Q4 2022 Canadian Utilities Ltd Earnings Call
Speaker 2: Thank you for standing by. This is the conference operator. Welcome to the fourth quarter in year-end 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.
Speaker 2: To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero.
Speaker 2: I would now like to turn the conference over to Mr. Colin Jackson, senior vice president, finance, treasury, risk and sustainability. Please go ahead, Mr. Jackson.
Speaker 3: Thank you. Good morning, everyone. We're pleased to join us for Canadian Utilities' fourth quarter 2022 conference call. With each of the Executive Vice President and Chief Financial Officer Brian Scrova.
Speaker 3: Before moving into our formal agenda, I would like to take a moment to acknowledge the numerous additional territories and hallmarks on which our global facilities are located.
Speaker 3: Today we're speaking to you from our Pat Colt Park Head Office in Calgary, which is located in the Treaty 7 region.
Speaker 3: This is the ancestral territory of the Blackfoot Confederacy comprised of the Sixthika, Kainai, and Bagani nations, the Suits, Nina, nation, and the Stonina code nations that include the Tukikki, Ferrispoth, and Good Stonin First Nations.
Speaker 3: The city of Calgary is also home to the 18th Nation of Alberta region 3.
Speaker 3: We honor and respect the diverse history, languages, ceremonies, and culture of the indigenous peoples who call these areas home.
Speaker 3: Brian will begin today with some opening comments on recent company developments and our financial results following these repair marks.
Speaker 3: We'll take questions from the investment community.
Speaker 3: Please note that the replay of the conference call and the transcript will be available on our website at CanadianUtilities.com and can be found in the Investor section under the heading events and presentation.
Speaker 3: I'd like to remind you that all our remarks today will include forward looking statements that are subject to important risks and uncertainties.
Speaker 3: For more information on these risks and uncertainties, please see the reports filed by Canadian utilities and Canadian securities regulars.
Speaker 3: And finally, an also-like point out that during this presentation...
Speaker 3: We may refer to certain non-GAB and other financial measures, such as total of segment measures, adjusted earnings, adjusted earnings for shared and capital investment. These measures do not have any standardized meaning at their IMRS, and as a result, they may not be comparable to similar measures presented in other entities.
Speaker 3: And now I'll turn the call over to Brian for his opening remarks.
Speaker 3: Thank you, Colin, and good morning, everyone. Thank you all very much for joining us here today for our fourth quarter of 2022 conference goal.
Speaker 3: Before I jump into a summary of our financial results for the year, I just want to talk more generally about our performance and also highlight a few notable achievements we've had.
Speaker 3: First of all, 2022 saws deliver on significant year-over-year earnings growth.
Speaker 3: Our Alberta distribution utilities unlock significant efficiencies that will in turn create meaningful savings for customers going forward.
Speaker 3: It was also another successful year of operations for our Luma Energy Business, with numerous achievements in the support of the company's commitment of rebuilding and modernizing the electricity transmission and distribution system in Puerto Rico.
Speaker 3: These successes ultimately accumulated into the extension of Luma's supplemental operating agreement, allowing critical work the team is doing for the people of Puerto Rico to continue.
Speaker 3: We've also made significant strides in the execution of our energy transition strategy with the completed acquisition of a major renewable generation portfolio and related development pipeline, while continuing to advance a number of our other ongoing energy transition investments.
Speaker 3: including Alberta-based solar initiatives and are ongoing hydrogen initiatives in the Alberta heartland.
Speaker 3: We advance a number of Indigenous projects, including supporting the expansion of Dendriti Investants, Incorporated, or DIIs, interest in our Northland Utilities Business.
Speaker 3: Our relationship with the I.I. began in the 1980s and is one of our longest standing and Indigenous partnerships. This transaction saw them become a 50-50 owner with us in a business.
Speaker 3: We're truly proud of these results and the runway they create for us as we look to the future of our business.
Speaker 4: Taking this discussion back to our financial performance, last year was a great year for Canadian Utilities Limited.
Speaker 4: We achieved adjusted earnings of $655 million or $2.43 per share for 2022.
Speaker 4: This is $69 million or 26 cents per share higher than the previous year.
Speaker 4: While our business overall performed very well in 2022, this growth and year-over-year earnings was primarily driven by the performance of our international natural gas distribution business and the outperforms achieved in our Alberta distribution utilities.
Speaker 4: as they completed the final year of their second performance-based regulation cycle.
Speaker 4: And I know many of you have heard me talk about this before. While we are very proud of this financial performance, we are just as proud of our safety performance.
Speaker 4: At the heart of both our safety and financial performance is the dedication commitment of our employees to excellence.
Speaker 4: As we discussed throughout last year, our international natural gas distribution business in Australia benefited from strong law-prep performance and saw significant earnings uplift related to favorable CPI indexing.
Speaker 4: This inflation trend carried throughout the remainder of last year and saw the business deliver full year adjusted earnings of $93 million compared to not $65 million in 2021.
Speaker 4: This is truly an extraordinary performance for the business, and while the ultimate duration of these CPI tailwinds is difficult to predict.
Speaker 4: Current economic forecasts suggest that many of the drivers impacting stronger near-term CPI and Australia will ease into 2023.
Speaker 4: Current estimates suggest Australia CPI will begin to trend downward to more normal levels and say the 3-4% range for the year.
Speaker 4: This will be a key trend to watch and one we expect to realign our 2020 earnings back down to pre-high inflation levels and to reduce furnace from the segment on a year-over-year basis.
Speaker 4: Moving on to our Canadian Utilities, a strong performance we saw in our distribution utilities throughout 2022 continued as we closed out the year.
Speaker 4: It's important to understand that this performance is underpinned by the numerous efficiencies or businesses unlocked during their second PBR term.
Speaker 4: Looking ahead to 2023, we will now see these businesses enter a cost-to-service rebassion year where these efficiencies will be shared with ratepayers.
Speaker 4: We're proud to be able to share these efficiencies with customers at a time when affordability is front of mind for Alberta households. And these efficiencies will translate into an average rate reduction of 6 to 8% for most of our customers.
Speaker 4: Despite our Alberta distribution utilities entering a rebasing year in 2023, we still have strong expectations for performance across all of our utilities.
Speaker 4: The decisions received for our bird out distribution utilities on their 2023 cost of service applications have been positive.
Speaker 4: and support of you that the regulator understands the importance of facilitating a supportive and constructive regulatory framework for this rebasseneer.
Speaker 4: We know that we also have a strong track record of delivering exceptional ROE outperformance across decades and under numerous regulatory frameworks and structures.
Speaker 4: combined with the efficiency carryover mechanism within our existing regulatory framework, which will allow us to carry forward as much as 50 basis points of outperformance into 23 and to 24. We believe we have a solid foundation on which to deliver continued strong performance in 2023.
Speaker 4: Beyond 2023, we also know that this cost of service rebasing year will be followed by a third, five-year PBR term beginning in 2024.
Speaker 4: We expect decisions related to the key details of the three third PBR term later this year.
Speaker 4: Speaking more broadly to our regulatory slate for 2023, it's shaping up to be a busy year and one that looks to reinforce the continued prospectivity that we've seen from the regulator more recently.
Speaker 4: Decisions on PBR-3, the generic cost of calphe proceeding, and our electric transmission general tariff application for years 23-25 are all expected.
Speaker 4: Moving on to capital, I just want to touch on both capital investments we made last year and also where we're heading in the coming years.
Speaker 4: In 2022, we invested $1.4 billion in our business.
Speaker 4: with 1.1 billion of being invested in our core utilities.
Speaker 4: This ongoing utility investment ensures we have continued generation of stable earnings and reliable cash flows from our utility businesses and drives overall rate-based growth.
Speaker 4: In our energy infrastructure businesses, we invested in additional $240 million last year, which is an increase of $14 million from 2021.
Speaker 4: This increased investment reinforces our commitment to energy transition and includes a number of previously announced projects that we are pursuing in the space including
Speaker 4: The continued development of our Barlow, dear foot and Empress Solar projects.
Speaker 4: and our two we have our RNG project, all of which we expect to be completed in 2023.
Speaker 4: are ongoing hydrogen initiatives in both Canada and Australia and finally expansion of our gas storage facilities.
Speaker 4: In addition to these Greenfield initiatives on January 5, 2023, we have also announced the successful closing of our renewable generation portfolio acquisition.
Speaker 4: This acquisition immediately adds 232 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.
Speaker 4: Not only will this transaction drive cash flows and earnings accretion in 23, the 1.5 gigawatt development portfolio provides a clear pathway to meeting our 2030 ESG target of owning, developing, or managing 1000 megawatts of renewable energy.
Speaker 4: and will grow our renewable energy portfolio significantly in the coming decade.
Speaker 4: In conjunction with the successful closing of this acquisition, we also announce the signing of a long-term renewable energy purchase agreement with Microsoft.
Speaker 4: This agreement continues to build on the relationship we established with Microsoft through the contracting of our dear foot solar development earlier in the year.
Speaker 4: Collectively, disagreements and others like them, highlight our prioritization of earnings stability alongside growth.
Speaker 4: As we continue to develop a renewable portfolio and leverage the unique Alberta corporate PVA market.
Speaker 4: Touching briefly on our larger clean hydrogen production facility project with SunCore, we continue to advance the necessary work to support a move to the front end engineering design stage in the first half of 2023.
Speaker 4: Similarly, we continue to progress our work at the Atlas Carbon Sea Coasteration Hub in conjunction with Shell and SunCore and expect to make a final investment decision on the first phase of this project in late 2023. While there is significant
Speaker 4: Work's still to be done on these projects given their scale. We're excited to continue moving them forward and about the positive signals they send regarding our provinces' intentions to decarbonize.
Speaker 4: Moving on, our forward-looking expectations for capital investment. We expect to invest $3.3 billion in our regulated utilities over the next three years.
Speaker 4: While utility operations are the largest contributor to our earnings and will remain so for many years to come, we will also be actively investing in our energy transition growth initiatives in the coming years. Our ongoing hydrogen initiatives with SunCorn are continued pursuit of a potential energy storage investment in Australia.
Speaker 4: and our successful execution of the acquired 1.5 gigawatts of renewable generation pipeline will all necessitate significant capital investment and drive growth for our business.
Speaker 4: Overall, Canadian Utilities have had a phenomenal 2022 that solves advanced key initiatives in growth while delivering strong, year-over-year, earnings growth for our shareholders.
Speaker 4: We started the year with the objective of stopping ourselves as leaders in the energy transition
Speaker 4: Through our ongoing initiatives to modernize the grit and through the new investments made in 2022 related to renewable generation, we've laid a strong foundation to achieve this goal.
Speaker 4: I'm excited to continue pushing the business and these initiatives forward and that concludes my prepared remarks And I'll now turn the call back to Colm
Speaker 5: Thank you, Brian .
Speaker 3: 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 cube.
Speaker 3: I will now turn it over to the conference coordinator for questions.
Speaker 2: Thank you. We will now begin the question and answer session. As said in the interest of time, we ask you limit yourself to two questions and if you have additional questions, you are welcome to rejoin the queue. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speaker phone, please pick up your handset before pressing...
Speaker 6: Thanks a lot. So I just wanted to start with a little bit on your capital plans for 2023 to 2025. So utility investment looks similar to your previous capital plan. And then as you mentioned, there's a large jump for energy infrastructure.
Speaker 6: So can you add a little bit more color on those key areas of spend or split between generation and some of your other initiatives and maybe some color on timing for this additional spend?
Speaker 4: Sure. Thank you very much for your question. No, if I look at the utilities, we tend to categorize rate-based growth for both our Canadian and Australian utilities as normal given the true state of the markets.
Speaker 4: But moving forward, we see these markets now being, well, I'll expect an investment to fall in the steady growth profile, a system reliability, and modernization driving rate-based development.
Speaker 4: Above this, we, uh, this base investment, we also see significant opportunity for more rapid rate-based growth in the energy transition and decarbonization investments to the system.
Speaker 4: And on electricity side, we expect this to take the form of tie-in infrastructure to integrate additional renewable capacity and energy storage assets along with increases to system capabilities.
Speaker 4: You know, moving on maybe to some of the other growth that we see in our energy transition.
Speaker 4: Obviously, we've been very clear that this is the area where we see significant growth for cadening utilities. And we've mentioned a few of the hydrogen project, which is multiple billions of dollars.
Speaker 4: And we have the 1.5 gigawatts of renewable generation per coil, both we expect to drive growth throughout the period. So obviously there is some more decisions and FID decisions to come, but we are very excited about the growth opportunities faced in the business.
Speaker 6: Great. Thanks for the color. And then just just given the recent close of the acquisition of the SunCorp portfolio, I just wanted to follow up to see if you had any updated thoughts on selling down any assets here, potentially adding a partner to some of your projects.
Speaker 4: Yeah, that's a great question. And I think we've talked about we have numerous attractive investment opportunities that we're currently pursuing. And capital management will be a key focus for us moving forward. And in terms of options, yes, we would consider asset sales partnering. So let's join the second side for this judgment only! Let's agree.2and start
Speaker 4: or even issue of equity. And all of them will be
Speaker 4: Explore, we recognize that's difficult. We'll be required to fund these growths.
Speaker 4: And, you know, likely beyond our historical sources of capital to execute on that plan, while paying profit respect to the maintenance of our credit rate, credit ratings. So, you know, I think, historically, we've had strong access to the debt markets and we expect the continue to do so. In terms of capital recycling, I think we've...
Speaker 4: showed our willingness to do that, whether it's our selling of our legacy Canadian fossil fuel generation business, for example, or the sell down of our Alberta Powerline project. And as it relates to equity, well this has not been in the past a source of capital funding.
Speaker 4: It should be also noted that we're not going to shy away from that need for that funny beyond what's available through the other channels to accept their insignificant.
Speaker 2: Once again, if you have a question, please press star then one.
Speaker 2: Our next question comes from Alex Kwong of TD Securities. Please go ahead.
Speaker 3: Good morning. This is Alex stepping in for Linda. I have two questions for you today. My first question is on the commissioning of the two hydrogen projects at the Clean Energy Innovation Hub. Just wondering how these two projects are progressing now that they're in service.
Speaker 4: What are your thoughts on the ability to scale hydrogen moving forward? Thanks Alex. Yeah, I think we've been very clear. We do see three pillars of growth in our energy transition and one of them being clean fuels and particularly hydrogen. And we've progressing a number of our projects, Clean Energy Hub.
Speaker 4: For example, in Australia, we have started blending in the natural gas system there as well as our refueling stations. We've announced a number of projects, whether it's recent development, working to export hydrogen to us from Australia to Germany.
Speaker 4: Whether it's our projects here in Alberta, whether blending projects and as well as just recent development announcement on working with FALACO on a hydrogen community. And then of course we have the greater or larger project for the SunCore Hydrogen Facility.
Speaker 3: And then my second question is on the display for the DeoFlu and Barlow projects. I was wondering if you could talk about the causes of the delay, whether it's apply chain or labor related, and was wondering if you are seeing these factors impact your other projects. Back.
Speaker 4: Yeah, great question. Alex, and yes, in terms of the slight delay in the service dates, they were to supply chain. You know, the team has done exceptional jobs to source our panels and they are all sourced. There was some timing and shipping and delaying it to work.
Speaker 4: to our location here, but overall those projects are back on track and expect to be completed energized by Q3 2023 commercial operations and Q4 of 23 for the deer foot. And the Ampest Project, we expect construction that started in October 22.
Speaker 4: And we expect that to be done and served us by Q4 2023. So yeah, there is, we're seeing some of that, and particularly on our non-regulated projects, where we've seen some delay. Obviously we factor that into our expectations some timing and being very proactive on it. In our regulated businesses, we haven't seen the same level of supply disruption.
Speaker 4: That said, our teams are ensuring that they're taking more lead time and securing material contractors. Overall, we're managing quite well with the inventories that we have. Hopefully that answers your question.
Speaker 3: Yes, it is. Thanks for answering our questions. I will jump back into the queue. Thank you.
Speaker 2: This concludes the question and answer session. I would like to turn the conference back over to Mr. Colin Jackson for any closing remarks.
Speaker 5: Thank you, Ariel. And thank you all for participating today. We appreciate your interest in committing utilities. We look forward to speaking with you again soon. Thank you.
Speaker 2: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
Speaker 1: The pro.