Canadian Utilities Limited (CU) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Creating a Canadian Energy Champion: Emera and Canadian Utilities Merger of Equals.

Continuity for customers and communities and the benefits for employees and shareholders. Following Scott and Bob's remarks, Jared and Katie will join Scott and Bob in answering your questions. And with that, I'll turn the call over to Scott.

Thank you, Dave, and good morning. Today is an important day. Not only [indiscernible] investment and the need for a more resilient [indiscernible] energy system. At the same time, utilities are being called upon to modernize aging infrastructure, strength and resilience and connect new sources of economic growth [indiscernible] and delivering these investments while keeping service affordable for customers. Meeting that challenge will require unprecedented levels of [indiscernible] capital, expertise and [indiscernible] execution. Together, Emera and Canadian Utilities will create a top 20 North American utility and energy infrastructure company with an enterprise value of approximately $72 million, approximately $45 billion of rate base, approximately 6 million customers across 12 [indiscernible] regulated utilities at approximately 95% of expected 2026 earnings coming from regulated operations. With approximately 80% of adjusted earnings generated in Florida and Alberta, and roughly 70% of the combined rate base invested in electric and natural gas transmission and distribution infrastructure, the combined company [indiscernible] will be anchored in the essential networks that support economic growth and have [indiscernible] life. Importantly, this transaction brings together two of North America's most attractive growth markets. Florida remains a core growth engine for Emera [indiscernible] fueled by population growth and continued economic expansion. Alberta provides a similar and complementary platform with strong investment momentum, expanding industrial activity, a growing energy sector and [indiscernible] emerging demand from large load customers. Together, these jurisdictions offer a compelling [indiscernible] foundation for long term growth. Across North America, utilities are being called upon to make significant investments in transmission, distribution and supporting infrastructure. We believe larger financially stronger companies will be best positioned to deliver those investments while maintaining affordability and reliability. We also believe this transaction is important for Canada. As the demand for energy infrastructure accelerates, Canada needs companies with the skill and capabilities to compete for capital, attract talent, execute large projects and support economic growth. The company we are creating today is designed to do exactly that, a Canadian headquartered champion with meaningful operations across North America and a long-term commitment to investing in the communities it serves. The question facing our industry is no longer whether investment is needed. The question is whether utilities can mobilize the capital, talent, technology and partnerships required to deliver it at the pace, customers and economies demand. The combined company will be well positioned to answer that challenge with greater financial strength, broader access to capital and an enhanced ability to invest in the infrastructure that powers growth and supports reliability. It will deepen our technical, operational and regulatory capabilities, strengthen relationships throughout our supply chain and improve our ability to execute an increasingly complex portfolio of projects Just as importantly, scale allows us to learn from one another by sharing proven practices across safety, operations, cybersecurity, procurement and major project delivery, we can build an even stronger utility platform while preserving the local accountability that is essential to serving customers well. And at this point, this is worth underscoring. This transaction is not about centralizing local utility operations because they won't be. Our utilities will remain locally governed and deeply connected to the customers, communities and regulators they serve. What changes is the strength of the platform behind them. The company we're creating will be stronger, more balanced and better positioned for long-term growth. Following the transaction, no single jurisdiction is expected to represent more than half of the combined rate base. Florida and Alberta will become the company's two largest jurisdictions, representing approximately 45% and 34%, respectively. That gives us meaningful scale in two attractive growth markets while preserving the stability and predictability of a predominantly regulated business. Just as importantly, this combination enhances the quality of our growth profile. The combined company is expected to deliver high single-digit rate base growth of 7% to 8% through 2030, supporting Emera's long-term 5% to 7% adjusted earnings per share growth guidance and 1% to 2% dividend growth target. In Florida, Tampa Electric has delivered approximately 2% annual growth since 2020 and is forecast to deliver more than 8% annual rate base growth through 2030. Peoples Gas has also benefited from strong market fundamentals, achieving approximately 4% annual customer growth over the same period. In Alberta, Canadian Utilities is positioned at the center of one of North America's most attractive infrastructure growth opportunities. Its rate base is forecasted to grow from approximately in $15.1 million 2025 to $21.4 million. by 2030, supported by a province that has grown its population by approximately 2.4% annually, since 2020 and continues to attract investment in industry, energy development and other emerging sources optimism. What excites us the most is that this is not simply a larger company. It's a stronger platform for long-term value creation with greater capacity to invest in critical infrastructure, supporting growing demand and to deliver sustainable growth for shareholders. The transaction also strengthens the company's financial profile. It's structured principally a share for share [ exchange ]. A share for share combination using the fixed exchange ratios outlined in today's materials. This structure minimizes financing execution risk, while creating a larger, more diversified regulated cash flow base. The result is a company with greater financial flexibility, enhanced access to capital and a stronger foundation for future investment. We expect the transaction to be accretive to earnings per share in the first full year following close and to improve credit rating thresholds, providing greater financial flexibility. We remain committed to disciplined allocation of capital and a strong dividend. Emera intends to maintain its current dividend policy and targeted dividend growth rate of 1% to 2% while continuing to improve the payout ratio. Canadian utilities are expected to benefit from the adoption of Emera's quarterly dividend subject to the final transaction terms and closings. This transaction brings together two highly experienced leadership teams and reflects a shared commitment to long-term value creation. Under the proposed transaction, Canadian Utilities will become shareholders of the merged entity, which continues as Emera. ATCO shareholders will become both shareholders of Emera and the new ATCO entity. Under the proposed transaction, Canadian utilities will receive Emera voting shares based upon the fixed exchange ratio set out in today's materials. Following closing, Emera shareholders are expected to own approximately 60% of the combined company and Canadian Utilities and ATCO shareholders combined will own the remaining approximately 40%. I will continue as President and Chief Executive Officer of the combined company, and Jared Green will continue as Chief Financial Officer. Bob Myles will become a senior executive at Emera and continue with the CEO of Canadian Utilities reporting directly to me. Becky Pemex will also join the Emera leadership team as Executive Vice President, Corporate Transformation and Integration, Leadership across Canadian Utilities operating companies will not change. The Board of Directors will reflect the strength of both organizations. The combined company will have a 13 member Board of Directors with 6 directors put forward by Canadian Utilities and 7 directors from the current Emera Board. Nancy Southern will serve as our Co-Chair, alongside Emera's Chair, Karen Sheriff. Emera will continue to trade on the Toronto Stock Exchange and the New York Stock Exchange. Finally, the company will maintain a meaningful presence across its key jurisdictions, the combined company's public company headquarters will remain in Halifax. Canadian Utilities corporate and operational headquarters will continue in Calgary with a continued presence in Edmonton and Perth. And Emera's U.S. operations will continue to be headquartered in Tampa. That reflects an important principle of this transaction. We're building a stronger company with greater scale and capability while preserving the local leadership, expertise and community connections that have made both organizations successful. And with that, I'll turn the call over to Bob for his remarks and perspective.

Thank you, Scott. Today marks a defining moment for Canadian Utilities and the beginning of an exciting new chapter for our company, our employees and our shareholders. For decades, Canadian Utilities have built and operated the infrastructure that powers homes, businesses and communities. Through every stage of that journey, our success has been grounded in a commitment to safety, reliability, operational excellence and long-term value creation. Those principles remain unchanged, and they are the foundation of the transaction we are announcing today. Canadian Utilities brings a high-quality portfolio of essential utility and energy infrastructure assets anchored by a predominantly regulated business model and anchored in Alberta. With approximately $16.6 billion at midyear 2025 rate base, our operations are concentrated in stable regulated jurisdictions with 91% of rate base located in Alberta. Our portfolio is further complemented by a regulated natural gas distribution business in Western Australia and contracted energy infrastructure assets that provide additional diversification in cash flow. But this transaction is more than the assets each company brings. It is about positioning our businesses to succeed in the future where utilities will be called upon to deliver significant levels of investment to support economic growth, reliability and affordability. By joining forces with Emera, we will become part of a larger, stronger company with greater scale, broader capabilities and enhanced access to capital. Together, we will be better positioned to pursue the opportunities ahead to invest in critical infrastructure. Just as importantly, this combination brings together two organizations that share similar values, a long-term perspective and a deep understanding of the responsibility that comes with operating essential infrastructure. We believe this transaction creates a compelling value for our shareholders, meaningful opportunities for our employees and a stronger foundation for continued investment in the communities we serve. Alberta is at the center of Canada's energy economy, and that is one of the reasons this combination is so attractive. The province continues to benefit from strong population growth, expanding industrial investment and increasing demand for electricity and natural gas infrastructure. New opportunities associated with oil and gas, electrification and broader economic development are expected to drive significant long-term infrastructure investment across the province. Canadian Utilities is uniquely positioned to help meet that demand. We operate critical electric and natural gas infrastructure across Alberta supported by deep operating experience, strong project execution capabilities and long-standing relationships with customers, regulators, indigenous partners and communities. Our current plan directs approximately 95% of Canadian Utilities 2026 to 2030 capital program to Alberta, reflecting our confidence in the province's long-term outlook. We see an opportunity for substantial investment needs across electric and gas transmission, distribution, system modernization and infrastructure required for new large loads. We also see supportive macro trends in Australia, both on the regulated and nonregulated side on which we believe we can capitalize including population growth, the expansion of mining, LNG and critical minerals, record demand for infrastructure investments and industrial energy demand. The merger with Emera provides additional scale, financial capacity and expertise to pursue those opportunities allowing us to invest with confidence while maintaining the disciplined approach that has long defined Canadian Utilities. While today's announcement is significant, the commitments that matter most to our customers remain unchanged. We will continue to prioritize safe, reliable and affordable service and investment decisions will continue to be made within the regulatory framework of the jurisdictions we serve. Local leadership, accountability and community relationships will remain at the heart of how we operate our utilities. The combined company's greater scale and financial strength are expected to support continued investment in the infrastructure customers depend on every day. At the same time, investment decisions and regulatory engagement will continue to be made locally and to reflect the needs of each local service territory. We will continue to maintain a strong long-term presence in Alberta, including the Calgary and Edmonton operational headquarters, and we will continue the community and indigenous partnerships that have been central to our success and our identity for generations. I know today's announcement will create questions for employees, and that is understandable. Until the transaction closes, Canadian Utilities and Emera will continue to operate as separate companies with our focus firmly on serving customers, executing our business plans and delivering on our commitments. Looking ahead, we believe the combination creates new opportunities for our people. It brings together two organizations with similar values and strong cultures. The combined company will offer a broader platform for career development, leadership growth and the sharing of expertise across the larger organization. As we move through the process, we are committed to communicating openly, clearly and respectfully with employees every step of the way. For Canadian Utilities shareholders, this transaction represents an opportunity to participate in the future growth of a larger, stronger and more diversified regulated utility company. Shareholders will benefit from meaningful exposure to two of North America's most attractive growth markets in Florida and Alberta, a large regulated rate base, enhanced financial strength and a broader platform for long-term investment and value creation. At the same time, current Canadian Utilities shareholders will benefit from a 20% increase in their dividend and the transaction preserves meaningful continuity through Canadian Utilities representations and governance and leadership of the combined company. Ultimately, we believe this transaction builds on the strengths that have made Canadian Utilities successful. It expands our opportunities, strengthens our growth outlook and amplifies the value for assets our people and expertise while preserving the local relationships, operating capabilities and commitment to customers that define who we are today. And now back to you, Scott.

Thank you, Bob. Before we open the line for questions, let me close with a few final thoughts. The transaction of course remains subject to shareholder approvals and customer regulatory approvals and closing conditions. Based on our current expectations, we expect closing in late 2027. Additional details on required approvals and principal milestones are described in today's presentation. As we've discussed throughout the call, what makes this transaction particularly compelling is the strength of the growth platforms being brought together. Together, these businesses create something distinctive, a company with meaningful scale and two of North America's strongest utility growth markets, supported by predominantly regulated operations, a deep pipeline of investment opportunities and a shared commitment to operational excellence. For customers, this combination strengthens our ability to invest in the infrastructure they depend on every day. For our employees, it creates a broader platform for growth even moment and long-term opportunity. For communities, it reinforces our ability to be a long-term partner and supporting economic growth and prosperity. And for shareholders, it creates a larger, more diversified utility company with an enhanced financial strength, great investment capacity and a clear path for sustainable long-term value creation. Ultimately, this transaction is about more than combining two successful companies. It's about building a stronger platform for the future with the scale, financial strength and capabilities needed to help power the next generation of growth while continuing to deliver value to customers, numerous communities and shareholders for decades to come. We believe this is a compelling transaction for both Emera and Canadian Utilities shareholders, and we're excited about the opportunities ahead. With that, operator, you can please open the line for questions.

[Operator Instructions] And your first question is from [indiscernible]

Maybe I'd like to start with one for Bob, what made this the right transaction for CU? I guess that's really my question. Given that you as a company, I would say, have added your growth disclosures over the last year and shown some regular growth beyond just the Yellowhead pipeline, the incremental opportunities, some longer-term runway there in that context. Why was this the right transaction for CU, for shareholders?

John, I know you participated in some of our quarterly calls. And one of the things I've always believed in is having a lot of discipline across our growth platform, but also operational excellence and financial capabilities. And when I really looked at this opportunity, I really believe gave that strongly that we need to diversify geographically. I think this opportunity really helps us in that area. And also on the financial side is, as you've seen, our capital plan has grown significantly. And I think this opportunity with Emera really allows us to step out and access a lot more available capital, which really helps us drive our strategic plan. So those are the big reasons, geographic diversification and financial capacity that I really saw as one of the big benefits for this opportunity.

And then maybe one for Scott, as you looked at this opportunity, how -- I guess, a two-part question. Number one, how did you weigh the decision to -- I'm going to use the word loot, the relative exposure to Florida, just given the economic tailwinds in that state and the rate base growth you've been able to generate there. And then as you look forward, clearly, the capital plans of the companies are in place and certainly are going to inform how you think about capital allocation going forward once the companies are combined. How do you weigh that relative capital allocation pass between incremental investment in Florida versus incremental investment in Alberta, like what are the may be the key considerations. And as you look at let's say, the next 5 years beyond the current capital plan?

Yes. So thanks for the question, John. I'll tackle the first one, and then Jared can answer the second, I think what made this combination compelling to me is that we don't see this as diluting our interest and economic benefits from our strong portfolio in Florida. The fact is the -- there are not many jurisdictions that you could think about across North America that you could look at like we do in Alberta as having very similar growth opportunity both near term and longer term. And so it was largely that. That was not in any means to suggest that other parts of the Canadian Utilities portfolio aren't important. Of course, they are. But with over 80% of Canadian Utilities earnings and portfolio today centered in Alberta that obviously captures some attention. And we look at -- we just see a very complementary to the strong portfolio we've got right now, largely anchored in Florida with now the two -- those two jurisdictions combined representing approximately 80%. As I said in my remarks, these are two of the strongest jurisdictions in North America, and we see them very complementary, and that was really the attraction of the interest in this merger combination with Canadian Utilities. In terms of capital allocation going forward, Jared?

Good morning all. And so John, on the capital allocations. This is kind of one of the big beauties of this combination with these two entities. This does not create a one or the other situation. Putting the two businesses together that are both very high performing business from an earnings perspective, from a capital perspective, is not a case that we have to have a choice on capital allocation for them. And for both companies, when we look at the capital programs that are being put together, these are programs that are -- they're thought out many years in advance. They're designed with a number of factors that drive in the customer needs, the safe, reliable operations, the regulatory strategies, the financing plans associated with all of those factors come together. And with this combination, being almost an entirely a share combination, we are able to preserve the full balance sheet strength of each individual. But then when they come together, you actually get stronger base outcome and a stronger set of earnings streams, so we don't see this as something that is going to create a conflict between investment decisions within both of the businesses. And we have these two jurisdictions to invest into them. The growth opportunities in both Florida and Alberta, but also the opportunities that are in Australia and the growth that we're putting into to Nova Scotia as well. Those all our good strong utility investment platforms. And so we do see within kind of that complex investment world, it works very well.

I'm really going to stretch those this answer on you, John, on a little bit, but I think it's also important to say that as we -- as you heard within my remarks, we really think this is a moment for Canada. In terms of the focus that the Canadian government has put on investing in Canada's future on building projects of national interest, on the understanding that the energy powers so much of the Canadian economy, all of the ambitions that the federal and provincial governments have as it relates to developing, expanding and investing in their economies is dependent upon the energy that the Canadian Utilities and Emera and companies like us provide. And this combination really, truly creating a Canadian champion puts us in a position to support and frankly, capitalize on the opportunities that arise from that this moment that Canada has in the context of investing in Canada's future. So we're positioning ourselves to be part of that.

Not every day we see regulated utilities of this scale, especially in Canada. So congrats to everybody involved.

Your next question is from Maurice Choy from RBC Capital Markets.