Thank you for standing by. This is the conference operator. Welcome to the Q2 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. Colin Jackson, Senior Vice President, Finance, Treasury, Risk, and Sustainability. Please go ahead, Mr. Jackson.
2021 conference call. With me today is Executive Vice President and Chief Financial Officer Dennis DeChamplain, and CU Inc.'s Senior Vice President, Finance and Regulatory, Brian Shkrobot. Dennis will begin today with some opening comments on recent company developments and our financial results.
Following his 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 canadianutilities.com and can be found in the investor section under the heading Events and Presentations.
I'd like to remind you that all 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 measures such as adjusted earnings, adjusted earnings per share, funds generated by operations, 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 Dennis for his opening remarks.
Thanks, Colin, good morning, everyone. Thank you all very much for joining us today on our Q2 2021 conference call. Canadian Utilities achieved adjusted earnings of CAD 115 million, or CAD 0.43 per share in the Q2 of 2021. This is CAD 21 million or CAD 0.09 per share higher than the Q2 of last year.
The CAD 21 million of growth in our earnings was primarily driven by strong performance in our Puerto Rico LUMA business, our Australian Natural Gas Utility, and our Canadian distribution utilities. Our Australian Natural Gas Utility benefited from a rising CPI, which continued to trend upwards towards a more stable level during the Q2.
Economic activity in Western Australia has also improved in 2021, with mining activity in particular looking strong coming out of the pandemic.
We're optimistic that these trends will continue through the remainder of 2021 and create momentum coming out of the pandemic. In Puerto Rico, we marked a significant milestone on June 1st with the successful completion of the one-year transition period, which on top of being completed ahead of schedule, involved countless regulatory, operational, safety, financial planning, and readiness activities.
Following the successful transition, LUMA Energy assumed full operation of the electricity transmission and distribution system under a supplemental agreement. We will operate under this supplemental agreement until such time that PREPA has concluded its bankruptcy proceedings, at which point we'll move directly into the 15-year operating agreement.
Since commencing our work in Puerto Rico, there have been challenges, some of which have been covered in the local media. As with any undertaking of this scale, there will always be challenges and resistance to change, but we remain committed.
We'll be putting our heads down and working to meet our commitments to all stakeholders, including the people of Puerto Rico. On the regulatory front, we have continued to gain more progress on prospectivity with several decisions received in the quarter. In mid-June, the AUC issued its decision on the ATCO Gas transmission application to acquire the Pioneer Pipeline.
The commission ruled favorably and approved the application as filed. The AUC also approved our application to transfer the 30 km western segment of the Pioneer Pipeline to NOVA Gas Transmission, as this segment is located within NGTL's service area. NGTL is awaiting approval from the Canada Energy Regulator.
The transfer is expected to close in the Q4 of this year. Further direction on the 2023 cost of service application process for the Alberta Distribution Utilities was also received in June and came in largely in line with our expectations.
Applications from both our electricity and natural gas distribution companies will be filed in the Q4 of this year. Following the one-year 2023 cost of service period, the AUC has also approved a third PBR term to commence in 2024.
A generic proceeding will be initiated in the Q3 of 2022 to outline the parameters of this third PBR cycle, including a review of the term, capital funding provisions, inflation and productivity factors, and consideration of an earnings-sharing mechanism.
In terms of capital investment, we invested CAD 430 million in our business in the Q2 of 2021. Of this CAD 430 million, CAD 412 million was invested in our core utility businesses to ensure the continued generation of stable earnings and reliable cash flows. This investment does include the Pioneer Pipeline acquisition that I noted earlier.
In our energy infrastructure businesses, we continued to invest in our clean energy strategy in the Q2 , exploring opportunities in both the renewable energy generation and clean fuel streams of the strategy, including our recently announced collaboration with Suncor to pursue a world-class hydrogen production facility in Alberta.
In line with this clean energy strategy, I wanted to highlight that we released our 2020 sustainability report in May of this year, which included key information on how we're positioning our business for a lower emissions future. Notably, this report highlighted the 90% reduction in Scope 1 emissions that we achieved against 2019 through the sale of our fossil fuel generating business, along with the 17% reduction we've achieved since 2019 in our retained portfolio.
Hydrogen, a clean fuel that is part of our larger clean energy strategy, will play a critical role in affordably decarbonizing the production and delivery of heat to our customers. Amongst other benefits, it has the potential to utilize existing pipeline infrastructure, which will greatly reduce the transition time and costs necessary to move closer to a lower emissions world.
We believe that hydrogen will become an important source of revenue and profitability for Canadian Utilities into the future. That's why we've continued to take steps to maximize our presence in this market globally. In early May, we announced our plans to develop Western Australia's first commercial-scale green hydrogen production facility, called the Clean Energy Innovation Park, in association with our joint venture partner, the Australian Gas Infrastructure Group.
This project leverages the learnings from our Clean Energy Innovation Hub in Australia, which was focused on investigating the potential role of hydrogen in Australia's future energy mix and has been successfully blending hydrogen into our gas system in Australia.
Not only is the Clean Energy Innovation Park a significant step forward for commercial hydrogen in Australia and for our own aspirations in the hydrogen market, we have also been successful in securing AUD 29 million in funding from the Australian Renewable Energy Agency, referred to as ARENA, to kickstart this initiative.
With the planned 10-MW electrolyzer, the park will be capable of producing 4.6 tons of hydrogen per day and will utilize renewable power from an existing co-located 180-MW wind farm. The park will also house related storage infrastructure and provide delivery to natural gas system injection points.
In May, we announced that we are working with Suncor to design a clean hydrogen production facility at ATCO's Heartland Energy Centre near Fort Saskatchewan, Alberta. This world-class project is expected to produce more than 300,000 tons per year of clean hydrogen and reduce Alberta's CO2 emissions by more than 2 million tons per year.
This hydrogen project with Suncor will significantly advance Alberta's hydrogen strategy and Canada's net-zero ambitions as a whole, generating substantial economic activity and creating jobs in the process. While it remains early days for this project and there is significant technical development work to do, we're working with the provincial and federal governments to ensure that sufficient support structures are in place for a project of this scale to be successful.
I also want to take a minute to highlight our recently announced renewable natural gas, or RNG, development with Future Fuel Limited that is located near Two Hills, Alberta, which is about an hour-and-a-half drive just east of Edmonton. The facility will utilize organic and agriculture waste from nearby communities to produce approximately 230,000 gigajoules per year of RNG.
This is enough renewable natural gas to fuel 2,500 homes and will lead to the avoidance of up to 20,000 tons per year of CO2-equivalent emissions. While the scale is much smaller than the hydrogen opportunity we discussed a couple of minutes ago, this project and others like it that we intend to explore in the near term are critical to our larger clean fuel strategy.
This project serves as a blueprint for other rapidly executable projects and will provide near-term earnings and cash flows to support the ongoing development of our larger and longer lead hydrogen initiatives. Lastly, I wanted to mention ATCOenergy's June launch of Rümi, an innovative startup aimed at providing homeowners with solutions for everyday household challenges by connecting them with trusted professionals.
Rümi offers smart home technology products and repair and maintenance services to the Calgary and Edmonton markets, in addition to a wealth of general home management advice. All in all, Canadian Utilities carried the momentum from the Q1 of 2021 into a strong Q2 and will continue to push hard heading into the second half of this year. That does conclude my prepared remarks, and I'll now turn the call back over to Colin.
Thank you, Dennis. 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.
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 from the question queue, 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 Canadian Utilities investor relations team will follow up with you by email after the call. Once again, we ask anyone on the conference call who wishes to ask a question may press star then one at this time. Our first call comes from Maurice Choy, RBC Capital Markets. Go ahead, please.
Thank you. Good morning. My first question relates to all the clean energy initiatives that you've announced. Obviously, you've got the hydro that you previously announced in Australia, the renewables in Chile, RNG in Alberta, as well as the hydrogen production facilities that may come online in Alberta and Australia.
If you were to draw a spectrum of returns and compare these initiatives against perhaps the 8.5% base allow ROE you get for Alberta regulated utilities, how would that spectrum look like, and how would you rank these initiatives?
Good morning, Maurice. I hope you're staying safe. Yeah, the utility returns would be, we'll say, at the far left of the spectrum with the lowest risk and therefore the lowest return. The other projects that you've outlined, maybe I should check that. Right now, we're seeing solar returns for solar projects, coming in lower than the utility returns. Right in around that area in terms of equity returns.
The other projects, we really do need to look at them on a project-by-project basis. Our method of operating, we prefer long-contracted assets with credible counterparties. Also with partnering with like-minded firms that share our values as we go to de-risk the investments. I can't tell you for certain whether a Central West Pumped Hydro would be more or less risky than the hydrogen project.
It depends on the long-term contracted outputs, the inputs, what kind of backstops you may have from counterparties, and what have you. Because of the additional risks, those returns are north of the utility returns, I'd say, somewhat obvious. I'm not prepared to get into specific returns for specific projects due to commercial reasons.
That's fair enough. Maybe as a follow-up to that, would it be fair to say that you wouldn't enter into these initiatives after considering the government funding or subsidies that you may receive, that you wouldn't enter into these initiatives unless it's at least in line, if not better than, the Alberta returns? Again, recognizing that you do outperform in Alberta as well.
Well, we'd need to take a look at the projects. As we scan the environment, the utilities, I'm going to say, are at the far left of the spectrum. If we can't completely de-risk it down to utility level, then yes, we would be expecting higher returns.
Understood. My second question,
You do hit on a good point of the approved return versus the achieved return coming out of our utilities, which we do take into account as well.
When you look at your far left of the spectrum, is that the 8.5 or is it 8.5+ out-performance?
There's a range there depending. Given the regulatory resets and what we have achieved over the last decade of north of 200 basis points out-performance, we get asked, "What are you going to do for me next year, and how are you going to restock those saving shelves?" We do continue to out-perform.
It's a challenge to management, and the teams do a great job of doing it. I'll say we do bank on somewhat out-performance. The exact amount, I'll say we don't have an exact amount, and it's a bit of a range given the regulatory pressures and our views going forward.
Understood. My second question, maybe take a few years forward into the Suncor clean hydrogen project that you're considering. If you were to FID this later this decade, can you help us understand roughly what type of investment your share would be? Would you consider bringing on a partner alongside yourselves and Suncor?
Never say never with another partner. We do think between ourselves and Suncor, we have the capacity and the skills required in order to execute the project. Suncor brings hydrogen production experience, large project management experience.
We're in the storage and piping business, so we believe that we have the capability required and the capacity required to do the project on our own. In terms of capital costs and economic return details, those are still being worked out. Given that it's a world-class scale, there's great long-term potential for the project, and we're continuing to work through those details.
I guess, would it be fair to look at the balance sheet capacity that you have, in particular, using the proceeds from the recent asset sales? Would you say that what you have today is enough to fund these and all the other initiatives that you've announced so far?
Yeah. We've looked at the stacking of opportunities. We wouldn't have pursued the hydrogen production facility with Suncor if we didn't have the financial capacity and ability to proceed with it.
We've been, I think, relatively clear on our strategy with regards to clean fuels and renewable energy. The pace and quantum can flux with opportunities, we do have that capacity to execute on all the initiatives in our strategy.
Great. Thank you very much.
Thanks, Maurice.
Our next call comes from Andrew Kuske, Credit Suisse. Go ahead, please.
Thank you. Good morning. Maybe I'll start with a narrow question first. Obviously, we've seen some pretty robust inflation numbers around the world and various regions is a bit different. Could you maybe just address any near-term positive impacts you have from the inflation data, just by way of the regulatory mechanisms you have? The flip side of that is, are you experiencing any cost pressures in any of your assets?
Sure. Maybe I'll start, and then I'll ask Brian Shkrobot, who heads up the finance and regulatory from CU Inc., to talk about the Alberta utilities. We are seeing the positive impacts from the inflation in Australia. Last year, I think we had recorded in the first six months about 0.3% in inflation, and this year it's been 1% inflation.
That additional 70 basis points accounts for about CAD 7 million in adjusted earnings coming out of Australia, a great benefit in terms of the adjusted earnings coming from Australia. We do see cost pressures in Australia along, and lengthening of some lead times in order to get materials, pipe in particular, into Perth to execute on our projects. It's all very manageable right now.
The other elements will maybe turn it over to Brian for some color on the Alberta regulatory environment and impacts on PBR and your costs, Brian.
Thank you, Dennis. Thanks, Andrew, for your question. As Dennis mentioned, in Alberta, we do the PBR mechanisms for the distribution utilities adjust for inflation. To the extent that we have higher inflation, that gets adjusted into future rates. That said, similar to Australia, we are seeing some inflationary pressures on our materials, but not too significant.
Very manageable. We have really good long-term relationships with our suppliers, so we're not seeing any issues in terms of getting that material at reasonable rates. Continue to monitor through that, but nothing of significance to Alberta for the inflation at this time.
Thank you. That's helpful. For the second question, a little bit different, and really relates to PREPA, and Dennis, you mentioned this in your prepared remarks, just a bit of the resistance to change that's been documented and that you're committed to making the situation there better.
Not to belittle the dynamics of it's difficult, but you're very capable, and I'm not trying to be patronizing about this because you've got a very extensive track record of doing these kinds of things. Is this just a function of time to win hearts and minds in just delivering what you've promised to deliver on the front end in a very public process through the whole dynamics around PREPA and how you wind up with the contract?
Yeah. A great question, Andrew. If you look at the vested interests in PREPA for us going in, I'll say versus what's in the hearts and minds of the people of Puerto Rico, I think there's a general consensus, overwhelming consensus, that a transformational change is required. There was a J.D. Power customer satisfaction survey, out of 50 companies, PREPA was number 50, and they had a heck of a long way to get to number 49 on the list.
That wasn't any of the, we'll call it the stakeholders with the vested interests in PREPA. That was the customers. That's been our focus going in. Winning the hearts and minds of customers. There was a large fire on June 11th. It knocked out about 1 million customers. We had them all back online within 26 hours, I think, just over 1 day.
I know you weren't belittling at all in your comments, but the way our teams worked through it in the methodical, safe, efficient manner, it just exudes that operational excellence and the pride that we have in the people down in LUMA. Some of the management stock from Quanta and from ATCO.
The boots on the ground coming from ex-PREPA employees was just wonderful to see. We're not out of the woods yet. There's a lot of work to do. As we continue to perform and execute, we hope the public sentiment will help turn the vested interests, and the noise will quieten down and let us get on with giving the Puerto Ricans the electrical system that they deserve in the years coming forward.
That's great. I greatly appreciate it. Thank you.
Thanks, Andrew.
Our next question comes from Mark Jarvi, CIBC Capital Markets. Please go ahead.
Thanks. Good morning, everyone. I wanted to start with RNG, and you talked about sort of announcement earlier, a couple of months ago or last quarter. I don't believe that initiative will be sending the RNG or renewable natural gas into your own utility and go to some other customers.
Just curious when you think you'll start to introduce RNG into your own gas distribution facility in Alberta, and what you need to see from regulators and policy before you can start to make those types of investments and integrate into your own utility?
Yeah. Good morning, Mark. That's another great question. One of the elements that we're pursuing with the government, in relation to hydrogen, but it's also applicable to RNG. Right now, the Gas Utilities Act does not allow for or permit the injection of clean fuels in order to lower the CO2 impact compared to natural gas.
We are working with the provincial government in order to try to get them to amend the GUA in order to allow for that. All of the discussions so far have been very receptive and have gone in a very positive nature. I'll ask afterwards, Brian, if you've got anything to add, you're closer to that than I am. That's what we need in order to inject that blending up to potentially 20% to help lower the emissions for our customers. Brian, that said.
Thank you, Jarvi . Just to add on, yes, the provincial government. We are working with them directly. They are very open to it. It's in the works, per se, in terms of allowing the hydrogen or RNG into our systems. That said, we've also introduced new producer rates that would also facilitate the connection of the RNG into our systems. We've laid the foundations there. We expect in short order to have those approvals.
Would you envisage yourself being a producer yourself, or some part of Canadian Utilities or ATCO, in terms of supply of RNG? Or is it more likely to go to third parties?
No. We are investing in RNG production as part of our clean fuels initiative. The first project out of the hopper is the Two Hills RNG project at 230,000 GJs. That would be because of the small capital costs and associated earnings impact, we're looking to build a portfolio of the RNG production facilities in Alberta and also outside of Alberta as our customers are looking to help decarbonize on their efforts. That's not just in Alberta.
Got it. I wanted to go into the segments a little bit. One, just about corporate. You brought up Rümi, a new initiative that you've launched. Is there any upfront costs you have to be mindful of that might be a bit of a drag in the next few quarters as you start to build that?
Second, it looks like the ATCOenergy business seems to be turning forward here and doing well and contributing, is there anything special about the contribution in this quarter to two or seasonality? Or do you think that contribution seemed to have a positive impact this quarter should persist?
For the first part, is there going to be any drag from Rümi? No, we don't see much of a drag. We're continuing to expand our products and services into first the Edmonton and Calgary markets. Should it be successful, when it's successful, we could be looking to expand that outside of Alberta borders. There's a potential there.
There may be some costs, but there's nothing in the near term that should impact the corporate results. The results in Q2 and year to date for ATCOenergy buried in the corporate segment, there's nothing unusual or a one-time nature in those results that would cause that to be a blip or we're looking for a continued performance out of ATCOenergy as they continue to build their market share here in Alberta.
Okay. Last one is just on the Alberta distribution utilities. The gas and electric seem to have fairly strong results year-over-year improvements. There was a mention for the gas about some timing of costs.
Is that sort of a retrospective or is that you deferred some costs that will show up next quarter? Then on the electric side, is that just stronger industrial load as activity picks up in and around gas basin? Is there sort of a weather factor there around residential loads in the quarter?
Yeah. In terms of gas, and then I don't know the answer to the second question, so I'm going to pump that one out for to Brian, too. In terms of gas, that's in-year timing, so there's some expenses in the first half of the year that we expect to incur in the second half of the year. That's the timing that we're referring to. Brian, on the load for the first bit, weather impacts?
Yeah, just on electric and growth in earnings, again, it's mainly driven by the continued operating efficiencies that we have implemented over the years, and we continue to see the compounding effects of those benefits.
As for the load, yes, we do see strong growth in our customers. We not impacted by weather per se too much. But it's really driven by strong customer growth and again, mainly due to the cost efficiencies and programs that our people have implemented for the benefit of customers and shareholders over the years.
Perfect. Thanks for taking my questions.
Thanks, Mark.
Once again, if you have a question, please press star, then one. Our next question comes from Matthew Weekes, iA Capital Markets. Please go ahead.
Hi. Thanks for taking my question. I was just looking for a little bit of clarification. You talked about the economic growth.
Sorry, Matthew, we're having extreme difficulty hearing you. Now I can't hear you at all.
Sorry, can you hear me better now?
Much better. Thank you, Matthew. Sorry about that.
Okay. Sorry about that. Thanks. Yeah, I was just wondering if you'd be able to comment on kind of separating what the impact in the quarter was from the settlements that occurred in the Australian gas business, which was mentioned in the MD&A as providing a tailwind versus recovering economic growth and inflation?
Yes. Thanks, Matthew. We talked about it a little bit earlier with regards to inflation when I was answering Andrew's question. The impact from inflation in the first half of the year is about CAD 7 million uplift on the results due to CPI. The settlement that we had related to back when we bought ATCO Gas Australia,
Which it just happens to be the 10th anniversary today that we acquired WA Gas Networks or WAGN. That settlement added about AUD 2 million to the Q2 results for Australia, and that's included in the results and that gives you most of the uplift in Australia's earnings.
Okay. It doesn't sound like it was really too material overall.
No.
Okay. Thanks.
They're continuing to perform and execute and as I referred to in my opening comments, the economic activity is really picking up there. We've got for now being able to manage the impacts of inflation on their performance. They're continuing to perform extremely well.
Okay. Thanks for the clarification on that. That's it for me. I'll turn it back.
Thanks for your question, Matthew.
This concludes the question and answer session. I would like to turn the conference back over to Mr. Colin Jackson for any closing remarks.
Thank you, operator, 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 and goodbye.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.