Algonquin Power & Utilities Corp (AQN) 2023 Q4 法說會逐字稿

Hello, and welcome to the Algonquin Power & Utilities Corp. fourth-quarter and full-year 2023 earnings conference call. (Operator Instructions) I will now turn the conference over to Mr. Brian Chin, Vice President of Investor Relations. Please go ahead.

Thanks, operator. Good morning, everyone, and thank you for joining us for our fourth-quarter and full-year 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 is 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 at algonquinpower.com. Our financial statements and management discussion and analysis are also available on the website as well as on SEDAR+ and EDGAR.

We'd like to remind you that our discussion during the call will include certain forward-looking and non-GAAP measures. Please note and review the related disclaimers located on slide 2 of our earnings call presentation at the Investor Relations section of our website at algonquinpower.com. Please also refer to our most recent MD&A filed on SEDAR+ and EDGAR and available on our website for additional important information on these items.

On the call this morning, Chris will provide a business update, including key highlights pertaining to our regulated and renewables business groups, as well as brief comments on our strategic plan, process, and CEO search, and Darren will review our fourth quarter and full year financial results.

We will then open the lines for the 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. With that, I'll turn it over to Chris.

Thank you, Brian, and good morning, everyone. 2023 was a decisive year for Algonquin. We made several strategic decisions and are focused on becoming a pure-play regulated utility, simplifying the company and achieving greater operational efficiency. We're excited about the opportunities ahead and will shape our regulated business into a leading utility platform.

When I started in August, I focused on four things, our people, the renewable sale, optimizing the value of AY, and getting the regulated business set up as a standalone. Although there's still lots of work to be done, we're making progress. We've retained our people and they are engaged in the change. We have been simplifying the business and making it more transparent to investors.

The renewable sale is proceeding as planned, and we continue to expect to close a transaction this year. We're actively working with AY to support them. And we've begun making changes to the way the regulated business is organized and the way it runs while making use of our new SAP system.

From a business segment performance standpoint, both full year 2023 and fourth quarter saw a double-digit divisional operating profit growth for our regulated services group due primarily to a number of new rate implementations across our utility portfolio. Our renewable business placed in service 453 megawatts of new wind and solar generation for 2023.

Despite a weather challenge year, our renewables business ended the period with fourth-quarter divisional operating profit up by 6%. These results demonstrate that despite 2023 headwinds and the strategic transition currently underway, these two solid businesses -- our solid businesses with significant long-term opportunity. Darren will provide more color on the 2023 financial metrics later in the call.

Our regulated services group grew at a healthy pace in 2023. Regulated divisional operating profit grew 10% year over year, primarily driven by interest income on regulatory asset accounts and new rates implemented at several of our utilities, most notably, our CalPeco, Empire, and BELCO electric system.

This growth reflects tremendous opportunity to invest in our systems for the benefit of our customers. These are not new rates for the sake of new rates, but rather a recovery of and on already invested capital and our systems to provide safe and reliable service to our customers.

With that said, we have plenty of work and opportunity ahead of us. Our objective is to earn our allowed cost of capital, while serving our customers. Our GAAP today reflects timing from investments we have made and under earning at New York Water as a result of our stay out from the acquisition.

We're working to improve our returns and have a number of active rate cases. We also see an opportunity to improve our performance and maximize our operational efficiency, including through initiatives, such as the rollout of our customer first SAP program and improving our processes and leveraging this significant technology foundation that we've put in place.

In 2024, we expect to have our Canadian and US regulated utilities transition to this standard software platform, which is a key step through our multiyear journey. We're pleased to report that during the course of 2023, our regulated services group received final rate case orders at eight of our utilities and one additional orders subsequent to year-end in January '24, with authorized revenue increases totaling $44.1 million, representing over 70% of our rate requests.

We believe this is reflective of our constructive partnerships and with our regulators and the communities we serve. We are pleased with these continued advancements as a core growth strategy of the regulated services group is to responsibly invest in our utility systems on behalf of our customers and target a constructive return on our rate base.

In total, the regulated services group had at year-end pending rate reviews totaling $93.4 million across six of its utility systems with an additional $12.4 million at two of the water systems filed in January, bringing the total for the year to $105.8 million currently pending.

These rate cases reflect our continued commitment to invest in our utilities for the benefit of our customers and shareholders alike. While we see these advances as success, we are not satisfied with some of our regulatory positions, and we are committed to changing this and making this better.

Turning now to an update on the projects of our renewable energy group. Along with the 453 megawatts delivered in 2023, in the fourth quarter we completed construction of our Hazlehurst, Texas solar facility. Site preparations continue at the 150 megawatt Carvers Creek and 144 megawatt Clearview solar projects, and panel installation has commenced.

In total, we now have approximately 300 megawatts of solar projects in various stages of construction. As well, we have added [1,660 megawatts] to the development pipeline in 2023. All in all, the renewables business had lower generation due to unfavorable weather, but made solid progress, growing generation capacity and the development pipeline.

As of year-end, our net generating capacity is 2.7 gigawatts, which excludes our partner's interest in our construction joint ventures. Subsequent to year end, we've also chosen to take further steps to simplify our renewable energy business.

In January, we consolidated our renewables development joint venture and monetize two small renewable development projects in Spain. This will have the effect of simplifying and consolidating our development expenses without impacting our investment in development or our projected cash flows.

And finally, before I turn things over to Darren, a few comments on the strategic plan for the company and the CEO search. We launched the sale process with potential buyers in the fourth quarter and are pleased with the level of buyer interest that we've seen in our renewables platform.

We continue to target a potential transaction announcement around mid-'24 and closing later in the year. We also are making progress in our search for a permanent CEO and have been pleased with the slate of candidates reviewed thus far.

I remain dedicated to this role of Interim CEO for as long as required and as the Board works to find the right candidate. In keeping with my transparency objective, I'm again focused on four things for '24, first, drawing our people and their capabilities; second, completion of the renewable sale and optimizing the value of AY; third, meeting our financial objectives as a team; and fourth, getting the regulated business running as one optimized business, including fully utilizing our SAP platform.

With that, I'll turn things over to Darren, who will speak about our fourth quarter and full year financial results. Darren?

Thank you, Chris, and good morning, everyone. As Chris touched on briefly, 2023 was a year of decision making. We believe the decisions we've made are the right actions to simplify the business and better position the company for long-term profitable growth and focused value creation for shareholders.

Overall, we're pleased with our fourth quarter results in the backdrop of a challenging 2023. Q4 consolidated adjusted EBITDA was $334.3 million, up 13% from the same period last year, while full year consolidated adjusted EBITDA was approximately $1.24 billion, an increase of 4% over 2022.

Fourth quarter adjusted net earnings were $115.5 million compared to $97.6 million reported last year, an 18% increase. Full year adjusted net earnings were $372 million, down 11% from last year. On a per-share basis, our fourth quarter adjusted net earnings per share was $0.16, a $0.14 improvement year over year, primarily attributable to organic, regulated growth and higher tax credit recoveries from our renewables business.

This was partially offset by higher interest expense. For the full year, adjusted net earnings per share came in at $0.53, a decline of 13% year over year. This is consistent with our third quarter update, where we stated that we expected full year guidance to come in at or below our 2023 guidance range of $0.55 to $0.61.

While full year adjusted net earnings per share were boosted by organic growth in our regulated business and higher than typical tax credit recoveries, these positive items were more than offset by higher interest expense and $0.05 from unfavorable weather, as well as higher minority interest expense related to our fourth quarter 2022 asset recycling transaction.

Looking now at results on a segmented basis, the regulated services group delivered $238.3 million in divisional operating profit in the fourth quarter and $954.1 million for the full year, up 11% and 10%, respectively, year over year.

The increases were primarily due to new rate implementations of several of the company's electric and water utilities, the previously disclosed one-time CalPeco true up and higher interest income on regulatory asset account. These were partially offset by unfavorable midyear weather at the Empire electric system.

The renewable energy group posted fourth quarter divisional operating profit of $107.6 million, an increase of 6%, primarily due to improved equity income from the Texas coastal wind facilities, more favorable capacity revenues for the majority of solar facilities and slightly higher HLBV income.

On a full year basis, operating profit was $371.8 million, a 9% decrease year over year, which was driven primarily due to an expected drop in HLBV income from certain 2012 vintage assets reaching ends of PTC eligibility and unfavorable weather across Canadian and US wind facilities. These impacts were partially offset by higher equity income from the Texas coastal wind assets and contributions from new facilities and investments.

Let me now touch on CapEx and the balance sheet. We ended 2023 with regulated capital expenditures of approximately $700 million and renewable CapEx of approximately $300 million, rounding up in total to $1.1 billion. As of the year in 2023, our long term debt was $8.5 billion, which includes $1.1 billion of equity units and $1.4 billion of subordinated unsecured notes. Subsequent to year end, we successfully raised $850 million of Liberty Utilities' senior unsecured notes and an additional $306 million of securitized utility tariff bonds at Empire. The proceeds were used to repay short-term and floating rate debt.

And lastly, a few comments on our forward outlook for 2024 and beyond. We are focused on simplifying the business. As a result of the pending sale of our renewables business, we will not be providing adjusted earnings per share guidance at this time. Directionally, we expect our regulated rate base growth to be in the mid-single digits and our regulated capital intensity to be at a similar level to 2023.

To conclude, we are focused on executing on the renewable business sale, maintaining our BBB investment grade credit rating, supporting our dividend and generating long-term shareholder value. With that, I will now turn the call over to the operator to open the lines for questions. Operator?

(Operator Instructions) Sean Steuart, TD Securities.

Thanks. Good morning, everyone. Chris, wondering if you can give us any directional guidance on the sales process on the renewable side. Are we at a point where all interested offers are in? And you're vetting the offers as we progress towards the decision middle of the year? Any additional context you can give on where we are in that process?

Well, it's pretty hard to give any color at this point. We are in a confidential process, and I think we were pretty clear with folks last time that we wouldn't be able to comment. But the one thing we did say was that no news is good news and you're not hearing any news.

I'll take that as a positive. Okay. And appreciating this is all dependent on the renewable sales process, but you churned through some liquidity this quarter. Can you comment on the investment plan for the regulated platform and overall comfort with liquidity absence sale on the renewables platform at this point?

Hey, Sean, it's Darren here. I mean, we've got a number of steps in place. We're quite pleased with what we did in Q1 with both the bond and the securitization. They were four times oversubscribed, so lots of interest there. So from a liquidity point of view, we're in good shape and we're just executing our plan with the sale of the renewables business.

And on the capital for the REG business, we've said it about the same this year as last year, and that's where we see it.

Okay. That's all I have. Thanks very much.

Nelson Ng, RBC Capital Markets.

Great, thanks and good morning, everyone. Maybe I'll try to have another go at the renewal sales process question. So Chris, you mentioned that you'll be making a sales announcement. Are you expecting to make a sales announcement in mid-2024?

So just to clarify, are you essentially saying that the renewables sales proceeds -- do you expect to announce the sale of the renewables division in mid-2024? Or are you saying that an announcement will be made in mid-2024, regardless of whether there is a sale or not?

Well, what you just described as our target, it's to announce a sale at '24. That's our target.

Okay. And things are tracking well, it sounds like.

No news is good news.

Okay, thanks. And then just to clarify and the question that Sean asked, so you mentioned that the utilities' CapEx is the same this year compared to last year. What about on the renewable side? Can you comment on the expected CapEx there?

Yeah, Nelson, hi. No, I mean, we're just not going to make comments on the renewables. It's obviously with everything going on, we just don't think it's the appropriate time to provide guidance on the renewables business.

Okay. And then just I guess, one, Iike since you're not providing guidance for 2024, can you just directionally talk about the utilities? The two divisions plus the tax rate in terms of obviously the utilities you're running through a number of rate cases, so I presume it's positive directionally.

Can you talk about the tax rate, where obviously you've benefited from a number of tax credits? And then on the renewables side, I think 2023 had below-average generation and also had some additional assets that were brought online. So I presume directionally everything looks positive. Maybe the tax rate will move up rather than -- I'll just let you see if you can provide --

Yeah, there was a lot in that, Nelson.

Yeah.

Yeah, I mean, again, we're not providing guidance, but just directionally, we want to be as helpful as we can be and be as transparent as we can be. Certainly, what I would say is tax credits were higher than they normally are on the renewable side, but it's a lumpy business and the tax credits can be quite lumpy.

The underlying tax rate has been having those the increases that we would have expected if you take away the tax credit. And as we've previously talked about, even when we just started, we do expect the underlying to go up over a number of years as a result of some of the changing tax landscape. So no color, I would say on again on 2024 on the tax credits in the renewables business because we're just not providing the guidance at this time, given the dynamics.

Yeah, I think the only other thing to say is that part of the tax improvement you saw last year is we actually sold a couple of tax credits into the market. And so we see that as very positive for the business because the market continues to develop.

Okay, thanks. I'll leave it there.

Thanks Nelson.

Rob Hope, Scotiabank.

Good morning, everyone. I was hoping you could explore the concept of simplicity a little bit more. You did, simplify the business a little bit here with some of those rollups in Q4. But when you take a look into later this year and into 2025, like how do you envision simplifying the business and what key factors should we be looking for?

I think it goes into a couple of different things. So first of all, one of the things that will be true is that the business will become more transparent because the utilities will be more surfaced in the business and you'll be able to see more directly what the utilities are actually doing.

And then when it comes to the platform that we've put in place and we're putting the last stage of that platform in place in the spring at Empire, and so by the time we get into solidly into Q2, we'll have our SAP platform solidly across the entire business. That will allow us to simplify our processes, which will allow us to simplify our reporting to speed up things like reporting.

And we've already started to see that improvement and continue to be more transparent and simplified as we report to you and to customers about it. So at the end of the day, it really is about optimizing this business using our platform that could be using the ability to bring the utilities more to the surface of the business.

All right. That's helpful. And then maybe just sticking with the utilities as well. You did see some headwinds in 2023 as expected. Where do you think the achieved ROE came in at? And as we look out into 2024, is it really just normalized weather as well as getting in New York decision going to be the key factors driving it closer to the allowed?

Yeah. And in fact, again, from a simplification perspective, we did take a hit on weather in our regulated business as well as our unregulated business this year. And fundamentally, that should not be the case. We should be able to manage our way through weather events of that scale.

And so those are the some of the things that we're working on with the business, so that we don't have as much reporting on things like variations from weather. So there's an awful lot of that work that's going on as well. I think weather was probably [about $0.05 in total] for this year. So it was a material amount, and we have to minimize that. We cannot have that fluctuation relative to weather in the future.

Thank you.

Paul Zimbardo, Bank of America.

Hi, good morning, team. Thank you. So I wanted to follow up a little bit. You mentioned that SAP rollout a few times as a driver for 2024. Just could you talk about the experience in New Hampshire where it looks like it was a little rocky with that, the $500 million-plus overstatement area identified? Just if you could give some background on what happened in New Hampshire and the remedy plans you have for rest of the business, that would be helpful.

Yeah, so fundamentally, what happened in New Hampshire is it was an early stage release that we were looking at. And it's primarily focused on 2022 data. And only about three months of that data was actually in SAP. So that's the circumstance very, very new systems, both to the intervenors and also to the company.

And so in large part, growing pains with respect to implementation of a new system. The fact that we have been able to analyze what happened there and understand it much better, the fact that we've asked for a pause, and have third parties looking at the numbers, so that we can prove to the regulatory authorities that the numbers are good, even though we had to make some corrections.

We're learning that across the entire system. And so that's going into everything we do as it relates to. And fundamentally, what we're talking about here is the translation between our GAAP accounting and our FERC accounting. And that translation needed some tweaking and it's now in much better shape.

Okay, great. Thank you. And then the last for me, just I know you don't have 2024 EPS guidance, but could you give at least directional view on where FFO-to-debt goes into 2024? It looks like it's around 8.5% in 2023, so just hoping you could help there. Thanks.

Let me start with. We wouldn't see 8.5%, so we'd probably spend some time with you off-line on just seeing how you're calculating that. I mean, the rating agencies will publish where they see the FFO, but I'd say it's more in the [mid-11s] would be he range and really the plan is to again to make sure we are BBB investment grade.

And so the sale of our renewables business and the proceeds of that will be used to pay down debt, delever, and any excess would be used for buybacks, that's the plan and that's what we've been talking about for some time there.

Okay, great. Thanks a lot.

Yeah, there's probably some items you're using in there that aren't -- that get equity credit most likely, but we can go through that. We did it also include a little more color in our investor deck on these debt components because I know it can be confusing for people. So that should hopefully try to get everybody on the same page.

Okay. Yeah, we can pop. I was just taking your FFO divided by debt, so we can [follow it, thanks].

Mark Jarvi, CIBC.

Yeah, good morning, everyone. Maybe, Chris, going back to your comments about maximizing the value of AY. I think you said in your prepared remarks, you're actually working with them to support them. Can you elaborate on that, what that means, what that could mean in terms of your relationship going forward? And maybe I'll pause for that, my answer?

Yeah, I mean, I think it's just fundamentally we're supporting the activities that they're going through right now. The transaction that I noted in my comments that we sold some of our assets in Spain to them, giving them some development opportunities. And we're looking at how we can be helpful in that respect.

But in terms of how you think about maximizing your value in it, is there any view on that aside from making sure that they're unencumbered and can optimize their own business or is there something else that we should read into your comments?

No, I think that's appropriate, the way you've described it.

Okay. And just going back to Rob's question, you commented on the 2023 headwinds on earned ROEs. As you look through '24 safe to assume, given the fact you've got a lot of rate requests pending, you will get there in 2024. Is there a type of cadence or timeline when you think of like improvements in overall achieved ROE through '24 and '25. Is it 25 basis points each year of improvement? Is there some way to gauge or tell the market in terms of how you think the earning profile or earned ROE track over the next two years?

I think first of all, the results of our application in New York will be very important to that because New York is a substantial part of the lack of return at this moment. And the other thing that you're going to see from us is especially as I said earlier, as we get the SAP system up and running and working efficiently, we're going to be able to improve our cost of operations.

And that will also help us from a return perspective, and so making sure that we can actually deliver the cost structures that the utilities have been approved to deliver. In a regulatory construct were given a certain amount of operating costs and a certain amount of capital that we would put into the business, we need to hit those numbers.

And if we're not hitting those numbers that we're not achieving our returns. And so the SAP system is going to be very helpful to making sure we hit those numbers. And so I would see substantial improvement in '24 and then continued improvement in '25. But the biggest single step will be New York Water.

So if we exclude New York and come back to the SAP comments, is the goal to be there by year-end in terms of managing down regulatory lag and making sure that you earn on your deployed capital? Is that something that you think is a target for the end of '24 to be accomplished?

The biggest funded capital that we have out there right now is the SAP system itself. And so it's really just a matter of the timing of recovery of that relatively large investment. That is the biggest single factor we have. There's not very much regulatory lag on anything else, but it was, as you can imagine, it was pretty hard to get that system into rates until we had it working properly in each one of the systems. And so that has caused quite a bit of lag in and of itself.

And Mark, just want to add to the other part of your question there. I mean, obviously, people know, putting in systems like this, I think we've done a lot of good things getting it to where it is today, but then utilizing the systems, the efficiency, taking out waste, that's a journey. It's a good thing. It's a multiyear journey with multiyear opportunity for us. So we're excited by that. But those things aren't done overnight.

Understood. So just to clarify, you don't think operating costs and interest expense are a drag on earned ROEs at the subsidiary levels at least in 2024 by and large?

No, I didn't say that. What I said was there is opportunity for us to get closer to the cost structure that we have been granted under our rates. And so the system will help us do that in a very big way. But obviously, implementing that system was a drag on those costs. And so now we'll have it implemented. We'll be able to take advantage of it and therefore, get our cost exactly where they should be, so that we can make our return. And as I said, it's a big cost onto itself, we spent almost $0.5 billion on that system. And so getting that into rate recovery by itself will help on regulatory lag.

Okay, understood. Thanks, Chris. Thanks, Darren.

(Operator Instructions) Ben Pham, BMO Capital Markets.

Hi, good morning. A couple of questions on the renewables business. Can you comment on whether the credit rating agency --

Ben, I'm sorry, you broke up there at the front end, could you try that again?

Yeah, there's couple of questions on the renewable power business. Does your credit rating agency conversations drive the pace of the renewable sale process at all?

No, I mean, what is our plan? It's our plan and getting to simplification and maximizing the values. Our plan, we have kept the credit rating agencies lockstep with us since we started picking up since November of 2021. So it's yeah, I mean, it's our plan, it's what we're doing.

Yeah, it's the other way around Ben, as fundamentally, we laid out a plan in front of the agencies and they endorsed that plan and said that they could support it. So that -- I think that's really the direction. And then from a timing perspective, it's really just the practical result of how long it takes to sell an asset base and the business as large as the renewables business is. It's a very large business and in fact, that's why we see it as a very valuable business. It's a large and growing business.

Can you comment also, you mentioned in your report, [over 400 megs thing added]. Are you pausing development right now on renewables or is this just continuing the same course? And can you also update on the size of your backlog right now?

Yeah. Well, in my remarks, I stated that we had two fairly large solar projects on the way and that we also added 1,660 megawatts of new developments to our pipeline in '23. So '24, we'll be building those 300 megawatts and in '23, we added that 1,660 megawatts. So no, we're not slowing down at all. In fact, again, we think the momentum of that pipeline and the momentum of that business is part of what's attractive about that business.

And Ben, I'd just add to that. I mean, as you may recall, when we did the strategic review, the realization is we can't invest as much as the opportunity is in that business. So the pursuit of selling it is so that we can spend more on the regulated business and a buyer can spend more on the renewables business, because it has such a strong platform and a lot of opportunities.

Okay. Sorry, about that, I got in a little bit later in the call. But your backlogs are still in that 3.5 gigawatts or is it different now? Can you share that?

Sorry, Ben, you're breaking up again, we only got about three words.

Yeah, sorry about that, must be my old phone. Are you able to share the size of your backlog? Is it --

Oh, sorry, the pipeline?

Yeah.

Yeah. So obviously, we've built some assets, so there's about 700 megawatts that we've built. So that would come off the [eight] and then we added 1.6 gigawatt. So it's net up slightly from the [eight], yeah.

Got you. And then maybe lastly, just a detailed one on the debt. Darren, if you may on the total debt, can you decompose that for us in terms of like what amounts power, what amounts utility, and what is the holdco level, which we can probably just look in the financials?

We probably just ease this to take that offline. Let's do that one offline, if that's okay.

Okay. All right. Thank you.

There are no further questions at this time. I will turn the call back over to Mr. Chris Huskilson for closing remarks.

Okay. Well, thank you, everyone, for attending the call today and for your interest in Algonquin. And thank you for listening to this call. Have a great day.

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