Algonquin Power & Utilities Corp (AQNU) 2006 Q3 法說會逐字稿

Good morning. My name is Holly, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Algonquin Power third quarter 2006 conference call. (OPERATOR INSTRUCTIONS). Mr. Kerr, you begin your conference.

Good morning everyone. I am David Kerr. I am an Executive Director of the Algonquin Power Income Fund. With me today is Chris Jarratt, who is also an Executive Director of the fund; Peter Kampian, who is the fund's Chief Financial Officer; and Kelly Castledine, who is the Manager of Investor Relations and Communications for the fund.

As way of an agenda today I am going to do an overview of the fund's results for Q3 2006. I am going to do a summary of activities that have been occurring in different divisions of the fund. I will do a quick outlook for the fourth quarter of 2006. And we recently announced the recurring project at Sanger, our cogeneration facility in California. I will give you some details of it. And at the end, as much as we can, I'll discuss what the impact of the changes announced by the Ministry of Finance with the tax rate on our income fund.

Moving on to results, for Q3 2006 the revenues were C$51.1 million, which compares to $42.8 million for Q3 of '05, which is an increase of 19%. Our distributions to unitholders were C$17.4 million which compares to C$16 million for Q3 of 2005, which is a 9% increase. And the cash available for distribution is C$17.6 million, which compares to C$14.6 million in Q3 2005, which is a 20% increase.

Overall, by divisions the operating profits were divided by 30% in Alternative Fuels Division; 21% came from our Infrastructure Division; 30% came from our Cogeneration Division; and 19% came from our Hydroelectric Division.

In terms of overall operating results, Q3 was a very strong quarter for the fund. Our payout ratio improved to 99% for the first nine months of 2006, which compares to 106% for in the nine months of 2005. We also completed the acquisition of the remaining units of AirSource Power Fund, a limited partnership, which was done early in the quarter. And we have integrated the operations of the St. Leon wind energy project into the fund's assets.

Vito Ciciretto began his role as Chief Operating Officer at the end of July. And he has spent the first few months getting a number of initiatives underway for the operations.

Looking at the highlights of the different divisions, first in the Hydroelectric Division, we had an improved in the average hydrology in Ontario, Quebec, New York and New England. And the generated electricity was equaled to 91% of long-term averages which compares to 82% that we had for the third quarter of 2005.

At our recently acquired Beaver Falls hydroelectric facility the third and final turbine was repaired, upgraded and was online in the month of September.

The electricity that we sell at market rates in New York and New England, the average rates were higher than forecast in New York, which was C$0.0543 per kilowatt-hour, which compared to C$0.044 per kilowatt-hour that we projected. In New England our average price was C$0.0568 per kilowatt-hour which compares to C$0.058 of our forecast.

In the Cogeneration Division the production was down at the Windsor Locks facility and Crossroads facilities, but was up at the Sanger facility. The lower production however, was offset by higher energy rates at the Windsor Locks and Crossroads facilities where increased fuel costs were passed on to the customer in the form of higher energy prices.

In the Alternative Fuels Division our Energy-from-Waste facility processed 38,000 tons in Q3 2006, which is up from 33,000 tons that was processed in Q3 2005. We also had an increase of 2,000 megawatt hours in the quarter compared to the third quarter of 2005.

At our landfill gas facilities we had an increase of 5,000 megawatt hours to Q3 2006, which is compared to Q3 2005. And this is due to greater availability in the results of some of our initiatives to improve availability of those facilities.

Also, we were able to bring our St. Leon wind energy project, and the assets and liabilities for AirSource have been consolidated within the fund's balance sheet.

Within the Infrastructure Division all the facilities performed at or above targets for the quarter. We have also enjoyed 7.5% organic growth at the beginning of the year by adding on 1,900 new wastewater customers and 1,800 new water customers. Most of this additional growth in both distribution and wastewater is due to the acquisitions that were made during 2005.

We have got two rate cases proceeding and both are proceeding well with the formal proceedings being finished in the Black Mountain case, and proceeding well underway in the Gold Canyon rate case.

Moving on to our outlook for fourth quarter 2006, in the Hydro Division facilities located in New York, New England and Quebec regions are expected to perform near long-term averages during the first quarter of 2006. The facilities located in northern Ontario and Alberta are actually expected to perform below long-term averages during the quarter due to drier than expected conditions in these regions. We are expecting higher forecast of market rates in the New York region.

Although this is not a material impact of the fund, we have initiated the sale of a small hydroelectric facility in Ontario that no longer fits the fund's preferred asset profile. However, this is not expected to impact the Hydroelectric Division's operating results.

Within the cogeneration for fourth quarter we expect the production to be in line with expectations at both Windsor Locks and Sanger facilities. We are proceeding with the Sanger repowering project with an estimated cost of US$23 million. We expect it to be completed in the fourth quarter 2007. I'll talk a little bit about that in a minute.

Within the alternative fuels, we're continuing with our landfill gas initiatives that we started in the prior quarters, which are expected to be completed in Q4. And at the Energy-from-Waste facility we are proceeding with our plant component replacement with partial completion expected during the fourth quarter. These new components are expected to provide improvements in both energy production and waste processing in the early part of 2007. And our wind project at St. Leon is expected to meet our expectations in the fourth quarter 2006.

In the Infrastructure Division, for the fourth quarter we are expected -- organic rate -- organic growth to continue, primarily in Arizona. And as mentioned before, the proceedings at Black Mountain have been completed, and we expect a rate case decision in early 2007. We're proceeding with the rate case at Gold Canyon, and we expect those results to be completed in mid 2007.

The rate case of three facilities in Missouri are expected to be completed by the end of 2007. And the planned growth projects are expected to continue -- Litchfield Park, [continued growth] in new government regulations from Arizona.

We announced earlier this week that we decided to proceed with the Sanger repowering. I will just give you a quick overview of that. We selected the GE LM6000 as the turbine that we're going to install at Sanger. We have done this mainly because of its efficiency. The LM6000 has a heat rate of 8,500 BTUs per kilowatt-hour, which compares to 11,000 BTUs kilowatt-hour at the existing facility. We're going to finance this project through our existing line of credit. And the project economics is just like -- just on the fuel savings alone, because of the efficiencies of the new LM6000. We expect installation to be completed by the end of 2000 (sic - see press release) (indiscernible) expanded the project life of Sanger beyond the current PPA. The LM6000 actually is a well-known turbine that has a lot of support by its manufacturers.

And finally, I will just quickly go over some of the points that were made by the Minister of Finance, as we know them. We don't know -- have all the details. But we have probably as much information as you have, but just to give you an idea of what we think the Ministry of Finance announcement will affect the Algonquin Power Income Fund. We understand that the announcement of some changes to tax [unit] for the fund will not begin or affect the fund until the year 2011. And the taxes -- the taxing will not affect the portions of our distribution, which is the return of capital. Do you understand that? That will remain untaxable or non-taxable.

Just to give you an idea and put that in perspective for you, in 2005 50% of our distributions were considered return of capital. So that would be non-taxable.

In regards to our income fund also owns a number of assets in the United States. And the way we are looking at the announcement right now, we understand that those assets may not be subject to the proposed tax rules. But that is just our understanding and our interpretation. We don't know that for sure.

We have also looked at how the average taxable investor is affected by the changes, and our calculations indicate that after 2011 with the new tax treatment, taxable investors will not be affected. They will be treated the same way they are treated now.

Just to underscore that Algonquin Power we still focus on providing stable, sustainable distributions by good long-term assets, which we think will survive the changes in the tax rules.

With that, Holly, we can open it up to questions.

(OPERATOR INSTRUCTIONS). Bob Hastings, Canaccord.

Congratulations on your results. Just a couple of questions. You mentioned the impact on the rate case decisions would be sort of through next year, and I guess the full impact is in 2008. Anyway to sort of quantify whether you expect this to be positive, or by how much?

They are all positive because every rate case allows us to have an increase to our customers. We haven't got the results of either rate case yet, so we don't know exactly what the impact is. But on Gold Canyon, for example, we're asking for 90% to 100% rate increase. So, yes, it will be a positive impact to our revenue.

At EFW facility you are trying to put in some more parts into there. And once that is done would we expect to see any further improvements in utilization or revenues that would be material?

It is Chris Jarratt. Yes, we expect through 2007 to see some improvements. We have several projects underway right now. So through 2007 I would expect to see an increase in throughput at the fuel facility.

Is that in terms -- how material might that be?

Right now I think in our budgets we're assuming it is going to be about 160,000 tons per year. 2007, you're going to see some increase in that, but it won't be 10%, it will be probably closer to 5% or a little bit less than that.

In your MDA you mentioned that there are new initiatives underway to focus on maximizing operations in all divisions of the fund. You actually -- I guess you have been doing some work. Is there anything you can be more specific about other than like things for the parts?

No, I think our main focus there is in the EFW facility and in the LFG, and of course at Sanger. That is where our main focus is.

One last question before I let others in. Is the -- you were doing an issue, and of course we have the trust tax changes, and you have sort of [rejigged] that issue and pulled the trust unit issue. You're going to be raising some more money through your credit lines, etc. At what point do you have to get an equity issue off? And when do you think you're going to see some kind of clarification from the Feds on how much equity you can raise without creating a problem?

With respect to this clarification we don't have any more information than you have. Raising funds through our convertible debenture has given us headroom on our line of credit. I think our position right now is we don't know when we will raise more equity.

But it is not impinging on what you see going forward?

Sorry, say that again.

It is not impinging on your credit worthiness, or you don't have any issues with the rating agencies?

Oh, no, we are well within our covenants on our rating issues.

What I met by -- while I realize we have no clarity, there has been letters going back and forth between some trusts and the government looking for some clarification. Have you been involved in that?

No. No, we just learned what we do from the newspaper.

There's not a lot of news in there either. Thank you very much.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. Please go ahead.

Okay, if that is the end of the questions, we will thank you for joining us, and thanks for calling.

This concludes today's Algonquin Power third quarter 2006 conference call. You may now disconnect.