Q4 2021 Canadian Utilities Ltd Earnings Call
Thank you for standing by this is the conference operator, welcome to the fourth quarter and year end 2021 results conference call and webcast 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.
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I would now like to turn the conference over to Mr. Calling Jackson Senior Vice President Finance Treasury risk and sustainability. Please go ahead Mr. Jackson.
Okay.
Thank you Claudia.
Everyone. We are pleased you could join us for the Canadian utilities fourth quarter 2021 conference call.
With me today is executive Vice President and Chief Financial Officer, Brian Robot.
Brian will begin today with some opening comments on recent company developments and our financial results. 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. It can be and can be found in the investors section under the heading events and presentations.
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 the Canadian Securities regulators.
And finally I'd also like to point out that during this presentation, we may refer to certain non-GAAP or segment measures such as adjusted earnings adjusted earnings per share.
<unk> investment these measures do not have any standardized meaning under <unk> and as a result, they may not be comparable to similar measures 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 fourth quarter 2021 conference call.
Before I jump into a summary of our financial results for 2021, I want to talk more generally about our performance in a year and also highlight a few notable achievements we've had.
As most here are aware our core investments are largely focused on regulated utilities and long term attractive businesses with strong counterparties.
As we look back at the events of the last few years and the numerous challenges faced by businesses globally in the face of the COVID-19 pandemic the value of these core investments has really shone through.
Despite continued market turbulence 2021, SAR businesses deliver the following.
Year over year earnings and rate base growth.
That's key ESG initiatives, which accumulated and they're a release a formal targets in January of this year.
Commence operations in Puerto Rico through our alumina energy business and execute on a number of energy transition investments.
2021 also saw our business successfully go to the market twice for capital to support these ongoing growth initiatives.
In both cases, our offerings were oversubscribed and closed to add attractive rates highlighting the trust investors have in our business and the stability, we can deliver even in times of heightened market turbulence.
We are truly proud of these results and of our people who work tirelessly to continue delivering service excellence across the business.
And refusing to allow the numerous challenges created by ongoing pandemic distract them from this objective.
Okay.
Taking this discussion back to our financial performance 2021 was another great year for Canadian Utilities limited, we achieved adjusted earnings growth of $586 million or $2 17 per share for 2021.
This is $51 million.21 per share higher than 2020.
Well our businesses overall performed very well in 2021 this growth in year over year earnings was primarily driven by the performance of our <unk> energy business and continued strong performance from Atco gas Australia throughout the full 2021 year.
As we talked about in our third quarter conference call Luma energy assumed full operation of Puerto Rico's electricity transmission and distribution system under the supplemental operating agreement on June <unk> 2021.
Since taking over operations. The team has made a number of significant strides including marked improvements to customer satisfaction.
And customer safety and the launching of numerous capital and operating initiatives.
At the core of these initiatives is the aim of improving grid stability and modernizing the electricity transmission and distribution systems and Puerto Rico.
This work saw lumia energy contribute nearly $32 million of year over year earnings growth in our 2021 results and we expect <unk> to continue being a significant driver of earnings and cash flow for us in the future.
As a reminder, we will continue to operate under the 18 month supplemental agreement until such time that PREPA has concluded its bankruptcy proceedings at which point, we will move directly into the previously executed a 15 year operating agreement.
While the specific timing of the completion of these proceedings is difficult to protect the approval in January of a restructuring plan for Puerto Rico's territorial that provides promising evidence that if the process is moving forward.
We continue to expect preface bankruptcy proceedings should be completed in 2022 and before the completion of this existing 18 months supplemental agreement.
As I know many of you have heard us talk about before the process of transforming Puerto Rico's existing electricity transmission and distribution system.
To a reliable and modern system is no small undertaking there has certainly been some bumps along the road and resistance to change, but we remain committed to delivering on our promises for the good of all Puerto Rico citizens.
The last point I want to highlight on loom as the great work that the team has been doing.
<unk> through our own public reporting and then functions.
For anyone on the call that might be not aware luma filed its second quarterly report on February 14th 2022, with both the Puerto Rico private prior public private.
That partnership authority P. Three a M.
And the Puerto Rico Energy Bureau.
This report is publicly available through the Petrie a website and along with many other recent announcements made by luma through its own website and provides further insight into the businesses going ongoing initiatives.
Yeah.
Moving on to Australia, our natural gas utility continued to benefit from the inflation trends that we saw through the first three quarters of 2021 .
This upward pressure on CPI, along with solid system demand helped us deliver 2021 earnings were 34 million higher than 2020.
While the ultimate duration of the CPI <unk> is difficult to predict current economic force Cas suggests that many of the drivers impacting stronger near term CPI in Australia will persist into 2022.
For those on the call that may not be familiar with how CPI impacts earnings in our Australia and gas business and why stronger CPI drives higher earnings it's worth clarifying briefly here.
In our Australia and gas business. The inflation index portion of rate base is built to customers through the recovery of depreciation in subsequent years based on the annual rate of inflation.
The revenues for adjusted earnings purposes. However are recognized in the current year as earned for this inflation component of rate base.
As such we see higher inflation denoted by higher CPI translates into a higher current period earnings like we've experienced in 2021.
On the regulatory front there have been a number of a few developments in the first fourth quarter and early months of 2022 that are worth highlighting here.
As we've messaged in our last few conference calls we've been waiting the final approvals from both the AUC and the Canadian energy regulator on our acquisition of the pioneer pipeline and the subsequent transfer of a 30 kilometer segment to Nova gas transmission loop limited.
I'm happy to report that as of January 2022, We've now received all outstanding approvals related to this transaction.
Our revenue requirement for the SaaS. It was proved by the AUC is filed and the approval N. G. T. L received from the Canadian Energy regulator allows for the final transfer of their segment of the line.
We will be final I'm seeing this asset transfer through the first quarter of 2022 .
Switching to our Alberta distribution utilities, we continue to gain additional clarity on the 2023 cost of service Freebasing here that will fall. The second performance based regulation term that concludes in 2022.
While there is still additional work to be done in filings to be processed by the regulator early decision support the expectation of a fair and prospective regulatory framework for our distribution utilities in 2023.
Notably the AUC has agreed to a hybrid approach to forecasting 2023 costs, which will see applied for costs compared to an average of 22018 to 2022, sorry 2020 actual costs.
We expect to have these decisions on these applications for both our Alberta distribution utilities in the third quarter of 2022 .
Moving onto capital I want to touch on both the capital investments we made in 2021 and also where we are heading in the coming years.
In 2021, we invested $1 $3 billion in our business with $1 1 billion of this being invested in our core utilities.
This ongoing utility investment ensures the continued generation of stable earnings and reliable cash flows from our utility businesses and drives rate base growth.
When compared to 2020 capital investment. This represents an increase of $221 million the largest share of this increase is associated with our pioneer pipeline acquisition.
And our energy infrastructure businesses, we invested an additional $226 million in 2021 an increase of $198 million from 2020.
This increased investment reinforces our commitment to energy transition and includes a number of previously announced projects that we're pursuing in this space.
<unk>.
Our renewable natural gas investment with future fuels.
The acquisition of development rights for three solar developments in Alberta.
And in the fourth quarter, our acquisition of the Alberta hub natural gas storage facility.
While we discussed energy storage as a role in our overall energy transition strategy during our third quarter conference call.
Quickly revisiting this discussion in the context of our Alberta hub natural gas storage facility acquisition.
Energy storage is critical to the existing operations of our energy system.
And we believe its importance will grow as world Decarbonize.
Not only are assets like the Alberta hub facility critical in the development of industrial scale clean hydrogen they support the diversification of the industry within the province, including support for our critical petrochemical industry and also help support the affordability and reliability of our energy.
Hmm as more intermittent renewable generation is integrated into the grid.
Yeah.
Collectively projects initiated in 2021 represents a significant step forward for our energy transition strategy.
As our solar and renewable natural gas developments are completed in late 2022.
We will start to see the earnings and cash flows benefited by the bite sized and rapidly execute on nature of these initiatives.
Shifting to our larger clean hydrogen production facility project with Suncor, we began to see tangible evidence from both the federal and provincial governments of their support for large scale hydrogen development.
The latter half of 2021 saw the provincial government believes its hydrogen roadmap.
Tangible strategy that builds off many of the aspirations within the federal government's hydrogen strategy for Canada.
Yeah.
As we've been communicating from day one the success of this project will rely on the cooperation and collaboration of industry and government to ensure that policies are in place to make the project of this scale successful.
While there is still significant work to be done the importance of this project for all of Canada and meeting its climate change commitments is well understood and we will continue to advance the project, but the expectation of a 'twenty 'twenty four F. I D and first hydrogen production and 2028.
Moving on to our forward looking expectation for capital investment, we expect to invest $3 3 billion in our regulated utilities over the next three years.
Well utility operations are the largest contributor to our earnings and will remain so for many years to come we will look also be actively investing in our energy transition growth initiatives in the upcoming years.
Okay.
Overall Canadian utilities had a great 2021 that saw us advanced key growth initiatives, while delivering strong year over year earnings growth for our shareholders.
The groundwork that we've laid to establish ourselves as leaders in the energy transition space position us well heading into 2022 and I am excited to continue pushing the business in these key initiatives forward.
That concludes my prepared remarks, and I will turn the call back to Colin.
Thank you 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.
I will now turn it over to Claudio The conference coordinator for your questions.
Thank you <expletive> .
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Our first question is from Linda it's Doug.
<unk> with TD Securities. Please go ahead.
Thank you I.
I appreciate the context around the inflationary benefits at your Australian utility is that is getting now I'm. Just curious if you can help us understand in Q4, how much of that uplift was related to the quarter, specifically versus the full year and and how might we.
Think of the potential seasonality around.
The Australian gas distribution earnings are in 2020 two.
Yeah.
Yes, Linda Thank you for your question.
Yes.
The Australian CPI certainly.
<unk> was a big driver and I would think that in the fourth quarter.
The increase in <unk>.
CPI experienced the fourth quarter of Australia, It was way higher than anyone expected and certainly drove a big portion of the increase.
Throughout the year and I would say out of quarter results for Q4 was higher than normal just because of that that.
Higher than expected increase for Austria CPI.
As we look forward, we look to see that over time, the CPI would normalize and certainly we've had a uplift here in 2021 and in previous years, we've had a really low inflation, but overall, we expect it to normalize.
Over the years.
Okay.
Thank you and maybe moving onto my second question.
Your secured capital for <unk> through 'twenty 'twenty four I'm, just wondering how much that might potentially grow in terms of your backlog of opportunities I see the substantially related to energy transfer transition opportunities can you give us a sense of order of magnitude of.
What else you are looking at that's not in your secured bucket.
Yeah, Thanks, Linda and as you mentioned, we do have a number of energy transition projects in the queue, whether it's her energy solar.
Projects.
Renewable natural gas so we have a number on the go and we're certainly focusing on that.
As to the magnitude I guess that will depend obviously, we've we've talked about our hydrogen Suncor project was which is a significant project and obviously had it can have.
A large impact that forward outlook, though the construction of that is beyond 2024, and we're working really hard today on that.
As we've mentioned in previous calls we see a number of opportunities continue.
Continue to be in the Hopper I guess its a tough question to answer other than we are committed to ensuring that.
We only pursue those opportunities that fit well within our energy strategy.
And we recognize that it is a high competition for some of these projects that we want to make sure that when we entered them. We have the right team in place resources in place to execute successfully on that so I can't give you more guidance than that I think theres a lot of opportunities as we've mentioned before and.
We will make sure that we select a culmination of bite sized as well as pursuing these big projects like the the Suncor project.
Thank you I'll jump back in the queue.
Once again, if you have a question. Please press Star then one.
Our next question is from Matthew Weekes.
Capital markets. Please go ahead.
Hi, Good morning, Thanks for taking my question I think I just wanted to revisit first of all comments made during the prepared remarks on how the CPI.
CPI translate into earnings in Australia.
And.
I was wondering going forward.
There is a recognition in the current period based on that.
It is there is there any way that that would be given back in future periods and and reduce as that.
Through a little bit more of the earnings or I was just wondering if I'm wondering if you could clarify how that works a little bit.
Sure. Thank you for your question and so it may be just hit it right off no. There there would no it would not reviews versus in future years. It's it's it's based on current year's food inflation and Thats translated results and there will be effected over a number of years through depreciation. It is it can be a very complicated way.
Looking at it and perhaps that is what we can do for Ya. Matthew is just take that offline and call you directly and walk you through this very complicated regulatory mechanism if that works.
Yeah, absolutely. Thanks I appreciate that second question is a little bit bigger picture I'm talking about the energy transition.
Plenty to be aligned with all stakeholders and governments.
Before proceeding with opportunities looking at the the so.
So called Blue hydrogen opportunity.
Carbon capture.
Would you say that what part of the one of the key catalyst that would drive going forward with that is going to be government support in the form of a carbon capture a tax credit.
And do you believe you could see that incentive units.
Yeah.
Yeah, there is no.
Government support and policy is critical.
For developments of hydrogen and other energy transition opportunities and.
You know, there's there's a number you've mentioned one carbon capture and but there is theres a lot whether it's securing cost effective poor space for carbon capture.
There is a key clean fuel standards and related clarification on the value of liquid and gas credits under under these standards.
There's alberta tier in BC low carbon fuel.
Credit guarantees.
You mentioned the investment tax credit certainly is that something that needs to be clarified by the federal level.
Theres amendments to the Alberta gas utility act to allow hydrogen blending and so on so I could go on for a long time, but yes, I would just say policy is critical and certainly that's been one of our major focuses that we've been working with both the federal and provincial governments.
To gain certainty on these and clarity on these policies and I think these policies in place will allow all stakeholders to be able to proceed on on these long.
These projects that need to progress and that certainly that we're working on as we get to <unk> by 2024.
Okay. Thank you I appreciate that and just one last question just building on that and you mentioned the clean fuel standards.
The government with the federal government expected implement nationally the clean fuel standards in 2023 was that really one of the drivers behind the decision to move forward with the R&D.
Project and aligning with the timing of contributing really in late 2022, 2023 and building on that do you think there are more opportunities to invest in and renewable natural gas going forward.
Yes, great question, and I would say like renewable natural gas is not new and it's something that we see as as one of the part of the puzzles for addressing climate change.
And we've been working on various opportunities over the years. The I think one of the facilitators has is in BC. They are allowing for a new world natural gas to be included in their natural gas system and and paid for from customers and certainly that has allowed.
As to commercialize some opportunities in Alberta, although today. It is something that will be transported in and recognize NBC, but as we work with the Alberta government that is one of the policy changes that we're looking to implement alright. The government government is the low renewable natural gas to be part of the the market system here in Alberta.
And and because quite frankly, there there's the benefits are clearly known and it's something that it makes a lot of sense. So yes, I do see a lot of opportunities.
In Alberta, and elsewhere for renewable natural gas and certainly that's kind of the rationale for why we entered into that space earlier last year.
Okay. Thanks, I appreciate that that's everything for me I'll turn it back.
Our next question is a follow up from Linda.
With TD Securities. Please go ahead.
Okay.
I wanted to maybe take it up a level in terms of your capital allocation philosophies.
And how you might choose to finance them, just trying to understand how that's being planned.
These are and you know your strategic priority through 2020, Q to maintain an investment grade rating I guess its strong investment grade rating.
Potentially.
And within.
Within that also understand how that might influence the cadence and rate of dividend increases as well.
That's where Linda I think you cut out a little bit there.
Jerry a question do you mind repeating that sorry.
A little bit.
Apologies.
So.
In terms of your capital allocation decisions.
Especially as you face growing opportunities in energy transition I'm, just wondering how that might have been and how that might be influenced by your discussions with the debt rating agencies and your strategic priority to maintain a strong investment grade rating and within those capital allocation decisions beyond just I'm looking at.
At new investment opportunities and adding that to our secured capital bucket from your backlog I'm. Just also wondering how that might inform a.
The piece around your dividend cadence of your dividend growth.
Thank you Linda thanks for repeating that that was helpful.
Yeah, maybe its general like when we'll address solar capital allocation. We're looking at all factors in terms of how we would finance that growth and allocate the capital.
You know strong financial tenants are a key value for us.
Canadian utilities, and <unk>, Inc. And one aspect of this is our is our credit rating and like you mentioned and certainly.
<unk>.
We are our businesses are if our business would it be assessed as a pure play utility on the low volatility table, we would expect our.
<unk> debt to metrics to be well aligned with expectations for a credit rating and stable outlook.
But strategically we believe the energy transition investments will play a significant source of growth for us and our business is moving forward.
And these investments are critical to ensuring the long term stability of our businesses. So no. Unfortunately from a credit rating perspective, where investments are nonregulated and theyre seeing us increasing our business risks and push us further away from assessment under <unk> PS low volatility table.
So well we value our a credit rating and we're consistently seeking opportunities in credits investments that would increase.
Our group's <unk> to debt metrics and financial stability, we're mindful that managing this metric is not our only objective then we can't let our Aero, let Kent, let it create undue pressure that would prevent us from executing on our overall strategy and thats kind of goes to that capital allocation.
That being said, we know that Cu, Inc. Maintains a one notch installation factor from the group rating and given this we expect <unk> to maintain its a rating.
Even if a credit event at the group level words were to take place. So in terms of cost of and access to capital. We don't expect that our funding costs will look materially different if we foresee were rated at triple B plus in that scenario.
Similarly, we expect to continue to have good access to capital in both scenarios than we would if we needed to go to the market. So.
I just kind of give you examples of our recent preferred share dividend issues, both having very strong market acceptance and demand exceeding issue sizes. Both cases so.
We're all we're mindful of our credit rating.
Obviously, we work very well with the credit rating agencies and debt holders.
And as we look to our capital allocation, we want to make sure that Catholic allocation is directed to our long term strategy and stay with stick with that despite near term pressures on some of our metrics.
That we face today, so dividend policy included like where we were reinstated the drip all of these things are options to us and where we're constantly evaluating them. So hopefully that answered your question Linda.
Thank you and just as a follow up question just building on your energy transition opportunities and recognizing that there's still a lot that needs to be put in place from a from a regulatory and political perspective to enable those opportunities to be realized I'm wondering how much work you've.
John .
Our Alberta utilities to establish how much hydrogen you think could be blended into your natural gas distribution and transmission networks would've been document would be what what would be the nature and type of investments that we need to be done to that to enable that oh.
Yeah, Yeah. Thank you Linda.
Yeah, we've done a lot of work.
On our natural gas system too.
Prepare ourselves and evaluate.
Did they blending of hydrogen and again to remind you and others that blending of hydrogen and natural gas networks is not new.
It's been done in a number of places over the world.
So part of that as you know we've we've are starting to we've actually got a couple of pilots, where we're blending 20% of hydrogen and houses.
Obviously, you've heard about our pilot in Fort Saskatchewan, where we're going to be blending initially 5% of hydrogen in the.
Homes in an area of Fort Saskatchewan.
We have been working for quite a while in Australia, two in our clean energy hub. There in terms of the blending of hydrogen. So you know obviously important to US is ensure that we've got the safety case is well proven and.
Educating all parties the stakeholders involved.
And you know we will continue those efforts and that's a strong focus for us here this year.
In terms of getting ahead into on the regulatory front, we have filed as part of our 2023 cost of service application.
Included in there is.
You know the discussion about blending hydrogen and certainly we're working through the regulatory process.
Through that we are also engaged with the federal or the provincial governments in terms of getting guests amendment that they act amended to allow for the blending them hydrogen journey, we've been on that for some time. So I guess, we've been very active and I could go on to ensure that we are prepared for the day when we start blend.
<unk> hydrogen into a network and then we got all the policies and procedures in place and ensure that all stakeholders are are educated on the safety and the benefits of hydrogen and our and our natural gas system.
Thank you.
Yeah.
Our next question is from Maurice Choy with RBC capital markets. Please go ahead.
Thank you and good morning, My first question just bring it back closer to home can you discuss the Rovs that you keep in 2021 for you for a utility.
Hi, Morris.
Yeah in terms of you know the outperformance.
And are you Charles maybe I'll just speak just generally.
Certainly ill start off maybe with electric transmission and.
Electric transmission.
We've had.
<unk> had a number of kind of previous.
Appliance filings that came through in 2021 in terms of.
Getting those final requirements and as you've seen our MD&A had a negative impact.
On a year or.
2021 earnings for electric transmission, I think $12 million of that was related to prior year. So overall.
They have electric transmission is operating in line with AUC approved returns.
Our electric distribution has been doing extremely well and we're continuing to bring in those efficiencies year over year and building off of that so we've seen very strong utility returns.
And outperformance in our electric distribution business in 2021.
Our gas distribution business continues to have very strong outperformance in the business and.
Ultimately.
Builds off some of the initiatives that we've been over the last four years and we prepare ourselves for 2023.
And then the natural gas transmission.
2021.
Reflected the Rebating.
And where we passed and all the cost efficiencies that we've earned in prior years back into customer rates are moving forward. So again, we've had some great performance in our natural gas transmission business as we again start the first year of <unk>.
The incentive mechanisms of finding efficiencies in that business. So overall I think we're very proud with the men and women of our teams delivering continued pre.
Premium returns for our shareholders and obviously the.
The benefits that that goes to customers in the long run so maybe I'll leave it at that Maurice.
Great. Thanks, and thanks for those those explanations maybe it's a quick follow up for the T distribution utilities.
It's supposed to work.
You haven't given an exact number but how.
Many basis points, you've outperformed but maybe.
We are asking us how would you compare this year's outperformance versus say over the past one or two years.
Okay for the distribution, so I would say for.
For the natural gas and I don't have and we haven't gone we haven't gone through the full detailed calculation, where he said there's a there's a lot of myopic converted into regulated returns, but I would say generally our natural gas is in line relatively in line with 2020 and for our electric distribution business.
There's quite a bit higher outperformance in 2021 versus 2020.
Perfect.
And my last question and just sticking again with the <unk>.
But what are your views of the potential core ROE methodology moving to a formulaic approach from 'twenty to 'twenty four onwards and Directionally.
Do you see a risk that the starting point.
Rebates from one 5%.
Yeah, Great question, Maria and and as you're you're aware.
The Alberta Utility Commission has.
Has outlined that are following a.
Generic cost of capital.
Proceeding for 2023 that it's looking for 24 on too.
Evaluate a new process for generic cost of capital, which could include the discussion of our formula and.
You know I guess her views on that is it's early days and we would need to better understand.
The components of the formula to making sure that they can capture the the market conditions and the volatility.
That there is a solid starting point.
It was off ramps that's taken consideration.
And so and then obviously, how the inflation and capital all compensation factors are.
I'm thinking more of PBR.
But basically just overall market and conditions and we've seen so much market <unk>.
Turbulence over the last.
A number of years, and obviously, we'd need to make sure that that formula and how the market is is going to capture those impacts so.
Long way of saying is that you know.
We're not against a formula by that Formula would have to.
We'd have to be comfortable that that formula, which would capture all of those market conditions and provide a fair return which is ultimately.
Port and component of the regulatory compact.
Got it and if I could sneak one N pull up.
If the composition of that Formula mimic the one that we currently see in Ontario.
That would be a good starting point, though do you think that there's still needs to be some customization.
That's unique to Alberta.
Yeah.
Yeah great.
Great question honestly I don't have the specifics and I would need to do some more review and you know you mentioned, Ontario.
But I'd also say that there's very very few jurisdictions that have a formula based.
Right now in Ontario will be one of them. So I just kind of goes to show that you know right now its been pretty problematic to put something like that in place again, it's not something that is not doable, but again, we'd have to we'd have to see what the what parties and the commission is proposing and.
We could probably take something out of offline worries and get back to you. It is a comparison to Ontario provide you a little more details but.
I just respond generally in that way.
Perfect. Thank you very much for that.
Once again, if you have a question. Please press Star then one on your telephone.
There are no further questions registered at this time I would like to turn the conference back over to Mr. Colin Jackson for any closing remarks.
Thank you so much Claudia.
Claudia and thank you all for participating today, we appreciate your interest in Canadian utilities, and we look forward to speaking with you again soon thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pool.
Some day.
Yeah.
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Yes.
Yeah.
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