Q1 2022 Canadian Utilities Ltd Earnings Call
Thank you for standing by this is the conference operator, welcome to the first quarter 2022 results conference call for Canadian Utilities limited.
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I would now like to turn the conference over to Mr. Colin Jackson, Senior Vice President Finance Treasury risk and sustainability. Please.
Please go ahead Mr. Jackson.
Thank you good morning, everyone.
We're pleased you could join us for Canadian Utilities first quarter 2022 conference call.
With me today is executive Vice President and Chief Financial Officer, Brian scrub Bot, and president of Atco gas and pipelines Jason sharp.
Our call today will begin with some opening comments from Brian on recent company developments and financial results, followed by an update from Jason on our gas and pipeline utility businesses.
After 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, our Canadian utilities Dot com. It 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 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.
And finally I'd like to point out that during this presentation, we may refer to certain non-GAAP or segmented measures such as adjusted earnings adjusted earnings per share 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 measures presented in.
Other entities.
And now I'll turn the call over to Brian for his opening remarks.
Thanks, Paul and good morning, everyone. Thank you all very much for joining us today for our first quarter 2022 conference call.
Canadian utilities achieved adjusted earnings of $219 million or <unk> 81.
<unk> per share in the first quarter of 2022 this.
This is $28 million or 11 cents per share higher than the first quarter of last year.
The $28 million year over year increase in the first quarter earnings was a result of cost efficiencies rate base growth and the timing of expenditures in our Alberta utilities, along with stronger contributions from our alumina energy investment and our first full quarter of earnings from the Alberta hubs.
Natural gas storage facility, which was acquired in December of 2021.
While our business overall performed very well in the first quarter of this year. This growth in year over year earnings was primarily driven by the exceptional performance of our Alberta based distribution utilities, the gas distribution utility in particular.
I'll turn the call over to Jason shortly.
To provide some additional color on our Canadian gas business, but those who.
It may not be aware 2022 is a noteworthy year for both our Alberta distribution utilities.
It marks the final year of the second generation performance based regulation cycle, which we tend to refer to internally as PBR two.
The attention of the P. B R. A regulatory framework is to provide incentives to utilities operators to find system efficiencies and to make system improvements that will drive long term customer benefits and improvements to the overall system.
In line with the goals of this regulatory framework, our distribution utilities have done a great job of identifying and executing on efficiency improvements throat PBR two.
These efficiencies will create lasting benefits for customers.
In the near term. This also drives great, earning performance that Youre seeing for Q1 2022.
While we continue to expect our distribution utilities performed well through the rest of the year I would highlight that the performance in our gas distribution business. In Q1 2022 has also been impacted from the timing of certain expenditures.
For this reason the exceptional performance delivered by our gas business. During Q1 is likely to temper somewhat throughout the remainder of the year.
With that I'll turn the call over to Jason to speak the great work the gas business has been doing and to touch on our long term strategy for that business.
Thank you, Brian and good morning, everyone.
Brian alluded to we've been working hard in the gas utility to find efficiencies and drive not only near term earnings growth.
Long term sustainability as we position our business for what the future energy transition will look like.
In light of the global challenges currently being faced related to energy security and customer affordability, it's important to touch on the important interplay between our gas system.
De carbonization and the overall energy transition.
First it's important to recognize that the composition of energy sources will vary from geography to geography.
In Canada, there are several drivers that support the long term importance of our natural gas and.
And the utilization of our existing natural gas networks.
And the ability of this to be supportive to the country's decarbonization goals.
Natural gas is a high energy density.
At a lower carbon footprint to many of the competing energy sources, which.
Which is key in our Cold Canadian club.
Utilizing our existing gas systems, we're able to provide safe reliable cost effective energy to heat homes empower industry across our service territory.
<unk> remote areas and during peak seasonal demands where temperatures are regularly below minus three.
From a cost perspective, Canada proximity to significant natural gas resources also allows us to maintain favorable commodity economics compared to geographies that must import all of their energy.
This provides us not only with a reliable supply, but also with a lower cost pathway decarbonization opportunities.
Initiatives such as <unk>.
Excuse me initiatives, such as blending of hydrogen and renewable natural gas into our existing system are key to reducing emissions, while maintaining that safe reliable cost effective energy source.
It utilizes natural resources prevalent in our area.
Blending have the distinct benefit.
Requiring any end use appliance modifications utilizing the existing gas distribution networks and reducing the system wide carbon footprint.
In addition, the blending where it provides a stable market and infrastructure that can drive further investments in innovation and their renewable natural gas and hydrogen production and consumption markets.
Our work here to advance these blending initiatives is multifaceted.
We are actively leveraging the skills and learnings from our Australian gas utility, which today is blending hydrogen into segments of their network.
This year, we'll be launching hydrogen blending activities in Alberta and Saskatchewan.
We are currently or we are actively working with customers to connect new clean hydrogen markets with the supply that will be available here in the province.
We're working closely with stakeholders to ensure that the benefits of renewable natural gas and hydrogen are well understood.
And to ensure that by an existing cros key stakeholder groups.
While both provincial and federal governments have released their visions for hydrogen economy, we're continuing to work with all levels of governments on key initiatives, including the updating of regulations to allow for the blending of hydrogen and renewable natural gas into the greater system.
Alberta has the benefit of utilizing technologies that are already in place and geographies, such as Australia and the UK.
While there are numerous other initiatives in our business that we can speak to here I think this provides an overview of the opportunities we see within the gas utility and why we believe will be a leader in the energy transition and Canada's energy future.
I'll now pass it back to Brian .
Thanks, Jason you raised a lot of really important points for investors as they think about the future of natural gas in Canada.
It will certainly play a important role not only in facilitating energy transition, but in driving the hydrogen economy, and continuing to provide reliable and affordable delivery of energy for customers in the future.
Taking us back to a discussion on earnings for the quarter I want to quickly touch on our Luma energy investment, which contributed strong year over year earnings growth.
As we talked about in our fourth quarter conference call Luma energy assumed full operation of Puerto Rico's electricity transmission and distribution system on June one 2021.
As a result, our Q1 earnings this year reflect a full quarter of operating earnings while our Q1 2022 or 21 earnings reflect the fact that the business was still undergoing the necessary preparatory work required to assume operations in Puerto Rico.
Given the recent news in Puerto Rico around the restructuring plan for PREPA.
It's worth quickly reminding everyone about the structure of our current supplemental agreement.
This supplemental agreement has an initial term of 18 months and allows luma to begin executing on critical projects necessary to modernize and harden, Puerto Rico's electricity transmission and distribution system.
While we await the conclusion of PREPA bankruptcy proceedings were compensated for this work on a fixed fee basis.
Upon completion of these proceedings will move out of the supplemental agreement and into the 15 year O&M agreement. We are eager to see the bankruptcy proceedings completed and we continue to expect this process to be completed in 2022.
Touching briefly on Australia, our natural gas utility saw first quarter earnings that were comparable to the same period in 2021.
Looking to the remainder of 2022, we'll closely monitor the macroeconomic factors with the view that both the increasing system demand and CPI that we saw drive earnings in 'twenty 'twenty. One could continue until later part of 2022.
On the regulatory front there have been two developments in the first quarter that are worth highlighting here.
On March 31, the AUC issued its generic cost of capital decision for the 2023 year.
Under this decision the current generic cost of capital priorities of eight 5% return on equity and 37% equity thickness will be maintained for 2023.
We view this as a positive development as it provides regulatory push prospectively up to the end of 2023.
Now I also want to provide an update on the AUC enforcement proceeding that we've spoken about previously.
This inter affiliate code of conduct issue was brought to our attention in July last year and it was at that time, we initiated our own internal investigation.
Since September we've been working in cooperation with the excuse enforcement branch determined the most appropriate resolution to this matter.
Based on this work a joint settlement was filed with the AUC on April 14th.
This settlement remains subject to ultimate approval by the AUC and is currently under review.
The settlement is comprehensive in nature. It includes both a financial administrative penalty and a number of process improvements that we've committed to undertaking to ensure a situations situations like this does not occur in the future.
Many of these process improvements we've already completed.
Now we acknowledge that we have made administrative and regulatory areas and that these are serious missteps that have impacted customer trusts.
We remain committed to rebuilding trust.
Upholding the integrity of the affiliate code of conduct and ensuring something like this does not ever happen again.
For absolute clarity.
Neither the original cost and question, nor any penalties related to these items have or ever will in the future impact customer rates.
Yeah.
Now moving onto capital I want to briefly touch on the capital investments we made in the first quarter of 2022.
In the first quarter, we invested $265 million and our business with $218 million of this being invested in our core utilities.
This ongoing utility investment ensures the continued generation of stable earnings and reliable cash flows and drives rate base growth.
In our energy infrastructure business.
First quarter saw us invest additional $44 million, an increase of $36 million from last year.
These investments are tied to the ongoing energy transition initiatives that we launched back in 2021.
Yeah.
I'm also happy to report that just last week, we announced an agreement with Microsoft for the purchase of all renewable energy from our Dear foot solar facility.
The 37 megawatt facility, which will be energized in the fourth quarter of 2022 is a key step forward in our renewable generation strategy and highlights the work we're doing to support the decarbonization efforts for our customers.
Yeah.
Shifting to our larger clean hydrogen strategy and the awarding of poor space for our Atlas storage hub carbon capture and storage opportunity. We are continuing to see tangible evidence from both the federal and provincial governments of their support for large scale hydrogen development.
The recent federal budget included investment tax credits for carbon capture and storage as well as clean energy, which paints a clear picture of the importance of these projects.
As we've communicated from day one.
The success of our hydrogen project will rely on the cooperation and collaboration of industry and government to ensure policies are in place to make a project of this scale successful.
As most here will already be aware indigenous relations and reconciliation are core to our values at Canadian utilities.
In line with these values I'm happy to say that the first quarter of 2022 also saw us complete a meaningful transaction with entity investments incorporated or DIY.
A long time indigenous partner in the north.
On March 31, 2022, we announced the closing of a transaction, which makes D. II and actual electric 50, 50 partners and our Northland utilities enterprises business in the northwest territories.
This transaction demonstrates our continued commitment to economic benefit and capacity building with indigenous communities and will create long term benefits for DIY.
Lastly, I would like to highlight later today, we'll be releasing our 2021 sustainability report.
This report demonstrates our continued focus on energy transition.
Climate change and in environmental stewardship.
Operational reliability and resilience.
People and community and indigenous relations.
I would also encourage everyone to take a look at the report.
On our website.
Overall Canadian utilities had a strong first quarter of 2022 U S source events key growth initiatives, while delivering strong year over year earnings earnings growth for our shareholders.
That concludes my prepared remarks, I will now turn the call back to Colin.
Thank you, Brian and Jason.
In the interest of time, we ask that you limit yourself to two questions. If you have additional questions you're welcome to rejoin the queue.
I will turn it over to the conference coordinator now for questions.
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The first question comes from Mark Jarvi with CIBC capital markets.
Please go ahead.
Thanks, and good morning, everyone.
Maybe the first question is just with the hydrogen project maybe you can.
Thinking about or tell us in terms of after the federal budget announcements what are you looking for next whether its in the provincial level or just any one single partnership in <unk>.
Now with Shelby and involved in the hub can you maybe talk a little bit about how that with projects coming together in terms of partnerships.
Yeah.
Yes, Thanks, Mark and good morning.
Yeah, I would say that.
We're quite reviewing the the income tax credit announcement and the federal budget quite positive.
You know I think.
We had some expectation that we'd be getting say, 50% of that carbon capture so it was kind of a line.
With our expectations and then the 35% income tax credit related to transportation and storage and usage is also good news and in line or better quite frankly than what we were expected to land on this.
And for the more clean general clean technology income tax credits I think I think it's a little bit early to tell how we can apply it to our ongoing clean hydrogen project Suncor.
But overall, we're quite happy I think we've seen a lot of.
Great developments, both provincially and federally there was the hydrogen conference just the other day, where saw lot of provincial support.
Overall quite happy on how things are going.
As for the you mentioned the Atlas project.
That's a key piece of the puzzle for natural gas derived hydrogen production.
And our proposal with Suncor and shell. This has a direct tie toward clean hydrogen project Suncor that we're pursuing.
The Atlas project will serve as a hub for industry participants seeking economic carbon capture and storage capacity.
So from a partnership perspective.
The participation of the Atco Suncor joint venture provides a project with strong anchor tenancy to support the long term economics of that project.
While shelf brings its deep expertise in carbon capture and storage. The partnership. So yes, I think we know quite happy of how things are developing and.
Following the announcement on March 31st, which we've been Indentified.
Indentified as preferred preferred proponents.
What the you know the consortium with shell in Suncor and we've been asked to submit a full project proposal by no later than I think play may 2nd I believe it is so hopefully that answers your question Mark.
No that's helpful for sure. Thank you.
And then maybe just coming to the topic of inflation indexation in terms of the distribution utilities and under P. B R. Can you just remind us again of what inflation parameter would've been baked or have come into the 2022 rates I believe it was done in mid 'twenty 'twenty. One so maybe we're not getting the full benefit of what we've seen the last six months and then globally.
Inflation metrics and how that all gets folded into the rebase, even in 2023 and anything you could provide an update in terms of how that plays into this year of rates and what's going to happen next year.
Yes, Mark Great, Yes, I can't remember the exact number that's been built into our 2022 Nathan rates of at least 1% to 2%, but as you mentioned it doesn't fully.
Hey.
I guess factor in the latest increase seemed here.
In the last quarter that said.
You know I would say our distribution businesses are still quite well protected.
Protected and ways in terms of inflation increases and I'll turn the call over to Jason here shortly but we continue to monitor the impacts of inflation.
As well as supply chain disruptions.
And maybe Jason you can just kind of comment on what youre seeing in your business and trends of inflation.
Thanks, Brian .
I think what I'd, probably highlight is at least in the gas distribution business, we carry a lot of.
A lot of stock so the short term impact of that inflation isn't hitting us and then we have some stability also in our association agreements labor agreements. So we haven't seen those impacts of inflation as of yet on our distribution business and then as Brian indicated.
The future inflation that will be built into some of the rate cases that are going on right now.
And maybe just to add a little bit more on the electric side of our business.
We are seeing some inflationary impacts, especially some of our lead long lead material.
That we are obviously monitoring and ensuring that we.
We're putting our orders in early to ensure that we can meet our customer timelines and then EBIT on a customer's perspective, we're seeing you know how that's impacting their business and potentially some kind of movement in the timelines that are being requested to hook them up so something from a regulatory perspective, obviously.
Inflation is one of the areas that will ensure that is well addressed in our 2023 cost of service application as well as inflation will be and indexing factor. When we go to PBR three just like the first two BVR terms so.
Relatively our utilities are are fortunately.
Somewhat protected from those inflationary impacts.
And just quick follow up on that last comment in terms of the Rebating going is it fair to assume that you take the trailing three year operating costs and then just to adjust those based on.
Current inflation.
I guess sort of a markup or like how do we think about the ability to at least manage through the inflation. That's happened the last couple of quarters.
Forward into 'twenty 'twenty.
Yeah. So yes. It is based on a three year average as a guide and then of course. It is it is going to be indexed.
But I would say that as a one year impact and four for utilities, you know you've got to look at the long term.
Impact of effects of inflation, such as the capital it will be rolled in the extent that our capital comes in a little bit higher.
As a result of of inflation it will translate into the opening rate base for periods going forward. So you know there might be some short term impacts but from a long term perspective inflation should be addressed through our rate cases.
Sounds good thanks for your time and interest.
The next question comes from Maurice Choy with RBC capital markets.
Please go ahead.
Thank you and good morning, two questions from me first on do my second on the hydrogen projects in Florida.
First on <unk> you mentioned in your prepared remarks that you expect the bankruptcy proceeding T complete needed this year.
Given that the government has decided to cancel the PREPA.
PREPA has debt restructuring agreement can you discuss what happens if this.
Proceeding.
The bankruptcy continues past the 18 months and overall.
Your view about your continued appetite in the region.
Particularly given the press release, the blackouts alluded to mine.
Sure. Thanks, Mary Thanks for your question.
Yes in terms of the.
The PREPA, Thanks, Rob Rep C proceedings.
Initially hoped to be mid this year, but we do think it's going to take a little bit longer maybe closer to the end of the year.
That said you know in technical standards. The supplemental agreement would automatically terminate unless extension is negotiated and mutually agreed upon by the parties, which quite frankly is we think is the most logical thing that would happen to extent that it does not complete within 18 months.
We believe that this outcome of that kind of terminations highly improbable.
And that the negotiation extension is again continue to be.
Push forward because they need a strong operator that can repair and modernized Puerto Rico's electricity system and they look for a third party or external party coming in and that's part of the agreement with FEMA. So in all likelihood and we're pretty confident that this will be either completed or their extension.
That would be granted.
Yeah.
Thank you for that and my second question is about.
You're more specifically your hydrogen project with Suncor you would've seen some news this morning relating to suncor and an activist investor. So I just want to better understand your relationship and your desire for the project I suppose there is a change in intent from your partner on this project.
Could you discuss what other partners you may be thinking about M. B. If you would go at it alone.
Yeah, and I'm not specifically.
I didn't hear the news this morning, it or what the the comment that you just mentioned, but I'd say that we have seen no signs from suncor from any backing of the partnership they continue to work very well with us and it's again, it's a mutual partnership where we see combined value.
For what they bring to the table and what <unk> brings to the table.
So I know, there's a lot of industries like suncor that are pursuing hydrogen as an alternative and a de carbonization strategy. So I think there'll be a lots of opportunities for all players, but I again, I truly believe that the Atco Suncor partnership.
Just makes a lot of sense and you know from.
From our perspective, we would want a strong anchor tenant tenant for some of the capacity of any project that we built so.
I wouldn't think that we would do it alone we would need that that that strong partnership.
Great. Thank you very much.
Once again, if you have a question. Please press Star then one.
Next question comes from Matthew Weekes, with I E capital markets.
Please go ahead.
Good morning, Thanks for taking my question I think just on the renewable power side and the goal to own manage or operate a 1000 megawatts by 2030, just looking at that and sort of some of the things youre seeing in the federal budget about government support.
Continuing and then maybe strengthening for for electric for renewable electricity are you still sort of seeing any any support in terms of what you might be building out and are in that area of the business.
Yeah. Thank you Matthew Thank you for your question Yeah, we still see renewable generation is a great growth area for us and you might be aware of.
The kind of the three solar projects that we are currently underway completing the Barlow Deere foot solar project as well as the Emperor solar projects. So we're right in the middle of that and.
We recently announced the purchase power agreement with Microsoft as you can see a lot of demand for our purchase power agreements and renewable clean energy so yeah.
Yeah, I think theres going to be continued federal and provincial support for renewable generation.
And we definitely see that as a growth area for us and we will continue to pursue it.
Okay. Thanks, that's everything for me, Thanks, I'll turn the call back.
Okay.
That concludes the question answer session.
I'd like to turn the conference back over to Mr. Colin Jackson for any closing remarks.
Yeah.
Thank you so much a series and thank you all for participating today. We appreciate your interest in Canadian utilities, and we look forward to speaking to you again soon.
Thanks and goodbye.
This concludes today's conference call you may disconnect your lines. Thank.
Thank you for participating and have a pleasant day.
Yeah.
Yeah.
Yeah.
Yeah.