Algonquin Power & Utilities Corp. Common Shares

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to the Algonquin Power and Utilities Corp. Third quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers are marked, there will be a question and answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad. I will now turn the conference over to Mr. Brian Chin, Vice President of Investor Relations. Please go ahead.

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. To accompany today's earnings call, we have a supplemental webcast presentation available on our website, AlgonquinPower.com. Our financial statements and management discussion and analysis are also available on the website as well as on Cedar Plus 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. Please note and review the related disclaimers located on slide two of our earnings call presentation at our website. Please also refer to our most recent MDNA 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. 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. Thank you once again for your interest in Algonquin and for supporting us on our continued journey towards a pure play regulated utility. I'd like to start with a quick review of how far we've come in our strategic transition. But first, I wanna welcome Sarah McDonald, our Chief Transformation Officer, to the call. Welcome, Sarah. In 2023, we had the strategic, we made the strategic decision to simplify and focus the business as a core regulated utility. 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. We began to streamline our capital structure early for this year. 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. In May of this year, we announced our support for Atlantica's strategic sale agreement, which is now expected to close on December 12th, 2024. In August, we announced an agreement to sell our renewables business, excluding the hydro fleet, for up to $2.5 billion, representing an attractive valuation for our platform. 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, we will effectively be a regulated utility business with significantly reduced complexity. As we've mentioned in the past, we will be looking to monetize our hydro fleet as part of the separation transaction. 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. 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. 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 the journey at times has been challenging, I'm excited to lead the company through this transition period to brighter days ahead. While we've been executing our strategic simplification plan, we've also been busy optimizing the core regulated business. When I started as 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, sorry, early in the company's history, the business primarily grew in a piecemeal fashion. 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. First, we completed the rollout of our customer-first SAP-based IT platform in the spring. We're in the typical stage where we're adapting to our new system and our processes. 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. These key milestones in our transition to a more focused, regulated utility business. Although our system implementation has caused some short-term regulatory lag and has in part impacted the timing of rate cases, we are excited by the longer-term potential these steps will provide. Second, we're 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. Third, we're reorganizing our utility structure to group by commodity to drive best practices throughout our network. We have revamped a number of our internal processes in an effort to drive more consistent results. These approaches are approaches that I've 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. 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. 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. The general rate case for Empire Electric Missouri was filed yesterday, and includes a request to increase rate base by approximately $534 million. The filing includes a .1% equity layer and 10% allowed return on equity, resulting in a requested revenue requirement increase of approximately $92.1 million. Historically, Empire's electric rate cases take about one year to resolve. CalPICO'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 .5% equity layer and 11% allowed return on equity, resulting in a requested revenue requirement increase of approximately $39.8 million. Based on typical timing, we would expect this rate case to be resolved sometime in the first half of 2026. Concurrent with the rate case, we filed a request to adjust rates vector-actively. 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 and it serves significant manufacturing development along a key corridor in the greater Phoenix area. The plant itself represents approximately $108 million in investment, offset by approximately $23 million in connection fees. This results in our seeking approval to increase rate base by approximately $85 million. 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. These three rate cases constitute over $700 million in potential net increases in our authorized rate base. As we turn to 2025, it will be the first year we will be in a position to focus completely on our regulated business. 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. 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, 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. And with that, I'll ask Darren to review this quarter's operational and financial results. Darren?

Thank you, Chris, and good morning, everyone. I'll start off my commentary today with an overview of key rate case developments. 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 1st. 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%. 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%. 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. As we've mentioned on prior calls, 2024 represents the largest number of concurrent rate cases in the company's histories. At this time, the company has pending 13 rate reviews, which represent approximately $205 million in revenue requests. Turning now to financial results. This quarter, we separated our results from the continuing operations and discontinued operations. Let me provide further color to help you better understand the moving parts. Our continuing operations includes our regulated business, hydro business, and ownership stake in Atlantica. It also includes all debt, except debt specific to our renewables business. We continue to record our ownership stake in Atlantica and associate dividends in continuing operations based on the application of generally accepted counting principles. We now expect Atlantica to close on December 12th, 2024. 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. 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. Our revenue growth was partially offset by lower past through commodity costs. We recorded year over year decreases in adjusted net earnings and adjusted net earnings per share of 5 and 20% respectively. While our results benefited from new rates, they were more than offset by higher operating expenses as well as depreciation and interest expense. Adjusted net earnings 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. 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 HLBV income as a result of normalized wind resources in the recovery of securitized regulatory assets at Empire. These gains were partially offset by higher operating expenses as mentioned earlier. A few other comments on our balance sheet as we move closer towards closing our Atlantic and renewables transaction. 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 Carvers Creek. We expect to have approximately $1.7 to $1.8 billion in net proceeds from the renewable sale after off balance sheet construction loan obligations and other renewable liabilities are satisfied. Final net proceeds received may vary due to items such as construction spending variances, tax credit timing, and monetizations. 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 have a few call-outs on our -to-date earnings and some reminders for next year. -to-date, our continuing operations adjusted net earnings is $187 million, and our adjusted earnings per share for continuing operations is $0.25. Included in that is $65 million in Atlantic dividend -to-date, or approximately $0.09 in adjusted net earnings per share. So as you think about next year, there's a few pieces of merit calling out. If you combine the proceeds of both transactions ignoring timing, we would expect to receive $2.8 to $2.9 billion. 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, leaving $1.55 billion to $1.65 billion for deleveraging against the continuing operations. 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 at dividends. As we've noted before, we are not providing 2025 guidance at this point. As a reminder, our results on a per share basis will be affected by the full year effect of the settlement of equity units from earlier this year. We plan to provide guidance when we report our fourth quarter results. In summary, we are on track to achieving a number of key milestones on our path to simplification and becoming a peer-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. We're pleased with the progress that we're making on our journey to transform Algonquin into a peer-play regulated utility. We've already achieved several of the key initiatives we listed at the start of our strategic transition and we believe we have provided the meaningful steps on how we intend to get there. 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, and ultimately provide exceptional service and value to our customers and our shareholders. With that, I'll turn the call back over to the operator for some questions. Thank you.

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. Your first question comes from the line of Rupert Murr with National Bank. Please go ahead.

Hello. Good morning, everyone.

Morning, Rupert. 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. 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 give that walk in terms of what's left. Obviously, we're going to continue to file rate cases. We've got a number of other cases to file. We're definitely pleased that we got two significant rate cases behind us now. We're focused on Litchfield next and a number of other ones.

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. Number two, we see this occurring out into 2027.

Okay. If I could just focus on the Empire rate case, then that one, of course, is the largest. It seems like it has the potential to be completed the most quickly and possibly to be completed before the end of next year. What impact could that have on 2025 and how much of it could be retroactive?

Well, I think, as we said in the prepared remarks, if you look at histories, obviously, you can't predict exactly when these will settle, but if you look at history, it's about 12 months. We just put the rate case in and it would be prospective. 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.

All right, Gray, maybe one quick follow-up here. I think you were looking also at some 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?

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.

All

right, I'll leave there

and get back in the queue. Thank you. Thanks, Rupert. Thanks, Rupert.

Your next question comes from the line of Mark Charvet with CIBC. Please go ahead.

Thanks for that commentary on some of the helpful measures to get us to sort of perform a business outlook here. Question on the base set of earnings. I appreciate, Rupert, AUI, and then there's all these interest 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 up on what you've shown here to date?

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 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.

And when you say color on that, you close Q4 before the queue? No, no, no, sorry.

Before results? Before we do our fourth quarter results, thanks Mark.

Yeah, okay, all right. And then on the rate case filings, 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? Well,

so you have to remember that in Missouri we have the visa opportunity, and pretty much everything that we are applying for is in visa 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.

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 work through a settlement or is a refiling a more likely path?

No, no, we're expecting to settle both of those cases, and I think we've had good discussions with interveners and with the staff, and so we're optimistic that'll come to a conclusion.

Okay, thanks. Thanks Mark.

Your next question comes from the line of Sean Stewart with TD Collins, please go ahead.

Thanks, good morning everyone, and thank you for all the detail on the recase filings. 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?

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 hydro at the hydro level, and so we've been focusing on the recase filings, and so we've been focusing on the recase filings, and so we've been focusing on the recase filings, and so we've been focusing on the recase filings, and so we've been focusing on the recase filings, and so we've been focusing on the recase filings, and so we've been focusing on the recase filings, and so we've been focusing on the recase filings, and so we've been focusing on the recase filings, and so we've been focusing on the recase filings, and so we've been focusing on the the recase filings, and so we've been focusing on the recase filings, and so we've been focusing on the recase filings, and so we've been focusing on the recase filings,

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and so we've been focusing on the recase filings,

and so we've been focusing on the week a change in language. Again, if you would like to ask a question, press toward Again, if you would like to ask a question, press toward Again, if you would like to ask a question, press toward in the number one on your telephone in the number one on your telephone keypad. The next question comes from the line of The next question comes from the line of Rob Hom with Deutsche Bank, please go Rob Hom with Deutsche Bank, please go ahead.

I

didn't think you would. That was a good question.

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. So when you think about use of proceeds on the hydro assets, you know, could that push you to share buybacks or would that, help you accelerate investments 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?

Yeah, Rob, I'll repeat maybe comments that we've said in the past. You know, first, as we continue to say, we're committed to the investment grade rating. We want we intend to use proceeds to maintain flexibility. We want to be self-funding. That is the bigger priority. We certainly don't want to do a buyback 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. 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.

Yeah. And Rob, we will take a look at the balance between, 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 the most economic value, that's what we'll do.

I appreciate that. 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 we saw in the net proceeds will be offset by the debt being brought back onto the balance sheet. So the overall economics haven't changed?

Yeah. So it moved up by 200 million on the high end to, you know, one six to the one eight 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. 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 responsible for completing even through, you know, through the time 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. And Rob, just for clarity, that also impacted the timing of those also impacted. You know, 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 the same way anymore. But no change in our overall economics. It's just some

nuances to

it.

Thank you. OK, thanks Rob.

There are no further questions at this time. I will now turn the call to Mr. Chris Huskisson.

OK, well, 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 next rest of your day. Thank

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