ATCO Ltd. (ACOX) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the ATCO Ltd. Third Quarter 2022 Results Conference Call and Webcast. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Colin Jackson, Senior Vice President, Finance, Treasury, Risk and Sustainability. Please go ahead, Mr. Jackson.

Thank you. Good morning, everyone. We're pleased you could join us for ATCO's Third Quarter 2022 Conference Call. With me today is Executive Vice President and Chief Financial and Investment Officer, Katie Patrick. Before we move into our formal agenda, I would like to take a moment to acknowledge the numerous traditional territories and home lands 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 and 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 3. We honor and respect the diverse history, languages, ceremonies and culture of the indigenous peoples who call these areas home. Katie will begin today with some opening comments on recent company developments and our financial results. Following these prepared remarks, we will take questions from the investment community. Please note that a replay of the conference call and a transcript will be available on our website at atco.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 ATCO with the Canadian securities regulators. And finally, I'd like to point out that during this presentation, we may refer to certain non-GAAP or segment measures such as adjusted earnings, adjusted earnings per share and capital investment. These measures do not have any standardized meaning under IFRS. And as a result, they may not be comparable with similar measures presented in other entities. And now I'd like to turn the call over to Katie for her opening remarks.

Thanks, Colin, and good morning, everyone. Thank you all very much for joining us today for our third quarter 2022 conference call. ATCO achieved adjusted earnings of $87 million or $0.76 per share in the third quarter of this year. This is $18 million or $0.16 per share higher than the third quarter last year. This $18 million of year-over-year growth came primarily from the strong performance of our utilities, combined with great performance across our broader portfolio of investments. Our Canadian Utilities investment saw its adjusted earnings grow $32 million, from $88 million in the third quarter of last year to $120 million this year. The Alberta-based distribution utilities continued to deliver exceptional results in the final year of their second PBR cycle. Also, the international natural gas distribution business continued to benefit from CPI indexing, which pushed their earnings higher in the period. I want to briefly touch on a couple of points that Brian covered during this morning's CU call, which have important impacts to ATCO as well. First, I want to congratulate the entire team of CU on their transformational acquisition of Suncor's renewable generation portfolio. These assets provide immediate scale with renewable generation, along with a strong development pipeline. This is exactly aligned with the strategy we've outlined to be a leader in the energy transition. This provides a pathway to both achieving our 2030 ESG targets and is expected to be accretive to earnings and cash flow in its first year of operations. Also, as you heard from Brian, our utilities continue to perform very well. A meaningful portion of their earnings in the period came from the international natural gas distribution business, which has benefited from CPI indexing in the face of a rapidly rising Australian CPI. Australian CPI remains elevated, though some forecasts suggest that this figure will trend downward to more normal levels in 2023. This movement has the potential to materially impact the earnings for this business. Similarly, our Alberta distribution utilities have delivered exceptional earnings in 2022, the final year of their current performance-based regulation or PBR cycle. Consistent with the cyclical nature of the PBR framework, we expect to see earnings for the distribution utilities reset downwards as we rebase in 2023 and the efficiencies developed are shared with ratepayers. Despite the expectations that earnings from Alberta distribution utilities will reset downward in 2023, we still believe our utilities will deliver outperformance above approved ROEs in 2023, based on the drivers Brian outlined earlier today. I also want to take a moment to commend the LUMA team for the exceptional work that they've done in Puerto Rico as the territory works to recover from the damage done by Hurricane Fiona. The LUMA teams have worked tirelessly to restore service to customers impacted by the hurricane and ensure the safety of all citizens during the aftermath of this tragedy. While significant work remains, power has been restored for more than 99% of the customers. And the importance of LUMA in Puerto Rico's journey towards a stable, resilient and modern energy system has, again, been highlighted. I truly can't thank the LUMA team enough for their exceptional work. Turning to ATCO Structures. We delivered adjusted earnings of $15 million in the quarter, approximately $2 million higher than the same quarter last year. In line with our strategy of expanding the base business, growth in the period was driven by strong performance from the space rental segment globally. The Structures business continues to focus on diversifying its customer base across both market segments and geographies. This quarter, in particular, saw expansion in the U.S. market with significant growth in the space rental fleet. The U.S. is an important market for us and we expect its contribution to earnings to increase going forward. Beyond the base business of space rentals and workforce housing, which typically accounts for 2/3 to 3/4 of our segment earnings, strong project activity further supplemented our earnings growth. We continue to advance our Pluto II LNG expansion project with Bechtel, a long-time partner in the third quarter. This project will see us provide accommodations for 2,500 workers and displays our ability to execute large-scale, multifaceted workforce housing projects. Given the scale of this project, it will continue to be a significant driver of earnings for us throughout the next year. At ATCO Frontec, we delivered stable earnings of $3 million, which were comparable to the prior year and supported by strong occupancy levels at our Trans Mountain and other camps. As discussed on the second quarter call, Frontec through its Nasittuq partnership won a 7-year contract from the government of Canada to operate and maintain the North Warning System. The transition period for this contract commenced April 1, 2022, and was successfully completed on September 30 of this year. On October 1, our team assumed operations under the agreement. Leveraging our strong presence in the North and experienced gain through this contract, we expect the government of Canada's recently announced NORAD modernization project to create additional opportunities for us in the future. Our teams will be actively marketing the expertise of both Frontec and our Nasittuq partnership to help meet the needs of this initiative as they become more clearly defined. Moving on to Neltume Ports. The business continued to deliver stability in the third quarter with earnings of $4 million, which was in line with the prior period last year. Growth and the deployment of capital continues to be a key area of focus at Neltume. As global economic activity continues to improve, our pipeline of opportunities in the Neltume business grows. And we're confident that this will create meaningful opportunities for new investments. Overall, ATCO had a great third quarter. I'm excited to see the work that our businesses have been doing to secure new projects, execute on their long-term strategies and drive earnings stability. You can see from our results today that we are well positioned to close out the remainder of 2022 with many exciting opportunities ahead in 2023 and beyond. That concludes my prepared remarks, and I will now turn the call back to Colin.

Thank you, Katie. [Operator Instructions] I will turn it over to the conference coordinator now for questions.

[Operator Instructions] The first question comes from Linda Ezergailis with TD Securities.

Looking at the next decade, there's a lot of initiatives underway. And I'm just wondering if you can help us understand how we might think of your business mix shifting as your company decarbonizes and pivots to an energy transition.

Yes. I think...

Sorry, Katie, within that comment, maybe if you can talk about if you're considering any new discrete platforms as well in addition to the ones that you have?

Yes, absolutely. Thanks, Linda. I think Brian roughly talked to the transition and what we expect from a proportion of earnings for CU going forward. And I think the one thing I would add from an ATCO perspective, in addition to that, obviously, the energy transition business will become a growing portion of CU and hence flow up to being a more significant portion of ATCO's earnings as well. The ATCO businesses on a stand-alone basis also generally have a higher growth expectation going forward, just based on the relative size than CU. So over the next decade, they should make up a more meaningful size of the overall portion of ATCO's earnings. In terms of discrete new businesses, I would say that we do continue to look for platforms that are synergistic to the overall portfolio for ATCO. And we have, in the past, outlined the specific areas of essential services that we would look to make those investments. In the near term, we have, obviously, a very strong pipeline associated with the energy transition project. So most likely, from a capital allocation perspective, we will be putting a lot of focus there. But in the back half of the decade, there may be other opportunities that present themselves.

And just as a follow-up maybe on your existing ATCO level platforms. What is your outlook in terms of opportunities and achieving kind of an elevated growth profile at your Neltume business in Structures & Logistics? Can you comment on what role, if any, acquisitions might augment the organic growth and which growth driver do you expect to be more significant over the next 4 years, let's say?

Sure. Thanks, Linda. I think for both businesses, they have a very strong organic profile ahead of them. Now when I say organic, for Neltume, it's slightly different in that there is some greenfield and some brownfield. They've made some acquisitions, which I think they will continue to do that give them an entry into the new market. You will have seen we've made some acquisitions in the U.S. and stevedoring, which just provides the foundation to look for the more concrete asset opportunities. So I think there's a bit of a mix in the Neltume business with a more heavy leaning probably towards the organic growth options there. On structures, I think we have done very well in the past with an organic strategy with, call it, bolt-on acquisitions that help propel it forward a bit. But I think for the most part, we'll be looking for an organic strategy there with the areas we've identified that we don't have a strong presence as yet, particularly in the U.S., to make new headways.

The next question comes from Maurice Choy with RBC Capital Markets.

My first question is about tying back to your relationship with CU. Obviously, there's a lot of capital requirements on a CU level related to the energy transition. And I acknowledge that Brian has got various non-equity funding options that he highlighted on his call. But what do you see ATCO's participation being and helping CU with its fundraising in years ahead, if anything at all?

I mean we work very closely on trying to map out what the overall funding strategy would be for CU, between ATCO and CU, obviously. I think there is access to various forms of capital for CU, including potential asset recycling opportunities that Brian mentioned, great access to the debt capital markets, to other forms of financing, potentially the equity capital markets in the right situation. So I think CU on its own does have the capacity to fund its own growth without necessarily support from ATCO. And I think that's been our historical trajectory and likely would be the path forward. Did we lose you, Maurice? Do you have a follow-up on that one?