Fortis Inc. (NYSE:FTS) Q4 2022 Earnings Call Transcript

Fortis Inc. (NYSE:FTS) Q4 2022 Earnings Call Transcript February 10, 2023

Operator: Ladies and gentlemen, thank you for standing by. My name is Laura, and I will be your conference operator today. Welcome to the Fortis 2022 Annual 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. Please go ahead, Ms. Amaimo.

Stephanie Amaimo: Thanks, Laura, and good morning, everyone, and welcome to Fortis’ fourth quarter and annual 2022 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 U.S. GAAP financial measures in our annual 2022 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: Thank you and good morning, everyone. 2022 was a great year for Fortis. Our utilities invested $4 billion of capital for system resiliency and modernization and to interconnect cleaner energy to our systems. These investments translated into strong earnings and rate base growth, demonstrating the value of our organic growth strategy and supporting our roughly 6% dividend increase in 2022. On the sustainability front, we reduced our 2022 annual greenhouse gas emissions by 28% since 2019, keeping us on track to reach our carbon reduction targets. As part of their annual Board Games report, The Globe and Mail ranked Fortis number one among 226 companies in the S&P/TSX Composite Index for good governance, reflecting our board’s commitment to best-in-class practices.

And most importantly, we remain focused on delivering safe and reliable service to our electric and gas customers across our North American utilities. These are the core tenets of our value proposition. And at Fortis, as we keep this at the forefront as we mitigate and respond to the impacts of climate change. And while our reliability metrics continue to outperform industry averages in 2022, our utilities remain committed to investing in their energy systems to better withstand the increasing frequency of severe weather events. And with the backdrop of inflation reaching 40 year highs, our teams have successfully managed average annual increases in controllable operating cost per customer to approximately 2% over the past five years by finding efficiencies through innovation, and process improvements.

And while we have limited ability to control energy commodity costs that are passed through directly to our customers in some jurisdictions, we are helping our customers manage their bills by extending recovery periods and through energy efficiency and payment assistance programs. Over a 20 year timeframe, Fortis has delivered average annual total shareholder returns of approximately 11% or 751% in total, well above the benchmark indices shown on the slide. While our one year total shareholder return for 2022 was below our historical average returns, we expect to continue to deliver stable and compelling returns over the long run. At Tucson Electric Power, the closure of our last unit at the San Juan Generating Station, removed another 170 megawatts of coal-fired generation from our portfolio and contributed to our 28% reduction in Scope 1 emissions compared to 2019 levels.

With this progress, we are more than halfway to achieving our target to reduce greenhouse gas emissions 50% by 2030 and are on track to meet our 2035 target of 75% reduction. Upon achieving that target, we expect our assets will be primarily focused on energy delivery and renewable carbon free generation. Last year, we also established a 2050 net zero Scope 1 greenhouse gas emissions target, reinforcing our long-term commitment to decarbonize while ensuring we preserve customer reliability and affordability. In the fourth quarter, we rolled out our new $22.3 billion five-year capital plan, our largest to-date. The plan consists of virtually all regulated investments and a diverse mix of highly executable projects supporting rate base growth across our portfolio of utilities.

It also includes $5.9 billion for investments that directly support cleaner energy. Over the next five years, we expect rate base to increase by $12 billion from approximately $34 billion in 2022 and to over $46 billion in 2027, supporting average annual rate base growth of 6.2%. From a growth perspective, our teams continue to pursue opportunities beyond the base plan. Key areas of focus include incremental investments, supported by the Inflation Reduction Act in the U.S., Climate Adaptation & Grid Resiliency, as well as LNG and renewable fuels. Progress also continues on MISO’s long range transmission plan. As we previously discussed, ITC anticipates transmission investments in the range of US$1.4 billion to US$1.8 billion through 2030 for Tranche 1.

ITC currently has US$700 million of this estimate included in their five year capital plan. Tranche 2 is well underway with the initial concepts identified by MISO in late 2022. The second tranche will look at a new future, DOV2A, which calls for more renewable penetration and higher electricity demand. And while it is still early in the planning process, MISO Board approval of Tranche 2 projects is targeted for the first half of 2024. The Inflation Reduction Act is expected to support TEP’s clean energy transition by reducing the cost of new renewables and providing funding to aid the communities impacted by the exit from fossil fuels. The TEP team continues to work through its all source request for proposals, which seeks to secure renewables and energy storage to support their transition away from coal.

In total, we estimate incremental investments of approximately US$2 billion to US$4 billion through 2035 will be required to implement TEP’s current integrated resource plan. TEP expects to file an updated plan later this year. Next turning to Slide 10, we increased our dividends paid per common share to $2.17 in 2022, up approximately 6% from 2021, marking 49 consecutive years of dividend increases. Looking ahead, we remain committed to building on our track record through the execution of our organic growth strategy that supports our 4% to 6% (ph) dividend growth guidance through 2027. Now I will turn the call over to Jocelyn for an update on our fourth quarter and annual financial results.

Jocelyn Perry: Thank you, David, and good morning, everyone. Before I get into the annual results, I want to briefly touch on our fourth quarter performance. Reported earnings were $370 million or $0.77 per common share, $0.08 higher than the fourth quarter of 2021. Adjusted earnings were $347 million or $0.72 per common share, $0.09 higher than the fourth quarter of 2021. The key drivers of growth include strong regulated rate base growth across our utilities as well as higher sales and transmission revenue in Arizona, higher hydroelectric production in Belize, which was up significantly from historically low levels in the fourth quarter of 2021 and higher gas margins at Aitken Creek also contributed to earnings growth. And finally, foreign exchange favorably impacted the translation of our U.S. denominated earnings during the quarter.

Corporate cost for the quarter reflect higher finance costs and taxes. On an annual basis, reported earnings were $1.3 billion or $2.78 per common share, $0.17 higher than 2021. Adjusted earnings for 2022 were also $1.3 billion or $2.78 per common share. As the adjustments to reported earnings offset one another in 2022. Adjusted earnings per common share of $2.78 represents 7% growth or approximately 6% absent foreign exchange impacts. The waterfall chart on Slide 14 provides the annual EPS drivers by segment. And while there were several market factors impacting our 2022 results, underlying growth from our regulated utilities was the primary driver of year-over-year growth. Our largest utility ITC increased EPS by $0.07, again reflective of strong rate base growth.

Lower stock-based compensation costs at ITC in 2022 were substantially offset by losses on investments that support retirement benefits, higher non-recoverable finance costs and gains recognized on interest rate swaps in 2021. The $0.07 EPS increase for Western and Canadian utilities was driven by rate base growth. The increase in EPS of $0.06 for our U.S. electric and gas utilities was mainly driven by UNS. In Arizona, higher sales and transmission revenue more than offset higher costs associated with rate base growth, not yet included in customer rates, higher operating expenses, and losses on investments, including certain retirement benefits. Our Energy Infrastructure segment contributed to a $0.05 EPS increase, mainly driven by higher gas margins at Aitken Creek.

Rate base growth and higher electricity sales in Eastern Canada and the Caribbean contributed a $0.03 increase in EPS compared to 2021. Foreign exchange favorably impacted the translation of our U.S. denominated earnings, which increased annual EPS by approximately $0.06. The EPS change in corporate of $0.11 was mainly driven by mark-to-market losses on both total return swaps and foreign exchange contracts, as well as higher finance costs. The remaining decrease was largely related to increased corporate costs and taxes. And as a note, the mark-to-market losses in the corporate segment was more than offset by the favorable foreign exchange impact just discussed and lower stock-based compensation recognized across the utilities in 2022. And lastly, with our dividend reinvestment program, EPS decreased $0.04 due to higher weighted average shares outstanding.

As you can see on Slide 15, we were active in the capital markets again in 2022, issuing over $3 billion in long term debt. Debt issued at Fortis, Inc. and ITC Holdings, mainly refinance maturing debt, while our regulated utilities issued debt in support of their capital programs. Debt maturing at Fortis and ITC Holdings averages approximately US$400 million, annually through 2025. With our recent debt issuances coupled with almost $4 billion available on our credit facilities, we continue to maintain a strong liquidity position supporting our $22.3 billion capital plan as David mentioned earlier. And despite several macro headwinds, in 2022, we saw an improvement in our credit metrics and achieved a cash flow to debt ratio of 11.7%. And when we consider the import of foreign exchange, the ratio is actually 12%.

Our credit metrics coupled with Fortis’ low business risk profile continue to support our investment grade credit ratings. Turning to some of our ongoing regulatory proceedings since we last updated the market. At ITC, FERC issued an order in November denying the complaint filed by the Iowa Coalition for Affordable Transmission, which sought to lower ITC Midwest equity ratio. We also await next steps from FERC on the MISO based ROE and supplemental NOPR on transmission incentives. The timing and outcome of both proceedings remain unknown. In Arizona, TEP’s rate case is ongoing. In its application, TEP requested rate base of US3.6 billion and allowed ROE of 10.25% and equity layer of 54%. Arizona Corporation Commission staff have recommended a 9.6 allowed ROE with rate base and equity layer largely consistent with TEP’s request.

Rebuttal (ph) testimony is expected to be filed over the next month with hearings scheduled to commence in late March. Last month, Central Hudson filed a response to the New York Public Service Commission Show Cause order regarding the deployment of the utilities new customer information system. Central Hudson has devoted significant resources to rectify matters with the system and are making strong progress in resolving any remaining billing issues. The timing and outcome of this proceeding remains unknown. At Fortis DC (ph), the generic cost of capital proceeding remains ongoing with the decision expected in the second quarter. And lastly, the Alberta Utilities Commission issued a final decision in December approving Fortis Alberta’s 2023 revenue requirement reflecting a 5% increase in distribution rates.

The decision is expected to form the basis for going in rates for the third PBR term starting in 2024. With that, I will now turn the call back to David.

David Hutchens: Thank you, Jocelyn. To recap, in 2022, we invested $4 billion in capital delivered strong EPS and rate base growth, further reduced our carbon emissions, managed operating costs, and were recognized as a leader in Canada for our governance practices. These accomplishments wouldn’t be possible without the continued commitment of our 9,200 people. Moving forward, we are focused on executing our $22.3 billion capital plan, which will drive rate base growth of 6% and support our dividend growth guidance of 4% to 6% through 2027. That concludes my remarks. I will now turn the call back over to Stephanie.

Stephanie Amaimo: Thank you, David. This concludes the presentation. At this time, we’d like to open the call to address questions from the investment community.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from the line of Maurice Choy from RBC Capital Markets. Please go ahead.

Maurice Choy: Thank you, and good morning. My first question, Dave, you mentioned in your prepared remarks that there is an incremental spending of $2 billion to $4 billion through 2035 to implement the current TEP IRP, although, there is a new plan due late this year. How would you characterize impact of the IRA on this spending? Is that a case where the amount is likely not change or go up, or is it a case where mixes or projects will change? And also on timing, is there a way that you can accelerate the decarbonization projects?

David Hutchens: Yeah. Thanks, Maurice for that question. Actually, it might be a little of everything and that’s what we’re doing in the Integrated Resource Plan, update now is to figure out exactly what that means from a timing perspective, investment opportunity perspective as well as cost associated with the renewable energy investments that we have to make to keep on that transition path that we have there. I’ll have to say that probably one of the biggest benefits of the Inflation Reduction Act is that those tax credits, not just that there are those tax credits, but that those tax credits are transferable. I think that really levels the playing field between utility investments and PPAs. So you don’t have to find some fancy way of and in the tax equity et cetera. So all things being equal, I think that’s another notch in the column for doing more utility owned and utility constructed renewals.

Maurice Choy: And maybe just to follow on to that, you obviously have a new chairperson within the commission there. Any thoughts about changes in how the commission or chair looks at things in terms of affordability, in terms of decarbonization?

David Hutchens: Not right out of the gate. I’ll maybe turn that over to Susan to see if she has any opinions after her initial conversations with the new commissioners there at Arizona Corporation Commission. It is obviously after the election, we’ve got two new commissioners and we’re looking forward to getting our cases adjudicated before them. But I’ll turn it over to Susan to answer that in a little more detail.

Susan Gray: Okay. Thanks, Dave, and thanks, Maurice for the question. Yeah. I do think it’s early to tell how our new composite of commissioners will affect policy this year, but we do have a new Chair, Commissioner O’Connor. We do have two new commissioners. We’ve actually met with the new commissioners. They came down to Tucson last month, which I think is a really good sign that they’re interested in understanding our operations. They wanted to see our generation fleet. They wanted to see our control room where we participate in the energy and balance market. I think there is a greater understanding of our business. We’ll always lead to better outcomes. We really pride ourselves in having strong relationships with our commission and that trend is continuing with these new commissioners. But I do think in terms of policy, it’s pretty early to tell how the new chair and the new commissioners will impact policy.

Maurice Choy: Great. Thanks for that. And maybe I’ll just finish off with FERC matters. There are obviously a number of regulatory items that remain outstanding. How do you see these skinning resolve with the four member FERC makeup being what is it right now? And maybe as a quick follow-up thoughts on the MISO base ROE? What are you booking in right now? And then if there’s a possibility of proactively requesting and justifying for a higher rate?