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Edited Transcript of AQN.TO earnings conference call or presentation 3-Mar-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Algonquin Power & Utilities Corp Earnings Call

OAKVILLE Mar 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Algonquin Power & Utilities Corp earnings conference call or presentation Friday, March 3, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Jarratt

Algonquin Power & Utilities Corporation - Vice Chair

* Ian Robertson

Algonquin Power & Utilities Corporation - CEO

* David Bronicheski

Algonquin Power & Utilities Corporation - CFO

* Unidentified Speaker

Algonquin Power & Utilities Corporation

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Conference Call Participants

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* Rob Hope

Scotiabank - Analyst

* Rupert Merer

National Bank Financial - Analyst

* David Castagna

Raymond James - Analyst

* Ben Pham

BMO Capital Markets - Analyst

* Nelson Ng

RBC Capital Markets - Analyst

* Jeremy Rosenfield

Industrial Alliance Securities - Analyst

* Robert Catellier

CIBC World Markets - Analyst

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Presentation

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Operator [1]

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Welcome to the Algonquin Power & Utilities Corp. fourth quarter and year-end 2016 conference call.

(Operator Instructions)

I would now like to turn the conference over to Christopher Jarratt, Vice Chair of Algonquin Power & Utilities Corp. Please go ahead, Mr. Jarratt.

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Christopher Jarratt, Algonquin Power & Utilities Corporation - Vice Chair [2]

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Thank you. Good morning, everyone. Thanks for joining us on our 2016 fourth quarter and year-end conference call. As mentioned, my name is Chris Jarratt and I'm the Vice Chair of Algonquin Power & Utilities Corp. And joining me on the call today are Ian Robertson, our Chief Executive Officer; and David Bronicheski, our Chief Financial Officer.

I was thinking, as I was driving in this morning, that our first year end as a public entity was 1997, which makes this our 20th, which means a significant milestone. To accompany this earnings call, we also have a supplemental webcast presentation that you can access from our website, algonquinpowerandutilities.com. This presentation as well as additional information on our Q4 and year-end results is available for download from our website.

Over the course of this call, we will be providing information that relates to future events and expected financial positions which should be considered forward-looking and I direct you to review our full disclosure on our forward-looking information and non-GAAP financial measures, which are also available on our website. We will read full disclaimer at the end of the call.

On our call this morning, Ian will review the 2016 strategic achievements and David will follow up with the 2016 financial highlights and then Ian will come back conclude with our outlook for 2017. We will then open the lines for question and as usual, I ask that you restrict your questions to two and then re-queue. With that, I will turn things over to Ian, who will start with our 2016 strategic achievements. Ian?

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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [3]

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Thanks Chris. I appreciate you bringing how old we really are to the call today. That's really helpful. So good morning everyone and thanks for taking the time today. In terms of thinking back to 2016, all in all, we think that the last quarter was a pretty good end to a pretty good year.

In terms of some of the main topics I would like to highlight, there is really three. With a strong finish to the year, in Q4, I think once again, Algonquin Power & Utilities Corp., or APUC, as we effectually refer to it, delivered pretty strong year-over-year financial results and achieved the growth that we had set out for ourselves.

On a quarterly basis, we saw strong increase in adjusted EBITDA and adjusted earnings per share and while the Q4 results certainly included a catch-up for our CalPeco Utility, that we should have received for the entire year, which obviously makes the quarter look good, I think that timing issue does not affect our year-over-year EBITDA and EPS growth of 24% -- 27% to 24%, respectively. We saw with the operating profit increases posted in both our Renewable Generation and our Liberty Utilities business groups.

I hope that everyone concludes that we are maintaining and maybe even exceeding the earnings and cash flow growth needed to support our 10% dividend growth guidance. And speaking of which, as we've guided for the past couple of years and pleased that the Board of Directors made good on that guidance with a 10% increase in our US dollar denominated dividend, which on the Canadian dollar basis, represents more than 12% more dividends this year compared to last year.

The second point I would like to highlight is that 2016 saw the Company continue to expand, diversify, and fortify its assets base. Our Liberty Utilities Group significantly grew its customer base with the addition of more than 300,000 new utility connections. With the completion of our Park Water acquisition early in 2016, and the closing of our Empire acquisition on the stroke of midnight New Year's Eve this past year.

With respect to Empire, we have been pleased with the seamless addition of these customers to the Liberty Utilities family and while it's been noteworthy within our organization, I think it's a good thing that Empire's customers and communities have hardly been aware of the change. While there's a new look to the logo on the bill and the signs of the buildings, there's been no change to the reliable, safe delivery of electricity, natural gas and water and the timely issuance of accurate bills.

Internally, we're feeling a sense of enthusiasm from the Joplin-based Empire employees, who are now being given the opportunity to bring their best practices to the Liberty Utilities Group. The operations of both our Midwest Utilities and Empire's operations have been integrated under a single Joplin-headquartered Regional Management Team.

Next, 2016 was a big year for our Renewable Generation Group, with 360 megawatts of new energy capacity to the completion of the 200 megawatt Odell Wind Project in Minnesota and the 150 megawatt Wind Project in Michigan and the 10 megawatt Bakersfield II Solar Project in California. These projects are now fully contributing to our 2017 results.

And lastly, as a marker, on the evolution and growth of the Company, APUC's common shares commenced trading on the New York Stock Exchange in December of last year. We believe that this will allow our US-based employees to more comfortably participate in the ownership of our Company through our stock option plan and stock purchase plan, but also to allow us to make the APUC value proposition more conveniently available to a broader audience of US investors.

And this leads me to the third key takeaway for the year. Growth continues to be at the forefront of our shareholder value creation strategy. We will remain firmly on track in our pursuit of significant pipeline of investment opportunities we laid out at our Investor Day in late November 2016.

We've already completed approximately CAD4 billion in new utilities, wind and solar generation investments, of CAD9.7 billion five-year program that we outlined. Clearly, we have to set our sights higher. We are committed to strengthening our position in the US renewables market with the purchase of Safe Harbor wind turbines which will facilitate the addition of up to 700 megawatts of new renewable generation capacity.

Pursuing important new organic investment opportunities and customer growth within our expanded utilities group is clearly something we focused on. I will provide more specifics at the end of the call regarding the outlook for the 2017 development projects.

As previously mentioned, the Renewable Generation Group added 360 megawatts of net capacity to its generation fleet. It's an interesting milestone, the Odell and Deerfield Wind Farms at 200 and 150 megawatts respectively, pushes over a gigawatt of total installed wind capacity. We are also pleased to have now commissioned 10 megawatt Bakersfield II Solar Facility, represent our third solar installation.

As you can see from the map, these additions to our generation fleet support our commitment to a diversified portfolio, both on the geographic as well as by modality. We believe that our diverse portfolio of generating assets adds important stability to the results of the Renewable Generation Group.

Within our Liberty Utilities Business Group, we remain committed to our march-to-a-million utility customers; 2016 saw customer growth of more than 40% with the completed acquisitions of Park Water and Empire. At our Investor morning in November of last year, we reaffirmed our commitment to continued customer growth with a target of doubling our 2015 customer count by 2022.

One of the key drivers of our financial results within the Liberty Utilities is our focus on regulatory relationship to across the states in which we serve. Our proactive efforts to pursue prompt recovery of prudent capital investments is an essential part of our ability to close the gap, if you will, between our actual and authorized ROEs going forward.

And on this front, we were pleased to achieve CAD22 million in revenue requirement increases across five separate regulatory jurisdictions in 2016. On a percentage basis, this represents approximately 70% of our requested rate increases. With that summary, David, I will turn it over to you to discuss the financial results.

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David Bronicheski, Algonquin Power & Utilities Corporation - CFO [4]

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Thanks Ian. Good morning, everybody. We're very pleased to be reporting what we believe to be truly impressive financial results for the quarter and the year. As Ian mentioned earlier, we realized significant growth on both a quarter-over-quarter and a year-over-year basis. Certainly, the value of the diversification of our portfolio continues to be apparent.

Looking at of our adjusted EBITDA, on a year-over-year basis, it was up 27%, with strong performance of our new wind and solar facilities contributing just over CAD13 million of adjusted EBITDA. We have also had successful regulatory outcomes in recent rate cases. They contributed a further $21.4 million in the year-over-year improvement. Without the effect of FX, even our adjusted EBITDA was still up, over 23%, truly an indicator that it is based on fundamentals in our business.

Looking at our individual business units, our Renewable Generation Group's operating profits grew 15% over the year and Liberty Utilities grew by 35% year over year. The growth we experienced in 2016 was based on solid fundamentals in each of our underlying businesses and we are confident that these positive dynamics will continue into 2017.

Our adjusted EBITDA achieved a growth of 24% and our adjusted earnings per share went to CAD0.57 for the full year. Finally, our adjusted funds from operation grew 12% on a per-share basis to CAD1.29. Last year was significant for APUC on the acquisition front, with the completion of the Park Water acquisition and we will continue this trend into 2017 with the closing of Empire.

I would like to now turn our attention briefly to an update on our recent financings. Our Treasury Group has been quite active over the last couple of months. I'm pleased to report that our financing plan for our acquisition of Empire is now complete. We closed the acquisition of Empire on January 1 and have now raised all of the permanent financing required for the transaction, executing it exactly as we planned, right from the outset.

First, we set the final installment date related to our CAD1.15 billion bought deal offering of convertible unsecured subordinated debentures as February 2. And we've now received that final installment and are pleased to report that as of today, over 99% of the debentures underlying the installment receipts have now been converted into 107.5 million common shares.

In addition, as you saw from our announcement yesterday, or rather on Wednesday, we've entered into an agreement to issued $750 million of senior unsecured notes on a private placement basis, with a broad syndicate of US institutional investors. The notes have a weighted average life of approximately 15 years and an effective weighted average interest expense of 3.6%.

This offering was completed using our Liberty Utilities debt platform. Approximately CAD650 million of the notes will be used as the final piece of financing for our Empire acquisition. These notes are expected to close on or about March 24. Then the balance of the notes, approximately $100 million be used to finance some of our 2017 growth at Liberty Utilities including CalPeco's Luning Solar Project, which reached COD just recently.

Finally, on the Algonquin Power side of the business, we were one of the first issuers out of the gate in 2017, with an offering of CAD300 million of senior unsecured debentures for our Renewable Energy business here in Canada.

The offering was well oversubscribed and represented the largest, most successful offering on our Canadian bond platform to date. The offering priced at an attractive 4.09% coupon and had a 10-year maturity and it was the longest tenured bond that we have yet issued here in Canada.

The proceeds of this offering will help to permanently term out the debt portion of our financing plans for several of our newest renewable power projects, including Odell, Deerfield and Bakersfield II. We are certainly appreciative of the continued support that we continue to receive from investors in the debt and equity capital markets both here in Canada and the US in seeking the capital we need to execute on our growth initiatives.

Before I turn things back over to Ian, I would like to take this opportunity to briefly share some of our thoughts on the potential impacts of certain tax policy changes that are being considered in the United States. First, let me say that any analysis of the impacts of the tax changes being discussed on our business or any other business involves a high degree of speculation.

Nobody really knows what the final outcome of any tax reform might be, as it pertains to the US, as the reforms have not yet been announced. Nevertheless, there does seem to be some consensus around the main points of discussion, which are lower US taxes, non-deductibility of interest and full deductibility of capital expenditures.

As everyone on the call knows, our business is a mix of regulated and non-regulated businesses operating both here in Canada and the United States; financings occurring on both sides of our border, and we're growing at a pretty hefty rate of 10% to 15% per year. We have modeled a number of the different scenarios, as it relates to our business in particular.

And based on the scenarios we've run, we see that the changes could be a slight positive from an EPS perspective and from an FFO perspective, it could range from a slight positive to mildly negative in the 2% to 4% range and certainly, is a range, which given our current growth profile is really not that significant. But again, I would emphasize that we are long ways away from knowing, with any degree of certainty, what the final form of that US tax reform might take.

And we point out that as it pertains to our regulated utilities businesses, our regulators have significant latitude in how they might handle any impact that US tax reform might have on the utilities they regulate and by extension, the customers we serve. We believe that it's in our customer's best interest that they continue to enjoy the benefits from being served by strong utilities with a low cost of capital.

So our view is that regardless of the form the tax reform ultimately takes, we would expect to be able to work constructively with our utility regulators to arrive at a framework that will preserve for our customers the benefits of a strong regulated utility. With that, I will turn things back over to Ian.

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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [5]

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Thanks David and before we open up the line for questions, I just want to provide some thoughts on the outlook for 2017 and its growth initiatives. We certainly had a busy start of the year, supporting the integration of Empire, Deerfield Wind, Bakersfield Solar into our 2017 results. As David noted, we've also completed the necessary bond finances to term out the short-term debt, which was incurred in respect of these initiatives.

(Inaudible) of the year, three big pictures emerge -- our big picture objectives emerge. Firstly, 2017, we will see a total capital budget of close to CAD1.2 billion. I would like to spend a couple minutes talking about these investments.

Starting with our Renewable Generation Group. There's two projects are currently under construction; firstly, Amherst Island is finally underway, with construction of the docks needed to support bringing the materials to the island, just about complete. Wind turbines are now being manufactured with deliveries expected to start in early Fall. Two comments on the project. Firstly, we were pleased that the final appeal of the ERT, well, final so far anyway, of the ERT was summarily dismissed at the Divisional Court.

And second, notwithstanding the increase in our expected capital cost what we've been dealing with the permanent delays. The project remains attractive with an EBIT-to-EBITDA of slightly under 10 times. While the expansion of the cost being experienced in Amherst is indeed aggravating, the second point is they are more than offset by falling costs at our Great Bay Solar Project. Project costs dropped precipitously, primarily from the continued plunge in global panel pricing. We expect Great Bay to be commissioned this Fall.

Secondly, with respect to capital investment in our regulated utilities, we are targeting spending approximately CAD165 million in delivery of infrastructure maintenance, which represents approximately CAD200 for each of our approximately 800,000 customers. Additionally, we are continuing to invest in the growth of our businesses to both serve more customers and replace operating costs with capital cost.

The 50 megawatts of solar generating capacity acquired by CalPeco to replace energy, which is being purchased on the market currently, is a perfect example of investing capital to reduce customer bills. We are confident that our expertise and our experience will allow us to deliver on this significant capital investment budget, both on time and on budget.

Secondly, for the year, we will remain focused on prosecuting existing projects and seeking new opportunities for continued expansion within our Renewable Generation business. In addition to the 150 megawatts of generating capacity currently under construction, you can see from the slide that there's just over 200 megawatts of contracted projects in development.

With respect to the Chaplin Blue Hills Project, we provided some greater clarity on the minor impact on capital costs as a result of the reconfiguration of the Project West of its original location. But also, the much more positive impact of higher available wind resource on expected production, all in all, the project remains highly attractive.

Switching to the Liberty Utilities investment, with investment primarily in the US with respect to new wind projects. At the end of 2016, you will note that we purchased roughly 75 million of wind turbines that will qualify up to 700 megawatts of new Algonquin Power & Utilities Corp. projects for 100 % of the US production tax credit.

While these projects are qualified for the full rate PTC if completed before the end of 2020, we remain committed to promptly moving ahead, to commit these turbines to projects and our development teams are active, identifying such sites in the US. It's important to note that these turbines might also effectively be used in the greening of the Empire generation portfolio.

We will be filing a notice next week confirming our intention to formally update the integrated resource plan for Empire. Clearly, a plunging cost of renewable energy are changing the generating landscape pretty significantly.

With respect to development in Canada, we are active in the Saskatchewan and Alberta processes. We qualified for the Saskatchewan 10-megawatt solar RFP and are intending to offer into the Saskatchewan wind RFP. Obviously, Alberta has become instantly more attractive as a result of its announced 400 megawatt RFP. We're searching for local partners to collaborate with in that process.

Lastly, in terms of 2017 focus, the above is not enough. We will continue to drive returns through rate cases across the various jurisdictions within our Liberty Utilities Group. We have another string of rate cases coming forward for review in 2017, representing a total of CAD14.1 million of requested revenue increases.

The majority of the final rate decisions for these rate cases are expected before the end of the first half of 2017. So with that as an outlook, operator, I would like to open the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Rob Hope, Scotiabank.

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Rob Hope, Scotiabank - Analyst [2]

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I was just -- I'm sorry, I was just hoping you could add some additional color on your plans for Asbury in the greening of the Empire fleet. You did note that you would be filing a document in the coming weeks. Just wondering as we move through 2017, what are the key [gaining] factors to get additional wind into Empire and potentially shut down Asbury?

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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [3]

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Well, I will start Rob -- thanks for the question. I will start by saying is this is a journey and a process, for greening of the Empire fleet. You accurately note that the very first step on that journey is the filing of a notice, I think March 9 or March 10 is the date for that filing, that indicates that we will formally update the integrated resource plan.

And it maybe just by way of background the integrated resource plan is our long-term plan for how we think we will optimally, most cost effectively meet the energy needs of the Empire customers. We would expect that plan to be filed before the end of the first half of this year. And then we will pursue and we will go through the regulatory approval process of socializing that plan with the regulators.

And implicit in that plan is the analysis that confirms that what we would be advancing, we believe, is the most effective way to meet energy needs for our customers. You've heard me say in the past that with the falling price of renewable energy, there is an economic thesis to say that the operating costs of some coal facilities and certainly Asbury falls into that category, might be more expensive than the all-in cost of building new wind given the continuing drop in that cost.

I think we would see that -- and so consequently, in parallel with that, we are continuing to development teams within Empire looking for sites, exploring interconnection issues, exploring in western, southwestern Missouri and eastern Kansas and I guess northern Oklahoma sites to put some of those wind projects so that's proceeding in parallel.

But in summary Rob, I think you need to think about the ultimate greening of that of the Empire fleet really starting from an investment perspective not until 2018 from a -- and probably seeing those projects online in 2019. So it's not a 2017 initiative but it's certainly a journey that I think we are committed for on behalf of the customers.

And as I said, we ultimately think that this is a good thing from a customer perspective. I don't know if that's the kind of color you're looking for Rob?

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Rob Hope, Scotiabank - Analyst [4]

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That was great. Thank you. And then maybe to follow up, just in -- I guess more in the near term, looking at 2017 with your CAD1.2 billion capital budget, just want to get a sense of how you're thinking about financing in terms of -- it looks like you already made some progress on the debt but as well as tax equity and other sources of capital.

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David Bronicheski, Algonquin Power & Utilities Corporation - CFO [5]

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I think the 2017 plan really calls for a significant investment from tax equity and we have actually received those commitments and funds in their FFO. Again, it continues to be well over a third of what we expect for financing those things. We've raised some of the debt already.

We have a pretty strong balance sheet and we would like to position ourselves so that we are never in a situation where we have to come to the market for equity. I think you can see that in our December balance sheet.

So I think we will want to continue to have a strong balance sheet and we will continue to watch it as the year progresses. And obviously, with CAD9 billion of capital over the next five years, we will be coming to market for some amount of equity, as we communicated on our investments at Investor Day back in December. But it's not something we feel pressured into having to do today.

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Rob Hope, Scotiabank - Analyst [6]

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Thank you for the color.

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Operator [7]

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Rupert Merer, National Bank.

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Rupert Merer, National Bank Financial - Analyst [8]

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So you had a great finish to 2016 and you gave a little bit of guidance on your Investor Day in November for 2017 for EBITDA, earnings, FFO. For example, you're projecting 97% year-over-year increase in EBITDA in 2017. Are those numbers still a good reference for us, now that 2016 is in?

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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [9]

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Yes. I think obviously, candidly, when we held our Investor Day, we probably had a better idea than you might have had in terms of how 2016 was going to wrap up. And so certainly nothing came as a surprise to us in 2016 and so when we gave you those thoughts as to looking forward to what 2017 might hold, I don't think we're changing our thoughts there.

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David Bronicheski, Algonquin Power & Utilities Corporation - CFO [10]

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The other thing I would also add, Rupert, is I think that the thought then was, as you think about FX, was in the context of FX at the time, which was closer to CAD1.35 so there will also be, I think a factor for you to think about because I think everybody's got a different view of FX for the year.

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Rupert Merer, National Bank Financial - Analyst [11]

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Right. Okay, very good. And with the [ED] acquisition you mentioned it's been a pretty seamless integration so far. Can you give a little more color on the process? How much work is less left in that process? Have any surprises, either positive or negative so far on that transaction?

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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [12]

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No. Certainly no surprises, I guess, frankly, to the negative or the positive. Empire turned out to be exactly what our due diligence had indicated -- conservatively run, well-managed utility for 109 years; met its obligations to customers. In terms of integration, I think we had indicated that the acquisition was so not premised on synergies and cutting workforces and so we just have not embarked on those things because they were never part of what we had premised with the acquisition.

So consequently, I guess I've got to say, we sort of left the Empire people to continue to do what they do best but that's largely what the way it's worked out. As I mentioned in my prepared remarks, we have consolidated our Midwest Utility operations under a broader central regional management team which is headquartered in Joplin.

And frankly, made up of a combination of both the use existing Joplin staff and some of our existing Liberty Utilities staff. They work very well together. I think the team share a lot of cultural similarities and so to be frank, it's worked out okay. In terms of work still to do, in 2017, not very much actually. We have some, I will say, broader plans that did include the rollout of a new customer information system and enterprise-wide resource planning system.

That's a multi-year program but to be frank, it affects all of our utilities, including Empire. I think, again, part of the justification for the Empire acquisition is we get to spread those costs across a larger customer base. That's looking down the road, 2018, 2019, maybe even 2020, Rupert.

So far, there is in a lot to do in 2017, and as I said, the gas and electricity and water is still flowing reliably; bills are going out. I think fingers crossed, that there isn't really an opportunity for a hiccup.

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Rupert Merer, National Bank Financial - Analyst [13]

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Sounds like you might have capacity for another acquisition if one should come along in the near-term?

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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [14]

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That's where your question was going. Well, and so maybe if on that front, I think we are -- want to keep our eye on the landscape down in the US. I think and hope that people would believe that Empire represented disciplined execution from our perspective in terms of something that we can see value. We would want to make sure that anything we did continued with that theme, front and center.

But yes, I think we would always keep our eyes open. And just as you know that even if we were to announce something tomorrow, and we are not, that's for sure a 2018 transaction. So we are easily a year away from doing something like that anyway.

But yes, Rupert, for your records, this organization doesn't stop. Just because once we've got something done. We're not resting on our laurels. We have high aspirations for creating shareholder value and M&A is definitely part of that

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Rupert Merer, National Bank Financial - Analyst [15]

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Great. Thank you very much.

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Operator [16]

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David Castagna, Raymond James.

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David Castagna, Raymond James - Analyst [17]

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My first question, you mentioned pretty significant decline panel prices on your solar project you have ongoing. Curious if that's consistent with I guess the general trend in reduced cost per solar or are you seeing some elements of reduced cost is a function of, like, an oversupply in panels currently?

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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [18]

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Well, David, it's an interesting question. To be frank, it's a little bit hard to parse through when one holds an RFP for panels and the panel pricing comes in it CAD0.39. Is that driven by the panel manufacturer having excess capacity or increasing economies of scale and efficiencies of manufacturing? Certainly the panel manufacturers -- maybe this is more anecdotal than specific, the panel manufacturers are seeing -- the Chinese manufacturers are seeing particular increases in their efficiencies caused by volume.

A lot of that volume, as you probably are aware, is actually dedicated to Chinese projects. But I think we are getting the benefit globally here in North America, all those falling prices. I guess I would have to -- maybe the short answer to your question. I probably should have given it to you right upfront is I actually don't know, whether it's driven by manufacturing efficiencies or excess capacity.

But we are pretty comfortable that to the extent that the demand continues, we will see panel pricing continue on a downward trend. Broad predictions are that you're going to see 5% to 7% continued erosion in the cost of solar projects over the coming few years. So this is just continuing that trend.

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David Castagna, Raymond James - Analyst [19]

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Okay, great. Thank you that's helpful. My second question, just on your 700 megawatt PTC and Safe Harbor projects. I'm wondering what your thoughts are and once you get a line of sight on building out that amount of capacity, would you consider adding projects at the 80% tax credit level? Is that something that's on the table or at that point, would you maybe consider a pivot towards solar?

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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [20]

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Well, it's an interesting question. What's going to drive that decision from my perspective, is what is the inventory of 100% PTC-qualified turbines. Part of the issue, as you accurately point out, we've got CAD1.5 billion, maybe a little bit more of project Safe Harbor-ed. The competitiveness and after we build that out, the competitiveness of an 80% PTC-qualified project is, in some respects, going to be determined. Are you actually competing against residual 100% PTC-qualified turbines.

As you know we are not the only people on the planet who took advantage of that strategy to qualify PTC Safe Harbor turbines. My thought, the short answer to that question is it will depend on how fast the market consumes the 100% PTC-qualified turbines. To the extent that they continue to hang around, that's going to make a 80% qualified project much more complicated and much more challenged to compete.

So I guess the answer is I don't really know. We'll have to see how it sorts itself out. To be frank, we don't have very -- there isn't great color on the total amount of PTC-qualified turbines that are out there, but it's a fairly big number. Just - when you look at -- we're probably one of the smaller guys.

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David Castagna, Raymond James - Analyst [21]

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Okay. Fair enough. Thank you very much. I will get back in the queue.

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Operator [22]

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Ben Pham, BMO.

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Ben Pham, BMO Capital Markets - Analyst [23]

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On that question on acquisitions, your increased scale, you're in right now just after Empire, did that actually increase your opportunity set for acquisitions. I'm not suggesting that you will do something soon but did that change at all considering that there has been a pretty big wave of consolidation in the last 24 months?

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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [24]

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That's an interesting thought or a great way to position it. I think undoubtedly, our increased scale would allow us to pursue bigger opportunities but then the opposite impact of that on the opportunity set is the continued consolidation. I don't think I've ever gone back and added up how many -- who fit into our filter of opportunity set before Empire versus after Empire given that the actual smaller total universe.

I think in general, though, we haven't raised the lower bar, as I have been fond of saying. I think this organization has the capacity, maybe even the core competency of acquiring and integrating new utilities into the family. So we would continue to be quite comfortable buying smaller utilities to the extent that they become available.

But the upper end of the bar has been increased given as we crest CAD11 billion or so of total size over the next little while, I think the upper end of that opportunity set has gone up. And I think that probably has added more potential targets to our look-see than the consolidation that's taken place.

I think one of the things that I will just add is that the M&A marketplace not withstanding AltaGas' acquisition of Washington Gas remains a little bit uncertain given the tax reforms that may be going on in the US and those can certainly have an impact on the overall value proposition. The good news is we've got nothing to announce right now but we will have to see until the tax reform starts to get clearer, does that consolidation market still remain robust.

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Ben Pham, BMO Capital Markets - Analyst [25]

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Ian, may I ask, you highlighted the lower ranges in the past; what about the upper range? Is it more Empire percent increases or could it be something probably even bigger than that similar to what we are seeing in some your peers?

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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [26]

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I think Emera demonstrated in their acquisition of Peco demonstrated the art of the possible in terms of what they were able to do. Today, Empire would fall well below that art of the possible from our perspective and so sure, I think the upper end of the range and maybe just to put some absolute numbers around it, if there was something with an enterprise value of CAD8 billion or less, I think we would take a hard look at it.

Again, I want to get back to the comment about being disciplined and having a strategic rationale for what we're doing. I got to tell you, growth for growth sake is so not on this Management Team's agenda. We've been pleased in our ability to deliver growth and earnings per share and (inaudible) per share to support our dividend growth of 10%. Growth for growth sake is almost antiseptical to that proposal because you just have a heavier bar and flat earnings. So thanks, but no thanks to that one, Ben.

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Ben Pham, BMO Capital Markets - Analyst [27]

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Okay. Thanks, everybody and congrats on the anniversary pipeline.

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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [28]

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It's been a long time, hasn't it? Thanks for that.

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Operator [29]

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Nelson Ng, RBC Capital Markets.

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Nelson Ng, RBC Capital Markets - Analyst [30]

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Just a quick clarification. In the presentation, it shows on the CapEx page fleet maintenance costs on the renewable side of about CAD45 million. Should we be thinking about this as being maintenance CapEx? And if so, does that seem high? Like, does this include other expenses or how do you look at that CAD45 million and I'm thinking in terms of -- I think the EBITDA from the Renewable side was CAD217 million so if it is maintenance CapEx, it seems like a big number.

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David Bronicheski, Algonquin Power & Utilities Corporation - CFO [31]

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The way you have to look at it's a combination of a couple of things. So GAAP requires as to capitalize a portion of our maintenance agreements that we have with all of the turbine manufacturers. So I would say arguably, there is a part of that that do you considerate it OpEx or do consider it CapEx; it's a gray zone in my mind. The true actual, I will say, get all the bolts and shovels and real capital is probably half of that.

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Nelson Ng, RBC Capital Markets - Analyst [32]

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Okay. That makes more sense. My next question is, I guess to follow-up on the panel pricing. Are your panel prices -- have you fixed the cost of your panel prices and fixed from an after-tax perspective given some people have been talking about the border tax, if those panels are being imported over?

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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [33]

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Yes. So in fact, our panels are largely in inventory right now. They're not coming in at a later date. So they are already in the country; clearly, country of origin, no question, was China. But those panels have been manufactured and been delivered. In fact, largely, if they have not been paid for that have been committed to be paid for -- maybe it will be in accounts payable coming up in 2017, but yes, Nelson, they are here now.

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Nelson Ng, RBC Capital Markets - Analyst [34]

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That's perfect. If I could squeeze in one more question

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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [35]

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We will give you one more.

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Nelson Ng, RBC Capital Markets - Analyst [36]

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Thanks. There's more big picture, given your wind portfolio is growing and you still have a lot of third-party turbine maintenance contracts, have you looked at in-housing some of those operations and connectivities? Like I know others have looked at it. And I think they are seeing savings but I know you have to weigh the risks versus the cost savings but can you just comment on whether you've looked at those opportunities?

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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [37]

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Sure. I think the way you set up your question is actually perfect to the answer which is, until you have 1,000 megawatts worth of capacity under operation, it's hard to be thinking that you have the economies of scale to go and do that yourself but as you point out, we've now crested that gigawatt of installed capacity.

The short answer to your question is, yes, we've looked at it and but again, the way you set up the question is perfect as well in that the operation and maintenance agreements do more for us then just change the oil and respond to trips. Baked into our maintenance and operations agreement is an important element of warranty, as David had mentioned in your earlier question about CapEx, is those fees that we are pain have shifted reliability and longevity risk to the original manufacturer.

And so I think we would have to be very considered in the decision to internalize those costs and internalize that operation. I think you want to make sure that you know what you're getting yourself into because you've lost that coverage, that insurance policy for either blade or gear box, generator, you name it in terms of systemic problems across the generators that might be in the fleet. So yes, we are looking at it but it isn't a real simple analysis and so -- but it's on our radar scope, Nelson. It's a good question.

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Nelson Ng, RBC Capital Markets - Analyst [38]

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Okay. Thanks Ian.

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Operator [39]

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Jeremy Rosenfield, Industrial Alliance Securities.

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Jeremy Rosenfield, Industrial Alliance Securities - Analyst [40]

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Just a couple questions. First on the structure for Blue Hills, formerly Chaplin, I remember previously in the past, you had mentioned that you would develop the project with similar structure to what had Red Lily had in the past and it seems that this structure may have changed here. I'm just curious as to -- is it going to be 100% ownership from the onset or maybe you can just help clarify that?

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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [41]

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I think that the Red Lily structure, as you're probably aware, was designed initially to be more optimal in terms of the hardest things to value out of some of the tax benefits that came with the project. I think as we've looked at Chaplin -- I'm not sure that the cost aggravation and perhaps most importantly, the time schedule implications of developing the project along the Red Lily paradigm actually play out. And so right now the plan is single-phase construction with where we would just continue to own 100% of it, Jeremy.

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Jeremy Rosenfield, Industrial Alliance Securities - Analyst [42]

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Okay. And then just turning to the Luning Solar Project that's going to go into CalPeco's rate base. I'm just wondering if that gets captured in the most recent rate increase at CalPeco or if that is something that would be reflected in future rate application and reflected in rates down the line?

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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [43]

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It has been reflected in rates now. It was a planned capital investment before we started construction of the Luning Project. We actually opened a docket in front of the CPUC to get a prudency and frankly, rate case consideration for that project. And so, no, it's not something new, Jeremy.

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Jeremy Rosenfield, Industrial Alliance Securities - Analyst [44]

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Okay, perfect. That's it for me. Thanks.

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Operator [45]

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Robert Catellier, CIBC World Markets.

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Robert Catellier, CIBC World Markets - Analyst [46]

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I just wanted little bit more clarity on the tax equity situation. David, I think you said about a third of the CapEx might come from tax equity. So I just want to clarify that number and then maybe provide an update on availability of tax equity in the US in light of the uncertainty around US tax reform and the risk transfer issues that, that might entail? And then the follow-up there, of course, is what you might have in terms of alternative financing strategy if you don't like the risk transfer of any PTC deal?

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David Bronicheski, Algonquin Power & Utilities Corporation - CFO [47]

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Okay. A couple of things there. Just on the tax equity, I think the largest one for this year is Deerfield, which reached COD and we've landed on the tax equity there being about CAD150 million and we've received that. So that part is in the largest part of that program for the year.

As far is the availability of tax equity, we continue to have discussions with tax equity providers. The focus right now is on solar and there does seem to be continued appetite, certainly for solar tax equity projects. We will keep our eyes on how the market shifts as far as tax equity goes for PTC deals.

But one thing to keep in mind is we are starting to be close to taxable ourselves and so there is some thinking taking place internally now about exactly the right point in time in which we could just become our own tax equity provider. Of course, the big wildcard in that is US tax reform, which could shift our taxability horizon out similar. So it is still a bit of a question mark, as far as how, in the long-term, the -- certainly, the PTC tax equity market will shake out.

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Robert Catellier, CIBC World Markets - Analyst [48]

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Okay. In the situation where perhaps you don't like the terms for the tax equity market, so how do you balance weighing other alternative sources of financing versus simply waiting out the period of uncertainty and then moving forward once the tax equity market opens up again? In other words, would you delay projects on that basis or would you just simply move forward with the projects with another form of financing?

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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [49]

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Well, Rob, it's Ian. Just maybe to add a little color to start to David's statement, 2017 initiatives are really the only outstanding tax equity is related to Great Bay Solar. As David said, that's an ITC-premised project which means that the tax attributes that are the subject of the tax equity investment are realized in one year. The problem with the PTC projects and the reason there's greater trepidation within the tax equity market related to PTC, that's a 10-year horizon.

I think it is important to distinguish whether entities have interest in tax equity for ITCs or PTCs. And maybe just -- and so 2017, our growth program probably unaffected by any concerns in the tax equity market right now because the sole focus in 2017 is on ITC-based projects. I think your broader question is, as we think about our Safe Harbor program and the roll-out of the greening of the Empire fleet, which is certainly premised on taking advantage of those PTC-levered projects, I think we are in a wait-and-see mode.

We are actively exploring projects, working to identify opportunities. I think the actual financing and maybe you hit the nail on the head as you phrased your question, which is we are obviously not going to do, I would say, growth-for-growth's sake if a project doesn't stand on its own from an economic perspective in the context of current price of tax equity and all those terms.

Frankly, we will just slow down and focus on things that aren't tax equity levered and whether that's continued organic in our existing utilities, work here in Canada on Chaplin and Vallejo and Quebec and so the nice thing about the portfolio, from our perspective, isn't a one-trick pony so to speak in terms of if there is continued uncertainty in the PTC tax equity market, our growth comes to a screeching halt.

It would be disappointing but keep in mind, we have until 2020 in order to complete those 100% PTC-levered projects. I think the tax reform and well, do I think it gets sorted out immediately? No, they have clearly got healthcare in front of them, and a bunch of other things that are causing a delay in some of those reforms. I think it will largely there will be clarity long before those PTC projects start to sunset.

Maybe this is wrong, Rob. We're just not feeling the pressure right now to just get something done. That's not how we're thinking of the world.

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Robert Catellier, CIBC World Markets - Analyst [50]

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Thanks for that. That's helpful. It sounds like you are just not as exposed to the uncertainty as I may have thought. Thank you.

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Operator [51]

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(Operator Instructions)

We do not have any questions at this time. This concludes the question-and-answer session. I would now like to turn the conference back over to the presenters for any closing remarks.

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Ian Robertson, Algonquin Power & Utilities Corporation - CEO [52]

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Perfect. Thanks, operator, and thanks for everyone joining us on this. As Chris had started the call, our 20th anniversary earnings call for the Algonquin organization. Obviously, as always, I would ask you to stay on the line for a review of our disclaimer.

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Unidentified Speaker, Algonquin Power & Utilities Corporation [53]

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During the course of this conference call, we may have made statements relating to the future performance of Algonquin that contain forward-looking information, including statements with respect to the expected performance of the Company, its future plans and its dividends to shareholders. While these forward-looking statements represent our current judgment based on certain material factors or assumptions, actual results could differ materially from such forward-looking statements made today.

Additional information about the material factors that could cause actual results to differ materially from such forward-looking information and the material factors or assumptions that were applied in making any forward-looking statements, as well as risk factors that may affect the future performance and results of Algonquin are contained in the results press release at Algonquin's public disclosure documents filed by the Company on SEDAR at www.sedar.com.

We undertake no obligation to update these forward-looking statements, unless required by law. Furthermore, during the course of this conference call, we may have referred to certain non-GAAP financial measures, including but not limited to: adjusted net earnings, adjusted EBITDA, adjusted funds from operations, per share cash provided by adjusted funds from operations, and per share cash provided by operating activities.

These non-GAAP measures do not have any standardized meaning under GAAP and may not be comparable with other GAAP or non-IFRS financial measures presented by other companies. We refer you to our management commentary posted on SEDAR and on our website for more information about these non-GAAP measures, including a reconciliation of the non-GAAP measures to the corresponding GAAP measures where our comparable GAAP measure exist. Thank you.

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Operator [54]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.