Algonquin Power & Utilities (TSX:AQN) Q1 2026 Earnings Call

0:00 Hello, and welcome to the Algonquin Power and Utilities Corporation First Quarter twenty twenty six Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I

0:24 will now turn the conference over to Mr. Brian Chin, Vice President of Investor Relations. Please go ahead. Thank you, operator, and good morning, everyone. We appreciate you attending our first quarter twenty twenty six earnings conference call. Joining me on the call today will be Rod West, Chief Executive Officer and Rob Stefani, Chief Financial Officer, who will share prepared remarks. Other members of the management team are also available to answer your questions during the Q and A portion of the call today. 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 plus and EDGAR. We would like to remind you that our discussion during the call will include certain forward looking information and non GAAP measures.

1:12 Actual results could differ materially from any forecast or projection contained in such forward looking information. Additionally, all net earnings information to be discussed today is for continuing operations and is attributable to the common shareholders of Algonquin. Certain material factors and assumptions were applied in making the forecast 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 section of our website at algonquinpower.com. Please also refer to our most recent MD and A filed on SEDAR plus and EDGAR and available on our website for important additional information on these items. On the call this morning, Rod will provide a business update and Rob will follow with the details of our financial results.

1:59 We'll then open the line for questions. We ask that you kindly restrict your questions to two, then follow-up with us after the call if you have any additional questions to allow others the opportunity to participate. And with that, I'll turn things over to Rod.

2:14 Thanks, Brian, and good morning, everyone. Thanks for joining us. First quarter twenty twenty six has been a solid start for Algonquin, and I'm pleased to say that we are indeed pushing ahead on our path to Premier. As I stated in my early days at Algonquin, a premium pure play regulated utility earns its standing through consistent execution, constructive regulatory outcomes supported by disciplined financial and operational management. These attributes position the company to deliver sustainable value to shareholders, customers, employees, and the communities we serve. As we'll discuss in a moment, this quarter's results touch on all of those and build on the measurable progress we've made from 2025.

3:02 In short, we're advancing toward our goal of becoming a premier pure play regulated utility. Taking measure of our strategic priorities for the year, I'm pleased with the progress we've made in the first quarter. For example, on the operations front, we've begun to roll out updated procedures and training materials for damage prevention and leak response at our gas operations. We've also implemented quality assurance and quality control reviews of line locating activities by independent inspectors. On the customer side in Missouri, we've improved our billing accuracy versus prior periods, and improved our communications to customers in the moments that matter to them.

3:48 On the regulatory side, we are pleased to achieve conclusions to our rate cases at New England Gas and Calpico Electric, an order approving our settlement agreement at Empire Electric and the tariff agreement at Ceralis, our Chilean water utility. We continue to work towards resolution of our Arizona Litchfield Park water and sewer and Empire Kansas rate cases. On the corporate front, we expect to refinance our senior unsecured notes due in June, which Rob will discuss in more detail shortly. And we continue to explore tax optimization strategies, including a potential redomicile. In summary, we've laid out our list of strategic priorities for the year, and for the first quarter, we've made solid progress on this priority list.

4:39 On slide six, we've outlined several factual considerations that require evaluation as part of a possible redomicile, which I know is a common area of inquiry. As a reminder, we have not made any definitive decisions on this, and such a move would require the approval of our board, shareholders, and other stakeholders. One timing point. We have engaged with the Internal Revenue Service to request a private letter ruling to confirm tax treatment, and these types of requests typically take six to nine months to rule on. We will update you when we have more to share.

5:25 Turning to slide seven. Focusing in a bit more on our regulatory strategy, we've prioritizing earlier dialogue to identify areas of common ground, as well as advancing more pragmatic filings. We expect this to deliver fair regulatory outcomes that allow us the opportunity to capture both recovery of reasonable costs and returns on our investments for the benefit of our customers. I'm pleased to note that we are starting to see this play out. In Massachusetts, the Department of Public Utilities on March 27 approved our New England natural gas settlement agreement, which calls for a $45,300,000 revenue adjustment. In California, the Public Utilities Commission on March 19 approved a proposed decision that adopts our Calpico electric settlement agreement with the exception of changes to the proposed adjustment to our fixed charge for residential customers, which will remain the same.

6:26 The approved decision provides for additional $48,600,000 in annualized revenues and includes a retroactive adjustment to January 2025. Rob will provide more details on the Calpeco settlement in just a moment. For Empire Electric Missouri, we continue to await commission review of our customer performance data. As a reminder, the approved settlement requires three consecutive months of customer metric performance before we can implement the $97,000,000 in annualized revenues. We've submitted the three monthly filings in which we identified limited deviations in each month, consistent with the provision of the settlement. We are now awaiting commission approval. Separately, the next step to the settlement is an additional potential $13,000,000 of annual revenues based on meeting further performance requirements stated in the starting, rather, in the second half of twenty twenty six.

7:25 We remain in close discussions with stakeholders to arrive at an appropriate set of customer performance metric definitions and review the processes for this second tranche of revenues. With regard to active cases, in Arizona, our settlement agreement and a decision regarding formula rate plans remains pending at Litchfield Park Water and Sewer. We've asked the commission for a decision by August. In California, separate from our CalPeco general rate case, we have our WEMA proceeding, which we filed in June 2025. This application seeks recovery of approximately $77,000,000 in wildfire costs, consisting primarily of claim settlements in excess of insurance coverage, legal costs, and finance costs related to the twenty twenty Mountain View fire.

8:18 We have also received proposed decisions and alternate proposed decisions in our Park Water and Apple Valley rate cases. In Kansas, our rate case at Empire Electric requesting a $15,800,000 base rate change is pending. And finally, at our Chilean water utility, Ceralis, we just this week reached an agreement with our regulators in our most recent tariff proceedings, which includes a $4,000,000 rate adjustment expected in the latter half of the year. The common thread through these updates is this: We continue to make steady progress on rate cases across multiple jurisdictions in a more deliberate and intentional manner, doing a better job of involving all stakeholders.

9:09 Slide eight helps to put all of this in context. Simply put, our regulatory strategy means we're engaging in key dialogue earlier, identifying broader areas of common ground, filing in a more timely and accurate fashion, and as a result,

9:29 more constructive resolutions. In other words, we're getting back to regulatory basics to earn our right to grow, earn the right to grow on our path to premier. Turning to slide nine. I'll add a few comments regarding our evolving regulatory and legislative landscape. On April 7, the California Earthquake Authority released its Natural Catastrophe Resilience Study report, as required by Senate Bill two fifty four's passage last year. We found a number of points in the report worthy of further discussion. For example, we support the report's concept of expanding the catastrophe fund to protect smaller utilities like Calpico and the communities we serve so that we have the same financial protections during natural disasters as those served by our larger brother and sister utilities in the region.

10:28 We also support the report's suggestion to transition the catastrophe fund away from a customer only funding model. Wildfire safety is a shared state responsibility that should be supported by broader state resources, not just through utility bills. We're looking forward to presenting more of our perspectives on this and other points raised in the report in the near future. More broadly, in states including Arizona, Missouri, and New Hampshire, we're working to build coalitions with our peers to educate stakeholders on the benefits of forward test years and formula rate plans that facilitate constructive customer centric investment in our communities.

11:17 These mechanisms are examples of the predictable, transparent regulatory framework that support full and timely cost recovery and are key to operating as a premier pure play regulated utility. This allows the opportunity to capture returns closer to authorized return ROEs with the objective of supporting earnings and credit metrics stability, all to benefit our customers. And I'm pleased to say that in this first quarter, we've taken several steps further along on our journey to Premier. With that, I'll turn it over to Rob to walk through our financial update for the quarter. Thanks, Rod, and good morning, everyone. On slide 11, we reported first quarter GAAP net earnings of $83,100,000 compared to $92,800,000 for the same period in 2025.

12:13 First quarter twenty twenty six adjusted net earnings were 99,600,000 versus $109,000,000 for first quarter of twenty twenty five. Overall, the slight decline from 2025 to 2026 reflects the non recurrence of favorable depreciation and tax adjustments recognized in the first quarter of twenty twenty five and slightly unfavorable weather year over year, almost entirely offset by a favorable retroactive adjustment in the resolution of our Calpico general rate case. I'll discuss the drivers behind this in more detail as I walk through our results. On slide 12, we provide our first quarter twenty twenty six adjusted net earnings per share walk to common shareholders.

12:58 First quarter adjusted net EPS to common was $0.13 per share, which was $01 lower year over year. Our CalPeco rate case is the largest driver for our year over year results. As noted earlier, our rate case concluded with the increase to approved annualized rates of $48,600,000 This resolution includes retroactive revenues to 01/01/2025 of $60,700,000 This revenue uplift was partially offset by higher wildfire insurance expenses recovered in rates of $28,500,000 which includes retroactive

13:37 insurance expenses to the first quarter of twenty twenty five of $22,700,000 I'll provide a little more context on this point. Wildfire insurance costs incurred and paid in 2025 above the amount permitted in rates at that time were deferred onto our balance sheet as part of the regulatory process. In the first quarter of twenty twenty six, the commission approved and finalized authorized revenues and costs for 2025. The commission's approval prompted retroactive recognition of those on our income statement,

14:12 along with the higher revenues and costs as required by US GAAP. The net effect of the increase in revenues and the increase in wildfire insurance expenses, inclusive of the retroactive adjustment, amounts to an increase in year over year EPS of $03 per share. Elsewhere, our net revenues year over year were down by 11,900,000 driven primarily by slightly unfavorable weather in the quarter compared to slightly favorable weather in the comparable period in 2025. Operating expenses increased by $41,000,000 compared to the first quarter of twenty twenty five, driven primarily by the aforementioned twenty eight point five million dollars of wildfire insurance expenses as a result of the retroactive adjustment from the Cal Pico rate case.

15:00 Aside from the retroactive adjustment, the increase in operating expenses was primarily driven by our $3,800,000 in gas safety excellence costs and higher labor, benefits and property taxes across our gas systems. Depreciation increased by $12,900,000 primarily due to the non recurrence of two favorable depreciation deferrals in the first quarter of twenty twenty five that totaled $8,200,000 at Granite State Electric and Litchfield Park Water and Sewer. Tax expenses were higher by $9,000,000 due primarily to the non recurrence of a favorable first quarter twenty twenty five tax adjustment for our hydro group following the January 2025 sale of our renewables energy business.

15:47 Briefly touching on slide 13, our balance sheet continues to be in a position of strength. With a reaffirmation of our credit ratings in the BBB range by Fitch for Algonquin in the last few weeks, and we remain at BBB at S and P and Baa2 at Moody's. On the near term financing front, we expect to refinance the Algonquin unsecured notes due in June of this year by raising approximately $1,150,000,000 at LUKO through a 144 bond issuance as discussed on our prior earnings call.

16:22 Additionally, we recently put in place a $1,150,000,000 delayed draw credit facility to support the execution of this refinancing if it's required. With that, I'll turn the call back over to Rod for his closing remarks. Thanks, Rob. Before we open the line for questions, I just wanted to step back for a second and leave you with a few thoughts on where we are and where I think we're headed. It's only been a couple of months since we last provided you an update. But in that short time, we've made some meaningful progress.

16:58 We received the approvals in our Empire Missouri, Calpico, and New England Gas rate cases and and reached an agreement in, in Chile, for Ceralis, the water company there. We're working diligently towards the resolution of our California WEMA, Arizona Litchfield Park, and Empire Electric Kansas proceedings.

17:21 We're providing an influential voice in advancing our point of view towards more constructive regulatory and legislative compacts in states like California, New Hampshire, and Missouri. And operationally, we've implemented improvements in our gas excellence efforts and improved our customer billings accuracy. In short, we've extended our tremendous 2025 momentum into the first quarter of this year and we remain confident in our plan ahead. I couldn't be more excited for what's next and I hope you will join us on our path to Premier. Thanks for your time this morning. And with

17:58 that, I'll turn it back to the operator for questions. Thank you. If you have a question, star one on your telephone keypad. To withdraw your question, simply press star one again. One moment please for the first question.

18:18 The first question comes from Eli Johnson from JPMorgan. Your line is live. Hey, good morning everyone. Just wanted to start on the Empire Missouri billing. Can you just walk us through procedurally, you know, what the key milestones are for execution, the phase in timeline once you kind of have clarity on those metrics, and any other expectations from staff that you can provide color on today? Thanks. I think I'll just give you an overview. Our objective and certainly responsibility is to show three consecutive months of designated performance metrics. We made the filings for those first three months, and the commission will get essentially an assessment from the staff on their point

19:15 of view and observations regarding our performance. And then the commission would then essentially confirm their point of view on us having met the requirements and allow us to implement the rates consistent with the settlement. And it's our expectation, given the fact that we believe we've met our expectations, that the commission will rule on it by mid year. Amy, our Chief Customer Officer is here with me, and if there's anything I've missed or anything that you think we ought to communicate, you're welcome to add anything, Amy. I think you've covered it, Rod. I do believe we want to thank the staff for their thorough review of the data that we've provided, and we look forward to the Commission's response to their feedback.

20:08 Good. Great. Thanks for the color there. And then maybe just further on the IRS private letter ruling. I know that this is an ongoing process, and you provided some clarity in your opening remarks. But maybe can you just give us a little bit of color on what this ultimately means for Algonquin going forward and what a potential outcome could look like here? Thanks. Yeah, go ahead. Hey, Eli, it's Rob. Yeah, so we've engaged with the IRS. As you probably know from other situations, those rulings typically take six to nine months. So, that will affect the timing of kind of further updates around this.

20:55 What we're asking them to assess is obviously the tax implications of legal redomiciling into The United States. There would be tax consequences associated with that, and we're trying to get the best estimate of what those would be. Great. I'll leave it there. Thanks, guys. Your next question comes from the line of Nelson Ng from RBC Capital Markets. Your line is live. Great. Thanks, and good morning, everyone. I just had a question relating to Calpico. I I saw an article about NV Energy indicating that they'll no longer supply electricity to Calpico starting in May of next year. And I think that coincides with the completion of that Greenlink transmission line.

21:55 But can you just provide a bit more comment on the power supply plans for Calpico and whether there's any opportunities to add some generation to the utility? Hey, Nelson, this is Rob. So we're launching a competitive search for new energy partners. We filed a request with the CPUC to begin the search. Expect formal bidding to commence later this summer. And then preferred selection should be announced in the winter of twenty six-twenty seven. So, if that's then approved by the CPUC, we'd expect to enter in a new power supply agreements by the spring of twenty twenty seven. Okay, got it. And there are no plans to potentially add generation to the utility in terms of building some of your own generation. I know previously Calpico added some solar facilities.

22:59 Yes. So as part of the fourth quarter, solar facilities we stood down on. But at this point in time, we're just launching a competitive search for new energy supply partners in the region. Got it. Thanks. And then my next question just relates to CapEx. I know the guidance for the year is about $800,000,000 I think CapEx in Q1 was about $88,000,000 So like I presume it's just seasonal or timing, but or is there a large project might kick off later? It's a safe, yeah, your assumption is correct. Seasonal and timing. We still have an expectation of meeting our capital plan, your instincts are spot on.

23:49 Okay, great. Thanks. I'll get back in the queue. There are no further questions at this time. I'll turn the call to Mr. Rod West for closing remarks. Well, I'll just say thank you for your time and attention, and we look forward to our next update. And before I close, just thanks to the employees who've contributed so much to our progress thus far. All the best. That concludes today's meeting. You may now disconnect.