Q2 2016 Algonquin Power & Utilities Corp Earnings Call
Aug 12, 2016 AM EDT
AQN.TO - Algonquin Power & Utilities Corp
Q2 2016 Algonquin Power & Utilities Corp Earnings Call
Aug 12, 2016 / 02:00PM GMT
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Corporate Participants
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* Christopher Jarratt
Algonquin Power & Utilities Corporation - Vice Chairman
* Ian Robertson
Algonquin Power & Utilities Corporation - CEO
* David Bronicheski
Algonquin Power & Utilities Corporation - CFO
* Ian Tharp
Algonquin Power & Utilities Corporation - VP of IR
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Conference Call Participants
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* Rob Hope
Scotia Capital - Analyst
* Rupert Merer
National Bank Financial - Analyst
* Orhan Eldarov
RBC Capital Markets - Analyst
* Sean Steuart
TD Securities - Analyst
* Ben Pham
BMO Capital Markets - Analyst
* Paul Lechem
CIBC World Markets - Analyst
* Jeremy Rosenfield
Industrial Alliance - Analyst
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Presentation
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Operator [1]
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This is the conference operator. Welcome to the Algonquin Power & Utilities Corporation 2016 second-quarter conference call.
(Operator Instructions)
I would now like to turn the conference over to Christopher Jarratt, Vice President (sic - see slide 3, "Vice Chairman") of Algonquin Power & Utilities Corp. Please go ahead, Mr. Jarratt.
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Christopher Jarratt, Algonquin Power & Utilities Corporation - Vice Chairman [2]
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Good morning, everyone. Thanks for joining us on our 2016 second-quarter conference call. My name is Chris Jarratt and I am the Vice Chair of Algonquin Power & Utilities Corp. Joining me on the call today are Ian Robertson, our Chief Executive Officer; and David Bronicheski, our Chief Financial Officer.
For this earnings call we have a supplemental webcast presentation that you can access from our website. Please go to our homepage www.algonquinpowerandutilities.com where you'll find access instructions. Additional information on our Q2 2016 results are also available for download at our website.
As usual, on this call, we will be providing information that relates to future events and expected financial positions which should be considered forward-looking. I direct you to review our full disclosure on forward-looking information and non-GAAP financial measures also available on our website. We will read the full disclaimer at the end of the call.
This morning Ian will discuss our second-quarter growth highlights, David will follow with our financial highlights and then Ian will conclude with an outlook for the remainder of 2016. We'll then open the lines for questions at the end of the presentation and I would ask that you restrict your questions to two and re-queue if you have additional questions.
With that I would like to turn things over to Ian to present some of our second-quarter growth highlights.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [3]
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Thanks, Chris. Good morning, everyone. I appreciate you taking the time today to listen in to our Q2 2016 earnings call. We are coming to you from our office here in Oakville. It's going to be a scorcher here in Toronto today. I guess with the weather this summer, over the past couple of months we are pleased to have been in the solar business.
I would like to start with a few of the highlights of our businesses in second-quarter 2016. David's going to give you some financial results a little bit later, as Chris had mentioned. As I think about Q2 this year and how I define it, there's kind of three things that I would like to highlight. First and perhaps most importantly I think everybody is -- I hope everyone's comfortable that the financial results for the quarter fall solidly into the category of in line with expectations. Our CAD99.2 million of adjusted EBITDA for the quarter represents close to 25% increase over the same quarter last year. But given that we all own this company one share at a time, we're probably most pleased that the per-share results are equally solid with growth in Adjusted Funds from Operations and adjusted Earnings per Share of close to 40% in each category.
Second of all, and as a key component of our strategy, the diversified business mix within our independent power and regulated utility business, continued to show its worth as a risk mitigant and value creator. Looking at our power portfolio, the geographic and modality diversification of fleet again proved to benefit in our Q2 power production, helping to smooth results in the face of naturally occurring volatility of wind and hydrologic conditions across Canada and the US. On the regulated side of the business, in Q2 our diversification across electricity, natural gas and water distribution businesses reduced volatility in our results. It continues to be an important component and contributor to shareholder value.
And then I guess lastly and perhaps importantly for the future, we believe that the proposition for shareholder value creation through growth remains solidly on track. While the Empire transaction within the distribution business group looms large, given its size, and I'll speak to that in a moment, the recent commissioning of our 200 megawatt Odell wind facility in Minnesota shows our generation business group will and can contribute -- continue to contribute to meeting our growth objectives.
Additionally, our 75 megawatt Amherst Island wind project in Ontario is now moving purposefully into construction with the dismissal of the appeal of our renewable energy approval, which you received late last week. And I think we certainly need to thank our partners in the development team for their dedication and persistence on Amherst Island. We're looking forward to a commercial operation state finally for that project in the next 18 or so months.
As to the distribution side of our business, I think we've delivered solid growth including several rate cases successfully prosecuted over the past year. And we are pleased that the Park Water acquisition is also solidly contributing with their first full quarter of results.
Let's turn our attention to the Empire acquisition. We are pleased to report that the efforts to reach approval of the transaction are progressing in line with our expectations. Following our conference call last quarter we're pleased that the Empire shareholders voted overwhelmingly in favor of the agreement and plan of merger, voting 99% in favor of the proposed transaction.
More recently, we filed agreements with the Public Service Commission in Arkansas which recommend approval of the transaction. We have also filed a similar joint stipulation agreement with the Missouri Public Service Commission. We're looking forward to a hearing in Missouri which is scheduled for the end of the month.
We are working well with the Empire team as we engage with the respective regulatory agencies and progress toward the approval of the transaction. We're quite impressed with the connections and the depth of the regulatory relationship that the Empire team brings. And while there is much still to be done, we still remain focused on a conclusion of the transaction early in the first quarter of next year.
And with that in terms of the summary for second quarter, David, why don't you take it away with some of the financial results.
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David Bronicheski, Algonquin Power & Utilities Corporation - CFO [4]
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Thanks Ian, and good morning everyone. We're pleased to have reported solid financial results for the second quarter of 2016. Our adjusted EBITDA in the second quarter continued to show impressive growth totaling CAD99.2 million, which is a 22% increase over the amount reported in the same quarter of 2015.
Our diversified portfolio and the success of our growth program were clear contributors to our improved performance. Compared to the second quarter of 2015 the increase in EBITDA was mainly due to CAD13 million of additional EBITDA for our newest utility, Park Water, along with another CAD3.7 million from positive rate case settlements. EBITDA on our generation side was consistent with the previous year. Earlier spring runoff in Ontario in the Maritimes in Q1 of this year meant that those hydro facilities saw less production in Q2 compared to last year.
For the three months ended June 30, just a few highlights, our adjusted EPS came in at CAD0.11 per share and a total revenue is CAD222.8 million. Adjusted earnings grew by CAD0.03 over 2015, main contributor was growth from our operating facilities and lower income taxes. Adjusted Funds from Operations increased to CAD77.6 million, which is an impressive 41% improvement over the same quarter last year.
As previously reported, we're pleased to have been able to satisfy our equity capital needs for 2016, including the equity required for Empire. The CAD1.15 billion of debentures we raised at the time we announced the transaction are expected to convert to equity and the final installment will be due upon the expected close of the Empire acquisition in early 2017.
More recently, in fact just last week, we closed our $180 million tax equity financing for Odell wind facility. With respect to our debt requirements we are currently preparing to meet with key fixed income investors through the remainder of 2016, and to be active in the US debt capital markets come the fall to complete the debt financing for Empire. We remain confident that we have strong access for the capital markets to fund our growth program.
I will now hand things back over to Ian.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [5]
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Thanks, David. And before we open it up for questions, as we stand here kind of in the midpoint of 2016, I think we look back over the first six months and we look forward to the next coming six months. And we are pleased that there is a number of achievements in the rear view mirror and some positive milestones which are in sight through the windscreen, as we focus on completing the growth plan for 2016 and frankly beyond.
As I mentioned, and David highlighted, commissioning our 200 megawatt Odell wind facility in Minnesota was an important milestone. But we actually fully expect to complete another 160 megawatts of capacity which is currently under construction before year end. That's comprised of our 150 megawatt Deerfield wind facility in the northern eastern part of Michigan. It's advancing well; all the foundations are poured; 20% of the 75 turbines are already erected. They're putting them up at the rate of about 6 a week. So the end is in sight, certainly for that project.
In California, construction of our 10 megawatts at Bakersfield II solar facility which is an expansion of our 20 megawatt Bakersfield I solar facility, it is just about complete now and we think operation will be commencing early next quarter. We are continuing to prosecute rate cases across our distribution business group as we continue to make organic investments in the capital of our utilities; specifically California, Arizona, New Hampshire, figure prominently into that work.
The revenue requirement increases of these three states is close to $24 million, so significant growth expected from those activities. In California alone we have reached settlement for close to [CAD10] million and we are expecting the rate decision later this quarter with, I'll mention that rates are retroactive back to the start of this year.
On the Empire front we're working effectively, we believe, with the Empire management team to progress through the approval steps in the four states in which Empire serves its customers. Alongside that I think we have good line of sight to the key components involved in ensuring a smooth integration and seamless transition of Empire and its customers into the operation of Liberty Utilities which is clearly our objective.
And lastly, I think we remain focused on strengthening our current set of opportunities in the generation business, as we add new initiatives to the to-do list, if you will, from a growth perspective. We think that the backdrop for renewable power generation, particularly in the US, has not ever really been brighter and so we're obviously looking forward to adding more projects to that to-do list.
So operator, with that I would like to open the lines up for questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Rob Hope, Scotia Capital.
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Rob Hope, Scotia Capital - Analyst [2]
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Thank you and good morning everyone.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [3]
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Good morning Robert.
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Rob Hope, Scotia Capital - Analyst [4]
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Just a couple questions on your generation business. Just to clarify, Amherst, in the slides that says construction is starting, is that project fully FID'd now?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [5]
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It is, and it has reached final investment decision. And I think Robert, as you are obviously aware, the real gating item to getting going in earnest was the dismissal of the REA appeal which happened, I think, on August 2 or 3 of this month.
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Rob Hope, Scotia Capital - Analyst [6]
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All right. That is helpful. Just when I look at Chaplin, Great Bay and Val-Eo, just wondering when do you think you can maybe move that from the in development bucket into the construction bucket?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [7]
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Well, I certainly -- let's start I will say with the easiest. Val-Eo is moving ahead, it's a relatively small project as I'm sure you can appreciate, and so I don't think it's a very momentous FID decision, we're working our way through it. To be frank I think it's going to happen pretty seamlessly that construction will start on that project this fall.
With respect to Great Bay solar, we're moving ahead on that and in fact that project does have final investment confirmation. That timing of it is a little bit uncertain as we work our way through some interconnection issues and some final design with respect to land, how much over build, that sort of stuff. We are committed to that one.
Chaplin is a little bit, I'll say, more complicated. As you probably saw in the MD&A, we are looking at some potential reconfiguration of the project to be more sensitive to some of the environmental impacts of the project. We're working cooperatively from our perspective with the Ministry of Environment in Saskatchewan and frankly, SaskPower. We had tried to give some indication that before -- before the end of this year we'll have some pretty clear direction on the timing of FID for the Chaplin project.
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Rob Hope, Scotia Capital - Analyst [8]
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All right. That is helpful. One last question.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [9]
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You are allowed two, Rob, so go ahead.
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Rob Hope, Scotia Capital - Analyst [10]
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With the second half of Odell being taken in, would you give any thought to potentially monetizing some of your renewable assets given market conditions and relatively lofty valuations to fund your other businesses?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [11]
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Well it's a great thought. I think without telling stories out of school, obviously the yieldco phenomenon that existed in the US capital markets, and I will say last summer and beyond, was obviously a pretty enticing opportunity in terms of realizing some of the value that is implicit in these assets. As we kind of look at what is happening right now, while the yieldcos themselves have collapsed, clearly the demand and desire for yield hasn't gone away. I think that is what you are alluding to.
We always are balancing whether we want to be buyers or sellers in the marketplace and so -- it hasn't quite pushed us to be sellers, we would be remiss on behalf of our shareholders if we didn't keep our eye on it and look at it, should we be recycling capital from some of our committed projects into the pipeline we have. Rest assured, Rob, it's on the radar scope. I don't think, as I said, there's anything imminent from our perspective, but man it is hard not to look at these valuations, as you allude to.
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Rob Hope, Scotia Capital - Analyst [12]
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All right, thank you for the insights.
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Operator [13]
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Rupert Merer, National Bank Financial.
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Rupert Merer, National Bank Financial - Analyst [14]
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Good morning, everyone.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [15]
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Good morning.
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Rupert Merer, National Bank Financial - Analyst [16]
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You mentioned the market in the US for renewable power is very positive right now. What's going to pace your growth in the US and in the wind market? Is it site access, permits, or PPAs, and can you give some color on the market for PPAs today?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [17]
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Well, I think I've probably, if you asked me which one of those factors is probably the gating item from a project perspective, I would say it's probably PPAs that would be the issue that is driving a project. As you know, Lord knows there's lots of land particularly in the Midwest where the wind resources are strong, and certainly there's I think a fair degree of clarity to the permitting guidelines. So it's access to PPAs.
I think in terms of -- but what's helping that, so what's helping the opportunity for PPAs -- and I guess we are actually on both sides of this analysis, is when you look at the ability to have the US Treasury effectively subsidize the price of power through the PTCs, it's hard not to think that it would be prudent as a utility to the extent that you need more energy to satisfy retirements in the coal space or other forms of generation, that you should be taking advantage of some of that CAD20 or CAD25 power, which is available right now from the wind industry.
So, I mean I think we are hopeful that those forces continue to encourage utilities such as Northern States Power who's the off-taker for Odell, from our perspective or, Wolverine, who is the off-taker for Deerfield, to take advantage of the full value of the PTCs. As you are aware Rupert, they kind of step down, it's a five-year goodbye to the PTCs, but this year you can harness 100% of those PTCs and so we are seeing lots of activity. People are considering it.
We are thinking about it ourselves as we think about Empire. As you know, Empire is bringing 1400 megawatts worth of generation to the mix, a lot of it which is coal. So the question is, should Empire be thinking about taking advantage of this by taking advantage of the ability to get 100% of the PTCs. So we're active in the marketplace. I think the permitting environment, certainly the appetite for yield and therefore cost of capital, the availability of tax, they are all positive contributers which kind of are the basis for my statement, Rupert, that there is a fair number of tailwinds, pardon the pun, to the development environment in the US.
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Rupert Merer, National Bank Financial - Analyst [18]
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Okay. Great. And then secondly more of housekeeping question, on Calpeco you had the positive CAD10 million revenue increase for that settlement in Q2. I believe you were looking for the final permit decision in Q2 originally but it's now moved to Q3. Can you discuss the timing of the final decision? And is it correct to assume that we should see the full revenue increase in Q3 with full retroactive payments for Q1 and Q2 also in Q3, if that final decision comes through?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [19]
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Yes. Let me kind of give you a 30 second primer on the regulatory approval process for the rate case. As you accurately point out, we reached agreement in May of last year and filed a settlement agreement with between ourselves and staff. That goes in front of an administrative law judge; administrative law judge reviews the settlement.
In this case, I would say interestingly, the administrative law judge rather than just stamping it had a number of questions on some of the accounting treatment that we employed in the calculation of the rate case and the agreed-upon settlement. We went -- and we went back, and we and staff responded to that. I don't think there was any issues. But unfortunately the occasion probably six weeks -- eight weeks longer in terms of the administrative law judge's review, that proposed decision gets issued by the administrative law judge and then it gets ratified by the commission.
And so that's kind of the process behind it and so while it is an annoyance with respect to the delay, the second part of your question is correct which obviously takes the angst off, which under the memorandum agreement we have in the state of California, the revenues associated with the utility and that settlement are retroactive back to January 1. So in some respects the delay is an aggravation but it didn't cost us any money if you want to think of it that way, Rupert.
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Rupert Merer, National Bank Financial - Analyst [20]
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So it could come as a lump in Q3?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [21]
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Yes. But I think -- I would say nobody is not being transparent and say a big chunk of that is obviously related to revenues that were notionally attributed to Q1 and Q2. Unfortunately just the way the accounting works is, we weren't able to recognize those revenues until a final order from the commission is in hand. That's just kind of the way the regulatory accounting treatment works.
But you're absolutely right, the nice thing is we'll get the check, we will get the revenue in some respects in Q2 -- in Q3.
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Rupert Merer, National Bank Financial - Analyst [22]
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Excellent, thanks very much.
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Operator [23]
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Orhan Eldarov, RBC Capital Markets.
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Orhan Eldarov, RBC Capital Markets - Analyst [24]
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Hey, guys. Congrats on a good quarter.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [25]
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Thank you.
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Orhan Eldarov, RBC Capital Markets - Analyst [26]
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I want to start off big picture, 30,000 foot view question, you kind of touched on it earlier saying that the US renewable market is quite hot right now, especially in wind. As you mentioned the PTCs are going to be declining over time. So what we've seen in the market with some other developers is there is sort of a rush to put down that 5% deposit to be eligible for the full PTCs, right?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [27]
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Yes.
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Orhan Eldarov, RBC Capital Markets - Analyst [28]
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So have you been seeing any of that? Would you be willing to do that? And sort of to piggyback on that, we've seen some people who even put deposits, say, on a large turbine before fully having a wind project all set up, and kind of banking (multiple speakers).
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [29]
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There are two parts to your question. One is, your fact pattern is absolutely correct, which is the PTCs are declining. If you want to lock in the 100%, you do need to safe harbor those turbines. We have and that involves kind of putting down 5% of the expected capital cost of your project, which actually translates to 8% or 9% if you want to buy turbines to satisfy that cost obligation, 8% or 9% of the cost in the form of turbines.
One way to look at it is that, if you don't lock up the turbines today, and following Rupert's earlier question about PPAs and it's a competitive process, you will not be competitive if you are competing in that marketplace with 80% PTCs against some guy who has locked up turbines and has 100% PTCs. So therefore, in order to preserve our competitiveness, we too will be locking up turbines, I think which is the second part of your question. I think we are sufficiently confident and comfortable in our ability to sort of locate projects and find opportunities to deploy the turbines that we were making commitments for, so that we -- that we can lock those down.
And just to put that in context to the extent that we are able to commit say CAD50 million to purchasing turbines, there's kind of a 12 times multiplier effect, that represents about CAD600 million worth of PTC wind projects for which you would've locked up 100% PTCs. I think it's not a strategy that we developed; other people are doing it right now. But to be frank, if you want to remain competitive in this market place, you'd better have the stuff to be able to go along turbines. So the short answer to your question I guess is, yes, and yes.
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Orhan Eldarov, RBC Capital Markets - Analyst [30]
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Okay that's very helpful, I guess with your development expertise that should not be too much of a problem. And then the next question is sort of a more detailed one. I was going through your financials and I saw that there was an CAD8.6 million cash gain from a sale of a long lived asset. I was trying to figure out the cash flow stream of that transaction. I saw a CAD8.2 million gain on the income statement and then CAD800,000 write-down Can you just explain what that is all about? Was there something actually sold? Did that go into the cash flow from operations at all?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [31]
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Sure. Well, I am going to turn things over to Chris Jarratt, because I think what you are referring to is the conclusion of a 15-year odyssey on which we have been on.
So Chris, why don't you give a little color on that one?
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Christopher Jarratt, Algonquin Power & Utilities Corporation - Vice Chairman [32]
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Thanks. I think we are quite pleased with that situation, and I can speak personally. We are kind of pleased for probably two reasons. The first is, it is the last of the related party issues that were a holdover from the income trust days, and as Ian said that was a 15-year -- it has been a 15-year odyssey.
And I guess the second thing I am pleased about is I will never have to use the word Trafalgar and power in the same sentence again. We are done. It is good news that we have resolved the situation and it was a result in our minds quite favorably.
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Orhan Eldarov, RBC Capital Markets - Analyst [33]
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So that CAD8.6 million cash gain is what you guys were talking about in the notes of the financials with respect to the Trafalgar settlement, $6.6 million?
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Christopher Jarratt, Algonquin Power & Utilities Corporation - Vice Chairman [34]
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It is $6 million and change US, converted to Canadian.
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Orhan Eldarov, RBC Capital Markets - Analyst [35]
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That's good. I'm assuming you guys haven't backed that out from like Adjusted Funds from Operations?
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Christopher Jarratt, Algonquin Power & Utilities Corporation - Vice Chairman [36]
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Yes. It is a one-timer. We sure hope it is a one-timer.
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Orhan Eldarov, RBC Capital Markets - Analyst [37]
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That's fair. I guess that write down, is that some accounting treatment of that or is that completely unrelated?
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Christopher Jarratt, Algonquin Power & Utilities Corporation - Vice Chairman [38]
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It is completely unrelated. That would be a different thing.
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Orhan Eldarov, RBC Capital Markets - Analyst [39]
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It was just labeled long-lived asset so I couldn't tell based on the financials. That is it for me, thanks a lot.
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Christopher Jarratt, Algonquin Power & Utilities Corporation - Vice Chairman [40]
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We appreciate the call.
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Operator [41]
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Sean Steuart, TD Securities.
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Sean Steuart, TD Securities - Analyst [42]
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Good morning everyone. A couple of technical question on Park Water. I guess when we work through the math, the entire EBITDA contribution is going to come in around CAD35 million. I am wondering what chunk of that would be attributable to Mountain Water?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [43]
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Well, in big-picture, and sort of thinking about it for let's just think about it for 2016, about 20% of the EBITDA from Park would probably be attributed to Mountain Water.
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Sean Steuart, TD Securities - Analyst [44]
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Okay. And with respect to Mountain Water, there's some mention in the MD&A about the FPO contract liability. How does that, if at all play into the sale of that chunk?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [45]
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Well, I will start by saying that the final details of the sale or the condemnation aren't really complete. There are ongoing hearings.
There is ongoing discussions that are needed to be had between us and the city and one of the aspects of those discussions are those developer contracts. And they are really in respect of capital that the developers contributed to the utility to provide service for new development and for real estate development. In which capital is committed to be refunded over 40 years.
So while the headline number might be CAD22 million, when you look at sort of the actual net present value, the discounted value, it's obviously significantly less than that. The second thing that I would say is, it is our belief and I think precedents across the US would sort of say that the capital, the assets and those 40-year refunding obligations really belong to the utility.
And so, certainly part of the discussion that is going to be ongoing between us and the city is, what happens to that refunding obligation? As I said, it is over 40 years. Certainly I think that the headline number probably is a little bit misleading in terms of the size of what was being discussed here. Particularly in the context of -- there are a lot of other things are being debated as well. Which is post-notice interest, legal fees, taxes. There's a bunch of moving parts, Sean, but that gives you a little bit of color to the disclosure in the MD&A over those developer contracts.
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Sean Steuart, TD Securities - Analyst [46]
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Great. Thanks, Ian. The rest of my questions have been answered.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [47]
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Thanks Sean.
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Operator [48]
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Ben Pham, BMO.
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Ben Pham, BMO Capital Markets - Analyst [49]
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On the last topic, if you guys do get the 100 plus on Mountain, isn't this transaction more accretive than what you initially expected? If you are losing 20% EBITDA but getting back one-third of the capital you put in?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [50]
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And -- I mean -- I will start with the short answer, Ben, yes I'll go with the longer answer which is, we are hardly in the business of going through the heartache and aggravation of buying utilities only to sell them for slight premium and gains. It would probably be the rationale that made us not frightened of buying Park Water in the face of the condemnation process that was underway. And as I said earlier, in general, condemnation is not generally one of the things that is feared by utilities. But let's not kid ourselves, it's an aggravation to try to build a business and then have it get smaller on you.
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Ben Pham, BMO Capital Markets - Analyst [51]
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Are you still interested in Montana? I know one part of the reason you wanted to get in there or buy Mountain was to expand?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [52]
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Sure. And I think part of the -- I think we went to a fair amount of trouble to work on the regulatory relationship. You know, Ben, that part of our game plan in terms of our regulated utilities is to build a constructive and transparent relationship with the regulators in all the states that we serve, and Montana was no different. You saw that there was a settlement there. We, I think we reached agreement constructively with staff and the commission to sort out some of the issues that had arisen during the acquisition.
It is disappointing, I agree with you, it is disappointing, notwithstanding the fact that as you said that the Park water transaction is more accretive without Montana in it, but CAD103.5 million in cash. But to be frank, we're always looking to capitalize on the jurisdictions in which we go into, and Montana is no different. That's what I'm saying is, I think I agree with you. It's an aggravation and an annoyance, but the solve for that aggravation is, as you said, is a condemnation proposition. Which I think leaves us whole, and then some maybe.
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Ben Pham, BMO Capital Markets - Analyst [53]
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My second question is on your rate cases, and as you go through mid-2017 looking at the table with revenue increases, are you pretty much effectively complete your -- I guess your tongue-in-cheek orphan strategy that has been a pretty good source of earnings?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [54]
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When you say complete, we own the utilities. The rate cases are really, they are the culmination of a capital investment cycle for utilities. So why don't buy the utility and invest capital in the utility? And then ultimately the utility compact allows us to go back and seek an increase in our rates to provide us a return on a return of that increased capital. To be frank, that cycle never ends for us in terms of continuing to invest capital in our utilities.
And I think we've got probably four or five years' line of sight of projects and opportunities to continue to invest in those utilities. You know, initially some of those utilities provided a real -- were very starved for capital, and I think there still are utilities within our portfolio that can benefit from significant investment, but that never ends for us, to be frank. As I said, I think our commitment is always to invest more capital in our utilities, to replace depreciating assets, to take advantage of energy efficiency opportunities. I don't think it ever ends, Ben.
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Ben Pham, BMO Capital Markets - Analyst [55]
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I guess I was just more referring to the ROEs that you have been able to create a lot of value before what your premiums, low ROEs. You've moved those ROEs over time, now you are paying a bit more higher premiums but higher-quality earnings stream and maybe more of a CapEx type of story now.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [56]
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Yes. I mean I think you have kind of touched on another aspect which is, maybe to rephrase the question, tell me what's happening in the M&A space within the regulated utilities in the US. I think your inference is absolutely correct. It's an aggressively competitive marketplace right now.
You look at where utilities are trading, and the thought of being able to buy utility for 1.1 times rate base, that would be a difficult proposition right now in the industry, even with, as you point out, sort of the thought of taking orphans, those orphans have a great deal of value and selling utilities recognize that. Having said that, I think we continue to create significant value, notwithstanding the fact, as you said, we've moved upscale.
I think the Empire acquisition represents a significant transformation for our organization, but I think we've done it at a price point and with a proposition which is accretive to value going forward. I think we're thrilled at having those customers and that generation and the opportunity to continue to invest in that utility.
But you're absolutely right, I think the observation is, we did not get it for 1.1 times rate base. Having said that, it remains accretive to earnings and value for the utility. So we are not demoralized by the change in the marketplace, but it would be remiss if we did not at least acknowledge it.
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Ben Pham, BMO Capital Markets - Analyst [57]
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Okay. That is helpful. Thanks everybody.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [58]
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Thanks, Ben.
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Operator [59]
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Paul Lechem, CIBC.
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Paul Lechem, CIBC World Markets - Analyst [60]
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Thank you, good morning.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [61]
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Hey Paul, didn't we already have someone from CIBC? You guys are trying to get more questions in? I am just kidding you. Go ahead.
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Paul Lechem, CIBC World Markets - Analyst [62]
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A couple questions on some of your other investment opportunities. After the cancellation of the Kinder Morgan pipeline, I think you were revisiting the opportunity to build compressed natural gas in the Northeast. Just wondering if that project is still a go, or where you are at with that one?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [63]
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Yes, your memory is serving you correctly. That just because Kinder Morgan, I will say proverbially fell on their sword with respect to the Northeast Energy Direct pipeline, that didn't change the demand dynamics in the Northeast natural gas sector, which was the underpinning of support for the pipeline. And so, we are continuing, both on the behalf of Energy North and New England Gas, which are our two LDCs in the sector, but the other LDCs as well to explore opportunities to meet the needs going forward.
Our LNG plant, I think we were pleased to acknowledge that it received support from the Mass Department of Public Utilities in the form of a confirmation of the customer, which is National Grid, to an agreement that we had reached with National Grid to buy -- it is actually liquefied natural gas off that facility. And so consequently we are moving forward to reach final investment decision ourselves on that project.
But I'd say that the cancellation of the Northeast Energy Direct has actually probably encouraged us to look at expanding the scope of that project beyond what it was originally sized for, to meet the needs of not only ourselves and our utilities but other utilities. It's definitely going ahead from my perspective in the size that it was conceived and I think there's an opportunity to make it bigger.
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Paul Lechem, CIBC World Markets - Analyst [64]
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And remind us what is the current scale of that project as currently conceived?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [65]
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It's about CAD130 million in total capital investment. I will point out that we 50% partner in it, so it's only about CAD65 million. But to the extent that we are able to conceptualize bigger storage and bigger liquefaction and gasification, you could quite easily imagine another CAD250 million being associated with that. With that expansion.
You know, will that unto itself replace the CAD400 million hole that Kinder Morgan's cancellation of the NED occasion in our growth pipeline? Probably not absolutely completely; but I think it's a big step to try to buttressing the growth in our transmission group.
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Paul Lechem, CIBC World Markets - Analyst [66]
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Thanks, Ian. Just lastly from me, given what your comments were earlier around how competitive projects have become in North America for renewables and utilities, what are your activities outside North America? Have you got any business development ongoing outside in either Europe or South America? Or elsewhere?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [67]
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The short answer is that, I will say yes, we do. I think we would be remiss -- and we have said we are opening our eyes up to possibilities outside of the boundaries of Canada and the US. I think Mexico is obviously something which is looming large. They are going through a relatively significant restructuring of their electrical system and it's creating opportunities for private investment in wind and solar. We have looked at OECD countries as well.
I think we are pleased and comfortable that the growth pipeline that we have in front of us, both with on the generation and the distribution side, makes that examination take place with measure and it can be paced without stress. And what I mean by that is, I don't think you want to jump into a foreign market without having taken lots of time to fully understand that foreign market. Because for that foreign market -- it is foreign to you; it's actually the home market to somebody else. And it would be very easy to find yourself not fully understanding all the yins and yangs of that foreign market, so we're taking our time. But rest assured, Paul, that we are buying airplane tickets outside of Canada and the US for our BD guys right now.
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Paul Lechem, CIBC World Markets - Analyst [68]
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Okay. Thanks, Ian.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [69]
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Thanks, Paul.
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Operator [70]
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(Operator Instructions)
Jeremy Rosenfield, Industrial Alliance.
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Jeremy Rosenfield, Industrial Alliance - Analyst [71]
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Thanks. I hope those BD guys get some first-class tickets.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [72]
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No, that is actually not the case, Jeremy. I am sorry.
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Jeremy Rosenfield, Industrial Alliance - Analyst [73]
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In terms of just some growth opportunities, I've seen a lot of power plants in the thermal space, natural gas power plants, particularly in the northeast US that have maybe been offering better valuations than wind and solar in the current market. And I'm just kind of curious whether there may be an opportunity to be opportunistic and expand the thermal business, or just from a strategic perspective, whether that probably just doesn't make sense, and there are better investment opportunities in other places you would like to be spending the money?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [74]
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It is a great thought, but I guess my response to the question is, you really better invest in what you know most. And the problem with a natural gas plant, in today's market, is that without a long-term contract, really are making a bet on what the average system heat rate is, how your plant is likely to fare against the average system heat rate, you've got to manage gas availability. It's a very complex understanding which is as much founded on understanding the markets and the confluence of the electricity and natural gas prices as it is on understanding the technology of converting that natural gas into electricity.
I don't think I'm embarrassing the organization to say, that's probably not one of our biggest core competencies. And so while it might appear enticing to look at a particular power plant opportunity and say, oh gosh, we should jump into that, I think it's something that we approach with a fair amount of caution. Because if you find yourself on the wrong side of a heat rate curve, or find yourself with constraints from a natural gas supply perspective, that value proposition can evaporate in a heartbeat.
And so, I think of those projects largely as being highly operationally leveraged because of the demand for natural gas. And so I think the short answer is, we are pretty good at renewable energy and I think sticking to our knitting is probably our strategy. I think that to the extent that we want to go beyond that, it's probably more geographic diversification rather than modality diversification, kind of apropos of Paul's earlier question.
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Jeremy Rosenfield, Industrial Alliance - Analyst [75]
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Sure, make sense. And then, I guess on the Great Bay solar project, has tax equity been secured already for the project, or is the financing process still ongoing there?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [76]
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It is still ongoing. We are in active conversations with a tax equity provider for that project. I think we like to think that this organization is built as a core competency and understanding of the tax equity marketplace, I think our competency at negotiating and meeting the needs of the tax equity community. And so I am pleased that we don't see it as the kind of the hurdle that perhaps we once did, because we've got a group of three or four people who that is what they are focused on. And so we are confident that the tax equity is available for Great Bay, we just obviously have not announced that transaction yet.
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Jeremy Rosenfield, Industrial Alliance - Analyst [77]
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Okay. Perfect. Those are my questions. Thanks.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [78]
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Thanks, Jeremy.
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Operator [79]
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This concludes the question answer session. I would like to turn the conference back over to Mister Robertson for any closing remarks.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [80]
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Well thanks, everyone. We appreciate everybody taking the time for our Q2 conference call. And appreciate all of the questions that were posed. With that, thanks very much; we'll speak to you next quarter. And please stay on the line for our riveting disclaimer from Ian Tharp.
Go ahead, Ian.
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Ian Tharp, Algonquin Power & Utilities Corporation - VP of IR [81]
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During the course of this conference call we may have made statements relating to the future performance of Algonquin that contain forward-looking information, including statements with respect to the expected performance of the Company, its future plans and its dividends to shareholders. While these forward-looking statements represent our current judgment based on certain material factors or assumptions, actual results could differ materially from such forward-looking statements made today. Additional information about the material factors that could cause actual results to differ materially from such forward-looking information, and the material factors or assumptions that were applied in making any forward-looking statement, as well as risk factors that may affect the future performance and results of Algonquin, are contained in the results press release and Algonquin's public disclosure documents filed by the Company on SEDAR at www.sedar.com. We undertake no obligation to update these forward-looking statements, unless required by law.
Furthermore, during the course of this conference call we have referred to certain non-GAAP financial measures including, but not limited to, adjusted net earnings, adjusted EBITDA, Adjusted Funds from Operations, per cash, or per share cash provided by Adjusted Funds from Operations, and per share cash provided by operating activities. These non-GAAP measures do not have any standardized meaning under GAAP and may not be comparable with other non-GAAP or non-IFRS financial measures presented by other companies. We refer you to our MD&A for more information about these non-GAAP measures, including a reconciliation of the non-GAAP measures to the corresponding GAAP measures where a comparable GAAP measure exists. Thank you.
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Operator [82]
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This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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