Algonquin Power & Utilities Corp. (AQN) Earnings Call Transcript & Summary

Good morning. It is my pleasure to welcome Ian Robertson, Chief Executive Officer of Algonquin Power & Utilities Corp. to the JPMorgan 2020 Energy, Power & Renewables Conference. Ian, I'll turn it over to you for opening remarks and any additional thoughts before we begin Q&A.

Perfect, Rich. Thanks, and good morning, everyone. Thanks for taking the time to spend a few minutes discussing Algonquin Power & Utilities Corp. So we have a slide deck, our normal investor slide deck. But rather than walking through each one, thought I might choose some interesting specific slides and speak to those. And so I'm going to start my remarks on Slide 3, which is it's really the overview of this organization. And so at its heart, Algonquin Power & Utilities Corp. is a U.S.-based renewable energy and regulated utilities business. We were founded about 30 years ago by myself and a couple of other individuals. And the business, while it started in the renewable energy space and continues to have a strong presence in that area, has now actually grown where the preponderance of the business, close to 70%, is actually in the regulated utility services area, which is providing about 800,000 customers with water, gas and electric services. And you can see from Slide 3, that businesses on the left-hand side of the slide, we are in the middle of a couple of acquisitions, which actually take our total customer count to about 1 million. And those customers will be divided approximately equally between water, gas and electric. On the right-hand side of that slide, you can see our renewable energy business. And while that was the legacy business and has -- it has now shrunk to be about 30% of our business. And if it's a long term contracted portfolio of wind, solar, hydroelectric generation. And I will say that the -- that if there's a commonality between the renewable energy and the regulated services business, it's a focus on growth. And as I've mentioned, we are pursuing a number of acquisitions on the regulated utility side, together with an organic pipeline, which will be about $6.5 billion over the coming 5 years. And on the renewable energy side of the business, we are pursuing the development and investment in some $2.5 billion worth of new wind and solar projects, primarily to take advantage of the production tax credits in the U.S., which for those of you who are familiar with the space, understand that they are on a legislative phaseout. Together, it's over $9 billion worth of growth. And with the focus on continuing to drive earnings per share and, ultimately, dividends per share, and we'll talk a little bit about that. But flipping to Page 4 of the deck. I think it's important to kind of backdrop that the growth, the focus, the business strategy of this organization very much are aligned with ESG principles. In some respects, we say to anyone who will listen that we were green before it was hip to be green. We started our business in the small hydro space and have obviously continued on with wind and solar. But interestingly, those business strategies are crossing over into the regulated side of our business with an economically founded thesis to shut down coal plants in favor of building new wind, installing solar panels on top of our water reservoirs in Arizona, as an example, to reduce purchases from the local utility. And so there's been very much a blurring of the lines between regulated utilities and the renewable energy space. And candidly, we see our expertise as a developer of renewable energy facilities as a big competitive advantage. We are very much, I'll say, a dirt under the fingernails organization that got its start in the development of renewable energy. And so clearly, we are very much aligned with the UN sustainability -- Sustainable Development Goals. And we, last October, announced at our sustainability morning, our 2019 plan, which had 9 very specific objectives that were set for sustainability, including 1 million -- reducing emissions by 1 million tonnes of CO2 and a number of other very specific quantifiable goals. And I will tell you that each one of those 9 goals are reflected in our corporate scorecard, and candidly, in my individual compensation. So we have taken the concept of sustainability and integrated it into our business strategies as much as our financial objectives. The entire point of this business candidly is to generate stable earnings, stable cash flows and ultimately to pay stable dividend. And maybe as an illustration of that, I'm going to flip to Slide 10 in our deck, and it gives you a sense for where the growth of the business is going to take our earnings per share. We are focused on high single-digit growth in EPS to be able to support our dividend growth, which if you flip the Page 11, shows the growth in our dividends. We are immensely proud of a 10-year history of 10% CAGR in the dividends, and 2020 was no exception, with the Board approving -- recently approving a growth in the dividend of 10% at our last earnings call. And those growth in dividends are founded on growth in EPS. Let's face it, it's a little illusory to crank up dividends if you're not growing EPS at the same time. And so we're obviously proud of both the history of EPS growth, but probably more proud of the underlying EPS growth which has supported it. I will mention that this $9.2 billion pipeline of growth is founded on both a couple of acquisitions that we have already announced, development work that is underway, where, as I said, as dirt under the fingernail developers of assets, we are continuing to ply that trade. But it is not premised on any further success in M&A. I think while we are certainly confident that we will continue to find more M&A opportunities every year when we announce our growth pipeline, we are explicit about saying that this is not premised on any future growth than we've been able to find and surface attractive growth opportunities in the -- notwithstanding that. And so while last year was no different, we added the acquisition of the electric utility in the country of Bermuda and entered into an arrangement with American Water to buy a certain water and sewer utility assets on Long Island. We obviously didn't disclose or anticipate those when we announced our pipeline. So we're confident we'll continue to grow it going forward. But at -- as I said, at the heart, the growth is founded on organic growth or development. And before we jump back to Rich to kind of engage in some questions, I thought I would give you a few comments on COVID-19 and how the business has performed. From the outside looking in, and I mean, I guess, from our customers' and hopefully, from our investors' perspective, the business has been surprisingly untouched by the tragedies of COVID-19. Our service has obviously been uninterrupted. Phone calls are getting answered. Capital is getting invested. From the outside -- from the inside looking out, from our employees' point of view, I have to say I thank the employees profusely because they transition seamlessly to a work-from-home model that I'm sure it doesn't surprise you. Fingers were crossed to -- that the IT infrastructure was as robust as it at least was designed to be when we sent 80% of our 2,500-person workforce home, and it all worked. And so while there's obviously struggles to do with the lack of social contact and that, I'm sure, applies to everyone, our employees are continuing to perform their functions, I'll say, flawlessly and for that, I thank them. So I think with that, Rich, I'm happy to jump back into Q&A if you've got a couple more minutes.

Great. Thank you, Ian. Maybe starting on the COVID side, since it's so topical. Across your regulated operations, what are you seeing locally with expected impacts maybe going down to 1Q earnings versus dynamics now with more local reopening?

Yes. Well, I'll say -- I say if it's God's will, but our Q1 results were impacted not by COVID candidly, but by just warmer-than-average weather. It was -- I'm going to use the word, hellishly warm winter, and I'm not sure you can say those words altogether because most people talk about hellishly cold winter as well. When you're in the natural gas and electricity business, particularly in areas where you don't have volumetric decoupling in your rate structure, a warmer than normal weather actually does impact your net revenues. Now over the long term, assuming you got the averages right, it all works out. But Q1 was a study in the impacts of weather, rather the impacts of COVID. Interestingly, at our Q1 meeting, we tried to give a little bit of color as to how much of the business was impacted by, I think, what you're referring to is falling demand caused by, I'll say, businesses being shut down. In our case, most of our utilities, the majority are in areas where we do have volumetric decoupling. And so while we did experience a drop in our demand, probably not inconsistent with most of the other utilities, which you cover mid-single-digits drop in demand, that obviously didn't translate to a commensurate drop in earnings. We saw about $3 million of impact over the month of April, which obviously is a month after our quarter ended. And actually, I think that's getting probably a little bit less, as you said, as, a, we reopened. And candidly, as we're starting to see warmer, maybe even warmer-than-average weather in some of our service territories where air conditioning load is kind of making up for that. And so right now, I think it's probably fair to say that we're not seeing enduring impacts in the -- from COVID so far. Obviously, we don't know -- nobody knows what the future has to hold. But we aren’t a cruise ship line, if that's kind of where your question is going so.

Great. Thank you for the update there, Ian. And maybe continuing with that theme, you're involved in a couple of renewables projects straddling both the regulated side and your Liberty Power efforts. Could you provide a construction update and maybe any other new changes with your development activities?

Yes, sure. I should point out, we've got 1,300 megawatts of wind and solar projects, I'll say, under construction right now, targeting the 100% production tax credits, which I know you're familiar with, a construct of the Internal Revenue Code. Which perhaps 3 weeks ago, we might have been having a little bit more intense conversation about the completion of those projects before December 31, 2020, which, as you know, was the end of the safe harbor. It's a long the story, it wasn't -- that wasn't really a cliff, but it is an important milestone to meet in order to provide comfort to tax equity providers that the project has qualified for 100% PTCs. And so the construction of our projects, those 1,300 megawatts, were all deemed, I'll call it, essential infrastructure. So the shelter in place rules that we have seen, in fact, continued to exist in a number of states exempted our projects. And so construction went along just fine. If we had any challenges, it was due to global supply chain restrictions. You can imagine, if you had to get parts out of India or Malaysia, that those are different challenges than whether we can pour concrete in Missouri or Kansas. And so -- but here's the epilogue. And I think good things happen to good people, that the IRS has provided an extension to the -- to those PTCs. So while we fully expect still to be done close to the end of the year, it's no longer sort of -- there's no pressure on it, Rich.

Great. Good to know. And maybe continuing with that theme across your active regulatory calendar, particularly with the pending acquisition approvals. Could you speak to where you stand in the process, one, with those approvals? And two, across regulatory proceedings?

Okay. Quick update on BELCO. Still thinking is in July of this year, so sometime next month. Nothing has arisen that causes us any, I'll say, I would say, concern over that. With respect to Long Island, New York, as you probably are aware, living there, is a complicated place to do business, certainly on the utility side. And we actually have experience in this. We just completed our acquisition of Enbridge's St. Lawrence Gas. And so we understand the, I'll say, the complexity of the process in Albany for -- with the NYPSC. But we're still anticipating a close early next year. We have a procedural schedule negotiated that sees hearings in November. So it's moving along, I'll say, purposefully, but at a New York time frame. And so I'm not exactly sure where you guys came up with this, in a New York minute. That's supposed to sound quick, but certainly, that didn't find its way up to Albany. So go ahead.

Understood, very clear on that. Maybe stepping back then to a high level and thinking with your acquisition of Empire District and the win that you now are seeing out of that and we talked about doing with BELCO. And then also, a big tackle claim for New York American Water as well, I guess I'm curious about how you view the intersection of the M&A potential for Algonquin plus your expertise in applying some of these programs that clearly aren't necessarily being considered before the assets are in your hands.

Yes. No, it's -- well, first of all, I think it's certainly right out of our playbook, which is to find a utility, particularly one that may have massive fossil fuel reliance. Bermuda's the perfect example, almost 100% of their energy comes from fuel oil in reciprocating engines. And then with the price of renewables today, there's -- you can invest a fair amount of capital and save customers' money. What a wonderful intersection, as you point out. But I think the thesis is applied, I'll say, across the entire spectrum. So I think it's probably a little bit unfair to say that other utility players don't understand that. They do. I think we were very, not lucky, but the time was right for Empire in terms of being able to bring that to bear, that thesis to bear in terms of shutting down coal. But I will say we are active in California. We have a program underway, what we call C100, California 100% renewable. That's a program that we have going through the integration of more solar, probably some battery storage, maybe even a little bit of wind. We can get that utility to 100% renewables far sooner than, I'll say, the rest of the state as a whole. But the good news is you've got legislative and regulatory support for that. So we intend to continue to ply that trade wherever we can across our footprint. And look, as we think about M&A, to find those nuggets, where that can be done like BELCO.

And then just one more on the M&A front. I'm curious how you view electric versus gas versus water in today's environment. And also, I guess, in consideration of those future capital opportunities for you?

So you're asking me to make Sophie's Choice between modalities is what you're really suggesting? Okay. Well, I mean, I think if we were forced to choose, water and sewer utilities obviously have the least substitution risk, if you want to think of it that way. And given that the second largest cost in running a water and sewer utility is electricity because it's all about pumping a fairly substantial opportunity to put solar panels, maybe some batteries in there to reduce capacity or demand charges, and so we're all over that. And so if we could wave a magic wand, there'll be more American Waters on the horizon. But as you know, water utilities are trading for a horrific price and so that's the big challenge. And in making Sophie's Choice, just to be clear -- and you're too young to even know what I'm talking about. You haven't even seen that movie that -- but that -- in making that choice, it doesn't mean that at all we're not supportive of electricity or natural gas. And in fact, natural gas, I think, has the greatest opportunity for focusing on renewable sources of methane molecules, whether that's RNG, I think hydrogen is a hugely exciting opportunity as we think about the prospects for hydrogen. You hear some of the things you're doing in Europe like wind farms with gigawatts worth of installed capacity solely focused on producing hydrogen. And what natural gas utilities have is an incredibly reliable distribution system. When the electricity goes out, the gas keeps going. And so I think there's -- so I guess I'll say, we love all of our children for different reasons. And I think there's -- and each of them provides super interesting opportunities for growing the business, for our focus on ESG alignment, for implementation of sustainability across the board. And each one of them is a study in doing well by doing good. And so I guess I wouldn't say -- I mean, if you were trying to sort of pick for which would you rather do, we kind of like the diversity that they all bring us.

Great. Maybe switching to the Liberty Power side. Curious if there have been any changes with the post-2020 pipeline? Any updates there? And then how do you view the sale of Liberty Power? Given the robust construction activity now, I guess, how is the completion of those activities?

Well, I mean, one of the things, and maybe this is the way your question is going, and it's an interesting thought with the extension that the IRS just provided. They basically moved the goalposts either downfield or upfield, depending on the way you look at it. They gave us an extra year for 100% PTC projects and an extra year for 80% PTC projects. And you can imagine, there are projects in our pipeline where we were planning to do them on the basis of 80% PTCs, and they may well now qualify for 100%. So the economics just got, I'll say, a lot better for those projects. And the same thing for projects that were at 60% would now qualify for 80%. So I think that certainly, there is an opportunity for upside. I don't see any downside in what's happened. I'm not sure that the thesis of, "Oh, well, we can originate a project from scratch and take advantage of that extension" is really very practical. You know the gestation period for, certainly, for a wind project, anyway, is measured in years. And so if you don't have things already in the hopper, it's going to be hard to originate them. But you have -- but we do have lots of things in the hopper. So the opportunity set, without being specific, it isn’t getting smaller as a result of the extension to the PTCs. And so we were obviously thrilled when -- and we were part of a lobbying effort from both AWEA and EEI to get that done, and we're obviously thrilled with the outcome.

Great. And so maybe following up on that point there. Are there different market opportunities now following the extension that might not have been available to you before? Or is it really your positioning from, I guess, a turbine perspective and a project development perspective than you feel confident in your positioning anyway to take advantage a few of your own opportunities after this?

Well, you know we're a nationwide developer. I don't want to say we're indifferent between looking at investments in California all the way to Quebec, if you want to draw a line between them. And so I think there is no doubt about it, the penetration of renewables across the country, maybe even more grandly across the globe, is being driven by economics, it's not being driven by public policy or supportive administrative policy. And so we remain as bullish on the sector, maybe more so as prices continue to fall. And I think our hope and maybe let's just -- to be clear, our hope is that the path to recovery from the pandemic may lead through a decarbonized economy. So if we have a chance to recover -- and everything that has -- we've heard has indicated that people's commitment to sustainability, and I mean, investors, the people, your community, haven't -- they haven't got weak in the knees, if you want to think of it that way, as a result of the pandemic. And so there's nothing that leads us to be any less bullish about where the sector is going. I don't know if that's responsive to your question, Rich, but…

No, that's very helpful color. And switching gears a bit. I'm kind of curious, given we started on COVID impacts, and you talked about some of the protections that your businesses have naturally from COVID. And then there are substantial changes in Missouri as well. We have your latest rate case and, I guess, soon to be filed rate case as well, which is -- it seems to be a culmination of a number of years' work on your front to change some of the regulatory paradigms in Missouri. Curious from a regulation perspective, how you feel that the business stands going forward? And if there are any additional, call them, regulatory [ apps ] that would be high profile for you to see at this point? Or if the step-up in decoupling alone is a big change for you?

Well, I got to say, if you had asked me this question a month ago, I would have said that the finish line in Missouri was in sight. We were about to break the tape, so to speak. I would actually say, today, it remains a bit of a work in progress, that we've got -- well, we have done well, as you know, in the regulatory dockets related to our Greening the Fleet, our Customer Savings Program (sic) [ Customer Savings Plan ] as we've called it, that this idea of shutting down coal in favor of wind. We are working our way through the regulatory process on our current rate case. And I think the regulators trying to find their way through this as well. So maybe to put it in specific context, this Senate Bill 564, which was a piece of legislation to which you're making reference, which represented the first really substantive change in the regulatory environment in Missouri in years and included decoupling and it included some very specific accounting methodology. I think the regulator and the staff are struggling to work on implementation details. Now am I confident they'll get there? I am. But as I said, I think it's fair to call it a work in progress rather than sort of a completed piece of regulatory outreach. So anyway. But we've got lots of activity in front of them. As you know, we've got a rate case coming up for the inclusion of these wind farms. And so that's kind of where our focus is right now.

Understood. And maybe just one quick follow-up there. The discussion on the decoupling, I believe there was a reference to a start date sometime in June and the potential, I guess, to have a make-whole period, if you will, back to the start date. Is that something you're still expecting in terms of decoupling in place for the summer? Or is there the possibility that the actual decoupling protection could begin later?

Yes. I think right now -- I mean, I hate to sort of pre guess the regulatory outcome. But I think it's probably -- I'd say, if I was a betting man, I'd say it's probably -- it's going to start later. Now the flip side, of course, to that I mentioned earlier is the hot weather and the hotter than usual weather is one's friend when one hasn't been decoupled. And so while, obviously, reduction in risk is the primary objective of decoupling, maybe a chance to win back some of the cost of the winter would be welcome. And so we'll get there, but it's a matter of timing.

Understood. Well, Ian, thank you very much for joining us today. It's been a pleasure catching up with you.

Rich, thanks very much, and best to everyone.

Thank you.