulatory liabilities.
1 0 4
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
Energy Contracts Not Subject to Regulatory Deferral
UNS Energy holds wholesale trading contracts to fix power prices and realize potential margin, of which 10% of any realized gains is shared with
customers through rate stabilization accounts. Fair values are measured using a market approach incorporating, where possible, independent
third-party information.
Aitken Creek holds gas swap contracts to manage its exposure to changes in natural gas prices, capture natural gas price spreads, and manage the
financial risk posed by physical transactions. Fair values are measured using forward pricing from published market sources.
Unrealized gains or losses associated with changes in the fair value of these energy contracts are recognized in revenue and were not material for
2020 and 2019.
Total Return Swaps
The Corporation holds total return swaps to manage the cash flow risk associated with forecast future cash settlements of certain stock-based
compensation obligations. The swaps have a combined notional amount of $113 million and terms of one to three years expiring at varying dates
through January 2023. Fair value is measured using an income valuation approach based on forward pricing curves. Unrealized gains and losses
associated with changes in fair value are recognized in other income, net and were not material for 2020 and 2019.
Foreign Exchange Contracts
The Corporation holds US dollar-denominated foreign exchange contracts to help mitigate exposure to foreign exchange rate volatility. The
contracts expire at varying dates through February 2022 and have a combined notional amount of $245 million. Fair value was measured using
independent third-party information. Unrealized gains and losses associated with changes in fair value are recognized in other income, net and were
not material for 2020 and 2019.
Interest Rate Swaps
ITC entered into forward-starting interest rate swaps to manage the interest rate risk associated with planned borrowings. The swaps, which had a
combined notional value of $611 million, were terminated in May 2020 with the issuance of US$700 million senior notes. Realized losses of $31 million
were recognized in other comprehensive income and are being reclassified to earnings as a component of interest expense over five years.
Other Investments
ITC, UNS Energy and Central Hudson hold investments in trust associated with supplemental retirement benefit plans for select employees. These
investments consist of mutual funds and money market accounts, which are recorded at fair value based on quoted market prices in active markets.
Gains and losses are recognized in other income, net and were not material for 2020 and 2019.
1 0 5
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT 27.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (cont’d)
Recurring Fair Value Measures
The following table presents derivative assets and liabilities that are accounted for at fair value on a recurring basis.
(in millions)
Level 1 (1)
Level 2 (1)
Level 3 (1)
Total
As at December 31, 2020
Assets
Energy contracts subject to regulatory deferral (2) (3)
Energy contracts not subject to regulatory deferral (2)
Foreign exchange contracts and total return swaps (2)
Other investments (4)
Liabilities
Energy contracts subject to regulatory deferral (3) (5)
Energy contracts not subject to regulatory deferral (5)
As at December 31, 2019
Assets
Energy contracts subject to regulatory deferral (2) (3)
Energy contracts not subject to regulatory deferral (2)
Foreign exchange contracts, interest rate and total
return swaps (2)
Other investments (4)
Liabilities
Energy contracts subject to regulatory deferral (3) (5)
Energy contracts not subject to regulatory deferral (5)
$
$
$
$
$
$
$
$
–
–
16
126
142
–
–
–
–
–
14
121
135
(1)
–
(1)
$
$
$
$
$
$
$
$
38
6
–
–
44
(94)
(12)
(106)
22
8
4
–
34
(138)
(12)
(150)
$
$
$
$
$
$
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
$
$
$
$
$
$
$
38
6
16
126
186
(94)
(12)
(106)
22
8
18
121
169
(139)
(12)
(151)
(1) Under the hierarchy, fair value is determined using: (i) Level 1 – unadjusted quoted prices in active markets; (ii) Level 2 – other pricing inputs directly or indirectly observable in
the marketplace; and (iii) Level 3 – unobservable inputs, used when observable inputs are not available. Classifications reflect the lowest level of input that is significant to the
fair value measurement.
(2) Included in accounts receivable and other current assets or other assets
(3) Unrealized gains and losses arising from changes in fair value of these contracts are deferred as a regulatory asset or liability for recovery from, or refund to, customers in future
rates as permitted by the regulators, with the exception of long-term wholesale trading contracts and certain gas swap contracts.
(4) Included in other assets
(5) Included in accounts payable and other current liabilities or other liabilities
The Corporation has elected gross presentation for its derivative contracts under master netting agreements and collateral positions, which apply
only to its energy contracts. The following table presents the potential offset of counterparty netting.
Gross Amount
Recognized in
Balance Sheet
Counterparty
Netting of
Energy Contracts
Cash Collateral
Received/Posted
Net Amount
$
$
44
(106)
30
(151)
$
$
26
(26)
22
(22)
$
$
10
(9)
10
(2)
$
$
8
(71)
(2)
(127)
(in millions)
As at December 31, 2020
Derivative assets
Derivative liabilities
As at December 31, 2019
Derivative assets
Derivative liabilities
1 0 6
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
Volume of Derivative Activity
As at December 31, 2020, the Corporation had various energy contracts that will settle on various dates through 2029. The volumes related to
electricity and natural gas derivatives are outlined below.
Energy contracts subject to regulatory deferral (1)
Electricity swap contracts (GWh)
Electricity power purchase contracts (GWh)
Gas swap contracts (PJ)
Gas supply contract premiums (PJ)
Energy contracts not subject to regulatory deferral (1)
Wholesale trading contracts (GWh)
Gas swap contracts (PJ)
(1) GWh means gigawatt hours and PJ means petajoules
Credit Risk
2020
522
2,781
156
203
1,588
36
2019
628
3,198
168
241
1,855
43
For cash equivalents, accounts receivable and other current assets, and long-term other receivables, credit risk is generally limited to the carrying
value on the consolidated balance sheets. The Corporation’s subsidiaries generally have a large and diversified customer base, which minimizes the
concentration of credit risk. Policies in place to minimize credit risk include requiring customer deposits, prepayments and/or credit checks for certain
customers, performing disconnections and/or using third-party collection agencies for overdue accounts. As a result of the impact of the COVID-19
pandemic, certain of the Corporation’s utilities have temporarily suspended non-payment disconnects, delayed customer rate increases and deferred
the recovery of costs (Note 2). The Corporation has seen an increase in accounts receivable and, accordingly, its allowance for credit losses during
2020 (Note 6).
ITC has a concentration of credit risk as approximately 70% of its revenue is derived from three customers. The customers have investment-grade
credit ratings and credit risk is further managed by MISO by requiring a letter of credit or cash deposit equal to the credit exposure, which is
determined by a credit-scoring model and other factors.
FortisAlberta has a concentration of credit risk as distribution service billings are to a relatively small group of retailers. Credit risk is managed by
obtaining from the retailers either a cash deposit, letter of credit, an investment-grade credit rating, or a financial guarantee from an entity with an
investment-grade credit rating.
UNS Energy, Central Hudson, FortisBC Energy, Aitken Creek and the Corporation may be exposed to credit risk in the event of non-performance
by counterparties to derivatives. Credit risk is managed by net settling payments, when possible, and dealing only with counterparties that have
investment-grade credit ratings. At UNS Energy and Central Hudson, certain contractual arrangements require counterparties to post collateral.
The value of derivatives in net liability positions under contracts with credit risk-related contingent features that, if triggered, could require the
posting of a like amount of collateral was $88 million as at December 31, 2020 (2019 – $161 million).
Hedge of Foreign Net Investments
The reporting currency of ITC, UNS Energy, Central Hudson, Caribbean Utilities, FortisTCI, Belize Electric Company Limited and Belize Electricity
is, or is pegged to, the US dollar. The earnings and cash flow from, and net investments in, these entities are exposed to fluctuations in the
US dollar-to-Canadian dollar exchange rate. The Corporation has limited this exposure through hedging.
As at December 31, 2020, US$2.3 billion (2019 – US$2.2 billion) of corporately issued US dollar-denominated long-term debt has been designated as an
effective hedge of net investments, leaving approximately US$10.2 billion (2019 – US$9.7 billion) unhedged. Exchange rate fluctuations associated with
the hedged net investment in foreign subsidiaries and the debt serving as the hedge are recognized in accumulated other comprehensive income.
Financial Instruments Not Carried at Fair Value
Excluding long-term debt, the consolidated carrying value of the Corporation’s remaining financial instruments approximates fair value, reflecting
their short-term maturity, normal trade credit terms and/or nature.
As at December 31, 2020, the carrying value of long-term debt, including current portion, was $24.5 billion (2019 – $22.3 billion) compared to an
estimated fair value of $29.1 billion (2019 – $25.3 billion).
1 0 7
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
28. COMMITMENTS AND CONTINGENCIES
As at December 31, 2020, unconditional minimum purchase obligations were as follows.
(in millions)
Total
Year 1
Year 2
Year 3
Year 4
Year 5
Thereafter
Waneta Expansion capacity agreement (1)
Gas and fuel purchase obligations (2)
Power purchase obligations (3)
Renewable PPAs (4)
ITC easement agreement (5)
Debt collection agreement (6)
Renewable energy credit purchase agreements (7)
Other (8)
$ 2,576
2,355
1,867
1,380
381
112
97
116
$
52
679
249
102
13
3
15
48
$
53
453
208
102
13
3
14
5
$
54
312
188
101
13
3
16
4
$
55
192
191
101
13
3
9
4
$
56
124
180
101
13
3
7
3
$ 2,306
595
851
873
316
97
36
52
$ 8,884
$ 1,161
$
851
$
691
$
568
$
487
$ 5,126
(1)
(2)
FortisBC Electric is a party to an agreement to purchase capacity from the Waneta Expansion for 40 years, beginning April 2015.
FortisBC Energy ($1,482 million): includes contracts for the purchase of gas, gas transportation and storage services, expiring in 2062.
FortisBC Energy’s gas purchase obligations are based on gas commodity indices that vary with market prices and the obligations are based
on index prices as at December 31, 2020.
UNS Energy ($747 million): includes long-term contracts for the purchase and delivery of coal to fuel generating facilities, the purchase of gas
transportation services to meet load requirements, and the purchase of transmission services for purchased power. Amounts paid for coal
depend on actual quantities purchased and delivered. Certain contracts have price adjustment clauses that will affect future costs. These
contracts have various expiry dates through 2040.
(3)
Maritime Electric ($910 million): includes an agreement entitling Maritime Electric to approximately 4.55% of the output of New Brunswick
Power’s Point Lepreau nuclear generating station and requiring Maritime Electric to pay its share of the station’s capital operating costs for the
life of the unit. Maritime Electric also has two take-or-pay contracts for the purchase of either capacity or energy, expiring in December 2026.
FortisOntario ($599 million): an agreement with Hydro-Québec for the supply of up to 145 MW of capacity and a minimum of 537 GWh of
associated energy annually through December 2030.
FortisBC Electric ($295 million): an agreement with BC Hydro to purchase up to 200 MW of capacity and 1,752 GWh of associated energy annually
for a 20-year term beginning October 1, 2013.
TEP and UNS Electric are party to renewable PPAs, with expiry dates from 2027 through 2043, that require TEP and UNS Electric to purchase
100% of the output of certain renewable energy generating facilities and RECs associated with the output delivered once commercial
operation is achieved. Amounts are the estimated future payments.
ITC is party to an agreement with Consumers Energy, the primary customer of METC, which provides METC with an easement for transmission
purposes and rights-of-way, leasehold interests, fee interests and licences associated with the land over which its transmission lines cross.
The agreement expires in December 2050, subject to 10 potential 50-year renewals thereafter unless METC gives notice of non-renewal at
least one year in advance.
Maritime Electric is party to a debt collection agreement with PEI Energy Corporation for the initial capital cost of the submarine cables and
associated parts of the New Brunswick transmission system interconnection. Payments under the agreement, which expires in February 2056,
will be collected from customers in future rates.
UNS Energy and Central Hudson are party to renewable energy credit purchase agreements, mainly for the purchase of environmental
attributions from retail customers with solar installations or other renewable generation. Payments are primarily made at contractually
agreed-upon intervals based on metered energy production.
Includes a $24 million payment to be made in 2021 under the Oso Grande Wind Project build-transfer agreement by UNS Energy, as well as
AROs and joint-use asset and shared service agreements.
(4)
(5)
(6)
(7)
(8)
1 0 8
For the years ended December 31, 2020 and 2019Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT
Other Commitments
Under a funding framework with the Governments of Ontario and Canada, Fortis will contribute a minimum of approximately $155 million of equity
capital to the Wataynikaneyap Partnership, based on Fortis’ proportionate 39% ownership interest and the final regulatory-approved capital cost
of the related project. In October 2019 the Wataynikaneyap Partnership entered into loan agreements to finance the project during construction.
In the event a lender under the loan agreements realizes security on the loans, Fortis may be required to accelerate its equity capital contributions,
which may be in excess of the amount otherwise required of Fortis under the funding framework, to a maximum total funding of $235 million.
UNS Energy has joint generation performance guarantees with participants at San Juan, Four Corners, and Luna, with agreements expiring in 2022
through 2046, and at Navajo through decommissioning. The participants have guaranteed that in the event of payment default, each non-defaulting
participant will bear its proportionate share of expenses otherwise payable by the defaulting participant. In exchange, the non-defaulting
participants are entitled to receive their proportionate share of the generation capacity of the defaulting participant. In the case of Navajo,
participants would seek financial recovery from the defaulting party. There is no maximum amount under these guarantees, except for a maximum
of $318 million for Four Corners. As at December 31, 2020, there was no obligation under these guarantees.
Central Hudson is a participant in an investment with other utilities to jointly develop, own and operate electric transmission projects in New York
State. Central Hudson’s maximum commitment is $94 million, for which it has issued a parental guarantee. As at December 31, 2020, there was no
obligation under this guarantee.
As at December 31, 2020, FortisBC Holdings Inc. (“FHI”) had $69 million of parental guarantees outstanding to support storage optimization activities
at Aitken Creek.
Contingency
In April 2013 FHI and Fortis were named as defendants in an action in the British Columbia Supreme Court by the Coldwater Indian Band (“Band”)
regarding interests in a pipeline right-of-way on reserve lands. The pipeline was transferred by FHI (then Terasen Inc.) to Kinder Morgan Inc. in 2007.
The Band seeks cancellation of the right-of-way and damages for wrongful interference with the Band’s use and enjoyment of reserve lands. In May
2016 the Federal Court dismissed the Band’s application for judicial review of the ministerial consent. In September 2017 the Federal Court of Appeal
set aside the Minister’s consent and returned the matter to the Minister for redetermination. No amount has been accrued as the outcome cannot
yet be reasonably determined.
1 0 9
Notes to Consolidated Financial StatementsFORTIS INC. 2020 ANNUAL REPORT Historical Financial Summary
Statements of Earnings (in $ millions)
Revenue
Energy supply costs and operating expenses
Depreciation and amortization
Gain on disposition
Other income, net
Finance charges
Income tax expense
Earnings from continuing operations
Earnings from discontinued operations, net of tax
Extraordinary gain, net of tax
Net earnings
Net earnings attributable to non-controlling interests
Net earnings attributable to preference equity shareholders
Net earnings attributable to common equity shareholders
Balance Sheets (in $ millions)
Current assets
Property, plant and equipment, non-utility capital assets(2) and intangible assets
Goodwill
Other long-term assets
Total assets
Current liabilities
Long-term debt (excluding current portion)
Other long-term liabilities
Total liabilities
Total equity
Cash Flows (in $ millions)
Operating activities
Investing activities
Financing activities, excluding dividends
Dividends
Financial Statistics
Return on average book common shareholders’ equity (%)
Capitalization Ratios (%) (year end)
Total debt and finance leases (net of cash)
Preference shares
Common shareholders’ equity
Interest Coverage (x)
Debt
All fixed charges
Total capital expenditures (in $ millions)
Common share data
Book value per share (year end) ($)
Average common shares outstanding (in millions)
Basic earnings per common share ($)
Dividends declared per common share ($)
Dividends paid per common share ($)
Dividend payout ratio (%)
Price earnings ratio (x)
Share trading summary (TSX)
High price ($)
Low price ($)
Closing price ($)
Volume (in thousands)
2020
8,935
4,999
1,428
–
154
1,042
231
1,389
–
–
1,389
115
65
1,209
2,612
37,289
11,792
3,788
55,481
4,148
23,113
7,936
35,197
20,284
2,701
(4,132)
2,243
(916)
7.12
56.8
3.7
39.5
2.4
2.4
4,177
36.58
464.8
2.60
1.965
1.9375
74.5
20.0
59.28
41.52
52.00
441,457
2019 (1)
8,783
4,972
1,350
577
138
1,035
289
1,852
–
–
1,852
130
67
1,655
2,574
35,248
12,004
3,578
53,404
4,176
21,501
7,614
33,291
20,113
2,663
(2,768)
788
(634)
10.40
55.1
4.0
40.9
2.9
2.9
3,818
36.49
436.8
3.79
1.855
1.8275
48.2
14.2
56.94
44.00
53.88
297,490
2018
8,390
4,782
1,243
–
60
974
165
1,286
–
–
1,286
120
66
1,100
3,261
33,957
12,530
3,303
53,051
4,252
23,159
7,184
34,595
18,456
2,604
(3,252)
1,254
(610)
7.78
59.7
3.9
36.4
2.3
2.3
3,218
34.80
424.7
2.59
1.75
1.725
66.6
17.6
47.36
39.38
45.51
269,284
(1) Results were impacted by non-recurring items, largely associated with the disposition of the Waneta Expansion in 2019, the acquisition of ITC in 2016, the sale of non-core assets
in 2015, the acquisition of UNS Energy in 2014 and the acquisition of Central Hudson in 2013.
(2) Non-utility capital assets were sold as part of the sale of commercial real estate and hotel assets in 2015.
1 1 0
2017
8,301
4,611
1,179
–
116
914
588
1,125
–
–
1,125
97
65
963
2,207
30,749
11,644
3,222
47,822
3,504
20,691
6,878
31,073
16,749
2,756
(3,025)
932
(593)
7.31
59.2
4.4
36.4
2.7
2.7
3,024
31.77
415.5
2.32
1.65
1.625
70.0
19.9
48.73
40.59
46.11
2016 (1)
6,838
4,372
983
–
53
678
145
713
–
–
713
53
75
585
2,166
30,348
12,364
3,026
47,904
3,944
20,817
6,693
31,454
16,450
1,884
(6,891)
5,491
(441)
5.56
60.6
4.4
35.0
2.1
2.1
2,061
32.31
308.9
1.89
1.55
1.525
80.7
21.9
44.87
35.53
41.46
2015 (1)
6,757
4,465
873
–
197
553
223
840
–
–
840
35
77
728
1,857
20,136
4,173
2,638
28,804
2,638
10,784
5,029
18,451
10,353
1,673
(1,368)
(14)
(332)
9.75
54.8
8.3
36.9
2.7
2.7
2,243
28.62
278.6
2.61
1.43
1.40
53.6
14.3
42.23
34.16
37.41
2014 (1)
5,401
3,690
688
–
(25)
547
66
385
5
–
390
11
62
317
1,787
18,304
3,732
2,410
26,233
2,676
9,911
4,534
17,121
9,112
982
(4,199)
3,627
(266)
5.45
56.4
9.1
34.5
1.6
1.6
1,725
24.89
225.6
1.41
1.30
1.28
90.8
27.6
40.83
29.78
38.96
2013 (1)
4,047
2,654
541
–
(31)
389
32
400
–
20
420
10
57
353
1,296
12,612
2,075
1,925
17,908
2,084
6,424
3,024
11,532
6,376
899
(2,164)
1,434
(248)
8.06
56.2
9.0
34.8
1.9
1.9
1,175
22.38
202.5
1.74
1.25
1.24
71.3
17.5
35.14
29.51
30.45
2012
3,654
2,390
470
–
4
366
61
371
–
–
371
9
47
315
1,093
10,574
1,568
1,715
14,950
1,350
5,741
2,449
9,540
5,410
992
(1,096)
396
(225)
8.06
55.3
9.7
35.0
2.0
2.0
1,146
20.84
190.0
1.66
1.21
1.20
72.3
20.6
34.98
31.70
34.22
2011
3,738
2,547
416
–
38
363
84
366
–
–
366
9
46
311
1,132
9,937
1,565
1,580
14,214
1,305
5,685
2,281
9,271
4,943
915
(1,115)
386
(206)
8.79
57.1
8.3
34.6
2.0
2.0
1,171
20.25
181.6
1.71
1.17
1.16
67.8
19.5
35.45
28.24
33.37
205,261
293,991
172,038
174,566
120,470
115,962
126,341
FORTIS INC. 2020 ANNUAL REPORT Property, plant and equipment, non-utility capital assets(2) and intangible assets
Statements of Earnings (in $ millions)
Revenue
Energy supply costs and operating expenses
Depreciation and amortization
Gain on disposition
Other income, net
Finance charges
Income tax expense
Earnings from continuing operations
Earnings from discontinued operations, net of tax
Extraordinary gain, net of tax
Net earnings
Net earnings attributable to non-controlling interests
Net earnings attributable to preference equity shareholders
Net earnings attributable to common equity shareholders
Balance Sheets (in $ millions)
Current assets
Long-term debt (excluding current portion)
Goodwill
Other long-term assets
Total assets
Current liabilities
Other long-term liabilities
Total liabilities
Total equity
Cash Flows (in $ millions)
Operating activities
Investing activities
Dividends
Financial Statistics
Financing activities, excluding dividends
Return on average book common shareholders’ equity (%)
Capitalization Ratios (%) (year end)
Total debt and finance leases (net of cash)
Preference shares
Common shareholders’ equity
Interest Coverage (x)
Debt
All fixed charges
Total capital expenditures (in $ millions)
Common share data
Book value per share (year end) ($)
Average common shares outstanding (in millions)
Basic earnings per common share ($)
Dividends declared per common share ($)
Dividends paid per common share ($)
Dividend payout ratio (%)
Price earnings ratio (x)
Share trading summary (TSX)
High price ($)
Low price ($)
Closing price ($)
Volume (in thousands)
2020
8,935
4,999
1,428
–
154
1,042
231
1,389
–
–
1,389
115
65
1,209
2,612
37,289
11,792
3,788
55,481
4,148
23,113
7,936
35,197
20,284
2,701
(4,132)
2,243
(916)
7.12
56.8
3.7
39.5
2.4
2.4
4,177
36.58
464.8
2.60
1.965
1.9375
74.5
20.0
59.28
41.52
52.00
441,457
2019 (1)
8,783
4,972
1,350
577
138
1,035
289
1,852
–
–
1,852
130
67
1,655
2,574
35,248
12,004
3,578
53,404
4,176
21,501
7,614
33,291
20,113
2,663
(2,768)
788
(634)
10.40
55.1
4.0
40.9
2.9
2.9
3,818
36.49
436.8
3.79
1.855
1.8275
48.2
14.2
56.94
44.00
53.88
297,490
2018
8,390
4,782
1,243
–
60
974
165
1,286
–
–
1,286
120
66
1,100
3,261
33,957
12,530
3,303
53,051
4,252
23,159
7,184
34,595
18,456
2,604
(3,252)
1,254
(610)
7.78
59.7
3.9
36.4
2.3
2.3
3,218
34.80
424.7
2.59
1.75
1.725
66.6
17.6
47.36
39.38
45.51
269,284
(1) Results were impacted by non-recurring items, largely associated with the disposition of the Waneta Expansion in 2019, the acquisition of ITC in 2016, the sale of non-core assets
in 2015, the acquisition of UNS Energy in 2014 and the acquisition of Central Hudson in 2013.
(2) Non-utility capital assets were sold as part of the sale of commercial real estate and hotel assets in 2015.
Historical Financial Summary
2017
8,301
4,611
1,179
–
116
914
588
1,125
–
–
1,125
97
65
963
2,207
30,749
11,644
3,222
47,822
3,504
20,691
6,878
31,073
16,749
2,756
(3,025)
932
(593)
7.31
59.2
4.4
36.4
2.7
2.7
3,024
31.77
415.5
2.32
1.65
1.625
70.0
19.9
48.73
40.59
46.11
205,261
2016 (1)
6,838
4,372
983
–
53
678
145
713
–
–
713
53
75
585
2,166
30,348
12,364
3,026
47,904
3,944
20,817
6,693
31,454
16,450
1,884
(6,891)
5,491
(441)
5.56
60.6
4.4
35.0
2.1
2.1
2,061
32.31
308.9
1.89
1.55
1.525
80.7
21.9
44.87
35.53
41.46
293,991
2015 (1)
6,757
4,465
873
–
197
553
223
840
–
–
840
35
77
728
1,857
20,136
4,173
2,638
28,804
2,638
10,784
5,029
18,451
10,353
1,673
(1,368)
(14)
(332)
9.75
54.8
8.3
36.9
2.7
2.7
2,243
28.62
278.6
2.61
1.43
1.40
53.6
14.3
42.23
34.16
37.41
172,038
2014 (1)
5,401
3,690
688
–
(25)
547
66
385
5
–
390
11
62
317
1,787
18,304
3,732
2,410
26,233
2,676
9,911
4,534
17,121
9,112
982
(4,199)
3,627
(266)
5.45
56.4
9.1
34.5
1.6
1.6
1,725
24.89
225.6
1.41
1.30
1.28
90.8
27.6
40.83
29.78
38.96
174,566
2013 (1)
4,047
2,654
541
–
(31)
389
32
400
–
20
420
10
57
353
1,296
12,612
2,075
1,925
17,908
2,084
6,424
3,024
11,532
6,376
899
(2,164)
1,434
(248)
8.06
56.2
9.0
34.8
1.9
1.9
1,175
22.38
202.5
1.74
1.25
1.24
71.3
17.5
35.14
29.51
30.45
120,470
2012
3,654
2,390
470
–
4
366
61
371
–
–
371
9
47
315
1,093
10,574
1,568
1,715
14,950
1,350
5,741
2,449
9,540
5,410
992
(1,096)
396
(225)
8.06
55.3
9.7
35.0
2.0
2.0
1,146
20.84
190.0
1.66
1.21
1.20
72.3
20.6
2011
3,738
2,547
416
–
38
363
84
366
–
–
366
9
46
311
1,132
9,937
1,565
1,580
14,214
1,305
5,685
2,281
9,271
4,943
915
(1,115)
386
(206)
8.79
57.1
8.3
34.6
2.0
2.0
1,171
20.25
181.6
1.71
1.17
1.16
67.8
19.5
34.98
31.70
34.22
115,962
35.45
28.24
33.37
126,341
1 1 1
FORTIS INC. 2020 ANNUAL REPORT Investor Information
Expected Dividend* and Earnings Release Dates
Dividend Record Dates
May 17, 2021
November 18, 2021
August 19, 2021
February 15, 2022
Dividend Payment Dates
June 1, 2021
December 1, 2021
September 1, 2021
March 1, 2022
Earnings Release Dates
May 5, 2021
October 29, 2021
July 29, 2021
February 11, 2022
* The setting of dividend record dates and the declaration and payment
of dividends are subject to the Board of Directors’ approval.
Transfer Agent and Registrar
Computershare Trust Company of Canada (“Computershare”
or “Transfer Agent”) is responsible for the maintenance of
shareholder records and the issuance, transfer and cancellation
of stock certificates. Transfers can be effected at its Montreal
and Toronto offices in Canada and at the co-transfer agent’s
Canton, MA, Jersey City, NJ, and Louisville, KY offices in the
United States. Computershare also distributes dividends and
shareholder communications. Inquiries with respect to these
matters and corrections to shareholder information should be
addressed to the Transfer Agent.
Computershare Trust Company of Canada
8th Floor, 100 University Avenue, Toronto, ON M5J 2Y1
T: 514.982.7555 or 1.866.586.7638
F: 416.263.9394 or 1.888.453.0330
W: www.investorcentre.com/fortisinc
Computershare Trust Company N.A.
Attn: Stock Transfer Department
Overnight Mail Delivery: 462 South 4th Street, Louisville, KY 40202
Regular Mail Delivery: P.O. Box 505005, Louisville, KY 40233-5005
T: 303.262.0600 or 1.800.962.4284
Direct Deposit of Dividends
Shareholders may arrange for automatic electronic deposit
of dividends to their designated Canadian and U.S. financial
institutions by contacting the Transfer Agent.
Duplicate Annual Reports
While every effort is made to avoid duplications, some
shareholders may receive extra reports as a result of multiple
share registrations. Shareholders wishing to consolidate these
accounts should contact the Transfer Agent.
Eligible Dividend Designation
For purposes of the enhanced dividend tax credit rules
contained in the Income Tax Act (Canada) and any
corresponding provincial and territorial tax legislation,
all dividends paid on common and preferred shares after
December 31, 2005 by Fortis to Canadian residents are
designated as “eligible dividends.” Unless stated otherwise,
all dividends paid by Fortis hereafter are designated as
“eligible dividends” for the purposes of such rules.
Annual Meeting
Thursday, May 6, 2021 – 10:30 a.m. NDT
To be held virtually
Dividend Reinvestment Plan
Fortis offers a Dividend Reinvestment Plan (“DRIP”) as a
convenient method for Common Shareholders to increase their
investments in Fortis. Participants have dividends plus any
optional contributions (minimum of $100, maximum of $30,000
annually) automatically deposited in the plan to purchase
additional Common Shares. Shares can be purchased quarterly
on March 1, June 1, September 1 and December 1 at the
average market price then prevailing on the Toronto Stock
Exchange. The DRIP currently offers a 2% discount on the
purchase of Common Shares, issued from treasury, with the
reinvested dividends. Inquiries should be directed to the
Transfer Agent.
Share Listings
The Common Shares; First Preference Shares, Series F; First
Preference Shares, Series G; First Preference Shares, Series H;
First Preference Shares, Series I; First Preference Shares, Series J;
First Preference Shares, Series K; and First Preference Shares,
Series M of Fortis Inc. are listed on the Toronto Stock Exchange
and trade under the ticker symbols FTS, FTS.PR.F, FTS.PR.G,
FTS.PR.H, FTS.PR.I, FTS.PR.J, FTS.PR.K and FTS.PR.M, respectively.
The Common Shares are also listed on the New York Stock
Exchange and trade under the ticker symbol FTS.
Valuation Day
For capital gains purposes, the valuation day prices are
as follows:
December 22, 1971
February 22, 1994
$1.531
$7.156
Analyst and Investor Inquiries
T: 709.737.2900
F: 709.737.5307
E: investorrelations@fortisinc.com
1 1 2
F O R T I S I N C . 2 0 2 0 A N N U A L R E P O R T
Fortis Inc. Executive
David G. Hutchens
President and Chief Executive Officer
Jocelyn H. Perry
Executive Vice President, Chief Financial Officer
Nora M. Duke
Executive Vice President, Sustainability and Chief Human Resource Officer
James P. Laurito
Executive Vice President, Business Development and Chief Technology Officer
James R. Reid
Executive Vice President, Chief Legal Officer and Corporate Secretary
Gary J. Smith
Executive Vice President, Eastern Canadian and Caribbean Operations
Stephanie A. Amaimo
Vice President, Investor Relations
Karen J. Gosse
Vice President, Treasury and Planning
Ronald J. Hinsley
Vice President, Chief Information Officer
Karen M. McCarthy
Vice President, Communications and Corporate Affairs
Regan P. O’Dea
Vice President, General Counsel
James D. Roberts
Vice President, Controller
Photography:
David Howells, St. John’s, NL
David Sanders, Tucson, AZ
Design and Production:
m5 Marketing Communications, St. John’s, NL www.m5.ca
Moveable Inc., Toronto, ON www.moveable.com
Printer:
The Lowe-Martin Group, Ottawa, ON
Board of Directors
Douglas J. Haughey Q X H
Chair of the Board, Fortis Inc.
Calgary, Alberta
Tracey C. Ball Q H
Corporate Director
Victoria, British Columbia
Pierre J. Blouin X H
Corporate Director
Montreal, Quebec
Paul J. Bonavia X H
Corporate Director
Dallas, Texas
Lawrence T. Borgard Q X
Corporate Director
Naples, Florida
Maura J. Clark Q H
Corporate Director
New York, New York
Margarita K. Dilley Q X
Corporate Director
Washington, D.C.
Julie A. Dobson X H
Corporate Director
Potomac, Maryland
David G. Hutchens
President and CEO, Fortis Inc.
Tucson, Arizona
Jo Mark Zurel Q X
Corporate Director
St. John’s, Newfoundland and Labrador
Q Audit Committee X Human Resources Committee
H Governance and Sustainability Committee
For Board of Directors’ biographies,
please visit www.fortisinc.com.
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Fortis Place | Suite 1100, 5 Springdale Street | PO Box 8837 | St. John’s, NL, Canada A1B 3T2
T: 709.737.2800 | F: 709.737.5307 | www.fortisinc.com | TSX NYSE: FTS
info@fortisinc.com | @Fortis_NA | Fortis Inc.
2020 ANNUAL REPORT