Q4 2019 Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the Canadian Utilities limited at year end 2019 results conference call and webcast. As 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 a question.
The joined the question to you May Press Star then one on your telephone keypad should you need assistance during the conference call May signal on the operator by pressing star and zero.
I would now like to turn the conference over to Mr Miles Dougan director of Investor Relations. Please go ahead Mr. do again.
Thank you Anastasia and good morning, everyone.
Please take a join us for our fourth quarter 2019 conference call with me today, as executive Vice President and Chief Financial Officer tenants to share a plane senior Vice President controller, Derek Cook, and Vice President Finance Treasury risk, calling Jackson.
Dennis will begin today with some opening comments on our financial results and recent company developments.
Following his prepared remarks, we will take questions from me investment community. Please note that a replay of the conference call. It a transcript will be available on our website, a Canadian utilities dot com and can be found in the investor section under the heading events and 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.
More information on these risks and uncertainties. Please see the reports filed by Canadian utilities with the Canadian Securities regulators.
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 to not have any standardized meaning under I for us as a result, they may not be comparable to similar measures presented in rough seas.
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 fourth quarter 2019 conference call.
Canadian utilities achieved adjusted earnings of $608 million in 2019 compared to $670 million in 2018.
Our strong performance in 2019 was mainly the result of continued cost improvements across the company.
Ongoing capital investment and utility rate base growth and positive regulatory decisions.
Two additional hydrocarbon storage caverns became operational in the second quarter of 2018 and provided a full year earnings in 2019.
Additional earnings also resulted from regulatory rate decisions in both the electricity transmission and the natural gas transmission businesses.
Maintaining stable year over year earnings was quite an achievement considering that 2018. So adjusted earnings included $35 million an earnings associated the Alberta bouncing pools termination of the Battle River unit five P.P.A.
We also recorded $12 million an earnings in 2018 due to an early energization incentive for completing construction ahead of schedule on Alberta power line.
Well those are good financial outcomes in 2018, they also set us up for quite a challenge in 2019 to close that earnings yeah.
Due to the great work of our people in 2019, not only did we closed out earnings gap, we recorded ever so slightly higher earnings in 2019 compared to last year.
We also completed two notable asset dispositions in 2019 in September we sold our Canadian fossil fuel based electricity generation business.
And in December we completed the sale of our 80% interest in Alberta power line.
We made the decision to sell the generation business and our ownership business or sorry, our ownership interest in Alberta power line 2019 for different business reasons, but the overall strategic rationale for the same way.
We are increasingly focused on global prospects for growth.
As we seek strategic opportunities to expand our global portfolio of utility and energy infrastructure investments and services. We continuously review our holdings to look for opportunities to monetize assets and increase our capacity for growth. These 2019 sale transactions significantly improve our overall financial state.
Thanks.
Our many years of success as a financially secure and stable utility and 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 opportunities for similar investments and complimentary services outside of Alberta, with a particular focus on North America, Latin America and Australia.
Maintaining our patient approach to long term shareowner value creation has been Canadian utilities Hallmark for many years, we'll look for the right investment with the right strategic fit and at the right price.
In the meantime.
We continue to build our portfolio of utility and long term contracted energy infrastructure assets.
Our 2020 capital plans, including investing more than $1 billion.
Five regulated utilities and their long term contracted capital assets.
We are already busy on several of those projects in 2020.
We commenced construction on the Pembina Keephills natural gas transmission pipeline in the fourth quarter of 2019.
The 59 kilometer high pressure and natural gas pipeline supports the coal to gas conversion of power producers in the Jesse and surrounding areas of Alberta.
The estimated cost to construct this natural gas pipeline as approximately $230 million and is expected to be complete in mid 2020.
We secured long term contracts and commence construction for a fifth salt caverns hydrocarbon storage facility.
Construction began in the fourth quarter of 2019 with full operation targeted for late 2021.
We also entered into a partnership with the Chilean developer to build and operate an 18 megawatt solar project located in southern Chile.
Total investment in this project is predominantly sorry, approximately $24 million with an expected completion in 2021.
With these projects and others our plans for continued utility and energy infrastructure investments are already well underway in 2020.
In January we declared a first quarter 2020 dividend with a 3% increase over the dividends paid in 2019.
Canadian utilities has increased its dividend per share for 48 consecutive years, the longest track record of annual dividend increases of any publicly traded company.
We're very proud of our track record of dividend increases it was the prudent choice to adjust the size of our dividend increase to be in line with our sustainable earnings growth, which is linked to grow from our regulated and long term contracted investments over the next three years are expected rate base growth is about 3% per year.
Going forward Canadian utilities strong stable foundation of regulated utility and long term contracted energy infrastructure investments and services will provide the platform to continue our long track record of exceptional returns for our shareowners.
That concludes my prepared remarks, I'll now turn the call back over to mouse.
Thank you Dennis and we'll turn the call over to the conference coordinator now for your questions.
We will now begin the question and answer session.
And the interest of time, we ask you to limit yourself to two questions.
If you have additional questions you are welcome to rejoin the queue.
To join the question Q you May Press Star then one on your telephone keypad.
Your tone acknowledging your request if you are using a speakerphone. Please pick up your handset for pricing any Keith.
To withdraw from the question Q. Please press Star then too.
Webcast participants are welcome to click on the submit question tab at the top of the webcast frame and type their question.
Canadian utilities Investor Relations team will follow up with few 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.
Our very first question comes from Linda Ezergailis with TD Securities. Please go ahead.
Thank you.
I'm wondering if you could maybe give us some more context about how you're thinking of the probability and timing of putting your sale proceeds to use what are you seeing in terms of the current environment.
Relative attractiveness of various geographies types of investments and at what point would you consider an alternative uses of proceeds including potentially a share buybacks or special dividends.
Thanks, Good morning, Linda.
In terms of our strategy for for redeploying the capital I mean, we are we are staying staying the course with what we've communicated in the past.
Our our core strength is really managing operating regulated utility assets. So we've achieved as you know top tier results under all different regulatory regimes to bring value to our shareowners.
Or let's say continually assessing our investment portfolio portfolio.
Asset sales that we didnt make as I mentioned in our opening comments, where the right decision increase the financial strength.
If you.
If you put that together with the target markets that are that we mentioned.
North America, ex Alberta, Latin America, and Australia, there are Oh.
Opportunities.
And I'll say, the kind of Greenfield developments and Australia, there are a utility opportunities and.
The rest of.
North America that we're continuing to look out.
South America, we are developing albeit at a slower pace on some of our greenfield developments like car.
Our Chilean solar project.
Hi, I'm quite say, there's nothing imminent right now on the or redeploying that cash mentioned that we are are looking for the right asset in the right geography, you are right price.
In terms of alternate uses.
Our.
Right now our cash on the balance sheet does help our credit metrics.
As our AFFO to data as a net debt. After you subtract the cash so that does help us on the credit metric side and gives us optionality.
So while we are focused on growing the business within Canadian utilities there.
And we diligently pursue those there's.
Never say never down the road, we could look at a special dividends and we've we did one in the mid two thousands.
And and buybacks as well but.
Right now, though the focus is on growing the company. So that's our.
Oh.
So in essence, our plans.
I think I've I think I've addressed your four.
For bullet [laughter], sorry, I guess my follow up question might might have a few bullets as well if you want to call. It that so on the flip side youre focusing on growth, but you also have been disciplined stewards of capital and what would be the criteria for considering on the edge as partial or full asset sales.
Would it be if you found a super sized opportunity to raise proceeds would it be maybe.
Because you could surface value and clearly these assets would be valued more highly with you know maybe private money or some other strategic operator, or maybe a with S.G. considerations a influence as well how you look at optimizing your portfolio of assets businesses.
I mean, we Ah we continue to look look at our portfolio.
In terms of value to us versus value to other and how it's performing and that's a long term fit into our strategic plans. So we.
Like many businesses.
Continue to review that.
So I said further asset sales I guess could be of potential in terms of looking for Super sizing a deal I mean, we have partnered and are.
And are willing to work with.
Other partners in order to increase the that the check size.
Increased the target size same check size for us in terms of the potential targets.
You mentioned, yes in Gi considerations, I mean with the disposition of our generation business you know that are.
Our carbon dioxide emissions are down.
Pretty much to nothing I'm going to say through through our generation.
Where we're at the point now where our old Man River Hydro down that we retained from the disposition generates enough electricity to power all of our Alberta businesses. So in terms of SNG bonuses and pluses.
That is.
A factor that we that we look at although that was not the primary reason for the generation sales to.
Look for long term contracted earnings on the earnings for generation, we're becoming increasingly merchant so.
That's helpful. Thank you I'll jump back into queue.
Thanks Linda.
Our next question comes from Murray's choice with RBC capital markets. Please go ahead.
Thanks, and good morning, I guess my first question is really a full up to the previous topic what capital deployment.
You mentioned, obviously disposition the power projects as one of the things to consider when it comes ski as cheap but.
Taking a step further as you think of gas versus electricity.
Utilities.
And.
Do you not saying, obviously Africa utilities in Alberta, as you think about in the next dollar that you want to invest do you have a preference for Nova together.
Uh-huh, probably we would probably prefer electricity over gas that's not to say that a gas isn't.
Viable in the long term we are.
Innovating with hydrogen down in Australia, we have the opened our clean energy innovation hub at our operations in Perth.
Whereby we're creating green hydrogen running a fuel cell off of that hydrogen injecting some of the hydrogen into our gas lines.
To further kind of a promote the usefulness of natural gas as a fuel.
In the future.
Electricity with the electrification of.
Everything.
We believe that there's a.
There there is a great future there maybe not the electricity that we've seen in the previous few decades as more distributed systems come online.
So we're oh the then the next dollar.
As you put it we will look at electricity and gas.
All else being equal, which they never are.
We would probably mean to electricity.
Thanks, and and then second questions.
More about this quarter, our this year in particular.
As you look across four utilities and Oh by the can you speak to the cheese dollar we used to do you see.
This year and whether or not you believe.
Some of the outperformance this will continue moving forward.
I'm sure our.
Our two distribution companies.
That are governed by performance based based regulation their financial returns on equity we don't have the utility returns there yet their financial returns are about 300 basis 350 basis points above the approved return.
Our two cost of service utilities, the gas and electricity transmissions.
There there.
There are always our financial are always are about tendon three quarter percent on average.
Which is compared to the eight the half percent approved return that's no north of a couple of hundred basis points outperformance.
[laughter] we.
On the PBR companies, we view those earnings as an entirely sustainable we are in a 29 team finished your two of the five year term of.
The second generation of PBR, So we are well underway of.
Lowering our.
Our run rate and our costs, so that we will be able to.
Achieved the.
Returns for the shareowner over the PBR term.
And just like in when we came off of PBR, one into PBR too that benefited our customers by having.
A great rate decrease.
As we reset from PBR, one into PBR to all the while during a during this PPR period, our customers are experiencing say a rate increases at lower than inflation.
So, let's say the that PBR.
Model is continuing to deliver the.
Sorry intended results for both our customers and for our shareowners.
Oh the service utilities.
They've been.
They've been.
[noise] steady in their outperformance of.
The approved returns.
That being said there are a there's kind of more variability in those Ah transmission cost of service companies.
As they go in and out of shorter.
Two or three year.
Terms for their rates.
Thank you very much.
Thanks, Mike.
Sorry go ahead.
Our next question comes from March RV with RBC capital markets. Please go ahead.
Thanks, Good morning, <unk>, maybe just wanted to start on there are some commentary in the Mdna boat reassessment of nominee adjustments I'm, just wondering what that could mean for the PBR.
Regulated utilities in Alberta.
[laughter].
[laughter].
[noise] reassessment of anomaly adjustments. So this oh, sorry, good morning, Mark.
The Uh huh.
Did you see.
Went back and reviewed what they had previously identified as the there five criterion for identifying as a normal an anomaly which rates would.
The adjusted moving from PBR, one into PBR too.
They say essentially scrapped those criteria and have put it up for a kind of.
AD hoc you make an application if you believe that an anomaly has been hit.
That being said they have come out to say.
The the past performance or the overall performance of the utility companies. They don't believe would adjust would make it as an anomaly.
You see doesn't expect there to be many anomalies and it is on the utilities and the customer groups to apply for anomalies and this would be going back and reaching back adjusting rates not.
Back to January one 2018, so there would be accumulate to.
A cumulative impact.
Should any anomalies be approved.
We've applied for a for an anomaly to increase our increased the rates due to the inflation factor.
Who we know of one customer group that has indicated that they will be applying for an anomaly.
We don't know what that.
Application will be [noise].
But [noise].
The that process is intended to roll out over the remainder of this year. So assures heck hope we got final rates for 2018 by the end of this year.
So thats the the largest kind of a potential retrospective reach that we have hanging out on our companies.
And could you quantified it all Dennis in terms of what it could be impact on retroactive needed on the go forward.
You know I I think that I'll have to.
Follow up maybe you could follow up offline with with miles because I I don't want to give you a wrong number mark Okay fair enough. It is that it isn't the millions okay.
I wanted to maybe a pick up on the comedy made about the cash being on the balance sheet being credit positive.
I'm just curious if you've seen hydro one come to market. This week with really low rates and the markets are right now how do you guys think about the debt financing markets and where you are at the balance sheet and does does the current rate you're seeing out there change when you come to market.
Maybe lucky enough to slow rate for longer.
Yeah, I mean as a you know looking at those are the rates. The other day with a long Canada does that whatever 1.3% center.
<unk> role in our spread right now it could be between 130 140 basis points would make for a I'll say and even lower than our 2.96% issuance that we had from last year.
We we generally had been issuing later on in the year once we get kind of.
Uh Huh firmer bead on our capital programs.
With the current environment right now I don't to.
No we continually monitor it I don't think that there's going to be a large uptick in.
In the near future, but yeah, we continue to monitor it as you know we've been a traditional.
Third fourth quarter issuer, but yeah those rates those rates are appealing and they caught my eye.
Okay. Thanks Dennis.
It's very much more.
Once again, if you have a question. Please press Star then one.
Our next question comes from Patrick Kenny with National Bank Financial. Please go ahead.
Hi, Good morning, guys [noise], Dennis just on the a 3% dividend increase versus.
I'd call. It 75% I guess, you mentioned that 3% rate based growth profile, but I was just curious what opportunities.
You might be pursuing to augment.
You use dividend growth rate. So that you know converges closer to that goes over the coming years.
Yes I.
I mean, there there was more there what that convergence and others more of a a divergence.
The will say that the payout ratio and Canadian utilities in is in line with the with our peers. If you take a look at at close payout ratio.
There's more room, given that utilities right now as a large component for a for at coast base. So I'm just given to you know at closing the in the fifties percentage.
In terms of payout ratio and see you this in the seventies so.
Until until something changes.
Between Atco, that's not in Cu or sorry, and see you that's not an ACO theres not going to be Oh, let's say, a kind of a realignment of those.
Dividend increases given the our long term sustainable growth rate that we're seeing and see you.
Makes sense and then on the flip side I guess.
With that you see considering a return to middle Formula based generic cost to capital approach.
How much downside to the 8% base or are we do you think you could absorb without impacting the 3% dividend growth rate.
[noise].
The in that you still see proceeding nobody.
Not utilities to our customer groups have advocated a return to a formula.
Going forward on D.C. put it out there.
And given the current environment nobody.
As proffered evidence that a return to a formula would be oh, good for a good for all stakeholders.
So, but I suspect that's kind of.
Chilled a little bit in the agencies I'll say quest for regulatory efficiency, we get just to dispense with GCL season invoke a formula.
So that that doesn't seem like that would be the case.
Where we're at 8.5% a richer return on 37% equity thickness.
And the a and you look at a fair return standard.
Two of the elements of the three legged stool comparable investments in capital traction are not being Matt and argue with that eight and a half on 37.
The approved are always elsewhere in Canada, or an average of 9.2% on 43% equity. So we are Oh, that's kinda like the but the backbone for our submission of 10% on 40% equity thickness.
Sure Yeah, we have an alternative in there if you see doesn't want to increase the equity thickness leave it at 37% then we'd be applying for 10.5%.
Return.
So so that's my that's my pitch for returns should go up not down.
At eight and how that at 37% equity.
Every 100 basis points.
That changed from that impacts Canadian utilities by between 40 and $45 million per year. So that's an earnings and cash.
So if you if you look at.
600, or you know without generation in Alberta power line.
Future earnings if you you back that out here and we'll call. It the 500 to 550 range that 30 or sorry that $40 million is is a good hunk of Oh growth. So.
That's great very big so those are those are our considerations and and how we what the impact of that Oh Gee C.
She's you'll see would be and again that that's not effective until 2021 right got it okay.
And then just last one from me here.
Given the current sell off in commodities.
You mentioned BSG considerations weighing in on your capital redeployment strategy.
Any chance, you clarify, which geographies industries or even counterparties are now off the table given the your strategy around SG.
Hi, I'm I'm mentioned.
Ah, Yes, GE the primary component for our generation was the kind of long term versus merchant.
Earnings that was being driven by our generation portfolio.
Yes in GI was a factor, but it wasn't the driving factor.
In the in the decision.
If you take a look at.
Geography these targets.
With a heavy yes G component.
We would ER, we would think hard about investing in coal.
And we couldn't do call. If there is a a path like we were on with our our former generation business to convert it to cleaner fired natural gas.
But that being said given a given where.
Sentiment is and the investors.
We would consider that in our.
In our targets.
But.
I don't I don't think anything as a is completely off the table right. Now so like you know as I say, we could do could do coal and convert.
But.
That's about it.
Okay, great. That's a very helpful. Thanks again.
Thanks Pat.
Our next question comes from nod you paid down with the Industrial Alliance Securities. Please go ahead.
Hi, Good morning, and just one question for me Im wondering if you can talk about your chalet investment in solar.
I need potential follow on investments, so what about partner or the same region or in South America.
The Oh, thanks, Thanks to the question I mean, it's a it's a small small project.
It gets us into the market gets us into the renewable market. It's its.
It doesn't contracted it's merchant that being said the generation from that solar project is you know feeds into a kind of a stabilized pricing mechanism whereby we the proceeds we received on sales is equivalent to kinda like that the current.
<unk> contracts that are in the market.
It's going to be developed over the the next couple of years.
Uh huh.
Well I can't remember cost $24 million.
$24 million for for the cost so small small project the.
And we're in a partnership with a with the developer so there's other opportunities.
There.
And we're continuing to look at you know as I mentioned before Latin America is one of our target markets. So we are.
Or we're looking there as well as and in North America in Australia.
Thanks. That's helpful. Just wondering if you can have a bit more color on what that scope and scale. Those are digital investments Noble's Doug look like.
Oh, well it it'll depend on the on the opportunity I mean.
We recently completed a well north of 100 million dollar deal for a.
35 megawatt hydro plant in Mexico. So it gives you a little bit of an idea as to you know in the tens of millions into the hundreds of millions.
You know, there's other opportunities out there that could be significantly larger than that and our development teams or or looking at all of those elements as we.
We continue to invest in our.
Existing utilities, we're continuing to look for M&A activity for other utilities and Greenfield developments for probably kind of more on the on the renewable side. So we're looking at all of those aspects given a given where we are with our current financial strength.
Thank you.
This concludes the question and answer session I would like to turn the conference back over to Mr miles Dougan for any closing remarks.
Well, thanks, Anastasia and thank you all for participating this morning, we appreciate your interest in Canadian utilities.
And we look forward to speaking with you again soon bye for now.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
[music].