Q2 2021 Fortis Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by my name is Phyllis and I will be your conference operator today.
Day welcome to the Fortis Q2, 2021 conference call and webcast during.
During the call all participants will be in a listen only mode. There will be a question and answer session. Following the presentation at that time those with questions should press star followed by 1 on their telephone.
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At this time I would like to turn the conference over to Stephanie a mimo. Please go ahead Miss a mimo.
Thanks, Phil and good morning, everyone and welcome to afford us the second quarter 2021 results conference call.
I'm joined by David Hutchens, President and CEO, Jocelyn Perry Executive VP and CFO other members of the senior management team as well as Ceos from certain subsidiaries 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, all non-GAAP financial measures referenced in our prepared remarks are reconciled to the related U S. GAAP financial measures in our second quarter 2021, and DNA also unless otherwise specified all financial information.
For instance, in Canadian dollars with that I will turn the call over to David.
Thank you and good morning, everyone.
The underlying long term fundamentals of our company remained strong in the second quarter, we continued to see growth from our investments in our regulated utilities maintained reliable service through severe weather event.
That's across our footprint effectively manage the safety of our employees customers and communities. Even during this pandemic and started to see the green shoots of economic recovery across our jurisdictions.
This solid foundation allows us to withstand and see through headwinds like the impacts of foreign exchange volatility.
After day, we also issued our 2021 sustainability update which can be found on our website the.
The report highlights our priorities and progress on sustainability initiatives. Additionally, we announced that Fortis has signed on as a supporter of the task force for climate related financial disclosures or Tcf D.
With the easing of pandemic restrictions and the corresponding reopening of businesses and with a little help from warm weather. Our second quarter sales have improved from last year, while uncertainty remains surrounding the pandemic increased commercial and industrial activity contributed to an overall increase in sales across our portfolio.
<unk> utilities.
As you May recall, you and us and our other electric segments have the most exposure to changes in sales favorable weather in Arizona and higher commercial and industrial sales contributed to a 3% increase in retail sales at U N S for our other electric segment sales were up 3.
3% for the quarter, mainly driven by the ongoing recovery of the tourism industry and the Caribbean.
Turning to slide 6 the 2021 sustainability update details the progress we are making to support a cleaner energy future.
Notably in 2020, we reduced our scope 1 emissions by 15%.
For full equating to removing over 400000 vehicles from the road in just 1 year.
This marks measurable progress towards our target to reduce carbon emissions, 75% by 2035 compared to 2019 levels.
Transitioning to renewables and building out the grid is at the heart.
Of our long term strategy.
Our update also highlights that in 2020, we achieved our best safety performance and delivered top quartile reliability performance relative to our industry peers and it also includes 50, new key performance indicators of which 14 are aligned with.
<unk> sustainability accounting standards board or SaaS fee.
We are pleased to report another step in our ESG journey by expanding our disclosures and solidifying our commitment to the Tcf day recommendations by signing on as a supporter.
We are continuing our climate scenario analyses.
With assess the resiliency of our energy delivery businesses, and we expect to provide a progress update in 2022.
As slide 8 highlights nearly all of our $19.6 billion 5 year capital plan supports energy delivery and cleaner energy infrastructure.
The first half.
To say 'twenty, 1 we made capital investments of $1.7 billion in our systems and for the full year, our $3.8 billion capital plan remains on track.
This balanced low risk plan supports our sustainability strategy and includes renewable generation, such as wind solar and batteries.
Badri storage interconnections of renewables and liquefied natural gas and renewable natural gas investments.
The capital plan is expected to increase rate base by 10 billion from $30.5 billion in 2020 to over $40 billion in 2025 supporting average annual rate base growth.
Growth of approximately 6% through 2025.
Slide 9.
Beyond our base capital plan, our teams continue to push forward with opportunities to expand and extend growth at our regulated utilities for the benefit of our customers.
Since we covered this topic.
Extensively last quarter I will briefly discuss a few recent developments.
First at ITC, the proposed Lake Erie Connector transmission project continues to progress and made the Ontario government authorized the independent electric system, operator, or ISO to enter into contract negotiations.
We are in the early stages of negotiation and the ISO is expected to report back to the government by the end of the year.
Earlier this month FERC issued an advanced notice of proposed rulemaking to solicit comments on regional transmission planning cost allocation and generator interconnection interconnection.
Action processes overall, it's encouraging to see the commission's recognition the substantial investments in transmission infrastructure are needed to facilitate a lower carbon future and our teams are actively engaged in these processes.
Lastly, at Fortis, BC, reducing customer greenhouse gas emissions.
Can use to be a priority recently, British Columbia amended their greenhouse gas reduction regulations to allow the increase in the production and use of renewable natural gas as well as hydrogen in the province.
The revised regulation will advance the production and distribution of renewable natural gas and hydrogen.
We will utilize our existing natural gas infrastructure to reduce emissions and decarbonize our economy.
With 47 consecutive years of dividend increases coupled with our low risk growth strategy, we remain confident in our 6% average annual dividend growth guidance through 2000.
There are 5.
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.
For the quarter adjusted net earnings for $259 million or <unk> 55 per common share 1 lower than the second quarter of 2020.
'twenty Foreign exchange was a significant impact in the quarter U S. Dollar to Canadian dollar exchange rate was 123 for the quarter compared to $1.3 9 for the second quarter of 2020, and this unfavourably impacted quarterly results 5.5 cents.
So excluding.
<unk> foreign exchange impacts earnings per share was for higher mainly driven by our rate base growth at our regulated utilities and higher earnings in Arizona and the Caribbean.
For the 6 months ended June 2021, adjusted net earnings of $619 million or $1.32 per common share.
29 cents higher than the same period in 2020.
And this growth was despite the FX impact of 7 year to date.
Excluding the FX impacts earnings per share increased 16, reflecting the same factors noted for the quarter as well as some timing of earnings on retirement investments.
Sure Slide 13 highlights EPS drivers for the quarter by segment, our U S electric and gas utilities increased EPS by 3 cents for the quarter, our Arizona business contributed <unk> <unk> driven by new rates at Tucson Electric power effective January 2021, and warmer weather Jim was.
So in fact, 1 of the hottest 2 months on record in Arizona earnings in Arizona were tempered by higher planned maintenance costs, primarily at springerville.
In New York Central Hudson increased EPS by ascent, driven by rate base growth and lower operating cost incurred related to the pandemic as compared to last year.
Action at ITC rate base growth, mainly contributed to a 2 <unk> increase in EPS for the quarter.
The 2 cent EPS increase in our other electric segment reflects higher sales in the Caribbean with the continued recovery of the tourism industry.
Corporate EPS decreased Tuesday, mainly due to.
Eric consolidated state tax rate associated with changes in regional sales mix.
And higher weighted average shares outstanding issued through our dividend reinvestment program decreased EPS by 1 cent.
And as discussed a lower U S dollar to Canadian dollar exchange rate unfavorably impacted the quarterly results.
For a high 5 cents.
And although not depicted on this slide earnings for our Western Canadian utilities were flat for the quarter rate base growth in both Alberta, and British Columbia was tempered by the timing of operating expenses at Fortis BC associated with the multiyear rate plan decision last year.
Overall strong.
Quarter, despite foreign exchange headwinds.
Turning to slide 14, this waterfall breaks down the EPS drivers for the first half of 2021 our U S electric and gas utilities provided the most significant contributions growing EPS by 8 cents, our Arizona business contributed.
A 6 cent EPS increase the increase was driven by similar items noted for the quarter again, new rates at T. P warmer weather, partially offset by higher operating costs.
The impact on losses on retirement investments recognized in 2020 also favorably impacted EPS by <unk> <unk>.
Central Hudson contributed <unk> of the increase driven again by rate base growth and lower operating cost.
Bind our western Canadian regulated utilities, an ITC contributed a <unk> <unk> EPS increase driven by rate base growth.
At our other electric segment higher sales in the Caribbean and rate.
Both contributed to a 2 <unk> increase in EPS.
And our energy infrastructure segment reported higher hydroelectric production and believes in higher volumes and margins associated with the Aitken Creek natural gas storage facility together, they increased EPS by <unk>.
As expected with our dividend reinvestment program EPS deal.
Basically <unk> due to higher weighted average shares outstanding.
And lastly, a lower U S dollar to Canadian dollar exchange rate unfavorably impacted the results by 7 to year to date.
Turning to slide 15 during the quarter, we were active in the debt capital markets with.
<unk> 1 billion in long term debt raise at attractive rates debt issued at Fortis, Inc, mainly refinance maturing debt, while while our regulated utilities issued debt in support of their capital expenditure programs more recently ITC price of $150 million notes U S of which half were actually green notes.
Over with our recent debt issuance, coupled with approximately 4 billion available on our credit facilities. We are in a strong liquidity position supporting our capital plan.
And now for an update on our ongoing regulatory proceedings in June 2021, ITC filed comments in conjunction with the.
Supplemental notice of proposed rulemaking or no per on incentives.
Recall PRC is proposing to eliminate the 50 basis points regional transmission organization or our T. O ROE adder for utilities like ITC that have been RTL members for more than 3 years.
In its reply comments ITC maintain that FERC proposal is counter to current policy goal to encourage investment in transmission and transition to a cleaner energy future.
ITC also highlighted that participation in an RTL provides customers with significant benefits that fire.
Weigh the costs and the current proposal would discourage ongoing efforts to retain and grow our T O.
Time frame has not been established for book to issue a final rule and any impacts would be perspective.
In New York settlement discussions are ongoing and central Hudson's General rate.
For our Asian, and we do still expect a decision later this year.
Earlier this year, the British Columbia Utilities Commission initiated a generic cost of capital proceeding for all regulated utilities in D. C. Next steps include the BC UC issuing a report with the regulatory timetable.
Including when Fortis BC will file evidence.
And lastly in conjunction with the exploration of Fortis up on its current performance based ratemaking or PBR term ending in 2022, the Alberta Utilities Commission or AUC confirm that for this Alberta will return to a third P.
Our term beginning in 2020 for following the completion of our cost of service Rebased, Inc. In 2023.
The AUC has initiated a new proceeding to consider the design of the third PBR term.
That concludes my remarks, and I'll now turn the call back to David.
Thank you Jocelyn to conclude our utilities are performing well positioning us to deliver on our capital and rate base growth objectives for the remainder of the year and with the progress. We've made in 2020 to reduce our already low carbon footprint. We are excited to be part of the solution to transition in North America to a cleaner energy.
Energy future with.
With the combination of our high quality ESG profile, 5 year growth outlook, and 6% dividend growth guidance through 2025, we have a balanced low risk value proposition with opportunities to extend growth for the foreseeable future 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.
Okay.
Thank you, ladies and gentlemen, we will now conduct the question and answer period. If you would like to now Register a question. Please press the star followed by the 1 off.
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Gen.
1 moment please for the first question.
Our first question comes from the line of Maurice Choy with RBC capital markets.
Thanks for this and good morning, everyone.
Just a quick first.
Question on ITC and transmission investments.
I know that back into the Q1 call you mentioned that visibility on initial projects could come as early as this year and obviously during this past quarter. There had been a lot of announcements from the FERC in the progress sanctions mission development and.
David You mentioned in your prepared remarks.
There was obviously encouraging recognition of the importance of these investments. So I wonder if you could provide us an update on your view of timing of cost for this visibility as well as any changes to the size of these opportunities.
I'm already so thanks for that question.
Obviously, the the question that we're all trying to answer as quickly as possible. We're seeing a lot I mean, a lot of positive indications from FERC.
Related to trying to trying to remove some of the obstacles to the rapid development of transmission that is going to be needed to interconnect the renewables for the goals that the.
The administration down.
Here in the U S has now that being said that's still has the process that has to be has to be gone through and particularly from a MISO.
Perspective, and their long range transmission plan, there's been no update to those kind of later this year sort of October time frame for that initial list of projects to come out.
And then even potentially.
On approval of those by the MISO Board.
In December but you know those timeframes are obviously are.
A bit up in the air.
I can't think that they can accelerate them too fast even with all the positive momentum around our FERC, it's still going to take some time.
And in essence punch through the all the other details and all the planning that's required to put those projects together.
And maybe just a follow up to that and given you mentioned you know October Slash December and earlier on the call you mentioned that the Lake Erie connector.
I could go back to the government.
<unk>.
This year as for Ya.
Approach your 5 year update plan this fall.
How do you see your visibility and being able to provide us with updated capex plans or do we need to wait for more announcements from some of these parties before we could get a more definitive list.
But yes, we're going to need some more information before we can start laying these investments and to be honest, we we really want to make sure that we maintain credibility with you all so that when we put when we put capital in our budget you know that it's that it's common that is real.
So we will need to see some visibility.
Lake Erie connector and through the MISO planning process before we're going to be able to put those dollars into.
Our 5 year capital plan. So that's kind of our that's our thing we want to be as transparent.
And as credible as we possibly can so we can throw out ranges but.
Rangers can't make it into a capital plan because we really think that that has to has to show you all what we've.
Really honestly believe theres going to be there. So it will probably take a little more time, we are actually thinking about what exactly is the right timing for that capital plan or you were released.
<unk> 1 in May.
But those data later, but that's so that's something that we're still still thinking through.
Great and just to finish off.
Something that's very exciting proposed tax changes in Canada, and the U S.
Greedy interest deductibility limits from Canada, a minimum tax in the U S. Any.
Any update on either of those fronts.
Yeah, Morris I think the minimum tax in the U S seems to not.
The concern for Fortis now because we're going to fall under the threshold for the size that it relates to because it applies to the bigger bigger companies Inc.
In Canada, we don't have.
Visibility just yet on the interest deductibility limits and again this is really a cash flow thing because it will limit the amount of interest you can deduct in any 1 year, but you can carry it forward.
And I know that there's certainly a considerable effort in Canada, which we are a part of to have discussions with the government.
So that they fully understand that.
Pretty capital intensive company, where our capital structure was regulated we have to spend a lot of investments to keep the grid reliable and safe and certainly with the clean energy investments as well. So there are definitely discussions being had so that everyone fully understands.
For the necessity for investments in this sector as well so.
It's still early days I do believe.
Great. Thank you very much.
Our next question comes from the line of Ben Pham with BMO.
Hi, Thanks, good morning.
Couple of questions on your BC utility would love an update on where you are in the R&D side.
Side of things any discussions of wood fiber and on LNG and then also on the Tilbury LNG Calix cloud for regulatory.
And that comes from.
Sure Ben Yeah. That's it's it's always a lot of opportunities out there in Florida species, such a such a great gas business and really looking across the full suite.
Spectrum of things that they can do to be right in the heart of the conversation around reducing greenhouse gases.
And so I'm gonna.
Actually kicked us over to Roger Dell Antonio since we have them on the line and he'll give you a much more detailed and better view of that then I can Roger.
Alright, Thanks, Steve Good morning, Ben can you hear me okay.
Yep.
Great Yeah. So on the first question on R&D.
Making good progress.
Uh huh.
Up to the.
At the end of Q2, we've got 22.
Contracts approved by the BCC for R&D for a total of about 7 drills and we have a couple more contracts.
Waiting approval, which will bring us over 8 percentage rules.
No.
2 years into our.
Target by 2030, we're making good progress on the acquisition of renewable natural gas, so that's going well.
Our wood fiber.
Nothing new in the quarter, we're continuing to work with wood fiber and.
They're still planning to.
I have a definitive.
And the timing of the project.
Later this year.
And then your last question on Tilbury, the environmental assessment process.
Earlier this year, we filed the initial project description are preliminary.
We are in the what's called the early engagement phase.
Your view on stakeholder consultation with various stakeholders.
We'll take that feedback and hopefully be in a position to file a detailed project description with the environmental assessment office in Q3.
Alright, great. Thanks for a fulsome answer and then maybe.
And my second question on.
The energy infrastructure results.
Got it.
Police production and storage margins they can improve.
Would you characterize Q2 results.
There's normal seasonality credit quarter, and now Youre back to the 100 long term means.
The storage is the seasonality you typically expect.
So bandwidth to the results for B call for the quarter was clearly impacted by rain right. So we had lower production in Q2 than what I would say is typical now that fluctuate right because.
It fluctuates with the amount of rain and timing of rain, so, but I would say that it was low relative to history and so just just a difficult 1 to predict obviously.
Hey, Ben I want to add something because I think.
Not on the call, but on Rogers conversation, because I can't believe neither he nor.
Ray had mentioned the fact that while we mentioned that the greenhouse gas reduction regulations.
It allowed for an increased amount of RMG slash hydrogen.
And the systems and for the utilities to actually.
Contract for it or produce it themselves, but we never throughout the number though.
Sets the limit at 15%, which for BC is 30 P. J. So when you looked at those numbers that Roger was talking about and having the contracts up to 8 we still have a lot of growth opportunity going forward to fill in that remaining 22 pjs overtime.
Thanks for that.
Mark off so corruption below long term means still.
What about.
The storage spreads.
The range of seasonality <unk> seen in the past.
Hum.
I'm not quite sure how to answer that band because we've seen it fluctuate right because I know.
Okay.
19, we had there were some drought conditions in 2019, and I think that the total year was less than 100 gigawatt hours, but yet in 2020, we went back over 200 gigawatt hours. So so.
So far this year I think we're up somewhere around 17, 9 so depending on the last half of the year. The rain I do believe comes later.
Other things August.
August July August so that will that will set us up for knowing how the full year's going to look.
What kind of looked at day.
Thank you for your next question comes from the line of Rob Hope with Scotiabank.
Yes. Good morning, everyone. Just wanted to follow up on the on the Lake Erie Connector can you just kind of outline kind of what the discussions are happening now like it seems like it was rather.
Positive enforceable message that the minister.
Directed the bureaucrats to start negotiations, there, especially given that theyre going to be the counterparty to that approach.
So can you just walk us through kind of next steps on the Lake Erie project.
Yeah, Rob really it is just about filling out the contract negotiations I mean, you just start with a term sheet and you start passing that back and forth.
You get you know obviously the cost allocation.
For the returns that we need to see on our <unk>.
Approach.
The contract the contract terms the ongoing O&M, it's really just a full term sheet of of things to bring in obviously, how you look at and share risk both on a.
Pre construction and construction basis from an operation basis, So it's pretty much a tip to tail negotiation.
It was a.
Great positive signal from the government that they you know.
We thought that this is a good project and that they directed ISO to enter into those contract negotiations.
But it's sort of that normalized you know I'll say kind of normal contract negotiation process. So be a lot of turns of documents for a lot of turns a term.
Investments and then of course, then you get the lawyers involved in a lot of turns of documents and before we get to a final deal.
Alright, I appreciate that and then you know this is a bit of a broader kind of.
And longer term question just just.
Regarding some of the challenges the U S electric systems had over there.
Past, we'll call it year.
We continue to see increasing demand for transmission regarding new connection of new renewables, but also kind of reinforcement of the grid is a connecting in the various geographies. There when you take a look at your system, where do you see kind of the greatest opportunity is at the renewable side or if it's.
Kind of a reliability and ensuring we don't see regions going dark.
Yes, that's a great question and 1 that we talk about quite a bit because we do tend to focus maybe a bit too much on the flashy stuff right because the flashy stuff nowadays is all about creating a cleaner energy economy.
Here in the U S and Canada, but that's.
That's just part of the story the rest of it has to be how else are we addressing the impacts of climate change and we're doing a lot of work internally with our operations folks to evaluate the impact of climate change obviously.
Much more severe weather.
Whether on a going forward basis, as you electrify things that changes everything from generation down into the distribution grid investment.
Thesis, all along that entire value chain.
<unk> got to strengthen local grids for things like electric vehicles, So theres a lot of storage.
In future and then.
I forgot you got to throw an aging infrastructure to these these assets aren't getting any younger so when you look at that full.
Bank of investment opportunities that we have and you go from interconnecting renewables transmission to get them to load the distribution needs the resiliency the rely.
<unk> the security investments that you need around cyber security to make sure that all of that system. As is now more resilient charging infrastructure all of that good stuff I can't tell you, which is going to win the race, but it's going to be a pretty big piece now the trick will be is managing all of those investments.
So.
Rely on have affordable rates at the tail end, and that's where the things like electrification electric vehicles, the industry et cetera will help out because of the more that we electrify the economies the bigger basically the the bigger the pie is to spread out those costs and when you look at it altogether like that.
I can't I would have to say that the renewables.
And the transmission of interconnect done will be a big piece and I mean, the renewables like in Arizona and the transmission interconnect them at ITC will be the 2 largest pieces, but the rest of that will fall across every 1 of our utilities in varying degrees.
Thank you.
You bet Rob.
Your next question comes from the line of Michael Sullivan with Wolfe Research.
Hey, Ron Good morning, good morning.
First question was just on Hey, good morning, Dave just.
First question was I think last quarter.
For you guys alluded to maybe some some higher capex in 2021 is helping to offset the FX headwinds you're seeing can you just give a little more color on how that's shaping up.
Yeah, it's a bit of cats and dogs to be honest that some some that are up across the <unk>.
A little here and there.
There so it's not anything big it's nothing that we could really point to and say you know.
$500 million project has just dropped in.
Some of it's timing shifting around.
Other others as some slightly.
Some smaller new projects, but for all nits and nats.
Okay, Great and also wanted to get a sense of conviction and where this for.
No per on our T O adders ultimately.
Ends up just given the latest meeting and some other commentary there seemed like you guys thought you had a pretty good case, but just curious if you are thinking there is change.
Change that all.
Well I still think we have a really good case in a really good argument. The arguments are absolutely strong net that doesn't necessarily you know maybe suede.
So someone who's got a very specific opinion on the issue, but the arguments are clear.
The first 1 is then RTL as we need.
We need a bigger and we need more of them.
And in order to end and the costs associated with.
The small amount of our T O adders that get passed through to the customers are dwarfed in comparison to the savings and the benefits that those same customers get by having that are there.
Coordination of transmission planning development et cetera, as well as the access to the market. So the <unk> has to be bigger and there has to be more of them and then you got to interconnect them.
This is a bit contrary to that.
I have to say, that's probably the other bigger issue I wouldn't say that.
There is there is a big.
Having the big issue here is the fact that.
The Federal Power Act of 2005 actually requires requires an incentive to be in in <unk>. So.
This legal.
This legal issue will have to run its course.
Because it does seem from a philosophical standpoint.
Biggest at several of the commissioners.
Don't like that adder and wants to look at other ways of incentivizing transmission, which there remember this is just 1 of a whole laundry list of additional ladders that are part of the original number. So this is just addressing a change in the treatment of that are at or which and the additional.
The endpoint over as you well know was actually recommending that it goes from 50 basis points to 100 basis points. So now go into zero is obviously, a big change, but the thing that the 100 basis points around reliability and another 100 basis points around new technology 50 basis points around.
Efficiency investments in from a transmission.
As mentioned perspective, those are all still part of the bigger order as well, but it will be interesting to see how.
The legal aspects of.
Someone saying well, we're all saying hey, this doesn't comport with the legislation that's supposed to require for that does require an.
<unk> at or for for being a participant.
Great. Thanks, Thanks for the color there and my last 1 is just wanted to check in on.
New York and the Covid recovery there is it still too late to kind of squeeze that into the some of the settlement negotiations and should we think of that is.
On a separate track yeah, just an update on the process there.
Yeah, we're we're still in those settlement negotiations.
We're hopefully getting towards the tail end of those but yes.
There is there is no real.
Clear path on how those costs will get recovered.
From the Covid perspective, obviously, we we immediately.
Those down so we don't have anything.
On the books related to those those COVID-19 costs now.
And if in some future proceeding those come back that's great.
And we think we have a good.
Bent on why they should come back and we also have good historical precedence on why some of that should come back, but we don't we don't have any visibility.
As to how much of that or when.
Great. Thanks, Thanks, so much.
Thanks, Michael.
Your next.
<unk> comes from the line of Mark Jarvi with CIBC.
Thanks, Good morning, everyone.
Our first question is just on the day.
The proposed clean energy standard.
Whether or not that it kind of goes forward, but just wondering what the implications might be for <unk>.
I guess probably TEP.
Most importantly.
Obviously, it seems like it'd be positive to help decarbonize that utility even faster, but just wondering how that impacts for rate base.
Imitations of challenge is there anything sort of to come out with that proposal.
Yes, so the clean energy standard if it gets passed from a federal regulation standpoint is that what youre talking about the federal 1.
Yes, yes, yes, yes.
No.
I think its actually about and within a couple of years of the Arizona Corporation commissions proposed rules right now on their renewable portfolio standard. So it's 50 in 2030 versus <unk> 50 in 2032, which is the Arizona standard.
And frankly, we are in our current path that we have laid out in our integrated resource plan will meet both of those.
So what we're really looking for from a from an acceleration standpoint at.
At TEP to have the possibility of maybe accelerating some of those renewable investments that we see.
Covid that are closer to a coal plant closure to maybe bring those forward and use a little last call keep the capacity don't get me wrong, where any of that capacity until that until we have those shutdown dates.
But we might be able to reduce the energy by feathering in more renewables over time.
But.
It will all be it will be a cost.
Conversation.
<unk> and Thats really what were waiting for is to see what our in some of the rest of these.
Infrastructure bills et cetera that might reduce the cost of renewables. Obviously, some other things are going the other way on inflation in materials.
May increase the cost of renewables. So we have a lot of that to see before.
See laid accelerated and we.
<unk>.
Cognizant of the overall rate impact we got this great story on our timeline of how we're trading those.
Opex and fuel cost fuel.
At the coal plants for investment and return on infrastructure.
Sure, we can share for solar wind and storage and we want to make sure that we're keeping those lined up so that we have a nice smoothed low cost trajectory like we see in our integrated resource plan.
So if I just listening to your comments.
More on the margin there haven't really immaterial impact given the fact that there are some similar airlines.
For struck between the federal targeting let's say target yeah.
Yes.
The difference from a clean energy standard isn't isn't going to be much it's really about whether or not we can accelerate it because we've talked about this and I got to drop this number again, because there's a lot of it's a lot of renewables. We just brought on a 200.
<unk> 50 megawatt wind facility, we just brought in a 100 megawatt PPA with 30 megawatts of storage from.
From a solar perspective down there in Arizona.
Still got 2000 megawatts of renewables and <unk> thousand 500 megawatts of storage to go before we can get to that 2035 goal.
So lots of lots of.
Your line is the investment opportunity and the vast majority is past that 5 year plan that we are talking about as we sit here today. So we're trying to figure out how where that comes in is it in in that year will be in our next 5 year plan.
Or is there also the opportunity accelerated just as is.
Minder, the first big coal plant that we have shutting down its in.
2027, so we got to make investments to be able to support that shutdown.
Got it and then just coming back for Lake.
I want to get ahead of ourselves too much but when you think about that that project.
You talked about risk management, and whatnot and just for current perspective.
Like how do you think about how much has to be contracted sort of on day 1.
The contracted portion has to hit a certain IRR return for a return objective and then you leave yourself name that open for some upside or is maybe how youre thinking about that in terms of returns and risk.
Exposure to any sort of merchant small exposure.
Brett This is all 1 big deal no merchant exposure, 1 customer signed sealed and delivered with a bowl. So it's us and the ISO there'll be our sole contractor and it'll take all of it that's the that's the current contract negotiation.
<unk> that we're in right now.
Got it okay. Thanks for clarifying that.
Thanks.
Yes.
Your next question comes from the line of Andrew Kuske with Credit Suisse.
Thanks, Good morning, I guess for first question's for jobs and it really revolves around COVID-19.
Various green financing initiatives, we see whether they'd be bonds or credit facilities with a bunch.
Adders.
For doctors, depending on how long months to look at it.
How do you think about just green financing initiatives with and for.
For your regulated asset base.
The regulator dock trends and just the capital structure like what's the interplay.
These initiatives that you could export to a greater degree or not.
So if I think if I hear you correctly, Andrew just asking us.
<unk> on our green financing going forward in our regulated utilities, I think youre going to see.
A lot of it I mean, we've already started to see the uptick ITC recently with our most recent and that's around interconnecting the renewable.
Resources.
As for admission grid.
And we're also seeing I think the phrase now as kind of a green Liam right. We're actually seeing some pricing Ah witness I do suspect, we're having conversations right across all of our utilities about segregating their capital to identify where and how they are investing to make.
For the time.
Greener and strong or even from a reliability perspective, it's all it's all the same.
So we're just going to see more of it and youre going to see it into our credit facility.
And and I do think they will involve a little more with respect to pricing, but so far.
But seeing some positive pricing and investors are wanting are wanting us to do this so yeah, it's definitely a trend a trend for more going forward.
That's great and then maybe just as a follow up to that comment given the fact that there is investor appetite and.
For Green premium.
While we were effectively rate per spin of benefit do you see that starting to build into regulatory doctrines and regulatory option for future where.
Basically gonna be required across the board and expected.
I don't think it would be required Andrew but ultimately anything we do for it to reduce costs will ultimately be for the benefit.
Customers in ratemaking overtime, and Thats the way it regulated rate, making works I.
I think if we have utilities that are not doing this yes, they could get asked by the regulator as to why they're not doing it because this is.
A market, where we could potentially get a green Liam for the benefit of customers. So yeah no.
I see it as no I don't see the regulator demanding that we do it but we better have some good reasons as to why we're not doing it.
If we're not in this space, which I don't see I do see will be in this space.
Okay. That's very helpful. And then 1 final 1 if I may and it just comes back for the RMG August where you've gone a long way on the R&D that you've.
Our contract and signed off by the PUC.
It's still a way to go.
How do you think those efforts really unfolds over the next several years.
The commitments and the requirement is a big number and how does that match separate really pregnancy doctrines.
Yes.
That's exactly.
The plan that the folks over in BC are working on is trying to figure out.
The cost curve of these investments and there is as we've mentioned I think hopefully like 3 or 4 times already it's balancing the cost with the transition to renewable resources and that's something that they've got right in the center.
<unk> of their playbook and Theyre looking for the opportunities.
For additional whether its RMG or hydrogen and making sure that the blend of what we do and how we put it in and at what pace.
Is suitable to the regulators and of course eventually our customers. So that is part of the.
Yeah.
Okay. That's great. Thank you very much.
Your next question comes from the line of David <unk> with Raymond James.
Thanks. Good morning, everyone. My first question here just on it you see I'm interested.
Any comments you have on how you prepare for I guess, a potentially I guess increased scale of opportunity is going forward with the with the reforms to electric transmission planning that for because rolling out and I guess lake Erie going forward potentially multiple larger projects.
Do you need to do you need to staff up.
For should answer that opportunity or is it still a little premature at this point.
Yeah, Let me, let me well first off good morning, David Good to good to hear from you I'm going to kick that 1 right over to Linda who is.
The CEO of ITC and she'll give you a good view on that.
Yeah.
Good morning, David Good question.
Yeah look I think it's we've already taken some steps that you would see some sort of re alignment if you will within our planning group too.
I would say create if you will a new subset department, if you will or planning to to look at some of the broader regional inter regional opportunities.
So certainly there is some internal realignment to put more priority more focus.
These anticipated outcomes.
But by and large I mean, we're not at a point, yet where we're staffing up.
We at this point, we've been working I would say hand in hand, as I've said before.
Transmission has arrived in terms of its attention and focus much of what is being discussed and talked about today is sort of in line and consistent with where itc's.
Priorities and focus have been all along so a lot of this isn't.
So the new our new revelations.
Each of.
This as you know many of you know.
The studies that have been performed.
Our consistent I think and Directionally with where we're going.
Not at this point certainly to the extent that when specific projects materialize.
We are our engineering.
Folks are lying design or interest engineering folks, we work hand in hand with some major.
Outside outfits consultants.
Engineering firms to assist in so we feel as though we're in pretty good stead with some of the internal realignments as well as you know kind of all along.
Long, where our focus has been so I think we are you know, we're obviously I think feeling pretty comfortable with where we're at and how we're going to get there certainly on the Lake Erie project.
When Lake Erie, I think sort of becomes closer to reality.
There will be further.
Further realignment and potentially additional staffing and resources that are necessary to to assist with the design certainly the construction, but most importantly, the ongoing operation and maintenance of that project, but that's certainly those plans have been identified but certainly we haven't.
Quite where we had executed on that.
Yeah.
That's great color. Thank you Linda appreciate that.
And maybe just 1 other follow up for me just on the topic of cost inflation on renewables as it relates to the rollout in Arizona I understand that anecdotally some.
Some people in America are suggesting a 10% to 15% increase in the cost of solar and wind turbine suppliers have also suggested price hikes are coming.
What would you say that that's broadly consistent with what Youre seeing or are you are you actively procuring equipment today that is where you're seeing a little bit of cost.
Cost creep there.
No to be honest, David we're not because we.
We don't have anything that we're doing.
Basically developing right now the projects that I mentioned also grounded and then this will not will not energy center.
<unk> was a PPA so we had we weren't.
Sales are engaged in that and also Grande it's been on the books and has been obviously planned out for years and was being constructed.
Finished construction before any of these cost increases hit.
As we go forward, though and we don't have anything really in the immediate Q. So when we go forward and start.
And by the timeline and start putting out.
Rfps, maybe next year or whenever.
Looking out for for.
For projects over the next several years, we might see it but where it's the anecdotal stories that you are hearing as well and that we're seeing and others and some of the other supply.
Looking at situations that we have.
That's great. Thanks for that David I'll I'll get back from Q.
Okay. Thanks.
Our next question comes from the line of Matthew Weekes with I E capital markets.
Good morning.
Taking my question.
Just focusing on on the earnings from the Caribbean and it looked like it was really quite a strong quarter quite a strong rebound there.
In the MBNA comment you talked about sort of the recovery in tourism, that's happening and then rate base growth as well, where there's sort of any other impact that you saw there in the.
For <unk>.
And then for 2 I was wondering if you'd be able to comment as we go through Q3 here now on the general outlook that you say you're seeing in the recoveries in the Caribbean.
Yeah Matthew.
Now clearly we are seeing improvement over Q2 of last.
Quarter, but that was you know COVID-19 was pretty Inc.
Intense during Q2.2020, but even throughout 2020, you know tourism was obviously impacted with the borders closed but here we have it now Turks in particular, the borders are wide open and but we're also even though the borders are not open.
I presume you see they are they are seeing an uptick in the construction market. So there's a lot of new hotels being built so there's a lot of them.
Probably build up right for for the tourism activity. So we're seeing it in Turkey, where we're seeing the construction activity in the Caribbean.
There was expectation this is going to continue clearly we keep watching what everyone else is watching with respect to vaccination rollouts and the variance and the like but right now we are seeing some positive uptick in those.
2 utilities and to go forward I suspect that you know that that trend is expected to.
Well, we're hoping it's going to continue right, but we're watching it.
Okay. Thank you that's it for me I'll turn the call back.
Thanks Matthew.
Our next question comes from the line of Darius Larceny with Bank of America.
Hey, good morning.
Continue for taking my question just wanted to ask quickly about how youre thinking about resource adequacy in Arizona I know.
California has taken some steps of late.
Essentially limited exports and just curious how that's informing your your long term planning as you think about Arizona.
Yeah, that's it.
Fortunately informing our long term plan and the timing of of our coal plant shutdowns as I mentioned earlier on the call that you know, we're we're not shutting down anything that provides dispatch book capacity before we have a system in place that we know can replace it and we've lived through a summer with it. So that's kind of I think.
It's dental principle.
And we did take additional actions even before this summer to make sure that we were able to get additional capacity that we can use to serve our customers and in the event that we have higher than nor.
Normal or higher than our historical peak load.
We actually.
Did set a new peak in June and made it through that because of the because of all the perhaps that the team did in Arizona to make sure that we had those additional resources.
So that's something that obviously on the front of mind theres been some regulatory filings.
From California.
In essence our.
Sure.
Precluding energy that flow through Arizona to continue other closer to California to continue to Arizona, which we were obviously very distressed about.
Sure.
Actually you're asking for a rehearing from FERC on that but it's a regional situation and we have to look.
Look at it like that from a regional perspective, and we have to we just have to make sure that.
Our state and in particular, our utility is doing everything we can to protect our customers, but also looking broader and I think this summer was a good indication of that where.
California brought on a lot more.
More resources are ones that were shut down and some that were going to shut down there has been a lot of battery installations out there as well. So I think this is on front of mind and end of every utilities CEO across the well in essence across North America, because we've seen whether.
Streams, particularly from a heat perspective.
Most.
Every area of North America over the past 2 years.
And if you haven't had 1 it's come in for your next so everyone's got to make sure that they're doing what they can to beef up the capacity and the ability to serve that load and frankly, 1 of the best ways.
Whether it from that because it doesn't all happen at once is building out those <unk> and then interconnecting them with transmission and.
And so that's another key conversation that has to fall into that bigger broader.
Picture around transmission.
Okay, great. Thank you for that detailed answer.
1 more if I can and this is just on the quarter. The <unk> drag that you guys reported at the parent.
I think I heard at the opening remarks that some of that with like state tax considerations.
Is that something that you expect to carry forward in Q3 and for or is it perhaps more of a timing items between quarters.
<unk> just I'm curious.
How you think about that for the balance of the year.
Yes, no that's more of a 2021issue so filing the consolidated state tax, which we elected to do add back in 2018, it's a benefit it's just a lower benefit in 2021, and that's because we had them.
Change up in our regional sales mix and some of that is obviously driven by COVID-19. So while it's still a benefit is just a lower benefit in 2021.
2 centers, all we expect year over year, but yeah. So for 2021 thing not expecting it for for go forward.
Yes.
Great. Thank you very much I'll turn it back.
Your next question comes from the line of Patrick Kenny with National Bank financial.
Yes. Good morning, just wanted to check in on.
The BC wells for situation.
I guess confirm that you guys have been experienced.
Any significant damage.
To your electric infrastructure.
It requires some near term capital to repair.
I guess worst case scenario.
The liabilities that you might be concerned about.
Yes, actually thanks for that question Patrick.
Obviously, you had some severe.
Weather events across our footprint, whether it's whether it's heat fires drought I mean net flooding we've had at all just in the first couple of months in the summer, but I'm going to turn that over to Roger Dell Antonio because he he gives us daily updates on that and they'll be able to fill you in.
Thanks, Patrick Yes, so the BC situation.
<unk> still under a state of emergency I think there's more than 250 active wildfires.
Just quickly on the on the gas side of the business.
Nothing really directly impacting though we are on alert on the electric side of the business. The area of concern right now for US is in the social can organ or on the soy is Oliver.
We have 2 lines that have been impacted.
We have lost transmission structures just recently.
Because of the wildfire Viking service, we havent gone in and be able to do a full assessment, we do expect there will be.
Quite a few repairs.
For those structures no.
No real impact on customers at this point, we're able to backfill through other means but the situation is fluid.
Per will take some time to assess we don't see any.
Liability issues, we do have debt factor.
Treatment or exogenous factor treatment for things like this in our REIT.
For area structure.
To the extent that we do have significant repairs to meet.
Okay, that's great I appreciate the update.
Thanks, Patrick.
Thank.
<unk>.
As there are no further questions I would like to turn the call back to Ms. A mimo for any closing remarks.
Thank you felt like we have nothing further at this time. Thank you for participating in our second quarter 2021 results call.
Please contact Investor Relations should you need anything further and thank you for your time and have a great day.
Yeah.