Algonquin Power & Utilities Cor Q4 FY2023 earnings call

Management Statement and Operational Highlights

• Strategic Focus: 2023 was a decisive year with a focus on becoming a pure-play regulated utility, simplifying the business, and achieving operational efficiency. The Regulated Services Group is being shaped into a leading utility platform.
• Regulated Business: Grew healthily in 2023 with divisional operating profit up 10% Y/Y due to new rates and interest income. Had pending rate reviews totaling $105.8 million as of year-end. Plans to transition Canadian and U.S. regulated utilities to SAP platform in 2024.
• Renewable Business: Placed in service 453 MW of new wind and solar in 2023. Completed construction of Hayhurst, Texas solar facility; site preparations ongoing for other projects; added 1,660 MW to development pipeline in 2023. Simplified renewables business by consolidating joint venture and monetizing projects in Spain.
• CEO Search and Sale Process: Launched renewable sale process with potential buyers, targeting transaction announcement mid-2024 and closing later in the year. Making progress in CEO search.

Segment Performance

• Regulated Services Group: In the fourth quarter of 2023, divisional operating profit was $238.3 million, and for the full year, it was $954.1 million, up 11% and 10% year-over-year, respectively. This growth was primarily due to new rate implementations at several utilities, interest income on regulatory asset accounts, and the one-time CalPeco true-up, partially offset by unfavorable midyear weather at the Empire Electric system.
• Renewable Energy Group: Fourth quarter divisional operating profit was $107.6 million, up 6% year-over-year, driven by improved equity income from Texas coastal wind facilities and more favorable capacity revenues for most solar facilities. For the full year, operating profit was $371.8 million, down 9% year-over-year, mainly due to expected drops in HLBV income, certain 2012 vintage assets reaching end of PTC eligibility, and unfavorable weather across Canadian and U.S. wind facilities, partially offset by higher equity income from Texas coastal wind assets and contributions from new facilities and investments.

Guidance

• No adjusted earnings per share guidance provided due to the pending sale of the renewables business.
• Expect regulated rate base growth to be in the mid-single digits and regulated capital intensity to be similar to 2023.
• Focus on simplifying the business, maintaining BBB investment-grade credit rating, supporting the dividend, and generating long-term shareholder value.

Risks

• SAP Implementation Issues: Experience with SAP rollout in New Hampshire had some early-stage release challenges with data, leading to corrections and learning for the rest of the system.
• Weather Impact: Unfavorable weather affected earnings in both regulated and renewable businesses, with weather contributing approximately $0.05 to the total impact in 2023.
• Regulatory Challenges: Regulatory positions in some areas are not fully satisfactory, and challenges remain with New York Water's acquisition stay-out and achieving returns on deployed capital.

Question and Answer

Q: Wondering if you can give 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?

A: It's a confidential process, and no news is good news, so we can't comment further.

Q: You churned through some liquidity this quarter. Can you comment on the investment plan for the regulated platform and overall comfort with liquidity, absent the sale on the renewables platform at this point?

A: We've had steps in place, like the bond and securitization in Q1 which were 4x oversubscribed, so we're in good shape and executing the renewables sale plan. Capital for the reg business is about the same as last year.

Q: You mentioned that you'll be making a sales announcement and expect to make a sales announcement in mid-2024. So just to clarify, are you essentially saying that the renewables sales -- like you expect to announce the sale of the renewables division in mid-2024?

A: Our target is to announce a sale mid-2024.

Q: 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?

A: We're not providing guidance on renewables CapEx at this time as it's related to the sale process.

Q: I want 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 there that you identified?

A: It was an early-stage release with only about 3 months of 2022 data in SAP, causing growing pains. We've asked for a pause and have third parties looking at numbers to ensure accuracy, and it's now in better shape as we tweak the translation between GAAP and FERC accounting.

Q: 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?

A: We wouldn't see 8.5%, and it's more in the mid-11s range. The plan is to use proceeds from renewables sale to pay down debt, delever, and use excess for buybacks.

Q: Coming back to your comments about maximizing the value of AY, like you said in your prepared remarks that you're actively 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?

A: We're supporting AY's activities, such as selling some assets in Spain to them, and looking to be helpful in their development opportunities.

Q: A couple of questions on the renewable power business. Does your credit rating agency conversations drive the pace of the renewable sale process at all?

A: It's our plan, and the rating agencies endorsed our plan. The timing is due to the practicalities of selling a large business like renewables.

Q: Can you comment also -- you mentioned in your report around -- over 400 megs being added. Are you pausing development right now on renewables? Or are you just continuing the same course? And can you also update on the size of your backlog right now?

A: We're not slowing down; we added 1,660 MW to the development pipeline in 2023 and will be building 300 MW in 2024. The backlog details were hard to share due to connection issues but the pipeline is active.

Q: Maybe lastly, just a detailed one on the debt there. And 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?

A: It was suggested to take that offline for a detailed decomposition.