AQN 2025Q3

Hello, and welcome to the Algonquin Power & Utilities Corp. Third Quarter 2025 Earnings Conference Call. I will now turn the conference over to Mr. Brian Chin, Interim Chief Financial Officer and Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us for our third quarter 2025 earnings conference call. Joining me on the call today is Rod West, Chief Executive Officer. To accompany today's earnings call, we have a supplemental webcast presentation available on our website at algonquinpower.com. Our financial statements and management discussion and analysis are also available on the website as well on SEDAR+ and EDGAR. We'd like to remind you that our discussion during the call will include certain forward-looking information and non-GAAP measures. Actual results could differ materially from any forecast or projection contained in such forward-looking information. Certain material factors and assumptions were applied in making the forecasts and projections reflected in such forward-looking information. Please note and review the related disclaimers located on Slide 2 of our earnings call presentation at the Investor Relations section of our website at algonquinpower.com. Please also refer to our most recent MD&A filed on SEDAR+ and EDGAR and available on our website for additional important information on these items. On the call this morning, Rod will touch on our leadership and then provide a review of the key highlights and operational updates for the quarter. He'll also provide some commentary regarding the company's portfolio strategy. I will follow with details of our financial results. We will then open the lines for questions. We ask that you kindly restrict your questions to 2, and then requeue if you have any additional questions to allow others the opportunity to participate. And with that, I'll turn things over to Rod.

Thanks, Brian, and good morning, everyone. Thanks for joining us on the call. Before we move into the quarter results, I'd like to briefly touch on the important leadership update we announced by press release earlier this morning. We're very pleased that Robert Stefani will be joining Algonquin as Chief Financial Officer, effective January 5, 2026. Robert brings to the role an exceptional blend of financial discipline, capital markets expertise, and strategic acumen, having served the last 3 years as CFO at Southwest Gas Holdings and 4 years in the same role and Treasurer of PECO Energy. We're excited to welcome Rob to the executive leadership team. I expect his capabilities and contribution will help us accelerate our path to becoming a premium pure-play regulated utility. I'd also like to take a moment to thank Brian Chin for stepping into the interim CFO role. I personally appreciate his partnership and steady hand during my early months as CEO, and we look forward to having Brian continue with us as a key member of the finance and leadership team and to assist in the leadership transition. Now, moving on. From a financial and operational standpoint, I'm pleased to report that it was a constructive and solid quarter. Our Q3 financial results were strong with double-digit year-over-year percentage increases in adjusted net earnings and adjusted net earnings per share, and our outlooks remain unchanged. On the operational front, we received approval of our EnergyNorth rate case settlement, and our CalPeco rate case settlement is pending. At Empire Electric, we filed a settlement and recognize from commission feedback that we have more work to do to align on specific metrics and milestones to demonstrate improved and predictable customer service. Let me state, we always appreciate hearing from the commission. We are listening, and we are committed to reciprocating the transparency. We will be working with the parties to consider how to factor the commission's feedback into our settlement. We have hearings in December on our New England Natural Gas rate case. And in our Litchfield Park case, intervenor testimony is due on January 2026 with hearings scheduled for March of next year. These 2 cases represent a combined total rate request of $73.6 million of the $326.4 million in total pending rate request. A few additional comments: while we're on the topic of our regulatory proceedings, we understand that any adjustments in rates can be challenging for some customers, and affordability is a concern we take very seriously. Rate requests go through a rigorous regulatory review process designed to support our continued delivery of safe, reliable, and cost-effective utility services for our customers, with rates reflecting the very real cost of modernizing infrastructure, meeting safety and reliability standards, and improving customer experiences and outcomes. These are investments made by the company to create sustainable value for all of our stakeholders. We recognize that while necessary, our investments must be balanced with affordability in mind, which is why we are committed to doing our part to continuously find ways to lower our costs and be more efficient in the way we work. And finally, before I turn things over to Brian on the results, a few comments on the company's portfolio optimization strategy. When I became CEO in March, I initiated a series of quantitative and qualitative screens of our portfolio including value accretion, dilution, credit strength, and overall strategic fit. I heard the questions that many of you were asking me in my first days, hours, and weeks in the role. With the benefit of that initial work now behind me, I am confident that our back-to-basics pure-play regulated strategy we laid out in June is fundamentally sound. Continuing our focus on lowering our cost curve, improving operational performance, and stakeholder engagement is our best path to creating sustainable value, reducing risk, and growing our business. That being said, with a stable balance sheet and robust organic growth prospects within our existing portfolio, we are poised to be opportunistic should the situation arise. And regarding those opportunistic situations, you should first expect that any potential opportunity must be first value-enhancing to our regulated pure-play strategy, whether it's through EPS accretion and/or risk reduction. And secondly, you should expect that we would have and articulate clear lines of sight on transactability. And thirdly, it should not be a surprise to you, given the fact that we're turning this company's performance around or aim to. It should not unduly distract management's attention from our central strategy of turning around our financial performance and keeping our promise to you to be steady and predictable. That being said, Brian, I'll turn it over to you for the quarter results.

Thank you, Rod. As Rod stated earlier, it was another positive quarter for our key financial metrics, and our 2025 financial outlook remains unchanged. Third quarter adjusted net earnings from continuing operations were $71.7 million, up approximately 10% from $64.9 million in 2024. Net earnings for the Regulated Services Group were up year-over-year, fueled by growth from the implementation of approved rates across several of the company's gas and water utilities as well as slightly favorable weather compared to the prior year at the Empire Electric system. Lower operating and interest expenses also contributed positively to the quarter with gains partially offset by higher income tax expense due to higher earnings before tax. Our expectation of an effective tax rate for the year in the mid-to-low 20% range has not changed. Net earnings for the Hydro Group were essentially flat for the quarter. And for the Corporate Group, a decrease of $14.7 million was primarily related to the removal of dividends related to the company's investment in Atlantica, which was sold in the fourth quarter of 2024, partially offset by lower interest expense of $8.9 million. Moving to our EPS walk. Q3 adjusted net earnings per share were $0.09, up 13% from last year's Q3 2024 adjusted net earnings per share of $0.08. Positive drivers for the quarter included $0.02 driven by stronger operational performance from approved rate adjustments and favorable weather compared to last year, another $0.01 related to lower operating expenses and a $0.01 onetime gain from the EnergyNorth depreciation deferral. We were down $0.01 due to the inclusion of a benefit in third quarter 2024 of a New York Water retroactive payment that did not repeat in 2025. Additionally, we benefited by $0.02 from lower interest expense from deleveraging, which was more than offset by the elimination of Atlantica dividends of $0.03 and then finally, a negative $0.01 of unfavorable taxes. And now back to Rod for his closing remarks.

Thanks, Brian. And to close, this was another quarter of quiet but steady, thoughtful execution. As we continue our way forward, our focus remains on creating sustainable long-term value for our stakeholders and continuing to effectively serve our customers and communities. We're looking forward to seeing many of you at EEI in the coming days. Thanks again for your time and continued support, and we are happy to take your questions. Back to you, operator.

Your first question comes from Baltej Sidhu from National Bank of Canada.

Congratulations on the strong quarter. Just looking at the OpEx improvement, could you share any color as to what were the main drivers of this and if it's sustainable? Looking in the MD&A, you had highlighted favorable timing as a factor.

Yes. Thanks, Baltej. So, as you know, we have been continuing to work on improving our cost discipline. You'll notice that we have taken cost-cutting measures as part of our ongoing strategy of improving value to our customers and stakeholders. We do say in the MD&A, and I'm glad you pointed it out, that we do expect a little bit of reversal on OpEx timing to happen in Q4, and that's part of the reason why our guidance remains unchanged. In terms of specific drivers, it's across the board. I wouldn't point to any one particular thing, Baltej. It's a myriad of improvements in efficiency and discipline across the board. So do be prepared for a little bit of reversal of that in Q4. But broadly speaking, we're pleased with the trajectory that we've been making.

Great. Can you provide some insights on any recent discussions with data center companies and whether you anticipate any large projects that could significantly impact your system or rate base?

Yes. We wouldn't be talking about any conversations with customers unless they were aligned with us disclosing those conversations. I will say that our focus is on creating the conditions precedent to serving a multitude of customers, especially increasing transmission capacity in Southern Missouri, which we've already disclosed that we intend to do, and certainly looking at stabilizing our generation portfolio in the region as well. And that's about all we'll say.

Your next question comes from the line of Nelson Ng from RBC Capital Markets.

I have a quick follow-up on the operating costs. Out of the $11 million in cost reductions we observed in Q3, $9 million was related to timing. Brian, should we anticipate that the entire $9 million will carry over into Q4?

Nelson, I think that the timing aspect for Q4 is going to be an item that does crop up. Is it going to come out exactly at $9 million? We'll see what happens as we continue to progress through Q4, but the order of magnitude, I think, is correct.

Okay. And then also in the quarter, I think restructuring costs were about $9.6 million for the quarter and I think $22 million year-to-date. Can you just talk about when you expect to see restructuring costs gradually roll off?

What I'd say is we're in the early innings of our restructuring efforts still. Obviously, given the history of the company, we believe we have a lot of opportunities to provide value across our cost curve. And so stay tuned for more, but early innings is how we would describe it here.

Okay. So this could be a multiyear process?

Early innings, Nelson, is how I would phrase it.

Your next question comes from the line of Rob Hope from Scotiabank.

As part of the portfolio optimization review, do you take a look at the domicile of the company just given the fact that the majority is now in the U.S.?

No, no question about it. I got those questions, as you know, and you guys were part of the queue from March on about the domicile question. It is an active conversation and consideration as we think about providing sustainable value. The question for us, recognizing that we would need to get the support of our existing shareholder base, is how does that play out. And while we have not made any determinations, I owe it to you and to my Board to do the due diligence to answer those questions. That work and that analysis is in flight. And that's all I can say. I do expect that at some point, we'll be in a position to opine as to whether it's something we pursue or not.

All right. Appreciate that. And then maybe just moving over to the regulatory front. Are the settlements at the various utilities kind of better or worse than you were expecting in your financial update in June? And more broadly, on the next go-around for these regulatory filings, how would you as the new management team do things differently?

Well, I'll simply say in our outlook that we laid out for you in June, we made certain assumptions around the reasonableness of our regulatory outcomes in the litany of rate cases. And I'll simply say that, as I alluded to in my opening remarks, everything is very much in flight. So I won't comment on whether or not where we are in our various settlement postures is above or below expectations, but our expectation around reasonable outcomes remains as reflected in our outlook. In terms of what we are doing differently and what our existing, and certainly with Rob's arrival, our future management team would be doing differently, we'd be spending more time as we've sought to accelerate here, engage with our stakeholders long before we put pen to paper on a regulatory filing. And you've heard me say this before, but it bears repeating that our objective is that by the time we actually make a filing for any rate adjustment mechanism or legislative change, we have reduced the number of contested issues to as few as possible before we make the filing to give our regulators a lot better air cover in both assessing and deciding on regulatory outcomes. And that's just more work beforehand that really efficient and, candidly, premium utilities, that's what they do, and we expect to mirror the attributes of those highly valued pure-play utilities.

Your next question comes from the line of Mark Jarvi from CIBC Capital Markets.

Just on the activities at Empire, you had a non-unanimous settlement. OPC hasn't signed off yet. Are you in ability to negotiate with them and do a revised sort of more fulsome settlement in parallel to the public hearings that were ongoing?

We're going to always be open to resolving disputes between any and every stakeholder. I'm not singling out OPC, as I don't want to get ahead of any of the processes in Missouri. But the short answer is our objective is to get the support of the commission by bringing as many of the stakeholders along and resolving disputes. So OPC is an important stakeholder, but it's the commission at the end of the day who will call balls and strikes, and we're going to do our best to bring as many folks along as we can.

I'm also curious how you guys think about updating the market in terms of the journey on the cost-cutting and navigating these rate cases. If you had sort of final decisions on CalPeco and Empire at some point in earlier 2026 and you've seen some progress on the cost reductions, would there be a view to update potentially '26 and '27 guidance at some point early or sort of mid-year 2026?

Yes, that's a great question. I believe it coincides with the arrival of our new CFO in January. I would want my new CFO to be involved in the decision-making process since both of us will be responsible for the direction going forward. If we determine there is a significant change needed in our outlook, I would give him some time in the early part of next year to settle in. Our foundation remains solid, and my short answer is that I would provide updates if there were any substantial changes, but the new CFO's arrival will allow us to reflect and examine things from a fresh perspective. I think your assumptions about the timing are quite reasonable.

Okay. Makes sense. And then just, Brian, I know you mentioned the reversal in Q4 of some operating costs. But just as it stands today now, would you be tracking above the 2025 guidance on EPS?

No, our guidance is our guidance. So we're not going to make any comment about how we're thinking about things relative to that guidance.

Your final question comes from the line of John Mould from TD Cowen.

Maybe just going back to the portfolio optimization aspect. I'm just wondering if you can elaborate a little bit on the risk reduction commentary. Is that chiefly a comment around utility or state-specific regulatory risk? Or are there other aspects of the portfolio optimization process where you see risk reduction opportunities as enhanced potential?

Great question. The short answer is all of the above. It's risk period. So anything that would reflect a risk to our ability to achieve steady, predictable outcomes for the long term would be a consideration. So I don't mean to point to any specific one. But in the same way that we are not doing the math on whether a specific transaction would be EPS accretive, the remainder of the considerations that would drive portfolio assessment and value assessment would be just how we articulate, identify, and mitigate risk. So I appreciate the opportunity to be explicit on that. It's the generic enterprise risk to value.

Okay. And then maybe just one more on your customer and billing and data systems. I appreciate the challenges that we've talked about on previous calls are pretty backward looking at this point. But can you just give us a sense of how that system is operating broadly across your utility footprint at this point?

I am encouraged by the progress we have made despite the customer disruptions caused by the billing issues. When we appointed Amy Walt as Chief Customer Officer, her expertise in SAP deployment and customer systems instilled confidence in our ability to achieve better outcomes for our customers. We are making significant headway in this area, and it's important to acknowledge the guidance we received from Missouri, which emphasizes the need for improved customer results. They are focused on the metrics and milestones, and we are committed to showing them our progress in a sustainable way. I am optimistic about what we are accomplishing internally and the potential to demonstrate the sustainability of our improvements in Missouri. We still have a lot of work ahead, but we are advancing.

There are no further questions at this time. I'd like to turn the call over to Mr. Rod West. Please go ahead.

Well, everyone, we are days away from EEI. So I thank you for your time and attention to our story, and we look forward to double-clicking face-to-face. Safe travels to everyone. Have a great weekend.

This concludes today's conference call. You may disconnect.