Thank you for standing by. This is the conference operator. Welcome to the Canadian Utilities Limited Second Quarter 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 questions.
I would now like to turn the conference over to Mr. Myles Dougan, Senior Manager, Investor Relations. Please go ahead, Mr. Dougan.
Thank you, Ariel. Good morning, everyone. We're pleased you could join us for our Q2 2019 conference call. With me today is Executive Vice President and Chief Financial Officer, Dennis DeChamplain and Assistant Controller, John Jeffery. 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 and a transcript will be available on our website at canadianutilities.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 Canadian Utilities with Canadian Securities Regulators. And finally, I'd 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. And now I'll turn the call over to Dennis for his opening remarks.
Thanks Miles and good morning everybody. Thank you all very much for joining us today on our Q2 2019 conference call. Canadian Utilities announced adjusted earnings in the Q2 of 2019 of $126,000,000 or $19,000,000 higher than the $107,000,000 in the Q2 of 2018. 2nd quarter earnings growth was due to the favorable impact of electricity and natural gas transmission regulatory decisions, as well as ongoing growth further cost efficiencies, as well as income taxes. During the quarter, we also entered into definitive agreements to sell non regulated electricity assets.
In May 2019, Canadian Utilities entered into definitive agreements to sell its Canadian fossil fuel based electricity generation portfolio for aggregate proceeds of approximately $835,000,000 subject to customary closing adjustments. The sale will occur as 3 separate transactions. The transaction for Canadian Utilities 50 percent ownership interest in the 2 60 Megawatt Corie cogeneration station closed in July 2019. The remaining two transactions, one for 10 partly or fully owned natural gas fired and coal fired electricity generation assets located in Alberta and British Columbia and the other for Canadian Utilities 50 percent ownership in the 580 Megawatt Brighton Beach Power joint venture in Ontario are both expected to close in the second half of twenty nineteen. In June 2019, Canadian Utility with its partner Quanta Services Inc.
Entered into definitive agreements to sell Alberta PowerLine Limited Partnership through a competitive process for total proceeds of approximately $300,000,000 and the assumption of approximately $1,400,000,000 of APL debt. As part of these agreements, Canadian Utilities is offering an opportunity for indigenous communities along the transmission line to obtain up to a 40% equity interest in Alberta PowerLine. The final ownership mix will be determined upon close of the purchase opportunity for indigenous communities. Canadian Utilities will remain
the
result, we received several regulatory decisions this quarter. As a result, we generated higher earnings in the quarter due to the favorable impact of the electricity transmission 2018 to 2019 general tariff application and natural gas transmission 2019 to 2020 $6,000,000,000 capital investment plan over the next 3 years. We remain focused on building a globally diversified portfolio of utility and energy related infrastructure assets, leveraging the breadth and depth of our energy expertise in the Alberta market. That concludes my prepared remarks. And I'll now turn the call back to Myles.
Thank you, Dennis. And I'll turn the call over to our conference coordinator now for questions.
Thank you. We will now begin the question and answer session. In the interest of time, we ask that you limit yourself to 2 questions. Our first question comes from Linda Ezergailis of TD Securities.
Thank you. I'm wondering if you could help us navigate this Australia access arrangement for ATCO Gas down there. You gave you provided some helpful context in your MD and A, but I'm just wondering how we might think of the magnitude of the reset starting next year and some other moving parts with respect to other rebasing related to demand and throughput?
Good morning, Linda. Thanks for your question. We can't say right now what the impact will be on 2020, because we won't be getting the final decision until September, October timeframe. What I can say is that the Australia will be subject to the binding rate of return guidelines that are out right now. If you were to take a look at the risk free rate, say right now, the relative return on equity will drop from 7.15% that we have right now to about 5.15 percent or a 200 basis point drop in the ROE.
For Australia, a 100 basis point reduction results in about a $7,000,000 per year earnings impact. So, that's part of the reset. But that risk free rate is not finalized yet. That will be finalized between now and the decision. So it can move.
And then there with regards to the other aspects of your throughput and demand, that will come out in that final decision right now. Bear in mind that over the recent past, Australia has been performing about 300 basis points over and above the approved return. And as we saw with the Alberta PBR utilities, when they came out of their 1st generation 5 year PBR term, the outperformance was a little bit lower than what they had recently experienced, just given the nature of the reset on the operating costs and capital. So, we would expect some of that 300 basis point historic outperformance to be eroded slightly going forward. But again, we can't say for certain until we get that final decision later on this year.
Helpful context. Thank you. And moving on to something maybe a little bit more aspirational prospectively in Western Canada, I see you're going to be adding another 19 EV charging stations in 2019 2020. Can you comment on the rationale? Is it more of a strategic toehold that you want to establish to understand the possibilities there?
Are they already economic on a standalone basis? And what might be the ultimate potential of that foray into the EV world?
Yes. This is, we'll call it, a very small project and as you say, like, dipping our toe into it. We really believe in the future electrification of transportation industry and getting our experience with the EV stations here in our home province will be a good foundation for future growth and opportunity in that market as we move forward. But it's not going to be a big moneymaker for us, that's for sure, our first twenty stations.
Our next question comes from Ben Pham of BMO Capital Markets.
Some of your tax benefits that you booked during the quarter and both regulated, non regulated. I'm just curious on the regulated side. Can you remind me, is that going to be a flow through benefit to your customers eventually? Do you got to keep some of that upside in the PBR
regime? No. Good morning, Ben. Those the upside in the regulated companies comes from accelerated capital cost allowance measures that were introduced by the Government of Canada and enacted in April of 2019. So it is kind of a go forward benefit to us.
And those upside is not passed on to customers through PBR2.
Okay. So you realize ROE that you had expected beginning of the year, I mean, it looks like there's some nice upside potential from
Sorry, yes, that helps both our electricity distribution and natural gas distribution companies. And that goes to, as we've been saying, like restock the savings shelves and the earnings opportunities. So that would help us get back to actually we kind of already are at that the first trigger of 300 basis points 2 years in a row. Bear in mind that neither of those companies exceeded 300 basis points last year. So, 500 basis points is not in the cards for either of those 2 companies this year.
So, 2019 will not in our estimates right now result in a reopener for either of those companies.
That's great. And my second question, maybe with your asset sales on the power side and maybe a refresh on your BD thoughts on just specifically on the power and some news on Heartland being pushed up the regulatory. I mean, are you still on Old man, but are you still looking to build up power in Alberta and Canada generally?
Probably not in Alberta, Ben. Take a look at the market, it's oversupplied right now. The government announced yesterday that they'll be sticking with the energy only market and kind of shelving the plans or holding the plans to conversion to capacity market in advance. Either way, we don't view the ability for Canadian utilities to secure long term contracts, profitable long term contracts in the Alberta market as something that's available in the market right now given the oversupply position. And we are looking for utility, long term contracted assets.
So, to the extent that we could find those generation opportunities in the rest of Canada, we would look at that.
We are
attempting or not more than attempting, we are diversifying geographically outside of Alberta and Canada as well. So really our target markets and we're looking at the rest of Canada, the United States, Latin America and Australia as well.
Our next question comes from Andrew Kuske of Credit Suisse.
Thank you. Good morning. Last year, you had a lot of heavy lifting with restructuring costs. And I guess the question really is you've had some pretty big reductions in operating expenses in a number of the segments. Are you really seeing the full benefit of just all the heavy lifting you did in the past years this time around?
And are these kinds of the run rates we should think about into the future?
Good morning, Andrew. Thanks. Yes, we are seeing the benefits of those, the restructuring that we did. We took a restructuring charge in Q2 of 2018. That helped with the lower operating costs.
We're seeing the benefit of those lower run rates now. We are continuing to look for advancements and opportunities and efficiencies with regards to the remaining base of the operating costs through information technology improvements and improvements to our workforce management and asset management in our utility systems. So, we're continuing to advance opportunities to help lower that run rate going forward. And again, those go to help bolster our returns on equity above that, the approved returns that we've been seeing in the last number of years.
Okay. Thank you. I appreciate the color. And then just on the capital management, you've obviously had a few large scale monetizations, which in their path to closing at this stage. So how do you think about further capital management just of your existing asset base and then deployments?
And I know you touched upon this earlier on the call, but deployments by looking at other things you can do in the core Alberta base or just elsewhere and how do you weigh the opportunity set?
In terms of our existing portfolio, we continue to review as part of our ongoing process where we review our existing assets and the strategic fit and performance what have you that has led to monetization of the generation assets and Alberta PowerLine. So, we continue to look at that as part of our normal course of business. In terms of redeployment of that capital, I think we've kind of we're patient with the capital. We're looking for the right opportunity, utility and utility along with the businesses working on opportunities as we speak. So, we'll continue on that path until we can effectively redeploy our capital.
Okay. That's great. Thank
Our next question comes from Maurice Choi of RBC Capital Markets. Thank you
and good morning. Just my first question is about, I guess, capital deployment again. I wonder whether you could provide us with an update on your discussions with the credit rating agencies, how discussions there may or may not affect how you look at what you buy, where you buy and the types of assets that you're looking at?
Thanks, Maurice. We discussed the monetization of our generation and Alberta PowerLine with our credit raters, I'll say, commencing last year. We with that those sales, we'll say that improves the quality of the earnings, predictable reliability, reliable earnings. Our percent share right now from regulated assets is, I'll say, very high, north of 90%. We believe that really should put us being judged on the S and P's low volatility table, which would bring our FFO to debt levels down to about 10% to 11% in order to maintain our credit rating.
So in order to maintain that credit rating, if we were to go on the low volatility table, we would be looking at targets in the M and A world that would help us stay on that low volatility table. So you're looking at the utility and utility like investments that can continue to provide that high quality, stable cash flows and earnings. So those I'll say those are the credit rating implications of our or not implications, I should say, information that forms our view as to future deployment on the capital.
And just to clarify, have they already commented on putting you in a low volatility table? Is there a timing that you can provide us on that decision?
No, they have not. I mean, we received confirmation of CU Inc. Credit rating from DBRS this past week. We expect to hear from Standard and Poor's on our current credit review, I'll say, in the imminent future. So either July or August, we expect to hear from S and P.
Okay. And then my second question and this is you've already touched upon it on the government's decision to keep an energy only market. Is there should we expect any impact at all on your sale process, whether it is the timing, the pricing or the overall process?
No, there is no impact on our sale process as a result of the change in the market design in Alberta for any or either of the remaining two transactions that are expected to close in the second half of 2019.
Our next question comes from Jeremy Rosenfield of Industrial Alliance Securities.
Just one more follow-up, I guess, on the outlook for capital deployment. I'm just curious, Dennis, when you're looking at growth opportunities, you highlighted on geographies, etcetera, and risk criteria. But in terms of sort of accretion and timing, are you thinking in terms of operating assets or an operating platform or are you thinking of investment opportunities that are, let's call them late stage development assets that could be built out. So there could be lag between deploying the capital and then when you start to realize earnings and cash flows from that investment?
Thanks, Jeremy. I don't think I can rule I wouldn't want to rule out either of those. I mean, for operating assets on the M and A side, We're looking at that platforms for future growth. I mean, we're prepared to invest now for existing kind of expansion from those assets. So a platform for target markets we're looking for is we're open to.
In terms of late stage developed assets, we would look at that. We're also looking at greenfield opportunities as well, which would the late stage once the project has been derisked, you pay for that. So don't know how much that earnings opportunity there would be if it comes down to a strict cost of capital and there's not much we can add in terms of our operating regulatory expertise. I don't think we would win on a street fight with our cost of capital, but we would look at late stage development opportunities.
Okay. So it sounds like nothing is off the table. Okay, good. That's it for me. Thank you.
Thanks, Jeremy.
This concludes the question and answer session. I'd like to turn the conference back over to Mr. Myles Dougan for any closing remarks.
Thanks Ariel and thank you all for participating this morning. We very much appreciate your interest in Canadian Utilities and we look forward to speaking with you again soon. Bye for now.