Good morning, ladies and gentlemen, and welcome to Emera Q2 Analyst Conference Call. After the presentation, we will conduct a question and answer session. Instructions will be provided at that time. Please note that this call is being recorded today, August 10, 2018, at 9:00 A.M. Eastern Time. I would now like to turn the meeting over to your host for today's call, Ken McOnie, Vice President, Investor Relations and Treasurer for Emera. Please go ahead, Mr. McOnie.
Thank you, Dan, and good morning everyone, and thank you for joining us for Emera's second quarter 2018 call and live webcast. Emera's second-quarter earnings release was distributed yesterday after market close by newswire and the financial statement, management's discussion and analysis, and the presentation being referenced on this call will be available on our website at emera.com. Speaking on the call today is Scott Balfour, Emera's President and Chief Executive Officer, and Greg Blunden, Chief Financial Officer. Scott, Greg, and other members of Emera's management team will respond to your questions following their prepared remarks. This morning, Scott will begin with an update on the business and our strategic initiatives, and Greg will follow with an overview of financial results. We expect the prepared remarks to last about 15 minutes, after which we will be happy to take questions from analysts.
I will take this moment to advise you that this conference call will contain forward-looking information and statements with respect to Emera. Forward-looking statements involve significant risks, uncertainties, and assumptions. Certain material factors or assumptions have been applied in drawing the conclusions contained in the forward-looking statements. Generally, these factors or assumptions are subject to inherent risks and uncertainties surrounding future expectations. Such risk factors or assumptions include, but are not limited to, regulation, operations and maintenance, energy prices, general economic conditions, weather, derivatives and hedging, capital resources, loss of service area, licenses and permits, environment, insurance, labor relations, human resources, and liquidity risk. A number of factors could cause actual results, performance, or achievements to differ materially from the results discussed or implied in the forward-looking statement. I will turn things over to Scott.
Thank you, Ken, and good morning, everyone. Before we dive into the quarter, I would like to take a moment to welcome James Bertram and Jochen Tilk to Emera's board of directors. Jim and Jochen are both accomplished executives with extensive experience leading and building Canadian publicly-traded companies. I have no doubt that their business board and public market depth, combined with respective backgrounds in the energy and natural resource sectors, will make them invaluable to our board. Yesterday evening, Emera reported second quarter 2018 adjusted net income of CAD 111 million, or CAD 0.48 per share, compared to CAD 117 million or CAD 0.55 per share in 2017. Results for the quarter were slightly below our expectations and reflect the challenges of less favorable weather in key service territories, timing differences in our Nova Scotia and Maine utilities, and a stronger Canadian dollar.
For the year-to-date 2018, I'm pleased to report that Emera has delivered adjusted net income of CAD 313 million, or CAD 1.35 per share, and operating cash flow before changes in net working capital of CAD 767 million. This represents a 6% increase in our adjusted EPS and a 9% increase in our cash flow year-over-year. I'll also point out that the year-to-date results continue to track in line with our expectations of delivering adjusted EPS and cash flow growth in the range of 10% or higher for the full year. We've had a busy and productive first half of 2018. In addition to delivering strong year-to-date financial results, the team has made good progress on a number of key initiatives. In May, we announced that we would be proceeding with the opportunity to modernize our Big Bend Power Station in Florida.
The modernization will include repowering unit 1 and retiring unit 2 early. Unit 1 will be repowered with two natural gas combustion turbines and two heat recovery steam generators that will generate steam for a refurbished steam turbine. Construction is expected to take approximately five years, with in-service dates of 2021 for the combustion turbines and 2023 for the full combined cycle. This $850 million investment will significantly reduce the carbon intensity of the energy produced by the facility and is expected to generate savings on a net present value basis of approximately $750 million for customers. Detailed engineering is well underway, and we expect to receive the necessary environmental approvals to advance construction in or around May of 2019. In Florida, we continue to make good progress on our solar investments.
We've invested approximately $400 million of the forecasted total capital spend of $850 million and remain on track to bring the first Tranche of 145 MW online in September, with the second Tranche of 250 MW scheduled to follow in January of 2019. Pursuant to the Solar Base Rate Adjustment Mechanism, or SoBRA, announced in September of 2017, as each Tranche of solar is brought online, there is an immediate cash recovery in customer rates. Tranche 1 will add $8 million of incremental revenue in 2018, and Tranche 1 and 2 combined will add $70 million of revenue in 2019. As we highlighted in our first quarter call, the Florida Public Service Commission has already reviewed and approved Tranche 1. In June, we filed the costs of Tranche 2 for review and anticipate a positive decision in October.
We believe that there is further capacity in the Florida grid for solar, and we are actively looking at the potential to develop an additional 600 MW post-2020. Additional fast-acting generation is needed on the Florida grid to enable this additional solar capacity, our investment in the modernization of Big Bend will do just that and provide the important backup generation required in addition to the other customer benefits of that project. Our investments in Tampa Electric highlight the significant opportunity we see to grow rate base of the utility while transforming its energy mix. Over the next five years, we will invest over $1.7 billion or approximately CAD 2.2 billion in our solar and Big Bend projects, which will add cleaner, more efficient generation to the system for customers while growing earnings and cash flow for shareholders.
To put that in perspective, these two projects together will drive the earnings and cash flow growth of more than two Maritime Link projects, all while significantly reducing the carbon intensity of Tampa Electric's energy mix. In 2017, 69% of the utility's energy was generated from natural gas, 24% was from coal, and about 6.5% was from other sources, including solar. In 2023, it will be about 75% natural gas, 12% coal, and about 7% solar, with 6% from other sources. The constructive regulatory regime in the state of Florida allows us to be confident that making these investments will deliver on our strategy of delivering long-term value to shareholders by delivering value to customers.
At Emera, we believe that to keep pace with the evolving needs of customers and to remain a leader in the North American utility space, innovation needs to be at the center of what we do. With that in mind, we're continually looking for ways to invest in customer-focused technologies. On June 12th, the Nova Scotia Utility and Review Board approved Nova Scotia Power's plan to invest CAD 133 million to upgrade all customers to smart meters. Installation of the meters is expected to begin in late 2019, and over the life of the investment, the project will reduce costs in the electricity system by almost CAD 40 million. NSP's investment is one in a series of advanced meter infrastructure or AMI investments being made across Emera. Over the next five years, we expect to invest approximately CAD 500 million in AMI technology to upgrade over 1.5 million meters across four utilities.
Our companies are collaborating across our operating regions to take advantage of combined purchasing power and to share best practices. We believe that using this cross-utility strategy will allow Emera to become a global leader in third-generation AMI technology. Our investments in Big Bend, solar, and AMI form part of our CAD 6.7 billion or about CAD 2 billion a year capital forecast over the next three years. Our capital program focuses on investments in renewable and clean energy, modernization of aging infrastructure, and customer-focused technologies. Our three-year capital program has increased significantly since we acquired TECO in 2016. At that time, we had identified approximately CAD 4.2 billion of capital projects across the two companies. As we've integrated TECO into the portfolio and deployed Emera strategy in that business, we've identified an additional CAD 2.5 billion of accretive rate base investment opportunities.
Projects which will drive both significant value for customers and strong investment returns for our shareholders. Our capital program is expected to drive above-average rate base growth through to the end of the decade. Our rate base growth profile is underpinned by sustainable and consistent growth in our Canadian, Caribbean, and Maine utilities and driven by highly accretive growth investments in our Florida utilities. The rate base profile presented reflects a conservative estimate of our growth plans and only includes projects that we are highly confident will proceed. We will continue to fill in our forecasts as projects are approved. As we highlighted on our Q1 call, we are in the midst of completing our regular strategic planning process, and we anticipate providing a refreshed long-term capital forecast, including financing considerations, in the fall.
Our ability to deliver strong dividends to our shareholders and to grow that dividend level at a rate that is sustainable as well as attractive to shareholders is central to our thinking and value proposition. Over the past four years, our long-term shareholders have supported the construction of the Maritime Link project and the acquisition of TECO Energy. During this same period, we are proud to highlight that Emera has grown our annual dividend from CAD 1.55 per share to CAD 2.35 per share or by 11% on a compound annual basis and delivered total shareholder return of over 10.5% compared to the approximately 6% delivered by the S&P/TSX Capped Utilities Index. As we look at the significant near-term accretive rate base opportunities in front of us today, we are mindful of our objective to balance the funding of these investments with Emera's capital-raising activities, dividend payout ratio, and capital structure objectives.
In that light, yesterday, we announced a modification to our dividend growth target from 8% through 2020 to a range of 4%-5% through to 2021. We also announced an increase of the annual dividend to CAD 2.35. The decision to modify our dividend growth target was not taken lightly. We believe that this new target will better balance the need for funding flexibility for the business while still providing a reasonable target growth profile and dividends for shareholders. In this, it's important to understand that the CAD 6.7 billion investment we are making in rate base over the next three years is expected to drive adjusted earnings per share growth over the same period at a level that exceeds the new targeted dividend growth guidance.
I would also note that as we continue to grow our dividend through to 2021, we're confident that we will still more than fully achieve our previous growth target of 8% through to 2020. Overall, I'm pleased with the results of the year to date and the progress we've made advancing our capital program. I believe the changes we've made to our dividend guidance will allow Emera to more efficiently finance the accretive rate-based growth opportunities we see in front of us, while continuing to provide above-average long-term returns to shareholders. With that, I'll turn it over to Greg for the detailed financial results. Greg?
Thank you, Scott, and thank you all for joining us this morning. We released our earnings and filed our quarterly financial statements on MD&A for the second quarter of 2018 yesterday afternoon after market close. In Q2 2018, Emera reported adjusted net income, which excludes mark-to-market adjustments of CAD 111 million and adjusted earnings per share of CAD 0.48, compared with adjusted net income of CAD 117 million and CAD 0.55 per share in Q2 2017. Our June year-to-date adjusted net income was CAD 313 million, or CAD 1.35 per share, compared to CAD 269 million or CAD 1.27 per share for the same period in 2017. As Scott mentioned, while the results of the quarter were slightly below our expectations, we are pleased with the growth in our year-to-date results and are confident that we'll be able to deliver adjusted earnings per share growth of at least 10% for the year.
We also report an increase in our year-to-date operating cash flow before changes in net working capital of CAD 64 million or 9% to CAD 767 million. Operating cash flow is a key metric for our business because it is the basis upon which our credit metrics are calculated. The increase was in line with our forecast, and we expect that our annual operating cash flow growth will approximate earnings growth for 2018. Now the details for the quarter. Emera Energy experienced a typical shoulder season and performed as expected in the quarter. Margins in the marketing and trading business reflected 2017, while the generation business realized higher capacity revenues in the quarter. Energy margins also improved over Q2 2017, reflecting the impact of the unplanned outage at Bridgeport Energy from mid-March 2017 to mid-June 2017.
Florida and New Mexico experienced less favorable weather conditions in their service territory during the quarter. Compared to 2017, spring conditions in Tampa were relatively mild and wet, which decreased the number of cooling degree days and reduced overall load at Tampa Electric. Lower revenues due to less favorable weather were partially offset by lower O&M as a result of successful cost containment efforts. At Peoples Gas, earnings increased by approximately $2 million in the quarter compared to Q2 2017, as the utility continues to experience strong residential and commercial customer growth. Over the past 5 years, Peoples Gas has been growing its customer base annually by approximately one and a half times the population growth rate for the state of Florida. Emera Maine's earnings continued to be impacted by the late seasonal nor'easter it experienced at the end of Q1.
The storm activity delayed capital spending, which has increased the utility's O&M compared to last year. Despite these delays, we expect to complete our planned capital projects over the balance of the year and anticipate that more O&M will be capitalized as we ramp up our capital program. Maine's earnings were also impacted by the Maine Public Utilities Commission decision on our distribution rate case. On June 19th, the PUC group concluded their deliberations, which included assessing the impact of the U.S. tax reform and how the benefits would be incorporated into rates. Because our initial filing was in October 2017, before U.S. tax reform was passed, our REMU requirement did not include the benefits of tax reform.
Prior to the PUC concluding its deliberations, Emera's position was that the utility would retain the benefits of tax reform until new distribution rates came into effect on the basis that overall rates are just and reasonable, since tax reform would not cause the utility to earn in excess of its allowed ROE. The PUC disagreed with our position and has ordered that beginning on January 1st, the benefits of tax reform are to be returned to customers. As a result, we have recorded a CAD 2.5 million regulatory liability in the quarter, in addition to some other smaller regulatory adjustments related to the decision to reverse the benefits of U.S. tax reform recorded in the first half of the year. The benefits of tax reform from January one onwards have been incorporated into the new distribution rates that came into effect on July 1st.
While we are disappointed with the PUC's decision on the treatment of tax reform benefits for the first half of 2018, we are pleased that they have increased our allowed ROE from 9% to 9.35%. Over the past couple of years, Nova Scotia Power has made significant investments in IT infrastructure, including the implementation of a new ERP system. As a result of these investments and an overall increase in plants and service, depreciation expense increased in Q2 2018 compared to the prior year. The utility also experienced legislated increases in its demand-side management costs and higher interest costs as a result of an increased fuel adjustment mechanism liability and higher shorter-term interest rates. These cost increases were partially offset by an increase in residential load. For the year to date, Emera Energy has delivered strong earnings growth.
Favorable weather in early 2018 in several of Emera Energy's key market areas resulted in higher market prices and volatility that led to higher natural gas margins. The early [2018] activity also provided favorable hedging opportunities for the first quarter. As a result of a strong start to the year, we forecast that Emera Energy will deliver at the high end of its normal $15 million to $30 million USD earnings guidance for 2018. The generation business has realized higher capacity revenues throughout 2018, and as we previously noted, 2018 will see an approximate $40 million USD increase in capacity revenues. Emera Florida and New Mexico also benefit from favorable weather in their service territories. You will recall the Q1 weather in Tampa, and in Florida in general, was quite favorable in January and February, while New Mexico experienced a more seasonally cold winter.
In addition, the gas utilities benefited from lower income tax expenses. As a result, all three utilities generated strong first-quarter earnings. Despite less favorable weather in the second quarter, year-to-date earnings from the segment on a USD basis have increased by 7% compared to the prior year. We expect this growth trend to continue through the balance of 2018 and anticipate that earnings from this segment on a USD basis will grow by a rate similar to what we experienced in 2017. We expect that this segment will have an even stronger second half to 2018, as Tampa Electric experiences its summer peak in Q3 and continues to benefit from higher AFUDC from our solar and Big Bend investments, and Peoples Gas continues to experience strong customer growth. Quarterly earnings volatility is not unusual for Nova Scotia Power and Emera Maine.
As we have seen over the past couple of years, the timing of certain expenses through the year can change the quarterly earnings profile while the annual earnings remain consistent. In 2017, both utilities experienced a strong first half of the year, with Nova Scotia Power realizing over 75% of their earnings by June, and Maine, on a USD basis, realizing over 50% of their earnings over the same period. By comparison, in 2016, Nova Scotia Power realized approximately 60% of its earnings in the first half of the year, while Emera Maine realized approximately 40%. In 2018, we expect that the relatively lower year-to-date earnings will reverse out over the balance of the year, and both utilities are expected to experience modest growth in their rate base and earnings on a full-year basis.
As a result, we see that consistent with 2016, NSPI has earned over 65% of its annual earnings in the first half of the year. Despite some softness in the Q2 results for the year, we are in line with where we expected to be. Our portfolio has generated strong earnings and cash flows for the year-to-date, and we are looking forward to an even stronger second half of 2018. In addition, we continue to improve the quality of these earnings and cash flows. Our Q2 and year-to-date results have benefited from increased cash earnings from the Maritime Link and higher capacity payments in New England. These predictable sources of cash, combined with the stable cash flow from our portfolio of regulated utilities, underpin our ability to grow the business and fund our dividend. Having a strong balance sheet is also essential for our growth plans.
Over the past 12 months, we've made significant progress in strengthening our balance sheet and moving closer to our 2020 target capital structure of 55% debt, 35% equity, and 10% hybrid capital. Over the past 12 months, we have raised approximately CAD 880 million of common equity through a combination of a public issuance and our DRIP program. In May, we raised an additional CAD 300 million of preferred equity. We have been focused on de-leveraging at the holdco level, and we have decreased our consolidated leverage by more than 2% over the past 12 months. In 2018, we expect our total capital and dividend funding requirements to be approximately CAD 2.8 billion.
The vast majority of funding for these activities will be provided from cash flow from operations, which we expect will continue to show strong year-over-year improvement in 2018, and from operating company debt in line with approved capital structures of the utilities which are driving the rate base growth. We believe that the remaining incremental funding requirement has been addressed by the preferred shares that we issued in May. We are off to a great start in 2018, and I continue to believe that the fundamentals of the business have never been stronger. I am pleased with the progress we have made advancing our capital program, and I'm confident the significant investments we are making in Tampa will provide value for customers and shareholders for many years to come.
Our revised dividend growth target will allow us to more efficiently fund these projects while still continuing to provide a growing dividend to shareholders. With that, I'll now turn the presentation back over to Ken.
Thank you, Greg. This concludes the presentation. We would now like to open up the call to take questions.
Ladies and gentlemen, we will now conduct a question and answer session. If you would like to ask a question at this time, simply press star followed by the number 1 on your telephone keypad. Again, that's star followed by the number 1 on your telephone keypad. We'll pause for a few moments and compile a Q&A roster. Your first question comes from the line of Robert Hope with Scotiabank. Please go ahead.
Yes. Good morning, everyone.
Morning, Robert.
Just want to maybe touch on the cash flow guidance that Greg mentioned. The 10% year-over-year in CFO growth, that's what we've seen in H1 versus H1. If I recall on the Q1 call, which was a 28-ish% year-over-year growth in CFO, you thought that that higher cash flow growth could have been sustained. Just want to know if there's been any moving parts there.
No, nothing of any material. We obviously had some smaller things both on the upside and on the downside, Robert. Directionally, we would expect it to be in line with earnings, meaning greater than 10% and probably somewhere in the 10%-20% range on an annualized basis.
All right. That's helpful. Then, I realize that annual strategy sessions are ongoing, when you do look at the revised dividend growth outlook as well as your large capital plan, can you provide some additional color on how you're looking at the funding for 2018 as well as beyond?
Yeah. Robert, I think the way we've always looked at it is through a traditional lens is, work our way up the capital structure, starting with maximizing our operating cash flow in our businesses, which we're very focused on. Obviously, the change in the dividend growth target allows us to retain more of that for our business, as I'd indicated. We've done some financing at Tampa Electric already. The regulated utilities where those investments will be made, we'll have some OpCo debt issued. We've done CAD 300 million of preferred equity. We still have room in our capital structure to do some additional preferred equity, if necessary. As far as we are for 2018, we don't have any additional common equity requirements.
All right. I appreciate the color. Thank you.
Thank you.
Your next question comes from the line of Robert Kwan with RBC Capital Markets. Please go ahead.
Good morning. There was a statement earlier of greater than 8% EPS growth out through 2020. I think previously there was a discussion of 10% annual average EPS growth. I'm just wondering, has there been a change? I recognize those two statements still could be roughly the same, but, how are you looking at that EPS growth out to the end of the decade?
I mean, Robert, our view on earnings growth have not changed. I think, really what we're profiling here as it relates to the change in the dividend growth guidance is largely a capital allocation decision. If you sort of look whether it's over the last five-year period or over the last 10-year period, we've had and delivered strong earnings growth over that period. Our dividend growth has outpaced that. We're looking to make sure that we drive a dividend return profile that's still attractive to shareholders and still look for increases in that dividend on an annual basis. Looking to ensure that our earnings growth exceeds it. That is certainly our view. Our view of forward-looking earnings is not different than what it was or frankly what it has been. No real change in our view around earnings.
Really all we're doing is making sure that that dividend growth rate profile is sustainable and increasingly using that cash flow from operations to redeploy into the capital investment opportunities that we've got inside the business that frankly we think is the right thing to be doing for shareholders.
Got it. As we think about dividend policy in general, you've reduced the growth rate, you reiterated your long-term 70%-75% payout target, while also making the statement that you expect to be above that range through the guidance period. I guess at what point do you see yourself coming back into the range? If you think about where you were, the fact that you've reduced your dividend growth, was it completely unachievable to come back into the range, prior to reducing the dividend growth rate?
I don't really want to get boxed in, Robert, to saying a timeline as to when, or a date as to when we'd get the payout ratio back towards our target. Certainly, I'd say we remain comfortable that that is the right target. In the meantime, we're not uncomfortable with it being higher than that, given the quality of earnings and cash flow profile that we've got within the business and recognizing the highly regulated nature of it at well in excess of 90% regulated now, really more like 95%. I think, as I say, if you look over the last five or 10 years, earnings per share over the last five or 10 years has kind of grown in the range of 6% a year. Meanwhile, our dividends have grown in the range of 10% a year. That's obviously not a sustainable forever path.
All we're looking to do is to make sure as we continue to see a profile in front of us that has robust earnings growth driven by all the things that Greg and I spoke about, that are tangible and here and live now as we're actively making those investments that we know drive strong growth and earnings. That we make sure that we have a dividend growth profile that is sustainable, but also allows us to retain more funding flexibility within the cash generation that the business has and directing an increasing amount of that cash into that growth investment profile. As we work our way through that dividend payout ratio, of course, as our earnings growth is higher than that dividend growth profile, the payout ratio will over time come down.
Got it. If I can maybe just finish on overall capital allocation. I think that the dividend growth target that you've got now makes a lot of sense. When you look at your overall funding strategy and kind of having historically been regularly out for common equity and the amount of savings, notwithstanding it will compound over time, it's relatively small compared to the amount of equity you've raised. Are there other actions that you are considering to help funding over and above just the reduction in the dividend growth rate? I guess specifically I'm looking at asset sales.
I understand. I might say it this way, Robert, that we recognize that our cost of equity today is relatively high as to where it's been. As part of our strategic planning exercises that we do on an ongoing basis that Greg also referred to, we've looked at and continue to look at all options as it relates to how to best allocate capital and finance that attractive capital profile that we have in front of us. We've got a plan. We're looking to minimize, to the greatest degree that we can, the need for raising equity at this pricing level. We've got a plan, and we're working that plan.
Okay, just to be clear, were asset monetizations discussed at the same time as reducing the dividend growth rate, i.e., have we kind of just passed that as part of at least this year's strategic planning process, or is that still on the table?
I think, when we talk about and look at strategy, we think about everything, and all of those things are in the mix. All of those things we work through in trying to make the best capital allocation decisions that we can. We're comfortable that we've got a plan that addresses, appropriately, those needs over time. When we have something more to share and talk about, we'll do that.
Great. Thank you.
Thanks, Robert.
Your next question comes from the line of Ben Pham with BMO. Please go ahead.
Okay, thanks, good morning. I'm just wondering where debt repayment, does that play a role in your overall incremental cash to saving here through the dividend change?
Yeah. No, Ben, it's Greg. If you look at the maturity profile that we have on our longer-term debt, we've, like many of our peers, have taken advantage of the yield curve over the last decade or so and kind of maybe a little bit longer than normal. We don't really have anything material maturing, either at the OpCos or at the holdco over the next three or four years. That really didn't come into play with any of the decisions that we've made to date.
Okay. Maybe I can go back to some of the disclosures you had, a couple of different data points that provide a pretty good impression where EPS could go, you said you can probably still grow at 8%+ EPS, dividend 4% to 5%, the target payout is still going to be above the 70%-75% range. If you just simply take an EPS CAGR of 8%, it seems like your payout will get down to 70%-75% in 2021. Is there something else that's playing a role there, capacity payments that maybe there's a bit of volatility that you can't reconcile there?
Yeah. Let me try. I'm not sure I completely get where you're going, Ben, but I don't think we've said that our earnings growth target is 8%. We have talked about our 8% dividend growth target, of course. We've generally tried to stay away, frankly, from EPS growth guidance, although obviously we've given a sense directionally as to where we see things now with the reference in my remarks to 2018's expected growth of something in the range of 10%+, and that our longer-term view of EPS growth over the guidance period, i.e., through 2021, is expected to exceed, on average, the dividend growth profile. Which is really the fundamental message that we're trying to convey, that our earnings growth profile is unimpacted. It remains robust. It remains consistent with levels we've achieved in the past.
All we're really trying to do is set the dividend rate at a level that we think is sustainable and allowing us to, as I say, take some increased funding flexibility into our financing plans.
Okay. Maybe can I ask you maybe another way, is rate-based growth a good indicator of EPS growth?
Yeah, Ben, it's Greg. I think directionally. Obviously, not all rate-based growth is the same. Obviously if you're investing in certain utilities that have higher equity thicknesses and higher allowed ROEs, that would have a bit more of an overall impact on EPS growth than some other things. I'd say directionally, you'd be right just recognizing that some of it's probably a little bit more helpful than others.
Yeah, I think just to pile on to Greg's point, I think if you look at the rate-based growth profile that is a part of the materials for this call. The component part of that is in Florida, where we're seeing more growth and where relative to some markets, the allowed ROE ranges are a little bit higher and the equity thicknesses are a little bit stronger. The rate-based growth profile that we have that shows it on average, is weighted toward those Florida utilities. Those Florida utilities are growing at a rate through that period that is in excess of that consolidated rate. To Greg's point, yes, it's a helpful proxy, but in this case, I think you're seeing some of the growth coming from some of our stronger performing operations.
Okay. All right. It's very helpful. Thanks, everybody.
Thanks, Ben.
Your next question comes from the line of Linda Ezergailis with TD. Please go ahead.
Thank you. I realize there's a lot of strategic iterations that are going on, and it can be somewhat dynamic. Maybe you can help us understand where you're at in your discussions with the debt rating agencies and beyond capital structure, what sort of credit metrics kind of informed your views on optimizing your financing plans?
Hi, Linda. It's Greg. We have regular dialogue with both credit rating agencies. Obviously, they're insiders. They have full visibility on our plans. I'd say every step that we've taken to date is consistent with representations that we would have made to them last year when they did their annual report, including the equity issue last December, the preferred share issuance that we did in May. We're continually evaluating our capital plans and making improvements on our operating cash flow and our FFO as an extension of that. Again, continually believe that we're on track to maintain our investment-grade credit ratings.
Thank you. Maybe, also from an operational perspective, are there any changes that you're considering with new leadership in terms of operationally, how that might augment your rate-based growth, from a cost savings perspective or anything else that might be shifting?
No, Linda, I think, I'm really comfortable certainly with the leadership team that we have in place. Obviously, there were some changes made over the last 12 months in some jurisdictions. I have every confidence in each of the leaders of the businesses that we've got. Of course, driving efficiency of cost and process is a core element of everything that we all do, both at the corporate and the operational level. That's sort of a core part of the DNA here and something that is in focus for Greg and each of the business leaders. I have every confidence that all of those things are being done and tackled appropriately. No, there's no big changes or anything like that contemplated.
Okay. Thank you. Maybe, if you can help us understand some of the You've been very helpful in helping us understand the timing effects that we've seen in the quarter on earnings. Maybe, if you could help us understand if weather was normalized for the first half of the year, what Florida and New Mexico earnings might have been to give us a sense of what sort of a base we should grow off of for next year?
Yeah. With that, Linda, I don't have the exact numbers in front of me, interestingly enough, if you think of what we experienced in Tampa Electric, I'd say over probably the first 6 months of the year, it's probably been relatively consistent from a weather perspective versus what we've seen over the last few years. What we've seen is it was a little bit colder than normal early in the winter in Tampa, which helped. Both not just Tampa Electric, but also Peoples Gas. They did have some heating load or cooling load, I guess, to deal with late Q1 warmer weather. That kind of offset itself in Q2 with the cooler and moderate weather. What's interesting is it's kind of balanced out so far on the 6-month basis.
I can't say on a year-to-date basis it's been anything material, although there's been some ups and downs by month and obviously by quarter.
That's helpful context. Thank you. I'll jump back in the queue.
Thanks, Linda.
Your next question comes from the line of Andrew Kuske with Credit Suisse. Please go ahead.
Thank you. Good morning. I think the first question's for Scott, you mentioned something in the prepared remarks about CAD two and a half billion of accretive rate base opportunities at TECO since the acquisition. If you could maybe just give us a bit of context of how much did you contemplate at the time you did the TECO deal of the growth that you've actually seen thus far?
Yeah. In terms of numbers, I don't know whether Greg has that handy. I don't. What I can tell you is projects like the 600 MW of solar was not contemplated at the time of the acquisition. That is incremental, that arose out of strategic planning work that was done between the announcement and the close period and thereafter. I know the sort of thinking around the Big Bend plant had been in the works, but the ultimate project that we announced earlier this year, there wasn't full color around that, and the scale of that would have been unclear at the time of the acquisition. A component of that would be incremental as well.
Andrew, just maybe provide a little bit more color around it. When we think of the 2018, 2019, and 2020 period, when we originally acquired TECO, we were expecting to spend in CAD a little bit north of CAD 2 billion over that period. That number has effectively doubled because of the solar investment and the Big Bend modernization. Just to give you a rough number, so it's gone from about CAD 2 billion over that three-year period to about CAD 4 billion.
That's very helpful. Then maybe just an extension of that. When we think holistically about just the dividend, what you've done from a guidance standpoint and really the future of earnings, you're going to be effectively putting more capital to work at a greater equity thickness of higher-earning utilities also with U.S. dollars, than you would have been doing previously.
That's correct.
Okay. Thank you. Then maybe if I could just finish up on one thing on the advanced metering at NSPI, and then there's some commentary about best practices across the whole portfolio. Beyond just the capital that you're deploying, what other benefits do you see the portfolio of utilities getting from the AMI initiatives?
Yeah. I think, obviously, AMI, whether it's second generation or third generation, does provide much more efficiency as it relates to the process of meeting readers. That's a first and obvious impact. If you get into this, it's really a digitization of what has been, to this point, a non-digital process with third-generation meters, has computing power that is unlike previous generations that will now allow things like remote connects and disconnects of electricity. That creates a lot of operating efficiencies for the utility, that where right now that obviously is a much more manual labor-intensive process. It gives much more and better data for the utility to share with its customers. Customers will have better access to their energy usage and how that applies. Those would be some of the benefits.
Ultimately, you should land in a spot where you have lower OM&A associated with a lot of those activities and therefore greater efficiencies.
That's exactly right.
Yeah. That's correct.
Okay. That's very helpful. Thank you.
Your next question comes from the line of Robert Catellier with CIBC Capital Markets. Please go ahead.
Hey, good morning, everybody. I just wanted to clarify some of the numbers I think I heard on the call here. While it sounds like you're shying away from providing formal EPS guidance, the 8% CAGR you're talking about, is that from the adjusted EPS number of 2.46 in 2017 through 2021?
Robert, it's Greg. What we've said is that we expect our earnings growth over the guidance period to exceed our new dividend growth guidance. We also expect earnings growth in the current year to be kind of in the 10%-plus range, in 2018 versus 2017. In both cases, you're correct, that would be versus the 2.46 in 2017.
Maybe what's created the confusion, Robert, is the other reference was that we would still expect to meet the 8% dividend growth CAGR from when we put that 8% target in place, even with this new dividend growth profile.
Right. The question is, what is the base that 8% is based off? I think that is the 2016 number?
That 8% was a dividend number.
Oh, okay.
That would be based on when we first provided the 8% dividend growth guidance in 2015.
2015. That's right.
The 8% effectively is not an EPS CAGR.
No.
Correct.
All right. Okay.
No.
I just wanted to clarify that. Looking at the comments, I think I heard on FFO or cash flow, relative to your debt and the target, I think it's a 12% target you have. Have you socialized the expected cash flow growth and where you'll end up as a ratio with the rating agencies, and how wary with the sort of managing the outlook on the credit rating?
Robert, it's Greg. We have regular dialogue with rating agencies on all of our plans in terms of both forward-looking as well as year-to-date results. Again, we are confident, and I believe they are equally confident that we will achieve the targets that we've set for ourselves, both in 2018 and 2019.
Yeah, I guess where I'm struggling is getting to the 12% in 2018 with the FFO number that I think you said this year, 10% to 20% growth in cash flow.
Yeah. Robert, we're working through that. We're making sure we maximize as much of our operating cash flow as we can, as we had indicated earlier. We've done a pref share issuance. We have room in our capital structure, if necessary, to do an additional pref share. We're making measurable progress towards that 12% goal.
Okay. Then just two other quick questions here. I think I noticed in the MD&A a slight wording change on the timing of cash from LIL cash earnings to 2020 from late 2020. Has there been an appreciable change with respect to cash earnings there?
No.
No.
Okay. Similar question on the U.S. tax reform. There's obviously wording in there still under analysis, which is understandable given the nature of the beast, but is there anything that's changed specifically related to your expectations on interest deductibility or the valuation of alternative minimum tax credits?
Yeah. Robert, it's Greg again. No. Certainly, the feedback we're getting mostly through the efforts of Edison Electric Institute are that the interest deductibility and the methodology that will be employed is consistent with or maybe even slightly better than what most of us would have initially thought. We're not seeing any impediments to continue to deduct holdco interest as it relates to utility operations. That's a positive. Other than the one bulletin that the IRS came out with, there's been nothing else on the sequestration of the alternative minimum tax, but we're continually watching that and recognizing that. That'll be single digits of millions of CAD in cash flow if that was to play out, but there's been nothing to update on that.
From an operating business perspective, obviously, we made the reference to Emera Maine, but again, just to quantify, we're talking CAD 1 million or CAD 2 on our overall cash flow, nothing overly material that would impact ratings.
Okay. Fantastic. Thanks.
Thanks, Rob.
Your next question comes from the line of Christopher Turnere with JPMorgan. Please go ahead.
Good morning, Scott and Greg. It looks like your disclosure today says that you're bringing down the dividend growth rate in part to save cash flow. You also mentioned that the payout ratio is going to remain above the range during the period. I'm wondering if that is your goal, why not bring the dividend growth down lower than you did today?
Yeah. I think, Chris, really, as I stated in my remarks, it's really about, for us, finding the right balance between making sure that we've got the dividend at a sustainable level and maintaining a growth profile that we think provides an appropriate and attractive value proposition for shareholders. As I mentioned, we're not uncomfortable with the fact that the existing payout ratio is higher than that target on a temporary basis, recognizing the quality of the earning stream and the predictability of that earning stream and cash flow profile that is in front of us. Really, it's just a goal to reduce that over time, and we didn't see a need and didn't see it as necessary to look to reduce the dividend growth profile. We're comfortable with the target that we've set.
Is that in part informed by your post-2020 view being perhaps better on the EPS growth side than through 2020?
Yeah, I'd say we're not trying to extend the guidance period beyond what we have stated as to the guidance period. I think that we're comfortable that that dividend growth profile allows us to reduce the payout ratio over time with an earnings growth profile that exceeds that dividend growth target.
I think, Chris, it's Greg. It's important to remember, too, that there's a number of other factors that are not necessarily reflective of the other underlying business that impacts EPS and by default, dividend payout ratio in any given year. U.S. tax reform would have been one, but foreign exchange is another. We alluded to it earlier in my comments about the impact of FX in the quarter, and obviously, the Canadian dollar has been stronger. That has an impact on earnings EPS and dividend payout ratio. It's important for us to make sure that we have a dividend growth rate that's reflective of the underlying business. Scott's point, the fact that we may be above our dividend payout ratio for other factors that are not necessarily tied directly to the underlying business, doesn't make us uncomfortable at all.
Okay. Just modeling questions, I guess here. 10% EPS growth this year, then your message is something above the dividend growth rate for next year. What is your rate base CAGR these years or over the longer-term period? Is there anything in your 2018 plan that wouldn't necessarily repeat in 2019?
No. Chris, we don't provide annual EPS targets or growth guidance. We're expecting about 6.5% growth in our rate base from the end of 2017 through to 2020. There are some things in 2018 that won't necessarily be replicated in 2019 from a rate base investment perspective. Obviously, some of the solar that we're spending now wouldn't necessarily be replicated, but we also have starting up spending on the Big Bend modernization program at Tampa. When you look at that in totality, we're actually seeing an uptick in rate base investment in Florida. Other than that, I can't think of anything material in any of our businesses where there's an unusual investment in 2018 that wouldn't kind of be maintained going through the balance of the years.
Yeah, two great points. We are careful to try and say, look, we expect the earnings growth profile to exceed that dividend growth target on average over the period. There can be impacts in any one year, timing of CapEx or those kinds of things that can impact that. Don't want to think that it's a year-by-year number. We think about it on average.
Okay. That's helpful. In terms of the repeating in 2019, I was referring more towards your net income or your EPS.
Oh.
If there's anything in there that would not repeat next year.
No, I don't think so. Obviously, we're having a very strong performance of our Emera Energy business this year, in large part from the increased capacity payments, which took another step up in June 1st of this year. We'd expect to be pretty consistent across that. I think as we look across our businesses, there's nothing really unusually positive this year that we wouldn't anticipate continuing.
Got it. Thank you very much.
Your next question comes from the line of Jeremy Rosenfield with Industrial Alliance. Please go ahead.
Thanks. Morning. Can I just turn to the capital investment forecast for a second? Appreciate that you're probably going to have an update at some point this fall, but previously, I think you've elaborated on about CAD 2.1 billion of capital investment in each of 2019 and 2020. I'm just curious if you can provide some details on how much might be associated with AFUDC, so potentially not cash capital investment, particularly at TECO, I'm thinking, if there's anything there.
Yeah. Jeremy, when we generally quote capital investments, we do it on a pre-AFUDC level. Those would be the actual, truly, obviously, the rate-based investments, depending on the nature of the investment, would be slightly higher when you include AFUDC.
Okay, that's good. Then just on the NSPI advanced metering investment, I'm assuming that that's not, or that was not in the previous CAD 2.1 billion number, just to be clear.
Not that exact amount in that exact timeframe. We did know that over the planning period that there would be some investment in AMI. We probably had a significantly smaller amount a little bit earlier, now that we're not doing the pilot project and going to the full implementation, we see CAD 133 million being spent predominantly, I guess, in 2019 and 2020.
Okay. Then just in terms of the strategic planning and thinking of all options that are on the table, and we've discussed asset sales and other things. Just a question on, in terms of delaying future investments or trying to play with the timing of capital deployment opportunities, is that something that you have some flexibility on as you go through the planning process?
Yeah, we always have some flexibility on the timing of capital. In some places, if you're making rate-based investments in very strong regulatory regimes, it's hard to see a compelling story why putting your foot on the brake would be helpful from that perspective. There's some things that naturally move between years. We just talked about AMI and probably a little bit larger spend, but probably in a different profile than we initially thought. As we look at some of our other markets, whether it's the Caribbean or Maine, and given where we're at in various regulatory hearings, we always have the flexibility to move some capital around. I'd say it's probably the capital that we'd be thinking about moving around is relatively small to the overall capital program. The majority of our capital program is rate-based investments in very strong regulatory environments with returns that we like.
Compelling customer benefits.
Yeah.
Okay. That's very helpful. Thank you.
Thanks, Jeremy.
I'm showing no further questions in the telephone queue at this time.
Thank you all for participating in the call and the robust set of questions. We look forward to talking with you again after our third quarter of results in the fall.
Thank you to everyone for attending today. This will conclude today's call, and you may now disconnect.