Algonquin Power & Utilities Corp. (NYSE:AQN) Q3 2023 Earnings Call Transcript

Algonquin Power & Utilities Corp. (NYSE:AQN) Q3 2023 Earnings Call Transcript November 10, 2023

Operator: Hello and welcome to the Algonquin Power and Utilities Corp Third Quarter 2023 Earnings 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. [Operator Instructions] I will now turn the conference over to Mr. Brian Chin, please go ahead.

Brian Chin: Good morning and thank you for joining us on our third quarter 2023 earnings conference call. Speaking on the call today will be Chris Huskilson, Interim Chief Executive Officer; and Darren Myers, Chief Financial Officer. Also joining us this morning for the question and answer portion of the call will be Jeff Norman, Chief Development Officer; and Johnny Johnston, Chief Operating 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 SEDAR+. We would like to remind you that our discussion during the call will include certain forward-looking information.

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 SEDAR and available on our website for additional important information on these items. On the call this morning, Chris will provide a business update, including advancements relating to the pending sale of the Renewable Energy Group, the CEO search that is currently underway, and other business developments. Then Darren will review our third quarter financial results and provide comments on guidance. We will then open the lines for a question and answer period. We ask that you kindly 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 Chris.

Christopher Huskilson: Well, thank you, Brian, and good morning, everyone. To start things off today, I’d like to share my observations from my first 90 days as Interim CEO. During this time, I’ve had the opportunity to visit several of our regions across Canada and the United States. I have three main takeaways from these visits. First, we have dedicated and talented employees, managing a strong set of assets. Second, there is substantial opportunity to simplify, streamline and reinvest for greater customer service and value. And third, both our renewable and regulated segments have considerable long-term growth potential. From these takeaways, I’m even more convinced that moving to a pure-play regulated utility is the right answer for both businesses.

This will create focus and provide the chance to capitalize on all of our opportunities. We have now kicked off the formal sale process for our renewable energy business. We are, of course aware of the dynamic market environment. That said, we are seeing continued inbound interest from prospective buyers. We own a sizable fleet of high quality renewable assets and an extensive development pipeline. And by no means will our assets be sold at a buyer sale price. We continue to believe this is the strategic direction that creates the most long-term value for our stakeholders, allowing both business groups to better capitalize, be better capitalized while continuing to support our BBB investment grade credit rating and our current dividend. Since the announcement at the time of our Q2 call we have made considerable progress on the search for a new Chief Executive, with the current slate of qualified candidates.

As I’ve mentioned previously, I’m committed to staying on until the right candidate is found and I’m actively moving the company forward. Next, I want to highlight our recent DOE grants. We invest for the future to modernize our infrastructure, while keeping an eye on customer affordability. So we were very pleased to have successfully secured two DOE awards through our Grid Resilience and Innovation Partnerships program. We are only one of four regulated utilities to successfully secure two awards. This is but the first step of several towards the opportunity to invest over $100 million in accelerating the modernization of our electricity infrastructure while reducing the impact on our customers with the DOE grants covering 50% of the cost.

We’re excited for this partnership and look forward to working with DOE, and our local regulatory commissions, and stakeholders to get the full benefits from these programs for our customers. On the regulatory front, we’re pleased to report that during the quarter, a Regulated Services Group received the final rate case order at the Pine Bluff Water Utility in Arkansas, authorizing an annual revenue increase of $3.4 million, which became effective on August 15th. Additionally, this quarter marked the implementation of new rates at our St. Lawrence Gas facilities in New York. As the authorized revenue increase of $5.2 million became effective on July 1st. We’re pleased with these continued advancements as a core growth strategy of the Regulated Services Group is to responsibly invest in our utility systems and to target constructive return on rate base.

In total, the Regulated Services Group has pending rate reviews totaling $90 million across four of our utilities. These rate cases reflect our continued commitment to invest in our utilities and recovering these investments. And finally an update on the securitization of costs related to winter storm Uri and retirement of the Asbury coal plant at our Empire Electric utility. Oral arguments were heard in July following Empire Electric’s appeal to the Missouri Court of Appeals. And on August 1st, the court affirmed the amount eligible for securitization of $290.4 million. The company intends to securitize in line with the Commission’s order to recover remaining book value of the storm costs and Asbury. However, in doing so, our securitization excludes a portion of carrying costs and taxes, which leads to a one-time charge of $63.5 million or $48.5 million net of tax.

Turning now to an update on projects for our Renewable Energy Group, where our construction and development pipeline continues to progress. The third quarter of ’23 saw advancements at Phase 2 of our New Market Solar project, where 95% of panels have now been installed. Site preparations also advanced at both the Carvers Creek and Clearview Solar projects. In total, we now have approximately 400 megawatts of solar projects in various stages of construction. We’re pleased to report that the Sandy Ridge II Wind Facility achieved full commercial operations this past quarter, adding 88 megawatts of capacity to our operating fleet. Additionally, our Shady Oaks II facility achieved full commercial operations last week, adding 108 megawatts of capacity.

When you include our Deerfield II wind facility, which achieved commercial operations in March, we have now brought over 300 megawatts into service year-to-date. We continue to expect to bring approximately 450 megawatts in service in 2023. With that, I’ll turn things over to Darren who will speak about the third quarter results. Darren?

Darren Myers: Thank you, Chris and good morning, everyone. Overall, I would describe the third quarter as a mixed quarter, with underlying growth in the business offset by impacts of weather and higher interest costs. Adjusted net earnings for the quarter were up 7.9% year-over-year, while our adjusted net earnings per share was flat year-over-year. Our Regulated Services Group’s divisional operating profit was $246.4 million, up $17.1 million, or 7.5%, from the same period last year. Growth was driven by rate increases at Empire, CalPeco, BELCO, Granite State and Park Water. Year-over-year growth included a negative impact of an estimated $4.3 million from unfavorable weather. Our Renewable Energy Group’s divisional operating profit was $66.2 million, down $5.2 million or 7.3% from the same period last year.

The decline was primarily driven by unfavorable weather affecting wind and solar of production, offset by an increase from Deerfield II, which came online earlier this year. We estimate the weather impacted our year-over-year performance by $5.1 million. Depreciation of the quarter was $104.8 million, a $3.4 million year-over-year improvement driven by lower depreciation of $7.8 million in renewables, primarily from lower production which more than offset a $4.3 million increase in depreciation for the regulated business. At the corporate level, administrative and other expenses increased year-over-year by $4.3 million, reflecting IT costs including cyber and a greater use of shared services. We expect these costs will lay the foundation for improved future efficiencies for our regulated utility portfolio.

Our interest expense was $94.2 million in the quarter, a $19.2 million increase year-over-year, with approximately one-third to fund our growth and two-thirds due to the increase in interest rates on variable rate borrowings. The year-over-year impact is tracking a little better than in prior quarters. Our adjusted tax recovery was $8.1 million in the quarter, a $20.8 million favorable change year-over-year. The improvement in adjusted taxes was driven by higher tax credits associated with continued development of our renewable projects as well as $8.3 million from the unfavorable tax adjustment we recorded last year associated with custom delays at our new market solar project. So overall for the quarter, our adjusted earnings grew 7.9% as a result of the underlying growth in the business and tax favorability, which more than offset the negative impacts of weather and higher interest costs.

Our adjusted net earnings per share was $0.11 flat versus the last year. And now for a few comments on our forward-looking outlook. We are pleased that our underlying business continues to grow, however, primarily as a result of continued unfavorable weather, we now expect to come in at or below the low end of our previously disclosed 2023 adjusted net earnings per share range of $0.55 to $0.61. We remain focused on maintaining our BBB investment grade rating and supporting our dividend, as well as executing on the renewable business sales process. Please note we have several key marketing events ahead of us, including attending the EEI Financial Forum in November, the Wells Fargo Symposium in December, and the CIBC Whistler Conference in January.

We look forward to meeting many of you over the next few months. And with that I will now turn the call over to the operator to open the line for questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] One moment please for your first question. Your first question comes from the line of Sean Steuart with TD Securities. Please go ahead.

Sean Steuart: Thank you. Good morning, everyone. A couple of questions. First, let’s start with the process to sell the non-regulated power business. Little context on discussions you’ve had with various stakeholders, what’s convinced you that this is the right time to proceed given pronounced valuation headwinds for the group? And any updated thoughts on timelines towards completing the process?

Christopher Huskilson: It’s Chris, thank you. Thank you for your question. I guess, first of all, when we think about our business, it’s a very strong platform of renewable development. And so I guess it’s our view that if there’s a buyer out there who wants a strong platform, who’s ready to invest in renewables for the future, who wants to invest around the Inflation Reduction Act, all those kinds of issues, you know, we think that that platform is a unique offering that we believe people will pay for. And so regardless of what’s happening right now in the cost of capital regime, we think that the platform is something that is quite valuable. And so when we look at it through that lens, and also when we look at the fact that we’ve actually had lots of inbound interest in the platform, we say, we should absolutely continue and go to market.

And so if you see what’s happened right now, we’ve put the initial teaser into the market and we’re in the process of now responding to buyers who are interested. And we still would expect that we can get something done here in 2024.

Sean Steuart: Okay. And at what point in the process do you reclassify these operations as assets held for sale or not discontinued? But do we start to think about reclassification of these assets and how that affects adjusted EPS?

Darren Myers: Yeah, Sean. It will be a judgmental thing. There’s testing gaps when you, you know, you’re highly likely that you’re going to sell it. So within 12 months. So it’s more, if you look at a lot of companies do it different times, like once they have a signed agreement and different things like that. So we’ll continue to look at that, it’s not, we’re not at the point where just launching the teaser where we’d be at discontinued ops. But assuming we get bids at a valuation that is attractive to us, it will be at some point next year is when we would go to discontinued ops. And then, as you know, there’ll be differences on things like depreciation no longer occurs, it’s more of a fair value assessment that you got to continue to do. So it will make things a little bit tricky as you think about you know normal results and adjusted earnings, but we will have to work through that.

Sean Steuart: Okay. All right. Thanks for that. And then just second question, the CEO search process. Can you give us a sense of timelines towards concluding that how that process has evolved as you started it? Any further details on that front?

Christopher Huskilson: Yeah, we’ve always said it’s a six to 12 month process, and so we would continue to say the same thing. You know, we do have a good slate of candidates and the board is proceeding through the process. So, you know, I think the update is that we’re quite positive that we’re moving forward.

Sean Steuart: Okay, thanks very much, guys. I’ll get back in the queue.

Christopher Huskilson: Yep. Thanks, Sean.

Operator: Your next question comes from Nelson Ng with RBC Capital Markets. Please go ahead.