Q3 2024 Algonquin Power & Utilities Corp Earnings Call
Speaker Change: Hello and welcome to the Algonquin Power and Utilities Corp. 3rd Quarter 2024 Earnings Conference Call.
Speaker Change: All lines have been placed on mute to prevent any background noise. After the speaker's remark, there will be a question and answer session.
Speaker Change: If you would like to ask a question during this time, simply press star 1 on your telephone keypad. I will now turn the conference over to Mr. Brian Chin, Vice President of Interest Relations. Please go ahead.
Brian Chin: Thank you, operator, and good morning, everyone. Thank you for joining us for our third quarter 2024 earnings conference call. Joining me on the call today will be Chris Huskelson, Chief Executive Officer, Darren Myers, Chief Financial Officer, and Sarah McDonald, Chief Transformation Officer.
Brian Chin: To accompany today's earnings call, we have a supplemental webcast presentation available on our website, algonquinpower.com.
Brian Chin: Our financial statements and management discussion and analysis are also available on the website as well as on CDERplus and EDGAR.
We would like to remind you that our discussion during the call will include certain forward-looking information and non-GAAP measures. Actual results could differ materially from any forecast or projection contained in such forward-looking information. Certain material factors and assumptions were applied in making the forecast and projections reflected in such forward-looking information.
Brian Chin: Please note and review the related disclaimers located on slide 2 of our earnings call presentation on our website Please also refer to our most recent MD&A Filed as indicated earlier and available on our website for important information additional information
On the call this morning, Chris will provide an update on the company's ongoing strategic transition to a pure play regulated utility. Darren will then review key highlights pertaining to our regulated business and our third quarter financial results, followed by some final remarks from Chris. We will then open the lines for questions.
Speaker Change: We ask that you kindly restrict your questions to two, 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 Chris.
Thank you, Brian, and good evening or good morning, everyone.
Chris Huskelson: Thank you once again for your interest in Algonquin and for supporting us on our continued journey towards a pure play regulated utility.
Speaker Change: I'd like to start with a quick review of how far we've come in our strategic transition. But first, I want to welcome Sarah McDonald, our Chief Transformation Officer.
to the call. Welcome Sarah.
Speaker Change: In 2023, we made the strategic decision to simplify and focus the business as a core regulated utility.
Speaker Change: It was and continues to be our belief that separating the regulated and renewables platforms would, after a transition period, allow both businesses to be more ideally capitalized and ultimately lead to longer-term growth and value.
Speaker Change: We began to streamline our capital structure early for this year.
Speaker Change: This started with paying off our margin loan with Atlantica and collapsing our development joint venture this past winter.
And successfully remarketing our green equity units this past spring.
Speaker Change: In May of this year, we announced our support for Atlantica's Strategic Sail Agreement.
which is now expected to close on December 12th, 2024.
Speaker Change: In August, we announced an agreement to sell our renewables business.
excluding the hydro fleet.
Speaker Change: for up to 2.5 billion dollars representing an attractive valuation for our platform.
Speaker Change: This transaction is expected to close in the fourth quarter of 2024 or the first quarter of 2025.
These changes are a considerable evolution for the business.
and on upon close of renewables and Atlantica transactions.
Speaker Change: We will effectively be a regulated utility business with significantly reduced complexity.
Speaker Change: As we've mentioned in the past, we will be looking to monetize our hydro fleet as part of the separation transaction.
Speaker Change: We continue to focus our efforts on successfully closing the renewables transaction, and as such, we have not yet officially launched the process for hydro.
Speaker Change: We would expect to begin the sale process sometime in the first half of 2025 once the renewables transaction is closed. It's important to note that the hydro business represents an annual EBITDA run rate of approximately $25 million.
And we intend to only enter into a transaction.
if it creates value for our shareholders.
Speaker Change: At the end of the day, we're confident in the actions we're taking to position the business to deliver customer value and growth.
through simplification and focus.
While we've been executing our strategic simplification plan...
We've also been busy optimizing the core regulated business.
Speaker Change: When I started as a CEO, I highlighted that one of my main priorities
was to get the regulated business up and running.
Early in the company's history, the primary growth
I'm sorry.
Speaker Change: Early in the company's history, the business primarily grew in a piecemeal fashion.
Speaker Change: Our opportunity is to more effectively standardize and apply best practices.
to create additional value for our customers and shareholders.
Despite near-term challenges, I'm confident we're taking the right steps.
Speaker Change: First, we completed the rollout of our customer-first SAP-based IT platform.
in the sprint.
Speaker Change: We're in the typical stage where we're adapting to our new system and our processes.
Speaker Change: We recently rolled out the next phase of business services, which will help simplify and harmonize customer service and back office processes.
leveraging our new platform.
Speaker Change: These key milestones in our transition to a more focused regulated utility business.
Speaker Change: Although our system implementation has caused some short-term regulatory lag and has in part impacted the timing of rape cases,
Speaker Change: We are excited by the longer-term potential these steps will provide.
Second, we're evaluating our regulated utility infrastructure expertise.
Speaker Change: And we've just added, in the last few quarters, new members to our board and new executive leadership, all of which have extensive regulated experience.
Speaker Change: Third, we're reorganizing our utility structure to group by commodity to drive best practices throughout our network.
Speaker Change: We have revamped a number of our internal processes in an effort to drive more consistent results.
Speaker Change: These approaches are our approaches that I've successfully used in the past and I'm beginning to see positive change and increased accountability within the organization.
Speaker Change: To be clear, this is a journey, but we're heading in the right direction.
Speaker Change: Looking ahead, one of our main priorities is to recover and earn a return on capital that we've already invested, but have not yet captured in authorized rates.
Speaker Change: There are three large rate cases that we expect to improve our return on capital. I'm pleased to say that we recently filed rate cases for Empire Electric in Missouri and CalPICO in California, and expect to file Litchfield Park in Arizona in the first half of 2025.
Speaker Change: The general rate case for Empire Electric Missouri was filed yesterday and includes a request to increase rate base by approximately 534 million dollars. The filing includes a 53.1% equity layer and 10% allowed return on equity.
Speaker Change: Resulting in a requested revenue requirement increase of approximately 92.1 million dollars.
Historically, Empire's electric rate cases
take about one year to resolve.
Speaker Change: Galpico's general rate case was filed in September and includes a request to increase rate base by approximately $154 million through 2025. The filing is based on a 52.5% equity layer and 11% allowed return on equity.
Speaker Change: Resulting in a requested revenue requirement increase of approximately $39.8 million.
Speaker Change: Based on typical timing, we would expect this rate case to be resolved sometime in the first half of 2026.
Speaker Change: Concurrent with the rate case, we filed a request to adjust rates retroactively.
Speaker Change: We're aiming to file a rate case at the Litchfield Water and Sewer Facility in Arizona in the first half of 2025. As we indicated on prior calls, the Cerebell Wastewater Plant is a substantial investment in the community.
Speaker Change: and it serves significant manufacturing development along a key corridor in the Greater Phoenix area.
The plan itself represents approximately 108 million dollars in investment.
offset by approximately 23 million dollars in connection fees.
Speaker Change: This results in our seeking approval to increase rate base by approximately 85 million dollars.
Speaker Change: Historically, Arizona rate cases can take up to 18 months to complete, so we expect financial benefit from the rate case to start in 2020.
and Chris Huskilson. I'm Brian Chin. I'm Chris Huskilson.
Speaker Change: These three rate cases constitute over 700 million dollars in potential net increases in our authorized rate base.
Brian Chin: As we turn to 2025, it will be the first year we will be in a position to focus completely on our regulated business.
Brian Chin: As I mentioned on our last call, there's no question that our short-term results will be impacted by the timing of rate cases.
Brian Chin: On the other hand, we are taking the right steps and I'm confident that we have a tremendous opportunity to improve our rate case outcomes.
Brian Chin: leverage our IT platform and run the business more effectively. The filings of Empire and CalPICO, along with other actions I've described, are positioning us well to increase our momentum beyond 2025.
Speaker Change: And with that, I'll ask Darren to review this quarter's operational and...
financial results.
Thank you for your time. Thank you.
Speaker Change: Thank you, Chris, and good morning, everyone. I'll start off my commentary today with an overview of key rate case developments.
Speaker Change: During the third quarter, we received a final order for our New York water utility, authorizing a $38.6 million increase in revenues over a three-year rate plan, which came into effect on September 1st.
Speaker Change: As highlighted by Chris, in the third quarter, the company filed an application at our Calpico Electric Utility in California, seeking an increase in revenues of $39.8 million based on an ROE of 11% and an equity ratio of 52.5%.
Speaker Change: We also recently filed an application at our Empire Electric Missouri utility seeking a revenue increase of approximately $92 million based on an ROE of 10% and an equity ratio of 53.1%.
Speaker Change: As we look forward, we plan to file rate cases at Litchfield Water and Sewer, New England Gas, St. Lawrence Gas in either the fourth quarter of 2024 or the first half of 2025.
Speaker Change: As we have mentioned on prior calls, 2024 represents the largest number of concurrent rate cases in the company's history.
Speaker Change: At this time the company has pending 13 rate reviews which represent approximately 205 million dollars in revenue requests
Speaker Change: Turning now to financial results. This quarter, we separated our results into continuing operations and discontinued operations. Let me provide further color to help you better understand the moving parts.
Speaker Change: Our continuing operations includes our regulated business, hydro business, and ownership stake in Atlantica.
Speaker Change: It also includes all debt except debt specific to our renewables business.
Speaker Change: We continue to record our ownership stake in Atlantica and associate dividends in continuing operations based on the application of generally accepted accounting principles.
We now expect Atlantica to close on December 12th, 2024.
Speaker Change: Our discontinued operations includes our non-hydro renewables business, including taxes and associated tax credits, and $1.25 billion in specific debt related to our renewables business.
Speaker Change: In terms of the numbers, our third quarter financial performance for continuing operations saw year-over-year growth in revenue and adjusted EBITDA of 1% and 4% respectively, primarily due to the implementation of new rates across several of the regulated business electric, natural gas, and water facilities.
Speaker Change: Our revenue growth was partially offset by lower pass-through commodity costs.
Speaker Change: We recorded year-over-year decreases in adjusted net earnings and adjusted net earnings per share at 5% and 20% respectively.
Speaker Change: While our results benefited from new rates, they were more than offset by higher operating expenses, as well as depreciation and interest expense.
Speaker Change: Adjusted editorings per share was also negatively impacted by the previously disclosed issuance of 76.9 million common shares in connection with the company's green equity units through a mandatory conversion back in June.
Speaker Change: On a segmented basis, adjusted EBITDA growth for the regulated business in the third quarter was up 3% year-over-year due to the implementation of new rates at several of the company's electric, gas and water facilities.
Speaker Change: as well as higher HLBV income as a result of normalized wind resources and the recovery of securitized regulatory assets at Empire. These gains were partially offset by higher operating expenses as mentioned earlier.
Speaker Change: A few other comments on our balance sheet as we move closer towards closing our Atlantic and Renewables transaction.
Speaker Change: Our Q3 balance sheet debt, including continued and discontinued operations, is $8.7 billion, which increased from Q2 in part from the buyout of a construction loan at Carver's Creek.
Speaker Change: We expect to have approximately 1.7 to 1.8 billion dollars in net proceeds from the renewable sale after off-balance sheet construction loan obligations and other renewable liabilities are satisfied.
Speaker Change: Final net proceeds received may vary due to items such as construction spending variances, tax credit timing, and monetizations.
Speaker Change: It's worth noting, included in the $1.7 to $1.8 billion, we now expect to receive approximately $150 million of net proceeds associated with tax attributes in certain projects in late 2025.
Let me...
Speaker Change: Have a few call-outs on our year-to-date earnings and some reminders for next year.
Speaker Change: Year-to-date, our continuing operations adjusted net earnings is $187 million and our adjusted earnings per share for continuing operations is 25 cents.
Speaker Change: Included in that is 65 million dollars in Atlantica dividends year-to-date or approximately nine cents in adjusted net earnings per share.
Speaker Change: So, as you think about next year, there's a few pieces of merit calling out.
Speaker Change: If you combine the proceeds of both transactions ignoring timing we would expect to receive 2.8 to 2.9 billion dollars
Speaker Change: As you consider our pro forma adjusted net earnings per share, you need to take into account that based on our Q3 balance sheet, $1.25 billion of proceeds would go towards discontinued operations debt pay down.
Speaker Change: leaving 1.55 billion to 1.65 billion dollars for deleveraging against the continuing operations.
Speaker Change: So as you think about our pro forma continuing operations number, you would need to incorporate the continuing operations deleveraging and then remove the Atlantica dividends.
Speaker Change: As we've noted before, we are not providing 2025 guidance at this point.
Speaker Change: As a reminder, our results on a per-year basis will be affected by the full-year effect of the settlement of our equity units from earlier this year. We plan to provide guidance when we report our fourth quarter results.
Speaker Change: In summary, we are on track to achieving a number of key milestones on our path to simplification and becoming a pure play regulated business. This is a journey and we are focused on taking the right steps to create long-term value. With that, I will turn the call back over to Chris.
Thank you, Darren.
Chris Huskelson: We're pleased with the progress that we're making on our journey to transform Algonquin into a pure play regulated utility.
Chris Huskelson: We've already achieved several of the key initiatives we listed at the start of our strategic transition.
Chris Huskelson: And we believe we have provided the meaningful steps on how we intend to get there.
Chris Huskelson: These steps, past, present, and future, have the same goals, to strengthen the balance sheet
Optimize the payout ratio.
support future earnings and dividend growth.
Simplify and refocus the business.
Chris Huskelson: and ultimately provide exceptional service and value to our customers and our shareholders.
Speaker Change: With that, I'll turn the call back over to the operator for some questions. Thank you.
Speaker Change: Thank you. If you have a question, please press star 1 on your telephone keypad. To withdraw your question, simply press star 1 again. One moment, please, for your first question.
Thank you for watching. Bye.
Speaker Change: Your first question comes from the line of Rupert Murr with National Funds. Please go ahead.
Hello, good morning, everyone.
Speaker Change: If I could start by asking about your rate case submissions, I believe you've now submitted rate cases for 700 million of your target recovery. Well, that includes Litchfield coming up, of course.
Speaker Change: I believe there's another $300 million to come. Can you give us more color on that? What would be included in that $300 million and what would be the timing on submitting rate cases to get you up to your full billion dollars?
Yeah, hi Rupert, we're not going to...
Speaker Change: give that walk in terms of that of what's left. I mean, obviously, we're going to continue to file great cases. We've got a number of other cases to file. And, you know, we're definitely pleased that we got a, you know, significant, two significant rate cases behind us now and focused on Butchfield next and the number of other ones.
Speaker Change: Yeah, I think, Rupert, one of the things we've been fairly clear that, number one, the number is going to be a moving target as we continue to invest in the business, and number two, we see this occurring out into 2027.
Speaker Change: Okay, if I could just focus on the Empire Raid case, then that one of course is the largest. It seems like it has the potential to be
Speaker Change: completed the most quickly and possibly to to be completed before the end of next year. So what impact could that have on 2025 and and how much of it could be retroactive?
Speaker Change: Well, I think as we said in the prepared remarks, if you look at history, it's obviously you can't predict exactly when these will settle, but if you look at history, it's about 12 months.
Speaker Change: We just put the rate case in and it would be prospective, so there'll be a small amount of impact next year, but not meaningful for 2025, and then of course in 2026 we'll be getting the full benefit.
Speaker Change: All right, great. Maybe one quick follow up here. I think you were looking also at
Speaker Change: deferrals of depreciation, which you'd have to go to the regulators to see those allowances. Can you give us an update on how that might be progressing?
Speaker Change: Yeah, I think where we are right now, Rupert, is we've submitted applications in New Hampshire and in Arizona, and we don't have an answer yet.
Speaker Change: All right, I'll leave it there and get back in the queue. Thank you. Thanks, Rupert. OK, thanks, Rupert.
Speaker Change: Your next question comes from the line of Mark Charvey with CIBC. Please go ahead.
Mark Charvey: Thanks for that commentary on some of the helpful measures to get us to sort of pro forma.
Speaker Change: Business Outlook here. Question on the base set of earnings. I appreciate Mr. Stryker at AAY and then there's all this intrinsic savings, but the earnings on the utility business today, do you think there would be erosion as you get into 2025 with regulatory lag, or do you think that can be flat to up on what you've shown year to date?
Speaker Change: Hi, Mark. Yeah, I would say we're certainly not going to give guidance today because there's, you know, we do have the benefit of some rate cases that we've been able to settle this year that will go into next year. And then, of course, we're all over our OPEC spend and there's
Speaker Change: areas where you have some increases in non-controllable spend, but we're also looking for all efficiencies we can get. So it's a little early to say what next year is going to be and we're working hard on our plan there and we will provide further color on that as we close Q4.
Speaker Change: I'm thinking Missouri in particular, as part of your submission, is there anything you guys would be advocating for in terms of riders, measures to minimize regulatory lag, just given what you've been through the last couple years?
Speaker Change: Well, so you have to remember that in Missouri we have the PISA opportunity and pretty much everything that we are applying for is in PISA today, so we do have that advantage. There are a few things that we're applying for relative to our fuel adjustment mechanism and a few other items, so those are all listed in the case file.
Speaker Change: Okay and last question for me is just on New Hampshire, expectations on the path forward there, you've had some sort of extensions there I think to November 15th is there a view that you can can work through a settlement or is a refiling a more likely path?
Speaker Change: No, no, we're expecting to settle both of those cases and and I think we've been we've had good discussions with Interveners and with the staff and so, you know, we're optimistic that will come to a conclusion
Okay, thanks.
Thank you. Thanks, Mark.
Speaker Change: Your next question comes from the line of Sean Stewart with TD Covents. Please go ahead.
Speaker Change: Thanks, good morning everyone, and thank you for all the detail on the rate case filings.
Speaker Change: Just one question for me. Wondering if you can give us any updates on the process for hydro at this point? Is that underway? If so, any context on expressions of interest at this stage?
Speaker Change: Well, for one, we've had lots of expressions of interest. That has not been a problem. But no, we haven't really started the process there. What we've been focused on, obviously, is selling the bigger asset base.
Speaker Change: and also on the carbon of the hydro. Those two things are busy activities.
Speaker Change: And so what we've said is sometime in the first half, we'll actually go to market with the hydro, but through my eyes, it's not a certainty that they will sell just simply because they do make a fairly substantive contribution to the business.
Speaker Change: They won't affect our ability to be considered pure play, and so, you know, we'll sell if we can create some economic value, but if they're better off in the business, we'll keep them there. But we will go to market and test that.
Speaker Change: Yeah, Sean, and I know in the past we said we would, you know, we would be hoping to do that this year, but with all, as Chris mentioned, with everything going on, and, you know, with the fact we want to maximize value here, you know, we're just going to time it next year when we have a bit more bandwidth to give it the attention it needs.
Speaker Change: understood. The rest of my questions have been answered. Thanks very much guys.
Speaker Change: Again, if you would like to ask a question, press star then the number 1 on your telephone keypad. Your next question comes from the line of Rob Hope with Deutsche Bank. Please go ahead.
Speaker Change: I didn't think you moved, Rob. That was a good question.
Thank you. Thank you.
Speaker Change: Anyway, okay, so a follow-up to Sean's question there. So it doesn't seem like you need to sell the hydro assets from a strategic point of view or even a balance sheet point of view.
Speaker Change: So when you think about use of proceeds on the hydroassets,
Speaker Change: you know, could that push you to share buybacks or would that, you know, help you, uh, accelerate, uh, investments into, uh, the utility business or how do you think about kind of the potential levers for proceeds from hydro if you do choose to sell those assets?
Yeah, Rob.
Speaker Change: I'll repeat maybe comments that we've said in the past. You know first is as we continue to say we're committed to the investment grade rating.
We intend to use
Speaker Change: Proceeds to maintain flexibility. We want to be self-funding. That is the bigger priority. We certainly don't want to do a
Speaker Change: buy back and go back to the market after that. I will say that, you know, the amount of flexibility we have is dependent on getting the regulatory lag lower.
Speaker Change: You know, obviously there's earnings and FFO that's created by those rate cases. So a lot of it is going to be timing dependent, but ultimately, you know, we're looking to have flexibility, bring the more discipline internally on how we time capital spend with our regulatory recovery.
and then from there, you know, invest in the business.
Speaker Change: You know, what the value that we get from the hydro inside the business, and the value we can get if we continue to take that capital and reinvest. So, I mean, that'll be the test that we're looking at, and whichever comes over with the most economic value, that's what we'll do.
I appreciate that.
Speaker Change: And then sticking with the power business, you know, as we look through the balance of closing, you know, could we see the purchase price move again? And just to clarify or confirm, you know, the movement that was on the net proceeds will be offset by the debt being brought back onto the balance sheet. So the overall economics haven't changed?
Speaker Change: Yes, so it moved up by 200 million on the high end to 1.6 to the 1.8 Because of us bringing 200 million on balance sheet So that would have been in the construction JVs before and now that they're on our books you naturally get go higher So there's no economic effect
Speaker Change: We do have a range in here as we get closer, you know, there's a handful of projects that we need to complete or are responsible for completing even through, you know, through the time where we're
Speaker Change: where LS would take ownership and so some of those have been pushed to the right with some additional costs so we've put a range in here it's our best estimate at this time we're comfortable with that range of what it's going to take to finish those projects.
Thank you.
Speaker Change: And Rob, just for clarity, that also impacted, the timing of those also impacted, you know, you see I noted that we're going to get about 150 million of proceeds kind of the back half of next year.
Speaker Change: That's around tax attributes of those projects so as they've pushed out We don't see it being timed with the closing in the same way anymore, but no change in our overall economics It's just some nuances to it
Thank you.
Thanks, Rob.
Speaker Change: There are no further questions at this time. I will now turn the call to Mr. Chris Huskilson.
Chris Huskilson: Thank you very much for your interest in Algonquin and for your time today. We'll be heading to EEI, the financial conference, in a few days and we look forward to seeing many of you there. So have a great rest of your day.
Thank you.
This concludes today's conference call. You may now disconnect.