AQN 2025Q2

Hello, and welcome to the Algonquin Power & Utilities Corp. Second 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 second quarter 2025 earnings conference call. Joining me on the call today will be Rod West, Chief Executive Officer; and Sarah MacDonald, Chief Transformation Officer. To accompany today's earnings call, we have a supplemental webcast presentation available on our website, algonquinpower.com. Our financial statements and management discussion and analysis are also available on the website as well as 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 provide a review of the key highlights and operational updates for the quarter, and I will follow with the details of our financial results. We'll then open the line for questions. We ask that you kindly restrict your questions to two, 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. Thank you for joining us on the call this morning. At first glance, the past quarter may appear relatively quiet in terms of outward-facing updates, but rest assured, the calm belies a great deal of focused activity behind the scenes. Our team has been hard at work laying critical groundwork, refining internal systems and making strategic progress that sets the stage for what's to come. We're already starting to see the impacts of spending discipline take shape and while other efforts may not be immediately visible, there are essential investments in achieving our goals related to an improved customer experience and continued growth, resilience, and innovation all on our path to becoming a premium pure-play regulated utility. I remain motivated and excited for the opportunities ahead. And now some highlights from the quarter. Firstly, our Q2 financial results were solid and put us on track to meet our financial outlook for 2025, more from Brian on the financials shortly. Second, our regulatory schedule is proceeding as expected with notable rate case filings made during the quarter at Arizona Litchfield Park Water, New England natural gas, and a total combined rate adjustment request of $73.6 million. Next, we continue to strengthen our executive management team with the appointments of Noel Black as Chief Regulatory and External Affairs Officer; and Amy Walt as our Chief Customer Officer. These strategic additions fortify our bench strength as a leadership team, and underscore the company's commitment to operational excellence and stakeholder engagement and ultimately advance Algonquin's pure-play utility objectives. And lastly, on June 3, the company announced its 3-year financial outlook and Back to Basics customer-centric plan, which is focused on improving customer outcomes, driving operational efficiencies, and achieving constructive regulatory outcomes. In addition to announcing our estimated adjusted net EPS outlook for 2025 through 2027, we provided projections reflecting expected improvements to our earned ROE and operating expenses as a percent of revenues, anticipated organic capital investment deployment, continued maintenance of our BBB investment-grade credit rating, and our expectation that no common equity financings will be needed through 2027, all in the context of increasing value for our four key stakeholder groups. Turning now to some updates on the operational front, starting with regulatory updates that occurred during the period. The Arizona Corporation Commission approved a settlement agreement resulting in a $4.2 million revenue adjustment at the company's four water and wastewater facilities in Arizona, with approved rates taking effect July 1. A settlement agreement is awaiting approval with the New Hampshire Public Utilities Commission supporting the continuation of rates approved back in October 2023 at our Energy North Gas utility. The hearing was held on July 31, and we are awaiting a commission order. And some final comments before I turn things over to Brian. As a utility provider, we recognize that reliable infrastructure and energy services are the foundation of sustainable economic development. Our commitment goes beyond delivering services. We're proud to be an active partner in initiatives that drive growth, attract investment, and support the long-term vitality of the communities we serve. As a company still in transition, we continue to refocus our efforts on investing in our local communities. We desire to be a key partner in enabling growth and becoming a catalyst for economic development in the 13 states we serve. As part of our long-term strategy, we're actively developing targeted investment plans aimed at driving economic progress across our service areas. I'll now turn things back to Brian to review the financial highlights from the quarter.

Thanks, Rod. As stated earlier, it was an encouraging quarter for our key financial metrics, and we remain on track to meet our 2025 financial outlook. Second quarter adjusted net earnings from continuing operations were $36.2 million, down approximately 13% from $41.5 million in 2024. Net earnings from the regulated Services group were essentially flat year-over-year as growth from the implementation of approved rates and reduced interest expense related to deleveraging were slightly more than offset by the following factors: First, we saw a normalization of weather this quarter compared to slight weather favorability in the prior period. The lack of a favorable one-time revenue make-whole adjustment at our Bermuda Electric utility in the second quarter of 2024, and a higher effective income tax rate and lower HLBV income due to decreased wind production. The $5.8 million increase in net earnings for the Hydro group was primarily due to the finalization of a one-time tax recovery we discussed in Q1. Our expectations of an effective tax rate in the low to mid-20% range for the year has not changed. And on the corporate side, our adjusted net earnings decreased by $10.2 million primarily related to the removal of Atlantica dividends. Moving to our EPS walk. Q2 adjusted net earnings per share were $0.04, which is down from last year's Q2 2024 adjusted net earnings per share of $0.06, including one-time nonrecurring items, but otherwise was operationally flat. Positive drivers for the quarter included $0.02 related to the implementation of approved rates and $0.02 of deleveraging on interest expense. These were more than offset by the elimination of Atlantica dividends of $0.03, share dilution of a negative $0.01 related to the mandatory conversion of our equity units of which this is the last quarter of year-over-year dilution, a negative $0.01 from the combined effects of higher depreciation taxes and lower HLBV income, and a slight return to normal weather from the prior year whose effects also rounded to a negative $0.01. Overall, financial results for the quarter were relatively quiet as we said before, with much work continuing behind the scenes. And now back to Rod for closing remarks.

Thanks, Brian. We look forward to providing updates on our portfolio strategy closer to the end of the year. We also plan to attend the EEI financial conference in November and hope to meet with many of you then. In closing, I want to thank you for your continued support and interest. And as we look ahead, we remain confident in our ability to navigate the challenges, invest wisely in our infrastructure for the benefit of our stakeholders, and continue driving sustainable value and growth. We appreciate your time today and are looking forward to taking your questions. Back to you, operator.

Our first question comes from Richard Sunderland with JPMorgan.

Rod, are you still anticipating some type of portfolio update this year? I'm curious if you have any sense on timing there and what you're evaluating across the business in advance of that.

Yes. What we said, and I think I just alluded to it that we'll give a strategy update on the portfolio at the end of the year. We haven't made a formal announcement, although I did declare that we plan to attend the EEI financial conference in early November, but we've not made any formal pronouncements as of yet.

Okay. Got it. And then the investment plans for economic progress makes sense what you were outlining there, but I'm just curious if you can provide a little more detail on what you are thinking about as, I guess, a target for those investments and how you could be a partner with your territories?

Well, we won't get ahead of either our regulators or any prospects, but we are signaling particularly with our states that we understand our role as a utility in being a catalyst for economic development. It's been my experience in my prior associations as well as my specific intentions with Algonquin Liberty that we will be an active participant in our states. Anywhere there's economic development, there's usually a healthy utility helping to serve the communities that are in its service territory. My objective is making it clear, not only to our states, but also to our employees and prospects for growth that we expect to be a catalyst at the table. So it's the beginning of, as you might imagine, several conversations that are in various stages of maturity.

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

Quick questions for Brian. You mentioned that you've finalized some of the tax items for the Hydro business, and you recognize some one-time benefits in the first and second quarters. Should we expect to see any tax recoveries in the third quarter?

No. The majority of the tax adjustments related to Hydro were taken in Q1, as you know. There was a follow-on true-up in Q2, and we're not expecting any further updates on that.

Okay. Great. And then my next question, obviously, you have a lot of ongoing rate cases to run through. You hired Noel and Amy recently. There's a lot of heavy lifting involved. Should we expect any additional hires in the near term? Do you have the right team in place right now?

That will be a conversation that I would simply make announcements when I do no different than with Noel and Amy. I won't signal that I'm planning to do X, Y, or Z with a specific role. Just know that we're constantly asking the question, do we have the right skills in the right places for our objectives. And that will be my MO on a go-forward basis. I won't anticipate it. I'm simply letting everyone know that we're constantly asking that question. That's what I view as my job to make sure I got the right people in the right place to achieve our objective.

Next question comes from the line of Robert Hope with Scotiabank.

This is Jessica Hoyle on for Robert Hope. So just to start, can you talk a little bit more about the progress on the plans to rein in costs and increase efficiencies in the utility platform?

I want to emphasize that our efforts are in progress. We are still in the early stages and not committing to any specific outcomes regarding our efficiency initiatives. We are focused on maintaining cost discipline as our approach. The financial outlooks we shared on June 3 reflect our perspective on our overall cost strategy. This will manifest differently across various areas, but we intend to become a more streamlined company. We are working hard to reduce our costs to enable more productive capital investments for our customers, while minimizing the impact on our projects. We are still in the early stages, and while we are enthusiastic about the progress made, we have significant goals ahead and much work to do.

Got it. And then secondly, we've seen some hydro transactions in the market. Is there any update on the process to potentially monetize these assets?

No updates at this time, Jessica. We remain in the same posture as we articulated at the 3-year outlook and on the Q1 call.

Our next question comes from the line of Mark Jarvi with CIBC.

It's actually Ollie on for Mark Jarvi. Just a couple of questions. The first piggybacking off of a prior question on costs reductions. Just wondering where you might be focused now? Is it really more on the opco level? Or would it be on the holdco level? And wondering also how you think we might be able to gauge the progress over the year on those cost reductions efforts?

Yes, you won't see us providing updates on the cost-out program. You'll see us producing on a quarter-by-quarter basis, the outcomes at the jurisdictions. And by outcomes, I mean our rate case settlements, but more importantly, our overall production as a firm. And I think the signals that we've been giving to the marketplace around O&M as a percentage of revenues are the best and right now, only public pronouncement to give you a sense of what we're seeking to accomplish from an enterprise perspective because it's not just an operating company conversation, our holdco or corporate center conversation. It's an enterprise effort to lower our overall cost profile for the benefit of our stakeholders. And so we'll be deliberate about how we talk about it publicly, but it's an enterprise effort.

Excellent. Okay. That's helpful. And second question, on the Empire Electric proceedings, do you believe that the stakeholders might be willing to engage in a negotiated settlement? And if yes, any potential timelines for settlement discussions or resolution?

Well, the short answer is always, and the timeline is a function of the procedural schedule, and we have some of the early postures from staff and OPC and we'll have our rebuttals, I think, in the coming weeks. And around that November time frame after the initial posture from the stakeholders and our rebuttal to it, I think that's usually when the process of negotiations officially begin. But from our vantage point and our stakeholder engagement objectives, we're in a constant state of negotiations with the various stakeholders to that outcome. So I won't give you a timeline, but again, I don't ever want to get ahead of the ultimate decision makers there. But that process is well underway.

There are no further questions at this time. I will turn the call to Mr. Rod West.

Well, if there are no further questions, thank you for your interest, and this concludes our quarter call.

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