Fortis Inc. (NYSE:FTS) Q1 2024 Earnings Call Transcript

Fortis Inc. (NYSE:FTS) Q1 2024 Earnings Call Transcript May 1, 2024

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Operator: Good morning everyone. Thank you for standing by. My name is Ludi, and I will be your conference operator today. Welcome to the Fortis Q1 2024 Earnings Conference Call and Webcast. During the call all participants will be in a listen-only mode. There will be a question-and-answer session following the presentation. [Operator Instructions] At this time, I would like to turn the conference over to Stephanie Amaimo. Please go ahead, Ms. Amaimo.

Stephanie Amaimo: Thank you, Ludi and good morning everyone. Welcome to Fortis’ first quarter 2024 results conference call. I’m joined by David Hutchens, President and CEO; Jocelyn Perry, Executive VP and CFO; other members of the senior management team as well as CEOs from certain subsidiaries. Before we begin today’s call, I want to remind you that the discussion will include forward-looking information, which is subject to the cautionary statement contained in the supporting slide show. Actual results can differ materially from the forecast projections included in the forward-looking information presented today. All non-GAAP financial measures referenced in our prepared remarks are reconciled to the related US GAAP financial measures in our annual 2024 MD&A. Also, unless otherwise specified, all financial information reference is in Canadian dollars. With that, I will turn the call over to David.

David Hutchens: Thank you and good morning, everyone. Before getting started, I’d like to introduce Stephanie Raymond to her first earnings call since being appointed President of Central Hudson in April. Stephanie will serve as president until Chris Capone’s retirement in October, at which time she will assume full responsibilities as president and CEO. Welcome, Stephanie. We look forward to working with you on the Central Hudson team. For the first quarter, we delivered strong and consistent operational and financial results as our regulated utilities continue to effectively execute their business plans. And with $1.1 billion of capital investments made in the first quarter, our $4.8 billion capital plan for 2024 is on track.

Our low-risk growth outlook remains intact and opportunities to expand and extend our plan continue to progress. On the regulatory front, ITC has been focused on the right of first refusal statute in Iowa. While new ROFR legislation did not advance last month, we remain confident that ITC Midwest has the legal right and obligation to construct a Tranche 1 projects in Iowa, assigned through the MISO’s long-range transmission plan and associated tariffs. MISO also released its draft Tranche 2 portfolio, including a preliminary project map, while we expect further refinements, we view this as a promising step forward. With climate risks at the forefront of the utility sector, the recent release of our 2024 climate report was timely, highlighting how Fortis is preparing for and mitigating climate-related impacts across the group of companies.

We continue our long track record of executing our capital plan. These investments in our energy systems support the delivery of cleaner energy and the reliability our customers expect. Our five-year capital plan of $25 billion remains on track, comprising of virtually all regulated investments and a diverse mix of highly executable low-risk projects. With $7 billion earmarked for cleaner energy investments, we expect to interconnect renewables to the grid, invest in renewable generation and energy storage in Arizona, and deliver cleaner fuel solutions in British Columbia. Rate base is expected to increase by $12 billion to over $49 billion in 2028, supporting average annual rate base growth of 6.3%. Beyond the plan, our utilities continue to advance additional growth opportunities with a couple of key developments during the quarter.

As mentioned, MISO released a preliminary map of its LRTP Tranche 2 projects with total transmission investments estimated in the range of USD17 to USD23 billion. While it is too early to estimate the investment opportunities within ITC’s footprint, MISO Board approval is anticipated in the second half of 2024. The preliminary map of projects includes 765kV transmission lines. If approved, these investments would bolster MISO’s ability to facilitate the ongoing generation fleet transition, accommodate load growth, and address increasingly frequent and severe weather events. We believe this is exactly the forward-looking, innovative planning required to deliver a reliable, resilient grid of the future. In Arizona, the team is working to advance the 2023 integrated resource plans, filed by Tucson Electric Power and UNS Electric, which requires incremental investments estimated at USD2.5 to USD5 billion, through 2038.

In late 2023, TEP and UNS Electric released a joint all-source RFP, calling for up to 1,500 megawatts of new resources aligned with their respective IRPs. Proposals were received in March, and projects are expected to be announced later this year. In March, the BCUC approved key elements of FortisBC’s Renewable Natural Gas or RNG application, requiring that natural gas deliveries to all customers include a portion of RNG. In addition, the BCUC accepted FortisBC’s Long-Term Gas Resource Plan, which outlines FortisBC’s plan to serve customers’ energy needs, transition to a low-carbon energy future, and support meeting provincial greenhouse gas targets. Overall, we are pleased with this decision as it recognizes the key role that the gas system will play in meeting British Columbia’s energy future.

Also in March, the province of British Columbia issued an environmental assessment certificate for the Tilbury Marine Jetty Project. The construction of the jetty supports the expansion of the Tilbury LNG facility, which is uniquely positioned to meet customer demand for natural gas. The site is scalable and can accommodate additional storage and liquefaction equipment and is close to international shipping lanes. Once constructed, the jetty would make use of FortisBC’s assets at the Tilbury site to service marine bunkering. In the US, we are seeing momentum build around load growth opportunities. In ITC Midwest footprint, Google recently announced plans for a data center to be built in Cedar Rapids, Iowa, with a goal of coming online in 2026.

The data center will support initial load growth of 300 megawatts and is expected to increase to 600 megawatts over time. In Michigan and Arizona, we are seeing increasing inquiries related to manufacturing facilities and data centers. Also in Arizona, South 32 continues construction of the zinc and manganese Hermosa mine, which is expected to become one of UNS’s largest customers. These developments can provide strong economic growth for our communities and favorably impact customer rates. During the quarter, we released the 2024 climate report, which assesses the impact of climate on our priority assets over multiple scenarios. The report identifies key risks related to climate change, Fortis’ mitigation activities to address those risks, and future opportunities to advance the resilience of our utilities.

With a strong crack record of increasing dividends for the past 50 consecutive years, coupled with our low-risk growth strategy, we remain confident in our 4%-6% annual dividend growth guidance through 2028. Now I will turn the call over to Jocelyn for an update on our first quarter financial results.

Jocelyn Perry: Thank you, David, and good morning, everyone. The first quarter of 2021 reported and adjusted earnings per common share for the first quarter of 2024 were $0.93. Adjusted EPS was $0.02 higher than the first quarter of 2023, and key drivers of EPS growth related to rate-based growth across our group of companies, and the timing of earnings associated with the new cost-to-capital parameters at Fortis BC. Regulated utility growth was tempered by higher corporate costs and weighted average shares outstanding. The disposition of Acron Creek, which occurred in November 2023, also impacted EPS in the quarter by $0.03. While negative for the quarter, on an annual basis, the disposition of Acron Creek will be neutral to EPS.

The chart on slide 10 highlights the EPS drivers for the quarter by segment. Our Western Canadian utilities contributed a $0.06 EPS increase, $0.04 related to the timing of the new cost-to-capital parameters at FortisBC, approved by the BCUC in September 2023, and retroactive to January 2023. Growth also reflected rate-based growth and a higher allowed ROE at Fortis Alberta effective January 1. At our largest utility, ITC, the $0.02 EPS increase was mainly driven by rate-based growth. Lower sought-based compensation for ITC was offset by higher holding company finance costs. EPS was $0.01 higher quarter-over-quarter for our US electric and gas utilities, largely driven by rate-based growth and the timing of operating costs at Central Hudson.

In Arizona, earnings were largely consistent with the first quarter of 2023. The favorable impacts of new customer rates and higher margins on wholesale sales were offset by higher depreciation and operating costs and lower retail revenue associated with milder weather. Due to the seasonality of sales, the favorable impact of new customer rates at TEP is expected to be higher in the second and third quarters. At our other electric segment, rate-based growth and higher sales contributed a $0.01 increase in EPS, and for our corporate and other segment, the decrease mainly reflects the disposition of a concrete, which I mentioned earlier. The remaining decrease reflects higher holding company finance costs and unrealized losses on derivative contracts.

And lastly, higher weighted average shares reflect shares issued under our dividend reinvestment plan. To date, we have not used the ATM program as participation under the drip remains strong. Through April, we have raised approximately $400 million of debt to repay short-term borrowings and fund our capital program. As shown on the slide, we have limited non-regulated debt maturing in 2024, and our $600 million series in preference shares are scheduled to reset at the end of this year. Overall, we remain in a strong liquidity position as we execute our five-year capital plan. Our investment grade credit ratings with Moody’s, S&P and DBRS Morningstar remain unchanged. We are on track to achieve an average cash flow to debt metrics of 12% over the next five years, and we continue to engage with S&P on our physical risk around climate change.

In March, the Iowa District Court issued an order denying all motions for reconsideration of its decision in relation to the Iowa Rural Firm. This includes ITC’s request for reconsideration with respect to the scope of the injunction for Tranche 1 projects in Iowa that were previously awarded to ITC Midwest by MISO. ITC has appealed the district court’s decision to the Iowa Supreme Court. As discussed last quarter, under the MISO tariff, approximately 70% of the Iowa Tranche 1 projects are upgrades to ITC’s facilities, allowing existing rights away, which under MISO’s tariff grants ITC the option to construct the upgrades regardless of the outcome of the appeal. For any portion of the Tranche 1 projects in Iowa to be competitively bid, we believe a federal decision that significantly departs from existing rules under the MISO tariff is required.

Until there is more certainty around the resolution of this matter, we cannot predict the impact on the timing of the capital expenditures related to Tranche 1 projects located in Iowa. In New York, Central Hudson’s one-year general rate application is progressing. Hearings concluded in the first quarter, and we anticipated decision from the New York Public Service Commission in July. Last month, FortisBC filed its 2025 through 2027 rate framework proposal with the BCUC. The rate framework builds upon the current multi-year rate plan and includes a prescribed approach for operating expenses and capital, an innovation fund for cleaner energy, and continued earnings sharing mechanisms. The regulatory process will continue throughout 2024. And with that, I’ll now turn the call back to David.

David Hutchens: To conclude, Fortis is off to a solid start in 2024. We continue to advance our low-risk, sustainable growth strategy underpinned by our diverse, regulated energy delivery businesses across North America. Initiatives like our 2024 climate report, as well as our integrated resource plans in Arizona, show our proactive approach on behalf of our customers in identifying and mitigating climate risks and pursuing opportunities to ensure reliable and resilient service. With preliminary visibility on Tranche 2 of the MISO Long Range Transmission Plan, ITC is well positioned to advance investments in its footprint. And with low growth opportunities on the horizon, we are focused on investments that keep energy affordable for our customers.

We remain confident in our five-year capital plan, which supports average annual rate-based growth of approximately 6% and our 4%-6% annual dividend growth guidance through 2028. That concludes my remarks. I will now turn the call back over to Stephanie.

Stephanie Amaimo: Thank you, David. This concludes the presentation. At this time, we’d like to open the call to address questions from the investment community.

Operator: Thank you. We will now conduct the question-and-answer if you’re here. [Operator instructions]. And your first question comes from the line up Maurice Choy from RBC Capital Market. Your line is open.

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Q&A Session

Maurice Choy: Good morning, everyone. Please, let’s kick off with a comment you made earlier, Jocelyn, about how you’ve engaged the S&P credit rating agency on physical asset risk. As we head into, I guess, the later part this year with potential for higher wildfire risk. Can you just compare and contrast the regulatory and legislative setup across your attend utilities or even just areas where you feel there could be higher versus lower risk?

Jocelyn Perry: So Maurice, I’ll start off. So, yes, we have engaged with S&P and we continue to do so. And I would characterize up to this stage. We’ve been sharing information around that in terms of what we’re doing from a mitigation point of view, engagements we’re having with regulators, how we’re working with EEI. So, right now, we’re just continuing to information share with S&P. As you can appreciate, a lot of our jurisdictions are different with respect to how things are treated from a regulatory perspective. We don’t have specific regulatory mechanisms that specifically address wildfires. But we’ve had wildfires in the past, like in Alberta last year, we had around $10 million of cost in one particular fire. And that will be accommodated through the current rate structure that they have.

I will say that given, I say, the attention on wildfires, that our subsidiaries are having more conversations and more interactions with regulators so that they fully understand our plans. And that, that we’re just having more engagement generally with the regulator. So, I don’t know if I see any one particular area that’s having more risks than the others. One of the benefits of Fortes is that we’re substantially regulated. We are in good regulatory jurisdictions. We’ve historically done well in front of the regulator with respect to how we’ve managed our utilities and recovered our costs. So, I’m not expecting any issue there, but it is evolving as time progresses. And David?

David Hutchens: Yes, just to add a little color there, Maurice. Obviously, the virus does vary by jurisdiction and the focus areas have historically been, well, I’ll say currently even, have been on the western North America side of the continent here. And that primarily puts our focus on Alberta, BC, and Arizona in that order. But I think one of the things that folks have to understand, too, is the very different legal and liability and regulatory structures between, say, BC and Alberta, and their structures, which are much more favorable, much more regulated, much more defined on how things are handled from a liability perspective, different legal construct. All of those things are a very different risk profile than, say, in the US.

And in the US, our exposure is at Arizona, which is, has very limited exposure just because of the nature of the assets that we own. We own the majority of our assets are in the Tucson metro area, which don’t have a huge wildfire risk because of, well, there are not a lot of trees into the Tucson metro area or things that necessarily burn. So it is a very different, I’ll say, risk outlook. And we have been spending a lot of time with our teams across all of our subsidiaries, not just those three, to make sure we’re taking the best practices that we see, not just across our own utilities, but across the entire industry and finding ways of mitigating that risk and then getting out there and explaining the great job that we’re already doing, but also making sure that we’re explaining that to folks like our rating agencies.

Maurice Choy: Got it. Thanks for that. And it makes sense. And moving quickly over to BC with our [indiscernible], I gather that there were a number of items that FortisBC proposed to keep and continue as part of the rate framework. And I wonder if you could share if there’s anything in there that’s materially different from the current framework. It’s clearly a three-year plan, not a five-year one. And if there’s more of a holding pattern request until we get clarity on how the province will roll out the [indiscernible].

David Hutchens: Yes. So Maurice, the framework that they’ve filed, as I understand it, I’ll kick it over here to Roger, but it seemed like almost the exact same mechanisms that we had in the prior, maybe with just a little fine tuning other than, as you mentioned, it’s not a five-year plan. It’s a three-year plan. But Roger, anything to describe that’s sort of a little bit more out of the ordinary or slightly different from the last MRP?

Roger Dall’Antonia: No, thanks, David. Thanks Maurice for the question. I think David is characterized it correctly. It is a multi-rate plan, three years versus five. We continue to pursue, what we call a performance-based structure where our delivery rate or controllable O&M increases by an inflation minus the productivity improvement factors. So that structure is the same. We’ve focused again on controllable O&M and have proposed all the flow-through items for the non-controllable O&M. I think one area of difference, whereas we had escalated base capital or sustaining capital by formula, instead here for the utilities, did a three-year sustaining capital forecast. However, we’ve maintained a similar structure on the growth capital at underpins for the BC energy and customer addition.

So overall, the last plan we had, the PBR plan, the MRP plan was quite successful. No reason to vary significantly. I think the one area that we are putting a bit more focuses on things like energy transition. How do we undertake innovative investments, things like that, but more in relation to the policy drivers, not really much different on the underlying rate setting for the basic rates.

David Hutchens: And then the other piece, Roger, too, is the fact that we can still file for CPCNs for large projects, which is obviously important for us to do things above and beyond what the underlying MRP structure would allow for.

Operator: Thank you. And your next question comes from the line of Rob Hope from Scotiabank. Your line is open.

Rob Hope: Good morning, everyone. Maybe first off on transmission. It does seem like various levels of government are very supportive of incremental transmission investments. However, we continue to see challenges on the permitting as well as the legal side there. So when you take a look at Tranche 1 and Tranche 2 and the challenges that we’ve had there, what is the path forward such that we could see an acceleration of transmission investment at ICT and some of the other kind of for this subsidiaries?