Image source: The Motley Fool.
Algonquin Power & Utilities(NYSE: AQN)
Q2 2024 Earnings Call
Aug 09, 2024, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Hello and welcome to the Algonquin Power & Utilities Corp. second quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.
[Operator instructions] I will now turn the conference over to Mr. Brian Chin, vice president of investor relations. Please go ahead.
Brian Chin -- Vice President, Investor Relations
Thanks, and good morning, everyone. Thank you for joining us for our second quarter 2024 earnings conference call. Speaking on the call today will be Chris Huskilson, chief executive officer; Darren Myers, chief financial officer; Jeff Norman, president of renewables; and Sarah MacDonald, chief transformation officer. To accompany today's earnings call, we have a supplemental webcast presentation available on our website, algonquinpower.com.
Our financial statements and management discussion and analysis are also available on the website, as well as on SEDAR+ and EDGAR. We would like to remind you that our discussion during the call will include certain forward-looking information and non-GAAP measures. Actual results could differ materially from any forecast or projection contained in such forward-looking information. Certain material factors and assumptions were applied in making the forecasts and projections reflected in such forward-looking information.
Should you invest $1,000 in Algonquin Power & Utilities right now?
Before you buy stock in Algonquin Power & Utilities, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Algonquin Power & Utilities wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $643,212!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of August 6, 2024
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, including the material factors that could cause actual results to differ materially and the factors and assumptions applied in making such forecasts and projections. On the call this morning, Chris will provide an update surrounding the renewables sales agreement, which was press released this morning, and on the company's ongoing strategic transition to a pure-play regulated utility. Then Darren will review key highlights pertaining to our regulated and renewables business groups and our second quarter financial results.
Darren will also provide some color on the financial outlook following the expected sale of the renewables business, and then Chris will close with some final remarks. We will then open the lines for the question-and-answer period. We ask that you kindly restrict your questions to two then requeue if you have any additional questions to allow others the opportunity to participate. With that, I'll turn it over to Chris.
Chris Huskilson -- Chief Executive Officer
Thank you, Brian, and good morning, everyone. After being in the CEO role for a year, I'm more convinced than ever that our current path toward a pure-play regulated utility supports our goals to create long-term value, increase our quality of earnings, and bring increased focus to improving our execution. A year ago, I set three priority goals: to sell the renewables business, optimize the value of AY, and to get the regulated business up and running. Today, I'm pleased to announce the successful sale of our renewables business at a valuation of $2.5 billion.
As we set out to accomplish in our 2023 strategic review, we've achieved a deal at a compelling value for our platform business with strong assets and scale. As we set out to accomplish -- sorry, excuse me, this agreement between Algonquin and LS Power for the company's non-hydro renewable energy business, consisting of 2.28 billion in cash proceeds and 220 million in an earnout agreement relating to certain wind assets. I just want to take this moment to thank the team from across Algonquin for the tireless efforts that they put in. It was a great job, team.
Thank you very much. This major milestone, coupled with our previously announced support agreement to sell our Atlantica shares, delivers on our plan to transform Algonquin into a pure-play regulated utility, optimize our regulated business activities, strengthen our balance sheet, and enhance our quality of earnings. As Darren will touch on shortly, we expect to use the proceeds upon close in late '24 or early 2025 to recapitalize our balance sheet and position ourselves for future growth. We're also making progress on our goal to get the regulated business up and running.
We reorganized along commodity lines to improve operational efficiency. We recently completed the implementation of our Customer First enterprise platform, which promises to deliver value to our customers and substantial efficiencies. We added three new experienced board members with extensive infrastructure and regulated utility experience. We're implementing fundamental changes to how we operate the company with increased accountability.
This is the beginning of a multiyear journey to unlock the value of our regulated business. In addition, we're making changes at the executive level. Yesterday, the company appointed Sarah MacDonald as chief transformation officer. In her new role, Sarah will assume responsibility for utility operations and customer service.
Sarah is a lawyer by training and has more than two decades of legal, human resources, and operational experience. She has a broad background having worked in the utility sector for more than 20 years, including roles in utility construction, as president and CEO of Emera Caribbean, and as president of TECO Services. As part of this announcement, Chief Operating Officer Johnny Johnston has left the company. I'd like to personally thank Johnny for his dedication and service and his commitment as we wish him the best for his future endeavors.
As we look forward, we're focused on delivering value to our shareholders in a more self-sufficient manner. We see tremendous value in the business from investments we have made for our customers that are not yet in rates. We need to improve our recoveries, reduce our regulatory lag, and absorb our growth. As a result, we will be reducing our regulated capex for 2025.
Also, as part of our objective to be more self-sufficient, the board has decided to rightsize the dividend so we're not chasing a high payout ratio and excess -- excessive equity raises. These are necessary steps that we expect to unlock more value in the long term for our shareholders. Now, let me provide more details on the business, starting with the investments not yet in rates. We currently estimate over $1 billion in assets are not yet authorized in rates or receiving optimized regulatory treatment.
This represents a rare capital-light path to earnings growth. An example of this is our Sarival wastewater treatment plant in Arizona. The plant is an important and currently operating asset, enabling the local community to grow, but it's not yet in customer rates. Another is our Customer First SAP program, which, as I mentioned earlier, just completed its final implementation.
Our investment in the platform has been approved in six of our smaller jurisdictions but is not yet reflected in customer rates for the majority of our utilities. Our Customer First program is a world-class platform, designed to facilitate greater operational efficiency and utility integration or improved customer service. It's worth calling out that we are now in the typical post-conversion adjustment period for these types of systems. Our system implementation, combined with our most active rate case calendar in our history, is causing some delays in our rate case filings, which we're working through.
In terms of our rate case filings, I also want to call out changes to our expected regulatory calendar in a few of our jurisdictions, namely Missouri, New Hampshire, and California. In respect to these jurisdictions, we're expecting delays of one to two quarters, which will shift the beginning of our recoveries closer to 2026. These delays will, of course, impact short-term earnings. While we have some challenges in the short term, the substantial value here is a disciplined capital-light trajectory to improve returns.
With that, I'll turn it over to Darren.
Darren Myers -- Chief Financial Officer
Thank you, Chris, and good morning, everyone. I'll start with the regulated services group. During the second quarter of 2024, we received the final order for our BELCO utility in Bermuda, authorizing a revenue increase totaling $33.6 million over two years. New rates became effective on August 1, 2024.
In New York, we filed a joint proposal with the New York Department of Public Service staff resolving all contested issues, and a final order is expected sometime in the third quarter. The regulated services group currently has pending 14 rate reviews, totaling $131 million as of quarter-end. Turning now to a brief update on our renewables energy group. Our construction trajectory for renewables remains on track.
Our construction loan balance has fallen to $405 million due to the buyout of the New Market Solar and Shady Oaks II projects. By year-end, we expect that loan balance to round trip back up to similar level where we started the year due to the completion of construction at Carvers Creek and Clearview. I'll now turn to our financial results. Our second quarter financial performance delivered growth in each of our key financial metrics, EBITDA, adjusted net earnings, and adjusted net earnings per share, with double-digit increases compared to the same period last year.
Operating profit growth for both the regulated and renewables business were largely as expected, with regulated growing 7% and renewables growing 31%. Adjusted EBITDA was $311 million, up 12% from the same period last year. Adjusted net earnings were $65.2 million, an increase of 16%. On a per-share level, our second quarter adjusted net earnings per share was $0.09, a 13% increase from the second quarter of last year.
Let me briefly discuss individual EPS drivers. First, weather returned to a more normalized level, contributing approximately $0.03 to the upside year over year. Second, our regulated business operating profit grew organically by $0.02, primarily due to new rate implementations at several of the company's electric, gas, and water utilities. However, this was offset by a negative $0.02 year over year due to last year's benefit of a one-time retroactive rate order in California.
Renewables also organically grew by $0.02, driven by contributions from new wind facilities, Deerfield II and Sandy Ridge II, brought online last year. This was offset by a negative penny due to development cost expenses, in part, as a result of the simplification of our JV entity, as discussed in prior quarters. Depreciation contributed negative $0.02, and interest expense contributed a negative penny, excluding the impacts of our Empire bond securitization. And lastly, tax credits were a little better this year than we had projected, being flat year over year.
Turning now to key financing activities. During the quarter, the company settled the purchase contracts from its green equity units as expected, issuing approximately 76.9 million common shares for proceeds of $1.15 billion. These proceeds were used to reduce existing indebtedness and for general corporate purposes. We ended the quarter with approximately 767 million shares issued and outstanding.
With the conclusion of the equity unit remarketing and as of June 30, 2024, we have refinanced approximately $2.5 billion of our borrowings over the trailing 12 months and we have simplified our capital structure. As Chris mentioned earlier, we are pleased to announce the sale of our renewables business. The transaction proceeds and valuation are compelling. We expect to close the sale in late 2024 or early 2025 and receive net cash proceeds of approximately $1.6 billion after repaying construction financing and other customary adjustments.
Proceeds from the renewables sale, plus our Atlantica shares, will leave us with a very strong balance sheet. In addition, as we look forward, we are making changes to be more self-sufficient. We are looking at spending capital at a level just above requisite maintenance, safety, and environmental requirements in order for the company to digest the impacts of investments already made on behalf of our customers. Once we improve our returns to a more appropriate level, we will have the opportunity to increase our capital spending in a disciplined way.
With regards to our newly reduced dividend, we see our revised dividend payout as roughly 60% to 70% of our optimized core regulated earnings power on our current assets. And although we are not providing guidance at this time, as described earlier, 2025 earnings will be impacted by rate case timing. With that, I'll hand it back to Chris for some closing remarks.
Chris Huskilson -- Chief Executive Officer
OK. Thank you, Darren. In summary, we've achieved several major milestones and are delivering on our plan to transform Algonquin into a pure-play regulated utility. We're reducing our capital spend and dividend to position the company for greater long-term value creation.
As we look forward, we expect to have a solid balance sheet, a healthy payout ratio, a capital-light path toward earnings, and ultimately, dividend growth, all under, for the first time, a focused company with a singular business model. It's a tremendous story, and we're excited for the future. With that, we'll open the lines for calls. Operator.
Questions & Answers:
Operator
Thank you. [Operator instructions] And your first question comes from the line of Rupert Merer from National Bank. The line is open.
Rupert Merer -- Analyst
Hi. Yeah. Good morning, everyone. Congratulations on getting to the conclusion of that deal.
Chris Huskilson -- Chief Executive Officer
Thank you.
Darren Myers -- Chief Financial Officer
Thank you, Rupert.
Rupert Merer -- Analyst
So, if I can start by asking about the net cash proceeds of 1.6 billion, what does the walk-down look like from the sell price? How much of that difference is related to taxes, transaction fees versus construction debt repayment?
Darren Myers -- Chief Financial Officer
Yeah. I mean, Rupert, it's primarily the construction loans. There's very little tax friction on the deal, consistent with our original expectations. So, the majority of it would be construction loans.
And then, you know, really just the transaction costs and some of, you know, the break fees on the APCo bonds would be included in that as well.
Rupert Merer -- Analyst
OK. Great. And that construction debt, is that debt that's currently off balance sheet or yet to be incurred on your development pipeline?
Darren Myers -- Chief Financial Officer
Yes. As I mentioned -- so we -- the balance is lower as of the end of Q2, but we expect it to get back to -- you know, similar to levels that it was, call it, around the 700 million mark or just below that by the end of the year as we continue to build out Clearview and Carvers.
Rupert Merer -- Analyst
Great. And then on the transaction itself, can you walk us through your thoughts on the valuation? How much of this is, say, for your development pipeline versus your operating assets, and what's your perspective on the multiple that you're getting on the deal?
Darren Myers -- Chief Financial Officer
Yeah. Listen, we think it's an excellent multiple and a strong transaction. It's always hard to, you know, decipher what you're getting for the platform. But clearly, you know, we see this as a -- with the earnout at, you know, 12.5 times-type multiple of next year's, you know, EBITDA, like estimated EBITDA.
And, you know, without the earnout, you know, more like close to 11.5. So, you know, really strong multiples. And so, clearly, there was value seen in, you know, what the team has built over 30 years and the strong development pipeline and just the strength of the organization. So, we're quite pleased with where that ended up.
Chris Huskilson -- Chief Executive Officer
Yeah. And, Rupert, I think we said all along that in order for us to get to a sale of this business, we had to see value for the development pipeline. So, you know, we haven't tried to quantify that, but it's pretty clear to us that we did get paid for that.
Rupert Merer -- Analyst
Very good. I'll leave it there and get back in the queue. Thank you very much.
Darren Myers -- Chief Financial Officer
Great. Thanks, Rupert.
Operator
Thank you. Your next question comes from the line of Sean Steuart from TD Cowen. Your line is open.
Sean Steuart -- Analyst
Thanks. Good morning, everyone, and congrats on getting this over the line.
Chris Huskilson -- Chief Executive Officer
Thank you, Sean.
Sean Steuart -- Analyst
Chris, the 60% to 70% payout ratio on EPS, am I to take it that is from the starting point 2025, post this asset sale, or is that relative to where you would expect EPS to get to as your rate cases normalize, I suppose?
Darren Myers -- Chief Financial Officer
Yeah, Sean. It's Darren here. Let me just -- I'll just jump in. The target payout has been set based on our current reg assets, you know, fully earning or earning, you know, closer to fully earning.
You know, clearly, you know, we're -- you know, next year will be our first year as a pure-play regulated utility. We're on a multiyear journey. And as Chris highlighted through his, you know, prepared remarks, you know, we have the most active rate cases we've had in history, plus the implementation of a major system. So, you know, from a timing perspective, we do expect some delays in 2025, with improvements in 2026.
But just for clarity, you know, that dividend rate has been set based on, you know, the current assets, including the billion dollars -- you know, getting recovery on that billion dollars of investments we've already made that's not in rates.
Sean Steuart -- Analyst
OK. And then the follow-on question there is you've indicated constrained capital investment in the regulated base and capital-light approach putting these assets that haven't been recognized into the rate base. How long do you anticipate that capital-light approach to last and how does this feed into your expectation of midterm EPS growth off the reset base?
Chris Huskilson -- Chief Executive Officer
Yeah. Well, certainly, it really depends on how quickly we can advance the rate cases that we need to advance and our success rate on those, but I think we're talking about a few years. I mean, that's the kind of time frame we'd be expecting. And at the end of the day, what we're really focused on doing is, you know, raising our game when it comes to how we work through things with regulators, how we actually make decisions around regulatory investments, and how we just advance this business.
You know, there's a substantial amount of work going on to improve the accountability across the business and to improve the ability of our utility leaders to actually run those businesses. And all those things are going to be important parts of all this.
Darren Myers -- Chief Financial Officer
Yeah, Sean. We have to also -- we have to prove, just to add to what Chris is saying, that we can add more capital in a disciplined way and get appropriate returns with very little regulatory lag. And that's -- you know, I'm with Chris, there's probably a few years of restraint, but, you know, we do see growth after that. And, you know, from the kind of 2025 starting point, we see it -- an ability, really, to grow earnings without growing capital, so -- you know, just by increasing the returns and getting more efficient in the business.
Sean Steuart -- Analyst
Understood. OK. That's all I have for now. Thanks, guys.
Chris Huskilson -- Chief Executive Officer
OK. Thank you.
Operator
Thank you. [Operator instructions] Our next question comes from the line of Nelson Ng from RBC Capital Markets. The line is open.
Nelson Ng -- RBC Capital Markets -- Analyst
Thank you and congrats on the transaction. So, the first question, I just wanted to have a quick clarification. In terms of that 11.5 to 12.5 times next year's EBITDA, are -- is it roughly the run rate EBITDA of the assets, assuming that they're fully constructed and commissioned, and does it exclude the development expenses that you have within that business?
Darren Myers -- Chief Financial Officer
Yeah, you got it, Nelson.
Nelson Ng -- RBC Capital Markets -- Analyst
Yeah. OK.
Darren Myers -- Chief Financial Officer
Yeah, you got it.
Nelson Ng -- RBC Capital Markets -- Analyst
Perfect. And then the next question is more about capital allocation. Like, obviously, you will need to start the hydro sales process shortly, if you haven't already started. But like with the proceeds, can you just talk about capital allocation in terms of debt reduction, share buybacks, and I guess it's utility growth sometime, whether that's next year or the year after?
Darren Myers -- Chief Financial Officer
Yeah, Nelson. I mean, really, for us, it's around getting that strong balance sheet, you know, rightsizing the dividend. You know, primarily, this is all going to debt repayment. And of course, you know, with that strong balance sheet, we will have some flexibility to make different choices from there, but the primary focus is really to be more self-sustaining, you know, earn on what we have today and just be in a position of strength.
Chris Huskilson -- Chief Executive Officer
Yeah. And I'd say, Nelson, we're not ruling out buybacks, but at the end of the day, it's flexibility that we want and strength in our balance sheet. Those are the two things that are primarily on our minds. And so, you know, at the end of the day, we'll make those decisions as time unfolds.
Nelson Ng -- RBC Capital Markets -- Analyst
OK. So, primarily, debt repayment but not ruling out buybacks?
Chris Huskilson -- Chief Executive Officer
Correct.
Darren Myers -- Chief Financial Officer
That's right.
Nelson Ng -- RBC Capital Markets -- Analyst
OK. Thank you. I'll leave it there and get back in the queue.
Chris Huskilson -- Chief Executive Officer
OK. Thank you.
Operator
Thank you. Our next question comes from the line of Mark Jarvi from CIBC Capital Markets. Your line is open.
Mark Jarvi -- Analyst
Hey. Good morning, everyone. Can I --
Chris Huskilson -- Chief Executive Officer
Good morning, Mark.
Mark Jarvi -- Analyst
Can you give us a bit more -- yeah -- yeah, a lot to unpack here, very busy. Congrats on the deal. Can you explain the sort of change in tone around utility spend? Originally, it was that if the balance sheet was in a better position, you got the proceeds, you could accelerate spend. It's kind of going the opposite way here.
I get the issues of regulatory lag, but just trying to understand what's kind of transpired over the last few months here or quarter that really does have you really cutting back. Is it just more challenging regulatory environment, the push-out in some of the rate cases? It does seem a bit of a departure from what you guys were signaling before.
Chris Huskilson -- Chief Executive Officer
Yeah. Well, so we still see that future as has been described as our future. But at the end of the day, we also believe we need to put a substantial amount of discipline into this business. And so, as we work through, you know, accountability and how we want to structure and run our utilities, at the end of the day, you know, the main word is discipline.
And so, you know, we want to be absolutely certain that we understand, when we put a dollar of capital in the business, how we're going to recover that dollar of capital and how we're going to -- how that's going to advance our relationship with our customers, our service to our customers, and ultimately, the value for our shareholders. And so, that's really what we're working as we speak. And as I said, you know, one of my three goals originally was to get the business up and running -- the regulated business up and running as a normal regulated utility. And I've said to people all along for the past year that this utility was cobbled together.
It wasn't running the way I would have expected it to run. And as we, you know, learn more about how it runs and the discipline that it needs in order to be a good solid investment for folks, that's really what we've come to. And that opportunity to do capital-light growth is one that is pretty unique, and we're happy to be able to take advantage of that.
Darren Myers -- Chief Financial Officer
And, Mark, maybe just -- the only thing I'd just add to that is nothing has changed from our view that we originally came out with, which is the ability to invest $1 billion a year in this business. But I would say, you know, I don't know if it's a change in tone because we've been very consistent, we need to get more discipline in the business. And if we don't have that right discipline, we can't go spend the capital. We need to be good stewards of the capital and do good things for our customers and for our shareholders.
So, you're seeing us -- you know, we're not -- we -- we're -- we need to be better on our returns. And once we are there, we will spend more capital.
Chris Huskilson -- Chief Executive Officer
Yeah.
Mark Jarvi -- Analyst
Understood. And then, Darren, coming back to the question of where does the proceeds go, it doesn't seem like it's buyback. You did mention that the APCo bonds was a break fee. So, I assume those get repaid, as well as, obviously, the construction financing.
If you think about then the residual proceeds, what you expect to get from Atlantica, you might be at a point where you don't have to pay more, you know, floating rate debt or variable rate debt and you got your credit metrics. Will you sit on a cash balance for a while? Is that the expectation here as you work through the repositioning of the utility franchise?
Darren Myers -- Chief Financial Officer
Yeah. I think we'll continue to look at what the most optimal capital structures after. I think there's lots of options to repay debt but have the ability to, you know, obviously flex up credit facilities up and down. So, we'll give more of that.
And we do plan, you know, as we've said before, when we get closer to the closure of the renewables business to provide an Investor Day update to give you, you know, lots of the questions that I know you -- that you have.
Chris Huskilson -- Chief Executive Officer
Yeah. And, you know, just remember, a fair bit of time will pass before this cash actually comes to us. So, that -- you know, that's another factor in this. It's going to take some time to get through the regulatory approvals and so on that we need for these investments or these transactions, including AY.
You know, we're not sure exactly when that will get approved either.
Mark Jarvi -- Analyst
Right. And then just, Darren, as a follow-up, improved disclosure, sharing some views pro forma utility business after the close of the sale. I know you're trying to infer to us where the earnings is going to be with the payout ratio, but is there something where you could actually show the trajectory as you go into '25, '26, '27? Is that something where you think you could be a bit more explicit on the earnings outlook on an annual basis, whether that's guidance on a multiyear basis or just the cadence of the EPS, you know, uplift over time?
Darren Myers -- Chief Financial Officer
Yeah, no, absolutely, we will. Like I said, at an Investor Day, we'll give you, you know, as much transparency as we can so that you understand what we're doing and what you should be holding us accountable to. We're not prepared to do that today, but we definitely will. As we get closer to the closure of the deal, we'll give you more.
Chris Huskilson -- Chief Executive Officer
Yeah. And as we get into some of these regulatory processes, we'll have a better idea as to when these things might close, so, you know, that'll be the biggest factor is when do we actually see the proceeds.
Mark Jarvi -- Analyst
Understood. Thanks for the time today. Appreciate it.
Chris Huskilson -- Chief Executive Officer
Yeah.
Darren Myers -- Chief Financial Officer
Thanks, Mark.
Chris Huskilson -- Chief Executive Officer
Thank you.
Operator
Thank you. There are no further questions at this time. I'll turn the call over to Mr. Chris Huskilson.
Chris Huskilson -- Chief Executive Officer
OK. Well, with that, we'd like to thank everyone for their interest in Algonquin. And also, again, I want to thank the team from across the entire business that actually pulled this together, the folks in the renewables side and the folks across the business. This was a tremendous effort and obviously very successful.
So, thank you all for that, and thank you for your time today.
Operator
[Operator signoff]
Duration: 0 minutes
Call participants:
Brian Chin -- Vice President, Investor Relations
Chris Huskilson -- Chief Executive Officer
Darren Myers -- Chief Financial Officer
Rupert Merer -- Analyst
Sean Steuart -- Analyst
Nelson Ng -- RBC Capital Markets -- Analyst
Mark Jarvi -- Analyst
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.
The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
