| Fair Value of Financial Instruments and Risk Management | FAIR VALUE OF FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Derivatives The Corporation generally limits the use of derivatives to those that qualify as accounting, economic or cash flow hedges, or those that are approved for regulatory recovery. Derivatives are recorded at fair value with certain exceptions including those derivatives that qualify for the normal purchase and normal sale exception. Fair values reflect estimates based on current market information about the derivatives as at the balance sheet dates. The estimates cannot be determined with precision as they involve uncertainties and matters of judgment and, therefore, may not be relevant in predicting the Corporation's future consolidated earnings or cash flow. 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 price 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 June 30, 2024, unrealized losses of $182 million (December 31, 2023 - $197 million) were recognized as regulatory assets and unrealized gains of $42 million (December 31, 2023 - $37 million) were recognized as regulatory liabilities. E nergy 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, which was sold on November 1, 2023, held 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 were 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 . During the three and six months ended June 30, 2024, unrealized gains of $nil and $36 million were recognized in revenue, respectively (three and six months ended June 30, 2023 - unrealized losses of $8 million and unrealized gains of $6 million, respectively). Total Return Swaps The Corporation holds total return swaps to manage the cash flow risk associated with forecast future cash and/or share settlements of certain stock-based compensation obligations. The swaps have a combined notional amount of $134 million and terms of one Foreign Exchange Contracts The Corporation holds U.S. dollar denominated foreign exchange contracts to help mitigate exposure to foreign exchange rate volatility. The contracts expire at varying dates through March 2026 and have a combined notional amount of $440 million. Fair value was measured using independent third-party information. Unrealized gains and losses associated with changes in fair value are recognized in other income, net. During the three and six months ended June 30, 2024, unrealized losses of $2 million and $5 million, respectively were recognized in other income, net (three and six months ended June 30, 2023 - unrealized gains of $5 million and $7 million, respectively). Interest Rate Locks During the second quarter of 2024, ITC entered into and settled interest rate locks with a combined notional value of US$300 million. These contracts were used to manage interest rate risk associated with the issuance of US$400 million unsecured senior notes in May 2024. Realized losses of US$3 million were recognized in other comprehensive income, which will be reclassified to earnings as a component of interest expense over 5 years. Cross-Currency Interest Rate Swaps The Corporation holds cross-currency interest rate swaps, maturing in 2029, to effectively convert its $500 million, 4.43% unsecured senior notes to US$391 million, 4.34% debt. The Corporation has designated this notional U.S. debt as an effective hedge of its foreign net investments and unrealized gains and losses associated with exchange rate fluctuations on the notional U.S. debt are recognized in other comprehensive income, consistent with the translation adjustment related to the foreign net investments. Other changes in the fair value of the swaps are also recognized in other comprehensive income but are excluded from the assessment of hedge effectiveness. Fair value is measured using a discounted cash flow method based on secured overnight financing rates. During the three and six months ended June 30, 2024, unrealized losses of $2 million and $15 million, respectively were recorded in other comprehensive income (three and six months ended June 30, 2023 - unrealized gains of $9 million and $10 million, respectively). Other Investments UNS Energy holds investments in money market accounts, and ITC and Central Hudson hold investments in trust associated with supplemental retirement benefit plans for select employees, which include mutual funds and money market accounts. These investments are recorded at fair value based on quoted market prices in active markets. Gains and losses are recognized in other income, net. During the three and six months ended June 30, 2024, gains of $2 million and $6 million, respectively were recognized in other income, net (three and six months ended June 30, 2023 - gains of $1 million and $3 million, respectively). Recurring Fair Value Measures The following table presents assets and liabilities that are accounted for at fair value on a recurring basis. ($ millions) Level 1 (1) Level 2 (1) Level 3 (1) Total As at June 30, 2024 Assets Energy contracts subject to regulatory deferral (2) (3) — 57 — 57 Energy contracts not subject to regulatory deferral (2) — 40 — 40 Other investments (4) 132 — — 132 132 97 — 229 Liabilities Energy contracts subject to regulatory deferral (3) (5) — (197) — (197) Energy contracts not subject to regulatory deferral (5) — (2) — (2) Foreign exchange contracts, total return and cross-currency interest rate swaps (5) — (24) — (24) — (223) — (223) As at December 31, 2023 Assets Energy contracts subject to regulatory deferral (2) (3) — 49 — 49 Energy contracts not subject to regulatory deferral (2) — 6 — 6 Foreign exchange contracts (2) — 5 — 5 Other investments (4) 145 — — 145 145 60 — 205 Liabilities Energy contracts subject to regulatory deferral (3) (5) — (209) — (209) Energy contracts not subject to regulatory deferral (5) — (3) — (3) Total return and cross-currency interest rate swaps (5) — (6) — (6) — (218) — (218) (1) Under the hierarchy, fair value is determined using: (i) level 1 - unadjusted quoted prices in active markets; (ii) level 2 - other pricing inputs directly or indirectly observable in the marketplace; and (iii) level 3 - unobservable inputs, used when observable inputs are not available. Classifications reflect the lowest level of input that is significant to the fair value measurement. (2) Included in accounts receivable and other current assets or other assets (3) Unrealized gains and losses arising from changes in fair value of these contracts are deferred as a regulatory asset or liability for recovery from, or refund to, customers in future rates as permitted by the regulators, with the exception of long-term wholesale trading contracts and certain gas swap contracts. (4) Included in cash and cash equivalents and other assets (5) Included in accounts payable and other current liabilities or other liabilities Energy Contracts The Corporation has elected gross presentation for its derivative contracts under master netting agreements and collateral positions, which apply only to its energy contracts. The following table presents the potential offset of counterparty netting. Gross Amount Counterparty Recognized in Netting of Cash Collateral ($ millions) Balance Sheet Energy Contracts Posted/(Received) Net Amount As at June 30, 2024 Derivative assets 97 (34) 15 78 Derivative liabilities (199) 34 (10) (175) As at December 31, 2023 Derivative assets 55 (24) 28 59 Derivative liabilities (212) 24 (1) (189) Volume of Derivative Activity As at June 30, 2024, the Corporation had various energy contracts that will settle on various dates through 2029. The volumes related to electricity and natural gas derivatives are outlined below. As at June 30, December 31, 2024 2023 Energy contracts subject to regulatory deferral (1) Electricity swap contracts (GWh) 831 628 Electricity power purchase contracts (GWh) 492 588 Gas swap contracts (PJ) 247 228 Gas supply contracts (PJ) 113 134 Energy contracts not subject to regulatory deferral (1) Wholesale trading contracts (GWh) 4,092 1,310 Gas swap contracts (PJ) 2 3 (1) GWh means gigawatt hours and PJ means petajoules. Credit Risk For cash equivalents, accounts receivable and other current assets, and long-term other receivables, credit risk is generally limited to the carrying value on the consolidated balance sheets. The Corporation's subsidiaries generally have a large and diversified customer base, which minimizes the concentration of credit risk. Policies in place to minimize credit risk include requiring customer deposits, prepayments and/or credit checks for certain customers, performing disconnections and/or using third-party collection agencies for overdue accounts. ITC has a concentration of credit risk as approximately 70% of its revenue is derived from three customers. The customers have investment-grade credit ratings and credit risk is further managed by MISO by requiring a letter of credit or cash deposit equal to the credit exposure, which is determined by a credit-scoring model and other factors. FortisAlberta has a concentration of credit risk as distribution service billings are to a relatively small group of retailers. Credit risk is managed by obtaining from the retailers either a cash deposit, letter of credit, an investment-grade credit rating, or a financial guarantee from an entity with an investment-grade credit rating. Central Hudson has seen an increase in accounts receivable since the suspension of collection efforts initially required in response to the COVID-19 pandemic. Central Hudson continues to proactively contact customers regarding past-due balances to advise them of financial assistance available through state programs, and collection efforts continue to expand. Under its regulatory framework, Central Hudson can defer uncollectible write-offs that exceed 10 basis points above the amounts collected in customer rates for future recovery. UNS Energy, Central Hudson, FortisBC Energy, 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, Central Hudson and FortisBC Energy, 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 $111 million as at June 30, 2024 (December 31, 2023 - $117 million). Hedge of Foreign Net Investments The reporting currency of ITC, UNS Energy, Central Hudson, Caribbean Utilities, FortisTCI, Fortis Belize Limited and Belize Electricity is, or is pegged to, the U.S. dollar. The earnings and cash flow from, and net investments in, these entities are exposed to fluctuations in the U.S. dollar-to-Canadian dollar exchange rate. The Corporation has reduced this exposure through hedging. As at June 30, 2024, US$2.6 billion (December 31, 2023 - US$2.6 billion) of corporately issued U.S. dollar-denominated long-term debt has been designated as an effective hedge of net investments, leaving approximately US$11.8 billion (December 31, 2023 - US$11.5 billion) unhedged. Exchange rate fluctuations associated with the 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 June 30, 2024, the carrying value of long-term debt, including current portion, was $31.5 billion (December 31, 2023 - $29.7 billion) compared to an estimated fair value of $28.9 billion (December 31, 2023 - $27.9 billion). |
