Q3 2019 Earnings Call

A reminder, all participants are in listen only mode and the conference is being recorded after the presentation. There will be an opportunity to ask questions to join the question Q you May Press Star one on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star zero.

I would now like to turn the conference over to Mr. Miles you again director Investor Relations. Please go ahead Mr. do again.

Thank you salaries and good morning, everyone. We're pleased to can join us for our third quarter 2019 conference call.

With me today, 'cause executive Vice President and Chief Financial Officer dentists to Champlain.

Senior Vice President Controller, Derrick Cook, and Vice President Finance Treasury, Unrisk, calling Jackson.

Dennis will begin today with some opening comments on our financial results and recent company developments. Following his prepared remarks, we'll take questions from the investment community.

Please note that a replay of the conference call a transcript will be available on our web site at Canadian utilities Dot com and can be found in the investor section under the heading that some presentations.

I'd like to remind you all that our remarks today will include forward looking statements that are subject to important risks and uncertainties for more information on these risks and uncertainties. Please see the reports filed by Canadian utilities, the Canadian Securities regulators.

And finally I'd also like to point out that during this presentation. We may refer to certain non-GAAP measures such as adjusted earnings adjusted earnings per share funds generated by operations and capital investment. These measures do not have any standardize meeting under AFE for us as a result, they may not be comparable to similar measures presented in other.

Studies.

And now I'll turn the call over to Dennis for his opening remarks.

Thanks Mouse and good morning, everyone. Thank you all very much for joining us today on our third quarter 2019 conference call.

Canadian utilities announced adjusted earnings of $106 million and the third quarter of 2019, which is $26 million lower compared to the $132 million recorded in the third quarter of 28 King.

You May recall, we recorded $42 million, an adjusted earnings in the third quarter 2018 associated with the balancing pools termination of the Battle River unit, five P.P.A. and the completion of performance obligations and scalability incentives.

Well that was a good financial result last year. It also set us up for quite a challenge this year to close out earning scout.

And close that earnings gap is exactly what we've done.

Our adjusted earnings in the first nine months of 2019, our $432 million or $12 million higher than the first nine months of 2018.

Our pipelines and liquids and electricity businesses have both unwell. So far in 2019, they're positive earnings results have come from a number of area.

First.

Thanks to all of our people involved in our regulatory filings, we produced positive earnings impacts from the electricity transmission 2018, 2019 general tariff application decision.

And the natural gas pipeline 2019, and 2020 general rate application decision.

Second we continue to achieve rate base growth across most of our utilities in no small part due to the focus of our capital teams through their great work, we continue to deliver more energy safely and reliably for our customers.

And third our operating teams across the company have maintained a keen eye on cost containment and the implementation cost efficiencies.

Our customers benefit when we provide the best services and the most cost effective way and our shareowners benefit as we respond to the operating efficiency incentives inherent in our regulatory construct and generate premium returns on equity.

Due to the great work of all of our people, we've been able to achieve some remarkable financial results.

Continuing with that theme during.

During the quarter, we completed the sale of our entire 2100 megawatt Canadian fossil fuel based electricity generation portfolio in three separate transactions.

Canadian utilities received $821 million an aggregate proceeds we also recognized a gain on sale of $139 million, which is after tax.

And that has been excluded from adjusted earnings.

These sale transactions remove coal fired electricity generation assets from Canadian utilities asset portfolio and have the added benefit of significantly reducing our overall greenhouse gas emissions as of October one 2019.

We also continue working on the sale of Alberta power line.

In September we confirm that seven indigenous communities entered into definitive agreements to purchase the combined 40% ownership and appeal.

The remaining 60% of NPL will be owned by an investment consortium.

Canadian utilities will remain as the operator I'll DPL over its 35 year contract with the Alberta electric system operator.

We're pleased to announce that late yesterday October Thirtyth, we achieved another milestone towards the closing of Alberta Power line limited partnership sale.

Bondholder consent was achieved with more than 95% of bondholders, providing their approval during the initial written consent solicitation process.

The sale of NPL is expected to close in the fourth quarter of 2019.

Going forward, we will focus on opportunities that globally, diversify our portfolio of utility and energy infrastructure assets and leverage the breadth of our energy expertise.

Our success as a financially secure and stable energy infrastructure company as a result of our disciplined and prudent capital investment and utility and utility like assets with regulated or long term contracted earnings.

We will continue to look for similar investment opportunities outside of Alberta in North America, Latin America and Australia.

I'm also pleased to report that we received updates from our rating agencies on our financial strength in the third quarter.

In July and August Dominion Bond rating service released a series of reports affirming our a range corporate credit rating and stable outlook for Atco Canadian utilities, and see you Inc.

Earlier this month S&P global ratings affirmed their a minus credit rating and stable outlook for our companies as well.

We do intend to maintain these strong investment grade credit ratings in order to provide efficient and cost effective access to funds required for our operations and growth.

That concludes my opening prepared remarks and I'll.

Pass the call back over to mouse. Thank you Dennis I'll turn the call over now to our conference coordinator for your questions.

Thank you we will now begin the question and answer session in the interest of time, we ask you to limit yourself to two questions. If you will have additional questions. You are welcome to rejoin the queue to join the question Q You May Press Star one on your telephone keypad, you will hear a tone acknowledging your request if you are using a speaker phone.

Pick up your handset before pricing any key to withdraw your question. Please press star to webcast participants are welcome to click on the submit question tap near the top of the webcast frame and type their question the Canadian utilities Investor Relations team will follow up with you by email after the call once again anyone on the conference call.

Who wishes to ask a question May press star one at this time, we will pause for a moment as colors join the queue.

Our first question comes from Maurice Troy with RBC capital markets. Please go ahead.

Thank you and good morning. So my first question I guess, just a follow up on the capital deployment.

Sounds like the commentary has been.

Unchanged.

Yes as did a case.

Still casting a wider net or so been targets be it markets what type of assets that you further refined actually last shot at the Investor day.

I'm Hi, Maurice good morning.

No there's been a there's been no significant change and our capital investment prospects were still forecasting our.

Turning to half billion dollars of investment over the next three years.

And we're continuing our our pursuits for redeploying our or proceeds that we've garnered on the sale of our generation business.

And I guess since you brought that $3.5 billion I noticed that the electric transmission G.

Obviously, you fast for 2020 to 2022, but also establish an escalator for 2023 in 2024.

Notwithstanding that you see so actually we view this extension bit of it but can you speak a little bit about how this escalator may relate to your capital project opportunities or rate base growth for this business.

But the.

Our our transmission businesses, it's different there the regulatory requirements for transmission as a little bit different than natural gas power rates on the trends electricity transmission side, our day to certain so that means at the end of our test period.

We must file for new rates, whereas in our gas businesses, we can stay out on existing rates. What we've done is put in an option at our request to escalate the approved 2022 rates into 2023 and 24 hour.

Option.

So one we approach that time period will be assessing whether the.

Escalated rates for the call it the fourth and fifth fears will adequately recover our costs, including an opportunity to.

On a fair return and we'll take a look at what those growth prospects are in the transmission business at that point in time before we know if approved by the are you see pulled the trigger on.

On that escalator or not.

Thanks, and just finally on Australia, so I.

I guess other than getting better clarity on the allow ROI we.

And I believe your commentary on cost Rebasing is largely unchanged.

I mean anything that May have changed your view a few achievable our OE from Q2 are at the September Investor Day.

No.

Not really Maurice I mean, the out there the return on equity as a as we've disclosed has dropped from 7.21% to 5.02%.

Results and the 15 million about a 15 million dollar per annum drop in ER and regulated earnings coming out of ACO gas Australia.

There has been a little bit of work and the third quarter by the regulator, taking a look at the load forecast.

And there's been some puts and takes or tooling and following I'll call. It with the regulator and submissions on that but were right now and are in a holding pattern until we receive the decision and.

November .

As currently anticipated.

Thank you very much.

Thanks very much.

Once again, if you have a question. Please press star one our next question comes from Andrew Kuske with Credit Suisse. Please go ahead.

Thank you. Good morning, maybe the first question is just on the outlook for rate based growth in Alberta, and maybe we could just discuss a little bit of the mix of replenishment capital that is effectively driven by assets that are sort of towards the end of their life.

Versus really new growth capital.

Hi, good morning, Andrew.

Over the.

Well for our plan period, we're still looking at $400 million to $500 million worth of rate base growth per annum that results in about a 4% growth per year.

With the.

Growth prospects and what we've seen over the past couple of years in Alberta.

We've really gone to more maintenance capital as opposed to growth capital.

Maintenance capital is absolutely required for a safe reliable service examples of that our urban pipeline replacement program that we have and our gas transmission.

And a lot of the the Capex and electricity transmission so.

On a kind of a rough order of magnitude I'll call at about two thirds system maintenance and reinforcement capital and about one third on gross capital.

Okay. That's great and then maybe just a follow up when.

We see the policy coming out from a Alberta government today on just the rail over the production quotas.

How do you think about just longer term expectations for hydrocarbon production out of the province, and how does that impact the longer term growth rates for Cu.

Well the.

Hydrocarbon producers.

Ben or have been a great driver for the Alberta, and federal economies as our customers required additional transmission facilities powering the powering the north in getting the backbone of our grid.

Up to the.

Oil producing areas.

I really led to the call at the big build.

In the northern part of our province, and the southern part of our Province, we had.

Along with or without them like as well, we had significant investments to.

Rebuild our backbone to enable the interconnection of renewable generation.

That backbone is largely built now for.

For the major oil sands up north and the renewables down. So so we don't expect to see.

Huge rate based growth and our electric transmission company as a result of no hydrocarbons growth our distribution company as a.

More wells are drilled unexplored.

We interconnect the fields and Montenay do Vinay area that are really does help our electricity distribution business again, it's a long term play well see what we'll see what.

How that drives our customers investment decisions for future major plant.

Okay very helpful. Thank you.

Thanks, Andrew.

Our next question comes from Mark Jarvi with CBC capital markets. Please go ahead.

Thanks, Good morning.

Just wanted to come back to the your comments on the credit rating agencies.

Were there any more discussions with them around shifting you down to a lower volatility business risk given the.

Well the power assets.

Good morning, Mark No. We haven't had any further discussions with with the credit rating agencies regarding the improved quality of our earnings.

We are we are looking to can meet up with them soon and when our tabs connect we will we'll be continuing to advocate that but we haven't made any further a further grounds since since we last Chad.

Okay, and then obviously, there's a little bit uncertainty and it's a bit hard to predict but what the general cost of capital review coming up next year in Alberta.

Does that impact at all and how you guys think about redeploying the capital.

So much as you know maybe holding back a little bit depending if they do lower are always just to help you guys from preserve balance sheet strength or is there any thought around pulling back a little bit to see how that plays out.

Not a not so much I mean, a lot of our a lot of our utility capital is required for that safe reliable service as I mentioned earlier about two thirds of maintenance and one third growth capital projects like our urban pipelines renewals.

Continuing we have reinforcement.

Programs that are risk based and wobbles risks and timing of.

Our actions change our commitment to safe and reliable service does not so we'll continue to deploy our capital as required.

In our you tell regulated utilities in order to.

Meet our obligations to serve requirements.

Yes.

The generic cost of capital.

Outcome results in lower are always then that will would be consistent with a kind of overall.

Environment for all companies and a lower for longer scenario.

We'll take a look at as we as we redeploy our capital.

Returns and utilities come down.

Our returns and and other targets may come down as well so we'll take a look at that.

As a as we progress.

So just maybe as you stand today given the proceeds of come in here now with the balance sheet is a mirror discussion or the related issues, how confident would you guys being.

Redeployed <unk> like the bulk of the proceeds now.

Any concerns any any reservations about spending that money right now are sort of.

Yeah any commentary around that.

Yeah, well when we're not spending the money right now I mean, we are we are sitting on the cash and that helps our our net debt for RF FFO to debt calculations.

As Weve discussed at our Investor day, and continually we we will continue our.

Prudent disciplined approach to redeploying that capital, we're looking at our target markets outside of Alberta rest of Canada, a United States slowdown and and Australia as well.

Okay. Thanks to.

Thank you.

Once again, if you have a question please press star one.

Our next question comes from Patrick County, with National Bank Financial. Please go ahead.

Yeah. Good morning, guys, Dennis Theres been several new wind and solar projects announced in Alberta over the past few months.

Wondering if you know if this trend continues.

If tying all these projects into the grid might represent a bit of upside to your electric rate base growth outlook.

[noise] [noise] [noise] I mentioned, a little bit earlier in our the big build for transmission.

Yes.

We upgraded our network the backbone ourselves in Alberta like two to 40 Kb.

Our Hana project and the Alto link projects I think.

We initially energized one circuit, we've built those towers for the ability to carry two circuits and.

I'll say the major capital.

Has already been invested.

It's the lowest overall cost to be able to build a tower, where you can hang on to circuits on it right now on some of those are some of those lines, we've only Hong one circuit.

The growth materializes, we have the ability to go in and we'll call. It double the capacity up those lines. If there is future a major wind.

Projects that need to be interconnected that backbone has been built in order to accommodate it.

I think a lot of the economic projects.

For.

For the wind and solar the closer you are to hook up the better it a better it is.

For though those projects and those customers really pay for the interconnection costs. So if the costs.

<unk> $50 million to <unk> to interconnect Youre solar project to the distribution system customers typically would fund that while we would get the capital that would be offset with a customer contribution and as a result, there would there wouldn't be material rate base growth as a result.

Okay. Thanks for that.

And then curious your thoughts on Mexico as a target market. These days given you know we saw some resolved over the summer on some of the gas pipeline contracts in the country.

Maybe perhaps we could just get a refresh on your geographical pecking order for redeploying the sale proceeds between.

Canada, U.S. South America, Australia in Mexico.

As we look to redeploy the capital you know our call. It a regular were our target is for regulated and long term contracted earnings in utility or utility like so if you think of a regulated utility.

As is.

Up there in the pecking order.

Those aren't really available in Mexico.

So.

To redeploy those those proceeds we would be looking at other jurisdictions.

You know to redeploy in a in a regulated utility.

We we'd be looking at other jurisdictions. Besides Mexico, we're still looking in Mexico for the long term contracted earnings.

We do have.

Few projects down there now where we we do have a heavily contracted earnings such as our Veracruz Hydro plant.

And we continue to work with potential customers down there options for a utility scale solar that we can Uh huh.

Can be built if we have the offtake and we're considering a we're considering those types of projects down in Mexico as well [noise].

Yeah, I I can't give you.

The rest of Canada number one the United States number to Mexico, three Australia for South America, five type of a pecking order we evaluate each those projects as it comes but definitely geographic diversity is is a major consideration for when we review our potential projects and redeployment of our cash.

Fair enough yet got it.

And then lastly looks like there's going to be another round of petrochemical diversification subsidies here in the province.

Can you just maybe remind us how youre heartland water assets and footprint you might be position to your to capitalize on the next wave of petrochemical growth in that area.

Thanks, Thanks for that to water question, we have our small kind of water company right now we do have a contract to.

Supply water to IP Els, new facility that will be coming online and I guess 2020 or 2021, maybe 2021 time range.

So we we do have that water license were continuing were able to interconnect IPO through our caught.

Our little water backbone that we have there. So we are continuing to work with customers in the in the heartland to to help them with their needs.

Okay. That's great. That's it from me guys. Thanks.

Thanks Pat.

Our next question comes from Jeremy Rosenfield with industrial Alliant Securities. Please go ahead.

Yes. Thanks, Good morning, just a quick question on the.

I'm going to keep hills pipeline it looks like the capital cost estimate has creeped up a little bit here quarter over quarter can you just sort of walk us through what changes have been made if any to the project or whats really causing the capital cost to move around here.

Thanks, Jeremy you had when we initially disclose that it was that $230 million and then there was a time, where we we moved it down to 230.

Since then weve.

Been consistent with our regulatory applications. That's in there at $230 million. We the project is in flight right now we do expect those costs to come through between the 200 230 million dollar Mark there are some contingencies associated with that project.

Like most notably some of the river crossings with a directional drills that we need to ER.

Traverse a couple of a water bodies here and that will be the I think one of the key elements of whether all the contingency as required or not.

No we won't be passing through those events until.

Later on this fourth quarter early first quarter, and we'll be able to give a an updated number at that that point in time, but we're a we're right in there at that $200 million to $230 million range.

Okay, and then and just in terms of the regulatory approval process for the pipeline project. Specifically can you just remind us as to where you are with that.

[noise] we received.

Approval for that had been I keep hills and August .

29 team, which was a and it was approved as filed which was about a four year. After we file that application with the eight you see so put us behind the eight ball a little bit and.

Thanks for a following up because that's been lost a little bit, but that's a was one of the one of the great successes in.

The third quarters that we were able to get that approval from the you see and we'll still be able to meet our customers are required in service date of second quarter of next year.

Okay. That's great and then just as little cleanup question. There was a note in the mdna around.

Changes in.

The recording of depreciation expense I believe in this third quarter and the.

The electric.

Distribution segment, if I'm not mistaken can you just sort of explain what's going on in terms of depreciation rate changes and depreciation expense depreciation expenses and.

If this is gonna be something material that we should just be aware of for within that segment, specifically going forward.

That's on the electricity distribution side, Yeah. I believe there is just to note in the Mdna on that.

And those.

I.

I think my colleagues are are signaling to me about $20 million per year correct.

$20 million per year, lower depreciation expense as a result of our depreciate depreciation study extends the lives our revenue comes down by the $20 million, our depreciation expense will come down by the $20 million.

Leaving no impact to earnings a very small impact to the cash flows.

Are you do you notice there if there is seasonality associated with that or if it's a flat across the year just out of curiosity.

The depreciation expenses flat across the year.

Okay I appreciate it.

So unlike those distribution revenues.

Right I understand thank you.

Thanks, Jeremy.

Our next question comes from Ben Pham with BMO. Please go ahead.

Mr Family Your line is life.

Perhaps you're on mute Ben are you there.

Yes, I'm here sorry about that.

Can you hear me Okay now.

We have had go ahead.

Good morning Basket, Hi, good morning, trying to fix cost myself on I'm first question on Australia or are we are going on a 5% I know you you can have the over or not historically.

But are you are you.

Is there are options for you guys in the industry to look at maybe changing how that.

We would be colquitt going forward right and just having a great base by monetary policy every five years.

Oh, we're looking at that with.

With the legislators down there.

We don't believe that the 5% is representative of the returns that we should be a receiving on a on the systems.

Yeah.

It gets set based on a 20 day observation period. So under the same rules. If you had your 20 day observation period back in January your return on equity would be Oh, let's call it materially higher than than it is for 20 days in.

September .

Unfortunately, it's a national regulation the binding rate of returns, but we're continuing to advocate over the are.

Access arrangement number five in the next five years from 2020 to 2024, and we'll see how how we progress over the term in order to get that that turned around.

I agree with that.

Okay I know, it's just kind.

Got you did have a one month versus say he is an average last three years of five years or so.

And then second one.

Australia, Oh, sorry, I was trying to our bread or does that that factored a decision that you quoted I'm. Just just curious I know you got a pretty large portion of crew, but what are you thinking about the remaining 10% and now the regulators thing about stranded asset raskin and they're just not that on.

Where whereas the regulator in and maybe and the government with you till the asset disposition or.

Conversation that's been gone up for some time.

That's a good question where are they.

In the.

Said factor decision there kind of there wasn't a color that dissenting.

Comments, but there were comments from the commission.

Pointing out the oddities that the same fire can have an extraordinary retirement and one utility.

And an ordinary retirement in two others you know when we were able to recover there are a or the book value of our assets in our gas distribution business and in our electric transmission business.

But.

The fact that our distribution company Didnt reflect the fires in our most recent depreciation study, which was just going into PBR and that was the 2011 2012.

The general tariff application for distribution, our distribution or sorry, our depreciation study at the time used our experience up until 2008, so we weren't able to reflect the slave Lake fire, even though we you know we accounted for it and our usual wave recovered our costs.

It was clearly known anticipated we filed evidence to say that you know even if the the book value of those costs were included in our depreciation study it wouldn't make one iota difference on our depreciation expense.

The commission pointed that out with a view to spark conversation and.

And move away from the <unk> I don't know the rhetoric has the right word, but a healthy you see get over their interpretation of stores block and there.

Singular interpretation that stores block means extraordinary.

Gains or sorry extraordinary losses from goes to the account of our shareowners.

So we're continuing to advocate on the.

On the regulated front on the Legislative front, we been pretty clear that you know once our view is that once assets go in the ground based on an approved need and our cost are determined to be prudent.

Our utility is.

Entitled to recover those costs.

Irrespective of any future retirement event weather ordinary or extraordinary so that's what we are advocating with the with the legislatures a legislative.

Side as well.

So it sounds like you see as Oh, PPI and to some extent and now it's really you think it's more Alberta government you know I think the last one I propose a bell at its something along the lines of that you think that will provide a bit more clarity.

Yeah, well that that last one that we'll call. It failed bill 13 that they implemented I mean they that.

Amendments.

Gave the you see unfettered discretion in order to determine whether.

Or sorry, how those proceeds or how those.

Asset.

Loss on a that's destruction of assets should be attributed to shareholders or customers given that.

Discretion to do you see we'd be advocating.

No discretion to the eight you see.

As opposed to 100% discretion to the C.

Okay.

Okay I got it okay. Thanks, a lot then.

Thanks Ben.

This concludes the question and answer session I would like to turn the conference back over Mr miles dougan for any closing remarks.

Thanks, Jason. Thank you all for participating this morning, we really appreciate your interest in Canadian utilities, and we look forward to speaking with you again, saying that's it for now thanks.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.