Fortis Inc. (FTS) Earnings Call Transcript & Summary

Good morning. It is my pleasure to welcome Barry Perry, President and Chief Executive Officer of Fortis, to the JPMorgan 2020 Energy, Power & Renewables Conference. [Operator Instructions] Barry, I'll turn it over to you for the opening remarks and any additional thoughts before we go into Q&A.

Well, thank you, Richard. Good morning, everyone. Coming to you from my office here in St. John's, Newfoundland. I'm going to cover a few topics this morning, basically provide a COVID update, talk a little bit about regulatory and our growth opportunities, and I'll finish off just talking about some ESG initiatives that we have on the go, and then we're going to take some questions. So for folks that really don't know the company, we are a geographically-diverse energy delivery business. I know you have the slides deck. I plan to use a few of those slides as I go through my presentation. We're sort of spread out across North America. We have 10 utility operations across the continent, focused on the regulated utility business. 99% of our assets are on the regulated side. Rate base last year was about $28 billion. It would be about $30 billion this year when we get through 2020. We serve about 3.3 million customers overall. And actually, 93% of our assets are focused on the T&D space. So basically, poles, wires and gas lines, that's what our focus is. And our business right now is 65% of it. Our earnings are coming from the U.S., with the rest primarily coming from Canada. I would say, in terms of businesses, we have -- we own ITC, the largest independent owner of transmission in the U.S. We bought that business back in 2016. That's a high-quality business, FERC regulated. The rest of the businesses that we own are state-regulated or provincially-regulated in Canada. And again, regulation is essentially very, very similar in both countries. We're very used to intensive regulatory oversight and really pride ourselves on maintaining very reasonable regulatory relationships. So let's just talk a little bit about COVID. As you can see, I'm sitting in my office. So our corporate office here in St. John's, we have just 60 people in our corporate office. Overall, the company has about 9,000 employees across North America. About half the employees in corporate office came back on June 8, and the rest are planning on returning on July 6. Newfoundland, the province of Newfoundland, has about 0.5 million people. And we only have 1 active COVID case here in the province currently, so we're in a very strong shape. The health care professionals have done a great job managing the crisis here in Newfoundland. They locked the place down pretty tightly early on. Even today, you basically -- unless you're a resident of Newfoundland, you can't come into the province. And if you're a resident returning, you do have to quarantine for 14 days. So because we're an island, I think that's helped here. We're sort of very much similar to, I suppose, New Zealand and Tasmania over in Australia. So very similar outcomes, well-managed at this point. Hopefully, we can keep it that way. In terms of our business, overall, we have about 5,000 people working from home now across the group of companies. That's gone really well. The work in the field, the 4,000 or so that are still working, that's going well. Clearly, now these workers have all the PPE that they need. We're executing well. Our capital plan is still intact. We just -- this year, we're spending about $4.3 billion in capital, and we're not seeing any change to that plan at this point in time. And in the Q1 report, we identified that we had spent $1.2 billion in the first quarter, and that continues pretty well at this point in time. We've had no supply chain issues. Really, we've had a couple of small things but nothing material. Clearly, have done things like sequestering certain employee groups, but especially control room operators, practicing good social distancing and good hygiene practices throughout the company. I got my sanitizer here and all of that. We had -- each had a care package when we came back to work and on our desks, and that's gone really well. So overall, from a business perspective or a financial perspective, we did disclose in Q1 that 82% of our annual revenues were protected by regulatory mechanisms or from residential sales. That's a pretty strong place. We also said that we had strong liquidity coming into the crisis. You may recall, last year, we sold a large asset for $1 billion. We also issued $1.2 billion of common equity and used those proceeds to pay down debt. So we came into the crisis with probably one of the strongest liquidity positions in the entire sector, ranking in, I think, the sixth best liquidity for the entire sector and up with some of the very large companies. We also have some tailwinds around FX. The Canadian dollar, as we can hear during the crisis and that given our exposure to U.S. assets, that's been a tailwind for the company, and we do have regulatory mechanisms around pension expense as well and many of the utilities that is helping mitigate any issues around that. So overall, I would say we're in pretty good shape. In the first quarter, we did talk about each of our regions about how COVID was impacting load. And consistent with other utilities in the industry, we were seeing an increase in residential load and a decline in commercial and industrial load. The areas that we had some real exposure that weren't protected by regulatory mechanisms were Arizona and the Caribbean. So overall, we were seeing a decline of about 3% in load in these areas. And I would say that since the quarter end, since the period that we assessed, which is from mid-March to mid-April in the quarter end, things have improved, especially in Arizona. The weather has gotten really warm down there. So right now, the overall, I think, load is probably up year-over-year given the weather because last year, we had a really cool May. And so overall, we're not seeing those load impacts. The big impact in Arizona really is a delayed outcome for our rate case. It's been pushed back to the end of the year now. We were expecting that in sort of April, May period. But because of the crisis, we really had to push that back to the -- getting a decision now late November, December, so that's going to impact that business. But from a load perspective, we're not seeing that issue given that we've been running successfully now a number of days there at over 100 degrees, and that's helping out a lot. The Caribbean is a small part of our business overall. It's like 3% of the assets overall. That business is suffering, I would say, because of the tourism travel going to 0, large hotels basically empty, and we are seeing some impact. But fortunately, there, it's a pretty small part of the overall business. Our biggest business, as you guys -- as I mentioned, is ITC, the transmission company. That's about 40% of the overall company. That has a very strong regulatory mechanism. It gets to true-up its cost on an annual basis, and it's well-protected from the impacts of the pandemic. And even there, I think some of the load numbers, they get the bill on peak load. And because of some of the weather that we've experienced in the Midwest, I think we're hitting some really good peaks, and the impacts are not as great there. So -- but those impacts are recoverable anyway, so -- but it's nice to see that we're getting back to some better numbers there overall. So I would say, overall, we're managing the crisis pretty well, really focused on our employee safety. I should mention, we are working in a much safer manner. We -- historically, we've had some of the best safety stats in the industry. We're in the top quartile on a consistent basis. But since the beginning of the year, our numbers are running at half those levels, so we're even much better than we've been, say, on average for the last 3 years. We actually were better, like in the first 2 months, January and February, about 50% better before the crisis, but that's continued now during the pandemic. And we do think we've put a real big focus on safety in the organization, and it's paying off. But even now during the pandemic, I think our employees are very, very much looking out for each other and following good work practices, and that's showing up in our safety numbers. And I've said to my -- all my team members that if we can come through this pandemic and look back and say that it was the safest time in our history, that would be a pretty amazing accomplishment, and I'm hoping that we can do that. So on regulatory, maybe moving to that. This is Slide 18. It's a summary of our regulatory proceedings. We've made a lot of headway on ITC with the return on equity matters at FERC. I think the body of evidence is now growing that FERC is supportive of, I would say, reasonable ROEs for transmission. We just got the recent decision upgraded, the base ROE from 9.88% to 10.02%. And with the adders that ITC has, that allows them to earn 10.77% on their 60% equity. So I think that another positive sign that FERC is being really focused on making sure that ROEs for transmission are set appropriately. We're optimistic that this issue is receiving more now. And hopefully, also, FERC has announced sort of review of incentive adders, and they've outlined some thoughts around that, that are positive, I think. And hopefully, we'll see some more information on that soon as well. So all in all, we're feeling more comfortable about the situation there. Clearly, we could be surprised, I suppose, but I think FERC has left themselves a lot of flexibility in this recent decision to withstand any complaints that might come forward that suggest ROEs are higher. I will say that at 10.02%, there's still lots of state ROEs that even recently have been decided in the high 9s, and to have FERC at 10 for transmission, doesn't seem very unreasonable to me. That's for sure. TEP, the rate case there, we had filed this case mid-2019 using 2018 as a test year. The last time that we had set rates, we used a test year of June 30, 2015, so we're updating our rates from back then. We are trying to get about USD 700 million of rate base into rates, and that would provide a fairly significant lift to our earnings. So having the case delayed until late year was a significant impact to the company, and we're hopeful the regulator understands that. We've expressed our concerns around that clearly. And I'm very hopeful at this point that we'll get a decision around late November. So for new rates, January 1, which should provide a fairly significant lift to Fortis' earnings for the '21 year. There really is no contentious issues remaining in that case. The ROEs left to be decided, we asked for 10%, currently earning 9.75%, and the staff recommended 9.28%. So I'm hopeful that we'll do a bit better than 9.28%, but that's sort of the only remaining issue. The staff recently filed some testimony around some post-test year adjustments that we had done related to capital. We had installed some reciprocating engines outside of Tucson, about $200 million worth of those and also buy another unit at Gila River, and it looks like there's no real concerns around that. So that was a positive, and staff have filed some evidence on that recently. So overall, I think we're in pretty good shape there. We are expecting a decision in British Columbia on a new multiyear rate plan. Again, there were no real contentious issues in that. We should get that decision in the next few weeks, and I do expect that to be positive. I will point out that we've filed in BC an environmental assessment for our Tilbury LNG plant facility. That's a plant that's very near Vancouver on the Fraser River, a lot of potential upside for investment for Fortis in that plant. So we filed a full-scale environmental assessment that allows us to expand that plant in several different areas, and pretty excited stuff -- exciting stuff there. That's one thing to watch for us in the next few years. And then finally, on material regulatory matters, FortisAlberta, there was a cost of capital hearing that was started for the industry in Alberta. That's gotten delayed a bit here because of the pandemic. It was going to establish cost of capital for 2021 and onwards. Recently, the commission has asked for some input on how to restart that hearing, but there's been no final determinations made on that. And then finally, we -- last year, we did get a decision that was appealed for our transmission assets in Alberta. We're primarily a distributor in that province, but we did have some transmission assets, and the AltaLink franchise, which is owned by Berkshire Energy, felt that they should own those assets because they are mainly focused on transmission and regulator after this third regulatory proceeding on this issue. First 2, they agreed with us. Third one, they agreed with them, asked us to transfer those assets to AltaLink. We appealed that decision. And now, a regulator has asked for more evidence on that. And we expect a written proceeding, I think, in September with a decision before the end of the year. That's to deal with about $400 million worth of assets. Ultimately, if it is transferred, we will get paid for those assets. But clearly, we feel we should retain them. So that's sort of an update on regulatory. I'll quickly move to growth. We've been guiding The Street that we're -- our capital budget over the next 5 years out to 2024 is about $18.8 billion, call it $19 billion. That's going to allow us to grow our rate base by about 7% a year on average over the period. We're actually looking at adding about $10 billion of rate base, growing from $28 billion in 2019 to about $38 billion in 2024. And we're on track with that. That's going well, and that clearly supports our dividend growth guidance of 6%. And we've guided on the dividend for a while now. We -- in Canada, we tend to provide dividend guidance instead of earnings guidance. And we still have a big contingent of retail shareholders. I think 1/3 of our stock is held by retail shareholders, so very important the dividend growth is for them. And we have a record in Canada of increasing our dividend for 46 consecutive years, and that's an important metric for the company. So the capital investment supports the earnings growth and obviously supports dividend growth. In terms of the businesses that we're getting that growth from, fortunately for Fortis, it's coming from our larger businesses. ITC continues to perform well. It's investing, on a Canadian basis, close to $1 billion a year in its transmission system. And then we have our Arizona business. Tucson Electric Power continues to grow well, and we're really there focused a lot around renewable energy, cleaner energy. And I think that's going to fund or going to create growth for a long time for us in Arizona. And then finally, our BC business, our large gas distribution franchise. We serve over 1 million gas customers in BC. I think it's probably the most progressive, innovative gas franchise in North America. We're doing lots of great things around renewable natural gas, gas for transportation, bunkering of ocean vessels with natural gas. We're actually shipping containers of LNG, ISO-size, truck-size containers to China, the first Canadian company to send LNG to China, not by ship, but by containers on ships. So again, that's all supported by the regulator, all regulated investment. We're allowed to put fueling stations and rate base, those kind of things. So very excited about the growth prospects for that company overall. And we typically update our 5-year capital plans once a year. Clearly, typically, it's been done in the fall. This year, we haven't yet decided given the pandemic, but pretty optimistic about the overall growth of the company. I do want to comment finally on sustainability or ESG. We have, over the last number of years, spent a lot of time in this area. And we're fortunate at Fortis because we have a great sort of footprint. 93% of our assets are in energy, in transmission and distribution, and that provides a pretty light environmental footprint for the company. So we're in a strong place, and that's been recognized by the different surveys. MSCI have upgraded us over the last 5 years from BB to AA. That's 5 -- almost 5-notch improvement in their assessment of Fortis. And that's come from us engaging with them in conversation about our business and our plans and the performance, and they've rated us really, really high at this point. The areas where we are focused on improving mostly are in Arizona. We do still -- that's a vertically-integrated utility at Tucson Electric Power. We're moving away from coal there over time and moving much more to renewables. And we'll be coming out with some new targets in the second half of this year around sort of more aggressive greenhouse gas reductions for that business, and I think that's going to drive more growth in the business, more renewables and wind, solar, overtime transmission as well. In BC, our gas business, they were actually focused on customer emissions on using gas, and they're aiming to reduce those greenhouse gases by 30% by 2030, a lot of it on energy efficiency, a focus on renewable natural gas, LNG, clean LNG. BC's LNG is made from renewable power of hydroelectric. It's -- they're marketing it as the cleanest LNG in the world. So there's a lot of positive things happening there, and that's supporting those targets. In terms of the other areas, social, we've done a lot of great things there. We -- especially during the pandemic, we've been big partners of our community and charitable-giving, and that's been a hallmark of Fortis over the years. Great on safety and reliability as well. And in terms of governance, I will say that we've been ranked very high by the various rating agencies on this area. There's one in Canada that ranks all public companies, and Fortis is typically in the top decile in terms of governance. We have a strong Board, and so we rank really high -- highly there. So I think for us, overall, we're well positioned on ESG to be a leader, and that's definitely an area that we can continue to focus on. We will be rolling out our new sustainability report here in the next month or s and you'll see lots of great information in there that shows what the company is doing in this area. So feel that we're well positioned and that we'll continue to focus on clean energy going forward and even get stronger in this area. So Rich, I'm going to stop there and maybe take some questions if there are any and we'll go from there.

Thanks, Barry. Appreciate your [ coming ]. We'll start with one question from our audience. Turning back to Arizona and the rate case discussions, you kind of bracketed ROE between your announced band, the staff position. Do you have any more thoughts around where the ROE may fall within that range? And if those expectations have changed at all as the case has evolved from the April, May time frame to a more extended process?

I don't think that's changed really. It's going to be what it's going to be at this point. The evidence -- I think there's a hearing next week on some final matters, but -- and then a brief sort of in August, September, I think. But Richard, state ROEs are still being established at higher levels than that. DTE just settled at 9.91% in Michigan, right? So 9.28% is on the low side. It's on the low side, so we would hope we do better than that. And especially given the historical test year in Arizona, we were just talking about updating rates for 2015. And I feel the company has done its job in Arizona. We've really invested heavily in that business and moving it much further along the clean energy curve, I'll call it, and we'll continue to do that. So I think that when you put all that together, the ROE needs to be appropriate there. And it's -- hopefully, we'll do a bit better than the 9.28%.

And maybe sticking with Arizona, the -- I guess the remaining procedural schedule sounds relatively straightforward in the sense that you listed what was contested and what's not, and it seems like you're progressing through, albeit on a slower schedule. Do you see the elections and just the timing there impacting the rate case at all? Or by the time you get to the sort of November, December decision, you do have confidence you'll have new rates?

We're not seeing it. Clearly, you never can tell. You don't want to be in front of an election. You know that. I suppose it's a positive to -- once we knew it's going to be delayed, to delay it beyond the election, both for commission and for the federal election, makes some sense, I think. We've done a good -- I would say good job in the state. Our rates have been well-managed. On average, I think, last decade rates have only gone up about 1% a year, so it's not like there's been large rate impacts for customers. And yet, the business and the quality of the service in terms of cleaner energy that we're delivering has improved so much over that period of time. So I think that regulators, I hope, will realize that. And I think the decision will be made by the existing commission rather than the new. If there are new commissioners coming in, they don't get inaugurated until January, so we're hopeful, obviously, that the commission that we've been dealing with will make the decision. We've been here before. This has happened historically that commission between the election and the inauguration of new commissioners, the commission still operates basically. And we've had -- I will say -- people ask -- someone asked me recently, "Are you guys concerned about Arizona? Would -- will you be a seller in Arizona?" And I just fell off my chair, I just -- I said, "No, no, no, that we're a buyer." If there are assets in Arizona, like we're a buyer, right? It's -- we believe that the long-term growth potential for our business there. We knew coming in, it was the historical test year that the earnings would be saw tooth-like pattern of growth. I would hope that, over the long term, we could maybe get some of that changed, but it's not going to dissuade us. The business is a strong business, and the demographics in America support that state so much. The people are still moving to Arizona, and I think that's going to continue. And we're very, very -- we're happy with our investment there, and we're hopeful that we'll get a reasonable outcome in the rate case late this year.

Great. Maybe switching to ITC real quick. Great to see the MISO decision. Curious to get your thoughts, one, on the transmission incentives, as you briefly referenced, maybe just expectations for FERC's, I guess, seemingly positive or open approach to addressing incentive adders as well as, I guess, longstanding growth for ITC through a potential another round of regional transmission build-out? So both on the growth and the ROE front, maybe where do you see the outlook for ITC right now?

Yes. So at FERC, right now, based on what FERC's outline in the incentive docket, I guess, you could call it, this sort of idea of doubling the RTO adder from 50 to 100 basis points and -- but losing the Transco adder, which for ITC is 25. So net-net, just on those 2 items alone, that's 25 basis points that if FERC confirmed that that's what was going that ITC's ROEs would go up, so that 10.77% would be 11.02%, I think it is. So that would be a positive. But they talked about other adders that I think ITC could go after, and this concept of the 250 basis point range, where historically, we would have been capped out on some of these adders, that provides a lot more flexibility to earn a little more, frankly. And I think that's pretty exciting. So again, that points to a more positive view on at FERC about these matters, in my view. And so I think that, hopefully, there'll be a little more upside for ITC there. We -- from the beginning, Richard, we've really -- I think the market's finally getting it that ITC is growing faster than what anyone thought was going to grow when we bought it in 2016. They had a decline in CapEx curve back then. I remember saying to my Board that the outer years back in 2016, the ITC was down like 5% growth rate, whereas like 2017-2018 year, they were at 7%. And I said, "If we can grow ITC at 7% consistently, it's going to be a home run." It's going to be good anyway, but it's going to be a home run for the company. And we're there. We're at 7% growth, right? And they really are participating in the build-out of renewables in the Midwest. And there with the incumbent transmission lines, they own 16,000 miles of transmission, and people can't understand how much that is. That's massive. It's 5 times across Canada, from Newfoundland to Vancouver, stringing the line 5 times, like it's irreplaceable infrastructure, and I see that growth continuing. The multi-value projects that you mentioned, ITC just got approval to do the last 5 of those projects, and that's a couple of hundred million more in their 5-year plan related to that. And every time one of those projects got turned on, they were at maximum capacity. So it tells you that, first of all, it's a great idea to do those projects, those interregional projects. They were needed and -- but they should have been bigger. There should have been more capacity because when they were turned on, they were at max capacity. That's how much wind and solar is being built out in the Midwest. And the MISO cues are like up -- out of the -- off the charts, basically, and that's not going to change. It's not all going to get built, but a lot of it's going to get built. And you see the targets that are being set by ITC's main customers, Alliance, CMS and DTE around greenhouse gas reduction, renewable penetration, that's all going to drive growth at ITC. And so from a franchise perspective, I think it's one of the best franchises in all of North America. And it has a very strong regulatory compact. I'm just really, really happy that we were successful in acquiring it back in 2016.

Well, Barry, thank you for the presentation and the Q&A. Thank you for joining us today.

Thanks, Richard.