Emera Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 11, 2023

There are 14 speakers on the call.

Operator

Day, ladies and gentlemen, and welcome to the Emera Q2 2023 Earnings Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on August 11, 2023. I would now like to turn the conference over to Dave Besanzen.

Operator

Please go ahead.

Speaker 1

Thank you, Michelle, and thank you all for joining us this morning for Emera's Q2 2023 conference call and live webcast. Emera's 2nd quarter earnings release was distributed this morning via Newswire and the financial statements, management's discussion and analysis And the presentation being referenced on this call are available on our website at emera.com. Joining me for this morning's call are Scott Belfort, Emera's President and Chief Executive Officer Greg Blunden, Emera's Chief Financial Officer and other members of Emera's management team. This morning's discussion will include forward looking information, which is subject to the cautionary statement contained in the supporting slide. Today's discussion and presentation will also include references to non GAAP financial measures.

Speaker 1

Please refer to the appendix for definitional Information and reconciliations of historical non GAAP measures to the closest GAAP financial measure. And now, I will turn things over to Scott.

Speaker 2

Thank you, Dave, and good morning, everyone. I'd like to begin my remarks by taking a moment to acknowledge the 2 significant natural disasters that impacted our Over 150 families lost their homes to the devastating wildfires that broke out across the province. Thankfully, no lives were lost. However, many people, including our own employees were impacted. We're incredibly grateful to the hundreds of first responders who kept our community safe And courageously battled these fires.

Speaker 2

Only weeks later, the province was hit with a record breaking rainstorm, resulting in severe lightning and flooding That caused significant damage to homes and communities across the province. And tragically, 4 Nova Scotians lost their lives in the flooding. On behalf of the entire MiR team, we extend our heartfelt condolences to everyone affected by these events. I'd also like to take a moment to recognize the team at Nova Scotia Power. These disasters underscore the essential work we do And the value of a strong and reliable electrical grid.

Speaker 2

And the response from our team highlights the strength and resiliency of our people, As well as their expertise and unwavering dedication to the communities we serve. This morning, we released our 2nd quarter results. And I'm pleased to share that we continue to deliver steady, predictable earnings and cash flow growth. We reported 2nd quarter adjusted earnings per share of $0.60 up 2% from the Q2 of 2022, Driven by strong performance from our regulated utilities, partially offset by lower earnings from Emera Energy and the impact of higher interest costs And for the year to date, despite higher interest costs, which Greg will discuss shortly, as well as inflationary pressures generally, Adjusted earnings per share has increased $0.07 or 5% to $1.58 compared to $1.51 last year. Our regulated utilities delivered an 11% increase in adjusted earnings this quarter and 7% year to date, Largely driven by an increase in rate supported capital investments as well as favorable contributions from asset management agreements at New Mexico Gas in the Q1.

Speaker 2

We continue to see strong economic and population growth in our key service areas. The economic growth in Florida Continues to drive meaningful customer growth, approximately 2% at Tampa Electric and 5% at Peoples Gas. Here in Nova Scotia, we're experiencing the strongest population growth in decades, driving over 1% customer growth at Nova Scotia Power last year. At both Tampa Electric and Nova Scotia Power, this customer growth is contributing to growing customer demand and load, Which helps to offset some of the impact of less favorable weather in the first half of the year. As the economies and populations in our service territories grow, So does the level of capital investment required to support that growth and to deliver cleaner and reliable energy for our customers.

Speaker 2

In the first half of twenty twenty three, we deployed over $1,400,000,000 in capital, a 25% increase over 2022. And we continue to expect to invest almost $3,000,000,000 in capital this year. Our deployment in the first half of the year is on track with our 3 year capital plan, which remains focused on reliability and de carbonization investments, As well as infrastructure expansion investments in support of customer growth. Last year, we completed the Big Bend modernization at Tampa Electric. I'm proud to say that earlier this month, this project was recognized as the best energy project in 2022 by Engineering News Record.

Speaker 2

As one of the most efficient natural gas plants in North America, it can produce almost 1100 megawatts of energy, Enough energy to power more than 250,000 homes. This transformative project of a plant that once burned coal Not only provides cleaner and more reliable energy for our growing customer base, but also provides the necessary capacity to support The increasing build out of solar generation. Tampa Electric's investment in solar has continued over $120,000,000 invested in our solar program in the first half of the year. And we're on track to have another 125 megawatts of solar generation in service by the end of 2023 for what will then be total utility scale solar generation capacity of 12 5 megawatts, representing 20 percent of Tampa Electric's total generation capacity. We've also invested $110,000,000 so far this year in our storm protection plan, representing important investments to strengthen the system against severe weather events.

Speaker 2

We saw firsthand the value of these investments in the aftermath of Hurricane Ian with system impacts And outage restoration times both improved. And at Peoples Gas, we're focused on investments in system reliability and expansion to support Incredible customer growth utilities experience. We expect over 75% of our 3 year capital program will be invested in forward operations to support the strong population and economic growth that continues in the state. And overall, we continue to expect to deliver 7% to 8% rate base growth over the forecast period. However, we are focused on how to optimize the pace of capital investment to best manage the cost impacts for customers.

Speaker 2

As we collectively continue to navigate the current inflationary environment, we are also working to support our customers with energy efficiency programs as well as financial support for those who are struggling. Large government tax incentive programs are also helping to reduce the cost of the transition to cleaner energy. In the U. S, the Inflation Reduction Act provides tax credits that are expected to make several of our current and prospective projects more affordable for customers. Similarly, the most recent federal budget in Canada recognized the need to address the significant cost impacts of the clean energy transition With additional funding programs, including meaningful investment tax credit support.

Speaker 2

Within our capital plan, Tampa Electric's almost $1,000,000,000 investment in solar generation will attract production tax credits under the Inflation Reduction Act. And looking forward, as we highlighted in our Investor Day in March, we're excited about the opportunity that federal tax credits have created in support of carbon capture and sequestration, As well as hydrogen. Last year, Tampa Electric was awarded approximately $6,000,000 U. S. Funding from the U.

Speaker 2

S. Department of Energy to perform preliminary study at the Polk Power Station to evaluate the cost And feasibility of retrofitting carbon capture technology on a combined cycle generation unit. I'm pleased to say we received an additional $5,000,000 of funding from the Department of Energy this year to continue this important work on this promising project, albeit Still in early days. And in Nova Scotia, we continue to support stakeholders discussions with respect to the Atlantic Loop. Our objective since the beginning has been to find a way to phase out coal generation in a way that delivers the best solution to Nova Scotia Power customers.

Speaker 2

We believe that a strong transmission tie into the province is key to the most optimal path to phase out coal generation In Nova Scotia Power's electric grid, while maintaining grid reliability for Nova Scotians. Increasing electric transmission capacity Regions makes sense everywhere, particularly here in Nova Scotia, where our electrical connections to larger markets are currently constrained. New regional transmission capacity would provide Nova Scotia with critical access to dispatchable energy capacity For when intermittent wind and solar generation sources aren't available and would also enable Nova Scotia to become an exporter Of the incredible wind resources we have here in the province, which would also help support the development of green hydrogen and offshore wind in Nova Scotia.

Speaker 3

But it's complicated.

Speaker 2

And as you've heard me say many times, the kind of rapid and transformative transition to cleaner energy Now underway is extremely costly. And so we're aligned with the provincial government in the view that Significant financial support from the federal government is required to achieve federal clean energy policy goals here in Nova Scotia. It's imperative that we find a solution that is in the best interest of our customers of Nova Scotians. That is our focus. So while government and other important stakeholders continue to discuss whether the Loop project advances or not, the team at Nova Scotia Power continues to work with the province of Nova Scotia to advance the other important components of the clean energy transition.

Speaker 2

This includes investments in battery storage, supporting grid connections for new wind procurements and strengthening the intertie between Nova Scotia and New Brunswick. Last quarter, the team at Peoples Gas filed their petition for new rates effective January 1, 2024. Since their last rate increase in 2021, Peoples Gas has deployed more than $1,000,000,000 of rate base investment to serve the growing population of Florida And the team in New Mexico is in the process of developing a rate case that it intends to file later this year requesting new rates That would be effective in the fall of 2024. To sum up, the fundamentals of our business And our portfolio of high quality regulated assets remains strong. We remain focused on strengthening our balance sheet, Executing on our well established strategy of investing to deliver increasingly clean and reliable energy to our customers, while always considering The impact of cost on customers.

Speaker 2

And by doing that, we're also delivering consistent, reliable growth in earnings and cash flow for our shareholders. And with that, I'll turn it over to Greg to take you through our financial results.

Speaker 3

Thank you, Scott, and good morning, everyone. This morning, we reported 2nd quarter adjusted earnings of $162,000,000 and adjusted earnings per share of 0 point Earnings were $430,000,000 and adjusted earnings per share was $1.58 compared to $398,000,000 $1.51 for the same period in 2022. Our regulated portfolio was a driver of our strong second quarter results. Contributions from regulated utilities increased $27,000,000 over Q2 2022 or $0.07 of adjusted EPS, Due in part to an increase in rate supported capital investments at Tampa Electric, Nova Scotia Power and New Mexico Gas. This was partially offset by higher interest expense across our portfolio, lower contributions from Emera Energy and a higher share count.

Speaker 3

Operating cash flow before changes in working capital continued to grow in the second quarter. Despite slightly unfavorable weather the first half of the year, year to date operating cash flow increased by 56% primarily driven by fuel over recoveries at Tampa Electric compared to under recoveries in 2022. In addition, on April 1, we began collection of the 2022 fuel under recoveries in Hurricane Ian's storm Tampa Electric and the Labrador Island Link is now producing cash flow with our year to date results reflecting 1 quarter's worth and the balance of the year receiving a full 6 months worth. Excluding the impact of the fuel deferrals and collection of 2022 fuel and storm costs, we delivered over $1,000,000,000 operating cash flow in the first half of twenty twenty three, roughly half of our annual target of $2,100,000,000 And as I've said before, the cash flow challenges from 2022 were timing related and they are fully reversing as we had expected. Our path to improve credit metrics is still clear.

Speaker 3

Fuel costs have remained stable and the over recoveries we are seeing in 2023 so far are helping to pay down the under recovered balance faster than expected. While we are adjusting for the effect of the collection of fuel costs on This faster collection will reduce the outstanding debt balances associated with financing needs under recoveries and therefore improve our credit metrics. In addition, at our Investor Day in March, we were clear that we have additional levers available for credit metric improvement outside of our base plan should we need them. While we are encouraged by the progress in the first half of the year and the more favorable weather we are seeing so far in Q3, If needed, we will not hesitate to use these levers. In fact, we've already made the decision to defer our $240,000,000 incremental investment in Labrador Island linked from this year to 2024.

Speaker 3

This will result in moderate cash flow savings from reduced interest expense And more importantly, reduce our associated funding needs in 2023. And to the extent necessary, we have Some incremental opportunities to defer capital and we will reassess as necessary. Turning to our quarterly results, contributions from Canadian Utilities increased $10,000,000 or 26% compared to Q2 2022, driven primarily by Nova Scotia Power And higher earnings from our equity investments. Last quarter, we announced that Labrador Island Link had been commissioned. And in this quarter, we received flows of energy from the Nova Scotia block and as a result did not recognize any holdback costs contributing to our quarter over quarter increase in earnings.

Speaker 3

Tampa Electric delivered strong results with growth of US6 $1,000,000 in earnings or 5% over Q2 2022, Driven primarily by new base rates that went into effect on January 1. While the weather in the quarter was less favorable compared to the very favorable weather last year, this was largely offset by strong customer growth. The weakening Canadian dollar also increased earnings contribution from U. S. Operations by $8,000,000 for the quarter.

Speaker 3

Contributions from MiR Energy decreased $14,000,000 for the quarter. This was not unexpected. As noted in our Q1 call, Q2 and Q3 are generally challenged for profitability because costs of transport and storage are amortized equally over time despite the fact that the related revenues are mostly earned in the winter months. 2003 contracts were bid in 2002's markets, so the costs were somewhat elevated compared to the last couple of years, which is similar to what we experienced in 2019. And as I'll discuss shortly, year to date contributions from Emera Energy have still increased $10,000,000 year over year and we expect the business Deliver adjusted earnings within its guidance range of $15,000,000 to $30,000,000 Earnings from our Gas Infrastructure segment decreased modestly quarter over quarter, primarily driven by higher interest in operating costs resulting from continued investment in support of customer growth in Peoples Gas and corporate costs increased $4,000,000 this quarter, primarily driven by higher interest costs.

Speaker 3

And finally, higher share count decreased adjusted EPS by $0.02 compared to the Q2 of 2022. Year to date adjusted earnings per share increased by $0.07 to $1.58 driven by favorable foreign exchange movements as well as higher contributions from our regulated portfolio And Emera Energy, partially offset by higher corporate costs and an increased share count. As I mentioned a moment ago, despite the expected loss this Quarter year to date, Emera Energy's marketing and trading business generated CAD28 1,000,000 of adjusted net earnings compared to CAD18 1,000,000 for the first half of twenty twenty That's US22 $1,000,000 compared to US14 $1,000,000 last year, representing an almost 60% increase year over year. You'll recall the Q1 2023 was very strong reflecting favorable hedges, access to more gas transport and a brief coal spell in February. Miura Energy continues to expect annual earnings within its guidance range of $15,000,000 to $30,000,000 Contributions from our Canadian Caribbean utilities increased a combined $8,000,000 year over year due to Nova Scotia Power, interim rates of Barbados Light and Power and higher earnings from our Canadian equity investments.

Speaker 3

At our gas utilities, the results this year benefited from new rates and favorable asset management agreements at New Mexico Gas, which were partially offset by higher interest in operating costs primarily at Peoples Gas. And consistent with the quarterly results, higher interest costs contributed to the increase in corporate year over year, partially offset by the timing of share based compensation expense and related hedges. And at Tampa Electric, new rates and strong customer growth were offset by higher interest cost and less favorable weather resulting in a modest decrease in earnings year over year. And finally, higher share count decreased adjusted earnings per share by $0.05 over year. It is clear from our results so far this year that higher interest rates have had an impact throughout our portfolio and is offsetting some of the strong growth We are seeing from our regulated utilities.

Speaker 3

I wanted to take a moment to discuss how we're thinking about these impacts across the business and how we expect those to trend in the near and longer term. In our regulated utility portfolio, 3 of our utilities are currently in rate settlement periods that were negotiated before the rapid increase in interest rates. And while we never expected interest rates to remain at the historical lows of the COVID-nineteen pandemic and took advantage of the yield curve to term out significant portions of our debt, The rate of increase in interest rates over the last 12 to 18 months has been almost unprecedented in its pace. As you may recall, the Tampa Electric Electric rate settlement included a mechanism that increased the ROE at Tampa Electric by 25 basis points and allowed for an additional US10 $1,000,000 in base revenues When the average 30 year treasury yield increased by more than 50 basis points above the rate on the date of the settlement. While this innovative mechanism was constructive, the 30 year treasury yield has now increased nearly 200 basis points above the rate on the date of that settlement.

Speaker 3

While the settlement periods at our regulated utilities have many advantages, the impact in a rising rate environment like we have seen so far Means we are more exposed to higher interest costs. We will continue to operate our utilities as prudently and responsibly as possible and look for cost savings to help offset The impacts. However, at this pace of rate increases, we expect to continue to experience regulatory lag in the collection of interest costs. Importantly, we have a healthy rate case cadence with constructive regulatory environments and forward test years in all of our core utilities to ensure we earn a fair and timely return on and of the capital that is being prudently deployed. As Scott mentioned, the rate case of Peoples Gas is ongoing and we expect a decision later this year already been approved at Tampa Electric and Nova Scotia Power.

Speaker 3

2024 is also the last year in a 3 year rate settlement period at Tampa Electric. Tampa Electric like all of our core regulated utilities is on a forward test year. This means we'll be able to assess in 2024 whether we have efficient rates based on our forecast for 2025 and make an application of the regulator for new rates as necessary. Therefore, while we expect to continue to see some near term impacts from higher interest rates in 2023, there's a clear regulatory calendar ahead of us that should allow rates made meaningful progress to that end already this year. While interest costs are admittedly a headwind at this time, there are many reasons to be optimistic.

Speaker 3

Fuel costs have reversed in the highs of last year. The Labrador Island Link is commissioned and delivering energy across the Maritime Link is planned. The Canadian dollar exchange rate remains favorable and many of our service territories continue to see customer growth. There remains no shortage of investment opportunity our utilities as we continue along the clean energy transition and we remain committed to ensuring reliability of the grid and managing the pace of investments to ensure And with that, I'll turn the call back over to Dave.

Speaker 1

Thank you, Greg. This concludes the presentation. We would now like to open the call for questions from analysts.

Operator

Thank you. You will hear a 3 tone prompt acknowledging your request. First question comes from Maurice Choi of RBC Capital Markets. Please go ahead.

Speaker 4

Thanks and good morning. Maybe just sticking with the discussion on the balance sheet here. Apologies if I missed it, but what is the normalized FFO that You currently have as of Q2?

Speaker 3

Good morning, Maurice. It's Greg. On a 12 month kind of trailing 12 month basis, which would only Food, 1 quarter, obviously, of the line of our own link on a normalized basis, we're just shy of 11%.

Speaker 4

Thanks. And recognizing that Q1 as well as Q2 year for quarter relatively good Operating cash flow generation here. Just wanted to get your latest thoughts on moving back to stable outlooks. I think back in May, you mentioned that are not anticipating that the shift could happen anytime soon. With these kind of cash flow generation under the belt, perhaps Balance of the continued macro uncertainty, have you seen any positive or negative shifts from the rating agencies?

Speaker 3

No, I wouldn't say we've seen a shift in either way. I think the path we're on is well understood by the rating agencies. Things are unfolding exactly as we would have expected either from a collection of cash flow, collection of fuel under recovery storm costs As well as the regulatory agenda in front of us. And I think it's just a matter of executing on continue to execute on those and presumably that would put us in a good position to return to on those and presumably that would put us in a good position to return to stable at some point hopefully over the next couple of quarters.

Speaker 4

Thanks, Andy. And just to finish off, as a follow-up to slide 11, and Thanks for that discussion on interest rate impact. Recognizing that you do have variable rate exposure both to HOKO and as well as to press that are Set to reset later this month. You've talked a lot about where rates have gone. We appreciate your thoughts on where you think the rates Going and what how that drives your financing strategy?

Speaker 5

What are the

Speaker 4

many steps you can take to rein in the financing costs over and above the The regulatory calendar you just spoke of.

Speaker 3

No worries. I wish I knew where rates were going. My answer month ago might Difference than today, I mean, it does feel that we have topped out. Certainly, the yield curve would suggest that. In the near term, as we look in particular at our regulated utilities, Tampa Electric being 1, There's some opportunity to term out some of the short term debt with long term rates being lower than what we're experiencing in the short term market.

Speaker 3

So you might see us, For example, access to market at Tampa Electric doing a bond financing sometime over the next few months.

Speaker 5

Great. Thank you for the color.

Operator

Thank you. The next question comes from Rob Hope of Scotiabank. Please go ahead.

Speaker 6

Good morning, everyone. I want to stick with the balance sheet. Good to see a pickup in cash flow. And I did appreciate the Comments about the additional levers that could be pulled to further strengthen the balance sheet. We're almost midway through August and the LIL $240,000,000 has been pushed, but nothing else has really been no other levers have really been pulled.

Speaker 6

When we take a look at the puts and takes Your cash flows, is the expectation that you're seeing more tailwinds given the fuel recoveries as well as The hot summer so far such that you think you're in a good position for 2023 without really the need to pull these other levers?

Speaker 2

Yes, I think that's certainly,

Speaker 3

Rob, how we feel today, but we're still always evaluating our capital, to determine whether or not It would be prudent from a customer perspective to move some of it out. But you're certainly your characterization is right. We're seeing strong cash flows On a fuel adjusted basis, in line with our expectations, if you include the recovery of fuel and storm costs, Quite frankly, coming in way stronger than we might have otherwise expected. So yes, when you combine all of that together, We're feeling fairly confident from where we sit here today.

Speaker 6

All right. Thank you. And then just a follow-up and It was kind of noted in the prepared remarks. But the draft clean energy regulation, does this change kind of how you think about generation Investment, whether it be carbon capture or incremental wind in Nova Scotia as well. The federal government continues to speak quite favorably about the loop project.

Speaker 6

Can you just maybe give us some milestones where we could see some progress there?

Speaker 7

Hi, Rob. It's Peter Gregg from Nova Scotia Power. Hope you're well. The CERs, obviously, we just got those yesterday. We'll be diving in deeply to make sure we completely understand any impacts it would have on our recently Release integrated resource plan, you'll see we released that earlier this week.

Speaker 7

Initially, I'd say on the good side, Pleased to see mentions of the need for flexibility, particularly when it comes to the role of natural gas As a bridging fuel that can accommodate more renewables and also enhance reliability here in Nova Scotia. But always we look at the decarbonization agenda. We believe it's got to be balanced with affordability and reliability and that's I will look at it. And so still concerned as we dive into more details that it could have undue cost impacts in Nova Scotians. So that's where our focus will be.

Speaker 7

Also pleased to see that the Feds have indicated that they will have a robust Consultation period and we intend to consult very heavily with the federal government during that process. Did you have a follow on there on the loop as well?

Speaker 6

Yes. Just in terms of what milestones are kind of near term items we could see in there?

Speaker 7

So we're we continue to be engaged in the discussions with the federal government and I agree with you that the federal government has made Positive comments. There's still, I'd say, some uncertainty on

Speaker 3

whether there'll be

Speaker 7

the loop or no loop. And so where our immediate attention at Nova Scotia Power is focusing on investments that are required under any scenario. And really that's Enhanced reliability intertie to New Brunswick, that's investment in grid scale batteries and working very closely with Government on those investments, but also the need to procure more renewable resources by 2,030. So we're very focused on that and continue to be engaged in the discussions on

Speaker 4

And Rob, let me

Speaker 2

just add in the context of the CERs. I think Peter handled it Well, obviously, it's new and we're working our way through it. And yes, we're pleased with the flexibility. But the challenge in some The challenge across the country is not the same. It's very regionalized and no associated with one of the provinces where this will be particularly challenging To achieve particularly costly to achieve.

Speaker 2

And so yes, while we're pleased with That is indicated. Frankly, it needs more for there to be a clear path for Nova Scotia And it's going to need federal funding support in order to make it affordable. So those would be my additional thoughts to Peter's message.

Speaker 6

Thank you.

Operator

Thank you. The next question comes From Ben Pham of BMO. Please go ahead.

Speaker 8

Hi, good morning. On your leverage of potentially deferring 2023 CapEx. Can you comment on is there flexibility in your rate cases and And what not to do that seamlessly or do you have to go back and engage with stakeholders?

Speaker 3

Ben, it's Greg. No, managing our capital within a certain envelope, You probably have heard me say before, it's not uncommon to have a few $100,000,000 move between years, just because of timing considerations and the ability to Execute on projects because some of the supply chain constraints we're seeing right now are just naturally causing some projects not to get done on the exact same timeframe we would have thought. But we're able to make those changes across the portfolio with any kind of significant engagement with customer groups or regulators.

Speaker 8

Okay. Got it. And are you planning to provide a refresh of your CapEx next quarter? And then can you comment when you think about even just the trends in CapEx, dollars 2,530,000,000 Is really the willingness to increase that maybe somewhat tempered given where your balance sheet is right now?

Speaker 3

Yes. So we will be, as is customary, Ben, providing a roll forward of a 3 year capital and funding And on our call, Q3 call in November, in terms of willingness, all of the capital we're spending In support of our customers, whether that's decarbonization, reliability, customer growth. And so it's not a question of whether or not we can do it with our current balance sheet consideration, but it is Capital that is required to run the utilities and as such that doesn't really come into play on it. How we finance it is kind of the Piece of that. And frankly, Ben, also managing affordability impacts for customers and making sure that we're constantly focused

Speaker 2

On measuring that pace, so that we're managing that at a time where it's sensitive. As I say, the general inflationary environment is making that challenging. So really, it's a combination of all those things To manage it and obviously at this point in time, I can't speak to a trend as to Where things look like in the next 3 year forward forecast, but I wouldn't suggest there's going to be any significant differences,

Speaker 8

Okay. And maybe lastly on rate cases beyond the debts you're working on now. Is there Other issues you're going to be focused on in the back half of this year into early next year?

Speaker 3

Sorry, Ben, just so I understand, are you referring to specifically rate cases?

Speaker 8

Yes. In terms of your calendar for launching New rate cases to you mentioned around reducing regulatory lag?

Speaker 3

Yes. I think the only two things you'll see is a resolution In Peoples Gas, as Scott mentioned, we would anticipate that being resolved by the end of the year. New rates in January 2024 and again as Scott mentioned, New Mexico Gas will likely be filing as well, but that would be The 2 significant regulatory filings that we would have in front of us for the balance of 2023.

Speaker 5

Okay, got it. Okay, thank you. You're

Speaker 4

welcome.

Operator

Thank you. The next question comes from Linda Ezergailis of TD Securities, please go ahead.

Speaker 9

Thank you. Maybe Given that you're reassessing all your priorities around deleveraging and what might be optimal, Recognizing you are able to defer some CapEx, can you maybe also give us an update on whether you might consider any additional levers related To potentially selling any assets or interest in assets that might be valued higher by 3rd parties And conversely, might some of the tailwinds you're seeing, allow for you to consider discontinuing usage of the ATM over the next couple of years.

Speaker 2

I think as it relates to Asset sales, portfolio optimization, capital recycling, all the sort of the language that gets used In this sector, Linda, I'd say answer is really no different than what you've heard before. We continue to look at the portfolio and look at Our sources of funding and our balance sheet and when we see opportunities that Our value enhancing for shareholders and makes sense for us strategically, Then we spent a lot of time working our way through that. And Art, we won't hesitate to take steps When we see it makes sense and you've seen us do that obviously before with the sale of gas plants And

Speaker 10

Emera Maine.

Speaker 2

But at the same time, the portfolio that we have today is, you heard me say it in my remarks, We think we have a very strong portfolio of assets that contribute positively to earnings growth and cash flow growth. And so we remain very comfortable with the portfolio, but we constantly assess, would I guess be The way to answer that question, I'll let Greg respond to the ATM. Yes.

Speaker 3

I think with respect to the ATM Linda, as you've heard both Scott and I There's significant capital investment opportunities that are in front of us as a result of customer growth and a desire To decarbonize our fleets. And so it's from where I sit, I see the ATM as a very prudent and cost Effective way of raising the equity to support that growth that we're going to see. And I would expect that would be continued to be Part of our funding plan as we go forward.

Speaker 9

Thank you. And just reflecting on recent events, the unfortunate To wildfires and flooding in Nova Scotia and looking forward to the balance of the hurricane season in Florida, it looks Like condition support maybe an above average activity as we come towards the end of that. How might that inform any sort of prospective rate application or initiatives to Continue to storm, harden and maybe accelerate decarbonization. How are your thoughts evolving around lessons Learn with some of the recent experiences in your core utilities.

Speaker 2

I think, Linda, I mean, look, largely decarbonization investments initiatives Are either driven because investments can be made that are the most economic ones for customers like the solar investments And coal to gas conversions that we've been doing in Florida or it's driven by policy, obviously, which is More relevant to the path that Peter and the team in Nova Scotia have been Following, in the context of in an environment where the U. S. Government both from a Financial incentive with the IRA and the IIJA or now draft proposed guidelines, EPA guidelines providing More clear requirements in terms of de carbonization to the extent that those Are enacted. Those obviously will be drivers for those investments. And of course, in Canada, we know about The federal and the provincial climate and energy policy goals that are driving milestone achievements in 2,030 with 80% renewable and closing coal plants and now with the 30% with 80% renewable and closing coal plants and now with the CERs towards a version of net 0 by So those will all be drivers on decarbonization.

Speaker 2

On storm hardening and System resiliency type investments, of course, in Florida, our G and T Are well into a 10 year program now. There had been some conversation that had been started with some Of the customer stakeholder groups about whether perhaps that should be moderated somewhat in the More inflationary cost environment that was going on, but ultimately, the evidence With Hurricane Ian and the commission there sort of saw the value of those investments in terms of what it did for the resiliency Of the system and that program continues with vigor in Florida. In Nova Scotia, the team here obviously very aggressive right now in terms of its vegetation management, Really, tree trimming, order of magnitude, Peter, I think $25,000,000 a year right now being spent Almost double to what it was before, really trying to its own version of storm hardening without the same regulatory mechanisms that exist In Florida, but taking the important steps necessary to storm harden the system. Anything else, Peter, if you could say on that front? I think

Speaker 7

you covered it well. I'd just say part of it is just good utility management practices as well, as Scott mentioned on vegetation management. While the fires were certainly tragic for many Nova Scotians, we lost 30 wood poles over, I think it was 30,000 So it just reflected what Scott mentioned that importance of vegetation management, making sure we don't have the fuel That on the ground adjacent to our infrastructure to protect that. And then also on the floods, all of our hydro systems performed well, which Under really extreme circumstances. So I think it just underlines the importance of strong asset management plan and good utility practices as well.

Operator

Thank you. Thank you. The next question comes from Mark Jarvi of CIBC, please go ahead.

Speaker 5

Yes, thanks. Good morning, everyone. Just wondering how the run up in the 30 year U. S. Treasuries gets factored into The Peoples Gas rate case, obviously, you took a different approach with Tampa Electric.

Speaker 5

How do you incorporate that into Peoples Gas and the evolving interest rate costs?

Speaker 3

Yes. Mark, it's Greg. It doesn't specifically get factored in, but obviously when we filed The rate application, we had assumed an increase in interest rates and have requested a higher allowed ROE. I would say that the with the run up in interest rates, it's less controversial on the forecast of the interest rates. Obviously, it's supportive Of higher ROEs as well.

Speaker 3

So I'd say it's probably indirectly slightly positive, but it also puts In a position where depending on how the capital flows and the continued customer growth of Peoples Gas, We'll probably have to reevaluate sooner rather than later as to the timing of the next application after this one.

Speaker 5

And there'll be no conversation of doing sort of the inverse adjustment that was happening Electric, if bond yields receded, that there would be a retroactive or sorry, an adjustment on the allowed ROE spend?

Speaker 2

Yes. That was a result

Speaker 3

of a settlement agreement. That's certainly something that we would be open to if we found ourselves in settlement But unlikely to be achieved on litigated hearing, which is currently the path we're planning for.

Speaker 5

Sounds good. Okay. And then just on the recent EPA proposal, just wondering when you think about the units at Tampa Electric here, the last few units, just You've talked before about Polk and I think Big Bend about CCS and hydrogen blending and get to their units. Like at what point do you have to make a decision on how fast you pursue that? And then also, is there a decision between

Speaker 4

investing in

Speaker 5

your own units or thinking about Purchase power ramping up a bit more.

Speaker 10

Archie? Sure. Good morning, Mark. The proposed EPA rules really had a pretty modest impact on our generating fleet in The only units that are implicated in the guidelines as currently written would be Big Bend 4, which is the Single remaining coal fired unit we have in the fleet and the modernized Big Bend unit, the gas fired 1100 Megawatt natural gas that Scott referenced in his opening remarks. In order to comply with the EPA guidelines, All Big Bend 4 would have to do is invest in the ability for For Big Bend 4 to co fire 40% natural gas.

Speaker 10

We already have the ability to co fire 100% natural gas. So

Speaker 2

Hydrogen

Speaker 10

as a fuel source in addition to as a supplement to natural gas Or investing in CCS. Our belief at this point is that there will be Efficient flexibility embedded within the APA to allow in the APA regs to allow a little bit of trading Within the utility itself, meaning the work that we are intending to undertake at Polk, Provided we get comfortable with the business case and etcetera, etcetera, will more than make up for what we would need to do on Big Bend 1. So As we think about where we are, the assets that we have and the plans that we have in front of us, we feel we are in an Extremely good shape to be compliant with EPA regs to the extent they ultimately are enacted.

Speaker 5

It's good to hear. Thanks for that Archie. And just one last question for Greg. Just in terms of not seeing the ATM usage here in the first half of the year, is that probably just Reflection of the deferral of the investment in Will?

Speaker 3

Yes. It's a combination of things, Mark. Obviously, share price has been depressed, but Maybe equally so the volatility around it has been hard to land on. But yes, we've seen significantly stronger cash In particular, the fuel recoveries that we had and we're deferring some capital, but you should expect that you'll see us back Into the ATM market in the second half of the year kind of consistent with prior periods.

Speaker 5

Okay. Thanks everyone.

Speaker 6

Thanks Mark.

Operator

Thank you. The next question comes from Andrew Kuske of Credit Suisse. Please go ahead.

Speaker 11

Thanks. Good morning. I guess the question is for Scott. And you gave a pretty favorable backdrop for a lot of the potential in Atlantic Canada. And I guess maybe not to get too political, but when you look at just some of the incentives that have been given to the automotive battery industry in Ontario, do you think Atlantic Canada needs some similar incentives to really stimulate the offshore wind, green hydrogen and then increased electricity transmission that goes with all of that To really get things going in a very positive fashion?

Speaker 2

Look, so yes, look Andrew, I think as it relates to the development of wind in In Nova Scotia, I think 2 things are true. 1 is, onshore wind is generally more economic than offshore wind. However, what's intriguing about offshore wind is the degree to which it Blows at times when it's not as windy onshore. In other words, doesn't provide more capacity factor. So from a grid perspective, That's where offshore wind could have some helpful contribution to continuing to advance the journey To cleaner energy, in terms of the development of offshore wind in support of hydrogen, yes, I suspect, I believe That industry requires some of the clear intended financial that came out of budget 23 in order to accelerate that industry And that's good.

Speaker 2

I think that exactly makes sense in order to take advantage of that resource development opportunity Here, but I think getting sort of back to the broader and more important message from my perspective, the reality around the journey To net 0 electricity in Canada, I think there's a few things that are important to recognize. First of all, the Canadian grid is already one of the cleanest in the world, 85% non emitting. And the cost to move from 85% To net 0 is significant and frankly, just like anything, the last few steps are the hardest and the most expensive. And that will be true here too. But the particular challenge is, it's not uniform across the country.

Speaker 2

And some provinces are blessed Being much closer to that endpoint today than other provinces. And Nova Scotia is one of those other provinces Where this will be particularly challenging, just given the sort of the situational environment That we're in, the size of the province, the nature of the historical generation sources that exist here and the available Sources that are native to the province, we're just not blessed with some of the same benefits that other provinces do. And therefore, yes, it will be particularly In order to achieve the ambitious climate and energy goals that have been set for Significant financial support in order for those goals to be achieved.

Speaker 11

I appreciate that color. And then maybe just At Nova Scotia and with some of the basic blocking and tackling you can do at NSPI, obviously, the population growth is helping And that looks more secular in nature, maybe structural in nature right now. But when we look at things like heat pumps, maybe if we get an update from Peter on just Heat pump rollout, how that looks as part of a bigger, broader decarbonization effort, not just of is really not of electricity, but of the overall energy consumption in the province?

Speaker 7

Yes, we're certainly seeing positive impact. We've seen that over the last several years as the penetration of heat pumps continues to grow in Nova Scotia. We continue to see that contribute to while we're a winter peaking jurisdiction to revenues happening in the summer months As the people deal with the warmer weather. So it certainly is helping grow the load here in Nova Scotia and we expect to see that We still got I think it's just a little under 30% of our customers across the province use home heating oil as the primary source. So there's a real opportunity to see continued penetration of heat pumps across our service territory.

Speaker 5

That's great. Thank you.

Speaker 12

Just wanted to Circle back to the FFO to debt quickly. I think you guys mentioned just under 11% for the trailing 12 months. And I believe the target for 23% is at least 11.5%. So just doing the back of the envelope math there Suggest that you'd be on track for just north of 12% in the second half of the year. Can you confirm that that's the case and you're still tracking to 11.5% or higher for the full year?

Speaker 3

Yes. I mean, we're still tracking to kind of mid-11s, Darius. I mean, obviously, moving the investment, the planned investment Labrador Island Link is probably about 15 basis points on our expected credit metrics on an annualized basis. And of course, we'll have the full benefit of the cash Well, from the Labrador Island Link in the second half of the year as well. So, to your point, we're certainly trending in the direction that we would have expected.

Speaker 12

Great. Thank you. One more if I could. O and M pretty substantial year over year jump. Can you maybe unpack that a little bit?

Speaker 12

Obviously, inflation is a meaningful contribution. Can you also speak To customer growth, any other substantial drivers that you're seeing and how you expect those to shape up for the balance of the year?

Speaker 3

Sorry, I missed the first part of it, Darius. O and M?

Speaker 12

O and M, just the O and M line item, if you could potentially Speak to the contributions from respectively inflation, customer growth or any other drivers that you're seeing?

Speaker 3

Yes. At the corporate level, from a pure costing perspective, we've seen very little change. Most of the change you're seeing year over year is just the Timing of our long term compensation expense, which has some volatility related to share price and the related hedges that we have in place. But from a corporate perspective, outside of interest and the share based compensation, our core operating costs

Speaker 4

have been relatively flat

Speaker 3

on a year over year basis. We're flat on a year over year basis.

Speaker 12

Got it. Okay. Thank you, guys.

Speaker 3

Thanks, Terry.

Operator

Thank you. The next question comes from Patrick Kenny of National Bank Financial. Please go ahead.

Speaker 13

Yes, good morning guys. Just on the carbon capture opportunity down at the pulp power station And recognizing very early days as you mentioned, but just given we've seen a bit of a slower pace Here in Canada on CCS development and government support. Could you just provide your take on What the earliest timeframe might look like in terms of deploying capital for that investment?

Speaker 10

Good morning, Patrick. It's Archie again. I think

Speaker 7

So this is a

Speaker 10

very, very active file for us down in Tampa looking at what we refer to as the promise of poke. The phase that we're in now, so we're fortunate that we're getting support from the U. S. Department of Energy On the monies that they have earmarked for our front end engineering studies at Pope to the tune of $11,000,000 so far, which is Pretty substantial portion of the overall investment that we're making thus far. Our efforts right now are in Completing those engineering studies, we anticipate that in 2024, we would be filing the applications for the 6 wells that are necessary to store the carbon beneath the pulp power station.

Speaker 10

Meaningful capital spending likely doesn't begin until 2027, something like that Based upon the trajectory that we're on and realistically we wouldn't think we would have to the extent we undertake A CCS project at Polk, it's probably not completed until 2,031 or so, which again would be in line with The timelines that are set out in the proposed EPA regulations.

Speaker 13

Okay, that's perfect. Thanks for that Archie. And then maybe just for Greg to come back to the discussion around the equity portion of the funding plan. So Just given the pullback on the ATM, could you just refresh what your capacity for additional hybrid securities might look like Going forward, and also any other thoughts around potential refinancing opportunities to Perhaps mitigate the impact of rising financing costs?

Speaker 3

Yes, Patrick. We have Probably somewhere around $500,000,000 to $1,000,000,000 of capacity on our balance sheet to do either Canadian dollar preferred shares or some kind of hybrid offering. Obviously, that market is not very attractive right now. From a debt perspective, if you look at maybe Slide 11 in our presentation. Half of the rise in interest costs have been at Tampa Electric and that's likely as I referenced earlier an opportunity for us to term out some of that short term debt into long term debt, albeit it will still be more expensive than it was a year ago.

Speaker 3

But The way the yield curve right now is there's some opportunity to reduce the exposure and reduce our overall costs over the balance of the year by terming out some of that debt.

Speaker 13

Okay. That's great. Thanks, guys. I'll leave it there.

Speaker 3

Yes. Thanks, Matthew.

Operator

Thank you. There are no further questions at this time. I will turn the call back to Dave Bazanson for closing remarks.

Speaker 1

Thank you very much. Before wrapping up, please note that our next analyst call will be held on November 10. And as Greg mentioned, we will be rolling forward our capital and funding plans as per usual at that time. So thanks very much and have a great day.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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Earnings Conference Call
Emera Q2 2023
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