Algonquin Power & Utilities Corp (AQNU) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Algonquin Power & Utilities Corporation Q4 and year-end 2014 analyst investor call.

(Operator Instructions)

As a reminder, this conference is being recorded. At this time I would like to turn the presentation over to Mr. David Bronicheski, Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning, everyone. Before we begin the discussion on our fourth-quarter and year-end results, I'd like to make a few brief opening remarks.

Shortly before the previously scheduled release of our 2014 financial results, APUC became aware of certain anonymous, unproven allegations regarding certain APUC personnel. APUC shared the allegations with its auditors and delayed releasing its financial results in order to consider, together with the auditors, whether certain of the allegations, which related to APUC's financial reporting and related practices, could impact its financial results. This assessment, which was led by a committee of independent directors with the assistance of independent legal and accounting advisors, is now complete, and APUC will be and is releasing its financial results, having determined that the allegations did not impact the financial results. The committees investigation into allegations which are not related to APUC's financial reporting and related practices is continuing to be dealt with in a confidential manner, in accordance with APUC's complaint handling policies.

With that I'll turn things over now to Chris and Ian to begin the discussion on what we believe are very good strong Q4 and year-end results.

Great. Thanks, David. Good morning, everyone, and thanks for joining us on our 2014 fourth-quarter and year-end conference call. With me on the call today are Ian Robertson, our Chief Executive Officer; David Bronicheski, you just heard from, our Chief Financial Officer; 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 your full disclosure on our forward-looking information and non-GAAP financial measures and our results published this morning, which are also available on our website.

This morning, Ian will discuss the highlights of the quarter and the year, and David will follow with a review of the financial results, and then we'll open up the lines for questions. I would ask that you restrict your questions to two, and then re-queue if you have additional questions, to allow others to participate.

Before I turn the call over to Ian, I'd like to point out that this week is March break in Ontario, and Ian is on vacation dialing in from a fairly remote location. And we hope technology cooperates, but if things sound a little bit choppy, I just wanted to explain why.

And with that, I'll pass it over to Ian, on vacation.

Well, not really technically on vacation, Chris, but I appreciate that. Good morning, everyone. Before we dive into what we view are our strong 2014 and Q4 results, I did want to add my thoughts to David's comments regarding the delay in our recent financial statement release.

I believe that the confidence of the capital markets is equally important as delivering solid results. And I'd hope that the conclusion of the past few days inspires trust in our shareholders regarding the governance processes and practices that we've worked hard to implement. We trust that your enthusiasm and confidence, like ours, for the Algonquin story remains as strong as ever.

With that, let's turn our attention to the 2014 performance. In that regard, I'd like to position it against three significant strategic objectives that we set for ourselves. First and foremost it's our objective to conduct our operations in an environmentally sound and safe manner. And we're proud that our 2014 safety record continues to surpass industry averages and challenges world-class performance.

Second, we're committed to delivering attractive shareholder value consistent with our vision of being a must-own investment holding, in the portfolio of every long-minded investor. We're pleased with the 2014 total shareholder return of 37%. 2014 EBITDA reached an all-time high of CAD290 million-plus, an increase of over 30% from 2013.

And third, per share accretive earnings and cash flow growth is in our DNA. We believe that this is the path to continued dividend growth and capital appreciation. Adjusted 2014 EPS of CAD0.37 showed a close to 40% increase over 2013, and cash flow per share grew to close to CAD1.

To provide a clear path for sustained growth in the coming years, we're pleased to have successfully completed our CAD430 million 2014 CapEx program, including construction and acquisition of over 200 megawatts of new wind and solar-generating capacity, an investment of close to CAD200 million in acquisition organic growth for our regulated distribution utilities. For future growth, in 2014, we announced commitments to investments representing over CAD1 billion of new generation distribution transmission projects. And we're confident that these pipeline investments will continue to deliver accretive growth in earnings and cash flows. We believe that these 2014 accomplishments confirm the organization's ability to deliver growing earnings, cash flows, and dividends for our shareholders in a safe, ethical and low-risk manner.

And, lastly, before I turn things over to David to speak specifically to the financials, I would like to spend a minute or so on the Q4 results in the context of our three line of business groups -- generation, distribution, and the most recently added, transmission, a business group that figuratively connects our generation and distribution groups, making APUC a diversified company across the utility continuum.

Starting with the generation group, good Q4 operating performance was driven by a return to average wind resources, strong hydroelectric generation, and the first phase of our 24-megawatt St. Damase wind facility in Quebec, reaching commercial operation in early December. Consistent with our commitment to growth in our solar generation portfolio, in November the generation group announced plans to proceed with another 10-megawatt solar facility in Bakersfield, California. This CAD27 million project will sell its energy pursuant to a 20-year power purchase agreement, with a large California-based electric utility after its commissioning in 2016.

For the distribution business group, higher customer counts from the tuck-in acquisitions completed earlier in the year, continued organic growth in customers, increased commodity demands, reasonable rate case settlements and a stronger US dollar, all factors which contributed to consistent Q4 results.

Lastly, Q4 saw APUC create its transmission business group to pursue electric and natural gas transmission opportunities. As announced at our November 2014 investor morning, the transmission group has entered into an agreement with Kinder Morgan, a global pipeline developer to jointly develop, own, and operate the northeast energy direct pipeline, a pipeline with capacity scalable from 800,000 decatherms a day up to 2.2 billion cubic feet per day, depending on final customer commitments.

Subject to receiving sufficient commitments for capacity as well as regulatory approval, this up to CAD4 billion project is expected to begin service in November 2018. And under the terms of the agreement that Liberty Utilities has negotiated Kinder Morgan, we have the option of owning up to a 10% interest in the project.

As always, our continued success is the result of the dedication and commitment of our employees across the generation, transmission and distribution businesses. And with that, I'll turn things over to David to speak to the Q4 and year-end financial results.

Thanks, Ian. And, once again, good morning, everyone. Overall, our adjusted EBITDA in the fourth quarter was a strong CAD84.3 million. And that's a 23% increase over the amount recorded in the same quarter a year ago, primarily due to our completed acquisitions in 2013, the impact of rate case settlements in our distribution business, and increased hydrology.

Overall, adjusted EBITDA for the entire year was CAD291 million, a 27% increase over 2013. And the increase, again, was primarily due to acquisitions completed in 2013 and 2014, the impact of rate case settlements, increased customer demand in our gas distribution, and increases in renewable energy credits.

In all, just a couple highlights for the three months and year ended. For the three months ended December 31, 2014, we have revenue of CAD259.3 million, and that's a significant increase from the CAD205.3 million that we recorded a year ago in Q4. And adjusted EBITDA, as I mentioned, CAD84.3 million, compared to CAD68.5 million a year ago. For the year, we had revenue of an impressive CAD943.6 million, and adjusted EBITDA of CAD290.6 million.

Before I get into more detail on our operating segments, just a couple of short words on our new business segments. In the fourth quarter of 2014, for those that attended our investor day, you should be aware that we were making minor changes, really, to simplify our business segments in reporting, and align them with our management structure.

First, we announced the creation of a transmission business group to pursue transmission opportunities here in Canada and the US. We also combined all of our utilities into a single distribution business group, and our independent power generation business into a generation business group.

And now, I'll get into a bit more detail on our operating subsidiary results, beginning first with the generation group. For renewable energy during the fourth quarter of 2014, the generation group's hydro and wind facilities generated electricity equaled to 98.4% of long-term projected average resources, which is higher than the 93.4% that we generated a year ago. And this was primarily due to better hydrology in Ontario and western regions and increased wind resources at US and Canadian wind facilities. Also, I'll note that the solar facility in Cornwall completed its third full quarter of operations, as well.

For the fourth quarter of 2014, total net revenue, which includes net energy sales and revenue from renewable energy credits, totaled CAD47.1 million as compared to CAD39.7 million in the same period in 2013. For the year, total net revenue included net energy sales revenue from renewable energy credits of CAD159.7 million, as compared to one CAD144.4 million in 2013. And the operating profit on our renewable energy division was CAD45.4 million compared to CAD35.8 million a year ago.

In our thermal energy division, in the fourth quarter, the generation group's thermal energy division reported operating profit of CAD2.4 million, down slightly from the CAD2.7 million the same period a year ago.

Moving over to our distribution group, in the fourth quarter the distribution group reported an operating profit of $40.7 million compared to $32.5 million in the same quarter as a year ago, and those figures are in US dollars. The increase in operating profit is primarily due to the implementation of higher rates at our Granite State Electric distribution utility and our Peach State Gas Systems in Georgia, as well as the acquisition of New England Gas, which occurred basically at the end of 2013.

Moving over to the distribution group's electricity division, during the fourth quarter net electric utility sales totaled US $17.9 million compared to $16.7 million a year ago. And for the year, net utility electricity sales totaled $78 million compared to $66.8 million in 2013.

As far as our natural gas division goes, in the fourth quarter, net utility natural gas sales and distribution revenue was US $36.9 million compared to $29.4 million from the same period a year ago, with the increase largely attributable to the acquisition of the New England Gas System in December of 2013. For the year 2014, net utility natural gas sales and distribution revenue was $143.4 million compared to US $91.5 million in 2013. And, again, the increase primarily due to the acquisition of New England Gas, we did experience colder temperatures during the first quarter of 2014, and we had a full year of revenue from our Peach State Gas System in Georgia.

Moving over to the water division, in the fourth quarter of 2014, revenue from water distribution and wastewater treatment totaled US $15 million compared to $14 million a year ago. And for the year, we had revenues of $58.7 million compared to $55.6 million in 2013.

Now, before I turn things back over to Ian, just a quick update on our fourth-quarter financing activities. As everyone knows, on December 11, 2014, APUC completed a public offering of roughly 10.1 million common shares at CAD9.95 for gross proceeds of approximately CAD100 million. This financing advanced our previously planned 2015 equity offering and completed our equity financing plan for this year.

Concurrent with the December offering, APUC and Emera entered into a subscription agreement pursuant to which Emera agreed to subscribe for an aggregate of approximately 3.3 million of subscription of APUC at CAD9.95 for a total subscription price of CAD33 million. The proceeds are intended to be used to partially finance our previously announced acquisition of Park Water.

Finally, I'd like to touch on our recent announcement regarding CRA's letter proposing to re-assess our 2009 through 2013 income tax filings in relation to the corporate conversation and unit exchange transaction back in 2009. The CRA indicated in their proposal letter that they intend to challenge the tax consequences of the unit exchange. Should we receive a notice of reassessment covering the 2009 to 2013 taxation years, a deposit payment of 50% of the tax liability claimed by the CRA would be required in order to appeal the expected reassessment. This amounts to about CAD20.6 million.

We remain highly confident in the appropriateness of our tax filings and the expected tax consequences from the unit exchange transaction. And we intend to vigorously defend our position. APUC strongly believes that the acquisition of control or the general anti-avoidance rules do not apply to the unit exchange transaction, and we intend file our future tax returns on this basis.

With that, I'll now turn things back over to Ian.

Thanks, David. And just before we open the lines up for questions, I would like, as always, to provide an update on our additional growth and development initiatives. Within the generation group, construction is complete at APUC's second solar generating station at Bakersfield, California. The project is now delivering energy into the Cal ISO grid, with final paperwork being exchanged with regards to declaring COD under the 20-year power purchase agreement.

In August of last year, we entered into a definitive partnership agreement with a third-party tax investor who's investing US $22 million toward the US $58 million capital cost of the project in return for the majority of the tax attributes associated with the project. Construction of the 24-megawatt wind power generating station in Morse, Saskatchewan is nearing completion, with all but two of the turbines erected. It is anticipated the commercial operations will be declared by the end of this quarter, 2015.

Switching over to the distribution group, a US $7.4 million temporary rate increase went into effect in December of last year at our EnergyNorth gas utility. This interim increase is provided as part of the $16.1 million rate increase which EnergyNorth is currently seeking. And when the rate request is finally resolved in 2015, the new rates will be retroactive to the date of the granting of the interim rate increase in December last year.

Subsequent to the end of 2014, US $13.2 million in rate increases have been implemented across the Peach State, Missouri and Illinois gas systems. And additionally, another US $2.5 million rate increase is being sought for Pine Bluff, Arkansas, with resolution expected in Q2 of 2015.

And, lastly, with regard to the Park Water acquisition announced late last year, approval of both the California Public Utilities Commission and the Montana Public Service Commission are required. An approval application was filed in November of 2014 in both states, seeking approval to acquire the two water utilities in California owned by Park Water and in Montana for the Mountain Water Company owned in Montana. We expect a decision in the third quarter of 2015 in both of those regulatory application processes.

And to sum up just before we go to questions, I will say that APUC remains focused on our growth pipeline which includes plans for well in excess of CAD1 billion in capital deployment over the next few years. We're committed to continued long-term accretive growth in the business, which underpins further capital appreciation and further dividend growth. And our continued investment is long-term portfolio assets, we believe, will continue to deliver value for our shareholders.

And with that, given my remote location, I'm going to turn things over to Chris and David who are holding down the fort back in Oakville to chair the question-and-answer session. Chris?

Thanks, everybody. We'll now open things up for questions. Operator?

Ladies and gentlemen, your first question today will call from Paul Lechem with CIBC. Please go ahead.

Thank you. Good morning. Wondering if you can state whether the internal investigation that you carried out caused any changes at all to the financial statements or the notes to the statements from when you initially were scheduled to release them?

We didn't make any changes to our financial results, as a result.

Fair enough. Understanding that the internal investigation, which is ongoing, is confidential, but can you give us any sense of a time line when we might get a result from that investigation?

The Board's independent committee is committed to resolving and looking into these remaining allegations on an expedited basis.

Okay. And can you give a sense in terms of how widespread the investigation is? Is it against one individual, multiple individuals? Is there anything you can say along those lines, not giving out names obviously but in terms of what is underway here?

I think what I can add is the allegations that are remaining to be investigated, that are not related to our financial reporting and related practices, is around the workplace and its environment. And it's that aspect of the investigation that we'll continue.

Okay. If I can just get one operational question in. There have been a number of changes in the in-service dates at your wind facilities. Chaplin seems to have moved out a bit; Amherst, Odell, Vallejo. Can you talk a little bit about what's going on with those, if that was something that you just on year-end review came up with revised numbers? Or is this something that's been going on for a while? What can you say about those?

Paul, it's Ian Robertson speaking. Good day. I don't think there's anything thematic that you can infer from continued refinement of those dates. You can imagine for something like Chaplin, there's ongoing discussions and, I won't say negotiations, but ongoing discussions with Sask Power regarding the upgrades that they have to make to their system. We've been working on final turbine selection, which has been actually been helpful to the overall project economics.

But in each of the instances that you mentioned, it's individual project development issues, which have slightly delayed the in-service dates on all those projects. I do want to touch a little bit on the Odell project because I think everybody had a heightened sense of the impact of a potential delay in the COD given the qualifications of that project for production tax credits. And I think everybody's pleased with the announcement that got made relatively recently by the US Treasury, which confirmed that we really basically have until January 1, 2017, to get all these projects, or at least projects such as Odell, into commercial operation to continue to qualify for PTCs.

So, while in the case of Odell, it's a turbine supply issue, which has delayed the COD for a number of weeks, we are confident that there's practically no economic impact to us of such delay. I don't know if that's helpful, Paul, but, as I said, you shouldn't infer anything thematic about the continuing delay in projects. It's just the nature of the beast.

Okay. That's helpful. Thanks, Ian.

Thank you. Your next question will come from Nelson Ng with RBC Capital Markets. Please go ahead.

Great. Thanks. Good morning, everyone. Just a quick question on the allegations.

You mentioned that they don't have any impact on the financial reporting items, so I just want to make sure. So, the investigations on the financial reporting items, those are completed and closed off and we won't see any revisit -- you won't revisit those allegations and we won't see any impacts going into 2015 either, right?

Absolutely 100% correct.

Okay, great. And then just one question on wind. I think when I asked last time about the Courtenay wind development, I think Ian mentioned that you guys shifted resources to other projects due to the time constraints with the one-year extension of the PTC program. Does that mean the Courtenay project is under development again or what's the update there?

Nelson, it's Ian. Hopefully you can hear me. The short answer is, we see that one-year extension not only, obviously, in the qualification, but the Treasury's extension of the start of construction deadline as being very positive for things like Courtenay -- and, in fact, actually a number of other projects.

So, I think, as we think about our 2016 now pipeline, I'd argue it's full steam ahead in the development group to try to pull some of those projects that might have been challenged, given a 2015 deadline, back onto the burner, from our perspective. The short answer is, yes, it's all speed ahead in terms of getting a 2016 pipeline of PTC-qualified projects ready.

I see. So, you're looking at a number of wind projects that have, quote/unquote, started construction by the end of 2014.

Absolutely.

Okay. Great. Those are all my questions. I'll get back in the queue.

Your next question will come from Sean Steuart with TD Securities. Please go ahead.

A couple questions. With respect to Park Water, can you give any update on the condemnation proceeding with Missoula, timing there relative to your expected closing of that acquisition?

Sure, Sean. Hopefully, again, the technology's cooperating and you can hear me. I think you need to look at the acquisition of Park Water pursuant to the Montana approvals as asynchronous, if you will, and unconnected to the condemnation. The condemnation as a process is always available to cities in the US. There's clearly a process that cities who decide that their aspirations are best achieved by buying distribution utilities within their service territory, that's always open to them.

And obviously, as you're well aware, the city of Missoula has decided that they'd really like to own Mountain Water in the state of Montana. We obviously are, I'm going to say, mixed minds of it. While we certainly don't want to stand in the way of a city achieving its aspirations on behalf of the rate payers, I think we actually believe it's not in the best of the rate payers. And I think there's lots of examples where a city's resources are best devoted and deployed on managing the other social obligations or societal obligations that a town has. But having said that, that's up to the city fathers to conclude.

In terms of the process, the condemnation process, it's been underway for a little while now. In relatively short order, there's a hearing that will commence that we are, in some respects, bystanders to because it's a determination that needs to be made as to whether the condemnation by the city for Mountain Water is, quote, more necessary than not. We have obviously been providing evidence of the credibility of Liberty Utility as a owner and operator of water utilities.

That process, you don't really know how it's going to unfold. We obviously have a much better sense for how the process within the Montana Public Service Commission is going to unfold, and the application was made back in November.

We're fully expecting a determination by the Montana Public Service Commission in Q3. To our knowledge there's a hearing scheduled in July. It's a process that we understand and have been responding to the Service Commission with.

So, they are unrelated processes. We are confident that we will get through the Montana process. Whether the condemnation concludes before or after that, in some respects, is a little bit irrelevant. Obviously to the extent that we own it, the utility, clearly we're entitled to, and if the city's ultimately successful, we're entitled to fair and just compensation under the Fifth Amendment of the US Constitution. And that has generally been reasonably been interpreted to mean fair-market value.

I don't know if that gives you any color, Sean. I'm happy to go on if I haven't answered your question.

No, that's great context. Thanks, Ian. One other question for now. Any updates on the Amherst Island REA process at this point?

Sure. I think Paul Lechem had mentioned that the development project seemed to be continually subject to issues that can push out the COD dates, and this one probably is as good an example of that as any. We are optimistic that within the next few months we will be through the REA process.

Right now, and consistent with other projects, we fully anticipate an appeal of the issuance of the REA. That's an appeal process under which appellants can seek recourse against the Ministry of Environment for the issuance of the REA. That's typically a six-month process.

So, just to put the time frame in context for you, Sean, assuming that sometime by the end of Q2, the REA was issued, then it would look like that the appeal process would conclude on or before the end of 2015. I don't know, again, if that's helpful for background.

Very much so. Thanks, Ian.

Your next question will come from Matthew Akman with Scotiabank. Please go ahead.

Thank you very much. I have a couple questions on the independent review and the delay of the reporting. And, first, my question is for David to clarify. When you said workplace environment, did you say workplace and environment or workplace environment?

I said, I said workplace and environment.

And -- meaning the natural environment?

No. I guess, I mean, I did say that. It should be interpreted as workplace environment.

Thank you. I just wanted a clarification.

My next question on the topic is, really, there's a couple Board members speaking here on this call. Is the Board content with how this was handled given now how it did play out in the stock and reflection of that? And it seems, on reflection, that there must not have been any a priori basis to think that this complaint had any impact on financial statements.

I think the take away through this should be that we have really strong corporate governance practices. And we have procedures and policies internally that exist to investigate allegations when they're brought forward. Those policies work to protect the confidentiality of both the individual making the allegation and also internally to protect the individual that is the subject of the allegation. So, I think people should have as the only take away that the Board acted appropriately in accordance with our policies, and really have exercised good corporate governance practices.

Yes. I'm just wondering if the Board is satisfied with maybe the legal advice that was provided at the time given now some reflection in the context.

I'm sure the Board has full confidence in the legal and accounting advice that it received during the investigation.

Okay. Thanks. Those are my questions.

(Operator Instructions)

Your next question will come from [Mark Averness] with National Bank Financial. Please go ahead.

Good morning, everyone. It looks like the targeted CapEx of CAD261 million for 2015 is a little lower than what you highlighted in your investor day presentation. Is this mostly due to timing or can we read into this as increased opportunities for investment?

No. It really is just a matter of timing as we looked at the CapEx plans and projects. I think it's reflective of also what you've seen in the development pipeline vis-a-vis some of the pushing out of the dates due to things beyond our control. It really is nothing more than that.

Okay. And then just following up on that, can you remind us again what impact the stronger USD has on your capital deployment decisions?

Actually we're, I'll say, almost perfectly hedged from a currency point of view. We've got US dollar debt matched up against US dollar assets. To the extent we need debt to finance US CapEx, we raise that money in US dollars in the US. So, the up and downs of the US dollar doesn't really factor into our capital deployment plans.

Okay. Perfect. That's it for me. Thanks.

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

Thank you, everybody, for joining us on the call today. We trust that you remain confident of Algonquin Power & Utilities Corporation We posted a very strong 2014 and look forward toward even better results in 2015. Now, I'll turn things over to Kelly.

Certain written and oral statements contained in this call are forward-looking within the meaning of certain securities laws and reflect the view of Algonquin Power & Utilities with respect to future events based upon assumptions relating to, among others, the performance of the Company's assets and the business, financial and regulatory climates in which it operates. These forward-looking statements include, among others, statements with respect to the expected performance of the Company, its future plans and its dividends to shareholders.

Since forward-looking statements relate to future events and conditions, by their very nature they require us to make assumptions and involve inherent risks and uncertainties. We caution that although we believe our assumptions are reasonable in the circumstances, these risks and uncertainties give rise to the possibility that our actual results may differ materially from the expectations set out in the forward-looking statements.

Material risk factors include those presented in the Company's most recent annual financial results, the annual information form, and the most recent quarterly management discussion and analysis. 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 call, and such expectations may change after this date. APUC reviews materials with forward-looking information it has presented not lot 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 as required by law.

With respect to non-GAAP financial measures, the terms adjusted net earnings; adjusted earnings before interest, taxes, depreciation and amortization; adjusted funds from operations; per share cash provided by adjusted funds from operations; per share cash provided by operating activities; net energy sales and net utility sales; or collectively the financial measures, are used on this call and throughout the Company's financial disclosures. The financial measures are not recognized measures under generally Accepted Accounting Principles, or GAAP.

There is no standardized measure of these financial measures. Consequently, APUC's method of calculating these measures may differ from methods used by other companies, and therefore may not be comparable to similar measures presented by other companies.

The calculation and analysis of the financial measures, and a description of the use of non-GAAP financial measures, can be found in the most recently published management discussion and analysis available on the Company's website and SEDAR.com. Per share cash provided by operating activities is not a substitute measure of performance for earnings per share. Amounts represented by per share cash provided by operating activities do not represent amounts available for distribution to shareholders, and should be considered in light of various charges and claims against APUC. Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation. You may now disconnect your lines. And have a great day.