Thank you for standing by. This is the conference operator. Welcome to the ATCO Ltd. Second Quarter 2023 Results Conference Call and Webcast. 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 questioning 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 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. We're pleased you could join us for ATCO's second quarter 2023 conference call. With me today is Executive Vice President and Chief Financial and Investment Officer, Katie Patrick. 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're speaking to you from our ATCO 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 Siksika, Kainai, and Piikani Nations, the Tsuut'ina Nation, and the Stoney Nakoda Nations that include the Chiniki, Bearspaw, and Goodstoney First Nations. The City of Calgary is also home to the Métis Nation of Alberta, Region 3.
We honor and respect the diverse history, languages, ceremonies, and culture of the Indigenous Peoples who call these areas home. Katie will begin today with some opening comments on recent company developments and our financial results. Following these prepared remarks, we will take questions from the investment community. Please note that a replay of the conference call and the transcript will be available on our website at atco.com and can be found in the Investors section under the heading Events & Presentations. I'd like to remind you all that our remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reports filed by ATCO with the Canadian securities regulators.
Finally, I'd 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 any standardized meaning under IFRS, and as a result, they may not be comparable to similar measures presented in other entities. Now I'll turn the call over to Katie for her opening remarks.
Thanks, Colin. Good morning, everyone. Thank you all very much for joining us today for our Second Quarter 2023 Conference Call. ATCO achieved adjusted earnings of CAD 87 million or CAD 0.77 per share in the second quarter of this year. While this is slightly down on a year-over-year basis, these results really highlight the benefits of our diversified portfolio of investments. This diversification allowed us to partially offset the downwards earnings pressure associated with the Alberta Distribution Utilities rebasing, where the phenomenal outperformance in recent years is being shared with our customers. When we look more specifically at where these offsetting earnings came from, we see that our results were driven by exceptional growth from our Structures & Logistics business, combined with great performance across our broader portfolio of investments.
Collectively, the performance of our investments outside of Canadian Utilities served to offset approximately CAD 15 million of earnings pressure for the quarter. At ATCO Structures & Logistics, we delivered adjusted earnings of CAD 26 million in the quarter, CAD 7 million higher than the same period last year. Continuing the trend from previous quarters, a key driver of our earnings growth in the second quarter was the strong performance of our base businesses. Both our Space Rentals business and our newly acquired Triple M Housing division delivered exceptional results in the period. Compared to the second quarter of 2022, we grew our space rental fleet size by 13% and our average rental rate by 14%, all while achieving an average utilization rate of 75%.
Moving on to Triple M, the business continued its strong positive earnings momentum from the first quarter into the second and is integrating well into our existing Structures business. We continue to believe this integration will allow for opportunities to incorporate various manufacturing process efficiencies, as well as unlocking potential customer synergies across our businesses. During the quarter, we also reached substantial completion of the Bechtel-led Pluto Train 2 project. This project was a significant driver of project-based earnings for us over the last year and highlights our continued ability to successfully execute large-scale, multifaceted workforce housing projects globally. I'm also very proud to say that this project was completed approximately four months ahead of schedule, an amazing feat given the current economic and supply chain environment.
Our plan to grow our base business globally continues to take form, and we have had success securing new contracts as well as supplemental additions to existing contracts. This included the previously announced 116-unit project in Texas with TIC, where we were recently awarded a contract for an additional 31 units by the company. The US market represents a strong, repeatable growth platform, and we look forward to increasing our presence in this jurisdiction. As I've mentioned in the past, our base business typically accounts for two-thirds to three-quarters of our segment earnings. The strong performance from these base earnings at Structures offset the project-based earnings pressure we experienced at Frontec in the quarter. The team at Frontec continues to be active in pursuing new contracts to support earnings moving forward.
Particularly, we see opportunities in the defense and government spaces, where our deep Indigenous relationships can be leveraged alongside our core remote services expertise. At Neltume Ports, the business continues to deliver stable and dependable earnings. During the quarter, the business increased its ownership at Puerto Angamos and Terminal Guaymas del Norte from 40% to 50%, helping to expand our earnings base moving forward. Favorable foreign exchange impacts also served to push second quarter adjusted earnings higher when compared to 2022. As expected, our Canadian Utilities investment saw adjusted earnings decline by approximately CAD 19 million when compared to the second quarter of 2022. This decline was primarily due to the impact of rebasing at our Alberta distribution utilities, which I previously have mentioned.
This rebasing pressure was compounded by year-over-year earnings pressure in the Australian Natural Gas Distribution business, as inflation levels began to recede from 2022 highs. As Brian spoke about Canadian Utilities in detail on this morning's CU earnings call, I won't go into those details again here. I would, however, highlight how the expected performance for CU will impact the remainder of 2023 for ATCO. Looking ahead to the second half of 2023, we still expect to see year-over-year earnings pressure at ATCO in the third quarter, driven by the same rebasing forces we are seeing this quarter. By the fourth quarter, however, we expect this pressure to ease for CU. Seasonal benefits and growth within our non-regulated businesses at CU, combined with growth at our remaining portfolio of investments, should provide opportunities for continued growth year-over-year.
Overall, ATCO delivered a second quarter that was in line with our expectations and highlighted the strength of our diversified portfolio. Our non-CU investments delivered strong results that helped soften the earnings impact of rebasing and a downward trending Australian inflation. Although these headwinds are expected to continue through the remainder of the year, we continue to be proactive across our portfolio to deliver long-term shareowner value during this key transition year at our largest investment, Canadian Utilities. That concludes my prepared remarks. I will now turn the call back to Colin.
Thank you, Katie. In the interest of time, we ask that you limit yourself to two questions. If you have additional questions, you are welcome to rejoin the queue. I will turn it over to the conference coordinator now for questions.
Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw from the question queue, please press star, then 2. Once again, anyone on the conference call who wishes to ask a question may press star 1 at this time. The first question comes from Maurice Choy with RBC Capital Markets. Please go ahead.
Thank you, and good morning. My first question is just to follow up on the themes from the CU call, specifically, the potential ATCO EnPower separation, and a comment that was made that CU is open to selling assets. It sounds like that doesn't preclude selling regulated utility assets. From ATCO's portfolio standpoint and your position as a controlling shareholder of CU, how should we view your guardrails with regards to regulated utility and non-regulated earnings?
Thanks, Maurice. That's a great question. Thanks for that question. You know, ATCO really values the stability of the earnings and the cash flows that we receive from our regulated utilities business. Going forward, that is something that will continue to be a very significant portion of our portfolio. You know, as we think about, I think Brian mentioned, sort of the consideration that at a CU level, we would expect maybe earnings to grow to 20% from the non-regulated side. As I said, I think we, you know, we continue to value the stability of those utilities. When we do talk about capital recycling alternatives, you know, those would be probably more at the margin rather than a significant recycling opportunity within the utilities.
just to be clear, those recycling options at the margin, does that include, utility assets?
Sorry, could you repeat the back part of that question, Maurice?
You mentioned that any capital recycling that you do is on the margin. Just to be clear, does that include selling utility assets?
Yeah, no, as Brian mentioned, we're exploring all options at this point, but I would say, as I said before, ATCO, as a shareholder, really values the stability of those earnings and cash flows from the utilities. You know, long term, I don't expect our portfolio to deviate meaningfully from that 80/20 split that Brian had mentioned.
Got it. Then just, staying with the theme of funding, you know, obviously, CU is seeking funding options to fund its growth, and intuitively, I would think that equity raise at the CU level remains on the table. Can you speak to ATCO's range of options to raise funds to support CU, including, you know, of these options, what is your pecking order?
Sure. No, I mean, you know, we will, we have been a long-term shareholder in CU. We intend to maintain a similar ownership stake as a meaningful owner of CU. ATCO has ample access to liquidity through the debt capital markets, through various different financing alternatives at the ATCO level. As we look forward, you know, we probably, we'll look at the comparison between the cost of capital of all of our alternatives, but we maintain a very strong balance sheet at a standalone basis, at the ATCO level, including in cash and access to the debt capital markets. I think we'll look to use a balance of those to fund initiatives as well as we mentioned, you know, to help finance some of these options for ATCO EnPower and ATCO Energy Systems.
We look externally as well for those entities to be able to access capital.
Thanks. If I could just do a quick cleanup question on the assets that the stake sales that Neltume acquired. Can you just discuss how much is spent and how much cash does Neltume still have on its balance sheet?
Neltume.
Neltume Ports. Yeah, there's still a significant amount of cash on the balance sheet. We still have over CAD 100 million on the balance sheet at Neltume Ports, and that 10% stake, we took out a minority partner that was in those investments. We actually financed that not with directly cash on the balance sheet at the corporate level, so there still remains a substantial amount of liquidity remaining at the corporate level at Neltume Ports.
Thank you very much.
The next question comes from Robert Hope with Scotiabank. Please go ahead.
Morning, everyone. I just wanna turn the attention to the base business of the Structures business. You know, just taking a look at the global space rental income this quarter, both on a quarter-over-quarter basis and more so on a year-over-year basis. We're seeing, you know, strong growth, with it up 14%, the average rental rate. Can you maybe speak to what's driving this rental rate? You know, do you see this stabilizing at this level, or, you know, could we even see it softening depending on how mix works?
Yes. Thanks for the question. It's Structures, as you saw, had an exceptional quarter. We've been able to benefit from, you know, overall rising demand in that sector, which saw the rental rates increase. I would say I can't point to any one area. I would say that we are executing on our strategy to grow that business globally. Particularly in the US, we've had some success in growing our fleet there, but also our core markets in Canada and Australia continue to perform very well.
Going forward, you know, I think we've, you know, there's been significant growth in our fleet size, and you can probably see the, the level of that growth tempering a bit because we probably have a significant, we have enough capacity right now in some of our existing fleet that we probably can continue to grow the business and our earnings through deploying some of those assets. I hope that answers your question a bit.
Yep, that's helpful. I guess continued strong results in the base business, you know, as you take a look at the back half of the year, you have some larger contracts rolling off or have already rolled off. You know, what have conversations been with for some of the larger projects out there to help backfill, you know, we'll call it the large project backlog?
Yeah. No, I think we're still very optimistic for the back half of the year. I think we'll continue to see a lot of the same strong performance that we saw on the start of the year through the year. As you noted, there are some projects, some of the larger projects that have come off, notably the Bechtel-led Pluto project in Australia, that has come to substantial completion. We do have a strong pipeline of additional potential opportunities, as well as the resilience of that base business that I mentioned to carry us through the year.
All right. Thank you.
The next question comes from Mark Jarvi with CIBC Capital Markets. Please go ahead.
Yeah, thanks. I want to come back to the discussion of EnPower and the discussion on the CU call in terms of range of options. If they did spin it out as a standalone entity, any commentary in terms of what ATCO's ownership levels could be? I mean, obviously, you know, relative to where you are now or willingness to even maybe increase your position around that business, depending on the range of, I guess, solutions or financing options put out there.
Yeah, as Brian mentioned, we're, you know, we're still very early in exploring the options. You know, as we noted in the press release, a spin-out is one of many options under consideration. It would be too early to speculate exactly where ATCO would see ourselves long term in that. Obviously, as opportunities arise in both ATCO Energy Systems and in EnPower, ATCO would consider its options for capital allocations between the two based on the best use of funds to maximize shareholder value at that time.
Okay. There's been a handful of, I guess, different M&A deals and things I've seen across different trade magazines and news articles on the port space. In prior calls, you guys indicated you'd look at a number range of opportunities there. How would you say the deal flow looks right now in terms of, I guess, level of interest, competition, pricing? Just in terms of, I guess, whether or not economic outlook and/or, you know, the impact of higher rates, like, how would you say asset values are trending right now?
No, I mean, it's a very interesting space. Obviously, there's been a lot of action with the strikes in Canada and other events that highlight the benefit and the need for a diverse portfolio in terms of the ports. We are seeing a very strong pipeline there in terms of the range of opportunities. Now, to me, as I've discussed in the past, tends to target not necessarily the large, you know, heavily sought-after container-type opportunities as those continue to trade at the infrastructure premium-type levels. The Port of Vancouver in Washington State is a great example of kind of the type of opportunity that fits well within Neltume's sweet spot. That's a bulk port.
You know, there was obviously some competition, but we did manage to get that at a with an attractive profile going forward. There's definitely a lot of interest in that space. But we continue to look for more of those niche opportunities where we can really add value as Neltume to the opportunity.
Then, I guess, maybe just how you would say the competitive environment to find those opportunities. Has it, you know, moderated at all in terms of where you're seeing activity or, and in terms of valuations and how you're seeing assets priced or evaluated?
No, candidly not. I mean, it's the same themes across the sector, right? I don't think that in the private markets, in the M&A environment, there has been a significant moderation in the multiples that are being paid. You know, we continue to see strong demand for most of those larger opportunities that I mentioned. As I said, Neltume is looking in a slightly different field, which tends to have not as much interest from some of those, the infrastructure-type players in the opportunities we look at.
Got it. Okay. Thanks, Katie.
The next question comes from Linda Ezergailis with TD Securities. Please go ahead.
Thank you. Recognizing it's still early days, I just wanted to step back, big picture, and understand how ATCO balances, you know, complexity, and the potential for subordination of cash flows in any sort of restructuring, either at the CU level, or can you confirm that this might not spill into any sort of optimization or initiatives at the ATCO level? Is that off the table, or might that come subsequent to what you're doing at CU?
I mean, as Brian mentioned, again, there's very early days in terms of EnPower specifically exploring its financing alternatives. At the moment, this does not, you know, this doesn't impact ATCO in terms of how it's evaluating its current structure or its funding alternatives. You know, we, you know, if anything, and as mentioned, that it becomes a separate entity, I think, you know, CU will continue to evaluate what's in the best interest of Canadian utility shareholders, of which ATCO is one of those, obviously. I don't see any potential spillover, as you noted, for ATCO at the moment.
Okay. Just maybe, looking back, at one point, ATCO kind of streamlined and simplified its kind of ownership and platforms. I'm just wondering how both ATCO and CU consider not just best access to financing at a given point in time, but also considering some of the potential implications around potentially introducing complexity of structures and also the potential for subordination in the debt capital markets.
I mean, we, you know, ATCO, as we look to structure our investments, are going to take a look at each individual portfolio company and look for what's the best way to finance that vehicle. That the same would hold true for Structures, for Neltume, for any one of our particular investments. We would look to see the best way to maintain the ability for them to grow, combined with, you know, maximizing shareholder value for that, whatever that particular investment is. You know, in terms of, we understand that we do have a different structure, but I think that we continue to operate that well, and it continues to serve us well in terms of accessing capital for the various entities.
Thank you.
Once again, if you have a question, please press Star then 1. The next question comes from Ben Pham with BMO. Please go ahead.
Thanks. I wanted to follow up. I know you talked about the ports opportunity, and that could be M&A or organic. Can you talk what else you're probably the most interested in, in terms of M&A, whether it's Triple M Structures, related businesses, or even any other verticals that you have looked at in the past?
Yeah, I mean, when we think about ATCO's growth, I think I've said this a few times in the past, we look at both, you know, growth within our existing portfolio of investments. Which, you know, obviously would be the, you know, considering that if we can find areas where we can have synergies or clear value proposition, that's probably our most preferred route of growth. Triple M was a great example of how we were able to add on a very complementary business with synergies and forward-looking pipeline to one of our existing businesses. We also do look at growth outside of our existing verticals. You know, in our materials, we've mentioned interest in some of the other essential services, such as water and agriculture.
We'll continue to explore opportunities within those to add on a new portfolio for ATCO.
Okay. I think also in the past, you mentioned one of the constraints, for maybe more M&A side was valuations and then what you were willing to pay for valuations. Has that changed now? I think that's in somewhat an earlier question that was framed. Can you also comment, too, is this really a good environment for you to expand the opportunity of M&A, give more valuations, or is there's really maybe no change in how you're looking at the land?
Yeah, I think it's obviously very sector specific. I mean, you'll hear from most people, I'm sure, that we probably haven't seen the valuations and the premiums for M&A transactions come down as much as you would expect, considering the public markets at the moment. That is pretty specific to the sectors that you're talking about. I think, you know, for example, our Triple M, you know, we got a very attractive valuation, and I think in certain instances and in different opportunities, we can still find areas where we can deploy capital and M&A at attractive valuations. I'm sure, as everyone's aware, the general theme of the current market is still a bit, you know, unstable, and we're continuing to watch for opportunities that present themselves to deploy capital.
Maybe lastly, on your leverage, is there room for you to take on leverage or even prefs? I was just thinking the news on the credit rating agencies, and maybe just remind us on the balance sheet and where you're at.
I know we still have a pretty, a very, modest level of holding company leverage at the ATCO level, so I still think we do have, you know, capacity to take on additional debt there. We've kind of set ourselves an internal target that we wouldn't go above, around 30% debt to total cap, but we're far below that, so there still is pretty good room on a standalone basis that is at the ATCO level. Pretty good room to fuel growth if we see opportunities.
Okay. That's very helpful. Thank you.
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, Charisse and thank you all for participating today. We appreciate your interest in ATCO, and we 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.