Thank you for standing by. This is the conference operator. Welcome to the Algonquin Power and Utilities Corp. First Quarter 2019 Analyst and Investor Earnings Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Christopher Gerhardt, Vice Chair of Algonquin Power and Utilities Corp. Please go ahead.
Great. Good morning, everyone, Thank you for joining us this morning for our 2019 Q1 earnings conference call. As mentioned, my name is Chris Jarrett, 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 Bronachesky, our Chief Financial Officer. To accompany our earnings call today, we have a supplemental webcast presentation available at algonquinpowerandutilities.com and additional information on our results is also available for download at this site.
Over the course of the call, we will be providing information that relates to future events and expected financial positions, which should be considered forward looking. Our full disclosure on forward looking information and non GAAP financial measures are available on our website, and we will read the full disclaimer at the end of this call. On our call this morning, Ian, as usual, will provide the strategic achievements for Q1 2019 and David will follow-up with the Q1 financial highlights. Ian will then conclude with our strategic outlook for the business and then we'll open the lines up for questions. And as usual, we ask that you restrict your questions to 2, even though sometimes you don't, and we will re queue if you have any additional questions to allow others the opportunity to participate.
And with that, I will turn it over to Ian to start the presentation.
Great. Thanks, Chris, and good morning to you who've been able to join us on the call this morning. So as Chris mentioned, I'd like to start the conversation with some of the highlights from Q1. So firstly, in terms of financial results for the quarter, we felt the performance was generally in line with expectations. Slightly better than forecast performance in our regulated utilities helped offset lower than average resource conditions in our wind and hydro group.
With respect to year over year performance analysis, I think it's important to try to look through the one time impact of U. S. Tax reform within our Q1 2018 financials. And without the impact of the one time income acceleration in 2018 from the U. S.
Tax reform, Q1 2019 adjusted EBITDA shows approximately a 3% increase as compared to the same quarter last year. Q1 twenty nineteen adjusted EPS of $0.19 would be compared against the one time tax reform adjusted Q1 twenty eighteen EPS of around $0.21 We see ourselves as a business which is built from long lived assets and stable operations and we've consistently been able to produce stable and growing financial results and remain highly confident in our plans to continue delivering strong returns to our shareholders. We're pleased that Algonquin's performance throughout 2018 and our strong financial positioning has led to support from our Board of Directors to approve an increase in our common share dividend of 10% will apply to this quarter's dividend, which was declared yesterday. Secondly, and as to progress on our organic growth initiatives in the quarter, we made positive progress on the customer savings plan in the Midwest with recent approval granted by the Arkansas Commission. And following a hearing in front of the Missouri PSC, which was completed last month, We're hoping for an approval in Missouri by the end of this quarter.
Regulatory approval for the Granite Bridge Natural Gas Pipeline LNG and Storage Facility heads closer with filings made in the New Hampshire PUC. Perhaps a little disappointingly and I'll touch on it a little bit more. The PUC schedule won't allow completion of the process until this fall. And within Liberty Utilities, we secured $6,000,000 increase in our annual revenue requirement from completed rate reviews in Georgia and Massachusetts. And lastly, I think we've taken some positive new steps in advancing our development initiatives.
On the international front, we were pleased to announce that AAGES was selected as the successful proponent for the development of a 60 kilometer 500 kV transmission line in Uruguay. This project now could be added to the to do list for our international development team. Secondly, we're pleased to have completed a $30,000,000 investment in the San Antonio water pipeline. Some of you may recall that this is the close to $1,000,000,000 water delivery project in Texas, in which Abengoa owned a 20% interest at the time we announced our international expansion initiative. Close to home here in Canada, the quarter saw the closing of our partnership with Fortis in the Watanay Naytayap Northern Ontario transmission line.
We're pleased that the project has now received leave to construct approval from the Ontario Energy Board and is now awaiting environmental approvals. Project teams working with EPCs with construction expected to commence later this year. So all told, I think we took some positive steps to continue building the business and creating value for shareholders in this quarter. And so with that, I'll pass things over to David for a review of the Q1 twenty 19 financial results. David?
Thanks, Ian, and good morning, everyone. In the Q1 of 2019, our business operations overall generally performed in line with our expectations. Our results last year reflected certain one time items related to the 1st year implementation of U. S. Tax reform, which makes year over year comparisons somewhat Our Q1 2019 adjusted EBITDA on a consolidated basis was $231,500,000 which when adjusted for the one time effect of U.
S. Tax reform works out to about an increase of about $8,000,000 over the same period last year. Within Liberty Power, the business generated a divisional operating profit of $83,100,000 Liberty Power had 2 new facilities contributing to our EBITDA in Q1, including a full quarter production from our 75 Megawatt Great Bay Solar and our 75 Megawatt Amherst Island wind facility. As well, our incremental interest in Atlantica generated increased dividends this quarter. These new facilities contributed incremental EBITDA adjusted over Q1 in 2018, some of which was offset by slightly lower resources and production from our fleet of renewables and especially when contrasted to the above average conditions that we did have last year.
Growth and diversification continues to allow us to report solid results quarter after quarter. Net of U. S. Tax reform impacts and despite modestly weaker than expected resource conditions, Liberty Power's divisional operating profit increased by approximately 11% on a year over year basis. On the utility side of the business, Liberty Utilities generated Q1 2019 divisional operating profit of $161,300,000 which is consistent with the previous year and is a solid result given that it has absorbed the effects of lower revenues from U.
S. Tax reform across over 93% of our utility customer base. Adjusted EPS came in at $0.19 for Q1 2019 and well down
from the $0.32 we reported
in Q1 last year. That largest variance is, of course, related to HLBV income acceleration and other impacts of U. S. Tax reform that were reflected last year. Last but not least, we are pleased to have announced the 10% dividend increase in our common share dividend starting with our Q2 2019 dividend, which will increase it from the current 0.128 $2 per share to a new quarterly dividend of $0.1401 per share.
The dividend increase is consistent with the growth trajectory of our business and aligns with our stated dividend growth guidance we provided at our last Investor Day in late 2018. With that, I'll hand things back over to Ian for a future look.
Thanks, David. And before I close out on our prepared comments this morning, I wanted to give a quick update on the main areas and growth on which we focused in 2019. And then, as usual, open up the lines for the question and answer period. So first off, I mentioned that we've reached some important milestones in our efforts to bring new wind generation to bear to lower costs S. Midwest.
With the approval in Arkansas now behind us, we're looking forward to receipt of approval in Missouri before quarter's end. And as you can imagine, on a parallel path, we're working on all of the contracting and construction arrangements for each of the 3 projects comprising our customer savings plan, that being Kings Point, North Fork and Neosho Ridge. And we're ready to move into construction mode promptly following receipt of the final approvals. 2nd, a little bit a couple of thoughts on Granite Bridge. The Granite Bridge pipeline and storage infrastructure projects designed to improve local gas system reliability, lower costs and provide additional gas supply to support new customers in our service territories.
Further project submissions were made to the New Hampshire Public Utilities Commission in April. And I said that disappointingly with the other items on the docket in New Hampshire and the summer schedule, the next hearings will likely take place not until the fall of this year. And at this point, we anticipate that the New Hampshire Site Evaluation Committee filing will be made so as to support a final investment decision sometime early next year. And on the development side, engineering public consultation work on Granite Bridge continues to press ahead. Just a quick update on some of the previously announced gas utility acquisitions.
Things are marching ahead on the regulatory approval front for both of these terms terms of announcing these acquisitions, they're currently neck on neck in terms of reaching regulatory approvals. But we expect closing on both of these acquisitions in Q3, and therefore, they'll be in a position to make a contribution to earnings this year. And then summing up on some of our development initiatives, we've got some exciting opportunities underway within our infrastructure development group. At the beginning of the call, I mentioned our AAGES group was the winning bidder on an electric transmission project opportunity in Uruguay. It's I think it's an interesting milestone given that the AAGES team originated, developed, bid and secured this greenfield project basically from scratch.
The project, which is called the Cardal, it's an 80 kilometer transmission line and a substation with an expensive cost of just over $80,000,000 and commercial in service date expected in around 2022. And I think it might be noted that we already have a presence in Uruguay with 150 megawatts of operating wind generation owned through Atlantica. When we announced the formation of AAGES, you'll recall that part of the mandate was to further development of a number of projects in which Abengoa had an interest and some of which has started to go follow. The San Antonio water project was identified in 2017 as an interesting investment opportunity, and we're pleased that the AAGES team has been able to satisfy its original mandate and complete a $30,000,000 investment in the project. Development and construction of the project are underway with commercial operations expected mid next year.
And lastly, a quick update on our wind and solar development projects. Our near term development list, as you can recall from our disclosure, includes 5 wind projects totaling close to 600 megawatts, and that doesn't include the wind projects being pursued as part of the customer savings plan. We have 100% safe harbor turbines, which can accommodate 4 of those projects, meaning that one will likely have to drop to an 80% PTC project. Nearest term, Sugar Creek moving ahead with the synthetic TPA now signed, turbines on order and the final EPC negotiations ongoing. For Phase 1 of Broad Mountain, I can confirm we've now placed an order for the turbines that are working with our EPC contractors to secure cranes for our 2020 construction.
And so with that, operator, I'd like to turn things over to you to open the line for questions.
Thank
Good morning, everyone.
Hey, good morning, Rupert.
Just wondering if you could give us some color on the transactions you've proposed with Atlantica Yield today? It looks like you're investing $30,000,000 into Atlantica and giving them the right to acquire some assets. Can you give us a little more color on that transaction?
Rupert, actually maybe we'll get Chris Jarrett, who is I guess one of my co directors on Atlantica to maybe give you some thoughts on that. Chris?
Yes, sure. I think that's probably a strong way to kind of characterize the $100,000,000 It's really just the opportunity to talk about a couple of investments which are near term. One of them is the SARS, which is probably one that will definitely for sure happen. So that's the $100,000,000 We did give them $30,000,000 to buy additional shares. This is really just to fund some of their near term growth that they've announced already.
So when you look at doing dropdowns into Atlantica today, how do you view from another third party source with a lower cost of capital?
Well, Rupert, I think you've heard me say that one of the interesting characteristics between Atlantica or differentiating characteristics between Atlantica and ourselves is the asymmetry between the valuation metrics that they both that we both employ. As you can imagine there as a yield co kind of a a CAV D, cash available for distribution driven organization and as a regulated utility, GAAP earnings are probably more important to us. And I've said in the past that there may well be projects in our portfolio, which fall into the cash rich earnings poor category, which might actually be better held from our point of view down in Atlantica. And if you think about it, it's kind of the interesting opportunity for it to be accretive to us and accretive to them just given what the definition of accretive is. One of the things that, I'm going to say, you didn't mention, and I think this is probably an important consideration is that in addition to subscribing for that small equity issuance of $30,000,000 we get there's some headroom that's been granted in our ability to participate in Atlantica's equity.
So to the extent that we dropped an asset down into Atlantica, it is possible that we would possible, I think the intention is that we would be able to take back equity and maintain, I'll say, 100% exposure to the economics of that asset. And that's one of the things that the headroom and flexibility gives us. And so, I get it. Any transaction needs to be accretive to us and accretive to them, and that will be an interesting challenge. I just think with the asymmetry evaluation metrics, we probably have more flexibility than you might otherwise have thought.
But your comment is a good one and nothing is assured unless it works for both of us.
And so we can extrapolate then to assume that you could be acquiring more Lanica stock in the market though, not with direct purchases?
Oh, I don't know. That I mean, I don't want to say I think the headroom as from my perspective, I think was created primarily for us being able to drop assets down into it. And I think you've heard me say in the past, and maybe this is in the context of the Atlantica strategic review, we are kind of neither sellers of this company nor buyers, but I've always put a little asterisk to say, we're kind of comfortable between our 41.5% today and I'll say 48.5% or 49%, which is kind of where our cap out is. And I think this just gives us the flexibility to maximize value for ourselves and I guess arguably for Atlantica and gives us the flexibility to do that. But you shouldn't think of us like kind of going on a purchase a buying campaign.
All right, great. Thanks for the color.
Yes. Thanks, Rupert.
Our next question comes from Nelson Ng of RBC Capital Markets.
Great, thanks. Quick question on San Antonio Water. So can you just clarify whether that's being developed at AAGES? And can you just provide a bit more information in terms of I think you mentioned that it's like a $1,000,000,000 project. Is it already construction and under construction?
And what does that $30,000,000 investment go towards? And what's the current ownership interest in the project?
Sure. When Abengoa's wheels started to wobble, I guess, back in 2016, they took that project, the San Antonio Water Project, and sold 80% off to a 3rd party, but kept 20% themselves. And so I guess the good news is that the construction of the project and development of the project continued to move ahead, notwithstanding the fact that Abengoa might have been a little impecunious in terms of their ability to contribute more capital. But I think when we announced the arrangement with Abengoa, it was on the list of opportunities for us to invest in going forward. Our initial investment in the project is by way of, frankly, a loan into the Abengoa structure to give us exposure to the project.
And I think in terms of AAGES helping out, obviously, the AAGES guys, the team that we have on AAGES were actually involved, some of them were involved in the development of the project right from the beginning. So I think we have some pretty good insight into how the project is being developed. I will say that we're not on the front line. And so I don't know if that's a good or a bad thing from your perspective, Nelson. But we it is a high quality project, long term offtake, obviously denominated in U.
S. Dollars being in Texas. And so I think it's great that the AAGES guys have kind of been able to make good on that part of the mandate, which is to find value in that list of initial projects that we had set out when we announced there are the international expansion initiative. I don't know, Nelson, if that's the kind of color you're looking for.
Yes. So just to clarify, so Algonquin invested in or essentially acquired Abengoa stake or is that what happened?
Yes, that's probably that's I would say that's technically incorrect. First of all, as you know, we do these things through AAGES. And in the first instance, it's really alone from ACHESS to Abengoa, who hold the stake in the project. But a pretty significant chunk of the economics, obviously, are reflected in that loan. And so we're pleased with the exposure to the project, though it's still technically an Abengoa undertaking.
Got it. Okay. And then just to change the subject a little bit. Can you talk about succession planning? And I know there's some disclosure about how you guys essentially looking at candidates and putting a transition plan together.
Sure. And Nelson, let me start by saying I appreciate your characterization of my age as 59 years young. I thought that was particularly nice. But let me start and I guess probably maybe three points to make. First of all, I don't say this is not a new message.
And it's actually not even new disclosure. As you can probably recall in our circulars for the past 2 years, we've been, I'd say, pretty explicit of making sure that that succession kind of at least got coverage and got airtime in that. And but we have been getting questions for a little while from investors. And I guess it's not surprising. You got a CEO and a CFO who are both, as you characterized, 59 years young.
And we thought that if this is on the minds of a couple of investors, it's probably on the minds of more. And so we thought that an open discussion and perhaps providing a consistent message on the matter, it should be probably part of our ongoing dialogue. So there's the first one. The second one is, like the disclosure is really intended to confirm our collective commitment. When I say our, I mean the Board and management to a smooth and measured and thoughtful succession here at Algonquin.
And so as we put in the specific coaster, please don't read through that there's anything imminent happening. And so I guess, God willing, Chris and David and I, we ain't going anywhere in the near term. So hopefully, that provides some comfort. But I think it does confirm that the Board and management embrace the importance of a measured and planned transition. And we recognize that succession here at Algonquin might be a little bit more challenging usual, just given the central role that I guess Chris and I have played in building the company from its inception.
And but to provide you maybe a second thought on that is that we're all taking an active role in this process. And you can imagine for Chris and I, as founders of Algonquin, I think it's absolutely the right thing to do because the outcome
of this is going to
help frame our legacy of putting 30 years of our lives into it. And so and then the third point I'll make is, in the here and now, I can confirm to you that the management team, if you think of David and Chris and I, we are totally committed to this business. We owe them close to 4,000,000 shares of the company collectively. So I can tell you our alignment is completely with the shareholders and we're obviously focused on driving the business for us. So I don't know if that's the kind of color that you're looking for, but there's a couple of additional thoughts around the disclosure that we put in.
No, that's great. I think probably a more interesting indicator or disclosure in the future might be if you're looking for a vacation property in Mexico, Florida.
Got you. Unlikely, it's like vacation hasn't really been on my agenda for the past 30 years.
All right. Thanks. And I'll get back in the queue.
All right. Thanks, Nelson.
Our next question comes from Sean Steuart of TD Securities.
Thanks. Good morning, guys.
Hey, good morning, Sean.
Algonquin has been tied in the press to, I guess, potential interest in the El Paso utility. And you guys get tied to every process that comes up, I guess. But just general thoughts on appetite for M and A, scale of opportunities you're looking at there?
Sure, Sean. And in some respects, I don't say this is going to be a repeat of my standard answer. You know I, I don't say, accidentally miss spoke last time about our involvement in the Emera Maine process. That one obviously came to a conclusion. And while I use the analogy, we are always keeping our stick on the ice for these sort of things.
I kind of feel like we got cross checked a little in that process and maybe that's fair. If you're willing to pay more than anybody else in the planet, then you get to win. And so we didn't win in Emera Maine. But I think if there's a look through on that, it's a continued exercise of discipline from our perspective, because I think you could imagine, I might be a difficult conversation that I was having kind of defending the acquisition of Emera Maine at the price that it got done at. And then good for Emera, I think that's great for them.
But as we think about sort of the rest of the M and A landscape, I think a similar philosophy is going to be applied if we can do a transaction in which we see value for our shareholders in that we can create value then we'll look at it. And if we can't, we'll pass. And I think St. Lawrence Gas and New Brunswick Gas are two examples of opportunities where we did see an opportunity to create value and we left at them. And so you can imagine it's probably inappropriate to never confirm or deny any rumors with respect to El Paso.
But I think the philosophy stays the same, Sean. We've done very well in building this organization through acquisition. Note, there's no reason for us to give up on it, but we will remain disciplined in what is obviously a ferociously competitive marketplace.
Right. Thanks for that context. My second question is just a follow-up on the Atlantica, the amended agreement, I suppose. With respect to the dropdown potential, can you just maybe go through your thoughts of this option versus having a more, I suppose, formal competitive process to maybe sell some assets down? How you think about that tension and maximizing value from Algonquin's perspective of the asset base?
Well, I guess I'll start by saying and with the increased ownership, I'll say headroom, Sean, we don't actually think of when we drop an asset down into Atlantica that we're actually selling it in some respects. If you took back 100% on equity interest, which really allowed you to maintain the economic exposure to the asset, it's really just being held in a different vehicle. And Man With, to the extent that it's actually accretive to us on the metrics we use and accretive to Atlantica, arguably, we actually get half nice round numbers, half of that accretion down at Atlantica comes to us in addition to the accretion that we get on our own financial statements. And so I totally get it. If this was if we didn't have the ability to take back 100% of the equity value of an asset.
I think it's going to be with Atlantica's current cost of capital challenges, it probably is going to be a bit of a rough road in order to find those opportunities that it makes sense to drive. You know at our heart, we are not really sellers or flippers of assets. We see that we go to all the trouble of creating value during the development process and our thesis is we want to harvest that for our shareholders over the next 30 years. And the thought of taking a one time gain through a sale feels like the antithesis of our philosophy. And so I hope that I kind of give you a color that a drop down to Atlantica is really just Algonquin in another form.
I don't know if that's helpful, Sean.
No, that does help. That crystallizes it. Thanks, Ian.
All right. That's all
I had, guys.
All right. Thanks, Sean. Okay.
Our next question comes from David Quezada of Raymond James.
Thanks. Good morning, guys. Hey,
David. My first question just on the pipeline project in Uruguay. I'm wondering if you can provide any color on what the bidding process was like for that project, how competitive it was and the what return expectation you might have there?
Sure. Well, actually, let me start by saying this is in some respects, this was an execution in action of the plan that we had developed in the formation of AAGES. So, the opportunity, the broad opportunity kind of came to us through the eyes and ears of Abengoa's EPC subsidiary on the ground in Uruguay. And so but our guys took with it, ran it, got worked with Abengoa to come up with an EPC bid and we submitted our bid. Like every other transmission line, as you can imagine, David, that's this is a pretty intensively competitive market, almost irrespective of where it is.
Transmission lines are almost, if you think about it, the perfect infrastructure asset, basically no moving parts, no volumetric risk, and generally, they're secured by a sovereign guarantee. In this case, no different. I think the good news is because of aggressive work on getting the EPC costs to the point. While we won, I think the good news is I can confirm that we didn't win by a country mile, which in some respects would have been a little disappointing. It was 1% of percent.
So that makes us feel good that we understand the market correctly. In terms of return expectations, obviously, a little bit competitive competitively sensitive. But I can tell you that overall, I think with the leverage package, the financing package we put together, returns are right where we need them to be in terms of this to be accretive to us. And ultimately now the question is, this asset would obviously, I think as you think about its home, Atlantica has 3 wind projects, 150 megawatts, a significant player on the Uruguayan landscape, it's probably the right asset to drop down into them. So all in all, I mean, I think it's this is just us turning words to action in terms of the whole agency.
I don't know, David, if that's the type of color that you are looking for.
Definitely, that's great color. Thank you. Just my all other question on the power side of business in North America for Algonquin. I know that you guys at one time safe harbored quite a few wind turbines. Are you considering doing the same thing with solar panels currently to qualify them for the ITC?
Yes. I
think we're obviously pleased that the with our investment in 100 percent PTC projects and you kind of heard me mention that those that investment is facilitating, I'll say, hundreds of megawatts of wind turbines. And so I think the thesis is we'd like to pursue a similar strategy of safe harboring ITC projects for solar. I will say that the strategy there's different ways to secure the ITC in terms of solar projects. It doesn't necessarily actually having to be buying the panels. I mean, I think to the extent that there are other aspects of the solar project, most particularly things like the transformers.
To the extent you start to make an investment in those, you've kind of secured the ITC in that project. And so I'd say trust me that we're looking at all of those strategies because we're actually pleased with the results from our wind experience. I don't know if that's how what you were looking for, but we definitely see solar as I'll say the next decade has got to belong to solar if you think the last decade belonged to wind.
That's great color. Thanks Ian. Appreciate those comments. I'll get back in the queue.
All right, David.
Our next question comes from Ben Pham of BMO.
Hi, good morning. Hey, Ben.
Just go back to your comment around some of your projects, the wind side going into the 80% PTC. What's your I just want to clarify, what's your strategy in the 2020? I'm hearing some folks are just waiting it out because of a fear of returns compressing turbine orders getting pretty crazy. I mean, what's your thought process going into next year?
Well, you are correct. If you have not gone and locked up turbines, cranes, EPC suppliers, I think the competition will push returns to a place that you probably won't want to do them. The good news is we ain't in that group. As you probably heard me speak of, I believe, maybe even for the last year, securing EPC contractors with specific reservations for cranes has been part of our strategy. We inked a 1,000 Megawatt deal with Vestas last year to secure turbines for those at prices that made sense.
And so you're absolutely correct that I mean 2020 is shaping up to be a 15 gigawatt year in terms of installed capacity. And so if you are at the end of the line, at the end of that supply chain in terms of being able to secure what you needed, the economics are going to be impacted. When I say that we have projects that could drop from 100% to 80% PTCs, I think I'm just giving hoping giving you some comfort that the world is not going to end for us and arguably hopefully for the rest of developers that if you don't get your 100% PTC project that they're that you're that we're out of business. And so that we are pleased with as we think about the positioning for the projects we've identified as 2020, I think we're equally pleased that we've got a pipeline that is still has efficacy in 20 for 80% PTC. So I don't know, Ben, if that's kind of where you were what you were kind of hoping to understand as you think about the resiliency of our pipeline.
Yes, that's great. And then the second one, acquisitions, you mentioned you needed to see it value to your share. Can you comment on what your definition of value? Is it always EPS accretive from the gate? Or is there some of the things that you're looking at?
There's probably three measures. When we would look at sort of any investment. It's obviously multidimensional. But the first one and you mentioned it, we would obviously like it to make a constructive contribution to accretion on an EPS level. Having said that, that's not the only metric you have to look at.
We look at what if we're thinking about a wind project, we look at these things crater to grave on an unlevered project IRR basis. We would definitely consider that to make sure that near term accretion isn't somehow just a blip. We will look at the leverage of a particular project. Clearly, we are covetous of our BBB flat credit metrics and we are certainly not going to threaten that. And so, as we think about the leverage we can bring to bear, we're going to look at it.
And then I think that the very last one, and I know I said 3, but I guess I meant 4, is that as you think about the opportunities for revenue certainty in today's market, they probably on average are not going to extend for the economic use of life of this asset. So you have to think really hard that I'm building a manufacturing facility for all intents and purposes in a market, which will and that asset will be there to serve that market long after whatever the initial term of my PPA or commercial or industrial off take agreement or my synthetic PPA is going to exist. And so the question is, are you going to be happy being in that marketplace? And I think Walker Ridge is actually a perfect example of an asset that we picked because we like the market that it's going to be in. And I think as you think about California's focus on renewables going forward, it's just the right place to be.
So, there are kind of 4 things that we would think about being an attractive investment, Ben. I hope I was headed in the right direction.
And Ben, I would just add one more thing with respect to utility EPS accretions. We have, from time to time, bought utilities that happen to be under earning for various reasons. And so if it's in that particular situation, we would look to what is that accretion going to be once we get into that first rate case post acquisition. So there is one additional filter that we would put on it.
Okay. So I don't want to ask third question, but I just want to No,
go ahead, Ben. We'll give you a special dispensation for your third question.
Just want to clarify, it's just that, I guess, that arbitrage on the rate base. I mean, does that does that mean like you would do a dilutive deal year 1 and Well,
yes, I think where David is really going is that when you buy a utility, you get it at some point pretty arbitrarily in its rate review cycle. And so if you think that a utility has, I'll say, earning potential based on the rate base that you're acquiring at the time that you need to buy, you kind of got to look through where it is in the I mean, obviously, unless it's some massive I mean, obviously, unless it's some massive acquisition. And so I don't think it's an arbitrage issue. It's just a recognition that the regulated utilities go through a natural cycle of earnings as investments are made, rate reviews are undertaken and new tariffs are established.
Okay. All right. Thank you.
All right. Thanks, Ben.
Our next question comes from Rob Hope of Scotiabank.
Good morning, everyone.
Rob, you're on mute. I know it's a great insightful question, but you I can hear me now.
Yes. There we go. Okay.
All right. So let's start off with Aegis. I just want to get some insights on how you're going through the kind of the project evaluation. The $80,000,000 investment in Uruguay, absent the Atlantica in existing investment in that region, would that have been sufficient for you to pursue that? Or would you look to be adding clusters in certain geographies?
Let me do you want to speak to that, Ken?
Yes. And maybe I'll just add to that. Like, obviously, it makes more sense when you're already there. But if you're going to new jurisdictions, you got to start somewhere. And I think we would always look for a jurisdiction that we had line of sight to a cluster.
I don't think we would do a one off in any country. So that's part of the evaluation process we go through
in all these jurisdictions. And maybe just a couple of thoughts then, Rob, is rule of law, repatriation of capital, there's kind of a bunch of things that almost any jurisdiction has to pass. Okay. Thanks for that. And then moving to the Midwest, just on
the Okay.
Thanks for that. And then moving to the Midwest, just on the greening the fleet initiative. So a third party will be developing those sites, but have you been working with them on EPC contractors, cranes and turbines? And are those ready to hit the dirt in the coming weeks months?
Yes. So when you say 3rd party is going to be developing them, you know Kings Point and North Fork were, I'll say, Empire developed or Algonquin developed assets, which a third party is kind of taking over the responsibility of securing turbines from Vestas and securing the EPCs and getting all those crane reservations. So the good news is we've got teams that who are kind of doing that under contract for us, which is good. There's milestones all the way through. And I will say, it's pretty transparent, the whole process to us.
And so I yes, there are 3rd parties who are taking responsibility. But given the importance of getting these things done by 2020, this is not kind of a call us when it's done process. We are actively involved in making sure that from an environmental point of view and from a technical perspective and in connection. So I'll say, Rob, we're all over it, irrespective of the fact that somebody else is actually going to retain the EPC contract have the contract with us.
All right. Thank you.
Thanks, Rob.
Our next question comes from Mark Jarvi of CIBC.
Hi, good morning. Hopefully, I'm not on mute. Hi, Mark.
Hi, Mark. Yes.
I just wanted to
go back to sort of the $30,000,000 investment in Atlantica and think about this. It sounds like from their perspective, they're taking the proceeds and investing in the projects alongside you guys. So And then we talked about potential drop downs. Is this really just sort of managing leverage and balance sheet by deploying some equity through, I guess, Atlantica, which can use project finance and debt. Is that the right way to think about how this the relationship is evolving?
Well, actually, I think that's probably the way the relationship was originally crafted. As you and I have spoken, one of the advantages that Atlantica brings to the Algonquin story is the flexibility to use project financing that just to follow your thoughts on is that that $30,000,000 investment we're doing actually can be leveraged by Atlantica probably far more than we would do it if it was if the assets were owned directly by us. And so there is a benefit in that. And then maybe lastly, you know that Atlantica announced some a number of acquisitions over the past little while. And it would be shameful from our perspective if perhaps due to constraints and the access to capital that they might have that those opportunities went by the by.
And so I think we were just trying to be accommodating to help out, Mark. And so but I don't think you should I'm hoping that you're not reading that us putting some more equity into Atlantica kind of in any way deals deviate from the original investment thesis for them to be, I'll say, our holdco for international project finance opportunities.
No, no. It goes with what you guys said in the past. I was just trying to reconcile in terms of it is a project you're already doing, you're giving them $30,000,000 just kind of like you said, just explain the fact that they can use more leverage. Just want to confirm. Correct.
Correct. And then if you kind
of keep pursuing that path and explain their ability to use more leverage, is there any risk or any conversations that you had with the rating agencies around how they're going to view this and think about the read through from Atlantica and your ownership in Atlantica? Or do you think as long as you're under 50%, it's a non issue?
Yes. I would say our interactions with the rating agencies, I
think, is confirmed. They accept
is no issues as far as we're concerned for any consolidation, proportional consolidation or whatever. The GAAP treatment will be followed.
Okay. Thanks.
Thanks, Mark.
Our next question comes from Jeremy Rosenfeld of Industrial Alliance Securities.
Thanks. Good morning, Jeremy.
A couple of cleanups. In terms of the power development side of the business, you talked about locking up certain things heading into 2020. I'm just curious if you can elaborate a little bit on tax equity supply both from sort of external suppliers, but also the availability from within Algonquin? Good question.
So I think with the PTCs being phased out and maybe even tax reform kind of changing the taxability of the historic players in the tax equity market, you can imagine that the dynamics of that market have shifted. And I would argue, in some respects, it's a little bit been a flight to quality from the tax equity, the historic the traditional tax equity purchasers because they have, I'll just say, fewer dollars that they need to address. And so I think the broad relationship that Algonquin has been able to develop with Wells Fargo and BAML and some of these large U. S. Financial institutions, perhaps because of our presence in the utility market, has served us well to be able to secure tax equity for our projects.
And so I'd say we are comfortable as we sit here and think about the customer savings plan and the assets that we intend to complete in 2020 that we have good line of sight to tax equity needs and that's not going to be the constraint, but it is a really good question. But I'd like to think that we've positioned the organization well perhaps in other ways to secure the tax equity. David, I don't know if you wanted
to add anything. The other thing I would say, our customer savings plan tax equity project, I mean, that's a very coveted project in the tax equity community. There's a lot of interest in that because it's really first prize to have an asset like that that's going to be in regulated rate base. And so we're happy with that. And I think as Ian said, we have very strong relationships with all of the Tier 1 tax equity providers.
And I will just put in another comment too that we're approaching our taxability horizon. And so we are going to be able to be our own tax equity provider to the tune of about 400 megawatts and we communicated that at our last Investor Day as well.
Right. Okay, good. Just turning back to the Aegis and Atlantica discussion for a second. As you think about Aegis being successful in its development initiatives and potentially dropping down assets into Atlantica Yield, are you envisioning that Aegis would reinvest proceeds from those transactions within sort of future developments or distributions of proceeds up to the parents, so up to Algonquin?
Well, let me start by saying is, I think and maybe this gets back to kind of the characterization of what's the role that plays for Algonquin. And this idea that part of the thesis behind expanding our headroom in Atlantica is to give us the ability to actually take back shares, Jeremy, rather than cash, Atlantica shares, in return for dropping an asset down. And so in the first instance, we would want to preserve 100% of the equity exposure associated with any particular drop down. And so I think that the idea is that Algonquin would just preserve its equity exposure to that asset, albeit being held by Atlantica. To the extent that we got ourselves to the point where we had reached our cap of 48.5 percent ownership and that they had to pay cash for the other portion of it.
Now you've got an interesting question. Do we take the cash out and then just put it back into new assets? I think it's a little bit arbitrary from our point of view. But as you know, at our heart, we're not build and flip owners.
And Jeremy, it's Chris. If there's an uptick at the AAGES level, well, that just goes to fund the cost that AAGES incurs just on an ongoing basis. So that's probably how we look at it.
Perfect. Thanks for clarifying, Chris. Appreciate it.
All right. Thanks, Ian.
Thanks, Kevin.
Our next question comes from Nicholas Campanella of Bank of America Merrill Lynch.
Hey there. Hello, Nick.
Thank you
for taking my question.
Hey, Nick. Hopefully, I'm not on mute.
So sorry to beat a dead horse, but the Ay share purchase, I'm just trying to better strategic rationale. I know we
went over it a
few times, but I guess I'll preface it with we've seen that Ay is they're exploring strategic alternatives. In my conversation with all of you in the past few months, I think there is a mutual agreement that this portfolio of assets maybe has a perceived discount in the market today. So I'm curious as to why you would accept new issue stock rather than kind of purchasing in the open market? And then secondly,
correct me if I'm wrong, but
I don't think this comes with additional announcements for drops today. And I also appreciate that Ay has to fund their own business, but they have some of the lowest leverage right now versus their peer yield cost. So I'm just trying to get a better sense of why now. Know there was a lot in one, if you can just expand.
Sure. Yes, sure, Nick. I mean, I think you've heard the Atlantica guys on previous calls announce that they have some near term growth opportunities. And as I said in response to an earlier question, wouldn't it be a shame if Atlantica wasn't able to fully realize on those to the extent that they're accretive opportunities for us given that we own, I'll just say nominally half the business, that would be a shame for that accretion to not be realized. And so, I think given that they can lever that $30,000,000 I think it's a great opportunity for them to execute on some of the internal growth that they've been able to come up with.
And that's going into the marketplace. Buying stock doesn't help Atlantica and given that we own half of Atlantica in NICE Round numbers. And it really seems like not the value maximizing thesis. And so, I mean, I think that's kind of where the opportunity to do the capital increase came. And I think in some respects, you put it in a backdrop against the strategic review process.
And I actually would argue say the business of business needs to keep going irrespective of whether Atlantica thinks that the path that they're on may have some forks in that road down in the future. I think if you've got some opportunities now that you can execute on that are accretive at today's stock price and create value for all shareholders, why wouldn't you do it? And so anyway, there's kind of some my thought on the capital increase. In terms of the drop down of new assets, I mean, I think part of our discussions with Atlantica was to create headroom in our ownership level to the 48.5%, so that exactly we could explore those because I think there is an opportunity, as I explained again in response to an earlier question, this sort of interesting ability to be accretive to both entities, accretive to them as they think about CAFD and accretive to us as we think about earnings. So Nick, I don't know if that added more color or it just was me saying the same thing again.
Yes. No, I definitely appreciate it and thanks for that. And I mean just a follow-up, it seems like at this point, the preference is for continued new issuance rather than open market purchases as a means to maintain your own ownership and potential future transactions and scale up to that 48.5%, is that correct?
Yes. I mean, yes to that. We are not we didn't invest in Atlantica to be arbitraging and buying the securities of a public company. We invested in Atlantica to give us a platform and to give us access to assets. And to the extent that Atlantica can on their own come up with some growth opportunities sort of way, way, way, way down on our priority list.
Hey, Ian, thanks for that clarification. I'll get back in the queue.
All right. Thanks, Nick.
Our next question comes from Christopher Turnure of JPMorgan.
Good morning, Chris. Good morning,
Ian and David. So if I look back to 2018, you guys look like you had GAAP EPS of $0.38 and adjusted EPS of $0.66 And it looks like today you're indicating that you had $0.11 of that $0.66 come from U. S. Tax reform. What exactly was that?
Yes. In Q1 last year, there was an acceleration of HLBV income. That was primarily the major component of that. There is also the issue you can appreciate that January 1, there would have been last year, there would have been a think of it as the immediate reduction, the day 1 reduction to your tax expense and it took we went through various rate proceedings last year and so had over time reduction in revenues to take that. And so there is a little bit of that effect in that difference as well.
And then, so maybe then, Chris, just to do a fair year over year comparison, given that obviously in 2019, we didn't have that one time acceleration that you probably have to look through that into terms of 2018. And that's why I think you can look back at the disclosure of it. We were I hopefully have been pretty clear in terms that you can see that there's about 50 $5,000,000 $56,000,000 worth of income that was accelerated in 2018.
Okay. So perhaps, fair to characterize what looks like about 17 percent of what you're calling adjusted EPS in 2018 as something that's not recurring?
That's correct. I mean, we don't adjust out HLBV, I mean, income, if that's the question. And we pretty much stick to our formula. We don't like deviating from that. So, I mean, it is important to understand the variations of the things that we don't adjust for, obviously.
Okay. Is there anything else that was in that $0.66 of adjusted EPS? So I guess if I take that down, I would get to $0.55 of adjusted EPS for last year on an apples to apples basis. Is there anything in that $0.55 that would not be recurring?
No. Off the top of my head, I can't think of anything. I mean, I'll maybe put my mind to it later today, but I just I can't think of anything.
Okay. And then if we look at that $0.55 versus what you're calling adjusted EPS in 2017 to $0.57 that would be a decrease year over year. Last year, I think you increased the dividend by 10%. That would put your payout ratio for 2018 at 89%. And then it looks like today you also increased the dividend by 10%.
I'm wondering if there's something that might catch up here that helps to fund the dividend in 2019?
Well, a couple of things. I mean, you're certainly going back in time, and what you'd have to also be wanting to look through are basically year to year variations in due to weather patterns in that. And so that will involve sort of a deeper dive into the kind of historical record to make sure that you've normalized for year to year fluctuations in weather patterns. But when it comes to the dividend, I think our Board certainly takes a long term view so that the market gets long term comfort from the sustainability of the dividend. And there's no two ways about it.
The next couple of years, we've got some heavy lifting on the capital side. We've got a lot of projects coming online towards the end of 2020, early 2021. And all that's laid out in our Investor Day book and you can sort of see that kind of maybe not quite a bell curve, but kind of a clustering of some of the larger projects in that 2020 2021 period.
And I think then maybe to and Chris to put the whole picture to bring the picture into focus. I think the way we look at it is, if our EPS can grow and it's not on a year by year basis because a lot of these projects are lumpy like the customer savings plan has been in the works for 1.5 years. But that if we can look at it over and we generally use a 5 year planning horizon, which is what we talk about at our Investor Day, if we can see an EPS growth, which exceeds on average our DPS growth. And you're absolutely right that 10% is kind of a promise we made to the marketplace in the context of our growth forecast. It feels like we're doing the right thing and we're not threatening payout ratio, but it's really not done on a year by year basis.
I think it's really done as we look at the prospects for the business over the long haul. You know we announced a $7,500,000,000 pipeline of growth opportunities at our Investor Day last year. Those will, and they're forecast to deliver EPS growth of in and around the 10% mark. And so I think the way we hope that you look at it is that looked at over whatever the appropriate planning horizon is that the EPS growth and the EPS growth field related.
Okay. Yeah, I wanted to make sure I wasn't missing something there because without that number, your EPS goes down around 6% in 2018. And then again, as you point out today on an adjusted basis, your EPS is going down in the Q1 again, but it sounds like there might be things that are coming online in the future that are going to remedy that. Thank you very much.
Yes. Thanks, Chris.
There are currently no questions in the queue at this time. I would like to turn the conference back over to Mr. Ian Tharp for any closing remarks.
Thanks, everyone, for attending the call today. I'm going to read the disclaimer now. Our discussion during this call included certain forward looking information that is based on assumptions 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 EBITDA, adjusted funds from operations and adjusted earnings per share. There is no standardized measure of such non GAAP financial measures and consequently, APUC's method of calculating these measures may differ from methods used by other companies and therefore may not be comparable to similar measures presented by other companies. For more information about both forward looking information non GAAP financial measures, including a reconciliation of the non GAAP financial measures to the corresponding GAAP measures, please refer to our most recent MD and A filed on SEDAR in Canada or EDGAR in the United States and available on our website. Thanks again for attending today's call.