Algonquin Power & Utilities Corp. Common Shares

Good day and thank you for standing by. Welcome to the Algonquin Power and Utilities Corporation 2021 Third Quarter Earnings Webcast and Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone. Please be advised that today's call is being recorded. If you require any further assistance, please press star 0. I'd like to hand the conference over to our speaker today, Ms. Amelia Chang, Vice President, Investor Relations. Please go ahead.

Thank you. Good morning, everyone. Thanks for joining us this morning for our third quarter earnings conference call. Presenting on the call today are Arun Bhaskara, our President and Chief Executive Officer, and Arthur Kasperzek, our Chief Financial Officer. Also joining us this morning for the Q&A part of the call will be Jeff Norman, our Chief Development Officer, and Johnny Johnston, our Chief Operating Officer. To accompany our earnings call today, we have a supplemental webcast presentation available on our website, algonquinpowerandutilities.com. Our financial statements and management discussion and analysis are also available on the website, as well as on CEDAR and EDGAR. Before continuing the call, we would like to remind you that our discussion during the call will include certain forward-looking information, including but not limited to our expectations regarding future earnings, capital expenditures, and pending acquisitions. At the end of the call, I will read a notice regarding both forward-looking information and non-GAAP financial measures. Please refer to our most recent MD&A filed on CEDAR and EDGAR and available on our website for additional important information on these items. On our call this morning, Arun will provide an overview of our Q3 performance, Arthur will follow with the financial results, and then Arun will conclude with an update on our strategic plan for the business. We will then open the lines for questions. I ask that you restrict your questions to two and then re-queue if you have any additional questions to allow others the opportunity to participate. And with that, I'll turn it over to Arun.

Thank you, Amelia, and a very good morning to those who've been able to join us on the call and online. I'm pleased to report solid key financial metrics for the third quarter of the year. Q3 adjusted EBITDA was $252 million, a 27% increase year over year, and our Q3 adjusted net earnings per share was 15 cents in line with last year. On our regulated side of the business, operating profit was positively impacted by the addition of our new Empire Wind facilities, as well as the first full year of operations from our Bermuda Electric Utility and the Estal Water Utility in Chile, which both closed late last year and have both performed in line with our expectations. On the renewable side of the business, Operating profits from our new facilities, such as Sugar Creek and Maverick Creek, contributed to increased earnings on a year-over-year basis. Excluding new facilities, production was 7.3% below the same period last year due to lower wind resource, but this was partially offset from other income, including increased renewable energy credit or REC revenues. I'm pleased to report that the company's operating results were not materially impacted by the pandemic this quarter. Recall that in the third quarter last year, the pandemic did have a one cent impact on earnings per share. Generally speaking, we are not seeing negative impacts from COVID on our loads as business conditions in the regions we operate in return to normal. Our team continues to focus our efforts on Algonquin's three strategic pillars, growth, operational excellence, and sustainability. We operate through two primary businesses, regulated and renewables, and we'll spend some time on each for an update. On the regulated side, one important lever of growth is acquisitions. On that topic, I'm pleased to discuss our recently announced agreement to acquire Kentucky Power Company, a vertically integrated regulated electric utility that services approximately 228,000 customer connections in 20 eastern Kentucky counties. As part of the transaction, we will also be acquiring AEP Kentucky Transmission Company Inc., a regulated electric transmission utility operating in the PGM integrated market. We look forward to welcoming the Kentucky Power employees into the Liberty family and to working with AEP during the closing and transition process. The total enterprise value of the acquisition is approximately $2.8 billion, comprised of assumed debt of approximately $1.2 billion and a cash purchase price of approximately $1.6 billion. From our perspective, this represents an attractive valuation multiple of 1.3 times rate base. based on an estimated mid-year 2022 rate base of approximately $2.2 billion. This transaction will have the benefit of increasing our pro forma regulatory business mix to nearly 80% of our portfolio from nearly 70% currently, and further increasing our service territory and regulatory jurisdiction diversification with a supportive regulatory framework. Upon closing of the transaction, we expect to have approximately $9 billion of rate base, increasing our pro forma electric rate base from 63% to 72% of our total pro forma rate base. We expect to close the transaction in mid-2022, subject to customary closing conditions including the receipt of various state and federal regulatory and governmental approvals. We expect the transaction to be accretive to adjusted net earnings per share in the first full year of ownership, which would be calendar year 2023, and generate mid-single-digit accretion to our adjusted net EPS thereafter while being supportive of our long-term growth trajectory. Now I thought I'd spend a few minutes on the rationale behind the acquisition and why we feel strongly that it represents a strategic fit for us. This acquisition fits squarely into our two playbooks of greening the fleet and improving return on equity from non-optimized assets. As I've mentioned in the past, Greening the fleet is an important lever of growth and an area where we have a strong track record through the transition of our Empire and CalPICO utilities. Just between 2017 and 2020, we successfully reduced absolute carbon emissions at the acquired Empire District Electric Utility by 33%. and at the acquired CalPICO electric utility by 38% by including renewables in the rate base, use of tax equity, and shutting down a 200 megawatt coal plant in the case of Empire District. We plan on leveraging this experience at Kentucky Power. In particular, the Kentucky Power business offers significant opportunities for us to transition the existing fossil fuel generation to renewables, which will reinforce our leading role in the transition to a low-carbon economy. We see a pathway to decarbonize as it is our expectation that the low-cost resource to replace retiring or transferred coal will be a combination of renewables with support from energy storage. Wind and solar represent the lowest levelized cost of energy today and are expected to provide benefits for our customers. The existing unit power agreement with the Rockport coal-fired plant will expire in 2022, and Kentucky Power's 50% interest in the Mitchell coal-fired plant is expected to be retired or transferred by 2028. To replace the lost electricity supply from Rockport and Mitchell, we see an opportunity to utilize the integrated resource planning process to explore the potential to replace over 1,100 megawatts of fossil generation capacity with renewables. This would represent our largest greening the fleet opportunity to date and is aligned with our target to achieve net zero scope one and two emissions by 2050. We look forward to partnering with the Kentucky Public Service Commission, or KPSC, through the integrated resource planning process and leveraging our greenfield development expertise to deliver low-cost, clean energy solution capabilities. Secondly, Algonquin has had a successful track record of identifying, securing regulatory approvals, and closing acquisitions. We have extensive experience in managing the integration of multi-modality utilities such as Kentucky Power and Kentucky Transco. As with our previously acquired utilities, We strive to share learnings and best practices among our utilities with the aim of driving consistent have been utility acquisitions from large entities and our stewardship of those utilities as part of our Liberty family has helped us to create value for our shareholders and our customers. Similar with previous utilities, we will utilize our local responsive model has been able to reduce disallowances from having transparency of our costs, as well as the local model allows us to manage our costs within our regulatory allowances. In addition, we have generally been able to utilize our geographic diversity to deploy capital as we have done with many of our utilities. Also contributing to our ability to earn returns is a focus on added regulatory mechanisms. Under our ownership, we have been able to secure decoupling mechanisms, capital trackers, property tax adjustments, and similar mechanisms which all help the utilities increase their returns while providing bill stability and adding the necessary capital to allow us to better serve our customers. For example, after the acquisition of Granite State Electric in New Hampshire, since our first test year, our returns have averaged nearly 9% ROE whereas under prior ownership, the returns were frequently under 3%. Similarly, and perhaps more pertinently, at Empire District Electric, prior to our acquisition, ROEs achieved were commonly in the 7% to 8% range, whereas under our ownership, we have been able to average nearly 9.5%. Kentucky Power is primarily regulated by the KPSC, which we view as a constructive regulatory jurisdiction and is highly rated by SNP from a regulatory perspective. Kentucky Power is a utility that has historically realized ROE below the authorized levels when compared to peers in Kentucky. We see a compelling path forward to improving the earnings profile to achieve an RE that is closer to the authorized amount of 9.3% for the distribution rate base through the availability of certain key regulatory features. For instance, forward test years are not currently being employed by Kentucky Power, despite its approved use by other regulated peers in the state. and could provide for more timely recovery of costs and expenditures. We look forward to working with the Commission on implementing certain improvements to help us deploy the necessary investments to deliver reliable electric service to Kentucky Power's customers, and we plan to maintain Kentucky Power's headquarters in Ashland, along with developing construction Arthur will discuss the financing plan of the acquisition shortly. Lastly, on the acquisition front, I wanted to provide you with an update on our pending acquisition of New York American Water. We filed our joint proposal signed up by PSC staff and the majority of intervenors in early November. with a hearing scheduled for November 16th. While this has been a longer process than originally anticipated, we remain confident that the transaction will close, and we are on track to do that within the timeline set out in the stock purchase agreement, which calls for closing to occur on or prior to January 3, 2022. Moving on now to operational excellence. In a mission-critical industry, safety and reliability are always the most important areas of focus. I'm very pleased to share that we have passed the impressive milestone of over 650 days. That is over 9 million work hours without a single lost time injury across our North American business while keeping our customers and communities safe and maintaining our system reliability and resiliency. I want to thank our employees during the wildfire season, which was really operational excellence. It impacted our South Lake Tahoe area at Cal Pico, and our local teams worked with incident command.