Thank you for standing by. This is the conference operator. Welcome to the Q1 2021 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.
I would now like to turn the conference over to Mr. Myles Dougan, Director, Investor Relations and External Disclosure.
And Company. Please go
ahead, Mr. Dougan. Thank you, Claudia. Good morning, everyone. We're pleased you could join us for our Q1 'twenty one conference call.
With me today is Executive Vice President and Chief Financial Officer, Dennis DeChamplain. Canadian Utilities. Please note that a replay of the conference call and a transcript will be available on our website Canadian Utilities.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 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 Canadian Securities Regulators.
And finally, I'd also like to point out that during this presentation, we may refer to certain non GAAP measures such as adjusted earnings, continued earnings per share, funds generated by operations and capital investment. These measures do not have any standardized meaning under IFRS and as a result Canadian companies. And now, I'll turn the call over to Dennis for his opening remarks.
Thanks, Miles, and good morning, everyone. Thank you all very much for joining us today on our Q1 2021 conference call. Canadian Utilities achieved adjusted earnings of $191,000,000 or $0.70 per share in the Q1 of 2021, Canadian Natural Gas Utility also had earnings growth this quarter from a higher inflation rate and a stronger Australian dollar compared to our Canadian currency. Economic activity in Western Australia has really improved over the last couple of quarters. Mining activity has been picking up due to increasing iron ore and copper prices, And the Australian economy appears to be improving.
Hopefully, this trend continues through 2021. In Puerto Rico, In our Energy Infrastructure business, higher earnings were due to demand for natural gas storage services and recovered business development costs. Customers. On the regulatory front, we are seeing a return to prospectivity for our natural gas transmission business until the end of 2023. In the distribution utilities, The AEC was certainly busy this last quarter.
They issued a 2022 generic cost of capital decision, extending the current return on equity of 8.5% and the equity thickness ratio of 37% for 2022. Having clarity into the future from these regulatory decisions helps us plan more effectively, creates a more continued growth in our business and our customers. We do recognize that the economic situation currently here in Alberta is presenting many hardships Canadian customers as a result of the pandemic and it's been very challenging for our customers. In March, we filed a 2021 rate relief application for Canadian Utilities and Natural Gas Distribution to postpone rate increases for all of 2021. We propose to collect the deferred amounts commencing in 2023.
While this application will impact Canadian Utilities cash flow in the short term, In terms of capital investment, we invested $220,000,000 this quarter in our core utility businesses Canadian. A recent example of this is our newly announced agreement to acquire the rights to develop the 325 Megawatt Cano's Central West pumped hydro storage project, which is located 175 kilometers west of Sydney, Australia. This acquisition marks our first renewable energy investment on Australia's East Coast. The project is close to significant renewable energy resources Canadian Utilities. All in all, Canadian Utilities had a solid Q1 of 2021.
Canadian customers. All of our businesses performed very well, and we received important regulatory decisions, which allow us to plan more effectively for the future.
Questions. I'll turn it over to the conference coordinator now for questions.
Webcast participants are welcome to type their question in the Ask a Question box and hit submit. The Canadian Utilities Investor Relations team will a follow-up with you by e mail after the call. Our first question is from Mark Jarvi with CIBC Capital Markets. Please go ahead.
Thanks. Good morning, everyone. First question, Dennis, is on Luma, the joint venture. You alluded to the fact that you'll take over the 15 year 1M agreement with our transition phase. Can you give us an update in terms of where you are on the incentive criteria and also just PREPA coming out of bankruptcy, I think that was one of the criteria in terms
Sorry, what criteria? What was the first question?
The incentive criteria, I think there was some debate around what were some of the incentive metrics, which would determine your ability to earn it more Under that contract.
And bankruptcy. Okay, got you. Yes, Luma, Our joint venture with Quanta Services to run the Puerto Rico T and D Systems. Our CEO, Wayne Stenzby, It usually starts off most of the meetings with the safety moment and then reminds us how many days until the end of front end transition. And we're continuing to be 3 days out right now.
Those incentive criteria that you're talking about, Mark, we have filed all of that with The Puerto Rico Energy Bureau, the PREB, the equivalent to the AEC of the regulator down there. We filed that back in February. They have yet to make a final determination as to what those incentive criteria and The base amounts will be set at. So we don't know that yet. I was talking to the guys yesterday and over the weekend And there is a line of sight to get those approvals from the prep by June 1.
So unfortunately, we don't know now, and we do expect to receive the ruling from the prep before the end of the front end transition. In terms of bankruptcy, the PREB is still PREPA, sorry, the Puerto Rico Power Authority. They're in bankruptcy. We anticipate that they will continue to be in bankruptcy. There are provisions in the agreement that we can exit the front end transition and enter into operations under a supplemental agreement until the until PREPA does come out of bankruptcy.
So we anticipate that in June when we get the keys, they'll still be in bankruptcy. Views right now as to when they
And once they do come out of bankruptcy, can you explain in terms of how that moves back and forth between the supplemental? Is it sort of immediate? Is it Subsequent quarter, just wondering if there's any sort of time lag in terms of how you transition between these 2 different types of structures or contracts?
Yes, I'm not sure as to the exact date, but we will I'll say immediately, I don't know if that's the following month. I don't think it's the quarter, but we when we come out of the supplemental agreement, we would enter contract year 1 And that contract year would run until it would say it's January 1 of next year, contract year 1 would run from January Until the end of June, and then we would get into contract year 2 of the agreement and go on that 12 month cycle from there.
So it wouldn't necessarily extend the full duration of the O and M agreement?
Well, it depends on how long we stay operating under the supplemental agreement. If we're operating for a year under the supplemental agreement and then we have a It could extend it, but you're only really talking about a year.
Got it. And then your comments about Australia and the results out of the international gas distribution showed really strong year over year improvement. You talked about the commodity market impact. So the view would be that you've kind of hit a bit of inflection and this is sustainable for that business. And then maybe beyond just your existing assets, your views in terms of willingness to put more capital in Australia whether on regulated assets or contracted assets.
Are you So more constructive on that market today than it would have been a few months ago or a few quarters ago?
With regards The big banks down there, they're forecasting about a 2% to 2.5% inflation rate for the year. We were kind of thinking that the inflation rate for Q1 would have been a little bit higher. There were some federal and state subsidies to keep the cost of new dwellings down year over year. So that may have well, that did mute the overall CPI for the Q1. But given the as I mentioned in the opening remarks, the copper and iron ore prices down there, I'm not going to say it's booming.
Our guys down there would say it's booming. It's getting births for the ships to land pipe and we're seeing increases in cost of pipe. They're all manageable increases, But just that real heightened activity gives us some tailwinds, I'm going to say, for Australia the rest of this year certainly. In terms of kind of redeploying capital in kind of the Either the regulated or non regulated space. I think we've been consistent where consideration.
The example of the Central West Pumped Hydro and it's very early days on that project. FID isn't expected for a There's a lot of items on that particular project that we need to get comfortable with. But Yes, we are comfortable in deploying capital in that zone, probably more in the non
our next question is from Linda Ezergailis with TD Securities. Please go ahead.
Thank you. Just to build on Mark's question about geographic expansion and opportunities, sometimes It's also interesting to hear what you're not commenting on in your prepared remarks. And I'm just wondering if you can also touch Some of the recent developments in Mexico and how that might change your outlook for either new investments for the merits of potentially exiting your presence there entirely. Also, one of your affiliates I'm just wondering what the opportunities there might be long term for energy infrastructure in Canadian Utilities and then in the mix closer to home. While short term in Western Canada, there are some continued challenges, unfortunately, related to the pandemic.
We are seeing more than green shoots in the oil and gas industry Canadian Resources. So can you comment on the relative scale of opportunities and how you see those having shifted recently?
Thanks, Linda. Yes, I don't know. I wouldn't put too much stock in the stuff Canaccord Genuity. It's been very tough for us. I mean, we still have an outstanding arbitration decision award on the Tula pipelines.
I kid our guys keep getting updates and it's going to be this quarter and then it's going to be The following quarter and the following quarter. And they're taking their time getting to that ruling. And that was permitting delays. And in our MD and A this quarter, We've mutually agreed to cancel our agreement with Chemours due to permitting issues. So there's a little bit of a recurring theme.
We got all of our money out from that Chemours investment. So we are covered there. But given those experiences. We are probably waiting to redeploy So there isn't a concern on the structure side. In LatAm, we are continuing to Hydro in Australia isn't the only iron in the fire that we have.
We do have other projects that we are looking at in the region. Certainly, the we'll call it those permitting issues, we are particularly attuned to as we look In terms of Western Canada and the green shoots, I mean, there's great opportunity here. We've had hydrogen blending in Australia for a number of years for our Clean Energy Innovation Hub in Mal Park. We do have a blending project in Fort Saskatchewan, a small blending project with hydrogen. So When it comes to the renewable energy space, with the decarbonization of our Energy that we provide for our customers.
It's certainly an area that we are looking at, and we think we could
And in terms of organic opportunities, Canadian Retail. Clearly, those are have historically been a focus and I expect would continue to be. But what are you thinking in terms of maybe portfolio management? Just as a follow-up question to my prior one, portfolio management in terms of what might be a little bit less core versus where you might fill in continuing to provide some white space in your current core strategy and operations in terms of potentially some acquisition opportunities as they might arise opportunistically?
Yes. We like the cards that we're holding right now in the energy infrastructure space with regards continuing to our storage facilities and processing facilities that we have here in Alberta. If we're looking for any kind of a white space, kind of small tuck in acquisitions, we could be looking for, So, in terms of portfolio management, those would be one of the areas that we would be looking at to round out our product offerings.
Thank you. My second question relates to the Alberta Canadian customers. Regulatory environment definitely positive to see it moving to more prospective decisions. Canadian Utilities. And in fact, the fact that they are now contemplating what sort of regulatory framework might Canadian Utilities and the province for 2023.
I'm wondering in a perfect world, what Canadian Utilities views to be if you can influence that decision or advocate for something, how do you see an appropriate regulatory framework evolving beyond 2023 in Alberta?
Are you referring to the distribution side of the house or the transmission side or?
I was referring to distribution, but if you want to expand your response to include transmission, I'd be interested as well.
Yes, it was we're very pleased with the progress that the AAC has made Canadian and their efforts and actions to reduce the red tape and to try to help Canadian Utilities to get back to prospectivity. Our natural gas transmission Cano's business has had kind of more success than on the electricity transmission side. All the bright lights We're happy that we have 3 year test years for both of those businesses in order to help maintain that prospectivity. Application that the commission is looking to hear for all of the distribution utilities and We've all put in our comments as to what we would like to see, whether it's a full scale cost of service review, Leveraging some of the costs that we have incurred. The fact that Yes.
They didn't think there were merits in PBR. I suspect they would have gone back to A longer cost of service term for the distribution utilities. So while I don't want to handicap the outcome, And then it gets to the devil is in the detail. So going in rates will be fundamental to whether we have an opportunity to earn a fair return on our capital, Especially given the changes that we're seeing in the industry on the electricity side, there's a lot of modernization Canadian SolarWinds. So we would be looking And the only other element that we would like to see or are on our wish list or which we think for the mitigation of the
prudent
risk against prudent cost recovery continuing to ensure that we don't get hit with any extraordinary retirements without legislative change. We're continuing to work with The Alberta government's Department of Energy and what have you in order to get amendments to the legislation to allow for
our next question is from Matthew Leitze with IA Capital Markets. Please go ahead.
Good morning. Thanks for taking my questions. I'll just ask a couple really quick here. I was just wondering with the postponement of rate
It does not impact sorry, thank you for the question, Matthew. It does not impact our adjusted earnings. We'll continue to record the impact. We'll continue to record the revenues for So that would not be in the IFRS revenue IFRS earnings, but it will be in the adjusted earnings.
Okay. Thanks for the clarity on that. And just my second question was just about the natural gas transmission general rate application for for 'twenty one to 'twenty three. It looks like there was a bit of an impact from sort of some cost savings being passed on to the rate payers now. Was that Something that can be expected to continue through the rate period as you work through 2021 to 2023 And continue to impact the rate profile in the transmission there?
Yes. I mean that's it will continue to impact it. We always see the savings flowing through to customers and that's exactly how the regulatory compact is set up. Whenever we have a reset, there typically is the flowing of the benefits While our 2021 to 'twenty three earnings won't Enjoy the benefit of those cost efficiencies that were identified in prior years. They are identifying new cost savings.
Example of that is workforce asset management Canadian customers who are maintaining those assets.
Okay. Thank you. I appreciate that.
I'll turn the call back.
Thanks, Matthew.
Our next question is from Andrew Kuske with Credit Suisse. Please go ahead.
Thank you. Good morning. Dennis, could you maybe just give us a bit of a discussion around how you think about carbon a really meaningful decarbonization effort with the sale of the coal plants a while back. And then how do you really line up perspective investments. And I know you mentioned renewables, you have some focus on that, but looking at energy infrastructure or There may be more carbon intensive utilities on an acquisition basis that have a path to become much cleaner.
If you could just give us some color on that, that would be great.
Thanks, Andrew. Yes, if we got presented with an opportunity to buy a vertically integrated utility with a whole bunch of coal and a path to decarbonization. I think maybe a few years ago we would have looked at That path, right now, the leaning, When coal was in the crosshairs to get those emissions out of the energy chain, Many thought that natural gas would just be the next coal and that appears to be the case for striving to meet kind of net zero targets or 45% reduction in carbon emissions for long lived assets. So for that reason, we're more focused on the renewable side Energy Infrastructure side.
Okay. That's very helpful. And then, you did mention some comments around your shorter duration projects or potential acquisitions on the renewable side. If you could maybe just give us a bit of color on the balancing act because Clearly, you've got the pump storage project into the future. You've had other long dated projects in the past that didn't work out on the hydro side.
But I'm just sort of curious on how do you think about the balancing act of clearly the group always has had a long duration view and has really played through cycles, We see pockets of frenetic activity on shorter duration renewables, but respectively some really interesting opportunities on a longer duration basis. How do you bridge that or how do you balance that from a capital allocation perspective?
Yes. I mean, In order to get into that renewable space, to be have projects and to If we started to do the wind studies and solar studies now, it would take quite a bit of time before We've had an opportunity to redeploy that capital into the new areas. For that reason, we are looking at Through acquisition, we'll say similar to the group in Australia where we just acquired some rights, Like Central West, the potential for Central West pump hydro in Australia.
Okay. Thank you very much. That's very helpful.
Our next question is from Maurice Choe with RBC Capital Markets. Please go ahead.
Thank you. My first question is just along the lines of capital allocation as well. I recognize that And also recognize that similar to Q4, you've repurchased some of your own shares in Q1. As you look at your capital allocation options, Is the MCIB something that ranks well or high on your pecking order? But differently, what should we expect in terms of MCIB for the rest of this year or is that activity in that managing the stake held by ATCO and CU?
Some buybacks last year and continuing into the Q1 this year. And at Canadian Utilities, we haven't really done any buybacks, What this program is looking at is to right the ship and to offset the dilution that has eroded The big build in transmission, primary one of them. We have purchased, Think it's about 1,800,000 shares in Q1 under the NCIB. There is about another 1,700,000 shares in potential renew that NCIB just as a matter of course. But in terms of capital allocation, are we looking at are we considering taking a big hunk of the cash on the balance sheet and our capacity and plow it into buybacks, that's not really the case.
And just to follow-up
on that, like recognizing you've got $1,700,000 left, but you're renewing the NCIB, how much more do you need
We'll take a look at that as we go, Maurice. I suspect a fair chunk of it.
Okay. I'll follow-up with that off the call. The second question is But on the other hand, if you do move into the supplemental agreement, I reckon that the fees possibly could be higher than what was designated for year 1.
Yes. I don't know if it's tougher to achieve those incentives or not because the bar hasn't been set. As I discussed with Mark Out of the chute, we'll see what the PREB kind of approves for going in Under the supplemental agreement, there is no incentive potential Because it's still in bankruptcy, we don't have the all the means to improve performance. So in lieu of not being able to achieve to earn incentives Under the supplemental agreement, the fixed feed is higher. And I think all the contract details are out there, and I Want to double check with Miles as to the amounts that potential is there.
But in terms of the overall Status of the contract, it's probably fair to say that it's been harder than we thought With the hearings and with the people in Puerto Rico, we are committed The governor has come out and supported the agreement, and we are continuing on the path The end result is somewhat the same that in terms of our kind of the returns that we would expect from that investment.
Our next question is from Patrick Kenny with National Bank Financial. Please go ahead.
Yes, good morning guys. Just a quick question here on given the strong power price environment we've seen year to date, if you're experiencing any tailwinds on your retail business. I know it's still a small contribution, but just in light of the rate freeze, do you see your retail business as potentially
Hi, Pat. Good morning. Thank you for the question. We are seeing certainly some tailwinds Canadian Retail. In our retail business, we no longer have the benefit of having a Canadian Natural Hedge on the generation side.
To the extent that our retail business We've locked in some fixed price contracts, then the increase to the power prices You're here in Calgary. You know how cold it got in February here when it was minus, I'll say, 15,000 degrees. And we weathered that February quite well because of The great work that the teams have done in matching up the cost of the electricity with the sales. That being said, the energy retail energy business is continuing to chip away at market share that Non reg side is over 10% now, number 3 in the province and continuing to look to grow that business. Increased earnings in Retail Energy are included in the our corporate segment for Canadian Utilities.
So it is definitely a bright spot, another bright spot in our Q1 results.
Okay, great. Thanks for that. And yes, thanks for keeping the lights and the heat on during February. I appreciate that.
And it stayed on because it wasn't me. So that's a testament to that to our PO people and our ops guys, they did a phenomenal job.
For sure. And then maybe just to tie a bow on the net cash flow drag, if you will. But does that change any of the funding
Yes. The impact from that rate freeze is between $110,000,000 $120,000,000 in rate increases that we would forego in 2021, looking to recover them in 2023 over a time period yes to be determined. We would look to finance that with short term debt and cover it off that way. Our 5 year cost is hovering around, I think, 1.5%, 1.6%, give or take. The interest that we would earn from the commission, we'd be looking at around a 2% mark.
So we'll call that Cost of the financing would be covered by customers at a very low rate. So that's our proposal. We expect a decision here imminently. Yesterday, I heard it could be within a week. So we'll get clarity on that, but we wouldn't look to impact CE Wink's long term financing as a result
Thank you, Claudia, and thank you all for participating in the call this morning. We appreciate your interest in Canadian Utilities And we look forward to speaking with you again soon.
This concludes today's conference call. You may disconnect your lines.