Canadian Utilities Limited

Thank you for standing by. This is the conference operator. Welcome to the third 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 questions. 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. I would now like to turn the conference over to Mr. Lawrence Gramson, Director, Corporate Finance. Please go ahead, Mr. Gramson.

Thank you. Good morning, everyone. We're pleased you could join us for Canadian Utilities' third quarter 2023 conference call. With me today is Canadian Utilities' Executive Vice President and Chief Financial Officer, Brian Skrobot. as well as ACCO NPower Chief Operating Officer Bob Miles and ACCO Energy Systems Chief Operating Officer Wayne Stensby. Before we move into our formal agenda, I would like to take a moment to acknowledge the numerous traditional territories and homelands on which our global facilities are located. Today, we are speaking to you from our ACCO Park head office in Calgary, which is located in the Treaty 7 region. This is the ancestral territory of the Blackfoot Confederacy, comprised of the Siksika, Kainai, and Pekanee Nations, the Chutina Nation, and the Stoney Nakoda Nations that include the Chinooki, Bearspaw, and Good Stoney First Nations. The City of Calgary is also home to the Métis Nation of Alberta, Region 3. We honour and respect the diverse history, languages, ceremonies, and culture of the Indigenous peoples who call these areas home. Brian will begin today with some opening comments on our financial results and recent company developments, including regulatory decisions. Following these prepared remarks, Brian, Bob and Wayne will take questions from the investment community. Please note that a replay of the conference call, a short supplementary presentation and a transcript will be available on our website at canadianutilities.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 of segment measures, adjusted earnings, adjusted earnings per share, and capital investment. These measures do not have a standardized meaning under IFRS, 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 Lawrence and good morning everyone. Thank you all very much for joining us today for third quarter 2023 conference call. Canadian utilities achieved adjusted earnings of 87 million or 32 cents per share in the third quarter of this year compared to 120 million in the third quarter of last year. As you know, we concluded a successful second cycle performance based regulation in our Alberta distribution utilities in 2022. 2023 is a single cost of service rebasing year, and in 2024, we will start the third cycle of performance-based regulation with final rebase rates. Performance-based regulation facilitates affordability, which is important to the long-term sustainability of the business, as the savings and efficiencies generated in the second PBR cycle are returned to customers through the rebasing process. As expected, the impact of our Alberta distribution utilities rebasing resulted in lower year-over-year earnings in the third quarter. On its own, this rebasing contributed to a year-over-year decline in earnings of approximately $17 million. This is a significant impact to 2023 earnings, but for anyone who has listened to our conference calls throughout last year and this year, this is not an expected trend. It is a direct result of the exceptional performance that we drove throughout our second PBR cycle and the savings and efficiencies that are now being returned to customers. As our utility teams continue to work hard to find new efficiencies and drive down costs, we expect to see the earnings pressure associated with this rebasing begin to soften in the fourth quarter of this year. Looking ahead to 2024 and beyond within our Alberta utility businesses, I want to briefly touch on two key regulatory decisions that received earlier this month. First, the Alberta Utilities Commission, or AUC, released the parameters for Alberta's third performance-based regulation cycle, or PBR3 for short, which will be the framework in which our Alberta distribution utilities operate for the period between 2024 and 2028. Included in our MD&A for this quarter is a detailed breakdown of the differences and similarities between PBR3 and our outgoing PBR2 framework. At a high level, while PBR3 does include a tiered urinary sharing mechanism, we continue to believe that this framework would create opportunities for us to deliver strong outperformance and growth throughout the term. And importantly, This framework allows us to make investments needed to drive both efficiencies and long-term stability for our energy distribution systems in the province. Also in October, the AUC delivered its decision on the Generic Cost of Capital, or GCOC for short, and the parameters for 2024 and beyond. As was signaled throughout the year, the Commission has adopted the use of a formula for setting ROE, and this decision also reaffirmed equity thickness set at 37% for the Alberta utilities. The established formula for ROE utilizes a base rate of 9% and takes into account two variables to adjust this base rate. First, the changes in 30-year Government of Canada bond yields and changes in utility spreads. The Commission will update the RWE annually and issue the following year's RWE in November of the current year. Now, while the final 2024 RWE will still not be known until November of this year, current market data suggests an RWE in the range of 9 to 9.2%, up from the current rate of 8.5%. Now, as we begin to operate under these new frameworks in 2024, We'll continue to apply the ownership principles that we have historically used to drive efficiencies and operational excellence across our businesses, and we expect this to drive continual outperforms and growth for our business. Importantly, the receipt of both these critical regulatory decisions well in advance of their respective operating years further reinforces the strides we've seen in reducing regulatory lag in the province and providing prospectivity. Moving on to our natural gas distribution business in Australia, we continue to see strong growth in key operating metrics such as new connections, tariff rates, and system volumes. The narrative for this business, however, remains focused on Australia's in-country inflation profile, which continues to attribute to a year-over-year earnings pressure. As we alluded to in our second quarter 2023 conference call, It is important to remember that inflation in 2022 built rapidly in the second half of last year, with full-year inflation reaching almost 8% by the year-end of 2022. As a result of this building profile in the prior year, our third quarter 2022 earnings were exceptionally strong, creating a comparable that is difficult to compete with in 2023 as inflation levels begin to moderate. This trend resulted in us reporting year-over-year decline of $8 million for this business in the quarter. Similar to the messaging we delivered throughout this year, we continue to expect Q4 and full-year earnings for this business to be lower than 2022 as the CPI trend continues to moderate in Australia. For added context, in-country estimates continue to suggest full-year inflation in australia between four to five percent which is consistent with the in-market estimates from last quarter now before i move on to our aqua and power businesses i want to briefly touch on the capital investments we made in the third quarter the third quarter saw us invest 331 million in our business with 307 million of the spending being within our existing utilities This ongoing utility investment ensures a continued generation of stable earnings and reliable cash flows while also driving sustainable rate-based growth. The remaining capital was primarily related to our ongoing renewable generation initiatives at ACCO Empower. Moving on to ACCO Empower business, we delivered adjusted earnings of $9 million compared to $12 million for the same period last year. While our newly required and recently completed renewable assets contributed to earnings lower demand in our natural gas storage business, timing of costs and seasonally low wind output pressured earnings. As we continue to drive the numerous development processes already underway to completion and these assets begin to contribute additional earnings, we're confident that the earnings power of these assets will become more pronounced. Now moving to the development side of the discussion, it's been a busy quarter, and one highlighted by the creation and formalization of a number of key strategic partnerships that are paramount for us advancing growth strategy. In September, we announced our partnership with the Chinooki and Kidstonie First Nations, which saw them become joint owners of the Deerfoot and Barlow solar facilities. Nurturing Indigenous partnerships that promote social and economic development has long been a hallmark of our method of operating, and we're proud to announce this agreement with our new partners. The Deerfoot and Barlow solar facilities are some of the largest solar installations in an urban setting in Western Canada, and I'm proud to say that our Barlow facility achieved full commercial operations in the second quarter of this year. And we expect our Deerfoot project to achieve the same in the fourth quarter of this year. This month, we also announced a virtual power purchase agreement with Lafarge Canada, which will see them receive 100% of the energy produced at our Empress Solar facility. Again, we are proud to be at the forefront of the energy transition and providing solutions to help customers like Lafarge reduce their own carbon emissions, and it remains a key priority for us in our growth strategy. Agreements like this also align with our target of having approximately 75% of the renewable generation portfolio contracted under long-term agreements with high-quality counterparties. This portfolio view to contractiveness helps ensure a stable and secure cash flow stream for the long term, while ensuring we obtain the needed flexibility to maximize value within the portfolio and to capture near-term economics benefits as they arise. For our Empress project, we expect to achieve full commercial operations in the fourth quarter of this year. Looking ahead to our development pipeline, I think it's also valuable to briefly touch on the AUC's decision to pause approvals for the new renewable electricity generation projects until February of next year. First and foremost, this announcement does not impact our projects under construction. which are the upgrading of the 40-mile wind asset or the near-term development of our 40-mile solar project. For our renewables development pipeline more broadly, we continue to progress our near-term projects and our development pipelines did not contemplate a need to file any new AUC applications in advance of the expected lifting of this moratorium in February next year. We also continue to be focused on developing the 40-mile solar project, and we do not expect project delays related to this government pause. I would say that throughout this process, we've been working collaboratively with the AUC to ensure that the importance of developing these assets for the benefit of our province and its decarbonization goals is well understood. Finally, we remain committed to our hydrogen project within Alberta's industrial heartland and continue to move development of that project forward. Since last quarter, we've actively re-engaged discussions with both financial and strategic partners, along with the off-takers that are key to underwriting the business case on a project of this scale. We continue to believe that demand of this area exceeds the facility capacity. These negotiations are in advanced stages and we expect to be able to provide further clarity on timing and next steps in the coming months. Now on the topic of hydrogen, earlier this week it was also announced that our ACCO Australia business was named a preferred partner in the delivery of the South Australian government's hydrogen jobs plan. Under this plan, we'll work as part of a consortium with our partner to deliver a strategy and development program for a 250 megawatt hydrogen production facility, along with a 200 megawatt hydrogen-fueled electricity generation facility and related hydrogen storage. While this project is in its early days, projects like this further cement our global hydrogen strategy and our position as leaders in the global transition to a cleaner energy. So summing up overall, our third quarter results were in line with our expectations for a rebasing year. The earnings pressures that we expected related to rebasing and Australian inflation were evident in the quarter, but we expected this rebasing pressure to begin to ease in the fourth quarter. Now looking again ahead to 2024, our Alberta utilities now have prospectively, following the regulatory decisions on PBR3, and the GCOC that was received earlier this month. As I said in the past, no matter what the regulatory environment we operate in, we remain focused on driving exceptional results for all shareholders and positioning our businesses to maximize sustainable growth and earnings. I look forward to sharing our full 2023 performance and providing further updates on the progress of our numerous growth initiatives on our next call in early 2024. Now that concludes my prepared remarks, but before we open the call to questions from the analyst community, I just want to give everyone a chance to hear from both Bob Miles on our Aqua and Power business and Wayne Stansby on our Aqua Energy Systems business. Bob, the Aqua and Power business has made numerous strides in 2023 towards the achievement of its renewable generation and clean fuels growth objectives. In light of this progress, could you comment on the growth you're seeing in the business and where you expect things to go from in the near term?