Q2 2021 Canadian Utilities Ltd Earnings Call
Thank you for standing by and this is a conference operator welcome to the second quarter.
Quarter 2021 results conference call for Canadian Utilities Limited as a reminder, all participants are in listen only mode and the conference is being recorded after the presentation, there will be and opportunity to ask questions to join the question queue. You May Press Star then 1 on your telephone keypad.
Should you need assistance during the conference call.
You may signal, an operator by pressing star and zero I would now like to turn you over.
Turning the conference over to Mr. Colin Jackson, Senior Vice President Finance Treasury.
Risk.
And sustainability.
Please go ahead Mr. Jackson.
21 conference call with me today is executive Vice President and Chief Financial Officer, Dennis a dish on plane and Cu, Inc. 's Senior Vice President Finance and regular.
Brian scrub what day.
And as we will begin today with some opening comments on a recent company developments and our financial results. Following his prepared remarks, we will take questions from the investment community.
Please note that a replay of the conference call and a transcript will be available on our website a Canadian utilities dot.
Com and can be found and the investors section under the heading events and presentations I.
And I'd like to remind you that all.
Our remarks today will include forward looking statements that are subject to important risks and uncertainties for more information on these risks and uncertainties. Please see the reports filed.
But a Canadian utilities with the Canadian Securities regulators and.
And finally I'd also like to point out that during this presentation. We may refer to certain non-GAAP measures such as adjusted earnings adjusted earnings per share funds generated by operations and capital investment. These measures do not have any standardized meaning under ifr.
And as a result, they may not be comparable to similar measures presented and other entities.
And now I'll turn the call over to Dennis for his opening remarks.
Thanks, Tom and good morning, everyone. Thank you all very much for joining us today on our second quarter 2021 conference call.
Canadian utilities achieved adjusted earnings of $115 million or <unk> 43 per share and the second quarter a 2021.
This is $21 million or <unk> <unk> per share higher than the second quarter of last year.
The $21 million of growth and our earnings was primarily driven by.
Strong performance and our Puerto Rico alumina business.
Our Australia, and natural gas utility and our Canadian distribution utilities.
Our Australia and natural gas utility benefit benefited from a rising CPI, which continued to trend upwards towards a more stable level during the second quarter.
Economic activity in Western Australia has also improved in 2021 with mining activity in particular looking strong coming out of the pandemic. We are optimistic that these trends will continue through the remainder of 2021 and create momentum coming out of the pandemic.
And Puerto Rico.
Nicole we marked a significant milestone on June 1 with the successful.
Successful completion of the 1 year transition period, which on top of being completed ahead of schedule.
It involves countless regulatory operational safety and financial planning and readiness activities.
Following the.
<unk> transition luma assumed full operation of the electricity transmission and distribution system under a supplemental agreement.
We will operate under the supplemental agreement until such time that PREPA has concluded its bankruptcy proceedings at which point, we will move directly into the 15 year operating agreement.
Since.
Since commencing our work and Puerto Rico, there have been challenges some of which have been covered and the local media.
And as with any undertaking of this scale there will always be challenges and resistance to change, but we remain committed we will be putting our heads down and working to meet our commitments to all stakeholders, including.
Including the people and Puerto Rico.
On a regulatory front, we have continued to gain more progress on prospectively with several decisions received and the quarter.
In mid June.
And you see issued its decision on the Atco gas transmission application to acquire the pioneer.
Pioneer pipeline.
A commission ruled favorably and approve the application is filed.
<unk> also approved our application to transfer the 30 kilometer and western segment of the pioneer pipeline to Nova gas transmission. As this segment is located within and GTS service area and.
<unk> weighting.
Total from the Canadian energy regulator, and the transfer is expected to close and the fourth quarter a this year.
Further direction on the 2023 cost a service application process for the Alberta distribution utilities was also received in June and came in largely in line with our expectations.
Waiting a applications from both our electricity and natural gas distribution companies will be filed and the fourth quarter a this year.
Following the 1 year 2023 cost a service period day.
<unk> also approved a third PBR term to commence in 2024.
A generic proceeding will be initiated.
<unk> and the third quarter, a 2022 to outline the parameters of this third PBR cycle, including a review of the term capital funding provisions inflation and productivity factors and consideration of and earnings sharing mechanism.
Yeah.
In terms of capital investment, we invested 400.
$1 million and our business and the second quarter a 2021.
Of this $430 million $412 million was invested in our core utility businesses to ensure the continued generation of stable earnings and reliable cash flows. This investment does include the pioneer pipeline acquisition that I noted.
Earlier.
And our energy infrastructure businesses, we continue to invest and our clean energy strategy and the second quarter explore.
And exploring opportunities in both the renewable energy generation and clean fuel streams of the strategy.
Including our recently announced collaboration with Suncor to pursue.
30 per class a hydrogen production facility in Alberta.
In line with this clean energy strategy I wanted to highlight that we released our 2020 a sustainability report in May of this year, which included key information on how we're positioning our business for a lower emissions future.
Notably this.
A report highlighted the 90% reduction and scope 1 emissions that we achieved against 2019 through the sale of our fossil fuel generating business along with a 17% reduction we've achieved since 2019 and our retained portfolio.
Yes.
Hydrogen.
A clean.
Lean fuel that is part of our larger clean energy strategy will play a critical role and affordably decarbonising, the production and delivery of heat to our customers.
Amongst other benefits it has the potential to utilize existing pipeline infrastructure, which will greatly reduce the transition time and costs necessary to move closer.
Lower emissions world.
We believe that hydrogen will become an important source of revenue and profitability for Canadian utilities into the future.
And that's why we've continued to take steps to maximize our presence in this market globally.
And early May we announced our plans to develop western.
Trailing his first commercial scale green hydrogen production facility called a clean energy Innovation Park and association with our joint venture partner in Australia, a gas infrastructure group.
And this project Leverages, the learnings from our clean energy information hub, and Australia, which was focused on investigating the potential.
And 2 a role of hydrogen and Australia's future energy mix and has been successfully blending hydrogen into our gas system and Australia.
Yes.
Not only is the clean energy innovation Park, a significant step forward for commercial hydrogen and Australia and for our own aspirations and the hydrogen market.
We are also.
<unk> successful and securing $29 million Australian dollars and funding from the Australia and renewable energy agency referred to as a arena to kick start this initiative.
With the planned 10 megawatt electrolyze or the park will be capable of producing 4.6 tons of hydrogen per day and will utilize.
<unk> renewable power from an existing co located 180 megawatt wind farm. The park will also health related storage infrastructure and provide delivery to natural gas system injection points.
And May we announced that we are working with suncor to design, a clean hydrogen production facility.
<unk> been <unk> Heartland Energy Center and therefore.
Saskatchewan and Alberta.
This world Class project is expected to produce more than 300000 tons per year of clean hydrogen and reduce Alberta, <unk> emissions by more than 2 million tons per year.
This hydrogen project with Suncor will.
At a efficiently advance albertas hydrogen strategy and Canada's net zero ambitions as a whole generating substantial economic activity and creating jobs and the process.
While it remains early days for this project.
And there is significant technical development work to do.
And we're working with the provincial and federal.
Governments to ensure that sufficient support structures are in place for a project of this scale to be successful.
I also want to take a minute to highlight our recently announced renewable natural gas our RMG development with future fuel limited that is located near to Hill's, Alberta, which is about an hour and a half drive just each.
Signet.
The facility will utilize organic and in agriculture waste from nearby communities to produce approximately 230000 Giga joules per year of R&D. This.
This is enough renewable natural gas fueled a 2500 homes and will lead to the avoidance of up to 20000 tons per.
And here of Cotwo equivalent emissions.
While the scale is much smaller than the hydrogen opportunity we discussed a couple of minutes ago. This project and others like it.
And that we intend to explore and the near term are critical to a larger clean fuel strategy. This.
This project serves as.
Per year and for other rapidly executable projects and will provide near term earnings and cash flows to support the ongoing development of our large larger and longer lead hydrogen initiatives.
And lastly.
<unk>.
Wanted to mentioned <unk> June launch of Roomy and.
Innovative start startup.
Bloop aimed at providing homeowners with solutions for everyday household challenges by connecting them with trusted professionals.
<unk> offers a smart home technology products, and repair and maintenance services to the Calgary and Edmonton markets and addition to a wealth of general home management advice.
All in all.
<unk> Canadian utilities carried the momentum from the first quarter, a 2021 into a strong second quarter and will continue to push hard heading into the second half of this year.
That does conclude my prepared remarks, and I'll now turn the call back over to Colin.
Thank you Dennis.
And the interest a timely ASIC.
Ask that you limit yourself to 2 questions. If you have additional questions you are welcome to rejoin the queue I.
I will turn it over to the conference coordinator now for questions.
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Webcast participants are welcome to click on the submit a question tab near the top of the webcast frame and tight with your question.
And utilities Investor Relations team will follow up with you by email after the call. Once again, we ask anyone on the conference call who wishes to ask a question you May Press Star then 1 at this time.
Our first call comes from Maurice Choy RBC capital market.
Go ahead please.
Thank you and good morning, My first question relates to all the clean energy initiatives that you've announced.
Obviously, you've got the hydro that you previously announced Australia to renewables, and Chile, R&D and Alberta as well as the hydrogen production facilities that may come on line in Alberta.
A Canadian and Australia, if you would a draw a spectrum of returns and compare these initiatives.
Against perhaps a 0.5% base allowed ROE and you get from Alberta regulate utilities, how would that spectrum look like and how would you rank these initiatives.
A.
Good morning Morris.
And I hope, you're a hope you're staying safe.
Yes.
And the utility returns would be will stay at the far left of the spectrum.
Let's see.
And the lowest risk and therefore, the lowest return.
The other probably.
Yes.
And you've outlined.
Okay.
And maybe I should maybe I should check that.
Right now, we're seeing solar returns returns for solar projects and coming in lower than a.
And the utility returns right, alright, and around that area in terms.
Project of and equity.
Return on equity returns and the.
The other projects.
We really do need to look at them on a project by project basis.
Sure.
Our method of operating.
We prefer long.
Long contracted.
Assets with credible Counterparties.
And also a partnering with a like minded.
Firms that share our values and as we go to Derisk the investments.
A.
I can't tell you.
And for certain whether the a central west pumped hydro would be.
More or less risky than.
The hydrogen project it depends on the long term contracted outputs the inputs what kind of backstop.
You may have from from Counterparties and what.
Have you, but a well.
Because of the additional risks those returns are north of the a of the utility returns, let's say a kind of somewhat obvious.
But not prepared to get into a.
Specific.
Ups yearns for specific projects due to a commercial reasons.
But that's fair enough and maybe as a follow up to that would it be fair to say that you would and enter into these initiatives. After considering the government funding a subsidies that you may receive that you would've and.
And to these initiatives unless it's at least in line, if not better than the Alberta returns.
Again, recognizing that you do outperform and Alberta as well.
Well, we need to we need to.
To take a look at the projects.
As we scan the environment, the utilities and I'm Gonna say after a burst at the far left us a spectrum so.
If we can't completely derisk it down to a utilities, Utah.
A utility level, then, yes, we would be expecting higher returns.
Understood and then my.
Second question, but lets you, but you do hit on a good point of a.
Kind of be approved return versus the achieved return coming out of our our utilities, which we do take into account as well.
So when you look at your far left of the spectrum is that the 8 and a half or is there and a half plus a performance.
There's there's a range there dependent you know the.
Given the regulatory resets and what we what.
What we have achieved over a over the last decade of north of 200 basis points outperformance.
And we get asked.
What are you going to do.
For me next year, and how are you going to restock those saving shelves and.
We do continue to out perform it's a challenge to management and the teams do a great job of doing it. So I'll say, a we do bank on somewhat outperformance and.
And the a and the exact amount.
I'll say, we don't have an exact amount and that's a bit of a range given the.
And with Tori pressures and our views going forward.
Understood and then my second question.
And maybe take a few years for it and to the Suncor a clean hydrogen project that you sure.
Turing.
Could you if you were at a F. I E. This later.
This decade.
Help us understand roughly what type of investment your share would be and would you consider bringing on a partner a long thought yourselves and suncor.
Yeah.
Well never say never with a with another partner.
We do think between ourselves and Suncor, we are we have the capacity and the skills required in order to execute a project.
Suncorp brings a.
Yeah.
Consider a hydrogen production experienced a large project management experience.
We're in the storage and piping business.
We are.
And we believe that we have the capability required and the capacity required to to do the project on our own.
Terms of a capital costs and economic return details and then those or are still being worked out.
Given that it's a it's a world class scale, there's a great long term potential for the project and where we're continuing to work through those those details.
And.
I guess would it be fair to look at the balance sheet capacity that you have and particularly using the proceeds from the recent asset sales would you say that what you have today is enough to fund.
These and all the other initiatives that you've announced so far.
Yes, we've.
The stacking of opportunities and we wouldn't have pursued the.
The hydrogen production facility with Suncor, if we didn't have the ability to.
The financial capacity and ability to proceed with it.
Looked at and we've been I think relatively clear on our strategy with regards to clean fuels and renewable energy.
The pace and quantum can can flux with opportunities.
But we do have that capacity to.
Execute on all of the initiatives and our AR and our.
<unk>.
Yeah.
Great. Thank you very much.
Thanks Bryce.
Our next call comes from Andrew Caskey Credit Suisse go.
Go ahead please.
Thank you good morning, a maybe I'll start with a narrow question first and obviously we've seen some.
It's a pretty robust in place and the numbers are around the world and you know.
And as regions is a bit different.
But could you maybe just address any near term positive impacts you have from the inflation data just by way of a regulatory mechanisms you have and then.
The flip.
Are you experiencing a cost pressures.
And any of your assets.
Sure and maybe I'll start and then I'll ask Brian <unk>, who heads up the financing and regulatory from C link to to talk.
Talk about the Alberta utilities.
I mean, we are seeing the pause.
Positive impacts from the inflation and Australia.
Last year, and we had we had recorded and the first 6 months about a 0.3% and inflation and this year, it's been 1% inflation. So that additional 70 deeps accounts.
And for about $7 million and and adjusted earnings coming out of Australia. So a.
A.
Rate benefit in terms of the adjusted earnings coming from Australia, We do see cost pressures and Australia.
Along.
Lengthening of some.
Some lead.
And so in order to get a.
Materials pipe in particular.
And to into Perth to execute on our projects, but that.
It's all a very manageable right now.
Other elements will maybe turn it over to Brian for some.
Some color on the Alberta regulatory environment and.
Impacts from PBR and and your cost Brian.
Yes. Thank you Dennis Thanks, Andrew for your question.
Doug mentioned and Alberta, we do the PBR mechanisms for the distribution utilities adjusted for inflation.
Time that we have higher inflation and that gets adjusted into future rates.
That said similar to Australia.
We are seeing some inflationary pressures on our materials, but not too significant very manageable, we have really good long term relationships with our suppliers and we're not seeing any issues.
In terms of getting the material at reasonable rates continuing to monitor through that but nothing of significance to 2 Alberta for the inflation at this time.
And thank you.
That's helpful for a second question, a little bit different and.
And really relates to crop up and.
And so you mentioned that from your prepared remarks.
Extensive but other mis business has changed.
Changed and it's been documented and.
And then you are committed to making the situation and they are better.
And I'm not to belittle, the dynamics of our business difficult, but you're very capable and I'm not trying to be patronizing about this because you've got a a very extensive track record of doing these kinds of things, but is this just a function of time to win.
Marks a mines.
And just delivering what.
A promise to deliver on the front end and and a very public process through.
And the whole dynamics around PREPA, and how you wind up with a contract.
Yeah.
Great question, Andrew I mean, if you look at the.
The vested interests.
And and proper for us going in.
And I'll say versus.
And what's in the Hearts and minds of the people of Puerto Rico, I think there's a general consensus overwhelming consensus that a.
Transformational change.
Hearts and as required.
There was a a J P power customer satisfaction survey and at a 50 companies.
PREPA was number 50, and they had a heck of a long way to get to a number 49 on the list.
And you know that that wasn't any of the a call at the stakeholders.
There's with the the vested interests.
And in PREPA that where that was the customers and that's been our focus.
Going in and winning.
Winning the hearts and minds of our customers.
We had there was a large fire.
On June 11th and knocked out a about 1 million customers. We had them all back online you know within 26 hours I think just over a day.
And.
And I know you Werent belittling it all and your comments.
The way our teams.
Worked through it and a methodical safe efficient manner.
It just exudes that operational excellence and.
And the pride that that we have and the people down and luma.
Some of the management stocked from cash.
Quanta and from Agco.
And on the boots on the ground coming from ex PREPA and employees.
It was just wonderful to see.
Or.
Not out of the woods, yet there's a lot of work to do but as we continue to perform and execute.
<unk>.
And hope the public sentiment will will help turn the.
Vested interests and the noise will quieten down and let us get on with a <unk>.
And given the.
A Puerto Rican C a electrical system that they deserve.
And the years coming forward.
That's great I really appreciate it thank you.
Thanks, Andrew.
Our next question comes from a Mark Jarvi CIBC capital markets. Please go ahead.
Okay.
And you talked about a.
And it sort of a announcement earlier a couple of months ago, a loss last quarter.
And told them that initiative, we will be sending the R&D and and remember natural gas into a home until it and Infosys and limited.
Customers, just curious and when you think you'll start to introduce and Haynesville and gas distribution utility and Alberta, and what you need to see from regulators and policy.
And before you can start to make those types of investments and a great ensuring a utility.
Yes, I mean, that's a good morning, Mark that's a that's a another great question 1 of the elements that we're pursuing with the government.
In relation to hydrogen, but it's also.
Policy applicable to a RMB.
<unk> Yeah, right now the gas Utilities Act does not allow for a.
And our permit.
And the injection of a.
A.
Clean fuels and order to lower the.
C O 2 impact.
Compared to a natural gas.
We are working with the provincial government in order to.
Try to get them to amend the GE UA and order to allow for that all of the discussions so far have been very.
Very receptive and have gone very and.
A very positive nature.
Ask afterwards, Bryan if he's got anything to add your ear closer to to that then and I am but that's what we need in order to inject.
Jacked that blending up to potentially 20% to help.
Lower the emissions for our customers.
Brian and said yes.
Thank you Jesse.
Just to add on and yes, a provincial government as we are working with them directly and they are very open to us and the works per se.
Terms of allowing the hydrogen or.
Our LNG and <unk> systems.
We've also introduced new producer rates that would also facilitate.
The connection of the RMG into our system. So we have laid the foundations a there and we expect in short order to have those those approvals.
And then would you envisage yourself.
<unk> seen a producer yourself, a some part of a king county, and Rocco that kind of stuff.
Supply of LNG or is it more likely to go to third parties.
A note we are a we are investing and RMG production as part of our a clean fuels initiative the first.
The first project out of the Hopper.
The 2 hills.
R&D project, a 230000 and Gj's.
But that would be a.
Because of the small.
A capital costs and associated earnings impact.
We're looking to build a portfolio.
And the of the RMG production facilities.
And in Alberta, and also outside of Alberta is a R.
Customers are looking to help decarbonize on their efforts so and that.
It's not just in Alberta.
Got it.
And then I wanted to go into the segments a little bit.
This is a corporate and product roomy and new initiatives and they've launched is there any upfront costs lifting and mindful of and might be a bit of a drag and the next few quarters. As he says you can start to build that and then a second it looks like the actual energy business you know it seems to me.
Turning for here and and doing well and contributing is there anything special about the contribution and this quarter and Q2.
And 1 a seasonality.
Or do you think that that contribution seem to have a positive impact this quarter should persist.
Yeah.
For a for the first part is there going to be any drag from from roomy No. We don't see a we don't see the much of a a drag we're continuing to.
To expand our products and services into a first the Edmonton and Calgary markets should that.
Or should it go should it be successful when it's successful.
Could be looking to expand that.
Outside of the all of Alberta borders.
<unk>.
So there's a potential there so there may be some costs, but that's there's nothing in the near term that would.
But that should impact the corporate results.
And the the results in Q2 and and year to date for a.
For Atco energy.
And 2 varied and the and the corporate segment, there's nothing unusual or 1 time nature and those results that.
What caused that to be a blip or we're looking for continued performance out of that clean energy as they continue to build their market share here and here in Alberta.
Okay last 1 was just on the Alberta distribution utilities, a gas and electric seem to have a fairly strong results year over year improvement.
And there wasn't mentioned for the gas and with some timing of costs does that sort of a retrospective or is that you deferred some costs that will show up next quarter and then on the electric side is that just stronger.
For industrial.
Real load as activity picks up in oil and gas base or is there sort of a weather a factor there around residential loads and a quarter.
Yeah.
And in terms of gas and then I'll a I don't know the answer to the second question. So I'm going to pump that went up with a Brian too.
And in terms of gas.
And that's a that's in your timing so there's some expenses and the and the first half of the year that we expect to incur in the second half of the of the year.
So there's.
And that's the timing that we're referring to and.
And Brian on your on the load for the first for a spin.
And their impacts on.
On the electric and growth and earnings it and again, it's mainly driven by the continued.
<unk>.
Operating efficiencies that we have implemented over the years and we continue to see the compounding effects of those benefits as for the load, yes, we do see strong.
Growth and our customers.
<unk> not impacted by weather per se too much.
But it's really driven by strong customer growth and again, mainly due to the cost efficiencies and programs that are.
And that are that our people have implemented for the benefit of customers and shareholders over the years.
Perfect. Thanks for taking my question.
Thanks Mark.
Once again, if you have a question. Please press Star then 1.
Our next question comes from Matthew Weekes, I, a capital markets. Please go ahead.
Okay.
Thanks for taking my question.
Looking for a little bit of Clarus.
And so.
Economic growth.
Sorry, Matthew we're having extreme difficulty hearing you.
Yeah.
Okay.
Now I can't hear you at all.
Sorry can you hear me a better now.
Much better. Thank you Matthew sorry about that Heath talked about that so.
So yes, I was just wondering if you'd be able to comment on kind of separating what the impact and the quarter was from.
The settlement.
And then that that occurred in the Australia and gas business, which was mentioned in the MD&A as a.
And providing a tailwind versus.
Recovering economic growth and inflation.
Yes, Thanks Matthew.
And we talked about it a little bit earlier.
With regards to inflation will notice.
<unk> answering Andrew's question.
The impact from inflation and and the first half of the year is about $7 million uplift on a.
On the results due to CPI and that's the settlement that we that we had related to.
And back home.
And when we bought.
A couple gas, Australia, which it just happens to be the 10th anniversary today that we acquired.
And Western Australia gas network or our wagon.
And that.
Settlement added about $2 million 2.
The Q2 results for Australia.
And that's included in those and have.
Our results and that gives you a most of the.
The uplift and Australia as earnings.
Okay. So it doesn't sound like it was really 2 material overall.
No.
Okay.
And we are continuing they're continuing to perform and execute and the isn't referred to in my opening comments. The economic activity is a really picking up there.
And we've got a <unk>.
For now and being able to manage the impacts of inflation on a on their performance. So there's there continues.
And they're going to perform extremely well.
Okay. Thanks for the clarification on that that's it for me I'll turn it back.
Thanks for your question Matthew.
This concludes the question and answer session I would like to turn the conference back over to Mr. Colin Jackson for any closing remarks.
Continuing.
Thank you operator, and thank you all for participating today, we appreciate your interest and Canadian utilities, and we look forward to speaking with you again soon thank.
Thank you and goodbye.
This concludes today's conference call you may disconnect your lines. Thank you.
For participating and have a pleasant day.
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