Emera Inc

TSX:EMA

Earnings Call Analysis

Emera Highlights Capital Plan and Outlook in Q3 2023

In Q3 2023, Emera reported a slight decrease in adjusted earnings per share to $0.75, primarily driven by gains in the regulated portfolio headed by Tampa Electric, an 8% earnings increase thanks to higher capital investment, customer growth, and favorable Florida weather. The Board greenlit a 4% dividend increase, with a target growth of 4-5% continuing to 2026. A robust $8.9 billion capital investment is planned for the next three years, anticipated to yield a 7% annual growth in the rate base, with potential to reach 8%, focusing on productivity, clean energy, and modern infrastructure. Over 75% of this investment is earmarked for Florida operations due to strong customer and economic growth. Notably, Tampa Electric experienced record load levels, and Nova Scotia Power saw peak residential demand this quarter. Continual investments in solar and reliability paid off, showcased by Tampa Electric's improved reliability performance by 17%. A successful rate case will boost Peoples Gas revenues by $107 million next year, aiming for a 10.15% return on equity. Asset sales have been introduced into the capital funding strategy to secure financial foundations and support growth.

Steady Earnings with Promising Cash Flow Prospects

The company recorded a marginal increase in adjusted earnings, posting $204 million or $0.75 per share in the third quarter, versus $203 million or $0.76 per share for the same quarter in 2022. Year to date, adjusted earnings increased to $634 million with earnings per share rising to $2.33 compared to $601 million and $2.27 respectively in 2022. A considerable 125% upturn in operating cash flow was primarily fueled by fuel and storm cost recoveries at Tampa Electric, new base rates at three of the core utilities, and higher customer demand. This resulted in over $1.5 billion in operating cash flow in the first three quarters of 2023, a 6% year-over-year growth. Moving forward, additional cash flow growth is anticipated, with new rates leading to a cumulative bump of around CAD 300 million in 2024 and further rate filings expected to impact 2025 positively.

Key Segment Performance: Strengths and Headwinds

Tampa Electric showcased strong results with a $17 million increase in earnings or 10% from the prior year's quarter, credited to new base rates, customer expansion, and weather conditions. The U.S operations also benefited from currency exchange movements, adding $5 million to their earnings. However, corporate costs rose by $17 million, largely due to heightened interest charges and share-based compensation timing. Emera Energy's earnings saw a $5 million drop from Q3 2022, aligning with expectations given the quarter's historically lower performance and extraordinary circumstances in 2022. On the other hand, the Gas & Infrastructure segment earnings dropped by $8 million, attributed to soaring interest and operating expenditures as a result of increased investment to back customer growth at Peoples Gas.

Capital Plan Focus and Funding Strategy

The company has committed to an $8.9 billion capital plan over the next three years, aiming for a 7% annualized rate base growth, with the potential to surpass 8% in subsequent years. To finance this growth, the organization will capitalize on reinvested operating cash flows, anticipated to cover over half of the funding needs. Equity needs are projected to be met through the dividend reinvestment plan and the At-The-Market (ATM) program, targeting $250 to $280 million annually. Additionally, recognizing the heightened cost of capital, asset sales are targeted to supplement funding and enhance the balance sheet. The meticulous structure of the funding plan is designed to address the pace of capital expenditure and mitigate the impact on customers and regulatory lag.

Looking Ahead: Growth Supported by a Resilient Portfolio

Confidence prevails within the leadership regarding the company's ability to sustain growth and fulfill strategic objectives. The optimism is bolstered by a highly regulated and diversified portfolio capable of achieving a 7% rate base growth annually. This growth is seen as critical to the essential capital investments earmarked for the services areas. Ensuring a balance in financial stability and investment growth remains a pivotal aspect of the company's forward-looking strategy.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Emera Q3 2023 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct the question-and-answer session. [Operator Instructions]. Remember that this call is being recorded on Friday, November 10, 2023. I would now like to turn the conference over to Ariane [indiscernible]. Please go ahead.

[Unknown Executive]

Thank you, Sergio, and thank you all 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 the management team. Before we begin, I will 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 slides. 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, Ariane, and good morning, everyone. This morning, we reported third quarter adjusted earnings per share of $0.75 compared to $0.76 in the third quarter of 2022. Our regulated portfolio, led by Tampa Electric continues to drive our strong financial results. Earnings contributions from our regulated portfolio increased 8% this quarter over the same quarter last year or $0.06 in adjusted EPS terms, driven by higher rate supported capital investment, customer growth and by favorable weather in Florida. This increase was partially offset by lower earnings from Nova Energy and the impact of higher interest costs across the business. The sustained customer growth and overall strong demand we continue to see across our portfolio, combined with the investment opportunities identified in a refreshed capital program reinforce our confidence in our continued delivery of long-term earnings, cash flow and dividend growth to our shareholders. To that end, during this quarter, our Board of Directors approved a 4% increase in our dividend and extended our dividend growth guidance of 4% to 5% out to 2026. This represents 17 years of continuous dividend increases. Looking forward, our updated capital plan reflects $8.9 billion of capital investment over the next 3 years, with the majority of that focused on reliability, cleaner energy and infrastructure modernization. This investment profile translates to 7% of annualized growth in consolidated rate base over the same period. In addition to our baseline capital plan, we see incremental investment opportunities that could drive rate base growth to 8% or more on an annualized basis over this period. However, as always, we are focused on optimizing our capital investment strategy to manage the timing of capital deployment to consider the rate impacts on customers. That's particularly important now because, as Greg will discuss shortly, we are sensitive to the current higher cost of capital environment and the impact that is having on customer rates. Also increasingly important in this higher cost of capital environment is the need to align the deployment of capital with planned regulatory filings to minimize regulatory lag to the greatest extent possible. In this context, I will share that in addition to the rate cases currently underway at New Mexico Gas and in the Caribbean, we expect to file for new rates at Tampa Electric in 2024 to be effective in 2025. We expect that to the extent the incremental investment opportunities we have identified are supported by regulatory outcomes, including required rate support or support from potential government funding initiatives such as clean energy tax credits. These investments will be incorporated into updates to our baseline capital plans over time. With both Tampa Electric and Peoples Gas continuing to experience strong customer growth, over 75% of our 3-year capital program will be invested in our Florida operations, where population growth and economic conditions also continued to be very strong. We also continue to see the impacts of electrification and changing weather patterns on customer demand. In August, Tampa Electric set new record load levels. And during the quarter, Nova Scotia Power experienced their highest third quarter residential oak. And on the gas side, Peoples Gas continues to see customer growth of around 5%. As the economies and populations and overall demand in our service territories grow, so does the level of capital investment required to support that growth. In addition to supporting growth across our portfolio, our capital plan continues to be focused on advancing our strategy of delivering cleaner and more reliable energy to our customers, with over 60% of our capital spend focused on investments that will support reliability and reduce the carbon intensity of our generation mix. Our solar program and investments in store partnering at Tampa Electric continue to be the 2 largest projects in our 3-year capital program. By the end of this year, Tampa Electric will have over 1,200 megawatts of solar generation on the system, representing 14% of their generation capacity. This will grow to over 1,600 megawatts by the end of 2025. Thanks in part to these investments as well as the very successfully completed Big Bend modernization project. By 2025, we expect less than 2% of our generation at Tampa Electric will come from coal.In addition, this capital plan includes $165 million of investment in battery storage to complement the solar buildout. The value of these investments for our customers is clear. In 2022, solar investments in Florida saved customers around $80 million in avoided fuel costs. And our investments in reliability and storm protection resulted in Tampa Electric's best-ever reliability performance with an impressive 17% increase in reliability metrics compared to last year's results, which were also record best. In Nova Scotia, our capital program continues to be focused on supporting the customer growth we are seeing in the province as well as key investments in the safe and reliable operation of the system. Since 2015, we've increased our annual investment in the transmission and distribution system by over 50%, allowing us to achieve the second-best reliability performance last year for duration and frequency of outages among all comparable utilities in Atlantic Canada and Maine. Similarly, at our gas utilities, the focus on our capital plan is investment in maintaining the reliability and safety of the system as well as investments to support growing customer demand at Peoples Gas. We're also continuing to invest in cleaner energy initiatives like the renewable natural gas projects being advanced in Florida. I mentioned that our capital plan in Nova Scotia is currently focused on the safe and reliable operation of the system. However, we're also working to meet the ambitious federal and provincial clean energy goals for 2030. Last month, the province of Nova Scotia released their clean energy plan, which aligns with one of the pathways within Nova Scotia Power's most recent integrated resource plan, a plan we feel is achievable by the 2030-time line. We're encouraged by this recent progress, and we continue to work with the province and the federal government on the next steps to achieve the climate goals for Nova Scotia. I also wanted to highlight that yesterday, we received a very successful regulatory outcome at Peoples Gas. This rate case outcome will add $107 million in expected revenue for Peoples Gas starting next year, improving its targeted return on equity to 10.15% while maintaining its equity fitness at 54.7%. This was a fully litigated regulatory process that took considerable time and effort by our team at Peoples Gas as well as the intervenors and the Florida Public Service Commission. These are not easy processes, but we landed in a place that has both the best interest of customers and the financial health of the utility in mind. Thank you to everyone involved in getting this over the finish line. Achieving successful and balanced regulatory outcomes is critical to our success, but also to the success of the customers and communities that we serve. The growth opportunities in front of us are as robust as we've seen in decades as customer expectations for cleaner and more reliable energy drive a higher need for capital across the utility industry. However, as you're all aware, the cost of capital across our industry is much higher today than it was even just a few months ago. When we walked you through our financial priorities at Investor Day earlier this year, we were clear that our priority was strengthening the financial position of the company to allow us to deliver on the organic growth opportunities in front of us. Based on the increase in the cost of capital we've seen over the last year, the continued deleveraging and strengthening our balance sheet is even more important. This is why that you will see that select asset sales now form part of our capital investment funding plan. We're working to optimize our portfolio so that we can fund our best growth opportunities and maintain a strong foundation for our business, just as we've done successfully through asset sales in the past. We've been evaluating our portfolio through separate financial and strategic lenses, including value, marketability and opportunities for future growth. We know that redeploying capital into the growth investments of our strongest performing assets will lead to higher quality earnings and cash flows, creating an even stronger Emera that offers the best value proposition for both current and future stakeholders. I'll now turn it over to Greg to take you through our results and to share a bit more of our thinking on the funding plan. Greg?

[Gregory Blunden, executive]

Thank you, Scott, and good morning, everyone. This morning, we reported third quarter adjusted earnings of $204 million and adjusted earnings per share of $0.75 compared to $203 million and $0.76 in Q3 of 2022. Year-to-date adjusted earnings were $634 million and adjusted earnings per share was $2.33 compared to $601 million and $2.27 for the same period in 2022. Operating cash flow before changes in working capital continued to strengthen through the third quarter, and we continue to be pleased that the cash flow challenges from 2022 are fully reversing as we had expected. Operating cash flow increased by 125%, primarily driven by fuel and storm cost recoveries at Tampa Electric compared to under recoveries in 2022. In addition, operating cash flow has benefited from the commissioning of the Labrador Island Link in April of this year, new base rates at 3 of our 4 core utilities and the impact of customer growth and demand across the portfolio. These increases were partially offset by continued interest rate headwinds. Excluding the impact of fuel deferrals and the collection of 2022 fuel and storm costs, we delivered over $1.5 billion in operating cash flow in the first 3 quarters of 2023, representing a 6% growth year-over-year. Looking forward to 2024, we see several levers for continued cash flow growth across the portfolio, including the constructive regulatory outcome we achieved at Peoples Gas, which will drive approximately $107 million in incremental cash flow as well as the already approved rate increases from the Tampa Electric and Nova Scotia Power settlement agreements. In total, new rates of these 3 utilities will drive a combined approximately CAD 300 million in incremental cash flow in 2024. We'll also continue to collect the remaining fuel storm costs at Tampa Electric, which will be completed by the end of next year. And as Scott mentioned, we'll be filing for new rates at Tampa Electric that will also have a meaningful impact in 2025. We have mentioned a few times the impact that higher interest rates are having on our business year-to-date. These rate impacts are impacting both our utility operations and our corporate costs. The impact of higher interest costs on our utilities is transitory. New rates at Peoples Gas, the rate application in New Mexico and our planned filing for new rates to Tampa Electric early next year will incorporate these higher financing costs in rates and will eliminate the drag we're seeing on our 2023 results to date. At the corporate level, our planned financings and asset sales will reduce the exposure to higher rates and position us well in 2024 and beyond. And in the meantime, we have seen rates stabilize since midyear and the year-over-year impact will be moderated going forward. Turning to our quarterly results. Tampa Electric delivered strong results with growth of $17 million in earnings or 10% over the third quarter of last year, driven primarily by new base rates, customer growth and favorable weather. The weakening Canadian dollar increased the earnings contributions from our U.S. operations by $5 million for the quarter. Contributions from our Caribbean utilities increased modestly during the quarter, primarily driven by the impact of interim rates of Barbados Light & Power. Earnings from Emera Energy decreased $5 million compared to Q3 2022, but that was not unexpected. The third quarter is a shoulder season is generally a weak one for Emera Energy. 2022 was nominally driven by high gas pricing and volatility due to geopolitical upheaval. Our corporate costs increased $17 million this quarter, primarily driven by higher interest costs, the timing of share-based compensation and related hedges and realized losses on foreign exchange hedges. Earnings from our Gas & Infrastructure segment decreased $8 million quarter-over-quarter, primarily driven by higher interest and operating costs resulting from continued investment to support customer growth at Peoples Gas. Contributions from our Canadian utilities this quarter was challenged by the impact of post tropical storm led in Nova Scotia Power. Looking forward, as a result of the newly implemented storm rider that was approved as part of our settlement agreement earlier this year, our exposure to costs incurred for this type of storm is now eliminated for the remainder of the year. This means to the extent that we incur additional storm costs for this type of severe weather in the fourth quarter, those costs can be deferred as a regulatory asset with a clear mechanism for recovery. And finally, higher share count decreased adjusted EPS by $0.02 compared to the second quarter of 2022. Year-to-date, adjusted earnings per share increased by $0.06 to $2.23, driven by strong performance from Tampa Electric, favorable foreign exchange movements and higher contributions from Emera Energy, partially offset by higher corporate costs and an increased share count. At Tampa Electric, new rates, sustained customer growth and favorable weather have driven a 4% or USD 14 million increase in contributions year-over-year. Contributions from our Canadian Caribbean utilities increased to combined $8 million year-over-year with earnings from our Canadian equity investments and interim rates of our betas Light and Power, partially offset by higher storm interest costs at North Scotia Power. As I mentioned a moment ago, despite the decrease in contributions for the quarter, year-to-date, Emera Energy's Marketing and Trading business generated CAD 23 million of adjusted net earnings compared to $26 million for the first half of 2022. That $17 million compared to $21 million last year. Emera Energy continues to expect its earnings within its guidance range of $15 million to $30 million this year. Consistent with the quarterly results, higher interest costs and realized losses on foreign exchange hedges and the timing of share-based compensation expense and related hedges contributed to the increase in corporate cost year-over-year. Contributions from our gas utilities decreased modestly, driven by higher interest and operating costs at Peoples Gas, largely offset by new rates and favorable asset management agreements at New Mexico Gas. Finally, higher share count decreased adjusted earnings per share by $0.07 year-over-year. As Scott highlighted, over the next 3 years, we are committed to an $8.9 billion capital plan, driving an annualized 7% rate base growth. Additional investment opportunities in 2025 and 2026 across our portfolio could increase our rate base growth to over 8% annualized. In this higher cost of capital environment, we have a heightened focus on both managing the pace of our capital plan to ease the cost impact to our customers and reduce regulatory lag and the incremental opportunities will be evaluated at the appropriate time through these 2 lenses. Turning to our funding plan over the next 3 years. Our funding plan can be broken down into 4 components. First, we will maximize reinvested operating cash flows, which are expected to contribute 50% to 55% of our funding needs. We are focused on prudently managing our regulatory cadence to reduce regulatory lag during a fair and timely cash recovery on our investments. Secondly, our equity requirements over the next 3 years is expected to be raised through our dividend reinvestment plan, which is expected to raise approximately $250 million to $280 million per year and through our ATM program, a very efficient and cost-effective way to issue common equity. In September, we renewed our base shelf for $600 million, and this will allow us to access the ATM market until the base shelf expiry at the end of 2025. And in addition to our common equity needs, we continue to manage the hybrid and preferred capital portion of our capital structure at approximately 10%, consistent with our targeted capital structure. Thirdly, we will raise debt at each of our operating companies to fund their capital programs in line with the regulated capital structure. The fourth and final component of our funding plan is select asset sales. As Scott mentioned, we recognize that cost of capital today is much higher than it was even a year ago. And as such, we are committing to raise equity through asset sales to help fund the robust growth opportunities in our portfolio, while at the same time, strengthening our balance sheet. We expect this prudent and practical approach to our funding plan will improve the business risk of our portfolio, the strength of our credit standing and the overall value we offer to investors. We have been diligent in developing our capital and funding plans to achieve the key objectives of growing both earnings and cash flow and 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 7% annualized rate base growth through important and needed capital investments in the markets we serve. And now with that, I'd like to turn it back over to Ariane.

[Unknown Executive]

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

[Operator]

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

[Maurice Choy, analyst]

Maybe I could start with the asset sales of up to 15% of the funding plan. Maybe if I could ask you for additional color as to what brought you to the position. I know you mentioned the higher cost of capital environment, but if you could elaborate on that or any other factors beyond that? And as a quick follow-up to that. Once this SCO process is completed, what would you view as a successful outcome be that credit metrics, EPS dilution or accretion, all that stuff?

[Gregory Blunden, executive]

Yes. Maurice, and thanks for the question. So look, the rationale for this, I think you and investors have heard us say many times that we're fortunate enough to have a diverse portfolio with a number of strong and well-performing assets. And within that, as we think about on a regular and ongoing basis, the allocation of capital within and across our business to make sure that we are being disciplined in that allocation of capital, including where that capital is already invested. And so in this market, we see the opportunity for -- I know the word commonly used now is asset recycling, but effectively redeploying some of that existing capital into the higher value growth capital that we see across the business. And when the cost of raising new capital is higher as it is today relative to where it's been in previous markets, it makes the importance of that discipline and frankly, the value of those decisions even higher. So that's really the motivation and reflection that have led us to talking about it this way at this time. And you're right, the objectives, of course, are to ensure that we're doing that to optimize the outcome as we think about impacts on EPS growth, on credit metrics, on payout ratio and we look at all those factors as well as, of course, the strategic, critically important strategic factors as we think about this program and successful outcome of that.

[Maurice Choy, analyst]

And on the discussion about what is the successful outcome, can you help quantify that or even describe what that means? Is it a cushion versus your 12%? What is your successful outcome to be?

[Gregory Blunden, executive]

Yes. So you've heard us say before, our commitment to achieving our targeted threshold credit metrics, but then to create some cushion and that very much continues to be our focus and looking at asset sales really just provides the ability to accelerate -- ensure and accelerate that path.

[Maurice Choy, analyst]

And maybe just to finish off similar on tumor vein. I assume you would have seen a recent rating action by -- on one of your Canadian peers relating to physical asset risks. Thoughts on what that may mean for Emera, and whether the cushion that you're speaking of from potential asset sales will be sufficient?

[Gregory Blunden, executive]

Yes. Maurice, it's Greg. Yes, I don't think the action that you're referring to has much applicability to us. We have a very different physical risk profile in our assets than the peer you're mentioning albeit I should defer to them to respond directly to that. If you think of the implications of that rating action, they would have previous to the action on Friday, they would have had a downgrade threshold of 10.5%. Ours is 10% today. But of course, that downgrade threshold for them was for a rating that was a couple of not just higher than us. So I think it feels from our perspective, and we haven't had any conversations with us to be about any such changes. It feels like it's probably trying to get both us and then probably more in line from a credit profile perspective.

[Operator]

Your next question comes from Robert Hope from Scotiabank.

[Robert Hope, analyst]

Want to go back to the asset sale commentary. Have you started processes here? Or is this more of a 2025 impact, just given the fact that in 2024, where you will get some kind of residual benefit on the actual metrics from storm post and fuel.

[Scott Balfour, executive]

Look, I'm not going to get to telegraph too much into timing, Rob. But I'd say it's a very active file for us as we think about this. That is not new. Obviously, something that we always are thinking about, but I'd just say it's a very active discussion for us, Sam.

[Robert Hope, analyst]

Appreciate that. And then just maybe moving over to Nova Scotia. Can you walk us through kind of your updated thoughts on the pathway to being off coal, just given recent announcements by the province as well as the elastic loop, which appears to be off the table right now?

[Scott Balfour, executive]

Yes. So unfortunately, Peter has conflicted this morning with the public speaking engagement. So he's not able to respond. But yes, so the Atlantic Loop is really not now, not yet as we've been saying for some time, of course, been at the very least with challenge from a timing perspective and now in a place where that is a practical solution to achieve 2030 climate goals is just really not possible. We're thankful for the -- and encouraged that the province has established a clean energy plan that achieves those 2030 climate objectives. That plan is aligned with one of the scenarios from Nova Scotia Power is very detailed work, its integrated resource plan work. This plan, the clean energy plan involves significant more wind resources in Nova Scotia. It involves some great scale battery to support that incremental wind. It involves, of course, continued use of the hydroelectric energy through the Maritime Link that continues to perform well and will involve some fast-acting gas generation in addition to an important reliability transmission tie, a new transmission tie between the province of Nova Scotia and the province of New Brunswick. So those would be the major components of the clean energy plan that is geared and structured to achieve those 2030 goals.

[Operator]

Your next question comes from Ben Pham from BMO.

[Benjamin Pham, analyst]

On the Nova Scotia Power clean plan, the 2030 targets. You have a placeholder for some investments needed there in this CapEx update. Are you able to quantify how much in aggregate you need through 2030 to meet that plan?

[Gregory Blunden, executive]

Ben, it's Greg. I don't have a full amount yet. It's still work that's being done and the timing, of course, a lot of those investments would be outside of our current 2024 to 2026 period. But it's a plan that would have, I'd say, less capital requirements than what the Atlantic Loop would have had. But in terms of how much capital, what years and who's going to invest that capital. For example, we would anticipate a lot of the new wind developments would be based on -- or be funded by independent power producers. So at this point in time, we're still working through those details. And hopefully, in the coming quarters, we'll have a better visibility over the long-term requirements.

[Benjamin Pham, analyst]

Okay. And I know in response to some of the questions around asset sales and the balance sheet. You mentioned a couple of financial metrics you're looking at credit metrics, payout ratio and whatnot. Are you to rank order priorities of those financial metrics? And then that 15% asset sales, is that an enterprise value assumption? Or is it equity consideration you expect?

[Gregory Blunden, executive]

When we talk 15% of our funding requirement spend would be referring to proceeds, net proceeds to give you a sense. How we're thinking about it is it's really funding flexibility. And as Scott mentioned, credit metrics and EPS. We believe that we have some opportunities within our portfolio that will be accretive to our funding flexibility, accretive to our balance sheet and credit metrics and at best, slightly accretive to EPS, but certainly not dilutive to EPS is how we'd be effectively looking at it, but it's premature to get into any more specifics than that.

[Operator]

Your next question comes from Linda Ezergailis from TD Cowen.

[Linda Ezergailis, analyst]

Just wondering if you could help us understand a little bit more in terms of asset sales. How do you think of a partial sale versus a full interest sale in terms of maybe governance and financial complexity of a partial sale versus maybe achieving a higher valuation. Might you potentially increase optionality or bidding tension by putting more assets out for sale than you intend to sell? Or is it more of a targeted process? And can you comment on whether any regulated utilities might be considered, including New Mexico or maybe would contracted assets be more of a focus?

[Scott Balfour, executive]

Linda, it's Scott. So look, I know that the challenge with coming out and saying that we're going to look at select asset sales leads one to start to quickly question exactly which assets and how and I'm going to resist the temptation to get into that for, hopefully, obvious reasons. But I do think that from our perspective, we're looking at this in the context of making sure that the portfolio is set up on a forward-looking basis, continuing to drive the best profile of growth with strong financial footing. As you know, we do have a number of assets in our portfolio that many investors would speculate or maybe less core than others are a little more financially driven than strategically driven. And of course, we think about all those things. But I'm going to resist the temptation to get into specifics about commenting on any specific asset until we're in a position to announce something more formally.

[Linda Ezergailis, analyst]

Okay. Understood. And then maybe just as a follow-up, looking at your 2025 CapEx, it's increased -- the base CapEx has increased. Can you maybe stratify across what is behind that? Is there -- how much of that is inflation versus additional scope and projects versus maybe some moving parts on FX, and what factors and when might we see kind of an upsizing of that to additional CapEx so I would assume that's likely -- just trying to figure out the timing of when you might be adding stuff.

[Gregory Blunden, executive]

Yes. Linda, it's Greg. So we've tried to keep our capital forecast on a constant FX rate. So 130 is what we're using. So we're trying to take out any effective noise as a result of foreign exchange. In terms of what's driving a little bit of the increase in 2025 and 2026, quite frankly, as well. I'd say there's a little bit of inflation. Obviously, we're all experiencing some inflation, but that's not really the main driver for any of it. As Scott alluded to in his comments, we're just seeing an increased demand for capital across all of our business because of customer growth demand for more renewables, demand for stronger reliability. And so the themes that have been driving capital investment in our sector for the last -- arguably, the last decade are just continuing to accelerate. And so it's really those fundamental themes that we're seeing is driving the capital investment. It's capital investment that we need to service our customer growth.

[Linda Ezergailis, analyst]

And maybe just as another follow-up as you look to potentially increase the frequency of your rate applications to eliminate regulatory lag, might there be other levers you would seek to incorporate that you don't already have in terms of riders to maybe recover capital as it's spent more frequently, especially tough visibility to some important programs and initiatives to benefit customers in many ways or other ways to address that lag?

[Gregory Blunden, executive]

Yes. I think you're right on, Linda. Obviously, riders can be an effective mechanism. We use them quite frequently in our U.S. utilities, New Mexico Gas, Peoples Gas and Tampa Electric. They are incredibly effective when they're being used to respond to specific capital investments driven by public policy. So think of the storm protection plan at Tampa Electric and our gas utilities, the replacement of cast iron bare steel pipe that's in the ground. And so taking that learning that it's an effective tool from a shareholder and customer lens to support those public policy-driven investments, we think it makes sense. And so it's obviously something that we've utilized in the past and continue to see if there's an opportunity to expand it as we continue to respond to new government policies.

[Operator]

Your next question comes from Richard Sunderland from JPMorgan.

[Richard Sunderland, analyst]

I wanted to dig in a little bit more to the FFO side. Looking back to 2Q and the $2.1 billion target and the walk you had in the deck there. Could you speak a little bit more to trends on a year-to-date basis outlook for the fourth quarter? And I guess, expand a little bit upon your remarks on what you're seeing into 2024 here as well?

[Gregory Blunden, executive]

Yes, Richard, thank you. Yes. Certainly, we've been obviously very pleased with how the performance of cash flow has been for the year. We would have said on a normalized basis, we are targeting 11.5% with, I think, the expectations of at least one rating needs to be more in the 11% to 12% range. We're probably more towards the lower on a trailing 12-month basis, probably more like 11% at this point in time. And really, a lot of the progress we've made and the execution of things we've done has been partially offset by obviously higher interest costs that wouldn't have been expected a year ago. As we sit here today, if we were to take our failing 12 months and put it into, as an example, Moody's base methodology that would put us probably, we think, at around 11.5% to 12%, although we know there's obviously adjustments that get made to that up or down on any given year. So we're feeling pretty good about that, which is really why at this point in time, we're really transitioning our focus on 2024 and beyond. And that means refiling the ATM shelf and starting to access the ATM market, the contemplation of asset sales as part of that funding program and making sure we're incredibly disciplined on the timing and filing of rate cases. And so obviously, the Peoples Gas outcome is very positive '24. As both Scott and I alluded to, we'll be filing for new rates in Tampa Electric likely in the first quarter of next year for 2025 and New Mexico as filed. So the levers that we have in front of us, the path in front of us just reconfirms our confidence in getting the 12% in 2024 as planned.

[Richard Sunderland, analyst]

Got it. Very helpful. And maybe just to unpack that final bit a little bit more. With the asset sales in that 2024 and beyond look, is that all incorporating the full 15% level of the asset sales? Does part of that 15% contemplate any of the incremental CapEx you laid out today, I guess, maybe even to take a step back, how do you think about funding that incremental CapEx overall?

[Gregory Blunden, executive]

Yes. I think it goes back to Richard comment I made a couple of questions ago for another analyst. First of all, it provides incredible amount of flexibility. And that's flexibility on credit metrics and flexibility on funding. And both of those things will then allow us to be better positioned to capitalize on those incremental growth opportunities if, in fact, they are realized in the '25 and '26 period. So we're really positioning ourselves to be able to capitalize on those in a prudent way in '25 to '26.

[Operator]

[Operator Instructions] Your next question comes from Mark Jarvi from CIBC Capital Markets.

[Mark Jarvi, analyst]

Just in terms of the asset sales, it kind of implied that there's probably some different candidates you could even look at selling. Just wondering whether you could upsize the scope of the asset sales? Or why wouldn't you upsize the scope of asset sales to minimize the amount of needs on the ATM as you look forward?

[Gregory Blunden, executive]

I wouldn't say that we precluded that. It's always going to be a combination of what we think makes strategic sense and positions our portfolio in the best possible way going forward. Obviously, market interest valuations play a role in that as well. But we haven't necessarily precluded anything in terms of the scope of what we might be looking at, at this point in time.

[Mark Jarvi, analyst]

And just to clarify on that, Greg, if you did the 15% of the asset sales, that still requires you to do the roughly $250 million to $300 million annually on the [indiscernible]?

[Gregory Blunden, executive]

Yes. I don't think we see much of a change in that part of the funding plan, Mark. And I say that because I think as everybody knows, we're in an industry that's a negative free cash flow industry. And you can't continue to grow at 7% to 8% rate base growth to having some equity requirements over the period, and we think it's a prudent way to raise the equity to fund that capital growth in our business. So I suspect the ATM means maybe some years that we don't need to lean into it to the extent we've laid out. But I think over the entire period, I think it will remain part of our funding plan.

[Mark Jarvi, analyst]

And then just going to the last question, Richard asked about the upside and funding for incremental investment. So if I think about this right, 7-ish percent rate base growth, but then if you sell some assets, you lose rate base or maybe down to 6.5% rate base growth. Would your view then be that you would then pursue more aggressively some of those incremental investments and get yourself back to 7% rate base growth? Or am I thinking the right way to think about the net rate base growth more of 6.5% over the next 3 years?

[Gregory Blunden, executive]

Well, I'll leave it up to you to decide whether if you sell something, whether you take it out of the base or not. But our focus -- you can see 75% of our capital investment is in the state of Florida. And so as we think of the portfolio going forward I don't think the math is going to move quite as much as you may be calculating right now. Or maybe said another way, Mark, there's assets in our portfolio that are financial assets as an example, that actually are not growing at all today. And so you have to think about those kinds of things as well.

[Operator]

Thank you. There are no further questions at this time. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines. Thank you.