Q3 2021 Algonquin Power & Utilities Corp Earnings Call
[music].
Good day, and thank you for standing by welcome to the Algonquin power and Utilities Corp.
<unk> third quarter earnings webcast and conference call at this time, all participants I understand I think the speaker's presentation, there will be a question and answer session.
I asked a question during the session you will need to press star one on your telephone please be advised that today's call is being recorded.
Or any further assistance, please press star zero and I like Johanna conference over to your Speaker today, Mr. Manley Chang Vice President Investor Relations. Please go ahead.
Thank you good morning, everyone. Thanks for joining us this morning for our third quarter earnings conference call presenting on the call. Today are everyone. That's got a our president and Chief Executive Officer, and Arthur Kasprzak, Our Chief Financial Officer also joining us. This morning for the Q&A part of the call will be Jeff Norman our chief.
Development Officer, and Johnny Johnston, our Chief operating officer to accompany our earnings call. Today, we have a supplemental webcast presentation available on our website Algonquin power and utilities Dot com, our financial statements and management's discussion and analysis are also available on the website as well as on SEDAR and Edgar.
Yeah.
Before continuing the call we would like to remind you that our discussion during the call will include certain forward looking information, including but not limited to our expectations regarding future earnings capital expenditures and pending acquisition at the end of the call I will read a notice regarding both forward looking information.
And non-GAAP financial measures. Please refer to our most recent MD&A filed on SEDAR and Edgar and available on our website for additional important information on these items.
Yeah.
On our call. This morning are really will provide an overview of our Q3 performance Arthur will follow with the financial results and then we'll conclude with an update on our strategic plan for the business. We will then open the lines for questions I ask that you restrict your questions to two and then re queue. If you have any additional questions.
To allow others the opportunity to participate and with that I'll turn it over to Adrian.
Thank you Amelia and a very good morning to those who have been able to join us on the call and online.
I'm pleased to report solid key financial metrics for the third quarter of the year.
Q3, adjusted EBITDA was $252 million or 27% increase year over year.
And our Q3 adjusted net earnings per share was <unk> 15.
In line with last year.
Okay.
On a regulated side of the business.
Operating profit was positively impacted by the addition of our new Empire wind facilities.
As well as the first full year of operations from our Bermuda electric utility and as Tom water utility in Chile.
Which both closed late last year and have both performed in line with our expectations.
On the renewable side of the business.
Operating profit from our new facilities, such as Sugar Creek and Maverick Creek.
Contributed to increased earnings on a year over year basis.
Excluding new facilities.
Production was seven 3% below the same period last year due to lower wind resource, but this was partially offset.
From other income, including increased renewable energy grid.
Revenues.
I am pleased to report.
The Companys operating results were not materially impacted by the pandemic this quarter.
Recall that in the third quarter last year. The pandemic did have a one cent impact on earnings per share.
Generally speaking we are not seeing negative impacts from COVID-19 on our loose as business conditions in the regions, we operate in return to normal.
Our team continues to focus our efforts on Algonquin three strategic pillars.
Growth.
Operational excellence.
And sustainability.
We operate two to Bryan Murray businesses.
Regulated and renewables.
We will spend some time on each for an update.
On the regulated side.
One important lever of growth is acquisitions.
On that topic.
Pleased to discuss our recently announced agreement to acquire Kentucky Power company.
Vertically integrated regulated electric utility that service is approximately 228000 customer connections.
In 2000, and Eastern Kentucky counties.
As part of the transaction.
We will also be acquiring AEP can to keep transmission Company Inc.
Our regulated electric transmission utility operating in the PGM integrated market.
We look forward to welcoming the can to keep our employees into the Liberty family.
And to working with AEP during the closing and transition process.
Okay.
The total enterprise value of the acquisition is approximately $2 billion.
Comprised of assumed debt of approximately $1 $2 billion and.
The cash purchase price of approximately $1 6 billion.
From our perspective.
This represents an attractive value is a multiple of one three times rate base.
Based on an estimated mid year 2022 rate base of approximately $2 two.
$2 billion.
Okay.
Okay.
This transaction will have the benefit of increasing our pro forma regulatory business mix to nearly 80% of our portfolio from nearly 70% currently.
And further increasing our service territory and regulatory jurisdiction diversification.
With a supportive regulatory framework.
Upon closing of the transaction.
We expect to have approximately $9 billion of rate base.
Increasing our pro forma electric grid base from 63% to 72% of our total pro forma rate base.
We expect to close the transaction in mid 2022.
Subject to customary closing conditions.
Including the receipt of various state and federal regulatory and governmental approvals.
We expect the transaction to be accretive to adjusted net earnings per share in the first full year of ownership would you be calendar year 2023.
And generate mid single digit accretion to our adjusted net EPS you're after.
While being supportive of our long term growth trajectory.
Yeah.
Now I thought I'd spend a few minutes on the rationale behind the acquisition.
And why we feel strongly that it represents a strategic fit for us.
This acquisition fits squarely into our two playbooks of Greening the fleet.
And improving return on equity from non optimized assets.
As I've mentioned in the past.
Greening the fleet is an important lever of growth and an area, where we have a strong track record through the transition of our Empire and Gallup equal utilities.
Just between 2017 and 2020.
We successfully reduced absolute carbon emissions.
Acquired Empire District electric utility by 33%.
And at the acquired Cal <unk> electric utility by 38%.
By including renewables in the rate base.
Use of tax equity.
Shutting down a 200 megawatt coal plant in the case of Empire District.
We plan on leveraging this experience at Kentucky power.
In particular, the Kentucky power business offer significant opportunities for us to transition the existing fossil fuel generation two renewables would.
Would you reinforce our leading role in the transition to a low carbon economy.
We see a pathway to decarbonize.
As it is our expectation that the low cost resource to replace the retiring or.
Our transport pool will be a combination of renewables with support from energy storage.
Wind and solar represents the lowest level <unk> cost of energy to date.
And are expected to provide benefits for our customers.
The existing unit power agreement with the Rockwood coal fired plant will expire in 2022.
And Kentucky Power's, 50% interest in the Mitchell coal fired plant is expected to be retired or transferred by 2028.
To replace the lost electricity supply from Rockport and Mitchell.
We see an opportunity.
To utilize the integrated resource planning process.
We explore the potential.
To replace over 1100 megawatts of fossil generation capacity with renewables.
This.
Would represent our largest greening the fleet opportunity to date.
Aligned with our target to achieve net zero scope, one and two emissions by 2050.
We look forward to partnering with the Kentucky Public Service Commission or PSC.
Through the integrated resource planning process, and leveraging our greenfield development expertise to deliver low cost clean energy solutions.
<unk> powers customers as part of our demonstrated greening the fleet capabilities.
Secondly.
<unk> has had a successful track record of identifying securing regulatory approvals and closing acquisitions.
We have extensive experience.
In managing the integration of multi modality utilities, such as Kentucky power and Kentucky Transco.
As with our previously acquired utilities, we strive to share learnings.
And best practices, among our utilities with.
With the aim of driving consistent improvement.
Our key performance metrics.
That provide value for our customers.
A number of these acquisitions.
Have been utility acquisitions from large entities.
And our stewardship of those utilities as part of our Liberty family.
Has helped us to create value for our shareholders.
And our customers.
Yeah.
Similar with previous utilities, we will utilize our local <unk>.
Our responsive approach.
As our local model has been able to reduce disallowances from having transparency of our costs.
As well as the local model allows us to manage our costs within our regulatory allowances.
In addition.
We have generally been able to utilize our geographic diversity.
To deploy capital in a manner that reduces regulatory lag.
And increases returns.
As we have done with many of our utilities.
Also control contributing to our ability to earn returns is.
He is a focus on added regulatory mechanisms.
Under our ownership.
We have been able to secure decoupling mechanisms.
Capital trackers.
Property tax adjustments.
And similar mechanic, which all helped the utilities increased returns while providing builds stability.
And adding the necessary capital.
To allow us to better serve our customers.
For example.
After the acquisition of granite state electric and New Hampshire.
Since our first test year.
Our returns have averaged nearly 9% Roe.
Whereas under prior ownership.
The returns were frequently under 3%.
Similarly on perhaps more importantly.
At Empire District electric.
Prior to our acquisition of <unk>.
<unk> achieved where commonly in the 7% to 8% range.
Whereas under our ownership.
We have been able to average nearly nine 5%.
Kentucky power is primarily regulated by the PSC.
Which we view as a constructive regulatory jurisdiction.
And it's highly rated by S&P from a regulatory perspective.
Kentucky power is a utility that has historically realized utterly below the authorized levels.
When compared to peers in Kentucky.
We see a compelling path forward to improving the earnings profile.
<unk> already that is closer to the authorized amount of nine 3% for the distribution rate base.
The availability of certain key regulatory features.
For instance.
Forward test years are not currently being employed by Kentucky power. Despite its approved use by other regulated peers in the state.
And could provide for more timely recovery of costs and expenditures.
We look forward to working with the commission on implementing certain improvements to help us deploy the necessary investments.
To deliver reliable electric service to.
<unk>, Kentucky Power's customers.
And we plan to maintain Kentucky Power's headquarters in Ashland.
Along with developing constructive relationships in the local community.
Okay.
Arthur will discuss the financing plan of the acquisition shortly.
Lastly on the acquisition front.
I wanted to provide you with an update on our pending acquisition of New York American water.
We filed our joint proposal signed up by the <unk>.
BSC staff.
The majority of Intervenors in early November.
With a hearing scheduled for November 16th.
While this has been a longer process than originally anticipated.
We remain confident that the.
The transaction will close and.
And we are on track to do that within the timeline set out in the stock purchase agreement, which calls for closing to occur on or prior to January three 2022.
Moving on now to operational excellence.
In a mission critical industry.
Safety and reliability are always the most important areas of focus.
I'm very pleased to share that we have passed the impressive milestone of.
Over 650 days.
That is over 9 million work hours without.
A single lost time injury across our North American business.
While keeping our customers and communities safe.
And maintaining our system reliability and resiliency.
I want to thank our employees during the wildfire season, which was really operational excellence in action.
During the quarter.
The Gallagher fire impacted our South Lake Tahoe area at <unk>.
Our local teams worked with incident command and infrastructure prediction teams, where power lines were shut down for safety.
I'm glad to say that operations have returned to normal.
And our teams were proactive during the evolving events.
Bruni <unk> pools.
Deploying fire retardant unfolds and clearing vegetation.
Longer term.
We intend to continue to make investments for system resiliency.
System hardening.
And wildfire prevention.
On the regulatory front.
Our Missouri rate case continues to progress and.
And we expect the outcome in the middle of next year.
In our regulated businesses, we are closely tracking rising gas prices as we head into this winter.
We have different regulatory approved hedging policies in place, but overall, we expect the energy cost to increase and for this to flow through the customer bills through our various recovery mechanisms.
Affordability is always a concern for us and so we'll continue to work with our various partners on our energy efficiency programs.
And low income programs to help mitigate these costs, where we can.
And finally.
We remain firmly committed to sustainability through the inclusion of environmental social and governance values in our broader corporate strategy and <unk> operations.
I am pleased to report that last month, we announced our target for net zero for scope one scope two emissions by 2050.
The achievement of our net zero target is supported by our strong decarbonize and track record.
Extensive experience in regulated utility management.
And deep expertise in renewables development.
I spoke earlier of our greening the fleet capabilities.
And wanted to highlight our track record of environmental stewardship.
Since acquiring the empire distribute duty.
Company in 2017.
<unk> total scope, one greenhouse gas emissions have been reduced by over 1 million metric tons.
And scope, one and two emissions intensity per dollar of revenue have decreased by 26%.
Similarly at <unk>, we have already reduced our carbon intensity of <unk> by 46% since 2017.
At 0013 per dollar of revenue.
Algonquin has among the lowest carbon intensities among its peers in the industry.
Concurrent with the release of a net zero target.
We also released our 2021 sustainability report.
Which not only outline our progress on our ESG initiatives.
But also provided a higher level of detail around nine priority ESG targets for 2023.
Some of which we have already achieved ahead of schedule and others that we are confident in meeting.
With that I'll pass it over to Arthur who will speak to our third quarter 'twenty to 'twenty one financial results.
Sure.
Thank you Arun and good morning, everyone I.
I am pleased to report solid third quarter results, reflecting the benefits of Algonquin is diversified and resilient business model and proven track record of disciplined growth.
Our third quarter 2021, consolidated adjusted EBITDA was $252 million, which is up approximately 27% from $197 9 million, we reported for the same period last year, but slightly below our expectations.
The regulated services group delivered $195 $8 million in operating profit in the current quarter, which compares to $146 1 million in the same quarter last year.
This improvement primarily reflects contributions from belko, our Bermuda electric utility and to sell our Chilean water utility as both acquisitions closed in Q4 of last year.
As well as contributions from our wind facilities that were placed in service earlier this year as part of the Midwest Greening The fleet initiative.
Results also benefited from new rates implemented at energy, North and Peach State gas systems as well as the park water in Apple Valley systems in California.
This was offset by the impact of a one time retroactive rate increase in Q3 of last year at the Cal Pico electric system.
I should also note that the regulated services group did not experience any material negative impacts from COVID-19 this quarter.
However, the comparative results from Q3 2020 were negatively impacted by the pandemic by approximately $4 2 million.
Moving on the renewable energy group reported a Q3 divisional operating profit of $72 5 million, which compares to $67 1 million in the same quarter last year, an increase of about 8%.
But below our expectations for this business unit.
The addition of Sugar Creek, and Maverick Creek wind generation facilities as well as the Great Bay, <unk> and Alta Vista solar generation facilities, all contributed to the quarter over quarter increase in operating profit.
Our investment in Atlantica also continued to provide benefits with dividends received increasing by $2 8 million over the prior year.
However, this increase was partially offset by several factors.
We experienced lower overall production at our wind generation facilities, primarily due to resource shortfalls.
Including the impact of the newly added facilities production in our existing power generation facilities was seven 3% lower than the same quarter last year or approximately $15 four below the long term average.
Production shortfalls, along with lower than expected realized pricing also negatively impacted the results from our investments in the Texas coastal wind facilities.
Lastly performance at our Sanger facility was negatively impacted this quarter by higher carbon compliance costs and lower capacity payments.
Some of these impacts were partially offset by higher realized renewable energy credit pricing at our U S wind facilities as well as operating cost savings.
Yeah.
I should note that during the quarter the company self monetize approximately $8 7 million renewable tax credit benefits, which would have been otherwise included as part of the renewable energy group's operating profit and an adjusted EBITDA, but are reflected in our overall adjusted net earnings.
In total our Q3 adjusted net earnings per share came in at 15, which is in line with the 15 reported last year.
I now want to spend a few minutes on the financing plan for Kentucky power for their Kentucky power acquisition, which was designed to maintain our mid triple B investment grade credit ratings and maintain a strong and resilient balance sheet.
Concurrent with the announcement of the transaction, we announced a Canadian 800 million bought deal offering of common shares to fund a portion of the equity purchase price.
This offering is expected to satisfy all of our common equity needs to the expected closing of the transaction in mid 2022.
To fund the remainder of the cash purchase price, we plan to utilize some or all of the following sources.
<unk> hybrid debt, which.
Which has seen some very attractive rates in the market recently and provides for an attractive funding source received 50% equity credit from S&P and Fitch.
We continue.
To maintain a significant room in our capital structure for this low cost capital.
Second potential monetization of nonregulated assets or investments the current low cost capital environment continues to precipitate a strong valuation for quality renewable generation assets.
Although our core competency continues to be as a developer operator and owner of regulated and renewable assets. We believe augmenting. These competencies with the introduction of low cost capital through monetization of some of our renewable assets or investments as the potential to drive greater shareholder value.
Lastly, mandatory convertible units.
<unk> heard me say before we believe that mandatory convertible units are a great fit in our capital structure, having the potential to be lower cost capital compared to common equity and more effectively match investments of cash investments cash generation profile with its financing.
However, recognizing the ultimate conversion to common equity it used as a financing source, we intend to be prudent and the magnitude of their use.
While we expect to have the majority of our permanent financing in place at or near the transaction close.
We also secured an approximately $2 7 billion acquisition financing commitment to support the acquisition.
Finally, I wanted to say just a few words on the acquisition itself.
We view this acquisition to be of compelling value and expect it to be accretive to adjusted net EPS in the first full year of ownership, which would occur in calendar year 2023 based on our anticipated mid 2022 closing.
Thereafter, we would expect it to generate mid single digit accretion to adjusted net EPS and support growth in our adjusted net EPS over the long term.
Now moving on to provide some updates on our other financing activities and progress on our 2021 capital plan.
Since August of 2020, we have placed into operation approximately 1400 megawatts of renewable energy projects from our construction pipeline.
During the first nine months of the year, our Goldman has developed.
Fully capital on initiatives relating to the safety and reliability reliability of our electric water and gas systems as well as delivering new renewable generation from our projects, including Maverick Creek wind Alta Vista solar and our Midwest screening, bringing.
Bringing the total capital deployed so far this year to approximately $3 4 billion and on track for expected capital deployment in 2000 2021 of over $4 billion.
During the third quarter the company utilized its ATM program, raising proceeds slightly north of $100 million.
We view the ATM program is allowing for cost effective and opportunistic issuance of common stock, but plan to be disciplined in its use.
As a result, we do not expect further issuance under the ATM until after the expected closing date of the Kentucky power acquisition at the earliest.
Lastly.
I want to say that our balance sheet remains strong and resilient.
At the end of the third quarter. The company had approximately $1 9 billion of liquidity and capital reserves available.
We continue to have strong support from our key banking partners and expect to maintain resilient liquidity profile as our business continues to expand.
Before turning things over to Rune I'd like to provide a brief update on our 2021 adjusted net EPS guidance.
Excluding the impact of the market disruption on the Senate wind facility related to winter storm already in Q1, we continue to expect our 2021 adjusted net earnings per share to be in or around the lower end of the company's range of 71 to 76 that was communicated previously.
We continue to assume our earnings guidance normal and our earnings guidance normalized weather patterns in the fourth quarter as well as resource availability and production on our renewable generating facilities that is within long term averages.
Also assumed that the company is able to obtain constructive regulatory outcomes as well as absence of any supply chain delays that would impact our estimated placed in service dates based on the current equipment delivery and construction schedules.
With that I will hand, it back to Arun to outline our strategic plans.
Thank you Arthur.
Before we close out our prepared comments this morning I.
I want to give an update on our strategic initiatives.
With society and economy is working hard and preparing for the energy transition.
Excited about how Algonquin regulated and renewables businesses are both well positioned to contribute to and benefit from this decarbonization transition.
We remain committed to our strong track record of disciplined growth.
With many different levers at our disposal.
Having deployed nearly $3 $4 billion of capital this year.
We remain on track for our 2021 planned capital expenditures.
The addition of Kentucky power will be additive to the company's long term investment pipeline.
Another growth lever on our renewable side that I'd like to touch on is our significant focus on new Greenfield development.
As a reminder, this prospect in Greenfield pipeline is over and above our long term capital investment plan.
Our greenfield investments are focused on securing new opportunities and continuing to advance the projects that will eventually form part of our long term capital plan in future years.
We look forward to discussing this in more detail at our upcoming analyst and Investor Day, which is scheduled for the morning of Tuesday December 14th.
Where we will be providing the investment community solar.
Opportunity here from key members of the leadership team for an update on our operations.
Strategic direction.
And future growth plans for Algonquin.
In summary.
Three strategic pillars of operational excellence.
Growth.
And sustainability will be a key foundation as we continue to build the business and.
And strive to bring long term value to our shareholders.
We remain well positioned to continue to execute on our growth strategies.
While pursing our sustainability goals.
Guided by maximizing operational excellence.
On behalf of our investors.
And customers.
With that.
I will turn the call over to the operator.
For any questions from those on the line.
Sir you Minder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Again, if we would like to ask a question press Star then the number one on your telephone keypad. Please standby will be compile the Q&A roster.
Your first question comes from the line of Rupert <unk> from National Bank. Your line is open.
Thank you good morning.
Good morning.
Hi, good morning, so I'd like to start by asking about plans to finance, our Kentucky acquisition and the potential for asset sales have.
Have you had discussions in the past on selling assets and.
Let me get some some thoughts on which assets you might select for sale do you think you'll have some orphans in the portfolio or.
And would you maybe look at selling a share of the whole portfolio.
Well first of all a rupert.
Anything we do.
We're going to be guided by making sure we maintain a very strong balance sheet.
That is an absolute must for us.
So from a business risk and grid profile perspective.
Whatever we do in terms of asset recycling, probably will be more on the renewable side of the business.
We believe.
It could be a combination of some of the things you talked about.
It could be orphan assets.
That we perhaps developed or acquired many years ago that may not be a good strategic fit anymore or it may be opportunities to bring in low cost capital, while maintaining our strong development and operational.
Leavers.
So we probably will not be.
Obviously announcing which exact assets before we are prepared to do so.
Okay, that's fair enough.
And then secondly, if we can talk about supply chain logistics issues and.
Any inflationary pressures you might see on your operations.
Okay.
Sure.
We're not baking in any any potential.
Just six issues related to you.
Alright.
What sort of risks should.
Should we be baking in there.
Sure.
So first of all I don't want to give a little bit of context, so back in 2020.
We had 60 to 100 megawatts of renewables under construction right and that was right in the midst of Covid.
And I am very pleased to.
Board that by and large we are able to bring in that 60 to 100 megawatts of construction projects into operation.
Earlier.
Last year in 2020.
In 2021, and so we have actually really done a lot in terms of ensuring we are able to effectively match.
One is our supply chain efforts now having said that.
Yes, we are seeing.
Issues around shipping issues around delivery from from the various boards, but I believe we have a pretty effective supply chain management team and we do not see any.
Huge movements are significant movements in terms of our project milestones.
Are you seeing any inflationary pressures either on your construction costs.
Operations.
Yes.
Packed.
So sure.
Two items I just first of all.
Many of the <unk>.
MPC contracts and largely equipment supply agreements, we have Dr. Under biologic under fixed supply fixed price contracts right now for the ones that are coming up.
We tend to do is.
Try to align our.
It could be in supply and EPC agreement contracts as close as possible to the offtake agreements. So yes, we have seen some pressors and inflationary pressures.
We're from depending on cloud, especially with component, 5% to 10%, but we have also seen.
Sure.
An increase an uplift in the offtake pricing. So we have been able to preserve the kinds of returns that we look forward.
I'll leave it there thank you.
Thank you Hubert.
The next question comes from the line of Steven <unk> from Raymond James Your line is open.
Thanks, Good morning, everyone. I'm wondering if you can just provide any color on the pack you see two improving Roe.
Be it timing and what you see as the low hanging fruit just in terms of.
Whether thats, the future test year or anything like that.
So look this is something we're very focused on in.
David as I talked about earlier.
We do have a playbook.
We have utilized in places like Empire state.
In <unk> and other.
Granite state and some of our other utilities as well alright, So we are well aware that.
The ROE is not optimized.
Right now in Kentucky power there are a number of different mechanisms. We obviously will be working closely with the commission to make sure. We work this effectively.
We do something that's in the best interest of the customers as well. So there are things like for example, the unit power agreement with Rockport, which is a coal plant that is based in Indiana.
There are a certain number of <unk>.
Cost that have been deferred and disallowed for future.
The conclusion in the revenues.
So that's one lever.
Other one is utilizing forward test years, which as I said in my.
Our prepared remarks are utilized by our other investor owned utility peers in Kentucky.
There are also a items.
Such as the 42%.
<unk> equity that we see right now we believe we have room to increase that as well and other <unk>.
Capital and.
Operating cost tracking mechanisms that are available I mean, Kentucky is a very constructive regulatory state.
And we definitely look forward to working with the commission closely.
<unk> once again best for our customers over the long term.
That's great color. Thanks, Arun and then maybe just one more for me as you look to Green the fleet, a Kentucky power I'm curious if you had any initial thoughts on what the mix of renewables might be and if you could potentially even include storage there.
So look we look at store is whenever we look at any.
Renewable projects these days and it is becoming more and more compelling.
We will talk about this a lot more at the Investor day.
But by and large we believe that.
Between solar and wind in that.
<unk> solar is hasnt, probably better resource.
<unk> ability and better economics, there are pockets in the state of Kentucky, where wind is a strong resource.
We will have to work through obviously site.
Citing interconnection capacity all of those things and obviously make sure that we work with the commission through the integrated.
Uh huh.
The IRB process.
As we firm up our plans.
Excellent thanks for that I'll turn it over.
Thanks, David.
The next question comes from the line of Nelson <unk> from RBC. Your line is open.
Great. Thanks. Good morning, everyone. First question just to follow up on David's question on Greening, Kentucky.
So just in terms of the Rockport facility Rolling off that you pay at the end of 2022.
What is Kentucky power requirement to.
To backfill that capacity do you have enough spare capacity for now for that facility.
Facility to roll off or alright.
I can just provide a bit more details on like if you have to get new capacity by the end of.
At the end of.
2022.
Sure sure.
So.
At present, Kentucky power has several sources.
For its load right you've got the Rockford coal facility and you have got Mitchell, you've got Big Sandy gas and then you had purchases from the grid.
And interestingly enough over the last several years, what we've seen is a.
Purchases from the grid or in fact, a lower cost.
<unk> purchases from.
From the from the coal plants so.
When Rockwood EPA expires.
This should actually be positive.
And in terms of us being able to procure lower cost energy from the grid as compared to <unk>.
Okay, but there's no requirement to have available capacity as backup or anything right.
There are some utility capacity requirements and we will be working with AEP to replace the work for the contract on a short term basis to make sure we stay in compliance with those.
Okay got it.
And then my next question just relates to Balco I believe there is a $35 million right.
Increase request I didn't get a chance to pull the rate case filing but can you just talk about the key drivers of the increase and is it mainly just due to higher oil prices that you've been seeing.
Yes, I mean, I think the two main drivers Nelson you've hit on one of them, which is the increased fuel prices and then in the last rate agreement there was some deferred costs being in the middle.
The Covid pandemic and May.
Maybe as a reminder, in context for everyone. Traditionally we've been filing a new rate case with the.
The DRA in Bermuda. This is now going to offer sort of multi year filing this will be a two year rate case.
Okay. Thanks, Kenny I'll leave it there and get back in queue.
Thanks Vanessa.
The next question comes from the line of Julien Dumoulin Smith from Bank of America. Your line is open.
Hey, good morning team.
Opportunity.
Good morning Julien.
Yeah, Hey, it's a pleasure we avoid it.
Indeed, hey, so maybe just following up on let me just first focus on Kentucky here.
Just as you think about the first off Mitchell could that'd be transferred sooner here just as you think about the timeline to exit coal here. If you can elaborate on that and then also can you quantify a little bit.
I know you alluded to earlier the earned ROE just what the timeline is there and again I know this is ahead of your analyst day, but as you're thinking about that cold transition how much closing rate base today as you think about that outlook that you can provide as well that timeline to get to your earned ROE given the sort of the cadence of the rate cases around this.
Sure.
First one Mitchell.
Julian right so.
As Im sure Youre aware.
The Kentucky Commission basically.
Through the investment for CCR, which takes the.
Project capable of delivering.
Continuing to operate through 2028.
And.
The commission did not approve.
The investments in the EOG would.
Would you would have actually enable the plant to continue to operate.
Through 2040, <unk>, so given that.
Order.
<unk>.
Our view is that we will be able to transfer that ownership.
From Kentucky power too.
The West Virginia subsidiary of AEP in 2028 are there are compelling reasons for us.
B and economics for us to be able to transfer that earlier, that's something we'll obviously look at them, but again, we'll have to work with the commission.
On that account.
On your.
Earn hourly question.
The allowable arrow.
In Kentucky at nine 3%.
And I believe that some of the earlier comment I mean Julien around.
The disallowance of course under the Rockport Upa.
The potential to increase the.
Equity thickness from 43% to something higher.
Through utilizes of forward test years.
And some of the other mechanics that are already available in Kentucky that we will.
Hope to be able to come closer much closer to the reliable.
However, we have continued to be fairly conservative.
In our modeling as to.
Our forward looking.
Our views on that so we remain pretty confident to be able to get much closer to.
Alright.
Got it so.
Just to clarify that when you say youre concerned in your model and Youre, saying youre not necessarily fully assuming that as you look at your outlook.
Over that five year period.
That's right.
We assume that we will get closer to it over time.
And we believe that our first <unk> filing would be in 2023.
Got it excellent and then can you clarify the KOL and rate base here just as you stand today as you think about like that pivot over time, what's the starting point that we're at today, if you think about sort.
Sort of the degradation from coal rate base to transition to a renewable overtime.
So clearly the trend is and will start happening at the end of 2022 right and.
And obviously another big point in time is 28, when we will no longer.
Have ownership of Mitchell.
Third part obviously is how quickly can we bring renewables into the <unk> working through the IRB process and.
Given the.
Given the Steve of the economy and in the <unk>.
Eastern Kentucky.
Given the much lower LTV of renewables, we believe that.
We should be able to start layering in renewables as perhaps even as early as towards the end of 2024.
Got it excellent.
Alright, if I can I know, we're also fixated myopically on Kentucky here, but I've got to ask you. The question around BBB here reconciliation how are you thinking about your prospects under this legislation here, especially given how you guys talk about renewables at times.
And specifically also I'd be curious if you could comment on how you think about <unk>.
Given this legislation to I mean, obviously, an expanding opportunity set and some nuances I imagine for tax and how are you guys recognizing too.
Well, let me first.
The answer on the build back better look.
I usually.
Said to folks is that.
Renewables has gone beyond policy.
It's becoming.
Already become an economic value proposition right, what all of the deal wins.
That are out there.
Just on the things like build back better could can only help us right.
I will also go beyond that one of the fairly easy things I think the Baidu administration due to an executive order in fact is direct purchases.
Through the federal government of renewables, we already have.
The grid be solar project, where.
The General services administration of the Federal government is the off taker. So we have all of the accounting regulatory.
Bob.
Policies and processes in place to in fact directly contract with the federal government as well.
With all of the deal wins.
And what the buyers are municipalities trying to do to accelerate the pace of renewables. We believe that all of these deal wins can only benefit us Arthur why don't you.
Respond to the <unk> good.
Good morning Julien.
From.
The plan basically I mean, a lot of tailwind increased flexibility, obviously with the with the proposals around the extension of the tax credits just makes tax equity financing continue to be valuable for us also with the.
Direct pay proposals that out obviously.
Provides another dimension of financing and as well as <unk>.
I said before we continue to have tax appetite internally. So that we can continue we can look at.
At monetizing some of our own tax credits as well. So so from an overall perspective, it's provides flexibility and to look we'll we'll use it to.
Basically.
Enhance project economics.
Alright, guys. Thanks for the time best of luck.
Thank you Julien.
The next question comes from the line of Sean Steuart from TD Securities. Your line is open.
Thanks, Good morning, everyone.
Good morning, Sean.
Just a couple of questions Newark American water, just so I understand it ahead of the hearing next week.
If there are still dissenting parties on this transaction how does that play out post this hearing.
And how does that inform your thinking around the closing date of early January worst case scenario.
Hey, Good morning, Sean This is Johnny So I think in the joint proposal that we filed with the commission we had all parties ball one signing them and so I think we feel.
Very confident in terms of the process that we've gone through the large degree of alignment.
In with all the parties down in long island, and so I really feel pretty confident.
Coming through the hearing that we should be seeing an order in the in the not too distant future.
Okay. Thanks, Johnny for that.
Second question is on agents and C. You've got the new partnerships in place.
Can you give us some context on what Ares brings to the table for you guys and thoughts on.
Advancing that vehicle using it as a growth lever going forward.
So.
With aegis as you know we have had <unk>.
As a partner.
And based on everything.
That is out in the public.
It was a challenging partnership given the financial challenges.
There have been going through.
So what areas. What we have is a very solid financial partner for us to work through our development and construction financing.
And in a rather and then also bringing a peaceful partner every time, we do a project we now have.
The contractual terms and conditions and everything.
So pretty much with one partner and also there is no conflicts of interest given that.
Auto financial partner and they are not looking to enhance their own EPC.
I.
GAAP diluted or anything with steward.
We do intend to retire the aegis name in.
Basically everything now under Liberty development, all of our development activities globally. So you will probably be not be hearing about issues.
Going forward from us.
Okay. That's understood. That's all I have thanks very much Harry.
Thank you Sean.
Yes.
The next question comes from the line of Rob Hope from Scotiabank. Your line is now open.
Good morning, everyone I wanted to circle back on Ryans comments that youre seeing a little bit of cost inflation on newer notebook projects, but PPA pricing is coming up as well.
How are discussions going for the next phase of contracted renewable projects could we see a little bit of an air pocket here.
FTE.
The PPA off takers, one a little bit more certainty on whether or not the inflation is transitory or fits your AR for a while I'm just trying to get a sense of how discussions are going.
And then just to make sure I understand Rob So basically what I was trying to say in my comments is that we are seeing inflationary pressures depending.
Depending on when certain commodities.
But also it could include things like shipping and other.
Transportation.
Things of the sword, but what I was saying is that on the flip side.
Bye and lives, we have seen higher off grid prices as well. So we have been able to preserve the economics of our of our projects and one of the things. We do is we.
Is really try to make sure we are.
Sign off on the EPC and the major <unk> supply contracts as close to the offtake agreements as possible. So there is really middle of any daylight between the two where we are exposed.
That's really what I was.
Trying to say in my remarks, I don't know if I missed anything from particular from your question or.
If you feel free to.
Ask me again, Rob.
Yes, maybe just to clarify so.
The next phase of renewables are the ones that you still need to secure ppas how are the pace of conversations going on those to get those secured have they had any inflationary environment slowed it down or are they still making good progress.
No, we're still making good progress Rob.
We continue to advance those discussions will be sharing more at Investor day.
On some of those discussions, but we also.
Okay.
We'll anticipate as we as we move forward.
The counterparties are willing to transact at higher prices, but we have to have the difficult discussion of if.
There is uncertainty and things that are unknown.
How do we take and manage that risk because we typically do not take that on and we remain disciplined. So if we have to push a project out will push a project out but.
But the discussions.
Directly to your question had been going well.
Okay, good to hear and then.
Second question just in terms of how Youre looking at the Atlantic States.
We haven't seen a ton of Dropdowns, but you do have this capital requirement coming at us with Kentucky do you viewed dropdowns to atlantica as a.
As an attractive source of capital and I guess secondarily, how are you viewing Atlantic that from a strategic point of view.
Sure So look Atlantic remains.
Very attractive investment, especially given the.
The price at which we were able to enter.
Atlantica right.
It is also very aligned with our overall ESG poster I mean I've been.
We could be more.
Number one renewable energy company globally, and so we are.
Are very aligned on that front as well.
We continue to work with them.
Well, we in fact have dropped down last quarter.
One of our assets in Colombia that was under construction that is now fully operational so so we havent done dropdowns as we think about.
<unk>.
Possibly monetizing our.
Some of our renewable energy assets, we will do what.
Beth.
Or.
Uh huh.
From a balance sheet perspective, first and foremost, but also you know what.
What is best in the context of <unk> for our shareholders.
And if you found that dropdowns into atlantica as well.
The best outcome.
We will give that serious consideration as well.
Thank you.
Thanks, Rob.
The next question comes from the line of Ben Pham from BMO capital markets. Your line is open.
Hi, Thanks, good morning.
So there was.
Some commentary or a sentence in the MD&A matching your targeted you Tony exposure.
78% to 80% and I think thats.
Maybe the first time I've seen maybe some more specific numbers being put there correct me if I'm wrong.
And really my question is that.
Is that really.
Maybe to frame us.
How are you thinking about that I mean at Kentucky. It brings you to 80%. So are you basically saying you don't want to accelerate that utility.
Expansion or M&A as much anymore post Kentucky.
Does it impact how you sell renewable assets, because that's going to change that in the next four hours, that's maybe credit rating driven.
And.
First and foremost our balance sheet right again.
We're laser focused on making sure that.
But we do not degrade our triple B credit rating business mix, obviously is a part of that.
There is no.
Very very clear Red line on what exactly that business mix should be which gives us.
Optionality frankly on how we grow our regulated versus renewables the higher.
Regulated mix pro forma we can piggy power, obviously pyxis closer to 80%, which obviously has a positive impact on the businesses just.
Credit profiles and so on and so forth. It also gives us optionality on on.
Accelerating our growth on the renewable side, because let's say if we will do.
Come back to 70%.
Still within the right mix for four.
Clearly reading that opens a room just on the renewable side of the business for over 2700 megawatts now thats over and Bob.
On top of whatever we could do in terms of greening the fleet.
Kentucky, So it really does accelerate significantly our prudential.
Growth of renewables, both in rate base in Kentucky, as well as on the renewable side of the business.
Okay does that answer your question Ben.
That's helpful.
Maybe to.
Follow up on some of.
Our first comments around the remaining funding for Kentucky.
<unk>.
It sounds like I, just I just maybe wanted confirmation is like if you were to have cleared a funding.
Near term it sounds like your bias right now is hybrid securities maybe.
Maybe a little bit of a nonregulated asset sales, but less and less of a desire to add a lot of mandatory converts given that that future equity.
Dilution.
Is that correct.
I think I mean, one thing I can say about the remaining funding plan that gives us a lot of flexibility right.
Alright, I mean does this slide seconds hybrids are very attractive.
Got flexibility with mandatory.
We talked about.
Potential asset recycling.
Opportunities.
There could be there right.
Right now we really have.
<unk> flex flexibility.
Okay and is there I know you feel quite good about not needing external equity ATM.
ATM through mid 2022, but it's there.
Any sort of scenario like a dark sky scenario that.
Could happen or maybe even more robust growth opportunity that that you expect that could drive an equity issuance.
Issuance and in that timeframe.
Well look I mean, one of the things that thats non negotiable for US is our strong balance sheet, we need to maintain a strong balance sheet.
We can speculate I guess, there's a lot here and I wont speculate I mean, there could be.
A lot of the dark cloud scenarios, but right now as we're looking forward I think what we stated.
In my remarks.
Continues to hold.
Okay, and maybe a cleanup question on the tax credits you mentioned that you're booking this year year to date it looks like it's probably around five sensors. So like do you think.
Expect that <unk> tends to be more.
Maybe a structural impact to EPS going forward do you expect it to increase decrease.
That's a great question and I will say.
Yes, I mean, as we kind of look through it I spoke to the flexibility that that now will have actually under the build better back plan as well.
The ability to self monetize is going to be there for us and is one of the ways that.
We'll look to.
To potentially fund projects again, whichever way best Optimizes, the particular projects economics, so yes.
That is a tool that will have to continue to.
To manage our overall effective tax rate.
Okay, great. Thank you.
Thanks Ben.
Next question comes from the line of Andrew <unk> from Credit Suisse. Your line is open.
Thanks, Good morning, I guess the question is for Arun.
It's really around the whole notion of the organization getting thicker.
She's been a great growth trajectory for a while and then you got another acquisition in the fold.
How do you maintain the entrepreneurial culture and status of the organization that has historically been known for as you expand the entire enterprise.
It's a grid question Andrew.
Look.
One of the things I'm really really pleased about that.
<unk> is that very entrepreneurial culture, it's one of our guiding principles.
That and the strategic thinking is both on the renewable side of the business and on a regular decided that business. So.
As you.
You see things like Greening the fleet on the regulated side of the business as well we have been successful in putting in.
Significant amount of renewables into vps.
<unk>.
Tax equity.
Perhaps.
Pioneers doing that into the rate base.
We are doing things like <unk>.
Renewable natural gas, we've got a lot of storage pipeline.
We are doing.
Community solar projects so there.
A lot of <unk>.
From the levers we have but really everything is really around the whole decarbonize and transform reason right.
What I am extremely excited about is that that opens up a huge amount of opportunities and we are.
Our.
We absolutely stand to benefit hugely from that.
As we mentioned over the next 10 20 years, and that's where we are.
Really trying to align the entire company and all of our entrepreneurial bent is really towards that.
That's helpful. And then maybe just a follow up and related if you think about your overall portfolio now 10 years ago with some of the acquisitions that were done were.
They're meaningful to the company and those assets aren't that meaningful now.
But maybe they have traditional value and there's there's things that could be done around those assets. So how do you think about just rationalizing parts of the portfolio.
So maybe help us the financial structure versus the entrepreneurial efforts that can be driven off of sort of the assets that are across North America.
And again.
We do want to look at that very strategically right I mean so.
Frankly, each of our assets in jurisdictions, we should be looking at it from a perspective.
Do we grow do evolve.
<unk> diverse right.
At the end of the day, what is best for our shareholders.
And so we do look at.
From that perspective.
Like I said earlier.
At the edge there may be certain assets that we may have acquired 10 15 years ago that may not be good strategic fit for so when we think about things like asset recycling.
Obviously.
At the top of the.
Uh huh.
A heap for us, but other than that.
We also have been we have lots of opportunities given our scale on the renewables side two really.
Continue to do.
Use the flywheel in terms of.
But basically bringing in lower cost capital.
Utilizing some of that for sure.
For continued development continue to provide.
The kind of growth and returns that we want to provide to our shareholders. So there is a lot of good that could come from that process as well.
Okay. Thank you very much that's very helpful.
Thanks, Andrew.
First question comes from the line of Matt G laid down from I E. Your line is open.
Hi, good morning.
Yeah.
I just wanted to start off with some questions on <unk>.
Kentucky and some of the comments you made on the strategic fit of certain assets I guess to be clear. There's no currently any preference to so either it's taken atlantica or an existing assets.
To help finance, the Kentucky acquisition.
Well, what we've talked about is the various financing sources and one of them could be asset recycling.
But I think what Arthur has also said repeatedly is that we in fact have especially given our recent.
Bought deal that we have a lot of flexibility on how we are going to fund the remainder of the balance.
Again, thats hybrid debt.
It looks very attractive right now but.
We could be looking at other sources as well such as asset recycling.
Okay, Okay got it.
Just wanted to get a I guess a bit more of your thought process behind the Kentucky acquisition. It seems like there's a lot of value we can unlock maybe AEP.
Put into it wasn't interested in doing how do you view these assets in terms of risk return profile, maybe relative to some other M&A opportunities you're seeing in the market, especially when you take into consideration the size of the transaction.
Alright look what we're excited about several things first of all it's a very compelling values and winning when you think about one three times rate base and you just look at the other transactions that have been done out there, but this is a very compelling value.
Right.
If you look at the fact that Kentucky is in fact, a highly rated constructive regulatory jurisdictions.
That's another plus as well.
You look at the Greening the fleet.
Potential that I talked about earlier, especially given the fact that from the from the perspective of Kentucky.
One of the coal plants from where we're purchasing power.
As in the state of Indiana, and the other COO.
<unk> plan from which we're purchasing power and oil and 50% is in West Virginia.
And so.
From the perspective of Kentucky, being able to add significant amount of.
Lower cost renewable energy in the state of Kentucky.
To replace.
The.
The energy that is being brought in from either Indiana, Our West Virginia and that is pool and has a higher cost that has to be extremely compelling as well and on top of that what I talked about is the other playbook that we have where.
Examples like Glenn I'd state examples like Empire, which were underperforming when we acquired them and the fact that we have been able to bring them back to at or close to <unk>. I think that also speaks for itself. So for all of those reasons, we're actually really excited about this opportunity.
Okay got it that's very clear just one final quick question, if I can on the Empire, a missouri rate case.
Just any any preliminary thoughts on the staff recommendation.
And that rate case, I know, it's still ongoing but just any thoughts.
I think at this point in time as we're in the middle of the process.
Probably not the right time to come and look.
Forward to engaging with.
Through the process and look forward to getting a fair outcome.
Okay. Thank you.
Thanks Maggie.
There are no further question at this time I would now like to turn the conference back to Ireland, but this quarter.
Thank you operator, and thank you very much for those we are able to join US today for taking the time on our call today.
With that please stay on the line for our disclaimer.
Our discussion during this call contains certain forward looking information, including but not limited to our expectations regarding earnings ample expenditures.
Acquisitions potential future cleaning the fleet initiatives and potential future funding sources and transaction.
Forward looking information is based on certain assumptions, including those described in our most recent MD&A filed on SEDAR and Edgar and available on our website and is subject to risks and uncertainties that could cause actual results to differ materially from historical results or results anticipated by the forward looking information.
For it looking information provided during this call speaks only as of the date of this call and is based on the plans beliefs estimates projections expectations opinions and assumptions of management as of today's date, there can be no assurance that forward looking information will prove to be accurate.
You should not place undue reliance on forward looking information, we disclaim any obligation to update any forward looking information or to explain any material difference between subsequent absolutely that and such forward looking information except as required by applicable law. In addition, during the course of this call we may refer to certain non-GAAP.
Financial measures, including but not limited to adjusted net earnings adjusted net earnings per share or adjusted net EPS adjusted EBITDA adjusted funds from operations and divisional operating profit. There is no standardized measure of such non-GAAP financial measures and consequently, <unk> method of calculating these measures may differ.
From methods used by other companies and therefore, it may not be comparable to similar measures presented by other companies.
More information about both forward looking information and non-GAAP financial measures, including a reconciliation of non-GAAP measures to the corresponding GAAP measures. Please refer to our most recent MD&A filed on SEDAR in Canada or Edgar in the United States and available on our website and that concludes our call. Thank you for joining.
Okay.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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