Canadian Utilities Limited Q1 2023 Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the first quarter of 2023 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.
He joined the question queue you May Press Star then one on your telephone keypad.
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I would now like to turn the conference over to Mr. Colin Jackson, Senior Vice President Finance Treasury and sustainability East.
Please go ahead Mr. Jackson.
Thank you good morning, everyone.
We're pleased you could join us for the Canadian Utilities first quarter 2023 conference call with me today is executive Vice President and Chief Financial Officer, Brian scrub bought.
Before we move into our formal agenda I would like to take a moment to acknowledge the numerous traditional territories and homeland. So much of our global facilities are located.
Today, we're speaking to you from ACCO part head office in Calgary, which is located in the Treaty seven region.
This is the ancestral territory of the Blackfoot Confederacy comprised of a six acre kind I am Bugatti nations.
Our nation and the Estonian of coordination that include the Mckee bears Pas and good Stony first nations.
The city of Calgary is also home to the May Tee nation of Alberta region three.
We honor and respect the diverse history languages ceremonies and culture of indigenous peoples, who call these areas home.
Brian will begin today with some opening comments on recent company developments, our financial results and key trends and expectations from our businesses in 2023.
Following these prepared remarks, we will take questions from the investment community. Please.
Please note that a replay of the conference call and 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 also like to point out that during this presentation, we may refer to certain non-GAAP and other financial measures.
Such as total segment measures adjusted earnings adjusted earnings per share and capital investment.
These measurements do not have any standardized meaning under ifr asked 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.
Good morning, everyone.
Thank you all very much for joining us here today for.
For our first quarter 2023 conference call.
Canadian utilities achieved adjusted earnings of $217 million or 81 cents per share in the first quarter of 2023.
Compared to $219 million in the first quarter of last year.
This was a considerable accomplishment.
Given the expected impact of re basing in our Alberta distribution utilities and 2023.
This overall stability in first quarter earnings was primarily driven by strong contributions from our recently acquired wind generation assets and our Alberta storage assets.
Both of which serve to offset the expected decline in first quarter earnings in our Alberta distribution utilities, which is of course associated with the end of PBR, two and 2022 and the transition to a 2023 cost of service.
Also contributing to this great year over year result was a strong operating performance and timing of CPI indexing in our international natural gas distribution business in Australia, which I will go into more shortly.
With our renewables portfolio acquisition closing that the start of this year. The first quarter included a full quarter of contributions from our 40 mile wind in Adelaide operating assets.
Along with these assets performing in line with expectations operationally, our 40 mile wind asset also benefited from exceptional merchant market pricing in Alberta during the period.
As a reminder, our long term power purchase agreement for the 40 mile wind asset does not come into effect until Q3 of this year, allowing us to capture these strong merchant market trends in the near term.
Similarly since acquisition, our Alberta hub storage asset has contributed significantly to growing their earnings in our energy storage segment.
Q1 in particular, it benefited by strong commodity price spreads growing injection activity and higher facility capacity all of which support strong earnings growth.
Looking at our natural gas distribution business in Australia, not only did we see growth in key operating metrics, such as tariffs and system volumes in the period. The business also continued to benefit from strong CPI indexing when compared to the first quarter of 2022.
As we look back to 2022 for the Australian gas business, it's important to highlight that inflation trend we saw in that year.
This compares to our expectations for 2023 and of course, how this difference will impact our year over year results for the business.
2022 saw us enter the year with the full year annual inflation expectation of just 3% in Australia.
By the time the year had ended however, full year inflation had reached almost 8%.
This surge in inflation resulted in strong earnings for 2022, but more importantly, an earnings profile that built beginning in Q2 of 2022 and rapidly progressed through the year.
And 2023 are current in country estimates for CPI suggest full year forecast of five or 4% to 5% CPI and a greater degree of stability.
So while first quarter results look favorable to last year, we will expect this trend to reverse as the year goes on and expect earnings from this business to be lower when compared to 2022.
As we previously discussed the rate at which CPI may change in the year could potentially have a meaningful impact on our results. It will be a key trend to monitor throughout the remainder of the year.
Moving onto our Alberta distribution utilities, the work that we were able to advance into the latter part of 2022 combined but key regulatory decisions on our 2023 cost of service framework and the timing of Costa.
I'll help soften the earnings impact of our Rebating in the first quarter of 2023.
Our despite the strong showing from this business in the first quarter I want to caution that the Rebased <unk> of Alberta distribution utilities will still result in lower achieved ROE and earnings for 2023, when we compare that to the prior year.
As we move further into 2023 the seasonality and other timing impacts that helped hold first quarter earnings stable will begin to ease or.
Where we'll see the business deliver an earnings profile more in line with expectations for base an ear.
Moving onto capital.
To briefly touch on the capital investments, we made in the first quarter of this year.
The first quarter saw us invest $996 million in our business a significant increase compared to the prior year.
The largest driver of this increase was our successful renewable energy portfolio acquisition, which closed in January of this year.
Totaling $691 million. This acquisition dramatically increased the size of a removal renewable energy fleet and rapidly Lee Fabs are renewable energy ownership targets.
And our core utilities, we invested an additional 262 million in the quarter.
This ongoing utility investment ensures continued generation of stable earnings and reliable cash flows while also driving rate base growth.
Beyond the renewables acquisition I mentioned, a moment ago. We also invested an additional $42 million within our energy infrastructure businesses in the quarter.
These investments are tied to the ongoing energy transition initiatives that we launched last year, which continued to progress.
Notably our previously three previously announced solar developments Dear foot Barlow and Empress continue to move forward with the expectation of commercial operation in 2023.
We've also seen great progress advancing numerous projects within our acquired renewables development pipeline and expect the upgrading or upgrading of our 40 mile wind asset to be completed by year end.
Similarly, our teams are hard at work on both our worlds Elk hydrogen production project with Suncor.
And our Atlas storage hub carbon capture and sequestration of opportunity the suncor and shell.
As outlined in our year end 2022 conference call. We continue to see progress on both of these projects with the dishes a decision on feed for our hydrogen development coming in the first half this year and F E four or sequestration or opportunity in the later part of the ear.
Overall, it was a great quarter.
So our newly acquired assets contribute to earnings in a meaningful way and our core businesses continue to deliver great performance. During this key regulatory transition period.
Look forward, providing further updates on the progress of the numerous growth initiatives as the year progresses and that concludes my prepared remarks, So now I'll turn the call over back to Colin.
Thank you Brian .
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 now turn it over to the conference coordinator for questions.
Thank you we will now begin the question answer session.
To join the question queue you May Press Star then one on your telephone keypad.
Hear a tone acknowledging your request if you are using a speakerphone. Please pick up your handset before pressing any keys to.
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The first question comes from Linda <unk> with TD Securities.
Go ahead.
Thank you just wanted to get some updated big picture thoughts on Ah you, our transition to a lower carbon future and guarantee carbonization journey.
It seems that the renewables acquisition that you made is going quite well and I'm. Just wondering if you see any other acquisitions that might accelerate your path to decarbonize, our or do you also potentially see some regulated acquisitions or might they be more skewed to <unk>.
Our unregulated energy infrastructure.
Yeah. Thanks, Linda Thanks for the question.
Overall, we're very pleased on the progress we've made since January of last year, where we announced comprehensive set of 2030 ESG targets.
And our commitment to be net zero by 20 ft.
And you know overlaying those targets I think the biggest the recent announced renewable acquisition, obviously, it had a meaningful impact and a clear pathway to achieving our synergy targets and an acquisition that you mentioned so with that development pipeline at 1.5, Gigawatts certainly we have already a lot in.
Our arsenal to make meaningful progress progress towards continuing down that path of ESG performance I think we will always look at <unk>.
Acquisitions, you know where.
Obviously, not shy of doing that we're very happy that we have a development pipeline. Both short term medium term and long term opportunities to grow that.
Obviously, we have our our large projects for suncor.
And carbon capture that are also.
Provide meaningful contributions to our <unk> scores. So overall I think we have a great development pipeline already within our Arsenal, but again, we will continue to look for acquisitions to the extent they make makes sense.
Thank you and just as a follow up with the recent Canadian Federal government budget can you provide some thoughts on what was embedded in there and how it might influence the relative attractiveness of the investment. So that you are looking at that might benefit from that.
And do you think the federal and provincial governments need to do more to provide some of you are in industries decarbonization initiatives are the certainty and economic parameters. They need to proceed and maybe just within that if you can comment on how some of your proposed projects like your hydrogen hub and Atlas storage might.
The benefit from what was in the budget.
Yeah. Thanks, Linda Great question, Yeah that the Canadian Federal budget I think was presented back in the end of March of this year and overall the budget, including the announced income tax credits were in line with our expectations and certainly don't change our view on any of the projects that recur.
Currently pursuing.
We view continue to view the income tax credits has been supportive of our ongoing energy transition initiatives and a clear proof that the government understands the importance of these projects.
So part of that announcement was a clean hydrogen income tax credit.
There was also clean technology manufacturing credits.
It also clean electricity. So there's a number of announcement there that are supportive of some of the initiatives we do.
Overall right now.
To answer your question, we would continue to look for providing additional clarity within the federal and provincial government on some of their the more getting them. The details of how these tax credits will work. We're currently.
Discussing that with all levels of government right now so overall I'm very supportive continue to be in line with what we expected.
And yeah, hopefully we get that further clarification as time goes on.
Thank you I'll jump back in the queue.
Yeah.
The next question comes from Maurice Choy with RBC capital markets. Please.
Please go ahead.
Thank you and good morning.
Ill pick up on the renewables projects that you currently have.
Microsoft PPA, obviously relate to part of the 202 capacity.
40 mile. When phase one are you planning on contracting up the remainder of that asset, including additional capacity from upgrading and me.
Bigger picture, given how solid Alberta power prices have been and that obviously helped this quarter's results. How do you view your appetite for merchant power exposure.
Yeah, Thanks, great questions.
Yeah, you know in terms of.
The market here in Alberta, we are seeing some very favorable pricing and if you look out to Q2 and Q3.
That favorable pricing continues and so although it's it's tempting to have more merchant, we always want to balance.
The level of long contract with the merchant in and typically we try to target that 70 525.
Her sense of 75% long term contracted and 25% merchant exposure.
That said you know as we bring on more capacity and we continue to access the market for long term ppas theres favorable pricing those PPA environment definitely lock that in.
So and as we upgrade and put an extra 20 megawatts like Theres no rush to go out and contract right away. So we'll see how the market develops.
But again I think we would always try to target briefs that 70, 525% on a portfolio basis overtime.
Maybe just a quick follow up to that while you are not in a rush to contract that part right away.
How would you characterize the bidding behavior and the corporate PPA market for renewable generation.
Great question.
We see strong demand for for Ppas and a lot of the industry players like we've been successful at a great relationship to have a great relationship with Microsoft, but as we are going to contract assets were definitely see continue to see high demand for for corporates, especially to access a PPA and it's a great market.
Here in Alberta that supports that so and I don't expect that that man to fall off in the long term.
Thanks, So maybe finishing up on policy here, it's obviously an election in roughly a month.
Uh huh.
Affordability measures so far appear to be neutral to the utilities anything that you're watching out for whether from the U C. P. A N D P and any thoughts on anything that's going to come through the pipe post election.
Yeah, Great question, Yeah, where we're monitoring that I didn't think it's part of the budget.
Government, Alberta announced a visit.
Disciplined tuttle affordability and utilities, so you know part of that.
They want to continue to provide financial relief to our Burton through programs such as the natural gas rebate program in electricity rebate program.
And so you know I think there's nothing in terms that we see that's beyond what.
Existing mechanism that they are using today, which is those rebates.
You know, we're always worked with the government to make sure that they understand what we're doing to reduce costs for customers and continue to support affordability and I think we've demonstrated that I think on previous calls we've talked about how much our rates have gone down for 2023.
Both in our electricity business international gas business, So overall I.
I think the government is mindful of that and we'll continue to stick to proven mechanisms to provide rate relief for our burdens.
Thank you.
The next question comes from Rob Hope Scotiabank. Please.
Please go ahead.
Good morning, everyone. My question is on the hydrogen strategy. So can you maybe just walk us through how you're thinking about the opportunities longer term you have the suncor opportunity trying to deal with.
It looks like in the first half of this year, how does the kansai opportunity mesh hitting their can do we see you would look to do one larger facility or would those be two separate facilities.
Yeah, Thanks, Rob for the question.
Yeah, you know our recent announcement with Kansai involves collaborating to develop and integrate a clean fuel supply chain between Canada and Japan. So.
It kind of builds on our R. A suncor project was providing production silicon.
Significant production here in Alberta Heartland.
But not only serving.
Local customers, we view the opportunity to go beyond Alberta.
And look to export in markets that have a high demand for hydrogen such as Japan. So I think it's it's it's obviously very early days and announced but the announcement represents an important contribution to the decarbonization ambitions of Canada, and Japan, well deepening the important long standing relationships between our two countries. So.
I think it's overall in the whole value chain between production, whether it's through future expansions.
In the plant.
Through carbon sequestration, the whole value chain is a great opportunity for our company.
Alright, thanks for that maybe switching over to Australia.
Structure did highlight our ongoing development costs in Australia there.
Where are we on kind of the development timeframe or your opportunities, Australia and when can we see a potential sanctioning decision.
Yeah, Great question.
Yeah, we've been we've been active in a number of fronts in Australia. Our largest one is our central was pumped hydro project that we've been working on.
And it's an eight hour storage project and.
So that development pipelines, continuing we're waiting to hear.
From the New South Wales government on some of their long term energy supply agreements.
And based on kind of the developments from there we'll have a well have a better indication of what the future development is on that project.
We also continue to work on hydrogen opportunities UBS a few pot.
Pilots there.
Such as exporting hydrogen to Germany.
So you know a lot of things in the queue.
Like any anywhere.
Gone through selections were looking for some further guidance from useful so wells, especially in terms of of their renewable energy zones that they're looking to kick off which is a great opportunity for us in our electric transmission business.
Of course, what I mentioned earlier, which is the central West pumped Hydro project.
Appreciate the color. Thank you.
The next question comes from Ben Pham with BMO.
Please go ahead.
Alright, Thanks, and then maybe a couple of housekeeping items.
I assume your Capex program that are still tracking to.
Expectations for three year and can you also update us on you had.
Directional views on where it or are we just we're gonna attached should be realized in Alberta.
And then also a sensitivity to.
Australian CPI.
Yeah. Thanks, Ben.
That's your first question just a quick one of it is that yes, our capital expenditures continue to track.
Our three year guidance.
As moving onto kind of <unk> for <unk> I think we talked about at the end of last year of the call in terms of we expect for sure that there'll be a rate reset and that will have an impact on Roe.
So we are able to carry forward 50 basis points of ROE outperformance through the.
Sure.
ECM mechanism into 'twenty three on top of that.
We took the opportunity of the last year or two.
<unk> work, given favorable weather conditions and availability of contractors. So that's obviously helped.
Carry forward some 2023 maintenance work into 2022, and it gives us a little bit of an uptick for the current year.
We've had a very what we think is a great decision under 2023 cost of service Rebase and application.
Which again sets us up decently well to continue to have our real performance.
And I think we talked about a range.
We expect to.
B have smart firms and your maybe it's between that 100 200 basis points, but we'll see how that progresses as the time goes on.
And in terms of Australia.
C P I kind of mentioned that in my opening remarks.
You know, we're continuing to monitor and watch.
The CPI and how all that develops.
We do expect that CPI will be in that 4% to 5% range.
And how the Morris to Bill stable profile this year versus what we saw last year, which saw that.
CPI increase quite dramatically as the year went on last year.
So hopefully that answers your questions Ben.
Yeah, thanks for that and and on the Australian CPI.
I was more trying to clarify you had sensitivities before.
On every basis point change or inflation of that that's still intact for this year.
Yes, it's the same it's the same guidance we gave before you got the same rule of thumb.
Okay, Great and then and I know I know you and the second one.
I know you mentioned with Australia, yet if the Q1.
Probably normalizing for the.
Last three quarters at 50 year, depending on inflation.
What about the trends in distribution for the first quarter you look at it year over year, you saw earnings to decline as you've been convenient kitting is that.
Is that a good.
Trend that.
Is characteristic of what you expect it to your balance of year.
Yeah like I think the first quarter ban had a little bit of noise in there as I mentioned in terms of timing of costs, where we had advanced some work into the last quarter of 2022, and there's always some timing components. So we would expect the trend year over year in terms of.
Softer earnings for this year versus last year to continue each quarter, there might be some timing between the quarters, but overall by the end of the year Youll see the impact of that Rebase and in line, but some of the guidance that we've been providing.
Okay got it okay. Thank you.
The next question comes from Mark Jarvi with CIBC capital markets.
Please go ahead.
Thanks, everyone.
Let me talk a bit about the 'twenty 'twenty four GLC preceding I'm just curious in terms of <unk>.
You get a sense now of where that's trending if it goes towards a formula and one more kind of clarity on that.
It is towards the Formula is it most likely something like there is in Ontario.
But yeah.
Adjustments around bond yields.
Great. Thanks, Mark Thanks for the question.
Yeah, you know.
You know that the processes is progressing.
Most of the submissions went in in February of this year.
For both the utilities into repeaters and Theres, a hearing coming up in a few weeks. So the hearing will be may 15th the 19th.
The commission is continuing at least in their original guidance is is a sense of whether or not a form that could be adopted in.
And.
Have kind of highlighted the Ontario formula as a potential formula that could be put in place, which would be a risk free rate plus a spread premium type model.
You know I think.
It's hard to tell mark to be quite honest.
Obviously the commission is.
Is very interested in putting a formula and again I've said in previous calls we're not.
We're not against a formula but the important thing is having the right starting point.
And certainly a lot of our evidence as we continue throughout the proceeding will be focused on so yeah. I think if you're looking for some more information on I think if you listened in to the hearing on may 15th the 19th.
I'm sure there'll be a lot of interesting discussion.
The receipt of a proceeding progresses.
Got it Okay, we'll watch for that.
And then last quarter, you guys talked about funding and some of the bigger projects coming down the pipeline here.
Any sort of opened up the willingness to consider equity just curious in terms of when that might come or what pushes you to do that is because the E on hydrogen and sufficient to kind of make you think more about that or do you start to you know reconsidered partnerships. Just curious in terms of updated views on the balance sheet funding and any sort of gaps you might see in terms of the funding outlook over the next couple of years.
Yeah.
Yeah. Thanks, Thanks Mark.
Right now there's no rush.
Have ample cash on our balance sheet.
Against continued great access to the both the debt markets and equity markets.
But we're also part.
Explorer partnership so I think all of those will be the mix.
As we progress throughout the year and into the future and yes of course, if if one of these large projects like the Suncor project or a central west where they come to play and obviously that would.
Result, and taken on probably all those options and and bring it to more of a kind of a closer timing of that happening.
And then if you get to that point is something like an aftermarket equity program something you guys would consider just gives you a bit more flexibility and timing and at what level you issue stock because that's something you'd consider.
We would consider anything pushing that yeah again, I think all options are on the table, that's what we wanted to be making clearer.
We will use all.
All the options and those options that make sense for the project that we're leading.
Makes sense, okay. Thanks for time today, Brian .
Thanks Bart.
The next question comes from Andrew Pesky with Credit Suisse.
Please go ahead.
Thanks, Good morning up there.
The balancing act of affordability reliability, and decarbonization is pretty delicate and kind of fundamentally the same across all jurisdictions, but.
Practically when you think of generation mix regulation and just some other factors that could be quite different and application. So how do you think about just the opportunities and the challenges that arise from that reality across the portfolio.
Yeah. Thank Andrew it's that's a great question and something something that's really front of mind for us and I know for free government and customers and people like so.
Looking specifically at our situation here in Alberta.
We are we are in a unique environment where.
Certainly we don't have the same access to renewables as say other provinces. So in terms of opportunities at.
Certain opportunities our gas business continues to be very relevant.
And as an opportunity to provoke decarbonization, obviously, we see hydrogen can play a meaningful role in that both in the production, but also in their distribution gas utilities incorporate that into our energy mix.
Also in terms of bringing more renewables into the province, and hook it up renewables.
Even cross ties between provinces is another great opportunity for our business.
All of that.
As we talk about our <unk> business, we do need to be mindful of the cost and the impact on customers.
Especially with rising commodity costs.
How do we present that right balance and you know for US we definitely advocate in terms of that has to be a balance we can't just ring.
Bringing renewables without understanding the impacts on our customers and how do we best do that to bring in Decarbonising energy in a way that balances progress in de carbonization with with customer affordability. So.
It's a huge topic, we could spend all morning on it to be honest and it's something that we are very focused on.
No what we try to do what can sooner or control to impact customer affordability is really driving down our costs.
To what we do on the portion of the utility Bill and certainly we've been very successful now and it's a big focus focus of ours hopefully that answers some of your question Andrew.
I appreciate that incremental color and then maybe just keeping it in Alberta, and just thinking about part of the energy transition and seeing the need for charging stations.
Just where where are your what inning are you in at this stage across your owned utility base of things that are really.
Things that you control charging stations you control versus third party stations, and where does that number ultimately land or do you think it needs to land.
Yeah, Great question in overall.
In terms of energy charge stations.
You know that hasn't it's not like it's included in our regulated rate base, that's part of the market the whole design and infrastructure.
That will evolve.
You know I think in terms of how it impacts us to extent that EV vehicles.
Take on meaningful growth here in Alberta.
That obviously, there is a need for charging stations, but but also there is a need to modernize our grid and harder grid to accommodate.
The charging of Oleds vehicles, so that that obviously can have a significant impact on the electric utilities and the existing infrastructure and.
That's something that in terms of when you look forward in terms of what we're doing in terms of capital programs and working with our regulator to say, hey, listen EV Chargers are coming electric vehicles are coming here some of the things that we need to proactively do to our grid in order to prepare for that and so we can enable.
That to happen. So I think it goes well beyond the EV stations is more over the overall design of the grid to support that.
That penetration of EV vehicles.
Okay very much appreciated thank you.
The next question comes from Matthew Weekes with I E capital markets.
Please go ahead.
Okay.
Hi, Thanks for taking my question, just wondering and you know the green fast sustainable bond market continues.
Just wondering if you can comment on kind of your read.
Financing outlook over there.
Few years here or just kind of in the near term then.
Have you looked at sort of the potential for acquired Green bonds.
And your.
Our funding portfolio.
Yeah. Thanks Matthew.
Maybe I'll start with kind of our financing expectations for 2023.
First of all we know that we have $100 million of debt maturing this year.
Yep Yep, but beyond our refined advancing requirements, we would expect to need to see additional $250 million to further fund our capital requirements for our utility growth. So based on this maybe is maybe it's at $350 million range.
In terms of sustainability green bonds.
It's something that we'll continue to look at.
Two to date again.
Continue to have strong access to demand for our product and <unk>.
What we found so far there hasn't been a meaningful difference or.
A benefit to <unk>.
On some of those green bars sustainability bonds, but that said well continue to look at it if it makes sense to do so we we have no qualms about going down that path.
Okay. Thank you appreciate the commentary I'll turn it back.
Yeah.
This concludes the question answer session I would like to turn the conference back over to Mr. Colin Jackson for any closing remarks.
Thank you Sir and thank you all for participating today. We appreciate your interest in Canadian utilities, and we look forward to speaking with you again soon.
Yeah.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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