34 Caribbean Utilities Company, Ltd.  2011  Annual Report Notes to Financial Statements Notes to Financial Statements 1.  Nature of Operations and Financial Statement Presentation (Expressed in thousands of United States dollars) These financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles (“Canadian GAAP”) and reflect the decisions of the Electricity Regulatory Authority (“ERA”). These decisions affect the timing of the recognition of certain transactions resulting in the recognition of regulatory assets and liabilities, which Caribbean Utilities Company, Ltd., (“CUC” or the “Company”) considers it is probable to recover or settle subsequently through the rate-setting process.  The principal activity of the Company is to generate and distribute electricity in its licence area of Grand Cayman, Cayman Islands, pursuant to a 20-year exclusive Transmission & Distribution (“T&D”) Licence and a 21.5 year non-exclusive Generation Licence (collectively the “Licences”) with the Cayman Islands Government (the “Government”), which expire in April 2028 and September 2029 respectively. The Company was incorporated on April 30, 1966 under the laws of the Cayman Islands. On November 7, 2006, the Company announced that its majority shareholder, Fortis Inc. through its wholly-owned subsidiary, Fortis Energy (Bermuda) Ltd. (“Fortis”), acquired an additional 16% of the outstanding Class A Ordinary Shares of CUC from International Power Holdings Limited (“IPHL”) and four other vendors associated with IPHL. Fortis owns a controlling interest in CUC by beneficially holding approximately 60% of the outstanding Class A Ordinary Shares of CUC.  The Company is levied custom duties of $0.85 per imperial gallon (“IG”) of diesel fuel it imports. In addition, the Company pays customs duties of 15% on all other imports. The T&D Licence requires the Company to pay a licence fee of 1% of gross revenues, which applies to customer billings for consumption over 1,000 kilowatt-hours (“kWh”) per month as a pass-through charge on a per kWh basis. In addition to the licence fee, a regulatory fee of ½ of 1% of gross revenues, then prorated and applied only to customer billings with consumption over 1,000 kWh per month. CUC’s base rates are designed to recover and earn a return on all non-fuel and regulatory costs and include per kWh electricity charges and fixed facilities charges. Fuel cost charges and licence and regulatory fees are billed as separate line items. Base rates are subject to an annual review and adjustment each June through the rate cap and adjustment mechanism (“RCAM”). After the requisite review in 2011, the Company confirmed to the ERA that the RCAM yielded no rate adjustment; therefore there was no rate adjustment in June 2011. All fuel and lubricating oil costs are passed through to customers without markup as a per kWh charge.  For regulatory purposes fixed assets comprise the Property, Plant and Equipment (“PP&E”) and intangible assets acquired or constructed by the Company as reported in the Company’s financial statements (see Note 2). The original book value of these fixed assets include an Allowance for Funds Used During Construction (“AFUDC”) (Note 8) and an allowance for General Expenses Capitalised (“GEC”) (Note 8). GEC is calculated as a percentage of up to 10% of Non-Fuel Operating Expenses, varying annually depending on the level of capital activity. The preparation of financial statements in conformity with Canadian GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s critical accounting estimates relate to: Revenue is recognised in a manner approved by the utility’s regulatory authority. Revenue is billed at rates approved by the ERA and is generally bundled to include service associated with generation, transmission and distribution. Transmission is the conveyance of electricity at high voltages (generally at 69 kilovolts (“kV”) and higher). Distribution networks convey electricity from transmission systems to end-use customers. Revenue from the sale of electricity is recognised on an accrual basis. Electricity is metered upon delivery to customers and recognised as revenue using approved rates when consumed. Meters are read periodically and bills are issued to customers based on these readings. At the end of each period, a certain amount of consumed electricity will not have 2.  Summary of Significant Accounting Policies Revenue Recognition Rate Regulated Operations