Algonquin Power & Utilities Corp (AQNU) 2014 Q3 法說會逐字稿

Good day, and welcome to the Algonquin Power & Utilities Corporation Q3 2014 Analyst and Investor Conference Call. Today's conference is being recorded.

At this time, I would like to turn the presentation over to Chris Jarratt, Vice Chair. Please go ahead, Mr. Jarratt.

Good morning, everyone. Thanks for joining us on our 2014 third-quarter conference call.

With me on the call today are Ian Robertson, our CEO, David Bronicheski, our CFO, and Kelly Castledine, our Director of Investor Relations. For your reference, additional information on the results is available for download from our website at Algonquinpower.com.

I'd like to note that on this call, we will provide information that relates to future events and expected financial positions that should be considered forward-looking. Kelly will provide additional details at the end of the call and I direct you to review our full disclosure on forward-looking information and non-GAAP financial measures in our results published yesterday, which are also available on the quarterly results page of our website.

This morning, Ian, as usual, will discuss the highlights for the quarter and David will follow with a review of the financial results and then we will open the lines for questions. We would ask that you restrict your questions to two and then requeue if you have additional questions.

With that, I'll pass things over to Ian.

Thanks, Chris, and good morning, everyone. Thanks for taking the time to join us today for our Q3 investor call.

In recap, I think the third quarter saw some great progress in our growth story, with the announcement of over CAD0.5 billion of near-term growth initiatives. From a financial perspective, the third quarter was predictably seasonal, which is reflected in our Q3 results.

While David will provide greater detail on the financial performance, in summary, the quarter's minor shortfall in EBITDA expectations reflected below average earnings from our wind generation portfolio, which produced only 85% of forecast energy and weather impacted lower commodity sales within Liberty Utilities. I'm not sure who I complain to regarding the wind and the weather, but I'm going to find out.

Anyway, during the quarter, we did continue our focus on creating shareholder value through additional growth initiatives announced in both our generation and distribution businesses, which will further diversify our asset portfolio. For Liberty Utilities, we announced late in the quarter our agreement to acquire the Park Water Company, which owns and operates three regulated water utilities in Southern California and Western Montana. And just to remind everyone, Park Water is a business which is completely aligned with our core strategy of being long-term owners and operators of local utilities.

Currently, we are in the middle of the regulatory approval process and are optimistic that the strong relationship which Liberty enjoys with the California regulator will allow the investment in Park Water to proceed on a more expedited basis than originally contemplated. Speaking earlier of seasonality, I would note that the counter-cyclicality of Q3 being Park Water's largest EBITDA quarter will be a contributor to smoothing our annual earnings going forward. We're very enthusiastic about working the community served by Park Water and look forward to engaging with the local residents and businesses going forward.

On the generation side, our newly announced Odell Wind Project is expected to add 200 megawatts of generating capacity in Minnesota, an additional diversification to our existing generation portfolio. Construction and turbine supply contracts for this project are being finalized, with targeted commissioning date late in November next year.

Lastly, while we're very pleased that, during the quarter, the Board approved an 11.3% increase to the dividend to $0.35 per share annually. The move to declaring the dividend in US dollars was a result of growing US-based business and results in US revenue growth.

Finally, before I hand things over to David, I would note that, while Q3 was predictably seasonal and slightly below our expectations, total adjusted EBITDA through the end of the third quarter is over CAD206 million, an increase of over 30% over the first nine months of last year. Perhaps more importantly, as we sit halfway through the fourth quarter looking at [APCO] energy production, which so far is ahead of averages, we remain confident in the organization's capacity to deliver against the consensus expectations of annual EBITDA.

David?

Thanks, Ian, and good morning, everybody.

Our overall adjusted EBITDA in the third quarter came in at CAD41.4 million, compared to CAD40.2 million a year ago. Our results reflected the normal seasonality in our business for the quarter, but were about 10% below our expectations. Year to date though, as Ian said, we are still well-positioned to hit our 2014 earnings targets.

There were a few reasons driving the results for the quarter. The lion's share of the shortfall was our wind production, which came in at 85% of long-term averages and because of the relatively cool summer, we experienced lower market prices for that small portion of our wind production, which is not sold under long-term contracts. An additional contributing factor was the weather over the summer did affect demand for our natural gas and water sales at some of our utilities where we have some volumetric exposure.

Now a bit more detail about our operating subsidiaries, I'll begin first with Algonquin Power. In APCO's renewable energy division, during the third quarter, renewable energy division generated electricity equal to 88.2% of long-term projected average resources, compared to 94.2% in the same quarter a year ago. This was primarily due to a decrease in generation as a result of lower wind resources in Illinois and lower hydrology in the maritime region, compared to the third quarter of last year.

Total net revenue, which includes net energy sales and revenue from renewable energy credits, totaled CAD28.4 million, compared to CAD28.3 million a year ago. For the third quarter of 2014, operating profit totaled CAD19.1 million compared to CAD19.2 million in the same period of 2013. In APCO's thermal energy division, in the third quarter, the division reported operating profit of CAD4.9 million, down slightly from the CAD5.3 million for the same period last year.

Moving on to Liberty Utilities, third-quarter results obviously reflect the expected seasonality from our natural gas distribution utilities. In the third quarter, Liberty Utilities reported an operating profit of CAD22.9 million, compared to $20.2 million in the same quarter a year ago. The increase in operating profit is primarily related to higher rates for Granite State Electric and Peach State Gas in Georgia.

For Liberty Utilities West, during the third quarter, water distribution and wastewater treatment revenue was $10.8 million compared to $10.3 million in the same period a year ago. The improved performance is primarily due to an increase in rates as compared to the same period in 2013. Electricity sales and distribution revenue was $17.9 million compared to $17.7 million in Q3 of 2013.

Moving into the Central division, in the third quarter, the region's water and distribution and wastewater treatment revenue of $5 million was in line with results from the same period a year ago. Also, during Q3, Liberty Utilities Central's net revenue from gas and distribution was $5.3 million, a slight increase compared to the $5.1 million in Q3 of 2013.

In Liberty Utilities East, net utility sales, both gas and electric, totaled $32.1 million during the third quarter, compared to $23.8 million in the same period last year, with the year-over-year increase coming from higher rates from Granite State Electric and the acquisition of New England Gas.

Finally, an update on our financing activities. Having a strong balance sheet that allows us to quickly capitalize on opportunities and maintain a low cost of capital continues to be a priority for Algonquin.

Earlier in the fall, APUC completed a public offering of roughly 19.4 million common shares for total gross proceeds of approximately CAD172.6 million. The proceeds were raised to primarily address previously announced growth opportunities, including development projects reaching COD in 2015.

Currently, with the September offering, APUC and Emera entered into a subscription receipt agreement, pursuant to which Emera agreed to subscribe for an aggregate of 8.7 million subscription receipts of APUC at CAD8.90 per subscription receipt for a total subscription price of CAD77.5 million. The proceeds are intended to be used to partially finance the Odell Wind Project.

In addition to strengthening the balance sheet, when Algonquin raises equity, it should also be viewed as a leading indicator of the opportunity set we see before us in the market. We are now turning our minds to the completion of the acquisition of Park Water and ensuring that we are well-positioned for integrating it into our operations and Company in 2015.

On July 31, 2014, APCO increased the credit available under the senior unsecured credit facility to CAD350 million from CAD200 million. The larger facility firmly positions APCO to deliver on its growth pipeline over the next four years.

Now, I'll hand things back to Ian.

Thanks, David.

Just before we open the lines up for questions, I would like to provide a quick update on the status of our 2014 growth and development initiatives. Within APCO, we have three projects being constructed and are pleased that one is basically complete and progress on the other two is on track.

For our 24 megawatt Saint-Damase Wind Project, commercial operations are expected to occur within the next few weeks. More than half the turbines are already online generating power and the balance are going through final commissioning.

We believe that this first phase of the project will qualify as Canadian renewable and conservation expense and, therefore, the project will be entitled to a refundable tax credit equal to approximately CAD16.4 million. In the US, construction is well underway at APCO's second solar generating station in Bakersfield, California, with over half the solar panels already installed. Interconnection and substation are nearing completion and commercial operation is expected in the first quarter next year.

In August, we concluded a definitive partnership agreement with a third-party tax investor who will contribute $22 million towards the total capital cost of the project of approximately $59 million in return for the tax attributes associated with the project.

In Saskatchewan, we're well into the construction of our 23 megawatt Morse Wind generating station with the balance of the plant, including all foundations, now complete and awaiting erection and commissioning of the turbines, which will commence in six weeks or so. Commercial operations are targeted for next quarter.

Switching over to Liberty Utilities, as detailed in our MD&A, of the total of approximately CAD35 million in outstanding rate cases, we expect orders related to approximately half of these rate cases in the first quarter of next year. In particular, we are pleased to have reached agreement with the New Hampshire regulator with respect to an interim rate increase for EnergyNorth, representing approximately CAD7 million and we expect finalization of this rate case in Q3 of next year.

Just to sum up before we go to questions, our approximately CAD500 million 2014 capital program is just about complete and these attractive additions to our business will provide continued long-term accretion to earnings and cash flows, which underpinned further capital appreciation and further dividend growth.

With that, operator, I'd like to open the lines up for questions.

(Operator Instructions)

Nelson Ng, RBC Capital Markets.

Great. Thanks. Good morning everyone. Quick question on the Quebec RFPs. I looked through the list and I didn't see your name on it. I was just wondering -- I thought, in the past, you were looking to bid an expansion on one of your wind projects, the Saint-Damase, or one of the other ones. Could you just provide a bit of color as to whether you bid on them the (multiple speakers) or not?

Sure. No, you didn't miss our name on the list. I think we were disappointed to find out from TransEnergie, the Hydro-Quebec transmission group, that the capacity upgrades needed for our expansion of Saint-Damase won't be completed in time to meet the requirements of the current RFP. So in some respects, the two projects that we had that we were planning to bid in and frankly, I guess, still own and still have optimism for them, were, if you will, transmissioned out. So rather than participate with a losing hand, we're obviously just going to hold onto those projects. No, you didn't miss us. We didn't participate in this RFP. From our perspective, as we think about 2015, obviously, we've got 200 megawatts just announced with Odell, which is obviously sort of good news in keeping the group busy.

I see. So from your perspective, you might be able to bid an expansion in the next Quebec wind RFP if there is one several years down the road? Is that kind of how you think of it?

Yes. It's not like the project has gone anywhere or the wind is going to go anywhere. So, we remain optimistic. Obviously, we think it's a great opportunity. It really just came down to a timing issue from our point of view, which is unfortunate but it is what it is.

Okay. Just staying on the wind subject, I think in the past, you mentioned that you were looking at one other 200 megawatt wind opportunity other than Odell.

Yes.

I was wondering where you stand on that project and what your expectations are?

Well, again, that project still exists and we have certainly talked about it in the past. The Odell project has been pretty consuming to get it to this stage that it's at to be able to meet the December 31, 2015 in-service date. So I guess, it's really, frankly, just been a focus of resources, Nelson. We still have the other project and now that Odell has kind of way to the races, I think we're turning our attention perhaps to looking at Courtenay.

Okay. In terms of time constraints, I guess the construction window's getting pretty tight now for Courtenay?

Yes. You are correct. That's exactly the issue and that's why the focus has been to get the turbine supplied and the BOP contracts knocked into shape for Odell, so it's a way to the races without any concern of the meeting the timeframe. So, in some respects, I guess it's fair to say, it's been an allocation of resources.

Okay. Thanks. I'll get back in the queue.

Yes. Thanks, Nelson.

Rupert Merer, National Bank Financial.

Good morning, everyone. So we did see your name on the list for the Ontario RFPs in 2015. Can you give us a little more color on what we can expect for your activities in Ontario?

We certainly have an interest in building contracted wind projects and we wanted to make sure that the organization had the opportunity to bring -- it's got an interest in a couple of projects here in the province to the RFP. So really, it's just about positioning ourselves to make sure that we keep our stick on the ice, if you will, for future RFPs.

In Ontario, do you have projects that you think are material or competitive for the upcoming RFP?

I think the big issue, in fact, as you know, with any wind project is access to transmission and wind resource. While I think we're confident in the wind resource, I think the transmission constraints are the ones that are going to be probably the most troubling from our point of view. Though, I think it's really just, really early to tell at this stage.

Okay. Secondly, on the Park Water acquisition, sounds like it's moving along nicely. What hurdles remain to close in that acquisition and do you have a sense of timing on when you might be able to close it?

As I kind of mentioned in my prepared remarks, I think we were pleased with the reception that we received at the California regulator when we went in to introduce ourselves, introduce the transaction. In some respects, that our reaction and reception was tempered by the fact that we've had a great relationship with the electric branch, the electric division, through CalPeco. So perhaps, we're a little pessimistic in terms of the timing that saw this as being a 2016 completion and that there's an opportunity to get this done sooner than that. Obviously, we've kind of given up handicapping the regulatory approval process, but I think we wanted to comment and observe that perhaps our earlier guidance might've been a little pessimistic.

In terms of the hurdles that need to be cleared before completing the acquisition, obviously, we're working on the integration work right now. We are working our way through the regulatory approval application. Obviously, financing is on David's mind and he's working his way through that, but frankly, it's nothing that we haven't done a number of times in the past, Rupert.

All right. Very good. Thanks for the color.

Yes. Thanks much.

Sean Steuart, TD Securities.

Thanks. Good morning, everyone. A couple questions, any update on Amherst Island and where we are with the REA process and saw that the CapEx guidance there is up a little bit. Is that all FX? Can you speak to any other changes in that project that have impacted the CapEx schedule?

Sure. It's Chris Jarratt speaking. On the Amherst project, we have submitted the REA some time ago. It's close to being issued in its final form. We did get some comments back and we've kind of dealt with those. We have kind of gone back and requested a few technical changes and they are primarily to accommodate some social issues, as well as to assist with the costing of the project. When that comes back to us, it's a little bit hard to tell, but we kind of expect it early in the first part of 2015. Hopefully Q1, but it could be a little bit after that.

Just on the costing, I think there's a couple of buckets that the costs have gone up in. It's primarily because the approval process has taken us some 42 months, so during that time, there's been some FX movements, as you mentioned. Also, as the engineering has progressed, additional details are uncovered and that's also contributed. So those are probably the two main areas and it's both turbines and plants.

Okay. Thanks, Chris. Second question is we saw that Liberty Utilities signed up with Kinder Morgan's Northeast Energy Direct pipeline. Can you give some additional context there? Expanding on that, how you guys are thinking about potential direct investments in pipeline infrastructure going forward?

It's a great philosophic question, Sean. Right now, if you think about the utility value chain, Algonquin is and through Liberty has sort of squarely got a foot in the camp at the commodity generation end of it, in terms of our generation. In the water business, our water wells and storage and clearly, through the Liberty Utilities distribution business, have a pretty solid foot in the distribution end and the transmission sector between those two is an area that we've dabbled in.

I think we very much like the idea of regulated utility transmission assets, electric and natural gas pipelines are things that we think would fit well into the portfolio. Obviously, the challenge is finding the right opportunities. I think that the Northeast Direct pipeline of Kinder Morgan presents an interesting solution to a very capacity-constrained geographic area.

And it's certainly one -- it's not the only solution that being contemplated through the area and but from Liberty Utilities' and maybe from APUC's point of view, I think it would be an interesting investment opportunity and might be a good starting point for us. Obviously, it's a little early for us to see what that might look like. But I think if your question is do we see transmission as strategically aligned? The short answer, Sean, is yes.

Okay. Thanks for the detail.

Yes. Thanks Shawn.

(Operator Instructions)

We seem to have no further questions at this time. I'll turn the call back over to Management for any closing comments.

Great. Thanks, everyone. I appreciate you joining us this morning for the call. Just a quick reminder, we are holding our investor morning on November 25. And I didn't suggest that to the extent that you make it, you're obviously, the invitation is being extended and reach out to Kelly here at our office and she can give you the details. As usual, I'd ask everybody to stay on the line for Kelly's riveting forward-looking disclaimer. Go ahead, Kelly.

Thank you. Certain statements included in this call contain forward-looking information within the meaning of certain securities laws. These statements reflect the views of APUC with respect to future events based upon assumptions relating to, among others, the performance of APUC's assets and the business interest and exchange rates, commodity market prices, and the financial and regulatory climate in which it operates.

These forward-looking statements include, among others, statements with respect to the expected performance of APUC's future plans and its dividends to shareholders. Statements containing expressions such as anticipates, believes, continues, could, expect, estimates, intends, may, outlook, plans, projects, drives, will, and similar expressions generally constitute forward-looking statements. Forward-looking statements relate to future events and conditions. By their very nature, they require APUC to make assumptions and involve inherent risks and uncertainties. APUC cautions that, although it believes its assumptions are reasonable under the circumstances, these risk and uncertainties give rise to the possibility that actual results may differ materially from the expectations set out in the forward-looking statements.

Material risk factors include the impact of movements in exchange rates and interest rates, the effects of changes in the environmental and other laws and regulatory policies applicable to the energy and utility sectors. Decisions taken by regulators on monetary policy and the state of the Canadian and the United States economies and accompanying business climates.

APUC cautions that this list is not exhaustive and other factors could adversely affect results. Given these risks, undue reliance should not be placed on these forward-looking statements. In addition, such statements are made based on information available and expectations as of the date of this MD&A. Such expectations may change after this date.

APUC reviews forward-looking information it has presented, not less frequently than on a quarterly basis. APUC is not obligated to, nor does it intend to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise, except required by law. Thank you.

Ladies and gentlemen, that does include our conference call for today. We thank you for your participation and you may now disconnect your lines. Have a great day.