Q2 2023 Algonquin Power & Utilities Corp Earnings Call

August 10, 2023

Hello, and welcome to the Algonquin power and Utilities Corp, second quarter 2023 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session if you'd like to ask.

Question. During this time simply press star followed by one on your telephone keypad I will now turn the conference over to Brian Chin Vice President of Investor Relations. Please go ahead.

Thanks, and good morning, everyone and thank you for joining us on our second quarter 2023 earnings Conference call.

Speaking on the call today will be Chris Huskisson interim Chief Executive Officer, and Darren Myers, Chief Financial Officer also joining us. This morning for the question and answer part of the call will be Jeff Norman Chief Development Officer, and Johnny Johnston, Chief operating officer to accompany today's earnings call. We have a supplemental webcast presentation available on our website Algonquin power Dot com our financial statements.

And management discussion and analysis are also available on the website as well as on SEDAR and Edgar we.

We would like to remind you that our discussion during the call will include certain forward looking information at the end of the call I will read a notice regarding both forward looking information and non-GAAP measures. Please also refer to our most recent MD&A filed on SEDAR and Edgar and also available on our website for important information on these items on the call. This morning, Kristen Darren will walk through a few important updates first.

Chris will review the Board's decision on company leadership and then the results of the strategic review announced in May.

Then Dan will review, our second quarter performance and financial results. We will then open the lines for the question and answer period. Please restrict your questions to two and then re queue. If you have any additional questions to allow others the opportunity to participate.

That I will turn it over to Chris.

Okay, well, thank you, Brian and good morning, everyone.

Before we dive into our second quarter results I'd like to start off by providing an overview of this morning's announcements.

The board announced.

But I have been appointed interim CEO .

And then <unk>.

Got it.

<unk> down as president and Chief Executive.

On behalf of everyone at Algonquin I want to thank Arun for his contributions over the past three years and wish him the best in his future endeavors.

By means of introduction I've served on Algonquin as board of directors for the past two and a half years. Most recently as chair of the strategic Review Committee.

And I have worked closely with the executive team on the review.

Some of you may already be familiar with my experience in the utility industry I was previously CEO of emera from 2004 to 2018.

And some of that time <unk> was an investor in Algonquin.

The board has engaged a nationally recognized search firm to identify a permanent chief Executive officer.

During this period, however, I am committed to working towards a successful execution of the strategic separation.

And ensuring a smooth transition.

The board's decision to establish new leadership is directly related to the outcome of the strategic review process.

After a thorough strategic review, we announced earlier today that the company will pursue a sale of our renewable energy group.

With the support of our independent financial advisor the strategic review Committee of the board carefully evaluated both of our strong businesses and determined that we can create more long term value by focusing on our regulated business and pursuing a sale of the renewables business.

The regulated utility business is well positioned with diversified assets multiple modalities and attractive jurisdictions.

We have a proven track record of providing reliable service for our customers.

And have achieved constructive regulated returns.

For our shareholders.

Excuse me.

The renewable business has a solid and over the past 30 years.

Has grown into an attractive platform that remains poised to benefit from the acceleration clean energy.

Okay.

In fact, both businesses are well positioned.

<unk> from the energy transition.

That said.

With the work the board and management has done.

We believe our current integrated structure is holding us back from realizing the full value of both businesses.

We have a strong set of regulated assets.

Long term growth.

The regulated portfolio has upside potential that can be unlocked through more focused organic growth strategy.

Including a simpler business model and more disciplined approach to capital.

A sale of the renewables business support the realization of this value opportunity.

We also believe our renewables business would be better positioned to accelerate its growth under a different ownership structure.

We expect to use the proceeds of our renewables transaction to reduce our debt and fund share repurchase repurchases.

Our objectives for the transaction are to support our current dividend.

<unk>, our cost of capital and maintain our investment grade Triple B rating.

Always with the objective to build long term value.

Yes.

The timing of the sale will be dependent on value.

And we will update the market as appropriate.

JP Morgan will be acting as financial advisor for the FERC is purpose.

We look forward to exiting the sale process as a competitively capitalized regulated utility with a stable healthy growth outlook.

Let me take a brief moment to highlight some unique aspects of our regulated utility story.

With our first regulated investment in 2001.

<unk> is among the newer investor owned utility portfolios of our scale in North America.

Over the last two decades, and especially during the period of lower interest rates, we took the opportunity to build a utility platform by acquiring and investing in undervalued and underperforming assets.

Through improved customer and regulatory relationships as well as cost management, we've been able to improve delivered our oes and on average bringing them closer to our allowed return.

We now serve over $1 2 million customer connections in $7 billion of rate base across our utility business.

Our portfolio is heavily concentrated in four U S states.

Missouri, California, New Hampshire, and New York.

These provide 86% of our U S rate base and 73% of our overall rate base.

Our utilities are primarily comprised of electric distribution and water distribution, which is 78% of our rate base as well as natural gas distribution, making up the final 22%.

We believe this mix provides our investors a unique and favorable composition and exposure to clean infrastructure trends and investment opportunities.

While our story has been one of growth largely through acquisition.

In a higher cost of capital environment.

The company's strategy needs to adapt and evolve from our early regulated years.

More specifically, we see our strategy focusing more intently on our organic growth.

Later operational discipline and capital discipline.

With the plans, we're pursuing we expect to be able to bring additional efficiencies and value to customers, while investing in the infrastructure in an affordable way.

Clean affordable and reliable energy and water will be the focus of our regulated business.

Our plan to accomplish this is underpinned by aiming to invest approximately $1 billion of capital per year.

By focusing on standardizing, our infrastructure, which is expected to provide the biggest impact for our customers through improvements in reliability and creating economies of scale.

We are finding investment opportunities that provide the double benefit of improving service and helping customer affordability by opex to Capex investments.

By reducing a dollar of Opex. This creates headroom for up to $8 of Capex investment without increasing rates.

Our plan is to continue to modernize our utility systems supporting safe and reliable delivery of our services helped.

To help our customers transition towards net zero.

And keep a close eye on customer affordability with average aggregate rate increases roughly in line with inflation.

Since our regulated business is capital intensive.

Growth rates tend to be lumpy.

But we expect our annual adjusted net EPS growth over time to be in the 4% to 7% range consistent with the industry and exclusive of near term headwinds.

We also expect to continue to maintain our investment grade Triple B credit rating.

Diving deeper into our renewables business.

Comprised of primarily wind and also containing solar and hydro assets.

The renewable portfolio was positioned to benefit from the energy transition.

By operating scale, our fleet is approximately two seven gigawatts of gross generating capacity at 46 facilities in.

It operates in 11 states and six provinces in North America.

This provides diversity of geography and markets and is a business of scale.

Our footprint spans seven independent system operators, including PJM.

MISO in ERCOT.

Our development pipeline is comprised of over six gigawatts of solar and wind more than half of which is site certainty and is interconnection queue.

And we have over three gigawatt hours of storage and development.

We have grown this business significantly and believe the business is poised to continue this growth.

We have approximately 650 megawatts of projects in various stages of construction today.

That said for a variety of reasons its value is not being fully realized as part of the Algonquin integrated business.

We believe that a sale of the renewables business will unlock the unrealized value and better position the renewables business for growth.

And a positive future for our team members that supported.

In summary, we have four messages to communicate today.

First we have two strong growing businesses.

Second we're pursuing a sale of the renewables business.

And third the current dividend can be supported by the remaining regulated business combined with our intended sale and.

And fourth the remaining regulated business will have a strong balance sheet.

A lower cost of capital and a growing rate base.

With that I'll turn things over to Darin to speak about the second quarter.

Thank you, Chris and good morning, everyone.

Let me start with some operating update followed by an overview of our financial performance for the quarter.

Overall, we had a challenging quarter despite growth through constructive regulatory developments.

Unfavorable weather resulted in headwinds to our year over year financial results.

The map, we've provided illustrates how weather driven low wind production levels overlapped heavily with our fleet for the quarter.

I'll provide more detail on the financial impact of this in a moment.

On the regulatory front, we're pleased to report that our regulated services group received final rate case orders at our <unk> electric system in California, and St. Lawrence gas utility in New York at Cal Pico The CPUC issued a final order on April 27, authorizing an annual revenue increase of 27 million.

With new rates, becoming effective in June 2023, retroactive to January 2022.

For St. Lawrence gas on June 22nd the Commission issued an order authorizing a revenue increase of $5 2 million.

<unk> to be implemented over three years with new rates, becoming effective on July one 2023.

Looking now at recent pending rate proceedings are core growth.

Strategy of the regulated service group is to responsibly invest in our utility systems and targeted constructive return on the rate base.

I won't go through each of these I do want to highlight that the regulated service group filed for new rates at its Newark water and granite state electric utilities.

New York water application seeks an increase in revenues of $39 $7 million based on an ROE of 10% and an equity ratio of 50%.

The granite state electric utility application seeks an increase in revenues of $15 $5 million based on an ROE of 10, 35% and an equity ratio of 55%.

In total regulated service group has pending reviews totaling $95 $3 million across six of its utilities.

These rate cases reflect our continued commitment to earning as close to our authorized ROE as possible.

One more mentioned on August 1st the Western District Court of Appeals affirmed the Missouri commissions order in the Asbury securitization docket, we will finalize our response in the coming weeks on this longstanding issue.

Turning now to an update on construction projects for our renewable energy group the second quarter of 2023, some progress on panel installation at our New York market Solar project Phase. One is now fully commissioned as of June and 75% of the panels have been installed for phase II.

Site preparation has also advanced at both the <unk> Creek in clear view solar projects.

At our Sandy Ridge II wind project site preparations and turbine erection was completed during the quarter and the project is on track to achieve full <unk> by the end of the year.

In total we currently have nearly 650 megawatts of wind and solar projects in various stages of construction and expect to bring approximately 450 megawatts in service in 2023.

Turning now to our financial year over year performance.

Quarterly results were negatively impacted by weather higher interest and lower HBV from older project rollovers.

Our second quarter revenue increased by 1% year over year to $627 9 million.

Both was primarily attributable to the implementation of new rates offset by unfavorable weather.

Our second quarter consolidated adjusted EBITDA was $277 7 million.

Decline of approximately 4% from the same period last year.

Growth in our regulated operating profit was more than offset by decline in our renewables operating profit.

The regulated service group delivered $214 4 million and divisional operating profit in the second quarter of year over year increase of 15%.

The increase was primarily a result of new rates at certain of the company's utilities, most notably the <unk> electric system with recruitment to the first quarter of 2022 as well as Empire Belko in granite state electric.

Included in the regulatory results was weather driven reduced customer demand, which drove a divisional offer operating profit headwind of $11 million or approximately one penny of adjusted earnings per share.

Moving now to the renewable energy group second quarter 2023, divisional operating profit was $90 6 million a year over year reduction of 26%.

Approximately half of the decline was a result of the group's wind facilities operating at 75, 1% of the long term average resource.

This decline from weather equates to a negative <unk> <unk> impact on the adjusted earnings per share.

Additionally, lower HBV income accounted for much of the remaining decrease as a result of the and the production tax credit eligibility and projects commissioned in 2012.

This extends a year over year pattern first seen of late 2022 and is the last quarter of HBV rollovers, we expect to see for these projects.

Our interest expense was $89 7 million in the quarter, a $25 $1 million increase year over year with approximately two thirds of the increase attributable to a higher short term borrowing costs and approximately one third attributable to financing to support our growth initiatives.

This quarter's increase over the prior year is similar to the pattern observed in late 2022 and in Q1 2023.

In aggregate for the quarter, we delivered adjusted net earnings of $56 $2 million and adjusted earnings per share of <unk>, both representing a year over year decline of approximately 50%.

As we look to the balance of the year, we are tracking to the lower half of our previously disclosed 2023 guidance driven by the unfavorable impact of weather in the second quarter. Please.

Please note our guidance assumes continuing operations accounting treatment for the renewables business.

We look forward to updating you as the year progresses with that I will now turn the call over to the operator to open the lines up for questions operator.

Thank you if you have a question. Please press star followed by one on your telephone keypad to withdraw your question simply press Star One again one moment. Please for your first question.

Your first question comes from Darius <unk> from Bank of America.

Hey, guys. Good morning, Thank you for taking my question.

Maybe just at the outset on the planned renewable sale can you comment a little bit on obviously some of your publicly traded peers have announced similar transactions in recent months can you comment on what you're seeing from initial conversations as far as some of the valuations we've seen on those other announced.

And how about how that may potentially informed devaluation that you would see.

In your planned transaction and then also related could you potentially back or somehow rank the priorities for proceeds paying down parent debt and buying back shares. If you could put any specifics around that that would be very appreciated.

Yes.

Good morning, Thank you it's Chris.

When we when we did the separation calculations one of the things that we did was look hard at where the market is and and also look at our portfolio. So we have a very very strong portfolio with an extremely strong.

<unk> pipeline and so when we look at that and compare it with where we're at.

Markets are trading right now in.

In consultation with our our adviser Jpmorgan, we believe that this works for the business and what we've said is that the result of that is that we would be able to support our dividend reduce our cost of capital.

We maintain our credit rating in the regulated business. So that's the way we've looked at it the work that we've done has taken us to those views and so we're going to move in that direction.

Your other question was the use of proceeds so clearly one of the things that will be an opportunity for the business is that the <unk> that we will be able to to be reduced as a result of being a pure play regulated business and so some of it will go to debt, but we will look at putting the <unk>.

That in the right place and then the remainder will go to buying back shares and so we.

We're hopeful that we'll be able to buy back a significant number of shares to help support our growing business.

And there is as Chris mentioned I mean, the first priority in that equation is the triple B credit ratings. So first party is in.

And the order is to pay down the debt and then with the the balance for the buybacks.

Okay. Thank you guys for the color one more if I could just as a quick follow up.

It's a fairly diverse operating portfolio in terms of.

Both types of assets and also the ownership structures in terms of your on balance sheet assets and also the stake in a y.

Do you envision this as a series of discrete transactions or potentially.

One kind of holistic one.

So we're not making a final decision at this point, but we think that the portfolio as a whole has more value than in parts and especially with the development pipeline attached and so that's the way we're looking at it right now when we believe that that will create the most value, but remember, it's a competitive process and so through that competitive process we could.

Get offers that look different than that but that's our current view.

Okay I appreciate the color.

As Darius thank you.

Your next question comes from the line of Sean Stewart.

<unk> Securities Your line is live.

Thanks, Good morning, everyone.

Follow on question with respect to the process.

Any incremental thoughts on.

I suppose what the target <unk> to debt ratio is has that changed at all with respect to keeping the triple B credit rating.

And then further to that.

Any incremental ambition to have a little bit of a liquidity cushion leftover.

To provide room for growth in the regulated side of the business.

As the company takes on its new structure.

The R&D when we go ahead and take that yeah sure. Good morning, Sean Yes, I think the way to think but we're not going to get into the numbers today in terms of what that new target <unk> to debt would be but in the past we've talked about needing to be over 14% as an integrated business clearly that does come down.

Pure play regulated so directionally it would allow us to have a lower <unk> to debt and the other thing of course, we would want to make sure. We've got room to invest as Chris mentioned in his prepared remarks, we see an opportunity to invest approximately $1 billion a year on the regulated side. So finally getting to the right sweet spot to make sure we.

Got the appropriate liquidity to manage $1 billion of spend the year will be the key goal.

Okay. Thanks for that Darren.

And then this might be a question for the permanent CEO successor, but do you have any thoughts on the regulated makes it the company has.

Is there any benefit substantially streamlining the regulated portfolio one around tighter.

Tighter group of modalities or.

<unk>.

A tighter regional platform as well.

Well I mean, I would say first of all we're focused on the separation and so that's.

That's our that's where our focus is going to be on getting to that point and maximizing the value of those assets.

But I guess the other thing is is that we are going to bring a focus to the regulated business and I think that thats going to be a renewed focus that's going to allow us to look very hard at the at the <unk>.

Business and see how it grows best but when we think about that business. The diversity of modalities that diversity of the business. We think is an advantage and in fact, we are uniquely.

<unk>.

Our regulated company of scale that actually has water attached and we think that that's also a unique opportunity for the business as a whole. So at this point, we've got to stick with the focus that we have which is to to get the separation done and to sell the the current assets.

And focus on growing that regulated business.

Okay. Thanks, very much and the detail that's all I have.

Picture.

Your next question comes from the line of Robert Ho from Deutsche Bank.

Hi, good morning, everyone and good to hear from you, Chris it's been a little while.

I used to hear your voice.

I did actually want to go back to one of your comments in the prepared remarks, it's just that the timing of the sale was going to be dependent on value.

Can we just dive a little bit deeper into this like have you already got some inbound in terms of evaluation that kind of give you comfort.

As well as will this be.

A set formal process with a kind of wholesale.

Divestiture is the end goal and if valuations do not come where you expect I mean could we see the deferred.

Well I mean, I think thats, what we would mean by the by the <unk>.

Value.

Essentially being being part of what we're thinking about I mean, we're not we're not going to give these assets away I'll start with that.

But we don't see any need to we think that this is a very attractive portfolio.

And the work we've done with J P. M would tell us that we believe this portfolio will be valued appropriately.

And the modeling we've done to look at where the <unk> business would be after that.

In line with what J P. M thinks we can achieve with this sale and to your question about inbounds, we have actually had inbounds already and some very interesting interesting opportunities.

Our people are interested in new portfolios and this is what it is.

It is a portfolio of scale. It has a tremendous development pipeline and we think it's going to be very attractive to the marketplace.

I appreciate the color there and then just moving over to the dividend I appreciate the commentary on sustaining the existing dividend level as you take a look out in the in the outer years.

Have you an update on where you want the payout ratio to go on a longer term basis, and where do you think it will be.

I guess more near term.

Well as you can imagine near term, it's going to be.

Pretty reasonably high payout Theres no question about that but in the long term, we just want to get to where the industry is and we believe the growth that we have in this business will allow us to get there in a reasonable time and so it allows us to support the dividend and the way that we think we should.

We've done the work to tell us what what we think.

This how this is going to evolve and with the evolution. We see of this business, we're very comfortable with where we are today.

Thank you.

Your next question comes from the line of Rupert murderer from National Bank.

Hi, good morning, everyone. Thanks for taking the questions.

Now you've talked about the strength of your development platform. How important this is going to be in the sale process do you have any metrics maybe perhaps.

What percentage of the value of the sale price you think could come from the development platform.

Yes, I don't think we've tried to break it out that way, but I think what we would say, though is that for the right buyer. The development platform will be a very attractive thing because at the end of the day being able to have.

Already teed up opportunities to invest we've already got 650 megawatts under construction.

That by itself is a nice starting point and and the fact that half of the six gigawatts that we that we have under development are already in interconnection queues and have locations.

That's I think that's somewhat unique at least for something Thats being offered I don't know Jeff is there anything you want to add to that.

I would say Chris.

<unk>.

Pipeline and given where we are with the energy transition and the amount of excitement within the U S market that I think.

Your line is certainly going to have good value on the in construction projects in the near term development assets, but we're also going to see it kind of a sweetener in that longer term positioning of someone who wants to play in that.

Thank you and when you look at selling that development capability, how much of that capability do you need to keep in house for the regulated operation if youre looking to <unk>.

Continue to Green the fleet and head to to net zero, how do you separate that business.

Well, we certainly will need to keep some of that capability because the regulated business will continue to develop clean assets and so that's something we'll have to work our way through as we as we configure.

What's the actual renewable business is.

But thats something that we have in mind.

<unk>.

One of those significant opportunities for the rig business is to continue to build clean assets and also to build for the electrification of the entire the entire economy and so those two things are things that are absolutely in mind. When we look at how we're going to configure the company going forward.

Alright, thank you ill get back into queue.

Thank you.

Your next question comes from the line of Nelson.

From RBC capital markets.

Great. Thanks, and good morning, everyone.

First question relates to atlantica.

So can you talk about your launch.

Lots of investments is it kind of excluded from the <unk>.

Strategic review of the renewables business, obviously Atlantic is.

They are they have their own strategic review that's ongoing.

So any color you have there would be great.

Yes.

Staring good morning, yes, so in terms of the Atlantic.

I think I mean, I think the first the first point that we want to leave you with is we are moving to a pure play regulated business.

We are continuing with with regards to atlantica that is a separate process that they're running in terms of their strategic review and we continue to be supportive of that process that they're running.

Okay got it.

And then <unk>.

Second question, which relates to the sale of the renewables business.

Chris you mentioned that.

I guess timing will be dependent on value but.

If the value isn't there could.

Could you see a scenario where.

<unk> retained the renewables business or kind of spin it out rather than.

<unk> sell it.

Well.

When we look at the portfolio, we see that it does have value to the market and we end the development pipeline itself. We think is uniquely valuable. So so we're not expecting to.

To be in a position that you are describing.

So I would probably leave it at that at the end of the day, our objective will be to sell this in a competitive process and we believe that that will work very well that's why we employed.

J P M to help us with this and obviously they are very experienced in doing this business.

They and we believe that this will actually come off in the way that we expect.

Okay and then just finally, you talked about the value of your development pipeline.

How large is the development team currently.

So.

Jeff Nelson and so the development team is a little over 100 people at this point in time, which includes the construction team the development team and the origination team for wind and solar.

Our international team, which is relatively small but the international team is in that 100 to 110 of them.

Great. Thanks, Jeff I'll leave it there.

Your next question comes from the line of Mark Jarvi from <unk> capital markets.

Hey, Thanks, good morning, everyone.

I Wonder if you guys could share a range of expected proceeds based on what you think valuations would be I mean, how many other companies have done that just could you do that and I guess, he otherwise everything would be any implications around tax and the associated debt to the happy to repay it if you saw the renewables assets.

Yes, so we're not going to get into numbers today as I said, we've done the work.

Looked at.

What values, we believe can be achieved here, we've we've consulted.

Expertise in that area and we feel comfortable where we are.

It's a competitive process, if we started putting numbers out there that might that might flavor that competitive process, if we'd like to maximize value. So we're not prepared to do that today I don't know did you want to speak to the second half, yes, yes, Mark on tax is a little hard for me to comment on that today, there's lots of complexities in the way this could be sold.

Different things, depending on the buyers and what have you, but we've obviously done a thorough analysis of the tax impact as we've looked at and made the decision that we've announced today.

And then anything on the Opco notes in terms of them having to be repaid I guess, if you sell the renewables business.

Nothing that we would talk about today, obviously, we're looking at all of the.

All aspects.

Including the notes as part of our part of the sales process.

Okay and then.

In the slide deck, you talked about ramping up I guess, the capex or moving to a $1 billion in utility relative turning around $700 million this year.

Just wanted to make sure that that 300 million increase relative to what you're spending this year. It could be done within the context of current approved rate plans, whether or not you have to run into issues of regulatory lag. So just that confidence level in getting to $1 billion of spending on the utility business here.

On the other side of a sales process.

Yes.

This is Johnny.

Johnny him outcome, we feel very confident that we'll be able to ramp up to the.

Mark.

Very quickly within our existing plans you've got a number of.

Capital practice and as long as we continue to focus those investments on things that are providing benefits to our customers. We feel confident that we'll be able to get the return of those with with minimal lag.

And just to clarify the 4% to 7% growth rate is that essentially your underlying rate base growth with assuming that you are just staying around your authorized ROE when you put those numbers out there.

Yes, I think the rate base growth might be slightly higher than that but we think that that's what the net of the EPS will be great.

Great. Thanks, everyone for your time today.

Thanks Mark.

Your next question comes from the line of Ben Pham from BMO.

Hi, Thanks, good morning.

I wanted to clarify.

I think you mentioned in response to your question.

EPS payout.

Could be going up on pro forma net of share buybacks.

I just wanted to make sure that you've mentioned that.

If so.

It's really divide creation exercise ultimately expansionary Toby multiple.

Well I think when you when you think about this business the way it sits today.

It's not optimized for for either of the businesses.

<unk> that is higher than it would be if we are a pure play regulated.

And the rate the credit rating is probably higher than the renewables business needs. So so we would not because we're financing off our balance sheet, we're not actually optimally financed and so it's a combination of the financing getting in an optimal place for both businesses and seeing the growth that can be there and then.

Yes, the multiples will get in the right place as well once once we get in that structure. The other thing I would say is that.

As we've sat today, we essentially have to constrain the capital that goes into the renewables business, because we can't support as much as as they could actually develop and as Jeff told you earlier, we have quite a strong development team that's something we've ramped up over both the last two years and that development team can produce.

A lot more megawatts than our existing business can finance and so when you put all those factors together, that's really why the integrated business wasn't going to continue working it wasn't sustainable anymore in the state that it was in <unk> and another factor that we really goes into that is that the renewal of the overall business got to have scale.

That the amount of renewables you had to build two to not be holding back. The other part of the business was more than we could sustain so put all that on the table and that's really what's driven us to the decision we've made.

Okay.

Okay. Thanks.

Thanks, Chris.

I'm also wondering too.

You are running in the Irwin is trading at a premium valuation.

Quantum before.

The recent.

Cut and whatnot that trade at a premium.

Even though they have renewables in that business and you may talk about really the conditions that was driving that.

Many of Guaco dividend cut and why you don't think those conditions are going to continue going forward.

And supporting mineral cream valuation could even if you stay together the renewables and utility vehicles.

Well again, if you think about it because of this so we now have $7 billion of rate base on the regulated side. So in order for the renewables to keep up and not be a drag on earnings growth. They actually have to invest a tremendous amount of capital and so it's that combination of scale. So we've gotten to a SKU.

Rail that we need to grow a lot faster than we were growing which was why we ultimately ramped up the development.

But at that point the scale actually made at unsustainable when the company was a lot smaller than it was a lot easier for that to happen, but now at the scale that the business is it just it's just the math just doesn't work anymore.

Obviously, the other big difference is the <unk>.

In the interest rate environment, I mean, we're in a different or in a different environment now than.

That that makes the model that much harder to deal with higher rates and the changes in the capital markets exactly.

Okay I got you so <unk>.

Evaluation was predicated on our perceptions of high growth rate and regardless of the business.

<unk> it sounds like that's putting that smart speaking at both companies.

Will grow much higher goals.

Ben just remember, though in order to maintain our credit rating, we had to keep the regulated that above 70% in that.

It was a it was a very tight.

Set of criteria and a knife edge that the company was on at the time.

Alright got it great. Thank you.

Again, if you'd like to ask a question press Star then the number one on your telephone keypad Youre.

Your next question comes from Andrew Nowinski from Credit Suisse.

Thanks, Good morning, and welcome back Chris.

Maybe just building upon the comments of the math not working for the renewables growth rate and I know it was said earlier on that there was about 100 people in the development group.

If if that business group was unconstrained, which obviously it wasn't on your balance sheet, how much growth per annum and say megawatts do you think you could pull off each year.

Well, Jeff may want to speak to that but certainly more than we were doing thats for sure go ahead.

Andrew.

Okay.

It takes it takes time to move things through the pipeline, but we start to in.

Ramp up our investment in the Greenfield pipeline a couple of years ago as Chris said, our target for ramping that up was to get to a gigawatt a year in additions, which then obviously.

Balance sheet constraints on in terms of the business mix, but we do feel we can ramp up too.

We've done 1600 megawatts and at year end construction between the break in the non rig which was overseen by the team and we can certainly ramp up.

Serial number that's north of 500.

Potentially a gigawatt.

Okay I appreciate that thank you.

I guess as the financials go on transition from being maybe more complicated to being streamlined extra renewable group in the future are.

Or are there other opportunities for other optimizations and just if we think about partnership capital that some utilities have used for selling a 19, 9% interest.

In either an underlying disco or a transmission asset what is the appetite for that I know that's not part of the strategic review on on the renewable side, but.

I guess are you open to that and have you been approached on that that kind of concept.

Yeah again, Andrew I think we really have to go back to what our focus is right now.

We really have to get some momentum on on the sale.

And we need to bring a renewed focus to the existing regular regulated business and so I think that's where our focus is going to be.

But at the end of the day, we will run this business in the best possible way to create value for our shareholders. So that's what we'll be focused on doing.

Okay, great. Thank you very much.

Thank you.

Your next question comes from the line of <unk> pay down from <unk> capital markets.

Hi, good morning.

Want to go back to the topic of Atlantica yield.

A lot of infrastructure. So it's very clear that from the renewable portfolio sale, you're going to allocate a proportion to deleveraging and a portion for buybacks.

But I assume the potential sale of the clients that would be incremental to that so if that process does.

Work its way through what would be the use of proceeds potentially for that type of a deal.

At the end of the day all proceeds will go to the balance sheet. That's exactly the way we're going to look at it we want to have a competitively structured balance sheet for this reg business.

Which will make us which will create the most value for us.

So we don't necessarily have a target for incremental buybacks or just creating.

We're putting more capital to work and they are on the utility side, yes.

And that really comes down to the same equation.

The Triple B.

Triple B investment grade.

<unk> is our anchor.

And whether it's the sale proceeds from atlantica, if that ends up.

Resulting in the sale of plus what we've announced today. It goes to that first and then as we've mentioned buybacks.

We're going to capitalize the balance sheet. So we can grow and support the $1 billion of growth that we've mentioned today for the regulated business. So equation, it's going to be the same thing.

With both processes.

Okay got it.

And just going back to the topic of sort of.

Constrained and slow growth in the renewables business.

Earlier this year.

Maybe thinking about a 5% to 8% annualized growth rate of the Northstar now, it's 40% of the regulated growth.

The way to read that to say that.

Sort of 1% per year EPS growth was sort of the incremental volume of the renewables business today and then.

To your point earlier.

Constrained and growing it so it would make sense to two.

Go forward with the separation, but how you kind of view that standalone growth profile of <unk>.

The renewable business.

Yes, what we had talked about before in that 5% to eight was kind of a baseline for regulated to the four to six and then a sweetener from renewables of one one to two and so that that got you to map the $5 eight and obviously one of the one of the complications as both businesses trade a little bit different.

Naturally inherently renewables isn't as focused on earnings per share. So that does create a little bit of lumpiness relative to that 5% to 8%.

But then when we look at the 4% to 7% and all the modeling we've done through this process and with our regulated business.

One is we think it's in line with the industry for regulated companies and secondly, we think with our assets and focus on operational effectiveness and capital discipline, we certainly can deliver within that 4% to 7%.

Okay. Appreciate that and then just one final quick question I know.

Its been asked already in terms of other corporate simplification.

Processing just maybe.

On the one that sticks out which is the Chilean utility business and any updated thoughts on where that fits within the portfolio going forward.

Again, our focus at this time is on the renewable sale and on and on.

Our focus on operational aspects of the regulated business. So that's where we are right now and.

We'll get that done.

Okay understood. Thank you.

Yes.

There are no further questions at this time I will turn the call back over to Chris That's Kelson.

Okay, well. Thank you all for listening to our call today, and and our second quarter results.

I personally look forward to talking to all of you in the future. Please.

Please continue to stay on the line and listen to our disclaimer. Thank you all very much.

Thanks, Chris our discussion during this call contains certain forward looking information, including but not limited to statements regarding expected future dividends growth earnings and rate base as well as statements regarding the separation of the company's renewables unregulated business through a sales process, including the expected benefits and outcomes in the use of proceeds and our from this forward looking information is based on.

Certain assumptions, including those described in our most recent MD&A and annual information form filed on SEDAR and Edgar and also including an assumption at the renewable energy group remains a continued operations for accounting purposes for the remainder of 2023. In addition, this forward looking information is subject to risks and uncertainty and uncertainties that could cause actual results to differ materially from historical.

Our results or results anticipated by the forward looking information.

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 and 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.

Actual events and such forward looking information, except as required by applicable law. In addition, during the course of this call. We may have referred to certain non-GAAP measures and ratios, including but not limited to adjusted 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 measures and <unk>.

Our method of calculating these measures may differ from methods used by other companies and therefore may not be comparable to similar measures presented by other companies.

For more information about forward looking information and non-GAAP measures, including a reconciliation of non-GAAP financial measures to the corresponding GAAP measures. Please refer to our most recent MD&A filed on SEDAR in Canada, and Edgar in the United States and available on our website.

With that operator, we'll conclude this call. Thank you.

This concludes today's conference call you may now disconnect.

[music].

Okay.

[music].

Simply press Star followed by one on your telephone keypad I will now turn the conference over to Brian Chin Vice President of Investor Relations. Please go ahead.

Thanks, and good morning, everyone and thank you for joining us on our second quarter 2023 earnings Conference call.

Speaking on the call today will be Chris Huskisson interim Chief Executive Officer, and Darren Myers, Chief Financial Officer also.

Also joining us this morning for the question and answer part of the call will be just normal Chief development Officer, and Johnny Johnston, Chief operating officer to accompany today's earnings call. We have a supplemental webcast presentation available on our website Algonquin power Dot com, our financial statements and management discussion and analysis are also available on the website as well as on SEDAR and Edgar.

We would like to remind you that our discussion during the call will include certain forward looking information at the end of the call I will read a notice regarding both forward looking information and non-GAAP measures. Please also refer to our most recent MD&A filed on SEDAR and Edgar and also available on our website for important information on these items on the call. This morning, Christian Darren will walk through a few important updates first.

Chris will review the Board's decision on company leadership and then the results of the strategic review announced in May then Darren will review, our second quarter performance and financial results. We will then open the lines for the question and answer period. Please restrict your questions to two and then re queue. If you have any additional questions to allow others the opportunity to participate.

That I will turn it over to Chris.

Okay, well, thank you, Brian and good morning, everyone.

Before we dive into our second quarter results I'd like to start off by providing an overview of this morning's announcements.

The board announced that.

That I have been appointed interim CEO .

And then Ben Scot It has stepped down as president and Chief Executive.

On behalf of everyone at Algonquin I want to thank <unk> for his contributions over the past three years and wish him the best in his future endeavors.

By means of introduction I'm <unk>.

Served on Algonquin as board of directors for the past two and a half years. Most recently as chair of the strategic Review Committee.

And I have worked closely with the executive team on the review.

Some of you may already be familiar with my experience in the utility industry I was previously CEO of emera from 2004 to 2018.

And some of that time <unk> was an investor in Algonquin.

The board has engaged a nationally recognized search firm to identify a permanent chief Executive officer.

During this period, however, I am committed to working towards a successful execution of the strategic separation and.

And ensuring a smooth transition.

The board's decision to establish new leadership is directly related to the outcome of the strategic review process.

After a thorough strategic review, we announced earlier today that the company will pursue a sale of our renewable energy group.

The regulated utility business is well positioned with diversified assets multiple modalities and attractive jurisdictions.

We have a proven track record of providing reliable service for our customers.

And have achieved constructive regulated returns.

For our shareholders.

Excuse me.

The renewable business has a solid and over the past 30 years.

It's grown into an attractive platform that remains poised to benefit from the acceleration clean energy.

In fact, both businesses are well positioned to benefit from the energy transition.

That said.

With the work the board and management is that.

We believe our current integrated structure is holding us back from realizing the full value of our both businesses.

We have a strong set of regulated assets.

Long term growth.

The regulated portfolio has upside potential that can be unlocked through more focused organic growth strategy.

Including a simpler business model and more disciplined approach to capital.

A sale of the renewable business support the realization of this value opportunity.

We also believe our renewables business would be better positioned to accelerate its growth under a different ownership structure.

We expect to use the proceeds of our renewables transaction to reduce our debt and fund share repurchase repurchases.

Our objectives for the transaction are to support our current dividend.

<unk>, our cost of capital and maintain our investment grade Triple B rating.

Always with the objective to build long term value.

Yes.

The timing of the sale will be dependent on value.

And we will update the market as appropriate.

JP Morgan will be acting as financial advisor for the FERC. This purpose.

We look forward to exiting the sale process as a competitively capitalized regulated utility with a stable healthy growth outlook.

Let me take a brief moment to highlight some unique aspects of our regulated utility story.

With our first regulated investment in 2001.

<unk> is among the newer investor owned utility portfolios of our scale in North America.

Through improved customer and regulatory relationships as well as cost management, we've been able to improve delivered our oes and on average bringing them closer to our allowed returns.

We now serve over $1 2 million customer connections in $7 billion of rate base across our utility business.

Our portfolio is heavily concentrated in four U S states.

Missouri, California, New Hampshire, and New York.

These provide 86% of our U S rate base and 73% of our overall rate base.

Our utilities are primarily comprised of electric distribution and water distribution, which is 78% of our rate base as well as natural gas distribution, making up the final 22%.

We believe this mix provides our investors a unique and favorable composition and exposure to clean infrastructure trends and investment opportunities.

While our story has been one of growth largely through acquisition.

In a higher cost of capital environment.

The company's strategy needs to adapt and evolve from our early regulated years.

More specifically, we see our strategy focusing more intently on our organic growth.

Later operational discipline and capital discipline.

With the plans, we're pursuing we expect to be able to bring additional efficiencies and value to customers, while investing in the infrastructure in an affordable way.

Clean affordable and reliable energy and water will be the focus of our regulated business.

Our plan to accomplish this is underpinned by aiming to invest approximately $1 billion of capital per year.

By focusing on standardizing, our infrastructure, which is expected to provide the biggest impact for our customers through improvements in reliability and creating economies of scale.

We are finding investment opportunities that provide the double benefit of improving service and helping customer affordability by opex to Capex investments.

By reducing a dollar of Opex. This creates headroom for up to $8 of Capex investments without increasing rates.

Our plan is to continue to modernize our utility systems supporting safe and reliable delivery of our services helped.

To help our customers transition towards net zero.

And keep a close eye on customer affordability with average aggregate rate increases roughly in line with inflation.

Since our regulated business is capital intensive.

Growth rates tend to be lumpy.

But we expect our annual adjusted net EPS growth over time to be in the 4% to 7% range consistent with the industry and exclusive of near term headwinds.

We also expect to continue to maintain our investment grade Triple B credit ratings.

Diving deeper into our renewables business.

Comprised of primarily wind and also containing solar and hydro assets.

The renewable portfolio was positioned to benefit from the energy transition.

By operating scale, our fleet is approximately two seven gigawatts of gross generating capacity at 46 facilities.

<unk> operates in 11 states and six provinces in North America.

This provides diversity of geography and markets and is a business of scale.

Our footprint spans seven independent system operators, including PJM.

MISO in ERCOT.

Our development pipeline is comprised of over six gigawatts of solar and wind more than half of which is site certainty and is interconnection queue and.

We have over three gigawatt hours of storage and development.

We have grown this business significantly and believe the business is poised to continue this growth.

We have approximately 650 megawatts of projects in various stages of construction today.

That said for a variety of reasons its value is not being fully realized as part of the Algonquin integrated business.

We believe that a sale of the renewables business will unlock the unrealized value and better position the renewables business for growth.

And a positive future for our team members that supported.

In summary, we have four messages to communicate today.

First we have two strong growing businesses.

Second we're pursuing a sale of the renewables business.

Third the current dividend can be supported by the remaining regulated business combined with our intended sale and.

And for the remaining regulated business will have a strong balance sheet.

A lower cost of capital and a growing rate base.

With that I'll turn things over to Darin to speak about the second quarter.

Thank you, Chris and good morning, everyone.

Let me start with some operating updates followed by an overview of our financial performance for the quarter.

Overall, we had a challenging quarter despite growth through constructive regulatory developments.

Unfavorable weather resulted in headwinds to our year over year financial results.

The map, we've provided illustrates how weather driven low wind production levels overlapped heavily with our fleet for the quarter.

I'll provide more detail on the financial impact of this in a moment.

With new rates, becoming effective in June 2023, retroactive to January 2022.

For St. Lawrence gas on June 22nd the Commission issued an order authorizing a revenue increase of $5 2 million.

To build to be implemented over three years with new rates, becoming effective on July one 2023.

Looking now at recent pending rate proceedings.

Core growth strategy of the regulated service group is to responsibly invest in our utility systems and targeted constructive return on the rate base.

While I won't go through each of these I do want to highlight that the regulated service group filed for new rates at its New York water and granite state electric utilities.

The New York water application seeks an increase in revenues of $39 $7 million based on an ROE of 10% and an equity ratio of 50%.

Granite state electric utility application seeks an increase in revenues of $15 $5 million.

Just on an ROE of 10, 35% and an equity ratio of 55%.

In total regulated service group has pending reviews totaling $95 $3 million across six of its utilities.

These rate cases reflect our continued commitment to earning as close to our authorized ROE as possible.

<unk> preparations also advance of both the <unk> Creek in clear view solar projects.

At our Sandy Ridge II wind project site preparations and turbine erection was completed during the quarter and the project is on track to achieve full <unk> by the end of the year.

In total we currently have nearly 650 megawatts of wind and solar projects in various stages of construction and expect to bring approximately 450 megawatts in service in 2023.

Turning now to our financial year over year performance.

Quarterly results were negatively impacted by weather higher interest and lower HBV from older project rollovers.

Our second quarter revenue increased by 1% year over year to $627 9 million.

Growth was primarily attributable to the implementation of new rates offset by unfavorable weather.

Our second quarter consolidated adjusted EBITDA was $277 7 million a.

A decline of approximately 4% from the same period last year.

Growth in our regulated operating profit was more than offset by decline in our renewables operating profit.

The regulated service group delivered $214 4 million and divisional operating profit in the second quarter of year over year increase of 15%.

Included in the regulatory results was weather driven reduced customer demand, which drove a divisional operating profit headwind of $11 million or approximately one penny of adjusted earnings per share.

Moving now to the renewable energy group second quarter 2023, divisional operating profit was $90 6 million a year over year reduction of 26%.

Approximately half of the decline was a result of the group's wind facilities operating at 75, 1% of the long term average resource.

This decline from weather equates to a negative <unk> <unk> impact on the adjusted earnings per share.

Additionally, lower HBV income accounted for much of the remaining decrease as a result of the and the production tax credit.

Eligibility and projects commissioned in 2012.