Thank you for standing by. This is the conference operator. Welcome to the fourth quarter and year-end 2021 results conference call and webcast 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. Colin Jackson, Senior Vice President, Finance, Treasury, Risk and Sustainability. Please go ahead, Mr. Jackson.
Thank you, Claudia. Good morning, everyone. We're pleased you could join us for the Canadian Utilities fourth quarter 2021 conference call. With me today is Executive Vice President and Chief Financial Officer Brian Shkrobot. Brian 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 a transcript will be available on our website at canadianutilities.com and can be found in the investor section under the heading Events and 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 Canadian Utilities with the Canadian Securities Regulators.
Finally, I'd also like to point out that during this presentation, we may refer to certain non-GAAP or segment measures such as 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 Brian for his opening remarks.
Thanks, Colin, and good morning, everyone. Thank you all very much for joining us today for our fourth-quarter 2021 conference call. Before I jump into a summary of our financial results for 2021, I want to talk more generally about our performance in a year and also highlight a few notable achievements we've had. As most here are aware, our core investments are largely focused on regulated utilities and long-term contracted businesses with strong counterparties. As we look back at the events of the last few years and the numerous challenges faced by businesses globally in the face of the COVID-19 pandemic, the value of these core investments has really shone through. Despite continued market turbulence, 2021 saw our businesses deliver the following. Year-over-year earnings and rate base growth.
Advance key ESG initiatives, which culminated in our release of formal targets in January of this year. Commence operations in Puerto Rico through our LUMA Energy business and execute on a number of energy transition investments. 2021 also saw our business successfully go to the market twice for capital to support these ongoing growth initiatives. In both cases, our offerings were oversubscribed and closed at attractive rates, highlighting the trust investors have in our business and the stability we can deliver even in times of heightened market turbulence. We are truly proud of these results and of our people, who work tirelessly to continue delivering service excellence across the business and refusing to allow the numerous challenges created by ongoing pandemic to distract them from this objective. Taking this discussion back to our financial performance, 2021 was another great year for Canadian Utilities Limited.
We achieved adjusted earnings growth of CAD 586 million or CAD 2.17 per share for 2021. This is CAD 51 million and CAD 0.21 per share higher than 2020. While our businesses overall performed very well in 2021, this growth in year-over-year earnings was primarily driven by the performance of our LUMA Energy business and continued strong performance from ATCO Australia throughout the full 2021 year. As we talked about in our third-quarter conference call, LUMA Energy assumed full operation of Puerto Rico's electricity transmission and distribution system under the Supplemental Agreement on June 1st, 2021. Since taking over operations, the team has made a number of significant strides, including marked improvements to customer satisfaction, employee and customer safety, and the launching of numerous capital and operating initiatives.
At the core of these initiatives is the aim of improving grid stability and modernizing the electricity transmission and distribution systems in Puerto Rico. This work saw LUMA Energy contribute nearly $32 million of year-over-year earnings growth in our 2021 results, and we expect LUMA to continue being a significant driver of earnings and cash flow for us in the future. As a reminder, we will continue to operate under the 18-month Supplemental Agreement until such time that PREPA has concluded its bankruptcy proceedings, at which point we will move directly into the previously executed 15-year operating agreement. While the specific timing of the completion of these proceedings is difficult to predict, the approval in January of a restructuring plan for Puerto Rico's territorial debt provides promising evidence that the process is moving forward.
We continue to expect PREPA's bankruptcy proceedings to be completed in 2022 and before the completion of this existing 18-month supplemental agreement. As I know many of you have heard us talk about before, the process of transforming Puerto Rico's existing electricity transmission and distribution system into a reliable and modern system is no small undertaking. There has certainly been some bumps along the road and resistance to change. We remain committed to delivering on our promises for the good of all Puerto Rico citizens. The last point I want to highlight on LUMA is the great work that the team has been doing through our own public reporting and initiatives.
For anyone on the call that might not be aware, LUMA filed its second quarterly report on February 14th, 2022 , with both the Puerto Rico Public-Private Partnerships Authority, P3A, and the Puerto Rico Energy Bureau. This report is publicly available through the P3A website and along with many other recent announcements made by LUMA through its own website and provides further insight into the businesses ongoing initiatives. Moving on to Australia, our natural gas utility continued to benefit from the inflation trends that we saw through the first three quarters of 2021. This upward pressure on CPI, along with solid system demand, helped us deliver 2021 earnings that were CAD 34 million higher than 2020.
While the ultimate duration of the CPI tailwinds is difficult to predict, current economic forecasts suggest that many of the drivers impacting stronger near-term CPI in Australia will persist into 2022. For those on the call that may not be familiar with how CPI impacts earnings in our Australian gas business and why stronger CPI drives higher earnings, it's worth clarifying briefly here. In our Australian gas business, the inflation index portion of rate base is billed to customers through the recovery of depreciation in subsequent years based on the annual rate of inflation. The revenues for adjusted earnings purposes, however, are recognized in the current year as earned for this inflation component of rate base. As such, we see higher inflation denoted by higher CPI translates into higher current period earnings like we've experienced in 2021.
On the regulatory front, there have been a number of new developments in the fourth quarter and early months of 2022 that are worth highlighting here. As we've messaged in our last few conference calls, we've been awaiting the final approvals from both the AUC and the Canadian Energy Regulator on our acquisition of the Pioneer Pipeline and the subsequent transfer of a 30-km segment to NOVA Gas Transmission Ltd. I'm happy to report that as of January 2022, we've now received all outstanding approvals related to this transaction. Our revenue requirement for this asset was approved by the AUC as filed, and the approval NGTL received from the Canadian Energy Regulator allows for the final transfer of their segment of the line. We will be finalizing this asset transfer through the first quarter of 2022.
Switching to our Alberta distribution utilities, we continue to gain additional clarity on the 2023 cost of service rebasing year that will follow the second performance-based regulation term that concludes in 2022. While there's still additional work to be done and filings to be processed by the regulator, early decisions support the expectation of a fair and prospective regulatory framework for our distribution utilities in 2023. Notably, the AUC has agreed to a hybrid approach to the forecasting of 2023 costs, which we'll see applied for costs compared to 2020 actual costs. We expect to have these decisions on these applications for both our Alberta distribution utilities in the third quarter of 2022.
Moving on to capital, I want to touch on both the capital investments we made in 2021 and also where we are heading in the coming years. In 2021, we invested CAD 1.3 billion in our business, with CAD 1.1 billion of this being invested in our core utilities. This ongoing utility investment ensures a continued generation of stable earnings and reliable cash flows from our utility businesses and drives rate-based growth. When compared to 2020 capital investment, this represents an increase of CAD 221 million. The largest share of this increase is associated with our Pioneer Pipeline acquisition. In our energy infrastructure businesses, we invested an additional CAD 226 million in 2021, an increase of CAD 198 million from 2020.
This increased investment reinforces our commitment to energy transition and includes a number of previously announced projects that we're pursuing in this space, including our renewable natural gas investment with Future Fuel, the acquisition of development rights for three solar developments in Alberta. In the fourth quarter, our acquisition of the Alberta Hub natural gas storage facility. While we discussed energy storage's role in our overall energy transition strategy during our third quarter conference call, it's worth quickly revisiting this discussion in context of our Alberta Hub natural gas storage facility acquisition. Energy storage is critical to the existing operations of our energy system, and we believe its importance will grow as world decarbonizes.
Not only are assets like the Alberta Hub facility critical in the development of industrial-scale clean hydrogen, they support the diversification of the industry within the province, including support for a critical petrochemical industry and also help support the affordability and reliability of our energy system as more intermittent renewable generation is integrated into the grid. Collectively, projects initiated in 2021 represent a significant step forward for our energy transition strategy. As our solar and renewable natural gas developments are completed in late 2022, we will start to see their earnings and cash flows benefited by the bite-sized and rapidly executed nature of these initiatives. Shifting to our larger clean hydrogen production facility project with Suncor, we began to see tangible evidence from both the federal and provincial governments of their support for large-scale hydrogen development.
The latter half of 2021 saw the provincial government release its Hydrogen Roadmap, a tangible strategy that builds off many of the aspirations within the federal government's Hydrogen Strategy for Canada. As we've been communicating from day one, the success of this project will rely on the cooperation and collaboration of industry and government to ensure that policies are in place to make the project of this scale successful. While there's still significant work to be done, the importance of this project for all of Canada in meeting its climate change commitments is well understood and will continue to advance the project with the expectation of a 2024 FID and first hydrogen production in 2028. Moving on to our forward-looking expectation for capital investment, we expect to invest CAD 3.3 billion in our regulated utilities over the next three years.
While utility operations are the largest contributor to our earnings and will remain so for many years to come, we will also be actively investing in our energy transition growth initiatives in the upcoming years. Overall, Canadian Utilities had a great 2021 that saw us advance key growth initiatives while delivering strong year-over-year earnings growth for our shareholders. The groundwork that we've laid to establish ourselves as leaders in the energy transition space position us well heading into 2022, and I'm excited to continue pushing the business and these key initiatives forward. That concludes my prepared remarks, and I will turn the call back to Colin.
Thank you, Brian. 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 now turn it over to Claudia, the conference coordinator, for your questions.
Thank you. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. Webcast participants are welcome to click on the Submit Question tab near the top of the webcast frame and type their question. The investor relations team will follow up with you by email after the call. Once again, anyone on the conference call who wishes to ask a question may press star and one at this time. Our first question is from Linda Ezergailis with TD Securities. Please go ahead.
Thank you. I appreciate the context around the inflationary benefits that your Australian utility is getting now. I'm just curious if you can help us understand in Q4 how much of that uplift was related to the quarter specifically versus the full year? How might we think of the potential seasonality around the Australian gas distribution earnings in 2022?
Yes, Linda, thank you for your question. Yeah, the Australia CPI certainly was a big driver, and I would think that in the fourth quarter, the increase in CPI experienced in the fourth quarter of Australia was way higher than anyone expected and certainly drove a big portion of the increase throughout the year. I would say, yeah, the quarter results for Q4 was higher than normal just because of that higher than expected increase for Australia CPI. You know, as we look forward, we look to see that over time, the CPI would normalize and certainly we've had a uplift here in 2021. In previous years, we've had really low inflation, but overall, we expect it to normalize over the years.
Thank you. Maybe moving on to my second question. Your secured capital for through 2024, just wondering how much that might potentially grow in terms of your backlog of opportunities, I assume substantially related to energy transition opportunities. Can you give us a sense of order of magnitude of what else you are looking at that's not in your secured bucket?
Yeah. Thanks, Linda. As you mentioned, we do have a number of energy transition projects in the queue, whether it's our energy solar projects, we've got a renewable natural gas. We have a number on the go, and we're certainly focusing on that. As to the magnitude, I guess that will depend. Obviously, we've talked about our Hydrogen Suncor project, which is a significant project and obviously it can have a large impact to that forward outlook, though the construction of that is beyond 2024, and we're working really hard today on that. As we've mentioned in previous calls, we see a number of opportunities continue to be in the hopper.
I guess it's a tough question to answer other than we are committed to ensuring that we only pursue those opportunities that fit well within our energy strategy. We recognize that it is a high competition for some of these projects, so we wanna make sure that when we enter them, we have the right team in place, resources in place to execute successfully on that. I can't give you more guidance than that. I think there's a lot of opportunities, as we've mentioned before, you know, we'll make sure that we select a combination of bite-sized, as well as pursuing these big projects like the Suncor project.
Thank you. I'll jump back in the queue.
Once again, if you have a question, please press star then one. Our next question is from Matthew Weekes with iA Capital Markets. Please go ahead.
Good morning. Thanks for taking my question. I think I just wanted to revisit, first of all, comments made during the prepared remarks on how the CPI translates into earnings in Australia. I was wondering, going forward, if there's a recognition in the current period based on that, is there any way that would be given back in future periods and reduced as that passed through a little bit more in the earnings? Or, I was just wondering if you could clarify how that works a little bit.
Sure. Thank you for your question. Maybe just to hit it right off, no, it would not reverse in future years. It's based on current year's inflation, and that's translated results, and then it will be collected over a number of years through depreciation. It can be a very complicated way of looking at it. Perhaps what we can do for you, Matthew, is just take that offline and call you directly and walk you through this very complicated regulatory mechanism, if that works.
Yeah, absolutely. Thanks. I appreciate that. Second question is a little bit bigger picture in talking about the energy transition and wanting to be aligned with all stakeholders and governments really before proceeding with opportunities. Looking at the so-called blue hydrogen opportunity and implementing carbon capture, would you say that one of the key catalysts that would drive going forward with that is going to be government support in the form of a carbon capture tax credit? Do you believe you can see that implemented as soon as this year?
Yeah. You know, government support and policy is critical for developments of hydrogen and other energy transition opportunities. You know, there's a number. You mentioned one, carbon capture. But there's a lot, whether it's securing cost-effective pore space for carbon capture. There's the Clean Fuel Standard and related clarification on the value of liquid and gas credits under these standards. There's Alberta TIER and BC Low Carbon Fuel Standard credit guarantees. You know, you mentioned investment tax credit, certainly, as that's something that needs to be clarified at the federal level. You know, there's amendments to the Gas Utilities Act to allow hydrogen blending and so on. I could go on for a long time, Matthew.
Yes, I would just say policy is critical, and certainly that's been one of our major focuses. We've been working with both the federal and provincial governments to gain certainty on these and clarity on these policies. I think these policies in place will allow all stakeholders to be able to proceed on these projects that need to progress. Certainly that we're working on as we get to FID by 2024.
Okay, thank you. I appreciate that. Just one last question, just building on that. You mentioned the Clean Fuel Standard with the government. With the federal government expected to implement nationally the Clean Fuel Standard in 2023, was that really one of the drivers behind the decision to move forward with the RNG project and aligning with the timing of contributing really in late 2022, 2023? Building on that, do you think there are more opportunities to invest in renewable natural gas going forward?
Yeah. Great question. I would say, like, you know, renewable natural gas is not new, and it's something that we see as one of the part of the puzzles for addressing climate change. You know, we've been working on various opportunities over the years. I think one of the facilitators is in BC. They are allowing for renewable natural gas to be included in their natural gas system and paid for from customers. Certainly that has allowed us to commercialize some opportunities in Alberta. Although today it's something that will be transported and recognized in BC.
As we work with the Alberta government, that is one of the policy changes that we're looking to implement or the government to implement, is to allow renewable natural gas to be part of the market system here in Alberta. Because quite frankly, the benefits are clearly known, and it's something that makes a lot of sense. Yes, I do see a lot of opportunities in Alberta and elsewhere for renewable natural gas. Certainly that's kind of the rationale for why we entered into that space earlier last year.
Okay, thanks. I appreciate that. That's everything for me. I'll turn it back.
Our next question is a follow-up from Linda Ezergailis with TD Securities. Please go ahead.
Thank you. Just wanted to maybe take it up a level in terms of your capital allocation philosophies, and how you might choose to finance them. Just trying to understand how that's being influenced, and you know, your strategic priority for 2022 to maintain an investment grade rating, I guess a strong investment grade rating, potentially. You know, within that, also understand how that might influence the cadence and rate of dividend increases as well.
Yeah. Sorry, Linda, I think you cut out a little bit there, during your question. Do you mind repeating that? Sorry, I-
Sure.
Cut out a little bit.
Apologies. In terms of your capital allocation decisions, especially as you face growing opportunities in energy transition, I'm just wondering how that might be influenced by your discussions with the debt rating agencies and your strategic priority to maintain a strong investment grade rating. Within those capital allocation decisions, beyond just looking at new investment opportunities and adding that to your secured capital bucket from your backlog, I'm just also wondering how that might inform the pace around your dividend cadence of your dividend growth.
Thank you, Linda. Thanks for repeating that. That was helpful. Yeah, maybe as general, like when we address all our capital allocation, we're looking at all factors in terms of how we would finance that growth and allocate the capital. You know, strong financial tenants are a key value for us at Canadian Utilities and CU Inc. You know, one aspect of this is our credit rating, like you mentioned. Certainly, you know, our businesses are. If our business would be assessed as a pure play utility on the low volatility table, we would expect our FFO to debt metrics to be well aligned with expectations for a credit rating and stable outlook.
Strategically, we believe the energy transition investments will play a significant source of growth for us and our businesses moving forward. These investments are critical to ensuring the long-term stability of our businesses. You know, unfortunately, from a credit rating perspective, where investments are non-regulated and are seen as increasing our business risks and push us further away from assessment under S&P's low volatility table. You know, while, you know, we value our A credit rating and we're consistently seeking opportunities and credits, investments that would increase our group's FFO to debt metrics and financial stability, we're mindful that managing this metric is not our only objective, and we can't let it create undue pressure that would prevent us from executing on our overall strategy. That kind of goes to that capital allocation.
That being said, we note that CU Inc. maintains a one-notch insulation factor from the group rating, and given this, we expect CU Inc. to maintain its A rating even if a credit event at the group level were to take place. In terms of cost of and access to capital, we don't expect that our funding costs would look materially different if we, for say, were rated at BBB+ in a scenario. Similarly, we expect to continue to have good access to capital in both scenarios, and we would if we needed to go to the market. You know, I just kind of give the examples of our recent preferred share and dividend issues, both having very strong market acceptance and demand exceeding issue sizes in both cases. You know, overall, we're mindful of our credit rating.
Obviously, we work very well with the credit rating agencies, debt holders. As we look to our capital allocation, we wanna make sure that capital allocation is directed to our long-term strategy and stick with that despite near-term pressures on some of our metrics that we face today. Dividend policy included, like, we reinstated the DRIP. All these things are options to us, and we're constantly evaluating them. Hopefully, that answered your question, Linda.
Yes, thank you. Just as a follow-up question, just building on your energy transition opportunities and recognizing that there's still a lot that needs to be put in place from a regulatory and political perspective to enable those opportunities to be realized. I'm wondering how much work you've done in your Alberta utilities to establish how much hydrogen you think could be blended into your natural gas distribution and transmission networks? What would be the nature and type of investments that would need to be done to enable that mix safely?
Yeah. Thank you, Linda. Yeah, we've done a lot of work on our natural gas system to, you know, prepare ourselves and evaluate the blending of hydrogen. Again, remind you and others that blending of hydrogen and natural gas networks is not new. It's been done in a number of places over the world. So part of that is, you know, we've actually got a couple pilots where we're blending 20% of hydrogen in houses. Obviously you've heard about our pilot in Fort Saskatchewan, where we're gonna be blending initially 5% of hydrogen in the homes in the Fort Saskatchewan area. We have been working for quite a while in Australia to, in our clean energy hub there, in terms of the blending of hydrogen.
You know, obviously important to us is to ensure that we've got the safety case well proven and educating all parties and stakeholders involved. You know, we will continue those efforts, and that's a strong focus for us here this year. In terms of getting ahead and on the regulatory front, we have filed as part of our 2023 cost of service application. Included in there is you know the discussion about blending hydrogen and certainly we're working through the regulatory process through that. We've also engaged with the federal or the provincial governments in terms of getting the Gas Utilities Act amended to allow for the blending of hydrogen, and we've been on that for some time.
I guess we've been very active, and I could go on to ensure that we are prepared for the day when we start blending hydrogen into our network, and then we've got all the policies, procedures in place and ensure that all stakeholders are educated on the safety and the benefits of hydrogen in our natural gas system.
Thank you.
Our next question is from Maurice Choy with RBC Capital Markets. Please go ahead.
Thank you and good morning. My first question, just bringing it back closer to home, can you discuss the ROEs that you achieved in 2021 for your four Alberta utilities?
Hi, Maurice. Yeah, in terms of, you know, the outperformance in our utilities, maybe I'll just speak generally. Certainly, I'll start off maybe with electric transmission and, you know, electric transmission, we've had a number of kind of previous, like compliance filings that came through in 2021 in terms of, getting those final reg requirements. And as you've kind of seen, our MD&A had a negative impact on our 2021 earnings for electric transmission. I think CAD 12 million of that was related to prior years. Overall, the electric transmission is operating in line with the AUC-approved returns. Electric distribution has been doing extremely well, and we're continuing to bring in those efficiencies year-over-year and building off of that.
We've seen very strong utility returns and outperformance in our electric distribution business in 2021. Our gas distribution business continues to have very strong outperformance in the business and, you know, ultimately, you know, builds off some of the initiatives that we've been over the last four years, and then we prepare ourselves for 2023. In natural gas transmission, you know, 2021 reflected the rebasing and where we passed in all the cost efficiencies that we earned in prior years back into customer rates moving forward. We've had some, you know, great performance in our natural gas transmission business as we again start the first year of the incentive mechanisms of finding efficiencies in that business.
Overall, I think we're very proud with the men and women of our teams delivering continued premium returns for our shareholders and obviously the benefits that goes to customers in the long run. Maybe I'll leave it as that, Maurice.
Great. Thanks for those explanations. Maybe as a quick follow-up, for the two distribution utilities, I suppose while you haven't given us an exact number about how many basis points you've outperformed, but maybe a different way of asking is, how would you compare this year's outperformance versus, say, over the past one or two years?
Yeah. Okay. For the distribution. I would say for the natural gas. We haven't gone through the full detailed calculation, Maurice. There's a lot of math converted into regulatory returns. I would say generally our natural gas is in line, relatively in line with 2020. For our electric distribution business, you know, there's quite a bit higher outperformance in 2021 versus 2020.
Perfect. My last question, just sticking again with the ROE in Alberta, what are your views of the potential for the ROE methodology moving to a formulaic approach from 2024 onwards? Directionally, do you see a risk that the starting point may be rebased from the 8.5%?
Yeah. Great question, Maurice. As you're aware, the Alberta Utilities Commission has outlined that following a generic cost of capital proceeding for 2023, that it's looking for 2024 on to evaluate a new process for generic cost of capital, which could include the discussion of a formula. I guess our views on that is it's early days and we would need to better understand the components of the formula, making sure that they can capture the market conditions and the volatility. That there's a solid starting point where there is off-ramps that take into consideration. Obviously how the inflation and capital compensation factors are. Or sorry, I'm thinking more of PBR. But basically just overall market and conditions.
We've seen so much market turbulence over the last number of years. Obviously we'd need to make sure that that formula and how the market is gonna capture those impacts. Long way of saying is that, you know, we're not against a formula, but we'd have to be comfortable that that formula would capture all those market conditions and provide a fair return, which is ultimately important component of the regulatory compact.
Got it. If I could sneak one in as a follow-up. If the composition of that formula mimic the one that we currently see in Ontario, would that be a good starting point, or do you think that there still needs to be some customization that's unique to Alberta?
Yeah. Great question. I honestly don't have the specifics and I would need to do some more review. You know, you mentioned Ontario, but I'd also say that there's very few jurisdictions that have a formula-based ROE right now, and Ontario being one of them. It just kind of goes to show that, you know, right now it's been pretty problematic to put something like that in place. Again, it's not something that is not doable, but again, we'd have to see what parties and the commission is proposing and, you know, we could probably take something out offline, Maurice, and get back to you as a comparison to Ontario, provide you a little more details. I just respond generally in that way.
Perfect. Thank you very much for that.
Once again, if you have a question, please press star then one on your telephone. There are no further questions registered at this time. I would like to turn the conference back over to Mr. Colin Jackson for any closing remarks.
Thank you so much, Claudia, and thank you all for participating today. We appreciate your interest in Canadian Utilities, and we look forward to speaking with you again soon. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.