Yahoo Finance Fortis Inc. (NYSE:FTS) Q3 2023 Earnings Call Transcript
Fortis Inc. (NYSE:FTS) Q3 2023 Earnings Call Transcript October 27, 2023
Operator: Good morning, everyone. Thank you for standing by. My name is Ludy and I will be your conference operator today. Welcome to the Fortis Q3 2023 Earnings Conference Call and Webcast. During the call, all participants will be in a listen-only mode. [Operator Instructions]. At this time, I would like to turn the conference over to Stephanie Amaimo. Please go ahead, Ms. Amaimo.
Stephanie Amaimo: Thank you, Ludy, and good morning, everyone, and welcome to Fortis' Third Quarter 2023 Results Conference Call. I'm joined by David Hutchens, President and CEO; Jocelyn Perry, Executive VP and CFO; other members of the senior management team as well as CEOs from certain subsidiaries. Today, Jocelyn will speak to the prepared remarks on behalf of Dave as he is recovering from laryngitis. Both Dave and Jocelyn will address questions at the end. Before we begin today's call also, 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 Third Quarter 2023 MD&A. Also, unless otherwise specified, all financial information referenced is in Canadian dollars. With that, I will turn the call over to Jocelyn.
Jocelyn Perry: Thank you, and good morning, everyone. The third quarter proved to be a busy and positive quarter for Fortis. We received a number of key regulatory decisions in Arizona and Western Canada, which I will speak to shortly. Together, rate base growth in the recent regulatory outcomes in British Columbia and Arizona supported strong earnings growth in the quarter and year-to-date. And for those that attended in person or tuned in virtually, you know we held our Investor Day in September, outlining our new $25 billion capital plan for 2024 to 2028. This capital plan supports 6.3% average annual rate base growth and 4% to 6% annual dividend growth guidance through 2028. Lastly, the pending sale of Aitken Creek is progressing as expected, with the British Columbia Utilities Commission or BCUC, approving the sale last week.
With all regulatory requirements satisfied, we expect the transaction will close in the fourth quarter. With decisions in the TEP rate case and the Generic Cost of Capital or GCOC proceedings in Alberta and B.C., we have completed a number of large regulatory applications. In August, the Arizona Corporation Commission issued its decision in TEP's General Rate Application, approving an increase in nonfuel revenue of USD 100 million and 9.55% allowed ROE and a 54% equity layer. New customer rates became effective on September 1st. Also, last month, the BCUC issued a decision on the GCOC proceeding. The decision resulted in an allowed ROE of 9.65% for both Fortis utilities, reflecting a 90 basis point increase for FortisBC Energy and 50 basis point increase for FortisBC Electric.
The equity thickness levels also increased from 38.5% to 45% for FortisBC Energy and from 40% to 41% for FortisBC Electric. The new cost of capital parameters are retroactive to January 1st. I'll speak later to the related financial impacts. In October, the Alberta Utilities Commission or AUC issued a decision on FortisAlberta's third performance-based rate-setting mechanisms as well as the 2024 GCOC placebo. Overall, the PBR decision was generally in line with management's expectations. FortisAlberta continues to evaluate the annual capital provisions included in the PBR decision, which were premised on 2018 to 2022 historical levels. In the GCOC decision, the AUC adopted a formulaic approach in determining the allowed ROE, which will be calculated annually.
Although the 2024 allowed ROE calculation won't be finalized until later this year. Using today's inputs, we expect the allowed ROE for 2024 to be modestly higher than the notional ROE of 9%. All in all, we received balanced regulatory outcomes for our customers and stakeholders in Arizona and Western Canada. With $3 billion invested in our systems through September, our $4.3 billion annual capital plan remains on track. Major capital projects continue to advance in line with our plan. In August, FortisBC Energy commenced construction on the Eagle Mountain Woodfibre Gas Line project. And just a few weeks ago, TEP announced it will build the Roadrunner Reserve project, a 200-megawatt battery energy storage system. This system is expected to be operational in the summer of 2025, capable of serving approximately 40,000 homes for 4 hours when deployed at full capacity.
This project supports system reliability as TEP exits from coal and expands its renewable resources. TEP expects to file its next integrated resource plan on November 1st. The preferred portfolio is expected to align with Fortis' Scope 1 greenhouse gas emissions reduction targets of 50% by 2030, 75% by 2035 and net-zero by 2050. Our 5-year $25 billion capital plan is comprised of virtually all regulated investments and a diverse mix of highly executable low-risk projects. This new plan is $2.7 billion higher than the previous 5-year plan. The increase is driven by regional transmission projects at ITC associated with Tranche 1 of the MISO long-range transmission plan, as well as investments in Arizona to support TEP's exit from coal. Investments supporting system adaptation of resiliency and economic development are also driving capital growth for the benefit of our customers.
We expect rate base will increase by $12.6 billion to over $49 billion in 2028, supporting average annual rate base growth of 6.3%. In the third quarter, our Board of Directors declared a fourth quarter dividend increase of 4.4%, marking 50 years of consecutive increases in dividends paid. Fortis is proud to be 1 of only 2 companies listed on the Toronto Stock Exchange to achieve this significant milestone. In September, we also announced the extension of our 4% to 6% annual dividend growth guidance through 2028 supported by our sustainable growth outlook. Slide 8 provides a summary of our third quarter and year-to-date reported and adjusted earnings per share. Reported earnings include timing differences related to mark-to-market accounting of natural gas derivatives at Aitken Creek and the revaluation of deferred income tax assets related to a change in the corporate tax rate in the state of Iowa.
Adjusted EPS was $0.84, $0.13 higher than the third quarter of 2022. On a year-to-date basis, adjusted EPS was $2.37, $0.31 higher than the same period last year. Key earnings drivers center around continued investments in our regulated rate base, the recent regulatory orders in B.C. and Arizona as well as warmer weather in Arizona. I'll get into the details of each on the next couple of slides. The waterfall turn on Slide 9 highlights the EPS drivers for the third quarter by segment. Our Western Canadian utilities contributed a $0.09 EPS increase reflecting the new cost of capital parameters approved by the BCUC in September 2023, totaling approximately $0.08 and including $0.05 per common share associated with the retroactive impact to January 1st.
Rate base growth also contributed to the increase, which was partially offset by the timing of operating costs at FortisAlberta. EPS was higher by $0.01 for our U.S. electric and gas utilities with UNS increasing $0.02 in Central Hudson Down 1. In Arizona, the quarterly results were mainly driven by new rates at TEP effective September 1st and higher retail sales due to warmer weather. New rates increased EPS by approximately $0.02, while weather in the quarter favorably impacted EPS by $0.04, with July being the hottest month on record in Tucson. Lower wholesale and transmission revenues, higher operating costs and lower production tax credits for Oso Grande tempered the results at UNS for the quarter. Central Hudson's results reflect higher operating costs as expected due to the timing of costs in the first half of the year, partially offset by rate base growth.
At our Other Electric segment, EPS increased $0.01 driven by rate base growth and higher sales. Our Energy Infrastructure segment contributed a $0.02 EPS increase for the quarter. This includes higher earnings at Aitken Creek reflecting market conditions, net of lower hydroelectric production in Belize. Elevated finance costs at corporate and higher weighted average shares outstanding issued under our dividend reinvestment plan were offset by the favorable impact of a higher average U.S. to Canadian dollar foreign exchange rate. And although not shown on the slide, ITC's rate base growth for the quarter was largely offset by higher nonrecoverable finance and stock-based compensation costs. Year-to-date EPS was impacted by many of the same factors discussed for the quarter.
On a year-to-date basis, an increase in the market value of certain investments that support retirement benefits and lower depreciation associated with the retirement of the San Juan Generating Station in 2022 also favorably impacted results. Before I move on from earnings, I would like to take a moment to explain where we are with respect to the pending sale of Aitken Creek. As I mentioned, we expect to close the transaction in the fourth quarter. Until close, we continue to recognize earnings associated with Aitken Creek in accordance with U.S. GAAP. Upon close of the transaction, adjusted earnings will exclude the gain expected to be recorded on the sale as well as the earnings recognized since the March 31st effective date. For the third quarter, we recorded adjusted earnings of at Aitken Creek of $13 million or $0.03 per common share and $24 million or $0.05 per common share for the 6-month period since March 31st.
Through September, we have raised over $2 billion of debt, primarily to refinance maturing debt and to fund our capital program. With regards to upcoming maturities, we currently have about $1.7 billion due through the end of 2021, including almost USD 200 million in nonregulated debt at Fortis Inc. Our primary exposure to elevated interest rates pertains to holding company debt as our regulated utilities ultimately recover changes in interest rates through regulatory mechanisms and the periodic rebasing of customer rates. We'll continue to monitor the debt capital markets and consider interest rate hedges or prefunding opportunities. With proceeds from our debt issuances and the expected sale of Aitken Creek, as well as over $4 billion available on our credit facilities, we remain in a strong liquidity position and are comfortably positioned within our investment-grade credit ratings as we execute our $25 billion capital plan.
To summarize, we have made significant progress in 2023 to advance our growth strategy. We have executed our capital plan as expected, concluded key regulatory proceedings and delivered strong earnings growth through the third quarter. And with our recently announced 5-year capital plan, we are continuing to deliver regulated growth to support a more reliable and cleaner energy future. When combined with our regulated and geographic diversity, strong ESG story and good governance model, we are well positioned for the future. That concludes my remarks. I'll now turn the call over to Stephanie.
Stephanie Amaimo: Thank you, Jocelyn. 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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