Fortis Inc. (FTS) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for standing by. My name is Brian and I will be your conference operator today. Welcome to Fortis Q1 2023 Earnings Conference Call and Webcast. [Operator Instructions] At this time, I would now like to turn the conference over to Stephanie Amaimo. Please go ahead, Ms. Amaimo.

Thanks, Brian and good morning, everyone and welcome to Fortis' first quarter 2023 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 first quarter 2023 MD&A. Also unless otherwise specified, all financial information referenced is in Canadian dollar. With that, I will turn the call over to David.

Thank you and good morning, everyone. Before getting started, I'd like to introduce Chris Capone to his first earnings call, since being appointed President and CEO of Central Hudson in February, following the retirement of Charlie Freni. For those of you who don't know Chris, he's been with Central Hudson for over 20 years, serving for many years as Chief Financial Officer. Welcome, Chris. We look forward to working with you in this new capacity as you lead the team in New York.

Thanks, David.

Today, we are pleased to report strong first quarter results, which reflect the diversified nature of our business, favorable market conditions and the continued delivery of our low-risk capital plan. As we've talked about in the past, we remain keenly focused on meeting our clean energy goals, while investing in the resiliency of our energy systems, all-in a manner then ensures continued customer affordability. For example, FortisBC received a milestone approval in April from the British Columbia Utilities Commission for a $155 million investment supporting their energy efficiency programs. This is just one of the many ways our utilities are taking the lead on climate action, while offering practical options to customers to reduce emissions and their bills. From a financial perspective, we invested $1 billion of capital in our energy systems and adjusted earnings per share in the quarter increased $0.13 compared to the first quarter last year, driven by strong regulated growth which Jocelyn will speak to shortly. On the regulatory front, our applications in Arizona and British Columbia continue to progress with decisions in both expected mid-year. On Monday, we announced that we entered into a definitive agreement with Enbridge to sell our unregulated investment in Aitken Creek for approximately $400 million. Once the sale is closed, we expect to use the proceeds to paydown our corporate borrowings, which strengthens our balance sheet and provides additional funding flexibility to support our regulated utilities growth strategy. The transaction is subject to approval by the BCUC, as well as certain closing conditions and adjustments. The sale is expected to close in the second half of 2023. With approximately $1 billion invested in our systems in the first quarter, our $4.3 billion annual capital plan remains on track. Our major capital projects progressed during the quarter. In March, FortisBC filed amended transportation rate schedules with the BCUC in relation to the Eagle Mountain-Woodfibre gas line project. Approval is expected in May and once approved, the project would be one-step closer to construction. The first tranche of projects associated with the MISO long-range transmission plan are advancing with stakeholder outreach, routing studies and design engineering, all underway at ITC. In total, ITC estimates transmission investments of USD 1.4 billion to USD 1.8 billion through 2030, with 6 of the 18 projects in tranche one. As you may recall, the $22.3 billion 5-year capital plan consist of virtually all regulated investments and a diverse mix of highly executable low-risk projects supporting rate base growth across our portfolio of utilities. The plan also includes $5.9 billion for investments directly support cleaner energy. Over the next 5 years, we expect rate base to increase by $12 billion from approximately $34 billion in 2022 to over $46 billion in 2027, supporting average annual rate base growth of 6.2%. With a strong track-record of increasing dividends for the past 49 consecutive years, coupled with our low-risk growth strategy, we remain confident in our 4% to 6% annual dividend growth guidance through 2027. Now, I will turn the call over to Jocelyn for an update on our first quarter financial results.

Thank you, David and good morning everyone. Slide 9 provides a summary of our first quarter results. Reported earnings were $437 million or $0.90 per common share. Adjusted earnings were $439 million or $0.91 per common share, $0.13 higher than the first quarter of 2022. Rate base growth and higher earnings in Arizona were the key drivers of growth for the quarter, which I'll discuss shortly. Foreign exchange also favorably impacted the translation of our US-denominated earnings, while earnings growth was tempered by higher holding company finance cost and higher weighted average shares outstanding. The waterfall chart on Slide 10 highlights the EPS drivers for the quarter by segment. At our US electric and gas utilities, EPS increased by $0.08 for the quarter, with UNS contributing $0.09 and Central Hudson down $0.01. A number of items impacted UNS' results for the quarter, most notably higher wholesale sales and per transmission revenues were mainly driven by favorable market conditions. Additionally, UNS benefited from gains on investments that support retirement benefits. Higher retail sales including the favorable impact of weather also increased earnings. And lastly, lower depreciation expense associated with the retirement of the San Juan facility last June, more than offset higher operating cost. About half of the increase in EPS contribution from UNS is expected to moderate, given timing of wholesale and transmission revenues compared to 2022. The $0.01 EPS decrease at Central Hudson was mainly due to higher operating and cost and finance cost, partially offset by rate base growth. ITC in our Western Canadian utilities each contributed a $0.02 EPS increase, driven mainly by rate base growth. At ITC, earnings growth was tempered by higher holding company finance costs. Our energy infrastructure segment contributed a $0.02 EPS increase for the quarter, driven by higher margins and volumes at Aitken Creek and higher hydroelectric production in Belize. A higher US dollar to Canadian dollar foreign exchange rate favorably impacted the translation of our US-denominated earning, which increased EPS by approximately $0.03. The $0.03 decrease in EPS contribution from our corporate segment was mainly driven by higher finance costs. And lastly, EPS increased by $0.01 due to higher weighted-average shares outstanding related to our dividend reinvestment program. All-in-all, a very strong quarter, even after excluding the timing of earnings that UNS and foreign exchange impacts. During the quarter, our regulated utilities raised over $600 million in long-term debt, largely in support of their capital programs. We also recently entered into interest-rate hedges to mitigate holding company refinancing risks. Despite broader market volatility during the quarter associated with the banking crisis, there remains a strong appetite for low-risk, strong credit quality issuers like Fortis. With our recent debt issuances coupled with $3.6 billion available on our credit facilities, we continue to maintain a strong liquidity position, supporting our $22.3 billion 5-year capital plan. We remain comfortably positioned within our investment grade credit ratings as we execute our capital plan and pursue incremental organic growth opportunities. Turning to an update on some of our ongoing regulatory proceedings since we last updated the market. First, ITC has right to first refusal or ROFR for regional transmission projects in Iowa, Michigan and Minnesota. In March, the Iowa Supreme Court granted certain parties standing to challenge the Iowa ROFR, issuing a temporary injunction staying enforcement of the ROFR statue and remanding the issue to the District Court. Although, the timing of this proceeding and impact on future project is unknown, the decision is not expected to impact projects already approved and awarded by MISO, including Tranche 1 of MISO's long range transmission plan located in Iowa. In Arizona, TEP [Technical Difficulty] continues to progress, TEP's requested rate base of USD 3.6 billion and equity layer of 54% are consistent with Arizona Corporation Commission Staff recommendations. Staff has also recommended an allowed ROE of 9.5% compared to TEP's current ROE of 9.15%. Hearings concluded in April and recommended order and opinion from the Administrative Law Judge is expected mid-year. We expect new rates later this year. In New York, there are no updates on the Show Cause order regarding the deployment of Central Hudson's new customer information system, Central Hudson did file a response to the Show Cause order in January and the timing and outcome of this proceeding remains unknown. Turning to Western Canada, FortisBC filed its final reply arguments on its generic cost of capital proceeding and a decision is expected by mid-year. At Fortis Alberta, proceedings related to the generic cost of capital in the third [ PVR ] term effective in 2024 are progressing with evidence filed, a decision is expected from the Alberta Utilities Commission later this year on both proceeding. With that, I'll now turn the call back to David.

Thank you, Jocelyn. 2023 is off to a great start, both operationally and financially, highlighting the balance and strength of our regulated utility businesses. Looking ahead, we expect to continue to provide long-term value to our shareholders through the execution of our growth strategy, supporting our 4% to 6% annual dividend growth guidance through 2027, while concurrently delivering a cleaner energy future and safe, reliable and affordable service to our customers. That concludes my remarks. I will now turn the call back over to Stephanie.

Thank you, David. This concludes the presentation. At this time, I would like to open the call to address questions from the investment community.

[Operator Instructions] First question comes from the line of Maurice Choy.

Just want to dive a little deeper into Q1 results at UNS. Can you elaborate a little more on the nature of the timing of these wholesale electricity sales and transmission revenue. What happened during the quarter for these items to emerge? And when you say half of the year-over-year increase in EPS contribution were moderate, does that mean you need to somewhat give it back about $0.04 to $0.05 over the remainder of the year?

Maurice, yes, we indicate that we think it's going to moderate just really based on looking at how we transacted last year for wholesale sales in particular. We had done some wholesale sales in third quarter and I believe some in the fourth. So it's just early in the year to make predictions of how and when these transactions are actually going to unfold. So when we look at the timing, most of them were in Q2 last year. So with that, we just advanced it forward in Q1. So we are expecting some of the wholesale sales to moderate.

And I want to finish off with the sale of the Aitken Creek gas storage facilities. Can you take us back to when you first thought about selling the asset. Why do you feel selling an asset was the right thing to do? Why was this right asset to sell in also why now?

That's a great question, Maurice it's -- our job is fiduciaries to look for value within our company and that value change is based on a lot of different inputs, one of them being market condition, interest rate, et cetera. So given that we are always looking for finding that additional shareholder value, some of these things are just kind of on our list to be looking at. When things align, when you can find a good opportunity, good value and a good counter party to look at these assets and find even more value than we can find in them, that's what triggers a deal. It wasn't anything like we're sitting here trying to figure out how to sell this for years and years and years. This is just something that we were being very opportunistic with. And now given the market conditions, provides us particularly in a volatile market period, provides us that additional funding flexibility, balance sheet strength, et cetera. So that's just all of the right things aligned here.

I mean as a follow-up, you mentioned this is one of the things that's on your list to look at. What else is on that list? And obviously, there's some other large unregulated asset in there, like the hydro assets in Belize, with the same logic selling the gas storage in Aitken Creek apply to this set of hydro assets? Or is it more complicated because just taken Belize electricity?

Yes, Maurice, you did not disappoint. I figure that I would have given odds, I would have been your follow-up question. So the only other appreciable regulatory assets we have period is Belize. We don't have some sort of schedule to be looking at these assets. It again is just us being opportunistic across our portfolio and finding that value. So we don't have an agenda here.

Next question, we have Rob Hope with Scotiabank.

First question is Arizona, going into the hearing, you were a little confident that you could get a stipulation agreement, which didn't come to bear. But can you give us some color on how the hearings went and kind of where you see yourself more aligned or less aligned with the stakeholders?

Yes, I'll turn that over to Susan Gray, who's the CEO of UNS Energy and was -- just spent some time on that stand in those hearings. So definitely, has been a very -- I think, sitting from -- speaking from someone who was sitting in that chair, it seems like it was a very straightforward batch of hearings and frankly places of kind of standard disagreement or argument across things like ROE and some other odds and ends. But Susan, do you want to provide a little color on that?

Yes, I think that the hearings were as expected. Prior to the hearings, we were able to narrow some of the contested issues with the other stakeholders and our intervenors. And so, I feel like we had a pretty straightforward hearing in terms of issues that we covered. I would say a lot of discussion around the system reliability benefit, which is an adjuster mechanism that we're proposing to reduce regulatory lag for our new clean energy investments. There's also some conversation about the coal community transition and potential customer funding, which hasn't really been set as a policy by the Arizona Corporation Commission. And then, yes, kind of the typical ROE, fair value increment, things like that. But I think that we're pretty close, a bit closer than we've been in years past in terms of what staff has put forward and what we're recommending. And so looking forward to the judge's recommended opinion and order this summer and then a open meeting to decide the rate case probably early fall.

And then sticking with Arizona, a little bit more of a local question Proposition 412, kind of do you view this as kind of normal course? Or is there potentially some concessions to be made there?

So Proposition 412 is our proposition to approve a new franchise agreement with the city of Tucson. And I would say what's new in this franchise is that we have added a 0.75% increase to the rate, which was previously 2.25%. In order to cover the under grounding cost for a new transmission line that we're building through the city of Tucson and that would provide recovery over about a 10-year period. We've also designated 10% of those new fund to fund the city's climate action and adaptation plan. So that's what the agreement that we came to with the city and that's what's being proposed in Prop412. I think this is fairly new for the city, so I'm not sure I would call it normal course of action, I mean franchisees are normal. This is just a little bit of a twist on it. So the election is coming up just in a couple of weeks here and hope to get started on building that new transmission line underground.

Next question comes from the line of Linda Ezergailis with TD Securities.

Just wanted to step back to a very high level and get your updated views on the likelihood and the relative attractiveness of potential unregulated contracted energy infrastructure investments. I recall in recent history, kind of delegating a search for these types of opportunities to some of your regional heads. And just wondering if the overabundance of utility investments now has have kind of put those opportunities to the back burner or if they're less attractive or maybe you can comment on over time how much of your overall company might be unregulated, if any? And then maybe you can also specifically comment geographically on your the opportunities you also see in BC with the divestiture of Aitken Creek, but you've got your Woodfibre Gas Line likely proceeding and also some RNG opportunities.

That's a great question or questions, Linda and appreciate you asking them because I think this is -- provides an opportunity to provide some very -- some clarity. One is, are we interested in doing unregulated renewables? The answer is no. We have a lot to do in our regulated utilities. And frankly, that's where we see the additional growth going forward on top of our current existing capital plan. So that's where we're focusing. The others are back burner still however you want to think about it. It's -- that's not in -- not -- clearly not in our sights. When we think about longer term, what we want to look like from a company perspective, regulated versus unregulated, we're practically 100% regulated other than that investment in the Belize hydro generation that we have. We like that, we think that's what our investors like to. We think that's the right opportunity to look. And then frankly, that's where our core competency lies. And that's where I think we're going to see plenty of growth opportunities as we go through the clean energy transition on a going-forward basis. Can you remind me what the last part of your question was...

Just [indiscernible] specifically because you've got some R&D in place.

Yes, so the things that we're looking at in BC from the Woodfibre pipeline, regulated utility infrastructure from Tilbury 1B regulated utility infrastructure. It is -- don't try to read anything into us getting out of an unregulated storage facility as a view on our BC company. We love that BC company. We think that they have huge growth opportunities. We see them playing a big role in Clean BC and the strategy for decarbonizing that province. And we're -- it's just as simple as trading on reg for reg. And so I think that provides a lot of clarity on where we're going forward.

And just a follow-up question on your capital 5-year capital expenditure plan, as it continues to evolve and as you layer on new opportunities, especially potentially facilitated by the IRA in the U.S., might you look for alternative like not alternative finding thing, but like might you augment your current financing plan and add to it or might you defer some more discretionary capital to kind of stay within the current financing plans?

So as we build out that capital plan, I don't want to get ahead of our next release as we're drawing up our current plans. And so though look at what our next capital plan, which will be coming in kind of that September, call it, fall time frame, that will be the time that we'll update anything related to, obviously, the capital plan, timing and how we'll fund it. And obviously, the Aitken Creek gives us an extra $400 million in there from a funding flexibility perspective as well.

Our next question comes from the line of Mark Jarvi with CIBC.

I just want to come back to strong results at UNS and Jocelyn you talked a bit about timing, how we might see that year-over-year comparable moderate a little bit, but kind of implying also that results are up. So are you implying there's some sort of structural tailwind a little around the wholesale market in transmission revenues and what's driving that [ picture is ]?

Yes, for the most part it's volume and price differences. It's not -- it's market driven. It's very specific to shorter-term. I'll say shorter-term market perturbations if you want to think of it in that respect. So it isn't necessarily on the wholesale side, a view that there's this long-term additional wholesale sales that can -- that will continue on a going-forward basis. Now on the transmission side, there is just a lot more use of our transmission system than we've had in the past, that's probably, basically likely to continue. I think one of the things that folks forget is that UNS and TEP, Tucson Electric Power in particular has a large portion of their rate base that is for jurisdictional transmission. And we'd also have a forward formula rate that looks just like ITCs. And we have, I think, about $1 billion of transmission capital and about $900 million or so in the current 5-year capital plan at UNS. So some of those things will continue to grow over time.

And then, Jocelyn, coming back to you in terms, you mentioned putting some hedges around interest rates going forward, the Aitken Creek project take out some short-term debt here. Is there anything else you'd like to do in terms of managing any holding company debt or bring down interest expense cost?

Mark, I would say that the 2 you mentioned are 2 big ones for us, right? I mean obviously, Aitken frees up $400 million of our borrowings to give us that flexibility. But we did enter into both here and at ITC at the holding company level into interest rate hedges for the upcoming holding company financings that we have to do this year. So we're always watching the market to determine a good time to go in. And so -- but it's good to take that risk off the table, right? The markets are still volatile and so we're laser-focused on taking that risk off. But Aitken and interest rate lock certainly do improve our position with respect to the volatility we would expect to see on our business. So -- but we're always watching. I don't see -- I think we're going to be looking to -- for our regulated utilities, potentially looking at timing of their debt offering. So we're watching the market very closely.

We see actually more convertible note offerings from U.S. Utilities, is that something you contemplate or there's really not a fit right now for Fortis?

So definitely always looking at things, but the convertibles are not really in our space right now with our current 5-year plan because we don't require any further equity beyond the DRIP that we've already outlined within the plan. So -- but certainly, as we -- as David mentioned, as we now look to our next 5-year capital plan and as we look at the investment profile over the next 5 years, we'll look at all funding options, but convertibles definitely is something that's out there these days.

Next question comes from the line of Ben Pham with BMO.

I wanted to ask on the Iowa situation with ITC and one of your thoughts on next milestones to look for your overall thoughts on process a little bit there. And in terms of materiality, you're thinking this is more of a CapEx you have in there is not going to change or you might see some changes and it's not overly impactful to your potential CapEx plan.

I'm going to punt that one right over to Linda. She has all the details that you're looking for.