Canadian Utilities Ltd
TSX:CU
Earnings Call Analysis
Q3-2023 Analysis
Canadian Utilities Ltd
Canadian Utilities has navigated a challenging third quarter with adjusted earnings of $87 million or $0.32 per share, a notable decrease from the $120 million earned in the same quarter of the previous year. This dip was substantially influenced by the Alberta distribution utilities rebasing, which alone accounted for roughly $17 million of the decline. Nevertheless, management anticipates this earnings pressure will begin to soften in the fourth quarter of this year.
Prospective changes in the regulatory environment are to usher in a more favorable period starting 2024. The Alberta Utilities Commission (AUC) has set out the framework for Alberta's third performance-based regulation cycle (PBR 3), which introduces a tiered earnings-sharing mechanism among other components. With this change, Canadian Utilities predicts an increase in the Return on Equity (ROE), estimating it could climb to a range of 9% to 9.2%, up from the current 8.5%. The receipt of these decisions in advance reinforces the reduction of regulatory lag and will likely facilitate strategic planning and prospective investments.
Canadian Utilities continues to emphasize its role in the transition to cleaner energy sources. The company is committed to using renewables and hydrogen as catalytic for its growth strategy, with projects like its partnership with Lafarge aimed at reducing carbon emissions. On the downside, the business experienced a decline in Australia due to moderating inflation, resulting in an $8 million year-over-year decline for that sector in the quarter. Yet, advancements are being made in the hydrogen sector, including the selection of ATCO Australia as a preferred partner for South Australia's Hydrogen Jobs Plan, involving a substantial hydrogen production facility and electricity generation from hydrogen.
The company is exploring various avenues for funding, including private and public sources, to support imminent projects. Partnerships are set as a key near-term solution, while capital market options are contemplated for the future. The approach remains flexible, ensuring projects such as the 40-mile solar project and the hydrogen initiatives continue without delay.
Canadian Utilities empathizes with customers facing increases in transmission, distribution, and generation costs. The company remains focused on investments that will improve the reliability, adaptation, and resiliency of energy networks in response to customer demands. Anticipating strong demand growth supported by a thriving Alberta economy, the utility plans to invest in addressing growing customer needs, portraying an optimistic view for the next 3-5 years.
Regarding the transition of LUMA's supplemental agreement to an O&M contract, court dates have been set for early next year with expectations that PREPA will emerge from bankruptcy towards the end of 2024, signaling a transition into a 15-year contract term. Meanwhile, the organizational focus is on rebuilding and improving Puerto Rico's electric system.
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Thank you for standing by. This is the conference operator. Welcome to the Third Quarter 2023 Results Conference Call for Canadian Utilities Limited. [Operator Instructions] And the conference is being recorded. [Operator Instructions]
I would now like to turn the conference over to Mr. Lawrence Gramson, Director, Corporate Finance. Please go ahead, Mr. Gramson.
Thank you. Good morning, everyone. We're pleased you could join us for Canadian Utilities Third Quarter 2023 Conference Call.
With me today is Canadian Utilities Executive Vice President and Chief Financial Officer, Brian Shkrobot as well as ATCO EnPower Chief Operating Officer, Bob Myles; and ATCO Energy Systems Chief Operating Officer, Wayne Stensby. Before we move into our formal agenda, I'd 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 the Treaty 7 region. This is the ancestral territory of the Blackfoot Confederacy comprised of the Siksika, Kainai, and Piikani nations, the Tsuut'ina Nation and the Stoney-Nakoda Nation 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 people who call these areas home. Brian will begin today with some opening comments on our financial results and recent company developments including regulatory decisions. Following these prepared remarks, Brian, Bob and Wayne will take questions from the investment community. Please note that a replay of the conference call, a short supplementary presentation 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 all that our remarks today will include forward-looking statements, which 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. And finally, I'd also like to point out that during this presentation, we may refer to certain non-GAAP and other financial measures, such as total of segments measures, 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 to similar measures presented in other entities.
And now I'll turn the call over to Brian for his opening remarks.
Thanks, Lawrence, and good morning, everyone. Thank you all very much for joining us today for our third quarter 2023 conference call. Canadian Utilities achieved adjusted earnings of $87 million or $0.32 per share in the third quarter of this year compared to $120 million in the third quarter of last year.
As you know, we concluded a successful second cycle performance-based regulation in our Alberta Distribution Utilities in 2022. 2023 is a single cost of service rebasing year. And in 2024, we will start the third cycle of performance-based regulation with final rebase rates. Performance-based regulation facilitates affordability, which is important to the long-term sustainability of the business as the savings and efficiencies generated in the second PBR cycle are returned to customers through the rebasing process.
As expected, the impact of our Alberta distribution utilities rebasing resulted in lower year-over-year earnings in the third quarter. On its own, this rebasing contributed to a year-over-year decline in earnings of approximately $17 million. This is a significant impact to 2023 earnings. But for anyone who has listened to our conference calls throughout last year and this year, this is not unexpected trend. It is a direct result of the exceptional performance that we drove throughout our second PBR cycle and the savings and efficiencies that are now being returned to customers.
As our utility teams continue to work hard to find new efficiencies and drive down costs, we expect to see the earnings pressure associated with this rebasing begin to soften in the fourth quarter of this year.
Looking ahead to 2024 and beyond within our Alberta Utility businesses, I want to briefly touch on two key regulatory decisions that received earlier this month. First, is the Alberta Utilities Commission, or AUC, released the parameters for Alberta's third performance-based regulation cycle or PBR 3 for short, which will be the framework in which our Alberta Distribution Utilities operate for the period between 2024 and 2028.
Included in our MD&A for this quarter is a detailed breakdown of the differences and similarities between PBR 3 and our outgoing PBR 2 framework. At a high level, while PBR 3 does include a tiered earnings-sharing mechanism, we continue to believe that this framework would create opportunities for us to deliver strong outperformance and growth throughout the term.
And importantly, this framework allows us to make investments needed to drive both efficiencies and long-term stability for our energy distribution systems in the province.
Also in October, the AUC delivered its decision on the Generic Cost of Capital or GCOC, for short, and the parameters for 2024 and beyond. As was signaled throughout the year, the commission has adopted the use of a formula for setting ROE, and this decision also reaffirmed equity thickness set at 37% for the Alberta Utilities. The established formula for ROE utilizes a base rate of 9% and takes to account 2 variables to adjust this base rate. First, the changes in 30-year government of Canada bond yields and changes in utility spreads. The commission will update the ROE annually and issue the following year's ROE in November of the current year.
Now while the final 2024 ROE will still not be known until November of this year, current market data suggests an ROE in the range of 9% to 9.2%, up from the current rate of 8.5%.
Now as we begin to operate under these new frameworks in 2024, we will continue to apply the ownership principles that we have historically used to drive efficiencies and operational excellence across our businesses, and we expect this to drive continued outperformance and growth for our business. Importantly, the receipt of both of these critical regulatory decisions well in advance of their respective operating years further reinforces the strides we've seen in reducing regulatory lag in the province and providing prospectivity.
Moving on to our natural gas distribution business in Australia. We continue to see strong growth in key operating metrics such as new connections, tariff rates and system volumes. The narrative for this business, however, remains focused on Australia's in-country inflation profile, which continues to attribute to a year-over-year earnings pressure. As we alluded to in our second quarter 2023 conference call, it is important to remember that inflation in 2022 built rapidly in the second half of last year, with full year inflation reaching almost 8% by the year-end 2022.
As a result of this building profile in the prior year, our third quarter 2022 earnings were exceptionally strong, creating a comparable that is difficult to compete with in 2023 as inflation levels begin to moderate. This trend resulted in us reporting a year-over-year decline of $8 million for this business in the quarter. Similar to the messaging we delivered throughout this year, we continue to expect Q4 and full year earnings for this business to be lower than 2022 as the CPI trend continues to moderate in Australia. For added context, in-country estimates continue to suggest full year inflation in Australia between 4% to 5%, which is consistent with the end market estimates from last quarter.
Now before I move on to our ATCO EnPower businesses, I want to briefly touch on the capital investments we made in the third quarter. The third quarter saw us invest $331 million in our business with $307 million of the spending being within our existing Utilities. This ongoing Utility investment ensures a continued generation of stable earnings and reliable cash flows while also driving sustainable rate base growth. The remaining capital was primarily related to our ongoing renewable generation initiatives at ATCO EnPower.
Moving on to ATCO EnPower business, we delivered adjusted earnings of $9 million compared to $12 million for the same period last year. While our newly required and recently completed renewable assets contributed to earnings lower demand in our natural gas storage business, timing of costs and seasonally low wind output pressured earnings. As we continue to drive the numerous development processes already underway to completion and these assets begin to contribute additional earnings, we're confident that the earnings power of these assets will become more pronounced.
Now moving to the development side of the discussion. It's been a busy quarter and one highlighted by the creation and formalization of a number of key strategic partnerships that are paramount for us advancing growth strategy.
In September, we announced our partnership with the Chiniki and Goodstoney First Nations. We saw them become joint owners of the Deerfoot and Barlow Solar facilities. Nurturing indigenous partnerships that promote social and economic development has long been a hallmark of our method of operating, and we're proud to announce that this agreement with our new partners.
The Deerfoot and Barlow Solar facilities are some of the largest solar installations in an urban setting in Western Canada. And I'm proud to say that our Barlow facility achieved full commercial operations in the second quarter of this year. And we expect our Deerfoot project to achieve the same in the fourth quarter of this year. This month, we also announced a virtual power purchase agreement with Lafarge Canada, which will see them receive 100% of the energy produced at our Empress Solar facility.
Again, we are proud to be at the forefront of the energy transition and providing solutions to help customers like Lafarge reduce their own carbon emissions, and it remains a key priority for us in our growth strategy.
Agreements like this also align with our target of having approximately 75% of the renewable generation portfolio contracted under long-term agreements with high-quality counterparties. This portfolio view to contractedness helps ensure a stable and secure cash flow stream for the long term while ensuring we retain the needed flexibility to maximize value within the portfolio and to capture near-term economic benefits as they arise.
For our Empress project, we expect to see -- achieve full commercial operations in the fourth quarter of this year. Looking ahead to our development pipeline, I think it's also valuable to briefly touch on the AUC's decision to pause approvals for the newly -- the new renewable electricity generation projects until February of next year. First and foremost, this announcement does not impact our projects under construction, which are the upgrading of the 40-mile wind asset or the near-term development of our 40-mile solar project.
For our renewables development pipeline more broadly, we continue to progress our near-term projects and our development time lines did not contemplate a need to file any new AUC applications in advance of the expected lifting of this moratorium in February next year. We also continue to be focused on developing the 40-mile solar project, and we do not expect project delays related to this government pause. I would say that throughout this process, we've been working collaboratively with the AUC to ensure that the importance of developing these assets for the benefit of our province and its decarbonization goals is well understood.
Finally, we remain committed to our hydrogen project within Alberta's Industrial Heartland and continue to move development of that project forward. Since last quarter, we've actively reengaged discussions with both financial and strategic partners, along with the offtakers that are key to underwriting the business case on a project of this scale. We continue to believe that demand of this area exceeds the facility capacity. These negotiations are in advanced stages, and we expect to be able to provide further clarity on timing and next steps in the coming months.
Now on the topic of hydrogen, earlier this week, it was also announced that our ATCO, Australia business was named a preferred partner in the delivery of the South Australian Government's Hydrogen Jobs Plan.
Under this plan, we will work as part of consortium with our partner to deliver a strategy and development program for a 250-megawatt hydrogen production facility, along with the 200-megawatt hydrogen-fueled electricity generation facility and related hydrogen storage. While this project is in its early days, projects like this further cement our global hydrogen strategy and our position as leaders in the global transition to cleaner energy.
So summing up overall, our third quarter results were in line with our expectations for a rebasing year, the earnings pressures that we expected related to rebasing and Australian inflation were evident in the quarter, but we expected this rebasing pressure to begin to ease in the fourth quarter.
Now looking again ahead to 2024, our Alberta Utilities now have prospectivity following the regulatory decisions on PBR 3 and the GCOC that was received earlier this month.
As I said in the past, no matter what the regulatory environment we operate in, we remain focused on driving exceptional results for all shareholders and position our businesses to maximize sustainable growth in earnings. I look forward to sharing our full 2023 performance and providing further updates on the progress of our numerous growth initiatives on our next call in early 2024.
Now that concludes my prepared remarks. But before we open the call to questions from the analyst community, I just want to give everyone a chance to hear from both Bob Myles on our ATCO EnPower business and Wayne Stensby on our ATCO Energy Systems business.
Bob, the ATCO EnPower business has made numerous drives in 2023 towards the achievement of its renewable generation and clean fuels growth objectives. In light of this progress, could you comment on the growth you're seeing in the business? And where do you expect things to go from in the near term?
Thanks, Brian. It's hard to talk about where we're going without looking at what we've done in 2023. I'm proud to say that we have fully integrated the acquisition that we acquired earlier this year for the Suncor Renewables acquisition. We have fully integrated our two wind assets that are operating. So that's a great accomplishment. And we've also completed the -- pretty well completed all of the construction on our 3 solar projects here in Alberta, as you indicated a little earlier. So I think that was a great accomplishment as well.
The next project that we're pursuing right now is our 40-mile solar project. You touched on that, and that's a 220 megawatt solar project also in Alberta. And so that's fairly far along. We hope to make FID on that later this year or early into 2024. On the clean fuel side, you did indicate that we're progressing quite nicely on our hydrogen project, both domestically and with regards to exports. So definitely a busy time right now. So lots on the go.
Thanks, Bob. A lot of great opportunities on the horizon, as we said, and deciding to see these initiatives convert to stronger earnings contributions. Wayne in a similar way that third quarter saw your ATCO Energy Systems business receive 2 key regulatory decisions, the Generic Cost of Capital and the formalization of the framework for the third year PBR cycle. Now that you're back in Canada and refocused on our Canadian-based businesses for the Utilities, can you comment on how you're thinking of ATCO Energy Systems businesses moving forward? And what do we expect in the coming years?
Thanks, Brian. And let me start by just saying I'm very excited to be back and leading the Utilities portfolio. LUMA is in a good place or a good position with Juan Saca stepping into the CEO role, and I'm very confident that the more than 3,500 hard-working women and men who are in Puerto Rico in LUMA, will continue to build on the substantial early progress that we were all able to make.
So as you say, maybe a little closer to home here in Alberta, and as you mentioned, the number of regulatory decisions have now been received, and I look forward to working with our teams to build on what really is phenomenal progress that the Utilities have made through the first 2 PBR cycles or periods in the distribution businesses and also the strong progress in the transmission businesses. These past periods have yielded great efficiencies for our customers. And I see them as providing a very strong foundation as we now move to invest and perhaps get a little more oriented on growth to serve our customers' growing and evolving needs in the province.
Thanks, Wayne. That's great insight. Thank you. I will now turn the call back to Lawrence to bring us to the formal Q&A component of the call.
Thank you Brian. In the interest of time, we ask you to limit yourself to two questions. If you have additional questions, you are welcome to rejoin the queue. I will now turn it over to the conference coordinator for questions.
[Operator Instructions] The first question comes from Linda Ezergailis with TD Securities.
Very interested to hear your updated thoughts on what sort of optimization and cost efficiencies you're working on so that your utilities -- your distribution utilities can meet or beat any sort of productivity factors that they're working towards.
And I guess the second part of that question is, we are still seeing some inflationary pressures in various cost buckets. And I'm just wondering, in your view, how well the inflation indices reflect your true underlying inflation or might there be some mismatches for better or worse on that front.
Thanks, Linda. I appreciate your question. Yes, in terms of outperformance, as I've indicated on previous calls, and we have a long track record of finding new and creative ways to drive down our costs for our customers. And we continue to see that throughout this year. Although we've had the expected rebasing, I would say that the teams have done a great job in the first part of 2023 to find some additional savings throughout our business, and that's throughout, whether it's through some tax efficiencies, whether it's through our operations, of course, the wildfire also diverted some of our -- from our teams on to that response effort.
So overall, I guess, I would kind of give guidance that we are confident that we can drive continued efficiencies as we mentioned, maybe it's in the 100 to 200 basis points range for this year. Obviously, we'll have another resetting in PBR 3, and we get into 2024. But for this year, the teams are doing extremely well.
In terms of inflationary pressures, like I would say in the past, we've done really well to kind of work with our vendors and suppliers to maintain our expected cost increases in line with kind of general inflation, it's been sometimes improve. We've had a little bit of delay over a period of time on similar materials, especially some of our long leads, and we've just changed our practices going forward to make sure that we get well ahead of ordering long-term expected supplies for some of our projects, and we did that in our solar facilities getting ahead on that order in all the panels. So Bob, as you mentioned, can hit those time lines. So overall, I think we're not expecting any inflationary pressures that are outside of what we're seeing I guess, generally in the market.
And maybe just moving to Australia. Just trying to understand kind of what the financial benefit might be on this hydrogen project beyond just leveraging the learnings for future projects. Is there some sort of revenue model here? Or is it driving business through your existing assets? Can you comment on kind of what the end game is and the magnitude of any sort of economic participation, given that my understanding is the Australian government will own the facilities.
Yes. Maybe I'll start and then I'll ask Bob to help chip in here. And so first of all, I would just kind of comment that it's very early days. And yes, we're very excited to work for the South Australian government on this project. And it really sees kind of the benefit of kind of our outward approach to the hydrogen strategy globally and how we're recognized in the jurisdictions that we operate in.
And again, it's too early to talk about the funding model and how big this project will be. I think as part of this project, it's part of what we've been engaged to do is to provide that preliminary view. But I do think it's great for our business and kind of builds on some of the work that we've been doing across our various business units. And maybe, Bob, I'll turn it over to you to maybe provide some further color.
Yes. Maybe, the only other things, by the way Linda, the only thing I'd add to what Brian said is this project, I could -- I would say it could be 1 of 3 things. It could be engineering, procurement, construction. It could be engineering, procurement, construction and operation, and there's the potential of equity ownership as well. So as Brian indicated, it is early days, but all of -- 3 of those scenarios have all been discussed with the South Australia government as well.
And the next question comes from Rob Hope with Scotiabank.
I wanted to circle back on the EnPower business. It's been a little choppy out there in terms of valuations, the pause. And on the Q2 call, you had talked about the potential for looking at other financing opportunities for this business, whether it be a number of outcomes there. So just wonder if you could give us an update on how you're thinking about financing the renewable power business.
Yes. Maybe I'll start off on the financing side. Yes, I guess, as we talked about in the second quarter, we're looking at the long term, how we're going to fund the business, and we must consider how we best optimize the value for [indiscernible] shareholders and each step of the way.
While in the immediate term, our funding needs are tied to the continued development of our renewables, pipelines in the pre-FID hydrogen work. So to support this need, we're continuing to consider partnerships, options, particularly in the short term. Longer term, though, we will continue to evaluate both private and public sources of funding for the continued growth of the company.
So with all the strategic decisions that we make, we'll continue to evaluate these opportunities to the lens of shareholder value creation and the long-term growth with ability of this business. Any further comments, Bob, do you want to make?
Rob. The other thing is on the larger projects in EnPower, specifically the large hydrogen projects. It's not just a matter of the financing. We're also looking at who we partner with strategically with regards to strong operating partners, strong offtake partners. And with that, they also bring the financing side as well. So that's all very much part of the strategy as we build out ATCO EnPower.
I appreciate that. And then maybe more broadly, with the strong balance sheet, you were able to back to [ tap ] a little over a month ago attractive rates as well as kind of the choppiness we're seeing in the market. Have you thought -- or kind of what are your views on acquiring assets to lot of countercyclically in this environment and using your balance sheet to maybe [indiscernible] values.
Yes. Thanks, Rob. And yes, I would say that we're constantly evaluating opportunities, whether it's through M&A or other parts of business. And -- that doesn't change. Yes, there is some volatility in the cycle right now and appreciate where the capital markets are today. But yes, look, I'd say that we're constantly evaluating all of our aspects of our business and geographic locations opportunities. And if there is something out there that is attractive and accretive, we'll certainly look at it.
The next question comes from Maurice Choy with RBC Capital Markets.
Just wanted to follow up on the ATCO EnPower. Sorry if I missed this, but when are we expecting to provide -- when are we expecting to hear a meaningful update on this, if not a decision. And also, I know that you've been doing some market feedback on the potential options on this. So any thoughts on what you've been hearing, recognizing opportunities as like how we mentioned the market is choppy.
Sorry, Maurice, just to clarify, update on some of our projects or update on...
EnPower sorry -- EnPower's potential separation specifically. How you respond to the previous question, but timing-wise, when can we have clarity on it?
Yes. Like, in terms of timing, again, we're not rushing into anything. We said that we would evaluate as we cut, I've answered in the previous question. As we look to build out and some of these bigger projects come online, we would evaluate all options where the capital markets are today, as Bob kind of alluded to, certainly, partnerships is kind of a key probably near-term solution and focus. But over the long term, as a previous comment on the quarter, we're going to look at all opportunities in alternatives, including the public and private markets.
And just to be clear, as Bob mentioned, partnerships on the Hydrogen Project, specifically, when it comes to the entire ATCO EnPower entity, are you suggesting that this was a partnership for the entity or more like on a project-by-project basis?
It's more of a project-by-project basis, Maurice. And again, like we're going to evaluate all of those as those come up. And you've seen us just announce a partnership on some of our renewables. And so that's kind of evidence of what we're looking at.
So is it fair to say that ATCO EnPower at least from a base case will remain within CU and with the CU partnerships from this [indiscernible].
Like again, listen, we will evaluate all opportunities. But for now, yes, we were considering the partnerships and as we grow the business. I'm not going to suggest that all any options are not on the table, but certainly, we see partnerships within CU as being a meaningful way to fund the near-term projects of this nature.
Great. That makes sense. Maybe I just want to finish off on the government's review of the electricity pricing market, including reducing T&D costs. I know in the last call, you mentioned that you weren't expecting anything negative from this review. But obviously, cost of capital is higher, notwithstanding that your ROE now looks to rise next year. So as you look at the cost structure for T&D for customer bills, where would you see costs coming down for the government to achieve this T&D cost reduction?
Yes. Okay. It's a great question. And I think as I alluded to in prior calls, what we can directly do in our business is what we try to focus on. And certainly, as we've kind of communicated, we've worked really hard to drive down our cost for our customers, and we've seen a rate reduction, both in our transmission business and our distribution business with PBR rebasing. So that is the meaningful thing that we can do as a utility company. That said, we continue to work with the ISO and in terms of project designs and market studies to how we best source and do the right pricing those to get the most efficient way of connecting new generation, but also how do we ensure that our distribution and transmission grids can provide -- continue to provide the safe and reliability of the energy delivery. I don't know, Wayne, anything else that you'd want to offer?
Maybe what I would kind of just add, Brian, is we completely recognize the challenges of affordability here in Alberta and across Canada, right? And so we're well aware of that. We empathize with our customers as they have seen cost increases. The cost of the bill is, of course, the sum of the transmission and distribution or the delivery cost and the generation costs. And as you would recognize, there's been some volatility in all of that in the last few months and even years.
As Brian indicated, as we move forward, I think our emphasis is going to be on how do we continue to invest in those networks and bring the reliability improvements and the climate adaptation and resiliency improvements that our customers are really demanding. So I see it as far or more than just a cost conversation. And I think that's very important in our role as we have these distribution and transmission utilities here in Alberta and our role as a broader energy provider.
And the next question comes from Mark Jarvi with CIBC Capital Markets.
So just coming to the decisions, the formula of the ROE and the PBR parameters, including an earnings-sharing mechanism. How would you think that all shakes out? Obviously, the base ROE is going higher, but you then move into an earnings-sharing mechanism on above 200 basis points. Do you think the all-in -- all-in earned ROE changes at all under the new construct relative to what you're operating under previously?
Yes. Thanks, Mark. Yes, great question. And overall, I think we're -- in terms of generic cost of capital decision as a kind of expected the commission moved to a formula with the goal of reducing regulatory lag. That said, we're thankful that the base ROE has gone up. That said, it's probably below what we'd like it to be, but it's still going in the right direction.
In terms of the earnings-sharing mechanism, at least the first 200 basis points is on the account of shareholders and above that, there starts to becoming a sharing, which I think is a balance of the commission's truck at the end of the day, providing a supportive net -- framework. I'm sorry, I'm kind of mixing that with the PBR, but I do think they're both tied in terms of the ability to share and having a proper ROE. So I do think that it's kind of in line with what we would have expected. And I think as a supportive framework, I think on the PBR side, in terms of having the formula way approved it is, having some capital tracker mechanisms allow us to pursue decarb opportunities is supportive. And they even put in some creative mechanism on the pilot project to say if we could -- because if we have a capital versus an O&M decision to make to the extent that we can prove that it's a benefit of customers to have an O&M solution that we're allowed to earn on that program.
So I think the commission has taken a positive step forward in these decisions. And yes, I think we're -- now that we have the rules known and again, I'll go back to our previous tried and true ability to find ways to generate value for our shareholders throughout any PBR or cost of -- Generic Cost of Capital of framework.
And just a follow-up on the comments you made earlier about the annual updates. You've gotten the clarity and you know that the distribution utilities operate under PBR that they'll be an annual ROE update? Because I know in some jurisdictions, they said at the beginning of the 5-year window and then you kind of operate under that base ROE. And I guess if you do have an annual update, does that make it harder to manage through PBR in terms of how you think about timing and working through cost savings through the 5-year period?
No. Like in terms of the annual update for the Generic Cost of Capital rate flowing through, is that you're referring to, Mark?
Yes. Yes.
Yes. No, that's not -- it doesn't change anything in terms of our former normal compensation for inflation, and that is a typical thing through a PBR framework, but the update to ROEs, instead of being flat, yes, they will change maybe up or maybe down depending on kind of online parameters, those 2, but I don't think it's going to materially change throughout the 5-year period. And it'll be set November each year. And like I said in my opening remarks, we expect that to be north of 9% for the -- for 2024.
Okay. And then just one last question for me is just as you look into the medium term, particularly your Alberta Utilities, are you seeing anything changing in terms of the outlook, demand, regional needs, technology changes? Any sort of factoring into what you think the rate base outlook looks like for any of the Utilities in Alberta? -- maybe on a 3- to 5-year outlook?
Yes. Maybe I'll let Wayne kind of answer this one. I think you kind of hit it off in terms of what our outlook looks like. And certainly, all of those factors are something that are currently on our underwriter. Maybe, Wayne, do you want to get your views on that?
Yes. And I think you hit the kind of key elements in a way, but I'm almost building on the affordability conversation from a couple of questions ago. But we are seeing strong demand growth from our customers across the province. Alberta -- The Alberta economy is doing well and in an inflationary situation, right? So we are seeing customer growth, we are seeing I would say, ever increasing needs from our customers or wants from our customers from their Utilities. And so we are building strong plans as we move forward to invest and support those growing customer needs and growing numbers of customers. So we see the next 3 to 5 years as very positive for our -- for Alberta Utilities.
And was that expected to manifest itself into higher rate base growth when you look at maybe in a 5-year horizon?
Yes.
The next question comes from Patrick Kenny with National Bank Financial.
You guys touched on the -- on LUMA in your prepared remarks, but any update or guidance on when we might see a transition from the supplemental to the O&M agreement?
I'll pass that on to Wayne.
Patrick, yes, it is the question we've been facing, I suppose, for 2 or 3 years at this point in time. But maybe I can offer you a little more kind of color there. The -- it's in the public markets that the court dates or the confirmation hearing dates have been set for the first 2 weeks of March of next year. I -- it's possible those are delayed, but I think it's highly unlikely at this point in time. That's a U.S. Federal Bankruptcy Court. And so the judge will hold those confirmation hearings. If you follow then kind of conventional thinking from March, I think that the plan will take -- they'll have to be the hearing or the trial, I guess, than the evidence than the eventual ruling. That will probably take you all the way until middle of next year, and then there's the implementation of the plan.
So on broad strokes, we would imagine that the PREPA emerges from bankruptcy perhaps towards the end of 2024. That said, as you know, LUMA extended the supplemental period with no deadline roughly a year ago. And so if it takes longer, it takes longer. I think our real focus organizationally is to continue to build on what we were hired to do, which has fundamentally transformed the electric system in Puerto Rico and rebuild and improve that system. And so that's where I would tell you the vast majority of the focus is as we follow through the bankruptcy.
I guess I would have added. But of course, as you know, once we move out of the supplemental period, we move into the 15-year term of the contract.
Right. Okay. That's perfect for the update. And then maybe just shifting gears to the balance sheet. Brian, you issued some 30-year paper late in the quarter. Can you just provide maybe an update on your funding needs for the remainder of the year and maybe into 2024. Are there any other upcoming maturities or CapEx spend that you might be able to pre-fund and maybe take some additional market risk off the table?
Yes. Thanks, Patrick, for the question. Yes, I mentioned our issue that we did earlier in the year and very, very successful, very happy with the outcome of that debt issue got very favorable rates and well oversubscribed. And it's also the kind of the first issue since withdrawing from rating from S&P. And so in terms of the rest of the year, no, we don't expect to have to access the market for the remaining of this year. And into next year, I'd see that we have some -- definitely some flexibility there. And at least on the CU Inc, side we expect to be probably around the same range of this year for our earnings, but with some flexibility.
[Operator Instructions] The next question comes from Ben Pham with BMO.
I wanted to go back to the Alberta rebasing. I know you mentioned that it's tracking in line with your expectations to rebase and where earnings are going for 2023. I wanted to reconcile that with some of your comments early in the year. I think you mentioned Q3 was going to be a peak rebase, and then you would see growth in Q4. Is that still the trend? Because it looks like Q3 ended up not being as bad as Q2.
Yes. No. Thanks, Ben for the comments. And I'd say generality in terms of the seasonality of that's typically the case. And I would say there's all -- that said, there's always some timing of costs and initiatives that happened through the year. And I would say for the third quarter here, we did have some time, especially in our electric distribution business, timing of some costs, which probably improved us versus where kind of above the normal seasonality would be.
So I guess, yes, overall, we would expect, but with that kind of revisal that we do have on a typical year, some timing of operating initiatives from one year to the next. And whether it's us working on well for restoration, that changes some of our timing of our O&M costs. Those are kind of like examples which could -- from a typical year-over-year comparison can cause some noise.
And that Q3 timing and some of that maintenance work, is that a function to Q4 then maybe you won't see growth year-over-year?
Yes. I think I'd say we're still back in line with what we expect for when we communicated this we know we're coming off a 2022 outperformance. And I think you've seen in the regulatory filings and the significant outperformance we achieved. We do expect to come back down to kind of that 100 to 200 basis point range by the end of the year. So I do see a little bit of that adverse in Q4. But again, I do think it's in line with the guidance that we've already provided into that 100 to 200 basis point range.
Understood. And I know usually with -- the second question is on CapEx. I mean no news means there's no change in that Utility CapEx budget I wanted to check there was some reference to maybe rate base growth moving better than expected. Is that more a reference to your beyond your guidance time frame?
Yes. That's a great question, Ben. I think Wayne kind of alluded to in his comments, like we do see some significant growth in our jurisdictions here and certainly be mindful of affordability of our customers, but we are seeing pressures from the growth and evolving demands from our customers. And also, we recognize there's a little bit of a pause on the renewables. But reality is we do need to connect and make sure that we continue to provide a network which has safe and reliable energy in serving our needs. So I think this is evolving. We expect to give an update. Typically, we provide a further update at the end of the year. So in February, we'll provide kind of a more refined guidance in terms of what our expectations and outlook is for the next, say, 3 to 5 years.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Lawrence Gramson, 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.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.