Algonquin Power & Utilities Corp. Common Shares

Good morning. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the Algonquin Power and Utilities Corporation 2021 fourth quarter earnings webcast and conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star 1. Thank you. Amelia Tsang, VP, Investor Relations. You may begin your conference.

Good morning, everyone. Thanks for joining us this morning for our fourth quarter and full year 2021 earnings conference call. Presenting on the call today are Reem Basgoda, our President and Chief Executive Officer, and Arthur Kaspersak, our Chief Financial Officer. Also joining us this morning for the Q&A part of the call will be Jeff Normand, our Chief Development Officer, and Johnny Johnson, 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, management discussion and analysis, and annual information form 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 measures. Please also 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 Q4 and annual 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 recue 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 have been able to join us on the call and online. Given that this is our year-end earnings call, I want to provide some highlights and speak to performance, both financial and operational, for Q4 and full year 2021. Firstly, on financials, I'm pleased to report steady year-over-year growth in the following key financial metrics. 2021 adjusted EBITDA of nearly $1.1 billion increased 24% year-over-year from $869.5 million, largely from new facilities that came online in 2021 on the renewable side, including Maverick Creek Wind and Alta Vista, as well as contribution of new facilities on the regulated side, including Empire Wind and a full year of contribution from Belco and Esau. Our 2021 adjusted net earnings per share of 71 cents was up 11% from the 64 cents reported in the prior year and came in line with our expectations. Last year, we reported annual dividends per share of 67 cents representing a 10th consecutive year of dividend increases. We also exceeded the year with approximately $16.8 billion in assets, a 27% increase over the $13.2 billion reported in the prior year. Secondly, on execution. The company undertook a number of successful growth initiatives and continue to execute on strategic priorities in 2021, which are positioning us well for the future. We continue to focus our efforts on Algonquin's three strategic pillars, growth, operational excellence, and sustainability. And I will provide more details on each of these pillars. Earlier this year, We closed on the acquisition of New York American Water, which services over 125,000 customer connections across seven counties in southeastern New York, and we officially welcome the New York American Water employees into Liberty. The transition has gone very well as planned. Staying on the topic of growth, I want to provide you an update on our pending $2.8 billion acquisition of Kentucky Power Company and AEP Kentucky Transmission Company. We remain excited and firmly committed to this transaction and look forward to bringing the benefits of our local operating model to Eastern Kentucky. As we previously mentioned, our expectation of enhancing Kentucky Power's local operating model bringing benefits to customers by exploring opportunities to reduce customer rates through investing in green energy, and creating increased local employment are all attributes that are expected to help customers and the local communities while driving value for shareholders. To that end, you are likely aware that we jointly filed with ADP an application with the Kentucky Commission on January 4th for the approval of the acquisition of Kentucky Power. By statute, the Commission must issue an order on the application within 120 days. We expect to close the transaction in mid-2022 after receipt of state and folk level approvals and satisfaction of all other closing conditions. To date, We have already received hard-scarred Rodino and CFIUS approvals. Staying on the regulatory front, our red review at Empire Electric continues to progress well. On February 4th, 2022, a stipulation was reached among Empire Electric, Office of the Public Council, staff of the Missouri Public Service Commission, and other intervenors. Hearings were held on February 7 on rate design, and a hearing on the stipulation was held on February 10, with new rates expected to be implemented in May of 2022. We believe the settlement represents a fair outcome for customers and the company. We continue to invest in our network to deliver mission-critical services to our communities while keeping customer affordability top of mind. Another growth pillar in our regulated business is focused on deploying capital to benefit our customers. In 2021, the regulated services groups invested over $1.9 billion, including the completion of our Midwest Green Initiative, where we brought 600 megawatts of wind generation online. In the coming years, we expect to invest between 800 million and 1.2 billion annually into our rate base to improve safety, security, reliability, resiliency, and customer experience. Turning to the growth levers on our renewable business, in this business, Our ability to originate and execute projects is a critical growth lever. 2021 has been a record year for Algonquin, with nearly 1,200 megawatts of new renewable projects either closing or reaching commercial operations. In December 2021, we completed our latest project to achieve commercial operations, the 24 megawatt EBR wind facility in Quebec. with all of the energy being sold to Hydro-Québec. The 175 megawatt Blue Hill facility in Saskatchewan, with all of the energy under contract with SAS Power, is on track to achieve commercial operations in March 2021. Our construction program continues with the expected start of construction in Q2 2022 of the Deerfield 2 and Sandy Ridge 2 wind projects. Also, we continue to progress our partnership with Chevron and expect to start construction on the first two of these solar projects in mid-year. The fact that we continue to successfully execute on construction in the midst of the COVID pandemic and supply chain challenges is a testament to the hard work, entrepreneurial culture, and experience base of our employees. At our investor day, we discussed our strong development platform, where our ongoing development has resulted in growing our greenfield pipeline of prospective generation projects to 3,800 megawatts by the end of 2021. This growth is net of projects totaling 640 megawatts, which advanced from our greenfield pipeline into our five-year capital plan. The 640 megawatts that advanced includes the Riverbend Wind Project in Michigan, the Blue-Violet Combined Wind Solar Project in Illinois, and four projects being developed in partnership with Chevron in New Mexico and Texas. Two other important initiatives in 2021 to establish a strong foundation for future growth include building a 1,700 megawatt-hour pipeline of prospective energy storage projects and entry into renewable natural gas with the agreement to acquire Sandhill, a developer of RNG projects. Sandhill represents an attractive platform, giving us immediate entry via its portfolio of four projects in the state of Wisconsin, two of which are currently under construction with first production expected around the end of Q1, and two projects which are in late-stage development. According to a U.S. Environment Protection Agency report, Wisconsin represents the state with the second largest universe of renewable natural gas opportunities. And we are excited to utilize Sandhill as an RNG growth platform. This acquisition is expected to close in the first half of 2022. Moving on now to operational excellence. In a mission-critical industry, safety and reliability are always key areas of focus. I'm very pleased to share that we have passed an impressive milestone of over 750 days. That is nearly 11 million work hours without a single lost time injury across our North American business while keeping our customers and community safe. and maintaining our system reliability and resiliency. I want to thank all of our employees for their ongoing focus on safety and preparedness for weather events. I want to particularly call out and thank the electric team in Tahoe as that area received record-breaking snowfall over the Christmas holidays. Liberty crews worked hard throughout the holiday weekend to restore power to our customers and communities as quickly and safely as possible during harsh weather conditions. The hard work and dedication of our employees did not go unnoticed by the customers and local communities we serve. And finally, we remain firmly committed to sustainability through the inclusion of environmental, social, and governance values in our broader corporate strategy and day-to-day operations. In 2021, we announced our target for net zero for scope one and two emissions by 2050 with a critical path supported by our strong decarbonization track record, extensive experience in regulated utility management, and deep expertise in renewable development. On the governance side, We successfully embedded sustainability into our management's compensation model, continuing to enhance how ESG factors are embedded throughout the organization's business goals. And finally, in 2021, AQN's ESG ratings continue to improve in the aggregate, positioning the company as a sustainability leader. More recently, I'm pleased to report the company's inclusion in the 2022 Bloomberg Gender Equality Index for the third year in a row. Our inclusion into the index is a testament to our continued efforts for continued gender equality, improved gender equality, and transparency as we target above-market gender representation at our board and executive levels. With that, I'll pass it over to Arthur, who will speak to our fourth quarter and full year 2021 financial results.

Arthur? Thank you, Arun, and good morning, everyone. I'm pleased to report that our government has reported steady fourth quarter and full year results, reflecting the benefits of our diversified and resilient business model and proven track record of disciplined growth. Our fourth quarter 2021 consolidated adjustment EBITDA was $297.6 million, which is up approximately 18% from the $253.1 million we reported for the same period last year. The regulated services group delivered $191.4 million in operating profits in the current quarter, which compares to $162.4 million in the same quarter last year, an increase of about 18%. This improvement reflects contributions from our Midwest wind facilities, which were placed in service in 2021, as well as contributions from Belco, our Bermuda electric utility, and ASAL, our Chilean water utility, as both acquisitions closed during Q4 of 2020. Results also benefited from new rates implemented on Calpico and Granite state electric systems, as well as Parkwater and Apple Valley water systems in California. This was offset by lower consumption, driven by milder weather. Results were also impacted by higher non-pass-through fuel costs at Empire Electric, as well as higher operating costs at Granite State and Calpeco. The Renewable Energy Group reported fourth quarter divisional operating profit of $123.9 million, which compares to $97.9 million in the same quarter last year, an increase of about 27%. The addition of the Sugar Creek and Maverick Creek wind generation facilities contributed to the year-over-year increase in operating profit. Our investment in Atlantica also continued to provide benefits, with dividends received increasing by $4.4 million over the prior year. Q4 also benefited from the sale of our new market solar facility to a joint venture with our renewable construction partner, Aries. resulting in a recognized gain, reflecting a step up in the value created through the development process. However, this increase was partially offset by lower overall production on some of our wind and solar generation facilities and higher operating costs, while performance at our Sanger facility was negatively impacted this quarter by higher compliance costs and lower capacity payments. Our investment in the Texas coastal wind facilities was also negatively impacted by higher than expected basis cost, lower than expected production, and an acceleration of HLVD losses of $9 million related to Q1 hedge settlements caused by winter storm worry that are expected to largely reverse in the future. Fourth quarter corporate expenses were higher by approximately $10.5 million as compared to last year, driven primarily by higher administrative expenses and higher overall net dissolving expenses as compared to last year. In total, our Q4 adjusted net earnings per share came in at $0.21, which is in line with last year. In addition to the drivers discussed, our results were negatively impacted by financing costs associated with the capital deployed in 2021 and an increase in the weighted average shares related to the Kentucky Power Acquisition Funding. For the full year, adjusted net EPS came in at 71 cents and compares to 64 cents reported in the prior year, representing an annual growth in adjusted net EPS of 11%, showing solid year-over-year growth. Although we delivered strong results, we did encounter various headwinds throughout the year. As a result of record low wind resources experienced throughout the early part of the year, which was an industry-wide phenomenon, generation on our wind facilities was down approximately 10% from long-term averages. Also, much warmer than normal weather in the Midwest negatively affected customer usage in the early and latter parts of the year. Compared to normalized weather patterns, this represents an impact of approximately $48 million on our 2021 operating profit, or about $0.055 on our adjusted EPS. Moving on to the balance sheet and financing activities. First, I wanted to spend a few minutes to provide an update on our progress towards the financing of the Kentucky Power acquisition. On announcement of the deal back in October of last year, we executed a Canadian dollar bought deal offering of common shares, raising a U.S. dollar equivalent of approximately $640 million in proceeds. Early this year, we issued approximately $1.1 billion of hybrid debt and of concurrent public offerings in the U.S. and Canada. Recall that hybrid debt receives 50% equity credit from S&P and Fitch and never converts to common shares. We have issued this financing on an attractive expected 10-year rate of approximately 4.95% after factoring hedging. That brings the total rates for the transaction to just over $1.7 billion towards the $2.8 billion purchase price. On closing, we expect to assume approximately $1.2 billion of Kentucky Power Company debt, of which approximately $500 million is targeted to be refinanced using Liberty Utilities' established 144A debt platform, which we would expect would benefit our future Kentucky customers. We continue to see this acquisition as providing compelling value and look forward to closing later this year. Moving on to the broader capital and financing plan. In 2021, Algonquin deployed $3.7 billion of capital on organic initiatives relating to the safety, reliability of our electric, water, and gas systems. as well as delivering new renewable generation from our projects including Maverick Creek Wind, Alta Vista Solar, and our Midwest Greening. For 2022, Algonquin is targeting to spend over $4.3 billion in capital, with the majority related to the acquisitions of New York American Water, which closed earlier this year, and Kentucky Power, which is expected to close in the middle of this year. Our funding plan for the remainder of the year is predicated on maintaining a strong and resilient balance sheet, targeting a BBB investment-grade credit rating. I spoke to the funding associated with the Kentucky Power acquisition already. The remaining funding requirements can be solved by a combination of various funding sources available to us, including retained cash, some more hybrid debt, proceeds from securitization of certain regulatory assets, and as well as issuance of long-term debt. As we discussed during our investor day, asset recycling or selling down a portion of our non-regulated renewables can also be viewed as another source of potential value-accretive capital for us this year. Considering the various funding sources available, we do not expect to raise additional capital in the way of issuance of discrete common equity for the remainder of this year. Our funding plan is supported by a strong liquidity position. At the end of 2021, we had approximately $2 billion of committed capital and reserves available, not counting the acquisition facility that was arranged in connection with the Kentucky Power transactions. Before turning things over to Arun, I'd like to provide a brief update on our 2022 adjusted net EPS guidance. We continue to expect our 2022 adjusted net EPS per share to be within a range of $0.72 to $0.77, which was communicated previously on our investor day. We continue to assume in our earnings guidance normalized weather patterns and rate decisions in line with expectations, as well as resource production and realized pricing on renewable generating facilities consistent with long-term averages. We also assume that there are no impacts from COVID-19 on our operations. We look forward to continuing to deliver solid earnings from our diversified and growth-oriented business model, which along with our history of superior dividend growth, we believe will continue to drive strong shareholder return. With that, I will now hand it back to Arun to outline our strategic plans.

Thanks, Arthur. Before we close out our prepared comments this morning, I want to give an update on our strategic initiatives. At our December investor day, we updated our five-year capital investment program, which projects $12.4 billion from 2022 through the end of 2026, with a very visible capital plan. Of that, we have already closed on New York American water earlier this year. executing on approximately $600 million of the capital plan in January. On the regulated side of the business, the additions of New York American Water and Kentucky Power are expected to drive long-term adjusted net EPS growth, while a large portion of the capital plan is being spent on organic investments to improve the safety, reliability, and resiliency of our network. On the renewable side, We are excited about the growth potential and believe that we have a once-in-a-generation opportunity to accelerate renewable growth and add shareholder value. In just over a period of one year, we have made investments and have grown our prospective greenfield pipeline from 3,400 megawatts to 3,800 megawatts, while converting 640 megawatts from that greenfield pipeline into our new five-year capital plan. We also introduced a new prospective pipeline of storage opportunities of 1,700 megawatt hours at our December investor day. We believe this validates the strength of our development platform. We now have scale across both our development platform as discussed, and we own and have investments in over 4,000 megawatts of renewable generation. At our investor day, we spoke of accelerating renewables growth and adding shareholder value as we plan to increase our investments in greenfield development, which we expect will allow us to capture the higher development margins and take a number of those projects through construction. Once in construction, we see an opportunity to partner with institutional investors wishing to make alternate sustainable investments with our ability to develop and deliver on long-term contracted sustainable assets. In particular, we should be able to sell down to these investors while earning an operating fee. We could then deploy some or all of the capital gain in further greenfield development, creating a potential new recurring source of earnings for our investors. With scale, We expect to get incremental benefits, including improved negotiating power, lower transaction costs, and access to greater opportunities. We are on our way to completing planning and plan to execute this strategy in 2022. I'm excited about the prospects for Algonquin's regulated and renewable businesses, which are both well-positioned to contribute to and benefit from the decarbonization transformation that is currently underway and which will only accelerate over the coming years. In summary, our three strategic pillars of operational excellence, growth, and sustainability will be a key foundation as we continue to build the business and strive to bring long-term value to our shareholders. We remain well positioned to continue to execute on our growth strategies while pursuing our sustainability goals. With that, I will turn the call over to the operator for any questions from those on the line.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question today comes from the line of Sean Stewart with TD Securities. Your line is now open.

Thank you. Good morning, everyone. Good morning, John. Good morning. A couple of questions. The new market solar project sale to the joint venture with ARIS, how should we think about that project pipeline going forward for future sales into that vehicle?

Sure, Sean. So we have been talking a few times now about the ability for us to provide recurring shareholder value through the growth of our development and construction pipeline. And so what I talked about towards the end of my presentation was really how that new market solar also fits into our strategy of producing recurring shareholder value through such sell-downs. So because of the fact that we believe it's going to be a recurring source, we believe it is prudent to not adjust that out of our earnings.

Okay. Understood. The pace going forward, though, for future projects to be sold into that vehicle, any context you can provide there?

Well, we're about done with our planning process. I mean, we're starting our execution process on that, Sean. So we'll probably be able to give a lot more detail at the next quarterly call.

Okay. Thanks for that. The Sandhill acquisition – And I guess context on the amount of capital you expect to invest into those projects and more broadly speaking, larger investment opportunities for whether it's RNG or other energy transition type investments. Any details you can provide on that front?

Hey, Sean, it's Jeff. Yeah, I think the Sandhill acquisition and the four projects are anaerobic and so they're relatively small in terms of capex. It's important to us because of the benefits of advancing an RNG and improving our knowledge in that area more so than an absolute capital play. That being said, we do see RNG expanding. RNG includes hydrogen, and so as we start to build our knowledge, start to build how we trade and expand more, We do see that as an important area, but there's still a lot of information to unfold. Okay. Thanks, Jeff. That's all I have for now. Thanks, guys. Thanks, Sean.

Your next question comes from the line of David Quezada with Raymond James. Your line is now open.

Thanks. Morning, everyone. My first question here, just on New York American Water, now the BATS closed. And I'm curious what kind of potential you see there, I guess, for spending CapEx, either organic or otherwise. I think at the time of the acquisition, there was some talk about opportunities for consolidation there. So any thoughts around that would be appreciated.

Well, look, I mean, we are very much in a planning process for, you know, continued investments in New York American water. Our next rate case is not due for some time, but, you know, as with all of our other utilities, you know, we continue to invest in the safety and reliability and resiliency of that water system as with anything else. Now, given our unique positioning in terms of renewable energy, I mean, as you know, the There's quite a bit of energy required to transport water. One of the unique things we do do is look at opportunities to see how we can substitute the current energy profile with our renewable energy generation to serve our water utilities also, which I think is a unique capability that we have, and we have utilized that already. So that's something we're taking a close look at as well.

Excellent. Thanks, Arun. Maybe just one more for me, just on the topic of cost inflation. And I'm thinking specifically about your regulated business. I'm curious if you've had any discussions with regulators, especially on your active regulatory dockets, if inflation has been raised as a concern there at all, and how are those discussions going?

Sure. Look, David, I mean, inflation is the current topic du jour, right? So obviously, you know, we're seeing more inflation than we have seen in the past, probably 10, 15 years at least, I think. On the regulated side of the business, I mean, look, I mean, inflation is largely a pass-through. But at the same time, we are acutely aware of the potential impact on customer affordability, so we track that extremely closely. And that's a continuing source of discussion we have with the regulators on how to balance all the cost increases vis-a-vis the right level of customer rates. On the renewable energy side, it's largely a function in our minds of your three significant contracts on the renewable energy side. You've got your large equipment contract. You've got your EPC contract. You've got your off-take contracts. Once you sign those three agreements, all of them are fixed-price contracts. And so in our mind, the strategy we employ is trying to sign those three contracts as closely concurrently as possible so that we are not left holding the inflation risk. And that's the way we've been able to protect our return margins. Excellent.

Appreciate the callers. Thanks, Arun. That's all I have. Thank you, David.

Your next question comes from the line of Rob Hope with Scotiabank. Your line is now open.

Good morning, everyone. First question is just on the – it looks like a little bit of a pivot on the renewable power strategy to a bit more of a capital-like strategy. Is this what's driving the investment in capital projects in the renewable energy group of $5 to $30 million in 2020? should be a relatively busy year. So is the assumption that you're going to be kind of bending down more than half these projects, equity account for them and kind of recoup your capital here pretty quick?

That's basically it. What you're seeing there is basically the spend that's really the on-balance sheet spend, but obviously a lot of activity going on in the year and certainly a lot of development spend and continuing construction spend, but that spend is mostly reflected in our construction GVs.

And that activity is only likely to keep on increasing, Rob, and that's why if you notice, we started including a slide that shows you the level of construction activities, which is fairly significant. So we have not slowed down in terms of continuing to advance our greenfield project through the development process, through construction, and into operations.

All right, that's helpful. And then I guess the question is, how should we think about the you know, the $3.6 billion of capex that you put forward at your investor day, is that then more of a 100% number and then net to AQN could be, you know, significantly smaller, you know, then we'll add on more projects as they come?

Yeah, you could think of that as the gross number. I mean, obviously, as we think about how much is actually retained versus monetized and so forth would be determined in the future. Thank you.

Thanks, Rob.

Your next question comes from the line of Nelson Ng with RBC Capital. Your line is now open.

Great. Thanks, Anne. Good morning, everyone. Just a quick follow-up to that question in terms of the JV. So can you give a bit more color on your relationship with Aris Management? Are they a long-term buyer of your assets? Is that part of the plan?

Yeah, Nelson and Jeff, I wouldn't characterize it as a long-term buyer, so we've got a strong relationship with Aries, and we expect to do more than one transaction with them, but it's not an exclusive relationship, and I think there's a very robust market out there, and we want to keep our options open.

Okay. So I know in the past you would move assets into a JV, have it constructed, and then at the end you would usually kind of buy it back at a nominal price. But this isn't the case, right? Ares will be a long-term equity shareholder in Newmarket and the other assets. Is that right?

Yeah. Two elements to think of on that. The first one is on the development side, where we are moving projects through and they're participating in the risk on those projects. And then there's the construction-type JVs. I think the primary difference is ARIES The primary difference between the original construction projects and this would be we may not take them back at the end, but it may not be Ares that is the long-term hold. There may be a third party that picks up thereafter as well. So that's not absolutely certain at this time.

Okay, thanks. And then just one last follow-up question. In terms of timing, so is it the plan to have things sold down and moved to JV at I guess on financial clothes or just prior to construction or during construction rather than on or after completion. I presume there's still a bit of extra value to be had if after you hit COD.

The plan is that we're in the best position to de-risk these projects through development and through construction. Those are, you know, clearly areas of expertise we have, and take them through a certain period of operation, you know, take care of all the initial, you know, bedding down issues, things are restored, and then sell them.

Okay, thanks for that. Sorry, go on.

I was just going to add, and I mean, so with the construction JVs, Algonquin will still look to retain the full, obviously, upside value throughout the construction cycle.

Okay. Got it. All right. I'll get back to you. Thanks, everyone. Thanks, Andrew.

Your next question comes from the line of Ryan Greenwald with Bank of America. Your line is now open.

Good morning, everyone. Maybe starting with any additional color, how you're thinking about the dividend growth going forward. Looks like excluding the gain on the sale here, you guys were tracking at approximately 100% payout ratio. Is there any way to help frame how you're thinking about that ahead of the annual cadence in which you typically revisit it?

Yeah, I'll tell you, our stance really hasn't changed from what we communicated previously. Look, our dividends, we certainly want it to be at sustainable dividends. And we've communicated in the past an 80% to 90% payout ratio target. I mean, it's a long-term target that we're targeting between 80% to 90%. So there's going to be lumpiness in certain years. But from an overall long-term perspective, that's where we end up seeing and certainly do some further dividend growth as well.

Got it. That's helpful. And then in terms of the sale to Ares instead of AY, can you just talk about that and how you're thinking about the AY relationship going forward?

Look, the AY relationship remains strong, right? I mean, you saw we have dropped down some other assets into AY as well. Like I've told multiple times, I mean, we like the ESG profile of Atlantica. So the relationship remains strong. I just want to remind folks that the whole, you know, construct around the with AY on the dropdowns, was that it is going to be around non-regulated, non-North American assets. So this does not obviously necessarily fall into that category. So I think as a company, as we grow our renewables portfolio, we find ourselves in a good position that we have multiple options.

Yeah, understood. And then maybe just one more, if I may. In terms of your appetite for further M&A in the market environment, can you touch on that a bit? And then perhaps separately, given where LDCs have been transacting from a private valuation perspective, would regulated divestment be on the table, or is any asset recycling going to be more on the renewable side?

Look, I mean, Ryan, I will tell you that we're always looking to, you know, increase shareholder value, and we're never closing any doors and saying, you know, there are no sacred cows here, right? Having said that, from a strategic perspective, when we look at all of our assets in our portfolio, and given the external market as well, we believe that the first phase is really the sell-down on the on the renewable side of the business because we see our ability to be able to control more that development pipeline, the construction pipeline, the flow of the number of projects into operations. So it's a much more recurring and it's a much more controllable piece of recurring shareholder value rather than one-offs. Having said that, we're not against doing one-offs either. So one of the ways we look at that is, you know, is any particular asset more valuable under our ownership versus somebody else's ownership? So that's something we're always looking at.

Great. I'll leave it there. Thanks so much for the time. Thanks, Ryan.

Your next question comes from the line of Ben Pham with BMO. Your line is now open.

Hi, thanks. Maybe I want to start off – on maybe some of the questions you had on Ares and some of the structures that you utilize. And I'm wondering, when you look at asset drop-downs or asset sales, how do you position where it fits? Is Ares mainly development, construction, AY, operating assets, and then you compare that to third-party? How do you – there's a bunch of different structures going to – It'd be interesting to see how you think about where things fit.

So basically, when we look at development and construction, one of the options we have, obviously, is to utilize this joint venture with Ares. So we do not have any other, but we could develop it totally ourselves as well. So we have that flexibility of doing either or. We are not normally developing projects or going through construction with Atlantica. On the operational side, by and large, you know, we are the operating entity on our asset base, and Atlantica is the operator on their set of assets. And we obviously, you know, try to learn from each other, but those are two, you know, separate operation platforms.

Okay. And then your 2022 guidance or even thinking – the 7% to 9%, I would assume, correct me if I'm wrong, there's a drop-down element baked into those numbers?

Yeah, we do certainly look at extracting value out of our greenfield development pipeline, and we have to take that into the guidance. Now, whether it's a pure drop-down or a pure gain, or whether it's extracted through different ways, such as management fees and so forth, that's to be... we still work through, but there is certainly one thing we are looking at is obviously some of the value created through our current growth pipeline.

Okay, I understand. And then my last one, you mentioned some of the bridges on funding for Kentucky Power. I wasn't sure, Arthur, were you suggesting that you're now fully funded for Kentucky Power or there's still a slice left?

Yeah, we're basically done in terms of the notional amounts for Kentucky Power with our hybrid debt of $1.1 billion. We funded the cash purchase price. Now we obviously need to kind of put everything into the mix and make sure our credit metrics come out right on the other side of all of this. So the rest of our funding plan certainly considers that.

Okay, got it. Okay, thank you.

Your next question comes from the line of Andrew Kuske with Credit Suisse. Your line is now open.

Thanks. Good morning. I guess the first question is really around the ability to monetize certain assets, you know, portions of or entirely, and then, you know, use those proceeds to effectively accelerate growth. All that can be pretty compelling, but how do you balance just a more complicated structure versus being more simple, and how do you think about that, whether the financial terms are sort of warm or fuzzy kinds of feelings?

Andrew, great question. Thank you. So fundamentally, if you really look at it, what we're trying to do is leverage two specialized skill sets we have, right, one on the development side and one on the operation side. And I think over the years now, we have a certain level of skill, uh, on, on both sides of the business. And we believe that, you know, we should be able to just accelerate that growth by utilizing and leveraging those specialized skill sets even more, you know, given the external environment and the whole decarbonizers and ceases that's out there, right? So that's really the fundamental ceases. Now, obviously, you know, to grow significantly along that renewable energy portfolio requires you obviously need to access a lot of capital. And our view is that, again, looking at the external market with the number of sustainable investors out there, we believe that we should be able to sell down to those sustainable investors at a point where we can provide recurring value to our shareholders. So that's really the thesis of that flywheel, if you will, continuing to expand our renewables, the greenfield pipeline, de-risking those through development, construction, and operations, selling down, redeploying that capital back into more renewables growth.

Okay, that's helpful. I appreciate that. And then maybe just thinking about that flywheel and your businesses, and the transactional marks we've seen in the U.S. more recently on the LDC side, is there an opportunity to really focus your expertise in both the renewables business and the utilities business more broadly through the Caribbean? Because you've got the exposure in Bermuda. There's other assets there that do have good decarbonization stories, renewable needs, and offer just more compelling value from an investment standpoint. How do you think about that region more broadly?

Well, we were attracted to Bermuda from a lot of different factors, including the fact we even looked at things like hurricane profiles, things of the sort where Bermuda does experience fewer hurricanes than other parts of the Caribbean. So there's obviously a lot of things we look at when we look at any acquisitions. A scale is important, we believe, in terms of being able to do a lot more with less. So building scale across any one of our three modalities, especially electric and water, are things that we look at very closely. But again, we end up looking at a lot more opportunities than in terms of executing against those just because We continue to be extremely disciplined around which assets we bring under our foot. We just have a lot of financial metrics, risk metrics that we need to fit. Again, I hope I'm answering your question, Andrew. It's a long-winded question. Answer.

It wasn't a concise question either, so I appreciate the time. Sure.

Your next question comes from the line of Najee Badoon with Industrial Alliance. Your line is now open.

Hi, good morning.

Just wanted to start off with, I guess, a clarification on the balance of funding for this year. So you had the large hybrid bed offering. In terms of the priorities for asset recycling, can you just clarify if – you're thinking about existing asset monetizations or non-core asset sales, or is it really just more focused on development salons for this year?

So for this year, I mean, as we think about our funding plan, look, we've got, I would say, first of all, we've got optionality. As always, we've got a lot of different funding sources that we can look to tap. I mean, asset recycling is certainly one of those things. funding sources, and that would potentially come from existing assets that are in our fleet. But again, we've got quite a lot of funding sources to potentially satisfy what we need to do this year.

Okay. So there's no, I guess, necessity in terms of accelerating some of that here in the short term. Absolutely. Okay, just the other question I have was about the accelerating renewables growth that you mentioned. I know that you have a lot of projects, you know, in the pipeline for this year, but maybe just beyond 2022 and 23. Can you just give us an update on how the new development projects are going that could potentially extend that runway over time?

No, it's Jeff. And so I think everyone referred to our greenfield pipeline, the 3,800 megawatts, which we rolled out yesterday. That is what we see feeding our five-year capital plan. And we continue to add to that pipeline as well as advance the projects in that pipeline for pull-down into the capital plan. So we feel like we've got the pump well-primed or the flywheel turning here. and we're making good progress across the spectrum from new entrants into that Greenfield pipeline to pulling stuff out into the capital plan. And so 22, 23, 24, we won't be able to say anything concrete until we have names ready to share with you, but the process is certainly working well.

And on top of that, we also showed you the 700 megawatt hours of storage pipeline, which we were pretty bullish about.

Of course, and again, just to be clear, I think you said you're looking to add, you know, about a gigawatt of new projects in the next five years. So are you – you feel that you're still on track to do, you know, at least 200 megawatts this year of new development?

Yes. In terms of new development that would fall under the capital plan that we share at Investor Day, we would expect at least 200 megawatts. Yeah. Okay. Go ahead. Thanks, Najeef.

Your final question today comes from the line of Rupert Mayer with National Bank. Your line is now open.

Hi. Good morning, everyone. Another question on asset recycling. Can you talk about the potential to sell your existing assets? Are you only looking to do sell-downs on development assets, or could you do sell-downs on existing assets as well?

Hey, Robert, it's Jeff. Existing assets are certainly on the table, and we believe they've got good value given the transactions we're seeing in the market. And to the extent that we're looking to monetize anything in the shorter term, that's where the more material amount would be.

And then would you look to aim or look to say control 51% of assets in the future? So you're going to maintain control and then you have joint venture accounting somewhat like you have with your Texas assets?

Not necessarily, Rupert. I mean, we have not decided exactly what level of ownership we're going to take. I believe what is more important for us is to make sure, you know, we are the operating and asset management entity because, again, creating and furthering scale on that side of the business also continues to be important for us. So that's what we focus on, exactly what percentage we – So that's still in the planning stages.

Great. And then just finally on Texas, we saw some headwinds at the coastal wind assets. I know you gave us some color on that situation back in December. Just wondering if you could walk us through what you saw in Q4 and what the outlook is for these assets going forward. I understand you're looking at improved transmission there over time. What does that look like for the United States?

Sure.

So, Rupert, so there are really a combination of factors, right, on those coastal wind facilities. You know, first of all, you know, the lower wind resource, which, again, I believe is an industry-wide phenomenon that affected quite a number of our North American wind assets in 2021. On top of that, during periods of oversupply, the prices were obviously lower than anticipated in the market. And third, one of the projects actually got to use COD later than anticipated. And finally, as you saw, towards the late of the year, there was a general transmission constraint that was announced by IRCA. So it really was a combination of factors. We believe that the first three of those should be transitory. The fourth one we believe is going to go away with time because of the announcement of a general transition constraint. That means that both ARCA and the Commission have already approved transition upgrades around that region and that facility. So we believe that over time, starting 2024, that basis risk should significantly go away. So of the four factors I talked about, uh three of them are transitory one we believe will continue until 2024. okay very good i'll leave it there thank you yeah thank you rupert there are no further questions at this time arun i turn the call back over to you uh thank you operator and thank you everyone for taking the time on our call today uh with that uh please stay on the line for our disclaimer our discussion during this call contains certain forward-looking information

including but not limited to our expectations regarding earnings, capital expenditures, pending acquisitions, capital recycling, and future growth. This forward-looking information is based on certain assumptions, including those described in our most recent MD&A filed on Cedar and Edgar and available on our website, and is subject to risks and uncertainties that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. Forward-looking information provided during this call speaks only as of the date of this call and is based on the planned 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 why material difference between subsequent actual events and such forward-looking information except as required by a physical 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 net earnings, adjusted net earnings per share or adjusted net EPS, adjusted EBITDA, adjusted funds from operations and divisional operating profits. There is no standardized measure of such non-GAAP measures and consequently, AQM's method of calculating these measures may differ from methods used by other companies and therefore they may not be comparable to similar measures presented by other companies. For more information about both forward-looking information and non-GAAP measures, including reconciliation of non-GAAP financial measures to the corresponding GAAP measures, please refer to our most recent MD&A filed on CDAR in Canada or EDGAR in the United States and available on our website. And that concludes our call.