Thank you for standing by. This is the conference operator. Welcome to the Canadian Utilities Limited Year End 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.
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 year end 2018 conference call. With me today are Senior Vice President and Chief Financial Officer, Dennis DeChamplain Senior Financial Officer and Controller, Derek Cook 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 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. And for more information on these risks and uncertainties, please see the reports filed by Canadian Utilities with 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 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, Myles, and good morning, everyone. Thanks very much for joining us today on our year end 2018 conference call. Canadian Utilities announced higher adjusted earnings in 2018 of $607,000,000 or $2.24 per share, compared to $602,000,000 or $2.23 per share in 2017. Canadian Utilities had 4th quarter 2018 adjusted earnings of $187,000,000 or $0.69 per share compared to $169,000,000 or $0.63 per share in the Q4 of 2017. Higher Q4 2018 earnings compared to the same period in 2017 were due to strong results in all of our business segments.
Strong earnings for 2018 were driven by our non regulated businesses, mainly due to improved results in electricity generation and in Alberta PowerLine. The electricity generation business benefited from improved market conditions in 2018 as power prices in Alberta averaged $55 per megawatt hour compared to $22 per megawatt hour in 2017. The return of Battle River Unit 5 power purchase arrangement was also beneficial for cash flow and it triggered the recognition of earnings mainly because we maintained high plant availability through our continued operational excellence. In 2018, our electricity generation business also unlocked hidden value on our balance sheet and generated additional earnings through the sale of the Barking Power assets in the UK. From a cash flow perspective, the total proceeds received on the sale of Barking Power were $219,000,000 We also recognized earnings from this transactions related to the reversal of reclamation costs.
With the sale of the Barking Power site to another party, the funds that were previously put aside to help pay for reclamation for the site were no longer needed, and we reversed them resulting in an upside to earnings in 2018. The Barking asset sale is consistent with our strategy of selling mature assets and recycling the proceeds into growing areas of our company. We have more work to do on that aspect of our strategy in 2019. As you know, in September, we announced that we are exploring strategic alternatives for our Canadian electricity generation business. We're also exploring strategic alternatives for a sell down of our 80% ownership interest in Alberta PowerLine.
We are working through these strategic reviews now and may have an update for the market later in the Q1 of 2019. Canadian Utilities invested $1,100,000,000 in regulated utilities in 2018 after depreciation and a few other adjustments, that capital investment generated about $500,000,000 in rate base growth or about 4% growth over the last year. This $500,000,000 in rate based growth is consistent with the guidance that we provided to the market. But even with this rate based growth, earnings in some of our utilities were lower compared to 2017. These lower earnings were mainly due to the impact of the rate rebasing in the natural gas and electricity distribution utilities under performance based regulation or PBR.
With the rate rebasing, we gave up about $115,000,000 in adjusted earnings in 2018 compared to 2017. This was largely due to resetting our revenues to match lower our lower operating cost structure. That lower revenue helps out our customers and was the starting point on January 1, 2018 for us. Our task was to find new operational efficiencies in 2018. We did exactly that and generated about $50,000,000 of new earnings growth in those PVR utilities in 2018.
Our earnings in the PBR utilities generated strong financial returns on equity of about 11% in 2018. This is about 2 50 basis points above the approved ROE of 8.5%. This ROE achievement is consistent with what we told investors we were aiming for this year. These excellent results are due to the hard work of our employees as we continued our transformation to become an even more efficient organization, and I applaud all of our employees for their great work in 2018. Going forward, we expect these operational savings to grow and to generate continued strong ROEs well above the approved rate of 8.5%.
I do have some late breaking regulatory news to share with you. In June of 2018, the AUC initiated a process as the PBR reopener thresholds were triggered by our electricity distribution and natural gas distribution companies. The AUC had set up a 2 phase process. The first phase of the proceeding was to determine if a reopener proceeding was warranted. Last night, the Alberta Utilities Commission released its decision on this first phase of the reopener provision for the 2013 to 2017 PBR term.
The AUC determined that the 2013 to 2017 PBR plan will not be reopened. Based on this decision, our adjusted earnings as recorded in the years 2013 to 2017 are unchanged and there will not be a second phase to this process. On the unregulated side of the business, we invested $800,000,000 in long term contracted assets, including the acquisition of a hydroelectric power station in Mexico. We invested $664,000,000 in the construction of the Alberta PowerLine project. This project is ahead of schedule and the expected energization date has been advanced to March 2019 from the original target date of June 2019.
This resulted in the recognition of an early energization incentive in the 4th quarter's earnings. Going forward, in the period 2019 to 2021, we plan to invest $3,600,000,000 in regulated utility and long term contracted assets in Canada, Australia and Latin America. These investments will continue to strengthen our high quality earnings base. On January 10, 2019, Canadian Utilities declared a 1st quarter dividend for 2019 of $0.422 per share. Canadian Utilities has increased its dividend per share for 47 consecutive years, the longest track record of annual dividend increases of any publicly traded Canadian company.
All in all, 2018 was a very good year for Canadian Utilities. We overcame significant regulatory headwinds and grew earnings. We increased the dividend and we continued on our transformation path. All of these achievements will create long term value for our share owners. That concludes my prepared remarks.
And I'll now turn the call back over to Miles.
Thank you, Dennis. I'll now turn the call over to our conference coordinator for your questions.
Thank you. We will now begin the question and answer Our first question comes from Patrick Kenny of National Bank Financial.
Good morning, Dennis. Thanks for the update there. Just with respect to rate rebasing, I'm just curious how long you think it'll take to recover the full $115,000,000 impact. I think you said you've already recovered roughly $50,000,000 Just wondering how we should be thinking about the rest coming into play here through 2019 and beyond?
Good morning, Pat. Thanks for the question. Both of our utilities are kind of well on their way and we had a great start out of the gate. If you look back to where we were in 2017, that was the 5th and final year of that PBR1 term. We don't expect to get to those levels until the back end of the PBR2 term, which rolls out to 2022.
Sorry about that. So say we're on a great path. The reopeners for PBR2 are the same as they were in PBR1. That's if we exceed 300 basis points for any 2 consecutive years or 500 basis points in any 1 year. So those are the I'm not going to say the limiters on our returns, but those are items that we keep in mind as we drive our performance forward.
Great. Sounds like you're well on pace there. And then just on the decision to shut off the DRIP here, curious if that relates to any optimism around the sale process here for the power assets or now with Alberta PowerLine. Just can you speak to whether that's related to any confidence in those processes or is that just purely related to your internal funding capabilities outside of any asset sales?
Yes. We launched the DRIP in 2012 when our cash flows were about $1,000,000,000 a year and we were embarking on the big build investment in the regulated utilities here in Alberta. Since that time, the cash flows have grown to about $1,500,000,000 per year. And with our current plans, we don't need the DRIP. So it has been suspended.
It is not primarily linked to the Alberta PowerLine or the strategic reviews of Alberta PowerLine or the Canadian Electricity Business.
Okay, great. Thanks for that. Maybe last question if I could. Just with respect to the election in the spring here, do you see a potential change in government having any impact or tilting your capital allocation strategy either back towards Alberta or potentially towards more international? Just wanted to get your thoughts there.
I don't think the outcome of the election will influence that geographic diversification. We are heavily weighted in Alberta with over 90% of our assets. And irrespective of the government of the day, our long term plans will be to look to diversify that regulatory economic political risk out of Alberta. So we'll continue with our international diversification expansion.
Okay, that's great. Thank you very much.
Thanks, Todd.
Our next question comes from Mark Jarvi of CIBC Capital Markets.
Good morning.
Good morning, Mark. Yes.
I just want to touch on the earnings for the natural gas distribution utility. It was up year over year. Obviously, you had a rebase. Maybe you can just kind of walk through what allows you guys to have that strong performance in that utility this
quarter? Well, we've been proceeding with our integration between our transmission and distribution utilities. Those integration savings, they build over time. So you're seeing some of the results in the 4th quarter. We also have our efficiency measures that we've implemented like our aerial meter reading program.
Those continue to deliver savings in 2018. And those factors are building with the 20 18 Q4 results. So you'll see that manifested there.
Okay. And then maybe just on the Alberta Power line, you just talked about a sell down interest. Sort of how what's sort of the range of the ownership position you want to hold on to? Or would you be potentially open to the idea of completely selling your interest in the whole project or 80% interest?
Yes, we're running through the process right now. We're pursuing the shared equity ownership with indigenous communities, so providing them an opportunity. We're also considering the sell down of the remaining equity. So we'll see what those offers or what the price is. We can see ourselves going all the way down to 0 if that's available.
Either way, ATCO Electric, the electricity transmission company, will continue to operate that line over its 35 year concession agreement.
Okay. Thanks.
Our next question comes from Andrew Kuske of Credit Suisse.
Thank you. Good morning. Maybe just the first question is, how could you maybe give some context on your business development activities at CU and how they've changed over the last 5 years? Because obviously you've gone from really robust growth in Alberta and there's still growth in Alberta, but pivoting to explore some opportunities elsewhere around the world and you've invested capital in other jurisdictions?
Good morning, Andrew. Thanks. Our BD efforts, as you say, there is still growth in Alberta and we haven't turned our back on our home province or home country. We have in our target markets Australia, Mexico, South America, we are we do have boots on the ground. We have managing directors essentially in Mexico and Chile heading up smaller business development teams and are active in those markets.
So we're moving out from Calgary and putting the focus in those target markets where we're looking at. So I think that's the big difference over the last 5 years where we are out in the marketplace in those areas where we're looking to invest.
Okay, that's helpful. And then I might have missed it in the MD and A, but the quantum of the PowerLine Energization and incentive, how much was that in the quarter?
In the quarter, that was about $12,000,000 of adjusted earnings.
Our next question comes from Robert Kwan of RBC Capital Markets.
Good morning.
If I can just come back to funding and just wondering how much CapEx do you think you can spend per year excluding the impact of any asset sales without needing to turn on the DRIP? And then if you can also talk about what an underlying prefhybrid issuance assumption would be in that?
Good morning, Robert. Our plans that we have right now, we've got about $3,600,000,000 over the 3 years. If you think our the equity support for that at 37% is around the $1,200,000,000 $1,300,000,000 of equity. Our cash flows cover that. So we do have additional capacity on our balance sheet for further growth.
Our preferred shares take up about 9% of our capital structure. So to fund additional expansion beyond that, you alluded to hybrids. We've got about $1,000,000,000 of additional capacity through prefs or hybrids. And should the opportunities arise, then we would look to probably pull the trigger on that type of financing, keeping the DRIP in mind, whether we would turn that back on. But right now, we would probably lean towards a hybrid or a pref offering before turning the DRIP back on.
Got it. So you've got kind of the balance sheet capacity on the pref hybrid as you talked about. I'm just wondering, so you've got the ability to on the 3.6, you talked about some excess room. I guess just recognizing that cash flow is not equity, how much excess per year do you think you could actually fund of growth and kind of hold the credit metrics you want?
We're tight on the credit metrics. S and P is looking for a 15% to 20 percent FFO to debt. We're below that right now. They know that and they've seen our plans and are confident in our ability to get back up to the range. So we are tight with respect to additional internal capacity given those credit metric impacts.
Got it. If I can just finish, ATCOenergy, you really kind of built that back up. I'm just wondering, A, is it profitable yet or are there still a lot of kind of upfront costs? But taking a step back, the potential sale of your Canadian power business, is the retail business strategic then going forward?
We believe the retail business is strategic. I mean with the connection to the customers here in Alberta, I mean it's a great avenue for us and our brands. So we're continuing to explore that. Any decision on our strategic review of the power business is likely not to impact retail the retail business. We are growing that business.
We're going to say we're in 3rd place with market share. We've grown to over 10% of the market. So we are continuing to sign up customers and we're looking to expand the business in 2019 and beyond.
Okay, that's great. Thanks very much.
Our next question comes from Jeremy Rosenfield of Industrial Alliance Securities.
Yes, thanks. Just a cleanup question on the energization incentive at APL that was recognized in the quarter. I'm just curious that if the March 2019 energization is not achieved for some reason, is some of that incentive subject to reversal or repayment
in 2019?
Good morning, Jeremy. Yes, there would be a reversal of it. There hasn't been any cash yet. At the end of December 2018, we were 90% complete on the project. And we had always said, the last kind of key risk trigger that we needed to get through was the onset of winter, so we'd be able to do our construction.
We were able to pass that trigger. Right now, we're about 98% complete that project. We've got maybe 10% of the line left to string. Everything that we know now is still pointing towards our ability to achieve the early energization. So never say never, but we're 98% -plus the way there right now.
Okay. I guess that's good news. It's excellent. If we could just turn to the Pembina Keephills pipeline, correct me if I'm wrong, but I believe the capital cost estimate has increased from previous disclosure. Could you just sort of clarify that for me and let me know if what maybe is causing that cost estimate to move?
Yes. We originally estimated it at $150,000,000 We're disclosing right now $200,000,000 When we there's been no change essentially in the scope of the project. We received bids back from contractors on the work and those bid prices are considerably higher than what we had baked into the original estimate. We've gone back to the customers. Customers are still all right with the cost of the project at the higher estimate.
We're working our way through the facility application with the Alberta Utilities Commission. So once that permit is obtained, we'll proceed with the construction and those costs will go into natural gas transmission's rate base. Great.
And just to be clear, the revised cost of $200,000,000 is included in the capital plan?
That's correct.
Okay. Maybe just one last question in terms of there are a few contract extensions on the power side. I think I'm maybe just going to touch only on the Primrose and Rainbow Lake contracts in Alberta. And if you could just sort of talk about strategically in terms of the Alberta power outlook, assuming that you do hold on to your Canadian asset your Alberta assets there. What are you thinking for contracted exposure versus market exposure, outlook for the Alberta power market over the near term, any thoughts you have on that?
Yes. The that the power business was built off the back of our IPP with long term contracted assets. We I think at the end of 2018, including that, we're about 50% contracted when Sheerness comes off of its PPA at the end of 2020, that 50% contracted, 50% merchant will go to about 1 third contracted and 2 thirds merchant. So for Canadian utilities, those extensions were good in order to hang on to that contracted component.
So
that's where we're at and that's why we signed up the extensions. In terms of the Alberta power market outlook, forwards are still in that mid-50s range for forward power. Capacity market coming online, the terms of that capacity market are just a 1 year term. So it's favorable for incumbent generators. We're proceeding with our coal to gas conversion plans.
We will aim to be the 1st Alberta generator to be completely off coal. So we're marching down that path in order to extract value from our assets.
Okay, good. Great. 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, operator, and thank you all for participating today. We really appreciate your interest in Canadian Utilities, and we look forward to speaking with you again soon. Bye for now.