Q3 2021 Canadian Utilities Ltd Earnings Call
Welcome to the third 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 an opportunity to ask questions.
To join the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star zero.
I would now like to turn the conference over to Mr. Colin Jackson, Senior Vice President Finance Treasury risk and sustainability.
Please go ahead Mr. Jackson.
Yeah.
Thank you. Good morning, everyone. We're pleased you could join us for the Canadian utilities third quarter 2021 conference call.
With me today is executive Vice President and Chief Financial Officer, Brian Scrub, Pos and executive Vice President Corporate development, Bob miles, Bob leads Canadian utilities, Nonregulated energy infrastructure business.
Brian will begin today with some opening comments on recent company developments and our financial results followed by an overview of our energy infrastructure business and our energy transition strategy from Bob.
Following these 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 at Canadian utilities Dot com and can be found in the investors section under the heading events and presentations.
I'd like to remind you.
All that 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 by Canadian utilities with Canadian Securities regulators.
Finally, I'd also like to point out that during this presentation, we may refer to certain non-GAAP or other financial 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 S and as a result, they may not be comparable to similar mezz.
<unk> presented in other entities.
And now I'll turn the call over to Brian for his opening remarks.
Thanks, Colin and good morning, everyone. Thank you all very much for joining us today for our third quarter 2021 conference call.
Canadian utilities achieved adjusted earnings of $88 million or <unk> 33 per share in the third quarter of 2021. This.
This is $12 million or <unk> <unk> per share higher than the third quarter of 2020.
This growth in the third quarter earnings was primary driven by a little more energy investment and continued strong performance from Alco gas Australia.
As we highlighted in the second quarter Luma energy assumed full operation of Puerto Rico's electricity transmission and distribution system under the supplemental agreement on June <unk> 2021.
As such marks the first full quarter of operations for alumina energy investment driving significant earnings growth for us when compared to the third quarter of 2020.
As a reminder, we will continue to operate under the 18 months supplemental agreement until such time that PREPA has concluded its bankruptcy proceedings at which point, we will move directly into the previous executed 15 year operating agreement.
While the specific timing for completion of these proceedings is difficult to predict we continued.
You'd expect them to be completed in 2022 and before the completion of the existing 18 month supplemental agreement.
Despite ticket on operation of the Puerto Rico electricity transmission and distribution system only five short months ago, we have already made significant and tangible strides system service quality has improved safety performance has improved and we've begun significant system maintenance and repair work, which will help us.
Support the long term stability of the system.
There has however also been challenges for example, there have been a number of power outages, particularly in August and September associated with the lack of sufficient electricity generation.
We continue to remind everyone that luma is not responsible for electricity generation and the generation of electricity has a responsibility of PREPA PREPA.
PREPA PREPA has had a number of unplanned enforce outages that unfortunately has resulted in the loss of power to many of our customers.
As with any undertaking of the scale, there will always be challenges and resistance to change, but we remain committed to putting our heads down and work to meet our commitments to all stakeholders, especially the people of Puerto Rico.
Moving on to Australia, our natural gas utility continues to benefit from favorable inflation trends that we saw in the first half of 2021.
This upward pressure and see CPI.
CPI, along with a cool and wet winter in Australia that saw natural gas demand rise.
Resulted in strong third core earnings from the business.
Okay.
On the regulatory front, we continue to gain more certainty and prospectively heading to the ended the year.
The timber the AUC issued its decision on the alcohol electric transmission 2020 to 2022 general tariff application.
This decision set electricity transmission requirements through 2022 and provided greater certainty for the business heading into the year.
Shifting over to the pioneer pipeline as outlined in our second quarter call. The commission ruled favorably and approved our acquisition of the line.
The AUC also approved our application to transfer the 30 kilometer western segment of the pioneer pipeline to Nova gas transmission. As this segment is located within <unk> service area.
That's G T. L is waiting on approval from the Canadian energy regulator to complete this transaction.
We had originally expected us approval to be received in the fourth quarter of this year, but now I believe it's more likely be received in the first quarter of 2022, we do not expect this delay to have any impact on ultimate approval, nor will it impact our earnings or cash flows related to the pioneer acquisition.
In terms of capital investment, we invested $252 million in our business in the third quarter of 21.
Of this $250 million $217 million were invested in our core utility businesses to ensure the continued generation of stable earnings and reliable cash flows.
And our energy infrastructure business, we continue to invest in our energy transition strategy in the third quarter.
This included an announcement in a renewable natural gas space with our future fuels opportunity and the acquisition of development rights for three solar developments in Alberta, our Empress Dear foot and Barlow projects.
As we see these developments through to completion and the commencement of operations in 2022, we will simultaneously exploring further opportunities in both renewable energy generation and clean fuel streams of our larger energy transition strategy.
To speak more to this strategy and our energy infrastructure <unk> infrastructure business overall, I'll turn the call over to Bob miles Executive Vice President corporate development.
Thank you, Brian and good morning, everyone as Brian indicated energy transition is a key component of our growth strategy and the driving force behind many of our recent project announcements.
Four I jump into the specifics of some of these recent announcements I wanted to provide a quick overview of our energy transition strategy.
This strategy can be broken down into three key components renewable generation clean fuels and energy storage overall, our energy transition strategy is focused on increasing Canadian utilities prominence in the transition to cleaner lower emitting sources of energy as part of global.
Decarbonization goals. This includes actively seeking out opportunities that capitalize on the key trends shaping global energy markets, notably decarbonization.
Our knowledge and experience across the energy value chain, and our strong commitment and corporate values provides us to drive value for our customers.
As Brian alluded alluded too in his capital discussion, we made significant progress on the renewable generation leg of this strategy in the third quarter with the announcement of three new solar developments. Once completed these developments are expected to generate enough renewable electricity to power more than 29000.
Homes, and offset a 111000 tons of carbon a year.
Wiring the shovel ready projects allows us to quickly execute on low risk solar developments, establishing credibility with our customers and generating cash and earnings starting in 2022.
Collectively these projects represent a significant step forward in the build out of our renewable generation portfolio and more importantly will help our customers decarbonize their own operations through improved access to renewable energy in the Alberta market.
While these specific investments are located in Alberta, our renewable generation strategy is global and we continue to assess similar investments in other jurisdictions. Additionally.
Additionally, bite sized and rapidly executable projects like these provide near term earnings and cash flow.
Cash flow growth, while we continue to pursue larger and longer lead time initiatives, including commercial scale hydrogen production.
Shifting to the clean fuels component of our strategy, we continue to view hydrogen and renewable natural gas is critical players into successful decarbonization of our energy system over the longer term.
In addition to that there are primary emission reduction benefits hydrogen and renewable natural gas have the potential to utilize existing natural gas infrastructure in North America, reducing both the time and cost requirements of decarbonization and the energy transition.
Many of you will recall, our speaking about our renewable natural gas project near to Hill's Alberta. This facility will utilize organic and agricultural waste from nearby communities to produce approximately 230000 in giga joule per year of RMG enough renewable natural gas to fuel.
2500 homes, while the scale of this project is smaller than some of the hydrogen opportunities, we're pursuing and will discuss momentarily. This project and others like it are critical to our larger clean fuel strategy. It serves as a blueprint for other rapid executable projects in various jurisdictions.
Actions and similar to our solar opportunities provides near term earnings and cash flows to support the ongoing development of larger initiatives.
Pushing further onto the horizon, we continue to advance our previously announced hydrogen projects in Canada and Australia.
This includes both our near term blending projects and the longer term development of our hydrogen production facilities.
While we can't provide specific details at this time planning and early engineering for the development of a clean hydrogen production facility at goes Heartland Energy Center with Suncor continues to progress.
We are also working closely with provincial and federal governments to explore derisking opportunities for this project and to ensure that sufficient support structures are in place for a project of this scale to be successful.
This project will significantly advance Alberta as hydrogen strategy in Canada is net zero ambitions as a whole once completed this world class project is expected to produce more than 300000 tons per year of clean hydrogen and reduce Alberta C. O two emissions by more than 2 million tons.
Per year.
In Australia, we continued to advance Western Australia's first commercial scale green hydrogen production facility in conjunction with our joint venture partner Australian gas infrastructure group referred to as the clean Energy Innovation Park with the planned 10 megawatt electrolyze or this.
Park will be capable of producing up to four six tons of hydrogen per day and will utilize renewable power from an existing co located 180 megawatt wind farm.
This park will also house related storage infrastructure and provide delivery to the natural gas system injection points and developing transportation and power applications.
Lastly, I wanted to briefly touch on the importance of energy storage in our existing portfolio and our overall energy transition strategy, while energy storage is critical to the existing operations of our energy system. We believe its importance will grow as the world Decarbonize.
Energy storage is a key piece of the puzzle as we look to develop industrial scale clean hydrogen it supports the diversification of industry within the province, including support for our critical petrochemical industry and it helps support, peaking electricity demand as intermittent renewables make up a larger and larger component.
Of our generation systems.
I'll now pass the call over to Brian for any final comments.
Thank you Bob.
As these ongoing initiatives highlight de carbonization, not only for our operations, but for our customer operations through improved access to clean energy as a key growth area for our business.
Across our segments, we're investing in projects now that allow us to further our expertise and expand our market reach as energy transition objectives globally continue to mature.
This will help us ensure that we continue to tend to be leaders in the key energy spaces, including hydrogen and renewable natural gas.
And that we have a seat at the table on key energy transition topics moving forward.
All in all Canadian retail these carried momentum from the first half of 2021 into a strong third quarter and we'll continue to drive for top tier performance as we look to close out the 2021 year.
That concludes my prepared remarks, and I will now turn the call back to Colin.
Thank you Bob and Brian in the interest of time, we ask that you limit yourself to two questions. If you have additional questions you are welcome to rejoin the queue.
I will turn it back over to the conference coordinator now for questions.
Thank you we will now begin the question answer session to join the question queue. You May Press Star then one on your telephone keypad.
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The first question comes from Maurice Choy with RBC capital markets. Please.
Please go ahead.
Thank you and good morning. My first question is just picking up on the solar development projects, you've announced three so far can you help us quantify what the total construction cost is and more broadly.
As Bob alluded to there's obviously a wide ranging amount of opportunity and this transition is there a preferred level, let's call. It percentage of earnings that you like these renewables.
As far as energy storage to represent and your total earnings.
Yeah.
Thank you Bruce for your question.
Maybe I'll start it off and I'll turn it over to Bob you know as as for capital investment I think Bob alluded to that we're just in the stages of completing our more of our detailed engineering and assessments.
And in terms of earnings as I mentioned before we look to contract a good portion of our all of our production out of these facilities and in that kind of allude to the type of returns. We're looking for we're looking for stable earnings.
Less exposure to merchant.
So when you look at our utility earnings.
In terms of the risk levels. Obviously, these soldiers might carry a little bit more risk, but with the merchant exposure low again, it would be kind of comparable to what we would have in our utility space and maybe with that I'll turn it over to Bob just to give a little more details on the capital got where they are at in terms of the project execution, and then kind of how that fit.
And the overall strategy.
Sure Thanks, Brian and thanks for that Morris a couple a couple of comments I'd make one is strategically what we're trying to do is in our energy transition strategy is keep a balance between those three pillars being energy storage renewables and clean fuels, but the well what we're seeing is that the size of the are clean.
Fuel's hydrogen projects are significantly more than in some of the other pillars. So we're going to see over the longer term horizon, probably the earnings driven from our hydrogen projects will drive higher earnings just from the size of the projects with regards to specifically on these solar projects were still in the development of <unk>.
Our our capital estimates so we're still a ways away from finalizing that but we're having a pretty extensive discussions with off takers for the for the solar power from these facilities. So it's been very very encouraging discussions to date.
Okay.
And just to follow up on that question. So is there like a targeted mix between utilities and it's called energy transition type investments that they.
You're targeting over the long term.
Yeah, I guess in terms of targeting.
We're looking to diversify and clean.
Energy and energy transition is definitely part of our long term growth strategy as we we look to diversify and we see as Bob mentioned in his in his opening remarks, there is significant opportunities for Canadian utilities to play a lead role in the energy transition and that you know well I think what.
You see in the third quarter or some of the projects that have kicked off is just example of us executing on that strategy. We have a number of bite sized projects that are shovel ready that.
As Bob mentioned is nicely fitting into the gap between our our longer lead projects such as the hydrogen development.
Central West pumped hydro was so it's a balance and we will be after too optimistic as well as as opportunities arise, but again other than the guidance to say that.
We would look to continue to expand.
The clean fuels and renewable energy are part of our portfolio and have the proper balance between I guess.
Long term contracted opportunities longer with that longer lead and green development projects.
Understood and maybe just to finish off.
I suppose it is.
I think about tobacco and keeps that you obviously have.
Are you funding everything pretty much Jeff on your balance sheet or are you seeking to recycle some of these capital on the assets or you.
Finding other ways to fund it like how should I think about how big of a.
Capital you seek to invest here.
Yeah, Great question and you know in the short term, we'd look to kind of balance sheet finance these projects, but.
We've looked to wrap it up later on it with some other financing vehicles once we get some scale and look to project finance.
A good chunk of these projects in the meantime, we'll we have ample cash balances to deploy too and credit facilities to fund the short term nature, but yes, we would look to find financing vehicles that would.
Kind of marry up with the long term contract to build any of these projects.
Okay. Thank you very much.
The next question comes from Ben Pham with BMO.
Please go ahead.
Hi, Thanks, I wanted to a couple of questions on <unk>.
On the carbon.
Project.
Do you think that.
Carbon opportunity in Alberta.
And it's it's just gonna be so robust that it's mostly our winters market share situation. You you expect winners and losers out of this and how do you how do you or someone else differentiate that that project for Saturday.
Yes, Great question, Ben and maybe what I'll do is I'll per stop question over to Bob.
Thanks, Ben My views on that is I think there are significant opportunities in Alberta, but as we indicated in our announcement back in may with our partnership with Suncor. There are a number of things that have to have to happen and get resolved, whether it's you know the regulatory environment.
You know the carbon emissions regulations things like that have to occur to to allow these projects to proceed. So I think that's the first thing that really has to get resolved and we're spending a lot of time working in that area.
I'd say I'd say the other thing is we as industry really have to come together and partner on some of these opportunities I think youre seeing a lot of that happening now I think you need to see more of that going forward. So so I think there's great opportunities, but there is still work to be done.
Okay. That's great. That's those are my two questions. Thank you.
The next question comes from Linda <unk> with TD Securities.
Please go ahead.
Thank you.
Follow up question on your partnership with Suncor.
Is it possible to provide realizing that there might be a very large range what the bookends of the size of the investment might be I'm not just as a function of the product itself, but also maybe what you know depending on what level of ownership range, you would consider whether it be solely with suncor or potentially bringing.
Other partners, including potentially the government can you talk about what might be possible in terms of magnitude would be very helpful.
Sure Linda.
Take that Bob here.
I think you hit exactly on the points that we're pursuing within industry right now in this project, we announced with Suncor is a multibillion dollar project, but we're already having discussions with other parties around how we can combine it with other initiatives that are being pursued in the industry and that to me is very encouraging.
<unk> that we're working together.
Can't tell you that we have anything fully defined as of yet but discussions are occurring as we speak.
Thank you and just to understand the timeline of milestones.
You know recognizing that it would be great. If you could get by 2024.
When might we see certain milestones have to be met in order to achieve that timeline.
And if you could give us any sense of what you think might be possible in terms of getting regulatory certainty from the government for example.
Yeah, when might you need to potentially lock in.
Those commercial attributes even just conceptually in order to reach that realizing there's a lot of complexity in the various work streams any sort of understanding of how this might progress would be a.
Very helpful.
Yeah, Linda we have a very detailed plan for this project, but you're you're absolutely correct. As 2024 is when we said beginning of 'twenty 'twenty four for when we need to have our final investment decision and Thats just to allow us sufficient time to have construction.
Completed by the end of 2027, that's the timeline, we have and so I do think it's achievable, but from now to 2024, we've got a very detailed plan of things that have to happen.
You know, we're working with other priorities going back to your first question one of the challenges around trying to involve to many parties in a project as you know.
We have to lock down the project in the design in order for us to hit our 27 2027 construction date. So so that's one of the challenges. We have we've had a lot of great discussions with with governments I think theres a lot of support.
Lee this the election that we had federally kind of put things a little bit on hold until the outcome of that happened, but discussions are already happening again with government. So so I'm encouraged that we're going to be able to do that but we have decision points. It's not just waiting until 2024, there's there's things that are happening throughout that pro.
SaaS that we wanted to be able to determine before we proceed so.
Hopefully that helps Linda.
Yes, yes. Thank you it gives us some some better understanding and as a follow up question more broad beyond that specific project I'm wondering how you might think of accelerating potentially U R energy transition journey by considering acquisitions, whether it be to acquire certain Keith.
Identities, and certain new technologies or geographies or.
Just outright achieving scale and.
And I guess, it's a bit of a alluded to that too that when earlier question around business long term what might be possible.
Linda bought here again, I I agree that that's something we're definitely evaluating is acquisitions I.
I would say just though with regards to technology. We are really agnostic on technology, we want to be open minded to all different technologies and whatever the best technology as we will pursue it even if you take a look at our son our project with Suncor, we're very willing to look at different technologies as long as its provider.
Clean hydrogen at the end of the day, so but with regards to advancing our energy transition strategy, we are considering acquisitions in that process as well.
Thank you any sort of guardrails around them.
What what might be possible in terms of scale or risk attributes.
Maybe I'll take that one Linda in terms of scale.
In addition to pursuing organic growth I think optimistic M&A is helpful.
I think for scale.
We wanted to make sure it's balanced with our overall portfolio of investments. So I don't know if I can give you a lot of guidance on that I don't think it would be looking at large acquisition. It would have to be something very strategic but we think theres a lot of bite sized M&A out there that could be very supportive for our strategy.
Okay. Thank you.
The next question comes from Mark <unk> with CIBC capital markets. Please.
Please go ahead.
Thanks. Good morning, everyone Naval is continue on with the clean energy initiatives you talked about the acquisition the ongoing efforts in Alberta, just updated views in terms of organic growth opportunity around clean energy, whether it's renewables RMG outside of Canada, whether it's Australia U S or Latin America.
That's something we should be anticipating there'll be more announcements in coming quarters or is that something you feel like it's going to take a while to sort of bring them out.
So maybe I'll start off and I'll turn it over the ball, but yes, we are looking at other jurisdictions, but with that we want to be very focused we don't want to spread ourselves tooth to broaden and really focus on those markets that we see value.
And supportive regulatory and government support so maybe with that barbell any further that sure mark.
I agree totally with what Brian just said, we really need to stay focused but we're spending a lot of time right now not only looking at I'm going to call. It our own backyard here in Canada, but also in Chile and in Australia. So a lot of efforts are going into evaluating our energy transition in the air.
Areas of clean fuels, and renewables and both of those jurisdictions.
Yeah.
Got it and then maybe just a more detailed question on the Australian distribution utility you highlighted a couple of factors that drove the year over year results can you kind of split that apart in terms of.
So the inflation adjustment impacts versus sort of volume on favorable weather and then maybe just broadly.
How youre seeing that business evolve like it seems that things are slowing a little bit, but now just curious I'm connections in growth how about for that business on top of our or we are potentially.
Yes, certainly I can do that in.
I think we referenced that in our second quarter call, where we saw the you know I guess positive development on I guess returned to more stable levels of CPI and for Australia, and and just for information every 10 basis points translates to about $1 million and think year to date.
We're up about $6 million related to the kind of the positive CPI development.
And in the rest of the earnings increase is really driven by that that load growth yet and we are seeing.
Very favorable growth and demand for for gas in Australia.
I think beyond that I think we're going to continue to see hopefully continued.
<unk> growth in terms of demand.
We have an access arrangement, that's coming up in a couple of years that will have to pay attention to and including a kind of a cost of capital review and that's a lot of part of our business right now is going to be focusing on getting prepared for that next access arrangement.
That's helpful. Thanks for taking my question.
Yeah.
Once again, if you have a question. Please press Star then one.
The next question comes from Andrew <unk> with Credit Suisse.
Please go ahead.
Thank you good morning, I know, it's a small part of the business, but it's a big opportunity and you've got an interesting position in both Australia and Canada.
On the hydrogen side.
And so maybe you could just give us a bit of perspective on the framework positioning that both of the countries have.
And then you know maybe this applies to both baseball and crooked. So what inning do you believe each countries and for development.
Of hydrogen strategies and really how does that translate through to see you at the end.
Andrew Bob here, that's a very very interesting question.
You know I have to think about it but I would say that.
Australia has been pursuing the and I'm going to use their renewable generation.
I know that wasn't your question, but I'm going to start with that because they had been pursuing renewable generation much longer than we have in Canada and with that comes clean hydrogen in the form of green hydrogen and so they've I'd say, they're probably.
More they've been looking at this longer than Canada has but I would I would say from what I'm seeing is Canada is going a lot faster than Australia is right now so pardon me feels that we're actually pulling ahead in Canada.
Also spending a lot of time looking at different export opportunities for hydrogen for ammonia and you know looking at southeast Asia, and if youre not to get into the weeds on this but when you look at Australia, it's definitely closer to southeast Asia, but there's incredible amount of interest from southeast Asia.
Into the Canada hydrogen market right now and I think a lot of it is is because of the the the pace at which where we're developing hydrogen projects here in Canada. So I.
I'd like to think that going back to your baseball of I'll use baseball not cricket, but use your baseball analogy I'd say that Canada is probably getting into the later parts of the game and I'd still say, Australia is still early on with regards to larger projects.
Hopefully that helps.
That does that's that's very helpful context, and then the follow up is really to Brian and you know from a top of the house view when you think of some of these energy trends, but energy energy.
<unk> business opportunities that exists.
You know generally from a market standpoint, they they garner a higher multiple.
So how do you think about just the dynamic of these businesses, providing incremental growth where growth hasn't really been there in the last few years from a top of the house perspective to the same degree as it was in the past.
They also have higher multiple growth. So I guess, how do you think about just capital being allocated to these businesses and that client kind of context.
Yes, no great question and I agree with you that we do see these opportunities attracting higher multiples and I think foundation Lee we keep them.
Our house clean in terms of we have a very strong stable and foundational business and the utilities that drive good returns and cash flows that gives us the opportunity to invest in this energy transition and as Bob alluded to again I think there's ample opportunities we're going to stay very.
Focused and make sure that we approach opportunities with the balance and.
When we look to contract some of the production that we have a right balance of long contracted.
Off takes and.
Really see us.
Conserving cash, but have decent growth at our utility business, but really put that growth into these.
Energy transition and again, I think there's ample opportunity there and.
It suggests very similar to what you see it I think it drives higher multiples down the road and I think there's great opportunities in front of us for Canadian utilities.
Okay. That's great. Thank you very much.
This concludes our question and answer session I.
I would like to turn the conference back over to Mr. Colin Jackson for any closing remarks.
Thank you operator.
Thank you all for participating today, we appreciate your interest in Canadian utilities, and we look forward to speaking with you again soon.
I will turn it back to the operator.
Thank you.
This concludes today's conference call you may disconnect your lines. Thank you.
For participating and have a pleasant day.
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