Fortis, Inc. - A Case Study in Business Ethics

Board of Directors MeetingJanuary, 2002

Andrea Nowack ⦁ Hugh Livengood ⦁ Nada Al-Mousa ⦁ John Dillman ⦁ Katherine Oglietti ⦁ Chris Wienbeck

Why We Are Here Today

Chalillo Dam Decision (taking into consideration different issues)• Build• Alternative Site• Don’t Build

Adapt Fortis’ strategic proposition to deliver the long-term growth and earnings you are looking for

Fortis Inc.

Company’s Goals and Strategy: Today Goal is to deliver earnings to our shareholders

while continuing to provide our customers with quality service at reasonable prices

Strategy of combining profitable growth and disciplined acquisition strategy to produce positive results and to provide our shareholders with a healthy return

Source: Fortis Annual Report 2001

Who We Are

Distribution Real Estate & HotelsGeneration

FortisAlberta

FortisBC

Newfoundland Power

Maritime Electric

FortisOntario

Belize Electricity

Caribbean Utilities

British Columbia

Newfoundland

Ontario

Belize

Upper New York State

Fortis Properties

Diversified international electric utility holding company

The Chalillo Dam in Belize

Issue: Non-Market Forces How are non-market forces affecting:• Our approach to new projects and strategies?• Our ability to deliver long-term growth and earnings?

Fortis

Competitors

Customers

Competitors

Supplier

ENGOs

Government

Media

Community

Environment ?

?

?

?

?

Financial Analysis

Fortis Financial Snapshot1999 2000 2001

Sales Growth 6.87% 14.84% 8.28%ROE 8.55% 9.73% 12.41%

RNOA 2.59% 2.71% 3.42%Leverage 3.31 3.59 3.62

2000 20010%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

14.9%24.3%

85.1%75.7%

Contribution to Earnings

All other holdingsBelize

Chalillo Dam Financial Benefits (50 yr NPV)

Chalillo Earnings Mollejon Capacity Factor

Mollejon Increase in Earnings

Fortis Earnings (BEL)

($10,952,729) Worst – 80% $11,196,761 $163,502

($10,952,729) Likely – 90% $16,795,142 $3,914,142

($10,952,729) Best Case – 99% $21,833,684 $7,290,240

As a stand alone project, Chalillo (7.3 MW) is not profitable

However, Chalillo will make Mollejon (25 MW) more productive, likely generating an additional $4 million for Fortis

Indirect Financial Benefits A strategic move with long-term financial benefits • Cost savings from improved river management • i.e. $4 million in damage after Iris in 2000

• Fast-growing market with substantial scope for growth

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20142015

$0

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

$200 Million Market by 2015

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20142015

020000400006000080000

100000120000140000160000180000

160 Thousand Customers by 2015

Ethical Considerations

Stakeholder Issues

Canada

Fortis

Belize

Belize Stakeholders ConcernCommunity

Access to Electricity

Jobs

Preserving Heritage

Environment

Protection

Impact to Neighboring Ecosystems

Mayan Ruins

Government

Economic Growth

Stability

Strengthen Party Power

Fortis

Future Belize Profit

Current Profit

Community Relations

Canada Stakeholders ConcernCommunity and Customers

Protect the Environment

Corporate Responsibility

Electricity Prices

NGOs

Protect the Environment

Reputation

Represent Belize’s Interests?

Government

Economic Growth

International Relations

Regulations

Fortis

Profit

Reputation

Community Relations

Ethical Frameworks

Universal Rights Social Contract

Consequentialism Personal Ethics

Ethical Frameworks

Universal Rights

Social Contract Consequentialism Personal Ethics

Basic Idea: There are basic rights enjoyed by all people Ethical acts do not violate these rights

Environmental Concern: The environment is not considered to have rights Questionable whether there is a right to enjoy wildlife as found untouched by

human actions There are 30 Universal Human Rights designated by the United Nations –

Example: Right to life, liberty, and security of person

Corporate Policy: Ethical corporate policy requires identifying these rights and ensuring that

business policy does not violate them

Ethical Frameworks

Universal RightsSocial

ContractConsequentialism Personal Ethics

Basic Idea: Communities are held together through observation of basic norms and

values Ethical acts do not violate these norms and values A community upholds various rights as determined to be a common good

Environmental Concern: Protecting the environment is considered good if the norms of the

community support it

Corporate Policy: The ethical corporate action should uphold the values of the community

Ethical Frameworks

Social ContractConsequen

-tialismPersonal Ethics

Basic Idea: One must consider all likely consequences of an action and actions are more

right if they promote more happiness Collective happiness of all concerned is the goal The likely consequences of an action must be considered to ensure the

greatest good

Environmental Concern: The impact to the environment should be considered

Corporate Policy: The ethical corporate action must weigh the likely consequences of an action

and to ensure the greatest good

Universal Rights

Ethical Frameworks

Social Contract ConsequentialismPersonal

EthicsBasic Idea: Individual conscience’s determine the rightness of an action

Environmental Concern: The The environment is only considered if desired by the individual

Corporate Policy: The ethical corporate action is determined through individual preferences

Universal Rights

Ethical Frameworks’ Evaluation Criteria

Shareholder Analysis Is the framework easily communicated to the shareholders? Is the framework compatible with the shareholders other considerations?

Group Application Can the framework be applied by a group?

Stakeholder Analysis Does the framework align with the stakeholders ethical views? Does the framework address the issues most important to the stakeholders? Does the framework allow for drastically different communities of interest?

Ethical Frameworks’ Evaluation Criteria

Ethical Theory Shareholder Analysis

Stakeholder Analysis

Group Application

Total Applicability to Business Issues

Universal Rights 7 7 6 20

Social Contract 4 8 7 19

Consequentialism 8 10 9 27

Personalistic Ethics 1 1 5 7

Alternatives and Impact

Long Term Impact

Economic Social Environmental Legal

Long Term Impact Evaluation

• Score Card– Compare the three alternatives• Grade each alternative according to long-term impact:

economic, social, environmental, and legal

• Score Card Grading

-50 +5Negative Impact No Impact

Positive Impact

Long Term Impact EvaluationStakeholder BUILD DON’T

BUILDALTERNATIVE

SITEEconomic- Financial- Cost, access, reliability- Employment

FortisBelizeBelize

+2+5+2

-2-20

+2+2+2

Social - Steady supply of water- Flood control benefits

BelizeBoth

+4+4

00

+3+2

Environmental- Natural Habitat- Greenhouse Emissions- Air and noise pollutions

BelizeBelizeBelize

-4+2+2

0-3-3

-3+2+2

Legal- Legal actions seeking stoppage or injunctions

Fortis -3 0 -3

TOTAL +14 -10 +9

-5 0 +5Negative Impact No Impact

Positive Impact

Key Take-Aways from Analyses

• Future strategy proposition must take non-market forces into consideration

• Chalillo dam makes financial sense and adds additional benefits to Mollejon dam

• In order to make a humane, ethical decision all likely consequences must be considered

• Several positive long-term impacts related to social, economic and environmental issues

Decision & Implementation Plan

Build the Chalillo Dam!

Identify and Address the Influencers Conduct a full nonmarket stakeholder analysis to

understand our stakeholders and their level of influence

Partner with a third party, such as Tides Canada, to help conduct analysis

Address the influencers

Develop Strategic Partnerships Get other NGOs on our side• Canadian non-

environmental NGOs (ie, Development and Human Rights NGOs)

• Belizean NGOs and ENGOs

Potential Partners:• Centre for Affordable

Water and Sanitation Technology (CAWST)

• IDRC – CRDI • Oxfam Canada

Environment

International

Development

Human Rights

Move Forward With Transparency Conduct a proactive media

campaign to tell our story Issue public-facing

quarterly updates Implement a community

committee Develop a social contract Publically issue a third-

party environmental analysis

Always be transparent, even if the message is negative







10% of labor must be from Belize







10% of labor must be from Belize

Fund Natural Reserve

Sustainable Long Term Strategies

Developing Fortis’ CSR Strategy

Investment Strategic CSR

Current Situation Pernicious CSR

Shareholders

Society

Harms

Benefits

BenefitsHarms

Strategic CSR: Win-Win Strategy



Shareholders

Society

Harms

Benefits

BenefitsHarmsWin-Win Strategy

Community- building projects that support company long term objectives Company is seen as a game-changer

Bottom line: Investment improves community and long term shareholder value

Game Changing Opportunities

Source: www.internationalrivers.org

Hydroelectric Power Policy

Kyoto Protocol (2001)

World Commission on

Dams (2000)

World Bank (2002)Hydro-Quebec

Company (2001)

Demonstrate greenhouse gas reduction Trade Carbon credits

Become a forum member and sponsor Lead global policy discussion

Create Public-Private Partnership Benefit from neutral third party advocate

Fortis can:

Environ. Protection Social Acceptability Economic Benefits

Measuring the Win-Win PositionGoal - deliver earnings to our shareholders while continuing to provide our customers with quality service at reasonable price as an environmentally responsible company

Community Win

• Social Return on Investment

Fortis Win

• Shareholder Return on Social Investment

Implementation Timeline

Q1 2003

Start dam construction

Q4 2005

Completion and Lake

filling

Q1 2006

Dam is fully

operational

May 2002

City/Village Council meeting

Oct 2002

Community Board

Member election

Exit Strategy2015

Dec 2002

Community Engagement

Contract

Chalillo dam media

campaign

Become a member of the World

Commission on Dams

Q2 2003

Create strategic

alliance with Hydro

Quebec

Q3 2003

Measure firm’s

greenhouse gases

Q3 2004

Sell carbon credits to

other firms

Q1 2003

Create long-term CSR strategy

Public Private Partnership

with The World Bank

Chalillo Dam ConstructionChalillo Dam CSR ActivitiesFortis Long Term CSR StrategiesQuarterly public project update

Fortis: Delivering Sustainable Hydroelectric Power to the Globe

Thank You!

APPENDIX

AppendixChalillo Dam• Overall Benefits• Challenges

Fortis• Revenues and Earnings• Cash Flows• Project Finance Calculations

Short-Term Strategies• Evaluating ENGO Influence

Long-Term Strategies• Current Situation – CSR• Investment CSR• Pernicious CSR• Hydro-Quebec• When are we in a Win-Win position

Overall BenefitsFortis Government Community

Increase productivity in Mollejon (25MW), maximizing

the hydroelectric power generation of the river

Electrification important concept to improve the

country’s economy

Flooding control on the Macal River with significant

economic, health and safety benefits

Benefits the 50-year energy deal with the Government

5% participation in BELCO also as revenue generator

Steadier water supply for residents, especially during

dry seasonPolitical success leading to

re-electionFlexibility to provide better services to the customers

Create employment with additional economic benefits

Most economical option for generating power in Belize

Reduce reliance on petroleum generation

Enhance reliability, reducing power outages and secure supply of energy

Reduce greenhouse emissions and possibility of oil spills

Increase electrical output and raise energy self-sufficiency

Chalillo dam critical to increase the supply of electricity

ChallengesAdversely impact a biological rich and diverse area

ENGOs campaigns against the project

Fortis’ Revenue and Earnings

Belize growing importance, but Canada is the main focus

2000 2001Revenue

0

100

200

300

400

500

600

700

63.6 88.5

516.6539.8

Belize Fortis (other)

2000 2001Earnings

0

10

20

30

40

50

60

5.513

31.3

40.4

Belize Fortis (other)

Cash Flow Chalillo

Investment 2003 - 2012 2013 - 2022 2023 - 2032 2033 - 2042 2043 - 2052

($40,000,000)

($20,000,000)

$0

$20,000,000

$40,000,000

$60,000,000

$80,000,000

-$27,300,000

$23,506,850

$29,383,563 $29,383,563 $29,383,563 $29,383,563

-$27,300,000

$35,435,700

$44,294,625 $44,294,625 $44,294,625 $44,294,625

-$27,300,000

$47,364,549

$59,205,686 $59,205,686 $59,206,686 $59,205,686

Cash Flows from Chalillo

Worst Likely Best

Our Approach to Evaluating InfluenceCompany Power Legitimacy Urgency Probe International

Natural Resources Defense CouncilSierra Club

The Sierra Club of Canada

Humber Environmental Action GroupHumber Natural History SocietyPetitcodiac Riverkeeper

Action Environment

Defenders of Wildlife

Environment Coalition of Prince Edward IslandFalls Brook Centre

BACONGO

This exercise will allow us to group stakeholders into

categories based on influence

Current Situation



Shareholders

Society

Harms

Benefits

BenefitsHarms Current Situation

Damage to society Negative publicity to company reputation

Bottom line: Reduce long term shareholder value

Investment



Shareholders

Society

Harms

Benefits

BenefitsHarms Typical CSR

Non-strategic philanthropy Positive, short term publicity for company

Bottom line: Non-strategic use of shareholder funds

Pernicious CSR



Shareholders

Society

Harms

Benefits

BenefitsHarms Pernicious CSR

Philanthropy that negatively impacts the community Positive, short term publicity for company

Bottom line: Negative impact on society and long-term shareholder value

Strategic Ally: Hydro Quebec, CanadaHydroelectric Power for Sustainable Development Connects hydroelectricity with Canada’s objectives for reducing greenhouse

gas emissions under the Kyoto Protocol Foundation Hydro-Québec pour l'environnement (2001)

Systematically Monitor:1. Environmental

Protection2. Social Acceptability3. Economic Benefits

When are we in the win-win position?

Community Win - Social Return on Investment

Fortis Win - Shareholder Return on Social Investment

Quantify the positive impact on the environment, society, and the local economy

Strategic Partnerships Established that increase leverage and reduce cost

Create a Sustainability Report Shape global policy and public opinion on hydroelectricity

Stakeholder dialogue and active engagement

Win bids and smoother acquisition process

Project financing support and “smart subsidies” from Multilateral and Bilateral organizations

Reduced expenditures in defensive PR, environmental damage repair, and social concessions

Goal is to deliver earnings to our shareholders while continuing to provide our customers with quality service at reasonable price AND responsibly impacting the environment

Fortis, Inc. - A Case Study in Business Ethics

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