Thank you for standing by. This is the conference operator. Welcome to the Q3 2022 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. Colin Jackson, Senior Vice President of Finance, Treasury, Risk, and Sustainability. Please go ahead, Mr. Jackson.
Thank you. Good morning, everyone. We're pleased you could join us for Canadian Utilities Q3 2022 conference call. With me today is Executive Vice President and Chief Financial Officer, Brian Shkrobot, and Executive Vice President, Corporate Development, Bob Myles. Bob leads Canadian Utilities' non-regulated energy infrastructure business. 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 Treaty 7 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 Three.
We honor 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 recent company developments and our financial results, followed by an update from Bob on our energy transition strategy. 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 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.
Finally, I'd like to point out that during this presentation we may refer to certain non-GAAP and 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 Q3 2022 conference call. As Colin mentioned, I plan to run through some of our financial results for the quarter and provide some business updates. I'll turn the call over to Bob, who will update you on the significant progress made in our energy transition strategy, including the recently announced acquisition of Suncor's renewable generation portfolio that we are very excited about. Starting with the financial results, Canadian Utilities achieved adjusted earnings of CAD 120 million or CAD 0.45 per share in the Q3 of this year. This is CAD 32 million or CAD 0.12 per share higher than the Q3 of 2021.
This CAD 32 million increase in the Q3 year-over-year earnings was primarily driven by a continuation of many of the same trends we highlighted in our second-quarter conference call, such as a strong performance in our utilities. Our international natural gas distribution business in Australia continued to benefit from strong operating performance and favorable CPI indexing in the Q3. When we hosted our second-quarter conference call in July, forecasts at that time suggested the 2022 annual Australian CPI would reach approximately 6%. Today, these forecasts are suggesting full-year CPI is likely to rise higher to more than 7%. We expect this continued rise in inflation to drive strong earnings throughout the remainder of this year. Looking ahead to 2023, estimates suggest Australian CPI will begin to trend downward to more normal levels in the, say, the 3% range.
This will be a key trend to watch and one we expect to realign our 2023 earnings back to pre-high inflation levels when viewed on a year-over-year basis. Moving on to our Canadian Utilities, the strong performance we saw from our businesses in the H1 of this year largely continued in the Q3. In particular, our Alberta-based distribution utilities continued to deliver exceptional performance in their final year of the current performance-based regulation or PBR for short cycle. I talked about the mechanics of PBR in-depth during our Q2 earnings call, so I won't discuss those details here. I just would like to remind everyone that PBR frameworks are inherently cyclical.
The investments made in the early years of PBR to find efficiencies and to unlock additional value translate to strong earnings in the later years of PBR. These efficiencies are then ultimately passed on to customers in the form of long-term cost savings at the end of the PBR cycle. To this effect, our distribution utilities unlocked significant efficiencies through the second PBR cycle, and now 2023 will see these businesses enter a cost of service rebasing year. This cost of service rebasing year will then be followed by a third five-year PBR term beginning in 2024. We expect decisions on the key details of this third PBR term next year sometime.
While earnings from our Alberta distribution utilities will be reset downwards in 2023 as we pass on the efficiencies achieved to ratepayers, we still have strong expectations for performance across our utilities. In fact, the decisions recently received from our distribution utilities on their 2023 cost of service applications have been positive, with our applications largely being accepted as filed. Notably, our applications were based on the average historic costs for the period from 2018- 2020, and this as opposed to a less favorable best year model. This highlights the regulator's desire for a supportive and constructive regulatory framework for this rebasing year. We also have a strong track record of delivering exceptional ROE outperformance across decades and under numerous regulatory frameworks and structures.
Combining this efficiency carryover mechanism within our existing regulatory framework, which will allow us to carry forward as much as 50 basis points of outperformance into 2023 and 2024, we believe we have a solid foundation on which to deliver continued strong performance in 2023 and beyond. Moving on to Puerto Rico, I want to first acknowledge the terrible tragedy of Hurricane Fiona and the numerous hardships that has caused for the people of Puerto Rico. Critical infrastructure across the territory was impacted, and many families were forced to leave their homes. In many areas, access to critical services were lost or had to be turned off in order to ensure the safety of citizens. Returning service to impacted customers and ensuring the ongoing safety of all of Puerto Rico's citizens is LUMA's number one priority.
Our teams have been working tirelessly in this effort, and less than two weeks following the hurricane, service was restored to more than 90% of customers. By October tenth, this figure had increased to 99%. This is an incredible feat, given the state of electricity system in Puerto Rico. Now, speaking for all of our leaders at Canadian Utilities, we are extremely proud of the work the LUMA team has done, both leading up to the hurricane and in the days and weeks that followed. The team leveraged their local experience and resources to plan for the event and respond immediately, driving meaningful results for customers without compromising safety.
This experience highlights the key role LUMA Energy has to play in Puerto Rico's energy future and the important work that still needs to be done to harden the electricity system to ensure it's better prepared to handle future events like this. To that end, LUMA Energy has initiated more than 225 projects aimed at improving grid stability, reliability, and modernizing the energy system in Puerto Rico, and started construction on 29 FEMA reconstruction projects. This pace of construction and modernization well exceeds anything seen historically in Puerto Rico. I'd also encourage everyone to look at both the LUMA Energy website and their quarterly reports, which include great details on the numerous accomplishments the team has made to date and initiatives still underway in Puerto Rico. In terms of capital investment, we invested CAD 379 million in our business in the Q3 of this year.
Of this CAD 379 million, CAD 295 million was invested in our core utility businesses, which will ensure continued generation of stable earnings and reliable cash flows. As I alluded to in my early comments, and as Bob will elaborate on further, we made significant progress on a number of initiatives related to our energy transition strategy in the quarter. I want to congratulate Bob and his team on their acquisition of Suncor's renewable generation portfolio. This is truly a transformational step forward and exactly aligned with our energy transition strategy. I will now turn the call over to Bob Myles, Executive Vice President, Corporate Development, to provide further details on this and more. Bob?
Thank you, Brian. Good morning, everyone. It's been a busy quarter, and we believe we've made excellent progress on numerous fronts, including the Alberta solar projects we discussed previously, our pumped hydro storage opportunity in Australia, and our ongoing hydrogen opportunity with Suncor. As Brian mentioned, we took a big leap forward on our energy transition strategy with the successful acquisition of Suncor's renewable generation portfolio, which we announced in early October. Most will have heard me speak to our energy transition strategy previously and our three distinct pillars, renewable generation, clean fuels, and energy storage. The Suncor acquisition serves to rapidly advance the renewable generation leg of this strategy.
It adds 252 megawatts of operating renewables to our portfolio, brings wind generation into our energy mix to complement our existing solar and hydro assets, and includes a development pipeline of more than 1.5 gigawatts of new opportunities. It's also worth highlighting that the majority of the portfolio resides within our home market of Alberta. We've been in Alberta for decades and are well-positioned to leverage our existing relationships and expertise here to drive additional value through both the execution of the development pipeline and through the contracting of these assets with high-quality counterparties. Not only will this transition drive cash flow and earnings accretion in 2023, it provides a pathway to both meeting our 2030 renewable energy ESG targets and growing our renewable energy portfolio significantly in the coming decade.
Circling back to our other Alberta initiatives, I wanted to provide a quick update on the progress we're making on both our solar developments as well as the hydrogen opportunity we're pursuing with Suncor. While our business overall has fared well, despite the supply chain challenges being faced globally, we are seeing some delays on the acquisition of critical components needed to complete our ongoing solar initiatives in the province. While these assets are not individually significant to our overall financial results, we now expect energization of our Barlow and Deerfoot solar opportunities to shift into early 2023. Turning to our hydrogen opportunity with Suncor, a project of this scale and complexity requires significant upfront planning and coordination. While there's still a lot to be done, we're making great progress.
We are very deep into the design basis memorandum phase of the process and have made significant decisions around technology selection, including the use of autothermal reforming processes at this facility. Our teams are working hard to continue progressing this critical work, and we expect to make a decision to move into front-end engineering design of the development phase in the H1 of 2023. Lastly, I wanted to highlight the strong performance we've seen from our Alberta Hub storage asset that we acquired in December of last year. This asset has performed very well for us since acquisition and in the face of heightened energy price volatility.
This asset and energy storage assets more broadly provide critical energy stability to the system, and we expect the importance of these assets to only increase as the world decarbonizes and intermittent renewables make up a larger share of the energy system. We continue to look for opportunities to optimize this asset and to expand our presence in the energy storage market. I'll now pass the call back to Brian for any final comments.
Thank you, Bob, and congratulations once again on the Suncor Renewable Generation acquisition. As Bob said, it provides a pathway to achieving our 2030 ESG targets and is expected to be accretive to earnings and cash flow in its first year of operations. I'm happy to say all of our businesses across the board have continued to perform well, contributing to the overall success of our consolidated business as we delivered another strong quarter of results. Our core utility and long-term contracted assets provide the stability needed to pursue our energy transition strategy, and our recent renewable generation acquisition marks a meaningful step forward in this journey. This strategy remains critical to the success of our business long term and to society more broadly as the push to decarbonize the global energy system continues to gain momentum. That concludes my re-prepared remarks.
I'll now 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 turn it over to the conference coordinator now for questions.
Thank you. Once again, 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 are using a speakerphone, please pick up your handset before pressing any keys. To withdraw from the question queue, please press star then two. Anyone on the conference call who wishes to ask a question may press star one at this time. The first question comes from Linda Ezergailis with TD Securities. Please go ahead.
Thank you. I'm curious about your Australian pumped storage initiative. Do you have a sense of what still needs to be established or figured out before you get to FID, and when next year do you expect to get FID, and what would be the bookends of cost estimates that you would expect for it?
Thanks, Linda. Bob here. I can give you a pretty good update on Central West. We were just in Australia last week. We are submitting an application to the government for their long-term energy services agreement, and that application goes in this week. It's going to be based on the merit of the applicants.
Assuming we get through that process, then there is a pricing phase in Q1 of 2023 with a decision from the government on the successful applicants. We believe probably in late Q2, early Q3. A final investment decision for us, we're looking at probably this time next year, to give you a sense. On the capital side, it's a little early for us to work on that. We're still finalizing capital with our construction partner, and that process will take us to the end of this year to get a better sense of capital on the project. Hopefully that helps, Linda.
Yes, that's very helpful. Maybe, just given the opportunities in front of you and this, recently announced, pending acquisition of your renewable portfolio, just as a follow-up, maybe this is more for Brian, you know, can you give us a sense of what your, financing plans, how they might evolve? Would that potentially involve, the sale of, some less core assets, either in full or in part? Can you walk us through the relative attractiveness, and execution risks, associated with the various financing options?
Yeah. Thank you, Linda. Happy to do that. I guess in terms of financing, we continue to place a significant value on liquidity given the heightened broad market volatility right now and our near-term growth plans, both at the utility level and the non-utility spaces. For this reason, we're currently contemplating the use of a short-term, say 12-month bridge to fund the acquisition on close. You know, immediately following close, we would anticipate having project financing in place on the contracted assets and the ability to take out approximately half of this initial bridge loan. We'd look to take out the remainder of the bridge loan and evaluate a number of different avenues, whether it's strategic partnerships on existing assets or other capital recycling initiatives.
In an event that these initiatives are not executable within the bridge period, we'd look to utilize our existing balance sheet capacity to settle the bridge. Yeah, basically, we're keeping our options open. We see value in partnerships, but it's the timing. We do have some flexibility in that given the strength that we have in our balance sheet. Hopefully that answers your question, Linda.
Yes. Thank you. I'll jump back in the queue.
The next question comes from Maurice Choy with RBC Capital Markets. Please go ahead.
Thanks, Sam. Good morning. My first question is about renewables versus utilities. You know, it's clear that there is quite a bit of build-out that you can do, due to the Suncor acquisition. Unless you tell me otherwise, you know, this build-out, along with the hydrogen opportunity, all these things will probably outpace the growth that you have in regulated utility business. From being about 95% utilities now and then 5% energy infrastructure, what do you envision this mix to be, say, by the end of the decade, once you hit your ESG target?
Yeah. Thanks, Maurice. Maybe I'll start. Yeah, I think we've been very clear that the energy transition, we view that as a significant growth vehicle for Canadian Utilities. Bob kind of alluded to in his presentation and in previous calls, you know, the three pillars of clean fuels, renewable generation, and energy storage. We've been quite active on that front. You know, Bob mentioned the Alberta Hub facility that we purchased and obviously the big renewable Suncor acquisition. Yeah, we do expect the non-reg to take a bigger portion of a growing portion of our overall mix over the next 10 years. It will outpace the utility growth, which is right now what's in that 1%-2%.
Yeah, I would say that it'll still be a high percentage, but nowhere near where we're at today.
Got it. Just to give us some ranges there, are we talking about like a 60/40? Are we talking like a 50/50 type of a mix? I know there's no such thing as a target mix these days.
Yeah.
But, uh, for.
Good question. Maybe, you know, obviously it depends on how the renewables build out and all the different factors, but it'd probably be more in that 80% regulated, 20% non-regulated. But obviously that percentage will depend on the build-out and support of government policies.
Got it. Just my final question is about, you know, just more about the regulatory environment that you have in Alberta. I'm sure you would have heard what happened in Nova Scotia and the rate cap that was proposed over there. Given that you're heading into the PBR discussions now that COS ones are pretty much done, any thoughts on, you know, what you think happened in Nova Scotia and how that may or may not relate to your rate case and government relationships in Alberta?
Yeah. Good question. You know, Nova Scotia recently announced that it placed a rate cap on electricity rate hikes at, I believe it was 1.8% over the next two years, for non-fuel costs. We really believe that the rate cap is essentially on the wires portion, excluding retail. Needless to say, the rate cap situation in Nova Scotia is very troubling, for the utility there, as it truly undermines the overriding principles associated with recovering costs needed to provide utility service and with, you know, the fair return standards. That's really at the heart of a well-functioning regulated system. You know, certainly we're sensitive to the fact that there's high fuel and electricity costs.
You know, looking in our jurisdiction, certainly we don't see any talk about that in Alberta. In fact, when you look at our 2023 cost of service application, which we're very happy with, it was pretty much approved as filed. You know, that's very supportive. Our regulator has been very supportive. And then the only other thing I'd note, given that we're going through a rebasing year for next year, our rates will actually be declining by approximately 8% in our electricity customers and about 4% for our gas. We definitely did not, do not have a rate increase. We have a rate decrease. I believe in Nova Scotia, there was a quite significant rate increase proposed at that time.
I think we're in a different situation here in Alberta than down in Nova Scotia.
Great. Thank you very much.
The next question comes from Mark Jarvi with CIBC Capital Markets. Please go ahead.
Thanks. Good morning, everyone. You know, obviously the Suncor acquisition beefs up your renewable power ambitions. Just wondering, as you look forward, sort of the priorities there, would you do more M&A? Would you be more focused on organic development? You've increased scale in Alberta. Do you want to look and broaden your sort of footprint, look in the U.S. or, I guess, maybe do more in Australia?
Thanks, Mark. Bob Myles here. I think all of the above, what you said is probably the easy answer, but the Suncor acquisition for us on the renewables, we really like it. As I said in my remarks, it gives us a good balance between wind, solar to add into our, you know, our hydro assets right now. We really also saw it to get us better established in the renewable generation sector. Building it in our own backyard in Alberta was a very prudent thing for us to do, we thought. We have always looked into the U.S., and that'll be something we'll look going forward. You know, because we have a big presence in Australia, we're gonna continue to look in Australia. We won't do an acquisition just for the sake of doing an acquisition.
It really needs to align nicely with our strategy, and if it does, then we'll pursue those opportunities as they arise.
Yeah. It's Brian here. Only thing else I would add, Mark, is that, you know, the acquisition did come with a great development pipeline. That's the other thing that's, you know, not just having the operating assets, having that development pipeline in place really gives us a great growth platform.
Right. When you think about the U.S. market, is that something you guys could do greenfield, or do you think you'd have to do an acquisition or some sort of development portfolio or maybe development and operating to gain entry in the market there?
I would say to just start complete greenfield will be very difficult. We definitely have looked at partnering with companies to bring us into the U.S. That or an acquisition. To just try to start greenfield, we feel it'd be very, very difficult.
Understood. Then just coming back to the customer affordability and you guys commented about how you see the setup differently relative to what happened in Nova Scotia. At the UCP convention, they talked, one of the resolutions was about trying to reduce transmission distribution costs. When you hear that from the politicians, you know, what has to be done from educating from your perspective? Then when you do hear that, you know, where do you think they could try to push back on you at all in terms of either, you know, adjusting rates somehow or deferrals or anything like that?
Yeah, good question, Mark. You know, listen, utility costs are front of mind for everyone right now in the face of the global turmoil, the commodity shortage and inflation driving up prices. Looking specifically at the situation here in Alberta, it's important to recognize that transmission and distribution charges are just two of the many charges that make up a customer's utility bill. First, the commodity prices rose sharply in the face of the global supply chain pressures and rising geopolitical tensions and more than doubling since last year. You know, using an average customer's gas bill as example, these commodity costs can account for more than 40% of the total utility bill.
You know, these higher commodity prices were compounded with higher gas usage across the province in the last first few months of this year. Franchise fees, which is another part of the bill, are also going up. You know, for an average gas bill, this could account for about 8%-15% of the bill. You know, I guess all of that being said, we obviously education is an important part, and if you look at our website, we're trying to put on some education material for our customers. The best things that we can do, and we've kind of announced it at our AGMs, is just run our business as efficiently as possible. We note that our gas distribution utility office offers customers the lowest monthly distribution charges in North America.
In our electricity business, we continue to drive out efficiencies, and we note that our operating maintenance costs per kilometer have been reduced by 17% over the last six years. That's what we bring forward, and we're very mindful of any new project. It has to support the customers, and affordability is definitely something that we've been communicating to everyone that we talk to is a very important concern. Reliability and affordability and safety.
Okay. Thanks for that, Brian. Appreciate it.
The next question comes from Ben Pham with BMO. Please go ahead.
Hey, thanks. Good morning. I was wondering, you mentioned your returns in our distribution, they're gonna come down but still remain attractive. How do those returns compare to this renewable portfolio that you're moving forward with or will be moving forward with?
Yeah. You know, good question, Ben. Yeah, like what I've mentioned on utility returns is, you know, we've done very well in the last two PBR terms as we drive efficiencies for customers. I always go back to the regulated versus non-regulated. Certainly we look to have some long-term PPAs with a lot of renewable business, so take some of the risk away. When you compare risk between our regulated business versus our non-reg business, to the extent that we're adding on some more merchant or you know, taking more risk on a business, we would expect internally that we would come up with a higher return.
That said, you know, we have to start somewhere and strategically what we purchased for the Suncor assets with the development pipeline. Over the long term with the development pipeline, we expect those returns to be quite healthy.
Okay. Sounds like it's this renewable portfolio's maybe not as great near term, but it sounds like there's a lot of upside longer term.
Yeah. I think the development pipeline has, again, great growth in that portfolio. You know, I'd say that they would be somewhat aligned with what we got for regulated, given that we are going to contract a good portion of the offtake.
Okay. Understand. Then staying with returns, when you go into Australia, how should we think about calculating the realized return in Australia? Because it's, I think it's like 5% allowed, but then your rate base goes up with inflation, your earnings goes up. Do you actually adjust it too when you're calculating your return? Then if CPI goes down at 2% next year, how does that work? I guess earnings starts to creep lower into next year.
Yeah. Like, I think we try to be helpful and give everyone a kind of rule of thumb. The rule of thumb is that every 10 basis points change in inflation translates into about AUD 1 million of earnings for Australia. You know, if you take a base kind of approved rate of five, and buried within the regulatory mechanisms, in 5 was just over 1% inflation. To the extent that inflation goes up to 2%, that's 100 basis points, and that's AUD 10 million of earnings. Obviously, when you note that I noted earlier that if inflation's gonna be at 7%, and next year is gonna go down, say, roughly 3%, if that were to happen, that's a 4% change.
You could do the math on the rule of thumb that I gave you. Yeah, you take a look at your regulated return, like your actual rate of return that's approved in Australia, to the extent that that inflation goes up or down, it would be indexed accordingly with just that rule of thumb that I gave.
Okay. I know I'm only allowed two questions. I just wanna make sure I understand this. I mean, I got the earnings situation okay. But I'm more wondering with your approved rate base at 1.4 or so, when you're calculating the ROE, does that denominator actually change? Because if not, you're earning like a 15% realized ROE. I was just trying to make sure I get my math correct.
Yeah. In the current year, like, basically we get, we recognize the fact that when inflation is higher, our rate base gets indexed higher. We are allowed to collect that over a longer period of time, over 40 years. We recognize in earnings, whenever we index that rate base in year, we take those into earnings, knowing that's going to be collected over a long period of time, and that forms a new basis for going forward in our next access arrangement in terms of how our returns will be calculated on. The approved rate of return will be applied to that new inflated rate base.
Okay.
Certainly, our team here can work with you offline. We'll give you a little bit more of that mechanics.
Okay. All right. Thank you.
Once again, if you have a question, please press star then one. The next question comes from Matthew Weekes with iA Capital Markets. Please go ahead.
Hi. Thanks for taking my question. Just following up a little bit on kind of some comments about, you know, growing the renewable net, and how the energy transition strategy is expected to kind of grow in the portion of earnings going forward. As you see that kind of adding to the run rate growth of the business and sort of outpacing the growth in the utilities, you know, have there been any conversations about maybe increasing the payout a little bit on the dividend?
Thank you, Matthew. Thanks for the question. Yeah, you know, in terms of our dividend policy, broadly, what we say is that our dividend growth would be in line with kind of underlying growth of our portfolio. You know, at this time, no, we would, you know, we're gonna keep it pretty much at you know the moderate kind of increases. Over time, as we may address that given the pace of earnings growth. For now, well, that'll probably be a little ways in the future.
Okay, thank you. Just in terms of the renewable power portfolio, and you talked about, you know, the growth outlook there and the good backlog of projects and return potential. Do you see kind of the returns in terms of the development portfolio maybe being higher than the current operating portfolio based on your views of power market and the outlook for PPAs and the carbon tax going forward, et cetera?
Yeah, Matthew. Bob here. Absolutely, we do. That's how we do see things going forward. The other thing I was gonna comment earlier in one of the other questions is just we're also looking a lot on our renewable portfolio as well as all of our energy transition portfolios.
As we bring in new partners, the ability to actually increase our returns through that process, and then also as we develop projects, as we look to potentially sell down, we feel we'll have a good potential of increasing returns from that mode of operation as well.
Okay, thanks. That's helpful commentary. I'll turn the call back. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Mr. Colin Jackson for any closing remarks.
Thank you, Charisse. Thank you all for participating today. We appreciate your interest in Canadian Utilities, and we look forward to speaking with you soon. Thanks.
This concludes today.
I'll now turn it to the operator.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.