Q2 2022 Canadian Utilities Ltd Earnings Call
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Okay.
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Thank you for standing by this is the conference operator.
Welcome to the second quarter of 2022 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'll be an opportunity to ask questions.
He joined 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 and risk and sustainability.
Please go ahead Mr. Jackson.
Thank you good morning, everyone.
Pleased you could join us for Canadian Utilities second quarter 2022 Conference call with me today is executive Vice President and Chief Financial Officer, Brian This robot.
Brian will begin today with some opening comments on recent company developments.
Our financial results and key trends impacting our businesses.
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 for Canadian utilities Dot com and can be found in the investors section under the heading events and presentations I'd.
I would like to remind you all that our remarks today will include forward looking statements that are subject to important risks and uncertainties.
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 and capital investment. These measures do not have any standardized meaning under ifr us and as a result, they may not be comparable to similar measures presented in other entities.
Now I'll turn the call over to Brian for his opening remarks.
Thank you Colin and good morning, everyone. Thank you all very much for joining us today on our second quarter 2022 conference call.
Canadian utilities achieved adjusted earnings of $136 million or <unk> 51 per share in the second quarter of this year. This is $21 million or <unk> <unk> per share higher than the second quarter of last year.
The $21 million year over year increase in the second quarter earnings was primarily driven by strong operating metrics and CPI index and our international natural gas distribution business in Australia.
Cost efficiencies rate base growth and the timing of expenditures in our Alberta utilities, along with a strong performance from our Alberta hub asset also contributed to this great year over year earnings growth.
Going back to our Australia natural gas business not only did we see growth in key operating metrics such as gross new connections. The business also benefited from upward pressure in Australia in CPI and the regulatory CPI indexing mechanism.
Similar to the trends that we saw in the latter part of 2021. This upward trend in CPI serves to amplify the businesses strong operating performance and drive additional earnings.
Currently in country forecast now suggests that CPI could grow as much as 6% or potentially even higher for the full year.
This will be a key trend to monitor throughout the remainder of 2022.
While we're on the topic of CPI, it's worth touching on inflationary impacts across our businesses as.
As communicated on previous quarterly calls our utilities have strong inflationary protection embedded in their respective regulatory regimes.
But it is also our long held conservative financial tenants and operating expertise that ensures our businesses overall are not unduly exposed to these market risks.
To date, the measured approach, we take to financial leverage the operating expertise across our businesses and our expertise our experience managing through challenging financial times have kept us well insulated against these pressures.
That being said, we will continue to closely monitor inflationary impacts to all of our businesses and we will leverage the expertise of our teams and long held relationships to manage this exposure.
Yeah.
Moving to onshore our Canadian utilities, the strong performance that we saw from our businesses in the first quarter of this year continued into the second quarter.
Our distribution utilities continued to delivered exceptional performance in their final year of the current performance based regulation cycle or PBR.
The efficiencies unlocked in this PBR cycle will provide repairs long lasting benefits.
I've touched on the mechanisms of PBR in prior calls, but as we move closer to the end of 2022 and the completion of our current PBR two term, it's worth briefly touching on our expectations for the Alberta distribution utilities in 2023.
Consistent with the ultimate goal of PBR deficiencies at our distribution utilities unlock and their second PBR term and there were many will be passed onto customers starting in 2023.
To this effect, our Alberta distribution utilities will enter a rebase year governed by a cost of service regulatory framework in 2023 before starting their third five year PBR term in 2024.
Now looking back in our history, we have had a strong track record of delivering exceptional are we outperformance across the decades and under numerous regulatory frameworks and structures.
This achievement that we are as achievement of we are very proud of and one that is rooted in our operating expertise continued drive for finding efficiencies in the utilization of technology to modernize our systems.
Okay.
On top of this expertise and as a result of our efficiency carryover mechanisms within our existing regulatory framework, we expect to carry forward as much as 50 basis points of outperformance into 'twenty three 'twenty four as a reflection and a reward of the exceptional work that has done.
And the second PBR term.
So while we do expect to see earnings from our Alberta distribution utilities to reset downward for 2023 as we pass on efficiencies achieved to repairs, we still have strong expectations for performance across our utilities.
The factors that I highlighted combined with the drive of all our leaders to deliver top tier performance has me optimistic that we will continue to see outperformance in 2023.
Moving on to alumina energy, we continue to see great earnings contributions from this investments and numerous tangible signs that our work is improving the lives of people in Puerto Rico, bringing them closer to having a reliable and modern electricity system.
Over the last year of Lumens operations Luma connected over 25000 customers and net metering.
That equates to 2100 net metering installations per month and the equivalent tie in of 130 megawatts of renewables to the Puerto Rico electricity system.
The team has also executed numerous initiatives aimed at improving system reliability, and reducing outage frequency, which has declined 30% since luma assumed operations.
Along with the successes the team has seen on the safety and customer service fronts.
This translates to a long list of tangible and meaningful achievements and we certainly have no intention of slowing this momentum.
Moving onto capital I, just wanted to briefly touch on the capital investments we made in the second quarter of this year.
The second quarter saw us invest $297 million in our business with $244 million of this being invested in our core utilities.
This ongoing utility investment ensures the continued generation of stable earnings and reliable cash flows while also driving rate base growth.
And our energy infrastructure businesses, we invested an additional $51 million in the quarter, an increase of $36 million from 2021.
These investments were tied to the ongoing energy transition initiatives, we launched last year, which we continue to progress.
Our three previously mentioned solar developments Dear foot Barlow in Empress continue to progress forward alongside our R&D natural gas opportunity with future fuel.
We expect to see commercial operation of our R&D facility and <unk> of our Dear foot and Barlow projects by the end of this year with Empress falling later in the first half of 2023.
Okay.
Similarly, our teams are hard at work on both our world scale hydrogen production project with Suncor and our outlet storage.
Carbon capture sequestration opportunity with saw in core and shell I'm.
I am pleased to say commercial discussions with both Suncor and shell are progressing very well on both of these projects.
Our teams are also rapidly advancing technical and engineering work related to key segments of the projects, including our testing of Catherine storage for hydrogen.
And we expect to be in a position to provide more information on this in the near future.
We're also working and continue to work closely with government to help shape. The commercial construct that will govern both the hydrogen and carbon industries within the province in Canada more broadly.
Derbyshire. These constructs is key to ensuring an efficient effective and economic de carbonization of our energy systems.
It has been a very busy quarter for on the project front as we've moved numerous key energy transition opportunities forward and continue to progress our long term strategy and I look forward to providing further updates on these important initiatives in upcoming quarterly calls.
Overall Canadian utilities delivered another great quarter of earnings growth for our shareholders with many of the key drivers of this earnings growth likely to persist through the remainder of this year.
That concludes my prepared remarks, and I'll now turn the call back to Colin.
Thank you, Brian and 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 the call back over to the conference coordinator for questions.
Thank you we will now begin the question answer session. Once again in the interest of time, we ask you to limit yourself to two questions and again any additional questions Youre welcome to rejoin the queue to.
To join the question queue you May Press Star then one on your telephone keypad.
Cary Towne acknowledging your request if you are using a speakerphone. Please pick up your handset before pressing any keys.
She withdraw your question. Please press Star then two.
The first question comes from Mark Jarvi with CIBC capital markets.
Please go ahead.
Thanks, Good morning, everyone.
First question is just on the distribution utility in Alberta.
It seems like over the last couple of years you'd pay back their capital investment is a little bit obviously, they're performing well and it seems like.
Economic activity in the province is update us in terms of where you are in your spending.
The five year period, and where you'll end up relative to the original plan.
Yes.
Yes. Thank you Mark for your question.
Yes in terms of the Alberta distribution utilities, yes.
Our spending is consistent with our plan I think we had some delay.
Some supply chain issues, but overall, we continue to expect us to.
Deliver on the same capital plan that we had outlined.
We have in front of the commission right now and our cost of service application.
Request to increase the modernization of our electricity system and so depending on the approval of the regulator in terms of those plants it might adjust that that.
Rejection slightly but overall, we're in consistent with what we outlined in our capital plan.
Okay. Thanks.
And just turning to Australia in the past you've talked about different opportunities. There can you update us in terms of where you are you hearing any sort of joint bids or outlook for the transmission side of things renewables and I guess its appetite for M&A in that market for you or really just focus on organic growth opportunities in Australia.
Yes, thanks Mark.
Yes, overall, we still view, Australia as a great opportunity a lot going on.
In that country. They are pretty proactive in terms of the government front supporting various initiatives, whether its hydrogen whether it's <unk>.
Pumped hydro.
And certainly were active in both of those areas also they've identified electric renewables zones were.
B needed transmission infrastructure so in la.
Lot of it so.
Each of those areas, we are active in and we will continue to be active in.
In terms of M&A.
We can monitor M&A opportunities.
And of course, we will evaluate certain pre.
Premiums that are being sought out. These these days and the competition for that type of M&A activities, but so we will be active on that front or at least monitoring on that front, but we expect more to come from the greenfield opportunities.
Okay. Thanks for that Brian .
Okay.
And next question comes from Andrew <unk> with Credit Suisse.
Please go ahead.
Thank you good morning.
That's just in the core market.
Did you really being Alberta, how do you think about just the current cycle. We're in from an economic standpoint versus past cycles, you've seen and how that translates into growth in our core utility base.
Yes. Thank you Andrew it's great question.
No.
I wouldn't address it in terms of the economic cycle, we've seen quite a quite a switch here and quite a volatility in the province, you'll see the oil prices a.
A year ago, and you see where they are today.
Just kind of as an indication of overall activity in the province, and how it gets it could change, but overall broadly with the goal of de Carbonization, and Alberta, not just with and throughout Canada, and being a utility that could well serves that need we're optimistic that.
The economic cycle, we will continue on that the energy decarbonization subs.
And.
In terms of the oil.
Oil and gas activity I think obviously.
There's a lot of factors influencing that area right now, but I think we'll continue to see some higher oil prices for some time.
And I think the province in the oil and gas industry is committed to continue on deliver.
Delivering value, but also being mindful of the de carbonization front. So overall.
I think the economic cycles will continue to be strong at here in Alberta.
And I think we've got the business that can be resilient too.
To accommodate any swing in that cycle.
Okay. That's helpful. And then maybe just an extension do you get a little bit about the best of both worlds to a certain degree where.
You have larger energy companies looking to decarbonize, whether it's ccs or doing hydrogen initiatives and you have some opportunities in that with irons in the fire and then looking ahead.
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Eventually.
Boston Light vehicle sales will be banned in Canada, and how does that play into really reinforcement of utility grids EV Chargers and maybe focus just on those both ends of the spectrum the bigger D car opportunities for oil and gas emitters, and then on a more microscopic level with utility rate base.
Yes, no great question and certainly how you outlined it is.
Consistent with our views and yeah, no, we're very proud and happy to be able to support all our customers and their de carbonization goals and.
And again from our base in Alberta here, both on the electric side and our natural gas clean fuels position, we can help them in multiple fronts, we're certainly seeing oil and gas.
Yeah.
A lot of new connections and electrifying a lot of there there are parts of the business, we're seeing growth on that front.
In terms of the electric distribution system, you've touched on the Evs and the whole.
I guess pushed to use more electricity you, obviously has an impact on our distribution systems and the need to modernize it and invest in the infrastructure not just in electric transmission, but also in our electric distribution business.
To support these carbonization effort. So yeah, I think we're well suited and we'd like the view of that we can help our customers on multiple fronts.
With that at the pace of that will be quite honestly determined by the government direction and incentives that would pursue or I guess encourage that development.
Okay I appreciate the color. Thank you.
Once again, if you have a question. Please press Star then one at this time.
Our next question comes from Maurice Choy with RBC capital markets.
Please go ahead.
Thank you and good morning. My first question is about Australia, obviously, a very strong performance from the gas you cookie there.
And I'm trying to understand the staying power the results that you have over there so maybe just to kick off.
And that's what the sensitivity is.
Jason to earnings.
How many basis points decrease now mentioned Ernie.
Okay.
Yes, Thanks, Bruce in terms of Australia as.
As you mentioned very very strong year.
As we mentioned on the opening call is that we have seen all the growth we're getting a lot of new connections, but probably the largest driver is the CPI index seen that February benefits our business there.
Certainly we are seeing inflation continue to be.
Hi.
We saw that the end of 2021, but.
Although some view that it might return back to more normal levels. It certainly is remaining at the higher end and as a kind of a rule of thumb or guide every 10 basis points increase in CPI inflation translates into approximately $1 billion of or impact to earnings. So that's kind of some general guidance for you.
Thanks, Let me ask a follow up to that I suppose.
Wait for the number to come down in terms of total earnings to come down.
You mentioned the inflation situation, but where we can have 6% this year, but two 2% next year.
Your point expecting earnings to stay above these levels going forward.
Yes, I would say Murray said.
This is certainly heightened this year in 2021 with inflation.
6% or higher which suggests that and I think the market is expecting that CPI rate of return toward normal levels.
The near future.
I think that same expectation was there at the end of last year, but we're seeing a little bit longer delay of CPI to return so.
Obviously, CPI in Australia, and the World has been impacted by a lot of.
Geopolitical factors right now and to extent that those stabilize we would again, we would expect to long term the CPI to return more to go.
More normal levels, and then obviously, our Australia earnings to adjust accordingly.
Yes.
So just to clarify when you say just accordingly.
Do you mean going down or just year over year.
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Yes, no we would expect to Australia natural gas earnings to be lower than this year to extent that inflation as it returns to more normal levels.
Good.
And then my second last question I want to bring it back to Matt. Obviously, you lost you would've seen some news about <unk>.
Local residents.
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And asking them to come into the cancelled contract luma.
The outages in rate hike.
Is that the case.
Getting through some of the growing pains, where it makes wanted to use local sentiment will get better from here or.
Even new med successful.
Is this the kind of discourse.
We should expect for the remainder of the 15 years.
Yes, thanks for the question.
This is not new.
We've had ever since we started.
The operations there has been.
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I would say organized.
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Activity that would against luma in in that.
It's our.
Our view it's truly.
Driven by those that with benefited from a stop being there and so.
Ultimately, yes, the protesters protests that you referred to came and went.
And anyway.
Our view is that we will continue to operate the system.
And the way that we are accustomed to safety and reliability in terms of driving down outages by 30%, which I mentioned those are the things that we will continue to gain support for luma and we do see a lot of support on the street and the people that we've talked to yes. There was some organized protests and again I would.
Yeah.
Call that noise in the overall Grand scheme of things, we continue to operate our system well.
And continue to climb on the customer satisfaction. So we just we will continue to do what we do best which is to operate a safe and reliable system and.
Overtime, we expect that those protests will continue to decrease and especially after the the last part of the generation process is over.
And the unions that are supporting these protests no longer.
Have a leg to stand on.
Thank you very much.
As there are no more questions from the phone lines and this concludes the question answer session.
I'd now like to turn the conference back over to Mr. Colin Jackson for any closing remarks.
Okay.
Thanks, so much operator.
Thank you all for participating today, we really appreciate your interest in Canadian utilities, and we look forward to speaking with you again soon.
Okay concludes todays conference call.
May disconnect your lines.
Thank you for participating and have a pleasant day.
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