Fortis Inc. (FTS) Q2 2022 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen. Thank you for standing by. My name is Michelle and I will be your conference operator today. Welcome to the Fortis Second Quarter 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. [Operator Instructions] At this time, I would like to turn the conference over to Stephanie Amaimo. Please go ahead Ms. Amaimo.

Thanks Michelle and good morning everyone and welcome to Fortis' second quarter 2022 results conference call. I'm joined by David Hutchens, President and CEO; Jocelyn Perry, 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 slide show. Actual results can differ materially from the forecast projections included in the forward-looking information presented today. All non-GAAP financial measures referenced in our prepared remarks are reconciled to the related US GAAP financial measures in our second quarter 2022 MD&A. Also unless otherwise specified, all financial information referenced is in Canadian dollars. With that, I will turn the call over to David.

Thank you and good morning everyone. Today we are pleased to report another successful quarter underpinned by our investment in the energy infrastructure needed for the provision of safe and reliable energy service to our customers. For the first half of 2022, we invested CAD1.9 billion in our system, placing us on track to achieve our 2022 annual capital plan and supporting our second quarter adjusted earnings of CAD0.57 per common share. In today's economic environment, our utilities have been especially focused on maintaining customer affordability by proactively managing energy prices as well as other inflationary pressures through hedging programs, energy efficiency programs, and cost reduction initiatives. Today we released our 2022 sustainability report highlighting the progress made to reduce our greenhouse gas emissions and link sustainability targets to executive compensation and the corporation's revolving credit facility. The report also includes comprehensive diversity data on employees across the Fortis Group of Companies, which will advance our DEI strategies and inform our objective setting. Overall, the report contains more than 35 new key performance indicators and is fully aligned with the applicable Sustainability Accounting Standards Board or SASB standards. During the quarter, we continued to make progress towards our greenhouse gas emissions reduction targets. In June, TP retired San Juan Unit 1 removing another 170 megawatts of coal-fired generation from its portfolio supporting their plan to fully exit coal by 2032. Earlier this month, FortisBC announced a pilot project to produce carbon-neutral hydrogen from natural gas through a partnership between FortisBC, Suncor Energy, and Hazer Group, utilizing a new carbon capture and utilization technology that provides a marketable solid carbon byproduct. The pilot is being funded by the partner companies and the provincial government's Clean BC industry fund. While still in the early stages, it is innovative technologies and partnerships like this that will be necessary to accelerate the transition to clean energy. In June, TP filed its general rate application with the Arizona Corporation Commission seeking new retail rates effective September of 2023 based on a December 31st, 2021 test year. The application includes rate base of $3.6 billion representing an increase of $900 million since the last rate case, largely driven by investments for renewable generation such as the Oso Grande Wind project and the Raptor Ridge solar facility. The application requests an allowed return on equity of 10.25% and an equity layer of 54%. TP is proposing to modify an existing adjuster mechanism to include recovery of certain investments associated with TEP's clean energy transition. The new resource transition mechanism or RTM is intended to reduce regulatory lag between rate cases. In addition TEP is requesting to eliminate both the demand side management and the renewable energy standard adjusters and recover those costs in base rates. The requested non-fuel increase associated with the rate application totals $159 million. As the waterfall chart highlights, the recovery of investments in rate base make up the majority of the increase. TEP's progress in its clean energy transition plan, delivers a net reduction offset to customer rates in this case due to the cost savings from the recent retirement, of the San Juan coal facility. The impact of the proposal to eliminate the two adjusters, reduces the total revenue increase to US$136 million. Earlier this month commission staff filed a sufficiency letter, indicating that TEP's rate application meets all the necessary filing requirements. A procedural schedule was also agreed to earlier this week, with staff and intervenor direct testimony due in January of 2023. Today, we are reaffirming our CAD20 billion five-year capital plan through 2026. This highly executable and low-risk capital plan is expected to increase rate base, by over CAD10 billion over the next five years, supporting an average annual rate base growth of approximately 6%. Earlier this week the MISO board approved the first tranche of projects associated with the long-range transmission plan. These 18 projects, which span across the MISO Midwest subregion have total investments of approximately US$10 billion, with six of the projects located in ITC service territory ITC estimates investments of approximately US$1.4 billion to US$1.8 billion, through 2030. This is up from the previous estimate of US$1 billion to US$1.5 billion. Once ITC finalizes the timing of these investments, we will update our capital outlook accordingly. Next development activities and commercial negotiations on the CAD1.7 billion Lake Erie Connector project, were suspended earlier this week. This was driven by recent macroeconomic conditions that impacted our ability to secure a viable transmission service agreement within the required timeframe. We acknowledge the efforts by all parties to bring the project to this point. However, at this time it is a prudent and appropriate action given the circumstances. This project has never been included in our five-year capital plan. With 48 years of consecutive dividend payment increases, we continue to target 6% average annual dividend growth guidance, through 2025 underpinned by our five-year capital plan. Now I will turn the call over to Jocelyn, for an update on our second quarter financial results.

Thank you, David and good morning, everyone. So turning to Slide 11. Reported earnings for the second quarter of 2022, were CAD284 million or CAD0.59 per common share, compared to earnings of CAD253 million or CAD 0.54 per common share for the second quarter of 2021. On a year-to-date basis, reported earnings were CAD634 million or CAD1.33 per common share, compared to earnings of CAD608 million or CAD1.30 per common share last year. Reported earnings include timing differences related to mark-to-market accounting, of natural gas derivatives at Aitken Creek. Turning to Slide 12. We delivered adjusted net earnings of CAD272 million or CAD0.57 per common share in the second quarter. This is CAD0.02 higher than the second quarter of 2021. Rate base growth at our regulated utilities and a higher US dollar to Canadian dollar exchange rate favorably impacted the quarter. Climbing of earnings in Alberta and Arizona, as well as losses on retirement plan assets at UNS and ITC tempered earnings growth in the quarter. As you might recall, Fortis benefits from limited pension exposure given regulatory mechanisms at most of our utilities. In the second quarter, however, broader market volatility impacted the value of certain retirement assets. And our US utilities held outside are defined benefit pension plans, the quarter-over-quarter impact was CAD 0.02. For the six months ended June 2022, we delivered adjusted net earnings of CAD641 million or CAD1.34 per common share CAD0.02 higher than the same period in 2021. Year-to-date earnings reflect the same factors noted for the quarter, as well as higher sales in the Caribbean along with higher operating costs at Central Hudson and lower hydroelectric production in Belize. The waterfall chart on Slide 13 highlights the EPS drivers for the quarter by segment. We continued to see rate base growth, across our utilities supported by capital investments of nearly CAD2 billion year-to-date. Our Western Canadian utilities and ITC each contributed a CAD0.01 EPS increase driven mainly by rate base growth. At ITC, quarterly earnings growth was impacted as I mentioned, by losses on retirement assets, while earnings growth at Fortis Alberta was impacted by timing of operating costs. For our Energy Infrastructure segment, EPS increased by $0.01 due to higher hydroelectric production in Belize. Next, a higher U.S. dollar to Canadian dollar foreign exchange rate favorably impacted quarterly results by approximately $0.02. At our US electric and gas utilities, EPS decreased by $0.01 in the quarter, UNS was down $0.02 and Central Hudson was up $0.1. As expected, the lower earnings in Arizona were associated with both the timing of AFUDC recognized in 2021 during the construction of the Oso Grande wind generating facility and losses on retirement assets. UNS did benefit from higher long-term wholesale sales during the quarter, which helped offset higher operating costs and regulatory lags. Central Hudson's EPS contribution was driven mainly by rate base growth and the conclusion of its rate case in 2021. In our corporate and other segment, the $0.01 EPS decrease was mainly due to losses on hedging contracts. And lastly, as expected, with our dividend reinvestment plan EPS decreased by $0.01 due to higher weighted average shares outstanding. Year-to-date, EPS was impacted by many of the same drivers as the quarter. I would note that the losses on retirement assets at UNS and ITC was approximately $0.04 for the first half of 2022. Year-to-date, EPS was also impacted by higher costs associated with the implementation of a new customer information system at Central Hudson. Central Hudson does not anticipate any additional significant direct costs beyond the $0.03 EPS impact recorded through June. Turning to slide 15. We were once again active in the debt capital markets in the second quarter, bringing the total debt raise year-to-date to over $1.5 billion, largely in support of our capital program. With the backdrop of a rising interest environment, several of our utilities accelerated debt issuances in the first half of the year, locking in attractive rates to the benefit of our customers. At Fortis Inc. we recently refinanced $500 million in debt that was due in 2023 and ITC Holdings previously entered into interest rate swaps of US$450 million to mitigate refinancing risks associated with debt due later this year. During the quarter we also entered into a one-year US$500 million non-revolving corporate term facility and amended our existing $1.3 billion revolving corporate facility. Our revolving facility was amended to extend the term to 2027 and establish sustainability-linked targets related to board diversity and the reduction of Scope 1 emissions. And lastly, we continue to maintain strong investment-grade credit ratings. In May DBRS Morningstar confirmed our A low issuer and unsecured debt ratings and stable outlook. The recent debt issuances coupled with almost $4 billion available on our credit facilities places us in a strong liquidity position, supporting our $20 billion five-year capital plan. In addition to the TEP rate case that David spoke to earlier, I'll spend a moment on some recent regulatory updates. First ITC continues to wait for a final rule from FERC in relation to the supplemental notice of proposed rulemaking, or NOPR, on transmission incentives, which proposes to eliminate the 50-basis point RTO return on equity incentive matter. Next, FERC issued two additional NOPRs in June, addressing interconnection queue reform and grid reliability and extreme weather, both of which stemmed from the initial advanced NOPR released last year. While ITC continues to evaluate both NOPRs, any FERC actions that help streamline the interconnection queue will be positive for all parties involved. ITC also supports for continued focus on grid resiliency and expect to be active in the rule-making process. Reply comments on both proposals are due later this year. Also in May, the Iowa Coalition for Affordable Transmission filed a complaint with FERC, seeking to lower ITC Midwest equity ratio from 60% to 53%. The complaints allege that ITC Midwest no longer met the three-part test which authorizes the use of a utility's actual capital structure for ratemaking purposes. We believe the complaint is without merit and should be denied. ITC filed reply comments in support of its position in June. And while the timing and outcome remains uncertain, a decrease in ITC Midwest equity ratio to 53% would reduce annual EPS by approximately $0.05. And lastly, in British Columbia the generic cost of capital proceeding remains ongoing. The proceeding is expected to continue into the first part of 2023 and the effective date of any change in the cost of capital remains unknown. That concludes my remarks. I'll now turn the call back to David.

Thank you, Jocelyn. With the successful execution of our capital plan, our exit from the San Juan generating facility and key regulatory applications, we are in a strong position heading into the second half of the year to deliver on our growth and sustainability goals. Our local management teams will continue to work with their customers and regulators to manage through this time of high inflation and energy prices, while still making the investments needed to deliver a clean and resilient energy future. I will now turn the call back over to Stephanie.

Thank you, David. This concludes the presentation. At this time, I'd like to open the call to address questions from the investment community.

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer period. [Operator Instructions] Your first question comes from Maurice Choy of RBC. Please go ahead.

Thank you, and good morning. My first question is a follow-up on your comment about MISO spending timing. And specifically, I'm trying to understand the moving parts in the months ahead. I know that MISO staff on Monday noticed that on August 8, they will indicate what goes through competitive bidding and what will be assigned to incumbent utilities. But you also indicated the expectation that many of the aging projects will come online by 2028. So, it's a little bit of a tight deadline so to speak. Is the classification on August 8 is what you're waiting for in order to get a better idea of what all this means to your next CapEx update or is there something else?

Yes. Thanks and good morning, Maurice. Yes so we still have to figure out the exact timing. Obviously, there's estimates of timing of those projects that are part of the original filings et cetera. But there's still a fair bit of process to go through working with the other transmission owners because some of these projects we actually are splitting with other transmission owners. So lots more of detailed engineering, planning et cetera that needs to go in to our calculus here before we can put it into our capital plan. I do appreciate that some of those projects look like they're earlier, but those are also probably a bit stale on the dates because this process has been extended a couple of times. But don't worry, we'll get -- as soon as we get a good feel for where those dollars lay out from a capital plan perspective, we'll be putting that out.

Great. And my second question and this is a follow-up, not follow-up, I assume there are still limited details so far on the inflation reduction act that was announced yesterday. Whether this climate portion of this bill is a slim-down version of the bill initiative or something entirely different. Any thoughts on which parts of your business might benefit from this new build if it becomes law? And is there any changes to the taxes might offset that?

Yes. So, it is extremely early. So that crossed the wire there as we were all finishing up our notes for today. We do like the fact that it includes $370 billion of investments in energy and climate. We're not exactly sure what that breakdown is yet. So, we'll be looking at that today and going forward to see how that might apply to our companies and the things that we have in play. I think probably one of the -- at least on one of the press releases that we saw on this bill was the reference to permitting reform. So that's obviously they referenced transmission in that commentary. And that's always a welcome news when there can be additional help for us to get some of these projects permitted because that's obviously, one of the bigger things that we have to do that slows down us doing the transmission projects is getting through the siting and permitting processes. But we haven't been able to digest that completely yet but we will very soon.

Okay. Thank you very much.

Your next question comes from Robert Hope of Scotiabank. Please go ahead.

Good morning, everyone. Thanks for taking the questions. Maybe a broader question. We've seen I guess what we could argue is the Lake Erie costs go up. We've seen the MISO transmission projects increase there as well. When you're taking a look at we'll call it plain vanilla transmission projects, how much inflation are you seeing in those projects which could yield a higher capital plan? And then two, are you worried that the higher capital cost could defer further investments similar to what we saw look like Lake Erie?

Yes. Thanks, Rob. So it's really hard to judge inflation on a longer-term basis because that's what we do in our capital planning process as we obviously have to make some assumptions on where inflation is going and then frankly the shape of that curve. The things that we have in flight say this year's capital plan et cetera, we typically don't see a big inflationary impact on those because they're already in flight. We have the materials et cetera. But as we go forward, we're going to have to obviously adjust on the fly as needed in those capital projects to bring them in on budget as best we can. We don't see long-term inflationary pressures that would cause us to adjust our – I'll say there's two different questions, right? Because there's the capital plan as in the total for the current projects you have or is your budget going to get bigger and you're going to continue to do those capital plans, meaning which is going to give, are you going to keep the capital plan the same or keep the number of projects the same.\ We are definitely the capital projects that we have are ones that we are needed for the safe and reliable service for our customers. So we're going to have to do those projects. So we will have to manage the capital budget accordingly. And that goes to the other side of the ledger, right? So as we see some of these capital cost increases as we go, we'll have to look for efficiencies not only in the capital process and in the construction process but also look for efficiencies on the O&M side to help mitigate some of the rate impact as these projects go in. So there shouldn't and we don't see any reduction in the number of projects but we still are continually updating those capital plans to make sure we're capturing inflation as best we can. And that's something that of course we'll do in the fall, when we put out our next five-year capital plan.

I appreciate answer for that question. Maybe a little bit of a narrower one here. In Arizona, what's the initial feedback been on the filing as you're starting to engage stakeholders realizing that test not due for quite some time here. And B, in a higher yield environment, are stakeholders willing to agree with a higher ROE?

Yes, Rob, I actually missed the first part of what we're getting it was a little garbled. But I did catch the last part on the ROE. I mean the ROE, it's the formulas that have been used and the conversations that have been used for 100 years. And so as we see interest rates increase, we do expect ROEs to be following that. In some manner we typically see a little bit of a lag down and we'll typically see a little bit of a lag up. But that ROE, particularly in Arizona, since I was the one on stand last time, Susan was sitting next to me she gets to sit on the stand this time. She'll do better than I did in the ROE arguments because I think in the middle of COVID when we were at the end of 2020 and doing that case, we feel that we got a little bit of a reduced ROE because of that. Now when you look at the situation from an interest rate to underlying calculus that again goes into the ROE, I think we're going to come out in a better spot. So what was the first part of your question?

Just initial feedback on what the rate filing has been in Arizona any feedback from stakeholders so far?

Yes. I'll turn that over to Susan to answer.

Hey, Robert, this is Susan. Yeah, I think it's pretty early to tell the intervener testimony won't be filed until January of next year. But I think our initial conversations, as we were planning to file with staff and commissioners and some of the various stakeholders were very positive. And I feel like here we have a lot of support for the new adjuster mechanism, I think the economic situation supports a higher ROE. And so we're anticipating a great outcome.

Thank you.

Your next question comes from Ben Pham of BMO. Please go ahead.

Hi. Thanks, good morning. I wanted to go back to Lake Erie and you've characterized it as you're suspending the project. And I'm curious where are you with conversations with the ISO as it effectively stopped at this stage? And is there really any outcome here where you could start working on the project again, as if inflationary inputs that would drive that project going forward?

Yeah. Thanks for the question, Ben. And I got to tell you, this is a tough time for us to try to lock down a project. We probably couldn't have picked a more volatile three to six months of inflation interest rates et cetera for FX in order for us to try to lock in the economics that we would need to go forward. So we obviously have had very close conversations with ISO through this process. And it's the timing. It's a situation where we just -- we have to make the prudent investments and we can't get the return that we need for this type of project in the current environment, absent in essence sort of restarting those negotiations. So we have told the ISO that we are suspending the negotiations and that doesn't mean that the project is canceled, but it also -- it means that we would have to have a pretty big restart for us to get moving again. That's not -- that doesn't say that it might not happen. But right now our view is it's suspended. And if it comes back, it won't be soon and it will take a lot of things to align again.

Okay. That's great. And then maybe on your capital plan and looking at the one where you show all the wedges and that 20 billing between distribution and clean energy all that stuff. I mean, how do you think about when you factor in tranche one and there are some new sworn RNG and even transmission, do you expect any meaningful moves in those wedges as you think over the next six to 12 months?

Oh Ben, you're trying to get a little preview into our capital plan that we'll release here in the fall. I'll save the answer for that when we put all that together. We're obviously working hard behind the scenes, pulling those pieces together, but I can't really divulge any of that right now. I mean, it's the best part about that existing plan is, how those investments are spread across transmission, distribution, clean energy et ectara that's exact kind of capital plan you want to see. A lot of little projects little projects that are needed by our customers improve their reliability and of course the clean energy investments that we expect to continue to increase over time because of the transition that we're doing in Arizona, the additional renewable interconnections that we're going to be doing in MISO. It is always great to see FERC with that new NOPR on the interconnection queue. Hopefully, once that gets sort of that log jam that gets freed, we'll start seeing a lot more interconnections in ITC's footprint.

That's great. Thanks, David.

Thank you.

Your next question comes from Mark Jarvi of CIBC. Please go ahead.

Thanks. Good morning, everyone. First on the MISO transmission projects. Can you clarify whether or not the numbers you've provided the $1.4 billion to $1.8 billion is net ITC whether or not there's any type of partnerships on any of those projects? And then for Jocelyn with these incremental investments, can you talk about maybe it's too early at this point, but can you comment on how they would fold into your sort of funding plan over the next five years?

So I'll take the first part. That one point -- our new estimate for the MISO long-range transmission projects that's our estimate for our dollars, right? So it doesn't depend on someone else to come in. Now obviously, we have to be discussing the overall projects with the partners that we're going to be splitting some of these with, but those are our dollars and our portion.

And Mark with respect to the funding I believe, I think I got your question on the funding, particularly as it relates to bringing the MISO long-range transmission plans into fruition. So that's still a bit hard to answer because we don't know the full timing, but assuming it's over a certain period of time. I mean, we do have room even within our DRIP program. But it is something, we'll have to evaluate when we actually get a chance to see the timing. So, if it's a little bit I guess lumpier than we expect then, we'll have to look at other methods of funding. But right now, it is too early to tell.

Okay. [indiscernible] can you guys give us some sort of context in terms of when you said mid your application, where you were on inflation expectations now since you've submitted some of the updated numbers? And what is the mechanism by which you would update your application for new inflation expectations?

Yes. So -- since we have a historical test year in Arizona, we don't really get to update inflation as it were. But what we do because it's based on the historical 2021 test year expenses. But what we are able to do is, put in some adjustments on a going-forward basis for labor and some other known O&M with things that are known and measurable that go into that calculation. But we don't have an interest rate tracker or anything like that in Arizona. So that is the one jurisdiction that as we see inflation increase between rate cases that can have an impact. But also, on the other side it's regulatory lag that works both ways as inflation will come down the other side, you'll see the higher inflation built into rates. So overall, it kind of evens out over time. So, from a long-term perspective it kind of gives and takes throughout the years.

I guess it was most interested in the labor in the O&M stuff. So, is there an opportunity to resubmit updated expectations for those items?

I don't know of any way of doing that, but we also have never been in an environment like this. So, when you have high inflation and it changes from the time basically on a historical basis, there's a lot of different ways that you can get that consideration for that during the rate proceeding. So, there may not be as keen eye on expenses when the commission and the interveners realize that inflation has increased. But there's also ways of managing it, right? So, Susan and her team down in Arizona will be managing O&M expenses as best they can to offset that, offset the impact whatever it might be as we go forward. So, there isn't a standard process per se. Now if you get into settlement negotiations that opens the doors for a lot of different conversations that are typically not available to you, if you're going through a standard fully litigated process.

That makes sense. I'll sneak one more in here. Just at [indiscernible] I think one of the condition in submitting that sort of a novel idea of sort of capitalizing some of the, I guess purchase agreement costs. So. any initial thoughts on that and what that means I think from a cost mitigation for your customers?

Yes. We're actually pretty happy to see that conversation take place. This was the Chair, Marcus Peterson who put out that letter. It's a good way to look at things because PPAs versus ownership have to be looked at on a bit of a -- it has to be looked at on a level playing field. We feel that ownership has a lot of -- not just financial but intangible benefits related to the ability for us to dispatch say, renewable energy, battery storage et cetera exactly how we need to instead of trying to figure out how to get a contract price right to give you the full flexibility and unfettered access to the value of those assets. So, one of the things that PPAs do is, it leans on your balance sheet, right? It's imputed debt and having a recognition for that to in essence level that playing field, I think is helpful. Now, all that being said, I'm looking at Susan and seeing as she nods. We have no idea, where this is going to go because it was just a proposal by one commissioner. And we don't know, if this will get any traction with at least two others and she an agreement.

Your next question comes from Andrew Kuske of Credit Suisse. Please go ahead.

Thanks. Good morning. Maybe, if we could just look back at UNS and Arizona more broadly, because obviously there's a wealth of Arizona related experience on the call today. The regulatory environment it's ebbed and float at times. And maybe just give us some perspective on where you see the dynamics right now from a positive standpoint versus maybe less constructive in and of itself a history of Arizona and then also just as you see it versus other jurisdictions where you have exposure or just more broadly?

So, I'll turn this over to Susan to talk about the kind of the current situation. And if you want the history of the world, I can give you the last 27 years that I've been in Arizona as well. But I think the most important piece to answer here is kind of the current situation and Susan's got a pulse on that.

Yeah. I think that, our three companies have had some positive outcomes regulatory outcomes just even this year. And if you look at our last rate case other than maybe a lower ROE, we did have some positive outcomes out of that case. So we're feeling like there is regulatory support for UNS. I think some of the more extreme negative outcomes have been directed more at one company and we feel like that is unique just to that company and we don't expect that to be the case for UNS or for this TEP rate case.

And then really, how it compares across the rest of the footprint which was in your question there. I mean, I might be biased, because I came from Arizona, but I always thought that, it's a very constructive environment. When you get past some of the headlines and some of the kind of one-offs, we have a very good relationship with a very strong staff up there. And that's really the – that's the group that is there from year-to-year to year-to-year. And having those relationships building up the trust through transparency is how we've operated. And so there might be little rulings et cetera that we might not be found of as Susan mentioned, I guess, the ROE in the last case. But I mean, you have to realize in the scheme of things that, it's still a very in my opinion a very constructive environment. And as we go forward, I think, others will start seeing that as well.

Okay. Appreciate that. I'm going to refrain from naming that one company. But when you look at the –

As did we.

That was noted. If you maybe look at just the drivers within Arizona, and you mentioned the 27 years when you think about economic growth potential that has been robust on a historic basis, how do you think about the growth drivers and even in the event of a negative outcome or something that's less favorable from a regulatory standpoint does the overall growth environment in Arizona really support the business there?

Yeah. That's really one of the key underlying principles in any jurisdiction is that, we serve – we're regulated utilities. We serve lines – load within lines on a map, and it's really important for our growth that the lines on the map within which we serve are growing. And in Arizona, Arizona has always been one of the highest growth states, I wouldn't say always. But for – I think it's out of the last four or five decades, there was only one decade where Arizona was in the top four fastest-growing states. So even in economic downturns, net migration into the state, the business environment that we have a constructive business environment from a tax – business -friendly perspective. And just flat out, it's a good place to live and people like to move there. Weather is a consistent positive in Arizona, and that does bring in net migration to the state. So the underlying growth is there. And I think you'll see that, within the overall numbers when you look at Arizona versus the other states, and we expect that to continue. It is something that -- except for that big downturn in 2008, there was only for a few years after that that we didn't land in one of those top spots for statewide growth.

If I can sneak one more in and it's an area we don't talk about that much more, whether or not as positive as Arizona, but there's a lot of percolating positives in Atlantic Canada. Maybe just talk about any kind of emerging opportunities that could surprise to the upside in the portfolio.

In Canada, is that what you asked?

Really in Atlantic Canada.

Atlantic Canada. Yes. So there's -- while we're all sitting here in Alberta today, when I was in St. John's just a month or so ago and seeing the economic vibe in New Finland related to some new projects particularly in the oil and gas, which is a big part of that economy over there, a couple of big projects that were announced both an expansion and a new project that was a big deal. And I think that that has given a little bit of boost to people in New Finland in particular. I think probably the broader conversation around say the Atlantic loop and the opportunities that that might bring wind development that's being talked about in New Finland and Labrador. All of those things are additional positives for growth opportunities in our sector. Atlantic Canada you kind of have to look at as -- well, if you get something like the Atlantic loop you have to look at it like an integrated like an integrated resource plan for the region. And that means all of us need to do a little bit different resource planning and it's going to include transmission renewables maybe some additional hydro, et cetera. There's a lot of development opportunities. It is a resource-rich area. You've been there and you know how windy it can be. So, wind is definitely going to be a component going forward. And we may be able to even invest in some of that wind. As you also might know solar will not.

Thank you for that.

Your next question comes from Matthew Weekes of iA Capital. Please go ahead.

Good morning. Thanks for taking my question. I think I just have one and just wanted to ask if you could provide sort of any comments at this point on progress on the GCOC proceeding and NBC just in terms of development, how that's been progressing, timing, and maybe how those conversations are going with the regulator at this point?

Sure. I'll turn that over to Roger Dall’Antonia. He's here as well. Roger Dall’Antonia: Thanks, Matthew. The proceeding, we're through the information request process for the most part. We just had a procedural conference early in July, we are waiting the order for additional process. There is a potential for an oral hearing in November and should the oral hearing proceed then we'd likely be getting the early 2023 with the decision to follow, but we're waiting for that. As far as the process nothing surprising we did put forth a request for higher ROE and capital structure. The interveners, of course, are suggesting something less than that, and we're really no surprises so far in what we're seeing in parties and we look forward to seeing very soon here.

Okay. Thank you. I appreciate the update. I’ll turn the call back. Thanks.

Thank you, Matthew.

[Operator Instructions] Your next question comes from Michael Sullivan of Wolfe Research. Please go ahead.

Hey, everyone. Good morning.

Hi, Mike.

My first question was just around the FERC complaint on the equity ratio. I understand that you're pretty confident that you ultimately prevail here. But just in terms of process, would it be surprising if FERC at least took it off and set it to hearing. I think when this came up a number of years ago, they just outright denied it. Is that the expectation this time or would it be not surprising if they did at least take it up?

Well, our desire would be for them to outright deny it which we think would be the right process, but I'll turn it over to Linda Apsey to answer that one.

Yes, good morning. Thank you Michael. Absolutely, as Dave said, we certainly would hope that FERC would dismiss the complaint outright just given that how we set our capital structure directly according to the FERC's 3-pronged test. And so this would be a significant departure from FERC precedent if they were to grant the complaint. So, certainly our hope and desire that they dismiss it outright. And certainly the comments that we have provided in the docket certainly lay out our case. And we are hopeful that FERC will take the appropriate action. I would note that there are no timeframe required for FERC to act. So, we don't really have any visibility into when we might get a decision from FERC.

Okay. But if they don't outright deny it, should we be worried or it's still possible you can ultimately prevail?

Well, I think if FERC does not -- FERC would have to take action. If they don't deny it or dismiss it, there are two other possible paths. One, they could grant the complaint and yield their own decision through an order or through an order they could set the matter for hearing which would ultimately sort of take us off into a different track before an ALJ and we would certainly be down the hearing path which with presumably the expectation that there would be some settlement or at least attempt of settlement. So, I think it's far too soon to know or tell what the outcomes might be. Again we're hopeful that this will be an outright dismissal of the complaint given that we follow FERC precedent. And again I think as we've mentioned before this would have broader industry impacts as other utilities have similar equity components in their capital structure. So, this would certainly have much broader concern from the industry's perspective. And that's why I think there were other interveners in the docket to that effect reminding FERC that their precedent nothing has changed. There's no change in facts or circumstances. So, again, we remain hopeful that this will be an outright dismissal.

Okay, great. That's super helpful. Thank you. And I wanted to also just shift gears to the quarter and the trust asset performance drag. So, it looks like it's been about $0.02 a quarter so far this year. I mean if the market continues to kind of hold where it is obviously that's a big if but should we expect that to be like a sustainable drag through the remainder of the year?

Yes Michael, that's right. So, if the market holds then we shouldn't see any further impact of these assets. But as you know the market is still moving around. But if the market holds where it is today then we probably would keep the $0.04 impact that we would have.

Okay. So no incremental year-over-year impact in future quarters?

Not expecting no. It depends on the market.

Okay. Thank you.

Your next question comes from Dariusz Lozny of Bank of America.

Hey, good morning. Thank you for taking my questions. Just a quick one on your sales trends that you reported for the quarter. It looks like Central Hudson came in fairly robust double-digit increase on residential. Can you talk a little bit about what kind of trends you're seeing there? It looks like you're not calling out weather specifically. So, it looks like that might be organic growth but just curious if you could unpack that a little bit.

Yes. Let me turn that over to Charlie Freni we'll have some more details on the load impacts in this quarter. Charlie you there?

I am here Dave. Thanks for the question. Our service territory north of New York City is really prospered with I want to say the migration exit from the city. So, we're seeing a pretty robust housing development more housing development I've seen in a long, long time. So, people are moving to the area. And obviously, when mortgage rates were low, a lot of starts and purchases were taking place. So from a residential perspective, we're seeing that. We're seeing a fair amount of conversion, to heat pumps. The heat pump programs in our service territory, as well as some of the other service territories in New York, have been for the most part stripped of all of their funding because there's been such strong demand for the heat pumps. And more and more electric vehicles are in the area as well. So, I think there's a number of drivers there, that has supported the residential growth.

Great. Thank you for that. One more if I can, and this is just a follow-up to a response that you gave to another question. I think you said that, in response to seeing some of the pressures on capital costs and things like that you might look to efficiencies on the O&M side. And I'm just curious, if you'd be in a position to perhaps quantify those expected O&M efficiencies on any future updates.

Yes. In the future, we will. This is something that we've been having conversations throughout really the past year, on ways for us to find ways of reducing costs to allow us the headroom to make the needed investments, we need and the infrastructure that our customers need. So we are continually trying to figure out how to best gather and display that information for our investors and for ourselves. So we'll continue to do that and continue to refine that and get it in some of our IR materials and decks and conversations going forward.

Great. Thank you. I’ll turn it back.

Thank you, Dariusz

As there are no further questions, I would like to turn the call back to Ms. Amaimo, for closing remarks. Please go ahead.

Thank you, Michelle. We have nothing further at this time. Thank you for participating in our second quarter 2022, results conference call. Please contact Investor Relations, should you need anything further. Thank you for your time and have a great day.

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank everyone, for participating and ask you to please disconnect your lines.