Canadian Utilities Restricted (OTCPK:CDUAF) Q2 2022 Earnings Convention Name July 28, 2022 11:00 AM ET
Firm Contributors
Colin Jackson – SVP, Finance, Treasury, Danger & Sustainability
Brian Shkrobot – EVP and CFO
Convention Name Contributors
Mark Jarvi – CIBC Capital Markets
Andrew Kuske – Credit score Suisse
Maurice Choy – RBC Capital Markets
Operator
Thanks for standing by. That is the convention operator. Welcome to the Second Quarter 2022 Outcomes Convention Name for Canadian Utilities Restricted. As a reminder, all contributors are in listen-only mode and the convention is being recorded. After the presentation, there shall be a chance to ask questions. [Operator Instructions]
I’d now like to show the convention over to Mr. Colin Jackson, Senior Vice President, Finance, Treasury, Danger and Sustainability. Please go forward, Mr. Jackson.
Colin Jackson
Thanks. Good morning everybody. We’re happy you may be a part of us for Canadian Utilities’ second quarter 2022 convention name. With me right now is Govt Vice President and Chief Monetary Officer, Brian Shkrobot.
Brian will start right now with some opening feedback on latest firm developments, our monetary outcomes, and key tendencies impacting our companies. Following the ready remarks, we’ll take questions from the funding neighborhood.
Please be aware {that a} replay of the convention name and a transcript shall be out there on our web site at canadianutilities.com and will be discovered within the Traders part underneath the heading Occasions and Displays.
I would wish to remind you all that our remarks right now will embrace forward-looking statements which are topic to necessary dangers and uncertainties. For extra info on these dangers and uncertainties, please see the stories filed by Canadian Utilities with the Canadian Securities regulators.
And eventually, I would additionally wish to level out that in this presentation, we could check with sure non-GAAP or phase measures akin to adjusted earnings, adjusted earnings per share, and capital funding. These measures wouldn’t have any standardized that means underneath IFRS, and in consequence, they is probably not similar to comparable measures introduced in different entities.
And now, I will flip the decision over to Brian for his opening remarks.
Brian Shkrobot
Thanks, Colin and good morning everybody. Thanks all very a lot for becoming a member of us right now on our second quarter 2022 convention name. Canadian Utilities achieved adjusted earnings of $136 million or $0.51 per share within the second quarter of this 12 months. That is $21 million or $0.08 per share greater than the second quarter of final 12 months.
The $21 million year-over-year improve within the second quarter earnings was primarily pushed by robust working metrics and CPI indexing in our worldwide pure gasoline distribution enterprise in Australia.
Price efficiencies, charge base development and the timing of expenditures in our Alberta Utilities together with a powerful efficiency from our Alberta Hub asset additionally contributed to this nice year-over-year earnings development.
Going again to our Australia pure gasoline enterprise. Not solely did we see development in key working metrics, akin to gross new connections, the enterprise additionally benefited from upward strain in Australian CPI and the regulatory CPI indexing mechanism.
Much like the tendencies that we noticed within the latter a part of 2021, this upward development in CPI serves to amplify the enterprise’ robust working efficiency and drives further earnings.
At present, in-country forecasts now means that CPI may develop as a lot as 6% or doubtlessly even greater for the total 12 months. This shall be a key development to watch all through the rest of 2022.
Whereas we’re on the subject of CPI, it is value relating inflationary impacts throughout our companies. As communicated on earlier quarterly calls, our utilities have robust inflationary protections embedded of their respective regulatory regimes. However it is usually our long-held conservative monetary tenants and working experience that ensures our companies general are usually not unduly uncovered to those market dangers.
To-date, the measured strategy we take to monetary leverage, the working experience throughout our companies and our expertise managing by means of difficult monetary occasions have saved us effectively insulated towards these pressures.
This being stated, we’ll proceed to intently monitor inflationary impacts to all of our companies, and we’ll leverage the experience of our groups and long-held relationships to handle this publicity.
Shifting on to our Canadian Utilities, the robust efficiency that we noticed from our companies within the first quarter of this 12 months continued into the second quarter. Our distribution utilities continued to ship distinctive efficiency in our remaining 12 months of the present performance-based regulation cycle or PBR. The efficiencies unlocked on this PBR cycle will present ratepayers long-lasting advantages.
Now, I’ve touched on the mechanisms of PBR in prior calls. However as we transfer nearer to the tip of 2022 and the completion of our present PBR 2 time period, it is value briefly relating our expectations for the Alberta distribution utilities in 2023.
In step with the last word aim of PBR, the efficiencies that our distribution utilities unlock of their second PBR time period, they usually have been many, shall be handed on to clients beginning in 2023.
To this impact, our Alberta distribution utilities will enter a rebasing 12 months ruled by a price of service regulatory framework in 2023 earlier than beginning their third five-year PBR time period in 2024.
Now, trying again in our historical past, we have now had a powerful observe report of delivering distinctive ROE outperformance throughout the many years and underneath quite a few regulatory frameworks and constructions. This achievement that we’re very happy with, and one that’s rooted in our working experience, proceed to drive discovering efficiencies and the utilization of know-how to modernize our programs.
On prime of this experience and on account of our effectivity carryover mechanisms inside our current regulatory framework, we count on to hold ahead as a lot as 50 foundation factors of outperformance into 2023 and 2024 as a mirrored image and a reward of the distinctive work that was accomplished in a second PBR time period.
So, whereas we do count on to see earnings from our Alberta distribution utilities to reset downward for 2023 as we go on efficiencies achieved to ratepayers, we nonetheless have robust expectations for efficiency throughout our utilities.
The elements that I highlighted, mixed with the drive of all our leaders to ship top-tier efficiency has me optimistic that we are going to proceed to see outperformance in 2023.
Shifting on to LUMA Power, we proceed to see nice earnings contributions from this funding and quite a few tangible indicators that our work is enhancing the lives of individuals in Puerto Rico, bringing them nearer to having a dependable and trendy electrical energy system.
During the last 12 months of LUMA’s operations, LUMA related over 25,000 clients in web metering. That equates to 2,100 web metering installations per 30 days, an equal tie-in of 130 megawatts of renewables to the Puerto Rico electrical energy system.
The workforce has additionally executed quite a few initiatives aimed toward enhancing system reliability and decreasing outage frequency, which has declined 30% since LUMA assumed operations.
Together with the successes the workforce has seen on the protection and customer support fronts, this interprets to a protracted record of tangible and significant achievements and we definitely don’t have any intention of slowing this momentum.
Shifting on to capital, I simply need to briefly contact on the capital investments we made within the second quarter of this 12 months. The second quarter noticed us make investments $297 million in our enterprise with $244 million of this being invested in our core utilities. This ongoing utility funding ensures the continued technology of secure earnings and dependable money flows, whereas additionally driving charge base development.
In our Power Infrastructure companies, we invested a further $51 million within the quarter, a rise of $36 million from 2021. These investments have been tied to the continued power transition initiatives we launched final 12 months, which we proceed to progress.
Our three previously-mentioned photo voltaic developments; Deerfoot, Barlow, and Empress, proceed to progress ahead alongside our RNG pure gasoline alternative with future gas.
We count on to see business operation of our RNG facility and energization of our Deerfoot and Barlow tasks by the tip of this 12 months, with Empress following later within the first half of 2023.
Equally, our groups are laborious at work on each our world-scale hydrogen manufacturing challenge with Suncor and our Atlas storage hub carbon seize sequestration alternative with Suncor and Shell. I am happy to say business discussions with each Suncor and Shell are progressing very effectively on each of those tasks.
Our groups are additionally quickly advancing technical and engineering work associated to key segments of the tasks, together with our testing of cap in storage for hydrogen. And we count on to be able to offer extra info on this within the close to future.
We’re additionally working and proceed to work intently with authorities to assist form the business constructs that can govern each the hydrogen and carbon industries throughout the province and Canada extra broadly. Establishing these constructs is essential to making sure an environment friendly, efficient and financial decarbonization of our power programs.
It has been a really busy quarter on the challenge entrance, as we have moved quite a few key power transition alternatives ahead and proceed to progress our long-term technique and I sit up for offering additional updates on these necessary initiatives in upcoming quarterly calls.
Total, Canadian Utilities delivered one other nice quarter of earnings development for our shareholders, with lots of the key drivers of this earnings development prone to persist by means of the rest of this 12 months.
That concludes my ready remarks, and I will now flip the decision again to Colin.
Colin Jackson
Thanks, Brian. Within the curiosity of time, we ask that you just restrict your self to 2 questions. You probably have further questions, you’re welcome to rejoin the queue.
I’ll flip the decision again over to the convention coordinator for questions.
Query-and-Reply Session
Operator
Thanks. We’ll now start the question-and-answer session. [Operator Instructions]
The primary query comes from Mark Jarvi with CIBC Capital Markets. Please go forward.
Mark Jarvi
Thanks. Good morning everybody. First query is simply on the distribution utilities in Alberta. It looks like during the last couple of years, you had pared again your capital investments just a little bit. However clearly, they’re performing effectively, and it looks like financial exercise is first rate within the province. Are you able to simply replace us when it comes to the place you’re in your spending to the five-year interval and the place you will find yourself relative to the unique plan?
Brian Shkrobot
Sure. Thanks, Mark to your query. Sure, when it comes to the Alberta distribution utilities. Sure, our spending is in step with our plan. I believe we had some delay and a few provide chain points. However general, we proceed to count on us to ship on the identical capital plan that we had outlined.
We’ve in entrance of the fee proper now in our price of service utility a request to extend the modernization of our electrical energy system. And so relying on the approval of the regulator when it comes to these crops, it’d deal with that projection barely. However general, we’re in in step with what we outlined in our capital plan.
Mark Jarvi
Okay. Thanks. After which simply turning to Australia. Previously, you’ve got talked about totally different funding alternatives there. Are you able to replace us when it comes to the place you’re both in any type of joint bid or outlook for transmission aspect of issues, renewables? And I suppose simply urge for food for M&A in that market or for — you are actually simply targeted on natural development alternatives in Australia?
Brian Shkrobot
Sure. Thanks Mark. Sure, general, we nonetheless view Australia as an awesome alternative. So much occurring in that nation. They’re fairly proactive when it comes to the federal government entrance, supporting varied initiatives, whether or not it is hydrogen, whether or not it is pumped hydro. And definitely, we’re energetic in each of these areas.
Additionally, they’ve recognized electrical renewable zones the place we’ll be — want a transmission infrastructure, so — and a whole lot of it. So, every of these areas we’re energetic in and we’ll proceed to be energetic in.
By way of M&A, we monitor M&A alternatives. In fact, we’ll consider sure premiums which are being sought out as of late and the competitors for that sort of M&A actions. However — so we’ll be energetic on that entrance or a minimum of monitoring on that entrance, however we count on extra to return from the greenfield alternatives.
Mark Jarvi
Okay. Thanks for that Brian.
Operator
The following query comes from Andrew Kuske with Credit score Suisse. Please go forward.
Andrew Kuske
Thanks. Good morning. I suppose simply within the core market, you — actually being Alberta, how do you consider simply the present cycle we’re in from an financial standpoint versus previous cycles you’ve got seen and the way that interprets into development within the core utility base?
Brian Shkrobot
Sure. Thanks, Andrew. It is an awesome query. I’d guess I deal with it when it comes to the financial cycle. We have seen fairly a change right here and fairly a volatility within the province. You see the oil costs a 12 months in the past and then you definately see the place they’re right now simply type of as a sign of general exercise within the province and the way it may change.
However general, broadly, with the aim of decarbonization in Alberta, not simply with — and all through Canada, and being a utility that would effectively serve that want, we’re optimistic that the financial cycle will proceed on the power decarbonization entrance.
And when it comes to the owned gasoline exercise, I believe, clearly, there’s a whole lot of elements influencing that space proper now, however I believe we’ll proceed to see some excessive oil costs for a while. And I believe the province within the oil and gasoline business is dedicated to proceed on delivering worth, but in addition being aware of the decarbonization entrance.
So, general, I believe the financial cycles will proceed to be robust right here in Alberta. And I believe we have got the enterprise that might be resilient to accommodate any swing in that cycle.
Andrew Kuske
That is useful. After which possibly simply an extension. Do you get just a little little bit of the very best of each worlds to a sure diploma the place you will have bigger power firms seeking to decarbonize, whether or not it is CCUS or throughout hydrogen initiatives, and you’ve got some alternatives in that with irons within the fireplace?
After which trying forward, you’ve got received — ultimately combustion mild car gross sales shall be banned in Canada. And the way does that play in to essentially reinforcement of utility grids, EV chargers. And possibly focus simply on these — each ends of the spectrum, the larger decarb alternatives for oil and gasoline emitters, after which at a extra microscopic degree with utility charge base?
Brian Shkrobot
Sure, nice query. And definitely, the way you outlined it’s in step with our views. And sure, we’re very proud and comfortable to have the ability to help all our clients of their decarbonization objectives.
And once more, from our base in Alberta right here, each on the electrical aspect and our pure gasoline, clear fuels place, we will help them in a number of fronts. We’re definitely seeing oil and gasoline — overview — lot of recent connections and electrifying a whole lot of their elements of the enterprise, so seeing development on that entrance.
By way of the Electrical Distribution system, you touched on EVs. And the entire, I suppose, push to make use of extra electrical energy clearly has an impression on our distribution programs and the necessity to modernize and spend money on the infrastructure, not simply in Electrical Transmission, but in addition in our Electrical Distribution enterprise to help these decarbonization efforts.
So, sure, I believe we’re effectively suited, and we just like the view that we will help our clients on a number of fronts. And with that, the tempo of that shall be, fairly actually, decided by the federal government route and incentives that may pursue or, I suppose, encourage that growth.
Andrew Kuske
Okay, recognize the colour. Thanks.
Operator
[Operator Instructions]
Subsequent query comes from Maurice Choy with RBC Capital Markets. Please go forward.
Maurice Choy
Thanks and good morning. My first query is about Australia. Clearly, a really robust efficiency from the gasoline utility there. And I am making an attempt to grasp the endurance of the outcomes that you’ve over there. So, possibly simply to kick off, are you able to remind us what the sensitivity is of inflation to earnings? What number of foundation factors lower now and the way a lot you are incomes?
Brian Shkrobot
Sure. Thanks, Maurice. Sure, when it comes to Australia, as you talked about, very, very robust 12 months. As we talked about on the opening name is that we have seen a whole lot of development. We’re getting a whole lot of new connections, however most likely the biggest driver is the CPI indexing that favorably advantages our enterprise there.
And definitely, we’re seeing inflation proceed to be excessive. We noticed that finish of 2021, however though some view that it’d return again to extra regular ranges, it definitely is remaining on the greater finish.
And as a type of a rule of thumb or information, each 10 foundation factors improve in CPI inflation interprets into roughly $1 million of impression to earnings. So, that is type of some basic steerage for you.
Maurice Choy
Thanks. Perhaps as a follow-up to that. I suppose the one approach for the quantity to return down, when it comes to complete earnings to return down, you just about want a deflation state of affairs that — the place we may have 6% this 12 months, however 50% subsequent 12 months. You are most likely anticipating earnings to remain about these ranges shifting ahead.
Brian Shkrobot
Sure, I’d say, Maurice, that this has definitely heightened this 12 months in 2021 with inflation 6% or greater. I’d recommend that, and I believe the market is anticipating that CPI would return to extra regular ranges within the close to future, I believe that very same expectation was there on the finish of final 12 months, however we’re seeing just a little bit longer delay of CPI to return.
So, clearly, CPI in Australia and the world has been impacted by a whole lot of geopolitical elements proper now. And to the extent that these stabilize, we’d — once more, we’d count on, long run, the CPI to return extra to — extra regular ranges, after which clearly, our Australia earnings to regulate accordingly.
Maurice Choy
So, simply clarify, whenever you say, alter accordingly, do you imply happening or simply year-over-year development being extra regular?
Brian Shkrobot
Sure. No, we would count on the Australia pure gasoline earnings to be decrease than this 12 months to the extent that inflation is — it returns to extra regular ranges.
Maurice Choy
Understood. After which my second final query, I need to deliver it again to LUMA. Clearly, final week, you’d have seen some information about native residents taking to the streets and asking the federal government to cancel the PREPA contract of LUMA given all of the outages and charge hikes.
Is {that a} case of simply getting by means of among the rising pains for the following one or two years, and the native sentiment will get higher from right here? Or even when LUMA is profitable, is that this the type of discourse that shareholders ought to count on for the rest of 15 years?
Brian Shkrobot
Sure. Thanks for the query. This isn’t new. We have had — ever since we began in operations, there was, I’d say, organized exercise that may — towards LUMA. And that is — our view is it is really pushed by those who would profit from us not being there.
And so in the end, sure, the protesters — that protest that you just referred to got here and went. And anyway, our view is that we are going to proceed to function the system and the best way that we’re accustomed to secure and reliability when it comes to driving down outages by 30%, which I discussed.
These are the issues that can proceed to realize help for LUMA. And we do see a whole lot of help on the road and the those who we speak to. Sure, there are some organized protests. And once more, I’d simply name that noise within the general grand scheme of issues. We proceed to function our system effectively and proceed to climb on the shopper satisfaction.
So, we simply will proceed to do what we do greatest, which is to function a secure and dependable system. And over time, we count on that these protests will proceed to lower. And particularly after the final a part of the technology course of is over and the unions which are supporting these protests not have a leg to face on.
Maurice Choy
Thanks very a lot.
Operator
As there aren’t any extra questions from the cellphone traces, this concludes the question-and-answer session. I want to flip the convention again over to Mr. Colin Jackson for any closing remarks.
Colin Jackson
Thanks a lot, operator, and we thanks all for collaborating right now. We actually recognize your curiosity in Canadian Utilities and we sit up for talking with you once more quickly.
Operator
This concludes right now’s convention name. You could disconnect your traces. Thanks for collaborating and have a nice day.