Algonquin Power & Utilities Corp (AQNU) 2006 Q4 法說會逐字稿

Good morning. My name is Amadel and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Algonquin Power Income Fund fourth quarter and year end conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Kerr, you may begin your conference.

Thank you. Good morning. And welcome to Algonquin Power's fourth quarter and year end 2006 call. My name is Dave Kerr. I'm an Executive Director of the Algonquin Power Income Fund. Also with me today is Chris Jarratt, who is also an Executive Director of the Income Fund. Peter Kampian, who is the Fund's Chief Financial Officer, Vito Ciciretto, who is the Fund's Chief Operating Officer, and Kelly Castledine, who is our Manager of Investor Relations.

As a quick housekeeping issue, I would like to quickly review our forward-looking statement disclaimer. Certain statements contained in the information discussed today are forward-looking and reflect the views of the Fund and Algonquin Power management with respect to future events. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Forward-looking statements are not guarantees of the Fund's performance or results and are subject to various factors, including, but not limited to; assumptions such as those relating to the performance of the Fund's assets, commodity market prices, interest rates, and environmental other regulatory requirements. Although the Fund and it's management believe that the assumptions inherent in these forward-looking statements are reasonable, undue reliance should not be made -- be placed on these statements.

During the call today, I will provide a review of the fourth quarter and year end results for 2006, followed by a discussion of the divisional results. I will then provide an outlook for each division and finish off with some additional information about the Fund.

As a quick summary for Q4 and the year end for 2006; revenues for the fourth quarter 2006 were $53.7 million, which compares to $50.9 million for the fourth quarter of 2005. Total revenues for 2006 were $201.4 million. Distributions to unitholders for the fourth quarter of 2006 was $17.5 million, which compares to $16 million for Q4 2005. Total distributions to unitholders for 2006 were $67 million. Cash available for distributions for fourth quarter 2006 were $17.8 million, which compares to $19.5 million for 2005. Total cash available for distributions for 2006 were $67.5 million.

On a per unit basis, distributions to unitholders in Q4 2006 were $0.23, just the same as Q4 2005. And total distributions to unitholders per unit for 2006 was $0.92. Cash available for distributions in the fourth quarter 2006 were $0.23, which compared to $0.28 per unit for the fourth quarter 2005. Total cash available for distributions for 2006 were $0.93 per unit.

So in summary, Algonquin Power had a successful year and a strong finish for the fourth quarter 2006. Success in the quarter and the year 2006 was primarily due to improved hydrology and the integration of the results in St. Leon Wind Energy facility, and continued growth in the Infrastructure division, both organically and through acquisitions that were completed in 2005. The Fund achieved a payout ratio of 99% for the year 2006, which was in line with the year 2005.

During the fourth quarter, the Fund completed an offering of 60,000 convertible debentures for gross proceeds of $60 million. The debentures are due November 30th, 2016, and bear an interest rate of 6.2%.

Now, I will quickly go over some of the highlights of the different divisions in the Fund. Within in the Hydro division for the fourth quarter, the Fund's hydro assets generated electricity equal to 115% of long-term averages, which compares to 113% for the fourth quarter of 2005. For the year 2006, the Fund's hydro assets generated electricity equal to 103% of long-term averages, compared to 94% in 2005. Improved energy generations was due to improved hydrology in Quebec, Ontario and New York regions, and an inclusion the Beaver Falls facility, which was acquired late in 2005 and underwent repairs in 2006. During the fourth quarter of 2006, the Fund finalized the sale of its 220-kilowatts Drag Lake facility, which is near Halliburton, Ontario, as the Fund determined that this facility no longer fits the Fund's asset profile. The Fund of this asset will not materially impact the Hydro division's future operating results.

In the Cogeneration division, fourth quarter performance increased compared to the fourth quarter of 2005, which was primarily due to the increased production of the Sanger facility, which in 2005 had a planned temporary shutdown to resell the natural gas normally used by the facility. During 2006, the Windsor Locks facility underwent a planned overhaul, which contributed to a reduction in overall production in 2006 when compared to 2005. In November of 2006, the Fund announced plans to retrofit our Sanger facility with the General Electric LM 6000 turbine. The project is expected to result in improved fuel efficiency, increased facility output, improved maintenance and an extension of the useful life of the facility. The project is progressing on schedule, with commissioning target for the fourth quarter 2007.

For the Alternative Fuels division, at the Fund's Energy From Waste facility, 40,000 tons of waste was processed in the fourth quarter of 2006, which exceeded the Fund's target of 35,000 tons. A total of 156,000 tons of waste was processed during the year at our Energy From Waste facility. Production in the Alternative Fuels division for the year 2006 increased, primarily due to inclusion of the St. Leon Wind Energy facility and increased energy generated at higher levels of waste processed at the Energy From Waste facility. At the Fund's landfill gas facilities, improved projects -- improvement projects continued throughout the year of 2006, however, performance fell below management's expectations.

In the Infrastructure division, all facilities performed at or above target for the quarter, with the division experiencing a 1% growth during the quarter. During the year 2006, the Fund's wastewater business grew by 12%, while the water distribution business grew by 7%. Total new wastewater customers for the year were 3,000 and total new water distribution customers were 2,100. Also in December 2006, the rate case initiative for the Black Mountain facility was approved, resulting in a 20% increase in wastewater rates. Also the Rio Rico facility implemented a 9% wastewater rate increase in November of 2006, based on a prior approval from 2004. Growth in both water distribution and wastewaters due to organic growth at the Fund's existing facilities and acquisitions made during 2005.

Now, I will turn to some of the outlooks for 2007. For the Hydro division, the Fund's hydro facilities are expected to perform at or above long-term averages due to improved hydrologies during the first quarter of 2007. Favorable power rates are expected to continue in the New England region. And as usual, performance in the first quarter will depend on precipitation and no snow accumulations, but we expect the production will be at or slightly above target, resulting in a good start to 2007 for the division.

In the Cogeneration division, both the Fund's Windsor Locks and Sanger are expected to meet management expectations through 2007. The Sanger repowering project will continue throughout the year and the facility will operate as usual as the project proceeds. The buy-down of the power purchase agreement at the Crossroads facility was completed by the Fund at the end of the year and the Fund is now -- is examining its options and plans to have a strategy in place to redeploy our self-existing equipment at the facility by mid-2007.

In the Alternative Fuel division for 2007, the Fund will continue to focus on operational improvements at the Energy From Waste and landfill gas facilities. Improvements at the Energy From Waste facilities are expected to provide increased availability and an improved overall plan performance throughout 2007. And during the year, the Fund will move forward with esteemed sales projects at the Energy From Waste facility. The performance of the St. Leon Wind Energy facility is expected to continue at or above management's expectations for 2007. Management continues to work towards resolution of the outstanding items in the turn-key construction contract.

In the Infrastructure division, strong organic growth is expected to continue, primarily in Arizona, despite a general slowdown in the residential housing market in the U.S. Rate cases continue for Gold Canyon and in our three Missouri facilities, with the results expected in the second quarter for 2007 for Gold Canyon and later in 2007 for the Missouri facilities. Planned [inaudible] improvement projects are expected to continue at Litchfield Park to meet growth and new government regulations in Arizona.

[Just to add a couple of additional informations] affecting the Algonquin Power Income Fund; as previously announced, Algonquin Power Income Fund stated the intention to make an offer for all the outstanding trust units of the Clean Power Income Fund. The offer will be made by way of a takeover bid with consideration equal to the issuance of 0.6152 trust units of Algonquin for each Clean Power trust units plus a contingency value received, which entitles the holders, subject to certain conditions, to pay on the cash of an amount up to $0.27 per Clean Power trust unit. The Clean Power assets are long-lived assets with long power purchase agreements and compliment Algonquin's existing technologies, providing the ability to leverage Algonquin's technical and operation -- operating and expertise. Value will be created through optimizing management, administration and operational costs and the acquisition is expected to be accretive to the Fund.

This is an excellent opportunity and will make Algonquin one of the largest renewable energy companies in Canada and the largest owners of wind energy in the country. This opportunity allows the Fund to make a significant accretive acquisition, and allows the acquisitions of large, high-quality assets that we would not normally have the opportunity to acquire. The Fund -- the acquisition also enables Algonquin to minimize the impact of the proposed changes to taxation policies for income trust beyond 2011, reduces the Fund's foreign exchange exposures, and results in a longer average purchase agreement for our combined portfolio.

Now quickly -- on October 31, 2006, the Canadian Minister of Finance announced proposals to impose a tax similar to corporations on income trust, which are applicable to the Algonquin Power Income Fund. These proposals indicate that beginning in 2011 taxation year, Algonquin will be subject to tax at a rate that's equivalent to the federal corporate tax rate, as well as provincial tax. Although these proposals are to be legislated between now and 2011, Algonquin Power Income Fund will seek opportunities to minimize the impact of the proposal [inaudible], while continuing it's strategic focus.

And that ends our formal presentation. I would like to open it up to questions to the management team. So Amadel, if you want to open it for questions? Operator?

Hello, Mr. Kerr?

Yes, hi. We can open it up to questions now.

[OPERATOR INSTRUCTIONS ] We will now pause for just a moment to compile the Q&A roster. Your first question comes from Bob Hastings from Canaccord.

Hi, Bob.

Hi, how are you?

Good. Thanks.

So, just a couple of things. First of all, the -- the earnings statements, when will we get the full financial statements?

We will be filing those the end of the year -- or the end of the month, Bob.

By March 30th?

Yes, by March 30th, we will have them posted on SEDAR.

That's a little later than normal, isn't it? It would be nice to have them at the same time as the call.

We wanted to get our numbers out early but our financial statements are not ready for publishing. So we have done it this way. So we have published additional information on the website and on SEDAR.

No.

No, just on the website.

Was that in there last night? I didn't see it.

Yes.

Okay. I will look again.

Yes, look at our website. There's some additional information that has quite a bit of detail on our financials. But we have not published our financial statements until March 30th.

Okay. The Hydro -- you mentioned that you are looking to still sell off or rationalize some assets. And that's been taking some time now. I'm just wondering if we are any closer to anything, when you expect something to happen? And if you expect, still, no impact?

Well, we are still looking at the rationalization of our assets. The first one was Drag Lake, which we sold at the end of 2006. And, yes, we are still looking at that. But we haven't made any announcements about any activities in that respect.

Okay. But you don't expect anything material to occur from that?

No. Definitely not.

Okay. And just sort of -- on the outlook side, there was lots of comments about things looking better for 2007. Obviously, you announced some significant increases in your water infrastructure business and a whole bunch of other things listed in your statements. But then you come -- and that didn't include the Clean Power accretion, if that were to happen. But then you conclude that you expect distributable cash flow to be flat with last year's. So can you sort of tell me what -- what the negatives are to offset all the positives?

Well, I haven't made -- we haven't made any forecasts for this reason for 2007. I'm not sure why you -- why you said that. We're expecting a strong year. We haven't made any announcements about distributions.

Well, you said management anticipates the Fund's four divisions will continue to generate cash available for distribution in 2007, in line with distributions to unitholders. So that -- that's the $0.92 and that's about the same as what you had in 2006.

Right.

So you did make a statement. I'm just wondering, did you mean to say that it really would be above flat or did you mean that you expect it to be at least that?

Bob, it's Peter Kampian. We don't give guidance on distributable cash, as you know. Basically, that statement says that we will be -- distributions will be in line with distributable cash. And so our expectation is that we will achieve distributable cash adequate to meet our distributions.

That sounds like a forecast. I guess I don't understand that. Did you just say that distributions are forecast -- that you expect 2007 to -- distributable cash to match your current distribution? Or are you saying that there will be at least enough to cover it? I'm missing the distinction here.

I don't believe we did say that. All we said was that distributable cash would equal to distribution. So we are not forecasting what our distributions will be.

Oh, I see. So if distributable cash is up or down, so will the distributions.

We are not saying that either, Bob.

We are not giving any direction, in terms of the distributable cash. We expect a strong year in line with what we did last year. I think that's as far as we are going to go with that.

Okay. I guess we all need to read that first sentence again under outlook. Okay.

So let me try one other one then. The St. Leon liquidated damages. Do you think we are getting close to settling that?

It's Chris Jarratt. And, yes, Bob, I think we are obviously -- the project is rapidly getting close to the end. And we hope to have that settled relatively soon. It's not something that has really -- has an impact on cash flows at all, because we are getting paid the LDs. The contractor is receiving the revenues from the plant. And they are roughly equal.

They are roughly equal? Okay.

Yes. That's how they were calculated in the first place. So it's really -- it hasn't got a big impact on things.

I was trying to make sure that there wasn't a surprise down the road, that maybe you came to a settlement and there might have to be some changes or whatever. Okay. I will get back in the queue and let somebody else have some questions.

Thanks, Bob.

Your next question comes from Tony Courtright from Scotia Capital.

Hi, Tony.

Thanks very much. In relation to -- on a prospective basis, looking forward, in the calculation -- or your own accounting for distributable cash. I gather that there's a move afoot to try to -- more comparability between income [inaudible] relative to maintenance and expansion CapEx. Have you given any thought to how you might account for the investment in the Sanger repowering with an LM6000?

Well, that's a growth cap. That's a growth capital expenditure, really, Tony. Because that will actually give us additional cash flow and additional revenue. So it's no different than going out and buying another project.

If -- so you consider it all growth? There's no replacement component?

No.

You even term it as a repowering of -- if I'm not mistaken. In other words, you are replacing an older turbine with a newer turbine that gives you the ability to continue to honor a contract ,and maybe the opportunity to generate incremental revenue. But it presumably is being done in part to -- to prevent losing money if you were ever called away on dispatch, when the heat rate of your existing unit was substantially above the avoided -- short term avoided cost of power.

The economics on that project was premised on the fact that this project pays for itself. So that was the basic economics. And where we really do well on it, is we save money on natural gas. We don't sell any more -- any more electricity than we did, but our costs become lower and the project pays for itself.

Okay.

That was the premise of the growth. It wasn't selling more electricity. It was really saving money while doing it and making more money.

All right. And could you elaborate a little bit on the Alternative Fuel segment -- just the comment that the Fund sold about 80% of its partnership interest; this, I guess, is in Across America, I believe, in the tax credits. Can you just elaborate on what is transpiring there in the write-down -- the non-cash write-down that you have recognized?

With the sale of that partnership -- it's really how we recognize that -- the sale of the tax credits. That's all that was. As you may or may not remember, but we did that last year as well. And -- and it was fairly successful. This is one of our projects that was not included in the original deal, which was that Across America note. So anyway, that -- that's what that particular portion was.

With respect to the write-down of that note, that was a noncash item, as you may or may not know. But the -- the issue here was that that was a tax-driven note as well, and it's for these production -- the landfill production tax credits. And that is -- that the price of oil has an impact of these -- of what these tax credits are. And as the price of oil goes up, these production tax credits come down and so does the impact. And also, the landfill gas facilities were not generating as much production.

So what do you continue to -- to hold or own, in terms of landfill gas?

Well, the assets we originally purchased in the original deal that we still have. The production tax credits are not -- were not as valuable as we first thought they were. And a couple of the facilities are not generating as much gas as we thought they were and that's the reason why we had to write down the Across America note. But we haven't sold any of the assets.

All right. Thank you.

Okay.

Next question comes from Bob Hastings from Canaccord.

Hi again, Bob.

Well, when I said I would get back in the queue, I didn't realize it was such a short queue there. But anyways -- so looking at the Sanger -- or not Sanger, but the Crossroads.

Yes?

What are the costs of disposing of those assets? And what opportunities do you see -- you actually being able to use them?

There's not a cost to dispose of the assets. We are looking at opportunities and strategic opportunities to either sell the assets or repower them at the site. We had an opportunity to get the power purchase contract bought out. That's what we did.

Do you see -- so there's no down side here? There's just potential upside, from your perspective?

That's our perspective, yes.

Okay. The -- the EFW is still below expectations. I'm just wondering -- I know you have been working hard with this one, and you have got new people in there, et cetera. But still not quite to where you would like it to be. Just wondering, what more can you do? And how far away are you from -- or what's the is up side potential if you are successful? Is it meaningful now?

Okay, Bob, it is Chris Jarratt. Yes, we did make great strides in '06. I think -- if you remember, if you go by the amount that we processed in '05, there was a significant jump between '05 and '06.

Yes.

So -- but I think what you are going to find in that facility is improvements are done very gradually -- that there's no magic bullet here. It's -- it's a large, complex facility, and improvements are done gradually. So we are continuing to do that. I think we are relatively happy that we came extremely close to our target that we set for '06, which compared to '05 -- we felt was aggressive, and I think we became very close to that. So we are fairly happy with that. And going forward, we expect to see some improvements. It won't be as dramatic as the difference between 2005 and 2006, though.

Yes -- and sorry, I apologize. I wasn't meaning to say that you haven't made improvements. In fact, I thought you made a lot in and was -- but you made the statement that it still wasn't up to expectations. So I was wondering how much of that was left? And you are saying very modest, I guess.

Oh, yes. I would say -- practically, if we can -- we can probably get to 168,000 tons over the year. I mean, that's just guidance -- that's just ballpark target of what we are trying to get to.

Oh, okay.

I think you see we are at 156 right now. So that gives you some idea of the likely improvements.

Okay. You referred to, on the admin side, that you had staffed up some more positions with the growth, et cetera. How many new positions are there?

I guess when we did the staffing, it's not that many new positions. It's just that we ended up having some temporary people, as well. It's probably about three additional positions, overall. That's it. Bob? Bob?

We don't have any questions at this time. Please go ahead, Mr. Kerr.

Oh, there's no more questions. Then we'd like to thank everyone for joining us and thanks. Okay.

This concludes today's Algonquin Power Income Fund fourth quarter and year end conference call. You may now disconnect.