Ladies and gentlemen, thank you for standing by. My name is Dan and I will be your Conference Operator today. Welcome to the Fortis Q1 2018 conference call and webcast. During the call, all participants will be in a listen-only mode. There will be a question and answer session following the presentation. At that time, those with questions should press star followed by one on their telephone. If at any time during the conference you need to reach an operator, please press star zero. At this time, I would like to turn the conference over to Stephanie Amaimo. Please go ahead, Ms. Amaimo.
Thanks, Dan, and good morning, everyone, and welcome to Fortis' first quarter results conference call. I am joined by Barry Perry, President and CEO, and Karl Smith, Executive VP and CFO, other members of the senior management team, as well as CEOs from certain subsidiaries. Before we begin today's call, I want to remind you that the discussion will include forward-looking information, which is subject to the cautionary statement contained in the supporting slideshow. All non-GAAP financial measures referenced in our prepared remarks are reconciled to the related U.S. GAAP financial measures in our 2018 first quarter MD&A. Also, unless otherwise specified, all financial information referenced is in Canadian dollars. With that, I will turn the call over to Barry.
Thank you, Stephanie, and good morning, everyone. Before starting on the quarterly results, we wanted to briefly comment on the recently announced retirement of Karl Smith, our Executive Vice President and Chief Financial Officer. After more than three decades with Fortis, Karl announced that he will be retiring on June 1st. Over the years, he has worn many hats at Fortis and worn them well, including President and CEO of both FortisAlberta and Newfoundland Power. His operational utility experience, coupled with his financial acumen, provided Fortis with an incredible CFO over the last few years. Most notably, he successfully led our financial team and met our capital market needs during a time in which the company doubled in size following our strategic push into the United States. Karl, we are grateful for your dedication to Fortis and wish you all the best in life in your retirement. Thank you.
Succeeding Karl as Executive Vice President and Chief Financial Officer at Fortis Inc. will be Jocelyn Perry, effective June 1st. Jocelyn is the current President and CEO of Newfoundland Power. Previous to her experience at Newfoundland Power, Jocelyn led the financial reporting team at Fortis Inc. She brings her enthusiasm, strong work ethic, and close to 20 years of experience with the Fortis Group. Jocelyn, we're excited about your appointment and welcome your leadership to our executive table. For the record, Jocelyn and I are not related. Congratulations, Jocelyn.
Thank you.
Now let's start on slide four with our first quarter results. We're off to a good start in 2018 with operational financial performance aligned with our expectations during the first quarter. Reported net earnings of CAD 323 million for the first quarter of 2018 increased nearly CAD 30 million over the same period in 2017, largely due to a positive U.S. tax impact related to our intention to file a consolidated state tax return in 2018. Adjusted earnings were slightly lower than the first quarter in 2017, but met our expectations. We are pleased with these results considering some of the headwinds we experienced in the quarter. We spent CAD 685 million in capital during the quarter, enhancing service for our customers in a safe, reliable and affordable manner. We remain on track to invest CAD 3.2 billion in total at our utility businesses in 2018.
Since our last earnings call in February, we made progress on several fronts. In March, we reached a significant milestone in the Wataynikaneyap Power Project with a funding framework announced with the governments of Canada and Ontario, highlighting our dedication to advancing incremental growth opportunities. On the regulatory front, Central Hudson filed a joint proposal agreement with multiple stakeholders and intervenors in April, outlining a three-year rate plan for the period July 2018 to June 2021, underscoring Fortis's commitment to constructive customer and regulatory relationships. Karl will speak to this in more detail in his remarks. Operationally, the Turks and Caicos Islands are quickly returning to normal following the impact of Hurricane Irma this past fall. Thanks to the strong execution of our emergency response team throughout North America, electricity was restored to customers in less than 60 days.
We expect to recover most of the revenue loss later this year. Overall, the accomplishments of our utilities during the quarter reinforces the strength of Fortis as a North American utility leader and positions us well for the remainder of the year. We included the Wataynikaneyap Power project in our five-year capital plan following the announced funding framework in March. The project increased our capital plan by approximately CAD 600 million, reflecting our share of the expected capital investment to 2022, increasing the five-year capital plan from CAD 14.5 billion-CAD 15.1 billion. The capital program is expected to improve and automate the electric grid, address natural gas system capacity and gas line network integrity, increase cyber protection, and allow the grid to deliver cleaner energy. With our capital program consisting of a diverse mix of highly executable, low-risk projects, we are positioned to deliver superior risk-adjusted returns.
There are only eight projects included that each have a total project cost of CAD 150 million or greater, with the balance of the capital being spent on small projects. By 2022, we expect rate base to grow to approximately CAD 33 billion, resulting in a compound annual growth rate of 5.4% for 2017-2022. The three-year compound annual growth rate through 2020 is now expected to be 6.2%. As I mentioned, we successfully advanced the Wataynikaneyap Power project during the quarter with the announcement of the funding framework. The announcement is the culmination of years of important discussions among area chiefs. As a reminder, this project will connect 17 remote First Nation communities in Northwestern Ontario to the main electricity grid through construction of 1,800 km of transmission lines. The project has an estimated total cost of CAD 1.6 billion and is expected to be completed in phases.
The initial phase, connecting the Pikangikum First Nation to Ontario's power grid, is fully funded by the Government of Canada and is expected to be completed by the end of 2018. The next two phases are targeted to be completed by the end of 2020 and 2023. Remaining milestones include obtaining a leave to construct, which is expected to be received in early 2019 from the OEB, and finalization of environmental approvals and receipt of permits. We are proud to be involved in this signature project as it supports First Nation communities by providing access to cleaner, reliable power as they move away from costly diesel generation. We are also focused on growing our utility business and continue to track other development opportunities within and around our existing portfolio of businesses. The Lake Erie Connector project at ITC continues to be a focus.
The project is fully permitted in both the United States and Canada and will improve the security and reliability of both energy grids. In addition, ITC is exploring storage opportunities based on the needs in southwestern United States. As a result, ITC will incur incremental business development costs to support this initiative over the next year or so. In British Columbia, we continue to pursue additional LNG infrastructure investment opportunities, including expansion of the Tilbury LNG facility. In March, FortisBC shipped 20 LNG containers to China. This country's demand for LNG is growing as they ramp up efforts to improve air quality and are turning to natural gas as a reliable alternative to coal and wood. This is positive news, and more LNG shipments are planned in 2018. We currently have approval from our B.C. regulator to invest an additional CAD 400 million at the Tilbury facility.
We'll move forward with the project pending further demand for LNG from Tilbury. We're also supporting construction of a jetty or pier that will allow LNG from Tilbury to be delivered by vessel, which will help support the demand for future expansion, subject to permitting and other approvals. This will help the marine industry and local fleet switch from bunkering fuel to LNG and allow for the shipment of LNG to other countries. Opportunities for growth don't stop there. In fact, we are very confident in our ability to grow our portfolio of utility businesses. We are working on our five-year capital plan with the intent of providing you with a meaningful update this fall. Key areas of focus for us include incremental transmission and renewable energy investments, energy storage projects, and grid modernization across our utilities.
We are confident our capital plan and associated rate base growth supports our 6% average annual dividend growth target through 2022. We have increased our dividend for 44 consecutive years and have one of the longest records for a public company in Canada. This is a record we are proud of and expect to continue. I'll now turn the call over to Karl for his last update on our first quarter 2018 results.
Thanks, Barry. Good morning, everybody. Adjusted earnings for the quarter were CAD 293 million, compared to CAD 287 million for the same quarter last year. Adjusted earnings per share were CAD 0.69 for the quarter, down CAD 0.02 compared to the same quarter last year. Cash flow from operations of approximately CAD 600 million in the first quarter represents a 9% increase compared to the first quarter in 2017. The increase reflects the fact that ITC made a large payment in the first quarter last year related to the initial MISO-based ROE complaint. As noted on the previous slide, adjusted earnings per share decreased by CAD 0.02 compared to the first quarter of 2017, and there were a number of puts and takes affecting comparative earnings per share.
UNS had strong performance this quarter, improving our earnings per share by CAD 0.04, largely due to the impact of a full first quarter of new rates at Tucson Electric Power in 2018. The Corporate and Other segment contributed a CAD 0.01 increase in the quarter compared to the prior period. The decrease in corporate costs was a result of lower finance charges related to lower credit facility borrowings and favorable foreign exchange on U.S. dollar domiciled interest expense. Income tax recovery was comparable to the prior period. The negative impact of U.S. tax reform related to a lower tax shield for holding company interest expense was offset by timing differences associated with the application of a lower annual consolidated effective tax rate. Despite better operating performance in our Energy Infrastructure segment, mark-to-market accounting for natural gas hedges at Aitken Creek negatively impacted our first quarter results.
During the first quarter, there were CAD 4 million of unrealized losses, compared to unrealized gains of CAD 6 million for the same period in 2017. As a reminder, these mark-to-market accounting adjustments should be earnings neutral over the long term. However, there may be variability on a quarterly basis. Earnings variances at our other regulated utilities netted to a CAD 0.01 decrease in earnings per share quarter-over-quarter. This was primarily driven by a change in the timing of energy supply costs at Newfoundland Power and lower electricity sales at Fortis Turks and Caicos as a result of Hurricane Irma. As Barry mentioned, the Turks and Caicos Islands are quickly recovering following the hurricane. However, revenue was lower than normal during the quarter. We expect to recoup most of the lost revenue through our business interruption insurance and anticipate settling the claim later this year.
Changes in foreign exchange rates resulted in a CAD 0.02 decrease in the first quarter earnings per share compared to the same period in 2017. The average U.S. dollar to Canadian dollar foreign exchange rate was CAD 1.26 this quarter, compared to CAD 1.32 in the first quarter last year. As a reminder, earnings are not significantly affected by U.S. dollar to Canadian dollar foreign exchange fluctuations. Our annual earnings per share exposure is approximately CAD 0.06 for every corresponding CAD 0.05 change in foreign exchange. Strong uptake in our dividend reinvestment plan, coupled with a CAD 500 million common equity private placement in March 2017, lowered adjusted earnings per share by CAD 0.03 compared to the same period in 2017. We want to take a few moments today to provide an update on U.S. tax reform impacts.
During the quarter, progress was made at our U.S.-regulated utilities in working with their respective regulators to return the net savings to customers due to the reduction in the federal corporate income tax rate. At Tucson Electric Power, an application was filed with the Arizona Corporation Commission, or ACC, to return savings to customers through a combination of customer bill credits and the establishment of a regulatory liability account to be credited in the next rate case. The application was just approved by the ACC last week. At ITC, the current MISO 2018 formula rates reflect an 8%-10% reduction following U.S. tax reform. While MISO rates were reposted in April, they are retroactive to January 1st, 2018. ITC is also working to repost its 2018 rates in SPP to reflect the reduced tax rates.
Central Hudson filed a joint proposal with its regulator in April proposing a three-year rate plan for electric and gas delivery service commencing July 1st, 2018. Included in the agreement is a recommendation to have rates reflect the effects of lower income tax expense resulting from U.S. tax reform. Turning now to interest deductibility. On April 2nd, the U.S. Treasury confirmed application of interest deductibility on a consolidated basis for the purpose of calculating the 30% EBITDA cap under tax reform legislation. This is a positive development. In addition, EEI continues to lead efforts to clarify with the U.S. Treasury the utility exemption with respect to the limitation on interest deductibility. We remain confident that this exemption applies to U.S. holding company interests.
As noted in our annual 2017 earnings call, the lower corporate tax rate reduces the recovery and collection of tax expense from our U.S. customers, which has the effect of reducing near-term cash from operations at Fortis. During the first quarter, we held meetings with our credit rating agencies to review our revised credit metrics. While U.S. tax reform reduces our FFO-to-debt credit metrics, the impact is temporary. We found these meetings very constructive. There have been a number of releases to date. S&P has affirmed our A- rating and assigned a negative outlook. Moody's recently released a credit opinion with no change in our credit ratings or outlook. Overall, we continue to expect annual earnings per share to be negatively impacted by approximately 3% as a result of U.S. tax reform.
It's during times like these that the strength of our low-risk, diversified portfolio of utilities stands out in supporting our investment-grade credit ratings. From a liquidity perspective, our consolidated credit facilities total approximately CAD 5 billion. At the end of March 2018, there was CAD 3.9 billion of unused capacity, including approximately CAD 1.1 billion of unused capacity under our committed corporate credit facility. In March, we filed a CAD 500 million at-the-market, or ATM, common equity program for 2018. To date, we have not utilized the ATM program. However, it is available to support incremental growth opportunities if required. On the regulatory front, we continue to enjoy a period of relative stability. For 2018, there are a couple of regulatory items. At ITC, we await a decision from FERC on the second MISO ROE complaint.
Further, on April 20th, a third-party complaint was filed at FERC challenging ITC's independent incentive adders included in transmission rates for ITC's operating subsidiaries in the MISO region. The adders were approved by FERC to incent companies that focus on owning, operating, and investing in electric transmission. ITC is a pure-play transmission company. As a result, ITC is restricted from operating, owning, or investing in generation or distribution assets. ITC will contest this complaint, and we will provide updates as they become available. In April, Central Hudson filed a joint proposal outlining a three-year rate settlement agreement that seeks to establish new rates effective July 1st, 2018. The proposed settlement represents a balanced outcome for customers and all stakeholders.
It includes rate support for approximately $625 million of capital, which equates to approximately 8.5% annual growth in rate base over the three-year period. In addition, the proposal includes an allowed return on shareholders' equity of 8.8% on a common equity ratio of 48% in rate year one, 49% in rate year two, and 50% in the third rate year. An order from the New York Public Service Commission is currently expected in June 2018, with new rates effective as of July 1st, 2018. I'll now turn the call back to Barry.
Thank you, Karl. Overall, we're off to a good start in 2018. Looking ahead, we are very confident in our ability to execute our strategy of delivering 6% average annual dividend growth through 2022, with the goal in mind of providing sustainable growth to the benefit of our customers and shareholders over the long term. I'll turn the call back to Stephanie.
Thank you, Barry. This concludes the presentation. At this time, we'd like to open the call to address questions from the investment community.
Ladies and gentlemen, we will now conduct the question and answer period. If you would like to now register a question, please press the star followed by the one on your telephone. If your question has been answered and you would like to withdraw your registration, please press the pound sign. If you are using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question. Our first question comes from the line of Robert Kwan with RBC Capital Markets. Please go ahead.
Good morning.
Good morning, Robert.
If I can maybe start just on the funding side and your rating agency discussions, can you just talk about what you put in front of them on the equity side? Obviously, you've got the DRIP on. Can you just talk about how you might or might not be using the ATM as part of shoring up that cash flow, if there's any comments around discrete equity?
Just a comment before Karl weighs in, Robert. Clearly we said when we launched the ATM program that it was there to support incremental growth opportunity. Depending on the outcome of our discussions with the rating agencies, it could provide flexibility to support any issues there. We've come through this process with our rating agencies in a reasonable place. Really that ATM program is available now to support incremental growth opportunities.
Robert, just to add to that briefly. In terms of equity, similar to our presentation around Investor Day last year and our ongoing conversations with the investment community around the capital program and so on, the only equity that's included, and this would've been part of the conversation with the rating agencies, was the ongoing contributions from the dividend reinvestment plan. We don't have any anticipated need currently for discrete equity to fund that plan. Back to Barry's comment, the only contemplation for additional discrete equity would be to fund any additional growth projects.
Perfect. Just to be completely clear, although the ATM had that potential flexibility around tax reform, if everything kind of plays out the way you think it will and what you put in front of the rating agencies, the ATM really should be thought about completely to fund any new growth that pops up?
That's correct.
Perfect. If I can just finish on the five-year CapEx plan that you're working on, obviously, without getting too granular, given you roll it out in the fall, just wondering, is the initial cut looking like it's really just filling out the out years like you've always done? Are you seeing some opportunities for something, call it in the next couple of years, that could really lift the front-end growth rate as well?
I think it's mostly in those outer years, Robert, but there are some things in the earlier years as well that we're focused on. Clearly we're still a bit early on this. Our businesses are all bringing together their business plans over the summer and that sort of culminates in the Fortis Inc. sort of consolidated plan in the fall, so before our Investor Day. It's a little early, but we are seeing some opportunities as well in the front end and filling in those outer years.
That's great. Thank you very much. Karl, all the best in retirement.
Thanks, Robert.
Thank you, Robert.
Your next question comes from the line of Rob Hope with Scotiabank. Please proceed with your question.
Good morning, everyone, and congrats, Karl. All the best in retirement.
Thanks, Rob.
Maybe just the first question on the ITC adder complaint, thank you for the color in your prepared remarks. Just hoping you could flesh out some of your additional points on your defense, and why you believe the independence adder is still valid, as well as a possible timeline for resolution there.
Robert, I'm not going to argue our case on the call here, but I will allow Linda to give a brief sort of overview. I know we did a bit of a public response on Friday. Linda, do you want to just chip in?
Sure, absolutely. Thanks, Barry. Yeah. As Barry indicated, obviously, we are going to vigorously contest the allegations in the complaint. I would just sort of remind everyone that obviously, ITC is a standalone independent electric transmission company, and that certainly did not change as a result of the acquisition by Fortis and GIC. What I would remind everyone is, even if there were to be a conclusion, which obviously, we will vehemently oppose and contest, that we were no longer independent. I think it's important to remember that if FERC was to move away from its past policy and precedent and make such a change, we would expect to be treated no worse than any other standalone transmission company, such as NextEra that recently received a decision from FERC approximately a month ago that granted them an additional 50 basis points for having a transco in New York.
I think it is important to remember that there are other incentives available, and I think that would essentially mitigate. More importantly, we are a independent standalone transmission company, and we will vigorously contest the allegations in the complaint, as we believe they take a step well beyond past precedent and how FERC has defined market participant status.
Thank you. I appreciate the color. Moving over to UNS. There was a very strong quarter there. Going back to your 2017 Investor Day, you had a chart that kind of outlined illustrative earnings for UNS with 2018 being flat to down given the historical test year nature of the rates there. Is that still the case given the strength in Q1, as well as the fact that the rates were not effective until late February 2017?
Rob, I'll chip in and David Hutchens is here as well, who can say a few words about this. You will recall one of the things with an historical test year that the only real good time is when the economy is really improving. We are seeing a tick up in economic activity in Tucson. We're getting more confident that that business will perform better than we had anticipated this time last year, frankly. David, maybe you can chip in.
Yeah, I would agree with that, Barry, obviously, on a year-over-year basis. The quarter, Rob, is really just due to that two extra months of additional rate impact for TEP. That was slightly offset by increased D&A. That's the main story for Q1 year-over-year.
Thank you. I'll jump back in the queue.
Thank you.
Your next question will come from the line of Linda Ezergailis with TD Securities. Please proceed with your question.
Thank you. Congratulations to Karl on your retirement and Jocelyn for your promotion.
Thank you, Linda.
With respect to U.S. tax reform, now that you're filing a consolidated return, can you give us an update on how we might think of the effects of U.S. tax reform on your cash flows? I know you're collecting less taxes. We're eliminating bonus depreciation. I'm also wondering how you're thinking about how long we would amortize your deferred tax liability, as an example, and if there's any other effects we should be mindful of.
Yeah, that's a pretty broad question, Linda. I'm going to get up to the highest level I possibly can. The way we talked about the impact of U.S. tax reform and the 3% accretion to earnings per share still stands in terms of earnings. Cash flow, I don't think we ever provided any specific numbers, but the impact is fairly significant. That's why we wanted to point out that the anomaly in the first quarter compared to the first quarter last year having that payment related to the first decision on the MISO ROE complaint. Going forward, it'll become more evident and more clear as to what the impact on cash flows would be. In terms of the amortization, most of the deferred liability that was created is really tied into the plant assets.
So pick an average life for plant assets, very, very long, 20, 30 years, somewhere in that range, Linda.
Yeah, I would say, too, Linda, to take comfort that we went through a pretty detailed process with the rating agencies in the first quarter to review all of this and frankly, came through it well. I think it points to the strength of the overall regulated business of Fortis that with the capital that we're putting in the ground, that CAD 3 billion a year, essentially, of regulated capital, we quickly recover from the degradation on cash flow that was put in place because of U.S. tax reform. We're very pleased with the outcome of those processes. I know as we traveled around talking to our larger shareholders in the first quarter, that was a concern about what the rating agencies would do, and we've come through that in a very good fashion at this point.
Okay, thank you. Maybe just if you could give us a sense of how the rating agencies think about your foreign exchange exposure. It was a bit of a headwind in Q1, and I know that at times it could be a tailwind. Now with a significant portion of your business in the U.S., at what point would you consider converting your reporting currency to U.S. dollars? What would be the factors in considering that?
That's two very different questions, Linda. The first one, it doesn't really come up in a material way in our conversations with the rating agencies, because as you know the earnings impact is not that sensitive to fluctuations in the exchange rate. The second part of the question, yeah, that comes up, I wouldn't say often, but that does come up from time to time with discussions we have with our investors and so on. It's a big strategic question and one that we'll definitely not rush into. We don't feel any pressure currently to do that. Remember that most of our shareholder base is still Canadian. Overall, only about 25% of our investor base and shareholder base is U.S., although it's growing.
Until we get to a more significant number on that, I don't think we'll be turning our attention to that issue.
That's helpful context. Thank you.
Thank you, Linda.
Your next question comes from the line of Robert Catellier with CIBC Capital Markets. Please proceed with your question.
Just to follow up on ITC, can you tell us how much is in dispute in terms of the earnings under the complaint and the expected timeline for resolution?
Linda, I know that the complainants have identified certain amounts, I think in their complaint. Am I correct on that?
They have. However, they obviously identify sort of the entire value of sort of all of the incentive adders, which is really not a question in the complaint. I would just sort of remind everyone that obviously, in ITC Midwest, we're authorized to collect 50 basis points for the independence adder there. In the two Michigan operating companies, while we're authorized to collect up to 100 basis points, we're only collecting 53 basis points because we are capped at the high end of the zone of reasonableness, under sort of the recent MISO complaint number one decision last year. Really, as you think about it and sort of leveraging off of my prior comment, FERC obviously has a history of granting other types of incentives, which clearly, we feel we would be eligible for in the event that FERC sort of granted the complainant's request.
As I mentioned, we still are fundamentally a standalone independent transmission company and have no, obviously, affiliation with market participants within our MISO region. We still feel very confident that FERC will continue to sort of view the complaint, based on their past precedent.
Rob, just a little metric for you. Every 10 basis points of ROE at ITC works out to about a penny a share for Fortis.
Okay. That's helpful quantification. I just was hoping you could elaborate on the Southwestern storage opportunity. Maybe you could speak specifically to the potential investment over a three- to five-year horizon, and also how much you might be investing in development costs in 2018, 2019.
Rob, this is a fairly big project that we're thinking about. It's a pumped storage project in Arizona. That region, obviously, a very big focus on increasing the amount of renewable power, especially solar, that comes onto the grid in that Southwest area. This project would really facilitate a lot more renewable energy to come onto the grid. It's early days. We have allocated about $10 million this year at ITC to explore that project, to move it along, frankly. I will tell you that the project to go forward will have to be done with partners. We clearly have our own business in Arizona. Tucson Electric Power, especially, that would be a likely participant in that project. There will need to be other utility businesses in the region as well.
You do need to bring a project a certain distance before you can really have fruitful discussions with these parties. I think it's about a 2,000 MW project, and we're refining some of the estimates at this point, so I wouldn't give a number at this point.
Right. In any event, 2,000 MW is a significant investment, just given the nature of the project.
Yeah, for sure. It just aligns with a lot of the things that are going on, especially in Arizona. We do have one of the commissioners who are very highly supportive. David, I don't know if you want to comment because you're obviously living and breathing the Arizona situation.
Yes. We've received quite a bit of support from particular Commissioners and the Commission in general related to this storage, because it is such a big deal to be able to integrate more renewables into the Arizona grid. We're getting some pretty good traction and some pretty good publicity around it already.
Linda, I know ITC is leading this project, so, Linda, maybe you can offer some of your thoughts as well.
No, I think like you indicated, Barry, I mean, obviously we are very excited, very encouraged about the project. Certainly, we've gone through some initial pre-feasibility studies. Now we move into the actual feasibility study that obviously is required for us to continue to advance the project. I would say our dialogue, not just with sort of the policymakers, is constructive, but certainly our dialogue with other potential parties, whether they be potential parties that we would contract with or equity partners, is all constructive and positive. Would just indicate and highlight, I think we are feeling confident about the traction that we've been getting so far and really is reflective of a solution that addresses a fundamental problem in the Southwest. Again, sort of really trying to address that, sort of, if you will, that California duck curve problem.
This is really a solution, as well as provides other benefits to the Southwest. We're very encouraged and excited about continuing to push this project.
Sometimes we get questions about how does Fortis actually work with our substantially autonomous business units, and this is a great example of how it actually works. We have ITC with their expertise in transmission. We have Fortis with our expertise in hydroelectric generation, and David Hutchens and his team in Arizona with the on-the-ground regulatory experience with renewable power, all coming together now to put forward a very exciting opportunity in Arizona. Hopefully we can move this one along. As I said, we have to spend a little money here to see if it's a viable opportunity, and that's what we're intending to do.
Okay. That's very good color. If I could just ask one quick follow-up here. You did mention the California duck curve, which is obviously an important issue for the industry. California is a bit of a fickle jurisdiction at times. You're just doing feasibility studies, so it might be early to really address this. Does the project rely on California or can it move forward just with Arizona or other jurisdictions?
It'd be nice to have participants from California. I'm not sure it's the only scenario, though, and it's a little early to say that. I would say that overall, we'd like to have participants from the entire region, frankly, but it's not necessary. I don't think, under certain circumstances, just that it would not go forward if there were no Californian participants.
Okay. That's helpful. I just want to congratulate Karl on his retirement.
Thanks, Rob.
As a reminder, if you would like to register a question, please press star followed by the one on your telephone. Your next question comes to the line, Christopher Turnure with JPMorgan. Please proceed with your question.
Good morning, Barry and Karl. I wanted to get a sense as to the full, let's say, 2019 run rate of the cash flow shortfall from tax reform alone now that you have color on the ITC footprint, the New York footprint, and the Arizona footprint from regulators.
Chris, we haven't disclosed that number specifically, and I don't plan on doing it here today. What I will say, as I mentioned earlier, once we get into our second quarter results, I think it'll be much clearer. Our results then should give you a better indication of what you can model going forward.
Okay. To follow up on an earlier question on equity needs, can you give us a sense as to how much total equity would be required through the end of next year to meet your objectives, either S&P or yesterday's comment from Moody's that you need to get to 11% FFO to debt by next year to avoid, I guess, going back on watch?
Well, I'll answer it this way, Chris. Our equity needs haven't changed as a consequence of our discussions with the rating agencies around U.S. tax reform. The information that we provided around equity supporting the capital program is consistent with the numbers we used last fall, which equates to about CAD 250 million a year raised through the dividend reinvestment program.
That's all we can expect, 250.
Just the DRIP this year and just the DRIP next year.
Okay, CAD 250 in 2018, CAD 250 in 2019, excluding any future CapEx growth opportunities that are not in your plan right now?
You got it.
That's the entirety of the equity we should expect.
Yes.
Okay, great. Thank you.
Thank you.
Your next question comes to the line of Andrew Kuske with Credit Suisse. Please proceed with your question.
Thank you. Good morning. Just a question about power politics in Ontario. Obviously, you managed to bed down the Wataynikaneyap project. You've got some small LDC exposure here. Your presentation again highlights municipal utility consolidation. Just how do you think about this market, the Ontario market, for capital allocation, given really what's happening in the run-up to the election in June?
Yeah, we play the long game, Andrew. We'd like to expand our business in Ontario. Obviously, there's an election underway there, and there's a lot of discussion about the sector involved with that. We've been in Ontario for a long time. We've always did reasonably well in the province. We have strong support from the province currently for the Wataynikaneyap project. I think longer term, we do believe there will still be opportunities to do some streamlining of the sector there, but we'll have to watch out for that. Elections happen every four years. You go through these things, but we think longer than that.
Okay, helpful. Just maybe shifting geographies, a question really for David on Navajo. Is there any color you can give on the sales process at Navajo? Obviously, TEP is a small owner of the facility. How do you think about power availability and costs for your customers in Arizona if Navajo goes off the grid?
Yes. Andrew, Navajo's fate doesn't change from the 2019 that we currently think it's going to shut down. As far as replacement power, we already have a Gila plant that we're in the process of purchasing, and that will be the replacement power in Arizona, and we don't see that really affecting the market much.
Okay. That's great. Thank you.
Thank you, Andrew.
Thank you. As there are no further questions, I would like to turn the call back to Mr. Perry for any closing remarks.
Just to conclude, we are off to a good start this year, and we are focused on updating our capital numbers, which will come forward later in the fall. We're optimistic that our capital program will support our dividend guidance that we provided out to 2022, which is that 6% average annual increase in our dividends. Thank you very much.
Thank you for participating. Ladies and gentlemen, this concludes today's conference. You may now disconnect.