Fortis Inc. (FTS) Earnings Call Transcript

Thank you, Jim. Based on the report of our secretary, I confirm all motions brought before the meeting this morning has been carried. This concludes the formal business of the meeting. Before I pass things over to David and Justin for management's presentation, I will ask James Goodridge for a motion to terminate.

I hereby move that the meeting be terminated.

Thanks, James. Will Denise second the motion?

I second the motion.

Thanks, Denis. I declare the 36th Annual Meeting of Fortis then closed. I will be back with a couple of wrap-up comments at the end.

Thank you, Jo Mark. [Operator Instructions]. I note that David and Jocelyn's statements today may include forward-looking information. Details regarding forward-looking information are on screen and can also be found in our 2022 management discussion and analysis and as updated in our first quarter report to shareholders. Actual results can differ materially from forecast projections included in the forward-looking information presented today. This information is referenced in Canadian dollars. With that, I will now pass things over to Dave and Jason for management's presentation.

Good morning, and thank you for joining us. I'm happy to have a full house today. Welcome to our shareholders and guests here in the room and those joining us online. To kick things off, I'll introduce our Fortis senior leadership team. Please stand as I call your name. Previously introduced by Jo Mark, we have Jocelyn Perry, Executive Vice President and Chief Financial Officer; and Jim Reid, Executive Vice President, Sustainability and Chief Legal Officer. We also have Gary Smith, Executive Vice President, Operations and Innovation and Senior Vice President, Capital Markets and Business Development; Stuart Locker. I'd like to acknowledge a member of our executive team, who retired in June; Nora Duke, who is our Executive Vice President of Sustainability and Chief Human Resource Officer. Nora had an incredible 36-year career with Fortis, and she was integral to the growth and success of Fortis, and we're incredibly grateful for her many contributions. Standup, Nora. I'll now introduce the CEOs of our utility subsidiaries. I ask that you please stand as you're introduced. Linda Apsey, ITC Holdings; Roger Dall'Antonia, FortisBC, Ruth Forbes, Turks Cacos, Chris Capone, Central Hudson, Susan Gray, UNS Energy, Scott Hawkes, FortisOntario; Richard Hugh, Caribbean Utilities, Kay Menzies, Fortis Belize, Gary Murray, Newfoundland Power, Jason Roberts, Maritime Electric; and Janine Sullivan, Fortis Alberta. Please give them all a round of applause. Also with us today is Margaret Kanekonash, CEO of Lawton Kinney at Power, a transmission company majority owned by 24 First Nations in partnership with Fortis. And last but not least, my old boss, Barry Perry, is joining us today, past President and CEO of Fortis. Together with our 9,200 employees, we are Fortis. To all of you, thank you for your leadership and your commitment to safe operations and excellent customer service. Fortis is a premium North American utility, delivering a cleaner energy future for our 3.4 million customers with $65 billion in assets. Our geographic footprint is large and diverse. We have utility operations in 5 Canadian provinces, 10 U.S. states and 3 Caribbean countries. Fortis leadership teams are local to the communities and the customers they serve. Most of our utilities have Boards of Directors, with the majority of independent directors that oversee their business. This local operating model is key to our success. Several members of our utilities Boards of Directors have joined us here today. Please stand as I call your name: Newfoundland Power, Board Chair, Gina-Pecor; Maritime Electric Board Chair, Doug Newson, Fortis Alberta; Board member, Guide Bridgeman, FortisBC Board member, Peter Blake, Central Hudson Board members, Kevin Cleary and Mary Madden; CUC Board Sherry Ebanks and ITC Board member, Doug Rothwell. We are happy to have you here today. Please join me in acknowledging our independent Board members of our utilities. While our companies operate across a vast geographic footprint, Fortis is an interconnected network rich with collaboration. Subject matter experts from many areas of our business, electricity and natural gas operations, safety, sustainability, human resources and many more work together to drive innovation, share ideas and foster improvements that advance our business strategies. The force of our combined strength was put to test last fall when 3 of our 10 utilities were hit by one of the strongest storms in Canadian history. Hurricane Fiona caused significant damage in the Turks and Caicos, slept homes out to see on the West Coast here in Newfoundland and caused power outages for nearly every customer of Maritime Electric on Prince Edward Island. 260 crews from across our utilities worked tirelessly to restore power as safely and quickly as possible. I'd like to acknowledge the incredible teamwork and tenacity of our employers, contracts and communities in making this happen. Our focus on safety and reliability was steadfast in 2022. We experienced the lowest recordable injury rate in Fortis history, and we kept the lights on and the gas flowing, outperforming industry averages in Canada and the U.S. By providing reliable energy service into the future means preparing for more frequent extreme weather events. And Fortis is taking a pragmatic approach to both mitigating climate change and preparing for its impacts. We are keenly focused on meeting our clean energy goals while investing in the resiliency of our energy systems, all in a manner that will ensure continued customer affordability. In 2022, Fortis Utilities invested $4 billion to modernize and strengthen the resiliency of our energy systems, with $600 million focused on cleaner energy infrastructure. This includes one of our most transformative projects. You may recall the Wataynikaneyap transmission project will connect 17 remote First Nation communities to the Ontario Power Grid. In November, Kingfisher Lake became the third first nation to turn off diesel generators and connect to the grid, supplying cleaner, more reliable energy. Construction of the 1,800-kilometer Wataynikaneyap transmission line is 85% complete and scheduled to finish next year. This project will reduce greenhouse gas emissions by 6.6 million tonnes over a 40-year time frame. Only 5% of Fortis assets are fossil fuel generation, which contributes to the vast majority of our Scope 1 greenhouse gas emissions, and we are committed to getting this energy as clean as we can as fast as we can while maintaining reliability and affordability. Our approach is straightforward, replace fossil generation with renewables and storage, which leads to greenhouse gas emission targets that are clear and credible. In fact, Fortis has already achieved a 28% reduction in Scope 1 emissions through 2022 compared to just 2019 levels, putting us more than halfway to our short-term target of reducing emissions 50% by 2030 and on track to achieve our midterm target of 75% by 2035. We have also established a long-term aspirational target to reach net 0 by 2050. And in pursuit of this goal, we are investing in innovative technologies and advocating for support of regulatory and policy actions. Reductions in our Scope 1 emissions are being driven by Fortis utility, Tucson Electric Power, that just last year shut down another 170 megawatts of coal-fired generation, supporting its plan to fully exit coal by 2032. Tucson Electric continues to increase renewable electricity generation capacity with plans to add an additional 3,400 megawatts of wind, solar and storage by 2035. As we reduce emissions to help mitigate climate change severity, we're also committed to adjust transition and supporting the communities that are negatively impacted by these coal plant closures. Fortis expects to invest $5.9 billion in cleaner energy infrastructure over the next 5 years. Our focus is connecting renewables to the grid. This includes ITC transmission investments as well as renewable and storage investments in Arizona and the Caribbean. We're focused beyond electricity and looking at cleaner fuels as well. FortisBC is making important progress on decarbonizing the critical energy it delivers to its 1.1 million natural gas customers through investments in alternative fuels like renewable natural gas and hydrogen as well as efficiency programs to help customers use less energy. In 2022, FortisBC experienced its largest annual increase in renewable natural gas supply, and they've signed more than 30 renewable natural gas supply projects. This year, we announced a partnership for a new pilot project that will use an innovative technology to produce 0 carbon-hydrogen from natural gas for the first time in North America. By working together with all of our stakeholders, we'll continue to take deliberate and meaningful actions to execute our sustainability strategy. As we move to a cleaner energy future, we recognize that with cost increases in all parts of our lives, affordability is at the front of everyone's mind. Inflation and elevated commodity costs impact customer rates and requires us to find efficiencies through innovation and process improvements, getting the most out of our existing infrastructure and helping our customers manage their bills and save energy. Now I'll turn things over to Jocelyn for an update on our financial performance as well as our 5-year capital plan.

Thank you, David, and Good morning to everyone. I'm happy to start the presentation today with a look back on our 2022 results. David discussed several of our operational achievements in 2022. Our financial results were also very strong and showcased the strength of our regulated businesses. Reported net earnings were $1.3 billion or $2.78 per common share. This is up from $2.61 in 2021. Our adjusted net earnings per common share were $2.78, $0.19 higher than 2021. The EPS growth was mainly driven by rate base growth across our regulated utilities. We also experienced higher electricity sales and transmission revenue in Arizona and higher gas margins at Aecon Creek. The results in 2022 were also positively impacted by foreign exchange. However, even when you remove that impact, 2022 adjusted EPS grew approximately 6% over 2021. I'm also pleased to report we started 2023 strong. We released our first quarter results yesterday and Q1 2023 adjusted net earnings were $439 million or $0.91 per common share. This is up $0.13 per common share over Q1 2022. During the first quarter, we made capital investments of $1 billion and our annual $4.3 billion capital plan remains on track. We announced our new $22.3 billion 5-year capital plan in the fall of 2022. This is our largest plan to date. It consists of virtually all regulated investments with a diverse mix of projects supporting rate-base growth across our utilities. As David outlined, the plan will improve our already low carbon footprint with $5.9 billion in cleaner energy investments. Our capital plan is low-risk, balanced and highly executable. Large projects account for just 17% of the plan. As always, we are focused on responsible, cost-effective investments that provide the most value for our customers. Our capital plan is expected to increase rate base by over $12 billion from approximately $34 billion in 2022 to over $46 billion in 2027, supporting an average annual rate base growth of approximately 6.2%. We were active in the debt capital markets again in 2022. We issued more than $3 billion in long-term debt, including approximately $400 million in green debt at ITC and FortisBC Energy. In addition to our debt issuances, we amended the terms of our revolving corporate credit facility to establish sustainability-linked targets related to board diversity and the reduction of Scope 1 emissions. With our recent debt issuances, coupled with $3.6 billion available on our credit facilities, we continue to remain a strong liquidity position, supporting our 5-year capital plan. We also saw an improvement in our credit metrics and achieved a cash flow-to-debt ratio of 11.7% for 2022. Our credit metrics, coupled with Fortis' low business risk profile, continue to support our investment-grade credit ratings. On Monday, we announced we entered into a definitive sale agreement with Enbridge to sell our unregulated investment in the Aecon Creek natural gas storage facility in British Columbia for approximately $400 million. This transaction is subject to approval and is expected to close in the second half of 2023. We expect to use the proceeds to pay down our corporate borrowings, which further strengthens our balance sheet and provides additional funding flexibility to support our regulated utility growth strategy. In the third quarter of 2022, we announced annual dividend growth guidance of 4% to 6% through 2027. With our strong dividend track record and low regulated growth strategy, low-risk regulated growth strategy, this guidance extends visibility and dividend increases through 2027. The updated guidance also provides flexibility to fund more capital internally as the macro interest rate environment continues to change. Over a 20-year time frame, Fortis has delivered annual total shareholder returns of approximately 12%. Going forward, we expect to continue to deliver stable and compelling returns over the long run. Looking ahead, we are focused on executing our 5-year capital plan, which will drive rate base growth of 6% and support our annual dividend growth guidance of 4% to 6% through 2027. I'll now turn things back to David.

Thank you, Jocelyn. Fortis has delivered dividend increases to our shareholders for nearly 5 decades. This is one of the longest records for annual common share dividend increases by a public corporation in Canada. To continue this success, we must execute on our plan to deliver a cleaner energy future. This matters to our customers and the communities we serve, and it matters to you, our shareholders. At Fortis, we remain guided by our values. At the center of these values are our people. Our employees are dedicated. They take pride in working hard and doing the right thing. We continue to focus on fostering a diverse, equitable, safe and inclusive workplace culture, where our employees can reach their full potential. I want to sincerely thank our 9,200 employees for your hard work and commitment to serve our customers. You are the reason for our continued success. On behalf of Fortis, I also offer my thanks and gratitude to you, our shareholders, for investing in our company and for joining us today. I will now turn things over to Stephanie to begin the Q&A session. Thank you.

Thank you, Dave and Jocelyn. So now we'll begin our Q&A session. I would open it up to the room. If you'd like to ask a question, please come to the microphones in the center, please. I see no questions here in the room. I will go to the online questions that were submitted. We did receive one during the meeting. We have 3 also that were submitted ahead of time. So I'll start with the first one from James Polson. I'll read this for Batam. Accurate billing is fundamental to any business. It's been 18 months since Central Hudson Gas & Electric adopted a widely inaccurate billing system. It emits squandered a century of good customer relations. The regulator claims the adoption and continued failures violate state law. When will those customers get accurate monthly bills, and can Fortis assure shareholders this failure will not be repeated at other units?

Yes. Thank you. Mr. Paulson for that question. As many in the room know, we had a customer information system implementation at Central Hudson that went very poorly and had a very detrimental impact on a number of our customers in the Central Hudson service territory. We have put additional resources to bear at Central Hudson. We've brought in new people. We're hiring many in the call center and billing to make sure that we can, in essence, recover from those back bills that were not done correctly. As we sit here today, on a going-forward basis, we have confidence that the bills that are going out today are going out correctly. We still have work to do to get the last few of those prior bills cleaned up, and that's why we're getting those additional resources and those additional people and, of course, leaning across the Fortis family here to assist them. So we obviously apologize to those customers for the detrimental impact that it had on them. And we hope that you continue to work with us as we continue to fix those bills and rebuild that relationship and trust that we have with our customers there at Central Hudson. As far as additional and different systems across our subsidiaries, this is one of a prime example of how we share lessons learned that one utility across the rest of them. So we have had a lot of our teams have those conversations. We've had our corporate Chief Information Officer involved on these. And we are making sure that when we do any upgrade like this going forward, we have everything that we need ahead of time and before going live and making sure that we don't have an impact like this again. And again, I apologize Mr. Pulse.

Thank you, Dave. So we have 3 more questions that were pre-submitted. This comes from Derek Hutchins. You cannot be with us in person today. Mr. Hutchins, in the annual report, you talked about growth opportunities, but a question about your ability to raise funds internally when your actual dividend payout last year was nearly a record high of 78%. To borrow the necessary funds would be costly, given the interest rate hikes in the past year. So can you continue to pay out such a large percentage of net income for shareholder dividends and finance growth internally?

Mr. Hutchens, thank you for submitting those questions. I'm sorry you're not here. I think the last time we saw you live was 4 years ago and looking forward to you joining us again here in person. So it's a great question. And I think there's a couple of things to understand. One is our base funding plan is extremely straightforward. When you look at how we're funding that $22.3 billion capital plan, 57% of that is coming from funds from operations, 33% is coming from subsidiary debt, and 10% is coming through our dividend reinvestment program. So very, very straightforward. The other thing that there's 2 other pieces of information that are useful in this conversation, particularly related to payout ratio is the first is last year, we changed our dividend growth policy to target 4% to 6%. And that gives us a little additional flexibility to use internally generated funds, which gives us a little bit more headroom. And when we announced that, it was very clear that we said what we want to do here is have the rate base and underlying growth of the utilities that can support that 4% to 6% dividend growth while decreasing our payout ratio. So that's been the target. Now of course, when you look at it, as we sit here today with the announcement last, I guess it was this week of the Aitken Creek gas storage, that's another way that we're adding flexibility to our funding. That's $400 million of additional funding that we're taking out of an unregulated part of our business that we can invest infrastructure in our regulated businesses. So that's another thing that improves our balance sheet strength and provides us that. From an M&A perspective, FX is obviously something that goes into the basket of different variables when you're looking at mergers and acquisitions, say, in the U.S. as a Canadian company. Let me just put that one aside and say that's not where we're going. That's not what we're doing. That's not what we're focused on. So it doesn't really impact anything from a strategy perspective for us. Our strategy is clearly to grow organically across the existing footprint that we have. The other one is, well, does it impact in any way the investments that you make in your U.S. subsidiaries and absolutely not, right? Those are decisions that are made down at that local utility level. And frankly, all that FX kind of washes out when you think about our U.S. subsidiaries, right? The U.S. subsidiaries earned in U.S. dollars, get U.S. debt and send those dollars up to us in U.S. dollars. So the FX sort of nets out and takes care of itself. So no impact on our strategy and no worries from our perspective.

One last question here. Mr. Chairman, a human capital question. How do you identify candidates for leadership positions? And how successful were you last year with your new leadership program?

Okay. Well, thank you very much for that question. Human capital is a hugely important priority for our Board of Directors. Fortis is a people business. We have the Board of Directors under the capable leadership of Julie Dobson, the Chair of our Human Resources Committee, who does an annual talent review, which includes a review, in particular of the most important and imminent succession requirements. How that works is Dave and the executive team at Fortis Inc., along with all of the CEOs of the subsidiaries profile, all of their top leaders, profile their capabilities and the steps needed, the experience needed for them to advance to higher positions within the organization as well as the next generation of leaders that will be there for future requirements. In the past year, we had -- since the start of 2022 until now, we've had 13 planned executive retirements who we've recruited and put into new positions. Of these, 11 were candidates who were identified through the annual talent review process. Another highlight for this past year is over the past few years is we all hear a lot about the great resignation where through the pandemic, a lot of companies struggle to keep their people. We did not lose a single executive member across the organization to a resignation during that whole period. So it speaks to Fortis as an employer and as a place where we all feel proud to serve. The one other thing I'll highlight is we've got a new program called our leadership, the Fortis leadership lab. It started in 2021. We've had 2 cohorts go through already. Almost 70 participants have been through that. At our last Board meeting, we got to see a couple of participants present to the Board of Directors on real-live Fortis risks and opportunities and how they tackle them. How this works is the early career individuals within Fortis who identified as having a lot of talent and leaders of the future are challenged and paired up with mentors from the executive ranks of Fortis to tackle these real-life problems and opportunities. And they get to show their talent broadly across the organization. And I'm happy to say that over 50% of the people who have gone through the first 2 cohorts have already been promoted. And in fact, you saw James Goodridge prepare a motion today. He's one of that group. And I know a lot of us focused on our sustainability reporting and all the progress we've made. Kealey Martin was promoted to VP yesterday, and she came to that program as well. So we're very excited about the leadership team at Fortis, and we'll continue to focus on talent development and succession.

Thank you, Joe Mark. Having received no further questions. This concludes our Q&A session. I would like to turn it over to Joe Mark for final comments.

Great. Thank you, Stephanie. First, thank you very much for the questions today. They are always an important part of our annual meeting. Thank you to everyone who helped to organize this hybrid meeting, including critical Fortis employees, the audiovisual teams and the staff of the St. John's Convention Center. On behalf of our Board of Directors, we'd like to thank the entire Fortis team, including the folks in our operating companies for our continued strong performance in 2022. Finally, I'd like to thank our shareholders and other stakeholders who participated both in person and online today. With that, I'll declare the meeting adjourned. Please join us for lunch outside, but don't get in the way of Dave and Kathy Hutchens, right? They are expecting a grandchild later today. So as soon as they stand up, they're going to bolt straight through the lobby and head to the airport because they want to be on the ground when the baby is born. So all the best and congratulations to you both.