Canadian Utilities Limited

Thank you. Good morning everyone.

We are pleased you could join us for our second quarter 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 the 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 a transcript will be available on our website at canadianutilities.com and can be found in the Investors section under the heading Events & Presentations. I'd like to remind you that all 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 the Canadian Utilities with the Canadian securities regulators. And finally, I'd 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. And now I'll turn the call over to Dennis for his opening remarks.

Thanks Colin and good morning everyone. Thank you all very much for joining us today on our second quarter 2021 conference call.

Canadian Utilities achieved adjusted earnings of $115 million or $0.43 per share in the second quarter of 2021. This is $21 million or $0.09 per share higher than the second quarter of last year.

The $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 second quarter.

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 1 with the successful completion of the one-year transition period which on top of being completed ahead of schedule in both countless regulatory, operational safety, financial planning and readiness activities.

Following the successful transition LUMA assumed full operation of the electricity transmission and distribution system under a supplemental agreement, we will operate under the 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 and 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 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 has issued its decision on the ATCO Gas Transmission application to acquire the Pioneer pipeline.

The commission ruled favorably and approved the application as filed. AUC also approved our application to transfer the 30 kilometer Western segment of the Pioneer Pipeline to NOVA Gas Transmission as this segment is located within NGTL service area.

NGTL's waiting approval from the Canadian Energy Regulator and the transfer is expected to close in the fourth quarter 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 fourth quarter 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 third quarter 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 investments, we invested $430 million in our business in the second quarter of 2021.

Of this $430 million, $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 continue to invest in our clean energy strategy in the second quarter. 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 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 and 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 Australia Gas Infrastructure Group, this project leverages the learnings from our clean energy information 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 29 million AUD in funding from the Australian Renewable Energy Agency referred to as ARENA to kick-start this initiative with the plan 10 megawatt 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 megawatt wind farm, the park will help related storage infrastructure and provide delivery to natural gas system injection points.

In May, we announced that we're working with Suncor to design a clean hydrogen production facility at ATCO 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 CO2 emissions by more than two 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 Ltd. that is located near Alberta, which is about an hour and 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.

And lastly, I wanted to mention ATCO Energy's June launch of Rumi an innovative start startup aimed at providing homeowners with solutions for everyday household challenges by connecting them with trusted professionals. Rumi 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 first quarter of 2021 into a strong second quarter and we'll 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.

My first question relates to all the clean energy initiatives that you've announced. Obviously, you've got the hydro that you previously announced Australia the renewables in Chile RNG 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 and 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.

Yes, the utility returns would be, we'll see at the far left of the spectrum with the lowest risk and therefore the lowest return, the other projects that you've outlined and maybe I should check that, right now we're seeing solar returns, returns for solar projects are coming in lower than in the utility returns right in around that area in terms of an equity, return on equity returns. The other projects, we really do need to look at them on our project-by-project basis, our method of operating.

We prefer long contracted assets with credible counterparties also 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 that 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 back stops you may have from counterparties and what have you, but we do, because of the additional risk, those returns are north of the utility returns and say kind of somewhat obvious, but 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 at least in line, if not better than the Alberta returns, again recognizing that you do outperform in Alberta as well?

Well, we do - we need to take a look at the projects we - as we scan the environment the utility. So I'm going to say are at above at the far left of the spectrum.

So if we can completely de-risk it down to the utility level, then yes, we would be expecting higher returns.

Understood. And then my second question.

But you, but you do hit on a good point of kind of the approved return versus the achieved returns coming out of our utilities, which we do take into account as well.

So when you look at your far left of the spectrum. Is that the 8.5% or is that 8.5% plus our performance.

There is a range that are depending. Given the regulatory resets and what we have achieved over the last decade of north of 200 basis points outperformance.

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 outperformance of challenge to the management and the teams do a great job of doing it.

So I'll say we do bank on sum up outperformance and 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. And then my second question, maybe take a few years forward into the Suncor Clean Hydrogen Project that you're considering.

Could you, if you were to FID this later this decade. Can you help us understand roughly what type of investment your share would be?

And 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 where 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, I mean 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?

Yes, we've looked at the stacking of opportunities and we wouldn't have pursued the hydrogen production facility with Suncor, if we didn't have the ability to the financial capacity and ability to proceed with it. And 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, but we do have that capacity to execute on all the initiatives in our strategy.

Maybe I'll start with a narrow question first. And obviously, we've seen some pretty robust inflation numbers around the world and various regions is a bit different, but 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.

And then 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, I mean, we're 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, so that additional 70 bps accounts for about $7 million in adjusted earnings coming out of Australia.

So a great benefit in terms of the adjusted earnings coming from Australia. We do see cost pressures in Australia along lengthening of some lead times in order to get materials type in particular into Perth to execute on our projects.

But that’s very manageable right now. The other elements we'll maybe turn it over to Brian for some color on the operator regulatory environment and impacts on PBR and your cost Brian.

Yes, thank you, Dennis. Thanks, Andrew for your question.

Yes, as Dennis mentioned in Alberta. We do the PBR mechanisms for the year.

The distribution utilities adjust for inflation, so to 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. 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 second question a little bit different and really relates to PREPA. And you - Dennis you mentioned this in your prepared remarks just a bit of the resistance change that's been documented and that you're committed to making the situation there better.

And I'm not to belittle the dynamics of business difficult, but you're very capable. And I'm not sure we patronizing about this, because you've got a very extensive track record of doing these kinds of things.

But is this just a function of time to win hearts and minds. Just delivering what you promised to deliver in the front end in a very public process through the whole dynamics around PREPA and how you wind up with the contract?

Yes. Great question, Andrew.

I mean, if you look at the divested interests in PREPA for us going in and I'll say versus what's in the hearts and minds of the people of Puerto Rico. I think there is general consensus - overwhelming consensus that a transformational change is required.

There was JP Power customer satisfaction survey and out of 50 companies PREPA was number 50 and they had a heck of a long way to get to a number 49 on the list. And that wasn't any of the call of the stakeholders with the divested interests in PREPA that was the customers and that's been our focus going in winning the hearts and minds of customers we had.

There was a large fire on June 11th, it knocked out about a million customers. We had them all back online within 26 hours.

I think just over a day and I know you weren't belittling at all in your comments, but the way our teams worked through it and the methodical, safe, efficient manner, it just exudes that operational excellence and the pride that we have and the people down in LUMA, some of the management stocked from Quanta and from ATCO and on the boots on the ground coming from ex-PREPA employees was just wonderful to see. We're not out of the woods yet, there is a lot of work to do, but as we continue to perform and execute, we hope the public sentiment will help turn the vested interests and the noise were quite down and let us get on with giving the Puerto Ricans the electrical system that they deserve in the years coming forward.

I wanted to start with RNG and you talked about sort of announcement earlier couple of months ago last quarter, I don't believe that initiatives will be sending the RNG, and renewable natural gas into your own utility and ecosystem of your customers, just curious, when you think you will start to introduce RNG and natural gas distribution utility in Alberta, what you need to see from regulators and policy before you can start to make those types of investments in integrating strong utility?

Yes, I mean that's - 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're 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 discussion so far have been very receptive and have gone very - in a very positive nature, I'll ask afterwards Brian if he's got anything to closer to that than I am, but that's what we need in order to inject that blending up to potentially 20% to help lower the emissions for our customers. Brian?

Yes, thank you, Dennis and just to add on. Yes, the provincial government is, we're working with them directly and 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 system. So we've laid the foundations there and we expect in short order to have those approvals.

And then would you envisage yourself being a producer yourself or some part of Canadian Utilities, which was supply of RNG or is it more likely to go to third parties?

No, we're 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 but 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.

So, and that's not just in Alberta.

And then I wanted to go into the segments a little bit. One is in the corporate - product and in addition, they've launched, is there any upfront cost would be mindful of maybe a bit of a drag in the next few quarters as you start to build that.

And then the second, it looks like the ATCO Energy business, it seems to be carrying forward here and doing well and contributing. Is there anything special about the contribution in this quarter Q2 or seasonality or do you think that that contribution seems to have a positive impact this quarter should persist?

Yes, for the first part, is there going to be any drag from Rumi. No, we don't see, we don't see the much of a drag.

We're continuing to expand our products and services into first the Edmonton and Calgary markets should that or should it go, should it be successful when it's successful, we could be looking to expand that outside of Alberta borders. So there is potential there.

So 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 ATCO Energy buried in the corporate segment.

There is nothing unusual or one-time nature in those results that would cause that to be a blip or we're looking for a continued performance out of ATCO Energy as they continue to build their market share here in Alberta.

Okay. Last one is just on the Alberta distribution utilities of the gas and electric seeing a fairly strong results, year-over-year improvement.

There wasn't mentioned for the gas about some timing of cost. Is that sort of a retrospective or is that that you deferred some costs that will show up next quarter?

And then on the electric side, is that just stronger industrial load as activity picks up on the gas base or is there sort of a weather factor there around residential loads in the quarter?

Yes, in terms of gas and then I'll - I don't know the answer to the second question. So I'm going to punt that one up for the Brian to.

In terms of gas that's in your timing. So there is some expenses in the first half of the year that we expect to incur in the second half of the year.

So there is, that's the timing that we're referring to. And Brian, on your - on the load for the first bit, weather impacts.

Yes, 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 are 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 are - that our people have implemented for the benefit of customers and shareholders over the years.

Hi, thanks for taking my question. I was just looking for a little bit of clarification.

So are you talking sort of economic growth [technical difficulty].

Sorry, Matthew. We're having extreme difficulty hearing you.

[technical difficulty]

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. So yes, I was just wondering if you'd be able to comment on kind of separating what the impact in the quarter was from the settlement 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. I mean, 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 $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 Western Australia Gas Network or WAGN, that settlement added about $2 million to the Q2 results for Australia and that's included in those results and that gives you most of the uplift in Australia's earnings.

Okay. So it doesn't sound like it was really too material overall.

No.

Okay, thanks.

They're continuing to outperform and execute, it's referred to in my opening comments, the economic activity is really picking up there and we've got for now being able to manage the impacts of inflation on their performance. So they're continuing to perform extremely well.

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.