Thank you for standing by, welcome to the Emera Q4 2019 Analyst Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Scott Hastings. Please go ahead.
Thank you, Sharon. Thank you all for joining us this morning for Emera's fourth quarter 2019 conference call and live webcast. Emera's fourth-quarter earnings release was distributed this morning through Newswire and the financial statements, management discussion and analysis, and the presentation being referred to 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 Emera management team. Before we begin, I'll take a moment to advise you that this morning's discussion will include forward-looking information, which is subject to the cautionary statement contained on 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'll turn things over to Scott Balfour.
Thanks, Scott. Good morning, everyone. This morning, we reported fourth quarter adjusted earnings per share of CAD 0.60 and full year 2019 adjusted earnings per share of CAD 2.59. While consolidated results are down compared to last year, the core of our business, our portfolio of regulated utilities, remained strong and performed very well, delivering adjusted earnings growth of 10% for the year. We're very pleased with this level of growth, which was primarily driven by strong earnings from Tampa Electric and our gas utilities. Similar to our Q3 results, the financial results for 2019 were weaker due to four main factors. Two of those factors were expected: the loss of earnings contributions for our merchant gas plants that we sold in the first quarter of 2019 and the non-recurring tax benefit we recorded in the third quarter last year.
The other two factors were the impacts of Hurricane Dorian and unfavorable market conditions negatively impacting Emera Energy's marketing and trading operations. Collectively, the earnings impact of these four items outweighed the growth in our utilities for the year. Emera's portfolio of regulated utilities continues to be the primary driver of our growth, and the underlying performance of these businesses is delivering strong earnings growth consistent with our expectations. The contributions from our portfolio of utilities has been steadily and predictably growing through both ongoing rate-based investments and through greenfield investments like the Maritime Link and Labrador-Island Link projects. Over the past six years, we've grown contributions from our portfolio of regulated utilities by an average annual earnings growth rate of 11%.
Growth has been achieved by making smart investments in fuel-to-assets and OM&G to assets opportunities, by disciplined O&M management, and by working constructively with our regulators and customer groups, all helping to avoid putting pressure on customer rates over the same period. With over 95% of our earnings now coming from our regulated operations, the overall quality and predictability of our earnings and cash flow has improved. The continued execution of our strategy, making investments to provide cleaner and more reliable energy to our customers while ensuring that energy remains affordable, will continue to drive our growth looking forward. The strategic reallocation of capital to our strongest and fastest-growing businesses strengthens our asset base and further improves our growth profile. On our third-quarter call, I highlighted the impact of Hurricane Dorian and Grand Bahama Power Company.
I'm pleased to say that despite significant damage from the storm, our operations have rebounded well. Currently, GBPC reconnected all homes that can safely receive power, which represents 17,800 customers as compared to 19,300 prior to the storm. Commercial and residential customers that are not ready to receive power have had serious building damage, primarily due to flooding, and require extensive renovations. It's expected that most of these remaining customers will be connected over the next two years. Currently, this loss of customers represents approximately 13% of the pre-storm load. Our team has been working with the regulator and have developed a recovery plan for storm costs to customers over the course of a five-year period. Finally, we continue to work with the insurers on property and business interruption claims that we anticipate will be resolved in the first half of 2020.
The sale to Emera Maine is an important piece of our funding plan. To date, we have received all required approvals except for the approval by the Maine Public Utilities Commission. Our team has been working with ENMAX and the various stakeholders in the state of Maine to finalize this approval. A stipulation was filed with the commission in December, which contains a settlement and has the support of ENMAX , Emera Maine, and a number of interveners, including the Office of the Public Advocate. Currently, the commission is working to review the stipulation. We remain confident that the stipulation meets the net benefit test in the state. We look forward to closing this transaction in the coming month or two. Of course, looking forward, we do not expect to have earnings contributions from Emera Maine beyond Q1 of 2020.
Emera Maine contributed $27 million in the last three quarters of 2019. This creates a period of transition as we redeploy capital into our continuing businesses to replace the lost earnings contributions from the asset sales. Reallocating our capital to prudently address changing customer needs better positions Emera to balance ongoing rate base improvements with long-term returns. On February 25th, we'll be hosting our Investor Day in Tampa, Florida. As you know, 55% of Emera's rate base is now in the state of Florida, and that proportion is expected to grow given Tampa Electric and Peoples Gas account for nearly 70% of our planned capital investments over the next three years. We look forward to our investor events as it's a way for us to show our strategy in action. This event also gives people the opportunity to interact with other members of our team from across multiple affiliates.
The day will include presentations from our management team at Tampa Electric, Nova Scotia Power, Peoples Gas, and New Mexico Gas. Greg and I will give Emera updates and discuss company priorities as we look ahead over the forecast period. These presentations will be available by webcast if you're not able to attend in person. Following the presentations, we'll have site tours of the Big Bend Modernization project and Big Bend Solar and energy storage site. Our regulated utility business continues to perform extremely well, and as I reflect on the performance for the year, I'm pleased with the growth we've delivered for our shareholders. 2019 was an important year for our business as we made difficult but important decisions, and then executed on those decisions to better position Emera for the future.
In the first quarter of 2019, we completed the sale of the merchant gas plants and used the proceeds to de-lever our balance sheet by repaying debt at the holdco level. We also made significant progress on the sale of Emera Maine to ENMAX. In addition, we refreshed our capital forecast from 2020 to 2022. Our baseline capital forecast of CAD 6.9 billion reflects several opportunities to deliver on our strategy to continue to reduce our carbon footprint and increase reliability across our regulated businesses. In addition to the CAD 6.9 billion capital program, our teams continue to advance development opportunities of CAD 0.5 billion-CAD 1 billion.. Excluding the development opportunities, we're forecasting over 7% growth in rate base between 2020 and 2022, which will position Emera for long-term earnings growth.
We look forward to discussing this and our development opportunities in greater detail at our Investor Day in Tampa in the next week. Finally, all of our regulated companies have made significant progress on their strategic initiatives. Most notably, Tampa Electric now has 520 MW of solar installed, mostly as part of the Solar Wave One, and has received major milestones on the Big Bend Modernization project. These two projects will fundamentally change the generation mix of Tampa Electric and provide cleaner and more cost-effective energy to customers. Overall, our portfolio contains some of the highest quality regulated utilities in North America, and our proven strategy, which is rooted in the transition of our portfolio from higher to lower carbon energy, is particularly relevant today as we see increased global focus on decarbonization.
As I look at the growth opportunities in front of us, I'm confident that we will continue to deliver the competitive long-term system and rate base improvements and earnings growth that our customers and shareholders have come to expect. With that, I'll turn it over to Greg to take you through our financial results.
Thank you, Scott, and thank you all for joining us this morning. As Scott referenced, our 2019 results were impacted by the sale of our merchant gas plants, Hurricane Dorian, and weaker marketing and trading conditions. We continue to be very pleased with the earnings growth that is being delivered from our regulated portfolio. As I'll walk you through in a moment, strong growth from our regulated utilities has fully offset the earnings impact of the sale of our gas plants, and we expect our regulated earnings to continue to grow in 2020. This growth, combined with the opportunities identified in our new capital program, reinforces our confidence that we will continue to deliver long-term earnings growth to our shareholders. While the growth in our regulated earnings was significant for the year, this growth did not offset the impacts of Hurricane Dorian and weaker marketing and trading conditions.
We experienced lower annual adjusted earnings per share than 2018. Without these negative impacts, adjusted earnings per share for 2019 would have been consistent with the normalized 2018 results, despite the sale of our gas plants in Q1. Now let's get into the details of the quarter. In the fourth quarter of 2018, Emera delivered adjusted earnings per share of CAD 0.71- CAD 0.62 on a normalized basis. Growth from the normalized 2018 base of CAD 0.62 was largely driven by very strong performances by the Canadian electric utilities and the gas utilities. During the quarter, Nova Scotia Power and Irving Plant contributed CAD 58 million of earnings, an increase of CAD 11 million over the fourth quarter of 2018.
Growth in the quarter was driven by increased income from our equity investments in the Maritime Link and Labrador-Island Link, decreased income taxes, and lower non-current service pension costs. Earnings growth in the gas utilities and infrastructure segment was largely driven by favorable weather in New Mexico, customer growth at Peoples Gas, and lower depreciation and amortization at Peoples Gas. The Q4 results, like Q3, were impacted by Hurricane Dorian, with earnings being negatively impacted by CAD 12 million, or CAD 0.05 per share for the quarter. Fourth quarter earnings from Emera Energy's marketing and trading business were CAD 6 million, lower than Q4 2018, or CAD 0.03 per share.
The Q4 2019 earnings contribution from Tampa Electric was down $3 million, or $0.02 per share compared to Q4 2018 due to unfavorable weather. Progress for the year-to-date period are largely consistent with the quarter, with strong growth in the U.S. utilities being largely offset by lower market and trading margins and the earnings impact of Hurricane Dorian. Year-to-date, Tampa Electric increased earnings by $22 million. This increase is from higher base revenues related to in-service solar generation and customer growth. These increases were partially offset by higher depreciation and interest expense as a result of capital investments. For Emera Gas Utilities, recall that both Peoples Gas and New Mexico Gas had strong years, with earnings increases of $19 million after removing the $14 million of impact for one-time items related to New Mexico Gas' recognition of tax benefits.
New Mexico's results benefited from favorable weather and incremental earnings from an asset management agreement. Peoples Gas earnings benefited from lower depreciation rates and increased earnings related to ongoing cast iron and bare steel replacement investments. Our Canadian utilities experienced a strong 2019, with an increase in adjusted net income of CAD 11 million. This growth was primarily driven by increased investments in both Maritime Link and Labrador-Island Link, higher non-fuel revenues, timing of deferrals, lower non-current pension costs, and lower income taxes. As I have previously discussed, Emera Energy experienced difficult marketing and trading conditions in Q2 and Q3 of this year. For the year-to-date period, marketing and trading returned to profitability with earnings of CAD 5 million for the year. The impact of Hurricane Dorian continued into Q4.
Due to loss load and the corporate share of all recoverable losses, Emera's earnings were negatively impacted by CAD 28 million for CAD 0.12 for the year. It should be noted that Emera also recorded a goodwill impairment charge of CAD 34 million related to Grand Bahama Power Company against reported net income, but not the adjusted net income. The charge was taken due to a decrease in expected future cash flows resulting from the impact of Hurricane Dorian's storm recovery. Consistent with previous years, share dilution had an impact on adjusted EPS as Emera has continued participation in the dividend reinvestment plan and the At-the-Market Equity Program. In 2019, approximately 8 million common shares were issued through these plans and programs. Year-over-year, the EBITDA, earnings before interest, taxes, depreciation, and amortization, was consistent, decreasing by CAD 33 million or 1%.
Operating cash flow before working capital for 2019 was down CAD 208 million compared to 2018. The sale of merchant gas plants caused CAD 92 million of the decrease. The remaining difference related to Hurricane Dorian, timing of AMT credit payments, and lower marketing trading margins. Partially offsetting these decreases was the growth in our operating cash flow from our regulated businesses, which grew by 6% as compared to 2018. This growth was led by Tampa Electric, which grew cash flows by CAD 88 million or a 10% increase year-over-year. This increase in the regulated operating cash flows are a signal of the improving quality of our cash flows, which remains a priority for our team. With that, I'll turn the presentation back over to Scott.
Thank you, Greg. This concludes the presentation. We would now like to open the call for questions from analysts.
If you'd like to ask a question at this time, please press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. We will pause for just a moment to compile the Q&A roster. First question comes from the line of Ben Pham. Please go ahead.
Hi. Thanks. Good morning. Just on your slides, you highlight your utility businesses' good growth. You look at normalizing all the adjustments you've seen during the quarter. My question is, I guess it's a good point to highlight from Emera's standpoint. When you guys look at calculating EPS trajectory and your payout ratios and whatnot, your targets, are you guys taking the same approach where you're just mostly looking at the utility business, ignoring Emera Energy trading, which could be volatile every year?
Hey, Ben, it's Scott. Let me take a crack, and Greg can add on. We're looking at our consolidated adjusted EPS and EPS growth. What we're wanting to highlight as we go through this transition is, of course, with the loss of contributions from the merchant gas fleet and then prospectively from Emera Maine, really just trying to highlight that what's going on within the core and continuing business profile is these businesses are performing really well and delivering growth. Yes, Emera Energy, the marketing and trading operation, will continue to have some volatility to it. We highlight, of course, that it's a small portion of the overall CAD 2.5 billion- CAD 2.4 billion of EBITDA that this business generates. If you look at that sort of core portfolio of regulated utilities, which represents 95% of the going-forward business, those businesses are driving strong growth year-over-year.
They have been for some time, and we expect that'll continue to be the case in the future.
Ben, it's Greg. The only thing I would add to that is maybe to try to address your specific question. When we target a dividend payout ratio and growth over time, we would, in our long-term forecast, expect that Emera Energy and the marketing and trading side of the business to deliver that CAD 15 million-CAD 30 million on an annualized basis, recognizing that there'll be years where we'll be above that midpoint of that range and years where we'll be below it, similar to 2019 and 2020.
Okay. All right. Can you remind us the development opportunity, the CAD 0.5 billion-CAD 1 billion. What's in that? Maybe just a refresh on the timeline on the storm hardening.
Yeah. Good. We'll give some deeper color to that at Investor Day. It's continuing to include the same theme of things that we've talked about before as we continue to refine expectations around things like more solar investments in Florida, things like storm hardening as that becomes clearer, continued cleaning of the generation fleet in Nova Scotia Power, as we worked on some refurbishment of hydro-related resources. Those kinds of things all form part of that. We'll give some more color to that at Investor Day.
All right. Sounds good. Good timing on the capacity payment, just swapping out of that. Thanks a lot.
Thanks, Ben.
Next question comes from Linda Ezergailis with TD Securities.
Thank you. I'm wondering if you could just give us a sense, just further to Ben's question about storm hardening and your capital. I know you're going to be providing some more disclosure at your Investor Day. In Canada, the CSA is looking at implementing some more resiliency standards. I'm wondering if, given your recent experience with Nova Scotia Power, if that might suggest some opportunities to further storm-harden that utility or if that is already kind of as resilient as it can get, given the maritime geography.
I'll start and, Wayne, feel free to add in if it's helpful. I'd say making reliability investments, every utility is focused on that, including ours, of course, including Nova Scotia Power. Of course, the topography, the geology in Nova Scotia means undergrounding system here is very difficult and very expensive. A significant amount of effort has gone in by Nova Scotia Power over the last number of years to continue to storm-harden the system, as what we're seeing is increases in peak wind speeds more frequently. The team continues to work to ensure the system is improving its reliability as we continue to respond to what we're seeing as times where the winds are just stronger more frequently than they used to be. A good part of Nova Scotia Power's maintenance and capital program is focused on that.
Wayne, anything to add to that?
Linda, I just would say a couple of things. Reliability obviously is critically important to us and our customers, so we continue to look at ways to improve that. Scott has highlighted, we've been doing that for quite some time and continue to look for new ways to do that. We've been engaged with customers and the regulators here on some more innovative projects, some pilot projects that allow us to test out things like microgrids and batteries. We do see that as a growing opportunity for us going into the future as we look to improve upon reliability and make the grid more resilient.
Okay. Thank you. Just as a follow-up, maybe on your Q4 results, specifically in 2019. Maybe you could just give us an update on your thinking about the long-term outlook and benefits related to your marketing and trading business. I know historically, there was a view that it provided kind of strategic and industry insights that kind of punched above the weight beyond the direct contribution. Now that you've sold your gas plants and given some of the volatility and softness we're seeing, I'm wondering if you're thinking about changing the scope of what you do there or the strategy, or if you expect to see it continuing for the foreseeable future.
Linda, it's Judy. The marketing and trading business existed for 10 years before we owned the gas plant. It's kind of raised on debt to Emera, has been around for a lot longer than that five-year term. If you kind of look and see, it operates within its earnings range generally of 15 to 30. If you kind of look over the last several years, the average is around 28 or 29, which is very close to the top end of that range. 2019 was a hard year for it. That was frankly more unusual than normal circumstances. We still think there's opportunity in that business, and our goal continues to be to manage it with an appropriate downside risk and be there for the times when it can provide us with upside returns.
Okay. Maybe just a quick question on your New Mexico Gas business. Can you comment on the biggest changes in your regulatory application? Where you expect most of the discussion to be as it goes through the regulatory process?
Linda, I don't think Ryan's on. If so, Ryan, feel free to speak up. This will be the second rate case that we've filed in New Mexico since we acquired New Mexico Gas. The first rate case was seeking a modest increase in revenue. Also seeking a weather tracker, if you will, where in New Mexico, it's principally a winter-based.
System providing gas for home heating. The winter season can be quite short. That first application successfully on a period trial basis brought into place a weather tracking system that we think is constructive for customers, but also important for the utility. The second rate case is really just catching up to some of the capital investment initiatives that are going on in the system in New Mexico, adding to the resiliency of that system, improving the integrity of that system. Seeking additional revenues in order to support that capital investment, in this rate case is being done on a forward test year basis. This will be the first forward test year basis for a New Mexico rate application.
Thank you.
Next question comes from Robert Kwan with RBC Capital Markets.
Morning. If I can just turn to slide 13, you provided the normalized 2018 number, you've shown the waterfall to 2019. I'm just wondering, what would that normalized number for 2019 now look like when you think about energy services and Dorian, which you've outlined, as well as things like NMGC weather and some of the regulatory? I guess just as well, if you can comment on, do you have what the earned ROEs of the utilities were for 2019?
Robert, it's Greg. On slide 13, if you took the CAD 259 and adjusted it to a midpoint for marketing and trading and Hurricane Dorian, you'd effectively get back to the CAD 278 level that we would have had in 2018. It's really those two items that would have been the difference between what we reported in 2018, remember, absent that Florida tax adjustment, and what we realized in 2019. There was a lot of other differences through the individual line items. For the most part, it is a result of that. In terms of ROE, NSPI had an ROE towards the top end of their band, very consistent with what they had over the last number of years at around 9.25%. Tampa Electric and Peoples Gas were both in around the 10.25%-10.5% ROE. New Mexico, I believe, was 9.10%.
I'd have to get back to you, Robert, on New Mexico. I think New Mexico was kind of in the high 9s last year. I'd have to get back to you on that to confirm the exact number.
Okay. I guess just on that, though, for PGS, how far below do you expect PGS to be for 2020?
It'll be somewhat weather-dependent, Robert, but I wouldn't expect it to be too materially below the bottom of the band.
Okay. Obviously enough to file the rate case.
Yeah, we don't need to be below the band to file for rates, but we do need rates for 2021. As you would expect in particular the state of Florida, as you get a year out from requiring rates, you generally have a degradation of your ROE, and that's what we're seeing. Regardless of what we would expect to receive in 2020 without new rates, that number would be lower in 2021.
Got it. If I can just finish with sustainability or ESG-related topics. You talk a lot about that within your presentation and things that you're doing. I'm just wondering, how do you think about your gas distribution businesses? Whether that's just the way the market's viewing gas distribution or more long-term, the existential risk to those businesses?
Yeah, Robert, it's a good question and one that we're mindful about. I will say certainly today in both the state of Florida and New Mexico, both the state and ourselves in many ways see the gas LDC as an enabler to the continued electrification and decarbonization of the electricity sector in those states. We know that this is a growing topic. The reality is that natural gas is demanded by our customers in those states. It's seen as a cleaner, affordable fuel. There's a high-efficiency factor, of course, of that supply direct to the customer. At this point, as I say, we see those LDCs as enabling the decarbonization of the electricity sector. Of course, we're paying attention to what's going on in other markets. Right now, I think we're in a good place in both New Mexico and Florida.
Okay. Thank you very much.
Thanks,
Next question comes from Andrew Kuske with Credit Suisse.
Thank you. Good morning. What are your expectations around getting your block of power off of Muskrat Falls for later in 2020?
We continue to expect that we'll see the Muskrat Falls project commissioned and delivering energy for us in mid-2020. As we see it, we continue to be sort of tracking all of our expectations for Nova Scotia Power, consistent of course with Nalcor's representations as well. Mid-2020.
Appreciate that. How much headroom does that give you on multiple fronts on effectively lowering fuel costs in Nova Scotia for ratepayers, the emissions profile, and really transitioning out of the petcoke, the oil, and then the coal?
Clearly, Maritime Link has long been an important part of Nova Scotia Power's journey to reduce its coal-related generation, but particularly to reduce its carbon emissions. We'll be with the benefit of Muskrat Energy, once that starts to be delivered, at 40% renewable in Nova Scotia Power. It's almost 60% non-emitting. When you think about that in the context of the COP21 objectives and goals that were set, which was a 60% reduction by 2030. The journey for Nova Scotia has been a really good one. We would expect to see sort of on a full-year basis in 2021, 40% renewable and 60% non-emitting, which is great progress for the province of Nova Scotia.
Great. Thank you. One final one, just on expectations around the Northern Pulp mill. Do you see any impact on just regional load dynamics?
It is Wayne. Northern Pulp, as you know, is no longer running. The dynamics probably more are on the pulp and paper industry as compared to our overall load or generation. It's probably more keenly felt in that sector. We have a biomass facility in Port Hawkesbury that can burn more wood if we can get it at the right price. That's probably the biggest impact left to our overall load on an annual basis.
Okay. That's great. Thank you.
Once again, if you'd like to ask a question, please press star one on your telephone keypad. We have a question from Julien Dumoulin-Smith with Bank of America.
Good morning, guys. This is actually Ryan Greenwald on for Julien. Thanks for taking our questions. Just kind of curious how you guys are framing EPS growth for 2020, given the degree of headwinds that emerged in the back half of the year. Any color you guys could provide there?
Hi, Ryan. It's Greg. As you're probably aware, we don't provide earnings or EPS growth targets or guidance. What we have provided is a three-year capital plan that has our rate base growing by roughly 7%, and we would expect, all things being equal over that planning period, EPS growth would approximate that.
Fair enough. Then, I guess, how are you guys kind of thinking about your ability to earn authorized returns in the outer years as you guys go in for rate cases in the key subsidiaries here in Florida?
Yeah. Ryan, it's Greg again. What has been our experience is as you have the year leading up to, or the years leading up to the need for rates, that you often see some degradation. Generally, our experience is once you come out of getting new rates set, that we would have an expectation to be at the midpoint or slightly higher than that over that period of time, until again, you have to go back in for rates and start the degradation.
Got it. Just lastly, as you guys think about your rate base predominantly being in Florida, and ahead of the analyst day down there next week, just kind of curious on your latest thoughts of potential for a possible U.S. listing.
Ryan, I don't think anything's changed. When we think of what the benefits and costs are with a U.S. listing, we don't certainly see that there's a material valuation gap between where we think we would trade if we were dual-listed versus just Canada. We've reached that conclusion by looking at some of our peers that are listed in both countries. We don't feel like we have any kind of restrictions on access to capital or anything like that. We'll continually monitor it, but right now it's not something that's a priority for us.
Got it. Thanks for the time.
Thanks, Ryan.
Once again, if you'd like to ask a question, please press star, then the number one on your telephone keypad. Once again, that's star one to ask a question. We do not have any telephone questions at this time. I will turn the call over to the presenters.
Well, thank you for attending the Q4 2019 Emera call. If you have follow-up questions, please feel free to reach out.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.