Valener, Inc. (OTC:VNRCF) Q4 2016 Earnings Conference Call November 24, 2016 1:00 PM ET
Mariem Elsayed - Senior Advisor, IR
Sophie Brochu - President and CEO
Pierre Despars - EVP, Corporate Affairs and CFO
Robert Kwan - RBC Capital Markets
Avery Haw - TD Securities
Jeremy Rosenfield - Industrial Alliance
Good afternoon, and welcome to Valener’s Fourth Quarter and Full Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions]
Please note that this call is being recorded, today Thursday, November 24, 2016 at 1 o’clock Eastern Daylight Time.
I will now turn the call over to Ms. Mariem Elsayed, Senior Advisor, Investor Relations. Please go ahead, Ms. Elsayed.
Thank you, Sophie. Good afternoon and welcome to Valener’s fourth quarter and full year 2016 conference call. With me today from Gaz Metro are Sophie Brochu, President and Chief Executive Officer; and Pierre Despars, Executive Vice President, Corporate Affairs and Chief Financial Officer.
This call is being webcast and I encourage you to download the supporting slides, which are available in the Investors section of Valener’s website under Events and Presentations.
As always certain subjects 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 SEDAR.
We may also refer to certain indicators that are non-US GAAP financial measures and should not be considered in isolation or as substitute for other performance measures that are in accordance with GAAP. I will now turn the call over to Sophie.
Merci, Mariem. Bonjour a tous, and good afternoon everyone. I am pleased to announce that winter has arrived in Montreal; for any natural gas distributor this is a great time of the year. I am also very pleased to announce that as per previous guidance Valener is today confirming its third dividend increase.
Valener is raising its annualized dividend from $1.08 per common share to a $1.12 with the first quarterly dividend of $0.28 to be paid next January. Valener is also reiterating its target dividend increase of approximately 4% per year through to fiscal 2018.
Now let’s take a look at the annual result, I am on slide 4. 2016 was another solid year for Valener. Adjusted net income came in at $49.9 million, a $4.7 million increase from fiscal 2015. This driven by recurred results at Gaz Metro. Adjusted net income per share was $1.30 up $0.12 or 10% from 2015.
For Q4, a typically slow quarter given weather patterns Valener recorded an adjusted net loss of $0.02 per share up $0.08 from an adjusted net loss of $0.10 per share in the fourth quarter of 2015.
On to slide 5. In 2016, Valener generated normalized operating cash flows of $52.4 million down $6.2 million from last year. This is mainly due to two elements, first, higher distributions from the Seigneurie de Beaupre wind farms received in fiscal 2015, as this was the first year distributions were paid out, and as such included distribution related to 2014 operation.
And second element is an income tax reimbursement we had received in 2015. This was offset in part by higher distribution received in 2016 from Gaz Metro following Valener subscription of almost 4.5 million Gaz Metro units in the second half of 2015, and a $0.01 per unit increase in Gaz Metro’s quarterly distribution to unit holders in late 2015.
Now on to Gaz Metro, I am now on slide 6. With an adjusted net income of almost $250 million, Gaz Metro generated record results once again this year. The 14% year-over-year increase reflects the relevance and the effectiveness of our energy and geographical diversification strategy. I will come back to that in a minute.
For now let’s review what we did in 2016. This year’s higher net income was driven by the growth in Gaz Metro’s QDA non-rate based investment, the favorable effect of the stronger US dollar on our US operation and growth at Green Mountain Power. This was partly offset by lower net income at the Seigneurie de Beaupre wind farms which as we have said many times have enjoyed particularly strong winds in 2015.
On a per unit basis, adjusted net income for the year was $1.28, up from $1.22 in fiscal 2015 and again despite the unit issuances in the latter half of last year.
For the fourth quarter, a seasonally soft quarter as a result of the warmer summer months, Gaz Metro recorded an adjusted net loss of $0.06 per unit in 2016 compared to an adjusted net loss of $0.10 per unit in the same quarter of 2015.
As you know consistent with its diversification strategy, Gaz Metro is involved in projects spanning territories and end products. Let met walk you through these, please turn to slide 7. In Montreal, the work is well under way to triple the gas liquefaction capacity of our LSR plant and it’s nearing completion. We expect the new liquefaction train to be in service by early 2017. In the meantime, we continue to grow our customer base and are now delivering LNG to customers as far as the North Quebec region and the Northeastern United States.
In Vermont, we are awaiting a decision by the Vermont Supreme Court to lift an automatic stay in effect that would allow us to resume construction. Of course we are respectful of this process. Pierre will go through this in greater detail.
Back in Quebec, we are building a new completion station in La Tuque and upgrading the existing station in Saint-Maurice in order to improve and strengthen the transmission network to serve current and additional demand in the Saguenay. All engineering work is complete and we are now laying the foundation at both sites.
Ultimately, this $80 million project will ensure reliable gas supply to our customers and will allow us to meet the growth of their requirements over the next 10 years and service is planned for late 2017.
In Bellechasse, where we are extending the network by 72 kilometers, construction work is well under way and we expect it to be completed by the end of 2016. And as recently as this past August, we began work to extend again that work to Asbestos. This consists of a 7.5 kilometer extension and it is an important step for us and the city of Asbestos which has modelized to make its business greener and more competitive through the use of natural gas. This project is also scheduled to be commissioned by the end of this year.
Our project to build an LNG storage and liquefaction site at Becancour next to the TransCanada Energy Power Plant is currently under review, as we await regulatory approvals. The project was designed to supply Hydro-Quebec with electricity during its peak winter demand periods, a flexible and safe solution with limited environmental and community impact.
The BAPE, Bureau des audiences publiques en environnement held hearings to examine the project in June and July of this year before issuing a public report last month. While certain conclusions in the report are considered inaccurate and debatable as there were certain omissions in the analysis of alternative to the proposed project the report nonetheless acknowledges the minor social and environmental impact of the project. Both Gaz Metro and Hydro-Quebec continues to believe in the significant potential benefits of this project, as it offers the best solution to satisfy a very specific need in times of peak, peak demand.
As you know, our Seigneurie de Beaupre wind farms benefit from a 20 year power supply agreement with Hydro-Quebec. We are very pleased with the performance of all three of these parts. We are pleased with the partnership structure in place and we are pleased with the refinancing we did this year with which brought approximately 20 million to each of Gaz Metro and Valener.
Switching over to solar power, I am pleased to announce that Green Mountain Power has now obtained approval for all five of the solar parts it is building. One of them was put in service this September, and another is nearing completion. We continue to expect that the remaining three will be finished by the end of 2016.
This project will grow GMP’s rate base by approximately $40 million US. This will add 22 megawatts of renewable energy capacity to GMP’s already green energy offering. As of September 30, US$20 million has been injected in to the project.
And finally in hydro GMP is awaiting on regulatory approvals from the Vermont Public Service Board and deferred to finalize its acquisition of certain assets of Enel Green Power North America. We expect the deal to close in fiscal 2017.
So, as we begin another year in Gaz Metro’s chapter, we will continue the tireless pursuit of offering natural gas to a growing number of communities in Quebec and in Vermont by building on its environmental and economical benefits in order to progressively replace oil products.
We will keep a firm grip on operating cost for both our regulated and non-regulated businesses, and we will keep moving forward with our strategy of energy diversification that we initiated just a few short years ago. A strategy that allows us today to announce the great results we had in 2016.
In fact, 2017 will be another significant year, as much of the construction of our ongoing projects will come to an end and we will begin ramping them up.
I will now turn the call over to my colleague, Pierre, who will walk you through segment performance.
Thank you, Sophie. On to slide 8, excluding special items, Gaz Metro generated adjusted net income of $214.7 million in fiscal 2016, a $25.7 million increase compared to last year. Gaz Metro generated an adjusted net loss of $10.9 million during the seasonally slower fourth quarter, a $4.4 million improvement compared to the fourth quarter of 2015. The Energy Distribution segment generated adjusted net income of $201.5 million in 2016, up $25.7 million or 15% from 2015.
Turning to slide 9, natural gas distribution in Quebec generated adjusted net income of $129.7 million in 2016, up $19.2 million or 17% from 2015, driven by the parameters in the 2016 rate case which has projected a $13.2 million gain over 2015, as well as growth Gaz Metro-QDA’s non-rate based investment not forecasted in the rate base at the beginning of the year.
Gaz Metro authorized ROE for fiscal 2017 will remain at 8.9% as was confirmed by the Regie last year. And based on the 2017 rate case which calls for an $88 million increase in the average rate base, we expect Gaz Metro-QDA’s 2017 net income to be approximately $136 million.
Turning to slide 10, Vermont operation generated a combined adjusted net income of $71.8 million during the year, up $6.5 million or 10% from last year. Results were positively affected by the increase in Green Mountain Power average rate base, the favorable impact of a stronger US dollar, and the favorable effect stemming from GMP’s power purchase cost adjustment mechanism, as 2016 market price were lower than in 2015.
These were accepted partly by the net effect of the synergy sharing mechanism relating to GMP’s merge CVPS. GMP was required to reimburse its clients an amount equal to 50% of the synergy realized during 2016 fiscal year. This amounted to $15.6 million in comparison in fiscal 2015, an amount of $8 million was returned to clients.
During the third quarter of 2016, we stated that we now expect total cost for the Vermont gas addition project to be closer to $165 million. Therefore above the $134 cap that was reached with the Vermont Department of Public Service in 2015. As such we took a US$20.6 million pre-tax impairment charge during the fiscal 2016.
In 2015, following the rectification of the agreement with the Vermont Department of Public Service, we took a $10.3 million impairment charge. We have not changed our projected cost estimate for the Addison project and continue to expect total cost to be approximately $165 million.
Vermont Gas is currently seeking to get a pipe management through the parts in Hinesburg, which represents the last section required for the Addison project completion. The town of Hinesburg and VGS have previously reached an agreement on the term of an easement. On September 13, 2016, the Vermont Public Service Board issued an order recognizing the easement and allowing VGS to move forward with the Addison project.
However, residents opposed to the project, sought reconsideration of the decision with the VPSB and ultimately filed an appeal with the Vermont Supreme Court. This appeal comprises an automatic stay preventing construction and as such VGS has interrupted work in the area. The Vermont Public Service Board has since denied the resident motion to reconsider, after which time VGS immediately filed a motion to lift the stay with the Vermont Supreme Court.
On to slide 11, Natural Gas Transportation segment generated net income of $18.1 million in 2016, up $1.5 million from 2015. The increase is mainly the result of the provision recorded in the second quarter of 2015 relating to the FERC decision on the PNGTS rates as well as the favorable impact of a stronger US dollar. And had it not been for the impact of a warmer fiscal 2016 winter on the transported volumes, results would have been even stronger.
Gaz Metro recorded $1.4 million of net income in the electricity production segment in 2016, compared to $3 million in 2015. 2015 results were positively impacted by particularly a strong win that lasted throughout the year. 2016 win pattern were much more in line with the expectations and we are very pleased with the performance of all the products, and with the distribution they continue to pay out.
Collectively in fiscal 2016, the [FERC] paid out $14.2 million in distributions to Gaz Metro and Valener combined. In addition to the $40 million special distribution paid out by part two and three following its refinancing in May. Gaz Metro and Valener together received $29.1 million in distribution from the parts in fiscal 2015.
The energy services storage and other segment generated net income of $4.3 million this year, up $1.3 million or 43% from last year, driven improved profitability at Gaz Metro Transport Solution and our growing LNG business. We shipped 34.2 million cubic meter of LNG this year, that’s over 40% more than last year.
On slide 12, Gaz Metro generated $533 million in cash flow from operation this year, up 6 million from last year. We invested approximately $575 million in CapEx and interest in affiliates in fiscal 2016 above the $480 million we guided to as a result of an additional US dollar investment by Green Mountain Power in Transco, as well as a stronger US dollar, and GMP’s investment in Vermont Solar parks.
For fiscal 2017, we expect to deploy approximately $430 million in CapEx. We also closed to private placement of first mortgage bond for a total $225 million, both sets of bonds are secured and were assigned a rating of A and A+ by DBRS and Standard & Poor respectively. Proceeds from the private placement were used to pay down part of Gaz Metro’s [inaudible] and for general and corporate purposes.
Last month, Valener terminated an interest rate swap that it had entered in to in October of 2014 in order to edge a potential debt that ultimately was not issued. This resulted in a $7.8 million cash outlay and will have a $0.8 million favorable impact on net income that will show up in Valener’s financial statement for the quarter ended December 31, 2016.
Finally, and Sophie mentioned earlier, we are very pleased to announce that as expected and owing to the excellent result of Gaz Metro and the performance of the Seigneurie de Beaupre wind parks, that remains steady and on target. Valener is increasing its annual dividend to $1.12 per share up from $1.08 per share. Quarterly distributions will increase to $0.28 per share with the first one to be paid in January. We’re also reiterating on 4% dividend growth target for one more year that is until 2018.
That concludes the call. Operator, we’ll now be open for questions.
[Operator Instructions] Your first question comes from the line of Robert Kwan of RBC Capital Markets. Please go ahead.
If I can just start on the Addison project and the delays that you’ve got. If there are further delays, does that qualify under the circumstances beyond your control i.e. would you be able to see cost recovery?
It will depend on the nature of those costs and what caused those cost, and I can tell you if that will be covered or not, it will really depend on the nature of the element that caused those cost increase. But as of today, we’re still expecting that the total cost of the project will be $165 million.
Understood. And just I guess if the nature of those causes is what’s happening right now in terms of the injunction, would that be qualifying or not?
Actually we are minimizing the cost of the project because the project is almost completed except for that last mile construction. So there is very minimum cost associated with the project. So the remaining cost will be occurred when we’ll have the removal of the stay or the decision from the Supreme Court of Vermont.
Maybe just turning to QDA and just to be clear, the guidance that you’ve given for 2017 you’ve noted it includes the non-rate based investments, but does that also include the capitalized interest associated with that?
Yeah, that includes the capitalized interest that we foresee during the year. The way we are doing is that we expect some construction during the year, but sometimes there’s more or there’s more deferral account and so the variance during the year is mainly due to those difference. So in the 136 there’s a minimum there, but there could be fluctuations at that level.
And just when you’re referring to the non-rate based investments, can you just talk about some of the larger investments that are kind of within that?
It was mainly construction related activity that we did earlier than expected.
So early, like the spending went out the door before the recovery in rate base?
Yeah, before it’s included in the rate base, and it’s going to be included in the rate base when the construction will be completed and approved by the Regie.
And if I can just finish one last question, have you looked at the possible impact of any potential corporate tax rate changes in the US as it relates to your utilities and any cross border tax structuring that you’ve done?
Not yet. For the operation in Vermont, the tax expenses is included in the cost of service, so a decrease there will have an impact in the rates to the customers and we haven’t analyzed the impact of the cross-border structure.
And maybe just that the utilities, are there any material deferral accounts that you might apply because the cost of service would reduce which would be good for customers, but is there something that you could see as may be trading to recover any deferrals or ramp up any spending?
No, I don’t see that.
Your next question comes from the line of Avery Haw of TD Securities. Please go ahead.
Just back to QDA, you stated that you submitted a proposal to the regulators seeking regulatory relief for 2018 and 2019. Can you also describe what other elements was submitted and whether you contemplated things requesting elements of incentive mechanisms in 2018 and 2019?
What we suggest to the Regie in terms of timing and efficiency is to have a simplified rate of return for the year 2018 and ’19, so that we’ll expedite the regulatory reprocess, and also maintaining the return on equity at 8.9%. So we are still waiting for the decision of the Regie on that.
In terms of incentive for 2018 and ’19, we keep the sharing mechanism of any over earning that we have actually and also we keep the incentives linked with the energy efficiency program that can allow us to increase our net income by $1 million if we achieve certain target in terms of energy savings for customers.
So what we have in front of us for ’17 and also ’18, ’19 and what we suggest is that it’s the same incentive.
Now maybe moving towards the dividend, can you give a preliminary assessment on what your long term growth rate might look like post 2018, and how you might achieve that rate?
This is an interesting question. I will answer that, our objective to grow it as much as we can. And I have to tell you that when we announced that 4.4% increase up to 2018, we were extremely comfortable of delivering it and we are even more comfortable at this point.
We are in the process of doing a strategic review at Gaz Metro looking forward and beyond 2018 and when we’ll have completed that review, we’ll be in a much better position to confirm that dividend growth. But I can tell you at this point that we’re working really hard to maintain that growth, but I can’t confirm it or provide guidance at this point.
Your next question comes from the line of Jeremy Rosenfield of Industrial Alliance. Please go ahead.
Sorry, I missed a little bit at the beginning, so I apologize if I’m coming back on stuff that was touched on already. Just in terms of the Becancour LNG project and the decision from the BAPE that was received recently, are there any updates in terms of what you might do, what your next steps are for the development?
We’re still in discussion with Hydro-Quebec, so we had the BAPE decision after that we still have to negotiate with Hydro-Quebec and obtain the different permit. So we’re at that stage now and I cannot tell more than that at this point.
But fundamentally do you still see an avenue to develop the project even though the BAPE’s recommendation was not in favor of the project?
The BAPE recommendation, this is Sophie speaking, the BAPE report was a weird report essentially. The BAPE tried to do to be polite, the BAPE tried to do an economical analysis which is not the mandate of the BAPE and sure enough they got it wrong. The economical analysis was thoroughly made at the Quebec Regulatory Board, Energy Regulatory Board which found the project to be good to go forward.
So, on the substance of the BAPE mandate itself, they found very few social and environmental issues. So the BAPE expresses itself on the platform that was not the platform it was created for and for the reason it was created found the project to be essentially fine. So from there we’ll move on and work with Hydro-Quebec and we still need to have the decree from the Quebec government. So we’ll see where it leads.
The only other question that I have is, just if you have any insight into the performance of the wind farms in the last couple of months that we’ve seen or [two-thirds] [ph] through the quarter so far?
Do you mean the performance of the wind farm?
Yeah, just relative to average wind conditions if you’re seeing relatively good performance so far in October and November or --?
What we’ve seen is, as expectation I don’t have it right in front of me, but if I recall I think it’s in line with that we expected when we did the forecast and the analysis of the project itself, so nothing special there.
There are no further questions at this time. I will turn the call back over to the presenters.
We thank you very much for your time and we look forward to the next call beginning of 2017. Chow.
This concludes today’s conference call. You may now disconnect.
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