Episode 129: From a Provincial Utility to a Major North American Player, the Emera Story, with Scott Balfour

[MUSIC] By the time you put those two components together, the return on capital profiled in the US can actually be quite a bit higher than it is in Canada. And you might overlay that well if the risk in Canada were lower, then that might be okay. But that's not true. The risk profile I would say is quite comparable. [MUSIC] Welcome to the flux capacitor, a podcast about the future of electricity. I'm Francis Bradley of electricity Canada. This is number one two nine, episode 129 of the flux capacitor. I've been chatting with the industry's business leaders, thought leaders, new market players, and stakeholders. The folks that have been pondering the future of how we create, move trade and use energy, and what the future changes will mean for electricity companies, regulators, society, and customers. I hope these conversations have given you the listener a sense of the conversations that are taking place in the sector. My guest on the podcast today is Scott Balfour, president and CEO of America. Scott joined me for a chat about America's growth from a privatized ground corporation in Nova Scotia to a major North American energy player with operations in Canada, Florida, New Mexico, Grand Bahama, and Barbados. We discuss the challenges of balancing reliability, sustainability, and affordability in the energy sector, and differences in rates of return. Scott emphasized the need for honest conversations about the costs of decarbonization and the importance of nation building projects. We close the conversation with Scott's book recommendation. Here is my conversation with Scott Balfour recorded on Zoom in mid-November 2023. [MUSIC] Scott, welcome to the podcast. I'm looking forward to having a conversation about America. >> Great to be here. >> Look forward to the discussion. >> So maybe right at the outset for the listener, if you could maybe just do a bit of a thumbnail sketch about who America is, because unless people are either on the East Coast or following the financial community in the stock market, they may not know America as a name in the electricity sector necessarily. I'm very familiar because I was around in this sector in 1992, back when Nova Scotia Power was privatized. So maybe for the listener a little bit about where America is in the North American energy space now. >> Yeah, so you certainly got the year and the start of Francis. So in 1992, Governor Nova Scotia took the integrated electric utility Nova Scotia Power into the public markets. And, Emira has really grown from there. The Emira brand started in 2000. Really is a vehicle in order to grow beyond Nova Scotia Power and beyond Nova Scotia. Today we have 7600 employees as we own and operate. A number of regulated electric and gas utilities. And so of course, Nova Scotia, I'm sitting here in Halifax Nova Scotia as we chat, where Emira's head office is today and of course Nova Scotia Power. But we have other assets here in Atlanta, Canada, gas and electric transmission assets in particular, and an energy marketing and trading business called Amira Energy. All headquartered material in Halifax. But then most of our business today is actually not in Halifax, in fact not in Canada. Almost 70% of our business today is in the state of Florida, where we have a electric utility, Tampa electric that serves about 850,000 customers and a gas utility that serves about half of the gas connected customers in the state of Florida. We also have a gas utility in New Mexico, which we have currently contracted for sale is going through a regulatory process to complete that. And we also own electric utilities in Grampa, Hama and Barbados. So in total about 2 and a half million customers across all of those varying operations. All right, that is pretty expansive considering that you started off with a crown corporation in Nova Scotia that was simply privatized in 1992. So I think it's interesting that as you say 70% of your businesses is in Florida and you're in all these different places. But a home is still Halifax. Yeah, that's certainly true. It means a few of us spend a lot of time on the road and airports and airplanes and the like as we travel about. And as you also mentioned, of course, we are publicly traded. Still widely held. There's no principle shareholder. We trade on the TSEX. We're one of the TSEX 60 companies, meaning we're one of the largest publicly traded companies in the country. But most recently, we also listed in New York. So we are dual listed now. And you know, but we're still proud to call Nova Scotia home. So that's, I mean, you know, when you kind of step back and look at the sweep and everything that's happened in the past 33 years, that's an astonishing growth for the company. Yeah. And you know, I think it's a story that Canadians should be proud of. And Nova Scotia should be proud of. You know, we're, you know, punching it above our weight a little bit and competing against you know, some of the largest energy companies in North America. And you know, for coming out of humble beginnings of one of the smaller provinces in the country and to be in this place now, where you know, we're amongst energy energy leaders in North America in our sector. It's, you know, it's a prideful place to be. Yeah. Yeah. But I couldn't agree more. So say it's, you know, it's quite astonishing when you think that it simply began as the privatization of a moderately sized ground corporation, you know, three decades, three decades ago. But I think it also gives you a unique perch from from which to observe what's taking place in the in the energy sector because your wow, you know, headquartered in Halifax, you're in, I don't know, three, four different time zones from, you know, depending upon where your assets are, you're covering a lot of geographic area, a lot of different types of markets as well. So that's that's got to give like both, you know, I mean, you personally, Scott, but also, you know, your management team probably has a different perspective because of sort of the expansive and broad geographic area that the company covers. Yeah, I think, I think that's right. And I think in many ways that helps to make us better because we can bring experiences from from different jurisdictions and different businesses and different teams and different regulatory regulators and different economies and and bring those lessons to bear in operations across the business. And, you know, we will often also move members of our team will sometimes spend time in one business and then time in in another. And that too helps the development of talents, of course, but, but I think it also helps us to be better as a business. And then it is, are the businesses all regulated or are some of these also in the non-regulated space? What does that look like? Yeah, so we are today 95% of our earnings are regulated or one unregulated business would be the reference I made to a mirror energy, which is a marketing and trading business where we we principally as a gas-focused business principally in in the northeast USA that's sort of certainly where the heart of the business is it now has expanded further. And mostly what we're doing is moving other people's gas along gas transmission assets that we have effectively rented for a period of time. And so we'll move, you know, three billion, three BCF of gas a day on average where you know, the businesses become quite, quite, quite meaningful. And it's, you know, it's, you know, relatively a small component of our business, of course, but still an important part of our business and helps us to stay sharp. It's a competitive market-facing business and those are our skills that are helpful in terms of the development of talent within within an industry that is not typically known for its sort of competitive mentality, although I think it's actually really important in the regulated industry too, but it also gives us insight into different markets and that that business is active in as well. - Yeah, and then the bulk of your stuff is in regulated businesses. - Any observations about, you know, 'cause I'm not to kind of pick on Nova Scotia, but seeing us out, this is the podcast tends to focus on Canadian electricity. So you're seeing regulation and regulatory constructs in multiple jurisdictions. Generally, how do you see us doing in Canada? 'Cause I know you've got insight into other markets as well. Are we, you know, when it comes to regulatory innovation, are we leaders or we followers? Are we stuck in the 1960s? Just because, I mean, you can do a compare and contrast from the other jurisdictions that you're in. How are we doing in this space? - I think we have an opportunity to improve. If I were to, you know, put it in those terms. And, you know, if I had a worry Francis sort of seeing what's going on in the sector, and even frankly beyond the sector, but the demand for capital, the need for capital investment is at levels we've never seen before. - Right. - And so, you know, that capital is going to go to places where the risk return balance and profile makes the most sense where sort of the certainty of and confidence in the market makes the most sense. And so, you know, in that context, you know, I would advocate that there's opportunities for us to improve. I know certainly federally the focus on permitting reform, you know, is an important aspect, but I think even as it relates to electricity regulation, you know, I think there's opportunities to improve. And we would see where it is, you know, more effective in some markets also happen to be the markets that, you know, seeing capital being attracted to. I think that's a difference maker. - Yeah, yeah. Should we be, you know, taking, I don't know, but a message from the fact that the bulk of your growth has been not in Canada, but, you know, but in other jurisdictions, you know, you know, when you're, you know, you're talking about the risk profile and the returns are kind of what drive this. Is there an implicit message in this that the, you know, we don't have maybe as much opportunity or is it just that our markets too small and if you want to get big, you've got to, you've got to kind of grow outside as well. - Yeah, I think there's a bit of both in that. So if I start with a second point, I mean, as you would know, most of the, if I focus on electric utilities for a second, most of the electricity utilities in Canada, most of them are crown corpse. They're government, they're government owned, either by provinces or municipalities in some cases. And so for an investor owned utility company like Amira, you know, it's not like we can, we can go to Saskatchewan and say, hey, we're here, you know, we'd like to, to own a piece of that business. There are many, many more, the much more prominence of investor owned utilities as a construct in the US. So it's no surprise that companies like Amira and Fortis, and Dalgonquin as another example, have been investing in utility growth in the US. So that's certainly part of it, but the second part of it, yes, as we sit here in Canada, across the country, on average, the return on capital profile for investing in utilities in Canada is lower than what it is in the US. Our equity thicknesses are generally lower, you know, generally the equity thickness, the equity component of the capital structure that is invested on behalf of customers. Generally in Canada is 40% equity and 60% debt. In the US, generally, it's 50/50. - Okay. - And then the return on equity profile in Canada is generally a little bit lower than it is in Canada. By the time you put those two components together, the return on capital profile in the US can actually be quite a bit higher than it is in Canada. And you know, you might overlay that well if the risk in Canada were lower, then that might be okay. But that's not true. The risk profile I would say is quite comparable between the US and Canada on average. There are differences depending on which locations specifically you're in. So that's a factor for sure. But today for Amira, 80% of our capital, it's 68% of our business is in Florida, but 80% of our capital is being invested in Florida. And you know, what I just mentioned is, we sure that is part of it. Our investors are certainly when they see the return on capital in Florida being higher, they would encourage us to invest more of their capital there. But I'd also say part of it is just the Florida economy is growing, the customer base is growing, the need to invest is there. And so part of it is just sort of the natural state of strength in that Florida market that is also driving the need for higher levels of capital. - Yeah, yeah, okay. So I wanna talk about sort of the moment, the pivotal moment that we're at with respect to energy. But before that, Scott, I wanted to ask you about your journey. And so I ask everybody who comes on the podcast, I make the joke, Scott, when you were a kid in the playground, is this what you dreamed of doing? What was your journey to your role now at Amira? - Yeah, so I grew up in Ontario. I didn't grew up in Nova Scotia. - Okay, so that's why your reliefs fan, is that it? (laughing) - That's true from long ago many days, I have been hoping that maybe one day that these can make it a little further through a playoff run. But I'm also a fan of the Tampa Bay Lightning, as you might imagine. - Well, I guess, yeah. Of course, is that Tampa electric? Is our biggest business? And men, it's not lost on me that they also have a jersey that is the same blue and white colors as the maple leafs. And so it makes it a little easier to cheer on that team as well. And so by answering your question, no, I did not grow up thinking that I would be have a career in the energy or utility sector. I started my career in banking in Toronto, working for a couple of banks in Toronto, and then left there to work for one of my clients at the time, which today is a large construction company. It's been 17 years working for what was Armbro. It was now ACON, sort of like Pan-Canadian now even beyond that construction, self-performing construction engineering firm, and left ACON after 17 years, drawn into Mira 13 years ago was recruited, and was compelled by a little bit of the of the Mira story. And it had already demonstrated its growth beyond Nova Scotia, its ability to think a little more broadly and boldly than you might traditionally think of a utility company. And you know, I've had the privilege and pleasure to work with an amazing team here with the support of a terrific board of directors that has, you know, and played a part in shaping some of the growth and success of a Mira over the last 13 years. - Hmm, yeah, okay. So let's talk about that moment that we're experiencing in the energy sector. And you know, I bet we're like this. And in a lot of ways we're talking about, you know, as a country where Canada as is, I think that the Prime Minister talks about, you know, we're at a hinge moment with respect to, you know, the budget and the finances and, you know, a number of other things. Some folks in the energy sector, particularly the electricity sector say, you know, we're on the verge of mass of growth. This is an inflection point. But I know in some of the messages that we exchange prior to getting on this call, you know, I thought it would be interesting to talk about the pivotal moment there. that we're having here in the industry when, you know, thinking about the energy trilema, for example. So what's your perspective on what that moment is and where we're at? Yeah, so, you know, I think, I think really, you know, we're at a place where, you know, it's not that long ago, people might have thought of this sector, of our sector as a bit of, you know, a bit sleepy, you know, the utility sector, and that is definitely not true today. And, you know, you refer to the energy, I trilema, which is a complex thing that frankly, you know, it may have even gotten more complex over the last couple of years. So people, you know, the trilema would, would generally be described as the intersection of a need to focus on, um, reliability, sustainability or sort of cleaner energy and affordability, all at the same time. I'd say the sustainability or cleaner aspect of it has gotten more complicated. It will go the last couple of years from a policy perspective. Certainly, that would be true in the US to contrast the US and Canada and the drivers around that. I'd say, just availability of energy is increasingly, you know, part of the part of the conversation and, um, and, and, you know, energy providers, in this country included and in the US, unexpectedly now worried about, you know, making sure that there is just enough, enough supply available given the growing demand that is, that is happening, as you say, this, this sort of massive increase in demand. And affordability is, you know, as critical as it's ever been, you know, affordability well beyond the cost of electricity is a, is a challenge, whether it's groceries or housing or, um, just the cost of living, but the cost of energy and, electricity is a really important factor in that. And balancing all of those things at the, at the same time is, is really hard. As you know, we can, we can invest in reliability and make, you know, improvements in the reliability that our customers experience, but the more we invest in it has an impact on the cost because, of course, um, you know, that, that, um, that as a factor in the same thing, as it relates to the pace at which we, we clean the generation mix, um, in the energy that we supply, you know, the faster we do that, the higher and more dramatic the cost impacts will be the more pressure we put on affordability. And so, measuring the pace at which we're making these reliability investments, the pace at which we're making energy transition to, to clean our energy, and even the pace at which we are adding to the generation capacity in order to, to meet the increasing demand. These are all factors that we have to balance against affordability. And, you know, that's the, that's the trick. That's the challenge. And, you know, that's what utilities across across this continent, frankly, probably globally, are wrestling with, uh, at, at, at this time and, and a big part of the focus, uh, for, uh, for the team. Yeah. Yeah. You mentioned globally, I participated in the, uh, international electricity summit, uh, a month ago, and so Canada, uh, the United States, the Europe, uh, Japan, Australia. And I was struck with, you know, precisely that, that there's that, that the same, uh, challenges that we're faced with here are virtually the same challenges wherever you go. Yeah. Absolutely. And, you know, obviously, there's some markets like, um, Germany that had a lot of attention because of their, you know, their rapid transmission to, to renewables and then, and then their journey with, uh, with nuclear and, um, you know, the, the conversation has changed dramatically. And, and we see jurisdictions, you know, here in North America too, that, uh, you know, the conversation is different today than it was just a few years ago around, uh, how we think about all these things and how we best manage them. Yeah. Well, and then the conversation generally here in Canada is, is now shifted to, you know, what, what the, the federal government is referring to as nation building projects. Um, but, I mean, you, uh, have been involved recently in what, uh, one would consider, uh, a pretty significant nation building project that, that's, it's bringing electricity from Labrador, uh, down into Nova Scotia. So, you know, you've got, uh, some experience in this space when we're talking about getting big major nation building projects put together. This isn't easy, is it? No. And, and, truthfully, it's, it's probably going to get harder. And, you know, sort of building these things, you know, permitting and first nation consultation, contractor capacity, you know, would be an increasing challenge that I think we're, we're going to collectively, uh, face within this sector and, and others, uh, is, uh, you know, is, is an important consideration in, in navigating this journey ahead. And, you know, the focus on nation building infrastructure is exactly the right thing at exactly the right time. It's sort of, I applaud all of that. But, you know, but this too will, you know, there's, there's a, there's a cost factor that there's going to have to be a balance. If it's, you know, if it's infrastructure that is relevant in our sector, um, you know, sort of the, the balance around how does that get paid for? Is that paid for by customers? Is that paid for by taxpayers? Yeah. You know, how do we do, how do we do that in the most cost effective way? Uh, will be, you know, these are important questions to answer. Yeah. Yeah. So, you know, at the same time, you know, this is against a background of, I think a shifting discussion around, uh, sustainability, uh, and, and what our objectives need to be in this sustainability, uh, space, uh, you know, you, you know, you mentioned the, the trilemmer earlier. Uh, and it, it feels as though we're, we're, we've, we've, been in a period, uh, I don't know, perhaps the last decade where the, the, the, the, the, the was, was the thumb on the scale for, you know, one versus the other. Um, but, you know, what is, that, what is the concern about, um, affordability for customers and, and the need for reliability? Is that going to result in a kind of a shifting balance between these, uh, and, you know, what, what, what that do with respect to our sustainability target? Yeah. So, you know, I think, I think, I think a really important part of the conversation around navigating those, those, uh, sometimes competing forces, um, particularly as it relates to sustainability is to have an honest conversation around what the cost is. Right. And it's been, you know, my worry for, for a while, as it relates to, the, the focus on cleaning the electric sector in Canada to drive the electric sector towards net zero is we're having that conversation with, without talking about the cost. And without talking about the fact that the Canadian electric sector is already one of the cleanest in the world. In the world, yeah. Yeah. It's 85% 86% not emitting today and not emitting a little different, as you know, than, um, than saying renewable because we include nuclear. Yeah. That number, we don't have nuclear enough ascocia, but, um, but including nuclear in that number. And, you know, that's second amongst G7, G7 nations, only behind, uh, behind, uh, France and third amongst G20. I mean, it is, it is incredibly, uh, clean sector. We are, you know, twice as clean as the US system as an example. Right. And so, you know, have an honest conversation to say, okay, what is the cost and the value of moving from 85, 86%, um, not emitting to 100? And the reality is each, every step closer to 100 gets incrementally more expensive and harder. More expensive diminishing returns. Yeah. Exactly. Right. So I think we need to have an honest conversation around around that from a policy perspective. Yeah. Um, and to be clear, as it relates to that incremental cost, you know, our customers prepared to pay for it. If not, is it a taxpayer cost? And how do we, you know, how do we navigate that journey, as I think, a really important part? But I'd also say, uh, you know, it's certainly if we talk to our customers, and certainly, you know, that would be true, um, in, in, in Nova Scotia, yes, but, but even more true, as we, as we move into the US, the sustainability part of the, uh, provision of electricity would fall a very distant third to affordability and reliability. Mm-hmm. Those two, depending on the day, might sort of balance each other out as to which one is, is first or second, but they are very close. The sustainability, um, at least what we hear from our customers, would, would be a distant third. And I think that's a, you know, that's a truth across most of the sector based upon, you know, some of the polling and, and, and data that, uh, that we have, that we have seen. But from a policy perspective, you know, it plays a little higher, um, in Canada, and we respect that. But that's where I think the honest conversations around, um, the cost, um, and, uh, and how it gets paid for, uh, is, uh, is important to work our way through. Yeah. And do you, do you think those conversations are happening? Are we, are we getting a little more honest in these honest conversations? Yeah. I think, I think we are. I think, you know, I think, um, we're, you know, um, uh, getting a little, a little closer to having the, uh, the candid honest conversation around, uh, around all of this. And, you know, we're not all the way there yet. I don't think, but, uh, but I do, um, I'd like you words. I do think we are, we are closer to that. I think, you know, a little more pragmatic view around, around some of this. And look, the reality is the sector is going to naturally, naturally continue to decarbonize. Because technology is getting better, the cost profile of some of these technologies is getting better. It will happen naturally. And if we look at our journey in Florida as an example, there are no carbon emission target requirements. There's no renewable energy standard requirements. There is no price on carbon. And yet, we have dramatically reduced the emission profile of the generation mix in Florida, because it's been economic. We put solar in place because we could justify the cost of those solar investments in a cost-reducing way, relative to the alternative sources of adding new generation. We are closing coal units and replacing them with more efficient natural gas generation that is saving customers money. So along that journey, of course, we've reduced the emission profile as well. It is happening naturally. It's a matter of when policy starts to accelerate the need to navigate that journey. It's the part that I refer to the need for honest conversation around the cost and who pays for it. Yeah. You also suggested that it's complex and time-consuming to go through the permitting processes. And I know that's something that the federal government, the new federal government is attempting to address with Bill C5 in the creation of the major projects office. I would imagine this would be heading in the right direction based upon some of your comments, or at least the aspiration to make it easier to get things built. Yes. I think that's true. And I will say, and I applaud the Prime Minister Carter and the focus on this and Minister Hodgson as well. And it is important. I will also say, our experience in Nova Scotia has actually been pretty good. And sort of the permitting and environmental assessment process in Nova Scotia has actually been pretty effective. And one of our messages has been to the federal government is should look across the country and take a look at the best practices from across the country. And there may be some models. And I think this is an area actually where the government of Nova Scotia has done a pretty good job in our experience in that journey. It's in a good place. OK. Well, here's a maybe a question at a left field for you Scott. But looking at the success that Ameri has become when it started off as a crown corporation privatized in '92 and has now grown to be this major player on a North American basis. Do you occasionally get phone calls from premieres of provinces that have crown corporations that call and ask how Nova Scotia power Ameri did it? If there's a template that they could be looking at. No, but it is interesting to contrast the investor-owned utility model from the crown government-owned model. Look, there's advantages and disadvantages to both. And there's good examples and bad examples, of course, or more talented examples of both. But I think, again, in this environment where the need to invest is never bit higher. There are some of those government-- and if I think about some of the larger, municipally-owned utilities in the US as an example, maybe to disconnect it from things too close to home, to desensitize the discussion a little bit. But the need to invest is very significant. If you're a municipality and you need to invest in the utility, you try to balance that at the same time as you need to invest in roads and bridges and water systems and schools. And that can be a challenge. And so I think that there's no right or wrong answer in this. I think maybe to turn your question around a little bit, I think one of the other interesting things to observe today, the issue of affordability is almost a hot button issue in some markets. You'll know back a few years ago, there was a challenge here, even in Nova Scotia, with concern from the premiere around the cost of electricity and the increase in rates and an engagement in that process, starting to see some of those same themes in a few places in the US. There's some markets today that are balancing the data center driven activity and the impacts that that's having on customer cost. And in the US, it's interesting to see what's happening in markets that are, quote, unquote, deregulated, where the generation profile is separated from the transmission and distribution for a regulated utility would continue to do distribution and transmission. But a competitive market would be set up for the generation. Some of those markets in the US are struggling with that model today because some of those generators are saying, I'm happy to serve a large low data center. And then all of a sudden, the more socialized system, the regulated system finds itself struggling to meet the generation needs and needing to make Apple investments and putting incremental pressure on costs. And we're seeing some of the political activity arise as a result of some of that dynamics. So lots of interesting things going on in the sector. Yeah, yeah, absolutely. So the last question, Scott, I ask everybody the same final question. And that's for a book recommendation. And we've got our Flux capacitor book club. We put the list together. And so today, what book will you be adding to our reading list? Well, I'm going to get there in half a step for instance. I had the opportunity recently to listen to Mustafa Solomon, who is currently the CEO of Microsoft AI, but has had a career in the AI sector before. And he just recently published an essay that has led me to a book recommendation that I haven't read yet. But I've read the essay. And the essay is called Build AI for people, not to be a person. And it's pretty thought for provoking. And this whole sort of where AI is going, it's a little bit of a cautionary tale, frankly. And so he's got a book as well that predates this essay a little more thematically around the cautionary tale of AI. From someone who has been an architect, AI, continues to drive the focus of AI. And his book that I have not yet read, but is now on my reading list, is called The Coming Wave. OK, so The Coming Wave. And it is by Mustafa Simon, who is the CEO of Microsoft AI. And I would also recommend the essay. Gotcha. OK, there. So I got it on my screen. The Coming Wave. And it is Mustafa Suleiman. And Michael Baskar as the two authors. But OK, The Coming Wave. That is an excellent and timely edition. And so we'll put that on our reading list. That's terrific Scott. And thank you for the recommendation. But also thank you for jumping on the podcast to giving us some insight into your view and kind of an Ameri view, because it is a different perspective given, in all of the different markets that you're involved in. Appreciate you taking the time to chat. It was fun. I enjoyed it. Take Frances. [MUSIC PLAYING] For those that have been with the podcast since the beginning and those that have joined along the way, thanks for listening. Please take the time to rate the podcast on whatever platform you use to listen. And let me know what you think of the flux capacitor. You can find me on Instagram as the Brad Bradley, on LinkedIn and through our website at electricity.ca. The website for this pod is the fluxcapacitor.ca. And it includes links for this episode on the show page, this being episode 129. And while you're there, check out the book club page, which provides info on and links to the books, which have been recommended by guests on the fluxcapacitor, including Scott's recommendation, The Coming Wave by Mustafa Suleiman. And let's continue the electricity conversation on our Facebook page, on Instagram, and at electricity.ca. [MUSIC PLAYING] [Music]