Fortis Q2 2024 Earnings Call Transcript

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July 31, 2024

There are 9 speakers on the call.

Operator

Good morning, everyone. Thank you for standing by.

Operator

My name is Konstantin, and I will be your conference operator today. Welcome to Forti's Q2 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. At this time, I would like to turn the conference over to Stephanie Amaimo.

Operator

Please go ahead, Ms. Amaimo.

Speaker 1

Thanks, Konstantin, and good morning, everyone. Welcome to Fortis' Q2 2024 results conference call. I'm joined by David Hutchins, President and CEO Jocelyn Perry, Executive VP and CFO other members of the senior management team 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 slideshow. Actual results can differ materially from the forecast projections included in the forward looking information presented today.

Speaker 1

All non GAAP financial measures referenced in our prepared remarks are reconciled to the related U. S. GAAP financial measures in our Q2 2024 MD and A. Also, unless otherwise specified, all financial information referenced is in Canadian dollars. With that, I will turn the call over to David.

Speaker 2

Thank you, and good morning, everyone. Today, we are pleased to report our 2nd quarter results. Operationally, our teams delivered reliable service to our customers despite a variety of severe weather conditions experienced during the quarter. Through the end of June, we invested capital of approximately $2,300,000,000 focused on system reliability and resiliency, customer growth and economic development, as well as cleaner energy investments. These capital investments supported rate base and EPS growth.

Speaker 2

On the regulatory front, we had a number of key proceedings advance. Notably at ITC, the Iowa Supreme Court granted a motion filed by ITC Midwest requesting a stay of the injunction issued by the Iowa District Court for Tranche 1 projects in Iowa. With this stay in place, ITC is now permitted to advance construction of all Iowa Tranche 1 projects originally awarded to the company in 2022. This is a positive development as ITC looks to invest in critical transmission infrastructure to support the clean energy transition and load growth in the region. And today we released our 2024 sustainability report.

Speaker 2

It includes new information on resiliency efforts, biodiversity programs and actions to support energy efficiency and lower emissions. The report also contains information regarding our progress on key sustainability targets. Our 2024 capital plan of $4,800,000,000 remains on track. During the quarter, construction of the 1800 kilometer Watanakaniyah power transmission project was completed. We are proud to be a part of this project that is a majority owned by 24 First Nations provide social economic benefits and reduces greenhouse gas emissions associated with diesel fire generation previously used in these remote locations.

Speaker 2

We continue to execute our 5 year capital plan of $25,000,000,000 that is comprised of virtually all regulated investments and a diverse mix of highly executable low risk projects. Rate base is expected to increase by approximately $12,000,000,000 to over $49,000,000,000 by 2028, supporting average annual rate base growth of 6.3%. Beyond the plan, regulated growth opportunities progressed during the quarter. At ITC, MISO released a near final map of its LRTP Tranche 2.1 projects with transmission investments now estimated in the range of $23,000,000,000 to 27,000,000,000 dollars up from an earlier estimate of $17,000,000,000 to $23,000,000,000 While it is still too early to estimate the investment opportunities within ITC's footprint, MISO Board approval is anticipated in late 2024. In June, MISO also confirmed the transmission projects included in tranche 2.1 would be insufficient to meet the demand and needs of the MISO Midwest sub region under the future 2a scenario.

Speaker 2

As a result, MISO expects additional transmission will be required likely through a Tranche 2.2 portfolio. While MISO has not provided any firm details regarding timing or scope of this new tranche, it certainly underscores both the need and opportunity associated with transmission investments in the Midwest considering decarbonization and load growth trends. In British Columbia, the Federal Environmental Assessment Certificate was issued in the quarter for the Tilbury Marine Jetty project. The construction of the jetty supports further expansion of FortisBC's Tilbury LNG facility. The site is scalable and can accommodate additional storage and liquefaction equipment and is close to international shipping lanes.

Speaker 2

Once constructed, the jetty will utilize FortisBC's assets at the Tilbury site including the future Phase 1B expansion project to serve marine bunkering and reduce greenhouse gas and other emissions. In addition to the developments at ITC and Fortis, BC, our utilities across North America are focused on expanding and extending growth opportunities in their jurisdictions, especially in the areas of clean energy, continued electrification and load growth. With a strong track record of increasing dividends for the past 50 consecutive years coupled with our low risk growth strategy, we remain confident in our 4% to 6% annual dividend growth guidance through 2028. Now, I will turn the call over to Jocelyn for an update on our Q2 financial results.

Speaker 3

Thank you, David, and good morning, everyone. For the 2nd quarter, reported and adjusted EPS was 0 point 67 dollars $0.05 higher than adjusted EPS last year. Year to date June reported and adjusted EPS was 1.60 dollars resulting in an increase in adjusted EPS of $0.07 year over year. EPS growth was mainly driven by rate base investments across our utilities, new customer rates and warmer weather in Arizona, as well as new cost of capital parameters in British Columbia, which were approved in late 2023 and retroactive to January 1, 2023. The chart on Slide 9 highlights the EPS drivers for the Q2 by segment.

Speaker 3

Our U. S. Electric and gas utilities contributed a $0.05 EPS increase quarter over quarter. In Arizona, EPS was up 0 point 0 $7 due to the favorable impacts of new customer rates and higher retail revenues due to warmer weather. Weather impacts were $0.02 quarter over quarter.

Speaker 3

At Central Hudson, EPS decreased 0 point quarter largely due to a one time impact of a regulatory settlement associated with the CIS implementation, which I'll discuss later, as well as the recognition of a regulatory performance target in the Q2 of 2023. At ITC, the $0.02 EPS increase was mainly driven by rate based growth, tempered by higher holding company finance costs. Our Western Canadian Utilities increased EPS by $0.02 The increase largely related to the due to the timing of the new cost of capital parameters in BC, The higher allowed return in Alberta for 2024 was tempered by the timing of operating costs and the recognition of income tax expenses. Our other electric segment EPS decreased $0.01 mainly due to higher costs and lower equity income. For the Corporate and Other segment, the decrease mainly reflects the disposition of Aitken Creek in 2023 and higher holding company finance costs.

Speaker 3

And lastly, higher weighted average shares reflect shares issued under dividend reinvestment plan. We have not used the ATM program to date as participation under the remains strong. Turning to Slide 10, many of the factors discussed for the quarter are the same for the year to date period. There are a few items to note for the year to date results. For our Western Canadian Utilities, specifically at Fortis Alberta, higher demand charges and customer additions also favorably impacted the year to date results.

Speaker 3

In Arizona, in addition to the new customer rates at TEP and higher retail revenue driven by warmer weather, higher margins on wholesale sales tempered by higher operating costs also impacted EPS in the first half of the year. At our Corporate and Other segment, the disposition of Aconcrete, unrealized losses on derivative contracts compared to the gains in the first half of twenty twenty three and higher holding company finance costs were the main drivers of EPS. And while negative for the quarter and year to date periods, on an annual basis, the disposition of Aitken Creek will be neutral to EPS. And finally, higher weighted average shares outstanding reduced EPS $0.03 through year to date June. Through June, we have raised approximately $1,400,000,000 of debt to repay borrowings and to fund our capital program.

Speaker 3

We remain in a strong liquidity position as we execute our 5 year capital plan and maintain our investment grade credit ratings. As I mentioned last quarter, we expect to have further engagement with S and P in the fall, particularly on Fortis' mitigation plans around physical and climate risks. Looking ahead, we are on track to achieve average cash flow to debt metrics of 12% over the 5 year period. As David noted, earlier this month, the Iowa Supreme Court granted a stay of the injunction issued by the Iowa District Court with respect to construction of the MISO long range transmission plan tranche 1 projects in Iowa. With the stay of the injunction in place, ITC is permitted to advance construction on all Iowa Tranche 1 projects originally awarded to the company in 2022.

Speaker 3

Certain complainants have requested that the judge's order be reviewed by a full quorum of the Iowa Supreme Court. Regardless of any quorum review by the Iowa Supreme Court, approximately 70% of the Iowa tranche 1 projects are upgrades to ITC's facilities along existing rights of way, which under MISO's tariff grants ITC the option to construct the upgrades. Further, MISO is conducting a variance analysis for the Tranche 1 projects in Iowa and we believe the process should reaffirm the initial award of the projects in 2022. In Arizona, the generic regulatory lag docket continues to advance. The Arizona Corporation Commission will host workshops in the Q3 to further assess the possibility of using formulaic rates or forward looking test years instead of the historical test year currently in use.

Speaker 3

While the timing and outcome remain unknown, we are encouraged by these efforts to evaluate regulatory constructs that may reduce regulatory lag. In June, the New York Public Service Commission issued an order concluding the investigation into the implementation of Central Hudson's billing system. As part of the order, the independent third party monitor reported that the CIS system was deemed stable and critical issues were resolved. The order also stipulates certain costs are not to be recovered from customers, including US4 $1,000,000 for contribution to a customer benefit fund, which was recognized in the 2nd quarter. The vast majority of the remaining costs were previously recognized in prior periods.

Speaker 3

Future impacts are not expected to be material. And earlier this month, the New York Public Service Commission also issued an order on Central Hudson's 2024 general rate application. The decision retroactive to July 1 includes an allowed ROE of 9.5%, 50 basis points higher than the previous allowed return. Central Hudson expects to file its 2025 general rate application in the Q3. And with that, I'll now turn the call back to David.

Speaker 2

Thank you, Jocelyn. The first half of the year continued our long track record of executing our growth strategy. We continued to implement our $4,800,000,000 annual capital plan, made progress on opportunities beyond the plan and advanced our regulatory proceedings. This is an exciting time to be a regulated transmission and distribution company and we continue to pursue additional growth opportunities that deliver a cleaner energy future while continuing to prioritize safety, reliability and affordability for our growing customers' needs. That concludes my remarks.

Speaker 2

I will now turn the call back over to Stephanie.

Speaker 1

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 period. Our first question comes from the line of Maurice Choi from RBC Capital Markets. Please proceed with your questions.

Speaker 4

Thank you and good morning everyone. If I could start with your updated view of the electric and gas demand outlooks across your utilities. There's obviously a broad anticipation for higher load due to a number of reasons and that could also lead to higher gas fired power and potentially some changes in future IRPs. So can you speak to which utilities you're seeing a notable change in demand outlook versus a year ago? And how utilities might respond to this?

Speaker 2

Yes. Thanks, Maurice. I'll start with kind of a broad overview and if you want to dig down into any of the individual utilities, actually we have everybody in the same room for once this call. So, I can ping it over to them, if need be. But, I think probably the especially from a gas generation perspective, really the only, big utility that we have that we're considering additional gas generation right now is at UNS.

Speaker 2

We have as you know the 2 different UNS. We have as you know the 2

Speaker 5

different utilities

Speaker 2

are TEP and UNS Electric.

Speaker 4

And as part of the

Speaker 2

integrated resource plans that they filed last year, we're adding total of 600 megawatts, 400 megawatts at TEP and 200 megawatts at UNS Electric, of combustion turbines to help fill in the variability associated with adding quite a bit more renewable energy into the portfolio. So that was what we filed last year. Obviously, that was based on prior information on load growth, etcetera. So we are seeing a lot of potential for additional load growth related to manufacturing and data centers in that footprint. But at this point, we haven't changed our integrated resource plan or changed any timing or additions to it.

Speaker 2

Although we do as every resource line is good the day you file it. And then you look at the additional assumptions, the load growth and retirement schedules, etcetera, and adjust them accordingly. But right now, we don't have a lot of that built into the current plan, but we are working very hard behind the scenes to see where that might come. ITC also has, as we mentioned on the last call, some data centers looking to come into its footprint in both Iowa and I'm sure you're aware in Michigan as well, there's a lot of efforts to attract data centers into those utilities footprints, of course, that we serve from a transmission perspective. So, they're there, but there's still a lot of TBD to be determined on how that lands.

Speaker 2

Those are primarily our 2 jurisdictions that we'll see the biggest impact from those types of load. Now of course, I should mention Alberta as well, because Fortis Alberta, while a distribution company up there, I think we'll see some knock on impacts of data center growth there. And just due to the comments of the government up there, they are receptive to citing data centers up there, but they have what I'm calling a BYOP, bring your own power, sort of philosophy to make sure that folks who come up there are going to come and either build generation or contract with it to make sure that they're not pulling it all out of the market. So that's if you want to go into any more details, just let me know.

Speaker 4

Maybe just a quick follow-up on that and obviously there's a lot of discussion about sharing of transmission costs and any other costs related to this new load. How are you seeing or which part of your portfolio you're seeing the greatest progression and policy making and are you anticipating all the other jurisdictions to follow suit?

Speaker 2

Yes. So I think we're testing out a lot of stuff. And I think the big test bed, I suppose, is in Arizona because we have a vertically integrated utility and we can offer different kind of options for customers that come in there from special contracts to special rates etcetera. There's one principle that I think everyone, every utility, this isn't just unique to us, will be following and that is these this load has to pay for itself. And in fact, we think that it should have and will have a positive impact on customer affordability because of the additional high level of utilization that these high load factor customers bring.

Speaker 2

So, overall, we think it's a good story, both from a growth perspective and a customer affordability perspective.

Speaker 4

That's great. If I can just finish up on ITC to just better understand the District Court, the Supreme Court Judge's order here. Can the stay of the injunction continue endlessly for so long as the full quorum of the Supreme Court not review this Judge's order?

Speaker 2

Yes, I'll turn that over to Linda Apsey, as you know, CEO of ITC.

Operator

Yes. Good morning.

Speaker 6

Thank you, Maurice. I suppose, yes, it could. There's no requirement that the Supreme Court act in any certain timeline. They do act at their discretion. So, to the extent that there was never any ruling or further decision or determination, then yes, the state of the injunction would remain in place.

Speaker 4

And I guess to just follow-up on that, if we have a decision on tranche 2.1 and I suppose ITC is going to proceed with investments in tranche 1, 2.1, How should we think about these investments if one day, let's say, months, years, a decade from now, the original position is reverted back. Is there any risk of any stranded risk, stranded asset risk?

Speaker 6

Do you have Maurice? No, that we have no concern of any stranded asset risk. Obviously, we are continuing to pursue and invest in these projects according to the MISO tariff. And so the associated expenses related to that would all be under the premise that these projects were awarded to us and that we have continued to pursue and develop under all of the provisions of the MISO tariff.

Speaker 4

Great. Thanks for the color.

Speaker 2

Thanks, Maurice.

Operator

Our next question comes from the line of Rob Hope from Scotia Capital. Please proceed with your question.

Speaker 7

Good morning, everyone. I just want to take maybe some additional commentary on the regulatory outlook for Central Hudson. So the billing issues seem to be behind you and stabilized. New rates are in service July 1. Do you think the new rates are going to be sufficient to largely close the gap between the achieved and allowed ROE?

Speaker 7

Or is this something that probably is more of the next rate filing?

Speaker 2

Yes. So that should help definitely close that gap. And obviously, the difference between allowed and earned over the past couple of years have been related to the CIS implementation costs, the additional cost that we were seeing associated with that, which of course was part of that settlement that we agreed we won't recover. So that's all behind us. So on a going forward basis, we expect to see a much closer correlation between earned and authorized ROE.

Speaker 2

And as Jocelyn mentioned too, we're filing the next rate case because it is important to note that that rate case was just a 1 year rate case. So it's only good for a year and so we're required to file another one and we're doing that tomorrow.

Speaker 7

All right. Thanks for that. And then more broadly, in a relatively surprised move to Vancouver Council reverse the gas ban there. But when you think about or I just may, what are

Speaker 4

your thoughts on the continued

Speaker 2

need for natural

Speaker 7

gas in a world where the the cost of home ownership as well as just kind of the incremental load that we're seeing pop up for electrical demand there as well. Like could we is this the beginning of a change in sentiment on the gas side?

Speaker 2

So, Maurice, I think that change in sentiment has been around in almost every one of our jurisdictions. And but maybe the slight exception of British Columbia, which now I think is coming around that the impact on affordability has to be top line conversation. And as we look at different pathways for the energy service from an electric and gas perspective, we do believe that there is a necessity to have both of those contribute and supply energy in order for us to do it both affordably and reliably. So we do see some of those some of the LDC changes as we've seen in BC. We see role being a little bit different and maybe more of a capacity role on a going forward basis.

Speaker 2

But the necessity for that capacity is getting clearer and clearer across every jurisdiction. So I do think people are recognizing that. And I think also one of the main things we have to remember is we're still marching towards a clean energy future here. And we I think are also getting people to understand the ability for us as LDCs and as gas companies to be able to supply clean molecules. That's a huge thing that we need to remind people of and to focus on.

Speaker 2

As you probably well know out in Vancouver, we also got a good approval from the BCUC for RNG to be a part of the portfolio for every one of our customers. That was a big win for decision to allow natural gas and new buildings again or new construction. I think we're starting to see how we can make this blend work and cost effectively, affordably, but still hitting some clean energy targets.

Speaker 7

Thank you. I'll hop back in the queue.

Speaker 2

Could I call you Maurice, Rob? Rob, if I call you Maurice, I'm sorry, but I know who you are Rob very clearly.

Operator

Our next question comes from the line of Mark Jarvi from CIBC Capital Markets. Please proceed with your question.

Speaker 5

Hey, good morning everyone. Maybe just going back to the Iowa situation and the relief on the injunction, albeit there's I guess still uncertainty on

Speaker 4

how this all plays out. How does

Speaker 5

that impact your thinking and activity around procurement and moving out of the projects that might come through in 2025, 2026? Are you being a bit more cautious pushing things out a little bit? And then those projects that maybe wouldn't fit under the right of way, that 30%, how are you managing those projects in terms of permitting or trying to advance them quietly before you have to put CapEx to work?

Speaker 2

Thanks, Mark. I'll have Linda ask that. It was a question related to both how do we managing the risk in this from a supply chain perspective?

Speaker 6

Yes. Obviously, we are in the early stages of advancing all of the LRTP-1 projects. As you recall, obviously, there's significant work that has to go into citing, permitting, regulatory applications. So as it relates to the Iowa 21 projects, we're still in the early stages. And so we haven't even received the IUB regulatory approval for those projects yet.

Speaker 6

And in fact, we haven't even begun the franchise process that's required under state law. And so I would say, there is no there's no immediate effect or impact in how we in terms of how we think about supply chain. We have strategic relationships with all of our major vendors. So we have queue capacity for all of our major components of our infrastructure. Our queue capacity for the LRTP Tranche 1 projects as well as our other projects as well in hand.

Speaker 6

We don't anticipate any supply constraints related to this project or others. And so that's for us not a risk or anything that we are concerned about. We are keenly focused obviously in sort of the legal issues, the regulatory process, those are the and the landowner issues, those are the primary areas of focus for us at this stage of those LRTP projects.

Speaker 5

Can you remind us again what the planned spending would have been for next year and whether or not that could be impacted here as you sort through these issues?

Speaker 6

Oh, planned spending for next year, yes, we're continuing. Obviously, there's no change at this point in time in terms of our planned spend. We obviously will continue to reassess that as we release our next vintage of our 5 year plan. But obviously, we're continuing to move forward and pursue the projects as identified. And we certainly will update if there's any delay or slide specific to the LRTP-1 projects.

Speaker 6

But at this time, there's no change in our overall capital plan.

Speaker 5

Okay. And then on the regulatory lag docket in Arizona, what would you be advocating for as you work through these workshops in the fall and trying to push that forward?

Speaker 2

Yes, I'll turn that over to Susan Gray, CEO of UNS.

Speaker 8

All right. Good morning, Mark. Thanks for the question. The commission is considering basically either a forward test year or formulate rate. And so we're having another workshop coming up in the fall to discuss that.

Speaker 8

And I think either format can work for us as long as we get the design of it correct. I think it's a good sign that we're talking about changing our longstanding rate making policy here. And I think either way we'll end up reducing lag. In the workshop, we did emphasize the formulaic rate, but I think in either case, we can design it to benefit our company.

Speaker 5

It sounds like you're pretty confident.

Speaker 2

Yes, Mark, doing stuff down there at TP. I only dreamed of that was something that we've always been looking for is it was trying to figure out how to get out some of that regulatory lag and we've been doing things with other tracker mechanisms, etcetera. But this is quite a bit better and cleaner solution and probably a little bit more simpler too.

Speaker 5

It sounds like there is momentum behind it. So safe to say you think something will come to fruition and you won't hear any roadblocks where this stalls out? We're optimistic. Okay. And with the completion

Speaker 4

of the Watay project, what would be

Speaker 5

the sort of long term vision around your ownership there? Is there strategic benefits to stay invested? Do you think there's potential projects or investments around that, that launch a position that you can pursue or does it just become sort of a cash flowing asset that you hold and potentially monetize if and when opportunity presents itself?

Speaker 2

No, I think we've always seen that as a bit of a entry point into the Ontario market. I mean, it gives us a good anchor for looking at additional projects and additional transmission development. We obviously created a tremendous relationship with the First Nations up there. So, yes, we'd always love to build more transmission in Ontario, frankly, anywhere within our footprint. So, we would look at, we don't have any plans on a going forward basis other than owning that asset.

Speaker 5

Okay. Thanks everyone.

Speaker 7

Thanks,

Operator

to Ms. Amaimo.

Speaker 1

Thank you, Konstantin. We have nothing further at this time. Thank you everyone for participating in our Q2 2024 results conference call. Please contact Investor Relations should you need anything further and thank you for your time and have a great day.

Operator

Thank you for participating. This concludes today's conference call. You may now disconnect.

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Key Takeaways

  • The company delivered reliable service through severe weather and invested CAD 2.3 billion in Q2 toward system reliability, customer growth and clean energy, supporting rate base and EPS expansion.
  • The Iowa Supreme Court’s stay of the injunction allows ITC Midwest to resume construction of all awarded Tranche 1 transmission projects, advancing critical clean energy infrastructure.
  • The 2024 capital plan of CAD 4.8 billion remains on track—including completion of the Wataynikaneyap transmission project—and is part of a CAD 25 billion five-year regulated investment program targeting 6.3% annual rate base growth to 2028.
  • Q2 adjusted EPS of CAD 0.67 rose CAD 0.05 year-over-year, driven by rate base investments, new customer rates, warmer weather in Arizona and updated BC cost of capital parameters.
  • Beyond the plan, MISO’s near-final map for Tranche 2.1 projects ($23–27 billion) and anticipated Tranche 2.2 underscore additional transmission growth, while dividend growth guidance of 4–6% annually through 2028 remains intact.
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Earnings Conference Call
Fortis Q2 2024
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