Valener, Inc. (OTC:VNRCF) Q2 2016 Earnings Conference Call May 13, 2016 1:00 PM ET
Mariem Elsayed - Senior Advisor, IR
Sophie Brochu - President & CEO
Pierre Despars - EVP, Corporate Affairs & CFO
Ben Pham - BMO
Robert Kwan - RBC Capital Markets
Welcome to Valener's Second Quarter 2016 Earnings Conference Call. [Operator Instructions]. I will now turn the call to Ms. Mariem Elsayed, Senior Advisor, Investor Relations. Please go ahead., Ms. Elsayed.
Thank you, Sarah.Good afternoon and welcome to Valener second quarter 2016 conference call. With me today from Gaz Métro are Sophie Brochu, President and CEO and Pierre Despars, Executive Vice President, Corporate Affairs and Chief Financial Officer. This call is being webcast and I encourage you to download the support slides which are available in the investor section of Valener's website under events and presentations. As always certain subject we will cover involve forward looking information. Please refer to the cautionary notes section which can be found on the second page of our presentation as well as in our quarterly MD&A which was published earlier today and is available on our website and on CEDAR.
We may also refer to certain indicators that are non-U.S. GAAP financial measures and should not be considered in isolation or a substitute for other performance measures better in affordance with GAAP. I will now turn the call over to Sophie.
Good afternoon everyone. In the second quarter of 2016 Valener generated adjusted net income of $32.4 million unchanged from the second quarter of 2015. While Gaz Métro benefited from better results compared to last year, Seigneurie de Beaupré
wind farms experienced less favorable wind conditions. Overall these two trends offset one another explaining their relative stability year-over-year. For the first six months the net income attributable to common shareholders was $48.9 million up 2% compared to prior year period. Adjusted net income per share was $0.84 for the second quarter of 2016 compared to $0.85 the year before. This is due to the greater number of shares outstanding resulting from the success and the increased participation in the company's dividend reinvestment plan. After six months it's an improvement of $0.01 per share as the improved result in Gaz Métro more than offset the lower wind impact and the derivative [ph] effect of the trip.
On the cash flow front there is a little timing noise, Valener generated normalized operating cash flows of $11.3 million in the quarter and end of last March down $4.5 million from the year ago period. Normalized operating cash flows per common share were $0.20 compared to $0.41 per share in the prior year period. This is mainly due to the timing of a Seigneurie de Beaupré distribution. In the second quarter of last year a $4.7 million distribution was made to Valener. This year's corresponding distribution is expected to appear in the second half of the year. This timing difference was partly offset by an increase in distribution received from Gaz Métro following by the Valener's subscription of almost 4.5 million Gaz Métro unit in the second half of 2015.
And as you know Gaz Métro also raised its quarterly distributions unit orders by $0.01 per unit in late 2015. On to Gaz Métro itself on slide 5, excluding non-recurring items Gaz Métro generated net income of $140.5 million during the second quarter, an increase of 4% compared to last year. The higher net income was driven by the positive impact of the appreciation of the U.S. dollar on our U.S. operations. Growth in the Gaz Métro-QDA non-rate base investments and a timing difference between the recognition of sales and expenses in Gaz Métro-QDA. This was partly upset by lower power sales at Green Mountain Power as a result of this winter's very warm weather.
Yet despite these adverse weather conditions Gaz Métro results are stronger year-over-year. Now on a per unit basis the net income was $0.84 for the second quarter of 2016 and a $1.28 for the first six months of 2016. This is down from $0.90 in the second quarter of last year and a $1.35 for the first six months of 2015. Higher net income was more than offset by a greater number of units outstanding following the issuance of 15.5 million units and the second half of last year. That said, we expect that by the end of the fiscal 2016 Gaz Métro's net income per unit excluding non-recurring items will revert back to fiscal 2015 levels.
Let me now walk you through where we are with our latest project. On to slide 6, as you will see we are relentless in the pursuit and executor of our diversification strategy both operational and geographical and you know what it's paying off. In Montreal we are making great progress on the expansion work to triple the gas [indiscernible] capacity of our LSR plant. This summer we will be going full speed ahead with over 200 workers onsite with as always safety and security as our top priority.
Upon completion our facility will have a key faction capacity of 9 bcf per year. Although the plant is currently in operation and already shipping LNG as far as the Northeastern United States and to remote communities in Quebec. We expect the final commissioning to take place sometime in late 2016. In Vermont, the first segment of the addition Addison project was completed and gassed up in February. The second segment of construction consisting of putting an additional 49 kilometers of pipelines in the ground is now under way. We expect work to be finished by the end of this calendar year.
In [indiscernible] Quebec construction work to increase the distribution network by 72 kilometers is expected to begin in the spring. For Asbestos we obtain project approval from Regie in March and we expect the work to start in the second half of 2016. We expect both of these development projects to be completed by the end of this year.
Now next month in the Saguenay region we will begin major work to improve and strengthen the transmission network, to ensure reliable gas supply to our customers over the next 10 years. We will be building a new compression station [indiscernible] and upgrading the existing station in Saint-Maurice. The project is valued at about $80 million and work will take through 18 months to complete. Our focus on promoting greener energies is unwavering and we’ve voiced this on numerous occasions. Last quarter we shared with and highlighted some of the outcomes of the last December UN Conference Climate Change in Paris including how natural gas and Gaz Métro would be part of the solution in helping to achieve Quebec's future energy transition. And just a few short months later last April the province of Quebec released its Energy Policy 2030 confirming the role of natural gas and Gaz Métro.
Gaz Métro indeed shared a province vision for a while now and even with renewable energy. 10 years ago it was clear to us that growing the company's responsibly and sustainably meant that diversifying our portfolio by investing in renewable and cleaner energy was an avenue that we have to explore. A decade 10s of millions of dollars and numerous partnership later we’re extremely happy and proud to count wind energy and LNG as a part of our Quebec energy booking.
We look at innovative option everyday to better our energy mix. To this effect for instance our affiliate Vermont Gas recently announced that by the end of 2016 it would start distributing renewable natural gas generated from out of state sources. VGS is already planning to later supplement it's network with additional RNG produced locally from agricultural residues and local farms. With these initiatives VGS would become one of the first utilities in the United States to offer renewable natural gas to its customers. Indeed small is beautiful.
And just last week Green Mountain Power began customer installation of it's Tesla Power wall home battery, a battery that empowers customers to become more energy independent by storing power for use during outages. When paired with rooftop solar customers can generate and store their own energy, increasing reliability and the production of clean power. The power wall should also allow GMP to reduce peak demand on the system providing cost saving to all customers. We're proud to say that the GMP is the first utility in the United States to install the power wall for it's customers.
Tomorrow's greener energy are what we are already implementing today. I will now turn the call over to Pierre who will walk you through segment performance as well as the recently announced refinancing of our wind farms. Pierre?
Thank you. Sophie. On to slide 8, Gaz Métro generate a net income of $140.5 million during the second quarter of 2016, a $4.9 million increase or 4% over the second quarter of last year. And for the six months ended March 31 Gaz Métro generated net income excluding non-recurring items of $215.8 million, a 6% increase from the prior year period.
And now on to slide 9, where we'll review segment performance. The energy distribution segment generate a net income excluding non-recurring items of $133.4 million during the second quarter of fiscal 2016 up $5.4 million or 4% from the second quarter of last year. Natural gas distribution in Quebec generated net income of $112.9 million up 7.2 million from the second quarter of fiscal 2015 mainly as a result of an increase in capitalized interest in non-rate base investment and a timing difference between revenue and cost recognition part of which is expected to reverse by the end of fiscal 2016 as provided for in the 2016 rate case.
Note that in the Gaz Métro-QDA we have more than made up for the lag from the first quarter and we continue to expect that if we will finish the year with approximately $124 million of net income.
Turning to slide 10, Green Mountain Power and Vermont Gas generated a combined net income of $20.5 million during the second quarter down $1.8 million from last year. While the stronger U.S. dollar and the increase in GMPs average rate base both had a favorable effect on earnings, these were more than offset by the lower powered sales at Green Mountain Power mainly in the residential market as a result of warmer weather and the unfavorable effect of no longer capitalizing allowance for funds in construction or the AFUDC related to the Addison project as it is likely that we will use a portion of that contingency built into the project. The allowed greater return on future construction cost will therefore not be part of the authorized rate base upon completion of the project.
The natural gas transportation segment generated net income of $7.4 million during the second quarter up $800,000 or 12% compared to the same period last year driven primarily by a provision recorded by PNGTS in the second quarter of last year following a rate decision by the FERC and the favorable effect of the stronger U.S. dollar. This was partly upset by the lower sale as a result of warmer weather this winter.
On to slide 11, in power production we generated net income of $1.5 million during the second quarter down $600,000 for the year ago period mainly due to less favorable wind conditions as Sophie mentioned earlier. The energy services storage and other segment generated net income up $900,000 in Q2 up $500,000 from the period the prior year period largely as a result of a marked increase in LNG sales. We close to 4 million cubic meter more than that in the second quarter of last year nearly doubling our shipments mostly from short term contract. Through the first six months of fiscal 2016 Gaz Métro invested $207 million in power plant and equipment. With further investments to come in all our business segment notably for the Addison expansion project in Vermont, capacity expansion at our LSR plant in Montreal and improvement to our Quebec network mainly in the Saguenay region. We remain on track to deploy approximately $485 million in CapEx by the end of fiscal 2016 as previously guided.
On March 31, Valener amended the terms of it's credit facility pushing its maturity out to March, 2021. This is a six month extension from the previous terms, all over the terms remain the same. Just last week Valener and Gaz Métro together with our partner Boralex announced that $617 million non-recourse refinancing of the Seigneurie de Beaupré wind farm two and three. The refinancing provided the partnership with an additional $132 million in fund as well as lowering its overall interest rate. These funds were used to repay a portion of the covered tranche of the long, cover up front fees and transaction cost and finally pay out an $80 million special distribution to the partners, proportion at least to their respective share in the venture.
Gaz Métro received $20.4 million that it has used to pay down debt and Valener received $19.6 million that it will use to pay down a part of its credit facility. This distribution provides Valener with added flexibility to pursue its strategy of supporting Gaz Métro's growth.
We are pleased that we are able to take advantage of the improved market conditions to capitalize on better rates and ultimately pay a special distribution to the partners. Furthermore we continue to expect that over the life of the project Valener will receive an average of $8 million in annual distribution from the combined Seigneurie de Beaupré wind farms. That concludes the call. Operator we will now open the lines to question.
[Operator Instructions]. Your first question comes from the line of Ben Pham from BMO. Your line is open.
I wanted to clarify the 8 million distribution from [indiscernible], sometimes you lever up the asset and the cash flows possible could drop in a front end. Is that the case with this or is your distributions the same as it was before but you’ve effectively taken out some cash from the asset and using that for other alternatives?
The simple answer is that we will maintain the number that we've provided to you in terms of forecasts of that $8 million and it's based on the review of the wind regime that we have based on the actual wind measured that we've made since we are in operation. So based on the fact that we have been able to refinance our rate with the revised wind regime. We’re comfortable that we will be able to maintain that level of distribution.
Okay so no change there. Okay, I just wanted to check that and then the other question I had is on the distribution that you’re getting the 40 million amongst I guess the two. So is that more you getting your debt down to a level that you need to get down or are you basically paying your credit facility in a near term, maybe you can use that cash for additional investments instead but haven't made a decision on that yet.
As Valener, we want to be in a position where they can invest in Gaz Métro's growth and in those future investment. So that will reduce the debt level and that will provide a lot of flexibility to Valener and I’ve to support the future growth or the future investment that may come in the coming months or years and so contribute to capital contribution to Gaz Métro.
And just a last quick one for me to check in, Gaz Métro the ROE 8.9% of that, is that locked in through '17 then? Was just looking at your slides and you perhaps see some pressure later on with the bond yields is pretty well in Canada and some of that [indiscernible] trimmed ROEs over the years.
So in Gaz Métro-QDA so natural gas distribution in Quebec we’re operating under simplified approach for the establishment of the rate case and we already had a decision for 2017 where the rate of return on common share will be 8.9%, so this is already being established for 2017.
And you’re assessing that’s [indiscernible] rise by the next probably 18 or 19 or do you see that the regular feel that 8.9 is a good level for now to maintain your credit metric and your access to capital is that more of former or latter?
It's difficult for me to second guess what could be the decision of the Board but we're in a context where the interest rate did not fluctuate a lot since the last decision on the rate of return. So if you look at what was the risk free rate, what has been their decision, we're in a similar situation at this point. So, I cannot speculate on what will be the rate of return but we're in the same kind of interest rate environment.
Your next question comes from the line of Robert Kwan from RBC Capital Markets. Your line is open.
Just specific to the quarter when you look at all of your businesses obviously we had a very warm winter, do you’ve an estimate as to what the weather impact was across the board?
It's difficult to say it because we have -- we are weather normalized in Quebec so a good chunk of it has been weather normalized and it's the same case for Gaz Métro Quebec and Vermont Gas. It's mainly at VGS level and there's a lot of element in there where we've seen more throughput on the residential and commercial market but not due to the weather. It's difficult for me to answer you specifically on the weather impact at Green Mountain Power levels.
Just maybe I will give you a little color, it gets to a point where when we put all together variations of variation of demand because of efficiency, when we put together weather patterns, there is a little noise there that becomes to be a little difficult to decipher. Obviously the weather was extremely warm in winter. April has been in March has been April and May are proving to be cold. So there is a little bit of movement there that is difficult to decipher. So it's not to avoid your question but there is an extent to which again precisely modelize [ph] every degree days.
As I look at QDA I guess what you put up for the quarter though was better than what you had presented earlier. Now you mentioned that you expect some of this to reverse. I guess was there any amount of margin though that you earned but maybe didn’t book during the quarter? I know you guided to the 124 for the year but I'm just wondering are you are there certain aspects where you're running better than expected?
The $124 million is in the QDAs activity and we were trailing behind in the first quarter. We've put in place a plan where we'll address -- we will reduce expenses. It pays off in the second quarter and we’re also working on improving sales mainly on the large industrial side of the operation. So we’re comfortable seeing that we will achieve that $124 million. Will we be able to maintain all of that advances that we after the second quarter. I can tell at this point but we're very comfortable with the $124 million that we forecast.
And maybe just last on the Greenfield side, you obviously have great sights in Quebec, can you talk about some of on the wind side outside of that, are there other sites that you’ve got whether that's in Quebec or outside of Quebec and what you’re expected you know future development might be as it relates to the schedule of RFPs?
Well what I can say Robert is that we stay ahead of possibilities, we look at many possibilities. As you know the Seigneurie de Beaupré wind farms are very large grounds, there is still room over there, it will remain open and exploring various possibilities. None of them we can't comment further on at this point of time but we look at every stone and we turn them on and we take hard looks.
And I guess outside of that, the Seigneurie sites, so are there sites that you hold whether that's in Quebec or outside of Quebec?
No we don’t hold sites. We have quite a bit of land but those are not lands that we will put their minds on. No, another [indiscernible].
And then just on the Seigneurie sites with some of RFPs that have cleared, obviously it comes down to price but there's other factors there. What's your sense as to -- was it just the wind regime at the sites versus where others were or do you think there is any technical factors with respect to the remaining land that you've got that's causing a problem in terms of winning some of the RFPs that’s clear?
No I would say it's a matter of philosophy and we’re in the business of making money and we try to choose the best project overall that can get the return that we are hoping for. We still believe that we have an exceptional site but they are returns at which some people are willing to go that we are not willing to go and we would rather be patient than investing money that does not clear the rate of return that we are shooting for.
There are no further questions at this time. I turn the call back over to the presenters.
So thank you very much for being with us this afternoon. So see you next quarter.
Have a great weekend. Ciao.
This conclude today's conference call. You may now disconnect.
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