Fortis - Q4 2022

Transcript

Operator (participant)

Welcome to the Fortis 2022 Annual Earnings Conference Call and Webcast. At this time, I would like to turn the conference over to Stephanie Amaimo. Please go ahead, Miss Amaimo.

Stephanie Amaimo (VP of Investor Relations)

Thanks, Laura, good morning, everyone, and welcome to Fortis' Q4 and Annual 2022 Results Conference Call. I'm joined by David Hutchens, President and CEO, Jocelyn Perry, Executive VP and CFO, other members of the senior management team, as well as CEOs from certain subsidiaries. Before we begin today's call, I want to remind you that the discussion will include forward-looking information, which is subject to the cautionary statement contained in the supporting slideshow. Actual results can differ materially from the forecast projections included in the forward-looking information presented today. All non-GAAP financial measures referenced in our prepared remarks are reconciled to the related US GAAP financial measures in our annual 2022 MD&A. Unless otherwise specified, all financial information referenced is in Canadian dollars. With that, I will turn the call over to David.

David Hutchens (President and CEO)

Thank you, good morning, everyone. 2022 was a great year for Fortis. Our utilities invested CAD 4 billion of capital for system resiliency and modernization and to interconnect cleaner energy to our systems. These investments translated into strong earnings and rate-based growth, demonstrating the value of our organic growth strategy and supporting our roughly 6% dividend increase in 2022. On the sustainability front, we reduced our 2022 annual greenhouse gas emissions by 28% since 2019, keeping us on track to reach our carbon reduction targets. As part of their annual Board Games report, The Globe and Mail ranked Fortis number ONE among 226 companies in the S&P/TSX Composite Index for good governance, reflecting our board's commitment to best-in-class practices.

Most importantly, we remain focused on delivering safe and reliable service to our electric and gas customers across our North American utilities. These are the core tenets of our value proposition. At Fortis, we keep these at the forefront as we mitigate and respond to the impacts of climate change. While our reliability metrics continued to outperform industry averages in 2022, our utilities remain committed to investing in their energy systems to better withstand the increasing frequency of severe weather events. With the backdrop of inflation reaching 40-year highs, our teams have successfully managed average annual increases in controllable operating costs per customer to approximately 2% over the past five years by finding efficiencies through innovation and process improvements.

While we have limited ability to control energy commodity costs that are passed through directly to our customers in some jurisdictions, we are helping our customers manage their bills by extending recovery periods and through energy efficiency and payment assistance programs. Over a 20-year timeframe, Fortis has delivered average annual total shareholder returns of approximately 11% or 751% in total, well above the benchmark indices shown on the slide. While our one-year total shareholder return for 2022 was below our historical average returns, we expect to continue to deliver stable and compelling returns over the long run. At Tucson Electric Power, the closure of our last unit at the San Juan Generating Station removed another 170 MW of coal-fired generation from our portfolio and contributed to our 28% reduction in Scope one emissions compared to 2019 levels.

With this progress, we are more than halfway to achieving our target to reduce greenhouse gas emissions 50% by 2030 and are on track to meet our 2035 target of 75% reduction. Upon achieving that target, we expect our assets will be primarily focused on energy delivery and renewable carbon-free generation. Last year, we also established a 2050 net zero Scope one greenhouse gas emissions target, reinforcing our long-term commitment to decarbonize while ensuring we preserve customer reliability and affordability. In the Q4, we rolled out our new CAD 22.3 billion 5-year capital plan, our largest to date. The plan consists of virtually all regulated investments and a diverse mix of highly executable projects supporting rate-based growth across our portfolio of utilities. It also includes CAD 5.9 billion for investments that directly support cleaner energy.

Over the next five years, we expect rate base to increase by CAD 12 billion from approximately CAD 34 billion in 2022 to over CAD 46 billion in 2027, supporting average annual rate base growth of 6.2%. From a growth perspective, our teams continue to pursue opportunities beyond the base plan. Key areas of focus include incremental investments supported by the Inflation Reduction Act in the US, climate adaptation and grid resiliency, as well as LNG and renewable fuels. Progress also continues on MISO's Long-Range Transmission Plan. As we previously discussed, ITC anticipates transmission investments in the range of $1.4 billion-$1.8 billion US dollars through 2030 for Tranche one. ITC currently has $700 million U.S. dollars of this estimate included in their five-year capital plan. Tranche two is well underway with the initial concepts identified by MISO in late 2022.

The second Tranche will look at a new future dubbed 2A, which calls for more renewable penetration and higher electricity demand. While it is still early in the planning process, MISO board approval of Tranche two projects is targeted for the first half of 2024. The Inflation Reduction Act is expected to support TEP's clean energy transition by reducing the cost of new renewables and providing funding to aid the communities impacted by the exit from fossil fuels. The TEP team continues to work through its all source request for proposals, which seeks to secure renewables and energy storage to support their transition away from coal. In total, we estimate incremental investments of approximately $2-$4 billion through 2035 will be required to implement TEP's current integrated resource plan. TEP expects to file an updated plan later this year.

Turning to slide 10, we increased our dividends paid per common share to CAD 2.17 in 2022, up approximately 6% from 2021, marking 49 consecutive years of dividend increases. Looking ahead, we remain committed to building on our track record through the execution of our organic growth strategy that supports our 4%-6% dividend growth guidance through 2027. I will turn the call over to Jocelyn for an update on our Q4 and annual financial results.

Jocelyn Perry (Executive VP and CFO)

Thank you, David. Good morning, everyone. Before I get into the annual results, I want to briefly touch on our Q4 performance. Reported earnings were CAD 370 million or CAD 0.77 per common share, CAD 0.08 higher than the Q4 of 2021. Adjusted earnings were CAD 347 million or CAD 0.72 per common share, CAD 0.09 higher than the Q4 of 2021. The key drivers of growth include strong regulated rate base growth across our utilities, as well as higher sales and transmission revenue in Arizona. Higher hydroelectric production in Belize, which was up significantly from historically low levels in the Q4 of 2021, and higher gas margins at Aitken Creek also contributed to earnings growth. Finally, foreign exchange favorably impacted the translation of our US-denominated earnings during the quarter.

Corporate costs for the quarter reflect higher finance costs and taxes. On an annual basis, reported earnings were CAD 1.3 billion or CAD 2.78 per common share, CAD 0.17 higher than 2021. Adjusted earnings for 2022 were also CAD 1.3 billion or CAD 2.78 per common share, as the adjustments to reported earnings offset one another in 2022. Adjusted earnings per common share of CAD 2.78 represent 7% growth or approximately 6% absent foreign exchange impacts. The waterfall chart on slide 14 provides the annual EPS drivers by segment. While there were several market factors impacting our 2022 results, underlying growth from our regulated utilities was the primary driver of year-over-year growth. Our largest utility, ITC, increased EPS by CAD 0.07, again reflective of strong rate base growth.

Lower stock-based compensation costs at ITC in 2022 were substantially offset by losses on investments that support retirement benefits, higher non-recoverable finance costs, and gains recognized on interest rate swaps in 2021. The CAD 0.07 EPS increase for Western Canadian utilities was driven by rate base growth. The increase in EPS of CAD 0.06 for our US electric and gas utilities was mainly driven by UNS. In Arizona, higher sales and transmission revenue more than offset higher costs associated with rate base growth not yet included in customer rates. Higher operating expenses and losses on investments supporting certain retirement benefits. Our energy infrastructure segment contributed to a CAD 0.05 EPS increase, mainly driven by higher gas margins at Aitken Creek. Rate base growth and higher electricity sales in Eastern Canada and the Caribbean contributed a CAD 0.03 increase in EPS compared to 2021.

Foreign exchange favorably impacted the translation of our US-denominated earnings, which increased annual EPS by approximately CAD 0.06. The EPS change in corporate of CAD 0.11 was mainly driven by mark-to-market losses on both total return swaps and foreign exchange contracts, as well as higher finance costs. The remaining decrease was largely related to increased corporate costs and taxes. As a note, the mark-to-market losses in the corporate segment was more than offset by the favorable foreign exchange impact just discussed and lower stock-based compensation recognized across the utilities in 2022. Lastly, with our dividend reinvestment program, EPS decreased CAD 0.04 due to higher weighted average shares outstanding. As you can see on slide 15, we were active in the capital markets again in 2022, issuing over CAD 3 billion in long-term debt.

Debt issued at Fortis Inc ITC Holdings mainly refinanced maturing debt, while our regulated utilities issued debt in support of their capital programs. Debt maturing at Fortis and ITC Holdings averages approximately $400 million US annually through 2025. With our recent debt issuances, coupled with almost CAD 4 billion available on our credit facilities, we continue to maintain a strong liquidity position supporting our CAD 22.3 billion capital plan, as David mentioned earlier. Despite several macro headwinds in 2022, we saw an improvement in our credit metrics and achieved a cash flow to debt ratio of 11.7%. When we consider the import of foreign exchange, the ratio is actually 12%. Our credit metrics, coupled with Fortis' low business risk profile, continue to support our investment-grade credit ratings. Turning to some of our ongoing regulatory proceedings since we last updated the market.

At ITC, FERC issued an order in November denying the complaint filed by the Iowa Coalition for Affordable Transmission, which sought to lower ITC Midwest's equity ratio. We also await next steps from FERC on the MISO Base ROE and supplemental NOPR on transmission incentives. The timing and outcome of both proceedings remain unknown. In Arizona, TEP's rate case is ongoing. In its application, TEP requested rate base of $3.6 billion, an allowed ROE of 10.25%, and equity layer of 54%. Arizona Corporation Commission staff have recommended a 9.6% allowed ROE with rate base and equity layer largely consistent with TEP's request. Rebuttal testimony is expected to be filed over the next month, with hearings scheduled to commence in late March.

Last month, Central Hudson filed a response to the New York Public Service Commission show cause order regarding the deployment of the utility's new customer information system. Central Hudson has devoted significant resources to rectify matters with the system and are making strong progress in resolving any remaining billing issues. The timing and outcome of this proceeding remains unknown. At FortisBC, the Generic Cost of Capital proceeding remains ongoing, with a decision expected in the second quarter. Lastly, the Alberta Utilities Commission issued a final decision in December approving FortisAlberta's 2023 revenue requirement, reflecting a 5% increase in distribution rates. The decision is expected to form the basis for going-in rates for the third PBR term starting in 2024. With that, I will now turn the call back to David.

David Hutchens (President and CEO)

Thank you, Jocelyn. To recap, in 2022, we invested CAD 4 billion in capital, delivered strong EPS and rate base growth, further reduced our carbon emissions, managed operating costs, and were recognized as a leader in Canada for our governance practices. These accomplishments wouldn't be possible without the continued commitment of our 9,200 people. Moving forward, we are focused on executing our CAD 22.3 billion capital plan, which will drive rate base growth of 6% and support our dividend growth guidance of 4%-6% through 2027. That concludes my remarks. I will now turn the call back over to Stephanie.

Stephanie Amaimo (VP of Investor Relations)

Thank you, David. This concludes the presentation. At this time, we'd like to open the call to address questions from the investment community.

Operator (participant)

Thank you. Your first question comes from the line of Maurice Choy from RBC Capital Markets. Please go ahead.

Maurice Choy (Managing Director and Senior Equity Research)

Thank you and good morning. My first question. Dave, you mentioned in your prepared remarks that there is an incremental spending of $2-$4 billion, through 2035 to implement the current TEP IRP, although there is a new plan due later this year. How would you characterize the impact of the IRA on this spending? Is it a case where the amount is likely not change or go up, or is it a case where the mixes or projects will change? Also on timing, is there a way that you can accelerate the decarbonization projects?

David Hutchens (President and CEO)

Yeah. Thanks, Maurice, for that question. Actually, it might be a little of everything, and that's what we're doing. The Integrated Resource Plan update now is to figure out exactly what that means from a timing perspective, investment opportunity perspective, as well as, you know, costs that are associated with the renewable energy investments that we have to make to keep on that transition path that we have there. I'll have to say that probably one of the biggest benefits of the Inflation Reduction Act is that those tax credits, not just that there are those tax credits, but that those tax credits are transferable. I think that really levels the playing field between utility investments and PPAs. You don't have to, you know, find some fancy way of finding the tax equity, et cetera.

In all things, being equal, I think that's another notch in the column for doing more utility-owned and utility constructed renewables.

Maurice Choy (Managing Director and Senior Equity Research)

Maybe just to follow on to that, you obviously have a new chairperson within the Commission there. Any thoughts about, you know, changes in how the Commission or Chair looks at things in terms of affordability in terms of decarbonization?

David Hutchens (President and CEO)

Not right out of the gate. I'll maybe turn that over to Susan to see if she has any opinions after or initial conversations with the new commissioners there at the Arizona Corporation Commission. It is, you know, obviously after the election, we've got two new commissioners, and we're looking forward to, you know, getting our cases adjudicated before them. I'll turn it over to Susan to answer that in a little more detail.

Susan Gray (President and CEO)

Okay. Thanks, Dave, and thanks, Maurice, for the question. Yeah, I do think it's early to tell how our new composite of commissioners will affect policy this year. We do have a new chair, Commissioner O'Connor. Do have two new commissioners. We've actually met with the new commissioners. They came down to Tucson last month, which I think is a really good sign that they're interested in understanding our operations. They wanted to see our generation fleet. They wanted to see our control room where we, where we participate in the energy and balance markets. I think just a greater understanding of our business will always lead to better outcomes we really pride ourselves in having strong relationships with our Commission and that trend is continuing with these new commissioners.

I do think in terms of policy, it's pretty early to tell how the new Chair and the new commissioners will impact policy.

Maurice Choy (Managing Director and Senior Equity Research)

Great. Thanks for that. Maybe I'll just finish off with FERC matters. There are obviously a number of regulatory items that remain outstanding. How do you see these getting resolved with the four-member FERC makeup being what it is right now? Maybe as a quick follow-up, thoughts on the MISO base ROE. What are you booking in right now? If there's a possibility of proactively requesting and justifying for a higher rate?

David Hutchens (President and CEO)

Yes. Thanks, Maurice. I think we've talked about this in the past on, you know, it's really tough to see where some of these policy decisions are gonna land and how it's gonna be executed with a 2-2 commission, two Republicans and two Democrats, and seeing how that how the commission functions under the new interim chair, Chair Phillips. We do think that based on Chair Phillips' comments, that he's really gonna be pushing down the same path to get some of these policy issues that are in the NOPRs, the transmission planning and cost allocation NOPRs, as well as the interconnection queue NOPR.

It seems like he's really gonna continue to progress those has a big, strong focus on reliability, as you might imagine, from his history, working for NERC, but also on, you know, making sure that, there's, you know, there's energy equity and energy justice, involved in some of these decisions as well.We're looking forward to seeing him move forward on those dockets. On the ROE, I'm actually gonna turn that over to Linda Apsey, our CEO of ITC, 'cause she can explain exactly her thoughts on that.

Linda Apsey (President and CEO)

Great. Yeah. Thanks, Dave, and thank you, Maurice, for the question. Yeah, we continue to book basically and assume the 10.77% all-in ROE. It's obviously, it's premature, it's speculative to know or understand what FERC might do as a result of the court remand of the base ROE case. We are continuing forward, you know, with the current ROE projections. With regards to, you know, possibility for, you know, sort of a new Section five filing, to file for a new ROE, that's certainly something that we continue to track and monitor, as we continue to track, you know, you know, sort of the mark-to-market rates.

Obviously, you know, we are, you know, providing FERC with the appropriate sort of time, if you will, to respond to the court remands. We are continually in discussions and assessing our options with respect to, you know, whether we would move forward with a new updated 205 filing. At this time, that decision has not been made by the MISO transmission owners.

David Hutchens (President and CEO)

Thanks, Linda. I'd just add, too, that directionally, obviously with the data that would be updated in any new ROE filing, the current data and higher interest rates would be supportive of a higher ROE than the data that was used to set these prior ROEs back that data's six, seven, eight years old.

Maurice Choy (Managing Director and Senior Equity Research)

That makes sense. Thanks for the color.

David Hutchens (President and CEO)

Thanks, Maurice.

Operator (participant)

Thank you. Your next question comes from the line of Rob Hope from Scotiabank. Please go ahead.

Rob Hope (Managing Director of Equity Research)

Morning, everyone. Appreciate the thoughts on the Tucson rate filing. I was hoping you could maybe dive a little bit deeper. When you take a look at the staff testimony or the staff recommendation, you know, aside from the ROEs is there anything that, you know, gives you pause for concern? How have conversations gone with other stakeholders, although that may be a little bit early, just given when the evidence is due?

David Hutchens (President and CEO)

Yes, I'm gonna kick that over to Susan Gray, who I didn't probably properly introduce. I just introduced her as Susan. You all likely know Susan Gray is the CEO of UNS Energy. I'll kick it over to her to give you some insight on where we see that rate case going.

Susan Gray (President and CEO)

Sure, yeah. Thank you for the question, Rob. I think your question was, do we have any concerns based on what staff filed? I think that.

We think that what they filed was largely in line with our initial filing. We think that there's a pretty small gap between their testimony and ours. We're still in the rebuttal phase, so the rebuttal testimony is due next week. We're optimistic that we can reach some stipulations through this process and go into the hearings, which start March 29th in a pretty good position in terms of agreements with staff and other major interveners. We have not had significant conversations with the other interveners at this time. You know, I think there was a precedent set with the stipulations that were agreed to by staff and Southwest Gas in the Southwest Gas rate case that recently was settled.

We're hopeful that we can also work with staff to get to some stipulations prior to the hearing.

Rob Hope (Managing Director of Equity Research)

All right. Appreciate that.

David Hutchens (President and CEO)

Thank you.

Rob Hope (Managing Director of Equity Research)

Moving north, can you give us some updated thoughts on the build-out of LNG at Tilbury? You know, you were able to get some First Nations agreements there recently. However, the regulatory framework is still, you know, slow and ongoing.

David Hutchens (President and CEO)

Yeah, Rob, that's great. Actually, I'm gonna kick this right over to Roger Dall'Antonia. He's been working on some of these agreements as recent as last week, he's got the most recent updates. Roger.

Roger Dall'Antonia (President and CEO)

Thanks, Dave. Good morning, Rob. On Tilbury, there's two primary regulatory processes. One is the environmental assessment on the jetty, which is the infrastructure to allow for filling of bunkering barges to fuel marine vessels. The second is the environmental assessment for the build-out of the Tilbury site, including a storage tank and additional liquefaction. In both instances, the environmental assessment office, there's obviously significant focus on Indigenous support for those projects. The deals that we've been announcing recently primarily focus on the jetty process that's currently now with both the provincial and federal environmental assessment offices for referral. We're hoping to see a decision on the jetty sometime in the next few months.

The environmental assessment process for the Tilbury build-out tank and the further liquefaction is in the stage of preparing the detailed application working with the environmental assessment process in scoping out the application, as well as considering how to engage Indigenous communities to have Indigenous-led environmental assessments as part of the process.

Rob Hope (Managing Director of Equity Research)

Appreciate it. Thanks.

Roger Dall'Antonia (President and CEO)

Thank you.

David Hutchens (President and CEO)

Thank you.

Operator (participant)

Thank you. Your next question comes from the line of Linda Ezergailis from TD Securities. Please go ahead.

Linda Ezergailis (Managing Director of Equity Research)

Thank you. I'm wondering if you could give us a sense of how you view the relative attractiveness of different financing options with the filing of your short form base shelf prospectus. Wondering where pref shares sit in terms of your levers to finance either your current capital plan or if you choose to maybe accelerate some of the decarbonization initiatives and add to the current plan. Can you talk about also your capacity to add new projects to the current plan before considering other levers like discrete common equity?

Jocelyn Perry (Executive VP and CFO)

Thank you, Linda. This is Jocelyn. Yeah. So with pref, yeah, it's certainly a part of our toolkit today. We're always watching that market. When we laid out the 5-year capital plan in the fall, right, it was a pretty simple funding plan that we had for that CAD 22.3 billion capital. No discrete equity, just a DRIP. And most of the debt is at the regulated entity. At Fortis Inc, pref certainly will be a part of the equation, and we're looking at all sources, right, of funding. Very, very simple, and we expect to keep our balance sheet where it is. From a capacity perspective, you know, I actually. Clearly, it depends on DRIP participation, which remains quite healthy, thus far. It really gonna depend on the timing of any additional capital, right?

I mean, if for some chance that we advance for the LRTP projects, or I'm just choosing those as an example, or the investments in Arizona, you know, it's possible that, you know, we'll go back to the drawing board. I actually feel there's certainly a bit of capacity in our in our plan today, so it's not no immediate need that if we see some, you know, variances from our annual plan right now that we'll be able to handle it. If in fact, we see a material change, then, as I always say, I guess we go right back to the drawing table, and everything goes back on the table. We do have a bit of capacity in our funding plan today.

Linda Ezergailis (Managing Director of Equity Research)

Thanks, Jocelyn.

Jocelyn Perry (Executive VP and CFO)

I do expect more green financings. Linda, I do expect more green financings coming out of our subsidiaries. We're seeing more and more green financings because we're getting more and more involved in cleaner energy investments. I do expect to see that trend to continue as well.

Linda Ezergailis (Managing Director of Equity Research)

Thank you. Appreciate the context. Maybe just on the flip side of the equation, recognizing that affordability is at the forefront in many jurisdictions. You know, what are the thoughts on potentially deferring other discretionary capital to the extent that Fortis and its subsidiaries choose to accelerate green initiatives? What sort of forbearance is there at the rating agencies to continue to kind a defer recovery of those expenses as kind of the customer bill pressures, one of the levers as well to consider?

David Hutchens (President and CEO)

I'll start that answer, Linda. I think on deferring capital, we don't see that as necessary on a going forward basis. You have to remember that, you know, not all capital immediately either contributes to rate increases or even shows up in rate increase. We always like to prioritize our capital based on doing that capital first that saves our customers money. You know, the old CapEx for OpEx kind of trade. Even the resource transition that we're doing down in Arizona as we shut down a coal plant and remove the fuel and O&M and replace it with investments in infrastructure. It's a good story for customers, investors, and the planet. Those are the things that we're really focused on.

We can't slow down the necessary investments that we need to make in reliability and resiliency. In fact, those are ones that we probably need to step up more on a going forward basis to make sure that our systems are ready to handle more severe weather events going forward. That's kind of on the capital side. Now, on the cost control side, that's something that we're always focused on. We know that, you know, every dollar that goes in there, we wanna figure how much of that we can offset with other costs. That's really, you know, things that we can do across the board.

We start with, you know, obviously managing our capital, managing our expenses, looking at innovation and efficiencies as best we can. We look at the entirety of the bill, what our customers use, focus on energy efficiency conservation programs. We focus on, you know, in our vertically integrated utilities on how we dispatch that energy to maximize the benefits of being in the markets for our customers. At the end of the day, as you, as you alluded to, we have to find a couple things for assistance for our customers. One is, you know, federal or state assistance to help them pay their bills if they're, if they're struggling, which is something that we always do and obviously step up even more so in hard economics times like we're focused, or like we're in today.

We also look at ways that we can, you know, in essence use our balance sheet when we need to use our balance sheet to spread out some of these cost recoveries and smooth the bill impacts for our customers. Those are things that we have done in the past and will likely do going forward just to help manage our affordability and the impacts on our customers.

Linda Ezergailis (Managing Director of Equity Research)

Just to clarify, the debt rating agencies, have they communicated kind of any sort of notional limit to how the balance sheet can be used to smooth out bill impacts? Or is that de minimis in the grander scheme of things with them?

Jocelyn Perry (Executive VP and CFO)

Linda, this is Jocelyn. No, they have not, you know, specified down to that detail. We have conversations with them, of course, about, you know, how we plan to fund the capital program and how, you know, we see recovery. Affordability is clearly a part of that discussion, but they've not defined any boundaries by which, you know, we can execute and fund the capital program.

Linda Ezergailis (Managing Director of Equity Research)

Thank you. I'll jump back in the queue.

Operator (participant)

Thank you.

David Hutchens (President and CEO)

Thanks, Linda.

Operator (participant)

Your next question comes from the line of Mark Jarvi from CIBC Capital Markets. Please go ahead.

Mark Jarvi (Managing Director and Senior Equity Analyst)

Thanks. Good morning, everyone. I just wanted to talk about the sort of longer-term or interim growth prospects at ITC. Right now, you know, the, you know, five-year plan, you're looking around 6% rate base growth. As you look into sort of long-term planning prospects there, 2A, you talked about, David. You know, expectations around maybe seeing a higher growth to the back half of a decade. We're seeing some other transmission companies in MISO growing north of 8%. Is that something you guys think you could achieve as you move through these planning processes?

David Hutchens (President and CEO)

Mark, that's a great question, and it's early days for that right now. I think, you know, as we put out our five-year capital plan, I mean, that just went to press last fall, right? We immediately then start on the next one. We try to see how far out we can look on these investment opportunities. The long-range transmission planning process is a long process, and it's, you know, obviously early days in Tranche two. We like what we see in the early days, but we have no idea where that's all gonna land. You know, we won't for a bit longer. We don't expect those, you know, those final projects to really be approved by the MISO board until the middle of next year.

You know, we'll have more information each quarter as we go along and as that process proceeds. It's really hard to see how much and where those will fill in the out years. Even in the Tranche one that we have, we have less than half of our estimate in the next four years with the remaining part really in the following three years. We can kind a see how that's stacking up. Beyond that, it's just this layering effect of additional transmission projects, where they go and how they can be supported, the timing for permitting and siting, et cetera. It's too early to really give you anything other than directionally, we think that there's gonna be a fair bit more transmission.

Well, I'll say not just in MISO. Directionally in the United States, and I will say in North America, we will see a much more robust investment thesis on transmission. We see the Inflation Reduction Act and how that is driving, you know, the ends of this conversation, the generation transition, the renewable energy, clean energy of any kind. Of course, on the demand side, looking at electrification, manufacturing, et cetera. Well, you know, we have to make sure that we're focused on the middle part, which is the transmission and distribution that's between those two, and that's the investment that we think is really gonna be taking off here going forward we just can't put numbers on it, but we do know directionally it should be up.

Mark Jarvi (Managing Director and Senior Equity Analyst)

Okay. Maybe coming at it from a bit of a different direction. Are there any elements of ITC's footprint, age of the assets, capacity availability right now that would constrain, I guess, the upside case, relative to other transmission operators in the region? Whether it's more challenging permitting or siting in terms of where you operate right now?

David Hutchens (President and CEO)

No, there's, you know, I don't see any reason that ITC would be challenged any more than anyone else is to build transmission. In fact, I might say and, you know, pat that team on the back and say that they're probably the best transmission planning and development team out there. If there's ways to do it. They've got a great footprint too, right? I mean, they're in MISO, and MISO is basically wind alley and even solar alley to some extent. The ability, the number of projects, particularly as you look at the planning process that's going on in MISO and our expertise, in my view, should put us, you know, ahead of the curve.

Mark Jarvi (Managing Director and Senior Equity Analyst)

Okay. That's good to hear. Just turning to Central Hudson in terms of the customer information system. Are you guys able to at all give any color in terms of potential range of outcomes, and if it's just sort of one-time penalties you might be faced, or if there's other sort of more, I guess, recurring pressure in terms of earnings profile at Central Hudson might come out of this proceedings?

David Hutchens (President and CEO)

No, it's hard to say what's gonna come out of the proceeding. We answered the show cause order there, and now we'll have conversations with our regulators and try to figure out where this is going. Most of the O&M impacts that we have seen in 2021 and 2022 were to get the system, you know, to where it needs to be. We continue to make the additional changes and adjustments and tweaks to that system as we go to make sure that it's, you know, we got to get to the point where it's ultimately operating as designed, which we think we're getting close on.

We won't see the ongoing O&M drag that we saw the last couple of years. As far as penalties, that's hard to figure out now. I think we have got a good response to that show cause order, and we just need to explain the situation and get ahead of it.

Mark Jarvi (Managing Director and Senior Equity Analyst)

Got it. Thanks for the time.

Operator (participant)

Thank you. Your next question comes from the line of Ben Pham from BMO. Please go ahead.

Ben Pham (Managing Director of Equity Research and Energy Infrastructure)

Hey, thanks. Can you hear me okay?

David Hutchens (President and CEO)

Yeah, Ben, we can hear you.

Ben Pham (Managing Director of Equity Research and Energy Infrastructure)

Okay, great. I was wondering on your electric versus gas mix, how do you think that mix changes or will change over the next five years? Then do you have an internal target of where you want to be once the CapEx program to this current CapEx program is complete?

David Hutchens (President and CEO)

No, we don't have like a ongoing mix other than what you can see clearly in our five-year capital plan and the level of investments that we see there. In fact, FortisBC is still a very growing utility, and I think for all the right reasons. There's not just the natural gas service territory that they have there, but some of the LNG investments they're making to help reduce greenhouse gases in other people's neighborhoods. It's a great asset for us to have and still has very strong growth. We don't have any designs of changing, you know, on purposely changing that mix on a going forward basis.

Ben Pham (Managing Director of Equity Research and Energy Infrastructure)

Okay, great. Can you share for 2022, on the realized returns, was any utilities that, you know, are earning below the allowed ROE?

David Hutchens (President and CEO)

Yeah, I don't know. I don't have that at my fingertips. I don't have that handy. Obviously, when you look at regulatory lag cycles, just, you know, I'll just say philosophically, what you would see, like in Arizona is that you probably wouldn't be quite earning your return right as you're getting into, while you were in rate case, 'cause after a few years of lag, you'd see a dip but I actually don't have those numbers at my fingertips.

Ben Pham (Managing Director of Equity Research and Energy Infrastructure)

Okay. Maybe lastly on your, you have this, your maturity schedule on the debt, and you break up between non-reg and regulated. That's quite useful. Do you expect to recover the interest rate change in the regulated maturing debt and rates?

David Hutchens (President and CEO)

Yes, Ben. That'd be a part of our rate report proceedings, right, for our utilities. Some of our utilities have mechanisms that track it, but it certainly will be a part of the rate case.

Linda Apsey (President and CEO)

We've not had any issue in front of the regulator recovering these types of costs. We're not anticipating any problems going forward.

Ben Pham (Managing Director of Equity Research and Energy Infrastructure)

Okay. Perfect. Okay. Thank you.

David Hutchens (President and CEO)

Thanks, Ben.

Operator (participant)

Thank you. Your next question comes from the line of Richard Sunderland from J.P. Morgan. Please go ahead.

Richard Sunderland (Equity Research – North American Utilities and Power)

Hi, good morning, and thank you for the time today. I wanted to circle back to MISO in this Future 2A. Can you speak a little bit to what this refreshed scenario considers versus the old Future two, and how that's translating to the early stages of the Tranche two process versus, I guess, what you were witnessing at this point in time for Tranche one?

Yeah. I don't know the exact tweaks between what they did to Future 2 to make it Future 2A. Just to be clear though, I mean, the first tranche, Tranche one, was based off of Future one, which was the kind of lowest level of electrification and the probably lowest level of resource transition and renewable integration. Future two, which was in the middle, obviously Future three was the one that was the fastest on both of those. And if you remember historically, and this is data that is now a couple years old, they put, you know, kind of price tags on those different futures of $30 billion for Future oneand up to $80 billion for Future three.

David Hutchens (President and CEO)

Future two in the middle, I never had a number on exactly what that future, investment, portfolio would look like. You know, it's, you know I don't know if it's quite halfway there or not, but I don't know the exact adjustments that were made. I Maybe Linda has a little bit additional color on what 2A includes, that she could share.

Linda Apsey (President and CEO)

Yeah, Dave. They have not yet released specifically their updated assumptions in 2A. However, we do know directionally it's being updated to assume a greater level of renewables penetration, to update for utilities' carbon reduction goals, as well as increased load projections based on electrification. I would say from a directional perspective, it's all pointing in the direction of, you know, a more, probably ultimately a more realistic scenario of what the future looks like, which ultimately I think from a transmission perspective, I think would directionally result in the need for more transmission to interconnect more renewable generation resources.

Richard Sunderland (Equity Research – North American Utilities and Power)

Got it. That's a very helpful color. Just one follow-up on the MISO front. you know, again, around the Tranche two process, are you hearing anything from MISO on, you know, how they might tackle kind a the greenfield versus brownfield split or how they're baking that into their analysis? Obviously, there's been a lot of attention over the past few years on the, you know, some of the headwinds on greenfield transmission development. Just curious if you're hearing anything from MISO on this front for the latest tranche.

David Hutchens (President and CEO)

Go ahead, Linda.

Linda Apsey (President and CEO)

Dave. Yeah, thanks. You know, I wouldn't say in any, you know, great, specificity. I think there is recognition that, yes, I mean, certainly as we drive to build out more and more transmission investment, the siting becomes, you know, certainly more challenging to get the necessary land. I would say at a high level directionally, certainly there's a lot of encouragement to the extent that you can, you know, kind a upgrade existing infrastructure or upgrade the infrastructure on existing rights of way, that can certainly help to facilitate, you know, the realization of those projects. In terms of MISO, you know, being sort of, you know, I would say directive or assuming those things in their planning process, it does not really, you know, emerge.

I think they leave that more to the specific transmission owners, to identify and determine, you know, kind of the specific you know, routing, siting, and ultimately, you know, the necessary siting requirements. I would say just thematically, just given the, you know, the transmission is getting more difficult to build and land is getting more difficult, to acquire, yeah, I mean, I think, you know, solutions that would look at utilizing existing rights of way, structures, towers would be certainly beneficial in realizing the investment.

Richard Sunderland (Equity Research – North American Utilities and Power)

Great. Thank you for taking my questions.

Linda Apsey (President and CEO)

Absolutely.

David Hutchens (President and CEO)

Thanks.

Operator (participant)

Thank you. Your next question comes from the line of Patrick Kenny from National Bank Financial. Please go ahead.

Patrick Kenny (Managing Director and Research Analyst)

Thank you. Good morning, everyone. Just back to BC on the Eagle Mountain-Woodfibre Gas Pipeline. I know it's relatively small in the grand scheme of things, but just with respect to the 20% increase in the total cost up to CAD 420 million, I believe. Is the expectation that you'll be able to earn on the full final price tag, you know, whatever that ends up being by 2027? Or is it just the original CAD 350 million, and then you'll have to absorb any excess costs above that on the balance sheet?

David Hutchens (President and CEO)

No, we wouldn't absorb any excess costs. There's a bit of a complicated formula in the costs and contribution in aid of construction that the Woodfibre would pay for. The remaining part, all of our investment would go into rates.

Patrick Kenny (Managing Director and Research Analyst)

Okay, perfect. Thanks for that. Then in Alberta, just given how high power prices have been here, I know you've received approval for a 5% increase in distribution rates for 2023. Just wanted to, you know, check in on how you're thinking about managing or perhaps smoothing out future rate increases. If you're getting any pushback from the regulator on the pace of rate-based growth, at least until power prices settle back down.

David Hutchens (President and CEO)

Yeah. That's a great question. It's the same thing that we're seeing in every one of our jurisdictions. In Alberta, you know, we're just the distribution system operator there. Our rates are very kind of slow and steady increasing part of the bill it's not a very volatile. It's not volatile at all. This is the rate increase that we got going into this year pales in comparison to the increases that they're seeing on the actual power part of their bill, the energy part. You know, we're obviously watching that. We're investing as we need to invest in the system and the needed reliability upgrades that we need to do to connect new customers.

Obviously, the Alberta economy is a bit cyclical, so we see the boom and bust and growth, and we're seeing good growth there now and hopefully for a long period of time. We're cognizant of that cost focus, but it's really not our part of the bill that's causing the angst. We do know, though, that it's a total bill perspective that, you know, the regulators look at in that province. We're doing what we can to control the costs that we can control. We still have to make those investments we need to make in the system.

Patrick Kenny (Managing Director and Research Analyst)

Appreciate the color. Thanks, David.

Operator (participant)

Thank you. There are no further questions in the phone line at this time. Ms. Stephanie Amaimo, please continue for any closing remarks.

Stephanie Amaimo (VP of Investor Relations)

Thank you, Laura. We have nothing further at this time. Thank you everyone for participating in our Q4 and annual 2022 results conference call. Please contact investor relations should you need anything further. Thank you for your time, and have a great day.

Operator (participant)

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