Algonquin Power & Utilities Corp

TSX:AQN

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 earnings call for Algonquin Power & Utilities Corporation. [Operator Instructions]I'd now like to hand the conference over to your speaker today, Ms. Amelia Tsang. Thank you. Please go ahead, Amelia.

[Amelia Tsang, Vice President of Investor Relations]

Thank you. Good morning, everyone. Thanks for joining us this morning for our second quarter earnings conference call. Presenting on the call today are Arun Banskota, our President and Chief Executive Officer; and Arthur Kacprzak, our Chief Financial Officer. Also joining us this morning for the question-and-answer part of the call will be Jeff Norman, our Chief Development Officer; and Johnny Johnston, our Chief Operating Officer. To accompany our earnings call today, we have a supplemental webcast presentation available on our website, algonquinpowerandutilities.com. Our financial statements and management discussion and analysis are also available on the website as well as on SEDAR and EDGAR.Before continuing the call, we would like to remind you that our discussion during the call will include certain forward-looking information, including, but not limited to, our expectations regarding future earnings and capital expenditures. At the end of the call, I will read a notice regarding both forward-looking information and non-GAAP financial measures. Please also refer to our most recent MD&A filed on SEDAR and EDGAR and available on our website for additional important information on these items.On our call this morning, Arun will provide an overview of our Q2 performance. Arthur will follow with the financial results, and then Arun will conclude with an update on our strategic plan for the business. We will then open the lines for questions. [Operator Instructions]And with that, I'll turn it over to Arun.

[Arun Banskota, President, CEO & Director]

Thank you, Amelia, and a very good morning to those who've been able to join us on the call and online. And a special welcome today, since it's a Friday the 13th.I'm pleased to report solid year-over-year growth in our key financial metrics for the second quarter of the year. Q2 adjusted EBITDA was $244.9 million, a 39% increase year-over-year and our Q2 adjusted net earnings per share was $0.15, an increase of 67% compared to last year's $0.09.I'm pleased to report solid year-over-year earnings growth from the addition of approximately 1,400 megawatts of new renewable generation projects. These were in construction over the course of last year and this year, and this quarter's progress brings the 1,600 megawatts of projects that began construction in 2020, close to completion. We are also starting to see benefits from the first full year of operations from our Bermuda Electric utility as well as the ESSAL water utility in Chile, which both closed late last year and have all performed in line with our expectations.I'm pleased to report that the company's operating results were not materially impacted by the pandemic this quarter. Recall that in the second quarter last year, the pandemic did have a $0.01 impact on earnings per share. Generally speaking, we are not seeing negative impacts from COVID on our loads at this stage, as business conditions in the regions we operate in slowly return to normal.Approximately 60% of the company's workforce continues to work remotely, and we continue to employ operational measures intended to protect the health and safety of our employees and customers. Over the coming months, the company is planning to return to base operations as the impact of the pandemic further diminish. However, we will continue to keep watch for any developments with the Delta variant and adjust accordingly.Our team continues to focus our efforts on Algonquin's 3 strategic pillars: growth, operational excellence and sustainability. We operate through 2 primary businesses, regulated and renewables, and we'll spend some time on each for an update.On the regulated side, one important lever of growth is our Greening the Fleet initiatives. We continue to make investments for the benefit of our customers as we accelerate our transition to a clean energy future. During the second quarter, we successfully completed our Midwest Greening the Fleet initiative, as all 3 wind facilities, North Fork Ridge, Kings Point and Neosho Ridge have been placed in service and has been acquired by the Empire District Electric Company.The related closure of the Asbury coal plant in March 2020 comes approximately 15 years ahead of its original retirement schedule in accordance with our most recently filed integrated resource plan and is expected to reduce emissions by nearly 1 million metric tons of carbon dioxide as we work to generate and deliver cost-effective, diverse and sustainable energy solutions for our customers and communities. We continue to be responsible stewards of our energy infrastructure assets as we are an early pioneer in seeking to build renewables into rate base.The early retirement of Asbury has also contributed to the reduction in the company's total Scope 1 greenhouse gas emissions as well as reducing Scope 1 and Scope 2 emissions intensity per dollar of revenue by 26% since 2017, the year in which the company acquired Empire.The completion of the Midwest greening initiative is just one more step on our path to reduce emissions. Liberty recently filed an application with the California Public Utilities Commission to approve financing, construction and operations of the Luning expansion project, which is expected to be a combined 60-megawatt solar facility and 240-megawatt hour lithium-ion battery storage facility that will benefit Liberty's customers by adding reliability, resiliency and price stability in addition to meeting Liberty's renewable portfolio standard's energy supply objectives.Since 2017, we have already reduced the carbon intensity of CalPeco by 46%. And this new investment, if approved, will help us continue to decarbonize and provide cost savings over the long term to our customers.Another important growth lever in the regulated business is the organic investments in improving the safety and reliability of our mission-critical infrastructure. Working with our global regulators, we strive to make the ongoing necessary investments to improve service for our customers, while managing the affordability of their bills. Rate case activity across our jurisdictions continues to be quite active, and I wanted to provide you with a few regulatory updates in some of the jurisdictions that we operate in.In the second quarter, we filed our Missouri electric rate case with the commission at the end of May, which included seeking cost recovery of the 3 recently completed 600 megawatts of wind generation facility mentioned earlier. In addition, while our original filing included cost related to the impact of winter storm Uri, legislation has subsequently been passed, which will allow for these items to be securitized, a path which we intend to pursue.Apple Valley, which operates in California, was the subject of a condemnation lawsuit filed by the town of Apple Valley. For the last few years, we have been in legal proceedings over the water system and recently received a tentative statement of decision that supports our continued ownership and operation of the system. We have a track record of providing safe and reliable water services, and we look forward to working with the town of Apple Valley to continue those services for the benefit of our customers.Staying on the topic of California, we filed our CalPeco rate case in May and filed our Park Water Apple Valley rate case in July. Our California utilities will be the first to file rate cases seeking recovery of Customer First, which I'll provide more details on later.In addition, we recently reached a tentative agreement for our Energy North gas system in New Hampshire. As part of the settlement, the commission authorized a permanent rate increase, which is expected to result in a revenue increase of $7.6 million based on a return on equity of 9.3% and equity capital structure of 52%. In addition, Energy North received an authorization for a property tax tracking mechanism, which is expected to further increase the predictability of earnings. Further, step adjustments of $4 million for 2021 and $3.2 million for 2022 were authorized as part of the settlement, pending further diligence and hearings.Lastly, on the regulatory front, we reached a constructive rate case outcome with the regulatory authority of Bermuda, marking the first completed rate case since the acquisition of BELCO in the fourth quarter of last year.Another lever of growth is acquisitions, and we completed 2 utility acquisitions in Q4 of 2020, ESSAL and Ascendant. The integration of these 2 utilities into the Algonquin Liberty family continues to go well. With our pending acquisition of New York American Water, we are currently going through the settlement process. And important work continues to determine the best path forward on resolving issues related to the special franchise tax, we remain confident that Liberty is the best long-term owner of the utility and expect this transaction to close within the recently extended time line set out in the stock purchase agreement.Lastly, looking to the future of our gas utilities, we have begun exploring the utilization of renewable natural gas or RNG, to better serve our customers. We have RNG projects in various stages of commercial development and have already made a regulatory filing in New Hampshire for the approval of supply agreement that includes a purchase option for Liberty to be the ultimate owner of the facility.Moving on now to operational excellence. In a mission-critical industry, safety and reliability are always the most important areas of focus. I'm pleased that we have passed an impressive milestone of 526 days and over 7 million safety hours without a single lost time injury, while keeping our customers and communities safe and maintaining our system reliability and resiliency.I also want to highlight some innovative approaches we are taking to support system resiliency. Our Sagehen project in CalPeco is a microgrid at a Berkeley research station at the end of 4 miles of transmission line in wildfire territory. By putting solar and storage onto the site, we are able to take the transmission line out of service during wildfire season, while keeping the lights on for our customers, all for significantly lower cost than installing covered conductors to the 4 miles of transmission line through the environmentally sensitive forest. In the non-wildfire season, when the transmission line is back in service, the microgrid is expected to provide additional resiliency.As previously mentioned, we are excited about the new digital experience for our customers through our Customer First program. During the second quarter, the team successfully completed the first major implementation of our new suite of SAP tools and systems at our Massachusetts gas utility. We will be rolling out this enhanced technology platform in a phased approach across the rest of the organization over the next couple of years.The customer is at the heart of every good operational excellence strategy. We have continued to bring customer focus into action by asking our customers, after interactions with our team, about their experience. This quarter, we have started the rollout of Net Promoter Score measurements from our customers. This is on top of our existing J.D. Power service and will allow us to collect more timely and specific feedback to drive focused action as we continue to look to meet and exceed our customers' expectations.Turning to the renewables side of the business. In the second quarter, our 492-megawatt Maverick Creek Wind facility in Texas reached commercial operations and has a long-term power purchase agreement with General Mills and Kimberly-Clark. There was a blade manufacturing error, which impacted 26 of the 33 turbines at Maverick Creek. But remedies and work was completed in early June, with all 26 affected turbines returning to service. Our service agreement contains liquidated damage protections in favor of the company for revenue loss due to operating downtime.Altavista Solar, an 80-megawatt facility located in Virginia, also reached commercial operations in the second quarter. The facility has a 12-year power purchase agreement with Facebook. We are also excited to be collaborating with JPMorgan Chase on our Shady Oaks II wind construction project in Illinois, with JPMorgan Chase agreeing to purchase approximately 70% of the wind energy output, which will contribute towards the 100% renewable energy commitment. All these projects showcase our strong relationships with key commercial and industrial C&I customers.The demand from C&I customers who are helping to drive an acceleration towards clean energy is expected to be an attractive source of growth for Algonquin in the coming years, and Algonquin is well positioned to help them advance their own sustainability targets. We recently closed the acquisition of a 51% interest in the West Raymond wind facility, which reached commercial operations in the third quarter and has a generating capacity of approximately 240 megawatts, which we had previously agreed to purchase from RWE. With the close of West Raymond, we have completed the acquisition of our 51% ownership interest in 4 wind projects from RWE located in South Texas, with a total capacity of 861 megawatts and a net capacity of 439 megawatts.And finally, we remain firmly committed to sustainability through the inclusion of environmental, social and governance values in our broader corporate strategy and day-to-day operations. Last year, we released our 2020 Sustainability Report, which not only outlined our progress on our ESG goals, but also provided a higher level of detail around 9 priority issues.I'm pleased to say that we are making excellent progress on achieving our goals. We reached an important milestone, with Algonquin now owning, operating and having net interest in 4,000 megawatts of renewable generation across our 2 businesses. We are well on our way to achieving 75% renewable energy generation by 2023, another one of our sustainability targets. We have also added sustainability metrics to both our annual and long-term compensation for our leaders this year, embedding sustainability into our competencies and model.Another key ESG goal set out in our Sustainability Report is to add 2,000 megawatts of renewable power generating capacity between 2019 and the end of 2023. By the end of Q2, we have added over 1,400 megawatts of renewable generation, and we remain on track to achieving our 2023 target.We are focused on progressing and advancing our ESG disclosures to our stakeholders. I'm pleased to report that we recently launched a new data hub that can be found in the Sustainability section of our corporate website, which is further evidence of our increasing breadth and transparency on ESG data. I encourage you to take a look at the data hub, which provides detailed information around our operational metrics, governance and policy amongst many other measures.Our efforts in sustainability continue to pay off and we continue to receive external validation, including the recent inclusion of Algonquin into Corporate Knight's 2021 Best 50 Corporate Citizens, ranking within the top quartile of our peer group of power, transmission and distribution companies.With that, I'll pass it over to Arthur, who will speak to our second quarter 2021 financial results. Arthur?

[Arthur Kacprzak, Chief Financial Officer]

Thank you, Arun, and good morning, everyone. I'm pleased to report that Algonquin has made good progress meeting its financial targets for 2021 with solid financial results for the second quarter. The Q2 results are underpinned by Algonquin's diversified and resilient business model and proven track record of ambitious but responsible growth.Turning to Slide 11. Our second quarter 2021 consolidated adjusted EBITDA was $244.9 million, which is up approximately 39% from the $176.3 million we reported in the previous year. The Regulated Services Group delivered $165.9 million in operating profit in the current quarter, which compares to $114.5 million in the same quarter last year. The year-over-year improvement is primarily attributable to the additional contribution from BELCO, our Bermuda Electric Utility, and ESSAL, our Chilean water utility, as both acquisitions closed in Q4 of last year; as well as from the contribution of our wind facilities that were placed in service as part of the Greening the Fleet initiative that Arun spoke about earlier.Results are also benefited from new rates implemented at the Granite State and CalPeco Electric System, but were partially offset by higher fuel costs in the central region, resulting from out-of-period resettlements relating to storm Uri and increased operating expenses. I should also note that the Regulated Services Group did not experience any material impacts from COVID-19 this quarter, but the comparative results from Q2 of 2020 were negatively impacted by the pandemic by approximately $9.6 million.The Renewable Energy Group reported Q2 divisional operating profit of $97.9 million, which compares to $82.7 million in the same quarter last year. The increase is primarily due to the addition of the Sugar Creek and Maverick Creek Wind facilities and the Great Bay II Solar Facility. This was partially offset by lower production due to resource shortfalls, primarily across our wind portfolio. Excluding the impact of the newly added facilities, production at our renewable facilities was approximately 7% lower than last year or approximately 12% below the long-term average expected production.I should also mention that our investment in Atlantica's sustainable infrastructure continues to provide benefit to the Renewable Energy Group's operating profit, with dividends received increasing by $2.1 million over the comparative quarter, supported by Atlantica's continued growth in cash flows.Quarter-over-quarter, corporate and administrative expenses remained generally flat. Interest and depreciation expenses both increased due to higher property, plant and equipment and the associated financing related to the acquisitions that closed late in 2020. Income tax expense was lower and benefited from renewable energy tax credits recognized. In total, our Q2 adjusted net earnings per share came in at $0.15, which is up 67% from the $0.09 reported last year.Moving on to Slide 12, to provide some updates on our 2021 capital plan and financing activities. During the quarter, Algonquin deployed approximately $1.2 billion of capital, pertaining primarily to the previously discussed initiatives and initiatives relating to the safety and reliability of our electric, water and gas systems. This brings the total capital deployed so far this year to approximately $3.1 billion and on track to our expected capital deployment in 2021 of over $4 billion.Moving on to financing activities. I'm pleased to say that during the quarter, we made great progress in derisking our 5-year financing plan, further strengthening our balance sheet and reinforcing our commitment to BBB flat credit metrics. During the quarter, Algonquin completed a green mandatory equity units offering. Due to strong demand, the deal was upsized from the indicated $900 million size and the full overallotment option granted to the underwriters was exercised, bringing the total gross proceeds from the offering to $1.15 billion. The units are expected to receive 100% equity credit from Standard & Poor's.The transaction represents several firsts for Algonquin and the market in general. To our knowledge, this was the first green mandatory equity unit offering ever done, showcasing Algonquin's ongoing leadership and commitment to deploying capital to support sustainable initiatives. This was also the first offering by a Canadian issuer of a mandatory equity unit, which are more frequently used by some of our utility peers in the U.S.As you maybe heard me mention in the past, what we find attractive about the mandatory equity units is the natural match they provide to our business in terms of when we pay for our capital and when we earn on it. The securities deferred the issuance of shares until conversion after a 3-year period but received 100% equity credit immediately from S&P. Investors benefit from an enhanced yield and the issuer can partly benefit from share price appreciation, which can result in an overall lower cost of capital compared to common equity. Through this issuance, we have further expanded and diversified Algonquin's investor base and introduced another tool to fund future potential accretive growth opportunities.During the quarter, the company also utilized its ATM program, raising approximately $135 million of common equity. We view the ATM program as allowing us for cost-effective and opportunistic issuance of our common stock, we plan to remain disciplined in its use. To date, we have also received funding from over $1 billion from tax equity investors, monetizing the tax benefits associated with the renewable energy projects in the U.S. In total, I would say that we have satisfied the preponderance of our capital needs for the year and have positioned our balance sheet to continue to execute on Algonquin's growth plans. For the rest of the year, we will continue to monitor the hybrid debt markets as a potential opportunistic source of capital in the current low-yield environment.Before I turn things over back to Arun, I'd like to provide a brief update on our 2021 guidance. Algonquin continues to execute well against its 2021 financial targets. As discussed, we have already delivered approximately 1,400 megawatts of new renewable generation capacity from our 2020 construction pipeline. In addition, we have and continue to expect to benefit from the first full year of operations from BELCO and ESSAL. Excluding the impact of the market disruption on the Senate Wind facility related to storm Uri in Q1, we continue to expect our 2021 adjusted net earnings per share to be within the range of $0.71 to $0.76 as communicated previously.We continue to assume in our earnings expectation, normalized weather patterns as well as resource availability and production of our renewable generation facilities that are within long-term averages. We also assume that the closing of New York American Water will occur sometime within the fourth quarter of 2021, although a further delay in the closing is not itself expected to materially impact our 2021 adjusted net earnings per share estimates.I also want to reiterate that our 5-year capital plan of $9.4 billion remains on track. Having already deployed over $3 billion of capital this year, we are well on our way to meeting our 5-year targets.With that, I'll now hand it back to Arun to outline our growth plans.

[Arun Banskota, President, CEO & Director]

Thanks, Arthur. Before we close out our prepared comments this morning, I want to give an update on our strategic initiatives. As we look to simplify our business further, on August 6, we took a step towards simplification by exercising the option to acquire Abengoa's interest in AAGES. Given the change in ownership, we will be referring to AAGES and associate entities as Liberty development.Liberty development will remain focused on advancing Algonquin's nonregulated development pipeline in North America and selected international markets. Abengoa's interest is expected to be acquired by funds managed by the infrastructure and power strategy of Ares Management LLC, with Algonquin retaining the right to acquire 100% of Liberty development projects. We also anticipate that Ares will remain involved in projects until commercial operations.At Investor Day, we spoke about our $9.4 billion 5-year investment plan from 2021 through 2025, which has identified projects that make up the entire $9.4 billion with most of them now in operation, under construction or in advanced stages of development. Let me provide the latest update.The following projects have reached commercial operations since last November: Maverick Creek, Sugar Creek, Altavista on the renewable side. While on the regulated side, our 3 Midwest wind projects, totaling $1.1 billion in investments, were also completed. On the construction side, our 175-megawatt Blue Hill Wind Project in Saskatchewan and 24-megawatt Val Éo wind project in Quebec continue to progress well, with turbine deliveries in flight.We are also progressing well on our new sites, demonstrating the ongoing execution of our development portfolio. Shady Oaks II has signed an agreement with JPMorgan Chase, as I discussed earlier, and the project commenced construction in May. We have also included 2 PJM solar projects that will have incremental additions at Investor Day. In the first quarter of 2021, we completed the acquisition of these 2 Ohio solar projects, which had an expected combined capacity of 235 megawatts with the first project, Newmarket Solar at 100 megawatts having begun construction in May. We also recently executed equipment procurement's contracts for both our Deerfield II and Sandy Ridge II wind projects.I note that recent inflation and commodity pricing trends will likely result in higher project costs. Conversely, on-state contracts have seen similar increases in pricing recently, which may help to offset the impact, if any, of increased commodity risk. The Renewable Energy Group seeks to mitigate impact on project returns by working in generating equipment, construction prices and offtake as close to contemporaneously as possible.We continue to invest in the 3,400 megawatt greenfield pipeline that we discussed at Investor Day. As a reminder, this greenfield pipeline investment is over and above our $9.4 billion capital plan. Our greenfield investments are focused on securing new opportunities and continuing to advance the projects comprising the 3,400 megawatts. The Chevron project are included in the 3,400 megawatt greenfield pipeline. These projects continue to progress well, and we are on track to achieve final investment decisions for the initial projects by year-end. As discussed in the past, the greenfield pipeline is being built to replenish the more advanced projects included in our 5-year $9.4 billion capital plan.I'm proud of all we've accomplished so far this year, but even more excited for what lies ahead. With society and economies working hard to minimize carbon emissions, I'm excited about how Algonquin's regulated and renewables businesses position the company to contribute to and benefit from this decarbonization transition. We have multiple levers of growth across our 2 businesses that I've spoken about throughout today's call, which gives me further confidence in our opportunity to execute and deliver on our 5-year investment and growth plan.In summary, 2021 has been a very productive year so far as we continue to execute and deliver on the company's largest construction program in its history, with approximately 1,400 megawatts of the 1,600 megawatts already placed in service. For context, these new projects are expected to approximately double the size of the company's portfolio of renewable energy generation facilities that we own and operate. Our 3 strategic pillars of growth, operational excellence and sustainability will be a key foundation as we continue to build the business and strive to deliver steady earnings and dividend growth, creating long-term shareholder value.With that, I will turn the call over to the operator for any questions from those on the line.

[Operator]

[Operator Instructions] And your first question comes from the line of Sean Steuart with TD Securities.

[Sean Steuart, Research Analyst]

Thanks for all the detailed commentary. A couple of questions. With respect to the Empire rate request, a 10% ROE and 52% equity thickness, that looks similar to what was rejected last year. Can you give us some thoughts on the request this time? What gives you confidence that this is reasonable? And how things might have changed over the last year or 2 to give you that confidence?

[Arun Banskota, President, CEO & Director]

Sure. Sean, thanks for that question. So look, first of all, it's still early. We just very recently filed for that rate case. As we've said in prior calls, we continue to be confident in our position on equity thickness. And we believe we will get the right outcome around equity thickness.

[Sean Steuart, Research Analyst]

Okay. And further to that, the securitization of the costs tied to the weather event. Can you walk us through that process and how that could evolve to get to $30 million there?

[Arun Banskota, President, CEO & Director]

Sure. As you know, Sean, the legislature has recently passed legislation of -- that approves securitization of such extraordinary costs. And we do plan to avail of that mechanism. We are looking at -- we've started the internal process around that. Just as a reminder, of the $80 million increase, $30 million of that is from storm Uri. And outside of that, our rate case increase is more in the 7% range, which translates approximately to 1.4% CAGR when you look at it from the last rate increase in 2017.

[Sean Steuart, Research Analyst]

Okay. And then one last question, maybe for Arthur. You guys seem very focused on, obviously, growth here. But any updated thoughts on capital recycling as a longer-term funding source to feed the broader growth ambitions for the company? Any updated thoughts on potential for asset sales to fund earlier stage development?

[Arun Banskota, President, CEO & Director]

So before I turn to Arthur, I would say that, look, capital recycling is always on the agenda for us. When we announced that back in -- at Investor Day, we're still about 6, 7 months now from that point onwards. Still early days, but capital resizing is absolutely something we continue to look at as an option.

[Arthur Kacprzak, Chief Financial Officer]

I don't really have anything to add, Sean. It's on the radar. We look at it. It's nothing concrete to talk about at this stage.

[Operator]

And your next question comes from the line of Rupert Merer with National Bank.

[Rupert M. Merer, Managing Director and Research Analyst]

So getting back to the rate cases that you filed, can you give us a sense of the timing of the hearings here? And are you seeking any additional smoothing mechanisms and maybe a move-off piece of accounting with the rate case you filed with Empire?

[Arun Banskota, President, CEO & Director]

Sure. So we filed a rate case just late May. Now let me turn it to Johnny for further details.

[Anthony Johnston, Chief Operating Officer]

Yes. So hearings set will be later on, until back end, I think of this year. We're not expecting a decision until Q2 of next year. And we will work through with the commission and our stakeholders in terms of the best way to implement any increase. So we're certainly open to smoothing rates in a way that works for our customers.

[Rupert M. Merer, Managing Director and Research Analyst]

Right. Great. And Arun, you've completed the Greening the Fleet initiative in Missouri. You're looking at some new regulated investments at CalPeco. Is there more to come here? How soon before you could look at, say, Greening the Fleet Phase 2 in Missouri? Is there political support for doing many more investments like this across your asset base?

[Arun Banskota, President, CEO & Director]

We believe so, Rupert. And again, we're proud of the fact that we are pretty much entrepreneurs in this area. We look at it across our existing fleet. In fact, even on our water utilities, which there's a lot of energy that goes into moving water, and we look at that as well as an option.Even when we acquired BELCO, one of attractions for us was the fact that in a highland economy, it is -- pretty much all of it is a thermal generation. And with customers paying over $0.30 per kilowatt hour, and we strongly believe that there's a lot of ability to green the fleet in that case as well. So that's something we look at in pretty much every instance, whether it be with our existing portfolio or anything new possibilities we look at as well.

[Rupert M. Merer, Managing Director and Research Analyst]

So how long before you think we could see some more Greening the Fleet initiatives like at BELCO, for example?

[Arun Banskota, President, CEO & Director]

Stay tuned, Rupert. We're obviously excited to let everybody know as soon as we are able to announce it.

[Operator]

And your next question comes from the line of Nelson Ng.

[Nelson Ng, Analyst]

Great. Just to follow up on Rupert's question. Now that you have finished greening or you've start -- you finished the first phase of greening Empire, I'm just wondering, like bigger picture, now that you've kind of gone over that hump on your capital plan, spending about 1/3 of the -- of your 5-year capital plan in the first 6 months. If you -- I guess the question is, if you see an opportunity that's similar to Empire where you had the opportunity to buy some assets that has coal, would you do it? Like would you buy a utility with significant coal assets? Like does that -- is that something you would look to do?

[Arun Banskota, President, CEO & Director]

Look, it's a speculative question. And so I'll answer in a similar way, right? So first of all, we have a very attractive ESG profile. I mean when you look at our carbon intensity at 0.0013 per dollar of revenue, that's among the lowest, lowest among our peers, right? And in our history, Nelson, I like to repeat this fact, in our 33 years of existence, we've never ourselves developed and therefore, added to the world stock of indices. And at the same time, we are very good stewards of infrastructure. And so some of the numbers we gave you around Midwest greening with a reduction of 26% carbon intensity in just 3 years, in CalPeco, 46% reduction in carbon intensity in just 3 years.I think besides what we do on the renewable energy side of the business, in terms of investing in renewable energy assets for the good of our customers and our shareholders and the world at large, I think it's a similar profile on the regulated side on Greening the Fleet, which I believe is good for our customers, our shareholders and the world at large. So if there are similar kinds of opportunities where we can utilize our Greening the Fleet initiatives, we will take a hard look at that.

[Nelson Ng, Analyst]

Okay. That's clear. And then just moving over to CalPeco in terms of the rate case filing. I haven't gotten a chance to go through it. But the roughly $36 million increase seems like a big increase for utilities, that's not that big. Could you just run through some kind of big picture items in terms of what's driving the rate increase there at CalPeco?

[Arun Banskota, President, CEO & Director]

Yes. Let me give the big picture, and I'll turn it over to Johnny. So the vast majority of that increase is really associated with wildfire mitigation. And as you know, in California, in that greater geography, that's obviously something that's extremely important. We want to make sure we keep our customers and the community safe. Johnny?

[Anthony Johnston, Chief Operating Officer]

Yes. I mean, I think the short story is it's really what our wildfire costs have driven that increase. And it's the investments that we're making to reduce the risk of future impacts in the area, is the ongoing activities of increasing our tree trimming and monitoring so that we are able to sort of take our lines out of service at high risk time -- period of time.I think maybe the important point to note, despite the significant increase, even with -- if it were fully approved, we'd still be one of the lowest cost rates in California. And actually, if you look at what the other California utilities have been filing in terms of their rate increases, the majority of them have had 30% to 40% increases at sort of in this time frame, really driven by summer activities. So it is a big step-up, there's no doubt. And we're always very focused on the bill impact for our customers, but really, this has been driven by the evolving landscape in California.

[Nelson Ng, Analyst]

And just to follow up on that, is that increase like -- is it mostly to service higher operating costs? Or are you making a lot of capital investments? Like what's the mix roughly?

[Anthony Johnston, Chief Operating Officer]

It's roughly 50-50. And so there is significant investment going in, in terms of putting in covered conductor, modernizing our switching and fusing technology as well as some of the operating cost expenses that have covered off. So this is roughly 50-50.

[Operator]

And your next question comes from the line of Ryan Greenwald with Bank of America.

[Ryan Greenwald, Associate]

I appreciate your commentary earlier on potential coal opportunities and transition. But kind of given the media reports earlier this week, can you comment a bit more broadly just on your overall assessment of the regulated M&A landscape, ahead of the pending CapEx update at the end of the year here?

[Arun Banskota, President, CEO & Director]

Sure. So as everybody well knows, just a number of regulated M&A opportunity out there. When you look at it in 2010, for example, or 2000 versus now, that landscape has significantly shortened, right? So just a number of utilities out there are fewer with some of the consolidation that has been going on.And if you look at our $9.4 billion 5-year plan, right, we only include acquisitions that we've already announced. So we have signed New York American Water in there. Our $9.4 billion plan was not dependent on any future acquisitions. But having said that, we do look at that as our possible lever, another growth lever to enhance our growth even further and provide more shareholder value. So that's really the context.

[Ryan Greenwald, Associate]

Great. And then given broader concerns around the supply chain and inflationary pressures, is this having any impact on the way you think about the development pipeline? Any hesitation to go through with some of the potential projects given pressure on returns?

[Arun Banskota, President, CEO & Director]

So far, we are not seeing that, Ryan. And again, what we have seen is some of the increase on the supply chain has been offset by price increases on the offtake side of the ledger. And also, one of the strategies we've deployed is try to finalize the supply contracts, the construction contracts and the offtake contracts as close together as possible so that there is very little residual risk that we're taking in terms of commodity increases and the like.So far, we are -- we continue to accelerate our greenfield pipeline and other such projects. But we always have the options of delaying anything if such a contingency does that.

[Operator]

And your next question comes from the line of Rob Hope with Scotiabank.

[Robert Hope, Analyst]

First question is just on the 2021 EPS outlook that you reiterated. As we're kind of halfway through the year, can you talk about the puts and takes? It looks like taxes have been a pretty strong tailwind so far. Was that originally anticipated? Or is that offsetting kind of some of the weakness we're seeing in the renewable generation side?

[Arthur Kacprzak, Chief Financial Officer]

Rob, it's Arthur here. Sure, I can speak to that. So in terms of our outlook for the rest of the year, like I mentioned in my prepared commentary, we are reiterating our guidance between the $0.71 and $0.76. And in terms of when setting that guidance, I mean, we factored in several things. One of the things, obviously, being impacts of COVID, which thankfully we actually didn't see. So that is providing us a little bit of room. On the flip side, I mean, we did have a little bit of milder weather, obviously, throughout the year as well. So those 2 things are, to some extent, offsetting.Now to your second question around tax credits and I would say, a portion of the tax credits, yes, were not on plan, but maybe it's more of a function of geography where they're recorded. And I'll explain a little bit further, where as you're aware, we had the delays in the final commissioning of Maverick and Sugar Creek due to the blade issues there. So what that basically did is, in essence, it delayed the final investment by tax equity into those projects.So normally, what we would have seen for the year is if tax equity invested, we would have seen that those credits that were generated from the turbines that we're operating going through HLBV versus here, we had the opportunity to obviously take these credits and self-monetize them. So you're maybe seeing a little bit more in the tax line versus what you would have been seeing a little bit more in the EBITDA line, otherwise, if that wasn't the case. But overall, it kind of washes in the results.

[Robert Hope, Analyst]

And then maybe just a follow-up question on the Ares partnership there. Can you just walk us through your thinking of not taking 100% of AAGES? As well as whether or not -- I guess, what does Ares bring to the table and kind of what future partnerships could look there?

[Arun Banskota, President, CEO & Director]

So Rob, just to give you context, as you know, Abengoa was our 50% partner on AAGES. And given all of the challenges that they were having with the restructuring, the -- so it was timely for us to find a new partner. And so we have exercised the option. And we -- these areas does provide quite a bit of constructive experience and know-how in this sector.And they were, in 2020 for example, one of the 10 largest wind financiers. They also have companies that are in the construction business as well. So we believe that they bring both the development and construction expertise as well as financing capability to develop and to finance our construction activities. And that's where the fit is.

[Operator]

And your next question comes from the line of Ben Pham with BMO.

[Benjamin Pham, Analyst]

I had a couple of follow-up questions on utility M&A. Could you -- can you comment more broadly the criteria that you're most focused on now? Size, geographic diversification, synergies? Anything else you can share? And more specifically, just listening to your answers to earlier questions and with these Kentucky assets, would that fit into your overall preferences or targeting?

[Arun Banskota, President, CEO & Director]

Sure. Ben, lots of questions in there. So let me try to structure those questions, right? So first of all, geography is pretty clear. I mean it's North America. And again, we don't say never on -- other than North America. So for example, Chile was a case in point. But by and large, the geography is North America, right? We are one of the few companies that are across all 3 modalities: electric, water and gas. We are very, very bullish on electric and water. They fit extremely well with our ESG profile.Right now, on the gas side, we are focused much more on deploying renewable natural gas into our facilities. We have filed the first one in New Hampshire. We're looking at a pipeline of a lot more. And we're also looking at green hydrogen. We -- in New Brunswick, for example, we participated in a Maritime study, and we are following a number of other pilot projects that are out there in green hydrogen, that's our focus on the gas modality. So -- but on specific transactions, we have a policy to never comment on specific transactions, so I thought I'd leave it at that.

[Benjamin Pham, Analyst]

Okay. And then accretion that you want -- one accretion out of the gate?

[Arun Banskota, President, CEO & Director]

On the financial, absolutely. I mean, look, I mean, we don't -- we look at -- from a strategy perspective, clearly, it has to fit all of our strategic objectives, but we do not make -- kind of do transactions based upon strategy. I mean these transactions are absolutely have to stand on their own. We look at a lot of different metrics, and we are extremely disciplined around those. And we obviously end up not doing many more transactions than we end up transacting on. So absolutely extremely disciplined around the financial metrics.

[Benjamin Pham, Analyst]

Okay. And then the second one is on funding side in here, would execute something made it a bit larger than you see every month, your balance sheet [indiscernible] convert to their room. You mentioned the hybrid. Like how would you think about that impacting your funding plan?

[Arthur Kacprzak, Chief Financial Officer]

Yes. I mean -- and from our perspective, I mean, one thing I would say maybe generally, look, we've never kind of fallen behind on our balance sheet strength. We always -- we maintain a strong balance sheet. I think that itself kind of brings us from a position of strength, call it. To some extent, I mean, in speculating around any funding sources, as I said in my prepared remarks, lots of tools in the shed, right, in terms of what to be able to -- where to source capital.

[Operator]

And your next question comes from the line of Mark Jarvi with CIBC.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Just wanted to clarify one thing on the response to Ben's question. You talked about the different financial metrics you look at for a deal making sense. Was EPS accretion sort of the top list? It wasn't 100% clear EPS accretion has to be on day 1?

[Arun Banskota, President, CEO & Director]

Absolutely. We look at our EPS accretion. That's probably our most fundamental and most important metric we look at. Absolutely, Mark.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Perfect. And then also lots of action in California this year and we've seen reports that you guys entered the energized lines at CalPeco. Can you just update us in terms of any earnings hit or any potential liabilities that might be faced? Or so far, you've been unscathed by the wildfire action?

[Arun Banskota, President, CEO & Director]

Sure. So I think, Mark, we did report earlier -- we talked about the Mountain View wildfire and the investigation continues on that one. We also recently faced another wildfire, the Tamarack wildfire which is a much smaller one in comparison. That one is largely contained. We -- look, our [ team ] did an amazing job in terms of mitigating the wildfire and bringing all of the customers back online in a very, very short period of time. It is extremely impressive to see what our employees were able to do out there in bringing generators in place even for just a few customers. Reliability is so important.And yes, and that was all of the background and context behind what we're seeking for in terms of the new risk is because we do believe we need to continue to invest in wildfire mitigation assets. And that is really the context behind the most recent rate case filed.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Okay. And then just one more thing, just on the Ares partnership in the simplification, maybe Arthur, you can explain in terms of, will all the investments flow through your own financial statements? Is there still some SPVs involved in some of that stuff? And any capital commitments from Ares on any investments going forward?

[Arthur Kacprzak, Chief Financial Officer]

So maybe the simplest answer is, in essence, how it's going to flow through the financial statements, it's basically status quo in terms of how you currently see it to the extent that you will still see [indiscernible] being accounted for as a joint venture.

[Operator]

And your next question comes from the line of Naji Baydoun with IA Capital Market.

[Naji Baydoun, Equity Research Analyst]

I just wanted to start with the renewable projects that are already in the hopper. Can you just remind us of what's contracted -- so Shady Oaks, you have the contract with JPMorgan. What about the Ohio solar projects? Or some of the other projects coming on in the pipeline?

[Arthur Kacprzak, Chief Financial Officer]

Yes. Yes. Thanks, Arun. Happy to do that. You're you're absolutely right with Shady Oaks II in terms of the offtake with JPMorgan, the new market, that portfolio is also contracted and all of the projects that we have under active construction are contracted at this point in time.

[Naji Baydoun, Equity Research Analyst]

Okay. But I guess the other projects that are, let's call, in advanced development, are those -- what's still left to be contracted from those?

[Arthur Kacprzak, Chief Financial Officer]

Yes. So the two -- we've got the Sandy Ridge II, which is in advanced development, which is contracted and we've got Deerfield II, which we're in active discussions on the contracting, but have not signed the contract yet.

[Naji Baydoun, Equity Research Analyst]

Okay. Okay. Got it. That's good. And just on the...

[Arun Banskota, President, CEO & Director]

Just for context, I mean, the offtake contract happens towards the really very end before what we say internally as notice to proceed. So that's where we try to make sure we -- the supply contract, the construction contract and the offtake contract comes together, and that's when we go notice to proceed. So usually, it really happens towards the end of the development cycle.

[Arthur Kacprzak, Chief Financial Officer]

Arun, fully agree on that. That's very intentional on our part for the reasons that you cited earlier in terms of making sure we get alignment between cost and the offtake contract.

[Naji Baydoun, Equity Research Analyst]

Understood. And just on the Luning project, is this both the solar and the storage system together that you're working on?

[Arun Banskota, President, CEO & Director]

That is correct. It's a solar plus the 240-megawatt hour battery storage system. That's correct.

[Naji Baydoun, Equity Research Analyst]

Okay. I just want to get your thoughts broadly on, I guess, how you're thinking about storage. This is maybe the first project within the utility business, but just wondering how you're thinking about storage both within the regulated portfolio, but also maybe the nonregulated side of the house.

[Arun Banskota, President, CEO & Director]

Actually, we already have around what, 20 megawatts worth of capacity on the regulatory side of the business on storage. And on the renewables energy side of the business, our first project in New York State is under construction that it's a solar plus battery storage project. Look, given the prices on storage and the ability to shape up perhaps the energy outflows, we look at storage on every wind and solar project to see if it makes sense. And so it's very much part of the equation already.

[Naji Baydoun, Equity Research Analyst]

Okay. So it sounds like there's maybe opportunities on -- to add on both sides?

[Arun Banskota, President, CEO & Director]

Absolutely. And again, the reason I was telling you about the 20-megawatt plus on the regulated side is we're already deeply in it. We already have a lot of know-how and experience in operating these battery storage systems. So we absolutely will continue to look at storage as yet another area of technology growth.

[Naji Baydoun, Equity Research Analyst]

Understood. That's very helpful. Just, I guess, last question on that is what also meant by regulated versus nonregulated. Maybe how you think about the risk and the returns? And if you had to choose a project, would you -- on the storage side, does it make more sense for you today to have it within the utilities or not?

[Arun Banskota, President, CEO & Director]

I mean the risk profile is somewhat different on the two sides, but not that much, given the fact that even on our renewable side of the business, it's largely contracted. It was a long-term contract remainder average weighted life of 13 years. But still, there is some risk/reward difference, but it's not large enough for us to say we're going to put all of our capital on storage on one side or the other. I mean we believe that there's a lot of opportunities on both the regulated and the renewable side of the business.

[Operator]

And your final question comes from the line of David Quezada with Raymond James.

[David Quezada, Vice President & Equity Research Analyst]

Just one quick one for me. Arun, you mentioned renewable natural gas a little bit in your comments. Just wondering if there's any color you could provide around the timing and maybe the quantum of that opportunity. And given the tax credit that has been, I guess, proposed, could you look at that outside of the regulated footprint?

[Arun Banskota, President, CEO & Director]

Absolutely, David. We are already looking at it outside our regulated footprint as well. We have a development pipeline across every one of our gas utilities that is looking at renewable natural gas. We believe that at its maximum, it could actually substitute for approximately 25% of all of the natural gas that flows through our gas LDC system. So it's pretty attractive from that perspective. The pricing is something obviously, we're working on. One of the things we'll be very focused on is trying to make sure that it doesn't impact customer bill. So we're looking at different kinds of structures.It reminds me of the days of renewable energy a decade ago, when the prices were higher, but there were enough of a customer base out there that were willing to pay higher prices for the sustainability gain for renewable energy. And I think we see a similar pattern on the renewable natural gas side as well, where there's enough of a commercial and industrial customer base that is willing to pay the initial higher prices on renewable natural gas.Now a lot of the stuff that is going on in -- with the Biden administration's Climate Action bill should help in terms of bringing that cost down even further. So we're actually looking at that and have clearly a robust development pipeline on LNG.Okay. David, thank you very much. And thank you, everyone, for taking the time on our call today. With that, please stay on the line for our disclaimer.

[Amelia Tsang, Vice President of Investor Relations]

Thanks, Arun. Our discussion during this call contains certain forward-looking information, including, but not limited to, our expectations regarding earnings, capital expenditures and size and timing for completion of our projects. This forward-looking information is based on certain assumptions, including those described in our most recent MD&A filed on SEDAR and EDGAR and available on our website and is subject to risks and uncertainties that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information.Forward-looking information provided during this call speaks only as of the date of this call and is based on the plans, beliefs, estimates, projections, expectations, opinions and assumptions of management as of today's date. There can be no assurance that forward-looking information will prove to be accurate, and you should not place undue reliance on forward-looking information. We disclaim any obligation to update any forward-looking information or to explain any material difference between subsequent actual events and such forward-looking information, except as required by applicable law.In addition, during the course of this call, we may have referred to certain non-GAAP financial measures, including, but not limited to: adjusted net earnings; adjusted net earnings per share or adjusted net EPS; adjusted EBITDA; adjusted funds from operations; and divisional operating profit. There is no standardized measure of such non-GAAP financial measures and consequently, AQN's method of calculating these measures may differ from methods used by other companies, and therefore, they may not be comparable to similar measures presented by other companies.For more information about both forward-looking information and non-GAAP financial measures, including a reconciliation of non-GAAP measures to the corresponding GAAP measures, please refer to our most recent MD&A filed on SEDAR in Canada or EDGAR in the United States, and available on our website. And that concludes the conference call.

[Operator]

And this concludes today's conference call. Thank you for your participation. You may now all disconnect.