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Thank you for standing by. This is the conference operator. Welcome to the Canadian Utilities Limited Year-End 2019 Results Conference Call and Webcast. [Operator Instructions]I would now like to turn the conference over to Mr. Myles Dougan, Director, Investor Relations. Please go ahead, Mr. Dougan.
Thank you, Anastasia, and good morning everyone. We're pleased you could join us for our fourth quarter 2019 conference call. With me today is Executive Vice President and Chief Financial Officer, Dennis DeChamplain; Senior Vice President and Controller, Derek Cook; and Vice President, Finance, Treasury and Risk, Colin Jackson. Dennis will begin today with some opening comments on our financial results and recent company developments. Following his prepared remarks, we will take questions from the investment community.Please note that a replay of the conference call and a transcript will be available on our website at canadianutilities.com and can be found in the Investors section under the heading Events & Presentations.I'd like to remind you all that our remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reports filed by Canadian Utilities with Canadian securities regulators.And finally, I'd also like to point out that during this presentation, we may refer to certain non-GAAP measures, which is adjusted earnings, adjusted earnings per share, funds generated by operations and capital investment. These measures do not have any standardized meaning under IFRS and as a result, they may not be comparable to similar measures presented in other entities.And now I'll turn the call over to Dennis for his opening remarks.
Thanks, Myles, and good morning, everyone. Thank you all very much for joining us today on our fourth quarter 2019 conference call. Canadian Utilities achieved adjusted earnings of $608 million in 2019 compared to $607 million in 2018. Our strong performance in 2019 was mainly the result of continued cost improvements across the company, ongoing capital investment and utility rate base growth and positive regulatory decisions. Two additional hydrocarbon storage caverns became operational in the second quarter of 2018 and provided a full year of earnings in 2019. Additional earnings also resulted from regulatory rate decisions in both the electricity transmission and the natural gas transmission business.Maintaining stable year-over-year earnings was quite an achievement considering that 2018 is adjusted earnings included $35 million in earnings associated, the Alberta balancing pools termination of the Battle River unit 5 PPA. We also recorded $12 million and earnings in 2018 due to an early Asian incentive for completing construction ahead of schedule on Alberta Powerline. Well, all those were good financial outcomes in 2018, they also set us up for quite a challenge in 2019 to close that earnings gap.Due to the great work of our people in 2019, not only did we close that earnings gap. We recorded ever so slightly higher earnings in 2019 compared to last year. We also completed 2 notable asset dispositions in 2019. In September we sold our Canadian fossil fuel based electricity generation business and in December we completed the sale of our 80% interest in Alberta Power line. We made the decision to sell the generation business and our ownership interest in Alberta Power line in 2019 for different business reasons but the overall strategic rationale the same. We are increasingly focused on global prospects for growth. As we seek strategic opportunities to expand our global portfolio of utility and energy infrastructure investments and services. We continuously review our holdings to look for opportunities to monetize assets and increase our capacity for growth. These 2019 sale transactions significantly improve our overall financial strength.Our many years of success as a financially secure and stable utility and energy infrastructure company is a result of our disciplined and prudent capital investment and utility and utility like assets with regulated or long-term contracted earnings. We will continue to look for opportunities for similar investments in complementary services outside of Alberta with a particular focus on North America, Latin America and Australia. Maintaining our patient approach to long-term share owner value creation has been Canadian Utilities hallmark for many years. We will look for the right investment with the right strategic fit and at the right price. In the meantime, we continue to build our portfolio of utility and long-term contracted energy infrastructure assets.Our 2020 capital plans including investing more than $1 billion in our five-regulated utilities and in long-term contracted capital assets. We are already busy on several of those projects in 2020. We commenced construction on the Pembina Keephills natural gas transmission pipeline in the fourth quarter of 2019. The 59-kilometer high pressure and natural gas pipeline supports the coal to gas conversion of power producers in the Genesee and surrounding areas of Alberta. The estimated cost to construct this natural gas pipeline is approximately $230 million and is expected to be complete in mid-2020.We secured long-term contracts and commenced construction for a fifth salt cavern hydrocarbon storage facility. Construction began in the fourth quarter of 2019 with full operation targeted for late 2021. We also entered into a partnership with the Chilean developer to build and operate an 18-megawatt solar project located in Southern Chile. The total investment in this project is approximately $24 million with an expected completion in 2021.With these projects and others, our plans for continued utility and energy infrastructure investments are already well underway in 2020.In January, we declared a first quarter 2020 dividend with a 3% increase over the dividends paid in 2019. Canadian Utilities has increased its dividend per share for 48 consecutive years, the longest track record of annual dividend increases of any publicly traded company. We're very proud of our track record of dividend increases. It was the prudent choice to adjust the size of our dividend increase to be in line with our sustainable earnings growth, which is linked to grow from our regulated and long-term contracted investments. Over the next 3 years, our expected rate base growth is about 3% per year.Going forward, Canadian Utilities strong stable foundation of regulated utility and long-term contracted energy infrastructure investments and services will provide the platform to continue our long track record of exceptional returns for our shareowners.That concludes my prepared remarks and I'll now turn the call back over to Myles.
Thank you, Dennis, and we'll turn the call over to the conference coordinator now for your questions.
[Operator Instructions] The first question comes from Linda Ezergailis with TD Securities.
I'm wondering if you could maybe give us some more context about how you're thinking of the probability and timing of putting your sale proceeds to use. What are you seeing in terms of the current environment relative attractiveness of various geographies types of investments? And at what point would you consider alternative uses of proceeds including potentially share buybacks or special dividends?
In terms of our strategy for redeploying the capital. I mean we are staying the course with what we have communicated in the past. Our core strength is really managing operating regulated utility assets. So we've achieved top tier results under all different regulatory regimes to bring value to our shareowners. We're also continually assessing our investment portfolio asset sales that we did make, as I mentioned in our opening comments, we're the right decision, increased financial strength. If you if you put that together with the target markets that we mentioned North America, ex Alberta Latin America and Australia. There are opportunities and I'll say the kind of Greenfield developments in Australia. There are utility opportunities in the rest of North America that we're continuing to look at. South America we are developing or we had at a slower pace on some of our Greenfield developments like Chilean solar project. I'm going to say there's nothing imminent right now on redeploying that cash, I mentioned that we are looking for the right asset in the right geography at the right price. In terms of alternate uses in our- right now, our cash on the balance sheet does help our credit metrics as our FFO to debt is a net debt after you subtract the cash. So that does help us on the credit metrics side and gives us optionality. So while we are focused on growing the business within Canadian Utilities there and we diligently pursue those. Never say never, down the road, we could look at a special dividend and we did one in the mid-2000s and buybacks as well. But right now the focus is on growing the company. So that's our in essence, our plans. I think I've addressed you for bullet.
Okay, sorry. I guess my follow-up question might have a few bullets as well. If you want to call it that. So on the flip side, you are focusing on growth, but you also have been disciplined stewards of capital and what would be the criteria for considering on the edges partial or full asset sales would it be if you found super-sized opportunity to raise proceeds would it be, maybe because you could surface value and clearly these assets would be valued more highly with maybe private money or some other strategic operator or maybe with ESG considerations influence as well. How you look at optimizing your portfolio of assets and businesses?
Yes, I mean, we continue to look at our portfolio in terms of value to us versus value to other and how it's performing and it's a long-term fit into our strategic plans. So we like many businesses continue to review that, so further asset sales I guess it could be a potential. In terms of looking for super sizing a deal, I mean we have partnered and are willing to work with other partners in order to say increase the check size, increase the target size same check size for us in terms of potential targets. You mentioned the S&G considerations; I mean with the disposition of our generation business that our carbon dioxide emissions are down pretty much to nothing, I'm going to say through our generation. We're at the point now where our Old Man River hydro dam that we retained from the disposition generates enough electricity to power all of our Alberta businesses. So in terms of the S&G bonuses and pluses, that is a factor that we look at, although that was not the primary reason for the generation sales to look for long-term contracted earnings. And the earnings for generation will be coming increasingly [ merchant ].
Our next question comes from Maurice Choy with RBC Capital Markets.
I guess my first question is really up to the previous topic capital deployment. You mentioned obviously disposition of power projects as one of the things to consider when it comes to ESG. But, taking that step further, as you think of gas versus electricity, utilities and do you notwithstanding obviously, you have gas utilities in Alberta. As you think about the next dollar, that you want to invest, do you have a preference one over the other?
Probably, we would probably prefer electricity over gas, that's not to say that gas isn't viable in the long term. We are innovating with hydrogen down in Australia. We have opened our clean energy innovation hub at our operations in Perth; whereby we're creating green hydrogen running a fuel cell off of that hydrogen, injecting some of the hydrogen into our gas lines, to further kind of promote the usefulness of natural gas, as a fuel in the future. Electricity with the electrification of everything, we believe that there is great future there. Maybe not the electricity that we've seen in the previous few decades as more distributed systems come online, so the next dollar as you put it, we will look at electricity and gas all else being equal, which they never are we would probably lead to electricity.
And the second question is more about this quarter or this year in particular. As you look across four utilities in Alberta, can you speak to the achieved ROEs that you've seen this year and whether or not you believe some of the -- our performances will continue moving forward?
Sure. Our 2 distribution companies that are governed by performance based regulation their financial returns on equity, we don't have the utility returns yet their financial returns are about 350 basis points above the approved return. Our two cost of service utilities the gas and electricity transmission, their ROEs, our financial ROEs are about 10.75% on average, which is compared to the 8.5% approved return that's north of a couple of hundred basis points outperformance. We on the PBR companies, we view those earnings as an entirely sustainable. We are in 2019 finished year 2 of the five-year term of the second generation of PBR. So we are well underway of kind of lowering our run rate and our costs, so that we will be able to achieve the returns for the shareowner over the PBR term. And just like in when we came off of PBR 1 into PBR 2 that benefited our customers by having a great rate decrease as we reset from PBR 1 and PBR 2 all the while during this PBR period our customers are experiencing rate increases lower than inflation. So we'll say the -- that PBR model is continuing to deliver intended results for both our customers and for our share-owners. The Service Utilities, they've been, steady in their out-performance of the approved returns that being said, there are is kind of more variability in those transmission cost of service companies as they go in and out of shorter 2 or 3 year terms for their rates.
Our next question comes from Mark Jarvi with CIBC Capital Markets.
They just wanted to start on -- there is some commentary in the MDA about re-assessment of normal adjustments. I was wondering what that could mean for the PBR regulated utilities in Alberta.
Re-assessment of normal adjustments. So this, sorry -- the AUC went back and reviewed. But they had previously identified as the five criteria for identifying as a normal a normally by which rates would be adjusted moving from PBR one into PBR 2. They've say essentially scrapped those criteria and put it up for kind of an ad hoc you make an application if you believe that a normally has been hit. That being said, they have come out to say the past performance, the overall performance of the utility companies. They don't believe would adjust would make it as an anomalies, there you see doesn't expect there to be many anomalies and it is on the Utilities and the customer groups to apply for anomalies and this would be going back and reaching back adjusting rates back to January 1, 2018. So there would be accumulative impact should any anomalies be approved. We've applied for an anomaly to increase our, increase the rates due to the inflation factors. We know of one customer group that has indicated that they will be applying for an anomaly. We don't know what that application will be, but that process is intended to rollout over the remainder of this year. So I [indiscernible] hope we got final rates for 2018 by the end of this year. So that's the largest kind of potential retrospective reach that we have hanging out on our companies.
And could you quantify it all, Dennis? In terms of what it could be, impact on retroactive and the needed on the go forward?
I think that I have to follow up. Maybe you could follow up off-line with Myles because I don't want to give you a wrong number, Mark.
Okay. Fair enough.
It is in the millions.
Okay. I wanted to maybe pick up on the comment you made about the cash being on the balance sheet and being credit positive. Just curious, you've seen Hydro One come to market this week with really low rates and the markets are right now, how do you guys think about the debt financing markets? And where you are at the balance sheet? Does the current rates you're seeing out there, change of when you come to market and maybe locking in, at this lower rate for longer?
Yes, I mean as looking at those -- the rates the other day with long Canada's that whatever 1.3% and if you role in our spread right now, it could be between 130 and 140 basis points would make for I'll say an even lower than our 2.96% issuance that we had from last year. We generally have been issuing later on in the year, once we get kind of a firmer bead on our capital programs. With the current environment right now, I don't -- we continually monitor it. I don't think that there is going to be a large uptick in the near future, but we continue to monitor it. As you know, we've been a traditional third, fourth quarter issuer. But those rates are appealing and they caught my eye.
[Operator Instructions] Our next question comes from Patrick Kenny with National Bank Financial.
Dennis, just on the 3% dividend increase versus ATCO at 7.5%. I guess you mentioned the 3% rate base growth profile. But I was just curious what opportunities you might be pursuing to augments use dividend growth rates so that it converges closer to that goes over the coming years.
I mean there was more -- there was that convergence and how there's more of a divergence, we'll say the payout ratio and Canadian Utilities is in line with our peers. If you take a look at cost payout ratio there is more room given that Utilities right now is a large component for ATCO base. So just given to ATCO in the, in the '50s, the percentage in terms of payout ratio and use in the '70s. So until something changes between ATCO that's not in CU or sorry in CU that's not an ATCO there is not going to be, I'd say, kind of a realignment of those dividend increases, given our long-term sustainable growth rate that we're seeing in CU.
Makes sense. And then on the flip side, I guess with you see considering a return to formula based generic cost of capital approach how much downside to the 8.5% base ROE, do you think you could absorb without impacting that 3% dividend growth rate?
In the GCLC proceeding nobody not Utilities in our customer groups have advocated a return to a formula going forward the AUC put it out there. And given the current environment nobody has profit evidence that a return to a formula would be good for good for all stakeholders. So I suspect, that's kind of chilled a little bit in the AUC. I'll say quest for regulatory efficiency, we can't just dispense with GCLC in formula. So that doesn't seem like that would be the case. We're at 8.5% return on 37% equity thickness. When you look at fair return standard, 2 of the elements of the 3 legged stool comparable investments and capital traction are not being met in our view with that 8.5% and 37. The approved ROEs elsewhere in Canada or an average of 9.2% on 43% equity, so we are that's kind of like the backbone for our submission of 10% on 40% equity thickness or we have an alternative in there. The AUC it doesn't want to increase the equity thickness leave it at 37% then we'd be applying for a 10.5% return. So that's my pitch for returns should go up not down. At 8.5% that at 37% equity, every 100 basis points, change from that impacts Canadian Utilities by between $40 million and $45 million per year. So that's an earnings and cash. So if you look at 600 or without generation and Alberta Powerline, future earnings, if you back that out here and we'll call it the 500 to 550 range that $40 million is a good hunk of growth.
So that's great. Very well.
Those are our considerations and we what the impact of that to GCLC would be and again that's not effective until 2021.
Right. Got it, okay. And then just last one from me here, given the current sell off in commodities. You mentioned ESG considerations weighing in on your capital redeployment strategy. Any chance you clarify which geographies, industries or even counterparties are now off the table, given your strategy around ESG?
Hi, I mentioned ESG, the primary component for our generation was the kind of long-term versus merchant earnings that was being driven by our generation portfolio. ES&G was a factor, but it wasn't the driving factor in the decision. If you take a look at geographies, targets with a heavy ESG component. You know we would think hard about investing in coal, we could do coal if there is a path like we were on with our former generation business to convert it to cleaner fired natural gas but that being said given where sentiment is and the investors. We would consider that in our targets but I don't think anything is completely off the table right now. So like you know as I say, we could do coal and convert. But that's about it.
Our next question comes from Naji Baydoun with Industrial Alliance Securities.
Just one question for me. Wondering if you can talk about your Chile investment in solar and if there are any potential follow-on investments with our partner the same region or in South America.
Thanks for the question. It's a small projects; it gets us into the market. It gets us into the renewable market. It's doesn't contracted, its merchant. That being said, the generation from that solar project is feeds into kind of a stabilized price mechanism whereby we the proceeds we receive on sales is equivalent to kind of like the current PPA contracts that are in the market it's going to be developed over the next couple of years at can't remember cost $24 million for the cost, so small project. We're in a partnership with the developers, so there are other opportunities there. And we're continuing to look at as I mentioned before. Latin America is one of our target markets. So we're looking there as well as in North America and Australia.
That's helpful. Just wondering if you can add a bit more color on what the scope of the scale of those additional investments in renewables look like.
It will depend on the opportunity. I mean we recently completed north of $100 million deal for 35 megawatt hydro plant in Mexico. So it gives you a little bit of an idea as to in the 10s of millions into the hundreds of millions. There are other opportunities out there that could be significantly larger than that. And our developments teams are looking at all of those elements. As we continue to invest in our existing Utilities are continuing to look for M&A activity for other Utilities and Greenfield developments for probably kind of more on the renewable side. So we're looking at all of those aspects, given where we are with our current financial strength.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Myles Dougan for any closing remarks.
Well, thanks, Anastasia, and thank you all for participating this morning. We appreciate your interest in Canadian Utilities and we look forward to speaking with you again soon. Bye for now.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.