Algonquin Power & Utilities Corp (AQNU) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Algonquin Power Income first quarter 2008 results conference call. (OPERATOR INSTRUCTIONS) Following the presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference call is being recorded on Friday, May 9th, 2008, at 10 A.M. Eastern time. I'll now turn the conference over to Mr. Dave Kerr, Executive Director. Please go ahead, sir.

Thank you, Melissa. Good morning. My name is Dave Kerr, and I'm Executive Director of Algonquin Power. I would like to welcome you to Algonquin Power's our first quarter 2008 conference call. With me today is Chris Jarratt, Executive Director, David Bronicheski, our Chief Financial Officer, Louisa Reed, our Controller, Kelly Castledine, Manager of Investors Relations, and Andrew Ingram, our Treasurer. As a housekeeping issue, Kelly will quickly review our forward-looking statements disclaimer.

Certain statements contained in the information discussed today are forward-looking and reflect -- reflect the views of the Fund and Algonquin Power's 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 future performance or results and are subject to various factors, including, but, not limited to, assumptions, such as those relating to the performance of Fund's assets, commodity market prices, interest rates and environmental and other regulatory requirements. Although the Fund and its managers believe the assumptions inherent in the forward-looking statements are reasonable, undue reliance should not be placed on these statements.

Thanks, Kelly. I'll start off today with two announcements made during the quarter. In January 2008, Algonquin Power announced that it's renewed its combined C$175 million senior secured revolving credit facility for a new three-year term. The renewal calls for a three-year extension of these facilities, and, accordingly, in the future allowing an increase of C$225 million. This renewal - renewal lowers the cost of financing and provides a shorter source of funds to achieve growth targets, both organically and through acquisitions. On March 25th, Algonquin Power announced that its trustees had adopted a Unit-holder Rights Plan. The Rights Plan was adopted to ensure the fair treatment of unit-holders in connection with any takeover offer for the company and to provide the trustees and unit-holders with additional time to fully consider any unsolicited takeover bid, and. if appropriate, evaluate other alternatives to maximize unit-holder value. On April 24th, at Algonquin Power's Annual Special Meeting, the Rights Plan was approved by unit holders. The Rights Plan also received regulatory approval and now carries an initial term of three years. I would like to stress, however, that the Unit Rights Plan was not adopted in response to any specific proposal to acquire control of the company.

Before we move on to the first quarter results, I would like to tell you about Algonquin Power's recently realignment beginning in January in order to more effectively position itself to compete in the business sectors. The company realigned its operation into two major business units. Our Generation and Development and Utility Services. Power Generation Development business units have three divisions -- Renewable Energy, Thermal Energy and Development. Utility Service business unit currently has a Water division and will seek to expand its operations into other regulatory -- regulated utilities. To maximize efficiency both in Algonquin -- in both Algonquin business units, share administrative and support functions provided by Algonquin. Two new business units better reflect the company's business strategy and reflect how Algonquin managed its operations planning and performance.

Now, a review of the Q1 2008 results. Revenue for the first quarter was C$48 million, which compares to C$47.6 million for the same period last year. Distributions to unit-holders was C$17.5 million, which was the same for Q1 2007. Cash available for distributions was C$15.9 million for Q1 2008, which compares to C$15.1 million for 2007 -- first quarter 2007. Per unit distribution to unit-holders was C$0.23 per unit, which is the same as last year. Now, some first quarter highlights from our business units, beginning with the Power Generation and Development business units. In the Renewable Energy Division, during the first quarter of 2008, revenue from energy sales totaled C$19.8 million, and the division generated equal to 112% of long-term average wind and hydrology. The increase in revenues is mainly the result of inclusion revenue from the St. Leon Wind Facility, higher energy production and average energy rates in the U.S. regions and higher energy production in Quebec, Ontario and Western regions. For the first quarter 2008, operating profits totaled C$15.2 million, and, overall, the Renewable Energy division exceeded Algonquin's expectations due to greater long-term average resource available for both wind and hydrology. During the quarter, the Renewable Energy division produced sufficient energy to supply the quotient of 62,000 homes with renewable power. Using new standards for thermal generation, renewable energy production saved the equivalent of 153 ,000 tons of CO2 gas from entering the atmosphere in the first quarter of 2008. In the Thermal Energy Division, revenue for the first quarter of 2008 totaled C$20.6 million, a decrease over the same period in 2007 mainly due to lower demand at the Windsor Locks Facility. Revenue from waste disposal sales for the quarter increased due to an increased three -- throughput and improved -- improved recovery of ferrous material from the Energy-from-Waste Facility or what we refer to as EFW.

During the quarter, production increased 7,000 megawatt hours at the Sanger facility as a result of the repowering and 5 ,000 megawatt hours due to increased production at the landfill-gas facilities, partially off-set by lower demand of 4,000 megawatt hours at the Windsor Locks Facility. EFW increased throughput by over 400 tons as compared to the same period in 2007. For the first quarter of 2008, operating profits totaled C$6.6 million, but overall the Thermal Energy division did not meet the company's expectations due to increased operating expenses in the quarter and reduced demand at the Windsor Locks Facility. During the quarter, operations at the EFW facility resulted in a diversion of 27,000 tons away from landfill sites.

In the Development Division, the development team is working to effectively identify, develop and instruct new, renewable and thermal generating energy facilities as well as seeking to construct other accretive projects that maximize the potential of Algonquin's existing facilities. Some of the potential projects encompass new and energy, hydroelectric projects at different stages of development and opportunities for various thermal energy projects. The projects being examined are both -- located both in Canada and the United States. Algonquin's existing facilities, Development Division is reviewing the opportunities at the EFW facility to expand the power generation and waste processing through-put capacity. This project could increase the generating capacity of the facility and increase waste processing by over 100,000 tons annually. Algonquin is currently completing a feasibility study to assess the expected capital and operating cost of an expanded facility. Accordingly, the likelihood of Algonquin proceeding with this project will depend on the results of the feasibility study, the outcome of negotiations with municipalities for reliable supply and municipal solid waste. The division also continues to review its option to market the increased capacity at the Sanger facility. This project would increase the generating capacity of the facility by 14 megawatts annually.

Moving onto the Utility Services business unit. In the Water division, revenue for the first quarter of 2008 totaled C$7.5 million, a decrease over the same period last year, mainly due to reduction in revenue from operations and the result of a stronger Canadian dollar. This was partially offset by organic growth and an increase in revenue at the Gold Canyon Facility due to a rate increase. The wastewater treatment and water distribution customer -- customer base grew marginally during the first quarter. For the first quarter, operating profits totaled C$4.1 million, but overall the Water division did not meet the company's expectations due to cool, wet weather, which reduced demand for utility services mainly in the Arizona services area. During the quarter, operations provided approximately one billion U.S. gallons of water to its customers, treated over 500 gallons of wastewater and sold approximately 12.5 million gallons of treated ethylene. Now, looking out through the next quarters, the Renewable Energy division is expected to perform at or above long-term averages based on wind and hydrology conditions. In addition, the hydro facilities in the New England region are expected continue to benefit from improved market rates that we experienced in 2007. The Windsor Locks and Sanger facilities are expected to continue to operate through 2008 in line with Algonquin's long-term expectations. The facilities have no planned major outages in the second quarter of 2008. At the EFW facility, a routine major shutdown is scheduled for -- in the quarter. However, this is not expected to impact overall production, and through-put is expected to continue at current levels for the remainder of 2008.

Last quarter, we mentioned that the EFW, CAW Local 252 agreement was expiring. We are pleased to announce that on May 2nd, a new three-year collective agreement was ratified. The new agreement expires on April 2nd, 2011. During 2008, several projects aimed at increasing hydroelectric production are scheduled, including automatic trash-rack cleaning equipment and an inflatable vans at one of the U.S. facilities, both of which are expected to result in increased production. Algonquin qualified certain facilities for the 2008-2009 PJM capacity market in New Jersey. As a result, the Thermal Energy division anticipates an annual capacity revenue of C$0.4 million annually over the next four years commencing on June 1st, 2008. On the development side, we believe that future opportunities for power generation will continue to arise given the many -- in many jurisdictions, both in Canada and United States, continue to increase targets for renewable and other power-generation projects. The vision will continue to identify these new projects and pursue growth opportunities within our existing facilities throughout the remainder of the year. Utility Services is expecting lower organic growth rates, with approximately 4% average growth forecast during 2008 due to the slowdown in the U.S. housing market.

However, the Business unit continues to provide service -- to provide service in one of the fastest growing counties in the United States. The Utility services is initiating rate cases at Litchfield Park, Black Mountain and Bella Vista facilities during 2008 and rate cases at Northern Sunrise and Southern Sunrise in late 2008, early 2009. It is anticipated the regulatory view of the rates and tariffs would be completed in the second half of 2009, and the new rates and tariffs going into effect in the fourth quarter of 2009 and the first quarter of 2010. A firm forecast for rate increases at these facilities is not possible as the rate cases are in the early stages. Several capital projects are expected to be completed in the Litchfield Park service areas during the remainder of 2008. In particular, these projects are expected to increase the water distribution storage and pumping capacity and wastewater treatment capacity in order to meet the demands of the existing customers as well as expected growth.

And, finally, as an update to Algonquin's U.S. currency position, Algonquin attempts to manage currency risks to the use of forward contracts. At March 31st, 2008, the company had effectively hedged 92% of its expected 2008 U.S. dollar cash flow at C$1.21, and 61% of its expected 2009 U.S. cash flow at C$1.14. During the quarter, Algonquin realized a C$2.1 million gain on forward contracts settled during the period. Using the foreign exchange rate of March 31st, the exercise of these hedges would generate C$5.1 million in distributable cash during the remainder of 2008, C$2.9 million in 2009, and result in the use of $C0.2 million in distributable cash for the remainder of the hedge period beyond 2009. Algonquin has total forward contracts to sell U.S. dollars from 2008 to 2012, totaling $95.6 million U.S. dollars, carrying an average rate of $1.10. In summary, we anticipate that Algonquin's assets will continue to perform well for the remainder of the year. The new business units will focus on priorities that enable Algonquin to be innovative, respected and social responsible participant in the newer -- new -- in the North American power and utility business. With that, I'd like to open up the lines for questions.

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (OPERATOR INSTRUCTIONS) Your first question comes from Tony Courtright from Scotia Capital. Please go ahead.

Thank you. I noticed that subsequent to the quarter end, you purchased the remaining balance of the Campbellford Hydroelectric Facility. What sort of return are you expecting to earn on that investment? Like, what's the hurdle rate or the metrics that you justified -- ?

Thanks, Tony. We purchased the other half of the Campbellford preferred project from a partner that we had that wanted to get out of the project. So, it's purchased at the same hurdle rate as the first half of the Campbellford project, which was -- is effectively our yield.

Okay. Could you elaborate on how much of your credit facilities are availed by way of letters of credit? I noticed that you extended the accordion future presumably in part to make this acquisition, but I just want to know how much was outstanding by way of LCs at March 31st?

Thanks, Tony. Steven Bronicheski. We had C$27.1 million of letters of credit out there.

Okay. In terms of the Brampton Co-generation, what do you call it BCI? There is -- can you just make it clear in my mind that you do not need expanded waste to satisfy that contract, or you need to get expanded waste to be able to deliver the steam?

Yes, Tony. It's Chris Jarratt, and the answer is, no, we do not need any more -- any more waste. What we do is divert steam from the existing waste that we have.

Now, does that mean that you can't then comply with the power sales agreement, or do you have sufficient steam both to satisfy the power generation as well as selling steam twisting most -- ?

What it means is the output from the steam turbine drops, and that -- but, we are in compliance with our power purchase agreement.

So, the output from the steam turbine dropped. So, we should see a reduction in the electrical revenue, then?

Yes. For the EFW facility, but we get paid more for that steam when we sell it down the road to the mill.

Okay.

And, I think it also probably warrants mentioning that one of the drivers for doing that is, if, as and when we expand the EFW facility, we now have a home for that excess steam that would come from an expanded facility.

So, you're not jeopardizing your -- your power sales contract. So you can ramp back up again?

That's correct.

Now, what magnitude -- like it's indicated that the BCI should generate cash from operations of about C$1.5 million. What sort of reduction should we expect on electrical revenue as a result of the steam diversion?

Yes. I don't have that at the tip of my fingers here. We can get back to you on that. But, we -- it's, obviously, it's not as much, or otherwise we wouldn't be doing it.

Right. And, then, just lastly, in terms of the BCI, there's a reference to the fact that the Algonquin Power Management, Inc. is entitled to upside sharing in the cash flow above a 15% ROI. I presume that at the C$1.5 million, when you say in first full year, so that's a run rate. Would that trigger any upside sharing, or not?

No. I would say no.

Okay. And, when you're looking at that upside sharing, is that -- if you expand the energy from waste, you don't go back and look at the resumed power output and the BCI, like it's separate? That's just on BCI alone?

Yes. It's just on BCI alone. It's a separate issue.

Okay. Those are my questions.

Thanks, Tony.

Your next question comes from Bob Hastings from Cannacord Adams. Please go ahead.

Morning, Bob.

Good morning. A few questions here. The -- this thing on the EFW for the moment. The capital cost of that looks like it's gone up. Can you go through that a little bit?

Maybe have to explain that a little better. The capital cost of maintenance?

No. Sorry. Sorry. The steam expansion or the steam project.

The BCI project. Yes, Bob, that's correct. And, yes, it has gone up a little bit.

It was C$11 million, I think, originally; now it's 15?

Yes. Yes, that's correct.

Has there been any ability to pass through any of that to your -- under the contract that you have with your steam host?

Not a large -- well, there's been some, and we're in discussions right now with them. But, I don't anticipate it being a huge pass-through, but, hopefully, we'll get some.

Okay. And, staying at that -- at peel, is that five megawatt generator, and you were looking at maybe starting that back up and getting a new contract with LPA. Is anything going on there?

Yes. We're still working on that.

Okay. So, that's something that could still come?

Yes, it is. That is a facility that's basically been moth-balled. I think it has 50 hours on it. So, everything is in place. It has run. It's able to run. So, it should be a fairly easy project.

Yes. With no real cost attached to it; you just start her up and range the GAAP.

That's correct.

Okay. Good. The -- the union agreement there, can you put any sort of ideas on whether that will be seen as a financial impact going forward?

No. No. The contract that we negotiate was in line with what we had expected it to be. Our current budgets -- we're in compliance with our current budgets.

And, while not getting into what your currently budget is, I'm assuming we're not going to see a year-over-year decline as we go forward?

No.

Okay. Perfect. And, on the Water side, cold weather, wet weather. So, people weren't running at a more -- I understand a lot of those houses down there are empty these days. Are you getting any kind of feel that -- that given what's going on in the area on the housing front, that maybe there could be some more risk in here in terms of just not getting additional sales even though the house count is up?

No. We saw a 1% growth over Q1 in our organic growth, and we're using 4% for the 2008. So, we are in line with our expectations, and we're in the areas that are not really being in impact by the whole mortgage crisis. These are sometimes second and third homes of people, and, so, we're not seeing the foreclosures you do in other areas.

Okay.

In Maricopa County in Arizona is still one of the fastest growing counties in the United States, and it remains so.

Okay. So when -- so this was almost an unusual, not unusual, but just a weather-related occurrence. When we're looking out for the balance of the year, would it be sort of expecting year-over-year improvements compared to last year?

Well, we're dependent on weather, and we've seen weather -- we've seen the impact of weather before on our utilities.

Yes.

And, it's hard for us to forecast what the weather will be like.

No. I'm assuming normal weather here.

Yes. If you assume normal weather, yes, we will have the same run rate that you always have.

And, year-over-year operating income should be up other than we won't try to guess currency here, but currency is flat year-over-year?

Yes.

Okay. Good. And, the restructuring that you've done -- sorry. One last thing on the water. Yes, you threw out, and I didn't quite catch the -- the water metrics in terms of process and stuff. Are those things that you're going to put in your results quarterly? Because it would be useful to have.

I'm sorry, Bob. We're -- we're not sure what you're asking.

You were saying something like how -- how much water was processed and how much water was delivered.

I think we did that this year. Didn't we? In our MDNA? Yes. Yes, we have. That was the metric we haven't been using, but we're starting to use now.

Yes. And, I just liked to complement you on that. I liked seeing that, and I'd just like to make sure that stays in all of our quarterly results.

Yes, we like it, too. It's a relative number, so we will keep it in.

Okay. Great. And, then the last thing is, and then I'll let somebody else jump in. The -- the restructuring that you've done -- and I'm not just talking about restructuring of your reporting, but sort of what you're looking at in terms of opportunities. It would appear reading through in the lines that you've identified some internal growth prospects. You've maybe identified some acquisition opportunities. I wonder if you could maybe expand on what kind of things you see out there if you actually have some things that you're looking at now. And, when I hear water and electric distribution, those are usually mammoth projects or huge acquisitions to do, and I'm just wondering what kind of size projects or acquisitions you'd look at.

Yes, Bob. It's Chris. In the utilities space, I wouldn't say they're all mammoth. I mean, some are, and we have tended not to be too competitive in that field, but there are lots of smaller ones. So -- and then just in terms of the development opportunities, it's the same same -- it's a little bit of the same story. We have a number of opportunities in the wind sector out there. There's some in the high jolt, and there's also some in the cogent sector. And, unfortunately some of those are in the public bid process. And, so you have to be a little careful with what you disclose with respect to qualifying to participate in those. So, you can't really say too much on the specifics on those bid processes.

Yes. Fair enough. No, I just wondered if -- if -- I was looking more at the gas and electric distribution side, whether you're looking at anything particularly there close to generation.

Well, we've always been interested in the regulated utility business, and we're looking -- actually, looking at a number of utilities and different types of utilities, and they are utilities the size of utilities that we have acquired in the past. So within our bite-size range.

Okay. Would you have put a -- I don't know -- a maximum number on that?

I don't think so, no.

Okay. Well, I thought I could try.

Good try, though, Bob.

Yes. Thank you very much.

Thank you, Bob.

Your next question comes from Michael McGowan from BMO Nesbitt Capital Markets. Please go ahead.

Good morning.

Hi Michael.

We've seen the results from a couple wind RFPs being released. Looks like all those processes are becoming increasingly competitive. I was just wanted to -- can you discuss at all whether or not you're still planning to be active in provincial RFP solicitations, and really what your strategy is on the wind side?

Yes. It's Chris Jarratt again, and I would agree with you that from a developer's point of view, that they are becoming less competitive -- or highly competitive, and we are kind of mixed minds. On the one hand, we have built a wind project before, and it's performed extremely well, especially in the last quarter. But, we're finding, -- and it's -- it's been caused by a couple of things. One is the turbine suppliers are putting the prices up to the point where it's very hard to have a competitive project. So, I agree with you. It's hard to participate in that market right now.

I mean, the returns you're seeing, will they -- do they justify participation, or do you tend to scale back efforts there at all?

Well, I think we are scaling back efforts a little bit in that -- that sector.

Okay. Can you comment -- have you initiated discussions at all regarding the Windsor Lock PPA? I know that expires in 2010, and you have a little -- little bit of time in order to reach a new agreement. But, just can you talk a little bit about what your plans with respect to that facility?

I think all we can say is that we're actively working on that project right now. We recognize that it's an issue for us, and we have got a team working on it right now. And, we hope to be able to announce something within the next few quarters.

Okay. And, I guess, during the discussion as well, you had talked a little bit about your hedging strategy, and it looks like we'll have realized -- if exchange rates stay where they are, we'll have realized gains over 2008 and 2009. And, there is discussion of a use of cash beyond that time. Have you hedge the rates that were actually lower than a dollar U.S. per Canadian?

No, we haven't.

So, then, if there's -- I mean, well what's the exchange rate really that would trigger, say, a use of cash?

Well, it just depends -- I mean, we've got some that are hovering right around -- right around par, so I mean, at any point in time you might be in or out of the money on that. But, it's really a diminimous amount right now.

And, if -- do you expect -- are most of those hedges in and around the 2010 timeframe?

Yes. And '11.

Okay. Thank you. Those are my questions.

Thank you, Michael.

(OPERATOR INSTRUCTIONS) Your next question comes from Tony Courtright from Scotia Capital.

Just wanted to clarify, in terms of the dam remediation in Quebec, relative to your CapEx guidance, is that embedded in there as of yet, what is it, the C$6 or C$8 million, the initial estimates.

No. The C$8 million we refer to is the amount that we currently estimate is going to be required for the Quebec Dam Act. That is not in the 2008 numbers. Nor do we expect to actually have to expend C$8 million on that in -- in 2008. That C$8 million covers a number of facilities, and we'll have a number of years to make those expenditures and plus we are looking at ways to actually reduce that absolute number.

Great. Okay. Thanks.

Your next question comes from Bob Hastings from Cannacord Adams. Please go ahead.

Hi. The -- just on the capital structure, you made some comments, and with the restructuring that's going on. If I could summarize here, I guess you've made a step to restructure. You've changed reporting style. You've -- you're looking at your depth covenants, you're looking at acquisitions. It seems that -- and if you're looking at your capital structure, you probably looked at corporate structures. So I'm kind of wondering sort of where you see us going in this? Is this the end? And, what do you see on the capital structure front? Are you looking at significant introducing more debt, or what?

Like we said before, Bob, we are looking at all options right now. I think everything is on the table. We're getting close to the end of our analysis and to decide what -- what our structural would be going forward, at least in 2011. So, we haven't made any firm decisions, but we're actively looking at that.

Okay. Just I know you've made some good progress on that, and so I thought maybe we were getting closer to something. But, okay.

We're making progress, and, yes, we are making changes.

Okay. Great. Good to see. And one last question I had was, in your announcement, you mentioned that you anticipate the company's business units will continue to generate cash available for distribution for 2008 in line with historic performance. Do -- does that mean that you're looking for cash available to -- to be at or above your distribution level?

Yes.

Okay.

Continuously done historically.

Well, historically, you've had some difficulty some years ago, and so I just wanted it to be clear that you're referring to the recent performance where you're actually meeting or exceeding.

Yes, we are. We're referring to those quarters.

Great. Great. Good. Thank you very much.

Thank you, Bob.

Mr. Kerr, there are no further questions at this time. Please continue.

Thank you, Melissa. Thank you, everyone for joining us, and we look forward to talking about Algonquin Power in the future. Thank you.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect your lines.