Good day, and thank you for standing by. Welcome to the Emera quarter three 2021 analyst conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Dave Bezanson. Please go ahead.
Thank you, Alicia, and thank you all for joining us this morning for Emera's third quarter 2021 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 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 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.
Now, I will turn things over to Scott.
Thank you, Dave, and good morning, everyone. This morning, we released our third-quarter results, and I'm pleased to say we continue to deliver steady, predictable growth. Our third-quarter adjusted earnings per share was CAD 0.68 compared to CAD 0.67 in Q3 of 2020. When you adjust for the timing of preferred share dividends to make it an apples-to-apples comparison, our adjusted earnings increased by 10% compared to the same quarter last year. For the year -to -date, we've delivered 12% adjusted earnings per share growth from CAD 1.93 per share for the first nine months of 2020 to CAD 2.17 per share for the same period in 2021, even in a strengthening Canadian dollar environment. This growth reflects the overall strength of our business, underpinned by our regulated utilities.
Contributions from our regulated businesses have been increasing as we continue to advance our strategy by making rate-based investments to reduce carbon emissions and improve reliability while never losing sight of affordability for customers. As you know, the rate-based investments we're making on behalf of our customers in execution of our strategy to safely deliver cleaner, reliable, and affordable energy also drives our earnings and cash flow growth. This year, the foundation of our capital program has been our major project investments at Tampa Electric, including the Big Bend modernization project and the second phase of our solar program. We've also continued to make investments across the portfolio to decarbonize, to increase infrastructure resiliency, and to provide our customers with more choice and control, including the deployment of smart meter technology.
With 70% of our expected 2021 spend completed at the end of the third quarter, we remain on track to make over $2 billion of rate-based investments in 2021, all while keeping our team safe and our capital projects on time and on budget. Decarbonization has been central to Emera's strategy for over 15 years. Now, as policymakers, stakeholders, and customers continue to increase their focus on reducing carbon emissions, Emera is as well-positioned as ever to deliver growth and value for our customers, communities, and shareholders. Our decarbonization journey began here in Nova Scotia. Over the last decade, Nova Scotia Power has tripled the amount of renewable energy it delivers to customers and reduced its CO2 emissions by more than 30%. Nova Scotia Power is on track to deliver nearly 60% of its energy from renewable sources in 2022.
In August, we reached another important milestone in our decarbonization journey when hydro energy from Muskrat Falls began flowing to Nova Scotia through the Maritime Link. Having access to this source of clean energy will allow us to continue reducing the carbon intensity of our generation fleet and keeps us on track to meet the province of Nova Scotia's renewable energy targets. Last month, the Nova Scotia provincial government introduced climate commitment legislation that included the retirement of coal generation assets and supply of 80% renewable energy by 2030. Meeting these targets will require incremental investment in cleaner energy solutions, storage, and transmission, as well as alignment between regional utilities and provincial and federal policymakers. The team continues to advance discussions with stakeholders on next steps to achieving our shared goal of transitioning to cleaner energy in Nova Scotia by 2030.
The Eastern Clean Energy Initiative, the new transmission component of which is referred to as the Atlantic Loop, represents a significant opportunity to work collaboratively with our neighboring utilities in Eastern Canada and various levels of government to facilitate the transition off coal at an accelerated pace without undue rate impacts for our customers. In addition to new transmission capacity, this initiative includes investment in renewable sources, particularly wind, as well as transmission infrastructure upgrades and investments in battery storage, all to replace the energy and critical capacity that Nova Scotia Power's coal plants provide today. We continue to be encouraged by our ongoing discussions and hope to be in a position to provide a more clear sense of this significant project in early 2022. Earlier this week, Tampa Electric announced their vision for its cleaner energy future, aligning with Emera's climate commitment announced earlier this year.
Since the year 2000, Tampa Electric has reduced coal usage by more than 90% and cut CO2 emissions in half, even while demand for power has increased 25%. In addition to a net zero vision by 2050, Tampa Electric announced a series of interim goals that it will target on the journey to cleaner energy, including a 60% CO2 emissions reduction by 2025 and an 80% reduction by 2040 relative to their year 2000 levels. It's been a busy year for us on the regulatory front. Most recently, the Nova Scotia Power Maritime Link team filed the final project capital cost application with the UARB in Nova Scotia. In the Caribbean, both Barbados Light and Power and Grand Bahama Power recently filed rate cases. We expect to have final decisions on all these matters in early 2022 or before.
Achieving successful and balanced regulatory outcomes is critical to our success. We've consistently demonstrated our ability to secure fair and reasonable decisions across the business with rate case settlements over the last year at New Mexico Gas, Peoples Gas, and most recently at Tampa Electric. Last month, Tampa Electric's uncontested settlement agreement was unanimously approved by the Florida Public Service Commission. This settlement represents a balanced agreement that supports our strategy to provide Tampa Electric's customers with affordable, cleaner, and more reliable energy. Even with these new rates coming into effect on January 1, 2022, Tampa Electric's rates are expected to continue to be among the lowest in Florida and about 15% below the current national average.
These new rates not only support investments already made to decarbonize the generation mix, but provide full support for the completion of the Big Bend modernization and the second wave of new solar generation, while also providing a mechanism to recover the cost associated with the accelerated retirement of coal generation. Before I pass the call to Greg, I wanna take the opportunity to update you on some upcoming leadership changes at Peoples Gas. T.J. Szelistowski is retiring this December after 42 years with the company. 42 years. I know that sounds hard to believe, but he joined the company as a co-op student back in 1978. As president of Peoples Gas since our acquisition of TECO, TJ has been instrumental in driving the utility's growth, its strong safety performance, and its outstanding customer service.
Helen Wesley will be appointed as the next president of Peoples Gas on December first when TJ retires. Helen joined our team last year as the Chief Operating Officer at Peoples Gas. She's a dynamic leader who will build on the growth and momentum of Peoples Gas as the team continues to deliver for customers in Florida. Thank you, TJ, and congratulations, Helen. With that, I'll pass it over to Greg.
Thank you, Scott, and thank you all for joining us today. This morning, we reported third quarter adjusted earnings of $175 million and adjusted earnings per share of $0.68 compared to $166 million and $0.67 in Q3 of 2020. For the nine months year-to-date, adjusted earnings were $555 million and adjusted earnings per share was $2.17 compared to $477 million and $1.93 for year-to-date 2020. Emera's adjusted earnings per share increased for the quarter and year-to-date despite foreign exchange headwinds of $0.03 and $0.11, respectively. Our adjusted earnings exclude mark-to-market adjustments. Emera Energy's Q3 mark-to-market loss had a very material impact on reported earnings.
I gave you a refresher on that situation in Q2, and I'll deliver a condensed version now as a reminder. Emera Energy has deals with utilities and producers to buy or sell gas for a term that comes with the release of the customer's transport. Mark-to-market arises on the price difference between where the gas is sourced and where it is sold, which is fully offset by the value of the corresponding gas transportation asset. Because the gas is mark-to-market and the transportation asset is not, that results in some net mark-to-market gains or losses recorded in income. In Q3, the magnitude of the mark-to-market loss is particularly high because prices have surged in Emera Energy's primary sales market, New England. LNG is a marginal fuel there in winter, and global LNG prices are high.
As always, it is important to emphasize that these situations have no actual economic market exposure because regardless of the difference in the value of the gas between the receipt and delivery point, Emera Energy has a transportation capacity that enables it to move the gas to the point at which it is priced. As we'll take you through now, growth in adjusted earnings per share was primarily driven by steady growth in our core regulated utilities, lower corporate costs, and improved earnings in our marketing and trading business, partially offset by foreign exchange and a higher share count. Although third quarter results are flat relative to 2020, when you adjust Q3 2020 for the preferred share dividend that would have normally occurred in that quarter, earnings per share increased by CAD 0.05 over Q3 2020.
This increase is a result of our portfolio of businesses that performed well in the quarter. Our gas utilities, led by Peoples Gas, continued to benefit from new rates and continued growth in its customer base. Excluding the impact of a stronger Canadian dollar, Peoples Gas delivered CAD 10 million of increased earnings compared to Q3 2020. Emera Energy's marketing and trading net earnings increased CAD 7 million due to the strength in market pricing and higher volatility. Our Canadian utilities contributed modestly to growth in the third quarter with a higher contribution from Nova Scotia Power, due primarily to lower income tax expense. Excluding the impact of foreign exchange, higher AFPDC earnings increased the contribution from Tampa Electric as we continue to invest in our Big Bend modernization and solar projects.
This was partially offset by higher depreciation and amortization expense, reflecting increased capital investment and the effect of the 2020 amortization settlement in Q3 of last year. Growth from these businesses was partially offset by the timing of the preferred share dividend in 2020, a stronger Canadian dollar, and a higher share count. We continue to proactively manage our exposure to the strengthening Canadian dollar through economic foreign exchange hedges. In Q3, we recognized CAD 4 million in realized gains on these hedges and entered into additional FX forwards. For the remainder of 2021, we have CAD 56 million in hedges at an average rate of approximately CAD 1.35.
Similar to the quarter, the year-to-date increase in adjusted earnings per share of CAD 0.24 was driven largely by higher earnings at Emera Energy due to favorable market conditions as well as strong results from our gas utilities due to new rates and continued customer growth. Our corporate segment benefited from CAD 29 million of lower interest expense, primarily due to the retirement of corporate debt, lower interest rates, and the strengthening Canadian dollar. Realized gains on foreign exchange hedges contributed CAD 17 million to the increase over prior year, muting the impact of foreign exchange headwinds from our U.S. operations. Increases in our Canadian and Florida Electric segments were consistent with the factors that impacted the quarter as discussed a moment ago. Foreign exchange impacts, share dilution, and the sale of Emera Maine partially offset the growth from our core operations.
Operating cash flow year-to-date is down CAD 66 million or 6% compared to 2020, primarily as a result of incremental fuel costs associated with Winter Storm Uri at New Mexico Gas. Cash flow at our regulated utilities has been negatively impacted by the increasing commodity prices we are seeing around the world, in particular natural gas, prices which have increased twofold since January first. Although our cash flow results currently reflect the impact of the higher fuel costs incurred across the business, there are regulatory mechanisms in place to recover these prudently incurred costs from customers. While there's no impact on our earnings, it's important that the timing of cash flow recovery is actively managed by working with our regulators to balance affordability for our customers.
The most recent evidence of this was our regulatory approval in New Mexico to defer the cost of Winter Storm Uri and collect it over a 30-month period beginning on July 1 of this year. This ensured customers were not overly burdened and shareholder interests were protected. Now, before I turn the presentation back over to Dave, I would like to mention that at our upcoming Investor Day on December 1, we look forward to walking you through our new three-year capital forecast, updating you on our key strategic initiatives, and introducing you to some of our leadership team. Although we wish we could connect in person, we have decided, in the interest of safety, to move forward with a virtual event for 2021. With that, I'll turn it back over to Dave.
Thank you, Greg. This concludes the presentation. We would now like to open the call for questions from analysts.
At this time, if you would like to ask a question, please press star then the number one on your telephone keypad. Your first question comes from the line of Maurice Choy, RBC Capital Markets.
Thank you and good morning. First question is related to a topic you mentioned, Scott. You mentioned that, with regards to the move to decarbonize Nova Scotia, you're encouraged by the ongoing discussions, with the potential update in early 2022. Given that we've got, you know, the federal and provincial government support, especially given recent elections on both sides, can you provide some color on where, if any, the pushback currently is at? If you see elements of the Atlantic Loop and the 2030 off coal in Nova Scotia, will you see elements of that be part of your plan next month?
Yeah, Maurice, thanks for the question, and Peter Gregg here with me, and he can contribute to this too. Broadly, Maurice, you know, I don't think we're really seeing any resistance to this. Really, you know, the idea of this project around looking to optimize the energy resources that exist in our neighboring provinces to help Nova Scotia and New Brunswick, frankly, both to decarbonize. You know, a lot of this is around the effort to do it on a basis that doesn't sacrifice affordability for customers.
With that, it's about aligning all the parties involved in this, a number of provincial governments, a number of provincial utilities, and of course, the federal government in a way that has the, you know, sort of benefits to all of those parties. Part of this really is looking for support from the federal government in order to assist in this in a fair way for Nova Scotians, where today the cost to retire the remaining coal plants in Canada, 55% of that is in Nova Scotia, where we only have 3% of the population. Looking for federal government to help with this to ensure it's affordable, and frankly, I don't think it's anything about resistance at this point.
It's just really complicated and takes time to work through. In the meantime, Nova Scotia Power is working its own plan in terms of things that needs to be done within its own system here with investments, as I mentioned, in new renewable resources, in wind, in storage, and transmission upgrades will all be part of that as well and will form part of Nova Scotia Power's capital plan over the years to come. Peter, anything you'd like to add to that?
Scott, I think you said that well. Hi, Maurice. Let me just maybe re-emphasize that I think since we've had the provincial election and federal election, I think I agree with Scott. There is alignment. There's alignment on a 2030 goal for decarbonization. I think good support for our plan that we've put forward, particularly with the provincial government. I think there is alignment among many parties, but as Scott said, with many parties involved, it adds a level of complexity. Continued positive momentum on that goal of 2030.
Great. Maybe my second question is I wanted to pick up on, you know, your decision to extend your dividend growth rate by two years to 2024. At the same time, in your MD&A, you mentioned that you continue to see the payout ratio to be above the target range of 70%-75%. Given that now you have the Tampa Electric rate case approved, how has that approval improved your ability to, or maybe your visibility in, getting back to the target payout ratio?
Yeah, Maurice, this is Greg. You know, the settlement was pretty much in line with what our expectation would have been. We'll see, we believe, a meaningful improvement in our payout ratio over the next couple of years. We still would expect that we'll likely not get into the sweet spot of the 70%-75% until sometime after 2023 or 2024, assuming the Canadian dollar stays at these levels, and we don't see a material weakness in the Canadian dollar over that period.
Great. Thank you.
You're welcome.
Your next question comes from the line of Ben Pham, BMO.
Hi. Thanks. Good morning. Going back to Atlantic Loop, are you able to? I know there's still probably a lot of items you need to pin down for, but if you're able to frame it maybe from the perspective of Maritime Link, size and timing and just able to maybe frame it for us to try to gauge CapEx and the timing on whatnot.
Yeah, Ben, you know, I understand the question, and obviously, you know, would love to be able to do that. The challenge right now, of course, is until there's more clarity as to the role that all those parties are going to play, we've just been hesitant to lock in and set expectations around, you know, what it means from a capital cost perspective that's relevant for Nova Scotia Power and Emera. You know, I do know there's a number out in the media of roughly a CAD 5 billion project and, you know, order of magnitude that's obviously about right.
Looking as to, you know, what the component part of that is for Nova Scotia Power and therefore the CapEx and investment profile for Nova Scotia Power and Emera, it just, you know, it's still too soon to look at those numbers. That's why I say we're hoping that in early 2022, once we've got more clarity on all of this as to where all the parties are, that we'll be in a position to provide more clarity then.
Okay. On the balance sheet, you've mentioned maybe your sweet spot in the payout ratio, and you've also mentioned hitting the credit metrics next year. When you do reach there, 2022, do you have a preference for staying in that range as you add CapEx, or are you considering, I think, about maybe adding a bit of buffer to those credit metrics over time?
Yeah. Yeah, Ben. Good morning. It's Greg. I mean, first and foremost, what we've been focused on is getting our balance sheet to our targeted capital structure and getting our credit metrics to the 12% FFO and CFO to debt, and have them at a level that's sustainable over the long term. That doesn't mean that we're gonna stop there. We, you know, as we see the growth in the business beyond 2022, we think there'll be inevitably a buffer built into it. Most importantly for us is to get to those threshold levels, and have them at a point where they're sustainable over the longer term.
Okay. That's great. Thank you, everybody.
Thanks, Ben.
Once again, if you would like to ask a question, please press star then the number one on your telephone. Your next question comes from the line of Rob Hope, Scotiabank.
Morning, everyone. Another question on the Atlantic Loop project. Seems like a nice solution to phase out coal, but, you know, long-distance transmission systems are very difficult to permit, as we learned in Maine. What would plan B be for Nova Scotia Power? Like, do you think there is sufficient wind resources and firming resources even possible in the province to help you meet that 2030 goal? And will you have a dual-track process of kind of option A and option B? And when do you have to start engaging the regulator on that?
You know, Rob, it's Scott. Look, I mean, we're a utility, which means, you know, we contingency plan everything. Yes, we do have, you know, plan B, C and D and so on. We believe this is the right and best plan for Nova Scotia, frankly, for the region, as a whole. Look, you know, one of those contingency plans could be, you know, we build more gas generation capacity in the province to backstop more wind. We'd prefer not to do that, both because, you know, that has its own carbon-emitting profile, of course. Also, you know, we know that the access to natural gas in Atlantic Canada is constrained. That's one option.
There are others ideally, you know, creating more transmission capacity in order to provide, in particular, the incremental capacity that's required to backstop more intermittent renewables. The Maritime Link is a critical asset in achieving that future. Frankly, you know, one more big extension cord, as I've been describing to some investors, is something that, you know, really makes the most sense to achieve the off coal and 80% renewable objective for Nova Scotia Power. That continues to be the focus for Peter and the team.
You know, as I say, we're encouraged, we're optimistic, but, you know, still some lots of work to do before we're in a position to talk about it with any certainty.
I appreciate the color in my four-part question.
Yeah, Peter, Rob, I think Scott said it well. I think our preferred plan, which includes the Atlantic Loop, really is the preferred option from a customer affordability perspective, from an achievability perspective, and from a reliability perspective. Scott's right. We do you know, contingency planning. That points you to our integrated resource plan that we published last year. It's part of a regulatory requirement. It would give you a sense of the kinds of considerations we make as we do that long-range planning. That's probably all I've got to add.
Yeah. Good point. Thank you.
Thank you. Just a second question, this one's for Greg. You know, the commentary on higher fuel costs weighing on cash flow in 2021. You know, just want to confirm that's predominantly at New Mexico, as you did have that course correction adjustment at TECO. Then at NSPI, the FAM should be covering most of that. Just want to get a sense of, you know, whether or not you're seeing any other kind of, you know, inflationary pressures on fuel impacting cash flow that should, you know, potentially be offset in later years.
Yeah, no, I think you have it right, Rob. Obviously at Nova Scotia Power, any incremental fuel costs that we would have incurred to date, you know, wouldn't get trued up with customers until a future period. That's really what I was referring to. Tampa Electric, you're right, we had a mid-course correction. Even with that, we're still seeing a little bit more under recovery on fuel. That will all get trued up likely early next year, and we're still working through the timing of the regulatory filing on that. By far and away, our experience this year has been at New Mexico that you highlighted.
Thank you. That's it for me.
Thanks, Rob.
Your final question comes from the line of Andrew Kuske of Credit Suisse.
Thanks. Good morning. I guess it starts off with Greg, because even by CFO standards, you mentioned balance sheet a lot on this call. Not trying to be patronizing about it, but you've come a long way in the last two years. Where do you ultimately want to wind up?
I'll take that as a compliment, Andrew. Thank you. Look, we're happy. You're right. We have done a lot of work. We've done a lot of work with the asset sales that we, you know, completed a little over a year ago with the sale of Emera Maine. Happy with the outcome of that. You know, I've continued, I think, very methodically raised the appropriate amount of equity through our ATM and DRIP programs. Then, of course, this year, we're happy with the successful execution of a couple of preferred share offerings. I'd say we're happy with where the balance sheet now.
Obviously, the last 12 months or so, we've been focused on the cash flow, and that's why the three rate cases, the two at gas utilities last year, and by far and away the largest at Tampa Electric this year was a priority for us. We're happy with the outcomes of all those. I'd say from a balance sheet perspective and a credit metric perspective, we feel like we're in pretty good shape. You know, I don't want anyone. If we mentioned it more than you would have expected, we don't want you to be left with the impression that it's not still an area of focus, at least for me and my team, because it is.
Okay. That's helpful. You could take it as a compliment. The dynamics that you face right now, you've got, as with a number of others in the industry, like, a tremendous amount of growth opportunities within the rate base and, you know, doing more creative things like Atlantic Loop. How do you think about the funding of that? Is there a way that you could use securitization mechanisms? Because we've seen these in the past and, you know, even currently in place in some areas in the U.S. Does that sort of fit into the equation as part of the funding solution?
Yeah. I think at this point, it's probably premature to comment on that, Andrew. I'd say, you know, the capital in front of us and, you know, we'll be rolling that forward in a couple of weeks for you all to have some visibility on. I would say it's kind of normal course business for us. It's working our way through the capital structure, maximizing our operating cash flow, obviously debt at the utility level, and then, you know, preferred shares and common equity to balance that off as long as we're inside our targeted capital structure.
As we look forward, if we see a significant change in our capital investment opportunities, you know, things like the Atlantic Loop, which again, it's a little bit premature, then we'll look at all sorts of opportunities, whether securitization on retiring coal plants, you know, continually look at our portfolio to see if there's things that we can optimize our raising of equity in a more cost-effective way. But I'd say at this point in time, you know, all of that's premature, until we, you know, have a sense of what that capital profile looks like and what the funding requirements from Emera will be.
Okay, that's great. Thank you very much.
Thanks, Andrew.
Your next question comes from the line of David Quezada of Raymond James.
Thanks. Morning, guys. Just a quick one for me. Just curious, your thoughts on the various, I guess, clean energy incentives in the infrastructure plans that are being floated in the U.S. right now. You know, curious how you see that evolving in terms of your CapEx plan. Maybe this is preempting your Investor Day a little bit, but I guess certain things like RNG and, you know, I guess potentially further tranches of renewables, how do you see those playing a role, I guess RNG more specifically going forward?
Yeah. David, look, you know, I think in a way, it was a bit what I was trying to get at in my remarks, where, you know, we've been focused on decarbonizing for a long time, as you know, starting with a journey here in Nova Scotia, because Nova Scotia's generation profile not that long ago is 90%, very high carbon, emitting sources. You know, we're now in a place where we've got government policy that is advocating for, in some cases, mandating, a faster and more accelerated pace to decarbonize.
To the extent that there is government support for this in the form of tax credits or subsidy, frankly, it, you know, it helps because, you know, one of the challenges in this is not the ability for utilities to execute, and even for that matter, fund the capital plans relating to decarbonizing. It's doing it in a way that still keeps it affordable for customers. The fact is, you know, all else being equal, the faster you do it, the more it costs.
To the extent that there's government support through policy initiatives that you know seem to be in focus in both the U.S. and in Canada, frankly, that's just at least directionally helpful because it allows us to execute and to reduce the cost pressure that acceleration has on customer rates.
That's great color. Thanks, Scott.
There are no further questions at this time. I would now like to hand the call back over for closing remarks.
That concludes our call today. Thanks very much for your interest.
This concludes today's conference call. You may now disconnect.