Q3 2024 Algonquin Power & Utilities Corp Earnings Call
Hello, and welcome to the Algonquin power and Utilities Corp, third quarter 'twenty 'twenty four earnings conference call.
Hello and welcome to the Algonquin Power and Utilities Corps 3rd Quarter 2024 Earnings Conference Call.
Speaker Change: All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Speaker Change: I would like to ask a question. During this time simply press star one on your telephone keypad.
Speaker Change: I'll now turn the conference over to Mr. Brian Chin.
Speaker Change: Relation. 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 hospitals, and Chief Executive Officer, Darren Myers, Chief Financial Officer, and Sara Mcdonald Chief transformation officer to accompany today's earnings call. We have a supplemental webcast presentation available on our website.
Speaker Change: Oh Gulf wind power Dot Com, our financial statements and management discussion and analysis are also available on the website as well as on Cedar plus and Edgar we'd 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.
Speaker Change: Certain material factors and assumptions were applied in making the forecasts and projections reflected in such forward looking information. Please note and reviewed related disclaimers located on slide two of our earnings call presentation on our website.
Speaker Change: Please also refer to our most recent MD&A.
Speaker Change: Filed as indicated earlier and available on our website for important information additional information.
Speaker Change: On the call. This morning, Chris will provide an update on the company's ongoing strategic transition to a pure play regulated utility Darin 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. We ask that you kindly restrict your questions to two then re queue. If you have any additional.
Speaker Change: Questions to allow others the opportunity to participate and with that I'll turn it over to Chris.
Chris: Thank you, Brian and good evening.
Chris hospitals: Good morning, everyone.
Speaker Change: 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.
Speaker Change: But first I want to welcome Sarah Macdonald, our Chief transformation officer to the call.
Paul: Paul Welcome Sir.
Paul: In 2023, we had the strategic 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: It started with paying off our margin along with Atlantica and collapsing our development joint venture of this this past winter.
Speaker Change: And successfully remarketing, our green equity units this past spring.
Speaker Change: In May of this year, we announced our support for Atlantica strategic sale agreement.
Speaker Change: Which is now expected to close on December 12, 2024.
Speaker Change: In August we announced an agreement to sell our renewables business <unk>.
Speaker Change: Excluding the hydro fleet for up to $2 5 billion, 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.
Speaker Change: These changes are a considerable evolution for the business.
Speaker Change: Upon close of renewables and atlantica transactions, 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.
Speaker Change: Once the renewables transaction is closed.
Speaker Change: It's important to note that the hydro business represents an annual EBITDA run rate of approximately $25 million.
Speaker Change: And we intend to only enter into a transaction.
Speaker Change: 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.
Speaker Change: Through simplification and focus.
Speaker Change: While the journey at times has been challenging I am excited to lead the company through this transition period to a brighter days ahead.
Speaker Change: While we have been executing our strategic simplification plan. We've also been busy optimizing the core regulated business.
Speaker Change: When I started as CEO.
Speaker Change: Highlighted that one of my main priorities.
Speaker Change: So as to get the regulated business up and running.
Speaker Change: Early in the company's history, the primary growth growth.
Speaker Change: 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.
Speaker Change: Despite near term challenges I'm confident we're taking the right steps.
Speaker Change: First we completed the rollout of our customer first.
Speaker Change: Based Iot platform.
Speaker Change: In the spring.
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.
Speaker Change: Focused regulated utility business.
Speaker Change: Although our system implementation that has caused some short term regulatory lag and has in part impact impacted the timing of rate cases.
Speaker Change: We are excited by the longer term potential these steps will provide.
Speaker Change: Second we are evaluating our regulated utility infrastructure expertise 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 grew by commodity to drive best practices throughout our network.
Speaker Change: We have revamped ramped a number of our internal processes.
Speaker Change: In an effort to drive more consistent results.
Speaker Change: These approaches are approaches that I have successfully used in the past and I'm beginning to see positive change and increased accountability within the organization 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 an authorized rates.
Speaker Change: There are three large rate cases that we expect to improve our return on capital I am pleased to say that we recently filed rate cases for Empire electric in Missouri, and <unk> in California.
Speaker Change: And expect to file electric fulfilled park in Arizona in the first half of 2025.
Speaker Change: The general rate case for Empire Electric, Missouri was filed yesterday and includes the request to increase rate base by approximately $534 million.
Speaker Change: The file is the filing includes a 53, 1% equity layer and 10% allowed return on equity, resulting in our requested revenue requirement increase of approximately $92 $1 million.
Speaker Change: Historically Empire's electric rate cases take about one year to resolve.
Speaker Change: <unk> General rate case was filed in September and includes the 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: Solving and our 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 retrospect 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 survey will wastewater Plaid is a substantial investment in the community.
Speaker Change: And it's sort of significant manufacturing development, along a key corridor in the greater Phoenix area.
Speaker Change: The plant itself represents approximately $108 million and investment offset by approximately $23 million and connection fees.
Speaker Change: This result, and are seeking approval to increase rate base by approximately $85 million hit.
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 2026.
Speaker Change: These three rate cases constitute over $700 million in potential net increases in our authorized rate base.
Speaker Change: As we turn to 2025 it will be the first year, we will be in a position to focus completely on our regulated business.
Speaker Change: As I mentioned on our last call. There is no question that our short term results will be impacted by the timing of rate cases.
Speaker Change: 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.
Speaker Change: Leverage our it platform and run the business more effectively.
Speaker Change: Filings of Empire, and Cal Pico along with other actions I have described are positioning us well to increase our momentum beyond 2025.
Speaker Change: And with that I'll ask Darren to review of this quarter's operational and financial results there.
Darren Myers: Thank you, Chris and good morning, everyone.
Darren Myers: I'll start off my commentary today with an overview of key rate case developments.
Darren Myers: During the third quarter, we received the 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 one.
Darren Myers: As highlighted by Chris in the third quarter. The company filed an application at our <unk> electric utility in California, seeking an increase in revenues of $39 $8 million based on an ROE up 11% and an equity ratio of 52, 5%.
Darren Myers: We also recently filed an application at our Empire Electric, Missouri utilities seeking a revenue increase of approximately $92 million based on an ROE of 10% and an equity ratio of 53, 1%.
Darren Myers: As we look forward, we plan to file rate cases at Litchfield water and sewer, new England gas so Lawrence gas in either the fourth quarter of 2024 for the first half of 2025.
Darren Myers: As we've mentioned on prior calls 2024 represents the largest number of concurrent rate cases in the company's history.
Darren Myers: At this time the company has pending 13 rate reviews, which represent approximately $205 million in revenue request.
Darren Myers: 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.
Darren Myers: Our continuing operations includes a regulated business hydro business and ownership stake in atlantica.
Darren Myers: It also includes all debt, except that specific to our renewables business.
Darren Myers: We continue to record our ownership stake in atlantica and associated dividends in continuing operations based on the application of generally accepted accounting principles.
Darren Myers: We now expect to atlantica to close on December 12.
Darren Myers: 2024.
Darren Myers: Our discontinued operations includes our non hydro renewables business, including taxes and associated tax credits and 125 billion.
Darren Myers: And specific debt related to our renewables business.
Darren Myers: 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.
Darren Myers: Our revenue growth was partially offset by lower pass through commodity costs.
Darren Myers: We recorded year over year decreases in adjusted net earnings and adjusted net earnings per share of five and 20% respectively.
Darren Myers: While our results benefited from new rates, they were more than offset by higher operating expenses as well as depreciation and interest expense.
Darren Myers: Adjusted net earnings per share was also negatively impacted by the previously disclosed the issuance of $76 9 million common shares in connection with the company's green equity units through a mandatory conversion back in June.
Darren Myers: 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 as well as higher <unk> income as a result of normalized wind resources and the recovery of securitized regulatory.
Darren Myers: Assets at Empire. These gains were partially offset by higher operating expenses expenses as mentioned earlier.
Darren Myers: A few other comments on our balance sheet as we move closer towards closing our Atlantic in renewables transaction.
Darren Myers: Our Q3 balance sheet debt, including continued and discontinued operations is eight 7 billion.
Darren Myers: Which increased from Q2 in part from the buyout of a construction loan at <unk> Creek.
Darren Myers: We expect to have approximately one seven to $1 $8 billion in net proceeds from the renewable sale after off balance sheet construction loan obligations and other renewable liabilities are satisfied.
Darren Myers: Final net proceeds received may vary due to items, such as construction spending variances tax credit timing and monetization.
Darren Myers: Its worth noting including included in the one seven to $1 8 billion, we now expect.
Darren Myers: Spec to receive approximately $150 million of net proceeds associated with tax attributes and certain projects in late 2025.
Speaker Change: Let me.
Darren Myers: Kevin a few call outs on our year to date earnings and some reminders for next year.
Darren Myers: Year to date, our continuing operations adjusted net earnings is $187 million and our adjusted earnings per share for continuing operations was 25.
Darren Myers: Included in that is $60 million in atlantica dividends year to date were approximately nine and adjusted net earnings per share.
Darren Myers: So as you think about next year, there's a few pieces merit calling out.
Darren Myers: If you combine the proceeds of both transactions ignoring timing, we would expect to receive two eight to $2 9 billion.
Darren Myers: As you consider our pro forma adjusted net earnings per share you need to take into account the based on our Q3 balance sheet $1 billion to $5 billion of proceeds would go towards discontinued operations debt Paydown.
Darren Myers: Leaving $1 55 billion to $1 65 billion.
Darren Myers: For deleveraging against the continuing operations.
Darren Myers: So as you think about our pro forma continuing operations number you would need to incorporate the continuing operations deleveraging and then remove the Atlantic to get dividends.
Darren Myers: As we've noted before we are not providing 2025 guidance at this point.
Darren Myers: As a reminder, our results on a per share basis will be affected by the full year effect of the settlement of our equity units from earlier this year.
Darren Myers: We plan to provide guidance when we report our fourth quarter results.
Darren Myers: 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.
Speaker Change: With that I will turn the call back over to Chris.
Chris: Thank you Darren.
Chris: We're pleased with the progress that we're making on our journey to transform Algonquin into a pure play regulated utility we are.
Chris: <unk> already achieved several of the key initiatives, we listed at the start of our strategic transition and.
Chris: And we believe we have provided the meaningful steps on how we intend to get there.
Speaker Change: Steps steps.
Chris: <unk> present and future have the same goals to strengthen the balance sheet.
Chris: Optimize the payout ratio.
Chris: Support future earnings and dividend growth.
Chris: Simplify and refocus the business and.
Chris: 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.
Speaker Change: Thank you.
Speaker Change: Thank you if you have a question please press.
Chris: First one on your telephone keypad to a draw your question simply press Star one again.
Chris: Please for your first question.
Chris: Okay.
Speaker Change: Your first question comes from the line of Rupert <unk> with National Bank. Please go ahead.
Speaker Change: Hello, Good morning, everyone.
Speaker Change: Good morning.
Speaker Change: Could you could start by asking about your rate case submissions I believe you have now submitted rate cases for 700 million of your target recovery well that includes Litchfield's coming up of course I believe there's another 300 million to come can you give us some more color on that.
Speaker Change: What would be included in that $300 million and what would be the timing on <unk>.
Speaker Change: Submitting rate cases to get you up to your full billion.
Speaker Change: Yes, Hi, route, but we're not going to give.
Speaker Change: Give that walk in.
Speaker Change: In terms of that of what's left I mean, obviously, we're going to continue to file rate cases, we've got a number of other cases to file in.
Speaker Change: We're definitely pleased that we got a significant two significant rate cases behind us now and we're focused on Litchfield next in the.
Speaker Change: There are other ones.
Speaker Change: Yeah, and I think one of the things we've been fairly clear that number one.
Speaker Change: 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 rate case, then that one of course is the largest it seemed like it has the potential to be.
Speaker Change: <unk> completed the most quickly and possibly two to be completed before the end of next year. So what impact could that have on 2025 and how much of it could be retroactive.
Speaker Change: Well I think.
Speaker Change: As we said in the prepared remarks, if you look at history as obviously you can't predict exactly when these will settle but if you look at history. It's about 12 months. So we just put it put a rate case in <unk>.
Speaker Change: And it would be perspective, so there'll be a small amount of impact next year, but not not meaningful for 25, and then of course in 2026, we'll be getting the full benefit.
Speaker Change: Alright, great and maybe one quick follow up here I think you were looking also at.
Speaker Change: Some deferrals of depreciation, which you'd you'd have to go to the regulators to see those allowances could you give us an update on how that might be progressing.
Speaker Change: Yes, I think where we are right now Robert as we've submitted applications in New Hampshire, and in Arizona, and we don't have an answer yet.
Speaker Change: I don't believe there and get back into queue. Thank you. Thanks Rubricate. Thanks Robert.
Speaker Change: Your next question comes from the line of Mark Jarvi.
Speaker Change: Please go ahead.
Speaker Change: Thanks for that commentary on some of the measures to get us to sort of pro forma.
Speaker Change: Business outlook here question on the base set of earnings I Appreciate <unk> and then there's obviously interest expense.
Speaker Change: 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 there is we do have the benefit of some rate cases that we've been part of being able to settle this year that will go into next year and then of course, we're all over our opex spend and there's areas where.
Speaker Change: 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: And when you say color on the time, you close Q4 before the Q no no nor result.
Speaker Change: Thanks for that clarification.
Speaker Change: Our fourth quarter results. Thanks, Mark Yeah, Okay alright.
Speaker Change: And then on the rate case on the rate case filings.
Speaker Change: <unk>.
Speaker Change: I think in Missouri in particular.
Speaker Change: As part of your submission is there anything you guys would be advocating for in terms of riders measures to minimize regulatory lag.
Speaker Change: Just given we had been through the last couple of years.
Speaker Change: Yes.
Speaker Change: Well, so you have to remember that in Missouri, we have the fees.
Speaker Change: Opportunity in.
Speaker Change: Pretty much everything that we are applying for us is in visa today. So we do have that advantage. There are a few things that we're applying for.
Speaker Change: Relative to our fuel adjustment mechanism and a few other other items.
Speaker Change: So those are all listed in the case at all.
Speaker Change: Okay and last question for me is just on New Hampshire.
Speaker Change: Expectations on the path forward there you've had some sort of extension there I think November 15th is there a view that you can can work through a settlement or is a refiling or more likely path.
Speaker Change: We're expecting to settle both of those cases and I think we've been we've had good discussions with the intervenors and with the staff and so we're optimistic that will come to conclusion.
Speaker Change: Okay. Thanks.
Mark: Thanks Mark.
Mark: Your next question comes from the line of Sean.
Speaker Change: TV Goldman Please go ahead.
Speaker Change: Thanks, Good morning, everyone and thank you for all the detail on the.
Speaker Change: The rate case filings.
Speaker Change: Just one question for me I'm wondering if you can give us any updates on the process for hydro at this point is that underway.
Speaker Change: If so any any context on expressions of interest at this stage.
Speaker Change: Well for one we've had lots of expressions of interest.
Speaker Change: That has not been a problem.
Speaker Change: But no we haven't really started the process there.
Speaker Change: We've been focused on obviously is selling the bigger asset base and also on the carve out of the hydro those two things are busy activities.
Speaker Change: And so what we've said is sometime in the first half we will actually go to market with the hydro.
Speaker Change: 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 to be considered pure play and so we'll sell if we can create some economic value, but if they are better off in the business will keep them there, but we will go to market and test that.
Speaker Change: Yes, Sean and I know in the past, we said we would we would.
Speaker Change: Be hoping to do that this year, but with all as Chris mentioned with everything going on.
Speaker Change: In fact, we want to maximize value here.
Speaker Change: Just going to time it next year, when we have a bit more bandwidth to the attention it needs.
Speaker Change: Okay.
Speaker Change: Understood. The rest of my questions have been answered thanks very much.
Speaker Change: Thanks, Great. Thanks, Sean.
Speaker Change: Yeah.
Speaker Change: Again, if you would like to ask a question.
Speaker Change: Star then the number one on your telephone keypad.
Speaker Change: Next question comes from the line of Rod Hall with Deutsche Bank. Please go ahead.
Speaker Change: Scotiabank.
Speaker Change: Hi, everyone.
Speaker Change: Thank you.
Speaker Change: Sure.
Speaker Change: Good question.
Speaker Change: Anyway, Okay.
Speaker Change: Sean's question there so it doesn't seem like you need to.
Speaker Change: Sell the hydro assets from a strategic point of view or even a balance sheet point of view. So when you think about use of proceeds on the hydro assets.
Speaker Change: Could that push you to share buybacks or would that help you accelerate investment into 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.
Speaker Change: Yes, Rob.
Speaker Change: No I'll repeat could maybe comments that we've said in the past first is as we continue to say we're committed to the investment grade rating.
Speaker Change: We intend to use proceeds to maintain flexibility we want to be self funding that is the bigger priority week, certainly don't want to do a buyback and go back to the market. After that I will say that the amount of flexibility. We have is dependent on getting the regulatory lag lower obviously theres, earning.
Speaker Change: And that's before.
Speaker Change: That's created by those those rate cases, so a lot of it is going to be timing dependent but ultimately we're looking to have flexibility bring.
Speaker Change: Bring them more discipline internally on how we time capital spend with our regulatory recovery.
Speaker Change: And then from there you know invest in the business and.
Speaker Change: And Rob we will take a look at the balance between.
Speaker Change: What the 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 that'll be the tests that were looking at and whichever it comes over the most economic value is what we will do.
Speaker Change: I appreciate that and then sticking with the power business.
Speaker Change: As we look through the balance of closing could we see the purchase price move.
Speaker Change: Again, and just to clarify or confirm the.
Speaker Change: And the movement that we saw 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 106 of the 108 because of US, bringing 200 million on balance sheet. So that would've been in the construction jv's before and now they're on our books in actually go higher. So there is no economic effect, we do have a range in here as we get closer there is a <unk>.
Speaker Change: Handful of projects that we need to complete a responsible completing even through through the time were.
Speaker Change: Alex we take ownership and so some of those have been pushed to the right with some additional costs. So we've put a range in Europe. Its our best estimate at this time, we're comfortable with that range of what it's going to take to finish those projects.
Speaker Change: Thank you.
Speaker Change: And Rob just for clarity that also impacted the timing of those also impacted.
Speaker Change: You would see I noted that we're going to get about $150 million of proceeds kind of in the back half of next year. That's around tax attributes of those projects. So as they've pushed out we don't see it being timed with the closing of the same way anymore, but no change in our overall economics, there's just some nuances to it.
Speaker Change: Thank you.
Rob: Okay. Thanks, Rob.
Rob: Okay.
Rob: Okay.
Speaker Change: There are no further questions at this time I will now turn the call to Mr. Chris Schott.
Speaker Change: Yeah.
Chris Schott: Okay, well. Thank you very much for your interest in Algonquin and for your time today we.
Chris Schott: We will be heading to <unk> financial conference in a few days and we look forward to seeing many of you. There. So have a great next the rest of your day.
Speaker Change: Thank you.
Speaker Change: This concludes today's conference call you may now disconnect.
Speaker Change: Okay.
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