Fortis Inc

TSX:FTS

Earnings Call Analysis

Fortis Second Quarter Highlights Strong Growth and Investment

In the second quarter, Fortis reported a robust performance with an EPS of $0.67, up by $0.05 from last year, driven by rate-based investments and favorable conditions in Arizona and British Columbia. The company invested $2.3 billion by June, focusing on reliability, customer growth, and clean energy. Fortis continues to implement its $25 billion, 5-year capital plan, aiming for a rate base increase to $49 billion by 2028. The company maintains its dividend growth guidance at 4-6% annually through 2028. Regulatory advancements, including the clearance to proceed with Iowa Tranche 1 projects, bolster their growth strategy.

Solid Earnings Growth Driven by Strategic Investments

In the second quarter of 2024, the company reported a notable increase in earnings per share (EPS), with both reported and adjusted EPS rising to $0.67—a $0.05 jump compared to the previous year. The year-to-date EPS up to June was $1.60, marking a $0.07 year-over-year increase. This growth can be attributed to strategic rate-based investments across various utilities, introduction of new customer rates, and favorable weather conditions in Arizona, as well as new cost of capital parameters in British Columbia, which took effect retroactively from January 1, 2023.

Capital Investments and Regulatory Developments

By the end of June, the company had invested approximately $2.3 billion in enhancing system reliability and resiliency, customer growth, economic development, and clean energy projects. An ongoing five-year capital plan worth $25 billion aims to boost the rate base by $12 billion to over $49 billion by 2028, fostering annual rate-based growth of 6.3%. Regulatory advancements included the Iowa Supreme Court granting a stay on an injunction, allowing ITC Midwest to progress on critical transmission infrastructure projects in Iowa—a significant step towards supporting clean energy transitions and regional load growth.

Strategic Plans and Future Outlook

The company continues to progress with its 2024 capital plan, which is earmarked at $4.8 billion. Significant achievements include the completion of the 1,800-kilometer Wataynikaneyap power transmission project, which supports socioeconomic benefits and reduces greenhouse gas emissions from diesel generation. Beyond the existing plan, the company is eyeing additional regulated growth opportunities, especially in clean energy and electrification domains across North America.

Guidance and Dividend Growth

The company maintains its guidance for 4% to 6% annual dividend growth through 2028, building on a track record of dividend increases over the past 50 years. With the stay of the injunction in Iowa, ITC can advance on all Tranche 1 projects, expected to further solidify the company's growth trajectory.

Challenges and Resolutions

In New York, the conclusion of the Central Hudson billing system investigation has put previous issues to rest, with the new rates, effective from July 1, expected to bridge the gap between achieved and allowed returns on equity (ROE). The New York Public Service Commission's recent rate decision, which includes a 9.5% ROE, is retroactive to mid-2024. The company's efforts to continually optimize regulatory processes in Arizona, potentially shifting to a formulaic rate or forward-looking test year, are geared towards minimizing regulatory lag and enhancing operational efficiency.

Sustainability Commitment

The release of the 2024 sustainability report highlighted advancements in resilience, biodiversity, energy efficiency, and emission reduction. FortisBC's Tilbury LNG facility’s expansion, supported by the Federal Environmental Assessment certificate, underscores the company's commitment to sustainability. The Tilbury Marine Jetty project is particularly poised to leverage existing assets to further environmental goals.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, everyone. Thank you for standing by. My name is Constantine, and I will be your conference operator today.

Welcome to Fortis Second Quarter 2024 Earnings Conference Call and Webcast. [Operator Instructions]

At this time, I would like to turn the conference over to Stephanie Amaimo. Please go ahead, Ms. Amaimo.

[Stephanie Amaimo, executive]

Thanks, Constantine, and good morning, everyone. Welcome to Fortis' Second Quarter 2024 Results Conference Call. I'm joined by David Hutchens, President and CEO, Jocelyn Perry, Executive VP and CFO, other members of the senior management team, as well as CEOs from certain subsidiaries.

Before we begin today's call, I want to remind you that the discussion will include forward-looking information, which is subject to the cautionary statement contained in the supporting slideshow. 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 U.S. GAAP financial measures and our second quarter 2024 MD&A. Also, unless otherwise specified, all financial information referenced is in Canadian dollars.

With that, I will turn the call over to David.

[David Hutchens, executive]

Thank you and good morning, everyone. Today, we are pleased to report our second 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 $2.3 billion, 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. 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 not 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. 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 $4.8 billion remains on track. During the quarter, construction of the 1,800 kilometer Wataynikaneyap 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 socioeconomic benefits and reduces greenhouse gas emissions associated with diesel fire generation previously used in these remote locations.

We continue to execute our 5-year capital plan of $25 billion 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 billion to over 49 billion by 2028, supporting the average annual rate-based 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 USD 23 billion to USD 27 billion, up from an earlier estimate of USD 17 billion to USD 23 billion. While it's 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 that 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. 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. 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 FortisBC, 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 second quarter financial results.

[Jocelyn Perry, executive]

Thank you, David, and good morning, everyone. For the second quarter, reported and adjusted EPS was $0.67, $0.05 higher than adjusted EPS last year. Year-to-date June, reported and adjusted EPS was $1.60 resulting in an increase in adjusted EPS of $0.07 year-over-year. EPS growth was mainly driven by rate-based 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 second quarter by segment. Our U.S. electric and gas utilities contributed at $0.05 EPS increase quarter-over-quarter. In Arizona, EPS was up $0.07 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. At Central Hudson, EPS decreased $0.02 quarter-over-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 second quarter 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. At 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. 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 DRIP 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 FortisAlberta, higher demand charges and customer additions also favorably impacted the year-to-date results. 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, another segment, the disposition of Aitken Creek, unrealized losses on derivative contracts compared to the gains in the first half of 2023, 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, year-to-date June.

Through June, we have raised approximately $1.4 billion of debt to repay borrowings and to fund our capital program. 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&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 project 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.

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 third quarter to further assess the possibility of using formulaic rates or forward-looking test year instead of the historical test year currently in use. 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 USD 4 million for contribution to a customer benefit fund, which was recognized in the second quarter.

The vast majority of the remaining costs were previously recognized in prior periods. 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 1st 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 third quarter.

And with that, I'll now turn the call back to David.

[David Hutchens, executive]

Thank you, Jocelyn. The first half of the year continued our long track record of executing our growth strategy. We continue to implement our $4.8 billion annual capital plan, made progress on our 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 to deliver a cleaner energy future while continuing to prioritize safety, reliability, and affordability for our growing customers' needs.

That concludes my remarks. I will now turn the call back over to Stephanie.

[Stephanie Amaimo, executive]

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]

[Operator Instructions] Our first question comes from the line of Maurice Choy from RBC Capital Markets.

[Maurice Choy, analyst]

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 change in future IRPs. But 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?

[David Hutchens, executive]

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 as 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. We have, as you know, the 2 different utilities that are TEP and UNS Electric.

And as part of the integrated resource plans that they filed last year, we're adding a total of 600 megawatts, 400 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's -- that was what we filed last year. Obviously, that was based on prior information on load growth, et cetera. 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, although we do as every resource plan is good the day you file it. And then you look at the additional assumptions, the load growth and retirement schedules, et cetera, 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. 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 FortisAlberta, while the 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.

[Maurice Choy, analyst]

Maybe just a quick follow-up on that. And obviously, there's a lot of discussion about sharing the 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?

[David Hutchens, executive]

So I think we're testing on a lot of stuff. And I think the big test that 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, et cetera. There's one principle that I think everyone -- every utility this isn't just unique to us, we'll 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. So overall, we think it's a good story, both from a growth perspective and a customer affordability perspective.

[Maurice Choy, analyst]

If I could just finish up on ITC to just better understand the District Court, sorry, 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?

[David Hutchens, executive]

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

[Linda Blair, executive]

Yes. Thank you, Maurice. I suppose, yes, it could. There's no requirement that the Supreme Court acts 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 stay of the injunction would remain in place.

[Maurice Choy, analyst]

And I guess just a 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?

[Linda Blair, executive]

Yes, Maurice. No, 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.

[Operator]

Our next question comes from the line of Rob Hope from Scotia Capital.

[Robert Hope, analyst]

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

[David Hutchens, executive]

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 costs 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.

And as Jocelyn mentioned too, we're filing the next rate case because it is important enough that that breakage 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.

[Robert Hope, analyst]

And then more broadly, in a relatively surprised move to Vancouver council reverse the gas ban there. But when you think about or, excuse me, what are your thoughts on the continued need for natural gas in a world where gas-fired heating and cooking could help reduce 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 a beginning of a change in sentiment on the gas?

[David Hutchens, executive]

So Maurice (sic) [ Robert ], 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. The impact on affordability has to be top line conversation. And as we look at different pathways, for 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 our role being a little bit different and maybe more of a capacity role on a going-forward basis, 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 as gas companies to be able to supply clean molecules. That's a huge thing that we need to remind people and to focus on. As you probably well know, out now 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 Roger and his team out there in BC and something that I think that the compound that with the 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.

[Operator]

[Operator Instructions] Our next question comes from the line of Mark Jarvi from CIBC Capital Markets.

[Mark Jarvi, analyst]

Maybe just coming back to the Iowa situation and the relief on the injunction. Obviously there is, I guess, still uncertainty on how this all plays out. How does that impact your thinking in connectivity around procurement and moving out of a project 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 away that 30%, how are you managing those projects in terms of permitting or trying to advance them quite before we have to put CapEx to work?

[David Hutchens, executive]

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

[Linda Blair, executive]

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 siting, permitting, regulatory applications. So as it relates to the Iowa Tranche 1 projects, we're still in the early stages. And so we haven't even received the IUB regulatory approval for those projects yet. And in fact, we haven't even begun the franchise process that's required under state law.

And so I would say 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 cue capacity for all of our major components of our infrastructure, our cue capacity for the LRTP Tranche 1 projects as well as our other projects as well in hand. 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 -- and the landowner issues, those are the primary areas of focus for us at this stage of those LRTP projects.

[Mark Jarvi, analyst]

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?

[Linda Blair, executive]

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

[Mark Jarvi, analyst]

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

[David Hutchens, executive]

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

[Susan Gray, executive]

All right. Good morning, Mark, thanks for the question. The commission is considering basically either a forward test here or formulaic rate. And so we're having another workshop coming up in the fall to discuss that. 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 long-standing rate-making policy here. And I think either way, we'll end up reducing lag. In the workshop, we did emphasize the formula rate, but I think in either case, we can design it to benefit our company.

[Mark Jarvi, analyst]

It sounds like you're pretty…

[David Hutchens, executive]

And Mark, she's doing stuff down there at TEP I only dreamed of. That was something that we've always been looking for was trying to figure out how to get out some of that regulatory lag, and we've been doing things with other tracker mechanisms, et cetera, but this is quite a bit better and cleaner solution and probably a little bit more simpler too.

[Mark Jarvi, analyst]

It sounds like there is momentum behind us. So is it safe to say you think something will come to fruition and you don't get any roadblocks where this all goes?

[David Hutchens, executive]

We're optimistic.

[Mark Jarvi, analyst]

Okay. And with the completion of the Watay project, what would be the sort of long-term vision around your ownership there. Is there a strategic benefit to stay invested? Do you think there's potential projects or investments around that [indiscernible] position that you can pursue? Or is it just become sort of a cash flowing asset that you hold and potentially monetize if and when the opportunity presents itself?

[David Hutchens, executive]

No, I think we've always seen that as a bit of an 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 it -- we would look at -- we don't have any plans on a going-forward basis other than owning that asset.

[Operator]

[Operator Instructions] As there are no further questions, I would like to turn the call back to Ms. Amaimo.

[Stephanie Amaimo, executive]

Thank you, Constantine. We have nothing further at this time. Thank you, everyone, for participating in our second quarter 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.