ATCO Ltd. (OTCPK:ACLLF) Q3 2022 Earnings Conference Call October 27, 2022 12:00 PM ET
Company Participants
Colin Jackson – SVP, Finance, Treasury, Risk and Sustainability
Katie Patrick – EVP, Chief Financial and Investment Officer
Conference Call Participants
Linda Ezergailis – TD Securities
Maurice Choy – RBC Capital Markets
Mark Jarvi – CIBC Capital Markets
Operator
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]
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.
Colin 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’d like to take a moment to acknowledge the numerous traditional territories and homelands on which our global facilities are located.
Today, we are 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, Piikani nations and Tsuut’ina Nation Stoney-Nakoda nations that include the Chiniki, Bearspaw and Good Stoney First Nations. The city of Calgary is also home to the Metis Nation of Alberta Region 3. We honor and respect the diverse history, languages, ceremonies and culture of indigenous people 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 & 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.
Katie Patrick
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 growth $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 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 renewables generation along with the 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 target 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 international natural gas distribution business, which has benefited from CPI indexing in the face of a rapidly rising Australian CPI. Australian CPI remains elevated, so some forecast suggest that this figure will trend downward to more normal levels in 2023. This movement have 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 re-base 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 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 strategy. 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 segments 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 rentals 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 two-thirds to three-quarters of our segment earnings. Strong project activity further supplemented our earnings growth.
We continued 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 in the second quarter call, Frontec through its Nasittuq partnership won a seven year contract from the Government of Canada to operate and maintain the North Warning System. The transition period for this contract commenced on April 1, 2022, and was successfully completed on September 30th of this year.
On October 1st, our team assumed operations under the agreement. Leveraging our strong presence in the North and experience gained 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 port. The business continue 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 pipelines of opportunities in the Neltume business grows and we’re confident that this will create meaningful opportunities for new investment.
Overall, ACTO 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.
Colin Jackson
Thank you, Katie. 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.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from Linda Ezergailis with TD Securities. Please go ahead.
Linda Ezergailis
Thank you. 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?
Katie Patrick
Yes.
Linda Ezergailis
And maybe…
Katie Patrick
Linda, I think…
Linda Ezergailis
Sorry, Katie, it was in your 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?
Katie Patrick
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 standalone 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.
Linda Ezergailis
Thank you. 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 and logistics, can you comment on what rules any acquisitions might augment the organic growth and which growth driver do you expect to be more significant over the next four years, let’s say?
Katie Patrick
Sure. Thanks, Linda. I think for both businesses, they have a very strong organic profile ahead of them. Now, when I say organic for now, to me, 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 see we’ve made some acquisitions in the U.S. in stevedoring, which just provides the foundation to look for the more concrete asset opportunity.
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. And on the – 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 will 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.
Operator
The next question comes from Maurice Choy with RBC Capital Markets. Please go ahead.
Maurice Choy
Thank you, and good morning. 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’s got various non-equity funding options that he highlighted on his call, but what do you see ATCO’s participation being in helping CU with its fundraising in the years ahead, if anything at all?
Katie Patrick
I mean, we work very closely on trying to map out what the overall funding strategy will 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 and to other forms of financing, potentially the equity capital markets in the right situation.
So I think CU is 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? You have a follow up on that one?
Operator
Maurice, your line is now open still.
Maurice Choy
Sorry about that. Just a follow up to that, I suppose. If – you mentioned that equity capital market is something that CU can consider if the environment is suitable for that. I suppose, take that one step further, would ATCO be interested in maintaining your share that you have that CU take that route?
Katie Patrick
Yes, I mean, it’s – CU is a very important part of ATCO’s business obviously, and I think has been a longstanding – it’s a longstanding important part of our portfolio. So I can’t foresee that we would significantly diminish our interest in CU. If there was an equity capital raise from CU if that were to happen, I think ATCO would evaluate it based on the merits at the time, but it is an important portion of our business and I can’t, as I said foresee a significant dilution in that entity.
Maurice Choy
Perfect. And my second final question just going back to S&L. Obviously, the economic outlook seems to be everchanging not just in North America but just globally, any change in your view about the pace and interest of your customers wanting to continue their growth?
Katie Patrick
Yes, I mean, I think for structures, it is an industry tied to the economic activity globally and so we’re all watching to see the effects of inflation and what the economic growth going forward is. That being said, we’ve really, as we’ve mentioned in the past, tried to mention many times – tried to improve the earnings stability of our base space rentals and workforce housing business and be less reliant on the large projects.
We haven’t seen the same number of large projects emerging in more recent times, but that being said, the global infrastructure build out and construction activity is still very robust. So therefore, the demand for our base business there in the space rentals and smaller workforce housing is still very strong.
So I think we’re obviously still looking for those large projects and there are some that we continue to pursue but we’re really hopeful that there is continued growth in the economy generally supporting the space rentals and base workforce housing business.
Operator
[Operator Instructions] The next question comes from Mark Jarvi with CIBC Capital Markets. Please go ahead.
Mark Jarvi
Thanks, everyone. Katie, you talked about maybe trying to grow your presence a little bit more in the U.S. market, Maybe you can touch – this is infrastructure and logistics I’m talking about, if you can talk a little bit about the competitive dynamic both from an organic perspective, but also you did mention bolt-on acquisitions, so what are you seeing in that market and sort of competitive dynamic in terms of trying to grow your presence there?
Katie Patrick
Yes. And our – so far our growth to date has been from an organic basis and I think that served us well. We grew our fleet significantly in the U.S. over the last year. So I think that will be the continued strategy going forward. When I say bolt-on acquisition, I think there are some times essentially acquisitions of fleet or assets that become available at an attractive price that we could use to bolster that.
We have opened new branches and new locations in the U.S. over the last year and we’ve also importantly I think significantly diversified our customer base and we were relatively reliant in the past on but we had a large portion of our earnings, I should say come from a major customer and that has distributed to many more customers over the course of this year. So I think there is definitely space in the market, I would say first of all for us and a lot of opportunity to continue to grow organically.
Mark Jarvi
Okay. And then my second question, just in terms of how you think about funding structure and logistics? You have been expanding the rental fleet, investing a bit more capital there. Is the idea there that as cash flows grow with the business, you can grow the fleet or if you ever saw an opportunity to grow the fleet beyond what could be I guess self-financed by structure and logistics, would you start to sort of contribute more capital from, I guess, the top of the house, just trying to wonder about in terms of the sort of the outlook and sort of, I guess will to be sort of internally sort of free cash flow neutral or positive at structures and logistics?
Katie Patrick
Yes. I mean, we – obviously, at ATCO, we do look and hope for each one of our businesses to self-fund their growth but that being said, I think in certain instances, if there is a good growth opportunity behind our businesses, we will fund equity from a macro perspective and particularly the infrastructure and logistics. Should the right opportunity become available, ATCO also has good access to capital that could be used to help augment their own sources of capital that they have to grow that business faster.
Mark Jarvi
So as you are sitting here today and see the funnel and the opportunity in the U.S. market, do you see that where I guess internally generally cash flow and structures doesn’t quite fund the ambitions there to expand the fleet?
Katie Patrick
Honestly, over the medium term period here, we do have a self-funded outlook. So I don’t necessarily foresee that but should – as I said, should there – we –as we move forward and see that there is significantly more demand or as you mentioned an inorganic opportunity that presented itself then we would look to participate from the ATCO level.
Operator
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Colin Jackson for any closing remarks.
Colin Jackson
Thank you, Ceris, and thank you all for participating today. We appreciate your interest in ATCO. We look forward to speaking with you again soon. Thank you, everyone.
Operator
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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