Algonquin Power & Utilities Corp 6-K, filed Nov 14, 2022
Algonquin Power & Utilities Corp. (AQN)
6-K
2022-11-14
For: 2022-09-30
View Original
Added on
April 09, 2026
About this 6-K
Algonquin Power & Utilities Corp filed this 6-K on November 14, 2022.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 6-K
_______________________
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
Date: November 11, 2022
Commission File Number: 001-37946
_______________________
| Algonquin Power & Utilities Corp. | ||
(Translation of registrant’s name into English)
_______________________
354 Davis Road
Oakville, Ontario, L6J 2X1, Canada
(Address of principal executive offices)
_______________________
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F □ Form 40-F x
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): □
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): □
Exhibits 99.1 and 99.2 to this Report on Form 6-K are hereby incorporated by reference into Algonquin Power & Utilities Corp.’s Registration Statements on Forms F-3 (File Nos. 333-220059 and 333-227246), Forms F-10 (File Nos. 333-216616, 333-227245 and 333-236975) and Forms S-8 (File Nos. 333-177418, 333-213648, 333-213650, 333-218810, 333-232012 and 333-238961).
EXHIBIT INDEX
The following exhibits are filed as part of this Form 6-K:
| Exhibit | Description | ||||
| 99.1 | Unaudited Financial Statements for the quarter ended September 30, 2022 | ||||
| 99.2 | Management's Discussion & Analysis for quarter ended September 30, 2022 | ||||
| 99.3 | Certification of Chief Executive Officer | ||||
| 99.4 | Certification of Chief Financial Officer | ||||
| 99.5 | Earnings Press Release for the quarter ended September 30, 2022 | ||||
| 99.6 | Q4 2022 Common Share & Preferred Dividend Press Release | ||||
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ALGONQUIN POWER & UTILITIES CORP. | |||||
| (registrant) | |||||
| Date: November 11, 2022 | By: (signed) "Darren Myers" | ||||
| Name: Darren Myers | |||||
| Title: Chief Financial Officer | |||||
Unaudited Interim Consolidated Financial Statements of
Algonquin Power & Utilities Corp.
For the three and nine months ended September 30, 2022 and 2021
Algonquin Power & Utilities Corp.
Unaudited Interim Consolidated Statements of Operations
See accompanying notes to unaudited interim consolidated financial statements
| Three months ended | Nine months ended | ||||||||||||||||||||||
| (thousands of U.S. dollars, except per share amounts) | September 30 | September 30 | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Regulated electricity distribution | $ | 374,900 | $ | 308,116 | $ | 951,152 | $ | 922,100 | |||||||||||||||
| Regulated gas distribution | 79,636 | 62,584 | 464,981 | 353,909 | |||||||||||||||||||
| Regulated water reclamation and distribution | 107,105 | 64,008 | 275,362 | 176,600 | |||||||||||||||||||
| Non-regulated energy sales | 86,572 | 73,595 | 271,807 | 182,268 | |||||||||||||||||||
| Other revenue | 18,511 | 20,272 | 63,378 | 55,763 | |||||||||||||||||||
| 666,724 | 528,575 | 2,026,680 | 1,690,640 | ||||||||||||||||||||
| Expenses | |||||||||||||||||||||||
| Operating expenses | 216,647 | 177,204 | 634,979 | 528,343 | |||||||||||||||||||
| Regulated electricity purchased | 138,024 | 94,435 | 341,332 | 382,726 | |||||||||||||||||||
| Regulated gas purchased | 30,956 | 14,497 | 215,324 | 113,983 | |||||||||||||||||||
| Regulated water purchased | 3,528 | 3,888 | 9,680 | 10,036 | |||||||||||||||||||
| Non-regulated energy purchased | 15,081 | 11,898 | 41,685 | 25,887 | |||||||||||||||||||
| Administrative expenses | 23,445 | 15,165 | 61,004 | 48,930 | |||||||||||||||||||
| Depreciation and amortization | 108,207 | 96,553 | 340,718 | 292,153 | |||||||||||||||||||
| Loss (gain) on foreign exchange | (4,985) | 1,267 | (259) | 3,412 | |||||||||||||||||||
| 530,903 | 414,907 | 1,644,463 | 1,405,470 | ||||||||||||||||||||
Gain on sale of renewable assets (note 13(d)) | — | — | 1,200 | — | |||||||||||||||||||
| Operating income | 135,821 | 113,668 | 383,417 | 285,170 | |||||||||||||||||||
| Interest expense | (75,049) | (51,654) | (197,565) | (159,416) | |||||||||||||||||||
Loss from long-term investments (note 6) | (279,773) | (114,242) | (403,842) | (104,243) | |||||||||||||||||||
Other net losses (note 16) | (5,946) | (889) | (19,328) | (11,086) | |||||||||||||||||||
Pension and other post-employment non-service costs (note 8) | (1,518) | (3,875) | (6,354) | (11,420) | |||||||||||||||||||
Loss on derivative financial instruments (note 21(b)(iv)) | (386) | (1,817) | (6,270) | (2,082) | |||||||||||||||||||
| Loss before income taxes | (226,851) | (58,809) | (249,942) | (3,077) | |||||||||||||||||||
Income tax recovery (expense) (note 15) | |||||||||||||||||||||||
| Current | (5,433) | (3,755) | (15,146) | (10,994) | |||||||||||||||||||
| Deferred | 24,949 | 23,143 | 48,029 | 56,215 | |||||||||||||||||||
| 19,516 | 19,388 | 32,883 | 45,221 | ||||||||||||||||||||
| Net earnings (loss) | (207,335) | (39,421) | (217,059) | 42,144 | |||||||||||||||||||
Net effect of non-controlling interests (note 14) | |||||||||||||||||||||||
| Non-controlling interests | 16,608 | 14,087 | 89,571 | 54,989 | |||||||||||||||||||
| Non-controlling interests held by related party | (4,450) | (2,588) | (10,111) | (7,886) | |||||||||||||||||||
| $ | 12,158 | $ | 11,499 | $ | 79,460 | $ | 47,103 | ||||||||||||||||
| Net earnings (loss) attributable to shareholders of Algonquin Power & Utilities Corp. | $ | (195,177) | $ | (27,922) | $ | (137,599) | $ | 89,247 | |||||||||||||||
Preferred shares, Series A and preferred shares, Series D dividend (note 12) | 2,188 | 2,267 | 6,628 | 6,757 | |||||||||||||||||||
| Net earnings (loss) attributable to common shareholders of Algonquin Power & Utilities Corp. | $ | (197,365) | $ | (30,189) | $ | (144,227) | $ | 82,490 | |||||||||||||||
Basic and diluted net earnings (loss) per share (note 17) | $ | (0.29) | $ | (0.05) | $ | (0.21) | $ | 0.13 | |||||||||||||||
Algonquin Power & Utilities Corp.
Unaudited Interim Consolidated Statements of Comprehensive Income
| Three months ended | Nine months ended | ||||||||||||||||||||||
| (thousands of U.S. dollars) | September 30 | September 30 | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net earnings (loss) | $ | (207,335) | $ | (39,421) | $ | (217,059) | $ | 42,144 | |||||||||||||||
| Other comprehensive income (loss) (“OCI”): | |||||||||||||||||||||||
Foreign currency translation adjustment, net of tax expense of $7,391 and $5,118 (2021 - tax expense of $291 and recovery of $1,068), respectively (notes 21(b)(iii) and 21(b)(iv)) | (14,777) | (28,904) | (55,372) | (32,172) | |||||||||||||||||||
Change in fair value of cash flow hedges, net of tax expense of $5,048 and recovery of $24,846 of (2021 - tax recovery of $12,062 and $22,346), respectively (note 21(b)(ii)) | 1,451 | (31,599) | (70,314) | (55,746) | |||||||||||||||||||
Change in pension and other post-employment benefits, net of tax recovery of $40 and $70 (2021 - tax expense of $97 and $432), respectively (note 8) | (117) | 321 | (203) | 2,486 | |||||||||||||||||||
| OCI, net of tax | (13,443) | (60,182) | (125,889) | (85,432) | |||||||||||||||||||
| Comprehensive loss | (220,778) | (99,603) | (342,948) | (43,288) | |||||||||||||||||||
| Comprehensive loss attributable to the non-controlling interests | (13,862) | (12,801) | (81,917) | (46,476) | |||||||||||||||||||
| Comprehensive income (loss) attributable to shareholders of Algonquin Power & Utilities Corp. | $ | (206,916) | $ | (86,802) | $ | (261,031) | $ | 3,188 | |||||||||||||||
See accompanying notes to unaudited interim consolidated financial statements
Algonquin Power & Utilities Corp.
Unaudited Interim Consolidated Balance Sheets
| (thousands of U.S. dollars) | |||||||||||
| September 30, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 114,313 | $ | 125,157 | |||||||
Trade and other receivables, net (note 4) | 432,572 | 403,426 | |||||||||
| Fuel and natural gas in storage | 115,698 | 74,209 | |||||||||
| Supplies and consumables inventory | 122,606 | 103,552 | |||||||||
Regulatory assets (note 5) | 166,931 | 158,212 | |||||||||
| Prepaid expenses | 74,783 | 54,548 | |||||||||
Derivative instruments (note 21) | 11,192 | 3,486 | |||||||||
| Other assets | 28,052 | 16,153 | |||||||||
| 1,066,147 | 938,743 | ||||||||||
| Property, plant and equipment, net | 11,904,140 | 11,042,446 | |||||||||
| Intangible assets, net | 98,666 | 105,116 | |||||||||
| Goodwill | 1,291,433 | 1,201,244 | |||||||||
Regulatory assets (note 5) | 1,110,502 | 1,009,413 | |||||||||
Long-term investments (note 6) | |||||||||||
| Investments carried at fair value | 1,358,111 | 1,848,456 | |||||||||
| Other long-term investments | 568,355 | 495,826 | |||||||||
Derivative instruments (note 21) | 74,115 | 17,136 | |||||||||
| Deferred income taxes | 65,027 | 31,595 | |||||||||
| Other assets | 116,833 | 95,861 | |||||||||
| $ | 17,653,329 | $ | 16,785,836 | ||||||||
See accompanying notes to unaudited interim consolidated financial statements
Algonquin Power & Utilities Corp.
Unaudited Interim Consolidated Balance Sheets (continued)
| (thousands of U.S. dollars) | |||||||||||
| September 30, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 134,094 | $ | 185,291 | |||||||
| Accrued liabilities | 471,660 | 428,733 | |||||||||
Dividends payable (note 12) | 114,851 | 114,544 | |||||||||
Regulatory liabilities (note 5) | 71,204 | 65,809 | |||||||||
Long-term debt (note 7) | 461,862 | 356,397 | |||||||||
Other long-term liabilities (note 9) | 168,511 | 167,908 | |||||||||
Derivative instruments (note 21) | 56,302 | 38,569 | |||||||||
| Other liabilities | 9,691 | 7,461 | |||||||||
| 1,488,175 | 1,364,712 | ||||||||||
Long-term debt (note 7) | 7,243,042 | 5,854,978 | |||||||||
Regulatory liabilities (note 5) | 559,754 | 510,380 | |||||||||
| Deferred income taxes | 501,682 | 530,187 | |||||||||
Derivative instruments (note 21) | 148,341 | 81,676 | |||||||||
| Pension and other post-employment benefits obligation | 218,029 | 226,387 | |||||||||
Other long-term liabilities (note 9) | 431,999 | 515,911 | |||||||||
| 10,591,022 | 9,084,231 | ||||||||||
Redeemable non-controlling interests (note 14) | |||||||||||
Redeemable non-controlling interest, held by related party (note 13(b)) | 307,668 | 306,537 | |||||||||
| Redeemable non-controlling interests | 8,648 | 12,989 | |||||||||
| 316,316 | 319,526 | ||||||||||
| Equity: | |||||||||||
| Preferred shares | 184,299 | 184,299 | |||||||||
Common shares (note 10(a)) | 6,149,794 | 6,032,792 | |||||||||
| Additional paid-in capital | 4,002 | 2,007 | |||||||||
| Deficit | (796,439) | (288,424) | |||||||||
Accumulated other comprehensive loss (“AOCI”) (note 11) | (195,109) | (71,677) | |||||||||
| Total equity attributable to shareholders of Algonquin Power & Utilities Corp. | 5,346,547 | 5,858,997 | |||||||||
| Non-controlling interests | |||||||||||
| Non-controlling interests | 1,336,495 | 1,441,924 | |||||||||
Non-controlling interest, held by related party (note 13(c)) | 62,949 | 81,158 | |||||||||
| 1,399,444 | 1,523,082 | ||||||||||
| Total equity | 6,745,991 | 7,382,079 | |||||||||
Commitments and contingencies (note 19) | |||||||||||
| Subsequent events (notes 3(c) and 7(a)) | |||||||||||
| $ | 17,653,329 | $ | 16,785,836 | ||||||||
See accompanying notes to unaudited interim consolidated financial statements
Algonquin Power & Utilities Corp.
Unaudited Interim Consolidated Statement of Equity
(thousands of U.S. dollars) For the three months ended September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Algonquin Power & Utilities Corp. Shareholders | |||||||||||||||||||||||||||||||||||||||||||||||
| Common shares | Preferred shares | Additional paid-in capital | Deficit | AOCI | Non- controlling interests | Total | |||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | 6,082,511 | $ | 184,299 | $ | 261 | $ | (475,356) | $ | (183,370) | $ | 1,422,722 | $ | 7,031,067 | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (195,177) | — | (12,158) | (207,335) | ||||||||||||||||||||||||||||||||||||||||
| Effect of redeemable non-controlling interests not included in equity (note 14) | — | — | — | — | — | (3,172) | (3,172) | ||||||||||||||||||||||||||||||||||||||||
| OCI | — | — | — | — | (11,739) | (1,704) | (13,443) | ||||||||||||||||||||||||||||||||||||||||
| Dividends declared and distributions to non-controlling interests | — | — | — | (98,282) | — | (6,244) | (104,526) | ||||||||||||||||||||||||||||||||||||||||
| Dividends and issuance of shares under dividend reinvestment plan | 27,624 | — | — | (27,624) | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Common shares issued upon public offering, net of tax effected cost | 38,163 | — | — | — | — | — | 38,163 | ||||||||||||||||||||||||||||||||||||||||
| Common shares issued under employee share purchase plan | 1,496 | — | — | — | — | — | 1,496 | ||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 3,713 | — | — | — | 3,713 | ||||||||||||||||||||||||||||||||||||||||
| Common shares issued pursuant to share-based awards | — | — | 28 | — | — | — | 28 | ||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | 6,149,794 | $ | 184,299 | $ | 4,002 | $ | (796,439) | $ | (195,109) | $ | 1,399,444 | $ | 6,745,991 | |||||||||||||||||||||||||||||||||
See accompanying notes to unaudited interim consolidated financial statements
Algonquin Power & Utilities Corp.
Unaudited Interim Consolidated Statement of Equity (continued)
(thousands of U.S. dollars) For the three months ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Algonquin Power & Utilities Corp. Shareholders | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common shares | Preferred shares | Additional paid-in capital | Deficit | AOCI | Non- controlling interests | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | 5,251,808 | $ | 184,299 | $ | — | $ | (205,764) | $ | (56,057) | $ | 1,474,761 | $ | 6,649,047 | ||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (27,922) | — | (11,499) | (39,421) | |||||||||||||||||||||||||||||||||||||||||||
| Redeemable non-controlling interests not included in equity (note 14) | — | — | — | — | — | (874) | (874) | |||||||||||||||||||||||||||||||||||||||||||
| OCI | — | — | — | — | (58,880) | (1,302) | (60,182) | |||||||||||||||||||||||||||||||||||||||||||
| Dividends declared and distributions to non-controlling interests | — | — | — | (86,208) | — | (6,246) | (92,454) | |||||||||||||||||||||||||||||||||||||||||||
| Dividends and issuance of shares under dividend reinvestment plan | 23,288 | — | — | (23,288) | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Common shares issued upon public offering, net of tax effected cost | 104,326 | — | — | — | — | — | 104,326 | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares under employee share purchase plan | 1,267 | — | — | — | — | — | 1,267 | |||||||||||||||||||||||||||||||||||||||||||
| Common shares issued pursuant to share-based awards | 1,629 | — | (1,716) | (792) | — | — | (879) | |||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 3,675 | — | — | — | 3,675 | |||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | 5,382,318 | $ | 184,299 | $ | 1,959 | $ | (343,974) | $ | (114,937) | $ | 1,454,840 | $ | 6,564,505 | ||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited interim consolidated financial statements
Algonquin Power & Utilities Corp.
Unaudited Interim Consolidated Statement of Equity (continued)
(thousands of U.S. dollars) For the nine months ended September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Algonquin Power & Utilities Corp. Shareholders | |||||||||||||||||||||||||||||||||||||||||||||||
| Common shares | Preferred shares | Additional paid-in capital | Deficit | AOCI | Non- controlling interests | Total | |||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | 6,032,792 | $ | 184,299 | $ | 2,007 | $ | (288,424) | $ | (71,677) | $ | 1,523,082 | $ | 7,382,079 | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (137,599) | — | (79,460) | (217,059) | ||||||||||||||||||||||||||||||||||||||||
| Effect of redeemable non-controlling interests not included in equity (note 14) | — | — | — | — | — | (5,897) | (5,897) | ||||||||||||||||||||||||||||||||||||||||
| OCI | — | — | — | — | (123,432) | (2,457) | (125,889) | ||||||||||||||||||||||||||||||||||||||||
| Dividends declared and distributions to non-controlling interests | — | — | — | (298,152) | — | (42,032) | (340,184) | ||||||||||||||||||||||||||||||||||||||||
| Dividends and issuance of shares under dividend reinvestment plan | 70,403 | — | — | (70,403) | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Contributions received from non-controlling interests, net of cost | — | — | — | — | — | 6,208 | 6,208 | ||||||||||||||||||||||||||||||||||||||||
| Common shares issued upon conversion of convertible debentures | 6 | — | — | — | — | — | 6 | ||||||||||||||||||||||||||||||||||||||||
| Common shares issued upon public offering, net of tax effected cost | 38,163 | — | — | — | — | — | 38,163 | ||||||||||||||||||||||||||||||||||||||||
| Common shares issued under employee share purchase plan | 3,951 | — | — | — | — | — | 3,951 | ||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 9,377 | — | — | — | 9,377 | ||||||||||||||||||||||||||||||||||||||||
| Common shares issued pursuant to share-based awards | 4,479 | — | (7,382) | (1,861) | — | — | (4,764) | ||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | 6,149,794 | $ | 184,299 | $ | 4,002 | $ | (796,439) | $ | (195,109) | $ | 1,399,444 | $ | 6,745,991 | |||||||||||||||||||||||||||||||||
See accompanying notes to unaudited interim consolidated financial statements
Algonquin Power & Utilities Corp.
Unaudited Interim Consolidated Statement of Equity (continued)
(thousands of U.S. dollars) For the nine months ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Algonquin Power & Utilities Corp. Shareholders | |||||||||||||||||||||||||||||||||||||||||||||||
| Common shares | Preferred shares | Additional paid-in capital | Retained earnings (deficit) | AOCI | Non- controlling interests | Total | |||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 4,935,304 | $ | 184,299 | $ | 60,729 | $ | 45,753 | $ | (22,507) | $ | 458,612 | $ | 5,662,190 | |||||||||||||||||||||||||||||||||
| Net earnings (loss) | — | — | — | 89,247 | — | (47,103) | 42,144 | ||||||||||||||||||||||||||||||||||||||||
| Redeemable non-controlling interests not included in equity (note 14) | — | — | — | — | — | (2,747) | (2,747) | ||||||||||||||||||||||||||||||||||||||||
| OCI | — | — | — | — | (86,059) | 627 | (85,432) | ||||||||||||||||||||||||||||||||||||||||
| Dividends declared and distributions to non-controlling interests | — | — | — | (244,812) | — | (19,613) | (264,425) | ||||||||||||||||||||||||||||||||||||||||
| Dividends and issuance of shares under dividend reinvestment plan | 69,496 | — | — | (69,496) | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Contributions received from non-controlling interests, net of cost | — | — | 6,919 | — | (6,371) | 1,035,923 | 1,036,471 | ||||||||||||||||||||||||||||||||||||||||
| Common shares issued upon conversion of convertible debentures | 16 | — | — | — | — | — | 16 | ||||||||||||||||||||||||||||||||||||||||
| Common shares issued upon public offering, net of tax effected cost | 365,554 | — | — | — | — | — | 365,554 | ||||||||||||||||||||||||||||||||||||||||
| Contract adjustment payments | — | — | (62,240) | (160,138) | — | — | (222,378) | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares under employee share purchase plan | 3,839 | — | — | — | — | — | 3,839 | ||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 8,749 | — | — | — | 8,749 | ||||||||||||||||||||||||||||||||||||||||
| Common shares issued pursuant to share-based awards | 8,109 | — | (12,198) | (4,528) | — | — | (8,617) | ||||||||||||||||||||||||||||||||||||||||
| Acquisition of redeemable non-controlling interest | — | — | — | — | — | 29,141 | 29,141 | ||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | 5,382,318 | $ | 184,299 | $ | 1,959 | $ | (343,974) | $ | (114,937) | $ | 1,454,840 | $ | 6,564,505 | |||||||||||||||||||||||||||||||||
See accompanying notes to unaudited interim consolidated financial statements
Algonquin Power & Utilities Corp.
Unaudited Interim Consolidated Statements of Cash Flows
| (thousands of U.S. dollars) | Three months ended September 30 | Nine months ended September 30 | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Cash provided by (used in): | |||||||||||||||||||||||
| Operating activities | |||||||||||||||||||||||
| Net earnings (loss) | $ | (207,335) | $ | (39,421) | $ | (217,059) | $ | 42,144 | |||||||||||||||
| Adjustments and items not affecting cash: | |||||||||||||||||||||||
| Depreciation and amortization | 108,207 | 96,553 | 340,718 | 292,153 | |||||||||||||||||||
| Deferred taxes | (24,949) | (23,143) | (48,029) | (56,215) | |||||||||||||||||||
| Initial value and unrealized loss (gain) on derivative financial instruments | 1,405 | (11,884) | 1,003 | (11,686) | |||||||||||||||||||
| Share-based compensation | 3,055 | 3,414 | 6,550 | 7,800 | |||||||||||||||||||
| Cost of equity funds used for construction purposes | (476) | (275) | (1,443) | (406) | |||||||||||||||||||
| Change in value of investments carried at fair value | 300,358 | 139,050 | 484,387 | 183,452 | |||||||||||||||||||
| Pension and post-employment expense lower than contributions | (4,464) | (1,477) | (10,900) | (7,525) | |||||||||||||||||||
| Distributions received from equity investments, net of income | 17,616 | 6,676 | 21,000 | 13,587 | |||||||||||||||||||
| Other | 5,155 | (1,000) | 8,691 | 5,300 | |||||||||||||||||||
Net change in non-cash operating items (note 20) | (95,667) | 6,221 | (180,455) | (437,648) | |||||||||||||||||||
| 102,905 | 174,714 | 404,463 | 30,956 | ||||||||||||||||||||
| Financing activities | |||||||||||||||||||||||
| Increase in long-term debt | 5,951,493 | 1,824,449 | 11,231,531 | 9,175,714 | |||||||||||||||||||
| Repayments of long-term debt | (5,611,835) | (1,535,152) | (9,617,670) | (8,392,109) | |||||||||||||||||||
| Issuance of common shares, net of costs | 39,659 | 105,229 | 42,114 | 367,991 | |||||||||||||||||||
| Cash dividends on common shares | (94,364) | (82,151) | (281,922) | (222,928) | |||||||||||||||||||
| Dividends on preferred shares | (2,188) | (2,267) | (6,628) | (6,757) | |||||||||||||||||||
| Contributions from non-controlling interests and redeemable non-controlling interests | — | — | — | 1,032,204 | |||||||||||||||||||
| Production-based cash contributions from non-controlling interest | — | — | 6,208 | 4,832 | |||||||||||||||||||
Distributions to non-controlling interests, related party (note 13(b) and (c)) | (6,723) | (5,233) | (25,083) | (19,191) | |||||||||||||||||||
| Distributions to non-controlling interests | (4,782) | (3,449) | (29,891) | (7,447) | |||||||||||||||||||
| Payments upon settlement of derivatives | — | — | (26,254) | (33,782) | |||||||||||||||||||
| Shares surrendered to fund withholding taxes on exercised share options | (268) | (1,120) | (4,388) | (2,984) | |||||||||||||||||||
| Increase in other long-term liabilities | 5,536 | 4,986 | 12,804 | 61,202 | |||||||||||||||||||
| Decrease in other long-term liabilities | (26,406) | (21,742) | (68,978) | (25,046) | |||||||||||||||||||
| 250,122 | 283,550 | 1,231,843 | 1,931,699 | ||||||||||||||||||||
| Investing activities | |||||||||||||||||||||||
| Additions to property, plant and equipment and intangible assets | (321,956) | (348,050) | (897,193) | (1,051,182) | |||||||||||||||||||
| Increase in long-term investments | (60,028) | (118,764) | (156,966) | (787,149) | |||||||||||||||||||
Acquisitions of operating entities (note 3(a)) | — | — | (632,797) | — | |||||||||||||||||||
| Increase in other assets | (15,570) | (9,728) | (28,374) | (37,580) | |||||||||||||||||||
| Receipt of principal on development loans receivable | 74,892 | 834 | 75,215 | 834 | |||||||||||||||||||
| Decrease in long-term investments | — | — | 2,920 | — | |||||||||||||||||||
| Other proceeds | — | 1,616 | — | 5,960 | |||||||||||||||||||
| (322,662) | (474,092) | (1,637,195) | (1,869,117) | ||||||||||||||||||||
| Effect of exchange rate differences on cash and restricted cash | (1,447) | (1,276) | (3,293) | (749) | |||||||||||||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | 28,918 | (17,104) | (4,182) | 92,789 | |||||||||||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 128,289 | 239,911 | 161,389 | 130,018 | |||||||||||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 157,207 | $ | 222,807 | $ | 157,207 | $ | 222,807 | |||||||||||||||
| Algonquin Power & Utilities Corp. Unaudited Interim Consolidated Statements of Cash Flows (continued) | |||||||||||||||||||||||
| (thousands of U.S. dollars) | Three months ended September 30 | Nine months ended September 30 | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||||||||||||||
| Cash paid during the period for interest expense | $ | 89,580 | $ | 50,349 | $ | 203,454 | $ | 162,674 | |||||||||||||||
| Cash paid during the period for income taxes | $ | 2,335 | $ | 1,687 | $ | 8,692 | $ | 3,362 | |||||||||||||||
| Cash received during the period for distributions from equity investments | $ | 30,790 | $ | 28,139 | $ | 100,245 | $ | 90,779 | |||||||||||||||
| Non-cash financing and investing activities: | |||||||||||||||||||||||
| Property, plant and equipment acquisitions in accruals | $ | 118,952 | $ | 120,640 | $ | 118,952 | $ | 120,640 | |||||||||||||||
| Issuance of common shares under dividend reinvestment plan and share-based compensation plans | $ | 29,120 | $ | 26,184 | $ | 78,833 | $ | 81,444 | |||||||||||||||
| Property, plant and equipment, intangible assets and accrued liabilities in exchange of note receivable | $ | 74,891 | $ | 3,089 | $ | 74,891 | $ | 90,821 | |||||||||||||||
See accompanying notes to unaudited interim consolidated financial statements
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
Algonquin Power & Utilities Corp. (“AQN” or the “Company”) is an incorporated entity under the Canada Business Corporations Act. AQN's operations are organized across two primary business units consisting of the Regulated Services Group and the Renewable Energy Group. The Regulated Services Group owns and operates a portfolio of regulated electric, natural gas, water distribution and wastewater collection utility systems and transmission operations in the United States, Canada, Bermuda and Chile; the Renewable Energy Group owns and operates a diversified portfolio of non-regulated renewable and thermal electric generation assets.
1.Significant accounting policies
(a)Basis of preparation
The accompanying unaudited interim consolidated financial statements and notes have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and follow disclosure required under Regulation S-X provided by the U.S. Securities and Exchange Commission. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments that are of a recurring nature and necessary for a fair presentation of the results of interim operations.
The significant accounting policies applied to these unaudited interim consolidated financial statements of AQN are consistent with those disclosed in the consolidated financial statements of AQN as at and for the year ended December 31, 2021.
(b)Seasonality
AQN's operating results are subject to seasonal fluctuations that could materially impact quarter-to-quarter operating results and, thus, one quarter's operating results are not necessarily indicative of a subsequent quarter's operating results. Where decoupling mechanisms exist, total volumetric revenue is prescribed by the applicable regulatory authority and is not affected by usage. AQN's electrical distribution utilities can experience higher or lower demand in the summer or winter depending on the specific regional weather and industry characteristics. During the winter period, natural gas distribution utilities generally experience higher demand than during the summer period. AQN’s water and wastewater utility assets’ revenues fluctuate depending on the demand for water, which is normally higher during drier and hotter months of the summer. AQN’s hydroelectric energy assets are primarily “run-of-river” and, as such, fluctuate with the natural water flows. During the winter and summer periods, flows are generally slower, while during the spring and fall periods flows are heavier. For AQN's wind energy assets, wind resources are typically stronger in spring, fall and winter, and weaker in summer. AQN's solar energy assets generally experience greater insolation in summer, weaker in winter.
(c)Foreign currency translation
AQN’s reporting currency is the U.S. dollar. Within these unaudited interim consolidated financial statements, the Company denotes any amounts denominated in Canadian dollars with “C$”, in Chilean pesos with "CLP" and in Chilean Unidad de Fomento with "CLF" immediately prior to the stated amount.
2. Recently issued accounting pronouncements
(a)Recently adopted accounting pronouncements
The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-05, Leases (Topic 842): Lessors — Certain Leases with Variable Lease Payments, to address concerns relating to day-one losses for sales-type or direct financing leases with variable payments that do not depend on a reference index or rate. The update amends the lease classification requirements for lessors to align them with past practice under Topic 840, Leases. The adoption of this update did not have an impact on the unaudited interim consolidated financial statements.
The FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, to address the complexity associated with accounting for certain financial instruments with characteristics of liabilities and equity. The number of accounting models for convertible debt instruments and convertible preferred stock is being reduced and the guidance has been amended for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions. The adoption of this update did not have an impact on the unaudited interim consolidated financial statements.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
2. Recently issued accounting pronouncements (continued)
(a)Recently adopted accounting pronouncements (continued)
The FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions to ease the potential burden in accounting for reference rate reform. The amendments apply to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of the reference rate reform. The FASB issued an update to Topic 848 in ASU 2021-01 to clarify that the scope of Topic 848 includes derivatives affected by the discounting transition. The adoption of this update did not have an impact on the unaudited interim consolidated financial statements.
(b)Recently issued accounting guidance not yet adopted
The FASB issued ASU 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which require that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on roll forward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company is currently assessing the relevant disclosure.
3.Business acquisition and disposition transactions
(a) Acquisition of New York American Water Company, Inc.
Effective January 1, 2022, the Company completed the acquisition of New York American Water Company, Inc. (subsequently renamed Liberty Utilities (New York Water) Corp. (“Liberty NY Water”)). Liberty NY Water is a Merrick, New York based regulated water and wastewater utility company, serving customers in seven counties in southeastern New York.
A purchase price of $608,000 (before closing adjustments) was paid for this acquisition. The costs related to this acquisition have been expensed through the unaudited interim consolidated statement of operations. The following table summarizes the preliminary allocation of the acquisition prices of the assets acquired and liabilities assumed at the acquisition date:
| Working capital | $ | 4,493 | ||||||
| Property, plant and equipment | 517,591 | |||||||
| Goodwill | 95,514 | |||||||
| Regulatory assets | 68,270 | |||||||
| Other assets | 4,507 | |||||||
| Pension and other post-employment obligations | (13,402) | |||||||
| Regulatory liabilities | (59,650) | |||||||
| Other liabilities | (8,026) | |||||||
| Total net assets acquired | 609,297 | |||||||
| Cash and cash equivalents | 49 | |||||||
| Net assets acquired, net of cash and cash equivalents | $ | 609,248 | ||||||
The determination of the fair value of assets acquired and liabilities assumed is based upon management's estimates and certain assumptions. The Company has not finalized the fair value measurements. The fair value of property, plant and equipment was reduced by $9,194 in Q2 2022 to reflect the time value of money of assets that will not be included in rate base until the next rate case. The valuation of regulatory assets and liabilities and deferred income taxes has not been completed. The Company will continue to review information and perform further analysis prior to finalizing the fair value of assets acquired and liabilities assumed in the fourth quarter of 2022.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
3.Business acquisition and disposition transactions (continued)
(a) Acquisition of New York American Water Company, Inc. (continued)
Goodwill represents the excess of the purchase price over the aggregate fair value of net assets acquired. The contributing factors to the amount recorded as goodwill include future growth, potential synergies, and cost savings in the delivery of certain shared administrative and other services.
(b) Pending acquisition of Kentucky Power Company and AEP Kentucky Transmission Company, Inc.
On October 26, 2021, Liberty Utilities Co. (“Liberty Utilities”), an indirect subsidiary of AQN, entered into an agreement with American Electric Power Company, Inc. and AEP Transmission Company, LLC to acquire Kentucky Power Company and AEP Kentucky Transmission Company, Inc. for a total purchase price of approximately $2,846,000 including the assumption of approximately $1,221,000 in debt (the “Kentucky Power Transaction”). On September 29, 2022, the parties entered into an amendment to the acquisition agreement that, among other things, reduces the purchase price by $200,000. Closing of the Kentucky Power Transaction remains subject to the satisfaction or waiver of certain conditions precedent, which include the approval of the Kentucky Power Transaction by the U.S. Federal Energy Regulatory Commission. The Kentucky Power Transaction is expected to close in January 2023.
(c) Partial disposal of renewable assets
Subsequent to quarter-end, on October 3, 2022, the Company announced that it had entered into an agreement to sell ownership interests in a portfolio of operating wind facilities in the United States and Canada. The transaction consists of the sale of (1) a 49% ownership interest in three operating wind facilities in the United States totaling 551 MW of installed capacity: the Odell Wind Facility in Minnesota, the Deerfield Wind Facility in Michigan and the Sugar Creek Wind Facility in Illinois; and (2) an 80% ownership interest in the 175 MW Blue Hill Wind Facility in Saskatchewan. The Company will continue to oversee day-to-day operations and provide management services to the facilities. Total cash proceeds to AQN from this transaction are expected to be approximately $277,500 for the U.S. facilities and approximately C$107,300 for the Blue Hill Wind Facility, subject to customary closing adjustments. Closing of the transaction is subject to receipt of certain regulatory approvals and other customary closing conditions and is expected to occur in the fourth quarter of 2022.
4.Accounts receivable
Accounts receivable as at September 30, 2022 include unbilled revenue of $82,787 (December 31, 2021 - $102,693) from the Company’s regulated utilities. Accounts receivable as at September 30, 2022 are presented net of allowance for doubtful accounts of $26,539 (December 31, 2021 - $19,327).
5.Regulatory matters
The operating companies within the Regulated Services Group are subject to regulation by the respective authorities of the jurisdictions in which they operate. The respective public utility commissions have jurisdiction with respect to rate, service, accounting policies, issuance of securities, acquisitions and other matters. Except for ESSAL, these utilities operate under cost-of-service regulation as administered by these authorities. The Company’s regulated utility operating companies are accounted for under the principles of ASC 980, Regulated Operations. Under ASC 980, regulatory assets and liabilities that would not be recorded under U.S. GAAP for non-regulated entities are recorded to the extent that they represent probable future revenue or expenses associated with certain charges or credits that will be recovered from or refunded to customers through the rate setting process.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
5.Regulatory matters (continued)
At any given time, the Company can have several regulatory proceedings underway. The financial effects of these proceedings are reflected in the unaudited interim consolidated financial statements based on regulatory approval obtained to the extent that there is a financial impact during the applicable reporting period.
| Utility | State or country | Regulatory proceeding type | Details | ||||||||
| Empire Electric System | Missouri | General rate review and Securitization | On April 6, 2022, the regulator approved an annual base rate revenue increase of $35,516, as well as another $4,000 in revenues associated with the Empire Wind Facilities. The new rates became effective in the second quarter of 2022. In January 2022 and March 2022, Empire Electric filed petitions for securitization of the costs associated with the impact of the February 2021 extreme winter storm conditions (the “Midwest Extreme Weather Event”) and the retirement of Asbury. On April 27, 2022, the Missouri Public Service Commission (the “MPSC”) issued an order consolidating, for purposes of hearing, these two cases regarding the quantum financeable through securitization, which hearing was held the week of June 13, 2022. On August 18, 2022, and September 22, 2022, the MPSC issued and amended, respectively, a Report and Order authorizing Empire Electric to securitize $290,383 in qualified extraordinary costs (Midwest Extreme Weather Event), energy transition costs (Asbury) and upfront financing costs associated with the proposed securitization. The amounts authorized by the securitization order are generally consistent with the costs deferred by the Company in relation to these matters. However, the process could result in lower amounts being financeable through securitization than sought by the Company. Empire Electric filed a request for rehearing seeking reconsideration of the MPSC’s denial of recovery of five percent of the Midwest Extreme Weather Event costs, its calculation of accumulated deferred income taxes, and the exclusion of certain carrying charges associated with the Asbury plant, among other issues. On October 12, 2022, the MPSC denied all rehearing motions. Empire Electric filed an appeal of the MPSC order on November 10, 2022. | ||||||||
| BELCO | Bermuda | General rate review | On March 18, 2022, the regulator issued a final decision authorizing $224,056 and $226,160 in revenue for 2022 and 2023, respectively, at a weighted average cost of capital or return of 7.16% in each year. The new rates are effective from April 1, 2022. On April 7, 2022, BELCO filed an appeal in the Supreme Court of Bermuda challenging the decisions made through the recent Retail Tariff Review. | ||||||||
| Empire Electric System | Kansas | General rate review | On May 27, 2021, Empire Electric submitted an abbreviated rate review seeking to recover costs associated with the addition of the Empire Wind Facilities, the retirement of Asbury and non-growth related plant investments since the 2019 rate review. In May 2022, the Commission approved the unanimous partial settlement resolving the rate treatment of the Asbury retirement and the non-wind investments resulting in a base rate decrease of $636, and granted Empire Electric's motion to withdraw its request to recover cost associated with the Empire Wind Facilities. New rates became effective in July 2022. | ||||||||
| Empire District Gas Company | Missouri | General rate review | In June 2022, the Commission approved an annual increase of $1,000 in base rate revenues. New rates became effective in August 2022. | ||||||||
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
5.Regulatory matters (continued)
Regulatory assets and liabilities consist of the following:
| September 30, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Regulatory assets | |||||||||||
| Fuel and commodity cost adjustments | 368,483 | 339,900 | |||||||||
| Retired generating plant | 174,723 | 185,073 | |||||||||
| Pension and post-employment benefits | 138,609 | 134,141 | |||||||||
| Rate adjustment mechanism | 127,214 | 117,309 | |||||||||
| Income taxes | 95,935 | 79,472 | |||||||||
| Deferred capitalized costs | 85,243 | 62,599 | |||||||||
| Environmental remediation | 70,458 | 81,802 | |||||||||
| Wildfire mitigation and vegetation management | 57,682 | 35,789 | |||||||||
| Asset retirement obligation | 38,344 | 26,810 | |||||||||
| Clean energy and other customer programs | 27,118 | 26,015 | |||||||||
| Debt premium | 26,447 | 34,204 | |||||||||
| Rate review costs | 8,705 | 9,167 | |||||||||
| Long-term maintenance contract | 6,996 | 9,134 | |||||||||
| Other | 51,476 | 26,210 | |||||||||
| Total regulatory assets | $ | 1,277,433 | $ | 1,167,625 | |||||||
| Less: current regulatory assets | (166,931) | (158,212) | |||||||||
| Non-current regulatory assets | $ | 1,110,502 | $ | 1,009,413 | |||||||
| Regulatory liabilities | |||||||||||
| Income taxes | $ | 318,891 | $ | 295,720 | |||||||
| Cost of removal | 190,892 | 191,981 | |||||||||
| Pension and post-employment benefits | 66,710 | 34,468 | |||||||||
| Clean energy and other customer programs | 16,029 | 14,829 | |||||||||
| Fuel and commodity costs adjustments | 17,080 | 18,229 | |||||||||
| Rate adjustment mechanism | 2,680 | 3,316 | |||||||||
| Rate base offset | 3,703 | 4,998 | |||||||||
| Other | 14,973 | 12,648 | |||||||||
| Total regulatory liabilities | $ | 630,958 | $ | 576,189 | |||||||
| Less: current regulatory liabilities | (71,204) | (65,809) | |||||||||
| Non-current regulatory liabilities | $ | 559,754 | $ | 510,380 | |||||||
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
6.Long-term investments
Long-term investments consist of the following:
| September 30, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Long-term investments carried at fair value | |||||||||||
| Atlantica | $ | 1,287,725 | $ | 1,750,914 | |||||||
| Atlantica Yield Energy Solutions Canada Inc. | 68,253 | 95,246 | |||||||||
| Other | 2,133 | 2,296 | |||||||||
| $ | 1,358,111 | $ | 1,848,456 | ||||||||
| Other long-term investments | |||||||||||
| Equity-method investees (a) | $ | 419,092 | $ | 433,850 | |||||||
| Development loans receivable from equity-method investees (a) | 121,607 | 31,468 | |||||||||
| Other | 27,656 | 30,508 | |||||||||
| $ | 568,355 | $ | 495,826 | ||||||||
Income (loss) from long-term investments for the three and nine months ended September 30 is as follows:
| Three months ended | Nine months ended | ||||||||||||||||||||||
| September 30 | September 30 | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Fair value gain (loss) on investments carried at fair value | |||||||||||||||||||||||
| Atlantica | $ | (291,819) | $ | (132,690) | $ | (463,189) | $ | (168,234) | |||||||||||||||
| Atlantica Yield Energy Solutions Canada Inc. | (8,615) | (6,468) | (21,010) | (15,728) | |||||||||||||||||||
| Other | 76 | 108 | (188) | 510 | |||||||||||||||||||
| $ | (300,358) | $ | (139,050) | $ | (484,387) | $ | (183,452) | ||||||||||||||||
| Dividend and interest income from investments carried at fair value | |||||||||||||||||||||||
| Atlantica | $ | 21,789 | $ | 21,054 | $ | 64,876 | $ | 62,673 | |||||||||||||||
| Atlantica Yield Energy Solutions Canada Inc. | 3,003 | 2,433 | 15,694 | 11,153 | |||||||||||||||||||
| Other | 17 | 15 | 27 | 329 | |||||||||||||||||||
| $ | 24,809 | $ | 23,502 | $ | 80,597 | $ | 74,155 | ||||||||||||||||
| Other long-term investments | |||||||||||||||||||||||
| Equity method loss | (11,677) | (3,669) | (19,126) | (12,039) | |||||||||||||||||||
| Interest and other income | 7,453 | 4,975 | 19,074 | 17,093 | |||||||||||||||||||
| $ | (4,224) | $ | 1,306 | $ | (52) | $ | 5,054 | ||||||||||||||||
| Loss from long-term investments | $ | (279,773) | $ | (114,242) | $ | (403,842) | $ | (104,243) | |||||||||||||||
(a)Equity-method investees and development loans receivable from equity investees
The Company has non-controlling interests in various corporations, partnerships and joint ventures with a total carrying value of $419,092 (December 31, 2021 - $433,850), including investments in variable interest entities ("VIEs") of $117,882 (December 31, 2021 - $86,202). During the three and nine months ended September 30, 2022, the Company recorded OCI loss of $167 and $67,519, respectively (2021 - $nil and $nil, respectively) attributable to derivative financial instruments designated as a cash flow hedge, in proportion to the Company’s ownership interest in the entities.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
6.Long-term investments (continued)
(a)Equity-method investees and development loans receivable from equity investees (continued)
During 2021, the Company acquired a 51% interest in four operating wind facilities located in Texas (“Texas Coastal Wind Facilities”). All facilities have achieved commercial operations. The Company does not control the entities and, therefore, accounts for its 51% interest using the equity method. As at September 30, 2022, the Company had issued $119,750 in letters of credit and guarantees of performance obligations under energy purchase agreements and decommissioning obligations on behalf of the Texas Coastal Wind Facilities.
The Company owns 50% equity interests in several wind and solar power generation projects under development or construction. During development and construction, the Company provides cash advances and credit support in amounts necessary for the continued development and construction of the equity investees' projects.
Summarized combined information for AQN's investments in significant partnerships and joint ventures is as follows:
| September 30, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Total assets | $ | 2,630,635 | $ | 2,126,934 | |||||||
| Total liabilities | 1,452,967 | 945,971 | |||||||||
| Net assets | $ | 1,177,668 | $ | 1,180,963 | |||||||
| AQN's ownership interest in the entities | 312,657 | 327,555 | |||||||||
Difference between investment carrying amount and underlying equity in net assets(a) | 106,435 | 106,295 | |||||||||
| AQN's investment carrying amount for the entities | $ | 419,092 | $ | 433,850 | |||||||
(a) The difference between the investment carrying amount and the underlying equity in net assets relates primarily to development fees, interest capitalized while the projects are under construction, the fair value of guarantees provided by the Company in regards to the investments and transaction costs.
Except for Liberty Development Energy Solutions B.V., the development projects are considered VIEs due to the level of equity at risk and the disproportionate voting and economic interests of the shareholders. The Company has committed loan and credit support facilities with some of its equity investees. During construction, the Company has agreed to provide cash advances and credit support for the continued development and construction of the equity investees' projects. As at September 30, 2022, the Company had issued letters of credit and guarantees of performance obligations under: a security of performance for a development opportunity; wind turbine and solar panel supply agreements; interconnection agreements; engineering, procurement and construction agreements; energy purchase agreements; and construction loan agreements. The fair value of the support provided recorded as at September 30, 2022 amounts to $6,707 (December 31, 2021 - $4,612).
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
6.Long-term investments (continued)
(a)Equity-method investees and development loans receivable from equity investees (continued)
Summarized combined information for AQN's VIEs is as follows:
| September 30, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| AQN's maximum exposure in regards to VIEs | |||||||||||
| Carrying amount | $ | 117,882 | $ | 86,202 | |||||||
| Development loans receivable | 121,607 | 31,468 | |||||||||
| Performance guarantees and other commitments on behalf of VIEs | 529,989 | 409,232 | |||||||||
| $ | 769,478 | $ | 526,902 | ||||||||
The commitments are presented on a gross basis assuming no recoverable value in the assets of the VIEs.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
7.Long-term debt
Long-term debt consists of the following:
| Borrowing type | Weighted average coupon | Maturity | Par value | September 30, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Senior unsecured revolving credit facilities (a) | — | 2022-2027 | N/A | $ | 534,511 | $ | 368,806 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Senior unsecured bank credit facilities (b) | — | 2022-2031 | N/A | 766,072 | 141,956 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial paper | — | 2023 | N/A | 445,400 | 338,700 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. dollar borrowings | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Senior unsecured notes (Green Equity Units) | 1.18 | % | 2026 | $ | 1,150,000 | 1,142,294 | 1,140,801 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Senior unsecured notes (c) | 3.39 | % | 2023-2047 | $ | 1,505,000 | 1,491,724 | 1,689,792 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Senior unsecured utility notes | 6.34 | % | 2023-2035 | $ | 142,000 | 154,287 | 155,571 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Senior secured utility bonds | 4.71 | % | 2026-2044 | $ | 556,216 | 560,411 | 558,177 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Canadian dollar borrowings | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Senior unsecured notes (d) | 3.68 | % | 2027-2050 | C$ | 1,200,000 | 872,849 | 1,099,403 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Senior secured project notes | 10.21 | % | 2027 | C$ | 20,854 | 15,214 | 18,344 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Chilean Unidad de Fomento borrowings | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Senior unsecured utility bonds | 4.12 | % | 2028-2040 | CLF 1,695 | 69,979 | 77,963 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 6,052,741 | $ | 5,589,513 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Subordinated borrowings | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Subordinated unsecured notes (e) | 5.25 | % | 2082 | C$ | 400,000 | $ | 287,712 | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Subordinated unsecured notes (e) | 5.56 | % | 2078-2082 | $ | 1,387,500 | 1,364,451 | 621,862 | |||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 1,652,163 | $ | 621,862 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 7,704,904 | $ | 6,211,375 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Less: current portion | (461,862) | (356,397) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 7,243,042 | $ | 5,854,978 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Short-term obligations of $778,692 that are expected to be refinanced using the long-term credit facilities are presented as long-term debt.
Long-term debt issued at a subsidiary level (project notes or utility bonds) relating to a specific operating facility is generally collateralized by the respective facility with no other recourse to the Company. Long-term debt issued at a subsidiary level whether or not collateralized generally has certain financial covenants, which must be maintained on a quarterly basis. Non-compliance with the covenants could restrict cash distributions/dividends to the Company from the specific facilities.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
7.Long-term debt (continued)
Recent financing activities:
(a)Senior unsecured revolving credit facilities
On April 29, 2022, the Regulated Services Group entered into two new senior unsecured syndicated revolving credit facilities: a $1,000,000 senior unsecured revolving credit facility with an initial maturity date of April 29, 2027 (the “Long-Term Regulated Services Credit Facility”) and a $500,000 short-term senior unsecured revolving credit facility maturing on March 31, 2023. Subject to the terms and conditions therein, the Long-Term Regulated Services Credit Facility may be extended for two additional one-year periods. In conjunction with the new facilities, the Regulated Services Group’s $500,000 senior unsecured syndicated revolving credit facility was cancelled.
On June 24, 2022, the Regulated Services Group entered into a new $25,000 senior unsecured bilateral revolving credit facility in Bermuda that matures on June 24, 2024.
On July 22, 2022, the Renewable Energy Group’s senior unsecured syndicated revolving credit facility was amended and restated with a new maturity date of July 22, 2027. Subject to the terms and conditions therein, the facility may be extended for additional one-year periods.
On July 22, 2022, the Renewable Energy Group entered into a new $250,000 uncommitted bilateral letter of credit facility. Subsequent to quarter-end on November 8, 2022, the Renewable Energy Group's $350,000 uncommitted letter of credit facility was amended and restated with a new maturity date of June 30, 2024.
(b)Senior unsecured bank credit facilities
On December 20, 2021, the Regulated Services Group entered into a $1,100,000 senior unsecured syndicated delayed draw term facility, which matures on December 19, 2022. On January 3, 2022, the purchase price, plus certain adjustments and acquisition costs, for the acquisition of Liberty NY Water (note 3(a)) of approximately $610,400 was funded through a draw on the senior unsecured syndicated delayed draw term facility.
(c)U.S. dollar senior unsecured notes
On April 30, 2022, the Company repaid a $80,000 senior unsecured note on its maturity.
On August 1, 2022, the Company repaid a $115,000 senior unsecured note on its maturity.
(d)Canadian dollar senior unsecured notes
On February 15, 2022, the Company repaid a C$200,000 senior unsecured note on its maturity. Concurrent with the repayments, the Renewable Energy Group unwound and settled the related cross-currency fixed-for-fixed interest rate swap (note 21(b)(iii)).
(e)Subordinated unsecured notes
On January 18, 2022, the Company closed: (i) an underwritten public offering in the United States (the “U.S. Offering”) of $750,000 aggregate principal amount of 4.75% fixed-to-fixed reset rate junior subordinated notes series 2022-B due January 18, 2082 (the “U.S. Notes”); and (ii) an underwritten public offering in Canada (the “Canadian Offering” and, together with the U.S. Offering, the “Offerings”) of C$400,000 (approximately $320,000) aggregate principal amount of 5.25% fixed-to-fixed reset rate junior subordinated notes series 2022-A due January 18, 2082 (the “Canadian Notes” and, together with the U.S. Notes, the “Notes”). Concurrent with the pricing of the Offerings, the Company entered into a cross currency interest rate swap to convert the Canadian-dollar-denominated proceeds from the Canadian Offering into U.S. dollars, and a forward starting swap to fix the interest rate for the second five-year term of the U.S. Notes (note 21(b)(ii)), resulting in an anticipated effective interest rate to the Company of approximately 4.95% throughout the first ten-year period of the Notes.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
8.Pension and other post-employment benefits
The following table lists the components of net benefit costs for the pension plans and other post-employment benefits (“OPEB”) in the unaudited interim consolidated statements of operations for the three and nine months ended September 30:
| Pension benefits | |||||||||||||||||||||||
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Service cost | $ | 4,080 | $ | 3,987 | $ | 12,468 | $ | 12,323 | |||||||||||||||
| Non-service costs | |||||||||||||||||||||||
| Interest cost | 5,634 | 4,909 | 18,475 | 15,126 | |||||||||||||||||||
| Expected return on plan assets | (10,421) | (8,890) | (31,264) | (26,670) | |||||||||||||||||||
| Amortization of net actuarial loss | 865 | 2,431 | 2,911 | 7,243 | |||||||||||||||||||
| Amortization of prior service credits | (396) | (407) | (1,188) | (1,220) | |||||||||||||||||||
| Impact of regulatory accounts | 5,008 | 5,653 | 16,010 | 16,662 | |||||||||||||||||||
| $ | 690 | $ | 3,696 | $ | 4,944 | $ | 11,141 | ||||||||||||||||
| Net benefit cost | $ | 4,770 | $ | 7,683 | $ | 17,412 | $ | 23,464 | |||||||||||||||
| OPEB | |||||||||||||||||||||||
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Service cost | $ | 1,598 | $ | 1,942 | $ | 4,707 | $ | 5,486 | |||||||||||||||
| Non-service costs | |||||||||||||||||||||||
| Interest cost | 2,337 | 2,097 | 6,978 | 6,149 | |||||||||||||||||||
| Expected return on plan assets | (2,837) | (2,518) | (8,519) | (7,539) | |||||||||||||||||||
| Amortization of net actuarial loss (gain) | 130 | 643 | (42) | 1,516 | |||||||||||||||||||
| Amortization of prior service credits | 6 | 18 | 18 | 18 | |||||||||||||||||||
| Impact of regulatory accounts | 1,192 | (61) | 2,975 | 135 | |||||||||||||||||||
| $ | 828 | $ | 179 | $ | 1,410 | $ | 279 | ||||||||||||||||
| Net benefit cost | $ | 2,426 | $ | 2,121 | $ | 6,117 | $ | 5,765 | |||||||||||||||
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
9.Other long-term liabilities
Other long-term liabilities consist of the following:
| September 30, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Contract adjustment payments | $ | 132,384 | $ | 187,580 | |||||||
| Asset retirement obligations | 121,853 | 142,147 | |||||||||
| Advances in aid of construction | 88,635 | 82,580 | |||||||||
| Environmental remediation obligation | 43,047 | 55,224 | |||||||||
| Customer deposits | 33,750 | 32,633 | |||||||||
| Unamortized investment tax credits | 17,113 | 17,439 | |||||||||
| Deferred credits and contingent consideration | 35,668 | 35,982 | |||||||||
| Preferred shares, Series C | 11,869 | 13,348 | |||||||||
| Hook-up fees | 31,650 | 21,904 | |||||||||
| Lease liabilities | 21,381 | 22,512 | |||||||||
| Contingent development support obligations | 6,707 | 4,612 | |||||||||
| Note payable to related party | 25,808 | 25,808 | |||||||||
| Other | 30,645 | 42,050 | |||||||||
| $ | 600,510 | $ | 683,819 | ||||||||
| Less: current portion | (168,511) | (167,908) | |||||||||
| $ | 431,999 | $ | 515,911 | ||||||||
10.Shareholders’ capital
(a)Common shares
Number of common shares
| Nine months ended September 30 | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Common shares, beginning of period | 671,960,276 | 597,142,219 | ||||||||||||
| Public offering | 2,861,709 | 23,531,465 | ||||||||||||
| Dividend reinvestment plan | 5,140,249 | 4,560,456 | ||||||||||||
| Exercise of share-based awards (b) | 907,773 | 909,762 | ||||||||||||
| Conversion of convertible debentures | 754 | 1,886 | ||||||||||||
| Common shares, end of period | 680,870,761 | 626,145,788 | ||||||||||||
On August 15, 2022, AQN re-established an at-the-market equity program (“ATM Program”) that allows the Company to issue up to $500,000 of common shares from treasury to the public from time to time, at the Company’s discretion, at the prevailing market price when issued on the Toronto Stock Exchange, the New York Stock Exchange (“NYSE”) or any other existing trading market for the common shares of the Company in Canada or the United States.
During the three and nine months ended September 30, 2022, the Company issued 2,861,709 common shares under its ATM Program at an average price of $13.94 per common share for gross proceeds of $38,923 ($38,534 net of commissions). Other related costs were $371.
As at November 10, 2022, the Company has issued, since the inception of its initial ATM Program in 2019 a cumulative total of 36,814,536 common shares at an average price of $15.00 per share for gross proceeds of $551,086 ($544,295 net of commissions). Other related costs, primarily related to the establishment and subsequent re-establishments of the ATM program, were $4,656.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
10.Shareholders’ capital (continued)
(b)Share-based compensation
For the three and nine months ended September 30, 2022, AQN recorded $3,055 and $6,550, respectively (2021 - $3,414 and $7,800, respectively) in total share-based compensation expense. The compensation expense is recorded with payroll expenses in the unaudited interim consolidated statements of operations. The portion of share-based compensation costs capitalized as cost of construction is insignificant.
As at September 30, 2022, total unrecognized compensation costs related to non-vested share-based awards was $16,570 and is expected to be recognized over a period of 1.9 years.
Share option plan
During the nine months ended September 30, 2022, the Board of Directors of the Company (the "Board") approved the grant of 646,090 options to executives of the Company. The options allow for the purchase of common shares at a weighted average price of $19.11, the market price of the underlying common shares at the date of grant. One-third of the options vest on each of December 31, 2022, 2023 and 2024. The options may be exercised up to eight years following the date of grant.
The following assumptions were used in determining the fair value of share options granted:
| 2022 | ||||||||
| Risk-free interest rate | 1.9 | % | ||||||
| Expected volatility | 23 | % | ||||||
| Expected dividend yield | 4.3 | % | ||||||
| Expected life | 5.50 years | |||||||
| Weighted average grant date fair value per option | $ | 2.44 | ||||||
During the nine months ended September 30, 2022, 40,074 share options were exercised at a weighted average price of $15.78 in exchange for 3,999 common shares issued from treasury, and 36,075 options were settled at their cash value as payment for the exercise price and tax withholdings related to the exercise of the options.
Performance and restricted share units
During the nine months ended September 30, 2022, a total of 1,015,153 performance share units ("PSUs") and restricted share units ("RSUs") were granted to employees of the Company. The awards vest based on the terms of each agreement ranging from February 2023 to January 2025. During the nine months ended September 30, 2022, the Company settled 1,024,307 PSUs and RSUs in exchange for 520,085 common shares issued from treasury, and 504,222 PSUs and RSUs were settled at their cash value as payment for tax withholding related to the settlement of the awards.
During the nine months ended September 30, 2022, the Company settled 4,108 bonus deferral RSUs in exchange for 1,908 common shares issued from treasury, and 2,200 RSUs were settled at their cash value as payment for tax withholding related to the settlement of the awards. During the nine months ended September 30, 2022, 48,552 bonus deferral RSUs were granted to employees of the Company. The RSUs are 100% vested.
Directors' deferred share units
During the nine months ended September 30, 2022, 73,916 deferred share units ("DSUs") were issued pursuant to the election by Directors of the Company to defer a percentage of their directors' fee in the form of DSUs. In addition, the Company settled 5,176 DSUs in exchange for 2,403 common shares issued from treasury, and 2,773 DSUs were settled at their cash value as payment for tax withholding related to the settlement of the awards.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
11.Accumulated other comprehensive income (loss)
AOCI consists of the following balances, net of tax:
| Foreign currency cumulative translation | Unrealized gain (loss) on cash flow hedges | Pension and post-employment actuarial changes | Total | ||||||||||||||||||||||||||
| Balance, January 1, 2021 | $ | (39,725) | $ | 50,817 | $ | (33,599) | $ | (22,507) | |||||||||||||||||||||
| OCI | (25,982) | (97,103) | 32,247 | (90,838) | |||||||||||||||||||||||||
| Amounts reclassified from AOCI to the unaudited interim consolidated statements of operations | (4,288) | 42,772 | 9,804 | 48,288 | |||||||||||||||||||||||||
| Net current period OCI | $ | (30,270) | $ | (54,331) | $ | 42,051 | $ | (42,550) | |||||||||||||||||||||
| OCI attributable to the non-controlling interests | (249) | — | — | (249) | |||||||||||||||||||||||||
| Net current period OCI attributable to shareholders of AQN | $ | (30,519) | $ | (54,331) | $ | 42,051 | $ | (42,799) | |||||||||||||||||||||
| Amounts reclassified from AOCI to non-controlling interest | (6,371) | — | — | (6,371) | |||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | (76,615) | $ | (3,514) | $ | 8,452 | $ | (71,677) | |||||||||||||||||||||
| OCI | (54,281) | (124,980) | — | (179,261) | |||||||||||||||||||||||||
| Amounts reclassified from AOCI to the unaudited interim consolidated statements of operations | (1,091) | 54,666 | (203) | 53,372 | |||||||||||||||||||||||||
| Net current period OCI | $ | (55,372) | $ | (70,314) | $ | (203) | $ | (125,889) | |||||||||||||||||||||
| OCI attributable to the non-controlling interests | 2,457 | — | — | 2,457 | |||||||||||||||||||||||||
| Net current period OCI attributable to shareholders of AQN | $ | (52,915) | $ | (70,314) | $ | (203) | $ | (123,432) | |||||||||||||||||||||
| Balance, September 30, 2022 | $ | (129,530) | $ | (73,828) | $ | 8,249 | $ | (195,109) | |||||||||||||||||||||
Amounts reclassified from AOCI for foreign currency cumulative translation affected interest expense and derivative gain (loss); those for unrealized gain (loss) on cash flow hedges affected revenue from non-regulated energy sales, interest expense and derivative gain (loss), while those for pension and other post-employment actuarial changes affected pension and other post-employment non-service costs.
12.Dividends
All dividends of the Company are made on a discretionary basis as determined by the Board. The Company declares and pays the dividends on its common shares in U.S. dollars. Dividends declared were as follows:
| Three months ended September 30 | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Dividend | Dividend per share | Dividend | Dividend per share | ||||||||||||||||||||
| Common shares | $ | 123,718 | $ | 0.1808 | $ | 107,229 | $ | 0.1706 | |||||||||||||||
| Series A preferred shares | C$ 1,549 | C$ 0.3226 | C$ 1,549 | C$ 0.3226 | |||||||||||||||||||
| Series D preferred shares | C$ 1,273 | C$ 0.3182 | C$ 1,273 | C$ 0.3182 | |||||||||||||||||||
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
12.Dividends (continued)
| Nine months ended September 30 | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Dividend | Dividend per share | Dividend | Dividend per share | ||||||||||||||||||||
| Common shares | $ | 361,927 | $ | 0.5322 | $ | 307,551 | $ | 0.4963 | |||||||||||||||
| Series A preferred shares | C$ 4,646 | C$ 0.9679 | C$ 4.646 | C$ 0.9679 | |||||||||||||||||||
| Series D preferred shares | C$ 3,818 | C$ 0.9546 | C$ 3,818 | C$ 0.9546 | |||||||||||||||||||
13.Related party transactions
(a)Equity-method investments
The Company provides administrative and development services to its equity-method investees and is reimbursed for incurred costs. To that effect, during the three and nine months ended September 30, 2022, the Company charged its equity-method investees $10,621 and $29,207, respectively (2021 - $6,879 and $19,199, respectively). Additionally, one of the equity-method investees (Liberty Development JV Inc.) provides development services to the Company on specified projects, for which it earns a development fee upon reaching certain milestones. During the three and nine months ended September 30, 2022, the development fees charged to the Company were $nil and $nil, respectively (2021 - $nil and $738, respectively).
In 2021, the Company issued a promissory note of $25,808 payable to New Market Solar Investco, LLC, an equity investee of the Company.
On August 10, 2022, the Deerfield II Wind Project was contributed into a joint venture entity (in which the Company and the Infrastructure and Power strategy of Ares Management, LLC each own an indirect 50% equity interest). The transfer of the project did not result in a gain or loss.
(b)Redeemable non-controlling interest held by related party
Liberty Development Energy Solutions (note 6(a)), an equity investee of the Company, has a secured credit facility in the amount of $306,500 maturing on January 26, 2024. It is collateralized through a pledge of Atlantica Sustainable Infrastructure plc (“Atlantica”) ordinary shares. A collateral shortfall would occur if the net obligation as defined in the agreement would equal or exceed 50% of the market value of such Atlantica shares, in which case the lenders would have the right to sell Atlantica shares to eliminate the collateral shortfall. The Liberty Development Energy Solutions secured credit facility is repayable on demand if Atlantica ceases to be a public company. Liberty Development Energy Solutions has a preference share ownership in AY Holdings which AQN reflects as redeemable non-controlling interest held by related party. Redemption is not considered probable as at September 30, 2022. During the three and nine months ended September 30, 2022, the Company incurred non-controlling interest attributable to Liberty Development Energy Solutions of $4,450 and $10,111, respectively (2021 - $2,588 and $7,886, respectively) and recorded distributions of $3,576 and $8,980, respectively (2021 - $2,663 and $7,709, respectively).
(c)Non-controlling interest held by related party
Non-controlling interest held by related party represents an interest in a consolidated subsidiary of the Company, acquired by Atlantica Yield Energy Solutions Canada Inc. ("AYES Canada") in May 2019 for $96,752 (C$130,103) and an interest in Algonquin (AY Holdco) B.V., a consolidated subsidiary of the Company, acquired by Liberty Development JV Inc. in November 2021 for $39,376. During the three and nine months ended September 30, 2022, the Company recorded distributions of $3,147 and $16,103, respectively (2021 - $2,570 and $11,482, respectively).
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
13.Related party transactions (continued)
(d) Transactions with Atlantica
During 2021, the Company sold Colombian solar assets to Atlantica for consideration of $23,863, with a gain on sale of $878, and contingent consideration of $2,600, if certain milestones are met. During the nine months ended September 30, 2022, a gain of $1,200 relating to the contingent consideration has been recognized.
The above related party transactions have been recorded at the exchange amounts agreed to by the parties to the transactions.
14.Non-controlling interests and redeemable non-controlling interests
Net effect attributable to non-controlling interests consists of the following:
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| HLBV and other adjustments attributable to: | |||||||||||||||||||||||
| Non-controlling interests - tax equity partnership units | $ | 16,088 | $ | 14,264 | $ | 88,049 | $ | 55,785 | |||||||||||||||
| Non-controlling interests - redeemable tax equity partnership units | 1,278 | 1,696 | 4,214 | 5,121 | |||||||||||||||||||
| Other net earnings attributable to: | |||||||||||||||||||||||
| Non-controlling interests | (758) | (1,873) | (2,692) | (5,917) | |||||||||||||||||||
| $ | 16,608 | $ | 14,087 | $ | 89,571 | $ | 54,989 | ||||||||||||||||
| Redeemable non-controlling interest, held by related party | (4,450) | (2,588) | (10,111) | (7,886) | |||||||||||||||||||
Net effect of non-controlling interests | $ | 12,158 | $ | 11,499 | $ | 79,460 | $ | 47,103 | |||||||||||||||
The non-controlling tax equity investors (“tax equity partnership units”) in the Company's U.S. wind power and solar power generating facilities are entitled to allocations of earnings, tax attributes and cash flows in accordance with contractual agreements. The share of earnings attributable to the non-controlling interest holders in these subsidiaries is calculated using the Hypothetical Liquidation at Book Value ("HLBV") method of accounting.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
15.Income taxes
For the three and nine months ended September 30, 2022, the income taxes expense (recovery) in the unaudited interim consolidated statements of operations represents an effective tax rate different than the Canadian enacted statutory rate of 26.5% (2021 - 26.5%). The differences are as follows:
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Expected income tax recovery at Canadian statutory rate | $ | (60,116) | $ | (15,584) | $ | (66,235) | $ | (815) | |||||||||||||||
| Increase (decrease) resulting from: | |||||||||||||||||||||||
| Effect of differences in tax rates on transactions in and within foreign jurisdictions and change in tax rates | (11,709) | (11,398) | (30,748) | (33,283) | |||||||||||||||||||
| Adjustments from investments carried at fair value | 35,197 | 15,264 | 53,426 | 14,310 | |||||||||||||||||||
| Non-controlling interests share of income | 8,075 | 5,267 | 23,715 | 21,594 | |||||||||||||||||||
| Acquisition related state deferred tax adjustments | — | — | 7,600 | — | |||||||||||||||||||
| Tax credits | 8,285 | (8,801) | (13,738) | (35,320) | |||||||||||||||||||
| Amortization and settlement of excess deferred income tax | (3,724) | (3,435) | (10,054) | (10,435) | |||||||||||||||||||
| Other | 4,476 | (701) | 3,151 | (1,272) | |||||||||||||||||||
| Income tax recovery | $ | (19,516) | $ | (19,388) | $ | (32,883) | $ | (45,221) | |||||||||||||||
16.Other net losses
Other net losses consist of the following:
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Acquisition and transition-related costs | $ | 6,850 | $ | 1,725 | $ | 14,865 | $ | 4,709 | |||||||||||||||
| Other | (904) | (836) | 4,463 | 6,377 | |||||||||||||||||||
| $ | 5,946 | $ | 889 | $ | 19,328 | $ | 11,086 | ||||||||||||||||
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
17.Basic and diluted net earnings (loss) per share
Basic and diluted earnings (loss) per share have been calculated on the basis of net earnings (loss) attributable to the common shareholders of the Company and the weighted average number of common shares and bonus deferral restricted share units outstanding. Diluted net earnings (loss) per share is computed using the weighted-average number of common shares, additional shares issued subsequent to quarter-end under the dividend reinvestment plan, PSUs, RSUs and DSUs outstanding during the period and, if dilutive, potential incremental common shares related to the convertible debentures or resulting from the application of the treasury stock method to outstanding share options and Green Equity Units (note 7).
The reconciliation of the net earnings (loss) and the weighted average shares used in the computation of basic and diluted earnings (loss) per share are as follows:
| Three months ended | Nine months ended | |||||||||||||||||||||||||
| September 30 | September 30 | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Net earnings (loss) attributable to shareholders of AQN | (195,177) | (27,922) | $ | (137,599) | 89,247 | |||||||||||||||||||||
| Series A preferred shares dividend | 1,201 | 1,244 | 3,638 | 3,709 | ||||||||||||||||||||||
| Series D preferred shares dividend | 987 | 1,023 | 2,990 | 3,048 | ||||||||||||||||||||||
| Net earnings (loss) attributable to common shareholders of AQN – basic and diluted | $ | (197,365) | $ | (30,189) | $ | (144,227) | $ | 82,490 | ||||||||||||||||||
| Weighted average number of shares | ||||||||||||||||||||||||||
| Basic | 678,623,606 | 621,405,414 | 676,035,613 | 611,772,460 | ||||||||||||||||||||||
| Effect of dilutive securities | — | — | — | 6,300,009 | ||||||||||||||||||||||
| Diluted | 678,623,606 | 621,405,414 | 676,035,613 | 618,072,469 | ||||||||||||||||||||||
This calculation of diluted shares excludes the potential impact of the Green Equity Units and all potential incremental shares that may become issuable pursuant to outstanding securities of the Company for the three and nine months ended September 30, 2022, as they are antidilutive. This calculation of diluted shares for the three and nine months ended September 30, 2021 excludes the potential impact of 9,360,556 and 437,006 securities, respectively, as they are anti-dilutive.
18.Segmented information
The Company is managed under two primary business units consisting of the Regulated Services Group and the Renewable Energy Group. The two business units are the two segments of the Company.
The Regulated Services Group, the Company's regulated operating unit, owns and operates a portfolio of electric, natural gas, water distribution and wastewater collection utility systems and transmission operations in the United States, Canada, Bermuda and Chile; the Renewable Energy Group, the Company's non-regulated operating unit, owns and operates a diversified portfolio of renewable and thermal electric generation assets in North America and internationally.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
18.Segmented information (continued)
For purposes of evaluating the performance of the business units, the Company allocates the realized portion of any gains or losses on financial instruments to the specific business units. Dividend income from Atlantica and AYES Canada is included in the operations of the Renewable Energy Group, while interest income from San Antonio Water System is included in the operations of the Regulated Services Group. Equity method gains and losses are included in the operations of the Regulated Services Group or Renewable Energy Group based on the nature of the activities of the investees. The change in value of investments carried at fair value, unrealized portion of any gains or losses on derivative instruments not designated in a hedging relationship and foreign exchange gains and losses are not considered in management’s evaluation of divisional performance and are, therefore, allocated and reported under corporate.
| Three months ended September 30, 2022 | |||||||||||||||||||||||
| Regulated Services Group | Renewable Energy Group | Corporate | Total | ||||||||||||||||||||
Revenue (1)(2) | $ | 561,641 | $ | 86,572 | $ | — | $ | 648,213 | |||||||||||||||
| Other revenue | 14,316 | 3,822 | 373 | 18,511 | |||||||||||||||||||
| Fuel, power and water purchased | 172,508 | 15,081 | — | 187,589 | |||||||||||||||||||
| Net revenue | 403,449 | 75,313 | 373 | 479,135 | |||||||||||||||||||
| Operating expenses | 189,799 | 26,823 | 25 | 216,647 | |||||||||||||||||||
| Administrative expenses | 11,767 | 8,544 | 3,134 | 23,445 | |||||||||||||||||||
| Depreciation and amortization | 82,129 | 25,824 | 254 | 108,207 | |||||||||||||||||||
| Gain on foreign exchange | — | — | (4,985) | (4,985) | |||||||||||||||||||
| Operating income | 119,754 | 14,122 | 1,945 | 135,821 | |||||||||||||||||||
| Interest expense | (32,887) | (23,817) | (18,345) | (75,049) | |||||||||||||||||||
| Income (loss) from long-term investments | 6,919 | 15,278 | (301,970) | (279,773) | |||||||||||||||||||
| Other expenses | (614) | (1,464) | (5,772) | (7,850) | |||||||||||||||||||
| Earnings (loss) before income taxes | $ | 93,172 | $ | 4,119 | $ | (324,142) | $ | (226,851) | |||||||||||||||
| Capital expenditures | $ | 286,881 | $ | 35,075 | $ | — | $ | 321,956 | |||||||||||||||
(1) Renewable Energy Group revenue includes $23,856 related to net hedging loss from energy derivative contracts and availability credits for the three months ended September 30, 2022, that do not represent revenue recognized from contracts with customers.
(2) Regulated Services Group revenue includes $4,052 related to alternative revenue programs for the three months ended September 30, 2022, that do not represent revenue recognized from contracts with customers.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
18.Segmented information (continued)
| Three months ended September 30, 2021 | |||||||||||||||||||||||
| Regulated Services Group | Renewable Energy Group | Corporate | Total | ||||||||||||||||||||
Revenue (1)(2) | $ | 434,708 | $ | 73,595 | $ | — | $ | 508,303 | |||||||||||||||
| Other revenue | 14,490 | 5,394 | 388 | 20,272 | |||||||||||||||||||
| Fuel, power and water purchased | 112,820 | 11,898 | — | 124,718 | |||||||||||||||||||
| Net revenue | 336,378 | 67,091 | 388 | 403,857 | |||||||||||||||||||
| Operating expenses | 150,934 | 26,270 | — | 177,204 | |||||||||||||||||||
| Administrative expenses | 6,976 | 6,981 | 1,208 | 15,165 | |||||||||||||||||||
| Depreciation and amortization | 71,430 | 24,858 | 265 | 96,553 | |||||||||||||||||||
| Loss on foreign exchange | — | — | 1,267 | 1,267 | |||||||||||||||||||
| Operating income (loss) | 107,038 | 8,982 | (2,352) | 113,668 | |||||||||||||||||||
| Interest expense | (22,300) | (17,461) | (11,893) | (51,654) | |||||||||||||||||||
| Income (loss) from long-term investments | 4,470 | 22,126 | (140,838) | (114,242) | |||||||||||||||||||
| Other recovery (expenses) | (3,462) | (4,770) | 1,651 | (6,581) | |||||||||||||||||||
| Earnings (loss) before income taxes | $ | 85,746 | $ | 8,877 | $ | (153,432) | $ | (58,809) | |||||||||||||||
| Capital expenditures | $ | 263,711 | $ | 84,339 | $ | — | $ | 348,050 | |||||||||||||||
(1) Renewable Energy Group revenue includes $1,160 related to net hedging loss from energy derivative contracts for the three months ended September 30, 2021, that do not represent revenue recognized from contracts with customers.
(2) Regulated Services Group revenue includes $5,324 related to alternative revenue programs for the three months ended September 30, 2021, that do not represent revenue recognized from contracts with customers.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
18.Segmented information (continued)
| Nine months ended September 30, 2022 | |||||||||||||||||||||||
| Regulated Services Group | Renewable Energy Group | Corporate | Total | ||||||||||||||||||||
Revenue (1)(2) | 1,691,495 | 271,807 | $ | — | $ | 1,963,302 | |||||||||||||||||
| Other revenue | 41,863 | 20,374 | 1,141 | 63,378 | |||||||||||||||||||
| Fuel, power and water purchased | 566,336 | 41,685 | — | 608,021 | |||||||||||||||||||
| Net revenue | 1,167,022 | 250,496 | 1,141 | 1,418,659 | |||||||||||||||||||
| Operating expenses | 553,466 | 81,466 | 47 | 634,979 | |||||||||||||||||||
| Administrative expenses | 30,803 | 24,599 | 5,602 | 61,004 | |||||||||||||||||||
| Depreciation and amortization | 238,640 | 101,298 | 780 | 340,718 | |||||||||||||||||||
| Gain on foreign exchange | — | — | (259) | (259) | |||||||||||||||||||
| 344,113 | 43,133 | (5,029) | 382,217 | ||||||||||||||||||||
| Gain on sale of renewable assets | — | 1,200 | — | 1,200 | |||||||||||||||||||
| Operating income (loss) | 344,113 | 44,333 | (5,029) | 383,417 | |||||||||||||||||||
| Interest expense | (78,172) | (67,145) | (52,248) | (197,565) | |||||||||||||||||||
| Income (loss) from long-term investments | 16,693 | 69,579 | (490,114) | (403,842) | |||||||||||||||||||
| Other expenses | (8,400) | (9,757) | (13,795) | (31,952) | |||||||||||||||||||
| Earnings (loss) before income taxes | $ | 274,234 | $ | 37,010 | $ | (561,186) | $ | (249,942) | |||||||||||||||
| Property, plant and equipment | $ | 8,335,477 | $ | 3,539,518 | $ | 29,145 | $ | 11,904,140 | |||||||||||||||
| Investments carried at fair value | 2,133 | 1,355,978 | — | 1,358,111 | |||||||||||||||||||
| Equity-method investees | 54,825 | 350,722 | 13,545 | 419,092 | |||||||||||||||||||
| Total assets | 11,812,751 | 5,587,113 | 253,465 | 17,653,329 | |||||||||||||||||||
| Capital expenditures | $ | 722,344 | $ | 174,849 | $ | — | $ | 897,193 | |||||||||||||||
(1) Renewable Energy Group revenue includes $53,748 related to net hedging loss from energy derivative contracts and availability credits for the nine months ended September 30, 2022, that do not represent revenue recognized from contracts with customers.
(2) Regulated Services Group revenue includes $19,141 related to alternative revenue programs for the nine months ended September 30, 2022, that do not represent revenue recognized from contracts with customers.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
18.Segmented information (continued)
| Nine months ended September 30, 2021 | |||||||||||||||||||||||
| Regulated Services Group | Renewable Energy Group | Corporate | Total | ||||||||||||||||||||
Revenue (1)(2) | $ | 1,452,609 | $ | 182,268 | $ | — | $ | 1,634,877 | |||||||||||||||
| Other revenue | 40,056 | 14,536 | 1,171 | 55,763 | |||||||||||||||||||
| Fuel, power and water purchased | 506,745 | 25,887 | — | 532,632 | |||||||||||||||||||
| Net revenue | 985,920 | 170,917 | 1,171 | 1,158,008 | |||||||||||||||||||
| Operating expenses | 448,844 | 79,499 | — | 528,343 | |||||||||||||||||||
| Administrative expenses | 24,431 | 19,589 | 4,910 | 48,930 | |||||||||||||||||||
| Depreciation and amortization | 206,517 | 84,805 | 831 | 292,153 | |||||||||||||||||||
| Loss on foreign exchange | — | — | 3,412 | 3,412 | |||||||||||||||||||
| Operating income (loss) | 306,128 | (12,976) | (7,982) | 285,170 | |||||||||||||||||||
| Interest expense | (73,715) | (54,206) | (31,495) | (159,416) | |||||||||||||||||||
| Income (loss) from long-term investments | 14,937 | 70,531 | (189,711) | (104,243) | |||||||||||||||||||
| Other expenses | (16,108) | (8,424) | (56) | (24,588) | |||||||||||||||||||
| Earnings (loss) before income taxes | $ | 231,242 | $ | (5,075) | $ | (229,244) | $ | (3,077) | |||||||||||||||
| Capital expenditures | $ | 817,661 | $ | 225,968 | $ | 7,553 | $ | 1,051,182 | |||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Property, plant and equipment | $ | 7,394,151 | $ | 3,615,915 | $ | 32,380 | $ | 11,042,446 | |||||||||||||||
| Investments carried at fair value | 2,296 | 1,846,160 | — | 1,848,456 | |||||||||||||||||||
| Equity-method investees | 37,492 | 375,460 | 20,898 | 433,850 | |||||||||||||||||||
| Total assets | 10,512,799 | 6,123,888 | 149,149 | 16,785,836 | |||||||||||||||||||
(1) Renewable Energy Group revenue includes $45,748 related to net hedging loss from energy derivative contracts for the nine months ended September 30, 2021, that do not represent revenue recognized from contracts with customers.
(2) Regulated Services Group revenue includes $12,803 related to alternative revenue programs for the nine months ended September 30, 2021, that do not represent revenue recognized from contracts with customers.
The majority of non-regulated energy sales are earned from contracts with large public utilities. The Company has sought to mitigate its credit risk by selling energy to large utilities in various North American locations. None of the utilities contribute more than 10% of total revenue.
AQN operates in the independent power and utility industries in the United States, Canada and other regions. Information on operations by geographic area is as follows:
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| United States | $ | 532,231 | $ | 408,419 | $ | 1,630,811 | $ | 1,335,677 | |||||||||||||||
| Canada | 30,754 | 28,845 | 125,986 | 112,648 | |||||||||||||||||||
| Other regions | 103,739 | 91,311 | 269,883 | 242,315 | |||||||||||||||||||
| $ | 666,724 | $ | 528,575 | $ | 2,026,680 | $ | 1,690,640 | ||||||||||||||||
Revenue is attributed to the regions based on the location of the underlying generating and utility facilities.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
19.Commitments and contingencies
(a)Contingencies
AQN and its subsidiaries are involved in various claims and litigation arising out of the ordinary course and conduct of its business. Although such matters cannot be predicted with certainty, management does not consider AQN’s exposure to such litigation to be material to these unaudited interim consolidated financial statements. Accruals for any contingencies related to these items are recorded in the unaudited interim consolidated financial statements at the time it is concluded that their occurrence is probable and the related liability is estimable.
Mountain View Fire
On November 17, 2020, a wildfire now known as the Mountain View Fire occurred in the territory of Liberty Utilities (CalPeco Electric) LLC ("Liberty CalPeco"). The cause of the fire remains under investigation, and CAL FIRE has not yet released its final report. There are currently eleven active lawsuits that name the Company and/or certain of its subsidiaries as defendants in connection with the Mountain View Fire. Five of these lawsuits are brought by groups of individual plaintiffs alleging causes of action including negligence, inverse condemnation, nuisance, trespass, and violations of Cal. Pub. Util. Code 2106 and Cal. Health and Safety Code 13007. In the sixth active lawsuit, County of Mono, Antelope Valley Fire Protection District, Toiyabe Indian Health Project and Bridgeport Indian Colony allege similar causes of action and seek damages for fire suppression costs, law enforcement costs, property and infrastructure damage, and other costs. In four other lawsuits, insurance companies allege inverse condemnation and negligence and seek recovery of amounts paid and to be paid to their insureds. The eleventh lawsuit alleges the wrongful death of an individual, along with causes of action similar to those alleged in the cases filed by groups of individual plaintiffs. The likelihood of success in these lawsuits cannot be reasonably predicted. Liberty CalPeco intends to vigorously defend them. The Company has wildfire liability insurance that is expected to apply up to applicable policy limits.
(b)Commitments
In addition to the commitments related to the development projects disclosed in note 6, the following significant commitments exist as at September 30, 2022.
AQN has outstanding purchase commitments for power purchases, gas supply and service agreements, service agreements, capital project commitments and land easements. Detailed below are estimates of future commitments under these arrangements:
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Thereafter | Total | |||||||||||||||||
Power purchase (1) | $ | 76,734 | $ | 37,611 | $ | 37,845 | $ | 20,040 | $ | 12,459 | $ | 145,757 | $ | 330,446 | |||||||||
Gas supply and service agreements (2) | 92,191 | 82,276 | 64,594 | 36,162 | 27,227 | 159,649 | 462,099 | ||||||||||||||||
| Service agreements | 65,030 | 56,306 | 55,380 | 51,260 | 44,106 | 301,982 | 574,064 | ||||||||||||||||
| Capital projects | 27,089 | — | — | — | — | — | 27,089 | ||||||||||||||||
| Land easements and others | 13,268 | 13,249 | 13,428 | 13,596 | 13,764 | 461,675 | 528,980 | ||||||||||||||||
| Total | $ | 274,312 | $ | 189,442 | $ | 171,247 | $ | 121,058 | $ | 97,556 | $ | 1,069,063 | $ | 1,922,678 | |||||||||
(1) Power purchase: AQN’s electric distribution facilities have commitments to purchase physical quantities of power for load serving requirements. The commitment amounts included in the table above are based on market prices as at September 30, 2022. However, the effects of purchased power unit cost adjustments are mitigated through a purchased power rate-adjustment mechanism.
(2) Gas supply and service agreements: AQN’s gas distribution facilities and thermal generation facilities have commitments to purchase physical quantities of natural gas under contracts for purposes of load serving requirements and of generating power.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
20.Non-cash operating items
The changes in non-cash operating items consist of the following:
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Accounts receivable | $ | 20,107 | $ | (7,006) | $ | (29,146) | $ | 26,969 | |||||||||||||||
| Fuel and natural gas in storage | (34,360) | (43,158) | (41,488) | (37,229) | |||||||||||||||||||
| Supplies and consumables inventory | (6,423) | 8,363 | (17,198) | 3,977 | |||||||||||||||||||
| Income taxes recoverable | 870 | 1,547 | 2,941 | 380 | |||||||||||||||||||
| Prepaid expenses | (7,193) | (6,083) | (19,746) | (15,126) | |||||||||||||||||||
| Accounts payable | (13,811) | 25,731 | 12,948 | (22,123) | |||||||||||||||||||
| Accrued liabilities | 6,295 | 90,745 | 37,006 | (676) | |||||||||||||||||||
| Current income tax liability | 2,617 | 1,499 | 3,470 | 7,124 | |||||||||||||||||||
| Asset retirements and environmental obligations | (6,036) | (957) | (17,390) | (1,488) | |||||||||||||||||||
| Net regulatory assets and liabilities | (57,733) | (64,460) | (111,852) | (399,456) | |||||||||||||||||||
| $ | (95,667) | $ | 6,221 | $ | (180,455) | $ | (437,648) | ||||||||||||||||
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
21.Financial instruments
(a)Fair value of financial instruments
| September 30, 2022 | Carrying amount | Fair value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| Long-term investments carried at fair value | $ | 1,358,111 | $ | 1,358,111 | $ | 1,289,858 | $ | — | $ | 68,253 | |||||||||||||||||||
| Development loans and other receivables | 122,353 | 118,193 | — | 118,193 | — | ||||||||||||||||||||||||
| Derivative instruments: | |||||||||||||||||||||||||||||
| Interest rate swap designated as a hedge | 68,520 | 68,520 | — | 68,520 | — | ||||||||||||||||||||||||
| Energy contracts not designated as cash flow hedge | 1,213 | 1,213 | — | — | 1,213 | ||||||||||||||||||||||||
| Congestion revenue rights designated as a cash flow hedge | 2,568 | 2,568 | — | — | 2,568 | ||||||||||||||||||||||||
| Congestion revenue rights not designated as a cash flow hedge | 4,157 | 4,157 | — | — | 4,157 | ||||||||||||||||||||||||
| Commodity contracts for regulated operations | 3,235 | 3,235 | — | 3,235 | — | ||||||||||||||||||||||||
| Interest rate swap not designated as a hedge | 767 | 767 | — | 767 | — | ||||||||||||||||||||||||
| Cross currency swap designated as a net investment hedge | 4,847 | 4,847 | — | 4,847 | — | ||||||||||||||||||||||||
| Total derivative instruments | 85,307 | 85,307 | — | 77,369 | 7,938 | ||||||||||||||||||||||||
| Total financial assets | $ | 1,565,771 | $ | 1,561,611 | $ | 1,289,858 | $ | 195,562 | $ | 76,191 | |||||||||||||||||||
| Long-term debt | $ | 7,704,904 | $ | 7,319,099 | $ | 2,715,772 | $ | 4,603,327 | $ | — | |||||||||||||||||||
| Notes payable to related party | 25,808 | 14,972 | — | 14,972 | — | ||||||||||||||||||||||||
| Convertible debentures | 243 | 388 | 388 | — | — | ||||||||||||||||||||||||
| Preferred shares, Series C | 11,869 | 11,571 | — | 11,571 | — | ||||||||||||||||||||||||
| Derivative instruments: | |||||||||||||||||||||||||||||
| Energy contracts designated as a cash flow hedge | 154,763 | 154,763 | — | — | 154,763 | ||||||||||||||||||||||||
| Energy contracts not designated as a cash flow hedge | 1,141 | 1,141 | — | — | 1,141 | ||||||||||||||||||||||||
| Cross-currency swap designated as a net investment hedge | 26,196 | 26,196 | — | 26,196 | — | ||||||||||||||||||||||||
| Cross-currency swap designated as a cash flow hedge | 16,548 | 16,548 | — | 16,548 | — | ||||||||||||||||||||||||
| Interest rate swaps not designated as a hedge | 5,649 | 5,649 | — | 5,649 | — | ||||||||||||||||||||||||
| Commodity contracts for regulated operations | 346 | 346 | — | 346 | — | ||||||||||||||||||||||||
| Total derivative instruments | 204,643 | 204,643 | — | 48,739 | 155,904 | ||||||||||||||||||||||||
| Total financial liabilities | $ | 7,947,467 | $ | 7,550,673 | $ | 2,716,160 | $ | 4,678,609 | $ | 155,904 | |||||||||||||||||||
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
21. Financial instruments (continued)
(a)Fair value of financial instruments (continued)
| December 31, 2021 | Carrying amount | Fair value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| Long-term investments carried at fair value | $ | 1,848,456 | $ | 1,848,456 | $ | 1,753,210 | $ | — | $ | 95,246 | |||||||||||||||||||
| Development loans and other receivables | 32,261 | 33,286 | — | 33,286 | — | ||||||||||||||||||||||||
| Derivative instruments: | |||||||||||||||||||||||||||||
| Energy contracts designated as a cash flow hedge | 15,362 | 15,362 | — | — | 15,362 | ||||||||||||||||||||||||
| Interest rate swap designated as a hedge | 1,581 | 1,581 | — | 1,581 | — | ||||||||||||||||||||||||
| Commodity contracts for regulatory operations | 1,721 | 1,721 | — | 1,721 | — | ||||||||||||||||||||||||
| Cross-currency swap designated as a net investment hedge | 1,958 | 1,958 | — | 1,958 | — | ||||||||||||||||||||||||
| Total derivative instruments | 20,622 | 20,622 | — | 5,260 | 15,362 | ||||||||||||||||||||||||
| Total financial assets | $ | 1,901,339 | $ | 1,902,364 | $ | 1,753,210 | $ | 38,546 | $ | 110,608 | |||||||||||||||||||
| Long-term debt | $ | 6,211,375 | $ | 6,543,932 | $ | 2,418,580 | $ | 4,125,352 | — | ||||||||||||||||||||
| Notes payable to related party | 25,808 | 25,808 | — | 25,808 | — | ||||||||||||||||||||||||
| Convertible debentures | 277 | 519 | 519 | — | — | ||||||||||||||||||||||||
| Preferred shares, Series C | 13,348 | 14,580 | — | 14,580 | — | ||||||||||||||||||||||||
| Derivative instruments: | |||||||||||||||||||||||||||||
| Energy contracts designated as a cash flow hedge | 60,462 | 60,462 | — | — | 60,462 | ||||||||||||||||||||||||
| Energy contracts not designated as a cash flow hedge | 1,169 | 1,169 | — | — | 1,169 | ||||||||||||||||||||||||
| Cross-currency swap designated as a net investment hedge | 50,258 | 50,258 | — | 50,258 | — | ||||||||||||||||||||||||
| Interest rate swaps designated as a hedge | 7,008 | 7,008 | — | 7,008 | — | ||||||||||||||||||||||||
| Commodity contracts for regulated operations | 1,348 | 1,348 | — | 1,348 | — | ||||||||||||||||||||||||
| Total derivative instruments | 120,245 | 120,245 | — | 58,614 | 61,631 | ||||||||||||||||||||||||
| Total financial liabilities | $ | 6,371,053 | $ | 6,705,084 | $ | 2,419,099 | $ | 4,224,354 | $ | 61,631 | |||||||||||||||||||
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
21.Financial instruments (continued)
(a)Fair value of financial instruments (continued)
The Company has determined that the carrying value of its short-term financial assets and liabilities approximates fair value as at September 30, 2022 and December 31, 2021 due to the short-term maturity of these instruments.
The fair value of development loans and other receivables (level 2) is determined using a discounted cash flow method, using estimated current market rates for similar instruments adjusted for estimated credit risk as determined by management.
The fair value of the investment in Atlantica (level 1) is measured at the closing price on the NASDAQ stock exchange.
The Company’s level 1 fair value of long-term debt is measured at the closing price on the NYSE and the over-the-counter closing price. The Company’s level 2 fair value of long-term debt at fixed interest rates and Series C preferred shares has been determined using a discounted cash flow method and current interest rates. The Company's level 2 fair value of convertible debentures has been determined as the greater of their face value and the quoted value of AQN's common shares on a converted basis.
The Company’s level 2 fair value derivative instruments primarily consist of swaps, options, rights, subscription agreements and forward physical derivatives where market data for pricing inputs are observable. Level 2 pricing inputs are obtained from various market indices and utilize discounting based on quoted interest rate curves, which are observable in the marketplace.
The Company’s level 3 instruments consist of energy contracts for electricity sales, congestion revenue rights ("CRRs") and the fair value of the Company's investment in AYES Canada. The significant unobservable inputs used in the fair value measurement of energy contracts are the internally developed forward market prices ranging from $23.49 to $210.09 with a weighted average of $46.90 as at September 30, 2022. The weighted average forward market prices are developed based on the quantity of energy expected to be sold monthly and the expected forward price during that month. The change in the fair value of the energy contracts is detailed in notes 21(b)(ii) and 21(b)(iv). The significant unobservable inputs used in the fair value measurement of CRRs are recent CRR auction prices ranging from $1.58 to $19.65 with a weighted average of $7.76 as at September 30, 2022. The significant unobservable inputs used in the fair value measurement of the Company's AYES Canada investment are the expected cash flows, the discount rates applied to these cash flows ranging from 9.17% to 9.67% with a weighted average of 9.55%, and the expected volatility of Atlantica's share price ranging from 25% to 37% as at September 30, 2022. Significant increases (decreases) in expected cash flows or increases (decreases) in discount rate in isolation would have resulted in a significantly lower (higher) fair value measurement.
(b)Derivative instruments
Derivative instruments are recognized on the unaudited interim consolidated balance sheets as either assets or liabilities and measured at fair value at each reporting period.
(i)Commodity derivatives – regulated accounting
The Company uses derivative financial instruments to reduce the cash flow variability associated with the purchase price for a portion of future natural gas purchases associated with its regulated gas and electric service territories. The Company’s strategy is to minimize fluctuations in gas sale prices to regulated customers. The following are commodity volumes, in dekatherms, associated with the above derivative contracts:
| September 30, 2022 | |||||
| Financial contracts: Swaps | 2,245,873 | ||||
| Options | 113,504 | ||||
| 2,359,377 | |||||
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
21.Financial instruments (continued)
(b)Derivative instruments (continued)
(i)Commodity derivatives – regulated accounting (continued)
The accounting for these derivative instruments is subject to guidance for rate regulated enterprises. Most of the gains or losses on the settlement of these contracts are included in the calculation of the fuel and commodity costs adjustments (note 5). As a result, the changes in fair value of these natural gas derivative contracts and their offsetting adjustment to regulatory assets and liabilities had no earnings impact.
(ii)Cash flow hedges
The Company has sought to reduce the price risk on the expected future sale of power generation at the Sandy Ridge, Senate, Minonk, and Sugar Creek Wind Facilities by entering into the following long-term energy derivative contracts.
| Notional quantity (MW-hrs) | Expiry | Receive average prices (per MW-hr) | Pay floating price (per MW-hr) | |||||||||||||||||
| 4,204,184 | September 2030 | $24.54 | Illinois Hub | |||||||||||||||||
| 445,669 | December 2028 | $30.14 | PJM Western HUB | |||||||||||||||||
| 2,123,023 | December 2027 | $22.61 | NI HUB | |||||||||||||||||
| 1,764,648 | December 2027 | $36.46 | ERCORT North HUB | |||||||||||||||||
The Company provides energy requirements to various customers under contracts at fixed rates. While the production from the Tinker Hydroelectric Facility is expected to provide a portion of the energy required to service these customers, AQN anticipates having to purchase a portion of its energy requirements at the ISO NE spot rates to supplement self-generated energy. The Company seeks to mitigate the risk by using short-term financial forward energy purchase contracts. These short-term derivatives are not accounted for as hedges, and changes in fair value are recorded in earnings as they occur (note 21(b)(iv)). A prior contract used as a hedging instrument expired in February 2022.
The Company is party to two interest rate swap contracts as cash flow hedges to mitigate the risk that LIBOR-based interest rates will increase over the life of term loan facilities. Under the terms of the interest rate swap contracts, the Company has fixed its LIBOR interest rate expense on its two term loan facilities. The fair value of the derivative on the designation date is amortized into earnings over the remaining life of the contract.
The Company is party to a forward-starting interest rate swap in order to reduce the interest rate risk related to the quarterly interest payments between July 1, 2024 and July 1, 2029 on the $350,000 subordinated unsecured notes and between April 18, 2027 and April 18, 2032 on the $750,000 subordinated unsecured notes. The Company designated the entire notional amount of the pay-variable and receive-fixed interest rate swaps as a hedge of the future quarterly variable-rate interest payments associated with the subordinated unsecured notes.
In January 2022, the Company entered into a cross-currency interest rate swap, coterminous with the Canadian Notes, to effectively convert the C$400,000 Canadian Offering into U.S. dollars. The change in the carrying amount of the Canadian Notes due to changes in spot exchange rates is recognized each period in the unaudited interim consolidated statements of operations as loss (gain) on foreign exchange. The Company designated the entire notional amount of the cross-currency fixed-for-fixed interest rate swap as a hedge of the foreign currency exposure related to cash flows for the interest and principal repayments on the Canadian Notes. An offsetting portion of the AOCI balance related to changes in fair value of the cross-currency fixed-for-fixed interest rate swap attributable to changes in the spot exchange rates is also immediately reclassified into the unaudited interim consolidated statements of operations as an offsetting (gain) loss on foreign exchange.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
21.Financial instruments (continued)
(b)Derivative instruments (continued)
(ii)Cash flow hedges (continued)
The following table summarizes OCI attributable to derivative financial instruments designated as a cash flow hedge:
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Effective portion of cash flow hedge | $ | (43,128) | $ | (31,323) | $ | (124,980) | $ | (94,490) | |||||||||||||||
| Amortization of cash flow hedge | (3,401) | (545) | (7,393) | (1,657) | |||||||||||||||||||
| Amounts reclassified from AOCI | 47,980 | 269 | 62,059 | 40,401 | |||||||||||||||||||
| OCI attributable to shareholders of AQN | $ | 1,451 | $ | (31,599) | $ | (70,314) | $ | (55,746) | |||||||||||||||
The Company expects $49,323 of unrealized losses currently in AOCI to be reclassified, net of taxes into non-regulated energy sales, investment loss, interest expense and derivative gains, within the next 12 months, as the underlying hedged transactions settle.
(iii)Foreign exchange hedge of net investment in foreign operation
The functional currency of most of AQN's operations is the U.S. dollar. The Company designates obligations denominated in Canadian dollars as a hedge of the foreign currency exposure of its net investment in its Canadian investments and subsidiaries. The related foreign currency transaction gain or loss designated as, and effective as, a hedge of the net investment in a foreign operation is reported in the same manner as the translation adjustment (in OCI) related to the net investment. A foreign currency gain of $2,454 and $2,674 for the three and nine months ended September 30, 2022, respectively (2021 - gain of $338 and loss of $108, respectively) was recorded in OCI.
On May 23, 2019, the Company entered into a cross-currency swap, coterminous with the subordinated unsecured notes, to effectively convert the $350,000 U.S.-dollar-denominated offering into Canadian dollars. The change in the carrying amount of the notes due to changes in spot exchange rates was recognized each period in the unaudited interim consolidated statements of operations as loss (gain) on foreign exchange. The Company designated the entire notional amount of the cross-currency fixed-for-fixed interest rate swap as a hedge of the foreign currency exposure related to cash flows for the interest and principal repayments on the notes. Upon the change in functional currency of AQN to the U.S. dollar on January 1, 2020, this hedge was dedesignated. The Company redesignated this swap as a hedge of AQN's net investment in its Canadian subsidiaries. The related foreign currency transaction gain or loss designated as a hedge of the net investment in a foreign operation is reported in the same manner as the translation adjustment (in OCI) related to the net investment. The fair value of the derivative on the redesignation date will be amortized over the remaining life of the original hedge. A foreign currency gain of $18,033 and $24,498 for the three and nine months ended September 30, 2022, respectively (2021 - gain of $12,284 and $817, respectively) was recorded in OCI.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
21.Financial instruments (continued)
(b)Derivative instruments (continued)
(iii) Foreign exchange hedge of net investment in foreign operation (continued)
Canadian operations
The Company is exposed to currency fluctuations from its Canadian-based operations. AQN seeks to manage this risk primarily through the use of natural hedges by using Canadian long-term debt to finance its Canadian operations and a combination of foreign exchange forward contracts and spot purchases.
The Company’s Canadian operations are determined to have the Canadian dollar as their functional currency and are exposed to currency fluctuations from their U.S. dollar transactions. The Company designates obligations denominated in U.S. dollars as a hedge of the foreign currency exposure of its net investment in its U.S. investments and subsidiaries. The related foreign currency transaction gain or loss designated as, and effective as, a hedge of the net investment in a foreign operation is reported in the same manner as the translation adjustment (in OCI) related to the net investment. A foreign currency loss of $17,238 and $19,782 for the three and nine months ended September 30, 2022, respectively (2021 - loss of $744 and gain of $1,247, respectively) was recorded in OCI.
The Renewable Energy Group was party to C$500,000 cross-currency interest rate swaps to effectively convert Canadian dollar debentures into U.S. dollars. In February 2022, the Company settled the related cross-currency swap related to its C$200,000 debenture that was repaid (note 7(d)). The Renewable Energy Group designated the entire notional amount of the cross-currency interest rate swap and related short-term U.S. dollar payables created by the monthly accruals of the swap settlement as a hedge of the foreign currency exposure of its net investment in the Renewable Energy Group's U.S. operations. The gain or loss related to the fair value changes of the swap and the related foreign currency gains and losses on the U.S. dollar accruals that are designated as, and are effective as, a hedge of the net investment in a foreign operation are reported in the same manner as the translation adjustment (in OCI) related to the net investment. A loss of $6,110 and $12,190 for the three and nine months ended September 30, 2022, respectively (2021 - loss of $11,644 and gain of $1,630, respectively) was recorded in OCI.
On April 9, 2021, the Renewable Energy Group entered into a cross-currency interest rate swap, coterminous with the senior unsecured debentures, to effectively convert the C$400,000 Canadian-dollar-denominated offering into U.S. dollars. The Renewable Energy Group designated the entire notional amount of the cross-currency interest rate swap and related short-term U.S. dollar payables created by the monthly accruals of the swap settlement as a hedge of the foreign currency exposure of its net investment in the Renewable Energy Group's U.S. operations. The gain or loss related to the fair value changes of the swap and the related foreign currency gains and losses on the U.S. dollar accruals that are designated as, and are effective as, a hedge of the net investment in a foreign operation are reported in the same manner as the translation adjustment (in OCI) related to the net investment. A loss of $146 and $14,398 for the three and nine months ended September 30, 2022, respectively (2021 - loss of $10,135 and $12,788, respectively) was recorded in OCI.
Chilean operations
The Company is exposed to currency fluctuations from its Chilean-based operations. The Company's Chilean operations are determined to have the Chilean peso as their functional currency. Chilean long-term debt used to finance the operations is denominated in Chilean Unidad de Fomento.
(iv)Other derivatives and risk management
In the normal course of business, the Company is exposed to financial risks that potentially impact its operating results. The Company employs risk management strategies with a view to mitigating these risks to the extent possible on a cost-effective basis. Derivative financial instruments are used to manage certain exposures to fluctuations in exchange rates, interest rates and commodity prices. The Company does not enter into derivative financial agreements for speculative purposes.
For derivatives that are not designated as hedges, the changes in the fair value are immediately recognized in earnings.
| Algonquin Power & Utilities Corp. | ||
| Notes to the Unaudited Interim Consolidated Financial Statements | ||
| September 30, 2022 and 2021 | ||
| (in thousands of U.S. dollars, except as noted and per share amounts) | ||
21.Financial instruments (continued)
(b)Derivative instruments (continued)
(iv)Other derivatives (continued)
The effects on the unaudited interim consolidated statements of operations of derivative financial instruments not designated as hedges consist of the following:
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Unrealized gain (loss) on derivative financial instruments: | ||||||||||||||||||||||||||
| Interest rate swaps | $ | (521) | $ | — | $ | (5,201) | $ | — | ||||||||||||||||||
| Energy derivative contracts | $ | 68 | $ | (2,176) | $ | (3,035) | $ | (4,803) | ||||||||||||||||||
| $ | (453) | $ | (2,176) | $ | (8,236) | $ | (4,803) | |||||||||||||||||||
| Realized loss on derivative financial instruments: | ||||||||||||||||||||||||||
| Energy derivative contracts | (805) | (485) | (656) | (126) | ||||||||||||||||||||||
| Loss on derivative financial instruments not accounted for as hedges | (1,258) | (2,661) | (8,892) | (4,929) | ||||||||||||||||||||||
| Amortization of AOCI gains frozen as a result of hedge dedesignation | 872 | 844 | 2,622 | 2,847 | ||||||||||||||||||||||
| $ | (386) | $ | (1,817) | $ | (6,270) | $ | (2,082) | |||||||||||||||||||
| Amounts recognized in the unaudited interim consolidated statements of operations consist of: | ||||||||||||||||||||||||||
| Loss on derivative financial instruments | $ | (386) | $ | (1,817) | $ | (6,270) | $ | (2,082) | ||||||||||||||||||
22.Comparative figures
Certain of the comparative figures have been reclassified to conform to the unaudited interim consolidated financial statement presentation adopted in the current period.
Management Discussion & Analysis Management of Algonquin Power & Utilities Corp. (“AQN” or the “Company” or the “Corporation”) has prepared the following discussion and analysis to provide information to assist its shareholders’ understanding of the financial results for the three and nine months ended September 30, 2022. This Management Discussion & Analysis (“MD&A”) should be read in conjunction with AQN’s unaudited interim consolidated financial statements for the three and nine months ended September 30, 2022 and 2021. This MD&A should also be read in conjunction with AQN's annual consolidated financial statements for the years ended December 31, 2021 and 2020. This material is available on SEDAR at www.sedar.com, on EDGAR at www.sec.gov/edgar, and on the AQN website at www.AlgonquinPowerandUtilities.com. Additional information about AQN, including the most recent Annual Information Form (“AIF”), can be found on SEDAR at www.sedar.com and on EDGAR at www.sec.gov/edgar.
Unless otherwise indicated, financial information provided for the three and nine months ended September 30, 2022 and 2021 has been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). As a result, the Company's financial information may not be comparable with financial information of other Canadian companies that provide financial information on another basis.
All monetary amounts are in U.S. dollars, except where otherwise noted. We denote any amounts denominated in Canadian dollars with "C$" immediately prior to the stated amount.
Capitalized terms used herein and not otherwise defined have the meanings assigned to them in the Company's most recent AIF.
Unless noted otherwise, this MD&A is based on information available to management as of November 10, 2022.
Contents
| Caution Concerning Forward-Looking Statements and Forward-Looking Information | |||||
| Caution Concerning Non-GAAP Measures | |||||
| Overview and Business Strategy | |||||
| Significant Updates | |||||
| Outlook | |||||
| 2022 Third Quarter Results From Operations | |||||
| 2022 Year-to-Date Results from Operations | |||||
| 2022 Third Quarter and Year-to-Date Net Earnings Summary | |||||
| 2022 Third Quarter and Year-to-Date Adjusted EBITDA Summary | |||||
| Regulated Services Group | |||||
| Renewable Energy Group | |||||
| AQN: Corporate and Other Expenses | |||||
| Non-GAAP Financial Measures | |||||
| Corporate Development Activities | |||||
| Summary of Property, Plant and Equipment Expenditures | |||||
| Liquidity and Capital Reserves | |||||
| Share-Based Compensation Plans | |||||
| Related Party Transactions | |||||
| Enterprise Risk Management | |||||
| Quarterly Financial Information | |||||
| Disclosure Controls and Procedures | |||||
| Critical Accounting Estimates and Policies | |||||
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 1 | ||||
Caution Concerning Forward-Looking Statements and Forward-Looking Information
This document may contain statements that constitute "forward-looking information" within the meaning of applicable securities laws in each of the provinces and territories of Canada and the respective policies, regulations and rules under such laws and/or "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 (collectively, “forward-looking information”). The words “anticipates”, “believes”, “budget”, “could”, “estimates”, “expects”, “forecasts”, “intends”, “may”, “might”, “plans”, “projects”, “schedule”, “should”, “will”, “would”, "aims", "seeks", "strives" (and grammatical variations of such terms) and similar expressions are often intended to identify forward-looking information, although not all forward-looking information contains these identifying words. Specific forward-looking information in this document includes, but is not limited to, statements relating to: expected future growth, earnings (including 2022 Adjusted Net Earnings per common share) and results of operations; liquidity, capital resources and operational requirements; sources of funding, including adequacy and availability of credit facilities, cash flows from operations, capital markets financing, and asset recycling initiatives; expectations regarding the use of proceeds from financings; ongoing and planned acquisitions, projects and initiatives, including expectations regarding costs, results, in-service dates and completion dates; expectations regarding future macroeconomic conditions; expectations regarding the Company’s Investor and Analyst Day; expectations regarding the anticipated closings of the Kentucky Power Transaction and the Disposition Transaction (each as defined herein); expectations regarding the purchase price for the Kentucky Power Transaction; expectations regarding the financial impacts of the flooding that occurred in Kentucky Power’s service territory in late July 2022; expectations regarding financing of the Kentucky Power Transaction; expected proceeds from the Disposition Transaction; expectations regarding the Company's corporate development activities and the results thereof, including the expected business mix between the Regulated Services Group and Renewable Energy Group; expectations regarding regulatory hearings, motions, filings, appeals and approvals, including rate reviews, and the timing, impacts and outcomes thereof; expected future generation, capacity and production of the Company’s energy facilities; expected future capital investments, including expected timing, investment plans, sources of funds and impacts; expectations regarding the outcome of legal claims and disputes; strategy and goals; dividends to shareholders; expectations regarding new or proposed tax reforms, rules and laws, including the impact thereof on the Company; credit ratings and equity credit from rating agencies; expectations regarding debt repayment and refinancing; the future impact on the Company of actual or proposed laws, regulations and rules; the expected impact of changes in customer usage on the Regulated Services Group’s revenue; accounting estimates; interest rates, including the anticipated effect of an increase thereof; the implementation of new technology systems and infrastructure, including the expected timing thereof; financing costs; and currency exchange rates. All forward-looking information is given pursuant to the “safe harbour” provisions of applicable securities legislation.
The forecasts and projections that make up the forward-looking information contained herein are based on certain factors or assumptions which include, but are not limited to: the receipt of applicable regulatory approvals and requested rate decisions; the absence of a material increase in the costs of compliance with environmental laws following the completion of the Kentucky Power Transaction; the absence of material adverse regulatory decisions being received and the expectation of regulatory stability; the absence of any material equipment breakdown or failure; availability of financing (including tax equity financing and self-monetization transactions for U.S. federal tax credits) on commercially reasonable terms and the stability of credit ratings of the Corporation and its subsidiaries; the absence of unexpected material liabilities or uninsured losses; the continued availability of commodity supplies and stability of commodity prices; the absence of interest rate increases or significant currency exchange rate fluctuations; the absence of significant operational, financial or supply chain disruptions or liability; including relating to import controls and tariffs; the continued ability to maintain systems and facilities to ensure their continued performance; the absence of a severe and prolonged downturn in general economic, credit, social or market conditions; the successful and timely development and construction of new projects; the closing of pending acquisitions substantially in accordance with the expected timing for such acquisitions; the absence of capital project or financing cost overruns; sufficient liquidity and capital resources; the continuation of long term weather patterns and trends; the absence of significant counterparty defaults; the continued competitiveness of electricity pricing when compared with alternative sources of energy; the realization of the anticipated benefits of the Corporation’s acquisitions and joint ventures; the absence of a change in applicable laws, political conditions, public policies and directions by governments, materially negatively affecting the Corporation; the ability to obtain and maintain licenses and permits; maintenance of adequate insurance coverage; the absence of material fluctuations in market energy prices; the absence of material disputes with taxation authorities or changes to applicable tax laws; continued maintenance of information technology infrastructure and the absence of a material breach of cybersecurity; the successful implementation of new information technology systems and infrastructure; favourable relations with external stakeholders; favourable labour relations; the realization of the anticipated benefits of the Kentucky Power Transaction, including that it will be accretive to the Corporation’s Adjusted Net Earnings per common share; that the Corporation will be able to successfully integrate newly acquired entities, and the absence of any material adverse changes to such entities prior to closing; the successful transfer of operational control over the Mitchell Plant to Wheeling Power Company; the Mitchell Plant being transferred or retired in accordance with the Corporation’s expectations; the absence of undisclosed liabilities of entities being acquired; that such entities will maintain constructive regulatory relationships with state regulatory authorities; the ability of the Corporation to retain key personnel of acquired entities and the value of such employees; no
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 2 | ||||
adverse developments in the business and affairs of the sellers during the period when transitional services are provided to the Corporation in connection with any acquisition; the ability of the Corporation to satisfy its liabilities and meet its debt service obligations following completion of any acquisition; the absence of any reputational harm to the Corporation as a result of any acquisition; and the ability of the Corporation to successfully execute future “greening the fleet” initiatives. Given the evolving circumstances surrounding the COVID-19 pandemic and related response from governments, regulatory authorities, businesses, suppliers and customers, there is more uncertainty associated with the Corporation’s assumptions and expectations as compared to periods prior to the onset of COVID-19.
The forward-looking information contained herein is subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. Factors which could cause results or events to differ materially from current expectations include, but are not limited to: changes in general economic, credit, social or market conditions; changes in customer energy usage patterns and energy demand; global climate change; the incurrence of environmental liabilities; natural disasters, diseases, pandemics and other force majeure events; critical equipment breakdown or failure; supply chain disruptions; the imposition of import controls or tariffs; the failure of information technology infrastructure to protect against data, privacy and cybersecurity breaches; failure to successfully implement, and cost overruns and delays in connection with, new information technology systems and infrastructure; physical security breach; the loss of key personnel and/or labour disruptions; seasonal fluctuations and variability in weather conditions and natural resource availability; reductions in demand for electricity, gas and water due to developments in technology; reliance on transmission systems owned and operated by third parties; issues arising with respect to land use rights and access to the Corporation’s facilities; terrorist attacks; fluctuations in commodity prices; capital expenditures; reliance on subsidiaries; the incurrence of an uninsured loss; a credit rating downgrade; an increase in financing costs or limits on access to credit and capital markets; significant inflation; increases and fluctuations in interest rates and failure to manage exposure to credit and financial instrument risk;; currency exchange rate fluctuations; restricted financial flexibility due to covenants in existing credit agreements; an inability to refinance maturing debt on favourable terms; disputes with taxation authorities or changes to applicable tax laws; failure to identify, acquire, develop or timely place in service projects to maximize the value of tax credits; requirement for greater than expected contributions to post-employment benefit plans; default by a counterparty; inaccurate assumptions, judgments and/or estimates with respect to asset retirement obligations; failure to maintain required regulatory authorizations; changes in, or failure to comply with, applicable laws and regulations; failure of compliance programs; failure to identify attractive acquisition or development candidates necessary to pursue the Corporation’s growth strategy; failure to dispose of assets (at all or at a competitive price) to fund the Company’s operations and growth plans; delays and cost overruns in the design and construction of projects, including as a result of COVID-19; loss of key customers; failure to complete or realize the anticipated benefits of acquisitions or joint ventures; Atlantica (as defined herein) or a third party joint venture partner acting in a manner contrary to the Corporation’s interests; a drop in the market value of Atlantica's ordinary shares; facilities being condemned or otherwise taken by governmental entities; increased external-stakeholder activism adverse to the Corporation’s interests; fluctuations in the price and liquidity of the Corporation’s common shares and the Corporation's other securities; the severity and duration of the COVID-19 pandemic, including the potential resurgence of COVID-19 and/or new strains of COVID-19, and collateral consequences thereof, including the disruption of economic activity, volatility in capital and credit markets and legislative and regulatory responses; impact of significant demands placed on the Corporation as a result of pending acquisitions or growth strategies; potential undisclosed liabilities of any entities being acquired by the Corporation; uncertainty regarding the length of time required to complete pending acquisitions; the failure to implement the Corporation’s strategic objectives or achieve expected benefits relating to acquisitions; Kentucky Power’s failure to receive regulatory approval for the construction of new renewable generation facilities; indebtedness of any entity being acquired by the Corporation; reputational harm and increased costs of compliance with environmental laws as a result of announced or completed acquisitions; unanticipated expenses and/or cash payments as a result of change of control and/or termination for convenience provisions in agreements to which any entity being acquired is a party; and the reliance on third parties for certain transitional services following the completion of an acquisition. Although the Corporation has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking information, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. Some of these and other factors are discussed in more detail under the heading Enterprise Risk Management in this MD&A and under the heading Enterprise Risk Factors, in the Corporation’s MD&A for the three and twelve months ended December 31, 2021 (the “Annual MD&A”) and in the Corporation's most recent AIF.
Forward-looking information contained herein (including any financial outlook) is provided for the purposes of assisting the reader in understanding the Corporation and its business, operations, risks, financial performance, financial position and cash flows as at and for the periods indicated and to present information about management’s current expectations and plans relating to the future and the reader is cautioned that such information may not be appropriate for other purposes. Forward-looking information contained herein is made as of the date of this document and based on the plans, beliefs, estimates, projections, expectations, opinions and assumptions of management on the date hereof. There can be no assurance that forward-looking information will prove to be accurate, as actual results and future events could differ
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | |||||
materially from those anticipated in such forward-looking information. Accordingly, readers should not place undue reliance on forward-looking information. While subsequent events and developments may cause the Corporation’s views to change, the Corporation disclaims any obligation to update any forward-looking information or to explain any material difference between subsequent actual events and such forward-looking information, except to the extent required by applicable law. All forward-looking information contained herein is qualified by these cautionary statements.
Caution Concerning Non-GAAP Measures
AQN uses a number of financial measures to assess the performance of its business lines. Some measures are calculated in accordance with U.S. GAAP, while other measures do not have a standardized meaning under U.S. GAAP. These non-GAAP measures include non-GAAP financial measures and non-GAAP ratios, each as defined in Canadian National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure. AQN’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.
The terms “Adjusted Net Earnings”, “Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization” (“Adjusted EBITDA”), “Adjusted Funds from Operations”, "Net Energy Sales", "Net Utility Sales" and "Divisional Operating Profit", which are used throughout this MD&A, are non-GAAP financial measures. An explanation of each of these non-GAAP financial measures is set out below and a reconciliation to the most directly comparable U.S. GAAP measure, in each case, can be found in this MD&A. In addition, “Adjusted Net Earnings” is presented throughout this MD&A on a per common share basis. Adjusted Net Earnings per common share is a non-GAAP ratio and is calculated by dividing Adjusted Net Earnings by the weighted average number of common shares outstanding during the applicable period.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure used by many investors to compare companies on the basis of ability to generate cash from operations. AQN uses these calculations to monitor the amount of cash generated by AQN. AQN uses Adjusted EBITDA to assess the operating performance of AQN without the effects of (as applicable): depreciation and amortization expense, income tax expense or recoveries, acquisition and transition costs, certain litigation expenses, interest expense, gain or loss on derivative financial instruments, write down of intangibles and property, plant and equipment, earnings attributable to non-controlling interests, non-service pension and post-employment costs, cost related to tax equity financing, costs related to management succession and executive retirement, costs related to prior period adjustments due to changes in tax law, costs related to condemnation proceedings, financial impacts on the Company's Senate Wind Facility from the significantly elevated pricing that persisted in the Electric Reliability Council of Texas market over several days (the "Market Disruption Event") as a result of the February 2021 extreme winter storm conditions experienced in Texas and parts of the central U.S. (the “Midwest Extreme Weather Event”), gain or loss on foreign exchange, earnings or loss from discontinued operations, changes in value of investments carried at fair value, and other typically non-recurring or unusual items. AQN adjusts for these factors as they may be non-cash, unusual in nature and are not factors used by management for evaluating the operating performance of the Company. AQN believes that presentation of this measure will enhance an investor’s understanding of AQN’s operating performance. Adjusted EBITDA is not intended to be representative of cash provided by operating activities or results of operations determined in accordance with U.S. GAAP, and can be impacted positively or negatively by these items. For a reconciliation of Adjusted EBITDA to net earnings, see Non-GAAP Financial Measures starting on page 36 of this MD&A.
Adjusted Net Earnings
Adjusted Net Earnings is a non-GAAP financial measure used by many investors to compare net earnings from operations without the effects of certain volatile primarily non-cash items that generally have no current economic impact or items such as acquisition expenses or certain litigation expenses that are viewed as not directly related to a company’s operating performance. AQN uses Adjusted Net Earnings to assess its performance without the effects of (as applicable): gains or losses on foreign exchange, foreign exchange forward contracts, interest rate swaps, acquisition and transition costs, one-time costs of arranging tax equity financing, certain litigation expenses and write down of intangibles and property, plant and equipment, earnings or loss from discontinued operations (excluding sale of assets in the course of normal operations), unrealized mark-to-market revaluation impacts (other than those realized in connection with the sales of development assets), costs related to management succession and executive retirement, costs related to prior period adjustments due to changes in tax law, costs related to condemnation proceedings, financial impacts from the Market Disruption Event on the Company's Senate Wind Facility, changes in value of investments carried at fair value, and other typically non-recurring or unusual items as these are not reflective of the performance of the underlying business of AQN. AQN believes that analysis and presentation of net earnings or loss on this basis will enhance an investor’s understanding of the operating performance of its businesses. Adjusted Net Earnings is not intended to be representative of net earnings or loss determined in accordance with U.S. GAAP, and can be impacted positively or negatively by these items. For a reconciliation of Adjusted Net Earnings to net earnings, see Non-GAAP Financial Measures starting on page 37 of this MD&A.
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Adjusted Funds from Operations
Adjusted Funds from Operations is a non-GAAP financial measure used by investors to compare cash provided by operating activities without the effects of certain volatile items that generally have no current economic impact or items such as acquisition expenses that are viewed as not directly related to a company’s operating performance. AQN uses Adjusted Funds from Operations to assess its performance without the effects of (as applicable): changes in working capital balances, acquisition and transition costs, certain litigation expenses, cash provided by or used in discontinued operations, financial impacts from the Market Disruption Event on the Company's Senate Wind Facility, and other typically non-recurring items affecting cash from operations as these are not reflective of the long-term performance of the underlying businesses of AQN. AQN believes that analysis and presentation of funds from operations on this basis will enhance an investor’s understanding of the operating performance of its businesses. Adjusted Funds from Operations is not intended to be representative of cash provided by operating activities as determined in accordance with U.S. GAAP, and can be impacted positively or negatively by these items. For a reconciliation of Adjusted Funds from Operations to cash provided by operating activities, see Non-GAAP Financial Measures starting on page 38 of this MD&A.
Net Energy Sales
Net Energy Sales is a non-GAAP financial measure used by investors to identify revenue after commodity costs used to generate revenue where such revenue generally increases or decreases in response to increases or decreases in the cost of the commodity used to produce that revenue. AQN uses Net Energy Sales to assess its revenues without the effects of fluctuating commodity costs as such costs are predominantly passed through either directly or indirectly in the rates that are charged to customers. AQN believes that analysis and presentation of Net Energy Sales on this basis will enhance an investor’s understanding of the revenue generation of the Renewable Energy Group. It is not intended to be representative of revenue as determined in accordance with U.S. GAAP. For a reconciliation of Net Energy Sales to revenue, see Renewable Energy Group - 2022 Third Quarter and Year-to-Date Renewable Energy Group Operating Results on page 29 of this MD&A.
Net Utility Sales
Net Utility Sales is a non-GAAP financial measure used by investors to identify utility revenue after commodity costs, either natural gas or electricity, where these commodity costs are generally included as a pass through in rates to its utility customers. AQN uses Net Utility Sales to assess its utility revenues without the effects of fluctuating commodity costs as such costs are predominantly passed through and paid for by utility customers. AQN believes that analysis and presentation of Net Utility Sales on this basis will enhance an investor’s understanding of the revenue generation of the Regulated Services Group. It is not intended to be representative of revenue as determined in accordance with U.S. GAAP. For a reconciliation of Net Utility Sales to revenue, see Regulated Services Group - 2022 Third Quarter and Year-to-Date Regulated Services Group Operating Results on page 20 of this MD&A.
Divisional Operating Profit
Divisional Operating Profit is a non-GAAP financial measure. AQN uses Divisional Operating Profit to assess the operating performance of its business groups without the effects of (as applicable): depreciation and amortization expense, corporate administrative expenses, income tax expense or recoveries, acquisition costs, certain litigation expenses, interest expense, gain or loss on derivative financial instruments, write down of intangibles and property, plant and equipment, gain or loss on foreign exchange, earnings or loss from discontinued operations (excluding the sale of assets in the course of normal operations), non-service pension and post-employment costs, financial impacts from the Market Disruption Event on the Company's Senate Wind Facility, and other typically non-recurring or unusual items. AQN adjusts for these factors as they may be non-cash, unusual in nature and are not factors used by management for evaluating the operating performance of the divisional units. Divisional Operating Profit is calculated inclusive of interest, dividend and equity income earned from indirect investments, and Hypothetical Liquidation at Book Value (“HLBV”) income, which represents the value of net tax attributes earned in the period from electricity generated by certain of its U.S. wind power and U.S. solar generation facilities. AQN believes that presentation of this measure will enhance an investor’s understanding of AQN’s divisional operating performance. Divisional Operating Profit is not intended to be representative of cash provided by operating activities or results of operations determined in accordance with U.S. GAAP, and can be impacted positively or negatively by these items. For a reconciliation of Divisional Operating Profit to revenue for AQN's main business units, see Regulated Services Group - 2022 Third Quarter and Year-to-Date Regulated Services Group Operating Results on page 20 and Renewable Energy Group - 2022 Third Quarter and Year-to-Date Renewable Energy Group Operating Results on page 29 of this MD&A.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 5 | ||||
Overview and Business Strategy
AQN is incorporated under the Canada Business Corporations Act. AQN owns and operates a diversified portfolio of regulated and non-regulated generation, distribution, and transmission assets which are expected to deliver predictable earnings and cash flows. AQN seeks to maximize total shareholder value through new investments in renewable power generating facilities, regulated utilities and other complementary infrastructure projects, supported by the Company's focus on operational excellence and sustainability. Through these activities, the Company aims to drive real per share growth in earnings and cash flows to support a growing dividend and share price appreciation. AQN strives to achieve these results while also seeking to maintain a business risk profile consistent with its BBB flat investment grade credit ratings and a strong focus on Environmental, Social and Governance factors.
AQN’s current quarterly dividend to shareholders is $0.1808 per common share or $0.7233 per common share per annum. AQN believes, on a long-term basis, its targeted annual dividend payout allows for both a return on investment for shareholders and retention of cash within AQN to partially fund growth opportunities. Changes in the level of dividends paid by AQN are at the discretion of AQN’s Board of Directors (the “Board”), with dividend levels being reviewed periodically by the Board in the context of AQN’s financial performance and growth prospects.
AQN’s operations are organized across two primary business units consisting of: the Regulated Services Group, which primarily owns and operates a portfolio of regulated assets in the United States, Canada, Bermuda and Chile; and the Renewable Energy Group, which primarily operates a diversified portfolio of owned renewable generation assets.
AQN pursues investment opportunities with an objective of maintaining the current business mix between its Regulated Services Group and Renewable Energy Group and with leverage consistent with its current credit ratings.1 The business mix target may from time to time require AQN to grow its Regulated Services Group or implement other strategies in order to pursue investment opportunities within its Renewable Energy Group.
The Company also undertakes business development activities for both business units, working with a global reach to identify, develop, acquire, invest in, or divest of renewable power generating facilities, regulated utilities and other complementary infrastructure projects. See additional discussion in Corporate Development Activities.
Summary Structure of the Business
The following chart depicts, in summary form, AQN’s key businesses. A more detailed description of AQN’s organizational structure can be found in the most recent AIF.
1 See Treasury Risk Management -Downgrade in the Company's Credit Rating Risk in the Annual MD&A.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 6 | ||||
Regulated Services Group
The Regulated Services Group operates a diversified portfolio of regulated utility systems located in the United States, Canada, Bermuda and Chile serving approximately 1,238,000 customer connections as at September 30, 2022 (using an average of 2.5 customers per connection, this translates into approximately 3,095,000 customers). The Regulated Services Group seeks to provide safe, high quality, and reliable services to its customers and to deliver stable and predictable earnings to AQN. In addition to encouraging and supporting organic growth within its service territories, the Regulated Services Group seeks to deliver growth through accretive acquisitions of additional utility systems.
The Regulated Services Group's regulated electrical distribution utility systems and related generation assets are located in the U.S. States of California, New Hampshire, Missouri, Kansas, Oklahoma, and Arkansas, as well as in Bermuda, which together served approximately 309,000 electric customer connections as at September 30, 2022. The group also owns and operates generating assets with a gross capacity of approximately 2.0 GW and has investments in generating assets with approximately 0.3 GW of net generation capacity.
The Regulated Services Group's regulated natural gas distribution utility systems are located in the U.S. States of Georgia, Illinois, Iowa, Massachusetts, New Hampshire, Missouri, and New York, and in the Canadian Province of New Brunswick, which together served approximately 371,000 natural gas customer connections as at September 30, 2022.
The Regulated Services Group's regulated water distribution and wastewater collection utility systems are located in the U.S. States of Arizona, Arkansas, California, Illinois, Missouri, New York, and Texas as well as in Chile which together served approximately 558,000 customer connections as at September 30, 2022.
Below is a breakdown of the Regulated Services Group’s Revenue by geographic area for the nine months ended September 30, 2022.
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Renewable Energy Group
The Renewable Energy Group generates and sells electrical energy produced by its diverse portfolio of renewable power generation and clean power generation facilities primarily located across the United States and Canada. The Renewable Energy Group seeks to deliver growth through the development of new power generation projects and accretive acquisitions of additional power generation facilities, as well as the acquisition and development of other complementary projects, such as renewable natural gas and energy storage.
The Renewable Energy Group directly owns and operates hydroelectric, wind, solar, and thermal facilities with a combined gross generating capacity of approximately 2.5 GW. Approximately 82% of the electrical output is sold pursuant to long term contractual arrangements which as of September 30, 2022 had a production-weighted average remaining contract life of approximately 11 years.
In addition to directly owned and operated assets, the Renewable Energy Group has investments in generating assets with approximately 1.4 GW of net generating capacity which includes the Company’s approximately 42% interest in Atlantica Sustainable Infrastructure plc (“Atlantica”). Atlantica owns and operates a portfolio of international clean energy and water infrastructure assets under long term contracts with a Cash Available for Distribution (CAFD) weighted average remaining contract life of approximately 15 years as of September 30, 2022.
Below is a breakdown of the Renewable Energy Group’s generating capacity by geographic area as of September 30, 2022, which was comprised of gross generating capacity of facilities owned and operated and net generating capacity of investments including the Company’s approximately 42% interest in Atlantica.
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Significant Updates
Operating Results
AQN operating results relative to the same period last year are as follows:
| (all dollar amounts in $ millions except per share information) | Three months ended September 30 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net earnings (loss) attributable to shareholders | $(195.2) | $(27.9) | (600)% | ||||||||||||||||||||||||||||||||||||||||||||||||||
Adjusted Net Earnings1 | $73.5 | $97.6 | (25)% | ||||||||||||||||||||||||||||||||||||||||||||||||||
Adjusted EBITDA1 | $276.1 | $252.0 | 10% | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net earnings (loss) per common share | $(0.29) | $(0.05) | (480)% | ||||||||||||||||||||||||||||||||||||||||||||||||||
Adjusted Net Earnings per common share1 | $0.11 | $0.15 | (27)% | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 1 | See Caution Concerning Non-GAAP Measures. | ||||
Declaration of 2022 Fourth Quarter Dividend of $0.1808 (C$0.2438) per Common Share
AQN currently targets annual growth in dividends payable to shareholders underpinned by increases in earnings and cash flow.
The Board has declared a fourth quarter 2022 dividend of $0.1808 per common share payable on January 13, 2023 to shareholders of record on December 30, 2022.
The Canadian dollar equivalent for the fourth quarter 2022 dividend is C$0.2438 per common share.
The previous four quarter U.S. and Canadian dollar equivalent dividends per common share have been as follows:
| Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | Total | |||||||||||||
| U.S. dollar dividend | $ | 0.1706 | $ | 0.1808 | $ | 0.1808 | $ | 0.1808 | $0.7130 | ||||||||
| Canadian dollar equivalent | $ | 0.2161 | $ | 0.2345 | $ | 0.2312 | $ | 0.2438 | $0.9256 | ||||||||
Pending Acquisition of Kentucky Power Company and AEP Kentucky Transmission Company, Inc.
On October 26, 2021, Liberty Utilities Co. (“Liberty Utilities”), an indirect subsidiary of AQN, entered into an agreement with American Electric Power Company, Inc. ("AEP") and AEP Transmission Company, LLC ("AEP Transmission") to acquire Kentucky Power Company (“Kentucky Power”) and AEP Kentucky Transmission Company, Inc. (“Kentucky TransCo”) for a total purchase price of approximately $2.846 billion, including the assumption of approximately $1.221 billion in debt (the “Kentucky Power Transaction”). On September 29, 2022, the parties entered into an amendment to the acquisition agreement that, among other things, reduces the purchase price by $200 million to approximately $2.646 billion, including the assumption of approximately $1.221 billion in debt.
Kentucky Power is a state rate-regulated electricity generation, distribution and transmission utility serving approximately 228,000 active customer connections in 20 eastern Kentucky counties and operating under a cost of service framework. Kentucky TransCo is an electricity transmission business operating in the Kentucky portion of the transmission infrastructure that is part of the Pennsylvania – New Jersey – Maryland regional transmission organization, PJM Interconnection, L.L.C. Kentucky Power and Kentucky TransCo are both regulated by the U.S. Federal Energy Regulatory Commission (“FERC”).
Closing of the Kentucky Power Transaction remains subject to the satisfaction or waiver of certain conditions precedent, which include the approval of the Kentucky Power Transaction by FERC. The Kentucky Power Transaction is expected to close in January 2023, rather than in the second half of 2022 as previously disclosed.
Inaugural Asset Recycling Transaction
On October 3, 2022, the Company announced that it had entered into an agreement to sell ownership interests in a portfolio of operating wind facilities in the United States and Canada to InfraRed Capital Partners, an international infrastructure investment manager that is part of SLC Management, the institutional alternatives and traditional asset management business of Sun Life Financial Inc. (the "Disposition Transaction"). The Disposition Transaction consists of the sale of a (1) 49% ownership interest in three operating wind facilities in the United States totaling 551 MW of installed capacity: the Odell Wind Facility in Minnesota, the Deerfield Wind Facility in Michigan, and the Sugar Creek Wind Facility in Illinois; and (2) an 80% ownership interest in the 175 MW Blue Hill Wind Facility in Saskatchewan. The Company will continue to oversee day-to-day operations and provide management services to the facilities. Total cash proceeds to AQN from the Disposition Transaction are expected to be approximately $277.5 million for the U.S. facilities and approximately
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 9 | ||||
C$107.3 million for the Blue Hill Wind Facility, subject to customary closing adjustments. Closing of the Disposition Transaction is subject to receipt of certain regulatory approvals and other customary closing conditions and is expected to occur in the fourth quarter of 2022.
Outlook
The following discussion should be read in conjunction with the Caution Concerning Forward-Looking Statements and Forward-Looking Information section in this MD&A. Actual results may differ materially from the estimates below. Accordingly, investors are cautioned not to place undue reliance on these estimates.
Updated 2022 Adjusted Net Earnings Per Common Share Estimate
In light of challenging macroeconomic conditions (including higher interest rates and inflation), delays in the construction and completion of certain of the Company’s renewable energy projects, and anticipated delays in connection with certain rate decisions, among other factors, the Company is updating its previously-disclosed Adjusted Net Earnings per common share estimate for the 2022 fiscal year from a range of $0.72-$0.77 to a range of $0.66-$0.69 (see Caution Concerning Non-GAAP Measures).
The Company’s updated 2022 Adjusted Net Earnings per common share estimate is based on the following key assumptions, as well as those set out under Caution Concerning Forward-Looking Statements and Forward-Looking Information:
•normalized weather patterns in the geographical areas in which the Company operates or has projects;
•renewable energy production and realized pricing consistent with long-term averages;
•capital projects, including renewable energy generation projects, being completed on time and substantially in line with budgeted costs and
•the absence of significant changes in the macroeconomic environment, including interest rate and inflation increases above expectations.
Update on Longer-Term Targets
Given the challenging macroeconomic environment, which is expected to continue into 2023, the Company is evaluating its longer-term targets and financial expectations. The Company intends to provide further details at its upcoming Investor and Analyst Day, expected to be held in early 2023.
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2022 Third Quarter Results From Operations
Key Financial Information | Three months ended September 30 | ||||||||||
| (all dollar amounts in $ millions except per share information) | 2022 | 2021 | |||||||||
| Revenue | $ | 666.7 | $ | 528.6 | |||||||
| Net earnings (loss) attributable to shareholders | (195.2) | (27.9) | |||||||||
| Cash provided by operating activities | 102.9 | 174.7 | |||||||||
Adjusted Net Earnings1 | 73.5 | 97.6 | |||||||||
Adjusted EBITDA1 | 276.1 | 252.0 | |||||||||
Adjusted Funds from Operations1 | 205.5 | 170.2 | |||||||||
| Dividends declared to common shareholders | 123.7 | 107.2 | |||||||||
| Weighted average number of common shares outstanding | 678,623,606 | 621,405,413 | |||||||||
| Per share | |||||||||||
| Basic net earnings (loss) | $ | (0.29) | $ | (0.05) | |||||||
| Diluted net earnings (loss) | $ | (0.29) | $ | (0.05) | |||||||
Adjusted Net Earnings1 | $ | 0.11 | $ | 0.15 | |||||||
| Dividends declared to common shareholders | $ | 0.18 | $ | 0.17 | |||||||
| 1 | See Caution Concerning Non-GAAP Measures. | ||||
For the three months ended September 30, 2022, AQN reported a basic net loss per common share of $0.29 as compared to a loss of $0.05 per common share during the same period in 2021, a decrease of $0.24. This loss was primarily driven by the change in value of investments carried at fair value of $161.3 million as well as the additional items discussed in the next paragraph.
For the three months ended September 30, 2022, AQN reported Adjusted Net Earnings per common share of $0.11 as compared to $0.15 per common share during the same period in 2021, a decrease of $0.04. Adjusted Net Earnings decreased by $24.1 million year over year. The Company grew year over year Adjusted EBITDA by $24.1 million, primarily from the Regulated Services Group (see Caution Concerning Non-GAAP Measures). This growth was offset by increased depreciation of $11.6 million, increased interest to support growth of $23.3 million, in part driven by higher interest rates, lower recognition of investment tax credits (“ITCs”) and production tax credits (“PTCs”) of $17.1 million, and an increase in the weighted average number of common shares outstanding.
For the three months ended September 30, 2022, AQN experienced an average exchange rate of Canadian to U.S. dollars of approximately 0.7656 as compared to 0.7936 in the same period in 2021, and an average exchange rate of Chilean pesos to U.S. dollars of approximately 0.0011 for the three months ended September 30, 2022 as compared to 0.0013 for the same period in 2021. As such, any year over year variance in revenue or expenses, in local currency, at any of AQN’s Canadian and Chilean entities is affected by a change in the average exchange rate upon conversion to AQN’s reporting currency.
For the three months ended September 30, 2022, AQN reported total revenue of $666.7 million as compared to $528.6 million during the same period in 2021, an increase of $138.1 million or 26.1%. The major factors impacting AQN’s revenue in the three months ended September 30, 2022 as compared to the same period in 2021 are set out as follows:
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| (all dollar amounts in $ millions) | Three months ended September 30 | ||||
| Comparative Prior Period Revenue | $ | 528.6 | |||
| REGULATED SERVICES GROUP | |||||
| Existing Facilities | |||||
| Electricity: Increase is primarily due to higher pass through costs at the Empire, Granite State and Bermuda Electric Systems and favourable weather at the Empire Electric System. | 53.8 | ||||
Gas: Increase is primarily due to higher pass through commodity costs. | 17.2 | ||||
| Water: Increase is primarily due to the inflationary rate increase mechanism at the ESSAL Water System. | 3.4 | ||||
| Other: Decrease is primarily due to lower fiber optic project activity at Empire District Industries. | (0.4) | ||||
| 74.0 | |||||
| New Facilities | |||||
Water: Increase is primarily due to the acquisition of New York American Water Company, Inc. (subsequently renamed Liberty Utilities (New York Water) Corp. ("Liberty NY Water") in January 2022. | 44.0 | ||||
| 44.0 | |||||
| Rate Reviews | |||||
| Electricity: Increase is primarily due to implementation of new rates at the Empire, Bermuda and Granite State Electric Systems. | 12.6 | ||||
| Gas: Decrease is primarily due to one-time revenues in the third quarter of 2021 from a rate increase with recoupment at the EnergyNorth Gas System. | (0.5) | ||||
| 12.1 | |||||
| Foreign Exchange | (3.4) | ||||
| RENEWABLE ENERGY GROUP | |||||
| Existing Facilities | |||||
| Hydro: Increase is primarily due to higher overall production as well as favourable pricing at one of the Company’s hydro facilities. | 3.3 | ||||
| Wind Canada: Decrease is primarily due to lower production across all Canadian wind facilities. | (1.2) | ||||
| Wind U.S.: Decrease is primarily due to unfavourable renewable energy certificate ("REC") revenue. | (0.5) | ||||
| Solar: Increase is primarily due to higher market pricing at the Altavista and Great Bay II Solar Facilities and higher capacity revenue at the Great Bay I Solar Facility. | 1.3 | ||||
| Thermal: Increase is primarily due to favourable overall energy market pricing and favourable REC revenue at the Windsor Locks Thermal Facility. | 5.0 | ||||
| 7.9 | |||||
| New Facilities | |||||
| Solar: Increase is primarily due to Croton Solar Facility (full COD in December 2021). | 0.4 | ||||
| Other: Increase is primarily due to Congestion Revenue Rights ("CRRs") revenue at the Texas Coastal Wind Facilities (i.e., Stella, Cranell, East Raymond and West Raymond). | 4.1 | ||||
| 4.5 | |||||
| Foreign Exchange | (1) | ||||
| Current Period Revenue | $ | 666.7 | |||
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | |||||
2022 Year-to-Date Results From Operations
Key Financial Information | Nine months ended September 30 | ||||||||||||||||||||||
| (all dollar amounts in $ millions except per share information) | 2022 | 2021 | |||||||||||||||||||||
| Revenue | $ | 2,026.7 | $ | 1,690.6 | |||||||||||||||||||
| Net earnings (loss) attributable to shareholders | (137.6) | 89.2 | |||||||||||||||||||||
| Cash provided by operating activities | 404.5 | 31.0 | |||||||||||||||||||||
Adjusted Net Earnings1 | 324.5 | 312.7 | |||||||||||||||||||||
Adjusted EBITDA1 | 896.0 | 778.5 | |||||||||||||||||||||
Adjusted Funds from Operations1 | 606.1 | 535.8 | |||||||||||||||||||||
| Dividends declared to common shareholders | 361.9 | 307.6 | |||||||||||||||||||||
| Weighted average number of common shares outstanding | 676,035,613 | 611,772,460 | |||||||||||||||||||||
| Per share | |||||||||||||||||||||||
| Basic net earnings (loss) | $ | (0.21) | $ | 0.13 | |||||||||||||||||||
| Diluted net earnings (loss) | $ | (0.21) | $ | 0.13 | |||||||||||||||||||
Adjusted Net Earnings1 | $ | 0.47 | $ | 0.50 | |||||||||||||||||||
| Dividends declared to common shareholders | $ | 0.53 | $ | 0.50 | |||||||||||||||||||
| 1 | See Caution Concerning Non-GAAP Measures. | ||||
For the nine months ended September 30, 2022, AQN reported a basic net loss per common share of $0.21 as compared to net earnings per common share of $0.13 during the same period in 2021, a decrease of $0.34. This loss was primarily driven by the change in value of investments carried at fair value of $300.9 million as well as the additional items discussed in the next paragraph.
For the nine months ended September 30, 2022, AQN reported Adjusted Net Earnings per common share of $0.47 as compared to $0.50 per share during the same period in 2021, a decrease of $0.03. Adjusted Net Earnings increased by $11.8 million year over year. The Company grew year over year Adjusted EBITDA by $117.5 million, driven by growth in both the Regulated Services Group and the Renewable Energy Group (see Caution Concerning Non-GAAP Measures). This growth was offset by increased depreciation of $48.5 million, increased interest expense of $38.2 million, in part driven by higher interest rates, lower recognition of ITCs and PTCs of $21.6 million, and an increase in the weighted average number of common shares outstanding.
For the nine months ended September 30, 2022, AQN experienced an average exchange rate of Canadian to U.S. dollars of approximately 0.7794 as compared to 0.7990 in the same period in 2021, and an average exchange rate of Chilean pesos to U.S. dollars of approximately 0.0012 for the nine months ended September 30, 2022 as compared to 0.0014 for the same period in 2021. As such, any year-over-year variance in revenue or expenses, in local currency, at any of AQN’s Canadian and Chilean entities is affected by a change in the average exchange rate upon conversion to AQN’s reporting currency.
For the nine months ended September 30, 2022, AQN reported total revenue of $2,026.7 million as compared to $1,690.6 million during the same period in 2021, an increase of $336.1 million or 19.9%. The major factors resulting in the increase in AQN revenue for the nine months ended September 30, 2022 as compared to the same period in 2021 are as follows:
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 13 | ||||
| (all dollar amounts in $ millions) | Nine months ended September 30 | ||||
| Comparative Prior Period Revenue | $ | 1,690.6 | |||
| REGULATED SERVICES GROUP | |||||
| Existing Facilities | |||||
| Electricity: Increase is primarily due to higher pass through costs at the Bermuda and Granite State Electric Systems. | 11.9 | ||||
Gas: Increase is primarily due to higher pass through commodity costs. | 106.9 | ||||
| Water: Increase is primarily due to the inflationary rate increase mechanism at the ESSAL Water System and the tuck-in additions of the Bolivar and Beardsley Water Systems. | 11.9 | ||||
| Other: Increase is primarily due to an increase in projects at Ft. Benning. | 0.2 | ||||
| 130.9 | |||||
| New Facilities | |||||
Water: Acquisition of Liberty NY Water (January 2022). | 94.8 | ||||
| 94.8 | |||||
| Rate Reviews | |||||
| Electricity: Increase is primarily due to implementation of new rates at the Empire, Bermuda and Granite State Electric Systems. | 18.7 | ||||
| Gas: Increase is primarily due to implementation of new rates at the EnergyNorth and Peach State Gas Systems. | 4.0 | ||||
| Water: Increase is due to the implementation of new rates at the Park Water System. | 1.8 | ||||
| 24.5 | |||||
| Foreign Exchange | (9.4) | ||||
| RENEWABLE ENERGY GROUP | |||||
| Existing Facilities | |||||
| Hydro: Increase is primarily due to higher overall production as well as favourable pricing at one of the Company’s hydro facilities. | 6.0 | ||||
| Wind Canada: Increase is primarily due to higher production across all Canadian wind facilities. | 3.8 | ||||
| Wind U.S.: Increase is primarily due to the non-recurring impact of the market disruption event at the Senate Wind Facility in 2021, and higher production and favourable REC revenue across U.S. wind facilities. | 62.6 | ||||
| Solar: Increase is primarily due to higher overall energy market pricing across solar facilities, and higher REC revenue, and higher capacity revenue at the Great Bay I Solar Facility. | 3.8 | ||||
| Thermal: Increase is primarily due to favourable overall energy market pricing and favourable REC revenue at the Windsor Locks Thermal Facility. | 12.8 | ||||
| Other: Decrease is primarily due to non-recurring Operational Management Agreement fees received in the first quarter of 2021 prior to the Company's acquisition of the remaining 50% interest in the Maverick Creek Wind Facility. | (0.4) | ||||
| 88.6 | |||||
| New Facilities | |||||
| Wind U.S.: Decrease is driven by unfavourable pricing, partially offset by higher production at the Maverick Creek Wind Facility. This facility achieved partial completion on November 6, 2020 and COD on April 21, 2021. | (4.0) | ||||
| Solar: Increase is primarily due to the Altavista Solar Facility (full COD in June 2021) and Croton Solar Facility (full COD in December 2021). | 4.2 | ||||
| Other: Increase is primarily due to CRR revenue at the Texas Coastal Wind Facilities. | 8.5 | ||||
| 8.7 | |||||
| Foreign Exchange | (2.0) | ||||
| Current Period Revenue | $ | 2,026.7 | |||
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | |||||
2022 Third Quarter and Year-to-Date Net Earnings Summary
Net earnings (loss) attributable to shareholders for the three months ended September 30, 2022 totaled $(195.2) million as compared to $(27.9) million during the same period in 2021, a decrease of $167.3 million or 599.6%. Net earnings (loss) attributable to shareholders for the nine months ended September 30, 2022 totaled $(137.6) million as compared to $89.2 million during the same period in 2021, a decrease of $226.8 million or 254.3%. The following table outlines the changes to net earnings (loss) attributable to shareholders for the three and nine months ended September 30, 2022 as compared to the same periods in 2021. A more detailed analysis of these factors can be found under AQN: Corporate and Other Expenses.
| Change in Net Earnings (loss) attributable to shareholders | Three months ended | Nine months ended | |||||||||||||||
| September 30 | September 30 | ||||||||||||||||
| (all dollar amounts in $ millions) | 2022 | 2022 | |||||||||||||||
| Net earnings (loss) attributable to shareholders - Prior Period Balance | $ | (27.9) | $ | 89.2 | |||||||||||||
Adjusted EBITDA1 | 24.1 | 117.5 | |||||||||||||||
| Net earnings attributable to the non-controlling interest, exclusive of HLBV | (0.7) | 1.0 | |||||||||||||||
| Income tax | 0.1 | (12.3) | |||||||||||||||
| Interest expense | (23.3) | (38.2) | |||||||||||||||
| Other net losses | (5.0) | (8.2) | |||||||||||||||
| Pension and post-employment non-service costs | 2.4 | 5.0 | |||||||||||||||
| Change in value of investments carried at fair value | (161.3) | (300.9) | |||||||||||||||
| Impacts from the Market Disruption Event on the Senate Wind Facility | — | 53.4 | |||||||||||||||
| Costs related to tax equity financing | — | 4.3 | |||||||||||||||
| Loss on derivative financial instruments | 1.4 | (4.2) | |||||||||||||||
| Realized loss on energy derivative contracts | 0.3 | 0.6 | |||||||||||||||
| Foreign exchange | 6.3 | 3.7 | |||||||||||||||
| Depreciation and amortization | (11.6) | (48.5) | |||||||||||||||
| Net earnings (loss) attributable to shareholders - Current Period Balance | $ | (195.2) | $ | (137.6) | |||||||||||||
| Change in Net Earnings ($) | $ | (167.3) | $ | (226.8) | |||||||||||||
| Change in Net Earnings (%) | 599.6 | % | (254.3) | % | |||||||||||||
| 1 | See Caution Concerning Non-GAAP Measures. | ||||
During the three months ended September 30, 2022, cash provided by operating activities totaled $102.9 million as compared to $174.7 million during the same period in 2021, a decrease of $71.8 million. During the three months ended September 30, 2022, Adjusted Funds from Operations totaled $205.5 million as compared to Adjusted Funds from Operations of $170.2 million during the same period in 2021, an increase of $35.3 million (see Caution Concerning Non-GAAP Measures).
During the three months ended September 30, 2022, Adjusted EBITDA totaled $276.1 million as compared to $252.0 million during the same period in 2021, an increase of $24.1 million or 9.6% (see Caution Concerning Non-GAAP Measures). A more detailed analysis of this variance is presented within the reconciliation of Adjusted EBITDA to net earnings set out below under Non-GAAP Financial Measures.
During the nine months ended September 30, 2022, cash provided by operating activities totaled $404.5 million as compared to $31.0 million during the same period in 2021, an increase of $373.5 million. During the nine months ended September 30, 2022, Adjusted Funds from Operations totaled $606.1 million as compared to $535.8 million the same period in 2021, an increase of $70.3 million (see Caution Concerning Non-GAAP Measures).
During the nine months ended September 30, 2022, Adjusted EBITDA totaled $896.0 million as compared to $778.5 million during the same period in 2021, an increase of $117.5 million or 15.1% (see Caution Concerning Non-GAAP Measures). A more detailed analysis of this variance is presented within the reconciliation of Adjusted EBITDA to net earnings set out below under Non-GAAP Financial Measures.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 15 | ||||
2022 Third Quarter and Year-to-Date Adjusted EBITDA Summary
Adjusted EBITDA (see Caution Concerning Non-GAAP Measures) for the three months ended September 30, 2022 totaled $276.1 million as compared to $252.0 million during the same period in 2021, an increase of $24.1 million or 9.6%. Adjusted EBITDA for the nine months ended September 30, 2022 totaled $896.0 million as compared to $778.5 million during the same period in 2021, an increase of $117.5 million or 15.1%. The breakdown of Adjusted EBITDA by the Company's main business units and a summary of changes are shown below.
| Adjusted EBITDA by business units | Three months ended September 30 | Nine months ended September 30 | |||||||||||||||||||||
| (all dollar amounts in $ millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Divisional Operating Profit for Regulated Services Group1 | $ | 229.3 | $ | 195.7 | $ | 646.5 | $ | 567.6 | |||||||||||||||
Divisional Operating Profit for Renewable Energy Group1 | 71.5 | 72.5 | 315.0 | 264.7 | |||||||||||||||||||
| Administrative Expenses | (23.4) | (15.2) | (61.0) | (48.9) | |||||||||||||||||||
| Other Income & Expenses | (1.3) | (1.0) | (4.5) | (4.9) | |||||||||||||||||||
| Total AQN Adjusted EBITDA | $ | 276.1 | $ | 252.0 | $ | 896.0 | $ | 778.5 | |||||||||||||||
| Change in Adjusted EBITDA ($) | $ | 24.1 | $ | 117.5 | |||||||||||||||||||
| Change in Adjusted EBITDA (%) | 9.6 | % | 15.1 | % | |||||||||||||||||||
| 1 | See Caution Concerning Non-GAAP Measures. | ||||
| Change in Adjusted EBITDA | Three months ended September 30, 2022 | |||||||||||||
| (all dollar amounts in $ millions) | Regulated Services | Renewable Energy | Corporate | Total | ||||||||||
| Prior period balances | $ | 195.7 | $ | 72.5 | $ | (16.2) | $ | 252.0 | ||||||
| Existing Facilities and Investments | 0.5 | 3.5 | (0.3) | 3.7 | ||||||||||
| New Facilities and Investments | 22.5 | (4.0) | — | 18.5 | ||||||||||
| Rate Reviews | 12.1 | — | — | 12.1 | ||||||||||
| Foreign Exchange Impact | (1.5) | (0.5) | — | (2.0) | ||||||||||
| Administrative Expenses | — | — | (8.2) | (8.2) | ||||||||||
| Total change during the period | $ | 33.6 | $ | (1.0) | $ | (8.5) | $ | 24.1 | ||||||
| Current period balances | $ | 229.3 | $ | 71.5 | $ | (24.7) | $ | 276.1 | ||||||
| Change in Adjusted EBITDA | Nine months ended September 30, 2022 | |||||||||||||
| (all dollar amounts in $ millions) | Regulated Services | Renewable Energy | Corporate | Total | ||||||||||
| Prior period balances | $ | 567.6 | $ | 264.7 | $ | (53.8) | $ | 778.5 | ||||||
| Existing Facilities and Investments | 30.4 | 40.5 | 0.4 | 71.3 | ||||||||||
| New Facilities and Investments | 27.5 | 11.1 | — | 38.6 | ||||||||||
| Rate Reviews | 24.5 | — | — | 24.5 | ||||||||||
| Foreign Exchange Impact | (3.5) | (1.3) | — | (4.8) | ||||||||||
| Administrative Expenses | — | — | (12.1) | (12.1) | ||||||||||
| Total change during the period | $ | 78.9 | $ | 50.3 | $ | (11.7) | $ | 117.5 | ||||||
| Current period balances | $ | 646.5 | $ | 315.0 | $ | (65.5) | $ | 896.0 | ||||||
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 16 | ||||
REGULATED SERVICES GROUP
The Regulated Services Group operates rate-regulated utilities that as of September 30, 2022 provided distribution services to approximately 1,238,000 customer connections in the electric, natural gas, and water and wastewater sectors which is an increase of approximately 148,000 customer connections as compared to September 30, 2021, including the approximately 127,000 customers in the state of New York that were added effective January 1, 2022 with the acquisition of Liberty NY Water.
The Regulated Services Group seeks to grow its business organically and through business development activities while using prudent acquisition criteria. The Regulated Services Group believes that its business results are maximized by building constructive regulatory and customer relationships, and enhancing customer connections in the communities in which it operates.
| Utility System Type | As at September 30 | ||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (all dollar amounts in $ millions) | Assets | Net Utility Sales1 | Total Customer Connections2 | Assets | Net Utility Sales1 | Total Customer Connections2 | |||||||||||||||||
| Electricity | 4,889.6 | 609.8 | 309,000 | 4,618.1 | 539.4 | 307,000 | |||||||||||||||||
| Natural Gas | 1,649.0 | 249.6 | 371,000 | 1,518.4 | 239.9 | 371,000 | |||||||||||||||||
| Water and Wastewater | 1,422.3 | 265.7 | 558,000 | 836.1 | 166.5 | 412,000 | |||||||||||||||||
| Other | 374.6 | 41.9 | 265.8 | 40.1 | |||||||||||||||||||
| Total | $ | 8,335.5 | $ | 1,167.0 | 1,238,000 | $ | 7,238.4 | $ | 985.9 | 1,090,000 | |||||||||||||
| Accumulated Deferred Income Taxes Liability | $ | 670.7 | $ | 575.0 | |||||||||||||||||||
| 1 | Net Utility Sales for the nine months ended September 30, 2022 and 2021. See Caution Concerning Non-GAAP Measures. | ||||
| 2 | Total Customer Connections represents the sum of all active and vacant customer connections. | ||||
The Regulated Services Group aggregates the performance of its utility operations by utility system type – electricity, natural gas, and water and wastewater systems.
The electric distribution systems are comprised of regulated electrical distribution utility systems and served approximately 309,000 customer connections in the U.S. States of California, New Hampshire, Missouri, Kansas, Oklahoma and Arkansas and in Bermuda as at September 30, 2022.
The natural gas distribution systems are comprised of regulated natural gas distribution utility systems and served approximately 371,000 customer connections located in the U.S. States of New Hampshire, Illinois, Iowa, Missouri, Georgia, Massachusetts and New York and in the Canadian Province of New Brunswick as at September 30, 2022.
The water and wastewater distribution systems are comprised of regulated water distribution and wastewater collection utility systems and served approximately 558,000 customer connections located in the U.S. States of Arkansas, Arizona, California, Illinois, Missouri, New York, and Texas, and in Chile as at September 30, 2022.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 17 | ||||
2022 Third Quarter and Year-to-Date Usage Results
| Electric Distribution Systems | Three months ended September 30 | Nine months ended September 30 | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Average Active Electric Customer Connections For The Period | |||||||||||||||||||||||
| Residential | 261,800 | 261,200 | 261,800 | 261,200 | |||||||||||||||||||
| Commercial and industrial | 43,000 | 42,100 | 42,500 | 41,900 | |||||||||||||||||||
| Total Average Active Electric Customer Connections For The Period | 304,800 | 303,300 | 304,300 | 303,100 | |||||||||||||||||||
| Customer Usage (GW-hrs) | |||||||||||||||||||||||
| Residential | 804.8 | 771.8 | 2,246.3 | 2,188.0 | |||||||||||||||||||
| Commercial and industrial | 1,060.7 | 1,009.9 | 2,925.1 | 2,801.8 | |||||||||||||||||||
| Total Customer Usage (GW-hrs) | 1,865.5 | 1,781.7 | 5,171.4 | 4,989.8 | |||||||||||||||||||
For the three months ended September 30, 2022, the electric distribution systems' usage totaled 1,865.5 GW-hrs as compared to 1,781.7 GW-hrs for the same period in 2021, an increase of 83.8 GW-hrs or 4.7%. The increase in electricity consumption is primarily due to more favourable weather.
For the nine months ended September 30, 2022, the electric distribution systems' usage totaled 5,171.4 GW-hrs as compared to 4,989.8 GW-hrs for the same period in 2021, an increase of 181.6 GW-hrs or 3.6%. The increase in electricity consumption is primarily due to more favourable weather.
Approximately 47% of the Regulated Services Group's electric distribution systems' revenues are not expected to be impacted by changes in customer usage, as they are subject to volumetric decoupling or represent fixed fee billings.
| Natural Gas Distribution Systems | Three months ended September 30 | Nine months ended September 30 | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Average Active Natural Gas Customer Connections For The Period | |||||||||||||||||||||||
| Residential | 317,500 | 315,900 | 319,900 | 318,700 | |||||||||||||||||||
| Commercial and industrial | 38,100 | 37,700 | 38,700 | 37,900 | |||||||||||||||||||
| Total Average Active Natural Gas Customer Connections For The Period | 355,600 | 353,600 | 358,600 | 356,600 | |||||||||||||||||||
| Customer Usage (MMBTU) | |||||||||||||||||||||||
| Residential | 1,256,000 | 1,211,000 | 15,478,000 | 14,953,000 | |||||||||||||||||||
| Commercial and industrial | 2,350,000 | 2,057,000 | 14,884,000 | 13,619,000 | |||||||||||||||||||
| Total Customer Usage (MMBTU) | 3,606,000 | 3,268,000 | 30,362,000 | 28,572,000 | |||||||||||||||||||
For the three months ended September 30, 2022, usage at the natural gas distribution systems totaled 3,606,000 MMBTU as compared to 3,268,000 MMBTU during the same period in 2021, an increase of 338,000 MMBTU, or 10.3%. The increase in customer usage was primarily driven by customer growth in the New Brunswick Gas System and favourable weather in the Mid-States.
For the nine months ended September 30, 2022, usage at the natural gas distribution systems totaled 30,362,000 MMBTU as compared to 28,572,000 MMBTU during the same period in 2021, an increase of 1,790,000 MMBTU, or 6.3%. The increase in customer usage was primarily driven by favourable weather at the Mid-States, EnergyNorth and New Brunswick Gas Systems.
Approximately 86% of the Regulated Services Group's gas distribution systems' revenues are not expected to be impacted by changes in customer usage, as they are subject to volumetric decoupling or represent fixed fee billings.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 18 | ||||
| Water and Wastewater Distribution Systems | Three months ended September 30 | Nine months ended September 30 | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Average Active Customer Connections For The Period | |||||||||||||||||||||||
| Wastewater customer connections | 48,000 | 47,700 | 48,100 | 47,200 | |||||||||||||||||||
| Water distribution customer connections | 499,900 | 360,200 | 496,200 | 359,200 | |||||||||||||||||||
| Total Average Active Customer Connections For The Period | 547,900 | 407,900 | 544,300 | 406,400 | |||||||||||||||||||
| Gallons Provided (millions of gallons) | |||||||||||||||||||||||
| Wastewater treated | 817 | 701 | 2,443 | 2,041 | |||||||||||||||||||
| Water provided | 13,048 | 7,846 | 31,732 | 20,900 | |||||||||||||||||||
| Total Gallons Provided (millions of gallons) | 13,865 | 8,547 | 34,175 | 22,941 | |||||||||||||||||||
For the three months ended September 30, 2022, the water and wastewater distribution systems provided approximately 13,048 million gallons of water to customers and treated approximately 817 million gallons of wastewater. This is compared to 7,846 million gallons of water provided and 701 million gallons of wastewater treated during the same period in 2021, an increase in total gallons provided of 5,202 million or 66.3% and an increase in total gallons treated of 116 million or 16.5%. This is primarily due to the acquisition of Liberty NY Water.
For the nine months ended September 30, 2022, the water and wastewater distribution systems provided approximately 31,732 million gallons of water to customers and treated approximately 2,443 million gallons of wastewater. This is compared to 20,900 million gallons of water provided and 2,041 million gallons of wastewater treated during the same period in 2021, an increase in total gallons provided of 10,833 million or 51.8% and an increase in total gallons treated of 402 million or 19.7%. This is primarily due to the acquisition of Liberty NY Water.
Approximately 50% of the Regulated Services Group's water and wastewater distribution systems' revenues are not expected to be impacted by changes in customer usage, as they are subject to volumetric decoupling or represent fixed fee billings.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | |||||
2022 Third Quarter and Year-to-Date Regulated Services Group Operating Results
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| (all dollar amounts in $ millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Regulated electricity distribution | $ | 374.9 | $ | 308.1 | $ | 951.2 | $ | 922.1 | |||||||||||||||
| Less: Regulated electricity purchased | (138.0) | (94.4) | (341.4) | (382.7) | |||||||||||||||||||
Net Utility Sales - electricity1 | 236.9 | 213.7 | 609.8 | 539.4 | |||||||||||||||||||
| Regulated gas distribution | 79.6 | 62.6 | 465.0 | 353.9 | |||||||||||||||||||
| Less: Regulated gas purchased | (31.0) | (14.5) | (215.4) | (114.0) | |||||||||||||||||||
Net Utility Sales - natural gas1 | 48.6 | 48.1 | 249.6 | 239.9 | |||||||||||||||||||
| Regulated water reclamation and distribution | 107.1 | 64.0 | 275.4 | 176.6 | |||||||||||||||||||
| Less: Regulated water purchased | (3.5) | (3.9) | (9.7) | (10.1) | |||||||||||||||||||
Net Utility Sales - water reclamation and distribution1 | 103.6 | 60.1 | 265.7 | 166.5 | |||||||||||||||||||
Other revenue2 | 14.3 | 14.5 | 41.9 | 40.1 | |||||||||||||||||||
Net Utility Sales1,3 | 403.4 | 336.4 | 1,167.0 | 985.9 | |||||||||||||||||||
| Operating expenses | (189.8) | (150.9) | (553.5) | (448.8) | |||||||||||||||||||
| Other income | 6.9 | 4.5 | 16.7 | 14.9 | |||||||||||||||||||
HLBV4 | 8.8 | 5.7 | 16.3 | 15.6 | |||||||||||||||||||
Divisional Operating Profit1,5,6 | $ | 229.3 | $ | 195.7 | $ | 646.5 | $ | 567.6 | |||||||||||||||
| 1 | See Caution Concerning Non-GAAP Measures. | ||||
| 2 | See Note 18 in the unaudited interim consolidated financial statements. | ||||
| 3 | This table contains a reconciliation of Net Utility Sales to revenue. The relevant sections of the table are derived from and should be read in conjunction with the consolidated statement of operations and Note 18 in the unaudited interim consolidated financial statements, “Segmented Information”. This supplementary disclosure is intended to more fully explain disclosures related to Net Utility Sales and provides additional information related to the operating performance of the Regulated Services Group. Investors are cautioned that Net Utility Sales should not be construed as an alternative to revenue. | ||||
| 4 | HLBV income represents the value of net tax attributes monetized by the Regulated Services Group in the period at the Luning and Turquoise Solar Facilities and the Empire Wind Facilities (Neosho Ridge, Kings Point and North Fork Ridge). | ||||
| 5 | This table contains a reconciliation of Divisional Operating Profit to revenue for the Regulated Services Group. The relevant sections of the table are derived from and should be read in conjunction with the consolidated statement of operations and Note 18 in the unaudited interim consolidated financial statements, “Segmented Information”. This supplementary disclosure is intended to more fully explain disclosures related to Divisional Operating Profit and provides additional information related to the operating performance of the Regulated Services Group. Investors are cautioned that Divisional Operating Profit should not be construed as an alternative to revenue. | ||||
| 6 | Certain prior year items have been reclassified to conform with current year presentation. | ||||
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 20 | ||||
2022 Third Quarter Operating Results
For the three months ended September 30, 2022, the Regulated Services Group reported revenue of $561.6 million (i.e., $374.9 million of regulated electricity distribution, $79.6 million of regulated gas distribution and $107.1 million of regulated water reclamation and distribution) as compared to revenue of $434.7 million in the comparable period in the prior year (i.e., $308.1 million of regulated electricity distribution, $62.6 million of regulated gas distribution and $64.0 million of regulated water reclamation and distribution).
For the three months ended September 30, 2022, the Regulated Services Group reported a Divisional Operating Profit (excluding corporate administration expenses) of $229.3 million as compared to $195.7 million for the comparable period in the prior year (see Caution Concerning Non-GAAP Measures).
Highlights of the changes are summarized in the following table:
| (all dollar amounts in $ millions) | Three months ended September 30 | ||||
Prior Period Divisional Operating Profit1 | $ | 195.7 | |||
| Existing Facilities | |||||
| Electricity: Increase is primarily due to favourable weather at the Empire Electric System. | 1.1 | ||||
| Gas: Decrease is primarily due to higher operating expenses. | (3.6) | ||||
| Water: Increase is primarily due to the inflationary rate increase mechanism at the ESSAL Water System. | 1.6 | ||||
| Other: Increase is primarily due to increased carrying charges on regulatory assets and interest income. | 1.4 | ||||
| 0.5 | |||||
| New Facilities | |||||
Water: Acquisition of Liberty NY Water (January 2022). | 22.5 | ||||
| 22.5 | |||||
| Rate Reviews | |||||
Electricity: Increase is primarily due to implementation of new rates at the Empire, Bermuda and Granite State Electric Systems. | 12.6 | ||||
| Gas: Decrease is primarily due to one-time revenues in the third quarter of 2021 from a rate increase with recoupment at the EnergyNorth Gas System. | (0.5) | ||||
| 12.1 | |||||
| Foreign Exchange | (1.5) | ||||
Current Period Divisional Operating Profit1 | $ | 229.3 | |||
| 1 | See Caution Concerning Non-GAAP Measures. | ||||
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 21 | ||||
2022 Year-to-Date Operating Results
For the nine months ended September 30, 2022, the Regulated Services Group reported revenue of $1,691.5 million (i.e., $951.2 million of regulated electricity distribution, $465.0 million of regulated gas distribution and $275.4 million of regulated water reclamation and distribution) as compared to revenue of $1,452.6 million in the same period during the prior year (i.e., $922.1 million of regulated electricity distribution, $353.9 million of regulated gas distribution and $176.6 million of regulated water reclamation and distribution).
For the nine months ended September 30, 2022, the Regulated Services Group reported a Divisional Operating Profit (excluding corporate administration expenses) of $646.5 million as compared to $567.6 million in the same period during the prior year (see Caution Concerning Non-GAAP Measures).
Highlights of the changes are summarized in the following table:
| (all dollar amounts in $ millions) | Nine months ended September 30 | ||||
Prior Period Divisional Operating Profit1 | $ | 567.6 | |||
| Existing Facilities | |||||
| Electricity: Increase is primarily due to higher than usual non-pass through fuel cost increases associated with the Midwest Extreme Weather Event that were recorded in the comparative period at the Empire Electric System. | 29.9 | ||||
| Gas: Decrease is primarily due to higher operating expenses. | (1.5) | ||||
| Water: Increase is primarily due to the inflationary rate increase mechanism at the ESSAL Water System. | 2.5 | ||||
| Other: Decrease is primarily due to lower earnings from the San Antonio Water System investment due to a one time distribution catch-up recorded in the second quarter of 2021. | (0.5) | ||||
| 30.4 | |||||
| New Facilities | |||||
Water: Acquisition of Liberty NY Water (January 2022). | 27.5 | ||||
| 27.5 | |||||
| Rate Reviews | |||||
| Electricity: Increase is primarily due to implementation of new rates at the Empire, Bermuda and Granite State Electric Systems. | 18.7 | ||||
| Gas: Increase is primarily due to implementation of new rates at the EnergyNorth and Peach State Gas Systems. | 4.0 | ||||
| Water: Increase is primarily due to the implementation of new rates at the Park Water System. | 1.8 | ||||
| 24.5 | |||||
| Foreign Exchange | (3.5) | ||||
Current Period Divisional Operating Profit1 | $ | 646.5 | |||
| 1 | See Caution Concerning Non-GAAP Measures. | ||||
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 22 | ||||
Regulatory Proceedings
The following table summarizes the major regulatory proceedings currently underway or completed in 2022 within the Regulated Services Group.1
| Utility | Jurisdiction | Regulatory Proceeding Type | Rate Request (millions) | Current Status | ||||||||||
| Completed Rate Reviews | ||||||||||||||
| Empire Electric | Missouri | General Rate Case ("GRC") and Securitization | $79.9 | On May 28, 2021, filed a rate review based on a 12 month historical test year ending September 30, 2020, with an update period through June 30, 2021, seeking to recover an annual revenue deficiency of $50.0 million, or a 7.61% increase in total base rate operating revenue, based on a rate base of $2.6 billion, which includes the Empire Wind Facilities and the retirement of the Asbury generating plant, and $29.9 million in costs associated with the impact of the Midwest Extreme Weather Event. On March 9, 2022 the Missouri Public Service Commission (the "MPSC") approved four stipulation agreements resolving all issues, except rate design, and resulting in an annual base rate revenue increase of $35.5 million, as well as another $4 million in revenues associated with the Empire Wind Facilities. On April 6, 2022 the MPSC issued its Report and Order resolving all issues. Empire Electric filed updated tariffs in May 2022 for new rates to become effective in June 2022. On January 19, 2022, filed a petition for securitization of the costs associated with the impact of the Midwest Extreme Weather Event. On March 21, 2022, Empire Electric filed a petition for securitization of the costs associated with the retirement of the Asbury generating plant. On August 18, 2022, and September 22, 2022, the MPSC issued and amended, respectively, a Report and Order authorizing Empire Electric to securitize approximately $290.4 million in qualified extraordinary costs (Midwest Extreme Weather Event), energy transition costs (Asbury) and upfront financing costs associated with the proposed securitization. The amounts authorized by the securitization order are generally consistent with the costs deferred by the Company in relation to these matters. Empire Electric filed an appeal of the MPSC order on November 10, 2022. See – Regulatory Proceedings related to the Midwest Extreme Weather Event and the Retirement of Asbury for a more detailed description. | ||||||||||
| BELCO | Bermuda | GRC | $34.8 | On September 30, 2021, BELCO filed its revenue allowance application in which it requested a $34.8 million increase for 2022 and a $6.1 million increase for 2023. On March 18, 2022, the Regulatory Authority (“RA”) approved an annual increase of $22.8 million, for a revenue allowance of $224.1 million for 2022 and $226.2 million for 2023. The RA authorized a 7.16% rate of return, comprised of a 62% equity and an 8.92% return on equity (“ROE”). In April 2022, BELCO filed an appeal in the Supreme Court of Bermuda challenging the decisions made by the RA through the recent Retail Tariff Review. | ||||||||||
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 23 | ||||
| Utility | Jurisdiction | Regulatory Proceeding Type | Rate Request (millions) | Current Status | ||||||||||
| Empire Electric | Kansas | GRC | $4.5 | On May 27, 2021, submitted an abbreviated rate review seeking to recover costs associated with the addition of the Empire Wind Facilities, the retirement of Asbury and non-growth related plant investments since the 2019 rate review. In May 2022, the Commission approved the unanimous partial settlement resolving the rate treatment of the Asbury retirement and the non-wind investments, and resulting in a base rate decrease of $0.6 million. Withdrawal of the request to recover the Empire Wind Facilities through base rates results in an estimated benefit to Empire Electric of $3.9 million. New base rates became effective in July 2022. | ||||||||||
| Empire District Gas Company | Missouri | GRC | $1.4 | On August 23, 2021, filed an application requesting a revenue increase of $1.4 million based on an ROE of 10% and on a 52% equity capital structure. In January 2022, MPSC staff filed its testimony, recommending a $1.0 million revenue increase based on an ROE of 9.5%. On April 12, 2022 the Company, MPSC staff, consumer advocate group and industrial customer group filed a stipulation and agreement resolving most of the issues in the case. An evidentiary hearing was held in April 2022. In June 2022, the MPSC approved the stipulation and agreement providing for an annual increase of $1.0 million in base rate revenues. New rates became effective in August 2022. | ||||||||||
| Pending Rate Reviews | ||||||||||||||
| CalPeco Electric System | California | GRC | $35.7 | On May 28, 2021, filed an application requesting a revenue increase of $35.7 million for 2022 based on an ROE of 10.5% and on a 54% equity capital structure. CPUC Public Advocates Office issued its report on February 23, 2022 and CalPeco filed its rebuttal testimony in March 2022. In May 2022 a settlement was reached resolving all issues except ROE. A final decision is expected in the fourth quarter of 2022. | ||||||||||
| Apple Valley Ranchos Water System | California | GRC | $2.9 | On July 2, 2021, filed an application requesting revenue increases of $2.9 million for 2022, $2.1 million for 2023, and $2.3 million for 2024 based on an ROE of 9.4% and on a 57% equity capital structure. CPUC Public Advocates Office issued its report in January 2022. Rebuttal testimony was filed in February 2022. A hearing was held in March 2022 and a decision is expected in the fourth quarter of 2022. | ||||||||||
| Park Water System | California | GRC | $5.5 | On July 2, 2021, filed an application requesting revenue increases of $5.5 million for 2022, $1.8 million for 2023, and $1.8 million for 2024 based on an ROE of 9.4% and on a 57% equity capital structure. CPUC Public Advocates Office issued its report in January 2022. Rebuttal testimony was filed in February 2022. A hearing was held in March 2022 and a decision is expected the fourth quarter of 2022. | ||||||||||
| Empire Electric | Oklahoma | GRC | $4.1 | On February 28, 2022, filed an application seeking an increase of $4.1 million based on an ROE of 10% and a 52.79% equity capital structure. | ||||||||||
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | |||||
| Utility | Jurisdiction | Regulatory Proceeding Type | Rate Request (millions) | Current Status | ||||||||||
| New Brunswick Gas | Canada | GRC | -$3.9 | On November 22, 2021, filed its 2022 general rate application for a revenue decrease based on the Energy & Utilities Board's recent decision authorizing a capital structure of 45% equity and an ROE of 8.5%. In January 2022, New Brunswick Gas appealed the Energy & Utilities Board's cost of capital decision. In May 2022, the Energy & Utilities Board issued a partial decision approving a decrease in annual revenues of $1.23 million to become effective in July 2022. In June 2022, the Court of Appeal found in favor of New Brunswick Gas and remanded the cost of capital case back to the Energy & Utilities Board. A resolution is expected in late 2022 or early 2023. | ||||||||||
St. Lawrence Gas | New York | GRC | $4.1 | On November 24, 2021, filed an application requesting a revenue increase of $3.4 million based on an ROE of 10.5% and a capital structure of 50% equity. On January 31, 2022, filed a supplemental filing to update the requested revenue increase to $4.1 million. New York State Department of Public Service staff filed testimony on June 3, 2022 recommending an increase of $1.2 million in annual distribution revenues. St. Lawrence Gas filed rebuttal testimony on June 24, 2022 and updated request for an increase in distribution base revenues of $3.6 million. Settlement discussions began in July 2022 and a decision is expected in the fourth quarter of 2022. | ||||||||||
| Pine Bluff Water | Arkansas | GRC | $5.9 | On September 30, 2022, filed an application seeking an increase in revenues of $5.9 million based on an ROE of 10.5% and an equity ratio of 52% to be phased in over three years. | ||||||||||
| Various | Various | Various | $0.1 | Other pending rate review requests across two wastewater utilities. | ||||||||||
| 1 | All rate requests do not include step-up adjustments. | ||||
Regulatory Proceedings related to the Midwest Extreme Weather Event and the Retirement of Asbury
The Midwest Extreme Weather Event resulted in an extraordinary increase in costs incurred by Empire Electric for the purchase of fuel and power on behalf of its customers.
When Empire Electric filed its most recent Missouri rate case (the "Empire Rate Case") in May 2021, a request to recover the costs related to the Midwest Extreme Weather Event was included. In July 2021, Missouri House Bill 734 was signed into law, creating an option for utilities to finance the recovery of extraordinary weather event costs through securitization (the "Securitization Statute"). When it filed its surrebuttal testimony in January 2022, Empire Electric removed all costs related to the Midwest Extreme Weather Event from its rate request. Pursuant to the Securitization Statute, Empire Electric sought authorization for the issuance of approximately $222 million in securitized utility tariff bonds associated with the Midwest Extreme Weather Event.
In addition, as part of its 2017 and 2019 Integrated Resource Plans (“IRPs”), Empire Electric analyzed the effects of retiring Asbury, a coal-fired generation unit that was constructed in 1970 and determined that doing so would generate significant savings to customers. Asbury was retired on March 1, 2020. On July 23, 2020, the MPSC issued an Administrative Accounting Order ("AAO") that directed Empire Electric to establish regulatory asset and liability accounts, beginning January 1, 2020, to reflect the impact of the closure of Asbury on operating and capital expenses in Missouri.
Empire Electric initially sought to recover its Asbury related revenues and expenses, along with the balance of the AAO, in the Empire Rate Case. Following the passage of the Securitization Statute, all Asbury related balances were removed from the Empire Rate Case, and on March 21, 2022, Empire Electric filed a petition to securitize the Asbury related balances pursuant to the Securitization Statute. Empire Electric sought authority to issue approximately $141 million, in securitized utility tariff bonds for its Asbury costs, which include approximately $21 million in Asset Retirement Obligations, which are estimates of costs that Empire Electric will recover from the Asbury retirement but which have not yet been incurred.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | |||||
On April 27, 2022, the MPSC issued an order consolidating, for purposes of hearing, the cases regarding the quantum financeable through securitization for Asbury and the Midwest Extreme Weather Event, which hearing was held the week of June 13, 2022. On August 18, 2022, and September 22, 2022, the MPSC issued and amended, respectively, a Report and Order authorizing Empire Electric to securitize approximately $290.4 million in qualified extraordinary costs (Midwest Extreme Weather Event), energy transition costs (Asbury) and upfront financing costs associated with the proposed securitization. The amounts authorized by the securitization order are generally consistent with the costs deferred by the Company in relation to these matters. Empire Electric filed a request for rehearing seeking reconsideration of the MPSC’s denial of recovery of five percent of the Midwest Extreme Weather Event costs, its calculation of accumulated deferred income taxes, and the exclusion of certain carrying charges associated with the Asbury plant, among other issues. On October 12, 2022, the MPSC denied all rehearing motions. Empire Electric filed an appeal of the MPSC order on November 10, 2022.
Regulatory Proceedings related to Acquisitions:
Kentucky Power Transaction
Closing of the Kentucky Power Transaction is subject to receipt of certain regulatory and governmental approvals. During the first quarter of 2022, the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired and the Committee on Foreign Investment in the United States cleared the Kentucky Power Transaction. On May 4, 2022, the Kentucky Public Service Commission (the "KPSC") issued an order approving the Kentucky Power Transaction, subject to certain conditions set forth in the order, including those agreed to by Liberty Utilities in the course of the docket. On May 3, 2022, the KPSC issued an order that required certain changes to the proposed operating and ownership agreements (collectively, the “Mitchell Agreements”) relating to the Mitchell coal generating facility (in which Kentucky Power owns a 50% interest, representing 780 MW) (the “Mitchell Plant”). On July 1, 2022, the Public Service Commission of West Virginia (the “WVPSC”) issued an order on the Mitchell Agreements that is inconsistent with the KPSC’s order on the Mitchell Agreements. The closing of the Kentucky Power Transaction is subject to the satisfaction or waiver of certain conditions precedent, which include the approval of the Kentucky Power Transaction by FERC and those relating to the approval of the Mitchell Agreements by the KPSC, WVPSC and FERC. On September 29, 2022, Liberty Utilities, AEP and AEP Transmission entered into an amendment to the acquisition agreement that provides a path towards closing. Among other things, the amendment reduces the purchase price by $200 million. The Kentucky Power Transaction is expected to close in January 2023.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | |||||
RENEWABLE ENERGY GROUP
2022 Third Quarter and Year-to-Date Electricity Generation Performance | |||||||||||||||||||||||||||||||||||
| Long Term Average Resource | Three months ended September 30 | Long Term Average Resource | Nine months ended September 30 | ||||||||||||||||||||||||||||||||
| (Performance in GW-hrs sold) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||
| Hydro Facilities: | |||||||||||||||||||||||||||||||||||
| Maritime Region | 20.7 | 18.9 | 15.6 | 110.6 | 100.9 | 87.5 | |||||||||||||||||||||||||||||
| Quebec Region | 62.3 | 68.9 | 54.1 | 200.7 | 217.9 | 192.2 | |||||||||||||||||||||||||||||
| Ontario Region | 26.9 | 31.4 | 21.0 | 94.2 | 88.1 | 69.4 | |||||||||||||||||||||||||||||
| Western Region | 23.8 | 20.8 | 17.4 | 52.4 | 41.9 | 40.8 | |||||||||||||||||||||||||||||
| 133.7 | 140.0 | 108.1 | 457.9 | 448.8 | 389.9 | ||||||||||||||||||||||||||||||
| Canadian Wind Facilities: | |||||||||||||||||||||||||||||||||||
| St. Damase | 16.9 | 15.0 | 14.9 | 54.2 | 54.3 | 52.5 | |||||||||||||||||||||||||||||
| St. Leon | 87.9 | 81.6 | 88.2 | 308.8 | 309.6 | 295.0 | |||||||||||||||||||||||||||||
Red Lily1 | 20.4 | 16.2 | 19.5 | 64.4 | 65.5 | 64.9 | |||||||||||||||||||||||||||||
| Morse | 22.6 | 19.2 | 22.5 | 78.3 | 77.6 | 76.2 | |||||||||||||||||||||||||||||
| Amherst | 43.2 | 31.1 | 31.1 | 161.9 | 151.9 | 135.6 | |||||||||||||||||||||||||||||
Blue Hill2 | 134.4 | 111.8 | — | 357.9 | 324.0 | — | |||||||||||||||||||||||||||||
EBR3 | 15.6 | 13.9 | — | 53.4 | 49.9 | — | |||||||||||||||||||||||||||||
| 341.0 | 288.8 | 176.2 | 1,078.9 | 1,032.8 | 624.2 | ||||||||||||||||||||||||||||||
| U.S. Wind Facilities: | |||||||||||||||||||||||||||||||||||
| Sandy Ridge | 29.9 | 20.4 | 23.1 | 114.7 | 93.8 | 93.1 | |||||||||||||||||||||||||||||
| Minonk | 128.7 | 93.8 | 91.9 | 483.9 | 488.4 | 427.4 | |||||||||||||||||||||||||||||
| Senate | 91.7 | 83.8 | 88.9 | 380.4 | 375.8 | 336.4 | |||||||||||||||||||||||||||||
| Shady Oaks | 54.5 | 53.2 | 41.3 | 255.1 | 247.3 | 218.5 | |||||||||||||||||||||||||||||
| Odell | 155.1 | 144.2 | 128.5 | 593.8 | 618.4 | 505.6 | |||||||||||||||||||||||||||||
| Deerfield | 96.6 | 90.3 | 83.5 | 378.1 | 386.1 | 365.1 | |||||||||||||||||||||||||||||
Sugar Creek4 | 134.1 | 98.1 | 77.6 | 512.2 | 468.4 | 237.0 | |||||||||||||||||||||||||||||
Maverick Creek5 | 419.1 | 301.6 | 351.3 | 1,440.4 | 1,258.3 | 1,036.2 | |||||||||||||||||||||||||||||
| 1,109.7 | 885.4 | 886.1 | 4,158.6 | 3,936.5 | 3,219.3 | ||||||||||||||||||||||||||||||
| Solar Facilities: | |||||||||||||||||||||||||||||||||||
| Cornwall | 4.8 | 5.0 | 4.8 | 12.5 | 12.3 | 12.5 | |||||||||||||||||||||||||||||
| Bakersfield | 25.0 | 21.7 | 20.1 | 64.2 | 57.3 | 56.9 | |||||||||||||||||||||||||||||
| Great Bay | 56.2 | 64.4 | 59.4 | 168.1 | 170.6 | 167.6 | |||||||||||||||||||||||||||||
Altavista6 | 42.1 | 48.7 | 50.7 | 133.0 | 134.7 | 95.4 | |||||||||||||||||||||||||||||
Croton7 | 1.7 | 1.7 | — | 4.5 | 4.3 | — | |||||||||||||||||||||||||||||
| 129.8 | 141.5 | 135.0 | 382.3 | 379.2 | 332.4 | ||||||||||||||||||||||||||||||
| Renewable Energy Performance | 1,714.2 | 1,455.7 | 1,305.4 | 6,077.7 | 5,797.3 | 4,565.8 | |||||||||||||||||||||||||||||
| Thermal Facilities: | |||||||||||||||||||||||||||||||||||
| Windsor Locks | N/A8 | 32.9 | 33.4 | N/A7 | 97.8 | 97.8 | |||||||||||||||||||||||||||||
| Sanger | N/A8 | 65.6 | 73.4 | N/A7 | 149.1 | 110.9 | |||||||||||||||||||||||||||||
| 98.5 | 106.8 | 246.9 | 208.7 | ||||||||||||||||||||||||||||||||
| Total Performance | 1,554.2 | 1,412.2 | 6,044.2 | 4,774.5 | |||||||||||||||||||||||||||||||
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 27 | ||||
| 1 | AQN owns a 75% equity interest but accounts for the facility using the equity method. Figures show full energy produced by the facility. | ||||
| 2 | The Blue Hill Wind Facility achieved COD on April 14, 2022. AQN owns a 50% equity interest but accounts for the facility using the equity method. Figures show expected long-term average resources ("LTAR") and actual energy produced by the facility during the quarter. | ||||
| 3 | The EBR Wind Facility achieved COD on December 31, 2021. AQN owns a 50% equity interest but accounts for the facility using the equity method. Figures show full energy produced by the facility. | ||||
| 4 | The Sugar Creek Wind Facility achieved COD on November 9, 2020. Prior to January 29, 2021, AQN owned a 50% equity interest in the facility. On January 29, 2021, AQN acquired the remaining 50% equity interest that it did not previously own. Figures show full energy produced by the facility. As a result of a blade manufacturing error 26 of 40 turbines were initially shut down. All impacted turbines were back in service as of September 29, 2021. | ||||
| 5 | The Maverick Creek Wind Facility achieved partial completion on November 6, 2020 and COD on April 21, 2021. Prior to January 19, 2021, AQN owned a 50% equity interest in the facility. On January 19, 2021, AQN acquired the remaining 50% equity interest that it did not previously own. Figures show full energy produced by the facility. As a result of a blade manufacturing error 26 of 73 turbines were initially shut down. All impacted turbines were back in service as of June 7, 2021. | ||||
| 6 | The Altavista Solar Facility achieved partial completion on March 8, 2021 and COD on June 1, 2021. Prior to April 9, 2021, AQN owned a 50% equity interest in the facility. On April 9, 2021, AQN acquired the remaining 50% equity interest that it did not previously own. Figures show full energy produced by the facility. | ||||
| 7 | The Croton Solar Facility achieved COD on December 8, 2021. | ||||
| 8 | Natural gas fired co-generation facility. | ||||
2022 Third Quarter Renewable Energy Group Performance
For the three months ended September 30, 2022, the Renewable Energy Group generated 1,554.2 GW-hrs of electricity as compared to 1,412.2 GW-hrs during the same period in 2021.
For the three months ended September 30, 2022, the hydro facilities generated 140.0 GW-hrs of electricity as compared to 108.1 GW-hrs produced in the same period in 2021, an increase of 29.5%. Electricity generated represented 104.7% of LTAR as compared to 80.9% during the same period in 2021.
For the three months ended September 30, 2022, the wind facilities produced 1,174.2 GW-hrs of electricity as compared to 1,062.3 GW-hrs produced in the same period in 2021, an increase of 10.5%. The increase in production is primarily due to the addition of the EBR Wind Facility which achieved COD on December 31, 2021, and the Blue Hill Wind Facility which achieved COD on April 14, 2022. In addition, the Sugar Creek Wind Facility experienced lower production in 2021 due to the shutdown of turbines resulting from a blade manufacturing error. Excluding the Sugar Creek, EBR, and Blue Hill Wind Facilities, production was 3.5% below the same period last year. The wind facilities, including new facilities, generated electricity equal to 80.9% of LTAR as compared to 84.0% during the same period in 2021.
For the three months ended September 30, 2022, the solar facilities generated 141.5 GW-hrs of electricity as compared to 135.0 GW-hrs of electricity in the same period in 2021, an increase of 4.8%. The increase in production is partially due to the Croton Solar Facility achieving COD on December 8, 2021. Excluding the new facilities, production was 3.6% above the same period last year. The solar facilities, including new facilities, generated electricity equal to 109.0% of LTAR as compared to 105.4% in the same period in 2021.
For the three months ended September 30, 2022, the thermal facilities generated 98.5 GW-hrs of electricity as compared to 106.8 GW-hrs of electricity during the same period in 2021. During the same period, the Windsor Locks Thermal Facility generated 102.2 billion lbs of steam as compared to 95.3 billion lbs of steam during the same period in 2021.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 28 | ||||
2022 Third Quarter and Year-to-Date Renewable Energy Group Operating Results | |||||||||||||||||||||||
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| (all dollar amounts in $ millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Revenue1 | |||||||||||||||||||||||
| Hydro | $ | 17.0 | $ | 9.9 | $ | 45.5 | $ | 31.6 | |||||||||||||||
| Wind | 41.5 | 42.9 | 158.8 | 101.8 | |||||||||||||||||||
| Solar | 11.8 | 9.3 | 27.6 | 21.4 | |||||||||||||||||||
| Thermal | 16.3 | 11.5 | 39.9 | 27.5 | |||||||||||||||||||
| Total Non-Regulated Energy Sales | $ | 86.6 | $ | 73.6 | $ | 271.8 | $ | 182.3 | |||||||||||||||
| Less: | |||||||||||||||||||||||
Cost of Sales - Energy2 | (4.1) | (3.2) | (12.3) | (8.8) | |||||||||||||||||||
| Cost of Sales - Thermal | (11.0) | (8.7) | (29.4) | (17.1) | |||||||||||||||||||
Realized gain (loss) on hedges3 | (0.8) | (0.5) | (0.7) | (0.1) | |||||||||||||||||||
Net Energy Sales 4, 5 | $ | 70.7 | $ | 61.2 | $ | 229.4 | $ | 156.3 | |||||||||||||||
Renewable Energy Credits6 | 3.8 | 5.3 | 20.1 | 13.8 | |||||||||||||||||||
| Other Revenue | — | 0.1 | 0.3 | 0.7 | |||||||||||||||||||
| Total Net Revenue | $ | 74.5 | $ | 66.6 | $ | 249.8 | $ | 170.8 | |||||||||||||||
| Expenses & Other Income | |||||||||||||||||||||||
| Operating expenses | (26.8) | (26.3) | (81.5) | (79.5) | |||||||||||||||||||
| Gain on sale of renewable assets | — | — | 1.2 | — | |||||||||||||||||||
Dividend, interest, equity and other income7 | 15.3 | 22.1 | 69.6 | 70.5 | |||||||||||||||||||
| Impacts from the Market Disruption Event on the Senate Wind Facility | — | — | — | 53.4 | |||||||||||||||||||
HLBV income8 | 8.5 | 10.1 | 75.9 | 49.5 | |||||||||||||||||||
Divisional Operating Profit4,9,10 | $ | 71.5 | $ | 72.5 | $ | 315.0 | $ | 264.7 | |||||||||||||||
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 29 | ||||
| 1 | Many of the Renewable Energy Group’s power purchase agreements ("PPAs") include annual rate increases. However, a change to the weighted average production levels resulting from higher average production from facilities that earn lower energy rates can result in a lower weighted average energy rate earned by the division as compared to the same period in the prior year. Includes the impacts from the Market Disruption Event on the Senate Wind Facility. | ||||
| 2 | Cost of Sales - Energy consists of energy purchases in the Maritime Region to manage the energy sales from the Tinker Hydro Facility which is sold to retail and industrial customers under multi-year contracts. | ||||
| 3 | See Note 21(b)(iv) in the unaudited interim consolidated financial statements. | ||||
| 4 | See Caution Concerning Non-GAAP Measures. | ||||
| 5 | This table contains a reconciliation of Net Energy Sales to revenue. The relevant sections of the table are derived from and should be read in conjunction with the consolidated statement of operations and Note 18 in the unaudited interim consolidated financial statements, “Segmented information”. This supplementary disclosure is intended to more fully explain disclosures related to Net Energy Sales and provides additional information related to the operating performance of AQN. Investors are cautioned that Net Energy Sales should not be construed as an alternative to revenue. | ||||
| 6 | Qualifying renewable energy projects receive RECs for the generation and delivery of renewable energy to the power grid. The RECs represent proof that 1 MW-hr of electricity was generated from an eligible energy source. | ||||
| 7 | Includes dividends received from Atlantica and related parties (see Note 6 and 13 in the unaudited interim consolidated financial statements) as well as the equity investment in the Texas Coastal Wind Facilities (Stella, Cranell, East Raymond and West Raymond). | ||||
| 8 | HLBV income represents the value of net tax attributes earned by the Renewable Energy Group in the period primarily from electricity generated by certain of its U.S. wind and U.S. solar generation facilities. PTCs are earned as wind energy is generated based on a dollar per kW-hr rate prescribed in applicable federal and state statutes. For the nine months ended September 30, 2022, the Renewable Energy Group's eligible facilities generated 3,689.2 GW-hrs representing approximately $92.2 million in PTCs earned as compared to 1,727.6 GW-hrs representing $43.2 million in PTCs earned during the same period in 2021. The majority of the PTCs have been allocated to tax equity investors to monetize the value to AQN of the PTCs and other tax attributes which are the primary drivers of HLBV income offset by the return earned by the investor. Some PTCs have been utilized directly by the Company to lower its overall effective tax rate. | ||||
| 9 | Certain prior year items have been reclassified to conform to current year presentation. | ||||
| 10 | This table contains a reconciliation of Divisional Operating Profit to revenue for the Renewable Energy Group. The relevant sections of the table are derived from and should be read in conjunction with the consolidated statement of operations and Note 18 in the unaudited interim consolidated financial statements, “Segmented Information”. This supplementary disclosure is intended to more fully explain disclosures related to Divisional Operating Profit and provides additional information related to the operating performance of the Renewable Energy Group. Investors are cautioned that Divisional Operating Profit should not be construed as an alternative to revenue. | ||||
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | |||||
2022 Third Quarter Operating Results
For the three months ended September 30, 2022, the Renewable Energy Group’s facilities generated operating revenue of $86.6 million (i.e., non-regulated energy sales) as compared to $73.6 million in the comparable period in the prior year.
For the three months ended September 30, 2022, the Renewable Energy Group's facilities generated $71.5 million of Divisional Operating Profit (excluding corporate administration expenses) as compared to $72.5 million during the same period in 2021, which represents a decrease of $1.0 million or 1.4%. (see Caution Concerning Non-GAAP Measures).
Highlights of the changes are summarized in the following table:
| (all dollar amounts in $ millions) | Three months ended September 30 | ||||
Prior Period Divisional Operating Profit1 | $ | 72.5 | |||
| Existing Facilities and Investments | |||||
| Hydro: Increase is primarily due to higher overall production as well as favourable pricing at one of the Company's hydro facilities, partially offset by higher volume of purchases at unfavourable market pricing and operating expenses in the Maritime Region. | 1.3 | ||||
| Wind Canada: Decrease is primarily due to lower production across all Canadian wind facilities. | (1.1) | ||||
| Wind U.S.: Decrease is primarily due to unfavourable REC revenue and lower production at the Maverick, Senate and Sandy Ridge Wind Facilities. | (1.2) | ||||
| Solar: Increase is primarily due to higher market pricing at the Altavista and Great Bay II Solar Facilities and higher capacity revenue at the Great Bay I Solar Facility, partially offset by lower HLBV income for the Great Bay I and Bakersfield II Solar Facilities. | 0.4 | ||||
| Thermal: Increase is primarily due to favourable overall energy market pricing and favourable REC sales at the Windsor Locks Thermal Facility, partially offset by overall higher fuel and carbon compliance costs. | 3.2 | ||||
Investments: Increase is primarily due to higher dividends from AQN's investment in Atlantica.2 | 0.7 | ||||
| Other: | 0.2 | ||||
| 3.5 | |||||
| New Facilities and Investments | |||||
| Solar: Increase is primarily due to the Croton Solar Facility (full COD in December 2021). | 0.2 | ||||
| Other: Decrease is primarily due to lower equity income in 2022 from the investment in the Texas Coastal Wind Facilities, partially offset by CRR revenue. | (4.2) | ||||
| (4.0) | |||||
| Foreign Exchange | (0.5) | ||||
Current Period Divisional Operating Profit1 | $ | 71.5 | |||
| 1 | See Caution Concerning Non-GAAP Measures. | ||||
| 2 | See Note 6 and 13 in the unaudited interim consolidated financial statements. | ||||
2022 Year-to-Date Renewable Energy Group Performance
For the nine months ended September 30, 2022, the Renewable Energy Group generated 6,044.2 GW-hrs of electricity as compared to 4,774.5 GW-hrs during the same period in 2021.
For the nine months ended September 30, 2022, the hydro facilities generated 448.8 GW-hrs of electricity as compared to 389.9 GW-hrs produced in the same period in 2021, an increase of 15.1%. Electricity generated represented 98.0% of LTAR as compared to 85.1% during the same period in 2021.
For the nine months ended September 30, 2022, the wind facilities produced 4,969.3 GW-hrs of electricity as compared to 3,843.5 GW-hrs produced in the same period in 2021, an increase of 29.3%. The increase in production is primarily due to the addition of the Maverick Creek Wind Facility which achieved COD on April 21, 2021, the EBR Wind Facility which achieved COD on December 31, 2021, and the Blue Hill Wind Facility which achieved COD on April 14, 2022. In addition, the Sugar Creek Wind Facility and the Maverick Creek Wind Facility experienced lower production in 2021 due to the shutdown of turbines resulting from a blade manufacturing error. Excluding the new facilities, production was 11.6%
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 31 | ||||
above the same period last year. The wind facilities generated electricity equal to 94.9% of LTAR as compared to 87.2% during the same period in 2021.
For the nine months ended September 30, 2022, the solar facilities generated 379.2 GW-hrs of electricity as compared to 332.4 GW-hrs of electricity produced in the same period in 2021, an increase of 14.1%. The increase in production is primarily due to the Altavista Solar Facility which achieved partial completion on March 8, 2021 and COD on June 1, 2021. In addition, the Croton Solar Facility achieved COD on December 8, 2021. Excluding the new facilities, production was 1.4% above the same period last year. The solar facilities generated electricity equal to 99.2% of LTAR as compared to 94.2% in the same period in 2021.
For the nine months ended September 30, 2022, the thermal facilities generated 246.9 GW-hrs of electricity as compared to 208.7 GW-hrs of electricity during the same period in 2021. For the nine months ended September 30, 2022, the Windsor Locks Thermal Facility generated 389.8 billion lbs of steam as compared to 374.9 billion lbs of steam during the same period in 2021.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 32 | ||||
2022 Year-to-Date Operating Results
For the nine months ended September 30, 2022, the Renewable Energy Group's facilities generated operating revenue of $271.8 million (i.e., non-regulated energy sales) as compared to $182.3 million in the comparable period in the prior year.
For the nine months ended September 30, 2022, the Renewable Energy Group's facilities generated $315.0 million of Divisional Operating Profit (excluding corporate administration expenses) as compared to $264.7 million during the same period in 2021, which represents an increase of $50.3 million or 19.0% (see Caution Concerning Non-GAAP Measures).
Highlights of the changes are summarized in the following table:
| (all dollar amounts in $ millions) | Nine months ended September 30 | ||||
Prior Period Divisional Operating Profit1 | $ | 264.7 | |||
| Existing Facilities | |||||
| Hydro: Increase is primarily due to higher overall production as well as favourable pricing at one of the Company's hydro facilities, partially offset by higher volume of purchases at unfavourable market pricing and operating expenses in the Maritime Region. | 2.1 | ||||
| Wind Canada: Increase is primarily due to higher production across all Canadian wind facilities. | 3.8 | ||||
| Wind U.S.: Increase is primarily due to higher production, REC revenue and HLBV income, partially offset by higher operating expenses across U.S. wind facilities. | 23.6 | ||||
| Solar: Increase is primarily due to higher overall energy market pricing across solar facilities as well as higher REC revenue and higher capacity revenue at the Great Bay I Solar Facility. This was partially offset by higher operating costs at the Great Bay II Solar Facility along with lower HLBV income for the Great Bay I and Bakersfield II Solar Facilities. | 1.6 | ||||
| Thermal: Increase is primarily due to favourable overall energy market pricing and favourable REC sales at the Windsor Locks Thermal Facility, partially offset by overall higher fuel and carbon compliance costs. | 1.0 | ||||
Investments: Increase is primarily due to higher dividends from AQN's investment in Atlantica.2 | 7.7 | ||||
| Other: | 0.7 | ||||
| 40.5 | |||||
| New Facilities and Investments | |||||
| Wind U.S.: Increase is primarily due to higher production, higher HLBV income and higher availability revenue partially offset by unfavourable pricing at the Maverick Creek Wind Facility. This facility achieved partial completion on November 6, 2020 and COD on April 21, 2021. | 11.7 | ||||
| Solar: Increase is primarily due to the Altavista Solar Facility (full COD in June 2021) and Croton Solar Facility (full COD in December 2021). | 2.7 | ||||
| Other: Decrease is primarily due to lower equity income in 2022 from the investment in the Texas Coastal Wind Facilities, partially offset by CRR revenue. | (3.3) | ||||
| 11.1 | |||||
| Foreign Exchange | (1.3) | ||||
Current Period Divisional Operating Profit1 | $ | 315.0 | |||
| 1 | See Caution Concerning Non-GAAP Measures. | ||||
| 2 | See Note 6 and 13 in the unaudited interim consolidated financial statements. | ||||
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 33 | ||||
AQN: CORPORATE AND OTHER EXPENSES
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| (all dollar amounts in $ millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Corporate and other expenses: | |||||||||||||||||||||||
| Administrative expenses | $ | 23.4 | $ | 15.2 | $ | 61.0 | $ | 48.9 | |||||||||||||||
| Loss (gain) on foreign exchange | (5.0) | 1.3 | (0.3) | 3.4 | |||||||||||||||||||
| Interest expense | 75.0 | 51.7 | 197.6 | 159.4 | |||||||||||||||||||
| Depreciation and amortization | 108.2 | 96.6 | 340.7 | 292.2 | |||||||||||||||||||
| Change in value of investments carried at fair value | 300.4 | 139.1 | 484.4 | 183.5 | |||||||||||||||||||
Interest, dividend, equity, and other loss1 | 1.6 | 1.8 | 5.7 | 6.3 | |||||||||||||||||||
| Pension and other post-employment non-service costs | 1.5 | 3.9 | 6.4 | 11.4 | |||||||||||||||||||
| Other net losses | 5.9 | 0.9 | 19.3 | 11.1 | |||||||||||||||||||
| Loss on derivative financial instruments | 0.4 | 1.8 | 6.3 | 2.1 | |||||||||||||||||||
| Income tax recovery | (19.5) | (19.4) | (32.9) | (45.2) | |||||||||||||||||||
| 1 | Excludes income directly pertaining to the Regulated Services and Renewable Energy Groups (disclosed in the relevant sections). | ||||
2022 Third Quarter Corporate and Other Expenses
For the three months ended September 30, 2022, administrative expenses totaled $23.4 million as compared to $15.2 million in the same period in 2021. The increase was primarily due to higher staffing expenses as a result of increased headcount, inflationary increases, and timing of other costs.
For the three months ended September 30, 2022, interest expense totaled $75.0 million as compared to $51.7 million in the same period in 2021 due to the funding of capital deployed in 2022 primarily related to the acquisition of Liberty NY Water and development of renewable energy projects as well as an increase in interest rates on variable rate borrowings.
For the three months ended September 30, 2022, depreciation expense totaled $108.2 million as compared to $96.6 million in the same period in 2021. The increase was primarily due to higher overall property, plant and equipment, and the acquisition of Liberty NY Water.
For the three months ended September 30, 2022, change in investments carried at fair value totaled a loss of $300.4 million as compared to a loss of $139.1 million in the same period in 2021. The Company records certain of its investments, including Atlantica, using the fair value method and accordingly any change in the fair value of the investment is recorded in the Statement of Operations (see Note 6 in the unaudited interim consolidated financial statements).
For the three months ended September 30, 2022, pension and post-employment non-service costs totaled $1.5 million as compared to $3.9 million in the same period in 2021. The decrease was primarily due to lower amortization of actuarial losses.
For the three months ended September 30, 2022, other net losses were $5.9 million as compared to $0.9 million in the same period in 2021. The net losses in both the third quarter of 2022 and 2021 respectively, were primarily due to acquisition and transition-related costs. See Note 16 in the unaudited interim consolidated financial statements.
For the three months ended September 30, 2022, the loss on derivative financial instruments totaled $0.4 million as compared to a loss of $1.8 million in the same period in 2021. AQN uses derivative instruments to manage exposure to changes in commodity prices, foreign exchange rates, and interest rates. The loss in the third quarter of 2022 was primarily related to mark-to-markets on interest rate derivatives. The loss in the third quarter of 2021 was primarily related to mark-to-markets on energy derivatives.
For the three months ended September 30, 2022, an income tax recovery of $19.5 million was recorded as compared to an income tax recovery of $19.4 million during the same period in 2021. The increase in income tax recovery was primarily due to the tax impact associated with the change in fair value of the investment in Atlantica, partially offset by higher tax credits accrued in 2021. For the three months ended September 30, 2022, the Company revised its estimates associated with renewable projects previously expected to be placed in service by the end of 2022 and has reversed $8.3 million of ITCs and PTCs previously recorded as compared to $8.8 million of ITCs and PTCs recorded in the same period in 2021. These projects are now expected to be placed in service in 2023.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 34 | ||||
2022 Year-to-Date Corporate and Other Expenses
During the nine months ended September 30, 2022, administrative expenses totaled $61.0 million as compared to $48.9 million in the same period in 2021. The increase was primarily due to higher staffing expenses as a result of increased headcount, inflationary increases, and timing of other costs.
For the nine months ended September 30, 2022, interest expense totaled $197.6 million as compared to $159.4 million in the same period in 2021. The increase was primarily due to the funding of capital deployed in 2022 primarily related to the acquisition of Liberty NY Water and development of renewable energy projects as well as an increase in interest rates on variable rate borrowings.
For the nine months ended September 30, 2022, depreciation expense totaled $340.7 million as compared to $292.2 million in the same period in 2021. The increase was primarily due to higher overall property, plant and equipment, and the acquisition of Liberty NY Water.
For the nine months ended September 30, 2022, change in investments carried at fair value totaled a loss of $484.4 million as compared to a loss of $183.5 million in the same period in 2021. The Company records certain of its investments, including Atlantica, using the fair value method and accordingly any change in the fair value of the investment is recorded in the Statement of Operations (see Note 6 in the unaudited interim consolidated financial statements).
For the nine months ended September 30, 2022, pension and post-employment non-service costs totaled $6.4 million as compared to $11.4 million in the same period in 2021. The decrease was primarily due to lower amortization of actuarial losses.
For the nine months ended September 30, 2022, other net losses were $19.3 million as compared to $11.1 million in the same period in 2021. The net losses for the nine months ended September 30, 2022 were primarily due to acquisition and transition-related costs. The net losses for the nine months ended September 30, 2021 were primarily due to an adjustment to a regulatory liability pertaining to the true-up of prior period tracking accounts, and certain asset write-downs.
For the nine months ended September 30, 2022, the loss on derivative financial instruments totaled $6.3 million as compared to a loss of $2.1 million in the same period in 2021. AQN uses derivative instruments to manage exposure to changes in commodity prices, foreign exchange rates, and interest rates. The loss for the nine months ended September 30, 2022 was primarily related to mark-to-markets on interest rate derivatives. The loss for nine months ended September 30, 2021 was primarily related to mark-to-markets on energy derivatives.
For the nine months ended September 30, 2022, an income tax recovery of $32.9 million was recorded as compared to an income tax recovery of $45.2 million during the same period in 2021. The decrease in income tax recovery was primarily due to higher tax credits accrued in 2021, the tax benefits associated with the impact of the Midwest Extreme Weather Event in 2021, and state deferred tax adjustments related to the acquisition of Liberty NY Water. This was partially offset by the tax impact associated with the change in fair value of the investment in Atlantica. For the nine months ended September 30, 2022, the Company accrued $13.7 million of ITCs and PTCs associated with renewable energy projects that have either been placed in service or are expected to be placed in service by the end of 2022 as compared to $35.3 million recorded in the same period in 2021.These projects are now expected to be placed in service in 2023.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 35 | ||||
NON-GAAP FINANCIAL MEASURES
Reconciliation of Adjusted EBITDA to Net Earnings
The following table is derived from and should be read in conjunction with the consolidated statement of operations. This supplementary disclosure is intended to more fully explain disclosures related to Adjusted EBITDA and provides additional information related to the operating performance of AQN. Investors are cautioned that this measure should not be construed as an alternative to U.S. GAAP consolidated net earnings.
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| (all dollar amounts in $ millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net earnings (loss) attributable to shareholders | $ | (195.2) | $ | (27.9) | $ | (137.6) | $ | 89.2 | |||||||||||||||
| Add (deduct): | |||||||||||||||||||||||
| Net earnings attributable to the non-controlling interest, exclusive of HLBV | 5.2 | 4.5 | 12.8 | 13.8 | |||||||||||||||||||
| Income tax recovery | (19.5) | (19.4) | (32.9) | (45.2) | |||||||||||||||||||
| Interest expense | 75.0 | 51.7 | 197.6 | 159.4 | |||||||||||||||||||
Other net losses2 | 5.9 | 0.9 | 19.3 | 11.1 | |||||||||||||||||||
| Pension and post-employment non-service costs | 1.5 | 3.9 | 6.4 | 11.4 | |||||||||||||||||||
Change in value of investments carried at fair value1 | 300.4 | 139.1 | 484.4 | 183.5 | |||||||||||||||||||
| Impacts from the Market Disruption Event on the Senate Wind Facility | — | — | — | 53.4 | |||||||||||||||||||
| Costs related to tax equity financing | — | — | — | 4.3 | |||||||||||||||||||
| Loss on derivative financial instruments | 0.4 | 1.8 | 6.3 | 2.1 | |||||||||||||||||||
| Realized loss on energy derivative contracts | (0.8) | (0.5) | (0.7) | (0.1) | |||||||||||||||||||
| Loss (gain) on foreign exchange | (5.0) | 1.3 | (0.3) | 3.4 | |||||||||||||||||||
| Depreciation and amortization | 108.2 | 96.6 | 340.7 | 292.2 | |||||||||||||||||||
| Adjusted EBITDA | $ | 276.1 | $ | 252.0 | $ | 896.0 | $ | 778.5 | |||||||||||||||
| 1 | See Note 6 in the unaudited interim consolidated financial statements. | ||||
| 2 | See Note 16 in the unaudited interim consolidated financial statements. | ||||
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 36 | ||||
Reconciliation of Adjusted Net Earnings to Net Earnings
The following table is derived from and should be read in conjunction with the consolidated statement of operations. This supplementary disclosure is intended to more fully explain disclosures related to Adjusted Net Earnings and provides additional information related to the operating performance of AQN. Investors are cautioned that this measure should not be construed as an alternative to consolidated net earnings in accordance with U.S. GAAP.
The following table shows the reconciliation of net earnings to Adjusted Net Earnings exclusive of these items:
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| (all dollar amounts in $ millions except per share information) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net earnings (loss) attributable to shareholders | $ | (195.2) | $ | (27.9) | $ | (137.6) | $ | 89.2 | |||||||||||||||
| Add (deduct): | |||||||||||||||||||||||
| Loss on derivative financial instruments | 0.4 | 1.8 | 6.3 | 2.1 | |||||||||||||||||||
| Realized (gain) loss on energy derivative contracts | (0.8) | (0.5) | (0.7) | (0.1) | |||||||||||||||||||
Other net losses2 | 5.9 | 0.9 | 19.3 | 11.1 | |||||||||||||||||||
| Loss (gain) on foreign exchange | (5.0) | 1.3 | (0.3) | 3.4 | |||||||||||||||||||
Change in value of investments carried at fair value1 | 300.4 | 139.1 | 484.4 | 183.5 | |||||||||||||||||||
| Impacts from the Market Disruption Event on the Senate Wind Facility | — | — | — | 53.4 | |||||||||||||||||||
| Costs related to tax equity financing and other adjustments | — | — | — | 4.3 | |||||||||||||||||||
| Adjustment for taxes related to above | (32.2) | (17.1) | (46.9) | (34.2) | |||||||||||||||||||
| Adjusted Net Earnings | $ | 73.5 | $ | 97.6 | $ | 324.5 | $ | 312.7 | |||||||||||||||
| Adjusted Net Earnings per common share | $ | 0.11 | $ | 0.15 | $ | 0.47 | $ | 0.50 | |||||||||||||||
| 1 | See Note 6 in the unaudited interim consolidated financial statements. | ||||
| 2 | See Note 16 in the unaudited interim consolidated financial statements. | ||||
For the three months ended September 30, 2022, Adjusted Net Earnings totaled $73.5 million as compared to Adjusted Net Earnings of $97.6 million for the same period in 2021, a decrease of $24.1 million.
For the nine months ended September 30, 2022, Adjusted Net Earnings totaled $324.5 million as compared to Adjusted Net Earnings of $312.7 million for the same period in 2021, an increase of $11.8 million.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 37 | ||||
Reconciliation of Adjusted Funds from Operations to Cash Provided by Operating Activities
The following table is derived from and should be read in conjunction with the consolidated statement of operations and consolidated statement of cash flows. This supplementary disclosure is intended to more fully explain disclosures related to Adjusted Funds from Operations and provides additional information related to the operating performance of AQN. Investors are cautioned that this measure should not be construed as an alternative to cash provided by operating activities in accordance with U.S GAAP.
The following table shows the reconciliation of cash provided by operating activities to Adjusted Funds from Operations exclusive of these items:
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| (all dollar amounts in $ millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Cash provided by operating activities | $ | 102.9 | $ | 174.7 | $ | 404.5 | $ | 31.0 | |||||||||||||||
| Add (deduct): | |||||||||||||||||||||||
| Changes in non-cash operating items | 95.7 | (6.2) | 180.5 | 437.6 | |||||||||||||||||||
| Production based cash contributions from non-controlling interests | — | — | 6.2 | 4.8 | |||||||||||||||||||
| Impacts from the Market Disruption Event on the Senate Wind Facility | — | — | — | 53.4 | |||||||||||||||||||
| Costs related to tax equity financing | — | — | — | 4.3 | |||||||||||||||||||
| Acquisition-related costs | 6.9 | 1.7 | 14.9 | 4.7 | |||||||||||||||||||
| Adjusted Funds from Operations | $ | 205.5 | $ | 170.2 | $ | 606.1 | $ | 535.8 | |||||||||||||||
For the three months ended September 30, 2022, Adjusted Funds from Operations totaled $205.5 million as compared to Adjusted Funds from Operations of $170.2 million for the same period in 2021, an increase of $35.3 million.
For the nine months ended September 30, 2022, Adjusted Funds from Operations totaled $606.1 million as compared to Adjusted Funds from Operations of $535.8 million for the same period in 2021, an increase of $70.3 million.
CORPORATE DEVELOPMENT ACTIVITIES
The Company undertakes development activities working with a global reach to identify, develop, and construct both regulated and non-regulated renewable energy facilities, power transmission lines, water infrastructure assets, and other complementary infrastructure projects as well as to invest in utility electric, natural gas and water distribution systems.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 38 | ||||
SUMMARY OF PROPERTY, PLANT, AND EQUIPMENT EXPENDITURES
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||
| (all dollar amounts in $ millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Regulated Services Group | |||||||||||||||||||||||
Rate Base Maintenance1 | 81.9 | $ | 71.2 | 238.0 | 205.8 | ||||||||||||||||||
| Rate Base Growth | 139.9 | 126.3 | 416.3 | 1,497.6 | |||||||||||||||||||
Property, Plant & Equipment Acquired2 | — | — | 609.0 | — | |||||||||||||||||||
| $ | 221.8 | $ | 197.5 | $ | 1,263.3 | $ | 1,703.4 | ||||||||||||||||
| Renewable Energy Group | |||||||||||||||||||||||
Maintenance1 | $ | 4.3 | $ | 12.9 | $ | 17.7 | $ | 35.5 | |||||||||||||||
Investment in Capital Projects2 | 23.5 | 42.6 | 55.5 | 1,651.4 | |||||||||||||||||||
| $ | 27.8 | $ | 55.5 | $ | 73.2 | $ | 1,686.9 | ||||||||||||||||
| Total Capital Expenditures | $ | 249.6 | $ | 253.0 | $ | 1,336.5 | $ | 3,390.3 | |||||||||||||||
| 1 | Maintenance expenditures are calculated based on the depreciation expense for the period. | |||||||
| 2 | Includes expenditures on Property Plant & Equipment, equity-method investees, and acquisitions of operating entities that may have been jointly developed by the Company with another third party developer. Excludes temporary advances to joint venture partners in connection with capital projects under development or construction. | |||||||
2022 Third Quarter Property Plant and Equipment Expenditures
During the three months ended September 30, 2022, the Regulated Services Group invested $221.8 million in capital expenditures as compared to $197.5 million during the same period in 2021. The Regulated Services Group's investments during the third quarter of 2022 were primarily related to continued investments in the construction of transmission and distribution main replacements, work on new and existing substation assets, and initiatives relating to the safety and reliability of electric and gas systems.
During the three months ended September 30, 2022, the Renewable Energy Group incurred capital expenditures of $27.8 million as compared to $55.5 million during the same period in 2021. The Renewable Energy Group's investments, during the third quarter of 2022, were primarily related to the development and/or construction of ongoing maintenance capital at existing operating sites.
2022 Year-to-Date Property Plant and Equipment Expenditures
During the nine months ended September 30, 2022, the Regulated Services Group invested $1,263.3 million in capital expenditures as compared to $1,703.4 million during the same period in 2021. The Regulated Services Group's investments were primarily related to the acquisition of Liberty NY Water in January 2022. In addition, during the first nine months of 2022 the Regulated Services Group continued investments in the construction of transmission and distribution main replacements, work on new and existing substation assets, and initiatives relating to the safety and reliability of electric and gas systems.
During the nine months ended September 30, 2022, the Renewable Energy Group incurred capital expenditures of $73.2 million as compared to $1,686.9 million during the same period in 2021. The Renewable Energy Group's investments during the first nine months of 2022 were primarily related to the development and/or construction of various projects and ongoing sustaining capital at existing operating sites.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 39 | ||||
2022 Capital Investments
The following discussion should be read in conjunction with the Caution Concerning Forward-Looking Statements and Forward-Looking Information section of this MD&A.
Over the course of the 2022 financial year, the Company expects to spend between approximately $1.55 billion and $1.74 billion on capital investment opportunities. This represents a decrease compared to the Company’s previous 2022 capital investment expectation of between $4.35 billion and $4.68 billion. This decrease is due to the updated timing for the Kentucky Power Transaction, which is now expected to close in January 2023. Actual expenditures in 2022 may vary due to, among other things, the impacts of COVID-19 and related response measures, the timing of various project investments and acquisitions, the availability of financing on acceptable terms, and realized foreign exchange rates.
Ranges of expected capital investment in the 2022 financial year are as follows:
| (all dollar amounts in $ millions) | |||||||||||
| Regulated Services Group: | |||||||||||
Rate Base Maintenance | $ | 400.0 | - | $ | 440.0 | ||||||
Rate Base Growth | 450.0 | - | 540.0 | ||||||||
| Rate Base Acquisitions | 600.0 | - | 610.0 | ||||||||
| Total Regulated Services Group: | $ | 1,450.0 | - | $ | 1,590.0 | ||||||
| Renewable Energy Group: | |||||||||||
Maintenance | $ | 35.0 | - | $ | 50.0 | ||||||
Investment in Capital Projects | 65.0 | - | 100.0 | ||||||||
Total Renewable Energy Group: | $ | 100.0 | - | $ | 150.0 | ||||||
| Total 2022 Capital Investments | $ | 1,550.0 | - | $ | 1,740.0 | ||||||
The Regulated Services Group expects to spend between $1,450.0 million and $1,590.0 million over the course of 2022. This includes the acquisition of Liberty NY Water in January 2022 for a purchase price of approximately $609.0 million excluding transaction costs. The remaining Regulated Services Group spend is expected to contribute to continued efforts to expand operations, improve the reliability of the utility systems and broaden the technologies used to better serve its service areas. Project spending includes capital for structural improvements, specifically in relation to refurbishing substations, replacing poles and wires, drilling and equipping aquifers, main replacements, and reservoir pumping stations.
The Renewable Energy Group expects to spend between $100.0 million and $150.0 million over the course of 2022 to develop or further invest in development and construction (as applicable) of the Renewable Energy Group's wind and solar projects. Furthermore, the Renewable Energy Group plans to spend between $35.0 million and $50.0 million on various operational solar, thermal, and wind assets to maintain safety, regulatory, and operational efficiencies.
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LIQUIDITY AND CAPITAL RESERVES
AQN has revolving credit and letter of credit facilities as well as separate credit facilities for the Regulated Services Group and the Renewable Energy Group to manage the liquidity and working capital requirements of each division (collectively the “Bank Credit Facilities”).
Bank Credit Facilities
The following table sets out the Bank Credit Facilities available to AQN and its operating groups as at September 30, 2022:
| As at September 30, 2022 | As at Dec 31, 2021 | ||||||||||||||||||||||||||||
| (all dollar amounts in $ millions) | Corporate | Regulated Services Group | Renewable Energy Group | Total | Total | ||||||||||||||||||||||||
| Revolving and term credit facilities | $ | 550.0 | 1 | $ | 2,700.0 | $ | 1,100.0 | 2 | $ | 4,350.0 | $ | 3,075.0 | |||||||||||||||||
| Funds drawn on facilities/ commercial paper issued | (80.7) | (1,134.1) | (375.6) | (1,590.4) | (707.6) | ||||||||||||||||||||||||
| Letters of credit issued | (27.9) | (35.4) | (384.5) | (447.8) | (317.2) | ||||||||||||||||||||||||
| Liquidity available under the facilities | 441.4 | 1,530.5 | 339.9 | 2,311.8 | 2,050.2 | ||||||||||||||||||||||||
| Undrawn portion of uncommitted letter of credit facilities | (25.7) | — | (224.1) | (249.8) | (224.0) | ||||||||||||||||||||||||
| Cash on hand | 114.3 | 125.2 | |||||||||||||||||||||||||||
| Total Liquidity and Capital Reserves | $ | 415.7 | $ | 1,530.5 | $ | 115.8 | $ | 2,176.3 | $ | 1,951.4 | |||||||||||||||||||
1 Includes a $50 million uncommitted standalone letter of credit facility. | |||||||||||||||||||||||||||||
2 Includes $600 million of uncommitted standalone letter of credit facilities. | |||||||||||||||||||||||||||||
Corporate
As at September 30, 2022, the Company's $500.0 million senior unsecured syndicated revolving credit facility (the "Corporate Credit Facility") had $80.7 million drawn and had $3.6 million of outstanding letters of credit. The Corporate Credit Facility matures on July 12, 2024.
As at September 30, 2022, the Company had also issued $24.3 million of letters of credit from its $50 million uncommitted bi-lateral letter of credit facility.
Regulated Services Group
On April 29, 2022, the Regulated Services Group entered into two new senior unsecured syndicated revolving credit facilities: a $1.0 billion senior unsecured revolving credit facility with an initial maturity date of April 29, 2027 (the "Long Term Regulated Services Credit Facility") and a $500.0 million short-term senior unsecured revolving credit facility maturing on March 31, 2023 (the "Short Term Regulated Services Credit Facility"). Subject to the terms and conditions therein, the Long Term Regulated Services Credit Facility may be extended for two additional one-year periods.
As at September 30, 2022, the Long Term Regulated Services Credit Facility had no amounts drawn and had $35.4 million of outstanding letters of credit. As at September 30, 2022, the Short Term Regulated Services Credit Facility had no amounts drawn and no outstanding letters of credit. As at September 30, 2022, there was $445.4 million of commercial paper issued and outstanding.
As at September 30, 2022, the Regulated Services Group's $75.0 million senior unsecured revolving credit facility (the "Bermuda Credit Facility") had $74.3 million drawn. The Bermuda Credit Facility was amended to extend the maturity to December 31, 2022. On June 24, 2022, the Regulated Services Group entered into a new $25.0 million senior unsecured bilateral revolving credit facility (the "Bermuda Working Capital Facility") that matures on June 24, 2024. As at September 30, 2022, the Bermuda Working Capital Facility had $4.0 million drawn.
On December 20, 2021, the Regulated Services Group entered into a $1.1 billion senior unsecured syndicated delayed draw term facility ("the "Regulated Services Delayed Draw Term Facility") which matures on December 19, 2022. As at September 30, 2022, the Regulated Services Delayed Draw Term Facility had $610.4 million drawn in connection with the acquisition of Liberty NY Water.
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Renewable Energy Group
On July 22, 2022, the Renewable Energy Group amended and restated its $500.0 million senior unsecured syndicated revolving credit facility (the "Renewable Energy Credit Facility") with a new maturity date of July 22, 2027. Subject to the terms and conditions therein, the Renewable Energy Credit Facility may be extended for additional one-year periods.
On July 22, 2022, the Renewable Energy Group entered into a new $250.0 million uncommitted bilateral letter of credit facility. As at September 30, 2022, the Renewable Energy Group's bank lines consisted of $600.0 million letter of credit facilities ("the Renewable Energy LC Facilities").
As at September 30, 2022, the Renewable Energy Credit Facility had $375.6 million drawn and had $8.6 million in outstanding letters of credit. As at September 30, 2022, the Renewable Energy LC Facilities had $375.9 million in outstanding letters of credit.
Subsequent to quarter-end on November 8, 2022, one of the Renewable Energy LC Facilities, a $350.0 million uncommitted letter of credit facility was amended, and restated with a new maturity date of June 30, 2024.
Long Term Debt
On August 1, 2022, the Company repaid a $115.0 million senior unsecured note on its maturity.
Credit Ratings
AQN has a long term consolidated corporate credit rating of BBB from S&P, a BBB rating from DBRS and a BBB issuer rating from Fitch. Liberty Utilities has a corporate credit rating of BBB from S&P, a BBB issuer rating from Fitch and a Baa2 issuer rating from Moody's. Debt issued by Liberty Utilities Finance GP1 (“Liberty GP”) has a rating of BBB (high) from DBRS, BBB+ from Fitch, BBB from S&P and Baa2 from Moody's. Empire has an issuer rating of BBB from S&P and a Baa1 rating from Moody's Investors Service, Inc. Liberty Utilities (Canada) LP, the parent company for the Canadian regulated utilities under the Regulated Services Group, has an issuer rating of BBB from DBRS. APCo has a BBB issuer rating from S&P, a BBB issuer rating from DBRS and a BBB issuer rating from Fitch.
On October 28, 2021, following the announcement of the Kentucky Power Transaction, each of DBRS, Fitch and S&P made announcements regarding the credit ratings of the Corporation and its subsidiaries.
Fitch affirmed (i) the existing issuer ratings of both the Corporation and Liberty Utilities (‘BBB’ Long-Term Issuer Default Rating (“IDR”) and ‘F2’ Short-Term IDR, respectively), and (ii) all the security ratings of the Corporation, Liberty Utilities and Liberty GP. Fitch also noted that the rating outlooks for the Corporation and Liberty Utilities are stable and that the credit ratings of APCo are unaffected by the Kentucky Power Transaction. Fitch noted that it views the Kentucky Power Transaction to be neutral to the credit quality of the Corporation and Liberty Utilities, given the underlying credit quality of Kentucky Power, and what Fitch expects to be a relatively credit-supportive financing plan for the Kentucky Power Transaction.
DBRS placed the Corporation’s ‘BBB’ Issuer Rating and ‘Pfd-3’ Preferred Shares ratings ‘Under Review with Developing Implications’. DBRS indicated that it views the Kentucky Power Transaction as a positive development from a business risk perspective due to the expected increase in the Corporation’s regulated assets and rate base and expected improvements in jurisdictional diversification and capital expenditure planning. Notwithstanding these potentially positive impacts, the ‘Under Review with Developing Implications’ rating action reflects DBRS’s view that the Corporation’s financing plan for the Kentucky Power Transaction, which may include the issuance of hybrid debt, could increase the Corporation’s nonconsolidated leverage. DBRS noted that if the Corporation’s nonconsolidated debt-to-capital ratio, as calculated by DBRS, rises significantly above 20% following the issuance of any hybrid debt, a negative rating action could be taken.
S&P revised its outlook on the Corporation, Liberty Utilities, APCo, Liberty GP and Empire from stable to negative, noting a lack of certainty regarding the Corporation’s financing plan for the Kentucky Power Transaction, beyond the equity offering for gross proceeds of approximately C$800 million undertaken to partially finance the Kentucky Power Transaction, which could expose the Corporation to execution risks related to the procurement of credit supportive funding. S&P also noted that the negative outlook incorporates the possibility of any material adverse regulatory requirements which may be necessary to close the Kentucky Power Transaction. S&P also affirmed its ‘BBB’ issuer credit rating for each of the Corporation, Liberty Utilities, APCo, Liberty GP and Empire. Finally, S&P placed its rating on Liberty GP’s senior unsecured debt on CreditWatch with negative implications to reflect its view of the potential for such debt to be structurally subordinated following the closing of the Kentucky Power Transaction.
During the first half of 2022, S&P, Fitch, Moody's and DBRS affirmed their existing ratings. In addition, S&P removed the "CreditWatch with negative implications" from Liberty GP's senior unsecured debt.
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Contractual Obligations
Information concerning contractual obligations as of September 30, 2022 is shown below:
| (all dollar amounts in $ millions) | Total | Due in less than 1 year | Due in 1 to 3 years | Due in 4 to 5 years | Due after 5 years | ||||||||||||||||||||||||
Principal repayments on debt obligations1,2 | $ | 7,730.4 | $ | 1,240.6 | $ | 852.6 | $ | 1,690.9 | $ | 3,946.3 | |||||||||||||||||||
| Advances in aid of construction | 88.6 | 1.5 | — | — | 87.1 | ||||||||||||||||||||||||
Interest on long-term debt obligations2 | 5,082.9 | 244.3 | 471.5 | 392.7 | 3,974.4 | ||||||||||||||||||||||||
| Purchase obligations | 605.8 | 605.8 | — | — | — | ||||||||||||||||||||||||
| Environmental obligations | 52.5 | 26.0 | 5.9 | 1.8 | 18.8 | ||||||||||||||||||||||||
| Derivative financial instruments: | |||||||||||||||||||||||||||||
| Cross currency interest rate swaps | 42.7 | 3.5 | 6.0 | 7.2 | 26.0 | ||||||||||||||||||||||||
| Interest rate swaps | 5.7 | — | — | 1.8 | 3.9 | ||||||||||||||||||||||||
| Energy derivative and commodity contracts | 156.2 | 52.8 | 53.8 | 29.5 | 20.1 | ||||||||||||||||||||||||
| Purchased power | 330.4 | 76.7 | 75.5 | 32.5 | 145.7 | ||||||||||||||||||||||||
| Gas delivery, service and supply agreements | 462.1 | 92.2 | 146.9 | 63.4 | 159.6 | ||||||||||||||||||||||||
| Service agreements | 574.1 | 65.0 | 111.7 | 95.4 | 302.0 | ||||||||||||||||||||||||
| Capital projects | 27.1 | 27.1 | — | — | — | ||||||||||||||||||||||||
| Land easements | 529.0 | 13.3 | 26.7 | 27.4 | 461.6 | ||||||||||||||||||||||||
| Contract adjustment payments on equity units | 132.4 | 76.2 | 56.2 | — | — | ||||||||||||||||||||||||
| Other obligations | 302.8 | 64.9 | 5.5 | 5.2 | 227.2 | ||||||||||||||||||||||||
| Total Obligations | $ | 16,122.7 | $ | 2,589.9 | $ | 1,812.3 | $ | 2,347.8 | $ | 9,372.7 | |||||||||||||||||||
| 1 | Exclusive of deferred financing costs, bond premium/discount, and fair value adjustments at the time of issuance or acquisition. | ||||
| 2 | The Company's subordinated unsecured notes have a maturity in 2078, 2079, and 2082 respectively. However, the Company currently anticipates repaying in 2023, 2029, and 2032 upon exercising its redemption right. | ||||
Equity
The common shares of AQN are publicly traded on the Toronto Stock Exchange ("TSX") and the New York Stock Exchange ("NYSE") under the trading symbol "AQN". As at November 9, 2022, AQN had 683,444,959 issued and outstanding common shares.
AQN may issue an unlimited number of common shares. The holders of common shares are entitled to dividends, if and when declared; to one vote for each share at meetings of the holders of common shares; and to receive a pro rata share of any remaining property and assets of AQN upon liquidation, dissolution or winding up of AQN. All shares are of the same class and with equal rights and privileges and are not subject to future calls or assessments.
AQN is also authorized to issue an unlimited number of preferred shares, issuable in one or more series, containing terms and conditions as approved by the Board. As at September 30, 2022, AQN had outstanding:
•4,800,000 cumulative rate reset Series A preferred shares, yielding 5.162% annually for the five-year period ending on December 31, 2023;
•100 Series C preferred shares that were issued in exchange for 100 Class B limited partnership units by St. Leon Wind Energy LP; and
•4,000,000 cumulative rate reset Series D preferred shares, yielding 5.091% annually for the five year period ending on March 31, 2024.
In addition, AQN’s outstanding equity units (the "Green Equity Units") (that are in the form of "corporate units") are listed on the NYSE under the ticker symbol "AQNU". As at November 9, 2022, there were 23,000,000 Green Equity Units outstanding. Pursuant to the purchase contract forming part of each outstanding Green Equity Unit, holders are required to purchase AQN common shares on June 15, 2024. The minimum settlement rate under each purchase contract is 2.7778 common shares and the maximum settlement rate is 3.3333 common shares, resulting in a minimum of 63,889,400 common shares and a maximum of 76,665,900 common shares issuable on settlement of the purchase contracts.
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At-The-Market Equity Program
On August 15, 2022, AQN re-established an at-the-market equity program (“ATM Program”) that allows the Company to issue up to $500 million of common shares from treasury to the public from time to time, at the Company’s discretion, at the prevailing market price when issued on the TSX, the NYSE or any other existing trading market for the common shares of the Company in Canada or the United States.
During the three and nine months ended September 30, 2022, the Company issued 2,861,709 common shares under its ATM Program at an average price of $13.94 per common share for gross proceeds of approximately $38.9 million (approximately $38.5 million net of commissions). Other related costs were $0.4 million.
As at November 10, 2022, the Company has issued, since the inception of its initial ATM Program in 2019, a cumulative total of 36,814,536 common shares at an average price of $15.00 per share for gross proceeds of approximately $551.1 million (approximately $544.3 million net of commissions). Other related costs, primarily related to the establishment and subsequent re-establishments of the ATM program, were approximately $4.7 million.
Dividend Reinvestment Plan
AQN has a shareholder dividend reinvestment plan (the “Reinvestment Plan”) for registered holders of common shares of AQN. As at September 30, 2022, 142,304,835 common shares representing approximately 21% of total common shares outstanding had been registered with the Reinvestment Plan. During the three months ended September 30, 2022, 2,117,248 common shares were issued under the Reinvestment Plan, and subsequent to quarter-end, on October 14, 2022, an additional 2,508,889 common shares were issued under the Reinvestment Plan.
SHARE-BASED COMPENSATION PLANS
For the nine months ended September 30, 2022, AQN recorded $6.6 million in total share-based compensation expense as compared to $7.8 million for the same period in 2021. The compensation expense is recorded as part of administrative expenses in the consolidated statement of operations. The portion of share-based compensation costs capitalized as cost of construction is insignificant.
As at September 30, 2022, total unrecognized compensation costs related to non-vested share-based awards was $16.6 million and is expected to be recognized over a period of 1.9 years.
Stock Option Plan
AQN has a stock option plan that permits the grant of share options to officers, directors, employees and selected service providers. Except in certain circumstances, the term of an option shall not exceed ten (10) years from the date of the grant of the option.
AQN determines the fair value of options granted using the Black-Scholes option-pricing model. The estimated fair value of options, including the effect of estimated forfeitures, is recognized as an expense on a straight-line basis over the options’ vesting periods while ensuring that the cumulative amount of compensation cost recognized at least equals the value of the vested portion of the award at that date. During the nine months ended September 30, 2022, the Company granted 646,090 options to executives of the Company. The options allow for the purchase of common shares at a weighted average price of $19.11, the market price of the underlying common share at the date of grant. During the nine months ended September 30, 2022, executives of the Company exercised 40,074 stock options at a weighted average exercise price of $15.78 in exchange for 3,999 common shares issued from treasury and 36,075 options were settled in cash as payment for the exercise price and tax withholdings related to the exercise of the options.
As at September 30, 2022, a total of 2,646,544 options were issued and outstanding under the stock option plan.
Performance and Restricted Share Units
AQN issues performance share units (“PSUs”) and restricted share units ("RSUs") to certain employees as part of AQN’s long-term incentive program. During the nine months ended September 30, 2022, the Company granted (including dividends and performance adjustments) a combined total of 1,015,153 PSUs and RSUs to employees of the Company. During the nine months ended September 30, 2022, the Company settled 1,024,307 PSUs, of which 520,085 PSUs were exchanged for common shares issued from treasury and 504,222 PSUs were settled at their cash value as payment for tax withholdings related to the settlement of the PSUs.
As at September 30, 2022, a combined total of 2,387,122 PSUs and RSUs were granted and outstanding under the performance and restricted share unit plan.
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Directors' Deferred Share Units
AQN has a Directors' Deferred Share Unit Plan. Under the plan, non-employee directors of AQN receive all or any portion of their annual compensation in deferred share units (“DSUs”) and may elect to receive any portion of their remaining compensation in DSUs. The DSUs provide for settlement in cash or common shares at the election of AQN. As AQN does not expect to settle the DSUs in cash, these DSUs are accounted for as equity awards. During the nine months ended September 30, 2022, the Company issued 73,916 DSUs (including DSUs in lieu of dividends) to the non-employee directors of the Company. During the nine months ended September 30, 2022, the Company settled 5,176 DSUs, of which 2,403 DSUs were exchanged for common shares issued from treasury and 2,773 DSUs were settled at their cash value as payment for tax withholdings related to the settlement of DSUs.
As at September 30, 2022, a total of 599,118 DSUs were outstanding under the Directors’ Deferred Share Unit Plan.
Bonus Deferral Restricted Share Units
The Company has a bonus deferral RSU program that is available to certain employees. The eligible employees have the option to receive a portion or all of their annual bonus payment in RSUs in lieu of cash. The RSUs provide for settlement in common shares, and therefore these RSUs are accounted for as equity awards. During the nine months ended September 30, 2022, the Company settled 4,108 bonus RSUs, of which 1,908 were exchanged for common shares issued from treasury and 2,200 RSUs were settled at their cash value as payment for tax withholdings related to the settlement of the RSUs. In addition, during the nine months ended September 30, 2022, 48,552 bonus deferral RSUs were granted (including RSUs in lieu of dividends) to employees of the Company pursuant to the bonus deferral RSU program. The RSUs are 100% vested.
Employee Share Purchase Plan
AQN has an Employee Share Purchase Plan (the “ESPP”) which allows eligible employees to use a portion of their earnings to purchase common shares of AQN. The aggregate number of common shares reserved for issuance from treasury by AQN under this plan shall not exceed 4,000,000 shares. During the nine months ended September 30, 2022, the Company issued 210,687 common shares to employees under the ESPP.
As at September 30, 2022, a total of 2,242,012 common shares had been issued under the ESPP.
RELATED PARTY TRANSACTIONS
Equity-method investments
The Company entered into a number of transactions with equity-method investees in 2022 and 2021 (see Note 6 in the unaudited interim consolidated financial statements).
The Company provides administrative and development services to its equity-method investees and is reimbursed for incurred costs. To that effect, the Company charged its equity-method investees2 $10.6 million and $29.2 million, respectively, during the three and nine months ended September 30, 2022, as compared to $6.9 million and $19.2 million, respectively, during the same periods in 2021. Additionally, one of the equity-method investees (Liberty Development JV Inc.) provides development services to the Company on specified projects, for which it earns a development fee upon reaching certain milestones. During the three and nine months ended September 30, 2022, the development fees charged to the Company were $nil and $nil, respectively, as compared to $nil and $0.7 million, respectively, during the same periods in 2021. See Note 13 in the unaudited interim consolidated financial statements.
In 2021, a wholly-owned subsidiary of the Company made a tax equity investment into New Market Solar Investco, LLC, an equity investee of the Company and indirect owner of the New Market Solar Project. Following the closing of the construction financing facility for the New Market Solar Project, certain excess funds were distributed to the Company and in return the Company issued a promissory note of $25.8 million payable to New Market Solar Investco, LLC.
During the third quarter of 2021, the Company paid $1.5 million to Abengoa S.A. to purchase all of Abengoa S.A.'s interests in the AAGES, AAGES Development Canada Inc., and AAGES Development Spain, S.A. joint ventures. The assets acquired for AAGES Development Spain S.A included project development assets for $2.7 million and working capital of $1.5 million. The existing loan between the Company and the partnership of $3.1 million was treated as additional consideration incurred to acquire the partnership. Pursuant to an agreement between AQN and funds managed by the Infrastructure and Power strategy of Ares Management, LLC (“Ares”), in November 2021, Ares became AQN’s new partner in its non-regulated development platform for renewable energy, water and other sectors through an investment in the AAGES (subsequently renamed Liberty Development Energy Solutions B.V.) and AAGES Development Canada Inc. (subsequently renamed Liberty Development Services Canada Inc.) joint ventures.
2 Primarily Liberty Development JV Inc. and its subsidiaries, Blue Hill Wind Energy Project Partnership, and Red Lily Wind Energy Partnership.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 45 | ||||
In 2021, the Sandy Ridge II Wind Project, the Shady Oaks II Wind Project and the New Market Solar Project were contributed into joint venture entities (in which the Company and Ares each own an indirect 50% equity interest) in exchange for loans receivable in the net amount of $10.8 million and a contract asset of $17.0 million recognized for the portion of consideration expected to be payable on December 31, 2022. The transfer of the New Market Solar Project resulted in a gain of $26.2 million. The transfer of the Sandy Ridge II Wind Project and the Shady Oaks II Wind Project did not result in a gain or loss.
On August 10, 2022, the Deerfield II Wind Project was contributed into a joint venture entity (in which the Company and Ares each own an indirect 50% equity interest). The transfer of the Deerfield II Wind Project did not result in a gain or loss.
Redeemable non-controlling interest held by related party
Redeemable non-controlling interest held by related party represents a preference share in a consolidated subsidiary of the Company acquired by Liberty Development Energy Solutions B.V. (see Note 13 in the unaudited interim consolidated financial statements). Redemption is not considered probable as at September 30, 2022. The preference share was used to finance a portion of the Company's investment in Atlantica. During the three and nine months ended September 30, 2022, the Company incurred non-controlling interest attributable to Liberty Development Energy Solutions B.V. of $4.5 million and $10.1 million, respectively, as compared to $2.6 million and $7.9 million, respectively, during the same periods in 2021, and recorded distributions of $3.6 million and $9.0 million, respectively, for the three and nine months ended September 30, 2022 as compared to $2.7 million and $7.7 million, respectively, during the same periods in 2021 (see Note 13 in the unaudited interim consolidated financial statements).
Non-controlling interest held by related party
Non-controlling interest held by related party represents interest in a consolidated subsidiary of the Company acquired by a subsidiary of Atlantica in May 2019 for $96.8 million. The interest was used to finance a portion of the Company's investment in the Amherst Island Wind Facility. During the three and nine months ended September 30, 2022, the Company recorded distributions of $3.1 million and $16.1 million, respectively, as compared to $2.6 million and $11.5 million, respectively, during the same periods in 2021.
The above related party transactions have been recorded at the exchange amounts agreed to by the parties to the transactions.
Transactions with Atlantica
During 2021, the Company sold Colombian solar assets to Atlantica for consideration of approximately $23.9 million, with a gain on sale of $0.9 million, and contingent consideration of approximately $2.6 million, if certain milestones are met. For the nine months ended September 30, 2022, a gain of $1.2 million relating to the contingent consideration has been recognized.
ENTERPRISE RISK MANAGEMENT
The Corporation is subject to a number of risks and uncertainties, certain of which are described below. A risk is the possibility that an event might happen in the future that could have a negative effect on the financial condition, financial performance or business of the Corporation. The actual effect of any event on the Corporation’s business could be materially different from what is anticipated or described below. The description of risks below does not include all possible risks.
Led by the Chief Compliance and Risk Officer, the Corporation has an established enterprise risk management ("ERM") framework. The Corporation’s ERM framework follows the guidance of ISO 31000 and the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") Enterprise Risk Management - Integrated Framework (2013). The Corporation’s ERM Policy details the Corporation’s risk management processes and risk governance structure.
As part of the risk management process, risk registers have been developed across the organization through ongoing risk identification and risk assessment exercises facilitated by the Corporation’s internal ERM team. Key risks and associated mitigation strategies are reviewed by the executive-level Enterprise Risk Management Council and are presented to the Risk Committee of the Board periodically.
Identified risks are evaluated using a standardized risk scoring matrix to assess impact and likelihood. Financial, safety, security, reputational, reliability, and planned execution implications are among those considered when determining the impact of a potential risk. However, there can be no assurance that the Corporation's risk management activities will be successful in identifying, assessing, or mitigating the risks to which the Corporation is subject.
The risks discussed below are not intended as a complete list of all risks that AQN, its subsidiaries and affiliates are encountering or may encounter. Please see the Company's most recent AIF and Annual MD&A available on SEDAR and EDGAR for a further discussion of risk factors to which the Company is subject. To the extent of any inconsistency, the risks discussed below are intended to provide an update on those that were previously disclosed.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 46 | ||||
Risks Related to COVID-19
The COVID-19 situation remains fluid and its full impact on the Company’s business, financial condition, cash flows and results of operations is not fully known at this time. In addition to the risks and impacts described elsewhere in this MD&A, the COVID-19 pandemic and efforts to contain the virus could result in:
•operating, supply chain and project development and construction delays, disruptions and cost overruns;
•delayed collection of accounts receivable and increased levels of bad debt expense;
•delayed placed-in-service dates for the Company's renewable energy projects, which may give rise to, among other things, lower than anticipated revenue, delay-related liabilities to contractual counterparties and increased amounts of interest payable to construction lenders;
•reduced availability of funding under construction loans and tax equity financing, which may require the Company to initially increase its funding and, if possible, directly realize the tax benefits;
•lower revenue from the Company’s utility operations, including as a result of decreased demand and consumption by customers not covered by rate decoupling;
•negative impacts to the Company's existing and planned rate reviews, including non-recovery of certain costs incurred directly or indirectly as a result of the COVID-19 pandemic and delays in filing, processing and settlement of the reviews;
•introduction of new legislation, policies, rules or regulations that adversely impact the Company;
•labour shortages and shutdowns (including as a result of government regulation and prevention measures), reduced employee and/or contractor productivity, and loss of key personnel;
•inability to implement the Company’s growth strategy, including sourcing new acquisitions and completing previously-announced acquisitions;
•inability to carry out the Company’s capital expenditure plans on previously anticipated timelines;
•lower earnings from unhedged power generation as a result of lower wholesale commodity prices in energy markets;
•losses or liabilities resulting from default, delays or non-performance by either the Company or its counterparties under the Company’s contracts, including joint venture agreements, supply agreements, construction agreements, services agreements and power purchase and other offtake agreements;
•lower revenue from the Company's power generation facilities as a result of system load reduction and related system directed curtailments;
•delay in the permitting process of certain development projects, affecting the timing of final investment decisions and start of construction dates;
•reduced ability of the Company and its employees to effectively respond to, or mitigate the effects of, another force majeure or other significant event;
•increased operating costs for emergency supplies, personal protective equipment, cleaning services, enabling technology and other specific needs in response to COVID-19, some of which may not be recovered through future rates;
•increased market volatility and lower pension plan returns which could adversely impact the valuation of pension plan assets and future funding requirements for the Company's pension plans;
•deterioration in financial metrics and other factors that impact the Company’s credit ratings;
•inability to meet the requirements of the covenants in existing credit facilities;
•inability to access credit and capital markets on acceptable terms or at all, including to refinance maturing indebtedness;
•IT and operational technology system interruptions, loss of critical data and increased cybersecurity and privacy breaches due to “work from home” arrangements implemented by the Company;
•business disruptions and costs as "work from home" arrangements are reduced and a greater number of employees return to the office;
•losses to the Company caused by fluctuations and volatility in the trading price of Atlantica’s ordinary shares or reduction of the dividend paid to holders of Atlantica’s ordinary shares; and
•fluctuations and volatility in the trading price of the Company’s common shares and other securities, which could result in losses for the Company’s security holders.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 47 | ||||
The COVID-19 pandemic may also have the effect of heightening the other risks described herein, under the heading Enterprise Risk Management in the Company’s Annual MD&A and under the heading Enterprise Risk Factors in the Company's most recent AIF. The adverse impacts of COVID-19 on the Company can be expected to increase the longer the pandemic and any related response measures persist.
Treasury Risk Management
Capital Markets and Liquidity Risk
As at September 30, 2022, the Company had approximately $7,705.1 million of long-term consolidated indebtedness. Management of the Company believes, based on its current expectations that the cash flow from its operations, funds available to it under its revolving credit facilities and from potential future asset recycling initiatives, and its ability to access capital markets will be adequate to enable the Company to finance its operations, execute its business strategy and maintain an adequate level of liquidity. However, expected revenue and capital expenditures are only estimates. Moreover, actual cash flows from operations are dependent on regulatory, market and other conditions that are beyond the control of the Company and which may be impacted by the risk factors herein. As such, no assurance can be given that management’s expectations as to future performance will be realized.
The ability of the Company to raise additional debt or equity or to do so on favourable terms may be adversely affected by adverse financial and operational performance, or by financial market disruptions or other factors outside the control of the Company. In addition, the Company may at times incur indebtedness in excess of its long-term leverage targets, in advance of raising the additional equity necessary to repay such indebtedness and maintain its long-term leverage target. Any increase in the Company’s leverage or degradation of key credit metrics below threshold levels could, among other things, limit the Company’s ability to obtain additional financing for working capital, investment in subsidiaries, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; restrict the Company’s flexibility and discretion to operate its business; limit the Company’s ability to declare dividends; require the Company to dedicate a portion of cash flows from operations to the payment of interest on its existing indebtedness, in which case such cash flows will not be available for other purposes; cause rating agencies to re-evaluate or downgrade the Company’s existing credit ratings; require the Company to post additional collateral security under some of its contracts and hedging arrangements; expose the Company to increased interest expense on borrowings at variable rates; limit the Company’s ability to adjust to changing market conditions; place the Company at a competitive disadvantage compared to its competitors; make the Company vulnerable to any downturn in general economic conditions; render the Company unable to make expenditures that are important to its future growth strategies and require the Company to pursue alternative funding strategies, which may include accelerated asset recycling initiatives.
The Company will need to refinance or reimburse amounts outstanding under the Company’s existing consolidated indebtedness over time. There can be no assurance that any indebtedness of the Company will be refinanced or that additional financing on commercially reasonable terms will be obtained, if at all. In the event that such indebtedness cannot be refinanced, or if it can be refinanced on terms that are less favourable than the current terms, the Company's financial condition, cash flows and the ability of the Company to declare dividends or repay its indebtedness may be adversely affected.
The ability of the Company to meet its debt service requirements will depend on its ability to generate cash in the future, which depends on many factors, including the financial performance of the Company, debt service obligations, the realization of the anticipated benefits of acquisition and investment activities, and working capital and capital expenditure requirements. In addition, the ability of the Company to borrow funds in the future to make payments on outstanding debt will depend on the satisfaction of covenants in existing credit agreements and other agreements. A failure to comply with any covenants or obligations under the Company’s consolidated indebtedness could result in a default under one or more such instruments, which, if not cured or waived, could result in the termination of dividends by the Company and permit acceleration of the relevant indebtedness. If such indebtedness were to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay such indebtedness in full. There can also be no assurance that the Company will generate cash flows in amounts sufficient to pay outstanding indebtedness or to fund any other liquidity needs.
Interest Rate Risk
The Company is exposed to interest rate risk due to the impact of increasing benchmark interest rates and credit spreads on certain outstanding variable interest indebtedness, as well as any new borrowings on existing and new credit facilities, and other debt issuances. Fluctuations in interest rates may also impact the costs to obtain other forms of capital and the feasibility of planned growth initiatives.
In addition, for the Regulated Services Group, costs resulting from interest rate increases may not be recoverable in whole or in part, and “regulatory lag” may cause a time delay in the payment to the Regulated Services Group of any such costs that are recoverable. Rising interest rates may also negatively impact the economics of development projects and energy facilities, especially where project financing is being renewed or arranged.
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The Company's financing of its capital expenditures, including the Kentucky Power Transaction, is also exposed to changes in benchmark interest rates and credit spreads. While the Company intends to use the net proceeds from its approximately C$800 million common share offering which closed on November 8, 2021 and its concurrent $750 million and C$400 million fixed-to-fixed reset rate junior subordinated note offerings which closed on January 18, 2022 to finance the Kentucky Power Transaction, all such net proceeds have, in the short term, been used to repay variable rate indebtedness under credit facilities of the Company and certain of its subsidiaries prior to closing of the Kentucky Power Transaction. As a result, the Company expects to draw from the credit facilities of the Company and certain of its subsidiaries in connection with the closing of the Kentucky Power Transaction. Given the rise in variable rates to date in 2022, together with potential future interest rate increases, the Company expects higher financing costs for the Kentucky Power Transaction and other pending capital investments than initially anticipated.
As a result, fluctuations in interest rates, including the rate increases experienced to date in 2022, could materially increase the Corporation’s financing costs, limit the Corporation’s options for financing, and adversely affect its results of operations, cash flows, key credit metrics, borrowing capacity and ability to implement its business strategy.
As at September 30, 2022, approximately 78% of debt outstanding in AQN and its subsidiaries was subject to a fixed rate of interest and as a result, such debt is not subject to significant interest rate risk in the short to medium term time horizon.
Borrowings subject to variable interest rates can vary significantly from month to month, quarter to quarter and year to year. AQN does not currently hedge the interest rate risk on its variable interest rate borrowings due to the primarily short term and revolving nature of the amounts drawn.
Based on amounts outstanding as at September 30, 2022, the impact to interest expense from changes in interest rates are as follows:
•the Corporate Credit Facility is subject to a variable interest rate and had $80.7 million outstanding as at September 30, 2022. As a result, a 100 basis point change in the variable rate charged would impact interest expense by $0.8 million annually;
•the Long Term Regulated Services Credit Facility is subject to a variable interest rate and had no amounts outstanding as at September 30, 2022. As a result, a 100 basis point change in the variable rate charged would not impact interest expense;
•the Short Term Regulated Services Credit Facility is subject to a variable interest rate and had no amounts outstanding as at September 30, 2022. As a result, a 100 basis point change in the variable rate charged would not impact interest expense;
•the Regulated Services Delayed Draw Term Facility is subject to a variable interest rate and had $610.4 million outstanding as at September 30, 2022. As a result, a 100 basis point change in the variable rate charged would impact interest expense by $6.1 million annually;
•the Bermuda Credit Facility is subject to a variable interest rate and had $74.3 million outstanding as at September 30, 2022. As a result, a 100 basis point change in the variable rate charged would impact interest expense by $0.7 million annually;
•the Bermuda Working Capital Facility is subject to a variable interest rate and had $4.0 million outstanding as at September 30, 2022. As a result, a 100 basis point change in the variable rate charged would impact interest expense by $0.0 million annually;
•the Regulated Services Group's commercial paper program is subject to a variable interest rate and had $445.4 million outstanding as at September 30, 2022. As a result, a 100 basis point change in the variable rate charged would impact interest expense by $4.5 million annually;
•the Renewable Energy Credit Facility is subject to a variable interest rate and had $375.6 million outstanding as at September 30, 2022. As a result, a 100 basis point change in the variable rate charged would impact interest expense by $3.8 million annually; and
•term facilities at BELCO and ESSAL that are subject to variable interest rates had $80.9 million outstanding as at September 30, 2022. As a result, a 100 basis point change in the variable rate charged would impact interest expense by $0.8 million annually.
Tax Risk and Uncertainty
The Corporation is subject to income and other taxes primarily in the United States and Canada; however, it is also subject to income and other taxes in international jurisdictions, such as Chile and Bermuda. Changes in tax laws or interpretations thereof in the jurisdictions in which the Corporation does business could adversely affect the Company's results from
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operations, returns to shareholders, and cash flows. One or more taxing jurisdictions could seek to impose incremental or new taxes on the Company pursuant to one of the following or otherwise:
•The Inflation Reduction Act ("IRA") was signed into law in the United States on August 16, 2022. The legislation is inclusive of an extension and expansion of clean energy tax credits and a minimum tax. The minimum tax is currently not applicable to the Company. On October 5, 2022, the U.S. Treasury and Internal Revenue Service issued a set of notices requesting public comment on implementing key provisions.
•On April 19, 2021, the Canadian federal government delivered its 2021 budget which contained proposed measures related to limitations on interest deductibility and changes in relation to international taxation. Draft legislative proposals pertaining to interest deductibility were initially released for public comment on February 4, 2022, with revised legislative proposals subsequently released on November 3, 2022. The proposed rules on interest deductibility are expected to be effective no earlier than January 1, 2024. The proposed rules and their application are complex and could have a material adverse impact on the Corporation's effective tax rate and financial results in future years if enacted as drafted.
•As a consequence of the Organization for Economic Co-operation and Development’s (“OECD”) various initiatives on “Base Erosion and Profit Shifting”, there has been increased focus by taxing authorities across the globe to pursue common international principles for the entitlement to taxation of global corporate profits and eliminate perceived tax advantages enjoyed by multinational enterprises. Certain components of the relevant legislation in the jurisdictions in which the Corporation operates or has domiciled subsidiaries are expected to apply with application expected no earlier than January 1, 2023. As the local legislation in the various jurisdictions is enacted and comes into effect, there could be a risk that the Company's tax expense and/or cash taxes could materially increase or that the Company's interpretation of the new legislation may not align with that of the relevant tax authority’s interpretation. This could have a material adverse effect on the Corporation’s financial condition, results of operations, and cash flows in future periods.
The Corporation cannot provide assurance that the Canada Revenue Agency, the Internal Revenue Service or any other applicable taxation authority will agree with the tax positions taken by the Corporation, including with respect to claimed expenses and the cost amount of the Corporation’s depreciable properties. A successful challenge by an applicable taxation authority regarding such tax positions could adversely affect the results of operations and financial position of the Corporation.
Development by the Corporation of renewable power generation facilities in the United States depends in part on federal tax credits and other tax incentives. The IRA has extended and expanded certain energy credits, providing greater certainty regarding the availability of these credits on a going forward basis. However, the rules governing these tax credits still include technical requirements for credit eligibility. If the Corporation is unable to complete construction on current or planned projects within certain deadlines or satisfy certain new requirements relating to prevailing wage and apprenticeship requirements, the reduced incentives may be insufficient to support continued development or may result in substantially reduced financial benefits from facilities or long-term investment in facilities that the Corporation is committed to complete. In addition, the Corporation has entered into certain tax equity financing transactions with financial partners for certain of its renewable power facilities in the United States, under which allocations of future cash flows to the Corporation from the applicable facility could be adversely affected in the event that there are changes in U.S. tax laws that apply to facilities previously placed in service.
OPERATIONAL RISK MANAGEMENT
Inflation Risk
AQN's profitability could be impacted by inflation increases above long-term averages. The Regulated Services Group’s facilities are subject to rate setting by its regulatory agencies. The time between the incurrence of costs and the granting of the rates to recover those costs by regulatory agencies is known as regulatory lag. As a result of regulatory lag, inflationary effects and timing delays may impact the ability to recover expenses and/or capital costs, and profitability could be impacted. In the event of significant inflation, the impact of regulatory lag on the Company would be increased. In order to mitigate this exposure, the Regulated Services Group seeks to obtain approval for regulatory constructs in the states in which it operates to allow for timely recovery of operating expenses and capital costs.
The Renewable Energy Group's assets are subject to long term PPAs, most of which are not indexed to inflation and could experience declines in profitability if operating costs increase at a rate greater than the offtake price.
Development and construction projects could experience a decrease in expected returns as a result of increased costs. To mitigate the risk of inflation the Company attempts to enter into fixed price constructions agreements and fixed price offtake agreements.
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Tariff Risk
Changes in tariffs or duties, such as antidumping and countervailing duty rates that could be put in place as a result of the U.S. Department of Commerce's investigation into an antidumping and countervailing duties circumvention claim on solar cells and panels supplied from Malaysia, Vietnam, Thailand and Cambodia, may adversely affect the capital expenditures required to develop or construct the Corporation’s projects, as well as the timing for completion, or viability, of such projects. In the U.S., tariffs have been imposed in recent years to imports of solar panels, aluminum and steel, among other goods and raw materials. These occurrences may have adverse impacts to the Corporation, as the buyer of goods, which could adversely affect the Corporation’s expected returns, results of operations and cash flows.
Risks Relating to the Kentucky Power Transaction
The closing of the Kentucky Power Transaction is subject to the normal commercial risks that such acquisition will not close on the terms negotiated or at all. The Kentucky Power Transaction remains subject to closing conditions, including certain regulatory and governmental approvals. The failure to satisfy or waive the conditions may result in the termination of the acquisition agreement. Accordingly, there can be no assurance that the Company will complete the Kentucky Power Transaction in the timeframe or on the basis described herein, if at all. As the Kentucky Power Transaction is subject to various regulatory approvals, it is consequently subject to the risks that such approvals may not be timely obtained or may impose unfavourable conditions that could impair the ability to complete the acquisition or impose adverse conditions on the Company in order to complete the acquisition. The presence of intervenors in the regulatory approval process has the effect of increasing these risks.
If the Kentucky Power Transaction is not completed, the Company could be subject to a number of risks that may adversely affect the Company’s business, financial condition, results of operations, reputation and cash flows, including (i) the requirement to pay costs relating to the Kentucky Power Transaction, including costs relating to the financing thereof and obtaining regulatory approval, and (ii) time and resources committed by the Company’s management to matters relating to the Kentucky Power Transaction that could otherwise have been devoted to pursuing other beneficial opportunities. In addition, if the acquisition agreement for the Kentucky Power Transaction is terminated in certain circumstances, the Company may be required to pay a termination fee of $65 million.
Business combinations such as the Kentucky Power Transaction involve risks that could materially and adversely affect the Company’s business plan, including the failure to realize the results that the Company expects. Transition and integration activities associated with this business combination may not go as planned, creating the potential for increased costs, service disruption, noncompliance, reputational harm and other negative outcomes. There can be no assurance that the Company will be successful in increasing the historical returns earned by either of Kentucky Power or Kentucky Transco, that the load declines experienced by Kentucky Power over recent years will not continue to be a prevailing trend, or that the Company will be able to fully realize some or all of the expected benefits of the Kentucky Power Transaction or succeed in implementing its strategic objectives relating to the acquired entities, including the success of the transfer of operational control of the Mitchell Plant from Kentucky Power to the Wheeling Power Company and the transition of Kentucky Power’s generating mix to greener sources (i.e. “greening the fleet” initiatives). The ability to realize these anticipated benefits and implement these strategic objectives will depend in part on successfully retaining staff, hiring additional staff to replace certain of the vendors’ centralized operations, obtaining favourable regulatory outcomes, realizing growth opportunities, no unanticipated economic changes in the areas where the acquired entities operate, and potential synergies through the coordination of activities and operations with the Company’s existing business. There is a risk that some or all of the expected benefits and strategic objectives will fail to materialize, or may not occur within the time periods anticipated by the Company. A failure to realize the anticipated benefits of or implement strategic objectives relating to the Kentucky Power Transaction on an efficient and effective basis could have a material adverse effect on the Company’s financial condition, results of operations, reputation and cash flows.
A change in the capital structure of the Company could cause credit rating agencies which rate the Company’s outstanding debt obligations to re-evaluate and potentially downgrade the Company’s current credit ratings, which could increase the Company’s borrowing costs and adversely impact the market price of the outstanding securities of the Company.
The Kentucky Power Transaction could also result in a downgrade of the credit rating of Kentucky Power or its outstanding bonds, and could require Kentucky Power to offer to prepay $525 million in principal amount of its outstanding bonds if the credit ratings thereof fall below investment grade (or in the event such bonds are placed on “credit watch” or assigned a “negative outlook” if they are rated BBB- by S&P or Baa3 by Moody’s at such time).
There may be liabilities that the Company failed to discover or was unable to quantify in the Company’s due diligence, and the Company may not have recourse for some or all of these potential liabilities. While the Company has accounted for these potential liabilities for the purposes of making its decision to enter into the acquisition agreement, there can be no assurance that any such liability will not exceed the Company’s estimates. In connection with the Kentucky Power Transaction, the Company has obtained a representation and warranty insurance policy, with coverage up to $255 million, subject to an initial retention of $21 million. Nevertheless, this insurance policy is subject to certain exclusions and
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limitations and there may be circumstances for which the insurer attempts to limit such coverage or refuses to indemnify the Company or where the coverage provided under the insurance policy may otherwise be insufficient or inapplicable.
Kentucky Power and Kentucky Transco are parties to agreements that contain change of control and/or termination for convenience provisions which may be triggered following completion of the Kentucky Power Transaction. The operation of these change of control or termination provisions, if triggered, could result in unanticipated expenses and/or cash payments following the consummation of the Kentucky Power Transaction or adversely affect the acquired entities’ results of operations and financial condition. Unless these change of control provisions are waived, or the termination provisions are not exercised, by the other party, the operation of any of these provisions could adversely affect the results of operations and financial condition of the Company and the acquired entities.
All of the electricity generated by Kentucky Power is produced by the combustion of fossil fuels. As a result, the acquisition of Kentucky Power could result in reputational harm to the Company and adversely affect perceptions regarding the Company’s commitment to environmental and sustainability matters, as well as the Company’s ability to accomplish its environmental and sustainability objectives. The operation of fossil-fueled generation plants, including resulting emissions of nitrogen and sulfur oxides, mercury and particulates and the discharge and disposal of solid waste (including coal-combustion residuals (“CCRs”)), is subject to extensive federal, state and local environmental statutes, rules and regulations relating to air quality, water quality, waste management, natural resources and health and safety. Compliance with these requirements requires Kentucky Power to incur significant costs, including capital expenditures, for environmental monitoring, installation of pollution control equipment, emission fees, disposal activities, decommissioning, and permitting obligations at its facilities. If these compliance costs become uneconomical, Kentucky Power may ultimately be required to retire generating capacity prior to the end of its estimated life. The costs of complying with these legal requirements could also adversely affect Kentucky Power’s results of operations, financial condition and cash flows, and those of the Company following the closing of the Kentucky Power Transaction. In addition, the impacts could become even more significant if existing requirements governing air emissions management and disposal, CCR waste and/or waste matter discharge become more restrictive in the future, more extensive operating and/or permitting requirements are imposed or additional substances associated with power generation are subjected to increased regulation. Although Kentucky Power typically recovers expenditures for pollution control technologies, replacement generation, undepreciated plant balances and associated operating costs from customers, there can be no assurance that Kentucky Power will be able to obtain a rate order to fully recover the remaining costs associated with such plants in the future. The failure to recover these costs could reduce Kentucky Power’s results of operations, financial condition and cash flows, and those of the Company following the closing of the Kentucky Power Transaction.
In addition, future changes to environmental laws, including with respect to the regulation of CO2 emissions, could cause Kentucky Power to incur materially higher costs than it has incurred to date.
Kentucky Power’s service territory experienced significant flooding as a result of severe weather experienced in late July 2022, which resulted in additional operating and capital expenditures being incurred by Kentucky Power. While a regulatory asset has been established for such expenditures, regulatory review of those expenditures would not occur until Kentucky Power’s next rate case, which is expected to be filed in 2023. As a result, the Company’s financial condition, cash flows and results of operations could be adversely impacted based on the determination made in that case.
Litigation Risks and Other Contingencies
AQN and certain of its subsidiaries are involved in various litigation, claims and other legal and regulatory proceedings that arise from time to time in the ordinary course of business. Any accruals for contingencies related to these items are recorded in the financial statements at the time it is concluded that a material financial loss is likely and the related liability is estimable. Anticipated recoveries under existing insurance policies are recorded when reasonably assured of recovery.
Mountain View Fire
On November 17, 2020, a wildfire now known as the Mountain View Fire occurred in the territory of Liberty Utilities (CalPeco Electric) LLC ("Liberty CalPeco"). The cause of the fire remains under investigation, and CAL FIRE has not yet released its final report. There are currently eleven active lawsuits that name the Company and/or certain of its subsidiaries as defendants in connection with the Mountain View fire. Five of these lawsuits are brought by groups of individual plaintiffs alleging causes of action including negligence, inverse condemnation, nuisance, trespass, and violations of Cal. Pub. Util. Code 2106 and Cal. Health and Safety Code 13007. In the sixth active lawsuit, County of Mono, Antelope Valley Fire Protection District, Toiyabe Indian Health Project, and Bridgeport Indian Colony allege similar causes of action and seek damages for fire suppression costs, law enforcement costs, property and infrastructure damage, and other costs. In four other lawsuits, insurance companies allege inverse condemnation and negligence and seek recovery of amounts paid and to be paid to their insureds. The eleventh lawsuit alleges the wrongful death of an individual, along with causes of action similar to those alleged in the cases filed by groups of individual plaintiffs. The likelihood of success in these lawsuits cannot be reasonably predicted. Liberty CalPeco intends to vigorously defend them. The Company has wildfire liability insurance that is expected to apply up to applicable policy limits.
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Technology Infrastructure Implementation Risk
AQN and certain of its subsidiaries are in the process of updating their technology infrastructure systems through the implementation of an integrated customer solution platform, which is expected to include new advanced metering, customer billing, and enterprise resource planning systems. The implementation of these systems is being managed by a dedicated team. Following successful pilot implementations, deployment is occurring in a phased approach across the enterprise from 2022 through 2026. The implementation of such technology systems will require the investment of significant financial and human resources. Disruptions, delays or deficiencies in the design, implementation, or operation of these technology systems could adversely affect the Company’s operations, including its ability to monitor its business, pay its suppliers, bill its customers, and report financial information accurately and on a timely basis; lead to higher than expected costs; or result in the failure to achieve the expected benefits. As a result, the Company’s operations, financial condition, cash flows and results of operations could be adversely affected.
QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly financial information for the eight quarters ended September 30, 2022:
| (all dollar amounts in $ millions except per share information) | 4th Quarter 2021 | 1st Quarter 2022 | 2nd Quarter 2022 | 3rd Quarter 2022 | |||||||||||||||||||
| Revenue | $ | 594.8 | $ | 735.7 | $ | 624.3 | $ | 666.7 | |||||||||||||||
| Net earnings (loss) attributable to shareholders | 175.6 | 91.0 | (33.4) | (195.2) | |||||||||||||||||||
| Net earnings (loss) per share | 0.27 | 0.13 | (0.05) | (0.29) | |||||||||||||||||||
| Diluted net earnings (loss) per share | 0.26 | 0.13 | (0.05) | (0.29) | |||||||||||||||||||
Adjusted Net Earnings1 | 136.3 | 141.3 | 109.7 | 73.5 | |||||||||||||||||||
Adjusted Net Earnings per common share1 | 0.21 | 0.21 | 0.16 | 0.11 | |||||||||||||||||||
Adjusted EBITDA1 | 297.6 | 330.6 | 289.3 | 276.1 | |||||||||||||||||||
| Total assets | 16,785.8 | 17,669.9 | 17,737.9 | 17,653.3 | |||||||||||||||||||
Long term debt2 | 6,211.7 | 7,191.6 | 7,455.4 | 7,705.1 | |||||||||||||||||||
| Dividend declared per common share | $ | 0.17 | $ | 0.17 | $ | 0.18 | $ | 0.18 | |||||||||||||||
| 4th Quarter 2020 | 1st Quarter 2021 | 2nd Quarter 2021 | 3rd Quarter 2021 | ||||||||||||||||||||
| Revenue | $ | 491.3 | $ | 634.5 | $ | 527.5 | $ | 528.6 | |||||||||||||||
| Net earnings (loss) attributable to shareholders | 504.2 | 13.9 | 103.2 | (27.9) | |||||||||||||||||||
| Net earnings (loss) per share | 0.84 | 0.02 | 0.16 | (0.05) | |||||||||||||||||||
| Diluted net earnings (loss) per share | 0.83 | 0.02 | 0.16 | (0.05) | |||||||||||||||||||
Adjusted Net Earnings1 | 127.0 | 124.5 | 91.7 | 97.6 | |||||||||||||||||||
Adjusted Net Earnings per common share1 | 0.21 | 0.20 | 0.15 | 0.15 | |||||||||||||||||||
Adjusted EBITDA1 | 253.1 | 282.9 | 244.9 | 252.0 | |||||||||||||||||||
| Total assets | 13,224.1 | 15,286.1 | 16,453.7 | 16,699.0 | |||||||||||||||||||
Long term debt2 | 4,538.8 | 6,353.7 | 6,622.6 | 6,870.3 | |||||||||||||||||||
| Dividend declared per common share | $ | 0.16 | $ | 0.16 | $ | 0.17 | $ | 0.17 | |||||||||||||||
| 1 | See Caution Concerning Non-GAAP Measures. | ||||
| 2 | Includes current portion of long-term debt, long-term debt and convertible debentures. | ||||
The quarterly results are impacted by various factors including seasonal fluctuations and acquisitions of facilities as noted in this MD&A.
Quarterly revenues have fluctuated between $491.3 million and $735.7 million over the prior two year period. A number of factors impact quarterly results including acquisitions, seasonal fluctuations, and winter and summer rates built into the PPAs. In addition, a factor impacting revenues year over year is the fluctuation in the strength of the Canadian dollar relative to the U.S. dollar which can result in significant changes in reported revenue from Canadian operations.
Quarterly net earnings attributable to shareholders have fluctuated between a loss of $195.2 million and earnings of $504.2 million over the prior two year period. Earnings have been significantly impacted by non-cash factors such as deferred tax recovery and expense, impairment of intangibles, property, plant and equipment and mark-to-market gains and losses on financial instruments.
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DISCLOSURE CONTROLS AND PROCEDURES
AQN's management carried out an evaluation as of September 30, 2022, under the supervision of and with the participation of AQN’s Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operations of AQN’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15 (e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, the CEO and the CFO have concluded that as of September 30, 2022, AQN’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by AQN in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms of the U.S. Securities and Exchange Commission, and is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management Report on Internal Controls over Financial Reporting
Management, including the CEO and the CFO, is responsible for establishing and maintaining internal control over financial reporting. Management, as at the end of the period covered by this interim filing, designed internal controls over financial reporting to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. The control framework management used to design the Company's internal control over financial reporting is that established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company acquired Liberty NY Water during the nine months ended September 30, 2022. The financial information for this acquisition is included in this MD&A and in Note 3 to the unaudited interim consolidated financial statements. Liberty NY Water contributed net earnings of $10.7 million and represented approximately 4.7% of the Company's consolidated revenue for the nine months ended September 30, 2022, and approximately 1.9% and 4.1% of the Company's current and total consolidated assets, and 3.9% and 2.9% of the Company's current and total consolidated liabilities, respectively, as at September 30, 2022. National Instrument 52-109 and the U.S. Securities and Exchange Commission provide an exemption whereby companies undergoing acquisitions can exclude the acquired business in the year of acquisition from the scope of testing and assessment of design and operational effectiveness of controls over financial reporting. Due to the complexity associated with assessing internal controls during integration efforts, the Company plans to utilize the scope exemption as it relates to this acquisition in its management report on internal controls over financial reporting for the year ending December 31, 2022.
Changes in Internal Controls over Financial Reporting
For the nine months ended September 30, 2022, there has been no change in the Company’s internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting. AQN continues to apply its internal control structure over the operations of the acquired business discussed above.
Inherent Limitations on Effectiveness of Controls
Due to its inherent limitations, disclosure controls and procedures or internal control over financial reporting may not prevent or detect all misstatements based on error or fraud. Further, the effectiveness of internal control is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may change.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
AQN prepared its unaudited interim consolidated financial statements in accordance with U.S. GAAP. The preparation of the unaudited interim consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, related amounts of revenues and expenses, and disclosure of contingent assets and liabilities. Significant areas requiring the use of management judgment relate to the scope of consolidated entities, useful lives and recoverability of depreciable assets, the measurement of deferred taxes and the recoverability of deferred tax assets, rate-regulation, unbilled revenue, pension and post-employment benefits, fair value of derivatives and fair value of assets and liabilities acquired in a business combination. Actual results may differ from these estimates.
AQN’s significant accounting policies and new accounting standards are discussed in Notes 1 and 2 respectively in the Company's unaudited interim consolidated financial statements.
| Algonquin Power & Utilities Corp. - Management Discussion & Analysis | 54 | ||||
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE
I, Arun Banskota, President and Chief Executive Officer of Algonquin Power & Utilities Corp., certify the following:
1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Algonquin Power & Utilities Corp. (the “issuer”) for the interim period ended September 30, 2022.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
a.designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
i.material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
ii.information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
b.designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
5.2 ICFR - material weakness relating to design: N/A
5.3 Limitation on scope of design: The issuer has disclosed in its interim MD&A
a.The fact that the issuer’s other certifying officer(s) and I have limited the scope of our design of DC&P and ICFR to exclude controls, policies and procedures of a business that the issuer acquired not more than 365 days before the issuer’s financial year end; and
b.Summary financial information about the business that the issuer acquired that has been consolidated in the issuer’s financial statements.
6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2022 and ended on September 30, 2022 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
Date: November 11, 2022
/s/ Arun Banskota
_______________________
Arun Banskota
President and Chief Executive Officer
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE
I, Darren Myers, Chief Financial Officer of Algonquin Power & Utilities Corp., certify the following:
1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Algonquin Power & Utilities Corp. (the “issuer”) for the interim period ended September 30, 2022.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
a.designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
i.material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
ii.information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
b.designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
5.2 ICFR - material weakness relating to design: N/A
5.3 Limitation on scope of design: The issuer has disclosed in its interim MD&A
a.The fact that the issuer’s other certifying officer(s) and I have limited the scope of our design of DC&P and ICFR to exclude controls, policies and procedures of a business that the issuer acquired not more than 365 days before the issuer’s financial year end; and
b.Summary financial information about the business that the issuer acquired that has been consolidated in the issuer’s financial statements.
6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2022 and ended on September 30, 2022 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
Date: November 11, 2022
/s/ Darren Myers
_______________________
Darren Myers
Chief Financial Officer
Algonquin Power & Utilities Corp. Announces 2022 Third Quarter Financial Results
OAKVILLE, Ontario - November 11, 2022 - Algonquin Power & Utilities Corp. (TSX/NYSE: AQN) (“AQN” or the “Company”) today announced financial results for the third quarter ended September 30, 2022. All amounts are shown in United States dollars (“U.S. $” or “$”), unless otherwise noted.
“It was a challenging third quarter. Despite year-over-year growth in Adjusted EBITDA1, our results for the quarter came in below our expectations and were negatively impacted by increasing interest rates and the timing of tax incentives related to certain renewable energy projects. Our underlying businesses remain strong; however, we are not immune to the macroeconomic environment. Our team is focused on identifying and implementing the necessary adjustments while executing on our three pillars of Growth, Operational Excellence and Sustainability to drive shareholder value over the long-term,” said Arun Banskota, President and Chief Executive Officer of AQN.
Banskota continued, “Although our earnings were challenged, this past quarter AQN took important strides executing on our growth objectives across both the regulated and renewable sides of our business. On the regulated side, we are one step closer to completing the pending Kentucky Power acquisition, which is expected to add to our rate base, grow customer connections, and provide an opportunity to be part of the energy transition in Kentucky. The signing of our inaugural asset recycling transaction demonstrates the potential value of our existing renewable energy portfolio and greenfield pipeline. We continue to be excited about the prospects of our asset recycling program for 2023 and beyond.”
Q3 2022 Financial Highlights
•Adjusted EBITDA1 of $276.1 million, an increase of 10% compared to the third quarter of 2021.
•Adjusted Net Earnings1 of $73.5 million, a decrease of 25% compared to the third quarter of 2021. Adjusted Net Earnings1 was negatively impacted year-over-year by higher interest expense of $23.3 million as a result of borrowings to support growth and higher interest rates. The Company also had lower year-over-year recognition of investment tax credits and production tax credits of $17.1 million, which included revised estimates associated with renewable projects that are now expected to be placed in service in 2023.
•Adjusted Net Earnings1 per common share of $0.11, a decrease of 27% compared to the third quarter of 2021.
All amounts in U.S. $ millions except per share information | Three months ended September 30 | |||||||||||||||||||||||||
| 2022 | 2021 | Change | ||||||||||||||||||||||||
| Revenue | $ | 666.7 | $ | 528.6 | 26% | |||||||||||||||||||||
| Net earnings (loss) attributable to shareholders | (195.2) | (27.9) | (600)% | |||||||||||||||||||||||
| Per common share | (0.29) | (0.05) | (480)% | |||||||||||||||||||||||
| Cash provided by operating activities | 102.9 | 174.7 | (41)% | |||||||||||||||||||||||
Adjusted Net Earnings1 | 73.5 | 97.6 | (25)% | |||||||||||||||||||||||
| Per common share | 0.11 | 0.15 | (27)% | |||||||||||||||||||||||
Adjusted EBITDA1 | 276.1 | 252.0 | 10% | |||||||||||||||||||||||
Adjusted Funds from Operations1 | 205.5 | 170.2 | 21% | |||||||||||||||||||||||
| Dividends per common share | 0.1808 | 0.1706 | 6% | |||||||||||||||||||||||
1 Please refer to "Non-GAAP Measures" at the end of this document for further details.
Corporate Highlights
•Progress Towards Closing the Kentucky Power Acquisition — On October 26, 2021, Liberty Utilities Co. (“Liberty”), an indirect subsidiary of AQN, entered into an agreement with American Electric Power Company, Inc. ("AEP") and AEP Transmission Company, LLC to acquire Kentucky Power Company and AEP Kentucky Transmission Company, Inc. for a total purchase price of approximately $2.846 billion, including the assumption of approximately $1.221 billion in debt (the "Kentucky Power Transaction"). On September 29, 2022, the parties entered into an amendment to the acquisition agreement, providing a path towards closing. Among other things, the amendment reduces the purchase price by $200 million to approximately $2.646 billion, including the assumption of approximately $1.221 billion in debt. The Kentucky Power Transaction is currently expected to close in January 2023. Closing remains subject to the satisfaction or waiver of certain conditions precedent, including approval of the Kentucky Power Transaction by the U.S. Federal Energy Regulatory Commission. Upon closing, the Kentucky Power Transaction will add to the Company’s regulated footprint in the U.S. and is expected to offer the opportunity to leverage its operational expertise and deliver benefits to the customers and communities of eastern Kentucky.
•Inaugural Asset Recycling Transaction — On October 3, 2022, the Company announced that it entered into an agreement to sell ownership interests in a portfolio of operating wind facilities in the U.S. and Canada to InfraRed Capital Partners, an international infrastructure investment manager that is part of SLC Management. The transaction consists of the sale of (1) a 49% ownership interest in three operating wind facilities in the U.S. totaling 551 MW of installed capacity, and (2) an 80% ownership interest in a 175 MW operating wind facility in Canada. Total cash proceeds from this asset recycling transaction are expected to be approximately US$278 million for the U.S. wind facilities and approximately C$107 million for the Canadian wind facility, subject to customary closing adjustments. Through its ability to develop, manage construction and perform asset management services, upon closing AQN will have added incremental shareholder value from these four wind projects.
•Release of 2022 ESG Report — Subsequent to the quarter, on November 7, 2022, the Company released its 2022 ESG Report, which details AQN's progress with respect to environmental, social and governance matters. Highlights of this year's report include an enhanced Diversity, Equity and Inclusion section showcasing AQN's accomplishments in this area, as well as enhanced data-driven content with the inclusion of new key performance indicators.
Outlook
•Updated 2022 Adjusted Net Earnings Per Common Share Estimate – In light of challenging macroeconomic conditions (including higher interest rates and inflation), delays in the construction and completion of certain of the Company’s renewable energy projects, and anticipated delays in connection with certain rate decisions, among other factors, the Company is updating its previously-disclosed Adjusted Net Earnings per common share estimate for the 2022 fiscal year from a range of $0.72-$0.77 to a range of $0.66-$0.69. This revised estimate is based on, and should be read in conjunction with, the assumptions set out under “Outlook – Updated 2022 Adjusted Net Earnings Per Common Share Estimate” and “Caution Concerning Forward-Looking Statements and Forward-Looking Information” in AQN’s Management Discussion & Analysis for the three and nine months ended September 30, 2022 (the “Interim MD&A”), which will be available on SEDAR, EDGAR and the Company’s web site. Please also refer to “Caution Regarding Forward-Looking Information” and “Non-GAAP Measures” below.
•Update on Longer-Term Targets – Given the challenging macroeconomic environment, which is expected to continue into 2023, the Company is evaluating its longer-term targets and financial expectations. The Company intends to provide further details at its upcoming Investor and Analyst Day, expected to be held in early 2023.
AQN’s unaudited interim consolidated financial statements for the three and nine months ended September 30, 2022, and Interim MD&A will be available on its web site at www.AlgonquinPowerandUtilities.com and on SEDAR at www.sedar.com and EDGAR at www.sec.gov/edgar.
Earnings Conference Call
AQN will hold an earnings conference call at 8:00 a.m. eastern time on Friday, November 11, 2022, hosted by President and Chief Executive Officer, Arun Banskota and Chief Financial Officer, Darren Myers.
Date: | Friday, November 11, 2022 | |||||||
Time: | 8:00 a.m. ET | |||||||
Conference Call: | Toll Free Dial-In Number | 1-800-806-5484 | ||||||
| Toll Dial-In Number | (416) 641-6104 | |||||||
| Event Passcode | 8338665# | |||||||
Webcast: | https://edge.media-server.com/mmc/p/9wsn4dfd | |||||||
Presentation also available at: www.algonquinpowerandutilities.com | ||||||||
About Algonquin Power & Utilities Corp. and Liberty
Algonquin Power & Utilities Corp., parent company of Liberty, is a diversified international generation, transmission, and distribution utility with over $17 billion of total assets. Through its two business groups, the Regulated Services Group and the Renewable Energy Group, AQN is committed to providing safe, secure, reliable, cost-effective, and sustainable energy and water solutions through its portfolio of electric generation, transmission, and distribution utility investments to over one million customer connections, largely in the United States and Canada. AQN is a global leader in renewable energy through its portfolio of long-term contracted wind, solar, and hydroelectric generating facilities. AQN owns, operates, and/or has net interests in over 4 GW of installed renewable energy capacity.
AQN is committed to delivering growth and the pursuit of operational excellence in a sustainable manner through an expanding global pipeline of renewable energy and electric transmission development projects, organic growth within its rate-regulated generation, distribution, and transmission businesses, and the pursuit of accretive acquisitions and value enhancing recycling of assets.
AQN's common shares, preferred shares, Series A, and preferred shares, Series D are listed on the Toronto Stock Exchange under the symbols AQN, AQN.PR.A, and AQN.PR.D, respectively. AQN's common shares, Series 2018-A subordinated notes, Series 2019-A subordinated notes and equity units are listed on the New York Stock Exchange under the symbols AQN, AQNA, AQNB, and AQNU, respectively.
Visit AQN at www.algonquinpowerandutilities.com and follow us on Twitter @AQN_Utilities.
Investor Inquiries:
Amelia Tsang
Vice President, Investor Relations
Algonquin Power & Utilities Corp.
E-mail: InvestorRelations@APUCorp.com
Telephone: (905) 465-4500
Media Inquiries:
Stephanie Bose
Director, Corporate Communications
Liberty
E-mail: Corporate.Communications@libertyutilities.com
Telephone: (905) 465-4500
Caution Regarding Forward-Looking Information
Certain statements included in this news release constitute ‘‘forward-looking information’’ within the meaning of applicable securities laws in each of the provinces and territories of Canada and the respective policies, regulations and rules under such laws and ‘‘forward-looking statements’’ within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 (collectively, ‘‘forward-looking statements”). The words “will”, “expects”, “estimates”, “intends”, “anticipates” (and grammatical variations of such terms) and similar expressions are often intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Specific forward-looking statements in this news release include, but are not limited to, statements regarding: expectations regarding AQN’s Adjusted Net Earnings per common share for the 2022 fiscal year; expectations regarding the anticipated closing of the Kentucky Power Transaction and AQN's inaugural asset recycling transaction, including the expected timing and purchase price for such transactions; expectations regarding the Kentucky Power Transaction's impacts on, and opportunities and benefits for, AQN; the anticipated benefits of the Kentucky Power Transaction to customers and communities of eastern Kentucky; expectations regarding the energy transition in Kentucky; expectations regarding future macroeconomic conditions; and expectations regarding AQN’s Investor and Analyst Day. These statements are based on factors or assumptions that were applied in drawing a conclusion or making a forecast or projection, including assumptions based on historical trends, current conditions and expected future developments. Since forward-looking statements relate to future events and conditions, by their very nature they require making assumptions and involve inherent risks and uncertainties. AQN cautions that although it is believed that the assumptions are reasonable in the circumstances, these risks and uncertainties give rise to the possibility that actual results may differ materially from the expectations set out in the forward-looking statements. Material risk factors and assumptions include those set out in AQN's Management Discussion & Analysis and Annual Information Form for the year ended December 31, 2021, and in the Interim MD&A, each of which is or will be available on SEDAR and EDGAR. Given these risks, undue reliance should not be placed on these forward-looking statements, which apply only as of their dates. Other than as specifically required by law, AQN undertakes no obligation to update any forward-looking statements to reflect new information, subsequent or otherwise.
Non-GAAP Measures
AQN uses a number of financial measures to assess the performance of its business lines. Some measures are calculated in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"), while other measures do not have a standardized meaning under U.S. GAAP. These non-GAAP measures include non-GAAP financial measures and non-GAAP ratios, each as defined in Canadian National Instrument 52-112 — Non-GAAP and Other Financial Measures Disclosure. AQN’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.
The terms “Adjusted Net Earnings”, “Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization” (or “Adjusted EBITDA”), and “Adjusted Funds from Operations”, which are used in this news release, are non-GAAP financial measures. An explanation of each of these non-GAAP financial measures can be found in the section entitled "Caution Concerning Non-GAAP Measures" in the Interim MD&A, which section is incorporated by reference into this news release, and a reconciliation to the most directly comparable U.S. GAAP measure, in each case, can be found below. In addition, “Adjusted Net Earnings” is presented in this news release on a per common
share basis. Adjusted Net Earnings per common share is a non-GAAP ratio and is calculated by dividing Adjusted Net Earnings by the weighted average number of common shares outstanding during the applicable period.
Reconciliation of Adjusted EBITDA to Net Earnings
The following table is derived from and should be read in conjunction with the consolidated statement of operations. This supplementary disclosure is intended to more fully explain disclosures related to Adjusted EBITDA and provides additional information related to the operating performance of AQN. Investors are cautioned that this measure should not be construed as an alternative to U.S. GAAP consolidated net earnings.
| Three months ended September 30 | ||||||||||||||
| (all dollar amounts in $ millions) | 2022 | 2021 | ||||||||||||
| Net earnings (loss) attributable to shareholders | $ | (195.2) | $ | (27.9) | ||||||||||
| Add (deduct): | ||||||||||||||
| Net earnings attributable to the non-controlling interest, exclusive of HLBV | 5.2 | 4.5 | ||||||||||||
| Income tax recovery | (19.5) | (19.4) | ||||||||||||
| Interest expense | 75.0 | 51.7 | ||||||||||||
Other net losses2 | 5.9 | 0.9 | ||||||||||||
| Pension and post-employment non-service costs | 1.5 | 3.9 | ||||||||||||
Change in value of investments carried at fair value1 | 300.4 | 139.1 | ||||||||||||
| Loss on derivative financial instruments | 0.4 | 1.8 | ||||||||||||
| Realized loss on energy derivative contracts | (0.8) | (0.5) | ||||||||||||
| Loss (gain) on foreign exchange | (5.0) | 1.3 | ||||||||||||
| Depreciation and amortization | 108.2 | 96.6 | ||||||||||||
| Adjusted EBITDA | $ | 276.1 | $ | 252.0 | ||||||||||
| 1 | See Note 6 in the unaudited interim consolidated financial statements. | ||||
| 2 | See Note 16 in the unaudited interim consolidated financial statements. | ||||
Reconciliation of Adjusted Net Earnings to Net Earnings
The following table is derived from and should be read in conjunction with the consolidated statement of operations. This supplementary disclosure is intended to more fully explain disclosures related to Adjusted Net Earnings and provides additional information related to the operating performance of AQN. Investors are cautioned that this measure should not be construed as an alternative to consolidated net earnings in accordance with U.S. GAAP.
The following table shows the reconciliation of net earnings to Adjusted Net Earnings exclusive of these items:
| Three months ended September 30 | ||||||||||||||
| (all dollar amounts in $ millions except per share information) | 2022 | 2021 | ||||||||||||
| Net earnings (loss) attributable to shareholders | $ | (195.2) | $ | (27.9) | ||||||||||
| Add (deduct): | ||||||||||||||
| Loss on derivative financial instruments | 0.4 | 1.8 | ||||||||||||
| Realized (gain) loss on energy derivative contracts | (0.8) | (0.5) | ||||||||||||
Other net losses2 | 5.9 | 0.9 | ||||||||||||
| Loss (gain) on foreign exchange | (5.0) | 1.3 | ||||||||||||
Change in value of investments carried at fair value1 | 300.4 | 139.1 | ||||||||||||
| Adjustment for taxes related to above | (32.2) | (17.1) | ||||||||||||
| Adjusted Net Earnings | $ | 73.5 | $ | 97.6 | ||||||||||
| Adjusted Net Earnings per common share | $ | 0.11 | $ | 0.15 | ||||||||||
| 1 | See Note 6 in the unaudited interim consolidated financial statements. | ||||
| 2 | See Note 16 in the unaudited interim consolidated financial statements. | ||||
Reconciliation of Adjusted Funds from Operations to Cash Provided by Operating Activities
The following table is derived from and should be read in conjunction with the consolidated statement of operations and consolidated statement of cash flows. This supplementary disclosure is intended to more fully explain disclosures related to Adjusted Funds from Operations and provides additional information related to the operating performance of AQN. Investors are cautioned that this measure should not be construed as an alternative to cash provided by operating activities in accordance with U.S GAAP.
The following table shows the reconciliation of cash provided by operating activities to Adjusted Funds from Operations exclusive of these items:
| Three months ended September 30 | ||||||||||||||
| (all dollar amounts in $ millions) | 2022 | 2021 | ||||||||||||
| Cash provided by operating activities | $ | 102.9 | $ | 174.7 | ||||||||||
| Add (deduct): | ||||||||||||||
| Changes in non-cash operating items | 95.7 | (6.2) | ||||||||||||
| Acquisition-related costs | 6.9 | 1.7 | ||||||||||||
| Adjusted Funds from Operations | $ | 205.5 | $ | 170.2 | ||||||||||
Algonquin Power & Utilities Corp. Declares Fourth Quarter 2022 Common Share Dividend of U.S.$0.1808 (C$0.2438), and Declares Fourth Quarter 2022 Preferred Share Dividends
Oakville, Ontario – November 11, 2022 - Algonquin Power & Utilities Corp. (“AQN”) (TSX: AQN, AQN.PR.A, AQN.PR.D, NYSE: AQN) announced today that its board of directors has approved and declared the following common and preferred share dividends:
1.US$0.1808 per common share, payable on January 13, 2023 to the shareholders of record on December 30, 2022, for the period from October 1, 2022 to December 31, 2022. Shareholders receiving dividends in cash can elect to receive the dividend in Canadian dollars in the amount of C$0.2438.
2.C$0.32263 per preferred share, Series A, payable in cash on January 3, 2023 to preferred share, Series A holders of record on December 15, 2022, for the period from September 30, 2022 to, but excluding, December 31, 2022.
3.C$0.31819 per preferred share, Series D, payable in cash on January 3, 2023 to preferred share, Series D holders of record on December 15, 2022, for the period from September 30, 2022 to, but excluding, December 31, 2022.
The common share dividend will be paid in cash or, if a shareholder has enrolled in the shareholder dividend reinvestment plan (the “Plan”), dividends will be reinvested in additional common shares (“Plan Shares”) of AQN as per the Plan. Plan Shares will be acquired by way of a treasury purchase at the average market price as defined in the Plan less a 3% discount.
The quarterly dividends payable on common shares are declared in U.S. dollars. Beneficial shareholders (those who hold common shares through a financial intermediary) who are resident in Canada or the United States may request to receive their dividends in either U.S. dollars or the Canadian dollar equivalent by contacting the financial intermediary with whom the common shares are held. Unless the Canadian dollar equivalent is requested, holders of common shares will receive dividends in U.S. dollars, which, as is often the case, the financial intermediary may convert to Canadian dollars. Registered shareholders receive dividend payments in the currency of residency. Registered shareholders may opt to change the payment currency by contacting TSX Trust Company at 1-800-387-0825 prior to the record date of the dividend.
The Canadian dollar equivalent of the quarterly dividend is based on the Bank of Canada daily average exchange rate on the day before the declaration date.
Pursuant to the Income Tax Act (Canada) and corresponding provincial legislation, AQN hereby notifies holders of common shares, preferred shares, Series A, and preferred shares, Series D that such dividends declared qualify as eligible dividends.
About Algonquin Power & Utilities Corp. and Liberty
Algonquin Power & Utilities Corp., parent company of Liberty, is a diversified international generation, transmission, and distribution utility with over $17 billion of total assets. Through its two business groups, the Regulated Services Group and the Renewable Energy Group, AQN is committed to providing safe, secure, reliable,
cost-effective, and sustainable energy and water solutions through its portfolio of electric generation, transmission, and distribution utility investments to over one million customer connections, largely in the United States and Canada. AQN is a global leader in renewable energy through its portfolio of long-term contracted wind, solar, and hydroelectric generating facilities. AQN owns, operates, and/or has net interests in over 4 GW of installed renewable energy capacity.
AQN is committed to delivering growth and the pursuit of operational excellence in a sustainable manner through an expanding global pipeline of renewable energy and electric transmission development projects, organic growth within its rate-regulated generation, distribution, and transmission businesses, and the pursuit of accretive acquisitions and value enhancing recycling of assets.
AQN's common shares, preferred shares, Series A, and preferred shares, Series D are listed on the Toronto Stock Exchange under the symbols AQN, AQN.PR.A, and AQN.PR.D, respectively. AQN's common shares, Series 2018-A subordinated notes, Series 2019-A subordinated notes and equity units are listed on the New York Stock Exchange under the symbols AQN, AQNA, AQNB, and AQNU, respectively.
Visit AQN at www.algonquinpowerandutilities.com and follow us on Twitter @AQN_Utilities.
Investor Inquiries:
Amelia Tsang
Vice President, Investor Relations
Algonquin Power & Utilities Corp.
354 Davis Road, Oakville, Ontario, L6J 2X1
E-mail: InvestorRelations@APUCorp.com
Telephone: (905) 465-4500
Media Inquiries:
Stephanie Bose
Director, Corporate Communications
Liberty
354 Davis Road, Oakville, Ontario, L6J 2X1
E-mail: Corprorate.Communications@libertyutilities.com
Telephone: (905) 465-4500