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For Fortis CEO David Hutchens, running a nuclear power plant on a submarine might’ve been an easier gig than managing utilities in a time of energy upheaval

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Cassidy Araiza/The Globe and Mail

About 30 years ago, you’d have needed sonar to find David Hutchens. He was somewhere in the deep, running the nuclear power plant on a ballistic-missile submarine. When he was done with the U.S. Navy, he took his love of power to dry land, working his way up the ranks of an Arizona electric utility that became UNS Energy. Hutchens rose to CEO, and in 2014, Canada’s Fortis Inc.—looking to bulk up its holdings—acquired the company and Hutchens with it. These days, with Hutchens at the helm of the St. John’s–based utility conglomerate, Fortis is happy to grow incrementally. There are big changes coming to the world of energy and electricity. Infrastructure companies like Fortis have to navigate the cross-currents and prepare to meet a level of demand that no one can truly foresee.

The utility sector has had a rough time the past couple of years. What’s the investment case for Fortis?

The reason valuations in our entire sector are off so much is because of the rise in interest rates. Obviously that will moderate sooner or later. But our underlying investment thesis is absolutely solid. One, we’re diverse. We’ve got a broad set of utilities across North America that provide a good balance, and a low-risk growth trajectory. When you look at the overall investment thesis for a regulated utility, it’s all about the rate-base growth, and we have had a tremendous track record of setting out big capital plans, like our five-year, $25-billion capital plan, and executing it year after year after year. That turns into rate-base growth, which gives us the ability to have earnings growth, which supports one of the other key things that our investors are always looking for, which is dividend growth. And then on the risk side, our business is 93% transmission and distribution. So only 7% is energy generation, which is generally seen as a more risky part of the portfolio.

You had a setback last November when S&P moved Fortis’s credit rating outlook to negative. Apparently you were surprised by that. What happened?

Yeah, we were surprised by it. Before that, we gave them our five-year capital plan as we always do before we release it to the market, and there were a lot of new conversations around wildfire risk. That’s on the heels of Hawaii, and before that California and some in Oregon, as well. The biggest issue that folks are worried about is not just mitigating the impacts on your ability to deliver electricity, but to make darn sure that your infrastructure doesn’t cause a fire. And even though we do have some western jurisdictions that have seen some pretty drastic wildfires in the past couple of years, including Alberta and B.C., we thought we’d explained to S&P why our situation is different. You know, the liability is different in Canada and Alberta and B.C. The processes and the procedures that we have are very up-to-date. And so we didn’t see that this was a big change in risk profile. We’re doing our best to get S&P in front of our folks out in Alberta, which is one of their main concerns, because we’ve got more electric infrastructure out there. In B.C., most of our infrastructure is on the gas side, and underground assets aren’t nearly as susceptible as our electric assets. And if there’s things that they want us to do that we can do, then we’ll do that.

How are climate concerns changing the way Fortis operates and the way you perceive the future?

In the U.S., with the Infrastructure Investment and Jobs Act, or IIJA, and the Inflation Reduction Act, a lot of tax credits are being pushed out into our sector. They’re being pushed out to encourage the production of clean energy, R&D of clean energy, things like figuring out technology related to carbon capture, small modular nuclear, hydrogen—you name it. There’s a whole group of different carrots that are being tossed out into the U.S. market, which is really driving the clean energy transition. Down in Arizona, we’ve got a timeline to shut down our coal plants. We’ve got our greenhouse gas reduction goals that we’re executing on. So those things will all get accelerated and become a little more cost-effective from a utility perspective for our customers.

Is it fair to say that if the U.S. is taking a carrot approach to the transition, the Canadian government is taking a stick approach?

Yeah, I guess that’s fair. Look, I’m an American. I don’t like to say anything bad about the Canadian policy, but it is. The U.S. has been through this, right? Back in the Obama administration, trying to pass federally mandated renewable energy standards and greenhouse gas reduction to go beyond that, they just realized, “Oh my gosh, this is just too tough to do from a federal perspective. These are really things that are regulated by the states.” I think they figured this is a lot easier if we try to encourage it. Giving these tax credits, these benefits to companies and utilities to help meet policy goals is a heck of a lot better than trying to find something from a policy standpoint that fits for everybody.

Earlier you mentioned your gas infrastructure in B.C. Some people may not know that Fortis is in the gas pipeline business.

So, 20% of our business is natural gas distribution companies. Almost all of that is in B.C. Our company, FortisBC, serves about 1.1 million natural gas customers. It’s actually the largest energy provider in all of B.C. We provide more energy than BC Hydro. People don’t realize how much the gas system and its infrastructure supplies. We did a study to show how much it would cost to replace all that natural gas infrastructure and the energy it delivers with electricity, and no matter where you are in Canada, it’s anywhere from two, three to four-plus times the amount of electricity infrastructure that would be needed to displace the natural gas.

Are you looking to increase the amount of gas capacity and infrastructure you have overall?

Yes. We are well aware of the push in B.C. to reduce the amount of natural gas in its methane state, which is obviously a greenhouse-gas-emitting fuel. But we are trying to get folks to understand the need for that infrastructure, and it’s not for the need of additional gas energy per se, but for the additional gas capacity. Because when we have a peak cold day—back in January, BC Hydro set a peak of about 11,000 MW. The same hour they set that peak, we delivered twice the amount of energy through the gas system. This is the important part, understanding the value of that natural gas for those peak periods.

Why did the B.C. Utilities Commission deny your application for a capital project to increase gas pipeline capacity in the Okanagan?

They denied it based on their view that the CleanBC regulations will reduce natural gas demand growth in the future. Typically when we do a planning process, we plan for multiple decades. What do we need for the next 30 years? So on a long-term basis, we said, “Here’s where we see the demand growing, and this is what we see from a capacity-need perspective.” And they said, “We see that demand and think it’s actually a pretty near-term need for additional capacity. But we don’t think you should assume that it continues to grow over those longer timeframes. So come back with a different solution that solves that near-term need, without looking at that longer-term view.” This is the first time we’ve seen a regulator look at our demand forecast and say, “No, you’re not taking into account what we think is going to be the impact of these CleanBC policies.” We would say that we did take that into account.

As an observer, it seems to me that a utility company’s world is all about regulators. You’re either applying to regulators to do something or waiting for approvals or working to overcome denials. Does your success depend on making regulators see the world the way you do?

To a large extent, it does. You know, we have 10 different regulated utilities in our portfolio. There’s different policy bents in each of those jurisdictions, so we have to make sure when we’re talking to our regulators, especially around things like the clean energy transition, the pace, the things we need to do as a utility, we have to spend a lot of time talking to our regulators, giving them the view from that local utility’s perspective. It’s imperative for us to make sure we’re in line with our regulators, because the things we need to do for our customers have to be approved by the regulators.

How often do you find politics getting mixed up with regulator policy and decision making?

Well, I’ve found that to be the case for a long time in Arizona because our regulators in Arizona are elected, so they are politicians. There’s maybe a third or so of the jurisdictions in the U.S. that have elected versus appointed. When you have regulators like in B.C., Alberta, New York—where they’re appointed—they’re typically what we would call economic regulators. They make sure you’re following the policies the government sets, but in the end they’re just really looking at the economic impact: What’s the right return, what’s the right capital structure, what are some of the right programs that you need to do, and then what is the rate design on which you would recover all of this cost that you have?

As you model electricity usage in the future, do you think the grid is ready for the demand?

It will be. It’s not ready today for the level of electric vehicle adoption, and this is before you get to displacing home heating and some of the industrial processes. There’s a lot of investment that needs to be done to meet the growth in electricity demand. I mean, a lot. And it’s the whole value chain—generation, transmission and distribution. All of those things need to be really accelerated. Probably the most difficult thing that any utility in our sector is now facing is trying to understand that future demand. And you can’t be short. If you’re short, that’s a big problem.

What’s going to be the hardest part of meeting that need?

The biggest issue we’re going to have is customer affordability. We want to get as clean as we can, as fast as we can. We can’t mess up reliability. We can’t let the grid crumble. I mean, that’s loss of life, loss of economic value. So that part has to be maintained. But maintaining that causes affordability issues. Every policymaker, every government official knows that as soon as you lose the public’s confidence in this direction, it’s going to be stalled for a long time. Right now, public support for the clean energy transition is extremely strong. We have to make sure we don’t lose that. So we want to do this in the right fashion, at the right pace. That is going to take a lot of technology to flatten that demand curve so that we can manage it at the same time as we’re building out the infrastructure. Can we get folks to reduce load exactly when we need them to reduce load? Because if we can’t, a whole bunch of EVs are coming, and they’re all going to charge at seven o’clock at night, when everybody gets home from work. And the sun just went down, so there’s no solar. So we’re going to have to build a whole bunch of additional battery storage or gas generation or something to meet that peak, and that could be expensive.

If you look forward 10 or 15 years, how will Fortis be different as a company?

Boy, that’s a good question. The clean energy rules that are being pushed out are all about cleaning up the electricity sector. But the energy transition means cleaning up everybody else’s sectors, as well—transportation, industry—which is going to provide a big growth opportunity for electricity. So I see us as much larger, from an electric perspective. I think we’ll have a lot more clean energy investments within our regulated utilities to support that. And I also think we’ll see a lot of new technologies and a lot more cleaner molecule investments in our gas business.

I appreciate you walking me through some of these issues.

It’s a lot of fun. This is a great sector to be in. When I came to work in this sector 28 years ago now, one of my brothers said, “Why are you going to a utility? That sounds really boring.” And it wasn’t. It has been change after change. Before, you never talked about utilities, never paid attention to them, and now all of a sudden we’re like the cool kids. The front page of every paper is an energy story. And frankly, it’s the tip of the iceberg. We’re only this far into the clean energy transition, and we’ve got a long, long road ahead.

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Cassidy Araiza/The Globe and Mail

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