Welcome to the Algonquin Power and Utilities Corp. 20 22nd Quarter Analyst and Investor Earnings 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 I would now like to turn the conference over to Christopher Gerhardt, Vice Chair of Algonquin Power and Utilities Corp. Please go ahead.
Great. Thanks. Good morning, everyone, and thanks for joining us this morning for our 20 2Q2 earnings conference call. As mentioned, my name is Chris Jarret and joining me on the call today are Arun Banskoda, our Chief Executive Officer David Brna Cesky, our Chief Financial Officer and Arthur Kasperczak, our Deputy Chief Financial 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. And 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 as well as potential future impacts of the COVID-nineteen situation. We will also refer to certain non GAAP financial measures and at the end of this call, Amelia from our Investor Relations team will read a short notice regarding both forward looking information and non GAAP financial measures. Please refer to our most recent MD and A filed for important information on these items. On our call this morning, Arun is going to provide the strategic achievements for Q2 2020.
Arthur is going to follow with the Q2 financial results, and David will speak to our recent capital raise. And then we'll wrap up with Arun concluding with our strategic outlook for the business. We then open the lines for questions. And as usual, I'd ask that you restrict your questions to 2 and then re queue if you have any additional questions. Now before I turn things over to Arun, I would like to say a few words regarding David Bronoschewski, who is retiring in September after serving as Algonquin's CFO for 13 years.
On behalf of all our employees and the Board of Directors, I would like to thank David for his many contributions. Personally, I can tell you that it's been an absolute pleasure to work with David over the past 13 years, and I wish him the best in retirement. David's contribution to this organization over this time period have been immense, including building an extremely strong finance team that will succeed him. Thank you, David. And with that, I would turn things over to Arun.
Thank you, Chris, and good morning to those who've been able to join us on the call and online. As a business providing mission critical energy and water services to our customers, we continue to perform well, both from a financial and operational standpoint as we continue to navigate through the impact of COVID-nineteen. Given the resiliency in our business model, the company has been able to provide uninterrupted and continued high quality utility services since the onset of the pandemic. As expected, given the changing patterns of our customers, we have seen some moderate decreases in customer demand across some of our utilities, which have impacted our 2nd quarter results by just over $0.01 on a per share basis. Arthur will provide more commentary on these financial impacts.
Operations of our renewable energy generation facilities has naturally supported social distancing and with the lion's share of our business under long term contracts with creditworthy counterparties, we have not experienced any negative COVID-nineteen impacts. Our major renewable energy construction projects of approximately 1600 megawatts continue to be considered essential infrastructure in the jurisdictions in which they are located, and therefore construction has been proceeding despite the COVID-nineteen pandemic. At all of these sites, the anticipated timing for the projects to be placed in service has not been materially impacted by COVID-nineteen to date. I'm pleased to report that the continuity safe harbor deadline for U. S.
Federal production tax credits has been extended by 1 year, which provides more flexibility for our U. S. Wind projects currently under construction to qualify for the maximum PTC. Overall, I'm pleased with the progress we've made so far this year and I'm confident we will continue this into the second half of the year. Since joining the organization in February, I've been focusing my efforts on 3 pillars, operational excellence, growth and environmental social governance, ESG.
I would like to spend a bit of time going over each pillar. Firstly, on operational excellence, which is all about having a laser focus on improving our day to day service delivery in all areas. To do this well takes real organizational agility. Our response to COVID-nineteen has been a great example of how our organization and our frontline workers were able to pivot without missing a beat in delivering essential services for our customers. At Algonquin, safety is more than a priority.
It is part of how we operate and despite our industry leading performance, we are always looking for ways to improve. I'm pleased to share that our safety concert was recently recognized and awarded by the National Safety Council in our central region for working 2,000,000 employee hours without injury. And even greater achievement when you take into account the reference timeframe includes operating under COVID-nineteen times. Customer focus has to be at the heart of any operational excellence strategy. Over the past 3 years, we have increased our J.
D. Power results by 48 points as we strive towards top quartile. We continue to listen and act upon our customers' needs. Specifically as part of our grid modernization efforts, we have now installed over 13,000 electric meters in the 1st few weeks of our advanced metering project in Missouri. As we continue to demonstrate the customer benefits and receive regulatory support for our smart meter deployment.
We have progressed well on our customer first program and recently completed the global design phase and are on schedule to launch 1st in Massachusetts. 2nd, Aldantun has a strong history of growth and I am committed to continuing this growth trajectory and add value to our customers and shareholders. As I look forward at the changing energy market, I believe that the commercial and industrial C and I business segment will represent an enormous channel for growth. Today it accounts for the majority of energy consumption, in fact more than transport and residential commercial combined. And the vast majority of industrial consumption is fossil fuels, petroleum, coal and natural gas.
Commercial and industrial businesses will want to continue to decarbonize in the coming years and I'm confident they will become much larger consumers of renewable energy. That is why I'm particularly excited by our recently announced 4 year framework agreement with Chevron seeking to co develop more than 500 megawatts of renewable power projects provide electricity to their operations. This partnership unites Algonquin's technical and operations renewable power expertise with Chevron scale, land and local knowledge to enable faster, more cost effective renewable power solutions. This is exactly the type of growth opportunity that gets me excited about the prospects for this sector and our collaboration with Chevron is proof of concept. We can create shareholder value for Algonquin by helping customers decarbonize.
And finally on ESG, environment sustainability Governance. We remain firmly committed to sustainability through the inclusion of environmental, social and governance values in our daily operations and business planning activities. There has been much focus on the E or environmental, including the closing of our Asbury coal plant in March, which has reduced our greenhouse gas emissions by approximately 1,000,000 metric tons of carbon dioxide. I wanted to provide some commentary on the S social factors and G governance factors as well. In terms of social initiatives, one of our key sustainability goals is to achieve top quartile employee engagement.
Despite COVID-nineteen, I am pleased to report that the organization has made great progress on our 2020 employee engagement results. Our 2020 engagement score is near North American top quartile ranking. The improvement is evidence that we're committed to putting actions in place to continue to be a top employer of choice. As for G, we are focused on building effective governance practices for the long term. Our commitment to diversity and corporate governance practices can be evidenced by our continued year over year improvement in governance scores from independent organizations such as the Globe and Mail and ISS.
Before turning the call over to Arthur, I want to touch upon the recent MR electric ruling in Missouri that we received last month. Under Missouri law, Senate Bill 564, electric utilities have the option to apply for a weather decoupling mechanism. In our 2019 rate review, we requested a weather decoupling mechanism to provide stable rates to customers. We believed and continue to believe that this is a good to reduce volatility not just for the utility, but also for customers. However, with its reset order, the commission denied our request and as a result of this decision, the company reevaluated other options under Missouri law and opted to elect PISA, plant in service accounting.
The PISA election is not subject to additional approval, is expected to reduce regulatory lag, smooth the rate impact of necessary investments for customers and will remain in place through 2023. Later on this call, I will provide an update with respect to our major capital projects. With that, I'll pass it over to Arthur for a review of our Q2 2020 financial results. Arthur?
Thanks and good morning everyone. I'm pleased to participate in my first quarterly earnings call with the investor community and I look forward to meeting with all of you in person in the months ahead as these COVID-nineteen restrictions start to ease. In the Q2 of 2020, our adjusted EBITDA came in below our expectations at $176,300,000 which is down approximately 7% from the $190,000,000 we reported in the previous year. The regulated services group delivered $112,800,000 in operating profit in the current quarter. This compares to $109,500,000 in the same quarter last year.
The increase is primarily due to the addition of New Brunswick Gas and St. Lawrence Gas, which closed late last year, the implementation of new rates as well as operating cost savings realized during the quarter. This has been partially offset by decreased customer demand due to weather and the impacts from COVID-nineteen. We estimate the effects of the pandemic on the group's 2nd quarter divisional operating profit to be approximately 9,600,000 dollars The Renewable Energy Group reported Q2 divisional operating profit of $82,600,000 as compared to $93,400,000 in 20 19. The decrease is primarily related to timing of distributions received in the Q2 of last year related to the company's investment in an affiliate of Atlantica Yield.
Our Q2 adjusted net earnings per share came in at $0.09 which compares to $0.11 reported last year and was below our expectations of between $0.11 $0.13 As Arun has mentioned, COVID-nineteen negatively impacted our results by just over $0.01 this quarter. We had also anticipated that our acquisition of the Bermuda Electric Company would close early in 2020, which is now anticipated to take place later in the year. The delay in closing impacted our adjusted EPS by another $0.01 I would now like to provide a few more details on some of the impacts from the COVID-nineteen pandemic from a financial perspective. First, with respect to collections and accounts receivables, while the majority of our customers continue to regularly pay their utility bills, Like other utilities in the U. S.
And Canada, we have curtailed collection activities, including disconnections for non payment during the pandemic. We believe that this is the right thing to do in support of our most vulnerable customers during this unprecedented time. These measures have resulted in collection delays, which have increased our over 60 days past due accounts receivable. Although we have not experienced significant write offs, we have increased our allowance for doubtful accounts provisions modestly. Beginning in July, we have started to resume normal collection procedures in several jurisdictions and we expect our accounts receivable balances to normalize in the coming months.
2nd, as previously mentioned, the regulated services group has experienced load reductions due to decreased demand resulting from COVID-nineteen. This impacted divisional operating profit by an estimated $9,600,000 as compared to the same period last year. Although future impacts to customer demand resulting from COVID-nineteen are uncertain, we have already seen some gradually easing and we expect that to continue in the upcoming months as the states we operate in continue to open up. 3rd, as discussed in our Q1 call, we began implementing cost containment strategies in response to the demand decreases caused by the pandemic and unfavorable weather. I am pleased to report that in Q2, the company was able to achieve approximately $5,000,000 in cost savings and expect to show similar savings in Q3 and Q4 to achieve further expense reductions of approximately $10,000,000 in the second half of the year.
Some of the reductions are occurring naturally, like lower travel expenses over the course of the year, but we are also taking proactive measures to reduce operating expenses where possible, of course, without compromising on safety, security and reliability of the services we provide to our customers. Our regulated services group continues to track the incremental impacts related to COVID-nineteen and will be seeking recovery in all of its regulatory jurisdictions. Several jurisdictions have already approved mechanisms or accounting orders for the recording of and tracking of these incremental impacts and others are expected to do so in the coming months. Before turning things over to David, I'd like to touch briefly on our earnings guidance. The company reiterates its current 2020 adjusted net earnings per share guidance of between $0.65 $0.70 This adjusted guidance is based on certain assumptions, which are more fully described in our Q2 2020 MD and A.
With that, I will turn it over to David to talk about some of our recent financing activity. David?
Thanks, Arthur, and good morning, everyone. As everyone is acutely aware, COVID-nineteen has changed a lot of things in North America and around the world, including creating unprecedented uncertainty into the public markets. This coupled with Algonquin's largest capital program in its history in 2020, our treasury team felt it was prudent to be proactive in the execution of its funding program. Given the risks and uncertainties that we see ahead of us, the possibility of a second wave of COVID-nineteen, upcoming U. S.
Federal election, trade issues with China and all the potential that this disruption could have on the equity capital markets. We felt that unbalanced it would be prudent to solve for our equity needs for this year and put us in a position of strength for next year. We successfully accomplished this by completing an equity offering and a bought deal offered here in Canada. This was the first broadly marketed offering that we had in Canada in 3 years. We were also able to issue additional equity in a concurrent private placement with an institutional investor on the same terms for total gross proceeds of $724,000,000 The proceeds of the offering are expected to be used to partially finance our previously announced renewable development growth projects and for general corporate purposes.
In conjunction with our at the market equity program or our ATM, total equity raised this year is $845,000,000 Following this equity offering, Algonquin is well positioned to weather any potential future impacts from COVID-nineteen into 2021. I'm also pleased to report that Algonquin attained another milestone in the quarter and has been added to the S and PTSX-sixty here in Canada. This is a tremendous accomplishment for Algonquin. This will generate additional volumes and make us more visible to investors both inside and outside of North America. Now before I turn things back over to Arun and open the lines up for questions, I'd just like to say a few words to all of the analysts and investors on the call this morning.
Today will be the last time I'll be addressing our investor community on these quarterly calls as I will be retiring next month. For the past 13 years, I've had the honor of serving our employees, our investors and our customers as Chief Financial Officer of Algonquin. For 52 consecutive quarters, I've had the privilege to update everybody on the ups and downs of Algonquin's growth and fortunately more ups than downs from a company taking it from a market cap of just $200,000,000 back in 2,008 to the $11,000,000,000 market cap company that it is today. Certainly a blue chip TSX-sixty listed company that spans not only North America but also has significant investments around the globe. And I might add, one that's been ranked in the top 10 as among the most sustainable companies in the world.
But as everyone knows, there always comes a point when you know in your heart it's time to step aside and let others take the reins and that time for me is now. While I look forward to slowing down a bit and spending a lot more time with family, I also take a lot of comfort in knowing that you are in the very capable hands of a new generation of management. I have every confidence that Arun, Arthur and the entire very talented executive team that Ian Robertson, Chris Jarrod and I have put together at Algonquin to not only continue executing on our existing plan, but we'll also build on it with the new ideas and the new energy that inevitably comes 5
year strategic plan. I want to give a quick update on our 5 year strategic plan. We'll then open the lines for the question and answer period. Alconven remains committed to and reiterates our 5 year $9,200,000,000 capital investment program across our 2 business groups, which is expected to grow our asset base to nearly $17,000,000,000 by the end of 2024. The total growth thesis has not been impacted by the challenges currently being experienced due to COVID-nineteen.
Algonquin remains well positioned both in the near and long term to continue executing on our long term capital plan. Before wrapping up my formal remarks, I wanted to spend more time highlighting our pillar of growth, which I spoke of earlier. We remain committed to our strong track record of growth with many levers at our disposal. In our regulated services group, we have our Belco and New York American Water acquisitions in our pipeline of capital investments. In our Renewable Energy Group, our growth continues to be focused on greenfield development as well as in the C and I space where important long term customers are supporting renewable growth as we have contracts with General Mills and Kimberly Clark for our Maverick Creek wind facility and Facebook with Alta Vista Solar and our recently announced framework agreement with Chevron.
In summary, our 3 pillars of operational excellence, growth and ESG will be a key foundation as we continue to build the business and continue to bring long term value to our shareholders. In fact, for one of our pillars, ESG, we plan on releasing our updated 2020 sustainability report later this fall. We remain focused on delivering capital investments that enhance value for both our customers and shareholders. We remain firmly committed to extending our track record of creating shareholder value in the current year and beyond. Before opening up the lines for questions, I would also like to take the opportunity to acknowledge David's many contributions, which has played an integral role in Algonquin's success.
On behalf of everyone we have had the privilege to know and work with you, David, thank you for your years of dedicated service and leadership and all the best as you enjoy your retirement. With that, operator, I'd like to open up the lines for questions.
Thank Our first question comes from Sean Steuart of TD Securities. Please go ahead.
Thank you. Good morning. Couple of questions. On Missouri, can you give us some context on the rehearing timeline and process? And I guess your general thoughts on the lack of weather normalization mechanisms being approved in the decision?
Sure. Thanks, Sean. Good morning. So as you know, we filed for the rehearing already for the rate of return as well as on the equity sickness. Those we were clearly disappointed with what we got from the commission and we have filed for reearthing.
There is no set time, a period when they're going to be coming back to us and whether or not they're going to allow for a rearing. As you probably know, we all have also filed for a rate case, another rate case towards the end of the year. So we do have another pass at trying to do a better job in convincing the commission of our position regarding especially the equity thickness.
Okay. Thanks for that, Arun. And question on the agreement with Chevron. Can you give us a little bit of background on how that came together? And I suppose thoughts on similar agreements potentially with other oil majors going forward?
Is that an avenue for incremental potential growth?
Yes. It is clearly a fairly lengthy process as you can imagine. This is something pretty important for Chevron. So I assume they've talked with a number of other parties as well. We spent considerable time and energy with them going through their projects, how they viewed renewable energy projects, what is the kind of partnership they wanted And with all of that through the many months of discussions, we felt good about the partnership.
Both of us were very aligned in terms of what we are looking for. Chevron was looking to really minimize the levelized cost of energy. And with the price point around both wind and solar energy, we can certainly meet those targets. But it is a framework agreement, which basically lays out how the 2 parties will work together in the future. We are already in discussions about making that into real projects and we have plans to in fact start construction sometime in 2021 on the first of those projects.
Thanks for that detail. And David, congratulations on a well earned retirement and thanks for your help over the years. Thanks, Sean.
Our next question comes from David Quezada of Raymond James. Please go ahead.
Thanks. Good morning, everyone. My first question here just on the commentary around plant and service accounting. I'm wondering if you could comment at all on the lift you expect to get from that to rate base going forward?
Well, a couple of things, right. Clearly, there is no regulatory lag in terms of GISA. I think that is an important factor for us. The other thing is also it does move out the rates for our customers over the long term. It really doesn't change the capital plan or anything of the sort.
So those are primarily the benefits that we see.
Okay, fair enough. Thank you. And then maybe one more just on a follow-up on the Chevron agreement. Is it too early to discuss what you might see there in terms of the PPAs for those projects? Should we assume there is something similar to contracts that we've seen signed in the U.
S. Recently?
Clearly, it lays out what are the roles and responsibilities of the different parties. So obviously we as a developer sourcing the supply chain, being responsible for the financing part of things, while Chevron obviously has a local knowledge that they have their land and other facilities. So it really brings the 2 separate knowledge basis of the other 2 parties together. In terms of the power purchase agreements, that's going to be really very site specific, things like what is the term, what is the kind of financial structure, all of these things are going to be done in the power purchase agreement. And again, both sides are convinced that what we want to do is minimize the levelized cost of energy over the long term for Chevron and that's going to be the goal of the power purchase agreements.
Excellent. Thank you for that. And I'll echo Sean's comments.
Our next question comes from Nelson Ng of RBC Capital Markets. Please go ahead.
Great, thanks. Good morning, everyone. So my first question relates to the reiteration of the guidance. Could you just talk about what some of the biggest risks to hitting your guidance is? Because I was just looking I was just doing the quick math.
I'm not sure if it's correct or not, but I get the sense that you need a 23% earnings improvement over the second half of twenty nineteen to hit the low end of your guidance. I'm just wondering whether you're comfortable with that and, yes, what are some of the risks of not hitting guidance?
Hey, Nelson, it's Arthur. I'll try to take that one. So, first of all, I'd say, point you to the MD and A with respect to some of the assumptions that we've made with respect to our reiteration of that guidance. So you can look at some of the factors. But maybe to provide a little bit of color around that, we from a in terms of impacts from demand reductions and COVID, we actually have been seeing quite a lot more normalization, especially with respect to our demands on our C and I customers.
So demand has been normalizing over the course of Q2 and we continue to see that into Q3 as well. I mean, the other thing to point to, it's been a very hot summer, so weather actually has been cooperating with us as well. So as far as we see it right now and working through the various factors, we do see ourselves still reiterating that guidance.
Okay, got it. And then my second question relates to the Chevron deal. Like I know the initial focus is probably going to be in the U. S, but it mentions that geographies for the target geographies include Argentina, Kazakhstan and Western Australia. Could you just talk about how I guess, your comfort level in Argentina, Kazakhstan and what the approach for those places would be?
As you've seen, Nelson, we're currently not in places like Argentina and Kazakhstan. But what Chevron really wanted was a global partner. They didn't want to have a different partner for each country, so to speak. And that was a reason for coming up with a framework to cover these initial facilities and that could be even added over time, right. So we clearly our comfort level is there given the fact that Chevron is clearly the counterparty.
It's going to be sited on Chevron land. They know these reasons extremely well. So what I see ourselves doing even despite going to places like Kazakhstan and Argentina is that we are really taking Chevron credit.
Okay, got it. All right. I'll get back in the queue. But David, congratulations on your retirement and hopefully you can pick up some new
hobbies. Thanks, Nelson.
Our next question comes from Julien Dumoulin Smith of Bank of America. Please go ahead.
Hey, good morning team and congratulations to everyone as well.
Good morning, Julien. Just to
follow-up on Caspelab. Hey, good morning. Thank you. Couple of questions here if I can. Perhaps coming back to the guidance and how you're thinking this year, you guys provided at the start of the year at your Analyst Day, admittedly pre COVID guidance on a quarterly basis.
That would if you added those numbers up, it would suggest again going back to where I think the last question was going with a little bit of a delta. How are you thinking about the puts and takes mid year here to get you back within the guidance range versus your previously articulated guidance? It sounds like from the commentary earlier that you have $10,000,000 of cost reductions. What are the other moving pieces there, if you can speak to that? And then also, if I can just throw this in there, your CapEx budget, you're reaffirming that.
I know Granite Bridge, I think you guys canceled that project here. How much of that CapEx was tied to that? And reaffirming, what is taking its place? Can you talk about like the puts and takes in the CapEx budget as well?
Sure. So maybe just with respect to the guidance, as you know, we did provide guidance and we did provide quarterly guidance And last quarter, we widened it as COVID-nineteen hits. I mean, as we kind of look at our guidance for the year, we are admittedly maybe looking at it much more on an annual basis. And again, factoring things, as you mentioned, our operating cost savings, that we're actually well on track
for achieving as we see it our guidance is would hold. On the capital expenditure part, Julian, so Granite Bridge was in the $250,000,000 $300,000,000 range. And at that time, we firmly believe that that was the right solution for the customers in terms of liquid fine natural gas and the storage solutions we are proposing. However, as we are developing that, one of the largest customers that was on the Tennessee Gas Pipeline opted not to renew their contract. So we had significant amount of long term pipeline that became available.
So we did what was the right thing for customers. We that's obviously the right thing for us to do. However, given that there still will be system wide requirements for upgrading the system, possibly adding storage solutions, things of the sort may still be there. Also, when we talk about a 5 year plan like that, obviously we're a development company and we have a pipeline of development projects. So there's obviously other projects that are geared towards resiliency or safety or security that we have that would fill that pipeline.
And that's why we feel confident to reiterate that $9,200,000,000 CapEx plan.
Got it. So it sounds like you guys have something in mind already?
That's right.
Okay. And just if I can come back to this and this is more of a conceptual question. Obviously, dividend kind of annualizing at $0.62 level. How are you thinking about the balance between dividend growth versus growth versus cash for growth, right? Again, obviously, you guys have been fairly proactive this year.
But how do you think about positioning the company in terms of payout ratio in the future, etcetera? And again, this is more of a geared towards the new management team, if I can, in thought process, especially given the opportunities you guys have described etcetera?
Yes. Julien, I mean, I think at our last Investor Day, we reiterated what our dividend growth would be and we reiterated that all the way through 2021 and committed to relook at it after that more on a payout ratio basis.
Got it. All right. No, fair enough. Thank you guys very much. Take care and again congrats everyone.
Thanks, Julian.
Our next question comes from Robert Hope of Scotiabank. Please go ahead.
Good morning, everyone, and congratulations, David.
Thank
you. Thank you.
Want to circle back on the Chevron deal and conceptually how you're thinking about your international strategy. You have Atlantica, you have Aegis. Are you looking to utilize a third party here so that you can keep these equity accounted for? Or are you looking to consolidate them? Just want to get a little sense of how the international angle of the Chevron deal could play into your kind of side currencies?
Sure. Thanks, Rob. And really, we fundamentally consider ourselves to be a North American energy and water company, right. The vast majority of our business continues to be in the U. S.
And Canada. This Chevron transaction was again like I explained earlier a little different because they were truly looking for a global partner. And clearly they've got facilities around the world. They've got very large facilities in the Permian Basin around Texas and New Mexico was probably going to be among our first ones where we're going to be transacting around. But again, because of the fact that they wanted a global partner, we felt like, we feel much more comfortable taking Chevron risk rather than international country risk in going into these different jurisdictions.
So our thought process is somewhat different perhaps. We see ourselves going out there with a strong partner like Chevron taking Chevron credit risk rather than all these different countries. But fundamentally, we are a North American energy and water company.
All right.
And then as a follow-up, you mentioned that you could see, it looks like the some of the U. S. Properties start construction in 2021. When you take a look at that 500 megawatts, how do you think it will be built over through the years and kind of which countries do you think will be developed first?
So what we have started after signing the framework agreement is exchanging information. The two teams are working very closely together. So we've started receiving site specific information from Chevron. So we're looking through those. We're analyzing them in terms of okay, what is the right technology, solar or wind, what is the right capacity for each one of these.
So really we're in early stages of working towards our financial model and then the power purchase agreement. So I unfortunately cannot give you more details on that. But in our discussions with Chevron, both parties want to see progress and we have talked about starting construction on some of these projects even as early as 2021. Given COVID and everything, we assume the earliest ones will be in the Permian Basin, but we are looking at other projects as well.
All right. Thank
you. Thanks.
Our next question comes from Rupert Merer of National Bank. Please go ahead.
Good morning, everyone. Congratulations on the retirement, David, and congratulations to Arthur too.
Thank you.
I wanted to take one more crack at the Chevron deal. So with your relationship and and these relationships or any opportunities for these partners to be involved in the project?
We don't see any conflicts. There certainly could be opportunities in the future for us to work this through either AAGES or partner with Atlantica, those remain open. The C and I strategy is very important for us and the Chevron relationship is very important for us and they also really wanted a one face partner rather than having a number of other partners in the face on the other side of the table. So we will be taking the lead. Again, the goal from both sides is very, very clear is to minimize the levelized cost of energy and we will do the right kinds of partnerships if need be, the right kind of financing structures as needed in order to achieve that goal for Chevron and for us.
Given the comments that you made earlier about the size of the C and I opportunity and we see this global push towards investment in infrastructure and renewables. Do you see a potential for a shift in the focus of Algonquin back more to renewable energy and maybe a little away from regulated utilities?
Well, we actually like the balance we have in terms of the 65%, 70% regulated remainder renewable energy. We like that balance. There's a lot of cross synergies in terms of ideas and things of the sort on how either of those 2 business blocks could get better as well. So we obviously want to maintain our BBB credit rating. So there's a lot of factors around that.
I don't see any major departure from what we've announced before. So we also have opportunities on the regulated side. We are an acquisitive company. We've announced obviously Belco and New York American Water only over the 5 year horizon, but you can probably rest assured that we're always in the market looking for the right transactions that meet our financial and our shareholders financial thresholds.
Thank you. And then secondly, looking at cost, so your cost cutting initiatives, you're looking for $10,000,000 reduction in the second half of the year. Can you talk about where that's coming and how the admin costs fit in here? I think they were up a little bit quarter over quarter. Should we see that as a new normal for the admin costs or should those be lower in the second half of the year too?
Yes, sure. So maybe it's I can start with the admin costs. The one thing I want to maybe point out on the admin costs, some of that is probably climbing. It's so maybe that variance seems a little higher than it truly is because we look back in the prior year, our admin costs were actually flat year over year. So it's maybe a little bit exasperated the difference.
I mean, when you look at the increase in the admin costs, I mean, some of the cost there maybe could be considered a little bit one time in nature, some increased professional fees, etcetera. But in general, there is some increase. I mean, just the fact that we are becoming a bigger organization and really the admin costs are catching up.
Okay. Thanks very much. Appreciate the color.
Yes. And in terms of the sorry, just to answer your second part of the question, in terms of the cost savings, so the cost savings a lot of the cost savings are coming out quite naturally, I mean, with respect to people are traveling less, less conferences, etcetera. But we're also taking a pretty hard look at other items and implemented a bit of a hiring pause. So to the extent that there's any non critical positions, we're putting that on pause for a little bit, areas like property tax and so forth. So just really scouring through the organization and looking to see where we can potentially get some cost savings.
I mean, the one thing for sure is we are not compromising safety, reliability, resiliency. That's off limits.
Thank you.
Our next question comes from Mark Jarvi of CIBC Capital Markets. Please go
ahead. Great. Good morning, everyone. First, David, all the best in retirement. Going to the guidance again, one of the items you talked about was closing of Belco, small contribution, but it would be needed maybe to hit the low end.
Just give us an update on that and then just while you're talking about closing acquisitions, status of New York Water, where I think there's been an offer to maybe let municipalities bid on assets, just maybe prospects for closing all those acquisitions in the next 12 months?
Sure. It's Chris, Mark. Maybe I'll take the first one, Bellco. So just by way of background, the application was submitted to the regulatory authority on October 4, 2019. The public consultation process was completed on May 4th this year.
The other background component is that the government extended their guideline date when a decision will be made to October 4, which happened to be 12 months after the application was submitted. And so I guess if you just step back a little bit, I think you'd say that a duration for a regulatory decision on a regulated utility of 1 year is probably not unusual. And I guess we could be accused of being a little bit optimistic on our initial timing expectations. But that was probably because the regulatory approval process in Bermuda is a very new process and that the RA's mandate for electricity is only 3 or 4 years old and just no one had ever gone through the process. But I agree we probably were a little bit optimistic.
And to throw in, there's been a couple of unusual circumstances such as the RA succession that they underwent every regulator the Board of Commissioners was changed and something called COVID that you might have heard about. But if you just look at the benefits of the transaction, which is what we keep focusing on, there's a huge benefit to the people of Bermuda and there's a huge benefit to the customers of Bellco. We're very optimistic that this will be approved. It's just to us even in the times that we're in that this represents so many benefits to all stakeholders. On
New York American Water, as you know, we filed a joint petition back in February with the New York PSC. Based on what we've recently seen on the revised procedural schedule, we are expecting to have evidentiary hearings beginning in mid December and we're expecting the transaction to close sometime in 2021.
And is your view of this opportunity for these municipal bids to come in and some of that participation that can extend the process? And how confident are you that ultimately PSCC's Algonquin as the best owners of this asset?
And in fact, that was what extended the process, because there are 2 towns that served approximately 10,000 customers out of a total of 125,000 customers that expressed interest. And we support the New York PSC doing a fulsome review and looking at different options as well. But we remain confident that we will be able to close on this transaction sometime in 2021.
Okay. And then my second area for a question was just around simplicity. There's the last year or so management has talked about trying to simplify and some of the financial complexity. Maybe Arun, just with you coming in fresh perspective, is there anything low hanging fruit that you like accomplish in the next couple of quarters in terms of simplification?
Sure. So there's a number of areas as you well know that brings in complexity. Obviously, we'd like to simplify the story more so around ages, obviously, long term. We'd like to find a better way to work perhaps with Atlantica as well. So clearly there's opportunities like that and we are right now going through a fulsome review of all of the different opportunities.
Again, we clearly want to remain, retain our credit metrics. We probably want to gain more upside on the SFO debt ratio probably give us some more room and probably have a balance sheet that is flexible enough that we can do more transactions in the future because that is something we traditionally have been very good at uncovering value that's out there. So we'd like to be always prepared for that optionality.
Our next question comes from Ben Pham of BMO. Please go ahead.
Thanks. Good morning. I had a question on your funding plan now with equity that you've done. So you've basically reiterated the $9,200,000,000 You've done some equity more recently. And I think you mentioned about half of that CapEx is going to be funded by debt and FFO.
So I was wondering maybe you can update us on what's the funding breakout going forward in the next 4 years in terms of preferred shares, equity, DRIP, asset sales, all the options you're looking at?
Sure. I'll try to address that one. So I mean, we as you know, we did have our equity raise. We tried to get ahead of our equity needs this year. So I think we're taking care of certainly 2020 and into 2021.
I mean, as we look forward with respect to funding plan for the remaining CapEx, I mean, in the future, we've talked about certainly mandatory converts. It's a product that we still like quite a lot because it matches the earnings profile with the cash flows of the investments that we are making. So mandatory conversions are definitely on the table for us in the future. And otherwise, the funding plan kind of remains as is with debt and equity and free cash flow.
Do you the ATM, I know you have it not only a bunch for second half, but is it really a reassessment next year or is it the base plan that the ATM does come back on?
Yes. No, I think we reassess the ATM early next year. I think this year we've shut down the ATM. We really are done the equity for this year, but next year we'll take a fresh look at it.
Okay. Maybe I can go back to Missouri a bit more, just bunch of moving parts in MD and A. So basically, you had applied for $22,000,000 of revenue increases. You got one. You're obviously disappointed.
You're going to go back and try to get more. But in the meantime, you've exercised a plant in service. So is that basically the growth depreciation that's happening is, is the thought process that you spend CapEx each year now the next couple of years of the growth period and you can recover that CapEx right away and make a percent of that revenue you didn't get approved for and come 2023, your rate base effectively is rebased automatically. Is that the way that the bill was meant to work?
Yes. Again, primarily it is around reducing regulatory lag, right. That is the primary attraction for us, frankly. I mean, we had wanted to do weather decoupling because we thought it is good for the customers and for the utility not to see these large variations due to weather. But when that did not happen, we opted for PISA.
As you probably know, the other 2 investor owned utilities in Missouri have also opted for PISA earlier. So we're in good company from that perspective. But we're primarily seeing the benefit of reducing the regulatory lag and smoothening out the cost for our customer base.
Okay. So it's not only just rate base, it's also income statement too as well like the cost structure and whatnot.
That's great.
Okay.
All right.
Thanks very much. Thanks.
Our next question comes from Stephen Byrd of Morgan Stanley. Please go ahead.
Hi. Good morning.
Good morning, Stephen.
David, congratulations on a very successful career. I wish you all the best in retirement. I hope you have many, many happy years in retirement.
Thank you, Steve.
So a lot has been discussed. I wanted to maybe step back and just talk about the U. S. Election. And in the event of a democratic sweep, I guess I'm thinking about both sort of pro renewable policies like tax credit extensions, carbon regulations, but also thinking about the potential increase in the corporate tax rate.
And I wondered if you could just maybe at a high level give your thoughts on the implications for Algonquin in the event of a democratic sweep?
Sure. So maybe I can start with the tax rate, because that has been getting quite a lot of press. And so Joe Biden is looking at on this ticket proposing the increase in the tax rate from 21% to the 28%. He's also looking at some minimum tax increases. Kind of as we think about it, it's almost a reversal of 2018.
We when the rates came down, there was it was basically EPS neutral for us on the utility side and slightly cash flow negative. And on the non reg side, it was slightly EPS positive. So you can kind of almost think about it as a direct reversal of that. I mean, in reality, there's a lot of things to be sorted out, but it's difficult to tell. I mean, one thing, for example, is how does this new minimum tax interact with the BEAT, does the BEAT get repealed and so forth.
So I mean, we'll be watching it closely, but all in all, it's you can kind of think about it as a reversal of what happened last time.
And in terms of the overall environment, we've done we've managed to do very well even under an administration that may not perhaps be as bullish on renewable energy. So we assume we'll do very well under an administration that is very poor renewable energy. Our fundamental thesis remain strong. I think one of the things you may see is more direct federal procurement of renewable energy. And I think even for that, we're positioned very well.
As you probably know, we have a solar facility in Maryland, Great Bay Solar that contracts directly with the federal government. So we do have experience and expertise around doing that. There may be opportunities to add renewable energy more to the rate base as well. So we see if anything, I think a pro renewable energy policy will only enhance our renewable energy and growth story.
That makes sense. And then maybe just last question for me. Just on Chevron, it's obviously an exciting development and probably something we're going to see more of more broadly. As you continue to well, as you begin to really, I guess, to really execute on this agreement, Is there a natural stage at which you could expand this relationship? In other words, sort of is it could it be a year or 2 into the relationship?
Things are obviously they're going well, development is proceeding as planned and both sides really want to increase the scope of the arrangement? Or is that less likely? Is this in your mind sort of fairly discrete or you need to wait longer to kind of mutually decide to extend or sort of expand?
Stephen, we certainly hope to. I mean, if you look at the press release, it actually does not say 500 megawatts, it says over 500 megawatts. So we are certainly hopeful and we obviously need to prove ourselves as a good solid partner for Chevron and we have every intent of doing that. And we also frankly see this as almost like a passport project in terms of being able to do similar projects hopefully with other potential C and I customers as well. So we're excited about that possibility also.
So all in all, I think it's one more growth lever that we have within the company.
That's great. That's all I had. Thank you.
Thanks Steven.
Our next question comes from Najeeb Baidu of Industrial Alliance. Please go ahead.
Hi, good morning. Maybe just going back to the guidance for this year and maybe looking beyond, it sounds like you can offset some of the weakness year to date with some cost savings. But let's all agree that 2020 has been full of surprises so far. And David, you mentioned some clear uncertainties, U. S.
Election, 2nd wave, etcetera. Can you talk about some of the other levers that you can try and pull to offset anything else that might come your way over and above the $15,000,000 of cost savings?
Yes. Sure, sure. I'll take that. I mean, we do have with respect to we're also looking at some potential self monetization strategies with some of our assets as well. So there is some potential offset there from an earnings perspective.
And from an operations perspective, again, just we've committed to $15,000,000 we're continuing to push But you're right, I mean, it is an uncertain time for the remainder of the year. And at this 10 seconds, it's we certainly see ourselves holding to the guidance, but we really don't know what's going to happen with COVID or how the weather is going to be. So there is
certainly uncertainty.
Okay. Yes, I think that's something we can agree on. Maybe just a high level comment on authorized ROE trends. We've seen ROEs, a lot of ROEs in some of the recent U. S.
Rate cases continue to trend lower and the spread really versus, let's call them, long dated bond yields have really widened recently, which suggests more tick down of allowed OREs going forward. Just any comments on your expectations for allowed OREs within your utilities?
Sure. Good morning, Najee. So one of the strengths of our decentralized model is we're in water and gas and electric utilities. We're in 14 different jurisdictions. And so while you have seen the results in Missouri, but we've also seen results in places like California with 10%, Georgia with 10.4%.
So I think it's difficult to really conclude an overall North America wide ROE story based upon what we've seen in Missouri. We have seen other places where the commissions have approved higher ROEs as well.
Okay. Too soon to tell.
All right. Well, thank you very much. And David, congratulations on a very well earned retirement.
Thank you, Najee.
I would like to turn the conference back over to Mr. Benz Kota for closing remarks.
Thank you, operator, and thank you for taking the time on our call today. With that, please stay on the line for our disclaimer.
Our discussion during this call contains certain forward looking information, including, but not limited to, our expectations regarding future earnings and capital expenditures as well as potential future impacts of COVID-nineteen. This forward looking information is based on certain assumptions, including those described in our most recent MD and 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.
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