Algonquin Power & Utilities Corp. Common Shares

Hello and welcome to the Algonquin Power and Utilities Corporation first quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. I will now turn the conference over to Mr. Brian Chin, Interim Chief Financial Officer and Vice President of of investor relations. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us for our first quarter 2025 earnings conference call. Joining me on the call today will be Rod West, Chief Executive Officer, and Sarah McDonald, 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 CEDAR Plus 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 two of our earnings call presentation at the investor relations sections of our website at algonquinpower.com. Please also refer to our most recent MD&A files on Cedar Plus and EDGAR and available on our website for additional important information on these items. On the call this morning, Rod will provide brief commentary on his first 60 days at Algonquin, followed by a review of key highlights and operational updates for the quarter. I will then detail our financial results. We will then open the line for questions. We kindly ask that you restrict your questions to two, then re-queue if you have any additional questions to allow others the opportunity to participate. With that, I'll turn things over to Rod.

Thank you, Brian, and good morning, everyone. Before I provide my opening remarks on the quarter and my first 60 days, I first want to acknowledge the heartbreaking incident that occurred on April 9th in Lexington, Missouri, within our gas service territory. As members of the community, our thoughts and prayers remain with the affected families whose lives have been devastated by the tragedy Our hearts are with you. Nothing's more important to me and to this company than the safety of our customers, employees, and communities. We remain fully committed to working with the authorities to support the ongoing investigation into the cause of the accident. And we will continue to work in partnership with the community on restoration and recovery initiatives. Moving now to my comments on the quarter. I'd like to start things off by thanking you for your interest in Algonquin, for continuing to support the company through this transformative journey, and for welcoming Brian and I into our new respective roles. It's been a busy first 60 days for me, having had the opportunity to meet with many of our stakeholders and visit several of our regional offices. My observations are consistent with the remarks I shared on the Q4 call. I see significant opportunity ahead, but there's still a tremendous amount of work to do. Algonquin has real potential to be a premium utility. We have a solid, diversified asset base and many talented and hardworking employees, but we have yet to consistently evidence the practices that set premium utilities apart from the rest. Some areas of improvement that come to mind include improving our customer outcomes first, and community engagement, leveraging our economies of scale. I look forward to sharing more insights on our path forward. As promised, we plan to provide a forward-looking multi-year update on June 3rd, which falls approximately 90 days from our Q4 2024 call and my first day in the seat. Also on June 3rd, I plan to share more of my observations regarding the company. And later this year, I do expect to provide a little more color into our longer-term strategic thinking and positioning of the portfolio. With that, let's now turn to the operational highlights from the quarter. Starting with regulatory updates, on March 25th, the New Hampshire Public Utilities Commission issued an order approving the Granite State Electric Settlement Agreement with new rates having taken effect on April 1st. On April 21st, the New Hampshire Commission further extended a stay of the Energy North Gas rate case proceeding until May 30th, allowing more time for settlement negotiations to be completed. On our Empire Electric Missouri rate case, the Commission extended the test year true-up period from September 30th, 2024 to March 31st, 2025. which provides an opportunity for us to capture capital invested during that time frame in our rate filing. Moving to a brief update on the Missouri Commission investigation into our customer service and billing issues. As stated on the Q4 call, the investigation opened at the end of February, and we have been working with the investigation team, responding to data requests and providing answers to their questions. shifting from state-level rate cases to transmission. As discussed last quarter, the Southwest Power Pool, SPP, approved its 2024 Integrated Transmission Plan, the largest portfolio of transmission projects ever undertaken by SPO, totaling roughly $7.7 billion. A significant share of this transformative investment, approximately $750 to $800 million, is dedicated to strengthening the Empire District electric service area, underscoring the region's critical role in the future of the grid. Within the Empire District electric footprint, the approved upgrades encompass approximately 80 miles of 161 kV rebuilds or conversions, 90 miles of new 345 kV transmission lines, and the construction of two large-scale transmission stations. On April 23rd, Empire accepted the first tranche of Notices to Construct, or NTCs, for the 161 KV portion of the portfolio. Empire has also received the second tranche of NTCs, and the next step is the official acceptance of the second tranche of NTCs submitted to SPP on or before June 19th. We're excited for the opportunity these projects represent for our stakeholders. I'll now turn things back to Brian to review the financial highlights from the quarter. Brian?

Thanks, Ron. In a short summary, it was an encouraging quarter for our key financial metrics. First quarter adjusted net earnings from continuing operations were $111.6 million, up 39% from $80.1 million in 2024. 43% increase of $40.8 million in net earnings for the regulated services group was primarily due to the implementation of new rates of $15.7 million and lower interest expense of $13.6 million as a result of debt repayment with the proceeds from the sales of the renewables business and our Atlantica stake. Our depreciation expense was relatively flat year over year. Our usual organic growth and depreciation expense was partly offset by $8.2 million in non-recurring favorable pickups related to regulatory orders in New Hampshire and Arizona. The $13.4 million increase in net earnings for the hydro group was primarily due to a one-time tax recovery related to the sale of the renewable energy business. Our expectations of an effective tax rate in the mid to low 20% range for the year has not changed. And as we have said before, We do expect a bit of lumpiness in our quarterly tax profile. On the corporate side, our adjusted net earnings decreased by 22.7 million related to the removal of Atlantica dividends. Moving to our EPS walk, Q1 adjusted net earnings per share were 14 cents, which is flat to last year's Q1 2024 adjusted net earnings per share of 14 cents, which includes renewables. and yet above last year's Q1 2024 continuing operations adjusted net EPS of 11 cents excluding renewables. Starting with last year's 14 cents including renewables, year-over-year drivers include a negative 3 cents attributed to the renewable sale, an increase of 3 cents for new rate case contributions from New York Water, Belco, and MidStates Gas, as well as increased customer demand, and another two cents of contribution from lower interest expense from use of renewables and Atlantica sales proceeds to pay down debt, net of financing for organic growth. Mirroring my earlier comments, we had approximately a penny pickup from non-recurring items, favorable items, based on depreciation related to regulatory orders in New Hampshire and Arizona. Aside from the regulated business, We captured a two-cent increase for the one-time tax recovery related to our hydro group, a decrease of three cents for the removal of the Atlantica dividend, and a reduction of two cents for an increase in weighted average shares outstanding. For the last two quarters, our adjusted net EPS impact from dilution has been tracking to a penny each quarter. But since our results are proportionally skewed to Q1, this mathematically increased our dilution to two cents for this quarter. Let me pause here on non-recurring items embedded in this walk. If one takes the positive penny from regulatory orders related to depreciation and the two cents from the hydro tax recovery, our adjusted net EPS includes a total of three cents of favorable non-recurring items in the quarter. And given our unchanged view of an effective tax rate in the mid to low 20% range, We expect a portion of the effective tax rate non-recurring items to reverse over the remainder of the year. In keeping with our goal of reducing complexity, the company's financial disclosures now focus primarily on adjusted net earnings and adjusted net earnings per share and earnings per share as we view these as our key financial metrics. Our simplified financial disclosure includes net earnings from continuing operations separated into regulated hydro and corporate segments in our financial statement footnotes. A few comments now on our credit metrics. Simply stated, our credit metrics are healthy. For year-end 2024, S&P indicated our FFO to debt was 12.5%, comfortably above the requisite BBB threshold of 11%. Fitch indicated our debt to EBITDA was 5.6 times, appropriately below the requisite BBB threshold of 5.8. These metrics were measured before net deleveraging proceeds to continuing operations were received from the sale of the renewable energy business on January 8th. And now back to Rod for closing remarks.

Thanks, Brian. As per our press release this morning, I want to highlight to our listeners to save the date for our investor update call on June 3rd, which I referenced earlier. We expect this outlook, which will be primarily based on the current portfolio, will include projected adjusted net EPS ranges for 2025, 2026, and 2027, with more detailed thoughts on the company and its potential after my first 90 days. I also aim to share my broader strategic thinking on the broader portfolio later this year. Thanks to everyone for joining us on the call this morning. I am excited and motivated by the opportunities ahead, and now the management team is available to answer your questions. Operator?

Thank you. If you have a question, please press star 1 on your telephone keypad. To withdraw your question, simply press star 1 again. please limit your questions to two. One moment, please, for your first question. Your first question comes from the line of Robert Hope with Scotiabank. Your line is open.

Morning, everyone. I won't ask about the forward outlook, but maybe a little bit backwards looking. Rod, you've been here for a number of weeks, months now. Can you maybe walk us through kind of what you think the most impactful changes you've made to the organization so far have been?

Yeah, it's interesting that you say months because it is literally two months. So the S in month look back is literally one month. But my focus and the initial sort of impact has been setting a vision for what a premium pure play utility looks like and setting the attributes of a pure play utility to the corporation, which informs the work we're doing to lower our overall cost profile to make room to do more on the capital and O&M front, but also a focus on improving our stakeholder engagement capacity and sort of discipline. Again, these things are notional because I'm communicating them to the organization as I'm setting ourselves up to actually execute on those plans. And the way that they will ultimately play out our own outcomes for our stakeholders, you know, for the investment community. We're talking more and we'll be talking more about total shareholder return from the customer perspective. We'll be talking about net promoter score and specific customer outcomes that will drive our capital plan and our sort of organizational health, the motivation, the health, the alignment of our employees' actions to create sustainable value for those four key stakeholders. And the metrics that we're paying attention to are the types of things that will give us our stage gates along the way so everybody has a clear understanding of where we're headed and what are the milestones along the way that will separate us from good to great. The good thing is that we have a lot to work with, and that's the biggest part of my initial evaluation is that we have really quality assets and we have a group of employees who are really motivated

turn turn our performance around all right appreciate that color um second question moving over to the svp projects so you have two tranches with good clarity right now do you know how much capital that could be versus the 750 to 800 that you referenced as well as uh you know when would that capital start uh being spent we haven't we haven't disclosed anything beyond

what is currently public. And so I don't anticipate that we'll do so until we're further along. But the short answer is my expectation is that if we're successful in executing on what's in front of us, we'll be in a better position to capture and execute on additional CapEx opportunities in that space.

All right. Thank you. I'll jump back in the queue.

Your next question comes from the line of Sean Stewart with TD Common. Your line is open.

Thank you. Good morning. A couple questions. I want to start with investigations. So there's another investigation in Arkansas and an audit in New Hampshire. And I'm just trying to gauge, are these the same billing issues that you're dealing with in the Missouri investigation? And do you have any perspective on timing resolution for these various investigations and audits?

I don't believe New Hampshire is a customer-related investigation, but the other investigations have to do with the billing issues, the timeliness of billing associated with the deployment of an overhaul of a new system. And we are We're working with the regulators and the state in each of those circumstances. From my initial observation that our challenges were not unlike other utilities who have gone through system deployment, I think where we have fallen short and are seeking to remedy it is that we did not do a good job of stakeholder engagement prior to the deployment of the system, which left a lot of folks surprised when the normal, what I would consider to be the normal hiccups associated with the the scale of the system overhaul that we we implemented You know, we didn't we didn't in my view at least do the conditions precedent to making it a smoother transition For customers and regulators, but we're closing that gap as we speak and I don't I am NOT surprised at all by the Attorney General's or whoever else was was initiating investigations because we put them in a position where they had to do that. I do expect us to work through them. And I have personally gone to those respective states to represent my commitment to follow through and cure the issues that the customers have been experiencing. But we'll continue to participate and support the work of the states in closing out these customer complaints.

Okay, thank you for that context. Second question, wondering if there's any update on your thinking around the hydro portfolio, potential timeline towards divestiture, how the thinking's evolved in the current valuation environment.

Yeah, and I'll, you know, if we do a double click, I'll let Brian talk more about it, but my perspective is consistent with the position we've taken We're looking to transact, but the condition precedent has to be it being value accretive. Not from a singular EPS perspective, but certainly from a balance sheet and a strategy accretive perspective as well. We're monitoring the market environment for potential off-takers, but it has to be something that we view as net accretive. I don't know that We feel forced to pursue, but should that opportunity arise, I have given the go-ahead that we'll transact if those conditions are met.

Brian? Yeah, and Sean, as a reminder, our thought process is that we would be looking at that in the first portion of this year. Obviously, with the leadership transition and our thought process on the portfolio strategy has been evolving here. We've pushed back the timetable a little bit, but everything that we said before about it being value accretive on a number of fronts, that remains consistent.

Got it. Okay. Thanks very much, guys. Much appreciated.

Your next question comes from the line of Nelson Ning with RBC Capital Markets. Your line is open.

Great. Thanks. Good morning, everyone. Quick question on the whole CRM implementation. Can you just comment about, I think in the past you talked about how the CRM implementation would result in cost savings, and I just had a look at the operating expenses of the utility division. I think costs have increased by just 1.5% year over year, so that's obviously lower than inflation. So that's good, but can you just talk about

realizing cost savings in in the business that big picture and maybe do a bit more color going forward as well sure Nelson it's Sarah McDonald so the implementation was not just about cost savings there were a lot of other customer benefits that that where are now coming to fruition when we were starting to implement we had multiple systems no integration and and issues in making sure that customers had access, visibility, ability to go online and look at their bills. And so there was certainly a lot more benefits to the customer coming in. Ultimately, when the system is functioning optimally, you will start to see cost, you know, we'll start to be able to realize the benefits of that integration. But for now, we're focused on getting it implemented right and making sure the customer experience is better.

And the cost benefits are not going to be specifically called out solely to the implementation of the platform, but you would expect to see more digital channels, lower calls from customers because we're providing more self-help options and lower paper expenses, but those would be reflected in our overall O&M numbers and not just attributed to on a future basis to understand where we'll be coming from.

Okay, thanks for the color. And then the second question probably relates to Brian. So just a quick one on the non-controlling interest earnings of 18.9 million. I know in the past you kind of singled out HLBV as a line item. Is this item, is it all HLBV or are there several items lumped together? into earnings attributable to non-controlling interest.

Yeah, so it's primarily HLBB income. The other significant piece of that, and it's a relatively small piece, is the minority interest related to the ownership stake in Sorales down in Chile.

Got it. Thanks.

Let's get back to the queue.

Your next question comes from the line of Rupert Moorer with National Bank. Your line is open.

Hi, good morning, everyone. If I could start with a follow-up on the operating costs. I think with the billing issues you've had in previous quarters, it did incur some added costs. Are you still seeing added costs related to those issues, or is that largely in the rearview mirror now? And when we look at those operating costs, are they more representative of what we should expect in future quarters?

Yeah, Rupert, so when we started experiencing those billing issues, the extra cost that we did call out in the Q4 materials was bad debt expense, and that's where we saw the majority of that. You saw a little bit of that this quarter, but it wasn't really enough for us to call out specifically, and definitely the trend line is moving in a more improved direction. I think going forward from here, that we would expect that that would temper off, just given the trajectory of where our customer billings exceptions are at. So, you know, the short answer, Rupert, is we recorded the majority of that in Q4.

And last quarter, you talked about some synergies related to the sale of the renewable group. It seems like the costs in the renewables and corporate group have come down significantly. Have you largely dealt with these synergies, or are there any other sort of plans you can discuss to lower costs in the near term? I understand some of this may be things you want to talk about on June 3rd.

Yeah, Rupert, so last year, if you look at the year in aggregate, we had roughly 18 million in disenergies that affected our OPEX numbers last year. For the first quarter, it's at a smaller amount. It's less than a penny of disenergies that we're seeing. We didn't call it out specifically in the materials just because of the size. We do expect that as we're continuing to execute greater operational and capital discipline on the company, that the eventual removal of those disenergies will manifest themselves through the outlook. But at this stage for the quarter, it just simply wasn't large enough for us to call out. So we do think that that's a helpful stage, and that's something you should expect for us here.

Very good. I'll leave it there. Thank you.

Your next question comes from the line of Ben Pham with BMO. Your line is open.

Hey, thanks. Good morning. How do your peers on conference calls highlight customer affordability as a topic of interest these days with all that's going on with markets and inflation and supply chain? Can you add some flavor to that conversation? Can you think about some of your comments previously on cost initiatives and and narrowing that better way to get up towards a low?

Yeah, I'll certainly start on that. If I think about the guardrails of the company, you heard me make reference to premium utilities. You know, we aren't capital constrained if we have constructive regulatory mechanisms and we have a platform for customer-centric investment to meet, you know, evolving customer demands for our services. But I think the, you know, At this point, the one thing that gives us credibility when coming in to our regulatory environment asking for support is that we've done everything that we can to lower the cost profile, the actual cost of service for our customers. And so from my vantage point, the one constraint is not capital constraint, it's affordability. And so the conversation that we are having internally and for the entirety of of my tenure here in our pursuit to be a premium utility is driving the cost down so that we could put productive capital to work on behalf of our stakeholders in a way that minimizes the impact on customer bills. It's embedded in what you just heard Brian make reference to about capital discipline, but we're also constantly going to be benchmarking ourselves against best in class on our overall cost profile so that I can make, we can make a credible case to our stakeholders that we're responsible stewards of our service. So you'll see that in our O&M numbers, and I'll talk a little bit more about it in our outlooks on June 3rd. But I think discipline should be your takeaway. and we're comparing our objectives. We're not there yet. Obviously, we're a ways away, but our objective is to compare ourselves to best in class on both capital N, O, and M disciplines.

Okay, got it. And I need to provide some details on the June update. You mentioned also later in the year. I just wanted to clarify the June update portion with 25 to 27. Is it focused on EPS numbers, rate-based CapEx in that time frame, and then later in the year it's a beyond 27 guidance?

It's fair to say that you're absolutely right on 25, 26, and 27. And I know that there are going to be questions about broader points of view on a portfolio strategy. And what we're saying is that we're prepared to go public with the guidance and outlooks for that three-year timeframe. And while we are definitely thinking through the broader strategic portfolio questions, we think we'll be in a better position to talk about it publicly later in 2025.

Okay, got it. Thanks, Rick.

Again, if you would like to ask a question, press star then the number one on your telephone keypad. Your next question comes from the line of Mark Jarve with CIBC. Your line is open.

Mark, your line is open.

Sorry about that. Questions on New Hampshire. You've got settlements now at Energy North and Granite State, but obviously there's still the audit in terms of the systems there. A bit of perspective in terms of the path forward there, when you could get back into file for new rates and try to get through some of those revenue requests that didn't come through on the prior settlements.

Yeah, Mark, so just to be clear, we do have an order approving the settlement for Granite State. We are in settlement discussions at Energy North, and that's part of the prepared commentary that we've got a little bit more time as granted by the commission to negotiate that settlement, so just to clarify that. But with regards to when we can go back in for new rates, so for Granite State, What we have in the settlement is a stay out period until we can file a new rate case on January 1st, 2026. And that is a helpful data point in those. And given that similar parties, similar time scales for the rate cases, I think that's something to think about as we're looking at concluding settlement negotiations in Energy North.

Got it.

And then maybe updated views in terms of CalPICO, the application for interim rates, any feedback yet in terms of whether or not that's feasible and just probably how you see timeline progression in CalPICO?

So it's absolutely feasible. We wouldn't have filed otherwise. We haven't got any feedback yet, but we're continuing to answer any questions that come up, but it's certainly an option open to us that we're taking every advantage of.

When do you think you get clarity? Because I believe the ask was for interim rates by the middle of this year, and that's not that far away at this point.

California is a slower jurisdiction to hear back, so I actually can't say when we'll hear.

Got it. Okay, thanks for the time this morning. Thanks, Mark.

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

All right. Thanks again for your interest and your questions this morning. We look forward to visiting with you again in just a few weeks on June 3rd. Have a great rest of the day.

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