Fortis Inc. ($FTS)

Thank you for standing by. This is Betsy, the conference operator. Welcome to the Fortis Inc. First Quarter 2026 Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Stephanie Amaimo, Vice President, Investor Relations. Please go ahead, Ms. Amaimo.

Thanks, Betsy, and good morning, everyone. Welcome to Fortis' First Quarter 2026 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. Non-GAAP financial measures referenced in our prepared remarks are reconciled to the related U.S. GAAP financial measures in our first quarter 2026 MD&A. Also, unless otherwise specified, all financial information referenced is in Canadian dollars. With that, I will turn the call over to David.

Thank you, and good morning, everyone. Before getting into the results, I'd like to take a moment to acknowledge Gary Smith, Executive Vice President of Operations and Technology, who is retiring at the end of this month. Gary has had an incredible 42-year career with Fortis, serving in leadership roles and boards across our utilities. He has been integral to Fortis' growth and success, and we're incredibly grateful for his many contributions. We truly wish Gary all the best. We are pleased with our start in 2026, building on the momentum from last year. During the first quarter, we delivered safe and reliable service while advancing our long-term growth strategy. We invested $1.4 billion of capital into our utility systems and reported earnings per share of $0.99. We also successfully concluded the UNS Gas rate case reaching a constructive regulatory outcome for our customers and stakeholders. With 25% of our capital plan invested in the first quarter, we remain well positioned to execute our $5.6 billion of planned investments in 2026. Major capital banks continued to progress. A significant milestone was achieved at the Big Cedar Industrial Center, where ITC completed the substation that will support 300 megawatts a growth for the first data center. Transmission upgrade work for the big Cedar load expansion project is also underway at this location to serve another 1,600 megawatts of new data center load expected to be completed by 2028. We -- at UNS, the ACC approved an amendment to the Springville Generating Stations certificate of environmental compatibility to allow the conversion from coal to gas generation. This approval advances TEP's plan to extend the operational life of the facility and supports long-term customer affordability and system reliability. As we have discussed in the past, utilities continue to prioritize capital investments focused on operational need and customer bill impacts. At ITC, with a substantial data center load anticipated to come online in Iowa. ITC Midwest network transmission rates are expected to be reduced by approximately 20% by the end of the decade. At TEP, the coal to natural gas conversion at Springville generating station will be approximately 10% of the capital cost of new gas generation. This is an economical solution benefiting our customers and the communities we serve. Also at TEP, the 300 megawatts of load growth for the data center associated with the approved energy supply agreement is expected to save a typical residential customer, approximately USD 13 per month once at full production, thanks to this additional revenue. Overall, affordability continues to be an integral part of how we plan, invest and operate across our group of companies to ensure cost-effective service for our customers. Turning now to Slide 7. With our 2026 and 5-year capital plans on track, we continue to expect average annual rate base growth of 7% through 2030. Above and beyond the plan, our teams continue to drive forward a strong slate of incremental growth opportunities. First, at ITC, the MISO LRTP portfolio of projects is advancing. For Tranche 2.1, ITC expects USD 3.3 to USD 3.8 billion of investment beyond 2030 for projects that have been awarded and are not subject to competitive bidding. For projects that are subject to a competitive process, ITC is actively evaluating opportunities and preparing bids as appropriate. As it relates to competitively bid projects, ITC alongside its Grid acceleration coalition partners, filed a joint complaint at FERC in April against the competitive bidding processes in MISO and SPP. The complaint urges the commission to either direct MISO and SPP to exempt transmission projects from the solicitation process when those projects facilitate new generation or large load interconnection or suspend the solicitation process entirely for the next 5 years. The complaint emphasizes the competition delays much-needed infrastructure development, slowing down AI implementation through regulatory red tape and increasing cost to customers. While complaints at FERC are not subject to a fixed time line, the coalition has asked the commission to issue a ruling by July 16. Shifting now to load growth opportunities in Arizona, in April, key contractual contingencies tied to the approved ESA for 300 megawatts advanced at TEP with credit support now in place. As you may recall, this initial phase will leverage existing implant capacity with a ramp-up expected in 2027 and continuing through 2029. Beyond the CSA, negotiations are -- continue for an incremental 300-megawatt apatite to support a potential build-out of 600 megawatts at the it. TEP is also in active negotiations for additional capacity at a second site in the range of 500 to 700 megawatts. If agreements are finalized for the subsequent phases, we estimate new generation investment in the range of USD 1.5 million to USD 2 billion would be required. Our track record of long-term sustainable growth reflects the strength of our regulated businesses and supports our commitment to deliver 4% to 6% annual dividend growth through 2030. 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. For the quarter, we reported net earnings of $501 million or $0.99 per common share as shown on the slide, we have identified the EPS drivers for the quarter by segment. Our Western Canadian utilities contributed a $0.04 increase in EPS, largely driven by capital investments and timing of operating costs. At ITC, EPS increased by $0.02, largely due to continued capital investment and related rate base growth. For our U.S. electric and gas utilities, EPS decreased by $0.02 and earnings at UNS Energy were driven by wholesale market conditions, timing of planned generation, maintenance costs, milder weather as well as regulatory lag for rate base not yet included in rates. Moderating this was higher earnings at Central Hudson due to a shift in quarterly revenue, timing of operating expenses as well as rate base growth. The Corporate and Other segment reflects higher finance costs and unrealized losses on foreign exchange contracts. While not shown on the slide, earnings at our Other Electric segment were largely offset by the disposition of FortisTCI in 2025. In total, the dispositions had a $0.02 dilutive impact on the first quarter results, and we expect a $0.05 dilutive impact for the full year. Continuing on, foreign exchange had a nonfavorable $0.03 impact for the quarter and higher weighted average shares issued under our dividend reinvestment plan impacted EPS by $0.01. On the financing activities for the quarter, our utilities issued $800 million of long-term debt. Additionally, in April, ITC Holdings issued USD 900 million of unsecured notes with proceeds expected to repay maturing debt and short-term borrowings. Our capital plan is expected to funded largely from cash from operations, utility debt and our dividend reinvestment plan. Our $500 million ATM program has not been utilized to date and remains available for funding flexibility as required. On the rating agency front, Morningstar DBRS recently confirmed our A low issuer and unsecured debt crediting and stable outlook. Overall, our liquidity position and our funding plan support our strong investment-grade credit ratings. -- several regulatory filings advanced in Arizona during the quarter. In February, the ACC issued an order in the UNS Gas general rate application authorizing an allowed ROE of 9.61% and a 56% equity ratio. The order also approved a formula, subject to a range of plus or minus 50 basis points around the allowed ROE and inclusive of post-test year adjustments. The first rate adjustment under the formula is expected to occur in April 2027. New rates went into effect on March 1. The -- with respect to TEP's general rate application, the ACC staff filed testimony during the quarter, recommending a 9.75% ROE and a 55% equity ratio. Staff also filed rate design testimony recommending a formula rate framework that closely mirrors the recently approved approach for UNS Gas. Hearings commenced last month and based on the procedural schedule, we continue to expect an order in the fall. That concludes my. I'll now turn the call back to David.

Thank you, Jocelyn, to wrap up, we are off to a solid start in 2026 with first quarter results aligned with our expectations. Our utilities are executing their capital plans focused on reliability and customer affordability. We -- looking ahead, we will continue to drive meaningful shareholder value through execution of our 5-year capital plan and delivery of our 4% to 6% annual dividend growth guidance through 2030. That concludes my remarks. I will now turn the call back over to Stephanie.

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 Instructions] The first question today comes from Maurice Choy with RBC Capital Markets.

If I could just start, in your prepared remarks, you mentioned that affordability has been an integral part of how you plan, invest and operate across the companies. And you've also shared how TEP and ITC Midwest customers will benefit from your data center initiatives. So with that, given the heightened Indes, how would you characterize how data center sentiment among your local stakeholders have evolved.

Yes. Thanks, Maurice, and thanks for that question. It's obviously a big topic. And if folks understand how you can do data center development correctly, if you make sure that you have the protections in place for the rest of the retail customers, then you definitely can have a positive impact from an affordability standpoint. It's just, in essence, fairly straightforward math when you add some assets that someone else is going to pay for and then you actually have some kilowatt hours that they use that spread the rest of the fixed costs among a larger pie. -- then it definitely does help. It is really hard. I'm not going to lie. It's hard to get folks to understand that messaging, but you have to prove it. And that's hopefully what we're going to be doing here as we go forward as we add this contract that TP has in place for that first data center. And with no additional resources needed to supply it. They're paying for the transmission interconnection. And so now it's really just just the end result of them using a lot of kilowatt hours and pain for a lot of the system that are -- the rest of the customers would have. So it's an ongoing conversation and ongoing information flow that we have to have out there. But if you are doing it right, you should be making that loud and clear.

Understood. And if I could finish with a question on ITC. Recognizing that the grid Accellation coalition complaint was only 5 weeks ago, I wonder if you had any early feedback from FERC about whether they're moved by your arguments and how you think this will all play out in the coming months towards July, the line request.

Yes. Let me turn that directly over to Christoph Tanner, CEO of ITC, and she's the one who's been at the front of this. Christoph?

Yes. Thank you for the question. So obviously, we haven't talked to the FERC since we filed because that would be an ex parte, but we had several meetings beforehand, and we continue to have meetings with other key stakeholders. And I think it's fair to say that everyone understands that there's a problem here. Now what they will do, whether they will take our options or come up with their own, I think, remains to be seen. But when you have data centers wanting to connect in 24 months or less. And that's precisely how long the competitive solicitation process takes. That's just an untenable situation. And we provided a lot of good data about we will not win the AI race in this country if we don't move faster. So I think those arguments are compelling. I think everyone understands them. So we are optimistic that something will be done. But obviously, we'll have to wait to see the final order before we see what that solution is.

If I could have a quick follow-up. Have you seen a counter complaint being filed with FERC on this?

They've seen a counter complaint. The only thing that proponents of so-called competition, have submitted our studies that cherry pick a handful of projects that were competitive that came in, but nothing, I think, really compelling. Again, if you look at the data and the testimony that we filed with our complaint, I think it's really clear that so-called competition has not lowered costs for customers. In fact, it's increased cost in some cases and the costs associated with delay is far greater than any savings you might see. So really, all that so-called competition have accomplished is delayed. And I mean, there's just no evidence to contradict that. Furthermore, we've had a real work situation where someone won a bid and Wisconsin. And then 3 of those substations had to go to variance analysis because they couldn't be completed in time for a data center. So yes, of course, there other arguments out there, I would not characterize them as compelling and they have not filed anything.

That's good to know. And my congratulations to Gary on his retirement and all the best.

The next question comes from Robert Hope with Scotiabank.

So it would seem like you've been making some regulatory and contractual progress at TP regarding the initial 300 megawatts. This would include the $40 million termination fee. Can you speak to what the next steps are for this project to get across the line and what milestones we should be watching?

Yes. I'll turn that over to Susan Gray, CEO of UNS so that she only says the things that are public.

Yes. Thanks, Dave. And thanks for the question, Rob. We just hit some really major milestones in terms of having a $40 million letter of credit established and payment for the construction agreement to build out the station and the transmission interconnection. So the site has been prepared and they're starting to build at this point. So Phase 1 is off and running. The next steps are really around expanding the capability at that first site up to a possible 600 megawatts. So the first 300 is underway, now looking at doubling that capacity. And then the second site that's in Marana, just north of Tucson. We're also negotiating an agreement -- a service agreement for that site. And so then it's about -- once we have all of the terms established, we will have to build new generation to serve those additional agreements. And I think the terms of the as the contracts will help us -- help guide us in terms of what we need to build and when -- so those are really the next set -- really pleased to see that Phase 1 is underway and moving forward.

All right. Appreciate that. And then my follow-up question relates to Phase II. So when you're thinking about planning for incremental generation requirements to serve the next phase of load there, how are you incorporating increasing delivery time lines for electrical equipment such as generators could you potentially look to lock these up a little bit earlier if you are able to get line of sight to an agreement or we'll call it backstopping from the counterparty.

Yes, I think we would really need to have certainty from the customer that they're going to move forward and have those customer protections in place. in order to -- and I think that's the incentives to get the agreements locked up here so that we can start moving forward with procurement. -- and potentially partnering with a builder to start actually getting those sites going.

Next question comes from Mark Jarvi with CIBC.

Last quarter, you guys said that you thought maybe FERC would start to tie up some loose ends. We saw the decision on transmission operators in New England. Are you expecting more to come? Is there any expectations that they'll address the adders this year?

Yes. Thanks, Mark. We haven't seen any indication. We're hopeful that, that scale docket finally kind of gets pushed aside. And if they do want to address incentive adders that they do it and the fulsome approach that they started that way back when which was looking at all the different incentive adders that you could add based on not just the RTO adder in a bucket of several adders, including additions for use a new technology, reducing costs, increasing reliability. So if they do set that aside and want to address it, we hope that they would start with a fresh view of those incentives and what's needed on a going-forward basis.

Okay. And then last week, there's been some media reports about a potential executive order around some things like dynamic line rating, reconductoring for transmission from the White House. Is that something you guys feel like will come through? And what could that mean for ITC, if anything?

Can't say that's -- I heard of that. So Chris, is this something that you've heard so obviously, the things like dynamic line rating and other conduct reconductoring for higher capacity is something that we always look at from an affordability perspective. But I had no idea there was an executive order chatter on it, Chris?

Yes. I think there was just something that came out yesterday, Dave, so you're now behind -- and yes, there's always discussion about the proper use and are we using dynamic line ratings and other technology enough I think for ITC, we use it, we have used it when appropriate. And when we don't -- when it's not appropriate, we don't. So I think we're hopeful through the conversations we've had that it wouldn't be an across-the-board mandate or to use it when it doesn't make sense. I think if there is an executive order issue that it would just be for FERC to to look at it and consider it, which, frankly, they do and utilities do anyway. So I don't see this as significantly moving the needle rather than just advancing the conversation that's already happening.

Understood. And just last question for me. Just some of the media reports about DC LNG, wood fiber expansion. Do you mind us again where the pipe to size right now if there's the potential to do incremental investments there in B.C.

Roger, do you want to take that one?

Yes. Thanks, Dave. There is opportunity to expand pipe, it would require a debottlenecking further upstream from the current expansion of our pipeline. We haven't entered into discussions yet with wood fiber, but it's something that we will be looking at, I'm sure, in the near future here.

The next question comes from Benjamin Pham with BMO.

I want to say BC. You mentioned the environmental assessment update on Telba storage sites. Was that in response to the Middle East situation that's occurring? And maybe just add incremental context on future expansion at that potentially could be accelerated?

Yes. So far, everything that we have been doing has been based on projects that we've had in the queue for quite a while. So nothing that's incremental or increase due to the Middle East. Obviously, there's a lot of tension on LNG. It's having quite the moment now, and that's probably the genesis of that prior question on looking at whether or not you can increase capacity at wood fiber for additional LNG. But that was just the there's a couple of different EAs going on. One is related to the Tilbury tank, the larger size 1 that we got approved last year and the other is for any ultimate additional LNG liquefaction capacity that we can put at the Tilbury site, which is we refer to as Tilbury 2 in that VA process. So nothing is directly I'll say, impacted or pushed by the current situation.

Okay. Got it. And may switch to the stats that you are our expectation at the customer impact from the data center volume and integration? And particularly the pronounced impact you're seeing in the U.S. Midwest throughout a decade. Is that something you think that's more applicable to the Fortis magnitude? Or is that -- do you think that's more of a broader industry trend you're anticipating? And just related to that is the expectation that this is more of a long more room for rate base acceleration?

Yes. It is a broader sector. I'll say it's broader depending on how you're doing it. If you're making sure that the data centers are paying for the incremental or marginal generation that's being installed and I'll say, infrastructure in general, that's being installed to supply them and you're recovering that from that data center with all of, of course, the appropriate credit enhancements, et cetera. And then you are also getting a bit of contribution back to pain for the rest of the infrastructure that's needed to support that. You don't just pop it on the grid and not need to have the ancillary services and all the rest of the support that you get from the overall grid then it will have a positive impact for customers. Obviously, ITCs is the transmission rate you're putting a ton of KWH on that system. And you're basically doing a few interconnections to get there. So it's got some really good economics as that percentage decrease reflects -- and then in Arizona, same thing, you're not -- if you're not building even on the next phases, we would make sure that whatever those tax phases are that those data centers are paying for that marginal cost of energy and then some so that there is a positive customer contribution. So it is -- if you're doing it right, especially if you're in a region where you're controlling those portions of the cost, whether it's ITC is a transmission-only company or a vertically integrated utility, we have the ability to see quite clearly how that will benefit customers.

And do you think this is maybe a KW to rate base conversion similar to that recent historical trend of OpEx rate base.

Yes. So there's -- yes, it's all going -- you always have to look at things on a bill basis. on what our customers pay. So it does -- anything that puts downward pressure on bills is a good thing. And that's really what we're focused on, not necessarily saying, well, downward pressures allow for additional incremental investments. We're only making the investments that we need to, to provide value to our customers. So the more offsets we have for those needed investments that don't necessarily pay for themselves. We have a lot of CapEx or OpEx kinds of conversations, steel for fuel, whatever you want to call it, where you are replacing some of the operating costs with capital and still maintaining or even decreasing customers' bills in that sense. But there are things around resiliency and others investments that we have to make that would normally adjust to increase costs. So it is good to have this other side of the ledger helping to keep customers' rates balanced.

[Operator Instructions] The next question comes from John Mould with TD Cowen.

Maybe just starting with the Tucson Electric rate case and appreciating it's a live rate case. Just wondering if you could provide some initial thoughts on how the parameters in the rate as have been received and a point of debate so far that may have varied versus you saw in the UNS gas rate case process that concluded in February and I'm thinking both about the formulaic RAD AS and just also the broader points of the rate case.

Yes, John, it's obviously an ongoing rate case. The testimony started a couple weeks ago and meeting the in-person testimony, -- of course, most of this is actually done trade and paper testimony, which frankly hasn't we haven't seen anything come up in the hearings that would surprise us from a perspective of not already seen or here in the conversation arguments in the written testimony. So we were really pleased with the UNS gas outcome. We were the first utility in Arizona. The UNS Gas was to get that formula rate. We see that we're basically having those same types of conversations in the TEP rate case. So I think it bodes well from that perspective, but it's still in the middle of the process. So we'll kind of couch it at that.

Okay. That's fair. And then maybe just stepping back, 1 of the broader opportunities above and beyond the existing capital plan. I'd be curious to know just what are you the most optimistic about in terms of summing turning some of those more aspirational opportunities into firm security investment and whether it's some of the newer opportunities or items that extend beyond your current capital planning horizon right now?

Yes. We've got a really good slide in our deck that kind of breaks this conversation up into the 2 different time frames. One is what's possible in the -- kind of in the current 5-year capital plan. and then what's possible post 5-year capital plan. And obviously, we're generally like most folks focused on getting those near-term opportunities while still working to get those longer-term opportunities that fill in the growth opportunities later on. But we have a lot of that just in things that are already happening like the rest of the tranche 1, tranche 2.1 and wherever MTAP 26 goes. There's a lot of transmission opportunities that are longer term. Really, the short-term ones are some additional data center connections that could happen in and manufacturers and general interconnections, generation and load and DC's footprint. And then, of course, the data center developments that we have in Arizona, those can be -- well, they'd love them to be even shorter term, at least from a data center perspective and as quick as possible, but timing and availability of equipment, et cetera, can can delay that a little bit. So we are looking at those opportunities. And we still have a huge additional one that we really aren't talking about yet because we're in the process of developing the integrated resource plans in Arizona but that's going to spit out some longer-term investment opportunities for us as well. So a very target-rich environment as it were.

The next question comes from Patrick Kenny with National Bank.

Just a quick question on Fortis Alberta with, I guess, the number of proponents you're looking for data center projects. And I know I've seen for Alberta partner up with at least a couple of projects. Just wondering if you could walk us through some of those partnerships and help us to fill the overall upside potential if and when the Phase II allocation does take off in the province.

Yes. Thanks, Patrick. I'm going to kick that over to Janine Sullivan, CEO of FortisAlberta.

Patrick, thanks for the question. There certainly is a lot of data center activity, certainly a lot of discussion first happening in the province. And with the ISO having introduced its 1,200-megawatt cap, it certainly is relating to discussions at the distribution level as to how we can interconnect some of the smaller loads that they want more imminently interconnected. So lots of conversations going on between ourselves, the transmission facility owner and operator and the ISO right now as to how we can facilitate the more timely interconnection of some of the data center opportunity for the province sooner than later.

This concludes our question-and-answer session. I would like to turn the call back over to Ms. Amaimo for any closing remarks.

Thank you, Betsy. We have nothing further at this time. Thank you, everyone, for participating in our first quarter conference call. Please contact Investor Relations should you need anything further and have a great day.

This brings to a close of today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.