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 for today.
Welcome to the Fortis Q2, 2021 conference call and webcast.
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.
If at any time during the conference you need to reach an operator, Please press star zero.
At this time I would like to turn the conference over to Stephanie a mimo. Please go ahead miss them.
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.
For 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.
Unless otherwise specified all financial information referenced is in Canadian dollars with that I will turn the call over to David.
Thank you and good morning, everyone. The underlying long term fundamentals of our company remained strong in the second.
Current quarter, we continue to see growth from our investments in our regulated utilities maintained reliable service through severe weather events 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.
We also issued our 2021 sustainability update which can be found on our website. The report highlights our priorities and progress on sustainability initiatives. Additionally.
We announced that Florida 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.
Uncertainty remains surrounding the pandemic increased commercial and industrial activity contributed to an overall increase in sales across our portfolio of 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% 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.
What progress we are making to support a cleaner energy future, notably in 2020, we reduced our scope 1 emissions by 15% equating to removing over 400000 vehicles from the road in just 1 year. This marks measurable progress towards our target to reduce carbon emissions 70.
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.
So from its relative to our industry peers.
And it also includes 50, new key performance indicators of which 14 are aligned with the sustainability accounting standards board or Saturday.
We are pleased to report another step in our ESG journey by expanding our disclosures and solidifies.
<unk>, our commitment to the Tcf day recommendations by signing on as a supporter we're continuing our climate scenario analysis to 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.
Per for $19.6 billion 5 year capital.
It'll plan supports energy delivery and cleaner energy infrastructure through.
Through the first half of 2021, 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.
Our this balanced low risk plan supports our sustainability strategy and includes renewable generation, such as wind solar and battery storage interconnections of renewables and liquefied natural gas and renewable natural gas investments.
The capital plan is expected to increase rate base.
10 billion from $30.5 billion in 2020 to over $40 billion in 2025 supporting average annual rate base growth of approximately 6% through 2025.
Slide 9.
Beyond our base capital plan, our teams continue to push forward with opportunity.
Cities 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.
In May 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.
Those rulemaking to solicit comments on regional transmission planning cost allocation and generator interconnection interconnection 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 continues 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.
As hydrogen in the province.
The revised regulation will advance the production and distribution of renewable natural gases and hydrogen that 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 2025.
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.
As well net earnings for $259 million or <unk> 55 per common share <unk> lower than the second quarter of 2020 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.
Adjusted second quarter of 2020, and this unfavourably impacted quarterly results by 5.
So excluding foreign exchange impacts earnings per share was 4 cents higher mainly driven by our rate base growth at our regulated utilities and higher earnings in Arizona in the Caribbean.
For the 6 months ended June 2021, adjusted net earnings of $619 million or $1.32 per common share 9 cents higher than the same period in 2020.
This growth was despite the FX impact of 7 cents a year to date.
Excluding the FX impacts.
For this earnings per share increased 16, reflecting the same factors noted for the quarter as well as some timing of earnings on retirement investments.
Slide 13 highlights EPS drivers for the quarter by segment, our U S electric and gas utilities increased EPS by <unk> <unk> for the quarter our Arizona.
Arizona business contributed <unk> <unk>, driven by new rates at Tucson Electric power effective January 2021, and warmer weather.
<unk> was actually in fact, 1 of the hottest June month on record in Arizona.
Earnings in Arizona were tempered by higher planned maintenance costs, primarily at springerville.
In.
Earnhardt 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.
And 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.
In New York segment reflects higher sales in the Caribbean with the continued recovery of the tourism industry.
At corporate EPS decreased <unk> <unk>, mainly due to a higher consolidated state tax rate associated with changes in regional sales mix.
And higher weighted average shares outstanding issued through our dividend reinvestment.
Rectrix program decreased EPS by 1 cent.
And as discussed the lower U S dollar to Canadian dollar exchange rate unfavorably impacted the quarterly results by 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, a strong quarter, despite foreign exchange headwinds.
Turning to slide 14, this waterfall breaks down the EPS drivers for the first half of 'twenty.
<unk> pretty 1 hour.
Our U S electric and gas utilities provided the most significant contributions growing EPS by 8 our Arizona business contributed a 6 cent EPS increase the increase was driven by similar items noted for the quarter again, new rates at TEP warmer weather, partially offset by higher.
For operating cost the.
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.
Combined our western Canadian regulated utility.
Twin ITC contributed a 6 cent EPS increase driven by rate base growth.
At our other electric segment higher sales in the Caribbean and rate base growth contributed 2.2 <unk> increase in EPS.
And our energy infrastructure segment reported higher hydroelectric production and believes in higher volumes and margins.
Margins associated with the Aitken Creek natural gas storage facility together, they increased EPS by 1 cent.
As expected with our dividend reinvestment program EPS decreased 1 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 cents per year to date.
Yeah.
Turning to slide 15 during the quarter, we were active in the debt capital markets with over 1 billion in long term debt raised at attractive rates debt issued at Fortis, Inc, mainly refinance maturing debt.
Our regulated utilities issued debt.
Support of their capital expenditure programs more recently ITC priced $150 million notes U S of which half were actually green notes.
With our recent debt issuance, coupled with approximately 4 billion available on our credit facilities. We are in a strong liquidity position.
Position supporting our capital.
It'll 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 notebook unintended as you may recall for is proposing to eliminate the 50 basis points regional.
Debt information 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 far outweigh the cost and the current proposal would discourage ongoing efforts to retain and grow our T O at.
A timeframe has not.
Not been established for for 2 issue a final rule and any impacts would be perspective.
In New York settlement discussions are ongoing and central Hudson's General rate application and we do still expect a decision later this year.
Earlier this year, the British Columbia Utilities Commission initiated.
For the generic cost of capital proceeding for all regulated utilities in B 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 Fortis, Alberta will return to a third PBR term beginning in 2020 for following the completion of our cost of service Rebase thing in 2023.
The AUC.
<unk> 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.
<unk> had a 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 the transition in North America to a cleaner energy future.
With the combination of our high quality ESG profile, 5 year growth outlook, and 6% dividend growth guidance through 2020.
5 we have a balanced low risk value proposition with opportunities to extend growth for the foreseeable future.
I'll 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.
Yeah.
<unk>. 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 on your telephone. If your question has been answered and you would like to withdraw your registration. Please press the pound sign if you are using a speaker.
Phone. Please lift your handset before entering your request and we kindly request you to speak loudly and slowly to ensure all participants can hear your questions.
1 moment please for the first question.
Our first question comes from the line of Maurice Choy with RBC capital markets.
Thanks for less and good morning, everyone.
A quick first question on ITC and transmission investments.
I know that back into Q1 call you mentioned that visibility on the initial projects.
<unk> could come as early as this year and obviously during this past quarter. There has 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.
It on your view of timing of cost for this visibility as well as any changes to the size of these opportunities.
Maurice Thanks for that question. It's a it's 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.
As an update 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 are 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 there are long range transmission plan, there's been no update to those kind of later this year or sort of October time frame for that initial list of projects to come out and then even potentially or other.
On approval of those by the MISO Board.
In December but you know those timeframes are.
<unk> obviously.
Bid up in the air.
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 to.
Since punch through the all the other details in all of the planning that's required to put those projects together.
Okay.
But maybe just a follow up to that and given you mentioned.
Slash December and earlier on the call you mentioned that the leaky reconnect your eye.
I could go back to the government.
The share as you approach your 5 year update plan this fall.
How do you see your visibility and being.
And provide us with updated Capex plans or do we need to wait for more announcements from from these parties before we could get a more definitive list.
Yeah, we're we're going to need some more information before we can start laying these investments and to be honest, we really want to make sure that we maintain.
<unk> 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 on 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.
Are you able to debt that's 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 those ranges 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.
There's 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 <unk>.
At least 1 and then maybe update it 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.
Typically the interest deductibility limits from Canada, a minimum tax in the U S any color or any update on either of those fronts.
Yeah, Morris I think the minimum tax in the U S seem to not.
B.
For for this now because we are going to fall under the threshold for the size that it relates to because it applies to the bigger bigger companies are in.
In Canada, we don't have visibility just yet on the interest deductibility limit and again. This is really a cash flow thing because it will limit the amount of interest you can deduct.
Concerning 1 year, but you can carry it forward.
And I know that there is certainly a considerable effort in Canada, which we are a part of to have discussions with the government. So that they fully understand that you know, we're pretty capital intensive company, where our capital structure was regulated we have to spend a lot of investments.
They didn't keep the grid reliable and safe and certainly with the clean energy investments as well. So there's there's definitely discussions being had so that everyone fully understands 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.
A couple of questions on your BC utility would love an update.
Where are you on the R&D side.
Side of things.
Discussions with fiber.
On LNG and then also on the Tilbury LNG facility.
Sure.
And it's growing.
Sure Ben Yeah, that's it.
It's always up.
Lot of opportunities out there in Florida species, such a such a great gas business and really looking across the full spectrum of things that they.
For 2 to be right in the heart of the conversation around reducing greenhouse gases.
And so I'm going to I'm going to actually kick this 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.
Good morning, Ben can you hear me okay.
Yep.
Great Yeah. So on the first question R&D, we're making good progress.
Up to the.
The end of Q2, we've got 22.
Contracts approved by the BCC for R&D for total.
About 7 pet of drills, and we have a couple more contracts.
Waiting approval, which will bring us over 8 Jules so 2 years into our.
Target by 2030, we're making good progress on the acquisition of renewable natural gas, so that's going well.
Wood fiber nothing new in the quarter, we're continuing to work with wood fibre and they're still planning to have.
I have a definitive view on time any other project.
Later this year and then your last question on Tilbury, the environmental assessment process.
Earlier this year, we filed the initial project description or put in a hurry.
We are in the what's called the room the engagement fees.
Doing the stakeholder consultation with various stakeholders.
We will 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 call from answer and then maybe.
My second question on.
The energy infrastructure results.
That police production and storage from from the they can improve.
Improve.
Would you characterize cute to resell it says there's normal seasonality.
Credit quarter, and now you're back to the Hydrant Longterm Me then the storage is now you typically expect.
So family for me to the results for B call for the quarter was clearly impacted by rain right. So we had lower production in queue to them. What I would say is typical now that fluctuates right because it fluctuate with the amount of rain and timing of rain, so but I.
Would say that it was low relative to history, and so just a difficult 1 to predict obviously.
Hey, Ben I want to add something because I think.
Not on the B call, but on Roger's conversation because I can't believe neither he nor I had mentioned the fact that while we mentioned that the greenhouse gas reduction regulations.
Allowed for an increased amount of RMG slash hydrogen.
And the systems and for the utilities to action contract for it or produce it themselves, but we never throughout the number the what's what's out there is the possibility. So it sets the limit at 15%.
Which for BC is 30 P. J. So when you look at those numbers that Roger was talking about and having the contracts up to a week.
Still have a lot of growth opportunity going forward to fill in that remaining twenty-two pjs overtime.
Okay, Thanks for and adjusted more.
Fault for corruption below longterm meets still.
What about the the storage spirit that book.
The range of seasonality, we've seen in the past.
Mmm.
I'm not quite sure how to answer that banned because we've seen it fluctuate right because I know in 2019, we had there was some drought conditions in 2019, and I think the total year with less than 100 gigawatt hours, but yet in 2020, we went back over 200 gigawatt hours. So.
So far this year I think we're up somewhere around 79, so depending on the last half of the year. The rain I do believe come later.
August July August so that will that will sort of set us up for knowing how the full year is going to look.
What kind of look at it.
Thanks for your next question comes from the line of Rob how with Scotiabank.
Good morning, everyone. Just wanted to follow up on the on the Lake. Your connector can you just kind of outline in a book discussions are happening now like it seems like there was a rather.
Positive and forceful message that the minister.
Directed the bureaucrats to start negotiations, there, especially given that they're going to do the counterparty to that approach. So can you just walk us through kind of next steps on the Lake Your project.
Yeah, Rob really it is just about filling out the contract negotiations I mean, you start with a term sheet and you start passing that back and forth.
You get obviously the cost allocation.
The returns that we need to see on our investments.
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 on a free.
Preconstruction on construction basis in an operation basis. So.
It's pretty much a tip to tail negotiation. It was a great positive signal from the government that day.
Thought that this is a good project and that they directed eyesore to enter into those contract negotiations.
But it's sort of that normalized I'll say kind of normal contract negotiation process. So b a lot of turns of documents for a lot of turn to a term sheets 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 this is a bit of a broader kind of.
And longer term question, just just regarding some of the challenges the us electric systems had over the past will call it year.
We continue to see increasing demand for transmission regarding new connection in new renewable but also kind of reinforcement of the grid as well and connecting the various geographies. There when you take a look at your system, where do you see as kind of the greatest opportunity is it the renewable side or is it kind of the reliability, ensuring we don't see.
Regions going dark yes.
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 and future.
Here in the us in Kansas.
<unk>.
That's that's just part of the story of 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 undergoing for over a basis.
As you electrify things that changes everything's from generation down into the distribution grid investment thesis.
Thesis, all along that entire value chain.
You got to strengthen local grids for things like electric vehicles. So there's a lot of store and then and I forgot I got a throw an agent 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 a transmission to get them to load the distribution needs. The resiliency the reliability of the security investments that you need around cyber security to make sure that all of that system is is now more resilient charging infrastructure all.
For that good stuff I can't tell you, which is going to win the race, but it's going to be a pretty big feast now the trick will be as managing all of those investments. So that we have affordable rates at the tail end and that's where the things like electrification electric vehicles industry et cetera.
<unk> will help out because the more that we electrify the economy's 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 to interconnect them will be a big piece and I mean, the renewables like in Arizona in the transmission to interconnect them at ITC will be the 2 largest pieces, but the rest of that will fall across every 1 of our utilities and varying degrees.
Thank you.
You better up.
Your next question comes from the line Michael's settlement with Wolf Research.
Hey, Ron Good morning on a micro question was just on.
Modern day, just first question was I think last quarter, you guys alluded to maybe some some higher capex in 2021 is helping to offset the effects headwinds you're seeing can 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. It some some that are up across the and.
A little here and there so it's not anything big it's nothing that we could really point to and say.
$500 million project.
Just dropped in.
Some of it's timing shifting around and other others has some slightly.
Some smaller new projects, but yeah, I'll mix and match.
Okay, Great and also wanted to get a sense of conviction and where this.
For no per on our 2 adders ultimately.
Ends up just given the latest meeting and some of the commentary there seemed like you guys thought you had a pretty good case, but just curious if you are thinking there has changed at all.
Well I still think we have a really good case in a really good argument of the arguments are absolutely strong that that doesn't necessarily maybe swayed. So.
Someone who's got a very specific opinion on the issue, but the arguments are clear.
First 1 is our.
<unk>, we need we need them bigger and we need more of them.
And an order and the and the costs associated with.
The small amount of <unk> that get past due to the customers are dwarfed in comparison to the savings and the benefits that that those same customers get by having that <unk>, they're having the coordination of transmission planning development et cetera, as well as the access to the market. So our tos.
Has to be bigger and there has to be more of them and then you got to interconnect them. This this is 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 issue 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.
I think this is legal.
This legal issue will have to run its course.
Because it does seem from a philosophical standpoint that several of the commissioners just don't like that at her and want to look at other ways of Incentivising transmission, which there remember this is just 1 of a home laundry list of additional ladders that are part of the original Noecker. So this is just addressing a change in the trees.
Of that are at her which in the additional no for as you will 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 the 100 basis points around reliability and the other 100 basis points around new technology 50 basis points around.
Efficiency investments in from a transmission 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 it which is pay this doesn't come forward with the legislation that's supposed to require or that does require.
<unk> at her for for being.
Participant.
Great. Thanks, Thanks for the color of their and my last 1 I just wanted to check in on.
You work in 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 on the processor.
Yeah, we're still in those settlement negotiations.
Hopefully getting towards the tail end of those but yeah. It's.
There's no real.
Clear path on how those costs will get recovered and.
From the Covid perspective, obviously, we we immediately we wrote 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.
And we think we have a good argument on why they should come back and we also have good historical precedent.
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 question comes from the line of Mark Jarvie was CIBC.
Thanks, Good morning, everyone.
First question is just on the.
The proposed clean energy standard.
Who knows whether or not that it kind of goes for but just wondering what the implications might be for I guess, probably keep him.
Most importantly, obviously it seems like it'd be positive to help decarbonize that utility even cosco, but just wondering how that impacts rate base sort of limitations. A challenge is there anything sort of to come about what that proposal.
Yeah, so the clean energy standard.
It gets passed from a federal regulation standpoint.
Is that what you're talking about the federal yes, yes, yes, yes.
So I think it's actually about and within a couple of years of the Arizona Corporation Commission's proposed rules right now on their renewable portfolio standard. So it's 50 and 2030 versus 50, and 2032, which is Arizona standard and frankly, we in our in our car.
<unk> path that we have laid out in our integrated resource plan will meet both of those.
So what we're really looking for from from an acceleration standpoint.
TP to have the possibility of may be accelerating some of those renewable investments that we see later that are closer to a coal plant closure to maybe bring those forward and use a little less call keep the capacity don't get me wrong, we're going to have that capacity fill that just the total we have those shutdown dates.
But we might be able to reduce the energy by feathering and more renewables over time, but.
But.
It will all be it will be a cost.
Conversation and that's really what we're waiting for us 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's and materials.
May increase the cost of renewable so we have a lot of that to see before we can accelerated and we we definitely are really cognizant of the overall rate impact. We got this great story on our timeline of how we're trading those.
Opex in fuel costs of fuel or at the coal plants for investment in return.
An infrastructure for solar wind and storage and we want to make sure that we're keeping those lined up so that we have a nice smooth low cost trajectory likely see in our integrated resource planning.
So if I just listening to your comments.
For on the margin than having really a material impact given the fact that there are some similar alignment between the federal target in this day.
It's hard yeah.
Those are yeah. Those the difference on 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 a drop this number again, because there's a lotta for a lot of renewable we just brought on a 250 megawatt wind facility. We just brought in 100 megawatt PPA with 30 megawatts of storage.
From from a solar perspective down there in Arizona, but we still got 2000 megawatts of renewable and 1400 megawatts of storage to go before we can get to that 2035 goal.
Lots of lots of investment opportunity and the vast majority is past that 5 year plan that we are talking about as we sit here to day. So we're trying to figure out how.
That comes in is it in in that year 6 will be in our next 5 year plan.
Or is there also the opportunity accelerated just as a as a reminder of the first big coal plant that we have shutting down as in 2027, So we got to make investments to be able to support that shutdown.
Got it and then just coming back to Lake here and I don't want to get ahead of ourselves too much for when you think about that that project from.
You're talking about risk management from 1 non just for current perspective, how do you think about how much has to be contracted sort of 1 day 1.
The contract a portion has to hit a certain IRR return for a return objective and then you leave yourself open for some upside or maybe how you're thinking about that in terms of returns and listen.
Exposure to any sort of merchant small exposure.
Yes. This is all 1 big deal no merchant exposure, 1 customer signed sealed and delivered with a bowl so.
And I, so there'll be our solar contractor and they'll take all of it that's the that's the current contract negotiation.
That we're in right now.
Got it okay. Thanks for clarifying.
Your next question comes from the line of Andrew cause with credit Suisse.
Thanks for the morning, I guess for for questions for jobs, 1 and it really revolves around.
The various green financing initiatives receive other they'd be bonds or credit facilities for a bunch of sort of adders.
Doctors, depending on how long wants to look at it how.
How do you think about just green climb in some initiatives with effectively unregulated asset base.
Regulated doctrines and just the capital structure like what's the interplay.
These initiatives that you could explore greater degree or not.
So if I think if I hear you correctly, Andrea just asking us the perspective on our green financings going forward in a regulated utilities I think you're going to see a lot of it I mean, we've already standard to see the uptake ITC recently with our most recent and that's around interconnecting that renewable.
At resources to the transmission grid.
And we're also seeing I think the phrase now is called the Green M. Right, we're actually seeing some pricing witness.
I do suspect.
Having conversations right across all of our utilities about segregating their capital to identify where and how they are investing to make the.
Grid, greener and strong or even from a a liability perspective, it's all it's all the same so.
So we're just going to see more of it and you're going to see it into our credit facility.
And and I do think they will evolve a little more with respect to pricing, but so far we are seeing some positive pricing and investors are wanting.
Wanting us to do this so yeah, it's definitely a trend trend for more going forward.
That's great and then maybe just as a follow up to that comment given the fact that there's investor appetite.
Or green premium.
We're effectively repairs gonna benefit G C. That's starting to build under regulatory doctrines and regulatory options for the future where this is basically that'd be required across the board and expected.
Don't think it would be required Andrew but I mean, ultimately anything we do for to reduce costs will ultimately be for the benefit of our customers in rate, making over time and that's the way that regulated ratemaking works I think if we have utilities that are not doing this yes. They could get asked by the regulator as to why they are not doing it because.
This is.
Market, where we could potentially getting a green for the benefit of customer. So yeah. No I see it is no I don't see the regulators demanding that we do it but we better have some good reasons as to why we're not doing it.
For not in this space, which I don't see I do see we will be in this space.
Okay. That's very helpful and on 1 final wonder if I may and it just comes back to the Orange, obviously, you've gone a long way on the Orange you that you've got under contract and signed off by the Beach and you see.
Still a way to go.
How do you think of his efforts really unfolds over the next several years.
The commitment and the requirement is a big number and how does that matched up for really prudency doctrines.
Yes.
That's exactly the plan that the folks over in B C are working on is trying to figure out.
The cost curve of these investments in there as as we've mentioned I think hopefully like 3 or 4 times already it's balancing the costs with the transition to renewable resources and that's something that they've got right in the center of their play book and they're looking for the opportunities.
For additional whether it's 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 calculus for sure.
Okay. That's great. Thank you very much.
Your next question comes from the line of David cause data with Raymond James.
Thanks. Good morning, everyone. My first question here, just just non ITC I'm interested.
Any comments you have on how you prepare for I guess, a potentially I guess increased scale of opportunities 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 in advance of that opportunity or is it still a little premature at this point yeah.
Yeah, Let me, let me well first off good morning, David Good good to hear from you I'm going to kick that 1 right over to to Linda who is as you know the CEO of ITC in and she'll give you a good view on that day.
Good morning, David Good question.
Yeah look I think it's.
You've already taken some steps.
Some sort of a realignment if you will within our planning group too.
I would say create if you will a new subset department. If you will of planning to to look at some of the broader regional interregional opportunities.
So certainly there's some internal realignment to put more priority more focus.
And these anticipated outcomes.
But by and large I mean, we're not at a point, yet where we're staffing up.
At this point, we've been working I would say hand in hand, as I said before you know.
Transmission has arrived in terms of events 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 or new revelations.
Much of this as many of them.
The studies that have been performed.
Are consistent I think in Directionally with where we're going.
So not at this point and certainly to the extent that wins.
When specific projects materialize.
We are our engineering folks are lying design, our interest engineering folks we work hand in hand with some major.
Outside outfits consultants.
Engineering firms to assess and so we feel as though we're in pretty good stead with some of the internal realignments as well as kind of all along where our focus has been so I think we are.
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.
Certainly there will be further realignment and tap 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 that certainly.
We haven't gotten to the point, where we had executed on that.
That's a great color. Thank you Linda appreciate that.
And maybe just 1 other follow up for me just on the topic of constantly.
Cost inflation on renewables as it relates to the rule out in Arizona I understand that.
Anecdotally.
Some people in the marketers, suggesting a 10% to 15% increase in the cost of solar and wind turbine suppliers are also suggest price hikes are coming.
Would you say that that's broadly consistent with what you are seeing and are you are you actually procuring equipment today that is where you're seeing a little bit of cost creep there.
No to be honest, David we're not because.
We don't have anything that were.
Basically developing right now the the projects that I mentioned also ground day and then this will will not energy center.
Latter was a PPA. So we had we weren't involved or engage in that and also ground day has been on the books and has been obviously planned out for years and was being constructed and finished construction before any of these cost increases hit.
So as we go forward, though and we don't have anything really in the immediate queue. So when we go forward and start looking at the timeline and start putting out.
Rfps, maybe next year or whenever to stop.
Looking at for.
For projects over the next several years, we might see it but.
It's the anecdotal stories that you're hearing as well and that we're seeing in others and then some of the other supply.
Situations that we have.
That's great. Thanks for that David I'll get back in queue. Okay.
Okay. Thanks.
Our next question comes from the line I'm Matthew weeks with a capital markets.
Good morning.
For taking my question just focusing on on the earnings from the Caribbean and it looked like it was really quite strong quarter quite a strong rebound there.
And the MBNA comment you talked about sort of the recovery and tourism, that's happening and then rate based growth as well, where those sort of any other impact that you saw it there in the quarter for.
1 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 seeing in the recovery Caribbean.
Yeah Matthew.
Clearly we are seeing improvement over Q2 of last year, but that was.
Covid was pretty.
Intense during the Q2.2020, but even throughout 2020 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 open prissy you see they they are seen an uptick in the construction market. So there's a lot of new hotels being built so there's a lot of.
Probably build up right for for the tourism activity. So we're seeing it and Turks were standard construction activity in the Caribbean. There is expectation. This is going to continue clearly we keep watching what everyone else is watching with respect to vaccination rollouts and the variance in the late but right now we are seeing some positive up.
In those.
2 utilities and to go forward I suspect that that trend is expected to continue what we're hoping it's going to continue right, but we're watching it.
Okay. Thank you that's it for me I'll I'll turn the call back.
Thanks Matthew.
Our next question comes from the line of Darius Montney with Bank of America.
Good morning. Thank you for taking my question just wanted to ask quickly about how you are thinking about resource adequacy in Arizona I know California's taken from.
Steps of late to potentially limit exports and just curious how that from forming your your long term planning if you think about Arizona.
Yeah, it's it's definitely informing our long term plan and the timing of of our coal plant shutdowns as I mentioned earlier on the call that.
We're not shutting down anything that provides dispatchable 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 our general 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 in in the event that we have higher than.
Normal or higher than our historical peak load like.
Like we actually did set a new peak in June and made it through that because of the because of all the perhaps for the team did in Arizona to make sure that we had those additional resources.
So that's something obviously on on the front of mind, there's been some regulatory filings in from from California.
In essence are.
Precluding.
Energy that flow through Arizona to continue other closer to California to continue to Arizona, which we were obviously very distressed about.
R.
Actually asking for a rehearing from for work on that but it's a regional situation and we have to 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 resources.
Ones that were shut down 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 and.
Every utilities CEO across the well in essence across North America, because we've seen weather extremes, particularly from a heat perspective and almost.
Every area of North America over the past 2 years and.
And if you haven't had 1 it's coming for you next so everyone's got to make sure that they are doing what they can to beef up those the capacity and the ability to serve that load and frankly, 1 of the best ways of doing that because it doesn't all happen at once is building out those <unk> and then interconnecting them with transmission 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 2 cents drag that you guys reported in for parents.
I think I heard the opening remarks with some of that where it's like state tax considerations.
Is that something that you expect to carry forward in Q3, and 4 or is it perhaps more of a timing item between quarters just.
Curious, how you think about that for the balance of the year.
Yeah, no that's more of a 2021 issue so filing the consolidated state tax, which we elected to do at back in 2018 at the benefit is just a lower benefit in 2021, and that's because we had change up in our regional sales mix in some of that is obviously driven by COVID-19 so well.
Still a benefit is just a lower benefit in 2021.
And 2 cents is all we expect the year over year.
But yeah. So it's a 2021 thing not expecting it for <unk> for go forward.
Great. Thank you very much alternative assets.
Your next question comes from the lineup Patrick Kinney with National Bank financial.
Yeah. Good morning, Ah just wanted to check in on the the B C well for situation.
Just to confirm that you guys have an experienced any significant damage.
To your electric infrastructure that might.
Might require some near term capital to repair I guess worst case scenario any any liabilities that you might be concerned about.
Yeah actually thanks for that question Patrick.
Obviously it had some severe.
Weather events across our footprint, whether it's whether it's heat fires drought.
Flooding we've had it all just in the first couple of months for the summer, but I'm gonna turn that over to Roger del Antonio because he he gives us daily updates on that and he'll be able to fill you in.
Thanks, Patrick Yeah, So the D C situation.
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 around the Sorriest Oliver area.
We have 2 lines that have been impacted.
We have lost transmission structures just recently.
Cause of the wildfire frightening service, we haven't gone in and be able to do a full assessment.
We do expect there will be.
Quite a few repairs.
Those structures no real impact on customers at this point, we're able to back feed through other means but the situation is fluid there.
Repair will take some time to assess we don't see any.
My ability issues, we do have Z factor.
Treatment or exhaustion as factor treatment for things like this in our rate structure.
To the extent that we do have significant repairs to make.
Okay, that's great I appreciate the update.
Hi, Thanks, Patrick.
And thank you.
As there are no further questions I would like to turn the call back to Miss a mimo for any comes in remarks.
Thank you tell us we have nothing further at this time. Thank you for participating in our second quarter of 2021 results call.
Please contact Investor Relations should you need anything further and thank you for your time and have a great day.
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