Q3 2016 Algonquin Power & Utilities Corp Earnings Call
Nov 11, 2016 AM EST
AQN.TO - Algonquin Power & Utilities Corp
Q3 2016 Algonquin Power & Utilities Corp Earnings Call
Nov 11, 2016 / 03:00PM GMT
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Corporate Participants
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* Christopher Jarratt
Algonquin Power & Utilities Corporation - Vice Chair
* Ian Robertson
Algonquin Power & Utilities Corporation - CEO
* David Bronicheski
Algonquin Power & Utilities Corporation - CFO
* Alison Holditch
Algonquin Power & Utilities Corp. - IR
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Conference Call Participants
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* Rob Hope
Scotiabank - Analyst
* David Castagna
Raymond James - Analyst
* Jeremy Rosenfield
Industrial Alliance Securities - Analyst
* Nelson Ng
RBC Capital Markets - Analyst
* Robert Catellier
CIBC World Markets - Analyst
* Rupert Merer
National Bank Financial - Analyst
* Ben Pham
BMO Capital Markets - Analyst
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Presentation
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Operator [1]
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Welcome to the Algonquin Power and Utilities Corporation 2016 third-quarter conference call.
(Operator Instructions)
I would now like to turn the conference over to Christopher Jarratt, Vice Chair of Algonquin Power and Utilities Corporation. Please go ahead, Mr. Jarratt.
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Christopher Jarratt, Algonquin Power & Utilities Corporation - Vice Chair [2]
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Good morning, everyone. Thanks for joining us on our 2016 third-quarter conference call. My name is Chris Jarratt and I'm the Vice Chair of Algonquin Power and Utilities Corp. And 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 supplemental webcast presentation that you can access from our website. Please visit our home page where you will find access instructions and additional information on our Q3 2016 results. Today we'll be providing information that relates to future events and expected financial positions which should be considered forward looking and 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 third-quarter growth highlights. David will follow with the financial highlights and then Ian will conclude with a few thoughts on the events of this week and our outlook for the remainder of 2016 and early 2017. We will then open the lines for questions at the end of our earnings presentation. And I would ask that you restrict your questions to two and then re-queue to allow others the opportunity to participate. I'd also like to add that given today is November 11, in the event the call extends to 11:00 AM, we will be observing a moment of silence in recognition of Remembrance Day. Now I'd like to turn things over to Ian to present our third-quarter growth highlights.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [3]
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Thanks, Chris, and good morning, everyone. Thanks for dialing in today. We're speaking to you from our head office here in Oakville where it's a windy and sunny day. So I guess that's good for us in the wind and solar energy business. As Chris says, just want to reiterate the importance of today's Remembrance Day and so we're obviously mindful of this in terms of scheduling our call. While the call rarely goes over an hour, I just want to repeat that I think out of respect that at 11:00 AM we'll hold the call for a couple of minutes of silence.
So with that said, I'll start off with a review of the main highlights from our businesses in Q3. While David will detail our financial results later in the call, I think we see the Company as being three for three this year in terms of delivering another quarter of reliable financial performance in 2016. CAD91 million or so in adjusted EBITDA represents 30% over what we did this quarter last year. We posted solid quarter-over-quarter growth and adjusted funds from operations and adjusted per share earnings of 12% and 50% respectively.
Given the importance of growth in terms of dealing with potentially rising interest rates, we saw Q3 as meeting some important milestones in terms of our growth. Within the non-regulated generation business group, we brought the 200 megawatt Odell wind facility into commercial operations in July. September 15 saw us consolidating the entire project with the acquisition of 100% of the interest in the Odell facility.
I'm also pleased with the progress that's being made at our 75 megawatt Amherst Island wind project. Subsequent to the end of Q3, we issued a notice of commencement of construction to the permitting authorities. The notice advises of our intention to start certain construction activities. And while work is expected to commence shortly on the docks needed to access the island, the balance of construction activities will commence following the completion of certain consultation and planning as contemplated in our permitting agreements. As always, we thank our partners and the development team for their dedication on Amherst.
Within our rate regulated deliberation business, we're pleased to report that efforts to complete our merger with the Empire District Electric Company are progressing in line with our expectations. We expect to complete that acquisition in early 2017.
In September, specifically with respect to Empire, in September the Missouri Public Service Commission issued an order approving the transaction and the Arkansas Public Service Commission approved a joint stipulation and settlement agreement recommending approval of the merger. The final approval to complete the transaction is required from the state of Kansas.
On October 7, a stipulation agreement between Algonquin Power and Utilities Corp, Empire District Electric Company and the Kansas Corporation Commission staff was reached. And on Wednesday of this week, the Kansas state regulator held a short hearing to review the unanimous stipulation agreement. We're hopeful that an order from Kansas approving the transaction will be received before the end of the year. With those highlights, David, I'll turn things over to you to speak about the Q3 financial results.
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David Bronicheski, Algonquin Power & Utilities Corporation - CFO [4]
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Thanks, Ian, and good morning, everybody. We're pleased to have reported solid financial results for the third quarter of 2016, as Ian mentioned. Our adjusted EBITDA in the quarter CAD91.4 million represented a 30% increase over the amount we reported last year in 2015 for the same quarter. We saw good contributions from both our generation and distribution businesses and the success of our growth program was clearly in evidence in our improved performance.
When we look at Q3 compared to the same period last year, increase in EBITDA was largely due to our newest regulated utility, which we are happy to have in the fold. Park Water added CAD16.5 million of EBITDA over the same period last year. We also saw contributions from our newest wind farm, Odell, which was commissioned in the quarter and that contributed CAD2.5 million in additional EBITDA. So all in all, a very successful quarter.
Our adjusted earnings per share grew by CAD0.03 to CAD0.09 per share over Q3 2015 and our funds from operations increased to CAD61 million, a 12% increase over the same quarter last year.
It's also been a busy year for our treasury group. As most people on the call know, we've satisfied our equity capital needs for 2016, including the equity we will require for Empire acquisition. The CAD1.15 billion in debentures we raised back in February are expected to convert to equity as we close the Empire transaction. We have also moved to lock in the US foreign exchange rate on more of this equity financing this quarter. All in all, we have now locked in the exchange rate on nearly 75% of our equity financing at an average exchange rate of $132.
In addition with the greater visibility that we have today on the expected timing of the Empire acquisition, our treasury group moved to enter into hedges to fix the underlying rates for $500 million of the anticipated debt financing. The hedges mature on February 13, 2017 and consist of forward-purchase contracts of $250 million of 10-year US treasuries at a very attractive, especially with the events of this week, 1.84% and $250 million of 30-year US treasuries at approximately 2.55%.
Finally, with the COD of Odell, we are pleased to have completed our tax equity financing of approximately $180 million back in August. I'll now turn things back over to Ian.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [5]
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Thanks, David. Given the outcome of the recent election in the US, I wanted to offer a couple of thoughts regarding three factors that might be perceived as impacting our business. The incoming US administration's support for renewable energy, the threat of growing protectionism and perhaps the prospect of lower corporate tax rates.
So starting with renewable energy, and on behalf of renewable energy, I'll start by saying as Mark Twain quipped, the reports of my death have been greatly exaggerated. I think for the near-term business prospects of Algonquin, our more than CAD0.5 billion of pipeline of contractor renewable energy growth opportunities will proceed as contemplated. Construction of our Deerfield wind and Bakersfield solar projects are nearly complete. And our and our 75 megawatt Great Bay solar project is advancing towards completion next year. While these projects are supported by the existing tax legislation that was passed last year with bipartisan support, I will observe that none of these opportunities rely on the future of the clean-power plan.
As we look toward the future of renewable energy, actually or I don't see the election trail comments of the Trump administration as threatening that future. The straight-up economics of wind energy, the most prevalent form of renewable energy, make it the most competitive form of generation in today's market, and I mean that against coal, natural gas, nuclear. And that's without any new tax subsidies or greenhouse gas curtailments on the clean-power plan.
I think Trump made a number of promises during the election campaign to, quote, end the war on coal. Good news is, I think he's right, the war is over. The bad news, at least for coal, is that coal lost. The abundance of low cost natural gas married with even cheaper wind energy without any new tax subsidy support has and will continue to overwhelm the economics of coal. Forgetting that it's the right thing to do societally, renewables supported by natural gas win on cost alone.
Secondly, with respect to the thought of growing protectionism around, we'll call, Fort America, I would point out that Algonquin as a business is actually inside the fort. I appreciate the anxiety that must exist in the minds of leaders of businesses that export their products from outside the US into the US. But I'll tell you, that's not Algonquin.
Our utility and power business is based on producing our goods and services in America, by Americans, sold to Americans. To be frank, even if that wall that Trump talked about was built on the north side of America as well as on the south side, I don't think it would impact our business particularly much.
Interestingly, we've observed that Algonquin shares represent American business prospects priced in Canadian dollars. If anything, you'd think the recent strength of the US dollar and the expectation of renewed US economic prosperity should have sent Algonquin shares up. Anyway, with respect to recently rising bond yields, I believe our strong growth trajectory negates the impact of rising interest rates. And lastly, David, perhaps you could comment a little bit on the hopeful prospect of lower corporate taxes in the US, which was promised during the campaign.
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David Bronicheski, Algonquin Power & Utilities Corporation - CFO [6]
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Sure. I think what I can say initially is when it comes to taxes, there's certainly a lot of speculation on what the Trump administration may try to change in the tax code during the first session of Congress. But I think it's fair to say that an emerging theme is that there will be, in one manner or another, lower US corporate taxes. And certainly I think our view is that with over 80%, and soon to be over 90%, of our business in the US, US corporate tax rates, if they are lower, will end up being a net positive for our overall business in the United States. We have a substantial unregulated business. And obviously that business will benefit directly from lower taxes. Even in our regulated business, taxes are a pass-through expense to customers but lower taxes will indirectly provide head room for additional investment in our US utilities.
And then the fact that we are a Canadian Company, even with lower US tax rates, we'll still have the benefits of cross-border financings to avail ourselves of various strategies that we, along with most foreign-based companies operating in the US, currently utilize to optimize our cost of capital. But I just end by saying that until, really, we have greater clarity on what ultimately gets enacted by Congress, it really is just speculation on what this might mean to anyone's business.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [7]
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Thanks, David. But I guess in summary, it's hard not to see lower taxes as a good thing from a corporation perspective.
Lastly before we go to the outlook summary, I wanted to put a couple of thoughts regarding the ability of renewable energy to prevail into context for Algonquin's business. Part of the thesis underpinning our investment in Empire is the opportunity to, quote, green the Empire electric generation fleet. The ability to realize on that opportunity was never premised on the implementation of a clean-power plan or, frankly, any other federal or state initiative support renewable energy. It was and remains premised on the strategy of investing in assets to deliver the lowest cost energy for Empire's customers. That's no longer accomplished, frankly, by burning coal. It's accomplished through new investment and a combination of wind energy and natural gas generation, two areas which are core competencies for Algonquin and Empire respectively and part of the skill-set synergy that we anticipated in our merger.
Accordingly, we remain bullish on the significant investment opportunity that can be realized by the displacement/replacement of energy from coal in a manner that lowers customers' bills. As an inducement to attend, we will be providing specifics on the individual growth that we believe is available with Empire at our Investor Day which is scheduled to be held on November 29 later this month.
So lastly, I understand that everyone on this call, and perhaps more broadly in the market, is encountering new variables that need to be worked through in the calculus of their investment decisions. The uncertainty around these forces has had a noticeable and, frankly, disappointing impact on share prices of the utility participants and, I guess, in particular, ours. I think you can see that our results continue to show strong progress against our growth plan and we have more to come. We continue to have a pipeline of opportunities ahead of us and remain confident that we're strategically positioned for continued growth against a very solid base of low [oiled] assets.
Specifically, our 2016 capital plan is nearing completion. Much of if relates to the 160 megawatts of contracted wind and solar generation which remains under construction within our generation business group and which is targeted to be online in the next couple of months. Within our regulated distribution business, we currently have $28 million in rate cases being prosecuted across 7 of our 13 jurisdictions in the US.
On the capital market front, we outlined in our MD&A this quarter that we are finalizing our application to lift Algonquin's common shares on the New York Stock Exchange. For those who are familiar with the Company, you'll recall that it's something that we've been considering for some time now. We believe it holds benefit for our many US-based employees to participate in our stock purchase plan and, of course, in strengthening our connections into US-based retail institutional investors, including, frankly, the current shareholders of Empire district.
I outlined previously that we believe there's strong, economic arguments to be made for the continued growth in renewable energy and our ability to capitalize on these undeniable economics. Our focus on building our pipeline in this area will continue unabated.
And finally on the Empire front, the level of excitement around the close of this size transformative transaction is building within our halls, and I'm sure the same thing is happening down in Joplin. As we await a final decision in Kansas, we'll work smoothly and diligently with Empire's Management Team to make sure that the integration and transition for Empire's customers and personnel alike happens in a seamless way.
We believe that the growth opportunities that are available with Empire are an important part of our long-term growth plan. And with that, we'll open the line up for the question-and-answer session. And just before we do it, I just wanted to kind of reiterate, if we extend through 11:00 AM this morning, I want to remind everyone that out of respect for those who have given and continue to give to allow us the freedom to have calls like this will be observing a moment of silence. With that, operator, perhaps you can open up the lines up for questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions)
The first question comes from Rob Hope with Scotiabank. Please go ahead.
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Rob Hope, Scotiabank - Analyst [2]
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Thank you. Good morning, everyone. I was hoping you could provide some additional color on your discussions with the Saskatchewan government regarding Chaplin and what steps need to get that project moving forward and whether or not you have secured an additional site.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [3]
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Sure, Rob. So I think the discussions, to be frank, have not been as much with the Saskatchewan government as, more specifically, with SaskPower, which maybe are one and the same. We've negotiated the terms of whatever administrative amendment that need to be made to our power purchase agreement to allow the site to be reconfigured. And, frankly, the reconfiguration involves shifting it away from the sensitive sighting areas that were identified by the Ministry of the Environment.
The broad terms of that have been reached. We've -- I think we expect that to proceed with whatever additional permitting that needs to be done on the new site, which is to the west of the existing site. What it has occasioned, as you'll notice from our MD&A, is the delay in the expected COD date to 2019, 2020, from 2018, 2019. And that's likely just the incremental bird studies, et cetera, that need to be done for the new site.
So perhaps to be specifically responsive to your question, yes, we have land secured and a site for this reconfiguration. And so we're kind of moving purposely toward continuing the work necessary to build the site. I think one of the things I will point out, and maybe this is a little bit of a blessing in disguise, the shift of Chaplin downstream time wise certainly opens up the latitude for us to aggressively exploit opportunities in the US without taxing the organization -- and so from a development point of view.
So while it's obviously disappointing that we're not jumping into the construction of Chaplin right now, it remains, if you will, in the development bank and we're going to continue to prosecute development just perhaps on a slightly slower time frame. Rob, is that responsive to what you're looking for?
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Rob Hope, Scotiabank - Analyst [4]
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Yes. That's great. Thank you. And then just in terms of my second question, could you provide an update on the steps to close Empire post the Kansas approval? Just want to get a sense of whether or not we could see this earlier than your early Q1 statement if we get a positive approval from the KCC after Thanksgiving.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [5]
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I think, actually, to be frank, the steps following the Kansas City approval -- or the Kansas Commission approval are all pretty administrative in nature. And so -- but I think there's actually now -- there's I guess a little bit of a philosophic issue here. Do you want to close the transaction on December 28 assuming that we get the Commission's approval in early December? And as you heard, we had the hearing. It was positively uneventful. The order is being drafted right now. Actually the Commission asked if we would draft and submit the order for their consideration. I don't think -- I think if we had our druthers, we probably would probably close the transaction the first of January rather than the last day of December.
And part of it comes down to as much from the Empire shareholders' perspective. They are all realizing a gain on this transaction, just given the pricing of the takeover. And this allows them to recognize that gain in 2017, i.e. not have to be reconciled with the US government until 2018. And, frankly, I think it provides us some benefits of not having a stub year end in 2016. So all in all, Rob, I think even if the approval came in in the first week of December, which we've got our fingers crossed for, you'd probably see it in the first couple of days of January this year rather than in December.
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Rob Hope, Scotiabank - Analyst [6]
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That's helpful. Thank you.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [7]
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Thanks for your question.
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Operator [8]
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The next question is from David Castagna with Raymond James. Please go ahead.
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David Castagna, Raymond James - Analyst [9]
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Good morning, guys. My first question -- I believe on the last call you mentioned you were in the process of safe harboring projects to get that 100% wind tax credit that steps down at the end of this year. And I think you had indicated I guess a ballpark number of CAD50 million of down payments. I'm just wondering what kind of progress you've made on that number and if it's kind of unfolded the way you expected?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [10]
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It has unfolded the way it expected. To be frank, we are probably looking at maybe upping that to CAD60 million in recognition of the opportunity which we've really dug into over the past couple of months of building some incremental wind in Empire district's service territories. As you heard in my prepared comments with respect to the implications of the recent election, the US on renewable energy, we actually think renewable energy, as I said, is just the right economic solution regardless of how the administration views it. And so we have selected the turbine vendors that we are safe harboring with. And as I said, I think we've probably become a little more bullish on that and increased it to CAD60 million.
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David Castagna, Raymond James - Analyst [11]
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Great. That's helpful. Thank you. And I guess for my second question, and I appreciate the specifics of this will probably come at the investor day, but once Empire closes, just wondering if you'll be revisiting the capital plan that is in place there now and what's the right way to think about that?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [12]
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Yes, for sure. And, in fact, I think at our investor day we are going to give you details of that. If I told you now, you wouldn't show up, David. (laughter) And so -- but that has very much been the focus. And I think as we articulated at the time of the acquisition of Empire, the CapEx plan that was put forward was simply an adoption of the CapEx plan of the existing management team. I think things are changing relatively quickly in the renewable energy space and certainly even in smart grid space. And I think that's [occasioning] opportunities to put more money to work to actually lower customers' bills. And I think that's the detail you're going to hear on the 29 of November.
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David Castagna, Raymond James - Analyst [13]
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Okay. Great. Thank you very much. Appreciate it.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [14]
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Thanks, David.
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Operator [15]
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The next question comes from Jeremy Rosenfield with Industrial Alliance Securities. Please go ahead.
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Jeremy Rosenfield, Industrial Alliance Securities - Analyst [16]
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I'll keep it to two as well and jump back in the queue. Just in terms of the rate case outlook, I saw the updates to the Arizona water rate cases. So I think there was a decision delivered or proposed decision that was delivered in California on CalPeco. Do you want to just comment on that? It came out yesterday. And then the outlook for the overall rate case is coming up in 2017.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [17]
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I think -- well I'll start by saying, Jeremy, that you are correct, that the proposed final order in California just recently came out. I think it's largely consistent with our expectations. I think the highlights on it are 10% ROE, which is obviously something we're comfortable with -- 52.5% thickness from an equity perspective. The only tug and pull has been on a method for managing the capitalization versus expensing of maintenance and repair expenses, which is frankly kind of an initiative which a number of commissions across the US are considering.
But all in all I think the order's generally consistent with what our expectations are. We'll have the final approval hopefully, knock wood, at the first of December at the meeting at the commission -- the first of December. But I will point out, and I think it's important, that under the mechanisms at work in California, this rate increase is retroactive back to January 1. And so we haven't been able to, frankly, recognize that retroactive revenue just given the specifics of regulatory accounting. But the nice thing is that will be a nice little -- I'll say it's a one-time gain, but the fact of the matter is it really should have been showing up in our Q1, Q2 and Q3 results so it's really just a catch up. But we'll start to see the benefits of that in Q4. So is that what you're looking for, Jeremy?
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Jeremy Rosenfield, Industrial Alliance Securities - Analyst [18]
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Yes. And then I was just wondering in terms of the outlook for rate cases for filing in 2017 in the coming year, any big cases that you expect to be filing?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [19]
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I think the good news is our -- we try to give out some sort of color on the expectations of our rate case plan. I will say -- let's say that there's nothing that massive that is pending being filed. And in some respects maybe that's one of the great characteristics of our diversified portfolio. All of our regulatory eggs aren't in a single basket. They are -- we get to do this, if you will, bunts and singles around the bases because we have -- are always in front of commissions in one or another of the jurisdictions we serve. And I think it provides us stability to the growth in our revenues and returns rather than having one single large rate case and the step function that that would cause in terms of our earnings. So maybe the short answer to your question, Jeremy, it's going to be just normal business course going forward with sort of a kind of similar expectations that we had in 2015 and 2016.
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Jeremy Rosenfield, Industrial Alliance Securities - Analyst [20]
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Thanks. I'll get back in the queue.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [21]
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Thanks, Jeremy.
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Operator [22]
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The next question is from Nelson Ng with RBC Capital Markets. Please go ahead.
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Nelson Ng, RBC Capital Markets - Analyst [23]
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Great, thanks. First question is in terms of Park Water, I presume the Mountain Water results are included in the results. But I just want to clarify, what's the timing of selling Mountain Water to the city of Missoula?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [24]
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So, yes, until we don't own it, we own it. So that -- your assumption is correct. To be frank, the timing of the condemnation of Mountain Water is not in our control. It's totally in the control of the city now. I will say that it's a little counterintuitive that the city hasn't moved forward on the condemnation. To our knowledge, they have whatever let -- whatever approvals that they require. Perhaps they're having challenging with their bonding. I'm sure the recent rise in interest rates obviously isn't helpful from the city's perspective. But we are spectators to this process right now. And we're keeping our head down. We're providing reliable service to the city of Missoula and we'll just have to be frank, Nelson, wait and when the check shows up, the check shows up. But until that point in time, we're just going to keep doing what we do, which is being sort of reliable providers of essential services. Don't know what else to say.
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Nelson Ng, RBC Capital Markets - Analyst [25]
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Okay. So essentially all the approvals are in place and the city just needs to essentially cut you a check? Everything else is -- like they've paved the way, all the approvals are through. But in terms of --
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [26]
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Yes. But you sound so simple when you say it just to cut a check. Obviously it's a lot of work on behalf of the city, the binding -- a bonding that they have to accomplish. These are structured as -- our understanding, within the city anyway. They're structured as revenue bonds which brings an entire sort of set of considerations, not general obligations bonds in front of it. I'm not going to [pretend to] understand what the constraints of the city are. But you're absolutely right. I guess they're -- they gotta come up with the cash. Until they do, I guess we're, as I said, just going to continue doing what we do.
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Nelson Ng, RBC Capital Markets - Analyst [27]
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And then I think in your disclosures that CAD1.1 million in reduction of rates, that doesn't have anything to do with the condemnation, right? In terms of the rate case --
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [28]
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No. That was an accommodation that we made in sort of building our regulatory relationship in the state of Montana. We obviously have to prepare and anticipate that maybe the city will or won't buy this utility. And we obviously want to have a constructive relationship with the Montana PSC. And part of the settlement of that was to address that. Obviously I think if you read that reduction in rates -- that CAD1.1 million in reduction of rates. It really only continued until we had an opportunity to present a full rate case in the next 18 months or so. And I think it would be that we would have, in some respects, a blank sheet of paper for determination of appropriate rates in -- for the Mountain Water company. But it has really, frankly, nothing to do with the condemnation.
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Nelson Ng, RBC Capital Markets - Analyst [29]
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Okay. Thanks. And then my second question, in terms of financing Empire, what's the total amount of debt you need to raise? I understand that you've hedged out $500 million but what proportion of the total debt is that?
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David Bronicheski, Algonquin Power & Utilities Corporation - CFO [30]
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Hi, Nelson. Just to highlight it, we have fixed the interest rates of $500 million of the debt. We're looking at approximately $600 million to $650 million of debt to round off the financing plan for Empire. The delta, though, will be done at the shorter end of the maturity scale. So -- because I think in the first couple of years after we own Empire we'll look to do a little bit of deleveraging and that will -- so that's why we've only hedged out the long end at the [10s] and 30s.
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Nelson Ng, RBC Capital Markets - Analyst [31]
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Okay. Thanks, David. I'll get back in the queue.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [32]
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Thanks, Nelson.
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Operator [33]
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the next question is from Robert Catellier with CIBC World Markets. Please go ahead.
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Robert Catellier, CIBC World Markets - Analyst [34]
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Hi. Thanks very much for going over the situation in the US that's changed. But I'd like to see if I could prod you a little bit more and maybe you can address what you think the cash flow implications are in the first year if tax rates are materially reduced as contemplated in President-elect Trump's platform?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [35]
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Obviously it's a positive, Rob, to the extent that our utilities right now -- and I guess we have to sort of understand the timing of how rate -- tax rate decreases are put into effect and the implications of that in the context of our rate case timings. But right now if magically the tax rates were dropped, we'd probably see an EPS increase because of the nature of the timing. It's probably CAD0.10 a share. Now the reality is that we don't really pay any cash taxes, as you know, in the US, or, frankly, in Canada. So the tax rate for us is a little bit hypothetical. But in the fullness of time, it won't be hypothetical and that will turn into a positive from a cash flow perspective.
I think it's not an unreasonable observation though that in the regulated utility business, taxes are a pass through to the rate payers. And so to the extent that taxes go down, the rate payers will ultimately have less of a provision built into their rates for those taxes. Maybe I might look at that as -- at least from our perspective an opportunity to accomplish some of the reliability and other investment initiatives that we have on the books in a manner that creates no impact on rates as they stand today.
On the power generation portfolio we have in the US, the impact is obviously ultimately different. We, to the extent -- and well lets just hypothesize that Trump's 15% corporate tax rate is what comes into effect, well obviously that's a significant savings from projects, the economics of which, are already defined. And so that is going to be a net positive for us. And so I guess I would, to be frank, I never quite understood, as I read some of the reports that came out following the election, how lower tax rates was ever a threat to our business.
So, Rob, I mean in terms of specifically quantifying it, a lot of it, as I said, comes down to when we're ultimately cash taxable, both in Canada and the US. And as we continue to grow our business, I'm not so sure that that taxability horizon isn't something that keeps getting moved down the field. And so perhaps it's a little bit hypothetical at this stage.
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Robert Catellier, CIBC World Markets - Analyst [36]
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Just to clarify, I agree with what you're saying on the tax rates and that's pretty obvious and the customer bill as well and the flexibility it provides utility -- I'm with you on that. I'm just sort of implicit in your answer, though. Is your belief that whatever changes happen in the tax code and how they impact maybe your tax planning on acquisitions -- so your answer just implies that you have the ability to restructure around any net adverse changes in the -- that come as a result of the tax decrease?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [37]
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Well maybe I should be crystal clear. I actually don't see any adverse changes. And maybe we should just -- if you're trying to prod me here, let's parse this out a little bit. I think with respect to mergers and acquisitions -- and I'm thinking presumably where your question is getting to is how do the Canadians who -- or non-Americans perhaps we should say -- view the tax code in the US? Obviously, as I said, for the target businesses that we're acquiring, that is a pass through. And so I don't think -- I think lowering rates is kind of doesn't have any implications. It's just -- a lowering tax rate just lowers the rates presumably to those utility customers. I think the benefit that David alluded to in his comments is about how the tax code today provides provisions for non-Americans to be efficient and effective in bringing capital into the US.
Arguably -- I might actually argue that as the native tax rate in the US falls, those benefits which we enjoy here in Canada, in fact grow in proportion. Our competitiveness against US competitors in M&A situations will actually get broader -- or gets stronger as those tax rates fall in the US. And so think of it this way, maybe just to book end this, imagine if the corporate tax rate in the US went to zero. Under a number of the mechanisms we have, we still enjoy a deduction in Canada for interest which is paid in the US. And so think about that. I mean, that from a competitive perspective, it's just a freebie. So I think it's getting increasingly -- I think lower tax rates don't have any negative implications, Rob.
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Robert Catellier, CIBC World Markets - Analyst [38]
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Okay. Thanks for that comment. And then my second question is on the renewables. You talked about -- I agree with the view that society probably still wants renewables no matter what the policies come in with the President-elect. But just on an economic basis alone, can you compare how you're viewing wind today, the cost for new wind project today versus an existing coal plant in some of your key markets? And just maybe line that up wind versus the variable costs associated within existing coal?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [39]
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Sure. And at the risk of kind of giving you the punch line for our investor day, putting it directly in context, we see that the variable costs right now of operating -- and I won't say a coal plant -- let's be very specific and speak about the Asbury coal plant that exists within Empire, Take into account all the -- I'll call them fixed cost but you can imagine the labor associated with the [over excitement] administration of that plant is about CAD35 a megawatt hour. That's if you took all the costs and divided by the energy they produced, it's about CAD35.
And I will say that last year Asbury only operated at a capacity factor of under 80% and are forecasting 60% as it struggles to deal with the availability of lower cost wind. So CAD35 just the variable cost. Let's forget whatever capital happens to be tied up in the Asbury plant.
Today, and albeit with sort of the current existing rolling off PTCs, as you know, you can build wind for CAD22. And the reason I say that is we just commissioned Odell 200 megawatt wind farm for CAD22 or whatever the PPA rate is there. And so I can -- and that includes a return on -- return of the capital. So just based on, I think your comment, Rob, of comparing the variable costs of existing coal plants against the all-in variable and fixed costs of building wind, I see win-wins.
So that's what I'm saying is we really don't need -- and that's just today. So then I think the opportunity exists today even if the greenhouse gas initiatives embodied in the Clean Power Plan go no where. So I don't know if that kind of puts some numbers around the expectations, Rob.
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Robert Catellier, CIBC World Markets - Analyst [40]
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Yes. That's kind of what I was looking for to just color in the specifics on the economics. Thank you.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [41]
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Yes. We're going to try to give, obviously, a little bit more detail at our investor day so you can kind of get a real sense of why we see there's a significant opportunity to continue the investment in Empire beyond what was forecast at the time of acquisition. And to be frank, obviously we saw something there that maybe the market didn't see in the context of Empire. Otherwise we would have been -- you would have really questioned the prudence of us acquiring it.
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Robert Catellier, CIBC World Markets - Analyst [42]
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Okay. Thank you.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [43]
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Yes. Thanks, Rob.
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Operator [44]
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The next question is from Rupert Merer with National Bank. Please go ahead.
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Rupert Merer, National Bank Financial - Analyst [45]
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Good morning, everyone. A follow up on the coal plants. Can you remind us what's the expected life of the plants at Empire? And how quickly would you like to transition away from those and to wind? And if you did so -- and it's a long question -- but would the wind go in rate base, you think, or would it be outside rate base?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [46]
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Let me start by saying that Empire has a fleet, as you're aware. I think the most -- the easiest one to -- a fleet of coal plants, I mean, as well as a fleet of natural gas plants. And I think that's an important consideration as we kind of launch into the answer to your question -- is that the most obviously plant that needs to be considered is Asbury, as I was mentioning to Rob Catellier -- in response to Rob Catellier's question is Asbury. It was built in 1971. So starting to get, we'll say a plant of a certain age, but the reality is that you can keep your 1974 Dodge Dart on the road indefinitely. The question, of course, is at what cost.
And I think -- so I think, frankly, a plant like Asbury actually reaches the end of its economic useful life before it reaches the end of its physical useful or permitting useful life. I think as I mentioned in response to Rob's question is today the rate payers in Empire, the customers of Empire, are actually paying a premium over and above the cost of which the energy could be -- could be obtained from other sources and particularly wind.
I would say that given the relatively attractive WACC, weighted average cost to capital that regulated utilities have, that the investment in those wind projects should be in rate base. I think if you compare apples to apples, the return of capital associated with the wind farm would compare very favorably -- more favorably than that to -- under a PPA. And so I think -- which is really the thesis as you're aware of this 60 megawatts of solar that we are in the midst of building in California. This is exactly the fact pattern that was repeated in California for us where we're putting CAD120 million into a solar plant on the basis that we can lower the rates for our customers. And so we actually see being able to replicate that fact pattern in Empire. Rupert, I don't know it that's -- I know it was kind of a bit of a confused answer to your question, but did I get the points?
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Rupert Merer, National Bank Financial - Analyst [47]
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Yes, absolutely. As a followup to that, how important is it to have capacity in your generation? You're replacing capacity, well, you're replacing energy but maybe not capacity. Do you need to maintain the capacity within your generation?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [48]
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Certainly we do. You fully understand, obviously, the importance of both having capacity and energy supplies in the management of a grid. I will just say having a coal plant is hardly the most effective way to manage the intermittency which comes with the cheap energy off of a wind farm. We all -- I think it's probably intuitively obvious that the natural gas fleet that Empire has is the better bed fellow for managing that than trying to start and stop a coal plant.
It would be oxymoronic to be talking about a peaking coal plant. Whereas either the existing natural gas or perhaps even some of these new reciprocating engine natural gas fired generators -- that's the right bed fellow for wind to meet the capacity needs. And so I think first of all the nice thing Empire has that capacity already in its State Line and Riverton and other natural gas plants. And so it's well equipped to kind of manage that intermittency without the need and support of Asbury. So but you're absolutely is right. You've got to do both of them. I'm just saying peaking a coal plant is not the right way to do it.
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Rupert Merer, National Bank Financial - Analyst [49]
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Okay. Great. Thanks for the answer.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [50]
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Thanks, Rupert.
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Operator [51]
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The next question is from Ben Pham with BMO. Please go ahead.
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Ben Pham, BMO Capital Markets - Analyst [52]
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Thanks. Just at the risk of annoying you guys, I want to go back to the tax question and inquiries. I'm just wondering the -- you guys mentioned the CAD0.10 potential benefit of lower taxes. That's a wide range of different scenarios you guys are looking at. But I wanted to check in to see in isolation the earning stripping benefit that you could be using. Don't you see that isolation as a negative for you guys if corporate tax rates do decline? Or is it more you don't really utilize that structure as much for your business?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [53]
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Well let me start by saying -- and I'll turn it over to David -- but let me start by saying, Ben, you're right. We would never move income from the low tax jurisdiction to the high tax jurisdiction if that's what your question is. I think we got that one pegged.
And so we would obviously -- we're always looking to minimize the tax exposure. And if that happens to be in the US rather than Canada, that's what we do. But that's a different question than perhaps you were posing. David, you want to --
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David Bronicheski, Algonquin Power & Utilities Corporation - CFO [54]
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And I think much depends on really what is your assumption or speculation around how much US tax rates potentially can fall? And I think that's far from clear. And when we're -- when we talk about something of benefit to our EPS of somewhere between CAD0.10 and CAD0.14, I think we're kind of speculating in that scenario of about a 25% US tax rate from the current 35% that exists today. But much of the benefits that come from our cross border financing strategies really center around the asymmetry that exists in the various tax codes in different countries, whether it's between Canada and the US, whether it's between Canada and Ireland, or the Luxembourg and the US. And so those things, at least at this point in time, are sort of unchanged by I'll say just a straightforward reduction in US tax rates. So our tax strategies aren't really changing. And so I think we just come back to lower US taxes when you have 90% of your business in the US can only be a good thing.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [55]
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And maybe just to add -- to summary to David's comment, he said our cross border tax strategies are premised on asymmetry and tax codes, not asymmetry and tax rates. And so that the changing of those rates, even if they were made the same, doesn't defeat or reduce the value of the structures we enjoy, Ben. So we actually don't see it as a negative. And as David said, given that we're largely a US Company for economic purposes, how can lowering the tax rates ever be perceived as threatening from our perspective? It sounds so good.
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Ben Pham, BMO Capital Markets - Analyst [56]
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I got you. Get a tax lawyer in here. (laughter) On the -- should we think about any sort of tax equity implications where maybe you get more cash up on the front end and the flip dates a hit earlier -- you get some better returns from that side? Or is --
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [57]
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To be frank, and I think two things we have to consider, one is obviously the PTCs are on a phase-out program. And I think that's why -- I think if we were speculating right now, it doesn't feel like changing what's already a phase-out program would be a priority from the administration's point of view. But to be crystal clear, again, PTCs are really denominated, if you will, in absolute dollars in terms of value per production tax credit. They're not denominated in the context of a tax rate. I think one of the issues, obviously, is to the extent an organization who is taxable in the US has a lower effective tax rate, their total tax bill goes down and maybe their demand for future PTCs might be decreased. But to be frank, it's a dwindling supply in any event because five years from now it will be nothing because the PTC will be long gone and wind will be still, in my mind, effectively competing on the merits of its own economics without support of the PTCs. So I think it's a little bit of a moot point, Ben, just because I think they'll be seeing that the PTCs are fading to black as we speak.
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Ben Pham, BMO Capital Markets - Analyst [58]
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Okay. All right. That's helpful. Thanks, everybody.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [59]
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Thanks, Ben.
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Operator [60]
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The next question is from Jeremy Rosenfield with Industrial Alliance Securities. Please go ahead.
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Jeremy Rosenfield, Industrial Alliance Securities - Analyst [61]
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Just wanted to have one followup. Nobody asked the question, so I thought I'd put it to you. The New York Stock Exchange listing -- the application for the listing -- what do you think about the timing -- what makes the timing right for the listing now? Why do you want to put that into place now?
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [62]
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I think it's probably two or three rationales. And, Jeremy, as you'll recall, this isn't something new from our perspective as we spend as much time -- maybe not quite as much, but we spend a lot of time on Wall Street as we spend on Bay Street. But the rationales for it, we'll say one of them, is that -- and I mentioned it in my prepared remarks that the preponderance of our employees are in the US. And I think there's a difficulty, perhaps logistically, for them to participate in our employee stock purchase plan for a security which is traded on the Toronto Stock Exchange. And so we obviously we want to make that easy for them. And empirically we see that difficulty in the relatively low take-up rates of our employees in the US in the stock purchase plan as compared to those here in Canada.
And given that Empire has used its security as an important element of its variable compensation program, and we obviously -- the Empire employees have obviously then got comfortable and used to owning a piece of the business they work for. We obviously want to facilitate that. We're obviously trying to make the cultural changes as seamless as possible. And so by providing our shares on the Toronto Stock Exchange -- or on the New York Stock Exchange, I think will feel very comfortable for our employees in the US, including the new 800 who are joining us from Empire.
I think the second business rationale from our perspective in terms of -- and maybe it's the timing -- is that there's going to be CAD1.5 billion worth of Empire shareholders who will be given cash who obviously were happy to own an interest in the Empire assets. They form a substantial portion of Algonquin's business going forward. And we'd like to provide them an easy and familiar path to follow those assets. And so I think being able to be listed on the New York Stock Exchange, perhaps have a presence in the US equity capital markets will make that migration easy for them.
And then perhaps the last and I will say least important from our perspective is that I think we have a proposition which is inherently American in nature. Our centricity around America is undeniable. And so, therefore, as we think about our business and to whom it appeals, I think we are probably missing an opportunity to bring that business more flexibly to American retail, maybe less so to institutional shareholders because they understand the nature of buying shares -- I'll call it extra territorially in terms of the Toronto Stock Exchange. And so -- but that's got be -- I got to tell you, that's the least of the business propositions, but it's certainly one that's on the list. So I don't know, Jeremy, if that kind of gives you some insight into why and why now.
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Jeremy Rosenfield, Industrial Alliance Securities - Analyst [63]
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Yes. No, that makes -- all those reasons make sense. Great. Thank you.
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Operator [64]
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The next question is from Nelson Ng with RBC Capital Markets. Please go ahead.
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Nelson Ng, RBC Capital Markets - Analyst [65]
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Thanks. It's close to 11:00, so I just have one quick question. Just in terms of greening the Empire fleet, given that there's already two PPA wind facilities, can you talk about the likelihood or even the risk that the regulator would force Empire to run a competitive process and award PPAs which would essentially be outside of the rate base rather than let Empire build it on their own and add it to rate base? I just wondering what the requirement is and what's the rule.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [66]
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I think the short answer, Nelson, is you got to do what's most cost effective for rate payers in any event. And I think we were able to establish to the satisfaction of the California Public Utilities Commission that the construction of our Luning Solar Facility really met that test. And so I think the short answer is that it will be up to us to convince the commission. I think we have the ability to do it -- that construction of those plants in rate base is just the best way to go.
Having said that, if we have to participate in a competitive process with other developers, then, I don't want to say bring it on, but we're comfortable in our capacity to do so. We obviously understand the landscape very well. So I would say, is there some uncertainty? Of course there is there, Nelson. But I think we have been able to establish a precedent for doing that in our -- in California.
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Nelson Ng, RBC Capital Markets - Analyst [67]
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Okay. Thanks, Ian.
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David Bronicheski, Algonquin Power & Utilities Corporation - CFO [68]
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We will now pause for one minute of silence. Thank you. Are there any further questions on the call this morning?
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Operator [69]
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There are no further questions registered at this time. This concludes the question and answer session. I would like to turn the conference back over to Mr. Robertson for any closing remarks.
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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [70]
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Thanks very much, operator, and I appreciate everyone's time today and indulgence for recognizing our Remembrance Day. And with that, we'll turn things over to Alison for her always scintillating and captivating disclaimer.
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Alison Holditch, Algonquin Power & Utilities Corp. - IR [71]
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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 statements, 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 document filed by the company on SEDAR at 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 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.
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Operator [72]
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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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