Valener's (VNRCF) CEO Sophie Brochu on Q1 2017 Results - Earnings Call Transcript

| About: Valener, Inc. (VNRCF)

Valener, Inc. (OTC:VNRCF) Q1 2017 Earnings Conference Call February 8, 2017 1:00 PM ET

Executives

Mariem Elsayed - Senior Advisor, Investor Relations

Sophie Brochu - President and Chief Executive Officer

Pierre Despars - Senior Vice President Corporate Affairs and Chief Financial Officer

Analysts

Robert Kwan - RBC Capital Markets

Jeremy Rosenfield - Industrial Alliance

Ben Pham - BMO Capital Markets

Operator

Good afternoon, and welcome to Valener’s First Quarter 2017 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 Wednesday, February 8, 2017 at 1 o’clock Eastern Standard Time.

I will now turn the call to Ms. Mariem Elsayed, Senior Advisor, Investor Relations. Please go ahead, Ms. Elsayed.

Mariem Elsayed

Thank you, Cylvian. Good afternoon and welcome to Valener’s first quarter 2017 conference call. With me today from Gaz Métro are Sophie Brochu, President and Chief Executive Officer; and Pierre Despars, Senior 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 annual MD&A and 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.

Sophie Brochu

Merci, Mariem. Bonjour a tous, good afternoon, everyone. As you have seen, Valener kicked off the 2017 fiscal year with excellent results. Adjusted net income was $20.3 million, up 21% from the first quarter of last year. Adjusted net income per share was $0.52, up from $0.44 a share in the first quarter of 2016. All this is explained by strong results at Gaz Métro and consistent performance at the Seigneurie de Beaupre Wind Farms.

Valener generated normalized operating cash flows of $12.2 million during the quarter, up a significant 17% from the first quarter of 2016. On a per share basis, that is $0.32 per share for the first quarters of this year compared to $0.27 last year. This increase is a result of Valener receiving higher distribution from Gaz Métro due to two reasons; first, a subscription of an additional 2.1 million units in September of 2015; and second, the increase as of January 2016 of Gaz Métro’s quarterly distribution to unitholders from $0.28 per share to $0.29 per unit.

Without a doubt, we are very pleased with Valener’s first quarter results. We speak to the quality of its underlying assets, Gaz Métro and the Seigneurie de Beaupre Wind Farms. It’s only the first quarter for sure, but it looks good for the year.

Now on to Gaz Métro results on Slide 4. Gaz Mét ended the first quarter of 2017 on solid footing, generating adjusted net income of close to $89 million, up $13.6 million from the first quarter of last year.

On a per unit basis, adjusted net income for the quarter was $0.53, up from $0.45 in the same period of last year. Colder weather, which led to an increase in distribution of natural gas, as well as growth in Gaz Métro-QDA’s and Green Mountain Power were the driving forces behind the nearly 20% increase. That said, a part of that – of the net income increase year-over-year also stands from a timing difference between the recognition of sales and expenses that we expect will reverse over the course of the year.

I would like now to walk you through the progress we’re making on our different development projects and acquisitions.

Please turn to Slide 5. The extension of the Asbestos networks, which we began working on last August was gassed up in December. And just two weeks ago, we also gassed up the extension of the Bellechasse network. Combined, these two development projects at about 82 kilometers to our Quebec distribution network, and after governmental contribution, they add approximately $10 million to QDA’s asset base.

In Montréal, the construction project to triple the liquefaction capacity of our LNG plant is on the verge of completion, and we expect ramp-up and production to begin at the end of this month. Last December, we acquired our partners 50% interest in the CDH joint venture making us sole owners of this asset and by extension of CCUM.

Now, CCUM offers a district heating and cooling network to meet the needs of many landmark commercial buildings and residential condominiums in downtown Montréal. We thought the timing was right for us to take back control of this strategic energy asset located right here in our backyard. Benefiting from long-term contracts with financially strong customers, our base scenario with this acquisition consists of high single-digit returns with potential upside when growth materializes on CCUM network through the years.

In the Saguenay region, work to build a new compression station and upgrade an existing station is moving forward according to plan and it remains on time and on budget. In December, we completed all the civil work related to the project. In January, the new compressor in [indiscernible] was installed and just this week we completed the installation of the compressor in La Tuque. And service date for this $80 million investment is still planned for late 2017.

Last December, the Supreme Court of Vermont listed the automatic stay that had been in effect since September. Vermont Gas system is now authorized to move forward with the finalization of its pipeline extension in Addison County. What’s more in February, VGS reached an agreement in principle with the VDPS on all matters related to the 2017 rate case.

Among other items, the agreement we confirmed that the Addison project can be reflected in rate up to a cap of US$134 million. This settlement was filed with the VPSB and will be effective once it gets approved. There is less than 1 kilometer of construction work remaining to complete the second and last phase of the project, which consists of a 49 kilometer extension.

We expect it to be ready for gas up in the spring after final completion and review. As of December 31, about US$160 million has been invested into the project in line with our latest estimate. At Green Mountain Power, the regulatory process to acquire Enel hydroelectric power plant is ongoing. We expect the deal value the $US20 million would close by the third quarter of this fiscal year. And lastly, all five of Green Mountain Power’s newly built solar parts are now in operation. The $40 million investments adds 22 megawatts of renewable energy to the company’s energy mix.

As you can see, 2016 is off to an excellent start. Needless to say, we don’t intend to stop here. Short-term, we’re focusing on our efforts on getting the LSR facility second liquefaction train up and running. We will also be putting the finishing touches on the infrastructure required to connect the city of Saint-Hyacinthe renewable energy output to our distribution network in Quebec.

By tapping into the potential of way to recovery and recycling organic waste from household and local businesses, the city of Saint-Hyacinthe will be able to produce up to 13 million cubic meters of renewable natural gas per year through the process known as biomethanation. That will be injected after that into our distribution network. This is green local gas.

We expect to reach both of these milestones by spring. Longer-term, we are pursuing our objective of providing our clients with safe and efficient energy solutions, while gradually layering on additional renewable energy options to our offering.

I will now turn the call over to Pierre who will walk you through segment performance. Pierre?

Pierre Despars

Thank you, Sophie. On to Slide 6, excluding special items, Gaz Métro generated adjusted net income of $88.9 million during the first quarter, up from $75.3 million in the first quarter of last year. The Energy Distribution segment generated adjusted net income of $85 million during the first quarter of 2017, up 18% compared to the first quarter of last year.

As you’ll see on Slide 7, natural gas distribution in Quebec generated adjusted net income of $64.1 million in the first quarter, up $10.7 million, or 20% from the prior year period. This was driven by an increase in volume distributed as a result of colder whether, growth in the rate base investments, as well as the timing difference between the recognition of sales and expenses, which is expected to reverse by the end of the fiscal year.

This quarter’s results were $8.2 million above what we had initially projected based on the $88 million rate base increase in this year rate case. We expect some of this upside will flow through to our annual fiscal 2017 results. At this time, however, it’s still too early to determine by how much Gaz Métro-QDA’s 2017 adjusted net income will surpass the $136.3 million that we guided through last quarter.

Turning to Slide 8. Vermont operations generated a combined net income of $20.4 million during the first quarter, up $2.1 million, or a 11% from last year. These positive results were expected in part as they reflect the increase in GMP’s average rate base. They were, however, partly offset by the unfavorable effect of no longer capitalizing the Allowance for Funds Used During Construction or FUDC related to the Addison project beginning in January of 2016.

In the end, this was made up by a timing difference between the recognition of sales and expense that had a positive impact on net income and which is expected to reverse over the course of the year. The Natural Gas Transportation segment generated net income of $4.9 million during the quarter in line with the $4.5 million we made last year.

In power generation, we recorded $800,000 of net income during the quarter compared to $500,000 in the prior year period, as wind pattern during both periods were in line with expectations. Wind Farm 4 paid out $700,000 distribution during the quarter. We expect Wind Farm 2 and 3 to make its first 2017 distribution in the second quarter.

Turning over to Slide 9, the Energy Services Storage and Other segment generated adjusted net income of $1 million during the first quarter unchanged from the first quarter of last year. We shipped 8.8 million cubic meters of LNG this quarter, that’s more than double what we shipped last year. We also incurred higher operating costs in this segment as we invested in marketing in one of the segments operating entities.

On a non-adjusted basis, the segment generated GAAP net income of $13.5 million during the quarter, as we recorded a $12.5 million gain upon valuation at fair value of our ownership interest in CDH, following our acquisition of an additional 50% interest that granted us the sole ownership of CCUM.

On to Slide 10. Gaz Métro invested approximately $153 million in CapEx during the first quarter until I get with the $430 million that we expect to deploy in fiscal 2017. The first quarter, the CapEx spend included GMP’s investment in its Vermont solar parks, investment in the LSR parts expansion, distribution network extension in Quebec, and the usual maintenance capital expenditures.

In October, we closed a private placement of first mortgage bond for $125 million at a rate of 3.28% and reimbursed another series of the same amount carrying rate – carrying a rate of 7.45%. Furthermore, during the second quarter of fiscal 2017, Gaz Métro expect to carry out a unit issuance for a total amount of $100 million. Fund will be used to rebalance its capital structure and fine as various projects.

Valener is expected to subscribe for operated amount of units based on its respective share of units outstanding. As such, Valener strategy remains unchanged, to remain financially flexible in order to support the growth and the development of its underlying assets without to the extent possible, having to rely on the capital markets.

Valener also seeks to pay out the majority of its available cash flow in a sustainable manner. This means other than cash flow, excluding the impact of non-recurring item and irregular events.

So that concludes the call. Operator, we will now open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Robert Kwan of RBC Capital Markets. Please go ahead.

Robert Kwan

Hi. Maybe I’ll just start with VGS and some question about – around regulatory. You’ve got in front of the memorandum on whether normalization in front of the regulator, if that’s approved, will it – what’s the effective date will – or put differentially will be retroactive to the beginning of the fiscal year?

Pierre Despars

Yes, it will be retroactive to October 1, 2016 of the current year.

Robert Kwan

Okay. And then just on the rate case settlement, it talks about that it will not be effective until it’s approved. And so does that mean that what we’ve seen booked right now, I’m assuming is on the previous rates, including the old cost of capital numbers?

Pierre Despars

No impact, because we were underachieving versus the authorized ROE, and there is no rate adjustment in the MOU that we agreed with the DPS. So there’s going to be no change to the income recorded up to now.

Robert Kwan

Okay. And then I guess last one for VGS just on Addison County if I can just make sure. So it’s very small, but there’s a slight increase in costs. You’ve got the capital $134 million. I just wanted to make sure there’s nothing in any of the overage that while it may not be in rates, is not also in a – some sort of a deferral account?

Pierre Despars

No, the agreement is saying that, we’re cap at $134 million actually. And as you know, we took back a provision, or a write-off of $31 million over the two previous year, and actually we’re in line to achieve the project at $165 million. So if you take that $165 million minus the $31 million provision that we’ve made, that brings you to that $134 million dollars that we should be in line with at this point.

Robert Kwan

Okay, I understood and if I can just finish here with the questions on QDA. You did talk about some upsides following through from this quarter into the full year results, can you just talk about what were some of the main drivers, was that non-rate based investments? Was it new credits? Was it something else?

Pierre Despars

No, it’s -- this is the first quarter, even if -- and when we compare also with last year first quarter, we had a very strong first quarter in the residential and small commercial market. So the throughput increased by 1.5 BCF, which is a very positive start for 2017. As you know, the over earning is calculated on a yearly basis so depending on how we’ll go the remaining of the year that may -- part of it may result in over earnings that we will share with the customer by the end of the year, but it’s too early at this point to say that it will translate automatically in over earnings.

Robert Kwan

Understood. And then just last on, you have a kind of paragraph on the TCPL rates and the intervention you have on the proposed LTFT service, it’s pretty small service, so I’m just kind of wondering now, you’ve also talked about Quebec being captive to the mainline, can you just talk about how you’re viewing the entire mainline given your de-contracting long haul service, especially in the case of, if we see a broader settlement on the mainline, which is potentially out there?

Pierre Despars

Okay, in that specific case, we are intervening because we are one of the shipper on the mainline and even if we are de-contracting, there is the overall cost of service for TCPL. And we are in a situation where we are at the end of the line and we have -- we don’t have any alternative to TCPL, so we want to protect the cost for our customer going forward. So this is why we’re intervening and we want to protect our commercial position and having the fair cost for the transportation service at TCPL, on TCPL.

Robert Kwan

Okay, so in short what you’re concerned about is the division of revenues and costs between the long haul portion of the system in the Eastern triangle?

Pierre Despars

Could be part of it, yeah, it will be -- that’s part of the equation, yeah, right. It’s also that, yeah.

Robert Kwan

Okay, thank you very much.

Operator

Your next question comes from the line of Jeremy Rosenfield of Industrial Alliance. Please go ahead.

Jeremy Rosenfield

Yeah, just a couple of cleanup questions. Just for the Supreme Court decision in Vermont, and I’m just wondering if there is a timing around hearing and then when that decision might be expected?

Pierre Despars

I will say I don’t have it on the top of my mind. There is -- I don’t know, I don’t think there is specific timing, they issue their decision on the list of state, which allowed us to complete the construction, a construction that is in process right now, but I don’t have a specific date to give you at this point.

Jeremy Rosenfield

Okay. And I’m curious to know if you have a forecast, or if you have an estimate in terms of what the impact of the Q1 transaction would have on earnings on a full-year basis?

Pierre Despars

Okay. Yes, if you look at – I don’t think we have all that detail, but the forecast was, we were in between $1.5 million and $2 million at 50%, so if you may multiply by two and we see there opportunity for growth for the coming year, so.

Jeremy Rosenfield

Can you talk about that in any detail, where would that growth come from primarily residential, small commercial?

Pierre Despars

No, no, no. It’s -- we have -- and it’s more in terms of synergy, efficiency that we are looking at. We presently deserve the, let’s say, Montréal, Downtown Montréal with a large commercial building and some [Quebec building] [ph], co-ownership, but it’s much more related to efficiencies that we are targeting.

Jeremy Rosenfield

Okay, thank you that’s it.

Operator

[Operator Instructions] Your next question comes from the line of Ben Pham of BMO Please go ahead.

Ben Pham

Okay. Thanks, guys, good morning. Good afternoon I’m just wondering the – if you could comment on Valener’s balance sheet after the Gaz Métro call on the issuance, because I think you’ve drawn some on your revolver $29 million with this quarter and you would be contributing some more money after that. I’m just wondering where your debt balance is going to be, and your – possibly your access to capital on the preferred share side?

Pierre Despars

Okay. So the $100 million capital required by Gaz Métro will be funded $29 million by Valener. Valener will be able to draw it on its credit facility. I don’t have in front of me the exact amount drawn on the credit facility as of December 31. But it’s going to be just an additional $29 million on that credit line.

Ben Pham

Okay. So that the reference the $29 million in the quarter that’s relating to a future drawdown that was?

Pierre Despars

Yes.

Ben Pham

Okay. All right. And then going back to the Addison project and when you announced that project and then you’re working on it, you’re sitting at a return of 10% in the state and now returns have come down quite a bit, and maybe there’s some room to move that higher. But when you think about that and the cap on the CapEx, are you – is that a project like how are you guys managing the value creation on that project and the returns?

Pierre Despars

Every project that we’re doing, if we – we’re looking at different projects depending – different way depending if they are regulated, let’s say, in the natural gas distribution activities, or in the electric distribution, or non-regulated asset that we look at. For every specific project, we looked at it in the way we create value for the shareholders.

So in the regulated business, we know the authorized rate of returns. We know that we will finance it by the specific capital structure that is authorized by the different regulators. For other, as you know, we have non-consolidated capital structure authorized by the region that covers Gaz Métro and we look at project that brings added value or above our cost of capital for Gaz Métro. So we’re looking in the range of both low-teens, or more and depending on the risk of specific project.

Ben Pham

Okay. So, I guess, the amount about the cap, but you’re using maybe a bit more leverage to finance that portion?

Pierre Despars

So sorry, what do you mean the amount that we refer to as capital investment this year?

Ben Pham

I was thinking more there’s a cap in terms of how much you can recover in terms of your capital on Addison and you’re going to be exceeding that by $20 million, $30 million?

Pierre Despars

Okay. But this [Multiple Speaker] Okay, sorry.

Ben Pham

Oh, am I thinking about it wrong or right?

Pierre Despars

Okay. But it has been already written off from our books.

Ben Pham

Okay.

Pierre Despars

So we already absorbed that $31 million in our results. So we – and we rebalanced the capital structure based on that result that occurred in 2016 and 2017. So it has already reflected in our balance sheet as of September 30, and yes.

Ben Pham

Okay. So just taking as a marginal cost written whatever is in rate case return on [Multiple Speakers]

Pierre Despars

And when you look at Gaz Mét balance sheet as of December 31, or even September of last year, it was already reflected in there.

Ben Pham

Okay. All right. And the only thing I wanted to follow-up on is the LSR project, the tripling. Are you actually going to be the volumes that are moving through there, you put some data points out doubling from last year. Are you – is there going to be, I would think unutilized capacity when you get triple in the capacity, but the volumes aren’t going to come out until much later in future right?

Pierre Despars

Yes, it will come over the coming years as per our plan. So it won’t be all on for the first, let’s say, first quarter is going to come over the – that will grow over the coming years.

Ben Pham

Okay.

Sophie Brochu

The way it works is that, we have an existing train and capacity that we are using on the existing train. The service that we have on the existing train will fold over to the new capacity. So it creates a base for the new capacity and given the enthusiasm of the market and the demand for LNG, the goal was to build more than the one of the required capacity.

So the nice thing is that, the existing contracts carries us through what we need when we launch the capacity. And on top of that, whatever comes in will be just the gravy that we need. So it’s – we’re built for the future. We’re built in for the future, because we want to be there when the market is there and we have total confidence in that.

Ben Pham

Okay. That’s very helpful. Thanks, everybody.

Sophie Brochu

Yes.

Pierre Despars

Thank you.

Operator

There are no further questions at this time. I will turn the call back over to the presenters.

Sophie Brochu

So we thank you for your time. Thank you, and see you in a bit, like a quarter.

A - Pierre Despars

Bye.

Operator

This concludes today’s conference call. You may now disconnect.

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