Fortis Inc. (FTS) Earnings Call Transcript

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

Thanks, Chuck, and good morning, everyone. Welcome to Fortis' Second Quarter 2026 Results Conference Call. I'm joined by David Hutchens, President and CEO and 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 second 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. During the first half of the year, our utilities continue to provide safe and reliable service while advancing our regulated growth strategy. Through June, we invested $2.7 billion in our systems and delivered earnings per share in the second quarter of $0.78. More recently, we secured a milestone for a significant opportunity above and beyond our 5-year capital plan with the receipt of an order and counsel that supports the expansion of our Tilbury LNG facility in British Columbia. Today, we also released our 2026 sustainability report, highlighting our progress to decarbonize our energy mix including a 38% reduction in our Scope 1 greenhouse gas emissions through 2025 compared to 2019 levels. With nearly half of our annual capital plan invested through June, and our major capital projects tracking well, we remain on pace to invest $5.6 billion in 2026. In June, the second Roadrunner reserve battery storage project was placed in service at TEP. This 200-megawatt energy storage system facilitates the integration of renewables into the grid with the capability to store 800-megawatt hours of energy, enough to serve 42,000 homes for 4 hours when deployed at full capacity. With our capital plan on track we continue to expect average annual rate base growth of 7% through 2030. Last week, FortisBC received an order in council from the province of British Columbia approving a larger Phase Ib expansion of the Stilbury LNG facility, allowing total investment of approximately $2 billion in regulated rate base. We currently have approximately $350 million in our current 5-year plan. The OIC also provides the approvals required to implement an equity partnership with the Muscle Indian band and includes regulatory mechanisms to smooth the cost of recovery in the early years of the project. The Tilbury 1B expansion supports LNG marine fueling services and promotes jobs and economic growth in the province. The project positions the Port of Vancouver as a leading LNG marine fueling hub and supports the transition to lower emission marine fuels. This is an exciting opportunity, and FortisBC will now proceed to develop and refine project cost estimates, which will be reflected in our next 5-year capital plan expected to be released with our third quarter results. While the project remains subject to certain regulatory approvals and permitting requirements, construction could start as early as mid-2027 and be in service as early as 2031. As for other opportunities above and beyond the plan, our teams continue to make steady progress. At ITC, the MISO long-range transmission projects associated with tranche 2.1 are advancing. As we have noted in the past, ITC expects US USD 3.3 billion to USD 3.8 billion of investment beyond 2030 for projects that have been awarded and are not subject to competitive bidding. For the Iowa tranche 2.1 projects subject to a competitive process, ITC has submitted bids for 2 opportunities with MISO expected to award the projects in the fourth quarter. At TEP, negotiations continue with the data center customer for an incremental 300 megawatts of capacity to support a potential build-out of 600 megawatts at the first site. TEP is also in active negotiations for additional capacity at a second site in the range of 500 to 700 megawatts and is continuing to engage with other large customers for additional growth opportunities. If agreements are finalized for these subsequent phases, we estimate that new generation investment in the range of USD 1.5 billion to USD 2 billion would be required. In Arizona, TEP and UNS Electric expect to file new integrated resource plans with the ACC in the fall. The IRPs will support increasing energy needs while taking into account clean, reliable and affordable energy solutions. The IRP will include a high-growth scenario that evaluates the impacts of potential incremental data center load beyond the 300 megawatts currently approved as well as the clean energy build-out scenario. Our utilities continue to prioritize capital investments focused on operational need and customer bill impacts. As we highlighted last quarter, both ITC and UNS are great examples of how load growth and cost-effective capital projects can benefit customers. Adding to the discussion, continued growth of the LNG markets is also expected to provide rate benefits for customers in British Columbia. First, sales of LNG into the growing marine fueling market associated with our current Tilbury 1A facility have provided a rate benefit for customers of approximately 1.5% since 2024. The further expansion of FortisBC's Tilbury 1B facility is expected to build on this rate benefit. Additionally, increased demand served through the Eagle Mountain Pipeline project will increase the utilization of FortisBC's gas system and once complete and in service is expected to provide a rate benefit of approximately 1.5%. Overall, through operational efficiency, disciplined capital planning and innovation, Fortis Utilities continue to be laser-focused on finding better ways to reduce costs and support customer affordability. Our dividend remains a core component of our investment thesis. We have demonstrated that we can grow our dividend responsibly, having increased it for the past 52 consecutive years while maintaining a disciplined approach to balance sheet strength. Looking ahead, we remain confident in our 4% to 6% annual dividend growth guidance through 2030, supported by our regulated growth strategy. Now I will turn the call over to Jocelyn for an update on our second quarter financial results.

Thank you, David, and good morning, everyone. For the quarter, we reported net earnings of $396 million or $0.78 per common share, an increase of $0.02 compared to the second quarter of last year. At ITC, EPS increased by $0.02, largely due to continued capital investment and related rate base growth, partially offset by higher finance costs and stock-based compensation expense. UNS contributed a $0.02 increase driven by higher retail electricity sales, including the impact of warmer weather. This increase was moderated by the timing of operating costs as well as regulatory lag associated with rate base growth not yet reflected in customer rates. Our Western Canadian utilities increased EPS by $0.01, largely driven by capital investment. The Corporate and Other segment reflects unrealized losses on foreign exchange contracts, higher finance costs and lower earnings due to the disposition of Fortis believes in the fourth quarter of 2025, partially offset by the timing of the income tax recoveries. And while not shown on the slide, results at Central Hudson were consistent with the second quarter of 2025 as rate base growth was offset by the timing of quarterly revenue. And earnings for our Other Electric segment were also comparable quarter-over-quarter as earnings growth in the segment was offset by the impact of the Fortis TCI disposition completed in the third quarter of last year. Foreign exchange had a $0.01 unfavorable impact for the quarter and higher weighted average shares issued under our dividend reinvestment plan impacted EPS by $0.01. On a year-to-date basis, earnings were $897 million or $1.76 per common share. Results year-to-date were mainly driven by the same factors discussed for the quarter with a few additional items to note for Central Hudson and UNS Energy. For the 6-month period, Central Hudson was up $0.03, primarily due to rate base growth and the timing of operating costs. At UNS, EPS was down $0.03 as higher retail sales were tempered by lower margin on wholesale sales, the timing of operating cost and the regulatory lag for rate base growth not yet in rates. For the first half of 2026, our utilities issued $2.1 billion of long-term debt and our funding plan remains on track. As we have noted in the past, our capital plan is expected to be funded largely from cash from operations, utility debt and our dividend reinvestment plan. In May, S&P confirmed our A- issuer and BBB+ unsecured debt credit ratings and stable outlook, and Fitch also confirmed the corporation's BBB+ issuer and unsecured debt credit ratings and stable outlook. Overall, our liquidity position and our funding plans support our investment-grade credit ratings. As Dave mentioned, we expect to release our new 5-year capital plan on our third quarter earnings call, and we will address our new funding plan at that time. On the regulatory front, the TEP general rate application continues to progress. During the quarter, hearings concluded and the administrative law judge issued an extension of the procedural schedule such that a final decision on the rate case be issued by November 17. That concludes my remarks. I'll now turn the call back to David.

Thank you, Jocelyn. In closing, we have delivered a strong first half while maintaining our focus on what matters most, operating our utilities safely, reliably and affordably. Our two-pronged focus on execution is clear with our annual capital plan on track and our advancement of opportunities above and beyond the plan. Backed by a disciplined strategy and a diversified regulated portfolio we remain confident in our ability to deliver on our rate base and dividend growth outlook 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] And our first question for today will come from Maurice Choy with RBC Capital Markets.

Thanks, and good morning, everyone. As you know, I probably like to see BC take the spotlight here. So maybe my first question, if you could help unpack the next steps for Toby -- and also an update on the bigger Tilbury Phase II. I appreciate that. And presumably, Phase 2 also has some rate benefits for customers over and above all the other ones.

Yes. Thanks, Maurice. And Roger has been waiting for this question. So I'm going to turn it right over to Roger, our CEO of FortisBC. Roger?

Thanks, David. Thanks for the question, Maurice. Maybe I'll try to anticipate some of the other questions as well. Starting with Tory 1b. So the project itself with the order and counsel from the government really has 3 components. It's the marine jetty, the liquefaction expansion as well as 230 kV power line to provide power for the electric drive liquefaction. Those 3 components are covered by the OIC. The next steps, we're still assessing and designing plans to address the conditions that came out of the environmental assessment certificate that the provincial and federal government provided to us in 2024. Then designing the liquefaction and power needs for the -- so that's going to start in earnest with hope that we'll be in construction for TLC -- or sorry, for tower sometime in 2027. We are also finalizing agreements with the on their equity investment. The percentage that they may take is confidential at this point but we're working on finalizing the limited partnership agreement that will allow them to have a direct equity investment in this project. For Tilbury 2, as a reminder, there's 2 components to Tilbury 2. The first is the Tilbury storage tank, that's replacing the existing -- 1 of the existing tanks at Tilbury that was built and commissioned in 1971 as that facility is basically end-of-life every storage expansion, which we received BCUC approval in 2025 for once the EA is approved, we'll start the process for construction on that, that doesn't come with a direct rate benefit. It really is primarily resiliency, but the size of the tank up to 3 Bcf from what the current facility is about 0.6 Bcf. There will be some gas supply benefit where we can manage summer winter gas cost differential. So we will be able to expand our gas supply capabilities on system. The rest though is really just resiliency order system disruption and peak weather events. Tilbury 2 also has up to 2.5 million tonnes per annum of liquefaction that is further out. If that does get built, that would be designed with rate benefit, but it's too early to understand what those rate benefits might be. Hopefully, that answers the questions.

Maybe as a quick follow-up. Are just timing as to when these projects might be sanctioned?

For Tilbury 2 projects, the is expected later this year. We are in the mandate, I think, 151-day review period and that is going to end sometime in Q4, and then it will be referred to Cabinet. And at that point, there's a 30-day time frame for cabinet to prove the environmental assessment certificate. So that timing holds, and there's no additional process requested by the Environmental Assessment Office. We should see decision for October 2, both the storage tank and the added liquefaction later this fall.

Understood. And if I could finish off in Arizona, there continues to be, I guess, selective data center position in the U.S., and I know that you highlighted some real benefits in 1 of your slides. But at TEP, have you more recently witnessed any change in how your customers approach your negotiations, whether that be the pace, whether it be the terms, so and so forth.

Yes. So obviously, there has been a bit of pushback in data centers across the U.S. in general for various reasons. I think 1 of the stories our industry wasn't really pushing as well as it should have been as the rate benefit that these types of projects can have for our customers. And that's the message that we're trying to get out in Arizona and anywhere else we can, as is everyone else, including data center developers because there is a really good positive story, as you can see in our deck that customer rate benefit that we see just and that's just from the first phase of Project Blue. But the customers, as in the data center customers themselves, are very aware of making sure that we get the right design and are obviously willing and able to make sure that they -- and there's been all kinds of conversations and pledges, et cetera. at every level in government and whether it's federal, local and with utilities and then the data centers and the hyperscalers themselves, we're all on the exact same page to make sure that there is no cost shift or allocation of the costs that are needed to build and serve those customers that get shifted to the other customers. And everybody is on the same page that these data centers have to cover their own costs and then some. And that's the benefit -- that's where we get that -- and then some is the part that gives us the benefits that we see to lower the rest of the customers' rates by them sharing an actual large portion of the overall system fixed cost by the usage that those data center customers have. the message is -- we all have the same message we're just making -- it's a bit hard to get people to listen to it.

The next question will come from Ben Pham with BMO.

I know you mentioned you expect to refresh at the CapEx plan in the fall. Could you talk about maybe if there's any potential to look beyond the 5-year plan to maybe look at the long horizon? Just thinking about this Tilbury expansion going through 2031. You got the ITC transmission opportunity. And just also seems like your backlog is also more is that has been versus last year?

Yes, Ben, obviously, from a planning perspective, and there's a lot of things that we do that extend beyond the 5-year period. The integrated resource plans are a prime example, the LRTP projects. There's a lot of things, obviously, that we look at longer term. But just given how those types of forecasts tend to diverge and have quite wide air bars when you get past the 5-year period, it would really be to be able to put out a 5-year, say, capital -- or more than a 5-year capital plan without having a whole bunch of caveats. So we kind of want to stick with that -- and I wouldn't say 5 years is a short time period by any means. But we know that -- that's why we try to provide the color around what's going on within our portfolio and that above and beyond the plan conversation and try to break those into things that we see within the next 5 years, things that we could essentially add to the existing 5-year capital plan, but more importantly, things that extend that growth and beyond the 5-year plan. So we try to give color around that, but to lay out numbers that far. I don't know if that would be all that beneficial.

Okay. Got it. And going back to expansion -- and if you can maybe quantify or maybe come to think about this as you got enough time to think about the impact on the balance sheet as well, you put the CapEx in there. I know the First Nations piece is still TBD, but in a range of scenarios you looked at, does a content play potential.

Ben, this is Jason. Thanks for the question. Yes, Tilbury will be wrapped up with our whole look at the 5-year plan. And so we'll -- no doubt, this is putting good pressure on the amount that we're spending and -- but we need to firm up the time for Tilbury in particular, and when and how these investments will be coming into play. And so we'll look at all funding options available to us with the aim is to keep our credit metrics in check. So that's something that we're going to be taking a deeper dive on in fall.

The next question will come from Mark Jarvi with CIBC Capital Markets.

I know we're going to get the CapEx refresh. But just on the Tilbury project, anything you kind of indicated in terms of the profile of the CapEx? Is there material amounts before 2030? Or is most of those come in the early 2030s?

Yes. Yes, we haven't put that together yet. Obviously, there's there is a shape to the CapEx spend is kind of typically on large projects will start out slowly and ramp up over time. As I mentioned in the remarks, we could see this online as early as 2031. And as we spend capital, remember, we also get AFUDC on these projects as well. So there's a whole lot of modeling that still has to be done. But when we get that shape in there, we'll let you know. And that kind of goes to that prior question, shape of capital matters to not just the overall size of the capital plan.