Q3 2020 Canadian Utilities Ltd Earnings Call
In September S&P affirmed its a minus credit rating on Canadian utilities and ACO SM.
S&P is outlook for both companies was revised from stable to negative.
S&P also affirmed Cu inks, a minus credit rating and maintained a stable outlook, reflecting S&P his decision to insulate the Cu Inc. credit rating from the Atco group credit rating.
See length has been our main debt issuer in recent years. So we think this decision by S&P to change from a single group rating approach to a separate rating approach for HCC or sorry for SKU, Inc.
It's entirely appropriate and has been welcomed by our Siu Inc. bond investors.
That concludes my prepared remarks, and I'll turn the call back over to miles.
Thank you Dennis.
I'll turn the call over now to the conference coordinator for questions.
Thank you.
We will now begin the question and answer session in the interest of time, we ask you limit yourself to two questions. If you have additional questions you are welcome to rejoin the queue.
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Once again anyone on the conference call, who wishes to ask a question press star one at this time.
The first question is from Murray's Troy of RBC capital markets. Please go ahead.
Thank you and good morning, everyone. My first question is just picking up on the Capex plan.
Dennis you mentioned as the softening and spend and that has led to a 900 million spent this year down from 1.2.
Can you share with you had some discussions with your regulators with regards to the.
The direction that you could spend moving forward.
Typically I.
I suppose if you look at the effects of the pandemic surely you are now able to revisit some of the types of spending should we expect more towards electric side and perhaps away from gas given the GHG emissions reasons or is there any early indications of incorporating your findings from higher.
And blending.
Thanks Bryce.
We have not had direct discussion.
Discussions with the with the regulators on the on long to Capex as you as you know our distribution utilities in Alberta and in Australia are covered by a five year PVR or access arrangement deal. So thats a relatively low.
Right handed regulation for for those companies.
In terms of our cost of service companies.
Electric transmission is in the midst of its generals tariff application.
So I'll call it the long long running.
Electric GTH.
And we're also in the midst of our gas transmission.
So while there there hasn't been any direct discussions the.
The electricity transmission capital.
To the extent that its direct assigned by the ISO there there has been a deferral account treatment.
To to that capital, so any any reductions or changes to that capital get get trued up and flow through.
The impact flow through back to customers and the company Accordingly.
What what we see is really.
Our our Q3 results of capital, where we spent about $200 million.
We see that as kind of reflective of.
The run rate or what we would expect to see in Q4 at it at a very high level and.
So thats kind of how we get to that approximately $900 million in in capital investment.
For 2020.
Once you factor in depreciation.
And other adjustments.
That equates to about a 1% growth in rate base.
The.
With regards to the.
Ongoing the knock on effect to the three year forecast because as everyone's aware were in an extremely fluid environment.
We are reviewing our 2020 delays and deferrals and how much of that goes into the 2021 to 2023 timeframe.
Then the.
The domino or knock on effect from the the pandemic and oil price collapse, how much of that capital in that period would slide out so little.
We're going through that then we'll re arrive at our net number and communicate that to you and are.
Our fourth quarter, and DNA, which is.
We'll be able to update at the end of February I don't know the exact date.
But.
There is no there's there's no.
Significant spend I'm going to say in.
Hydrogen for for this year and again, we'll be reviewing that 2021 to 2023 forecast as we go through the final couple of months of this year.
And just a quick follow up and that is the process.
One where it's an internal review.
Or is it one that you are waiting for regulators to come back with your feedback.
In order to finalize this capital.
Yes.
It's it's our internal view, we are not waiting on on the regulator to to form our investment plans.
And the second and final question is with regards to Puerto Rico.
You would have seen some recent comments from some of the leading candidates for governor position.
What's the or and then contract can you.
Yes.
Thoughts as to.
How you think this contract will progress.
Let me discuss.
Discussions with any of the parties. Thank you.
Sure. Thanks, Thanks Bryce.
At this time.
Lumet doesn't believe that its just theres been a change in the assessment of the risk of termination of the agreement I think some of the or what at least one of the.
Gubernatorial candidates has expressed such a sentiment, but despite the public statements. There haven't been any third party actions that have been made that would undermine the legal enforceability of the agreement.
And we are as committed.
Committed as ever to work through the front entrance transition period, and we're focused on improving electricity service to to the people of Puerto Rico. So no no change in our in our view at present.
The next question is from Mark Jarvi ABSSSI ITC capital markets. Please go ahead.
Hey, good morning, everyone.
Wanted to talk with the case here, we're seeing given the fact that they essentially pushed out in short supply 20, 21% given they could get a decision probably done incremental for next year. So.
I think in M&A and could restart again.
In 2021 or 20.2.
How does that match up with given the fact that we're penny or 2.0 is how will flow wrap up within 2022. So how do you guys see the outlook here in terms of setting new regulatory ER, we equity thickness and having that match up with where you are in a current performance based mechanism.
Yes.
Good morning, Mark. Thanks, Thanks for the question now with our.
For Alberta based utilities, it really hasn't been possible in the past to have all of the all of the components of our revenue requirement to be determined as final going.
Final for the entire test periods that they're in.
We do have a good balance between our cost of service and PBR companies. It's about 60, 40, 60% cost of service and 40%.
PVR companies when you look at the at the rate base.
And with having staggered test periods, it really helps to lessen the overall impact of the.
Any rate resets in any given year.
Given that the GE feel see impacts all four utilities and the whole 13 ish billion dollars of our rate base.
It's extremely important that we have prospectivity for further GLC.
I guess.
Beyond USIO see what what we want and quite frankly expect does that all material components of our revenues, whether you know GCL C. I T costs, what have you are.
Our our finalized in advance of the test fair test periods. So that we can get the so that we and customers get the full benefits of prospectivity going into the into the terms.
Right. It doesn't line up exactly anymore with the with the end of PBR too but.
But.
It helps to align that maybe on the on the gas transmission or electricity side, and we'll we'll march forward, but again, having a having prospectivity for for such an important matter like GE CLC is paramount. So we are we are glad that the that the agency has determined those rates on a pro.
Back to basis.
We're not happy that is still the.
Among the lowest returns in North America, which way to doing to strive to ticket that reflective left up there.
The risk.
Given the times.
It's where we're at with the GCC.
And when you re enter I guess next year can you talk of the prospective outlook, what will you be advocating for and kind of the timeline for how long those than you are or will be set for or are you guys still gathering are faltering.
Yes, we're still gathering the gathering our thoughts on anywhere.
For most of the last proceedings there there weren't I was going to say there weren't many fans, but I don't think there were any fans of returning to a formula I don't think much has changed too.
To to get parties to change their positions on that so how long can are we able to forecast out for a final returns and equity thicknesses given given the current times.
Nobody wants to do this every year.
So we're probably looking at a two to three year.
Time period, but again gathering our thoughts and then we'll see we'll.
We'll see how that plays out when the sea announces their timeline for that proceeding.
Okay.
And then you made a comment about.
S&P.
Back to seeing Inc. preserve they're saying, okay, probably most senior funding.
And debt issuance, if any and wondering what the implications are for the negative outlook at gold King utilities in terms of capital redeployment again may.
Given the uncertain secondly, the pandemic how you guys are thinking about maybe.
Liquidity balance sheet metrics and in light of that.
Provide network.
Yes.
On a put on negative outlook not to as you expect not to.
Wildly happy about that.
They still have a have essentially a floor.
FFO to debt of about 15%.
The.
We're looking at our plans and see what we can do to convince S&P that those are attainable and the best way to do that is to deliver the goods for it.
Having cash on the balance sheet as a credit metric positive for us it offsets the ghosts offsets the amount for that debt. So in that regards.
It is our.
Strength of our balance sheet goals to help on the house FFO to debt metrics. So.
Soldier on and do what we can on our operations and work with S&P too.
Help hopefully remove that negative outlook and get it back to Steve.
Just a quick follow up on that I mean at one point with the asset sales, particularly our asset sales I think your view on the business risk profile has improved and therefore, there might be missing made to change if at all does that.
Threshold.
Or benchmarks.
Hello conversation going and how do the rate that agency couriers is think of the room.
Cash flows in terms of their business risk and quality well thats a regulated earnings.
Deal with the.
The the loom apart first S&P views that no.
Not.
To be in the same class as utility earnings so to move to the low volatility tableware the.
Where c. Lincoln that and having.
FFO to debt floor of about 10%.
The.
They count that in the we'll call it the nonregulated bucket. So when you take a look at Atco group on an overall basis with the.
I'll call it the strengthening of our structures earnings.
Then layer in.
Luma and our other non regulated businesses.
There are of the view that the Atco group is really.
Yes, it should be judged on the medial volatility table and therefore getting it to that 15%. So they havent havent insulated Canadian utilities limited.
That's.
Greg to non Reg mix and Canadian utilities limited is.
Well call at least 90 10 right now.
We do believe that.
Yes, yes that.
Negative outlook quarter to come to pass.
Our resulting in it and the downgrade for the Atco group that can be utilities limited should be insulated similar to how I see you.
Was.
Was insulated.
Again talking and hypotheticals, but.
Best way to avoid it is to deliver that 15% FFO to debt. So so we don't even need to go there.
Great. That's very helpful. Thanks, guys.
Thanks Mark.
The next question is from Andrew Petski as credit Suisse. Please go ahead.
Thank you good morning could.
Could you maybe give us just an outlook for your energy infrastructure business and I asked the question Park is you do have a fairly large land position.
And opportunity set in an area, where there's not necessarily a lot of land available for development and given your asset base, you do function, a little bit like Switzerland, where the neutrality kind of view on things and so how do you think about that business and just growing that business to a greater degree.
Thanks, Andrew Good Great question on the energy infrastructure I mean, we do have our we do have our presence in the industrial Heartland Weve got sufficient land to build.
Substantially more salt caverns, I think where we're putting in number five right now for for a customer and room to put dozens more in so when you talk about kind of our land position within Canadian utilities limited we do have.
Ideally situated with the footprint in order to.
To do that.
We do have other our land holdings and.
In past calls with our ACO land and development company. So some of the some of the lands in the Heartlands area are owned by.
Coke, but our energy infrastructure company is is ideally poised situated and and we are actively looking at that.
But we've got the hydrogen blend project.
In that area and we're continuing to look to build out that that energy infrastructure business unit in Alberta.
And and abroad as we look at.
Renewable energy.
In terms of.
Hydro solar and in our other target markets as well.
Thank you for that and maybe just on that latter points.
Maybe more focused on just the energy infrastructure side, when you see certain companies that have other engaged.
Right asset sales or infrastructure energy infrastructure.
Or butterfly off assets were planning to.
How do you think about that proposition from Cade utilities perspective, and Theres, a duality to it that would you go down that path or.
Conversely are there opportunities with just the pricing of those assets in the marketplace right now, where there's just opportunities for capital allocation outside of Alberta.
In that realm.
Yes, yes.
We continually look at our structure and.
Call it corporate corporate vehicle options.
Right now we are we're happy with our energy infrastructure assets located within Canadian utilities fits right in right in our wheelhouse in terms of.
Our operational excellence energy expertise. So there there are no no immediate plans.
Plans to do anything structurally.
With that company here and especially in the holdings here in Alberta.
And then growth opportunities elsewhere.
Yes growth opportunities or.
Well.
Mexico is is challenging.
Delay, which is a large focus for us right now.
As is Australia in terms of the.
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Developments in those especially in those latter two.
Geographic areas for development.
Okay. That's great. Thank you.
The next question is from Matthew weeks of Industrial Alliance Securities. Please go ahead.
Hi, good morning, I just clarify.
Clarification question for.
I just wanted to make sure you said that you lowered.
Capex for 20 $20 million to $900 million from 8.2 billion is that correct.
Thats correct not you.
Okay. Thank you.
Second question.
And on the upstream gas distribution.
Business and looks like quarter on quarter, there was a.
Pick up there and I know there had been some headwinds due to lower forecasted inflation rate.
Are you.
Remember, it's a little bit sort of economic conditions improve and is not really sort of rebasing is that what drove the improvement in earnings in the Australian gas business.
Yes, Australia is down I think gas, Australia about $8 million on a year over year as as we look at it the.
A five decision has taken about $7 million reduction from.
From Q3 2019 to to Q3 2020.
You're right CP VI has been has been a.
Very challenging for.
Australia Thats.
Thats contributing about a 4 million dollar decrease in year over year.
The.
The forecast the inflation rate that we use we is there there's CPI.
The forecast going in to just a couple of days ago, we're at about a 1.1%.
Inflation rate increase.
The actuals that came out or about 1.6% so higher than what they had.
What they were forecasting for the quarter. They haven't we haven't seen an updated full year forecast for them just yet maybe they've got it down under but hasn't made its way to my desk. So.
We are.
I think there is some upward pressure on there.
On their overall CPR inflation rate, which the previous forecast had 0.3% and not just for reference I mean that compares to 1.8% inflation from last year. So upwards pressure, we'll see we'll see how it goes.
In Q4.
Okay. Thanks, and then sort of the question.
In terms of the regulatory update provided in your presentation, saying you expect decision soon on the electric and.
Gas transmission general tariff in general rate applications I was wondering if you'd be able to help me sort of understand what the impact of those decisions would be in 2021, if we could quantify that.
Yeah, the the timing for the electricity GTH decision if they hold to their current schedule, which has been.
Problematic for them.
Were looking like a decision and.
We'll call it late Q1.
Don't know what the impact will be an EPS for 2012 that.
Tariff applications for 2020 to 2000 2023, so we probably won't receive it in time to record for our 2020 earnings. So there would be a retroactive impact.
For that for that decision, which we would need to book when we receive that decision.
Don't know.
I've said before they are they rarely if ever give you more than what you asked for.
So I can't forecast, what that what that impact will be.
On the gas transmission side, they're GRA as for the years 2021 to 2000 2023.
That process is going much.
Much better in terms of getting some prospectivity. So we won't get rates in 2021 for that for that test year, and again same comments, Kent, Kent, Kent hazard, a forecast as to what that impact is going to be.
Okay. Thank you.
Looking at the pioneer.
Hi in your pipeline acquisition I, just want to make sure I've kind of rockets right.
So the $255 million, but then.
NGL Jun end up paying.
Yes, I think it was about $63 million for you guys for their portion and then when you net out the 255 minus that 60 something is that how you get to your $200 million approximately added into rate base.
Yes, exactly there is a little bit of extra work that we need to do to tie everything and so there is there is a little bit of investment on the gas transmission side and it brings it to around 200 million homes.
Okay. So you take so it's about a 190 something and then there is a bit of investment after diagnosis to that to that figure there, but your net investment is going to be closer to that hundred guidance the something million dollars. After NGL buys their portion.
Correct.
Okay. Thank you.
I mean I appreciate the color on that I'll turn the call back.
Thanks, Patrick.
As a reminder, it is star one to ask a question.
The next question is from Paul down the wall as BMO capital markets. Please go ahead.
Hi, guys.
I was just wondering.
You'd be able to help one thing here, if you're able to quantify demand recovery in the quarter for your C. NIE customers.
Just just in terms of say like signage impact the load and then the financial impact there.
How where we're at right now compares to pre told at levels.
Okay.
Yes the.
What we're seeing on.
Are you talking electricity distribution.
That's right.
Yeah.
What we're seeing for overall for electricity, it's about a 5% reduction in in.
In sales.
The industrials and commercial Sienna is is about a 7%.
Reduction year over year, and we're seeing about a 4% increase in our residential load.
The.
We're closely monitoring to see if this will qualify for under PBR as said factor application to recover.
Kind of lost earnings from exogenous events.
Materiality factor for.
For filing those said factor applications, it's about three and a half million dollars for electricity distribution and.
While c. and I will have a 7%.
Load decrease it's protected by Ratchets contracts.
Fixed charges.
To the extent that we are ill say kind of right on the cost of whether we even meet that materiality threshold in order to recover from from customers. The lost earnings from.
From the from the impact of of coal that so we're taking a look at it we don't know yet whether whether it will trigger that three and a half million dollars earnings impact.
Let's see how how Q4 goes coal bid has reared its ugly head here in Alberta of late.
Okay. That's very helpful. I appreciate the color that Youre welcome Glenn.
Thanks, Paul.
This concludes the question and answer session I would like to turn the conference back over to Mr. miles just going for any closing remarks.
Well, thanks, Saatchi and thank you all for participating today, we appreciate your interest in Canadian utilities.
And we look forward to speaking with you again soon.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a testing.
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