Thank you for standing by. This is the conference operator. Welcome to the ATCO Ltd. Third Quarter 2018 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 questions. To join the question queue, 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. Myles Dougan, Senior Manager, Investor Relations. Please go ahead, Mr. Dougan.
Thank you. Good morning, everyone. We're pleased you could join us for our third quarter 2018 conference call. With me today are Senior Vice President and Chief Financial Officer, Dennis DeChamplain, Vice President and Controller, Anthony Maher, and Vice President, Finance and Risk, Katie Patrick. 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 the investment community. Please note that a replay of the conference call and a transcript will be available on our website at atco.com and can be found in the investors 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. For more information on these risks and uncertainties, please see the reports filed by ATCO with 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 do not have any standardized meaning under IFRS, and as a result, they may not be comparable to similar measures presented in other entities. Now I'll turn the call over to Dennis for his opening remarks.
Thanks, Myles, and good morning, everyone, and thanks for joining us today on our third quarter 2018 conference call. ATCO recorded third quarter 2018 adjusted earnings of CAD 87 million, or CAD 0.76 per share, which is CAD 33 million, or CAD 0.29 per share higher than the third quarter of 2017. Higher earnings were recorded in all of our investments. Our Structures & Logistics business recorded CAD 2 million in higher earnings, mainly due to improved margins on fleet sales and fleet rentals, as well as increased activity in Mexico and Chile. Canadian Utilities recorded CAD 18 million in higher earnings. Its higher earnings were mainly due to the termination of the Battle River Unit 5 power purchase arrangement by the Balancing Pool and the associated availability incentive and operating profit margins.
Higher earnings in Canadian Utilities were also due to improved Alberta power market conditions for its independent power plants. You can find further information on Canadian Utilities results on its website in the Events and Presentation section for its quarterly conference call and in the Documents and Filing section for the interim financial statements and MD&A. The website address is canadianutilities.com. In the third quarter, ATCO's corporate operations also recorded CAD 12 million in higher earnings compared to 2017. This was mainly due to the sale of four Alberta properties in our commercial real estate portfolio. Overall, we had a very good earnings quarter in all of our investments. We were also active on the M&A front this quarter. Structures & Logistics acquired 264 space rental units in Mexico.
This increases modular structures rental fleet to 468 units in Mexico. These units are 100% utilized on existing rental contracts, including a contract for 166 units with the Ministry of Education for schools in the city of Monterrey in northern Mexico. Perhaps the most interesting M&A development for our investors this quarter was our investment in Neltume Ports. On September 12th, 2018, ATCO invested in a 40% interest of Neltume Ports for approximately CAD 450 million. Neltume Ports is a leading port operator and developer in South America with 16 port facilities and three stevedoring businesses, primarily located in Chile and Uruguay. Neltume Ports portfolio is highly diversified across cargo types and volume mix. You can find more information about Neltume Ports in the archived webcast in the Events and Presentation sector, section on our atco.com website.
Neltume Ports contribution to ATCO's adjusted earnings in the third quarter was CAD 1 million. This amount represents ATCO's share of adjusted earnings from the closing date of the investment on September 12th, 2018 to September 30th, 2018. Regarding our financial strength, in August, Dominion Bond Rating Service affirmed its A(low) rating and stable outlook for ATCO. In September, S&P affirmed its A- rating and stable outlook for ATCO. Credit ratings are important to our financing costs and ability to raise funds. We intend to maintain strong investment-grade credit ratings to provide efficient and cost-effective access to funds required for operations and for growth. That concludes my prepared remarks. Myles, over to you.
Thank you, Dennis. I'll now turn it over to the conference coordinator for 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 have additional questions, you are welcome to rejoin the queue. To join the question queue, you may press star one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question from the question queue, please press star two.
Webcast participants are welcome to click on the Submit Question tab near the top of the webcast frame and type their question. The ATCO investor relations team will follow up with you via email after the call. Once again, anyone on the conference call who wishes to ask a question may press star one at this time. The first question comes from Linda Ezergailis with TD Securities. Please go ahead.
Thank you. Good morning, thanks so much for having this conference call. I'm wondering if you can give us a sense of your Structures & Logistics outlook, perhaps in the form of describing what your project lead list might look like, whether it be in British Columbia related to LNG or other major projects there, as well as other jurisdictions. Maybe also as a follow on just a comment on how you see growth being driven, whether it be organic versus further acquisitions potentially.
Hi Linda , do you mean growth in Structures & Logistics or growth at ATCO?
Well, why don't we start with Structures & Logistics. Thank you.
Okay. Keep it to S&L. In relation to our lead list, you know, we've seen a kind of a not an explosion, but a huge increase year-over-year from last year, we'll call it first quarter to now. It's probably almost a tripling of the amounts that we see. You know, we segregate it, you know, by type and by region. If you take a look at our lead list, probably half of it is associated with the natural resource sector. Maybe 1/3 in military and government contracts and the remainder in education, housing In education, housing and our other new markets that we're entering.
If you were to look at it by region, it's I'm gonna say fairly evenly split between Alberta, British Columbia, and the rest of Canada. That takes up probably 80% of it, and the remaining 20% was split between the U.S. and other international locations. That's kind of where we're at with the lead lists and, you know, BC is in there and that would include any potential work coming from LNG Canada.
In terms of growth at Structures & Logistics, while we're, you know, still ready to capitalize on the large workforce housing contracts, growth in that business is instead of the one-offs from the workforce housing kind of commodity-driven projects that we've experienced the huge spikes in earnings in the past, we're really going to, you know, building a base business in our sales and rental fleet, also through expansion into permanent modular construction, being able to supply different sectors like the education and housing sectors that I referred to earlier.
That's helpful. Do you see additional acquisitions similar to what you've done in Mexico recently?
Yeah, we've gone along about with structures, you know, the nature of the industries with, you know, further kind of tuck-in acquisitions in markets where there's demand where we feel that we could increase the service for those, for those markets. Mexico is included with the, you know, the area for further expansion. United States as well for, you know, potential bolt-on acquisitions.
Thank you. My second question relates to Neltume and, you know, it's a relatively low-risk way to get into a new business platform through partnering with an established operator. I'm wondering at what point ATCO might invest directly in ports outside of Neltume and in what geographies and what would need to be in place for you to be comfortable to do that?
You're bang on with that low-risk entry with an experienced operator like Neltume and provided by the Ultramar ownership. For now, I think we will defer to their port expertise and learn as we go. It depends on where we go on that learning curve. You know, our partnership with Ultramar through the ATCO-Sabinco investment that we've done, we are very much aligned in our views. We would, you know, for right now and foreseeable future, we are with Ultramar and Neltume for port expansions. I can't see us going off on our own in that respect for the foreseeable future.
That's helpful context. Thank you.
Thanks, Linda.
Our next question comes from Mark Jarvi with CIBC Capital Markets. Please go ahead.
Good morning. Continuing on with the Neltume, I just wondering if you guys could give us the update in terms of expectations and timelines for completing sort of permanent financing.
In our Investor Day back in mid-September, we said that we were, you know, planning to take out some of the credit facilities. We're looking to do that in Q4 this year, market conditions allowable. Still with a hybrid instrument.
You know, talked about the strategic review for the power assets. You know, if there wasn't a third-party buyer, what's the openness to sort of ATCO Ltd. to sort of take those assets out from CU transfer those assets inside the corporate structure? Is that something you guys would consider?
Unlikely. I mean, Canadian Utilities, you know, our 52% ownership in that they are dedicated to energy infrastructure, type investments. ATCO as a holding company would probably not take a direct investment in there or transfer those assets. That's not envisaged right now.
Okay. Thanks.
Thanks, Mark.
Our next question comes from Patrick Kenny with National Bank Financial. Please go ahead.
Yeah. Hey, guys. Just as it relates to the recent FID by LNG Canada, wondering if you can give us a sense as to, you know, what the scope of any workforce housing opportunities ATCO might be pursuing out in Kitimat or, you know, perhaps elsewhere along the coast if other LNG projects are sanctioned at some point over the next year or two.
Yeah. There's several workforce housing projects that are associated with that LNG Canada, both upstream on the pipeline route and downstream near the site itself. We have been actively involved in the proposal process, but we'll have to see what happens in the near future. For now, I think all I can recommend is that you stay tuned.
Got it. Just on the tuck-in acquisition in Mexico, wondering if you could provide some color on the duration of the contracts tied to the space rental units. maybe, you know, if possible, what sort of transaction multiple we should be assuming here, either on an earnings or an EBITDA basis.
Yeah. The initial term for the contract is for a year, and then it's kind of month-to-month extensions after that. That's the nature of those Mexican contracts. In terms of multiples and investments, I mean, that's kind of our initial very low cost acquisition entry into that marketplace. A little bit of a one-off, so I don't think it would be fair or indicative with respect to multiples. It's just a minor investment in Mexico. What it does show is that we are looking afield and we are expanding into further markets like the housing market and school market that we have those contracts for.
Okay, great. One last quick one, if I could. Just any update on how you're thinking about the hybrid market over the near term? Are you still looking to tap that market here in before year-end, or is that being pushed into the new year?
That would be in relation to the Neltume investment. Yeah, we're still looking for the hybrid instrument and market dependent. We're looking to close on that in the fourth quarter this year.
Great. Thanks, Dennis.
Thanks, Pat.
Our next question comes from Robert Kwan with RBC Capital Markets. Please go ahead.
Great. Thank you. Just in terms of the commercial real estate, starting with that, you had the CAD 13 million of gains. How much was actually the gross amount on the sale?
We had two transactions, Robert. It's Myles here. The gross amount on the first one was CAD 14.5 million for net earnings of just over CAD 10 million, I believe. We had a second smaller transaction as well. I don't have that gross amount at my fingertips, but it would be the similar kind of tax affected impact. We had total impact of CAD 13 million, so gross up another CAD 3 million-ish. Call it maybe just under CAD 5 million, would be my guess.
Sorry, Robert. A lot of the properties in ATCO Investments were transferred over the years through the utility operations, and those were assets that were no longer required for utility purposes, generally older. You'll see that at a relatively smaller book value.
Understood. I guess what I'm kind of wondering is recognizing, look, that not all real estate's homogenous, but how do those properties kinda compare to what's in the rest of the portfolio? I don't know if there's kind of you can use like a percentage. But the other thing I'm wondering too is how much of what's in the commercial real estate portfolio is actually leased back to ATCO entities?
Well, we've got, if you take a look at the rest of that commercial real estate portfolio, there's about 16, you know, other properties that are in there. There's not much that's leased to ATCO entities. I'm trying to think off the top of my head. It's always dangerous. There's some in downtown Calgary that's leased to Canadian Utilities. Apart from that, not much.
Okay. I'm just wondering, because you put out some stats at the Investor Day, I think it was 417,000 sq ft of saleable leasable office space, 90,000 for industrial. In terms of what you sold here, can you give a sense as to the percentage on, say, square footage?
Those would be in the, I don't know how much of the leasable office space would've been on the Calgary properties. It was kind of like a old gas appliance or sorry, gas distribution, warehousing. In Edmonton, the properties were, my understanding, just bare land.
Okay. Got it.
Don't have the square footage on the total assets sold at our fingertips here, Robert, but there's no problem with sharing that. I can follow up with you later.
Perfect. maybe I'll just finish here on financing and, you know, after you get past the Neltume financing, what do you think or how do you think about the amount of additional leverage you can add on your existing asset base, in terms of where you'd be comfortable with, whether it's within the credit ratings or just where generally you'd like to be? you know, put differently, you know, how much more could you raise to acquire things just by levering up the balance sheet?
Yeah. At, you know, at ATCO, it would be kind of our guide is really maintaining the credit rating. It would be minimal leverage at ATCO. I think at the investor days I said, you know, up to 20%. You know, we incur debt at the Holdco very infrequent and judicious. The plans right now aren't to lever up that balance sheet at ATCO.
Okay. That's great. Thanks very much.
Thanks, Robert.
Once again, if you have a question, please press star one. Our next question comes from Linda Ezergailis with TD Securities. Please go ahead.
Thank you. Within the context of allocation of capital, can you help us understand how you and your partner at Neltume are thinking of an appropriate dividend policy and payout frequency versus retaining free cash flows at the Neltume level to reinvest?
The arrangement in Neltume that we have with Ultramar is that after CapEx requirements are looked after, they dividend out all the free cash flow. There isn't any amounts being held back beyond what is required for right now.
Is that an annual exercise or quarterly, or?
That would be cleared up annually. You know, it excludes the additional kind of growth CapEx that was that's being held by the by Neltume. A portion of our CAD 450 million that is there to fund future growth. Absent that, the rest of the cash is dividended out.
That's helpful context. Maybe just as a follow-up, to build on some of Robert's questions, could I be so bold as to ask, how I might think of a differential or the vintage of the book value of your real estate assets or, you know, how the book value might differ from the market value at this point?
It's a good question, Linda. I've asked the same question of our real estate folks. The challenge of course is that's providing a market value-
Yeah.
If we wanna put up for sale. I think at this time we're probably wanna just keep that one to ourselves.
I can understand. I just felt that I could ask. Thank you.
Continue to be bold, Brenda. Linda, sorry.
This concludes the question and answer session. I would now like to turn the conference back over to Mr. Myles Dougan for any closing remarks.
Thanks. Thank you all for participating today. We appreciate your interest in ATCO, 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.