Algonquin Power & Utilities Corp. (AQN) on Q2 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by and welcome to the Q2 Earnings Call for Algonquin Power & Utilities Operation. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question-and-answer session. I’ll now like to hand the conference over to your speaker today Miss Amelia Tsang. Thank you. Please go ahead, Amelia. Amelia Tsang : Thank you. Good morning, everyone. Thanks for joining us this morning for our second quarter earnings conference call. Presenting the call today are Arun Banskota, our President and Chief Executive Officer and Arthur Kacprzak, our Chief Financial Officer. Also joining us this morning for the question-and-answer part of the call will be Jeff Norman, our Chief Development Officer and Johnny Johnston, our Chief Operating Officer. To accompany our earnings call today, we have a supplemental webcast presentation available on our website algonquinpowerandutilities.com. Our financial statements and management discussion and analysis are also available on the website, as well as on SEDAR 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 and capital expenditures. At the end of the call, I will read a notice regarding both forward-looking information and non-GAAP financial measures. 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 our call this morning, Arun will provide an overview of our Q2 performance. Arthur will follow with the financial results and then Arun will conclude with an update on our strategic plan for the business. We will then open the lines for questions. I ask that you restrict your questions to two. And then re-queue if you have any additional questions to provide others the opportunity to participate. And with that, I'll turn it over to Arun. Arun Banskota : Thank you, Amelia. And a very good morning to those who've been able to join us on the call and online. And a special welcome to today, this is the Friday the 13. I'm pleased to report solid year over year growth in our key financial metrics for the second quarter of the year. Q2 adjusted EBITDA was $244.9 million, a 39% increase year over a year. And our Q2 adjusted net earnings per share was $0.15 cents, an increase of 67% compared to last year's $0.09. I'm pleased to report solid year over year earnings growth from the addition of approximately 1400 megawatts of new renewable generation projects. These were in construction over the course of last year and this year. And this quarter’s progress brings the 1600 megawatts of project that began construction in 2020, close to completion. We are also starting to see benefits from the first full year of operations from our Bermuda electric utility as well as the ESSAL water utility in Chile, which both closed late last year and have both performed in line with our expectations. I'm pleased to report that the company's operating results were not materially impacted by the pandemic this quarter. Recall that in the second quarter last year, the pandemic did have a $0.01 impact on earnings per share. Generally speaking, we have not seen negative impacts from COVID on our loads at this day, as business conditions in the regions we operate in slowly return to normal. Approximately 60% of the company's workforce continues to work remotely. And we continue to employ operational measures intended to protect the health and safety of our employees and customers. Over the coming months, the company is planning to return to base operations as the impacts of the pandemic further diminish. However, we will continue to keep watch for any developments with the Delta variant and adjust accordingly. Our team continues to focus our efforts on Algonquin’s three strategic pillars; growth, operational excellence and sustainability. We operate through two primary businesses regulated and renewables and we'll spend some time on each for an update. On the regulatory side, one important lever of growth is our greening the fleet initiatives. We've continued to make investments for the benefit of our customers, as we accelerate our transition to a clean energy future. During the second quarter, we successfully completed our Midwest Greening fleet initiative, as all three wind facilities North Fork Ridge, Kings Point & Neosho Ridge has been placed in service and has been acquired by the Empire District Electric Company. The related closure of the Asbury coal plant in March 2020 comes approximately 15 years ahead of its original retirement schedule, in accordance with our most recently filed integrated resource plan. And is expected to reduce emissions by nearly 1 million metric tons of carbon dioxide as we work to generate and deliver cost effective, diverse and sustainable energy solutions for our customers and communities. We continue to be responsible stewards of our energy infrastructure assets, as we are an early pioneer in seeking to build renewables integrated. The early retirement of Asbury has also contributed to the reduction in the company's total Scope 1 greenhouse gas emissions, as well as reducing Scope 1 and Scope 2 emissions intensity per dollar of revenue by 26% since 2017, the year in which the company acquired Empire. The completion of the Midwest Greening Initiative is just one more step on our path to reduce emissions. Liberty recently filed an application with the California Public Utilities Commission to approve financing, construction and operations of the Luning expansion project, which is expected to be a combined 60 megawatt solar facility and 240 megawatt hour lithium ion battery storage facility that will benefit Liberty's customers by adding reliability, resiliency, and price stability, in addition to meeting Liberty's renewable portfolio standards, energy supply objectives. Since 2017, we have already reduced the carbon intensity of CalPeco by 46%. And this new investment, if approved, will help us continue to decarbonize and provide cost savings over the long term to our customers. Another important growth lever in the regulated business is the organic investments in improving the safety and reliability of our mission critical infrastructure. Working with our local regulators, we strive to make the ongoing necessary investments to improve service for our customers, while managing the affordability of their bills. Raise case activity across our jurisdictions continues to be quite active. And I wanted to provide you with a few regulatory updates in some of the jurisdictions that we operate in. In the second quarter, we filed our Missouri electric rate case with the commission at the end of May, which included seeking cost recovery of the three recently completed 600 megawatts of wind generation facilities mentioned earlier. In addition, while our original filing included costs related to the impact of winter storm query, legislation has subsequently been passed, which will allow for these items to be securitized a path which we intend to pursue. Apple Valley, which operates in California, was the subject of a condemnation lawsuit filed by the town of Apple Valley. For the last few years, we have been in legal proceedings over the water system and recently received a tentative statement of decision that supports our continued ownership and operation of the system. We have a track record of providing safe and reliable water services and we look forward to working with the town of Apple Valley to continue those services for the benefit of our customers. Staying on the topic of California, we filed our Cal Pico rate case in May and filed our Park Water Apple Valley rate case in July. Our California utilities will be the first to file rate cases seeking recovery of customer first, which I'll provide more details on later. In addition, we recently reached a tentative agreement for our Energy North gas system in New Hampshire. As part of the settlement, the commission authorized a permanent rate increase, which is expected to result in a revenue increase of $7.6 million based on a return on equity of 9.3% and equity capital structure of 52%. In addition, Energy North received an authorization for a property tax tracking mechanism, which is expected to further increase the predictability of earnings. Further, cap adjustments of $4 million for 2021 and $3.2 million for 2022 were authorized as part of the settlement, building further diligence and hearings. Lastly, on the regulatory front, we reached a constructive rate case outcome with the regulatory authority of Bermuda, marking the first completed rate case since the acquisition of Boto in the fourth quarter of last year. Another lever of growth is acquisitions. And we completed two utility acquisitions in Q4 of 2020, ESSAL and Ascendant. The integration of these two utilities into the Algonquin Liberty family continues to go well. With our pending acquisition of New York American Water, we are currently going through the settlement process. As important work continues to determine the best path forward on resolving issues related to the special franchise tax, we remain confident that Liberty is the best long-term owner of the utility and expect this transaction to close within the recently extended timeline set out in the stock purchase agreement. Lastly, looking to the future of our gas utilities, we have begun exploring the utilization of renewable natural gas, or RNG to better serve our customers. We have RNG projects in various stages of commercial development, and have already made a regulatory filing in New Hampshire for the approval of supply agreement that includes a purchase option for Liberty to be the ultimate owner of the facility. Moving on now to operational excellence. In a mission critical industry, safety and reliability are always the most important areas of focus. I'm pleased that we are passed the impressive milestone of 526 days and over 7 million safety hours without a single lost time injury, while keeping our customers and community safe and maintaining our system reliability and resiliency. I also want to highlight some innovative approaches we are taking to support system resiliency. Our Sagehen project in CalPeco is a microgrid at a Berkeley Research Station at the end of four miles of transmission line in wildfire territory. By putting solar and storage onto the site, we are able to take the transmission line out of service during wildfire season, while keeping the lights on for our customers, all for significantly lower costs than installing covered conductors to the four miles of transmission line through the environmentally sensitive boards. In the non-wildfire season, when the transmission line is back in service, the microgrid is expected to provide additional resiliency. As previously mentioned, we are excited about the new digital experience for our customers to our customer first program. During the second quarter, the team successfully completed the first major implementation of our new suite of SAP tools and systems at our Massachusetts gas utility. We will be rolling out this enhanced technology platform in a phased approach across the rest of the organization over the next couple of years. The customer is at the heart of every good operational excellence strategy. We have continued to bring customer focus into action by asking our customers after interactions with our team about their experience. This quarter, we have started the rollout of net promoter score measurements from our customers. This is on top of our existing JD Power service, and will allow us to collect more timely and specific feedback to drive focused action as we continue to look, to meet, and exceed our customer’s expectations. Turning to the renewable side of the business. For the second quarter, our 492 megawatt Maverick Creek wind facility in Texas, reached commercial operations and as a long term power purchase agreement with the General Mills and Kimberly Clark. There was a blade manufacturing error, which impacted 26 of the 33 turbines at Maverick Creek. But remediation work was completed in early June, with all 26 affected turbines returning to service. Our service agreement contains liquidated damage protections in favor of the company for revenue loss due to operating downtime. Altavista Solar, an 80-megawatt facility located in Virginia, also reached commercial operations in the second quarter. The facility has a 12 year power purchase agreement with Facebook. We're also excited to be collaborating with JP Morgan Chase on our Shady Oaks 2 wind construction project in Illinois, with JP Morgan Chase agreeing to purchase approximately 70% of the wind energy output, which will contribute towards the 100% renewable energy commitment. All these projects showcase our strong relationships with key commercial and industrial C&I customers. The demand from C&I customers who are helping to drive an acceleration towards clean energy is expected to be an attractive source of growth for Algonquin in the coming years, and Algonquin is well positioned to help them advance their own sustainability targets. We recently closed the acquisition of a 51% interest in the West Raymond wind facility, which reached commercial operation in the third quarter, and has a generating capacity of approximately 240 megawatts, which we have brought previously agreed to purchase from RWE. With the close of West Raymond, we have completed the acquisition of our 51% ownership interest in four wind projects from RWE located in South Texas, with a total capacity of 861 megawatts, and a net capacity of 439 megawatts. 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. Last year, we released our 2020 Sustainability Report, which not only outline our progress on our ESG goals but also provided a higher level of detail around nine priority issues. I'm pleased to say that we are making excellent progress on achieving our goals. We reached an important milestone with Algonquin now owning operating and having the net interest in 4000 megawatts of renewable generation, of course, our two businesses. We are well on our way to achieving 75% renewable energy generation by 2023. Another one of our sustainability targets. We have also added sustainability metrics to both our annual and long term compensation for our leaders this year, embedding sustainability into our compensation model. Another key ESG goals set out in our sustainable report is to add 2000 megawatts of renewable power generating capacity between 2019 and the end of 2023. By the end of Q2, we have added over 1400 megawatts of renewable generation and we remain on track to achieving our 2023 targets. We are focused on progressing and advancing our ESG disclosures to our stakeholders. I’m pleased to report that we recently launched a new data hub that can be found in the sustainability section of our corporate website, which is further evidence of our increasing breadth and transparency on ESG data. I encourage you to take a look at the data hub, which provides detailed information around our operational metrics, governance, and policy amongst many other measures. Our efforts in sustainability continue to pay off and we continue to receive external validation, including the recent inclusion of Algonquin into Corporate Knights’ 2021 Best 50 Corporate Citizens, ranking within the top part of our peer group of power, transmission and distribution companies. With that, I'll pass it over to Arthur who will speak to our second quarter 2021 financial results. Arthur? Arthur Kacprzak : Thank you, Arun and good morning, everyone. I'm pleased to report that Algonquin has made good progress to meeting its financial targets for 2021 with solid financial results for the second quarter. The Q2 results are underpinned by Algonquin’s diversified and resilient business model and proven track record of ambitious but responsible growth. Turning to Slide 11, our second quarter 2021 consolidated adjusted EBITDA was $244.9 million, which is up approximately 39% from the $176.3 million we reported in the previous year. The Regulated Services Group delivered $165.9 million in operating profit in the current quarter, which compares to $114.5 million in the same quarter last year. The year over year improvement is primarily attributable to the additional contribution from BELCO facility and ESSAL our Chilean water utility. As both acquisitions closed in Q4 of last year, as well as from the contribution over wind facilities that were placed in service as part of the greening the fleet initiative that Arun spoke of earlier. Results are also benefited from new rates implemented at the Granite State and CalPeco electric systems and were partially offset by higher fuel costs in the central region resulting from out of period resettlements relating to storm Uri and increased operating expenses. I should also note that the regulated services group did not experience any material impacts from COVID-19 this quarter, but the comparative results from Q2 of 2020 were negatively impacted by the pandemic by approximately $9.6 million. The renewable energy group reported Q2 divisional operating profit of $97.9 million, which compares to $82.7 million in the same quarter last year. The increase is primarily due to the addition of the Sugar Creek and Maverick Creek wind facilities and the Great Bay 2 solar facility. This is partially offset by lower production due to resource shortfalls primarily across our wind portfolio. Excluding the impact of the newly added facilities, production at our renewable facilities was approximately 7% lower than last year, or approximately 12% below the long-term average expected production. I should also mention that our investment in Atlantica Sustainable infrastructure continues to provide benefit to the renewable energy groups operating profit, with dividends received increasing by $2.1 million over the comparative quarter supported by Atlantica’s continued growth in cash flows. Quarter over quarter, corporate and administrative expenses remained generally flat. Interest and depreciation expenses both increased due to higher property, plant and equipment and the associated financing related to the acquisitions the closed late in 2020. Income tax expense was lower and benefited from renewable energy tax credits recognized. In total, our Q2 adjusted net earnings per share came in at $0.15, which is up 67% from the %0.09 reported last year. Moving on to Slide 12, to provide some updates on our 2021 capital plan and financing activities. During the quarter, Algonquin deployed approximately $1.2 billion of capital pertaining primarily to the previously discussed initiatives and initiatives relating to the safety and reliability of our electric water and gas system. This brings the total capital deployed so far this year to approximately $3.1 billion and on track to our expected capital deployment in 2021 of over $4 billion. Moving on to financing activity. I'm pleased to say that during the quarter we made great progress in de-risking our five-year financing plan further strengthening our balance sheet and reinforcing our commitment to triple B flat credit metrics. During the quarter, Algonquin completed a green mandatory equity unit offering. Due to strong demand, the deal was upsized from the indicated $900 million size and the full overallotment option granted to the underwriters was exercise, bringing the total gross proceeds from the offering to $1.15 billion. The units are expected to receive 100% equity credit from Standard & Poor's. That transaction represents several first row Algonquin and the market in general. To our knowledge, this was the first green mandatory equity unit offering ever done, showcasing Algonquin’s ongoing leadership and commitment to deploying capital to support sustainable initiatives. This was also the first offering by a Canadian issuer of a mandatory equity unit, which were more frequently used by some of our utility peers in the U.S. As you may be heard me mentioned in the past, what we find attractive about the mandatory equity units is the natural match they provide to our business in terms of when we pay for our capital, and when we earn on it. The securities defer the issuance of shares until conversion after a three-year period but received 100% equity credit immediately from S&P. Investors benefit from an enhanced yield and the issuer can partly benefit from share price appreciation, which could result in an overall lower cost of capital compared to common equity. Through this issuance, we have further expanded and diversified Algonquin’s investor based and introduced another tool to fund future potential accretive growth opportunities. During the quarter, the company also utilizes ATM program, raising approximately $135 million of common equity. We view the ATM program as allowing us for cost effective and opportunistic issuance of our common stock, but plan to remain discipline in its use. Today, we have also received funding from over $1 billion from tax equity investors, monetizing the tax benefits associated with renewable energy projects in the U.S. In total, I would say that we have satisfied the preponderance of our capital needs for the year and have positioned our balance sheet to continue to execute on Algonquin’s growth plans. For the rest of the year, we will continue to monitor the hybrid debt markets as a potential opportunistic source of capital into current low yield environments. Before we turn things over back to Arun, I'd like to provide a brief update on our 2021 guidance. Algonquin continues to execute well against its 2021 financial targets. As discussed, we have already delivered approximately 1400 megawatts of new renewable generation capacity from our 2020 construction pipeline. In addition, we have continued to expect to benefit from the first full year of operations from BELCO and ESSAL. Excluding the impact of the market disruption on the Senate wind facility related to storm Uri in Q1, we continue to expect our 2021 adjusted net earnings per share to be within the range of $0.71 to $0.76 as communicated previously. We continue to assume in our earnings expectation, normalized weather patterns as well as resource availability and production at our renewable generation facilities that are within long term averages. We also assume that the closing of New York American water will occur sometime within the fourth quarter of 2021. Although a further delay in the closing is not itself expected to materially impact our 2021 adjusted net earnings per share estimates. I also want to reiterate that our five-year capital plan of $9.4 billion remains on track. Having already deployed over $3 billion of capital this year, we are well on our way to meeting our five-year target. With that, I'll now hand it back to Arun to outline our roadmaps. Arun Banskota : Thanks, Arthur. Before we close our prepared comments this morning, I want to give an update on our strategic initiatives. As we looked at simplifying our business further, on August 6, we took a step towards simplification by exercising the option to acquire Abengoa’s interest in ages. Given the change in ownership, we will be referring to ages and associated entities as Liberty Development. Liberty Development will remain focused on advancing Algonquin’s non-regulated development pipeline in North America and selected international markets. Abengoa’s interest is expected to be acquired by funds managed by the infrastructure and power strategy of Ares Management LLC, with Algonquin retaining the right to acquire 100% of Liberty Development projects. We also anticipate that Ares will remain involved in projects until commercial operations. At Investor Day, we spoke about our $9.4 billion five-year investment plan from 2021 through 2025, which has identified projects that make up the entire $9.4 billion, with most of them now in operation, under construction, or in advanced stages of development. Let me provide the latest update. The following projects have reached commercial operations since last November. Maverick Creek, Sugar Creek, Altavista on the renewable side, while on the regulatory side, our three Midwest wind projects, totaling $1.1 billion in investments were also completed. On the construction site, what our 175 megawatt Blue Hill wind project in Saskatchewan and 24 megawatts Val-Eo wind project in Cuba continue to progress well, with turbine deliveries in flight. We are also progressing well on our new site, demonstrating the ongoing execution of our development portfolio. Shady Oaks 2 have signed an agreement with JP Morgan Chase, as I discussed earlier, and the project commenced construction in May. We had also included two PGM solar projects that were incremental additions at investor day. In the first quarter of 2021, we completed the acquisition of these two Ohio solar projects, which have an expected combined capacity of 235 megawatts with the first project New Market Solar at 100 megawatts having begun construction in May. We also recently executed equipment procurement contracts for both our Deerfield 2 and Sandy Ridge 2 wind projects. I note that recent inflation and commodity pricing trends will likely result in higher project costs. Conversely, offtake contracts have seen similar increases in pricing recently, which may help to offset the impact if any of increased commodity risk. The renewable energy group seeks to mitigate impact on project returns by walking in generating equipment, construction prices, and offtake as close to contemporaneously as possible. We continue to invest in the 3400 megawatt Greenfield pipeline that we discussed at Investor Day. As a reminder, this Greenfield pipeline investment is over and above our $9.4 billion capital plan. Our Greenfield investments are focused on securing new opportunities and continuing to advance the project comprising the 3400 megawatts. The Chevron projects are included in the 4400 megawatt Greenfield pipeline. These projects continue to progress well, and we are on track to achieve final investment decisions for the initial projects by year end. As discussed in the past, the Greenfield pipeline is being built to replenish the more advanced projects included in our five-year $9.4 billion capital plan. I'm proud of all we've accomplished so far this year, but even more excited for what lies ahead. With society and economy is working hard to minimize carbon emissions, I'm excited about how Algonquin’s regulated and renewables businesses positioned the company to contribute to and benefit from this decarbonizing transition. We have multiple levers of growth across our two businesses that I’ve spoken about throughout today's call, which gives me further confidence in our ability to execute and deliver on our five-year investment and growth plan. In summary, 2021 has been a very productive year so far as we continue to execute and deliver on the company's largest construction program in its history, with approximately 1400 megawatts of the 1600 megawatts already placed in service. For context, these new projects are expected to approximately double the size of the company's portfolio of renewable energy generation facilities that we own and operate. Our three strategic pillars of growth, operational excellence, and sustainability will be a key foundation as we continue to build the business, and strive to deliver steady earnings and dividend growth, really long-term shareholder value. With that, I will turn the call over to the operator for any questions from those on the line. Operator: Thank you. And your first question comes from the line of Sean Steuart, TD Securities. Sean Steuart: Thank you. Good morning, and thanks for all the detailed commentary. A couple of questions, with respect to the Empire rate request 10% ROE and 52% equity thickness, that looks similar to what was rejected last year. Can you give us some thoughts on the request this time? What gives you confidence that this is reasonable and how things might have changed over the last year to give you that confidence? Arun Banskota : Sure. Good morning, and thanks for that question. So, look, first of all, it's still early. We just very recently filed for that rate case. As we've said in prior calls, we continue to be confident in our position on equity thickness, and we believe we will get the right outcome around equity thickness. Sean Steuart: Okay. And further to that, the securitization of the costs tied to the weather event. Can you walk us through that process and how that could evolve to get the $30 million there? Arun Banskota : Sure, as you know Sean, the legislature has recently passed legislation that approves securitization of such extraordinary costs. And we do plan to avail of that mechanism. We are looking at starting the internal process around that. Just as a reminder, of the $80 million increase, the $30 million of that is from storm Uri. And outside of that, our rate case increase is more in the 7% range, which translates approximately into 1.4% CAGR, when you look at it from the last rate increase in 2017. Sean Steuart: Okay, and then one last question maybe for Arthur, you guys seem very focused on obviously growth here. But any updated thoughts on capital recycling as a longer-term funding source to see the broader growth ambitions for the company. Any updated thoughts on potential for asset sales to fund earlier stage developments? Arun Banskota : So, Arthur before I tell you to answer, I will say that capital recycling is always on the agenda for us. When we announced that back in at Investor Day, we're still about six, seven months now from that point onwards. Still early days, but capital recycling is absolutely something we continue to look at as an option. Arthur Kacprzak : I don't really have anything to add Sean. It's on the radar, we look at it. It's nothing concrete to talk about this picture. Sean Steuart: Okay, thanks very much, guys. I'll get back in the queue. Operator: And your next question comes from the line of Rupert Merer with National Bank. Rupert Merer: Morning, everyone. Arun Banskota : Good morning, Rupert. Rupert Merer: So, getting back to the rate cases that you filed. Can you give us a sense of the timing of the hearings here? And are you seeking any additional smoothing mechanisms and maybe a move off piece of accounting with the rate case you filed with Empire? Arun Banskota : Sure, so we filed a rate case just late May, but let me turn it to Johnny for further details. Johnny Johnston : Yes, so hearing settled will be later on towards the back end, I think of this year. We're not expecting a decision until Q2 of next year. And we will work through with the commission and stakeholders in terms of the best way to implement any increase. So, we're certainly open to smoothing rates in a way that works for other practice. Rupert Merer: All right. Great thanks. And Arun, you've completed the Greening, the fleet initiative in Missouri. You’re looking at new regulated investments at CalPeco. Is it more to come here, how soon before you could look at, say greening the fleet phase 2 in Missouri? Is their political support for doing many more investments like this across your asset base? Arun Banskota : We believe so, Rupert, and again, we you know we're proud of the fact that we are pretty much entrepreneurs in this area. We look at it across our existing fleet. In fact, even on our water utilities, which there's a lot of energy that goes into moving water, and we look at that as well as an option. Even when we acquired BELCO, one of the attractions for us was the fact that in an island economy, it was pretty much all of it is a thermal generation, and with customers paying over $0.30 per kilowatt hour. And we strongly believe that there's a lot of ability to bring the fleet in that case, as well. So that's something we look at in pretty much every instance, whether it be with our existing portfolio or anything new. Possibilities we'll look at as well. Rupert Merer: So how long before you think we could see some more greening and fleet initiatives like at CalPeco for example? Arun Banskota : Stay tuned, Rupert. We're obviously excited to let everybody know as soon as we are able to announce it. Rupert Merer: Okay, I'll leave it there. Thank you. Arun Banskota : Thanks Rupert. Operator: And your next question comes from the line of Nelson Ng. Nelson Ng: Thanks, everyone. Just to follow up on Rupert's question, now that you have finished greening or you finished the first phase of greening Empire. I'm just wondering, like bigger picture, now that you've kind of gone over that hump on your capital plan, spending about a third of your five year capital plan in the first six months. If you like, I guess the question is, if you see an opportunity that's similar to Empire, where you had the opportunity to buy some assets that has coal, like, would you do it? Like would you buy a utility with significant coal assets? Is that something you would look to do? Arun Banskota : Look, it's a speculative question. And so, I'll answer in a similar way, right. So, first of all, we have a very attractive ESG profile. I mean, when you look at our carbon intensity at 0.0013 per dollar of revenue, that's among the lowest-lowest among our peers, right. And in our history, Nelson, I like to repeat this fact, in our 33 years of existence, we've never ourselves develop and therefore added to the world stock of industries. And at the same time, we are very good stewards of infrastructure. And so, some of the numbers we gave you around Midwest greening with a reduction of 26% carbon intensity in just three years, in CalPeco 46% reduction in carbon intensity in just three years. I think, besides what we do on a renewable energy side of the business, in terms of investing in renewable energy assets for the good of our customers and our shareholders and the world at large, I think it's a similar profile on the regulatory side on greening the fleet, which I believe is good for our customers, our shareholders and the world at large. So, if there are similar kinds of opportunities where we can utilize our greening the fleet initiatives, we will take a hard look at that. Nelson Ng: Okay, thanks. That's clear. And then just moving over to CalPeco in terms of the rate case falling, I haven't gotten a chance to go through it, but the roughly $36 million increase seems like a big increase for utilities. That's not that big. Could you just run through some kind of big picture items in terms of what's driving the rate increase there, at CalPeco? Arun Banskota : Let me give the big picture and I'll turn it over to Johnny. So, the vast majority of that increase is really associated with wildfire mitigation. As you know, in California in that reserve geography, that's obviously something extremely important. We want to make sure we keep our customers and communities safe. Johnny? Johnny Johnston : Yeah, I mean, I think the short story is, it's really is what our wildfire costs have driven that increase. And it's the investments that we're making to reduce the risk of future impacts in the area with the ongoing activities or increasing our tree trimming, and monitoring so that we are able to sort of take our lines out of service at high risk in periods of time. I think maybe the important point to note, despite the significant increase, even with, if it were fully approved, would still be one of the lowest cost rates in California. And actually, if you look at what the other California utilities have been filing in terms of their rate increases, the majority of them have had 30% to 40% increases, that sort of in this time frame really driven by similar activity. So, it is a big step up. There's no doubt. And we're always very focused on the billing path for our customers. But really, this has been driven by the evolving landscape in California. Nelson Ng: And just a follow up on that, like, is that increase – Is it mostly to service higher operating costs? Or are you making a lot of capital investments? What was the mix roughly? Johnny Johnston : It's roughly 50-50. And so, it is very significant investment going in, in terms of putting in semiconductor, modernizing our switching and fusing technology, as well as some of the operating cost expenses that are covered. So, these are roughly 50-50. Nelson Ng: Okay, thanks. I'll get back in the queue. Arun Banskota : Thanks Nelson. Operator: And your next question comes from the line of Ryan Greenwald with Bank of America. Ryan Greenwald: Good morning, everyone. Arun Banskota : Good morning, Ryan. Ryan Greenwald: Good morning. Appreciate your commentary earlier on potential coal opportunities and transition, but kind of given the media reports earlier this week, can you comment a bit more broadly, just on your overall assessment of the regulated M&A landscape ahead independent CapEx update at the end of the year here? Arun Banskota : Sure. So as everybody well knows just the number of regulated M&A opportunities out there, when you look at it in 2010, for example, or 2000 versus now, that landscape has significantly short. So, just a number of utilities out there, are fewer with some of the consolidation that has been going on. And if you look at our $9.4 billion five-year plan, we only include acquisitions that we've already announced. But you'll find New York American water in there. Our $9.4 billion plan does not depend on any future acquisitions. But having said that, we do look at that as a possible lever, another growth lever to enhance our growth even further and provide more shareholder value. So, that's really the context. Ryan Greenwald: Great, thank you for that. And then given broader concern around the supply chain and inflationary pressures, this having any impact in the way you think about the development pipeline? Any hesitation to go through with some of the potential projects given pressure on returns? Arun Banskota : So far, we are not seeing that, Ryan. And again, what we have seen is some of the increase on the supply chain has been offset by price increases on the optic side of the ledger. And also, one of the strategies we deploy is try to finalize the supply contracts, the construction contract, and the optic contract as close together as possible so that there's very little residual risk that we're taking in terms of commodity increases and the light. So, so far we continue to accelerate our Greenfield pipeline and other such projects, but we always have the options of delaying anything if such a contingency does happen. Ryan Greenwald: Great. I'll leave it there. Thanks for the time. Arun Banskota : Thanks, Ryan. Operator: And your next question comes from line of Rob Hope with Scotia Bank. Rob Hope: Morning. First question is just on the 2021 EPS outlook that you reiterated. As we're kind of halfway through the year, can you talk about the puts and takes? And it looks like taxes have been pretty strong tailwind so far. Was that originally anticipated or is that offsetting kind of some of the weakness we’re seeing in the renewable generation side? Arthur Kacprzak : Yeah. Good morning, Rob. It's Arthur here. So sure, I can speak to that. So well, in terms of outlook for the rest of the year, like I mentioned in my prepared commentary, we are reiterating our guidance between the 71 and 76. And in terms of when setting that guidance, I mean, we factored in several things. One of the things obviously being impacts of COVID, which thankfully, we actually didn't see. So that is providing us a little bit of room. On the flip side, I mean, we did have a little bit of milder weather, obviously throughout the year as well. So those two things are some extent offsetting. Now to your second question around tax credits, and I would say, portion of the tax credits, yes, we're not unplanned but maybe it's more of a function of geography or where they're recorded. And I'll explain a little bit further. As you're aware, we had the delays in the final commissioning of Maverick and Sugar Creek due to the blade issues there. So, what that basically did is, in essence, it delayed the final investment by tax equity into those projects. So normally, what we would have seen for the year is tax equity invested, we would have seen that those credits that were generated from the turbines that were operating, going through HLTV. Versus here, we had the opportunity to obviously take those credits and self-monetize them. So, you're maybe seeing a little bit more in the tax line, versus you would have been seen a little bit more in the EBITDA line. Otherwise, if that wasn't the case, but overall, it kind of washes in the results. Rob Hope: That's some great color. Thank you. And then maybe just a follow up question on the Ares partnership there. Can you just walk us through your thinking of not taking 100% of ages, as well as whether or not, I guess what does Ares bring to the table and kind of what future partnerships could look there? Arun Banskota : So, Rob, just to give you context, as you know Abengoa was our 50% partner on ages. And given all of the challenges that they were having with restructuring, we felt it was timely for us to find a new partner. And so, we have exercised the option and we believe Ares does provide quite a bit of constructive experience and know how in this sector, and they were in 2020, for example, one of the 10 largest wind financers. They also have companies that are in the construction business as well. So, we believe that that they bring both the development and construction expertise as well as the financing capability to develop and to finance our construction activities. And that's where the fill is. Rob Hope: Thank you. Arun Banskota : Thanks Rob. Operator: And your next question comes from the line of Ben Pham with BMO. Ben Pham: Hey thanks. Good morning. Got a couple of follow-up questions on utility M&A. Could you comment more broadly the criteria that you're most focused on now as size, geographic diversification, synergies, and anything else you can share? And then more specifically, just listening to your answers to earlier questions. And with these Kentucky assets, would that fit into your overall preferences or targeting? Arun Banskota : Sure. Ben, a lot of questions in there. So let me try to walk through those questions. Right. So, first of all geographies is pretty clear. I mean, it's North America. And again, we don't say never other than North America. So, for example, Chile was a case in point but by and large, the geography is North America. Right. We are one of the few companies that are across all three modalities, electric, water and gas. We are very, very bullish on electric and water. They fit extremely well with our ESG profile. Right now, on the gas side, we are focused much more on deploying renewable natural gas into our facilities. We have filed the first one in New Hampshire, we're looking at a pipeline of a lot more. And we're also looking at Green hydrogen, New Brunswick, for example, we participate in a maritime study. And we are following on a number of other pilot projects that are out there in Green hydrogen, that's our focus on the gas modality. So, but on specific transactions, we have a policy never too common and specific transactions are probably used at that. Ben Pham: Okay, and then accretion, you want accretion on the date? Arthur Kacprzak : On the financial? Absolutely. I mean, look, we don't -- we look at from a strategy perspective, clearly, it has to fit all of our strategic objectives. But we do not make -- do transactions based upon strategy. And these transactions absolutely have to stand on their own. We look at a lot of different metrics. And we are extremely disciplined around those. And we obviously end up not doing many more transactions than we end up transacting on. So, absolutely extremely disciplined around the financial metrics. Ben Pham: Okay, and then the second one is, it made sense on the funding side, and here, we execute something make it larger than UCDF every month your balance sheet offers Medicare convert to their own you mentioned the hybrids like, how would you think about that impacting your funding plan? Arthur Kacprzak : Yeah, from our perspective, I mean, one thing I would say we generally -- look, we've never kind of fallen behind on our balance sheet strength. We always maintain a strong balance sheet, but I think that that itself kind of brings us from a position of strength, call it. To some extent, I mean, speculating around any funding sources as I said in my prepared remarks. Lots of tools in the shed, in terms of what to be able to -- where to source capital. Ben Pham: Okay, that's great. Thank you. Operator: And your next question comes from the line of Mark Jarvi with CIBC. Mark Jarvi: Thanks, good morning everyone. Just wanted to clarify one thing on the response to Ben's question, we talked about the different financial metrics you'd look at, for a deal making sense. Was EPS accretion, sort of the top list? Wasn't 100% clear EPS accretion has to be on day one? Arthur Kacprzak : Absolutely. We look at our EPS accretion that’s probably our most fundamental and most important metric we'll look CalPecoat. Absolutely, Mark. Mark Jarvi: Perfect. Thanks for that. And then also lots of welfare auction in California this year. And we've seen reports of UI center de energized lines at CalPeco. Can you just update in terms of any earnings hit or any potential liabilities that might be faced or so far, you've been unscathed by the wildfire action? Arun Banskota : Sure. So, I think, Mark, we did report earlier, we talked about the Mountain View wildfire, and the investigation continues on that one. We also recently faced another wildfire, the Tamarack wildfire, which is a much smaller one in comparison, that one is largely contained. We are looking at our employees did an amazing job, in terms of mitigating a wildfire. And bringing all of our customers back online in a very, very short time, is extremely impressive to see a lot of what our employees were able to do out there even bringing generators in places, even for just a few customers. Because reliability is so important. And yet, and that was all of background and context behind what we're seeking for in terms of a new rate case, because we do believe we need to continue to invest in wildfire mitigation aspects. And that is really the context behind the most recent rate case filed. Mark Jarvi: Okay, and then just one more thing, just on the Ares partnership in the simplification. Maybe Arthur, you can explain in terms of will all investments fall through your own financial statements, or is there still some SPVs involved in some of that stuff? And any capital commitments from Mary's on any investments going forward? Arthur Kacprzak : So, maybe the simplest answer is, in essence, how it's going to flow through the financial statements. It's basically status quo in terms of how you currently see it, the extent that you will still see being accounted for as a joint venture. Mark Jarvi: Okay, thanks a lot. Operator: And your next question comes from line of Naji Baydoun with IA Capital Market. Naji Baydoun : Hi, good morning. I just want to start with the renewable projects that are already in the hopper. Can you just remind us of what's contracted? So Shady Oaks, you have the contract with JP Morgan. What about the Ohio solar projects or some of the other projects coming down the pipeline? Arun Banskota : Yeah, go ahead. Arthur Kacprzak : Yeah. Thank you, Arun. Happy to do that. And you're absolutely right with Shady Oaks do in terms of the uptake with JP Morgan, the new market, that portfolio is also contracted. And all the projects that we have under active construction are contracted. Naji Baydoun : Okay, I guess the other projects that are in cognitive bank development, are those -- what's still left to be contracted from those? Arun Banskota : Yeah, the two -- we've got the Sandy Ridge 2, which is an advanced development, which is contracted and we've got Deerfield to which we're an active discussion on contracting, but have not signed the contract yet. Naji Baydoun : Okay, okay. Got it. That's good. And just on the larger – Arun Banskota : Just for context, I mean, the offtake contracting happens towards the really very end before what we say internally has notice to proceed. So, that's where we try to make sure we -- the supply contract, the construction contract, and offtake contract comes together. And that's when we go notice to proceed. So, usually, it really happens towards the end of the development cycle. Arun Banskota : And I fully agree, and that's very intentional on our part. So, the reason decided earlier in terms of and hit alignment and the offtake. Naji Baydoun : Understood. And just on the Luning project, is this both the solar and the storage system together that you're working on? Arthur Kacprzak : That is correct. It's a solar plus a 240 megawatt hour battery storage system. That's correct. Naji Baydoun : Okay, I just want to get your thoughts broadly on, I guess how you're thinking about storage. This is maybe the first project within the utility business, but just wondering how are you thinking about storage, both within the regulated portfolio, but also maybe the non-regulated side of the house? Arthur Kacprzak : Actually, we already have around what 20 megawatts worth of capacity on the regulatory side of the business on storage. And on the renewable energy side of the business, our first project in New York State is under construction, that is a solar plus battery storage project. Look, given the prices on storage and ability to shape perhaps, the energy outflows, we look at storage on every wind and solar project to see if it makes sense. And so, it's very much part of the equation already. Naji Baydoun : Okay. So it sounds like there's maybe opportunities on to add on both sides? Arthur Kacprzak : Absolutely. And again, the reason I was telling you about the 20 megawatt plus on the regulated side is we're already deeply in it. We already have a lot of know-how and experience in operating these battery storage systems. So, we absolutely will continue to look at stories as yet another area of technology growth. Naji Baydoun : Understood. That’s very helpful. Just I guess, last question on that is, what else you meant by regulated versus non-regulated? Maybe how you think about the risk and the returns? And if you had to choose a project, would you on the storage side does it make more sense for you today to have it within the utilities or not? Arun Banskota : I mean, look the risk profile is somewhat different on the two sides, but that much, given the fact that even on our renewable side of the business is largely contracted with long term contracts, remainder average weighted life of 13 years. But still, there is some risk reward difference. But it's not large enough for us to say, we're going to put all of our capital on storage on one side or the other. And we believe that there's a lot of opportunities on board, the regulator and the renewable side of the business. Naji Baydoun : Okay, got it. Thank you. Arun Banskota : Thanks, Naji. Operator: And your final question comes from line of David Quezada with Raymond James. David Quezada: Thanks, morning, everyone. Just one quick one for me. Arun, you mentioned renewable natural gas a little bit in your comments. Just wondering if there's any color you can provide around the timing and maybe the quantum of that opportunity/ And given the tax credit that has been, I guess, proposed could you look at that outside of the regulated footprint? Arun Banskota : Absolutely. David, we are already looking at it outside our regulated footprint as well. We have a development pipeline across every one of our gas utilities that is looking at renewable natural gas. We believe that at its maximum, it could actually substitute for approximately 25% of all of the magic guys that flows through our gas leasing system. So, it's pretty attractive from that perspective. The pricing is something obviously we're working on. One of the things we're very focused on, is trying to make sure that it doesn't impact customer bills. So, we're looking at different types of structures. It reminds me of the days of renewable energy, a decade ago when the prices were higher, but there were enough of a customer base out there that were willing to pay higher prices for the sustainability gain for renewable energy. And I think, we see a similar pattern on the renewable natural gas side as well, where there's enough of our commercial and industrial customer base that is willing to pay the initial higher prices on renewable natural gas. Now, a lot of the stuff that is going on in with the Biden administration and climate action bill should help in terms of bringing that clock down even further. So, we're absolutely looking at that and have a fairly robust development pipeline analogy. David Quezada: That's great color. Thank you very much. Arun Banskota : Okay, David, thank you very much. And thank you everyone, for taking the time on our call today. So, with that, please stay on the line for our disclaimer. Amelia Tsang : Thanks everyone. Our discussion during this call contains certain forward-looking information, including but not limited to expectations regarding earnings, capital expenditures and size and timing for completion of our projects. This forward-looking information is based on certain assumptions, including those described in our most recent MD&A filed on SEDAR 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 plans, beliefs, estimates, projections, expectations, opinions and assumptions of management as of today's date. There can be no assurance of forward-looking information, it 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 any material difference between subsequent actual events and such forward-looking information, except as required by applicable law. In addition, during the course of this call, we may have referred to certain non-GAAP financial measures, including but not limited to adjusted net earnings, adjusted earnings per share or adjusted net EPS, adjusted EBITDA, adjusted funds from operations and divisional operating profit. There is no standardized measure of such non-GAAP financial measures. And consequently, AQN’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. Or for more information about both for looking information and non-GAAP financial measures, including a reconciliation of non-GAAP measures to the corresponding GAAP measures, please refer to our most recent MD&A filed on SEDAR and CADA or EDGAR in the United States, and available on our website. And that concludes the conference call. Operator: And this concludes today's conference call. Thank you for your participation right now. 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