Q2 2023 Canadian Utilities Limited Earnings Call

Thank you for standing by this is the conference operator.

Walk up to the second quarter 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 a question.

Joining 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 sustainability.

Please go ahead Mr. Jackson.

Thank you good morning, everyone.

I'm pleased you could join us for Canadian Utilities second quarter 2023 Conference call with me today is executive Vice President and Chief Financial Officer, Brian scrub out.

Before we move into our formal agenda I'd like to take a moment to acknowledge the numerous traditional territories and homeland, which our global facilities are located.

Today, we're speaking to you from our Alco Park head office in Calgary, which is located in the Treaty seven region.

This is the ancestral territory of the Blackfoot Confederacy comprised of the Sika Ini Abergavenny nations, the <unk> nation and the Estonian Dakota Nations that include the key bearish Pas and good Stony second nations.

The city of Calgary is also home to the maintain nation of Alberta region three.

We honor and respect the diverse history languages ceremonies and culture of indigenous people, 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 for our businesses in 2023.

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.

Gideon utilities dot com and can be found in the investors section under the heading events and presentations.

I'd like to remind you 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.

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 of segments measures 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.

As 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 second quarter 2023 conference call.

Canadian utilities achieved adjusted earnings of 100 million or <unk> 37 per share in the second quarter of this year compared to $136 million in the second quarter of last year.

As expected the impact of our Alberta distribution utilities re basing following our second successful performance based regulation cycle resulted in lower year over year earnings in the second quarter.

And it's all this free base and contributed to a year over year decline in earnings of approximately $25 million.

While significant this is certainly not unexpected in every basin year, especially with the phenomenal outperformance we achieved last year the final year of PBR two.

Looking at the rest of the year, we expect to see the earnings pressure associated with this re basing peak in the third quarter.

And in the fourth quarter, we expect season, all the benefits and our annual spending profile to create potential opportunities for year over year growth.

Overall, despite the earnings pressure from Rebase, we still believe that our full year performance for these businesses will be in line with the expectations that we've shared previously.

More specifically, we continue to believe that we will be successful in achieving outperformance largely in line with our long term historical performance.

This will limit the single year earnings decline for this year to levels largely consistent with what we experienced back in 2018 following PBR one.

Moving to our natural gas distribution business in Australia, we continue to see strong growth in key operating metrics, such as new connections and system volumes.

The in country inflation trend within Australia continues to contribute to our year over earnings pressure.

As we discussed on our first quarter conference call 2022 saw us enter the year with a full year annual inflation expectation of 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 last year, but more importantly, an earnings profile that built beginning in Q2 of 2022 and rapidly progressed throughout the year.

As a result of this trend in the prior year, our second year, our second quarter 2022 earnings were exceptionally strong, creating a comparable that is difficult to compete with as 2023 inflation levels begin to moderate.

This trend resulted in us reporting a year over year decline of 5 million for this business in the quarter.

Similar to what we saw in our second quarter results. We expect to see continued pressure in Q3, and Q4 related to the CPI trend and for it to push full year results lower than last year.

For added color when we spoke following our first quarter call in country estimates for suggesting full year inflation in Australia to be between 4% to 5%.

While we continue to believe that this is an appropriate expectation, but do you see signs to suggest that inflation may trend closer to the 5% end of this range would be slower to seed than previously expected.

Moving onto our electric generation business, we continue to see strong earnings contributions from our existing assets and those that we've acquired earlier this year.

Along with our 40 mile wind at Adelaide assets performing in line with expectations operationally. We also saw earnings benefit from a strong Alberta merchant power pricing.

This pricing strength helped offset lower than normal wind levels in Alberta during that quarter.

As a reminder, our long term power purchase agreement for 40 mile Wind did not come into effect until July 1st of this year, which allowed us to capture the strong merchant market trends in the quarter.

Before diving into our capital investments I just wanted to touch on the recent wildfire activity Alberto.

Despite significant wildfire activity this year, our businesses have been successful in limiting customer outages and avoided any safety incidents related to these events.

My Sincerest Seer appreciation goes out to all our employees, who worked so tirelessly to restore service and to support first responders.

With wildfire activity, Alberta slowing significantly since its peak earlier in the second quarter. Our teams continue to remain focused on the restoration efforts.

And we do not expect to see any negative impact to earnings as a result of these events.

Moving onto capital I, just wanted to briefly touch on the capital investments we made in the second quarter.

The second quarter saw us invest $336 million in our business with $287 million of this spending being within our existing utilities.

This ongoing utility investments ensure the continued generation of stable earnings and reliable cash flows while also driving rate base growth.

The remaining capital was primarily related to our ongoing renewable generation initiatives and the second quarter sauce achieved full commercial operation at our Barlow solar generation facility.

We continue to push closer to completion of our previously announced dear foot than ever solar developments and expect commercial operation of these facilities this year.

We've also seen great progress in advancing numerous projects within our acquired renewables development pipeline and expect the upgrading of our 40 mile wind asset depleted by year end.

Overall, the second quarter was a key inflection point in this rebase in year. The earnings pressures, we expected related to re basing and Australia inflation became more pronounced than they were in the first quarter as offsetting seasonality and timing impacts fade.

That being said re basing is something that we've dealt with before and it's a key part of the PBR framework we.

We remain focused on driving exceptional results for our shareholders and position our business to maximize growth and earnings as we exit this key regulatory transition period.

I look forward to providing further updates on the progress of our numerous growth initiatives as the year progresses.

That concludes my prepared remarks, now I'll turn the call back to Colin.

Thank you, Brian and the interest of time, we ask you to limit yourself to two questions.

You have additional questions you're welcome to rejoin the queue.

As most of you know the Atco Q2 call immediately follows this and I'd like to just note that Katie Patrick Executive Vice President Chief Financial Officer, and investment Officer has joined us in the room.

I will turn it back to the conference operator now for questions.

Thank you we will now begin the question answer session to join the question you May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request.

If you were using a speakerphone please pick up your handset before pressing any keys.

To withdraw from the question queue. Please press star and two.

Once again anyone on the conference call, who wishes to ask a question press star one at this time.

Our first question comes from Linda <unk> with TD Securities.

Please go ahead.

Thank you I'm just wondering in terms of your.

P. B R. Reopener that was triggered for 2022, your electrical and natural gas distribution utilities I'm wondering what the process for resolving it what is the range of possible outcomes and what informs management's confidence, but you don't expect any adjustment.

Hi, Linda Thanks for your question.

Yeah, I guess, maybe just to start off on June 30th of this year. The AUC initiated a proceeding for both our electric distribution and natural gas.

As a as a reopener clause was triggered for both of our utilities and the final year of the PBR program and I, just kind of highlights the exceptional outperformance that we were able to generate.

Through the throughout the PBR term, but more significantly in the last last year.

So.

In this proceeding the AUC, but determined whether a reopening or potential adjustment to.

Two our 2018 of 22 plants are required.

And really at the heart of this assessment is whether the outperformance achieved was due to a malfunction or a design error in the PBR framework.

As opposed to the strong management of the underlying utilities.

And so this is not new for US we we experienced the same reopener proceeding at the end of the first PBR term in <unk>.

We view that we will be successful given you know that we truly believe and we can demonstrate that it's really response of management actions and not a design flaw in the plan.

And part of that is that you can look at the all the other utilities were all under the same program same plan and none of them have reopened. So so we fully expect as we go throughout this proceeding will be able to demonstrate that and don't expect any I.

I guess negative impact or adjustment as a result of that proceeding.

Thank you that's very helpful context, and maybe just as a follow up in terms of more broadly at our utilities.

<unk> framework.

Our recent mandate letter for Alberta Minister of affordability and utilities are contained to bullet about lowering a transfer.

Transmission and distribution costs and some other elements that could potentially impact your company.

How do you think the government might achieve and what might be the financial impact if any on your utilities.

And if you have any other perspectives on this mandate letter we'd appreciate it.

Yes. Thanks for the question Linda Yeah in terms of obviously affordability is top of mind of.

Of all our customers in all burdens end and.

Certainly it's top of mind for our company as we conduct ourselves in.

As the terms of the mandate letter, we fully expect to be in active conversations with the government and we have been and.

You know the first thing I'd note is.

And the government has acknowledged us we're the only utility in the province that actually saw a rate reduction in 2023 are meaningful rate reduction and Thats. The best thing. We can do is continue to operate our utilities as officially as possible and then pass all those savings to customers.

We'll also be looking at I know, they're going to review the AUC EMEA, So and Theres definitely I guess opportunities for savings.

The savings to be had across the utility sector.

And in terms some of their capital is appointment some of the policies investment criteria.

So I think well it's early days, we will be active in those discussions, but we don't anticipate any negative impact to our business are the government is in a regulator has been.

Very firm in upholding the regulatory construct which is a very positive thing and we expect that to continue.

Thank you I'll jump back in the queue.

The next question comes from Rob Hope with Scotiabank.

Please go ahead.

Good morning, everyone.

In the MD&A there was some commentary on the newly rebranded and power are potentially.

Reviewing financial alternatives that include a spin out.

The I guess the renewable power business.

Can you maybe talk to some of the.

Thinking behind the financial review here is the growth here too large of a handle on the balance sheet or do you think it's not being properly valued inside of <unk> you.

Yeah. Thanks, Rob.

Well first of all I think it's important to emphasize that we certainly haven't made any definitive decisions than they were simply just exploring examining all options.

As you've kind of heard us speak about previously we continue to see significant opportunities for growth in connection with the energy transition include.

Including existing and new opportunities in both our newly branded Atco Energy systems and act when power.

So, although we've kind of historically relied on whether it's cash from operations recycling of capital partnerships and debt issues to fund our growth and it certainly has served us well to date, but as we look ahead. However, we recognize the future growth is likely require capital and financing beyond the traditional sources.

Utilized so as a result of this and the attention up just being transparent within the market, we have announced our intention to explore all means of financing and including the potential creation of a separate separate entity. So our tests over a couple of upcoming months was to gather feedback from investors partners.

And other stakeholders to help inform our planning going forward to ensure that we're making the best decisions and once we've completed that assessment and a review of the various options, we'll certainly disclose any material decisions.

As with all of her decision we make we evaluate these opportunities through the lens of shareholder value creation, and long term growth and stability of our businesses. So you know for example, a separate entity a transaction of this nature would only be pursued if we saw clear signs of it being financially accretive.

Initial to shareholders and in the best interest of all entities within our group as we look to position our business for long term growth and stability.

I appreciate that.

And then just maybe in terms of the outlook for growth I should take a look at the backlog of renewable power projects.

Can you maybe update us on you know, which ones are percolating to the top.

And whether any progress has been made on the Alberta development projects or the Australia Heidrick consulting.

Yeah, great great. Thanks for the question Rob Yeah in terms of we are like I mentioned in my opening remarks, we're continuing to make some really good progress.

And the Barlow coming fully commercial operational and dear foot at Empress projects or are progressing well and that combined will have.

Capacity of 100 over 100 megawatts.

We're also working on our upgrading of our 40 mile wind assets and add an additional 20 megawatts and we expect that by the end of the year.

And the next kind of item in the Delta pipeline that we're actively working on and making progress as our 40 mile Solar project, which will add an additional 220 megawatts.

Of of solar production, So I guess long story short as all of our development pipeline is progressing well on all fronts, we're happy with the progress.

We're being proactive with supply chain and make sure that materials are ready when we need it and yup.

Yep.

Consumers continue to see a healthy pipeline of growth there.

Thank you I'll hop back in the queue.

The next question comes from Maurice Choy with RBC capital markets. Please go ahead.

Thanks, and good morning, I'm can I just follow up on discussion about go empower and separating potentially separating that.

Separate entity, you mentioned that any transaction needs to be to have clear sign so.

Actually accretive.

I assume by this you mean EPS and if so can you also talk to how.

You might size to with respect to that.

The mix between utilities and nonregulated.

Cash flows or earnings what are you Godfrey I was over there.

Yeah. Thanks Louise for the question and you know as I previously mentioned certainly we're at the very early stages and just exploring all options and so we haven't really defined it completely what that would look like but generally we would expect just like our branding we'd have no unregulated businesses and.

And our new branded.

At Cowen power, and then their regulator gas, new electric utilities and their actual energy.

Systems. So you know I think it's just too preliminary at this stage lengths to kind of get into that detail because we're at the very beginning stages.

And when we get a little bit further down the path and come up with some of that analysis, where it will for freely share that with you.

Understood.

I guess.

You know as you think about what obviously this is very early stage, but.

What have you ruled out in terms of.

Options to finance this growth because obviously today you are announcing.

And power are not the non Reg business.

Contemplated it possibly taking a.

Minority stake sale in your regulated business is that something you would consider or maintaining a majority of them, 90% stake in utilities versus 10%.

Is that important.

Part of that decision.

I guess, maybe just kind of I'll restate or is that in a world where exploit all options like we certainly have ample cash on our balance sheet continue to have access to debt and equity markets and just.

We're just kind of came out and just to continue to reiterate that we're exploring various alternatives like partnerships asset sales and even potentially the creation of a separate Ashland power entity. So we continue to explore a variety of those options to to support our growth and add value to shareholders.

You know in terms of kind of the growth that we've kind of gave some.

Some guidance in the past we continue to believe that the non rate portion of our growth could.

At the end of the day represent potentially a 20% of portion of our business. So the structure and makeup of our businesses going forward.

We don't expect to change from that guidance that we gave.

Got it that makes sense and maybe if I could.

Ask about your growth Capex expectations for your energy infrastructure business.

Next three years I know that just started a year.

You had around $800 million of Capex for 'twenty, three 'twenty five but its unclear to me what projects are included in there maybe you could just speak to that.

Sure. Thanks, So yeah in terms of our kind of our capital spend and we've kind of I've already talked about we're progressing a number of our solar initiatives for the severe foot bar low end breast projects.

We also are progressing or 40 miles solar which setting that is still 2200 20 megawatts.

And then on top of that we have that one five gigawatt pipeline theirs.

We continue to progress and that would be cause a 40 mile phase two so those are kind of like the sanction projects that we got going now obviously more in the pipeline, we've talked about hydrogen being potentially a significant investment area, that's kind of not in those base numbers.

But obviously has the potential to be significant.

Yeah.

And just to clarify I am going to assume that the central West pumped hydro was not in there notwithstanding the.

All tests our results a couple of months ago.

Yeah, I think in terms of the the central West project.

You know for that project currently since we did not get the Hell tests. We're currently on hold right now all we continue to work with the government to gather support for that project and we.

<unk> truly believe that.

Large scale commercial green hydrogen.

Facility or solar or sorry, sorry.

Storage.

<unk> will be needed and.

It makes a lot of sense for Australia. So to date, we haven't been successful in getting El tests up, but we will be other rounds and will continue to explore with the government alternative funding arrangements.

We've been successful securing the $9 million grant funding for the New South Wales related to this project. So I guess, we'll continue.

Continue to give you updates as that progresses.

Great. Thank you very much.

The next question comes from Ben Pham with BMO. Please.

Please go ahead.

Yeah.

I think sac right.

A quick follow up.

The rebranding.

Rebranding is is that just simply a rebranding or is there something some movement in.

Legal structure or just just how.

As he used randos those two businesses in terms of <unk>.

Responsibilities and kind of allocation.

Yes, Thanks, Ben for the question.

So in terms of rationale as we look to shape the future of Canadian utilities, while continuing to deliver the long term value for our customers and shareholders. We recognize there's a unique opportunities in dynamics between both our nonregulated businesses and our electric and gas utilities. So.

J S and the fact that each of these businesses are pursuing their own distinct growth strategies and excelling in their respective markets. We embarked on the accretion of this brand new of <unk> energy systems inaccurate empower brands to create market distinction for each segment.

We believe that this brand evolution will bring greater strategic focus to the two businesses and we believe it creates greater organizational alignment to enable both echo energy systems and empower to realize their exciting growth trajectory. So nothing more than that at this stage.

I gotcha, and and it sounds like you'll have a decision for.

But the market sometime later this year I think that was my read from your commentary.

In terms of are you, referring them to the evaluation of various financial options does that Oh.

Exactly it sounds like it's that's our early stage now revealing things are getting feedback do you have a sense of when this will be all done.

Yeah, I think well continue to complete the review for the rest of the year and again the decision might be nothing.

Of course, so you.

You know I think we'd give updates as we go and I'm sure you'll ask US. The same question in our Q3 call and yearend call and well be happy to give you an update of where we're at.

Okay.

Got it and maybe last time.

Australia with.

Following up on your access arrangement is there.

I mean, I get the whole CPI situation and rebates, but how how do we think about really just maybe.

More broader bigger changes into that acts the range from our Freebasing end.

He is probably moving up the allowed ROE is that.

Is it just as simple as a flow through is there more bigger impacts we can see Barry.

Yeah, No I think a great question.

In terms of the access arrangement, we've been active in that process for some time and I think for the biggest impact is we won't get them higher allowed ROE under the a six than what was we received under the 85, which is obviously great in terms of earnings and from.

Cash perspective, so that's probably the biggest.

Part of what to expect under the new access arrangements and obviously, we put a lot of work to make sure that our our de carbonization programs in and various capital activity that we're doing to support our customers.

We will get approved as part of this access arrangement.

So you know that that's kind of the key focus making sure that we had does the framework supports the treatment of our of our ESG goals, enabling hydrogen blending and make sure that keeps long term options to de carbonization trends available to us in part about submission so.

Aro <unk> is probably again the biggest thing to expect from the outcome of this proceeding.

Okay I got it thank you.

Once again, if you have a question. Please press Star then one.

The next question comes from Mark Jarvi with CIBC.

Go ahead.

Yeah. Thanks, Good morning, I wanted to turn to the disclosure where it's in the MD&A about suncor withdrawing from the hydrogen a project.

Maybe you can't speak for them, but it kind of means for you guys. How much would you be willing to shoulder yourself, what do you need to bring another partner and I guess.

Does that factor in at all in terms of what you're reviewing in terms of the empower options.

Yeah. Thanks for the question So you know.

As we kind of stayed at the MD&A and I'll state today, we remain committed to our hydrogen project.

And continue to move forward the development of that project going forward.

And certainly with the project as states get potential supply hydrogen to domestic and international markets, including the Alberta gas grid industrial municipal and this poll and commercial transportation users. So you know as.

We kind of noted in our MD&A that subsequent to our quarter that Suncor energy Ed provided noticed an attention to withdraw.

So again just to reiterate this is definitely has not changed our commitment to hydrogen project.

Nor is it a tour ongoing Atlas.

Carbon capture projects as well so.

You know in terms of progress going forward in our commitment.

We're in discussions with other hydrogen off takers.

The value chain and continue to believe that there's demand in the local market that exceeds a facility capacity even without the previously contemplated offtake from Suncorp.

With that I'll Smit.

We are also in active discussions I'll mention that we're in active discussions with other operating partners.

We're also heavily involved in discussions with the governments and even as late as last week. We have received some continued to receive some great support for the project. So overall still progressing forward very committed in terms of the overall size tranche.

Don't think that will be materially different obviously, if it goes the volumes that we're expecting partnerships will likely be expected, but again, it's still going to be a meaningful project for like in terms of our stake, but you know obviously, we're working continue to work with government off takers trying to get the.

Regulatory certainty and governments are there some of the policies decisions. So obviously still early days, but the progress on this project is definitely proceeding we've completed the D. B armed phase of the project and are now evaluating progress to the next phase which is the feed.

Hopefully that answers your question, yes, so just to clarify Brian She said, bringing in operating partners, but he also said sizing. It. So just do you think that in those operating partners, who would be also shoulder some of the capex and the equity investment as well right. So your total commitment wouldn't necessarily change relative to what you would assume 612 months ago.

That's correct and you know what the dust settles and that's what we expect yes, we expect our pretty part is to have our equity stake inside.

And ensure that we have the right balance between all parties and there are investment for what we're planning to take on so yeah, although there'll be some change to that overall partnerships. We don't think that would be materially different than what we call. It to play to go in.

Got it and in terms of the cost of capital proceeding 'twenty 'twenty four it seems like maybe increasingly moving towards a formula for that.

Updated views in terms of when we'll have clarity on that and then.

What comes with that as well in terms of I don't know review of earning sharing mechanisms criteria for re openers does that all fall in the same proceeding or is there a separate sort of proceeding and how to kick off Reynolds other elements.

Yeah, Great Great question and.

Yeah in terms of kind of update we've kind of completed our.

Our hearings were kind of waiting the decision interesting enough there was quite a bit discussion.

On a formula and the commission came out and and signal there, they're definitely not set on having a formula. So I guess, that's what I'd say, that's a certainty if anything that's it's itself, but the air whether or not the commission will go with a firm that they might instead arrive at our 2024 generic cost of capital.

But we'll need to weigh that against kind of a regulatory burden of continuous kind of generic cost of capital proceedings.

In terms of kind of the earning sharing that should come out as part of that decision as well.

And I guess, we'll wait the outcome of where the commission labs.

In terms of timeline when do you think you'll have clarity.

Yeah, I think the decision is expected to be in October of this year.

Okay, great. Thanks.

Once again, if you have a question. Please press Star then one.

As there are no additional questions. 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 so much for Ace and thank you all for participating today. We appreciate your interest in Canadian utilities, and we will look forward to speaking with you again soon.

This concludes today's conference call you may disconnect your lines.

Thank you for participating and have a pleasant day.

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