Q3 2022 Canadian Utilities Ltd Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the third quarter 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 will be an opportunity to ask questions.
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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.
Pleased you could join us for Canadian Utilities third quarter 2022 conference call with me today is executive Vice President and Chief Financial Officer, Brian scrub Bot.
And executive Vice President corporate development, Bob miles, Bob leads Canadian utilities, Nonregulated energy infrastructure business.
Before I move into our formal agenda I would like to take a moment to acknowledge the numerous traditional territories and homeland. So much our global facilities are located today. We're speaking to you from our Alco Park head office in Calgary, which is located in Treaty seven region. This is the ancestral territory of the Blackfoot Confederacy comprised of the six circuit.
And I and the County nations, such as Gino Nation, and a stone in the coordination that included that took the key arris PA and good Stony first nations. The city of Calgary is also home to the Macy nation of Alberta region three.
We honor and respect the diverse history languages ceremonies and culture of the indigenous peoples, who call these areas home.
Brian will begin today with some opening comments on recent company developments and our financial results followed by an update from Bob on our energy transition strategy.
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, a 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, which 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 like to point out that during this presentation, we may refer to certain non-GAAP and segment 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, Colin and good morning, everyone. Thank you all very much for joining us today for our third quarter 2022 conference call.
As Colin mentioned I plan to run through some our financial results for the quarter and provide some business updates and then I'll turn the call over to Bob who will update you on the significant progress made in our energy transition strategy.
In the recently announced acquisition of Suncor is renewable generation portfolio that we are very excited about.
Starting with the financial results Canadian utilities achieved adjusted earnings of 120 million or <unk> 45 per share in the third quarter of this year.
This is $32 million or 12 cents per share higher than the third quarter of 2021.
This $32 million increase in the third quarter year over year earnings was primarily driven by a continuation of many of the same trends we highlighted in our second quarter conference call such as our strong performance in our utilities.
Our international natural gas distribution business in Australia continued to benefit from strong operating performance and favorable CPI indexing in the third quarter.
When we hosted our second quarter conference call in July forecast at that time suggested that to it twice twenty-two annual Australia in CPI would reach approximately 6%.
Today. These forecasts are suggesting full year CPI is likely to rise higher to more than 7%.
We expect a continued rise in inflation to drive strong earnings throughout the remainder of this year.
Looking ahead to 2023 estimates suggest Australia, and CPI will begin to trend downward to more normal levels and see the 3% range.
This will be a key trend to watch and one we expect to realign our 2023 earnings back to pre high inflation levels. When we when viewed on a year over year basis.
Moving onto our Canadian utilities, the strong performance, we saw from our businesses in the first half of this year largely continued in the third quarter.
In particular, our Alberta based distribution utilities continued to deliver exceptional performance in their final year of the current performance based regulation or PBR for short cycle.
I talked about the merch and mechanics of P. D R and depth during our second quarter earnings call. So I wont discuss those details here, but I just would like to remind everyone that P. B R frameworks are inherently cyclical.
The investments made in the early years of PBR to find efficiencies and to unlock additional value translates to strong earnings in the later years of PBR.
These efficiencies are then ultimately passed on to customers in the form of long term cost savings at the end of the PPR cycle.
So this effect our distribution utilities unlocked significant efficiencies through the second PBR cycle and now 2023, we will see these businesses enter a cost of service Rebase senior.
This cost of service Rebase and year will then be followed by a third five year PBR term beginning in 2024.
We expect decisions on the key details of this 33rd PBR term next year sometime.
So while earnings from our Alberta distribution utilities will be reset downwards in 2023 as we pass on the efficiencies achieved to repairs. We still have strong expectations are for performance across our utilities.
In fact, the decisions recently received from our distribution utilities on their 2023 cost of service applications have been positive with our applications largely being accepted as filed.
Notably our applications were based on the average historic costs for the period from 2018 to 2020 and this as opposed to a less favorable best year model. This highlights the regulators desire for a supportive and constructive regulatory framework for this rebase in Europe .
We also have a strong track record of delivering exceptional <unk>, oh performance across decades, and under numerous regulatory frameworks and structures.
So combined with efficiency carryover mechanism within our existing regulatory framework.
Each will allow us to carry forward as much as 50 basis points of outperformance into 'twenty three 'twenty four we believe we have a solid foundation on which to deliver continued strong performance in 2023 and beyond.
Moving on to Puerto Rico, I want to first acknowledge the terrible tragedy of Hurricane Fiona and the numerous hardships that has caused for the people of Puerto Rico.
Critical infrastructure across the territory was impacted in many families were forced to leave their homes.
And in many areas access to critical services were lost or had to be turned off in order to ensure the safety of citizens.
Returning service to impacted customers and ensuring the ongoing safety of all of Puerto Rico citizens is lumens number one priority.
Our teams have been working tirelessly in the effort in this effort and less than two weeks. Following the hurricane service was restored to more than 90% of customers.
And by October 10th this figure it had increased to 99%.
This is an incredible feat given the state of electricity system in Puerto Rico.
Well speaking for all of our leaders that Canadian utilities, we are extremely proud of the work. The limber team has done both leading up to the hurricane and in the days and weeks that followed.
The team leveraged their local experience and resources to plan for the vet and respond immediately driving meaningful results for customers without compromising safety.
This experience highlights the key role Luna has to play in Puerto Rico's energy future and the important work that still needs to be done to harden the electricity system to ensure it's better prepared to handle future events like this.
To that end Luna has initiated more than 225 projects aimed at improving grid stability reliability and modernizing the energy system in Puerto Rico and started construction on 29 FEMA reconstruction projects.
This pace of construction and Modernisation, well exceeds anything seen historically and Puerto Rico.
I'd also encourage everyone to look at both the Luma energy website and their quarterly reports, which include great details on the numerous accomplishments. The team has made to date and initiatives still underway in Puerto Rico.
In terms of capital investment, we invested 379 million and our business in the third quarter of this year.
Of this 379 million 12 $295 million was invested in our core utility businesses, which will ensure continued generation of stable earnings and reliable cash flows.
As I alluded to.
In my early comments and as Bob will elaborate on further we made significant progress on a number of initiatives related to our energy transition strategy in the quarter.
I want to congratulate Bob and his team on their acquisition of Suncorp renewable generation portfolio.
This is truly a transformational step forward and exactly aligned with our energy transition strategy.
I will now turn the call over to Bob miles Executive Vice President corporate development to provide further details on this and more.
Thank you Brian Good morning, everyone. It's been a busy quarter and we believe we've made excellent progress on numerous fronts, including the Alberta solar projects. We have discussed previously our pumped hydro storage opportunity in Australia, and our ongoing hydrogen opportunity with suncor.
As Brian mentioned, we took a big leap forward on our energy transition strategy with the successful acquisition of Suncor is renewable generation portfolio, which we announced in early October most well I've heard me speak to our energy transition strategy previously and our three distinct pillars.
Renewable generation clean fuels and energy storage.
The Suncor acquisition serves to rapidly advance the renewable generation leg of this strategy. It adds 252 megawatts of operating renewables to our portfolio brings wind generation into our energy mix to complement our existing solar and hydro assets and includes a development.
Pipeline of more than 1.5 Gigawatts of new opportunities. It's also worth highlighting that the majority of the portfolio resides within our home market of Alberta.
We've been at Alberta for decades, and are well positioned to leverage our existing relationships and expertise here to drive additional value through both the execution of the development pipeline and through the contracting of these assets with high quality Counterparties.
Not only will this transition drive cash flow and earnings accretion in 2023. It provides a pathway to both meeting our 2030 renewable energy ESG targets and growing our renewable energy portfolio significantly in the coming decade.
Circling back to our other Alberta initiatives I wanted to provide a quick update on the progress we're making on both our solar developments as well as the hydro as well as the hydrogen opportunity, we're pursuing with suncor well our business overall have fared well despite the supply chain challenges being.
Faith globally, we are seeing some delays on the acquisition of critical components needed to complete our ongoing solar initiatives in the province, while these assets are not individually significant to our overall financial results. We now expect Energizer Asian of our Barlow endear foot solar.
Opportunities to shift into early 2023.
Turning to our hydrogen opportunity with Suncor a project of this scale and complexity requires significant upfront planning and coordination and while there's still a lot to be done we're making great progress.
We are very deep into the design basis memorandum phase of the process and have made significant decisions around technology selection, including the use of auto thermal reforming processes. At this facility. Our teams are working hard to continue progressing this critical work and we expect.
To make a decision to move into front end engineering design of the development phase in the first half of 'twenty two 'twenty three.
Lastly, I wanted to highlight the strong performance, we've seen from our Alberta hub storage asset that we acquired in December of last year. This asset has performed very well for us since acquisition and in the face of heightened energy price volatility.
This asset and energy storage assets more broadly provide critical energy stability to the system and we expect the importance of these assets to only increase as the world Decarbonize and intermittent renewables make up a larger share of the energy system.
We continue to look for opportunities to optimize this asset and to expand our presence in the energy storage market.
I'll now pass the call back to Brian for any final comments.
Thank you Bob and congratulations once again on the Suncor renewable generation acquisition.
As Bob said it provides a pathway to achieving our 2030 ESG targets and is expected to be accretive to earnings and cash flow in its first year of operations.
I'm happy to say all of our businesses across the board has continued to perform well.
Contributing to the overall success of our consolidated business as we delivered another strong quarter of results.
Our core utility and long term contracted assets provide the stability needed to pursue our energy transition strategy and our recent renewable generation acquisition marks a meaningful step forward in this journey.
This strategy remains critical to the success of our business long term and to society more broadly as the push to Decarbonize. The global energy system continues to gain momentum.
That concludes my prepared remarks, I will now 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're welcome to rejoin the queue.
I'll turn it over to the conference coordinator now for questions.
Thank you once again to join the question queue. You May Press Star then one on your telephone keypad you were here at town acknowledging your request.
People are using a speakerphone please pick up your handset before pressing any keys.
To withdraw from the question queue. Please press star two.
And he went on to conference call, who wishes to ask a question you May press star one at this time.
The first question comes from Linda as Hercules at TD Securities.
Please go ahead.
Hmm mm.
Curious about your Australian a pump storage initiatives.
Do you have a sense of what still needs to be established I figured out before you get to F. I D and when next year do you expect to get F. F D and what would be the bookends.
Cost estimates that you would expect for it.
Thanks, Linda Bob here I can give you a pretty good update on central West We were just in Australia last week, we are submitting an application to the government for their long term energy services agreement and that application goes in this week, it's going to be based on.
On the merit of the applicants and assuming we get through that process. Then there is a pricing phase in Q1 of 2023 with a decision from the government on the successful applicants we believe probably in late in Q2 early in Q3 so.
A final investment decision for US we're looking at probably this time next year to give you a sense on the capital side. It's a little early for us to work on that we're still finalizing capital with our construction partner and that process will take us to the end of this year to get a better sense.
Of of capital on that project hopefully that helps Linda.
Yes, that's very helpful and maybe just given the opportunities in front of you and that's recently announced pending acquisition of your renewable portfolio just as a follow up and maybe this is more for Brian .
Yeah can you give us a sense of what you are financing plans, how they might evolve.
And would that potentially involve.
The sale of some less core assets either in full or in part and can you walk us through the relative attractiveness and.
And execution risks associated with the various financing options.
Yes. Thank you Linda I'm happy to do that I guess in terms of financing we continue to place a significant value on liquidity given.
The heightened broad market volatility right now in and our near term growth plans both in the at the utility level. The non utility spaces for this reason we're currently contemplating in the use of a short term say 12 month bridge to fund the acquisition on close.
And then immediately following close we would anticipate having project financing in place on the contracted assets.
And the ability to take out approximately half of this initial bridge loan.
We'd look to take out the remainder of the bridge loan.
And evaluated a number of different avenues, whether it's strategic partners ships on existing assets or other capital recycling initiatives.
And then in the event that these initiatives are not executable within the bridge period, we'd look to utilize our existing balance sheet capacity to settle the bridge. So yeah, basically we're keeping our options open.
We see value in partnerships, but it's the timing we do have some flexibility in that given the strength that we have in our balance sheet.
Hopefully that answers your question Linda.
Thank you I'll jump back in the queue.
The next question comes from Maurice Choy with RBC capital markets.
Please go ahead.
Thanks, and good morning, My first question is about renewables versus utilities.
Clear that there is quite a bit of build out that you can do due to the suncor acquisition.
Unless you tell me otherwise this build out longer hydrogen opportunity all of these things will probably outpace the growth that you have in regulated utility business.
From being about 95% utilities now in 5% energy infrastructure.
Do you envision this mix to be say by the end of decade. Once you hit your target.
Yeah.
Yeah. Thanks, Bryce, maybe I'll start and yeah, I think we've been very clear that the energy transition, we view that as a significant growth vehicle for Canadian utilities.
And Bob kind of alluded to in his presentation and in previous calls the three pillars of clean fuels renewable generation and energy storage and we've been quite active on that front.
Bob mentioned, the Alberta hub facility that we purchased and obviously this debate this.
Renewable Suncor acquisition, so yeah, we do expect the.
The non rig.
To take a bigger portion of a growing portion of our overall mix over the next 10 years.
And it will outpace the utility growth, which is right now what's in that 1% to 2%.
So yeah, I would say that there's still be a high percentage, but nowhere near where we're at today.
Got it and just to give us some range. There are we talking about like a 60 40, where you're talking like a 50 50.
<unk> mix I know, there's no such thing as a target mix.
Sure.
Yeah. Good question. So maybe you know obviously it depends on how the renewables build out and while they could brought factors, but it would probably be more in that 80% regulated 'twenty nonregulated, but obviously that that percentage will depend on the build out and.
Support of government policies.
Got it and just my final questions about just more about the regulatory.
Environment that you have in Alberta.
I'm sure you would've heard what happened in Nova Scotia, and the rate cap.
Suppose over there.
Given that you're you're heading into the P. P. Our discussions not its U S ones are pretty much done.
Any thoughts on what you think happened in Nova Scotia, and how that may or may not relate to your rate case and building relationships in Alberta.
Yeah.
Good question.
Nova Scotia recently announced that it places a rate cap on electricity rate hikes that I believe it was one 8% over the next two years for non fuel costs.
We really believe that the rate cap is essentially.
Essentially on the wires portion excluding retail.
Needless to say the rate cap situation in northern Scotia has a very troubling.
For the Chile, there or is it truly undermines the overriding principles associated with recovering costs needed to provide utility service and with the you know the fair return standards.
And that's really at the heart of a well functioning regulatory regulated system.
You know certainly we're sensitive to the fact that there's high fuel and electricity costs.
But you know.
Looking at our jurisdiction.
Certainly we don't see any talk about that in Alberta.
In fact, when we look at our 23 cost of service application, which was we're very happy with it was pretty much approved as filed.
That's very supportive a regulator, it's been very supportive.
And then the only other thing I would note.
Given that we're going through a rebase in Europe for next year are our rates will actually be declining by approximately 8% and our electricity.
Customers and about 4% of our guests. So we definitely did not do not have a rate increase we have a rate decrease and I believe in Nova Scotia there was.
Put a significant rate increase.
Opposed at that time, so I think we're in a different situation here in Alberta than down in Nova Scotia.
Great. Thank you very much.
The next question comes from Mark Jarvi with CIBC capital markets.
Please go ahead.
Thanks, Good morning, everyone.
The Suncor acquisition piece up your.
Renewable power ambition I'm, just wondering as you look forward.
What are the priorities there would you do more M&A would you be more focused on organic development and how you've increased scale in Alberta do you want to look in and broaden your sort of footprint look in the U S or I guess, maybe do more on Australia.
Thanks, Mark Bob miles there.
I think all of the above what you said is probably the easy answer, but the the cynosure acquisition for us on the renewables, we really like it as I said in my remarks that it gives us a good balance between wind and solar to add into our you know our hydro assets right now we really also side.
To get us better established and the renewable generation sector building it in our own backyard in Alberta was very prudent thing for us to do we thought but we we have always looked into the U S and that'll be something we'll look going forward and you know because where we have a big presence in Australia, we're going to continue to look in Australia.
Yeah. So we we won't do an acquisition just for the sake of doing an acquisition it really needs to align nicely with our strategy and if it does then we'll we'll pursue those opportunities as they arise.
It's Brian here or anything else I would add Mark is that you know the acquisition did come with a great development pipeline and so.
So that's the other thing that's you know not just have no operating assets, having that development pipeline in place are really gives us a great growth platform.
Great and then when you think about the U S market is that something you guys can do greenfield or do you think you'd have to do an acquisition of some sort of development portfolio or maybe development and operating <unk>.
The entrance in the market there.
I would say to just start complete greenfield will be very difficult. We definitely have looked at partnering with companies to bring us into the U S.
Or an acquisition.
But to just try to start Greenfield, we we feel will be very very difficult.
Understood and then just coming back to the customer affordability and then you guys commented about how you see the setup differently relative to what happened in Nova Scotia, but they usually be convention. They talk to one of the resolutions was about trying to reduce transmission distribution costs. When you. You know you hear that from the politicians you know like what how should we done from educating from your perspective, and then when you do.
Here that you know where where do you think they could try to push back on you at all in terms of either.
Adjusting rates somehow or deferrals or anything like that.
Yeah. Good question Mark.
Listen the utility costs are front of mind for everyone right now.
On the face of the global turmoil the commodity shortage in that inflation driving up prices and you.
Looking specifically at the situation here in Alberta.
It's important to recognize that transmission and distribution charges are just two two of the many charts that makeup our customer's utility bill.
First the commodity prices rose sharply in the face of a global supply chain pressures and rising.
Geopolitical tensions and and more than doubling since last year.
Yeah.
Using that average customer's.
Customers' gas Bill. Its example, these commodity costs can account for more than 40% of the total utility bill.
And these higher commodity prices were compounded with higher gas usage across the province and lost.
First few months of this year.
Franchise fees, which is another part of the Bill are also going up and for an average gas Bill this could count for about 8% to 15% of the Bill So you know.
I guess all of that being said, obviously educations important part and if you look at our website, we're trying to put on some education material for our customers.
The best things that we can do and we've kind of announced it at our.
At our AGM is is just run our business as officially as possible and we would note that our gas distribution utility office offers customers the lowest monthly distribution charges in North America and in our electricity business, we continue to drive out efficiencies and we note that our operating and maintenance cost.
Per kilometer had been reduced by 17% over the last six years. So that's what we bring forward and we're very mindful of any new project.
It has to support.
The customers and affordability is definitely something that we've been.
Communicating to everyone that we talk to is a very important concern reliability and affordability and safety.
Okay. Thanks for that Brian appreciate it.
Okay.
The next question comes from Ben Pham with BMO. Please go ahead.
Hey, Thanks, Good morning, and I was wondering you mentioned.
He returned in Alberta distribution that they're going to come down but still remain attractive.
How do those returns compare to this renewable portfolio without error here moving forward.
Or what are we going in Portland.
Good question Ben and.
Yeah like the what I've mentioned on utility returns as you know we've done very well and lost a true PBR terms as we drive out Fisher seats for customers.
I always go back to the regulated versa nonregulated, certainly we look to.
Ah contract have some long term.
Ppas with a lot of our renewable business. So it takes some of that risk away. So when you compare our risk between our regulated business versus our non Reg business to extent that we're adding on some more merchant or take more risk on the business. We would expect internally that we would.
Come up with a higher return that said you.
You have to start somewhere and strategically what we purchased for the Suncor assets with the development pipeline over the long term with the development pipeline, we expect those returns to be quite healthy.
Okay.
So it sounds like it's.
Well.
Portfolio returns might be.
Hi.
Maybe maybe not as great near term, but it sounds like Theres a lot upside longer term.
Yes, I think the development pipeline has again great growth in that portfolio and you know I'd say that there would be somewhat aligned with with what we got for regulated given that we are going to contract a good portion of the offtake.
Okay.
Understand and then.
Returns drag onto Australia huh.
How should we think about calculating a realized return in Australia, because it's I think it's like 5% allowed.
Our rate base goes up with inflation you earnings goes up.
So do you actually adjust it too when you calculate your return and then if he goes down about 2% next year then.
How does that work I guess your earnings starts to creep lower into next year.
Yeah like I think we tried to be helpful and give everyone out of a rule of thumb and and and so they kind of that.
Rule of thumb is that every 10 basis points change in inflation translates until about $1 million of earnings for Australia.
And if you take a base kind of approved rate of five.
And buried within the regulatory mechanisms and a five was just over 1% inflation to extent that inflation goes up to 2%.
That's 100 basis points, and that's $10 million of earnings.
So.
Obviously, when when you note that I noted earlier that if inflation is going to be at 7% and next year is going to go down say roughly 3%. So if that were to happen. That's a 4% change and you can do the math on the rules of thumb that I gave you. So yeah. If you take a look at your regulated return.
Your actual rate of return that's approved in Australia to the extent that that inflation goes up or down.
It would be indexed at correlate with just that rule of thumb that I gave.
Okay, and and I'm only allowed two questions I just want to make sure I understand this I mean I got the earnings situation Okay.
But I'm I'm more wondering what's your approved rate base.
At 1.4 or so.
When you calculate the ROE does that does that the nominated actually change because if not you're earning like a 15%.
Really I'm just trying to make sure I got my in Africa Act.
Yeah and in the current year like basically we get we recognize the fact that we.
Inflation is higher our rate base gets indexed higher and so we are allowed to collect that over a longer period of time over 40 years, but we recognize in earnings.
Whenever we index had rate base in year, we wreck take those into earnings knowing that it could be collected over a long period of time and that forms a new base for going forward in the next access arrangement in terms of how our returns will be calculated on the appropriate rate of return will be applied to that new inflated rate base.
Certainly our team here can can work with you offline to give you a little bit more of that mechanics.
Alright, thank you.
Once again, if you have a question. Please press Star then one.
The next question comes from Matthew Weekes with I E capital markets.
Please go ahead.
Hi, Yeah. Thanks for taking my question just following up a little bit on kind of some comments about you know.
Growing the renewable.
The energy transition strategy is expected to kind of grow in the portion of earnings going forward and you see that kind of adding to the run rate growth of the business. It's already outpacing the growth in the utilities have there been any conversations about maybe increasing the payout a little bit on the dividend.
Thank you Matthew Thanks for the question so yeah.
Yeah, you know in terms of our dividend policy. It broadly what we say is that our dividend growth would be in lined with kind of underlying growth of our portfolio. So you know.
At this time no. We would you know we're going to keep it pretty.
Pretty much at the moderate kind of increases but over time as we.
We may address that.
Given the pace of earnings growth, but for now all well that would probably be a little ways in the future.
Okay.
Okay. Thank you and just in terms of the renewable power portfolio and you talked about the growth.
Look there and a good backlog of projects and return potential how do you see a kind of a return in terms of the development portfolio, maybe being higher than that in the current operating portfolio based on your view.
Power market and the outlook for Ppas and the carbon tax going forward et cetera.
Yeah, Matthew but Bob here, absolutely, we do that so we do see things going forward. The other thing I was going to comment earlier on one of the other questions is just we're also looking a lot under our renewable portfolio as well as all of our energy transition portfolios as we bring on new partners.
The ability to actually increase our returns through that process and then also as we develop projects as we look to potentially sell down we feel we'll have a good potential of increasingly turns from that mode of operation as well.
Okay. Thanks, that's helpful commentary I'll turn the call back thank you.
That's clear.
That's our question answer session I would like to turn the conference back over to Mr. Colin Jackson for any closing remarks.
Thank you Sherry and thank you all for participating today. We appreciate your interest in Canadian utilities, and we look forward to speaking with you soon.
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Yes.
Great.
This concludes today's conference call you may disconnect your lines.
Thank you for participating and have a pleasant day.
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