Emera Incorporated (EMA) Q2 2019 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Emera Q2 Analyst Conference Call. [Operator Instructions] Please note that this call is being recorded today, August 12, 2019 at 8:30 AM Eastern Time. I would now like to turn the meeting over to your host for today's call, Erin Power, Manager, Investor Relations for Emera. Please go ahead, Ms. Power.

Joining me for this morning's call are Scott Balfour, Emera's President and Chief Executive Officer; Greg Blunden, Emera's Chief Financial Officer; and other members of Emera's management team. Before we begin, I will take a moment to advise you that this morning's discussion will include forward-looking information, which is subject to the cautionary statement contained in the supporting slide show. Today's discussion and presentation will also include references to non-GAAP financial measures. You should refer to the supporting slides for definitional information and reconciliation of historical non-GAAP measures to the closest GAAP financial measure. And now, I'll turn things over to Scott.

Thanks, Erin, and good morning, everyone. We continued our positive momentum in the second quarter, increasing our year-to-date adjusted earnings per share by 10% and generating operating cash flow consistent with 2018. Adjusted earnings per share growth was primarily driven by our U.S utilities with strong results more than offset the earnings impact of completed asset sales and weaker marketing and trading margins. I’m pleased with these results, particularly strong growth we’re seeing in Florida. And we continue to be on track to deliver adjusted earnings per share and operating cash flow consistent with 2018 normalized results. We are benefiting from a period of regulatory stability as we look forward on to our regulatory initiatives for the balance of 2019. Last month we received a noteworthy decision from the New Mexico Public Regulation Commission approving the stipulation related to the New Mexico Gas 2018 distribution rate case. The Commission approved a modest $2.5 million increase in base revenues to be phased in over two years and improved a weather normalization mechanism. This mechanism the first of its kind in the state will allow New Mexico Gas an improved opportunity to earn its allowed return regardless of the weather, bringing a more consistent earnings profile for utility. Also with the necessary historical test year behind us, future rate applications find Mexico Gas will be on a forward test year. The Commission also ruled that New Mexico Gas does not need to retroactively refund customers for savings related to U.S tax reform, because it was uncertain how the Commission would rule on this matter. New Mexico Gas had accrued CAD$8 million refund to customers in 2018, an additional CAD$4 million in the first quarter of 2019. The $12 million adjustment recorded this quarter were versus those previous accruals. We are pleased with the Commission's decisions and we're encouraged by the recent changes in the economic environment in New Mexico. Here in Nova Scotia, we're working to extend rate stability as we continue to execute on the transformation of Nova Scotia Power generation fleet from coal to clean. In June, the utility applied for an annual average fuel rate increase of 2% per year beginning in 2020 through to 2022. Nova Scotia Power has maintained stable rates since 2014, while continuing to focus on rate based investments to reduce its reliance on carbon and to improve reliability. Hearing on the application is scheduled for October and we're expecting a decision later this year. We're on track to invest approximately $2.5 billion at a regulated utilities in this year and we remain committed towards $6.5 billion capital program through to 202.1 As we’ve highlighted in the past, almost 70% of our capital spend over the next three years will be invested in the state of Florida. This is largely driven by the considerable growth opportunities we see at Tampa Electric as we continue to clean the generation X and make investments to storm harden the system. We believe Florida is a very attractive jurisdiction with one of the largest and fastest-growing economies in North America and a business friendly environment. We continue to advance our solar program in the state. Today Tampa Electric has over 445 megawatts of solar capacity installed and construction of the next 150 is well underway and on track to come online in early 2020. By 2021 Tampa Electric will have over 640 megawatts of solar capacity and customers will get about 7% of their energy from the sun, the highest percentage of any Florida utility/ Our use of solar base rate adjustment ensures that our investments in solar is reflected in rates once the capacity is in service. Today approximately 405 megawatts of solar is being paid for through this mechanism, which is expected to generate an incremental US$62 million of revenue in 2019. In late June, Tampa Electric became the first utility in the state to offer its customers community solar. Sun Select, our 17.5 megawatt community solar program offers a cost competitive alternative to residential and commercial customers who want to ensure their energy is coming from the Sun. We are pleased with the level of investment -- level of interest in this program so far and we will continue to look for opportunities to expand Sun select in the future. We are very proud that our solar programs are leading the way in Florida. And we think, we can do even more. We believe the system has the capacity to handle further solar generation beyond the 600 megawatts we've announced so far. The team at Tampa is working through a multiyear generation plan to determine the timing and magnitude of future solar investments. We expect the results of this work later this year. We continue to make progress on the Big Bend modernization. And we're pleased to now have all the necessary approvals in place. Construction has started and we’re on track to invest approximately US$235 million in the project this year. As a result of our investment in solar in modernizing Big Bend, by 2023 more of Tampa Electric's energy will come from the sun than from coal. And utilities GHG emissions will be 30% lower than they would have been without these investments We are very pleased that the Storm Protection Plant Legislation has been approved. And we look forward to greater clarity from the Florida Public Service Commission on related rules by the end of October. This legislation was not contemplated when we set our current $6.5 billion capital plan last fall and we will provide incremental opportunities for investments, all with recovery of rates through rider. For several years, Emera's regulated utilities have been the primary driver of our growth. While our adjusted earnings per share has fluctuated over time as the result of one-time earnings in market driven volatility impacting their energy, earnings from our utilities have been steadily growing. While it's not as predictable as our utility business, Emera Energy's ability to capitalize on market changes in the Northeast U.S provides the opportunity for significant earnings and cash flow upside as we saw in 2018. I expect our regulated utilities will continue to drive our growth for the foreseeable future. Following the sale of our Northeast gas generation fleet, over 95% of our future earnings and cash flow are expected to come from a regulated operations. This shift to be more regulated will improve the underlying quality and predictability of our financial results. In addition, our asset sale program will improve the overall growth trajectory of our continuing operations. By divesting our merchant gas plans at Emera Maine, we're repositioning our portfolio and reallocating that capital towards strongest and fastest-growing businesses, which improves the rate based growth profile of our portfolio. While our capital reallocation improves our underlying growth, there will be an impact to our consolidated earnings. For the balance of 2019, we will not have earnings contributions from the gas plants, which were approximately $40 million in the second half of 2018. And in 2020, we do not expect earnings contributions from Emera Maine which have averaged approximately $45 million over the last few years. This creates a period of transition as we redeployed capital into our continuing businesses to replace the lost earning contributions from the asset sales. Reallocating our capital in this way better positions Emera to continue to deliver long-term earnings and rate based growth for our investors. When normalized for asset sales, our $6.5 billion capital program is expected to drive above average rate based growth of 7% through to 2021. As we've noted in the past, we expect that over time adjusted earnings per share growth of the continuing businesses will approximate rate based growth. The rate based profile only includes projects that we are highly confident will proceed. Additional capital investment opportunities including further investments in solar and storm hardening in Florida, will sustain or enhance our long-term rate based growth profile. Given the importance of Florida to our future growth, we made the decision to postpone and relocate our fall Toronto Investor event. We are planning to reschedule our Investor Day to be held in the first quarter of 2020 in Tampa. More details and a revised save the date will be provided as we get closer to the event. We will be sharing our refresh capital rate based and funding forecast with you on our third quarter earnings call in November. I'm pleased with our continuing strong performance in 2019. And over the balance of the year, I look forward to advancing our capital program and closing the Emera Maine transaction. As I look at the growth opportunities in front of us, I’m confident that we will continue to deliver the competitive long-term rate base and earnings growth to our shareholders have come to expect. Our portfolio includes some of the highest quality regulated utilities in North America. In our proven strategy, which is rooted in the transition of our portfolio from higher to lower curve in energy is particularly relevant today as we see increased global focus on reducing our collective carbon footprint. And with that, I will turn it over to Greg, who will take you through the financial results. Greg?

Thank you, Scott, and thank you all for joining us this morning. Adjusted earnings per share for the quarter were in line with our expectations and keep this on track to deliver annual results that are consistent with the normalized 2018 results. Our U.S utilities had a strong quarter, which more than offset more contributions for Emera Energy. For the second quarter of 2019, Emera reported adjusted net income which excludes mark to market adjustments of $130 million and $0.54 per share compared with adjusted net income of $111 million or $0.48 per share in Q2 2018. Year-to-date, Emera reported adjusted net income of $354 million and $1.49 per share compared to $313 million and a $1.35 per share in 2018. Growth in the quarter and year-to-date were primarily driven by strong results from Tampa Electric and a favorable regulatory decision for New Mexico Gas, partially offset by lower earnings from completed asset sales, lower market and trading margins in Emera Energy. A strong first quarter for gas utilities also contributed to the year-over-year increase. Assuming normal weather conditions, we expect adjusted earnings per share for the balance of 2019 will be lower than what was delivered for the same period in 2018 resulting in annual adjusted earnings per share being consistent with normalized 2018 results. This expected decrease is primarily due to lost earnings contributions from New England Gas Generation portfolio or NEGG. Normal marketing trading markets and a return to normal weather driven revenues from Tampa Electric and New Mexico Gas, partially offset by growth across the regulatory utility portfolio. Year-to-date, the business delivered operating cash flow for changes in net working capital of $775 million compared to $767 million in 2018. This result was also aligned with our expectation and we continue to expect that business will deliver annual cash flow that is consistent with 2018. And now let's get into the details. In the second quarter of 2018, Emera delivered adjusted earnings per share of $0.48. Keep in mind, this included net earnings contributions from NEGG and Bayside. As a reference point, moving their earnings contributions from 2018 will reduce Q2 2018 adjusted EPS to $0.44. Growth from the normalized 2018 base of $0.44 was largely driven by very strong performance from Tampa Electric. During the quarter, Tampa Electric contributed US$93 million of earnings, an increase of 27% over the second quarter of 2018. Growth in the quarter was driven by higher base revenues related to in-service solar projects, favorable weather and customer growth of 1.9%, partially offset by higher interest and depreciation costs related to capital investments. Cooling degree days were 8% above the 2018 period, which provides the utilities the opportunity to generate an incremental US$6 million of revenue. Earnings growth in the Gas Utilities and Infrastructure segment was largely driven by the favorable regulatory decision in New Mexico, which as Scott discussed, cost us to book a $12 million adjustment in the quarter reversed previous accruals, $8 million of which related to 2018. The second quarter solar season is fairly not a lucrative one for Emera Energy's marketing and trading business. In Q2, 2019, Marketing and Trading endured, particularly weak market conditions largely due to weather. Three days were 20% lower than the last two years, which reduced absolute pricing in volatility, enhance margin opportunity. Fixed costs for transportation and storage were also higher quarter-over-quarter. And as a result, Q2 2019's net loss was $15 million higher than Q2 2018. It is difficult to forecast earnings from marketing and trading, especially since last two months of the year are often material contributors to the total. That said at this point as a result of weak market conditions experienced in Q2 2019, we believe the best we can expect to do is to earn at the low end of our normal US$15 million to US$30 million this year. To give you some context, I will remind you that in 2017 marketing and trading also had a similar weak first half of the year earning US$9 million compared to US$7 million in 2019. Nonetheless full-year U.S dollar earnings in 2017 were $16 million. For the quarter, earnings across our other utilities were relatively consistent with prior year. In Maine, second quarter earnings benefited from higher capitalized overheads as a result of less storm activity this year and the absence of regulatory adjustments. Recall, in the second quarter of 2018, Emera Maine recorded US$2.8 million of negative after tax adjustments related to 2018 distribution rate case. At Nova Scotia Power, earnings in the quarter were lower than of 2018 period, largely due to the timing of regulatory deferrals. In the quarter, Nova Scotia Power deferred $14 million of excess non-fuel revenues compared to no deferrals in 2018. The timing of these regulatory deferrals consist quarterly earnings volatility, while full-year earnings results are more predictable. And at this point in the year, Nova Scotia Power continues to expect a modest increase in annual earnings. Drivers for the year-to-date period are largely consistent with the quarter with growth in the U.S utilities being partially offset by lower marketing and trading margins. Recall that both gas utilities had a strong first quarter. New Mexico results benefited from favorable weather and incremental earnings from an asset management agreement. At Peoples Gas, earnings benefit from lower depreciation rates and increased earnings related to its ongoing cast iron and bare steel investments. Annual customer growth at Peoples Gas continues to be strong at 3%, which has been helping to offset less favorable conditions in 2019. Increased year-to-date losses in the other segment were primarily due to lower marketing and trading margins, a modest $3.5 million net loss from asset sales and $3.5 million of after tax transaction cost related to Emera Maine partially offset by a $10 million gain on the sale of property in Florida realized in Q1. During the quarter, we’ve continued to make progress against our 3-year funding plans and the objectives we outlined last fall. One of our key objectives was to reduce and potentially eliminate any discrete common equity issuance. As we highlighted in our Q1 call, we will achieve that objective with the successful execution of our select asset sale program. Emera Maine transaction continues to progress as expected and we will work into the regulatory process collaboratively with NMAX. We have three required regulatory approvals in hand, including FERC and Hart-Scott-Rodino and we're continuing to progress our remaining regulatory applications. Based on the progress made to date, we anticipate that the transaction will close late this year. Our remaining equity requirements over the three years is modest and we expect approximately two-thirds of required equity will be raised through our dividend reinvestment plan. The remainder will be raised as an -- on an as-needed basis through a combination of hybrid capital and common equity issued through our recently established ATM program. A portion of the proceeds from asset sales will be used to retire holding company debt with the objective of sustainably reducing our Holdco debt to total debt to below 40%. In June, a portion of the proceeds from the NEGG transaction were used to retire our US$500 million bond at Emera US Finance LP and last one, a further US$50 million bond was retired. And assuming Emera Maine closes in 2019 as expected, we will achieve our target by the end of the year. In addition to reducing our holding company leverage, we continue to be focused on sustainably approving our cash flow metrics. And we’ve made good progress. On a trailing 12-month basis, our S&P FFO to debt is approximately 12% and our Moody's CFO to debt is approximately 11%. Over the course of 2019, we'd expect our cash flow to debt metrics to sustain at these levels. And looking forward, we'd expect these metrics to continue to strengthen to be sustainably at or above 12% by 2021 with the objective of sustaining this level or higher over the longer term. Management has demonstrated that we are committed to doing the right things for the business and over the past 12 months we’ve taken significant steps to improve the quality of Emera's underlying cash flows and business risks. And I’m pleased to say that this progress has been recognized by the credit rating agencies. On June 13, Fitch assigned a BBB rating with a stable outlook to Emera's debt. Later that month, Moody's reaffirmed Emera's Baa3 rating and revised its outlook from negative to stable. We are very pleased with both these actions and remain committed to maintain our investment-grade standing and doing the right things for the company -- company's long-term success. I’m pleased with the financial results that we’ve delivered for our investors in 2019 and the progress we’ve made on strengthening our balance sheet. While there will be a period of transition as we complete and absorb these asset sales, I remain confident that our prudent and disciplinary allocation of capital of 2019 will result in a stronger Emera that is well positioned to continue to deliver our long-term earnings and cash flow growth to our shareholders. And with that, I will turn the presentation back over to Erin.

Thank you, Greg. This concludes the presentation. We’d now like to open the call to take questions from analysts.

Thank you. [Operator Instructions] The first question comes from Linda Ezergailis of TD Securities. Your line is open.

Thank you. I’m wondering if you could give us some perspective on some of the recent developments in Florida, specifically related to deregulation proposed by different stakeholder groups. Can you comment on kind of what the bookends of possibilities might be in terms of process in outcome and what your suggestions are for kind of evolving the energy, I guess, commercial frameworks in the state, if at all?

Sure. Linda, this is Scott. Thanks for the question. Maybe I will start and Nancy can fill in if I miss anything. So, yes, there has been an initiative proposed called a ballot initiative that’s been proposed in Florida that got processes now sort of advance in the sense that there has been already a conference on financial impact that occurred to provide some of the data that the Supreme Court requires in order to determine as to whether the language that has been proposed on this will in fact get added to the 2020 ballot. There is a conference or a oral hearing by the Supreme Court at the end of August, August 28, I believe and we would expect the decision from the Supreme Court at the end of October, ourselves and the other investor owned utilities, of course are actively engaged in this. We’ve made submissions to the Supreme Court, but in total they were 40 different parties that made submissions to the Supreme Court that was raising concerns with the language and the initiative that has been proposed. We obviously are optimistic that we think that the Supreme Court's view on this, who has some concerns with what’s been proposed. But the process would be a decision from the Supreme Court that we expect in October. If the decision from the Supreme Court is against our view to the validity of this proposed language, what would happen in terms of process is at a certain number -- a threshold number of signatures would need to be gathered in order for that language to then make valid in 2020. It's not clear to us at this point as to whether the requisite number of signatures would be gathered for that to make the ballot or not. At this point, I would say we’re cautiously optimistic that this will take care itself. Obviously, Florida is a state right now that enjoys some of the lowest energy costs in the country that has a reasonably stable rate profile. The system operates well there. The regulatory construct is very well defined there and we think that the initiative to disrupt all of that with this ballot initiative is seen not just by us, but by other parties in the stage has not been the best thing for the people of Florida. Nancy, anything you want to add to that, that I might have missed?

Scott, the only thing I would add is when you talked about the briefs in front of the Supreme Court for the organization filing a total of 18 briefs, I think it's significant that the Attorney General Florida House and Senate and the Florida Public Service Commission all presented briefs that would be against putting this on the ballot. So there's lots of -- we feel that there's lots to support and lots of significant support to keep it off the ballot. But we do as you said, have to wait till the Supreme Court rule.

That’s helpful context. Thank you. And maybe just following up looking at your funding plan, it continues to progress a lot of times still the end of 2021 to finish all your equity raise requirements. Can you just give us an updated sense on what would cause you to trigger using the ATM versus the -- your views on the relative attractiveness of the hybrid capital markets. And I guess, I know there's no plans right now to sell some or full assets, but at what point might you revisit that? Would it be if your capital program increase significantly or what are the moving parts that you use to continue to assess the relative merits of Plan A, B and any sort of plan C for your funding?

Thanks, Linda. It's Greg. I mean, we are not in a position right now where we need to do anything over the near-term as we think over as you rightly identified '20 and '21, we will continue to look at the capital markets. I don’t know if I call the attractiveness or lack of attractiveness of the hybrid capital markets these days. Unfortunately we are not in a position where we need to access that market. What we will be doing in November on our call though is, we will be refreshing our capital program and we might hope we have some visibility in terms of what the storm hardening legislation will be in Florida and what really be through the context of any kind of material change in our rate base growth opportunities in our utilities that might cause us to rethink our funding plan, but we will provide that update to you in November as well. And then we will always go through the cost of capital ladder in the most effective way starting with internally generated cash flow moving our way up through operating company debt, hybrid capital and equity.

Great. Thank you. I will jump back in the queue.

Thanks, Linda.

Your next question comes from Julien Dumoulin-Smith of Bank of America Merrill Lynch. Your line is open.

Hey, good morning, guys.

Good morning, Julien.

Good morning. [technical difficulty] maybe a couple of housekeeping items first. [technical difficulty]

Julien? Julien, it's -- you’re breaking up. We can barely hear you.

Can you hear me now? I'm off the headset.

Perfect, Julien. Thank you.

Sorry about that. All right. Excellent. First housekeeping item with respect to the Analyst Day, can you just elaborate a little bit more specifically why the delay, what we should be looking towards if there is any evolution in the story on that front? And then secondly, can you elaborate a little bit more on 2019 as you see it. We heard some commentary about some of the expected shifts in timing this year. Obviously, trading impacted 2Q, but just wanted to get a sense as to the trajectory in 2019 and 2020 of earnings growth as you see it. Are we -- should we be thinking about some kind of} rate based type growth or should we be thinking about more normalized sort of flatter levels given the Emera Maine dilution, for instance, etcetera. Just want to make sure we have a good sense as to what you are expecting here over the next couple of years. I will leave it there for now.

Yes, Julien, it's Greg. Let me start with the Investor Day. As we started to schedule our traditional fall Investor Day, what we're hearing from investors and analysts was the key things for them was they wanted updates and clarity around the closing of Emera Maine, which obviously we will not have until end of year. Looking for much more insight in terms of the potential with the storm hardening legislation will be in Florida, and again that will be something that we really won't have until at the earliest late October and then for us to assess what the rulemaking comes out of the Florida Public Service Commission sometime late this year. And as well as I think most folks are familiar we're doing kind of a generation planning exercise inside the Tampa Electric kind of a mini IRP, if you will, which will start to give us some greater clarity and visibility around what we think is the potential for another tranche of solar. That is also scheduled to kind of wrap-up towards the latter part of this year. So the most important things for our investors and analysts all seem to point to the fall would be a little bit premature, it would be a much more productive discussion in the first quarter of next year. So that was really the driver. What we will do is still provide -- what we would have otherwise provided at that meeting in terms of an updated CapEx forecast funding plan etcetera. We will carve out a portion of our Q3 analyst call and provide that in December to you. In terms of specific guidance, I think we have been clear on this year is that if you took last year and normalize the $0.10 of tax benefit that we booked in the second half of last year, the 2.78 is kind of where we think the year will end or more or less and we are certainly on track for that. We’ve been ahead of that plan year-to-date, but as I indicated with the loss of NEGG, in particular, in the second half of the year, we would expect to come in pretty much in line with where we were last year on a normalized basis. We are not going to get into specific guidance for our 2020. We will provide a bit more color and update in November, but I think it's fair to say that we feel very confident in our ability to generate long-term earnings growth as consistent with our rate based growth and nothing is changing our business. Obviously in the period of transition, we might see a bit of a tail on that growth and that your observations next year with Emera Maine will probably be a little bit softer than Emera Maine was within the portfolio and I think that's a fairway to be thinking about it.

Julien, it's Scott. Just to add to that, I think Gregg said that well, but we see the contributions at the NEGG fleet added in the first quarter, roughly the contributions from Emera Maine, obviously none of those two businesses will provide contributions in 2020 on the assumption and expectation of closing Emera Maine this year. So that math for you will be relatively simple. The other things that you will see that has happened as a result you see that the rate base growth profile we have now taken Emera Maine out of that on a go forward basis and you will see that what was a 6% growth profile, that's now a little bit more than 7% growth profile. So you see what's happened as a result is the underlying growth profile of the business actually is stronger on a go forward basis. So really those are two things we're trying to point your attention to.

Right. So maybe repeating it back to you. It's adjusted for the Emera Maine net financing impact looking forward in the next year, in fact 7% rate-based growth might be the counterpoint, if I have got it straight?

Yes, when you are seeing in that capital plan and the rate based growth profile through to 2021 is that little north of 7% rate based growth profile, that is what we expect this business to do. We have said that we expect earnings growth to approximate that rate-based growth profile over time. Obviously, the near-term that won't be through in 2019 and 2020, because of the impacts that we share.

Great. Well, thank you so much for all the details here. Good luck and I'll get back in the queue.

Thanks Julien.

Your next question comes from Rob Hope of Scotiabank. Your line is open.

Good morning, everyone. And I may be jumping here a little bit with your upcoming Analyst Day, but it would seem that the growth opportunities in front if you continue to realize or even increase. How do you weigh capitalizing on storm hardening growth, additional solar versus your want to get to that 12% FFO to debt?

Yes, Robert it's Gregg. I mean, one of the nice things about the solar program that we have today and what we would expect the storm hardening legislation to come out with which it would be a rate riders is immediate cash recovery on those investments. So from a FFO or CFO to debt those projects are actually accretive when they go into service, which is helpful as opposed to for example a Big Bend conversion which obviously had a drag on credit metrics during construction when you're accruing FUDC. So some of the opportunities that we see in front of us in Florida that may be incremental that we have in our plan would actually be accretive to our credit metrics.

All right. Thank you for that. And then when we're looking at storm hardening, can you give us some goalpost of potential CapEx over the 10 years, or maybe if we're going to cut it another way, what percentage of your grid would you view as hardened so far and which percentage would need to be invested in?

Robert, let me start and then maybe Nancy can -- to be honest, I think it's just premature to speculate what it's not clear to us yet, whether the storm hardening legislation is going to be fairly narrow and specific to the undergrounding of the T&D system, or it's going to be broader and including storm hardening and protecting our generation assets, whether it's going to include things like vegetation management. And this is one of the reasons why we are thinking about the timing of the communication on this. We really need to see the rulemaking of Florida Public Service Commission before we start to kind of put bookends around that. I think if you took the FP&L numbers and divide it by six, they are about 6x the size of us, you would certainly kind of probably be in a ballpark range, but that's over a 20 to 30 year period. So I'm not so sure how helpful that is until we see what the actual rulemaking is.

Great. Appreciate the colors. Thank you. Oh, sorry.

Nancy?

Rob -- Robert, the only thing I would add is there is lots of opportunity for storm hardening, only 45% of our distribution system today is underground. And then all the other things that Greg named, there's lots of opportunity and the solar -- we won't be limited by capital opportunity in that regard.

Thank you.

Your next question comes from David Quezada of Raymond James. Your line is open.

Thanks. Good morning, everyone. My first question here just on Emera Energy, there was a comment in the MD&A 's about higher fixed cost for commitments on transportation and storage assets. Just wondering there is any color on you could run on how material that is going forward and if it affects your expectations for that earnings range at all?

So, its Judy -- Judy Steele. So, they vary, right? As soon as I kind of drop a number, the number will change, but directionally it's around $10 million a month. Most of these things are kind of some of the market three months long, and some of them are over the course of a year or a season. So it's kind of a constantly evolving portfolio [technical difficulty] currently for 2019 is about $10 million a month. I do remind you though, that lots of those are hedged, so that the net exposure is less than that. So we're still comfortable with our guidance at the low end of the earnings range.

Okay. Thank you for that. And then my second question maybe just more broadly on your New Mexico business. Obviously, there is a lot of renewables being built there. I'm wondering if you see that driving any opportunities above your current capital plan going forward here?

Yes. David, it's Scott. So I think we -- as mentioned in the remarks, we are encouraged by some of the activities that we are seeing in New Mexico. I think that the development activity in the Permian and other activities, frankly, broadly in the stage is starting to drive a more robust economic environment. We know that the recent efforts to decarbonize the electric sector, we think all of those things contribute positively to the opportunities for New Mexico. Obviously, it's early days as it relates to both impacts on the economy or creating opportunities, but overall as I would say, we are encouraged by what we see these opportunities in front of us in New Mexico to today even relative to what we we're seeing a year-ago.

That's great. Thank you. I will get back in the queue.

Your next question comes from Patrick Kenny of National Bank Financial. Your line is open.

Yes, good morning. Just first attack high level here. The 95% of earnings coming from related businesses going forward, just wonder to confirm, Scott, if that is also your long-term business target or do you see room to backfill with additional non-regulated or commodity-based cash flows towards 10%, 15%, 20% of the business over time?

Look, I think we're comfortable with where we are today. We don't have so much of a commitment to say it has to stay at 95%, certainly we targeted 90% or more to be regulated, but right now with the business environment where we are at in the growth opportunities in front of us, we are comfortable with the portfolio that we have got. We are pleased and comfortable with Emera Energy business and the opportunities that it has in front of it and I think what you expect from -- you can expect to see is that a business in ours that's predominantly regulated, has a small amount of unregulated in it that’s both financial and strategic value, but we are in a path to be substantially regulated as we are now.

Got it. Thanks for that. And then the work you are currently doing to assess the ultimate potential for solar in Florida, if you do end up pursuing more than 600 megawatts for Phase 2, Phase 3, would that coincide with accelerated coal retirements as well at, say Big Bend, or would this just be incremental net capacity to the portfolio?

Nancy, you want to tackle that?

Yes, I will take that. So we're looking at all those options right now. In terms of the -- as Greg called it, sort of a mini IRP, we are doing a review of our generation in its entirety to see what is the best for customers. I'll just say that from the ability to build another 600 megawatts solar, once we get Big Bend modernization in place in 2023, that will give us the ability to put more solar on our system, having more fast acting generation. But the rest of it as I said, we're taking a look at the entirety of our system through this process.

Okay, great. Will stay tuned for the update there. And then, last one maybe for Greg here. The negative outlook on the S&P rating, just curious are they looking for any change to the funding plan that you’ve put forth, or the capital plan or are they just waiting to make sure you execute the plan that you have over the next year or so before moving back to a stable?

Yes, Patrick, I mean, I wish I had a crystal ball on it. I mean, the report pointed to a couple of things including some uncertainty around the closing of our -- sale of our gas plants, which you’ve now achieved and we have achieved their targeted FFO to debt metrics. And so certainly our belief is that it just continue execution, wrapping up Maine, closing 2019 and sustaining the 12% FFO to debt. We think that should be enough of a catalyst to get back to stable.

Okay. That's great. That's it from me guys. Thank you.

Thanks, Patrick.

Your next question comes from Ben Pham with BMO. Your line is open.

Okay. Thanks. Good morning. I’ve one follow-up on the -- some of the questions and your comments on earnings generally tracking rate base growth. And I know it's pretty difficult to kind of pin this thing down by year, just looking at specific years. But I was just curious like when you think about this rate base growth of 7% and earnings, is the way to think about it, is it looking at 2018 as a base and just seeing how they look to the next five years on average just on your eyes, or is it more just going through a time period of asset sales and you start to use a new starting point in 2020 or 2021 going forward?

Good question, Ben. And let me take the first one and see if I answer your question. I mean, we provided kind of a 3-year guidance last fall. We were using 2017 as a base and obviously 2018 can materially stronger than 2017 and 2019 expected to relatively flat. So whether -- quite frankly, whether you use 2018 or 2019 as the base, you’re kind of effectively using the same base, which is probably convenient for your purposes. And then when we look over the longer term off of that base, yes, we expect EPS growth to be pretty much in line with the rate base grow that that Scott had identified. Recognizing that similar to this year as we go through a transition, it will be a little bit of a step change as we go through those 3-year period.

Okay. That's very helpful. And then second question on your funding. And I'm curious about the asset sales and you’ve certainly have urgency to sell more assets, but are you guys opportunistically still looking at asset sales? I know there's a couple of disclosure this quarter, last quarter and some smaller monetizations. Maybe you can comment on that. And how does your -- if you look at your ladder approach, how does the asset sales look relative to your stock across equity at this point in time?

Yes, Ben, it's Greg. I mean, I think we're done -- the asset sales that are required to meet our funding targets that we laid out last fall, as we go forward, the way we will look at any additional asset sales and we call that probably around the margin, it would be more through a strategic lens than it would be through a sort of, I would argue, financial lens, and how we have done in the context of how does that compare to raising equity in the capital markets.

And then the -- so I know last year, it was pretty obvious, selling assets make more sense than issuing equity. But are you -- can you look at how your stock's done? It's done quite well with some other peers, but are you -- is there a pretty similar talk list now at this stage between asset sales?

Yes, I mean, I think, Ben, if you look at some of our assets right now, we would obviously depend on valuation, but at a $55 share price versus a $40 share price, the matter is very different on asset sales versus raising equity in the capital markets than it would have been a year-ago.

Okay. All right. That's great. Thank you.

Thanks, Ben.

Your next question comes from Robert Kwan of RBC Capital Markets. Your line is open.

Great. Good morning. I'm just wondering if you had some additional color on how the process in Maine is going, particularly with just some of the recent headlines with respect to some opposition that seems to be propping up a little bit here.

Yes, Robert. It's Scott. Frankly, -- and we think the process is on track. And yes, there is going to be from time to time the headlines and distractions, but at the end of the day the Commission has a job to do. There is a defined structure for these things that has been not new ground for the Commission. We think we have a solid application, we think NMAX is a great next owner for Emera Maine. We think they're demonstrating that today in the state of Maine already and the content to be confident that this transaction will close in and around year-end.

That’s great. Maybe if I just turn to Marketing and Trading. Does this quarter represent kind of a very minimal revenue quarter? Put differently, is the $28 million negative margin close to the straight-line cost of transportation?

Sorry, I’m not sure I understand your question, Robert. Can you take another crack at it?

Sure. Recognizing this is a seasonally weak quarter, and then …

Right.

… you've got a bunch of the fixed cost that are out there, did you generate very minimal revenue? Like is this about as bad as it can get?

Yes. Yes, it is.

Okay.

Yes, sorry, I don’t mean to be blunt. It was extremely weak market conditions through the whole of the quarter, frankly. Anybody living in the Northeast can attest to that. So we had very limited opportunity and as you know the -- we carried the burden of the fixed costs, the investments we've make in transport and storage through the summer months so that we have the opportunity to make money on them through the winter months.

Okay.

I guess I could add to that the Robert. It's the one quarter where we actually expect to lose money in the quarter, that's the norm. And in part that the transportation across that Judy refers to is we -- they get booked evenly through the year where obviously the offsetting revenue opportunities are more seasonal in nature. So that's why we generally see that kind of pattern.

And the only other thing I will add and just remind folks is, as I said earlier, they are generally relatively short-term commitments. We acquired them in competitive processes. If market conditions are such that people don't see the value in the transport of a storage, if they don't see as much, then market crisis adjust accordingly on the next go around. So it's kind of a self-correcting cycle. So it have to be endured, but I expect to return to brighter days eventually.

Okay. I guess maybe just a follow-up in terms of how you then think about the business. So whether it's just going into the contracts or as you referenced, you have, it sounds like, higher levels of contracts on the books right now. When you are going into it, how do you decide the amount that you want to take out with respect to how much are you locking in or hedging against that fixed cost, let's just say on an annual basis?

Yes. So we would generally -- so as I said earlier, we bid competitively. So we go through a process of saying, okay, what do we think the upside opportunity might be in this circumstance. What can we hedge. What's the net exposure there and are we comfortable with that equation. So at any given time 75% to 80% it is what we'd hedge and then make a decision on how we feel about the exposure on the balance and whether or not we think that's what taking when we compare it to what the upside might be.

Okay. So when we take that number versus your annual guidance, the bottom end, it could be worse than that, but it really is that, call it, 20% to 25% on hedged exposure?

Yes, yes.

Okay. That's great. Thank you.

Directionally, yes.

[Operator Instructions] The next question comes from Andrew Kuske of Credit Suisse. Your line is open.

Thank you. Good morning. Maybe just another follow-up for Judy on the energy marketing. So given the pricing was poor, the volatility was poor in the quarter, and you got the greater fixed costs. When things rebound and you are in a more normal environment, do you really see the upside is being linear or is it more exponential in fashion?

Well, maybe I won't use the word exponential. I think its asymmetric. Let's put it that way. So we do manage the business, so we’ve got a norm and fixed downside, so -- and then with the opportunity for upside when market conditions present. So exponential is a big word, Andrew, but I will say asymmetrical to the positive.

Okay. That's good enough for me on that. And then just maybe on Florida, and this is probably for Nancy, with quarter-over-quarter decline in coal productions, about 1,000 gigs, I think there is commentary early on the call that greenhouse gas emissions were 30%, there is a 30% decline. Do you have any quantifiable data on just air quality improvements in the Tampa area given the transition you’ve had in your generation mix? And then does that become part of the regulatory dialogue not just in Florida, but elsewhere?

So, Andrew, I don't have anything of the top of my head on what's the change has been. So what we're seeing in our current generation mix today as we saw in the release, we are burning a lot of gas in the units that can burn gas or coal. And so that has a positive effect around the surrounding area in terms of the amount of coal we are bringing in, reduction in greenhouse gases, reduction in other pollutants on the gas versus coal. But -- so I think that by residents of the area and certainly in Tampa generally, I think all that is seen is very positive and we will continue to be, especially as we get Big Bend modernization up and running and not only will we have gas, but we will have more highly efficient gas generation. So it's certainly positive going forward.

Okay, great. Thank you.

Your next question comes from Julien Dumoulin-Smith of Bank of America Merrill Lynch. Your line is open.

Hey guys. Sorry for the quick follow-up, but I just wanted to be specific about the Florida legislation and the cost recovery enabled there. I know it's excluded from the $6.5 million number at present, but I wanted to understand just how you think by your earned ROE opportunity in Florida, given the potential for more cost recovery? And then separately, just could elaborate a little bit further on the process. I know you said already this was at end of October for an FCSE decision. Just can you talk about timeline and how that would relate to any eventual CapEx update?

Greg, take the first half and Nancy take the second.

Yes, Julien, I mean, all the cost recovery whether it's the SoBRA, storm hardening or any of the environment cost recoveries that we have in Florida will be at the defined capital structure at Tampa Electric and the midpoint ROE is 10.25% [ph]. And so that's relatively, I would say, straightforward math. And then Nancy, maybe you can take the second part of the question.

Yes. So, the rule -- we are working right now on the rulemaking with the other IOUs and intervening parties and commission staff. I suspect it will be next year before we have clarity on the exact amount of capital that will be allowed. I think the rule will give us some direction in October, but specific capital amounts will have a better sense of that in 2020.

Okay. And just to clarify this with respect to the consolidated earned ROEs at Tampa Electric, how material is the cost recovery? That's really what I was trying to get at is sort of the aggregate oscillations in earned ROE that you -- I suppose you previously kind of contemplated through the rate case cycle and this might mitigate that, or how material could it be to mitigating that rather?

Julien, we will have to follow-up you there. I don’t have that off the top of my head. And obviously as you go through time, that’s been changed. So for example, the solar today we get through a cost recovery, the next time we reset rates, that will go into base rates, which will then change. But in terms of what’s -- what component of the rate base today is cost recovery versus base rates, I don’t have that off the top of my head. How about you, Nancy?

No, I don’t.

Okay, great. I will pick it up later. Thank you all for your time.

Maybe just to -- but I think, Julien, the key -- so obviously its only helpful, but I don't think it will change the path that Nancy and team are on as it relates to the timeline and the need for rates. So it's helpful, but I don't think fundamentally it's going to shift the expectations around the timing and the need for rates.

All right. Great. Thank you all.

Thanks, Julien.

There are no further questions at this time. I will now return the call to our presenters.

Okay. Thank you all for joining us this morning and we look forward to speaking to you guys again in November.

This concludes today's conference call. You may now disconnect.