AltaGas' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar. 3.14 | About: AltaGas Ltd. (ATGFF)

AltaGas Ltd. (OTCPK:ATGFF) Q4 2013 Earnings Conference Call February 27, 2014 11:00 AM ET

Executives

Jess Nieukerk - Director of Finance and Communications

David Cornhill - Chairman and CEO

David Harris - COO

Debbie Stein - SVP of Finance and CFO

Analysts

David Noseworthy - CIBC

Carl Kirst - BMO Capital Markets

Steven Paget - FirstEnergy

Robert Kwan - RBC Capital Markets

Matthew Akman - Scotiabank

Operator

Good morning, ladies and gentlemen, and welcome to the AltaGas Ltd. conference call.

I would like to turn the meeting over to Mr. Jess Nieukerk, Director of Finance and Communications. Please go ahead, Mr. Nieukerk.

Jess Nieukerk

Thank you. Good morning, everyone. Welcome to AltaGas' fourth quarter and year end 2013 conference call. Speaking today are David Cornhill, Chairman and Chief Executive Officer, David Harris, Chief Operating Officer and Debbie Stein, Senior Vice President of Finance and Chief Financial Officer. After some formal comments this morning, we will have a question-and-answer session.

Before we begin, I would like to remind you that certain information presented today may include forward-looking statements. Such statements reflect the corporation's current expectations, estimates, projections and assumptions. These forward-looking statements are not guarantees of future performance and they are subject to certain risks which could cause actual performance and financial results to vary materially from those contemplated in the forward-looking statements. For additional information on these risks, please take a look at our annual information form under the heading Risk Factors.

I will now turn the call over to David Cornhill.

David Cornhill

Thank you, Jess. Good morning everyone. 2013 was a busy and outstanding year for AltaGas. Our business delivered exceptional results, our earnings per share increased by 31% to a $1.51, our EBITDA was up 51% achieving over a half a billion dollars for the first time in our history. And at over $400 million our funds from operations were up by 17% on a per share basis. Our results were driven by strong operations and positive growth in all three of our business segments. Our utilities performed extremely well. SimCo was the biggest driver and delivered per share results that exceeded our expectations.

SimCo benefited from colder than normal temperatures as did several of our other utilities. Our gas segment benefited from higher inlet volumes, this was due to increased producer activity in liquids rich areas and asset addition.

In power, our operations were strong, we benefited from higher power prices in Alberta and from the acquisition of Blythe. The strengths shown in our operations gave our Board the confidence to raise our dividend in 2013 from a $1.44 to a $1.53, a 6.25% increase. We have many major accomplishments in 2013. We established a significant joint venture with Idemitsu, we gained a solid foothold in the US power market with Blythe. This added over 500 megawatts of clean generation.

We significantly enhanced our mid-stream capability with Petrogas, their logistics and marketing capabilities allows us to provide greater service to our customers. We made excellent progress on our northwest projects, Forest Kerr was mechanically complete. We announced Volcano was two years ahead of schedule. David Harris will provide more details on the projects. We are proud of all these accomplishments. They are a clear reflection of the capability and strength of the company. When we look forward our focus is straight forward, we have over $2.5 billion worth of growth opportunities for our business.

Almost half of the growth is already secured and we’ll continue to progress on the other half. We have 2-5 billion in energy export opportunities which we continue to make good progress on. We expect to continue delivering greater than 10% growth in earnings and cash flow per share for the foreseeable future. For 2014 our investment plans are, bring Forest Kerr online by midyear and Volcano shortly thereafter, advance in McClymont Creek, ensuring it stays on track for 2015. Start construction on our Cold Lake pipeline expansion and our Cogen3 plant at our Hermatten facility, together these represent an investment of $75 million, at our utilities we increased planned spend by almost 25% to a 185 million for 2014.

This is a strong start to our five year target of 750 million capital spent. In Nova Scotia we’re planning major investments we’re looking to commit to investments of almost 150 million in utilities and gas related projects, roughly 45 million relates to our Heritage gas utility in 2014. It is part of the 185 million I mentioned earlier.

In Pictou County, Heritage gas is currently completing a pipeline expansion to serve major industrial customers. This pipeline will enhance our ability to serve additional customers in Pictou County. A recent Nova Scotia utility review board decision will allow more residential customers to receive gas in a shorter timeline. We are pleased to be able to service more residential customers more quickly. The remaining 100 million relates to Alton natural gas storage project. Earlier this month we acquired the remaining 50% ownership interest in this project. This gas storage project will help insure our security of gas supply in the Maritimes and less in the volatility of gas price. We expect to begin construction in Q2 of 2014 subject to the normal commercial arrangements and regulatory approvals.

We also continue to push several other projects forward; we have made significant progress on regional LNG. We have a five year plan to build out this business to approximately 500,000 gallons a day. This will require an investment of approximately $250 million, regional LNG is scalable and investment will be made over a five year period.

We’re confident we can do this; we already have several sites for our projects on Northern BC in the Fort Nelson to Prince Rupert corridor. Regional LNG can provide significant cost savings for our customers. It is also is much cleaner and significantly reduced emissions. Once the business is fully built out the greenhouse gas savings would be equivalent to taking over 50,000 cars off the road.

We’re moving forward with initial LNG project in Dawson Creek, the $22 million project could be supplying LNG to cut some risk early as late 2014. David Harris will provide updates on AltaGas' plants to meet demand for new -- new gas infrastructure, the potential Blythe expansion and our energy export initiatives. Before turning the call over to him, let me comment on the proposed BC LNG tax.

We’re evaluating the proposed tax to understand the impact on our project. At this point, the impact is uncertain. It is clear however that the tax puts BC at a disadvantage to compete with other suppliers in the well. The tax will also impact regional LNG resulting in higher costs to our customers.

To close, 2014 will be another big year for the Company. We expect greater than 10% growth in earnings in cash flow; Forrest Kerr and Volcano in particular will be a significant step change to AltaGas with strong secured cash flows.

This growth means we have ample room to raise our dividend and stay within our pay-out ratio of 40% to 50% of FFO. Our dividend is rock solid. This is exciting time for AltaGas. We have many exciting growth projects ahead and we have the organizational capability to execute on them successfully. I will now pass the call on to David Harris.

David Harris

Thank you David and good morning everyone. Operations across our three business segments were strong in the fourth quarter with normalized operating income of 123.8 million compared to 105.1 million in fourth quarter 2012. Normalized operating income from our gas business increased 45% to 38.8 million, our gas business benefit from the acquisition of Petrogas and the ramp up in volumes in liquid rich areas despite lower realized frac spreads.

Total volumes process increased by over 160 Mmcf per day to 1,454 Mmcf per day compared to Q4 2012. The increase was driven by higher volumes of their Harmattan co-stream facility and increased at Gordondale and Blair Creek. Realized frac spreads was approximately $25 per barrel compared to approximately $32 per barrel in Q4 2012.

Normalized operating income from our power business was 29.6 million an increase of 5.3% compared to the fourth quarter of 2012, while it contributed significantly to the power segment exceeding our expectations but was offset by lower power prices realized in Alberta. The average realized power price in Alberta was approximately $65 of megawatt hour compared to approximately $73 a megawatt hour for the same period last year.

Our utility business had another solid quarter; normalized operating income was 55.4 million, an increase of approximately 10% over Q4 2012. Higher earnings were driven by rate based growth and by colder weather compared to Q4 2012 in Michigan and Nova Scotia.

For the full year operating income for all three business segments increased 46% to 385.6 million. Contributing to the increase was the first full year contribution of SEMCO, which delivered approximately 143 million in EBITDA, beating our expectations. Results also benefited from higher volumes processed, the addition of Blythe in the acquisition of our interest in Petrogas. Our gas segment processed higher average volumes in 2013 of 1,361 Mmcf per day compared to 1,261 in 2012. Higher income was also driven by higher realized power prices in Alberta of $77 a megawatt hour compared to $69 a megawatt hour in 2012.

Rate based growth and colder weather in Michigan Nova Scotia and Alberta compared to 2012. Results for the full year were partially offset by lower realized frac prices.

Looking at our Northwest projects, construction on Forrest Kerr continues ahead of schedule and on budget, determine generative sets and are mechanically complete and the project has moved into the installation and commissioning phase. We continue to monitor the progress of the NTL and it remains on track to enable us to see through the grid by mid-2014. At Volcano we have made significant progress, construction of the intake and ware installation has been completed. The power house building, turbine foundations and crane installations have also been completed, turbine generator sets are scheduled for delivery to site in March and penstock installation is set to commence in the spring and the project is on track to come online later this year.

At the McLymont Creek construction of the seven kilometer intake access road is 85% complete. Work was shut down for the winter. We expect to restart roadwork in March and complete road construction by the summer.

Excavation of the power portal has been completed and approximately 50% of the 2,800 meter power tunnel has been excavated. Excavation of the powerhouse foundation is complete and installation of the powerhouse foundations has commenced. The project remains on track to be in service in mid-2015.

Also on the construction front, we have started detailed engineering for both our Cold Lake pipeline expansion and our Cogen III facility. For Cold Lake we are in a regulatory and permitting process and in talks with First Nations. Pending all approvals, construction is expected to begin around midyear. With Cogen III we’ve already procured the major equipment and construction is expected to start in May.

Finally, let me talk about some of the other gross initiatives we have going on. In gas, we are working with producers to meet their demand for new infrastructure. We are in on-going discussions with producers to build new gas processing facilities with feasibility studies and preliminary engineering underway. The opportunities include gas processing, NGL extraction and fractionation facilities as well as associated infrastructure. We expect to complete some of these studies in the following quarters of this year.

In power, we continue to evaluate the potential expansion that would double our capacity of life. There are a number of RFPs that helps support this and we are targeting a decision by the end of this year.

Finally, on our NGL export initiatives, results from the pre-feasibility and pre-feed studies are being evaluated. We’re in the site selection process for both LPG and LNG and our work with the First Nations is progressing well. We expect to be in a position to make investment decisions by mid-2014. With respect to LPG, AltaGas, Petrogas and Idemitsu together bring significant size, scale and expertise to move this initiative forward. Petrogas’ potential LPG storage development with ATCO is also a great advantage. It gives Petrogas ability to source, store and market LPG from Ft. Saskatchewan. With the progress made we expect LPG exports could begin in the early part of 2016.

Our work on LNG has been cantered on two fronts; first, we continue to be supportive of a solution for the restructuring proceedings with Douglas Channel LNG. Douglas Channel LNG would utilize the excess capacity on our PNG pipeline; second, we continue to focus on our Triton LNG project. Our Triton LNG project made an application to the NEB seeking approval to export 2.3 million tons of LNG per year and we expect to respond by Q3. Regarding our PNG pipeline expansion, The BC Environmental Assessment Office began the public consultation period. The pre-feed study for the pipeline expansion is expected to conclude by June while environmental studies are underway.

That concludes my prepared remarks. I’ll now pass the call over to Debbie.

Debbie Stein

Thank you, David. Good morning everyone and thank you for joining our call this morning. Today, we reported strong results, both on an annual and quarterly basis. We finished the year with normalized earnings of $0.49 per share for fourth quarter, an 11% increase over fourth quarter 2012. Our Q4 EBITDA increased 18% to $153.3 million and funds from operations were $117.1 million.

For the full year, normalized net income increased 61% to $175.8 million or $1.51 per share compared to $109.5 million or $1.15 per share for full year 2012. Normalized EBITDA for 2013 was a record $508.9 million, an increase of 51% year-over-year.

For 2013, normalized funds from operations increased by 43% to $402.7 million compared to $281 million in 2012. On a per share basis, this was a 17% increase from $2.96 in 2012 to $3.47 in 2013. This translates to a dividend pay-out ratio of 43%, which is at the lower end of our range of 40% to 50%.

On a GAAP basis, net income applicable to common shares for fourth quarter 2013 was 53.2 million or $0.44 per share compared to 26.7 million or $0.25 per share for fourth quarter 2012. On a GAAP basis, net income applicable to common shares for the full year 2013 was $181.5 million or $1.56 per share compared to $101.8 million or $1.07 per share for 2012. Interest expense for fourth quarter 2013 was 27.1 million and 102.1 million for full year 2013. This is higher than same periods last year as a result of higher debt balances from the addition of new assets and lower capitalized interest partly offset by lower interest rates.

In fourth quarter 2013, we reported an income tax expense of $14.5 million compared to $18.5 million in same quarter last year. For the full year, we reported income tax expense of $40.1 million compared to $46.1 million in 2012. Income tax was higher due to higher earnings but was more than offset by adjustments made to defer tax liabilities and as a result of a tax recovery after enactment of a Canadian tax amendment. As a result of our effective tax rate for full year 2013 was 16.1% compared to 27.7% last year, or in 2013 -- sorry in 2012 -- sorry. In 2014, we expect the effective tax rate to be approximately 25%.

For the full year 2013, net invested capital was $1.4 billion. The majority of which was related to the acquisition of Blythe, Petrogas and construction of the northwest projects. For 2014, we expect our capital expenditures to be in the range of $400 million to $500 million. Our balance sheet remained strong with debt to total capitalization of 53.1%. We have been active on the financing side, in fourth quarter we successfully completed an 8 million share issuance for Series E preferred shares for gross proceeds of $200 million. We also entered into an agreement for a $1.4 billion unsecured credit facility with the expiration date of December 2017. Early this year we issued $300 million in notes, a 100 million of which was our first-ever 30 year MTN.

As a result, our average debt maturity has been extended and is now seven years and continues to be very manageable. We will continue to balance our long-term and short-term financing as well as floating and fixed rate debt in order to execute a financing strategy that support our business strategy. And with that I will turn the call back to Jess.

Jess Nieukerk

Thanks Debbie. Operator, we will now take Q&A please.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone line. (Operator Instructions) The first question is from the David Noseworthy with CIBC. Please go ahead.

David Noseworthy - CIBC

Hi, good afternoon. Just a quick question on the gas. You mentioned that you're working with producers for a number of new processing facilities, NGL, extraction, fractionation. Can you provide any colour as to when you think these will go from discussions to agreements?

David Cornhill

We are hopeful this year some of them, some of them are much longer lead times but we would be hopeful this year.

David Noseworthy – CIBC

Okay. And when you look at the $500 million to $500 million of capital planned for this year, would there be any consideration in that number towards some of these potential projects?

David Cornhill

No.

David Noseworthy – CIBC

Okay, fair enough. And then in terms of the California power market, I was wondering if you could take a moment and just comment on what we're seeing there, I guess near term there's the issue of the snowpack being so low and drought concerns. Does that provide any kind of urgency or motivation for utilities to recontract Blythe or expand Blythe?

David Cornhill

I think it does, not just ourselves but the gas turbine generation in general within California is -- I think they got one of the or the most aggressive renewable programs in the U.S. So as you turnaround and expand renewable that have intermittent capability in a subject to mother nature more than conventional power, certainly helps add robustness for the utilities there to turnaround and push RFPs out to turnaround and underpin that from base gas generation, David.

David Noseworthy - CIBC

And if your utilization is higher on Blythe and generally pricing is stronger in California, how does that flow through, does any of that flow through to you in the quarter or is that, it’s just all capacity anyhow and so that you're not seeing any of that?

David Cornhill

No, it’s mostly 99% of that’s all capacity. We do see a little bit of uplift as when you do run is the margin you pick up on heat rate but for the sake of Blythe it’s all about capacity payment.

David Noseworthy - CIBC

Okay. Appreciate that. And then just finally on Alton Gas Storage, have there been any preliminary discussions with the Nova Scotia Utility and Review Board regarding this project and is there an appetite for this project? It sounds with -- what was it, a Q2 construction start; you must have socialized this idea already?

David Cornhill

Yes, this project would not be a regulated project.

David Noseworthy – CIBC

Okay. So then what is the 20 year term agreement, how does that work, is it with…?

David Cornhill

Well we would be negotiating with customers to take firm supply arrangements there, so they would take capacity.

David Noseworthy – CIBC

Okay. So, Heritage could be the customer and then that would be a cost pass-through?

David Cornhill

Yes.

David Noseworthy – CIBC

Okay. And on the approval will be more of can Heritage get that approved as a prudent expense?

David Cornhill

Yes.

Operator

Thank you. The next question is from Carl Kirst with BMO. Please go ahead.

Carl Kirst - BMO Capital Markets

Thanks. Good morning everybody. Nice results. Maybe a couple of questions, first on the Forrest Kerr and recognizing what sort of the commentary around midyear, perhaps I can ask it this way. Do you still see it as a feasible timeframe of the NTL coming in sort of June 1st with a 30-day sync and having Forrest Kerr earning revenues by July 1st or is that something that we should put push back a little bit?

David Cornhill

No, we are solidly on track for that projection.

Carl Kirst - BMO Capital Markets

Excellent. And David was asking about the drought in California but as we look at that sort of in BC, do you all look at I mean obviously a 60-year agreement that’s drop in the bucket but is there a potential that 2014 volume utilization as you are seeing it now comes on perhaps less than initially expected or do you not expect to really impact given the conservative assumptions that were baked in the Forrest Kerr?

David Cornhill

One of the conservative assumptions during the main production we have lots of spare, the snowpack was actually higher than normal, it’s not quite as well watched as California snowpack but last reports that we saw they are running somewhere north of 120% and normal last ones I saw. So there was a good snowpack on top of that a lot of the water is glacier fed.

Carl Kirst - BMO Capital Markets

Excellent. And then maybe last question if I could, to the extent that we’re looking at maybe midyear FID on the LPG export. Is there still a potential of an FID on the LNG export by the end of the year? Or has the BC LNG text inserted more of the ranch maybe than you otherwise were expecting or does that kind of just keeping on the parallel process and the year-end is still feasible?

David Cornhill

LNG is more complex, so there is more variability on that date, we still are working hard for that date, the tax plus other things, it’s just more complex than the LPG export opportunity. So at this point we haven’t moved it but there is more variability in our -- or lack of visibility in our forecasting.

Operator

Thank you. The next question is from Steven Paget with FirstEnergy Capital. Please go ahead.

Steven Paget - FirstEnergy

Could you please comment on your cash tax outlook for 2014?

Debbie Stein

If you just give me a minute here.

Steven Paget - FirstEnergy

Of course, why don’t I ask my second question first? Maybe if you could comment on equity distribution out of Petrogas in the fourth quarter and what your outlook might be for the first quarter?

David Cornhill

This a non-accountant view; I view the earnings from Petrogas and the equity as basically cash, we have the flexibility to move cash out full capability and actually contractual agreements to move a lion's share out on an annual basis. But from an equity accounting perspective I think we may see dividends twice a year.

Debbie Stein

Steven on the current assets, about 15 million for the year.

Steven Paget - FirstEnergy

15 million. Thank you Debbie. Those are my questions.

Operator

Thank you. The next question is from Robert Kwan with RBC Capital Markets. Please go ahead.

Robert Kwan - RBC Capital Markets

If I can just come back to some of the prospective projects around gas infrastructure and these feasibility studies. Are they being funded by customers?

David Cornhill

Yes.

Robert Kwan - RBC Capital Markets

And then so is there in a given place that by them funding it basically that would then turn into your project? If they’re happy with the feasibility study.

David Cornhill

I would say there is a high probability that that would go in that direction.

Robert Kwan - RBC Capital Markets

That’s great. And then just around NGL fractionation. Can you talk a little bit about what the plans are? Is that something you’d be looking at one of your existing sites or and also just the scale? Is it something similar to what we would see in Fort Saskatchewan or is it something a little bit smaller?

David Cornhill

I think I’ll -- it could be significant, I think we need a little more time for that to develop before I can propose new Greenfield as well as expanding our existing.

Robert Kwan - RBC Capital Markets

Just if I can clarify in the equity distributions Debbie you said twice the year. So is it fair that there wasn’t like -- or what quarters would be thinking about?

Debbie Stein

Probably Q2 and Q4 would be routine, but like David said we do have the ability to see that potentially more frequently.

Robert Kwan - RBC Capital Markets

And was there anything with relation to Sun B where equity distributions matching cash generation?

Debbie Stein

That typically happens on the year-end depending on the kind of fourth quarter you have. It’s really all about the timing of the cash flow in terms of when the cash comes in from the partnership.

Robert Kwan - RBC Capital Markets

So I guess if we look at Q4 was there something held back that we…

Debbie Stein

Yes there was less cash from an equity point of view, so we didn’t get any cash on the Petrogas earnings. And on the power there was less cash that came in the door compared to earnings in Q4 -- for Q4 2013 compared to Q4 2012.

Robert Kwan - RBC Capital Markets

The less though, was that due to the performance because of the power price or was that due to actually something being held back?

Debbie Stein

No nothing was held back, it’s just timing of when the cash flow comes in the door. So it came in in January.

Robert Kwan - RBC Capital Markets

Last question just on the LNG tax, with your regional LNG do you sense that the way it was awarded by the government to tax all LNG in the province Was that -- was there a sense that that was trying to close a loop hole or did you think that they were actually trying to target any of the local/regional initiatives?

David Cornhill

I’m not sure. Your guess is as good as mine.

Robert Kwan - RBC Capital Markets

I assume is there something that you will be talking with the government to see if you can at least have that lifted on local sales?

David Cornhill

I think we encourage regional LNG and to converting from diesel, we think it’s in the best interest of the province.

Operator

Thank you. The next question is from [indiscernible] with Scotia Bank. Please go ahead.

Matthew Akman - Scotiabank

Hi. It's Matthew Ackman, actually, a couple quick questions on utility. First, weather was favourable in the quarter. But I'm just reading from page 14 of the MD&A it looks like end-use was kind of flat year-over-year but you attributed higher earnings to higher use or I guess to weather. So I'm just wondering if you could kind of square that.

Debbie Stein

So Matthew on the increase quarter-over-quarter some of it was weather, some of it was higher usage on transportation and some of the industrial users. And then there was a little bit on FX as well.

Matthew Akman - Scotiabank

I guess, what I'm wondering, in part Debbie, is whether there -- sorry, to use the term, but is weather, there is I guess more positive impact, if I could call that on cold weather in Michigan versus maybe Alaska. Because last year it looked like weather was much colder in Alaska than this year in Michigan. So, is that part of it?

Debbie Stein

Yes, it was colder in Michigan than it was in Alaska in Q4.

Matthew Akman - Scotiabank

So that -- so, okay.

David Cornhill

Matthew, Michigan, see the biggest variants of weather and probably Alaska and Alberta.

Matthew Akman - Scotiabank

Yes, okay. That’s what its looks like, okay thank you. In terms of your guidance for the ROE decision that's coming in British Columbia is I guess and I'm on page eight now, return on equity decisions on PNG not expected to be to materially impact results. What was the ROE that you’re booking on PNG in 2013?

Debbie Stein

1.75 million, for the Western Lake and the Eastern I think was slightly below that.

Matthew Akman - Scotiabank

Okay. So are you suggesting that you don’t expect significant changes in the allowed ROE?

Debbie Stein

No, we don’t. That’s our takeaway on it based on our historical experience with the BCUC and how they look at the risk profile of the PNG system.

Operator

Thank you. There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Nieukerk.

Jess Nieukerk

Thank you operator. We’ll just finish with a few comments here from David Cornhill.

David Cornhill

Thank you. I just want to take the opportunity to thank David Wright, he is retiring at the end of March and done work for us with us for seven years and been a major part now. He is retiring and enjoying life and improving his golf game so he doesn’t have to buy his wife so many shoes. So I just want to mentions, thank him he will be as it will be the last conference call that he sits in on. So I just want to everyone know that he is planning to retire at the end of March. Thank you.

Jess Nieukerk

Thanks everybody for joining us today. And we are available for any follow up questions you may have.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.

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