Q3 2022 Fortis Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by.
My name is Michelle and I will be your conference operator today.
Welcome to the Fortis Q3, 2022 earnings and five year capital outlook 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 shut press star followed by the number one on their telephone keypad.
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 Mimo. Please go ahead Ms <unk> Mimo.
Thanks, Michelle and good morning, everyone and welcome to afford us as third quarter 2022 resulted in five year capital outlook Conference call I'm joined by David Hutchens, President and CEO , Jocelyn Perry Executive VP and CFO other members of our senior management team as well as Ceos from certain subsidiaries.
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 third quarter 2022 MD&A.
Also 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 before we get to the financial highlights I would like to take a minute to discuss the severe weather events experienced in the quarter.
In late September three of our communities were affected by Hurricane Fiona and the Caribbean It hurt at Turks and Caicos as a category three storm impacting several of the islands. However, we were able to restore service quickly following the storm due in large part to the prior investments made to strengthen the grid after hurricane Irma in 2017.
And Atlantic Canada, Fiona was one of the worst storms in its history. The small community as part of basket on the southwest coast of Newfoundland and Labrador took a direct and devastating blow from the hurricane as it swept several homes into the sea and severely damaged many others.
On Prince Edward Island title searches and high winds resulted in extensive damage across the island. The last nearly all 86000 customers without power immediately after the storm and unfortunately, some of our customers for an extended period of time.
In the wake of an historic storm like Fiona It is important to recognize the breadth of partners that come together to offer aid to our customers communities and employees during such a difficult time.
On behalf of Fortis I would like to give our sincerest. Thanks to the Canadian government the governments with Prince Edward Island, Newfoundland and Labrador, Turks, and Caicos and our industry partners in all the local people on the ground who pitched in to help across these jurisdictions.
A special thank you to our customers for their assistance in patients during the restorations.
Lastly, I would like to thank the dedicated people from our utilities in the U S and Canada, who assisted in the restoration efforts their commitment to the safety of our customers communities and each other is unmatched.
Now to touch on the third quarter highlights.
Financially third quarter adjusted EPS was <unk> 71 sites, increasing seven cents compared to the third quarter last year on a year to date basis, adjusted EPS was $2.06, representing 5% growth over last year Jocelyn will provide more details on this later.
September our utilities invested $2 $9 billion and our systems keeping us on track with our 2022 capital budget plan of $4 billion.
And today, we are pleased to unveil our $22 3 billion five year capital plan, our largest to date.
During the quarter, our board of directors increased the fourth quarter dividend by five 6% and today, we are announcing 4% to 6% annual dividend growth guidance and extending it two years through 2027.
Turning to slide five the new five year capital plan reflects two reflects a $2 3 billion dollar increase compared to the prior plan driven by growth at our utilities in a higher foreign exchange rate.
Key drivers of the growth include. The addition of of MISO long range transmission plant projects at ITC that I will speak to shortly.
New renewable generation and energy storage investments at U S energy to support its exit from coal and investments in distribution reliability and additional capacity to support customer growth across our utilities.
Consolidated rate base is expected to increase by $12 billion from approximately 34 billion in 2022 to over $46 billion in 2020 seven supporting average annual rent.
Through 'twenty 'twenty seven.
Customer affordability remains a top priority as we develop this plan, we prioritize capital investments that provide offsetting cost savings that flow through to our customers. Examples of such investments include renewable energy in Arizona, which translated into fuel and operating cost savings as coal plants are shut down.
Or investments in field technology, like advanced metering and grid sensor grid sensors that reduce operating costs, while also improving reliability and customer service.
Utilities are also continuing to manage operating costs by finding efficiencies through innovation and process improvements and lastly, as we have seen higher prices in the natural gas and electricity markets. We have increased our outreach on energy efficiency and assistance programs to help our customers manage their bills.
We are highly confident that we can execute this capital plan, 83% of the expenditures are relatively small routine projects. The remaining 17% that we categorized categorized as large which is over $200 million are also straightforward infrastructure projects.
From a geographic perspective, we expect 55% to be invested in the United States, 41% in Canada, and the remaining 4% in the Caribbean.
Similar to previous capital plans. The vast majority of investments are concentrated in our three largest utilities I T C, Florida, B C and U S energy, representing 68% of the total plan.
With $5 8 billion planned at ITC investments are focused on transmission infrastructure that ensures reliability resiliency and grid security. It includes approximately 700 million U S dollars associated with MISO is long range transmission plants as you will recall six of the 18 projects in tranche one our law.
Okay to deny T C service territory, including Michigan, Iowa were rights of first refusal provisions exist or incumbent transmission owners.
In total ITC estimates investments.
Of approximately $1.4 billion to $1.8 billion U S through 'twenty 30 under tranche one.
Florida, Specie plans to invest $4.6 billion in reliability and integrity projects liquefied natural gas infrastructure advanced metering and renewable gas projects.
Our U S energy investments of $4 $6 billion are planned over the next five years, including $1 2 billion for renewable generation and storage to support Tucson Electric Power's integrated resource plan.
Other investments include transmission and distribution investments to modernize the grid and ensure resiliency.
Turning to slide eight the plan includes 5.9 billion for investments that directly support cleaner energy. This includes 2.7 billion for for investments, which deliver renewables to the grid, primarily at ITC and 1.8 billion, mainly related to renewable generation and storage investments in Arizona and the Caribbean.
Ian.
Additionally, 1.4 billion is planned for liquefied natural gas infrastructure in British Columbia, as well as cleaner fuel solutions, such as renewable natural gas and hydrogen.
These investments keep us on track to achieve our target to reduce scope one emissions greenhouse gas emissions, 75% by 'twenty 35. It also supports our 2015 net zero target focused on Decarbonising, our already low emissions profile over the long run while preserving customer reliability and affordability.
Beyond the base plan, our teams are focused on incremental opportunities on several fronts first.
First it is important to note we have not included any incremental investments related to the recently passed inflation reduction Act.
With incentives and tax credits encouraging investments in clean energy storage electric vehicles and manufacturing.
The inflation reduction act will be a catalyst for a faster more affordable transition to a cleaner energy future. We expect it will drive additional investments under the MISO long range transmission plan MISO will begin studying the next phase of the long range transmission plan, which is tranche two with the aim of identifying new projects in late 'twenty 'twenty.
Three.
The inflation reduction act could also accelerate T p's clean energy transition by reducing the cost of new renewables and providing funding to the to aid the communities impacted by the exit from fossil fuels and.
In aggregate, we estimated an additional an additional investments of approximately two to 4 billion U S dollars through 2035 will be required to implement T P's integrated resource plan.
Furthermore, with more extreme weather events expected similar to the recent hurricanes, we have heightened our focus on climate adaptation, our Fortis operating group is evaluating grid resiliency and storm hardening requirements under various climate scenarios and geographies to enhance the readiness of our systems.
Lastly, our team in British Columbia is developing renewable fuel solutions to support the provinces clean B C Road match roadmap aimed at lowering emissions, 40% by 'twenty 30, while also working to provide the international community with Canadian LNG as a more secure and cleaner fuel option.
As I mentioned last month, our board of directors declared a fourth quarter dividend of <unk> 56.5 cents, representing representing a five 6% increase this brings our dividend track record record 249 consecutive years of increases a record of which we are very proud.
With our strong dividend track record and regulated growth strategy, we are announcing 46%.
Annual dividend growth guidance through 2027, with our low risk rate based growth fundamentals. This guidance extends visibility on dividend increases through 2027 provides.
Provides flexibility to fund more capital internally and is expected to reduce our dividend payout ratio to more historic norms overtime.
Overall, we expect to deliver stable and compelling returns to our shareholders over the long term.
Now I will turn the call over to Jocelyn for an update on our third quarter financial results.
Thank you David and good morning, everyone.
Turning to slide 12 reported earnings for the third quarter of 2022 with $326 million or 68 cents per common share five cents higher than the third quarter of 2021.
On a year to date basis reported earnings were $960 million or $2.01 per common share nine cents higher than last year.
Reported earnings include a timing difference related to mark to market accounting of natural gas derivatives at Aitken Creek, one time costs associated with the suspension of the Lake Erie Connector project and the revaluation of deferred income taxes related to a change in the Iowa state corporate tax rate.
Boeing discussion on our financial results for the quarter excludes these items.
We delivered adjusted net earnings of 341 million or 71 cents per common share in the third quarter. This is seven cents higher than the third quarter of 2021.
We continue to see rate base growth across our utilities supported by capital investments of nearly $3 billion year to date.
Higher earnings in Arizona, and New York Lower stock based compensation and increased production and believes were also key drivers of the quarter over quarter increase.
Year to date September we delivered adjusted net earnings of $982 million or $2.06 per common share 10 cents higher than the same period in 2021, representing 5% growth.
The waterfall chart on slide 14 highlights the EPS drivers for the quarter by segment and our U S electric and gas utilities EPS increased by eight cents for the quarter with you and ask contributing five cents and central Hudson contributing three.
In Arizona warmer weather and higher transmission revenue were partially offset by higher costs associated with rate base growth not yet included in customer rates due to the historical test year.
And as expected third quarter earnings in Arizona were favorably impacted by the recognition of production tax credits related to the <unk> Grande wind generating facility.
Central Hudson's EPS contribution was mainly driven by rate base growth as well as the timing of operating cost and implementation of new rates in 2021, new.
New rates did not become effective until the fourth quarter of last year favorably impacting quarter over quarter EPS by one penny.
Our energy infrastructure segment contributed a two cent EPS increase for the quarter driven by higher hydroelectric production believes which was up 60% from last year and higher earnings at Aitken Creek.
At ITC EPS.
Increased by one seven for the quarter rate base growth and lower stock based compensation costs were partially offset by a favorable adjustment related to interest rate swaps recognized in the third quarter of 2021.
Our U S dollar to Canadian dollar foreign exchange rate favorably impacted the translation of our U S denominated earnings, but your increase quarterly EPS by approximately two cents.
And next there were a number of items in the corporate segment driven by broader market volatility that I'm favorably impacted this segment by three cents.
First mark to market losses on total return swaps less stock based compensation expense contributed to a one cent decrease in EPS I would note.
This was more than offset by lower stock based compensation and other segments, particularly I T C that I mentioned earlier.
And in corporate we also had mark to market losses on foreign exchange contracts, which impacted the segment by two cents for the quarter.
The remaining decrease in E. P. S. At corporate is largely largely driven by higher finance charges.
And lastly, as expected with our dividend reinvestment plan EPS decreased by <unk> due to higher weighted average shares outstanding.
Yeah.
Year to date EPS was impacted by many of the same drivers as the quarter. In addition rate base growth at our Western Canadian utilities and higher wholesale sales at UNF favorably contributed to the results.
Losses on retirement assets at U N S. M. I T C reduced year to date EPS by approximately five cents and higher costs associated with the implementation of a new customer information system at Central Hudson also unfavorably impacted year to date results.
I would note that central Hudson did not incur any significant additional direct costs beyond the three cent EPS impacted recorded through to the end of June .
Turning now to our funding plan for a new five year capital plan as you can see from the Pie chart. The bulk of our new five year capital plan is expected to be funded from cash from operations and net debt primarily issued at our regulated utilities with the remaining funding coming from our dividend reinvestment plan.
Overall, our funding plan is largely consistent with last year's plan and does not require any discrete equity funding through 2027.
Our capital structure is expected to remain steady over the planning period, and Additionally, our dividend growth guidance range provides incremental funding flexibility.
We continue to take a conservative approach to running our business and our funding plan coupled with Fortis is low business risk profile, our funding plan positions us comfortably within our existing investment grade credit ratings as we execute on our capital plan and pursue incremental growth opportunities in particular.
Moody's CFO to debt and S&P F F O to debt metrics are each expected to average approximately 12% through 2027.
While we continue to await final regulations, the alternative minimum tax or a M. T is not expected to have a significant impact on our credit metrics over the planning period with limited near term impacts of less than 20 basis points on our CFO to debt metrics.
Turning to our regulatory update at ITC in August the D. C Circuit Court of Appeals issued a decision vacating them vacating and remanded Ferc's. Most recent LIFO base ROE methodology, you might recall in May 2020, Berk issued an order establishing a MISO base ROE of 10.0 to.
Percent, which resulted in an arrow for ITC of $10, 77%, including incentive adders.
The D. C Circuit court concluded that FERC failed to offer an explanation for its decision to reintroduce the risk premium model that resulted in a 14 basis points increase in the MISO base Roe.
Collected in the 10 77, all in a row that ITC continues to use today.
Although we cannot predict the timing and nature of any firm action for every 10 basis points change in ROE at ITC impacts Fortas's annual EPS by approximately one cent.
Well no change in the quarter for ITC, We also a way to final rule from FERC on the supplemental loper on transmission incentives and action on the ITC Midwest capital structure complaint the timing and outcome of both proceedings remain unknown.
In July the Alberta Utilities Commission issued a decision on cortisol part is 2023 cost of service re basing application in the.
<unk>, which is expected to form the basis for going in rates for the third PBR term starting in 2024, the AUC largely accepted the forecast methodology and O&M forecast submitted.
Cortisol brought every filed its 2023 revenue requirement last month, reflecting a 5% increase a final decision on the filing is expected later this year.
And lastly, we have a number of ongoing regulatory proceedings, which we expect to conclude over the next 24 months, particularly the TEP rate case and generic cost of capital proceeding in British Columbia.
Given some of the broader market volatility we've experienced this year I wanted to touch on some of the potential potential implications for fortis, starting with the strengthening of the U S. Dollar approximately two thirds of our earnings and capital investments are in U S dollars with.
With the release of our new capital plan, we have updated our assume foreign exchange rate using 1.3.
As you May recall every five cent change in the U S dollar to Canadian dollar exchange rate impacts annual EPS by approximately six cents on average and would result in an approximate $500 million change in our five year capital plan.
As most of our regulated utilities have regulatory mechanisms protecting against fluctuations in interest rates as well as periodic re basing it rates our primary exposure to rising rates pertains to nonregulated debt issuances and credit facility borrowings at Fortis, Inc, and ITC holdings.
Earlier, this year Fortis, Inc, refinance $500 million in debt due in 2023, and ITC entered into notion of $450 million U S dollars of interest rate swaps that mitigated refinancing Bruce associated with debt that was due in November .
From a near term refinancing perspective, we have approximately $400 million 400 million U S dollars and nonregulated debt maturing on average annually through 2025 at a weighted average rate of about 4%.
Uninflated, our five year capital plan assumes inflation levels return to historical averages starting in 2025.
While it's not easy to quantify the impact of inflation plan over plan given scope changes timing of projects and contract negotiations, we estimate inflation impacted the current plan by approximately 300 million over the five year period.
And lastly, given the ongoing regulatory proceedings. We have also included a sensitivity on the slide for changes in allowed returns and equity ratios at our largest utilities.
That concludes my remarks, I will now turn the call back to David.
Thank you Jocelyn at our core we are a diversified north American utility company with strong fundamentals and a straightforward growth strategy. We are leveraging our regulated energy delivery portfolio operating expertise strong governance and talented people to deliver the results that make us a premium.
To our stakeholders.
For our customers, we are focused on delivering a cleaner energy future with safety reliability, resiliency and affordability top of mind.
And for our shareholders, we have a low risk compelling return outlook supported by our capital plan and dividend growth guidance through 2027.
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.
Thank you.
Ladies and gentlemen, we will now conduct the question and answer session.
You would like to ask a question. Please press star followed by the number one on your telephone keypad.
If your question has been answered and you would like to withdraw please press star followed by the number too.
If you are using SP carphone. Please lift your handset before entering your request.
We ask that you speak loudly and slowly to ensure all participants can hear your questions.
One moment please for our first question.
Your first question comes from Maurice Choy of RBC. Please go ahead.
And thank you Paul the new disclosures that you've put out and in.
Trying times like this I really appreciate the macro algemene assumptions that you have so thank you for that I wanted to start with the dividend policy.
Could you. Please elaborate how you landed at the four 4% and 6% levels as you lower and upper bounds I seem to 6% simply matched the previous policy. So what scenarios are would be that a payout ratio otherwise, which you drive a decision to be 4% over the next say one or two years.
Yeah, Thanks, Maurice and good to hear from you this morning.
So the ranges is is basically developed by US is as we look forward at our forecast and looking at the things that we want to address from a from a both the earnings growth perspective, and a dividend a payout ratio perspective when.
When you look at our very strong rate base growth that we have as laid out by this capital plan, we see the ability for us to manage.
This dividend payout ratio of 46% and bring our payout ratio down.
Over over time, and so that's really what we were shooting for us is to have that flexibility.
Within that range is as you know the markets are absolutely volatile these days and having that flexibility.
For funding or gives us that additional room in that in that 2%.
Obviously, having a single point is very difficult to manage around as as you may guess and we think our range is very appropriate.
I mean, just a follow on to that like.
I guess, if you look at your peers here in Canada. Some of the payout ratios are north of 70%, whereas our U S peers are below that.
Yeah.
Do you see where you kind of want to payout ratio to be.
Over the long term or is it somebody middle between the two it's a sweet spot.
Yeah, No I knew that would be your follow up Laurie.
So.
It's <unk>.
We do wanted.
The decrease our payout ratio.
That's that's that's clear we we haven't really put out a target.
If you look at our more historical levels over the past you know even five to 10 years, we've ranged everywhere from mid Sixty's to upper seventies, and we just we just think it's right in our and our prudent for us to look at bringing that payout ratio down to give them.
More headroom over time, and so we don't have a definite goal in mind. This is something that we talk with our board about every year. So we have the payout ratio or I'm, sorry, the dividend growth range that we put out but we have yet to give it an official.
Payout ratio.
Dan that we want to be in.
But again discussed every year and Ah if we if we get more clarity on that next year. When we have these conversations with both Shirley.
Just the assumption of of US trying to get trying to push that down over time as it is the goal.
And I would I would say.
You did mention payout ratios and yeah, there their Canadian utilities, and our peers have a have a higher payout ratio some of them higher than than ours.
In the U S is lower than what we.
We recognize that but we have to do what we think is right and best for our own company, which as you know.
Basically have a Canadian half U S.
Understood and my second question I'm sure you've heard about what happened in Nova Scotia, and not few rate increased cat there maybe your thoughts about what you're seeing happen in the province from a utility standpoint, and how that may or may not relate to the various regulatory matters and government relations.
Have both north and south of the border.
Yeah.
Yeah, So I, obviously don't know.
Details of those regulatory relationships or the.
The history, there, but it would not know that there is a lot of history and every jurisdiction.
And every jurisdiction, obviously is different and there's different structures are different regulatory structures theres different regulators, and obviously governments and how they interact and how the utility fits in to that relationship and how they interact with each one of those I I can't be I can't comment on.
Why that's happening in Nova Scotia, I don't see.
Similar things like that happening across our jurisdictions, whether they'd be in Canada or the U S. Some of some of our jurisdictions have obviously very different setups like I T C.
<unk>, obviously has their main regulator as FERC, so that's a very different.
Set up there and then in Arizona, we actually have regulators, who are elected and not appointed an end or a fourth branch of government. So theres a lot of variations across jurisdictions I can't imagine seeing.
Any read through from what's going on in Nova Scotia, other than being a Nova Scotia specific issue.
Understood. Thank you very much.
Youre welcome.
Your next question comes from Rob Hope of Scotiabank. Please go ahead.
Good morning, everyone.
First question is on the capital plan. So we've seen an increase in the capital plan, including a step up in 2023. There is also some other factors going on including fuel recoveries.
How did you get to keeping that financing outlook unchanged and how are you thinking about your near term credit.
Metrics.
They soften a little bit here and improve through the term and what other options did you look at.
Thank you for the question Rob Yeah, when we looked at the financing there is a bit of a tick up in the capital plan have a plan in 2023, but after that it's really more weighted towards the tail end of the five year capital plan, which we had really built in the prior plan.
Around that so the drip was could easily handle them, how the new capital plan was coming in annually. So felt really comfortable over that you're right. There were some near term.
The credit metrics deterioration I guess in a lot of that was timing of recovery of regulatory assets and we do see some short term fluctuations in our credit metrics.
Yeah, depending on.
Settlements that we have with regulators on how we're going to collect things like the peapack account in the U S energy, which we extended from 12 months to 18 months those things just tend to put some pressure on metrics, but over the over the you know five years, where we're feeling good with respect to our credit metrics.
I have shared this plan with Moody's and S&P and you know I would say no surprises coming out of those discussions and and particularly around the funding plan.
Alright, I appreciate the clarity.
And then maybe more conceptually.
With the rise in interest rates, how are you thinking about what kind of cost of capital as well as our allowed Roe.
You have the ability to go in.
Or the transmission owners have the ability to go in at any time at FERC.
And you have to cost of capital.
Perfect.
In Western Canada.
Yeah, Rob as you know it as you know a good strong basis for those are OE.
Conversations and calculations relate to interest.
Interest rates and as interest rates go up we expect our ROA to follow follow them up as well not the direct correlation in time and lag and all that stuff is up for yeah, yeah up for debate, but I'm, even more even very recently, we just saw Ontario, increasing there are always there so you'll you'll see that kind of.
Conversation.
Across the board so as we have general cost of capitals are pending in both BC and Alberta as well as a rate case in Arizona et cetera, There's there's definitely.
Room for that for that Roy <unk> to go up again timing amounts very hard to tell at this point.
Thank you.
Thanks, Rob.
Your next question comes from Linda <unk> of TD Securities. Please go ahead.
Thank you.
Curious to see what's not in your press releases.
And specifically I'm looking at your funding plan and I'm. Just wondering if you can walk us through how our asset sales or partial interest in some of your franchise sales or maybe JV partnerships over time, where.
Centered or not and at what point might you reconsider those when you look at your funding plan, especially given any sort of amplification of volatility in the capital markets potentially over the next five years and our and increase to your capital plan for whatever reason.
Thanks, Linda Yeah, we're always looking always paying attention always evaluating that's what we do when we develop any kind of capital plan, but none of that's in this one so we'll continue to be looking at going forward, but there's nothing like that is needed to to fund this existing capital plan and you know as we always.
Talk about when if we have a a big slug, that's needed because we have a you know a nice big project that comes in or you know advancing our rate base growth Oh, that's a great problem to have that so that's where we then look and find a you know the.
The best way to fund our capital at that time, So it's always a very current conversation.
Great. Thank you and just as a follow up to.
Policy and regulatory.
Considerations and how they evolve over time, you know customer affordability probably.
Will become.
And increasing consideration and it's always considered I would say in the jurisdictions in which you operate.
And recognizing that.
You have a history in my view is of innovative thinking on the regulatory front.
How are you evolving your thoughts around accommodating any sort of increase in Roe.
Inflationary pressures on your capital plan.
Energy transition costs, you know what what levers do you think could be used to manage customer affordability without compromise.
Compromising any of the other tenants of Oh, the regulatory compact, especially a fair return.
Yeah. That's that's a great question I'm actually really glad you asked that because that's that's really what we.
We are focused on across all of our jurisdictions because as you know it's this capital plan is a big capital plan.
But that doesn't necessarily mean rates go up a lot and I'll explain that here in a second.
But obviously, there's been a lot of.
Pressure on customers bills related to electricity and natural gas commodity markets. We have we have very different business models across our our subsidiaries, but at the end yet and all of them have some sort of piece of that that goes through to their bills and so we really focus on cost management and cost control looking for.
Our efficiencies looking for innovative ways to keep our opex down.
But I think also.
As importantly, or perhaps more importantly, how we prioritize our capital and our and our planning cycles, we want to make sure that we prioritize capital that has you.
You know either a low or even a low rate impact or might even offset some rate impact of other things that Prime example, as we shut down some coal plants. This is a great theres a great exhibit in our slide deck in the back that shows it.
It shows Tep's rate case, and when you look at how we are while we are shutting down coal and removing a huge chunk of of opex and fuel that more than pays for the investments in renewables like wind and solar and even accelerated depreciation that we have in that case. So it's those kind of.
Capital plans that we have to look at there's there's other things that we do that relates that reduces opex as well. So it's not all of them not a big capital plan doesn't read through as big rate increases just as a as a big kind of caveat related to our capital plan sizes, but also you have to look at it from a total build perspective.
That's what our customers see and you know obviously, we don't necessarily control the commodity or we don't control the commodity and in most cases across our subsidiaries. So we have to figure out how to mitigate the impacts of increases to our customers and we do that over time through hedging of several of our utilities have hedging programs in.
In Arizona.
Tucson electric power and its other small utility are participants in the energy imbalance market in California that helps us.
Dispatch our resources more cost effectively and those savings go right back to customers, we push energy efficiency and conservation messaging and programs to our customers.
And you know as as was mentioned in one of the prior answers.
We we also.
Look at ways to help smooth out the impacts on our customers' bills by spreading out some of the recoveries of blips in electricity.
And natural gas markets and what they cause on our bills and then of course lastly, we.
Look for ways to get our customers federal dollars et cetera from a bill assistance perspective.
What could be federal state provincial or dollars to make sure that they're getting all the help that they can and all the help that's out there and available and then on top of that the good news of the inflation reduction Act is the some of these investments that we're making are not going to be as expensive to our customers because of things like production.
Tax credits et cetera that will then get pass through to our customers. So all of the all of that is to say.
We've got a very a multi pronged approach to make sure that we're growing our rate base we're growing.
Our earnings were growing our dividend, we're doing all those things, but we're trying to keep our rates as flat as possible as we do it.
Thank you I'll jump back in the queue.
Your next question comes from Ben Pham of BMO. Please go ahead.
Hi, Thanks, good morning on Euro five year Capex plan, you've mentioned that.
Focusing on investments that are contained costs.
And.
And I noticed that your percent of clean energy investments have gone up as well and I was wondering when you compile this plan this year.
How is it different than say last last year's plan was it was a process different where they're much more variables that you're dealing with.
Was there any more conservatism in a number and any additional context would be helpful.
Yeah, we didn't change the basics, we we we still we have always prioritized capital plans like I mentioned, we just it wasn't something that was.
Out there being discussed in the basically in the in the context of.
Bills in rate increases et cetera, that's always been and been part of our subsidiaries roles are that these are these are plans that are rolled up on a subsidiary by CIT Harry subsidiary perspective.
That then rolls into an overall capital plan. So we have many discussions with those subsidiaries with the individual utilities looking at those capital plans their own boards review them.
So there's there's nothing that's changed other than every.
Every year, you know looking at new projects looking at the timing looking at.
You know cost related to projects.
Re estimating them et cetera, but.
It's there's nothing quote unquote like really new here.
Okay got it and what was was there any change.
Change in R&D.
Oh, it's China quite small in the past as it.
Could it move up a bit or.
Research and development.
Renew one Oh, RMG, sorry, I thought I thought you said R&D and as like where did you get that line item.
Looking quickly at Johnson, Yeah, Yeah, so our renewable natural gas that yeah. That's that's still a very very small component of our b sees a capital plan.
Okay got it and maybe one for for Jos and I know you mentioned.
The 12% and you've you've gone there and it looks like you've hit your holdco debt.
I'm wondering though in this environment, we're in doesn't doesn't it make more sense to be.
Maybe more under Levered in this cycle of rising interest rates and a bit pumped up in your capex.
Yeah, Ben I am we're certainly looking at it right we have.
As I've mentioned a couple of times, we we we've done a lot to improve our balance sheet and yeah, we've actually.
The levered them, our balance sheet quite a bit over the last number of years, we're not we're in a decent spot right now with respect to that but and we're watching the rising interest rate environment, which is why we've done a number of things at corporate to pull forward debt at the holding company we do.
Did some interest.
Swaps at I T. C. So we're doing all the right things to manage our costs going forward, but it's certainly something that you know we were looking at constantly and it's evolving but we're doing the right things to manage the costs that we have.
Okay excellent. Thank you.
Your next question comes from Mark Jarvi of.
CIBC capital markets. Please go ahead.
Thanks, Good morning, just maybe sticking with the last topic Charleston.
Mentioned that.
And on the tax thing would be less than 20 basis points of it I think you said in the near term are you implying that you think that will go up overtime and just the cash taxes will creep up through the five year plan.
Thereby outcome.
Yeah, Mark it is expected to be lower in the earlier years down a man you know as low as 10% and could go up to 30 basis points in the latter part of the plan again I won't qualify a M. T. We are still waiting for final regulations as well, but based on what we see today.
Near term tend to 'twenty and it could increase a closer to 30 at the tail end.
Okay.
And then turning to the comment about or in the plant.
Incremental $1 2 billion of renewables and storage.
A T P and that's part of the RFP.
I assume you're implying that you hope to put that into rate base and just some sort of confidence on that versus outsourcing with PPA. So just maybe I know David you want to take that in terms of whether or not that all comes to fruition or if that's just the plan right now.
Yeah. That's that's our current projection of of the portion that we expect to be in rate base now where we're in the process of going through a R. S. P.
For both renewables and capacity down there in Arizona for our two two utilities in the middle of that because we were in the middle of it and then the inflation reduction came act came out and so obviously, we pushed the bids back to get to make sure that we had all of those things.
Built in there so.
So they're there.
One of the best things about the I R. A while theres a lot of good stuff in there.
But making sure that there's the credits.
The tax credits are transferrable really leveled the playing field a visa V utilities to do at regulated versus I P. Pes and other folks who are little more adept at finding the tax equity that would have been needed. So I would expect.
From last call to this call that.
On a going forward basis, I would expect us to see more utility owned portion of of the of that our capital spend for renewables and storage than we would have prior to the inflation reduction Act.
Thanks.
Your next question comes from Andrew Kuske of Credit Suisse. Please go ahead.
Thanks. Good morning, if you could maybe just give us a snapshot on how you think about economic growth on a jurisdiction by jurisdiction basis, where you've got exposure.
And maybe to follow up on that is really how that translates into.
Capex for the economic growth that can also for adult pressure abuse.
Growth essentially solves a lot of problems associated with adult pressure on a volume basis.
Any kind of color would be appreciated.
Oh boy, that's a that's a wide ranging question with the 10 jurisdictions. So okay.
Okay I'll hit maybe a couple of highlights.
Obviously.
The underlying growth in our biggest footprint, which as I T CS.
There's going to be driven mother, Amit, let me back up and say theres going to be that there's there's two kinds of growth there's customer growth and then theres use per customer growth.
And a lot of that use per customer growth is going to be driven by.
The incentives and the inflation reduction act by by driving demand for electricity, whether it be electrification electric vehicles. The manufacturing focus all those things are going to be driving economic development no matter, what what region, you're in what jurisdiction you're in in the in the U S.
That will be a big shot in the arm and that's that's on the use per customer side and frankly on the customer side too as you as you see economic growth for manufacturing turns and economic development with churns into jobs, which turns into you know people in those jurisdictions and obviously the Midwest and the the vehicle manufacturing arena is.
Very ripe for that so we see we see good growth. There are a lot of lot of strong economic development opportunities, Arizona has always got the underlying.
With weather fundamentals, but we're also seeing a manufacturing really tick up again, some related to electric vehicle manufacturing and other economic development opportunities that we're seeing.
In the state I mean, Arizona is one of the fastest growing states and depending on the year, sometimes the fastest growing state and so we'll be keeping an eye on that that is the year that that can give you both of those benefits both the customer growth and the use per customer growth.
So those are probably the two ones worth mentioning the most.
Other other than I know this is really a bit in the weeds and it's a very small part of our portfolio, but the the Caribbean and seeing those sales bounce back post COVID-19 had been quite impressive as well.
Okay that is.
One I noticed a big broad question and then maybe just going back to that.
Because you have a situation where you have at all where you effectively get economic growth in the jurisdiction. So other people are investing capital you are in that migration.
You're investing capital on the power side Bill rates are going down, but then given the competition for capital within our jurisdiction does that actually help you win rates biasing upwards on your allowed ROE.
Boy Ah Yeah, I I'd I think from a.
Jurisdictional perspective, I think you you can see a lot of those are positive benefits I don't I don't see the negative at the tail end of your of your of your question there.
If if we see if we get economic growth customer growth use per customer growth that keeps bill pressure down.
You were implying maybe is that going to be an issue from an ROE perspective will the will the will the return match the growth in our in our world the return.
As always going to is always going to be.
At you know at a right level right I mean, we obviously see ebbs and flows related to roe's than we've seen them come down over years, and we're going to see as interest rates tick up we're going to see them go up over the next few years.
So I think those that's a bit of a behind the scenes piece doesn't impact necessarily the.
The underlying growth opportunities that we see in that laundry list I gave you.
Okay.
Very much appreciate it thank you.
Your next question comes from David <unk> of.
Of Raymond James Please go ahead.
Yeah.
Thanks, Good morning, everyone.
My first question just on the capital plan in our U S. Specifically.
I guess since the the five year period, now kind of coincides with the retirement of Springerville unit. One does it planned renewable capex at ITC over five years does that get you all the power you need I guess to.
Offset that retirement or or would there be upside related to that.
Yeah, let me I'm going to turn that over to Susan Gray who's the CEO down there and is in the midst of looking at those rfps that we have out there and and let her answer that one Susan.
Alright, thank you.
Stephen Thanks for the question.
Yeah. So we are in the middle of an all source RFP in evaluating those bids for a potential project I would say what we have in the capital plan right now.
<unk>, what we think based on our 2020 ERP is required to offset the capacity that we'll be losing with the closure you not want it springerville. However.
However, we are publishing a new ERP next year and so well work. This is a continual process always looking at.
Current resources current technologies in the market in the southwest and whats available here. So it's always going to be adjusted as we go through the IRB process and again looking at.
You know the projects that are available through the all source RFP maintained our timing and an opportunity to accelerate investment, but I would say the current plan reflects what we think we need for that capacity.
Okay, great. Thank you for that and maybe just one more for me on the meso long lean transmission plan I think that the two of the six projects.
Do you expect to be involved in.
Or ones, where you have right of first refusal. So I'm just curious among those remaining four projects, which I guess will go to competitive bidding process any color around how you expect that.
Competitive process to play out and what assumptions are you, making there in terms of which projects you win I guess as it relates to the the 1.4 to $1 8 billion that you indicated you could build up to 2030.
Yeah, David that's actually incorrect, but I'll let.
I'll, let Linda our CEO at our I T C answer that because of those six projects are all ROFO projects. So go ahead Linda.
Great. Thanks, Good morning, David Yeah, as as Dave Hutchens, just mentioned all six of the projects that I T. C has within the current tranche one L. R. T P or indeed, all covered by row first all six of the projects are either in Iowa, and Michigan and both states.
Have active rights of first refusals that were put.
Put in place through legislation in those respective states. So are we those projects are all all ours and we do not we will not have any competitive bidding for those projects and in fact, we have already notified our respective state utility commissions.
That we are indeed pursuing those projects that are identified within our footprint and so we have made the appropriate notifications as required and so we are well well, we're already well well Intel in.
In terms of continuing chip to plan.
And make the appropriate regulatory filings to pursue those projects.
Excellent. Thank you for that.
Yeah welcome.
Yeah.
Okay.
Your next question comes from Patrick Kenny of National Bank. Please go ahead.
Hey, good morning, everybody I'm just on for the specie here as we head into the peak demand season.
Can you just remind us if we do see some wild natural gas price volatility this winter.
How you plan to recover these higher fuel costs going forward.
Swimming, you'll want to of course avoid material adjustment in near term customer rates and later the political focus on affordability right now.
Yes.
To that end, you know whether or not the rating agencies are fine with the potential drag on cash flow metrics at both for the specie in and on a consolidated basis. Thanks.
Yeah, Thanks, Patrick I'm going to kick that over to Roger a dial Antonio who's the CEO of Fortis BC to to cover that and what we currently are doing as well as.
You know answering your question there on going forward and then ill bounce it back to jostle in to cover the Consol.
Consolidated view on the cash flows.
Roger and thanks, David Thanks.
Thanks, David Thanks, Patrick for the question. So on the first part of the question regarding the <unk>.
Natural gas prices, we do have.
Commodity cost recovery account.
Our mechanism.
He is a quarterly recovery. So we're always trying to track fairly closely.
Yeah gas price changes so we avoid a large buildup and then requiring to very large pass through at at one point in the year. So far we've had some increases it increases this year.
What we're seeing for the next four to six months, we're not expecting much volatility in the BC context, but if we do the mechanism as we pass through the rate increase, but we forecast over 12 months to 24 month period.
No doubt.
Recovery of any increases to mitigate build pressure as far as the rating agencies go.
So far new indications is concerned we've never had any.
Issues with the commodity cost recovery counts in the past and it's about 40, 35% to 40% of our overall bill.
Yeah.
The only thing I would add to that is rating.
These tend to look through timing or short.
Short term volatility in collections of a flow through costs. So.
We've been always having those changes in cash flows because of the timing, but particularly it's of interest now given the increase in recoveries. So it's a it's always a balance to to work with regulators and to smooth out recovery with customers and.
Managing the cash flows of the utility. So you know folks are doing a great job balancing that but it's something that we're keeping our eye on and we're keeping the rating agencies.
Updated on as well.
Okay, that's great color much appreciated.
And then I guess, just being afford or celebrate a customer myself I got to ask on.
The recent re filing of your 2023 revenue requirement it looks like it includes a.
A 5% rate increase just curious what your read is on Premier Smith's comments to reduce electricity costs for all burdens over the near term.
And I guess, even if you do receive regulatory approval for this 5% increase.
Whether you see a risk in capturing electricity rates here in Alberta.
Coming a hot political topic ahead of the provincial election next spring.
Yeah. So I'll I'll provide you is this is why we have the business model that we have because we need those are ears on the ground in every jurisdiction to decipher some of this information and so I'll turn that one over to Janine Sullivan who's the CEO of Florida's Alberta right in your neck of the woods to answer that.
Good morning, and thanks for the question.
So just as a reminder, the cost of service application that we filed for 2023 was a reset of our revenue requirement. After almost a decade of P. P. R. Regulation. So there was a lot that went into that application and we fared very favorably in terms of things that we brought forward to us.
Stablish that new revenue requirement because it will be used as a stepping stone for the third generation of PBR starting in 'twenty 'twenty. Four. So you know there was a lot of appetite for the things that we brought forward and it was very balanced application I'll say in terms of resetting our cost to align with revenues, but also bringing some new item.
On the table that needed to be addressed after a decade as I said off of previous P. B R. So.
Affordability is a key topic in Alberta as it is in most jurisdictions that you've referred to a heart and start to head. This morning.
Daniel Smith has created a new ministry of affordability and utilities. So we do know that it is an important topic for for Albertsons as well as for this government, particularly as they prepare for an election, we're spending a lot of time with our customers and with the regulator outlining what we're doing to address the.
The affordability question on how our plants do consider it we're quite cognizant of the fact that any growth in Alberta, we will have to be done very thoughtfully and very mindful of the impact to customers and so in this application. We brought forward. Some ideas that were tested with the regulator around things like the S M and how we can help customers.
There are electricity bills along with.
The investments required to support electrification and it's easy to see that both the regulator and government are still contemplating what that means in a fossil fuel based economy.
But certainly there's a lot of conversation going on.
And we're staying very close to both the regulator government and customers as to how we respond to that question, but you're right. It is a hot topic and it will be a I think for the foreseeable future, particularly as Daniel Smith goes into an election next spring.
Okay. That's great. Thank you very much for your comments.
Thanks, Patrick.
Your next question comes from Darius Larceny of Bank of America. Please go ahead.
Hi, Good morning, and thank you for taking my question.
Just wanted to follow up on the U N renewals.
Renewal bolts Capex that you guys added to the plan.
Obviously, you've got some tailwind from the <unk> legislation curious if I know.
It's pending still but if you were to get a positive outcome on your proposed clean energy rider in Arizona, how that might affect that.
That renewables spend over whether it's display or the next generation of the plant.
Yeah, because it gives us a if we do get that resource transition mechanism, which is a tracker to to get a recovery on those investments in the clean energy transition that we make between rate cases.
Oh definitely allow us to create maybe a quicker than maybe even a less lumpy type of resource planning and allow us to quite a bit more flexibility in the timing when we make some of these investments. So that's that's probably the main thing and then it's the combination of.
That tracking.
The resource tracking our resource transition mechanism.
That tracker and the I R E and the <unk> and the tax credit benefits it would.
In essence get passed through to our customers sets us up pretty good for a for additional conversations on that tracker in the in the rate case.
Okay, great. Thank you one more if I can and this is shifting to your.
Capital plan.
You laid out a fairly steady cadence through 2007, and just doing the arithmetic it seems like.
Maybe half or just under half of your MISO tranche, one capital is in there.
As we think about the latter half of the decade and I guess the year that are not in this current five year plan should we.
Expect that step up possibly in capital as you deploy the rest of that Capex for myself, but then also any other spending that needs to be done.
Yeah. So it's hard to go past the current five it was hard enough to get that five years, Darius and you're you're asking for the next the next three.
But you know as as we stayed in the in our in our in our materials. We do expect the rest of that MISO long range transmission plan tranche one to be filled in you know post. This this five year period, and obviously then we start on MISO long range transmission transmission plant.
<unk>, two which we expect to be a pretty good sizable tranche and obviously I'm looking for a good chunk of those investments as well. So it's all of these pieces that lay in you know it's it's one of these things that you you have to look at it from a long term project perspective, some are getting completed long range transmission plans.
We're coming in on top of that those go out for several years and then tranche two comes on top of that the good will start in a few years at the soonest and lay it on top of that so it's just this layering effect. So it's really hard to say whether or not that when the big step ups will be until we get a little bit more visibility on that Troy.
Two because tranche two will take some time to get those projects won through the through the through the planning process, but then to obviously for our team to ITC to then lay them out and their capital plan.
But.
That's kind of all the different pieces that need to come together.
Okay, great. Thank you guys for the time.
Your next question comes from Matthew Weekes of I E capital markets. Please go ahead.
Oh good morning, Thanks for taking my question just following up on that last one and looking longer term bad debt opportunities.
ITC, if you think about some of the regulatory matters that are pending for from from the FERC.
Hypothetically, if there to be some sort of downside impact maybe reduce the returns a little bit longer term would you sort of think about your appetite.
In terms of how much you want to pursue you know long range transmission projects beyond tranche, one and in general.
Long term, what your capital allocation would be to the region.
No that's probably the that'd be the probably the simplest answer I can give today is no I mean, there's obviously a lot of.
Gyrations going on on our incentive adders base, our OE et cetera, but longer term.
On the FERC jurisdiction that ITC operates and and.
In my view will always have the right return levels to incentivize transmission remember this is the whole United States government is focused on accelerating the clean energy transition and I hardly think that it'll get bogged up by.
Not enough incentives or drive to get transmission done that's the critical link to to making all this happen.
Okay. Thank you I'll turn it back.
Thank you.
As there are no further questions at this time I would like to turn the conference back to MS. <unk> Mimo for any closing remarks.
Thank you Michelle we have nothing further at this time. Thank you for participating in our third quarter 2020 results in five year capital outlook Conference call. Please contact IR should you need anything further thank you for your time and have a great day.
Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank everyone for participating and you may now disconnect your lines.
Okay.
[music].