Emera Inc

TSX:EMA

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Emera Q3 2022 Analyst conference call. [Operator Instructions] This call is being recorded on Wednesday -- Friday, November 11, 2022.

I would now like to turn the conference over to Dave Bezanson. Please go ahead.

[David Bezanson, executive]

Thank you, Marcella, and thank you for joining us this morning for Emera's Third Quarter 2020 Conference Call and Live Webcast. Emera's third quarter earnings release was distributed this morning via Newswire and the financial statements, management's discussion and analysis and the presentation being referenced on this call are available on our website at emera.com.

Joining me for this morning's call are Scott Balfour, Emera's President and Chief Executive Officer, Greg Blunden, Emera's Chief Financial Officer and other members of Emera's management team. Before we begin, I would like to take a moment to advise you that this morning's discussion will include forward-looking information, which is subject to the cautionary statement contained in the supporting slide. Today's discussion and presentation will also include references to non-GAAP financial measures. You should refer to the appendix for definitional information and reconciliations of historical non-GAAP measures to the closest GAAP financial measure.

And now I will turn things over to Scott.

[Scott Balfour, executive]

Thank you, Dave, and Good morning, everyone. I'd like to begin this morning by taking a moment to acknowledge that today is Remembrance Day here in Canada and Veterans Day in the United States. We extend our heartfelt gratitude and respect to those who have served and continue to serve our countries. Our freedom today is because of their courage and sacrifice. On behalf of the entire Emera team, thank you.

This quarter, our customers, communities and teams were faced with 2 record breaking storms. Here in Nova Scotia, Fiona was the most powerful storm to ever make landfall in Canada and the most destructive storm to ever hit our [ prods ]. At the peak, more than 80% of Nova Scotia Power customers were without power and the restoration effort taken by the team with the largest in NSPIs history. As soon as is safe to do so, a team of over 1,500 powerline technicians, damage assessors and forestry technicians together with NSP's team of customer service representatives and other power system experts worked tirelessly to safely restore power to all impacted customers across the province. In addition to the NSP team on the ground, crews were brought in from Eastern and Central Canada and from the Northeastern United States to assist in the restoration.

The damage was significant. Over 4,000 downed trees to clear and the need to replace more than 2,700 poles, 500 transformers and 100,000 meters of overhead power line. That was 5 to 6x more poles down and wires down than the previous record storm in Nova Scotia, Hurricane Dorian. This incredible restoration effort involved more than 333,000 person hours of work.

Our team is motivated by the fact that we provide an essential service that our customers count on every hour of every day. We also understand that the damage caused by Fiona had particularly devastating impacts on some Nova Scotians. The teams at Emera and Nova Scotia Power moved quickly to partner with the United Way to establish the United Hurricane Relief Fund with a donation of $250,000 to provide immediate relief funding to the most -- to help the most vulnerable in the province.

And of course, just days after Fiona made landfall in Nova Scotia, Hurricane Ian swept through Florida, causing widespread devastation across the state. Thankfully, despite the severity of Hurricane Ian, only 35% of Tampa Electric customers lost power. The investments we've made through the storm protection plan to strengthen the grid, coupled with the effort of many hundreds of crews from Tampa Electric and neighboring states, enabled our ability to restore 99% of the outages within 4 days. We'd like to thank the crews in both the U.S. and Canada that came to the support of our teams in Nova Scotia and Florida to help us restore power to our customers as quickly and safely as possible. Storms like Fiona and Ian underscore the essential work that we do. And the response from our entire team highlights the strength and resiliency of our people and their unwavering dedication to our customers.

Turning to the financial highlights for the quarter. I'm pleased to say that despite the weather challenges, our track record of delivering solid earnings and steady growth continued. Our third quarter adjusted earnings per share was $0.76 compared to $0.68 in the third quarter of 2021. For the year-to-date, we've delivered 5% growth in adjusted earnings per share from $2.17 per share for the first 9 months of 2021 to $2.27 per share in the same period this year. This growth is underpinned by the strength of our investments in Florida, where we continue to see strong customer growth at both Tampa Electric and Peoples Gas.

Our Marketing and Trading business did what they do best this quarter by taking advantage of market conditions that enabled Emera Energy to contribute $13 million more in earnings quarter-over-quarter. This is a great example of how this strategic market-facing business applies its physical-based lower-risk operating model to capture market opportunities and deliver significant returns. It's also worth noting that our Board of Directors recently approved a 4.2% increase in our dividend and extended our dividend growth guidance of 4% to 5% out through to 2025. This represents more than 15 years of continuous dividend increases and reaffirms both management's and the board's confidence in the underlying growth of our business. We remain fully committed to our dividend and to our annual 4% to 5% dividend growth target.

Overall, our team continues to advance our strategy and deliver on our 2022 capital program. So far this year, $1.7 billion in capital has been deployed, and we are on track to deploy over $2.7 billion by the end of the year. This is slightly less than the original forecast of $3 billion, resulting from the delay in our final investment in the Labrador Island Link as we await final commissioning, which is expected in the next few months with benefit of robust trial operations and load testing now well underway. The Big Bend modernization project at Tampa Electric is near completion and is expected to go into full combined cycle commercial operation in the next month. This is a transformational project, effectively facilitating the retirement of the coal units at Tampa Electric and meaningfully reducing the carbon intensity of our generation fleet. This new generation facility at Big Bend station will be one of the most efficient natural gas generating units in North America. I'm incredibly proud of the team that has delivered this project on time, on budget and most importantly, safely.

I'd also like to highlight that during the quarter, the Tampa Electric team achieved a significant safety milestone of 365 days without a single employee missing work due to an injury. Despite the hazards associated with generating and delivering electricity and executing on our significant capital program, the team has now logged over 6 million work hours without a lost time injury. Our safety vision is an Emera where no one gets hurt. This impressive achievement by the team at Tampa Electric demonstrates our ability to achieve that vision.

Looking forward to our updated capital plan. Over the next 3 years, we expect to invest between $8 billion and $9 billion in reliability, cleaner energy and infrastructure modernization. These investments are expected to continue to support a 7% to 8% growth rate in consolidated rate base growth over the same period from almost $25 billion in 2022 to nearly $30 billion in 2025.

Before jumping into the detail on this, I'd like to take a moment to address the legislation passed by the government of Nova Scotia earlier this week. Bill 212 caps the allowable increase to base nonfuel electricity rates at 1.8% from now through to the end of 2024 and also directs that Nova Scotia Power can only use that increase for reliability investments. As you would expect, and from comments we've made on record, we are very concerned about the government's unprecedented decision to override the role of the Nova Scotia Utility and Review Board. Political interference in the rate setting process is unprecedented in North America and it's unprecedented for a reason. It's been well proven that the long-term interest of customers is best and most effective, both effectively, served by the adjudication and setting of electricity rates by an independent and expert body like the UARB, which benefits from direct engagement and evidentiary input from customer advocates, interveners and all stakeholders.

We remain deeply concerned about the long-term impacts of this legislation to Nova Scotia Power's customers as it delays the clean energy transition and will ultimately result in higher, not lower, cost for customers and is already evidenced by the likely negative impact to Nova Scotia Power's credit ratings as indicated by Standard & Poor's and DBRS. However, the Nova Scotia Power team is nonetheless laser-focused on working with its various stakeholders to address the constraints imposed by the legislation in the most effective way possible as it continues to prioritize its delivery of safe and reliable energy to every customer.

Subject to final determination by the UARB, Bill 212 results in a $150 million reduction to revenues and cash flows to Nova Scotia Power over the 2023 and 2024 period compared to what was submitted in the general rate application. It also restricts further investment in cleaner energy over this time period. This reduction in planned revenues and cash flows obviously requires Nova Scotia Power to reduce operating costs and planned capital investments in the province. For example, the last capital plan included $500 million in planned investment in the Eastern clean energy initiative, including the Atlantic Loop to fund new wind generation, transmission infrastructure upgrades and battery storage to help facilitate the transition away from coal-fired generation.

Given the restrictions imposed by Bill212, these cleaner energy investments have been forced to be put on hold as our capital investments at Nova Scotia Power are now required to only focus on maintaining system reliability. As you might expect, we continue to digest and analyze the impacts of Bill 212. So while this is our best estimate of Nova Scotia Power's capital plan at this time, we're continuing to work through the detailed impacts and we will update the profile if needed in future reports.

Even with this reduced capital investment level at Nova Scotia Power, when we look at our capital plan as a whole, it remains very strong and solidly maintains a consolidated rate base growth profile of 7% to 8% through to 2025. Consistent with our strategy, I'm pleased to say that over 60% or $5.3 billion of our 2023 to 2025 capital plan is specifically focused on delivering cleaner and more reliable energy with the remainder of our plan directed to sustaining capital projects. Tampa Electric continues to see strong economic and customer growth, requiring a higher level of capital investment to support that growth and in the process, investing in the continued improvement in the reliability of the system. The team at Tampa Electric also continues to make progress on the transition of their generation mix. Investing in solar generation at Tampa Electric continues to be the right thing to do for their customers, both economically and environmentally. In the face of a rapid and significant rise in fuel prices, our investments in solar are expected to save customers nearly $90 million in fuel costs this year.

In Atlantic Canada, I'm pleased to say that with Energy now flowing, our investment in the Maritime Link has saved Nova Scotia customers over $200 million in fuel costs so far this year, fuel that otherwise would have been needed to be purchased in today's high commodity cost environment. By replacing increasingly expensive high carbon generation with clean energy hydro, we are receiving through the Nova Scotia block of energy over the Maritime Link, the link will continue to deliver significant value to customers over time.

Solar investments at Tampa Electric are the largest clean energy projects in our capital plan. Last month, Tampa Electric announced expansion of their solar program with an additional 375 megawatts of solar power at 6 sites. By the end of 2025, Tampa Electric will have more than 1,600 megawatts of solar generation in its fleet, enough to power nearly 260,000 homes and the highest percentage of solar power of any electric company in the state of Florida. Tampa Electric's almost $1 billion investment over the next 3 years in solar generation will attract production tax credits under the Inflation Reduction Act, making them even more affordable for customers.

I also wanted to highlight that earlier this year, Tampa Electric received funding from the U.S. Department of Energy to perform a preliminary study at the Polk power station to evaluate the cost and feasibility of retrofitting carbon capture technology on a combined cycle unit. This is a renewal of the work started at the Polk plant nearly a decade ago. While carbon capture requires ongoing development work to be economically feasible, government support like this, along with the Inflation Reduction Act, helps to facilitate investments today so that we can be ready to make the best assessment for our customers when these technologies become commercially viable in the future. We're very excited to be part of the work being done in this important area.

The solar program at Tampa Electric and the Maritime Link and Nova Scotia are clear examples of how our strategy, first and foremost, importantly, serves our customers. And how in doing that also drives earnings and cash flow growth for our shareholders. In light of recent storms, it's also clear that investing in reliability enabled by mechanisms like the storm protection plan at Tampa Electric has never been more important. With a planned $775 million of spend on storm protection plan over the next 3 years, this represents one of the most significant projects in our capital plan with immediate recovery through a rate rider.

I spent a long time talking about the investment needs at our Electric Utilities, which is where almost 80% of our capital plan that will be deployed over the next 3 years. The remaining 20% will be invested in our gas utilities, where the focus is on maintaining reliability and safety of the system, along with investing in system expansion to support the significant customer growth we're seeing, specifically at Peoples Gas. We're also continuing to invest in cleaner energy initiatives like the renewable natural gas projects being explored and advanced at Peoples Gas. While our profile of capital spend looks different today than it did a year ago, the overall levels of expected investments and rate base growth remain essentially unchanged over the forecast period. We continue to focus on prudently managing our capital plans to ensure we're meeting customer and regulator demands, while at the same time, managing the pace of the transition in order to balance cost for customers and the ability for shareholders to earn a reasonable and timely return on their investment.

Before turning things over to Greg, I want to highlight a recent leadership announcement. After 33 years with Emera, our Chief Operating Officer, Rick Janega will retire at the end of this year. Over the past 3 decades, Rick has been a key leader in our business and an important part of Emera's growth and success. While he's helped us accomplish a lot, it's worth highlighting in particular that Rick led the Maritime Link team that delivered this transformational energy infrastructure project on time and on budget. The Maritime Link is already delivering cleaner energy to Nova Scotia and will benefit Nova Scotia Power customers for generations to come.

While his leadership, deep utility experience and unfailing commitment to safety will be missed day to day, I'm pleased to say that Rick will remain involved with a number of projects and will stay on the boards of several operating companies. On behalf of the entire team, thank you, Rick. And congratulations on your well-deserved retirement.

[Gregory Blunden, executive]

Thank you, Scott, and good morning, everyone. This morning, we reported third quarter adjusted earnings of $203 million and adjusted earnings per share of $0.76 compared to $175 million and $0.68 in Q3 2021. Year-to-date adjusted earnings were $601 million and adjusted earnings per share was $2.27 compared to $555 million and $2.17 for the same period in 2021. Our regulated portfolio, led by our utilities in Florida continues to be the driver of strong financial results. Contributions from our regulated portfolio increased 11% over Q3 2021, representing $0.10 of increase to adjusted EPS.

This strong growth combined with the opportunities identified in our new capital program reinforces our confidence that we will continue to deliver long-term earnings growth to our shareholders. Operating cash flow was challenged this quarter by the growing fuel under recovery and storm costs incurred primarily at Tampa Electric. It's important to highlight that absent these factors, we would have seen a 37% increase in year-to-date operating cash flow driven by growth in our regulated utilities. The fuel under-recovery in storm costs at Tampa Electric represent almost CAD 600 million of operating cash flows that we will collect through the regulatory recovery mechanisms available in Florida that are designed for this specific purpose.

We expect to file with the Florida Public Service Commission in the fourth quarter for recovery of the Hurricane Ian storm costs. The FPSC has 60 days to respond to our application and historically, storm costs have been collected over a period of 12 months. During the quarter, Tampa Electric filed for 2023 fuel rates. This application reduces the risk of ongoing material fuel under recoveries by ensuring we are recovering the appropriate amount from our customers in 2023 based on forecasted fuel prices. This filing was the first of 2 steps needed to address the impact of rising fuel prices at Tampa Electric. We also expect to file later this quarter or in early 2023 to recover the uncollected fuel costs from 2022. The company is facing any increases to ease the transition and reduce the impact on customer bills, but ultimately, the fuel under recoveries are temporary, and these costs will be recovered from customers.

Tampa Electric continued to delivered strong results with growth of USD 18 million in earnings or 13% over Q3 2021, driven by new base rates that went into effect on January 1 and continued customer growth. Favorable weather in July and August was offset by some loss loads during Hurricane Ian at the end of September.

Emera Energy's Marketing and Trading business capitalized on higher market pricing and volatility, delivering $8 million of earnings for the quarter. This is a good example of the upside potential for this business in the right market conditions that we often talk about. The weakening Canadian dollar increased earnings from our U.S. operations by $7 million for the quarter. And as we look to the fourth quarter of this year and into 2023 and 2024, we have taken advantage of the weak Canadian dollar and have hedged approximately 70% of our U.S. earnings for the remainder of this year, 45% for 2023 and 25% for 2024.

Contributions from our gas and Caribbean utilities increased modestly, driven by continued customer growth at Peoples Gas and the economic recovery in Grand Bahama. Corporate costs increased $25 million this quarter, largely driven by timing impacts of share-based compensation expense and related hedges, higher interest expense and a gain on foreign exchange hedges recognized last year. I would note that approximately half of the increased interest expense was related to posted margin positions at Emera Energy necessary to facilitate the unexpected market opportunity. And earnings from our Canadian electric utilities decreased modestly during the quarter, primarily due to lower contributions from our transmission investments. And similar to previous quarters, the growth in earnings was partially offset by higher share count.

Year-to-date, adjusted earnings per share increased by $0.10 to $2.27 driven by higher contributions across our regulated portfolio. Earnings from Tampa Electric increased USD 65 million or 22% year-over-year with drivers for growth consistent with the quarterly results as well as favorable weather in the first and second quarter. The weakening Canadian dollar increased earnings from our U.S. operations by $14 million for the year. Year-to-date contributions from our Canadian and other electric utilities increased by $7 million, driven by continued economic recovery in the Caribbean and colder weather in Nova Scotia in the first quarter, which drove higher sales volumes, partially offset by higher storm costs and lower contributions from our equity investments.

Earnings from our Gas & Infrastructure segment increased USD 4 million, driven by higher contributions from Peoples Gas and SeaCoast. And corporate costs increased by $56 million, driven by the same factors that impacted the quarter. Year-to-date, Emera Energy delivered $29 million of adjusted earnings. And although this represents an $8 million decrease from 2021, our prior year results benefited from event-driven volatility created by winter storm Uri. And again, finally, higher share count decreased adjusted earnings per share by $0.07 year-over-year.

As Scott mentioned, the profile of our capital investment across the portfolio has shifted from our previous capital plan. 75% of our 2023 to 2025 capital plan will be invested in Florida compared to 67% in last year's plan. For every dollar of capital spent at Tampa Electric, we are able to fund that capital investment with a higher equity thickness and also earn a higher rate of return on that equity. This means that for every dollar we spend in Florida, we generated 63% higher earnings and cash flow than at our Canadian utilities. In addition to higher earnings and cash flow, the higher equity thickness means that the funding of this capital will ultimately strengthen our balance sheet as we fund that capital in line with our targeted capital structure rather than the higher leverage required within the regulatory structure in Nova Scotia.

We also believe that this capital investment profile increases our ability to translate rate base growth into EPS and cash flow growth in support of our recently affirmed dividend guidance. As we optimize this capital plan, we remain focused on managing the impact on rates and ensuring the timing of capital deployment is aligned with our planned rate case filings. Unlike in past years, we have not included the category of investments under development. This is a result of the fact that we are seeing sufficient opportunities in our base case while continuing our focus on managing the pace of investment. We have always managed our funding program to maintain our targeted capital structure of approximately 55% debt, 35% common equity and 10% hybrid in preferred equity. Our funding program enables us to maintain this target capital structure and achieve our targeted credit metrics over the forecast period by maximizing reinvesting -- reinvested operating cash flows that are supported by common and hybrid equity capital issued by Emera and the issuance of debt at our utilities in line with their regulated capital structure.

Our equity requirement over the next 3 years is expected to be raised through our dividend reinvestment plan, which is expected to raise $200 million to $250 million per year in our ATM program, a very efficient and cost-effective way to issue common equity. In fact, we raised $235 million of equity through the ATM program during the first 8 months of this year. And finally, we will continue to manage the hybrid and preferred capital portion of our capital structure at approximately 10%, which is consistent with the targeted capital structure. And in October of this year, we increased our base shelf for the issuance of these types of securities by $425 million.

We have been diligent in developing our capital and funding plans to achieve the key objectives of growing both earnings and cash flow, strengthening our balance sheet, achieving our targeted credit metrics and serving our customer needs over the forecast period. We are confident that our highly regulated, diversified portfolio is well positioned to deliver on these objectives while achieving a rate base growth of 7% to 8% through important and needed capital investment in the markets we serve.

I would also like to take this opportunity to reinforce that we remain committed to an investment-grade credit rating and that we will continue to engage with the credit rating agencies to ensure that we have a full understanding of their approach to our rating and ensure that we are aligned on the path forward. While we are disappointed in the recent change in outlook at Emera by Moody's and S&P and while we understand the rationale each have taken, nothing has reduced our confidence in our ability to achieve a CFO to debt metric of 12% on a sustainable basis. We have well-established recovery mechanisms to manage fuel under recoveries and storm costs, which will address credit rating concerns. As these cash flow timing differences reverse and we continue to execute our refocused capital plan, I am confident that our funding plan and expected cash flows will allow us to achieve the targeted credit metrics that we have set out.

[Scott Balfour, executive]

Thank you, Greg. This concludes the presentation, and we will now open the call for questions from analysts.

[Operator]

[Operator Instructions] Your first question comes from Maurice Choy from RBC Capital Markets.

[Maurice Choy, analyst]

My first question goes back to Nova Scotia. Clearly, the government's rate cap was unexpected and unfavorable. Can I ask if you've had any discussions that you can share with us with the government since the bill was introduced as well as passed? How do they see the role beyond 2024, notwithstanding that there's obviously an election in the province in 2025?

[Peter Gregg, executive]

This is Peter. Just want to say we've been spending the time since the introduction and as passage of Bill 212 to really understand the impacts to the business. Scott did mention obviously in his remarks, too, that the impacts of our ability to spend on decarbonization investments. To your specific question, have we been having discussions around the government's view beyond 2024? We have not engaged in those studies at this point.

[Maurice Choy, analyst]

And maybe just a follow-up to that. As you look across the rest of your utilities, any thoughts on whether something like this is being contemplated by the local governments and/or its regulators?

[Scott Balfour, executive]

Look, it's Scott, Maurice. So thanks for the question. And look, I mean, I think we all have to acknowledge that we're in an environment where affordability for customers is a concern for everyone. And one of the reasons why we worked so hard to balance the pace and timing of the investments that we make, obviously, in Nova Scotia that's become particularly acute in part, frankly, because of working to achieve aggressive carbon reduction objectives, at least as we thought it was until the passing of this legislation, looking to close coal plants by 2030 and achieve 80% renewable requirements by 2030 as well, which leaves us in a bit of a confounding space now as we wrestle with that legislation together with Bill 212.

But I think we'd like to believe that with clarity of understanding of the implications of clinical interference in a well-established, independent expert regulatory process as has been done here in Nova Scotia. There are very real consequences to that, which we've obviously worked to ensure has been clear to all of our stakeholders. And I believe that the clarity of that is understood in most jurisdictions. And as such, I don't anticipate that this is something that will be evidenced or seen in other jurisdictions. But I think it does highlight the continuing important work that we do across all of our businesses to ensure that we are mindful of the impact of affordability and rate increases on customers. And obviously, that's something that our teams do and work on every day.

[Maurice Choy, analyst]

That's great to hear. Maybe if I could finish off with a question about credit ratings. With 2 of your 3 ratings moving your outlook to negative, philosophically speaking, how important is it to you that all 3 must have an investment-grade rating level? And what are some of the measures you would possibly take to support that?

[Gregory Blunden, executive]

Maurice, it's Greg. So it's incredibly important. And as I said, we remain committed to the investment-grade credit rating. Really, what we're faced with right now is, I think, 2 items, one is the Nova Scotia legislation, which although it will have an impact, I think, over the long term, short term and long term at Nova Scotia Power, we don't believe it's going to have any meaningful impact on the AmeriCredit rating over a period of time. And of course, the second thing is just the timing of recovery of fuel costs and storm costs predominantly at Tampa Electric. And really that's a timing issue. Those cash flows will reverse and we'll collect over the subsequent period. So nothing has changed from our perspective in terms of expecting to deliver the credit ratings or metrics that we want to support our ratings on a sustainable basis. But having said all that, I fully understand the actions that both Moody's and S&P took, but we're very confident that we will work our way through that over the next year or 2.

[Operator]

Your next question comes from Rob Hope from Scotiabank.

[Robert Hope, analyst]

Just maybe a follow-up question on the funding plan and the balance sheet strength. When you take a look at your asset base, you do have a number of assets where you could carve off partial interest that would likely be very well bid in the private markets. Any additional thought on potentially selling some minority interest in 1 or 2 assets to further bolster the balance sheet and help the funding plan?

[Gregory Blunden, executive]

Yes. I'll start. Rob, it's Greg. I mean no plans at this point. Again, as I mentioned in my response to Maurice, really what's dragging on credit metrics at this 10 seconds is really just the timing of the fuel cost recoveries and storm costs at Tampa Electric, which is truly a timing difference. But as we look at our funding plan on a broad basis, we will do what we always do is evaluate the best way of doing that, whether it's through internally generated cash, the hybrid preferred share market, whether it's through the issuance of common equity. And as part of that, as I think we've demonstrated in the past, we'll look to see if there's opportunistic ways of reallocating capital within our portfolio. No plans to do so at this point in time. But as you would expect, we'll continue to exercise that discipline as we look at our long-term funding plans.

[Robert Hope, analyst]

I appreciate that. And then maybe a question, not necessarily on engaging with the government, but engaging with the regulator in Nova Scotia. Have you been speaking to them -- is there a potential that you could defer some of the, we'll call it, under recovery of costs, whether that be related to the build and the hurricane fuel costs over an extended period of time to better ensure that you earn an adequate return on your capital in that region?

[Peter Gregg, executive]

Rob, it's Peter again. So yes, we have been engaged with the regulator. We still need to conclude the general rate application process. So the legislation didn't suspend the application. So it's still active, and we'll be moving into final argument and reply submissions later this month and into December. So there's more opportunity to engage with the regulator and with interveners to explore options. But beyond that, that's really the extent of the conversation so far.

[Operator]

Your next question comes from Mark Jarvi from CIBC.

[Mark Jarvi, analyst]

Provided that commentary around shifting capital and the different returns in the different jurisdictions. Is the incremental spend in the U.S. utilities in Florida, is that a concerted effort by you? Or is that completely independent of what happened in Nova Scotia?

[Gregory Blunden, executive]

Yes, Mark, it's Greg. It's completely independent. What we're seeing in Florida is customer growth far greater than what we historically have seen, and that's requiring some infrastructure investments to support that customer growth. Obviously, we're seeing some of our capital projects a little bit of an increase in the cost because of inflation that shouldn't surprise you. And then as well as because of the Inflation Reduction Act and some of the benefits -- for example, production tax credits on solar, it makes the acceleration of some of those programs a little bit more economic for the benefit of customers. So those capital investments in Florida would have happened irrespective of what has transpired here in Nova Scotia.

[Mark Jarvi, analyst]

Okay. And just given the initial discussions with the rating agencies and their negative watch, has it impacted your views in terms of how you manage, I guess, debt at the [ corp ] and then the Nova Scotia Power level in terms of sort of moving debt around and trying to preserve the higher rating and [ the look ] at the corp level?

[Gregory Blunden, executive]

Yes, I'd say probably -- I mean, we've already disclosed publicly, Mark, we're looking at what is the appropriate capital structure at Nova Scotia Power in light of Bill 212. And as a result of that, we will not be running at our traditional 40% equity thickness in that utility, which means that to the extent that we reduce our equity investment in Nova Scotia Power, that frees up some cash to allow us to rebalance some other requirements at the corporate level. So we're not talking massive numbers here, Mark, but there is some opportunity to optimize that around the edges a little bit.

[Mark Jarvi, analyst]

And that went out to the [ rating issuers ] and they considered that, you think, in their decisions and their commentary?

[Gregory Blunden, executive]

Yes. If you think of what they -- and I'll refer specifically to S&P and to Moody's. S&P, it's mostly a reaction, not to expected financial metrics but really is a reaction as we all expected to the government intervention and the challenge that, that will put on the regulatory construct in Nova Scotia. And so I'm not so sure that's going to change based on an improvement or a decrease in our credit metrics at Nova Scotia Power. So I really believe that's isolated from a government intervention perspective.

And Moody's is more of a focus on the fuel under recoveries and uncertainty. You may have seen, I think it was yesterday, Moody's came out with an industry-wide report talking about fuel under recoveries. They put the entire sector back on negative outlook from stable outlook. I think we're getting caught up in that a little bit. Fortunately, for us, the majority, if not all of our fuel under recoveries to date are largely in Florida, and we've been working very constructively with the various customer representatives down there and see a viable path forward over the next coming months.

[Mark Jarvi, analyst]

Okay. And just last question. There was commentary that you'll be below the ROE band in Nova Scotia, given the implication of legislation. When you talk about the band, is that the current band or the proposed band? I'm just wondering if that's 8.5% or 8.75% you're referencing at the low end?

[Gregory Blunden, executive]

Well, today, our band is 8.75% to 9.25%, and nothing to date has changed that band, so we would be referring to the existing band.

[Operator]

Your next question comes from Linda Ezergailis from TD Securities.

[Linda Ezergailis, analyst]

Wondering if you can help us understand what sort of conversations you might have had recently with any levels of the federal or other maritime governments and utilities around some of the regional decarbonization goals and initiatives and what their response has been and if they can see any hope to kind of mitigate some of the actions of the Nova Scotia government on that front?

[Peter Gregg, executive]

This is Peter. We've been engaging with the federal government and obviously, with utilities and provincial governments and neighboring jurisdictions on the Atlantic Loop or the Eastern clean energy initiative for quite some time. Obviously, Bill 212 and what Scott highlighted in his remarks, sort of restricts our ability to continue to invest in the decarbonization investments.

And so we're very concerned about that. In our discussions with the federal government, we've highlighted our concerns that it restricts our ability to make those capital investments. But we still have reiterated that we think the Atlantic Loop project is in the best interest of Nova Scotia and of Nova Scotians. And so we think it's an important project. We're struggling to see really what our role can be in it as a result of 212, but I've really been engaging with the federal government to say that to make this an affordable transition for Nova Scotians.

We need federal support. We've always needed that. But I think the results of 212 means that support is even more important. I think that I won't speak for the federal government, but I do believe they're receptive. You probably saw a minister [indiscernible] make some comments in the last couple of days that they're committed to the project. So we'll continue to have those discussions.

[Linda Ezergailis, analyst]

And as a follow-up, it's helpful to understand what sort of capital might be deferred or avoided in Nova Scotia. I'm wondering if you can provide some more context on your evolving thoughts on how to either avoid or defer operating expenses and without obviously compromising safety and hopefully not reliability too much. Any evolving thoughts would be appreciated recognizing we might get more context at your Investor Day in March.

[Peter Gregg, executive]

Yes, I think that's right, we would provide more specific context then. I'd say on that is that, obviously, we're deeply engaged in working through that thinking now, both from a capital deployment but also from an operating expense perspective, making sure that we stay -- continue to be really focused on safety and the reliable service to our customers. But really not at this time, but I'd be willing to go into anything more specific than that.

[Operator]

Your next question comes from David Peters.

[David Peters, analyst]

Most of my questions have been asked at this point. But Greg, if I could just go one back to the balance sheet, I'm just wondering with your credit metrics living on the edge of downgrade thresholds for a while now. I guess why not more seriously consider asset sales to accelerate improvement to sort of better withstand surprises like the one at Nova Scotia Power. Just particularly think that valuable as we head to more uncertain times economically. And then I'm just wondering, is it the payout ratio and commitment to the dividend that would kind of not allow you to do something like that?

[Gregory Blunden, executive]

I don't think so, David. I mean we look at all things. We were on -- and still remain on a very clear path to get to credit metrics that we believe are sustainable over the long term and support our credit ratings. Again, from a consolidated perspective, what really -- what's impacting our ratings or our metrics right now is not the decision in Nova Scotia, although that will have an impact in Nova Scotia itself. But from an Emera perspective, it's a timing of fuel cost. And so that will, in fact, naturally reverse itself over the subsequent periods in front of us. But as I said before, David, and as we have demonstrated before, we are always looking at all opportunities to cost effectively and appropriately raise capital in the way that is best for the company overall.

And in terms of the payout ratio, it's -- that's not necessarily a driver to any of our financial decision-making in some respects, kind of more of an output of all that and something we watch closely, but I wouldn't necessarily drive any decisions. And similarly, if you think of a 4% dividend increase that we've had the last couple of years, if you take off what comes back through the dividend reinvestment plan, you're only talking maybe $20 million of incremental cash. So that by itself isn't a driver on the old -- the entire raising of capital in our portfolio. But we'll continually look at all options as we have done in the past and make determinations on whether we think there's a more appropriate way of raising capital and also in a more timely way.

[David Peters, analyst]

Fair enough. And then I may have missed it. Did you guys say what FFO to debt would be currently today if you excluded the fuel. Obviously, assuming that you'll get recovery of that is just a timing issue.

[Gregory Blunden, executive]

We haven't. But I think maybe to point you to something, I think Moody's was calculating it at the end of June to be -- I think it was 10.5%. But if you look in their report, they showed what their calculation would have been. So that's probably directionally for both S&P and Moody's, we've kind of probably be in the 10% to 11% range if you normalized the fuel costs out.

[Operator]

Your next question comes from Ben Pham from BMO.

[Benjamin Pham, analyst]

I had a couple of follow-up questions on Nova Scotia Power. And I'm wondering when was privatized, are you restricted from any sort of rate fencing or restructuring given legislation, you can't -- I think you have to [ keep ahead of this ] in Nova Scotia, but can you remind us what the legislation is.

[Scott Balfour, executive]

Yes. So for Nova Scotia Power would have restrictions where no single shareholder greater than 15%, and no non-Canadian shareholders greater than 25%. And -- at the Emera level, in addition to head office requirements, there is a restriction of no single investor greater than 15%. But the non-Canadian shareholder restriction was removed from legislation a couple of years ago.

[Gregory Blunden, executive]

Ben, sorry, it's Greg. I just want to add, as you would expect through -- not through necessarily the Privatization Act, but through a series of regulatory decisions over the past 20 years or so, there's always other things that get put into place. Historically, it was to protect the utility itself from any exposure to parent company activities and those kinds of things. And so there's a number of things that would probably be traditionally called ring fencing that would fall into that category. And think of separate banking agreements, separate credit ratings, all those kinds of things. We're probably in a position now, though, that the design of those ring-fencing were designed to protect Nova Scotia from Emera and not the other way around.

[Benjamin Pham, analyst]

Interesting. Okay. And then your CapEx on Nova Scotia Power, I know you mentioned a reduction. How do you get to that revised figure. Is that just a booking rate base flat or is there some other driver?

[Gregory Blunden, executive]

Yes. So rate base is not going to be flat. Just for the very nature that if you replace a pole today, it's at today's dollars and not at the cost of a pole originally. So we are seeing some increase. So we are investing at a rate greater than depreciation. It was really done in 2 ways. But ultimately, what is -- what the revised plan is doing is removing capital investment that would have been made in support of decarbonization at Nova Scotia Power, which the legislation effectively restricts. So Scott mentioned incremental generation, our investments in wind, batteries, transmission upgrades to facilitate things like the Atlantic Loop. And so it's primarily targeted at those areas. We have not made any reductions in anything that would compromise the reliability of the system or the safety of our employees and the communities that we work in.

[Scott Balfour, executive]

Other ones I'd add to that, Ben, is that -- so first of all, at this point, it's still an estimate. The NSP team continues to work through and revise and assess the impacts of their capital plan in the context of Bill 212. But also, for context, that forward-looking capital profile, is it about where it's been on a consistent basis over the last few years, it just doesn't reflect the incremental investments that were planned as part of the transition to achieve the 2030 climate goals of both the federal and provincial government as a result now of the constraint imposed by Bill 212.

[Benjamin Pham, analyst]

And maybe my last question is I know you have that slide around the relative attractiveness of moving more money, or tons of money to Florida versus Nova Scotia, for example, makes a lot of sense. But is it -- do you think it's better to maybe reduce debt? Or I know maybe it's not as accretive near term, but just considering your credit rating risk. And then maybe just any comment on the dividend increase in guidance?

[Gregory Blunden, executive]

Yes, Ben, let me start with the first one specifically I mean it's not -- you can't necessarily look at any of these things in isolation. So we have a capital plan that the outcome of that capital plan and again, the higher level of investments outside of Nova Scotia are not a result of a reaction to what happened in Nova Scotia, they would have happened anyway. And what we're trying to illustrate is that higher weighting of capital investment outside of Nova Scotia does have, by its very nature, a higher return profile than what we would have experienced here. That's somewhat independent of the overall funding plan and how we manage debt levels, which we're also very focused on, as you can imagine.

And that's because the capital investments in our other jurisdictions outside of Nova Scotia, those are capital investments we need to do. We need to do it to storm harden the system in Florida. We need to do it to advance more solar generation. We need to do it for customer growth. So those are necessary and required capital investments irrespective. And so all to say is, again, it's not an option to necessarily pay down debt. How we fund those capital investments and manage our balance sheet is a separate discussion, which we're also focused on. Scott, do you want to talk on the dividend.

[Scott Balfour, executive]

Yes, on the dividend, Ben, really no change, right? We're as committed to our dividend and to our dividend growth guidance today as we were -- when the 4.2% increase in the extension through to 2025 was announced in September. So no change in our level of commitment to both things. Of course, dividends continue to be decisions at the Board of Directors level. But from our perspective, nothing has changed that causes us to have any hesitation in reaffirming our commitment to both the dividend and the growth guidance.

[Operator]

Next question comes from Andrew Kuske at Credit Suisse.

[Andrew Kuske, analyst]

I appreciate the comments earlier on the impact of Fiona earlier on the call. And I guess maybe just some perspective given the Caribbean assets you bought over the years and then TECO with the Florida exposure, how has your storm response mechanisms evolve is clearly you have more storm-prone exposures when you bought the Caribbean assets then TECO itself. And so how things evolve and become more sophisticated.

[Scott Balfour, executive]

Yes, Andrew, I think, obviously, storm hardening, storm protection, reliability investments have always been part of what utilities do and focus on. But there's no question that as we see the impacts of climate change. We are seeing increasing frequency and increasing intensity of storms in all of our regions. And so no surprise, of course, that are focused on hardening the system of designing the system in a way that it can withstand higher levels of wind loads is something that's in focus across our utilities.

Of course, the most robust process right now is in Florida, where the government in Florida, the state established a requirement for utilities to put in place a store protection plan and a follow-up really to Hurricane Irma at the time and provided through regulation, a mechanism for the timely recovery of investments made through the storm protection plan with a specific rider. So that's enabling not just Tampa Electric but all utilities in the state to storm harden the system.

And frankly, we've seen -- we saw the benefit of that most recently with Hurricane an in terms of less damage than would have otherwise occurred and the ability to restore power more quickly. And so we continue to believe that this is an important area of focus and pleased to be doing our part across the regions. Of course, Bill 212 does provide some cost constraints that does handcuff no Scotia Power ability to do everything that was looking to do, hoping to do in that area, but continues to be a key and critical focus.

[Andrew Kuske, analyst]

Okay. I appreciate that color. And then I guess just to expand upon that point that your Bill 212 effectively handcuffs you to a certain degree on some of the reliability initiatives you'd like to do from a storm hardening perspective?

[Peter Gregg, executive]

Yes, it's Peter, Andrew. It does. We're still working through that. Obviously, when we look at what necessary cuts we'll have to make as a result of the legislation. Our focus is really on safe, reliable delivery of power to our customers. So that's first and foremost, and we'll do whatever we can to make sure we have a safe, reliable service. And that's where our focus is, that's where we're making revisions to our plans for 2023 and 2024. Thank you.

[Operator]

Next question comes from Matthew Weekes at iA Capital Markets.

[Matthew Weekes, analyst]

I know this was -- I think this was talked about a bit in the prepared remarks and sorry if I just kind of missed some bits, but I was just wondering if you could kind of recap where you are as far as the Labrador Island Link commissioning progress made there and then kind of when you expect that to be sort of working and fully commissioned? And how confident you are in that target?

[Scott Balfour, executive]

Yes, Matthew. So yes, Labrador Island Link is now in commissioning, its commissioning process, and robust testing that obviously is enabling increased flows over the Maritime Link in terms of timing of final commissioning and full commercial operation for Labrador Island Link, of course, that's not within our control that's entirely within the control of Nalcor, but we expect that to be within the next few months, early 2023.

[Matthew Weekes, analyst]

Okay. And just basing on the testing and load testing you're doing right now, there's kind of no reason to think that it sort of wouldn't be progressing as planned at this point or that they are sort of continuing issues?

[Scott Balfour, executive]

I think I'd say the level of optimism is very high.

[Operator]

There are no further questions. Please proceed.

[Scott Balfour, executive]

Thank you, and thank you all for attending today. Before concluding, I'd like to draw your attention to a couple of upcoming dates. We will release our Q4 results on February 23, and we'll host an Investor Day on March 2 in Tampa with the reception to be held the evening of March 1. We hope to see you all there. Thank you, and have a great day.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please online.