Executive Summary / Key Takeaways

• Algonquin Power Utilities Corp. (AGQPF) has undergone a significant transformation, divesting its non-regulated renewable energy business and Atlantica stake to become a pure-play regulated utility, aiming for reduced complexity and enhanced shareholder value.
• The company's "Back to Basics" plan, under new CEO Rod West, focuses on improving customer experience, driving operational efficiencies through its SAP-based IT platform, and achieving constructive regulatory outcomes to bridge the gap between earned and authorized Return on Equity (ROE).
• A clear financial outlook for 2025-2027 projects estimated Adjusted Net EPS growth, an improvement in earned ROE to approximately 8.50% by 2027, and $2.50 billion in utility capital expenditures, with no new equity issuance expected through 2027.
• Recent financial performance reflects the transition, with Q1 2025 adjusted net earnings from continuing operations up 39% year-over-year, driven by new rates and deleveraging, though Q2 2025 saw a slight dip due to weather normalization and the absence of one-time adjustments.
• Key risks include ongoing customer service and billing investigations related to the IT platform implementation, litigation contingencies (Mountain View Fire, Lexington Gas Incident), and the successful monetization of the Hydro fleet.

The Transformation of Algonquin Power Utilities

Algonquin Power Utilities Corp. (AGQPF) is embarking on a pivotal strategic transformation, shedding its diversified past to emerge as a focused, pure-play regulated utility. Historically, AQN operated a broad portfolio encompassing regulated electric, water, and natural gas utility systems, alongside non-regulated renewable and thermal energy generation assets across the United States, Canada, Bermuda, and Chile. This extensive footprint, while establishing AQN as a significant player with over one million customer connections, also introduced complexities and challenges.

The strategic pivot, initiated in 2023, aimed to "simplify and focus the business as a core regulated utility," with the belief that this separation would optimize capitalization and foster long-term growth and value for both regulated and renewable platforms . This strategic shift gained considerable momentum in 2024 through a series of decisive actions. The company streamlined its capital structure by paying off a margin loan, collapsing a development joint venture, and successfully remarketing its Green Equity Units, which resulted in the issuance of approximately 76.91 million common shares for $1.15 billion in June 2024 . The culmination of this transformation saw the sale of its 42.20% equity interest in Atlantica Sustainable Infrastructure plc (AY) on December 12, 2024, followed by the disposition of its non-regulated renewable energy business (excluding hydro) to LS Power on January 8, 2025. These divestitures were "pivotal steps" in AQN's journey, with proceeds primarily directed towards debt reduction and balance sheet strengthening.

The company's new era is spearheaded by Rod West, who assumed the role of Chief Executive Officer on March 7, 2025, bringing extensive regulated utility experience from his tenure at Entergy (ETR) . Under his leadership, AQN is implementing a "Back to Basics utility customer-centric capital plan," announced in June 2025. This plan is designed to enhance customer experience, drive operational efficiencies, and achieve constructive regulatory outcomes, ultimately aiming to increase value for its four key stakeholder groups: customers, employees, communities, and investors.

Technological Edge and Operational Evolution

Algonquin's strategic transformation is underpinned by significant investments in operational technology, particularly its SAP-based IT platform. This platform, fully rolled out in spring 2024, represents a core technological differentiator, designed to simplify and harmonize customer service and back-office processes across its diverse utility operations . The stated goal of this technology is to improve customer outcomes and drive operational efficiencies, ultimately leading to a better customer experience despite initial implementation challenges .

While specific quantifiable performance metrics for the IT platform itself are not publicly detailed, management emphasizes the strategic intent behind these investments. The platform is expected to enable more digital channels, reduce customer calls by offering self-help options, and lower paper expenses, all contributing to a reduced overall operating and maintenance (O&M) cost profile . Furthermore, the company is implementing a new Interactive Voice Response (IVR) system, expected to significantly improve customer interfacing and response times . These technological advancements are crucial for AQN to achieve its goal of being a lean, efficient utility and to make a credible case to regulators for productive capital investments that minimize impact on customer bills .

The company's commitment to operational excellence extends beyond technology, with a focus on reorganizing its utility structure by commodity to drive best practices and increase accountability within the organization . This internal "self-help story" of managing overall cost structure and improving operational efficiency is a key lever for bridging the gap between earned and authorized ROE, a critical factor for accelerating value creation .

Financial Performance: A New Chapter Unfolds

Algonquin's recent financial performance reflects the ongoing strategic transition and the initial impacts of its focused utility model. For the first quarter of 2025, adjusted net earnings from continuing operations surged to $111.6 million, a 39% increase from $80.1 million in Q1 2024 . This growth was primarily fueled by $15.7 million from new rates and $13.6 million in lower interest expense, a direct benefit of debt repayment using proceeds from the renewables and Atlantica sales . The Hydro Group also contributed positively, with a $13.4 million increase in net earnings due to a one-time tax recovery related to the renewables sale . However, corporate adjusted net earnings decreased by $22.7 million due to the removal of Atlantica dividends .

The second quarter of 2025 saw adjusted net earnings from continuing operations at $36.2 million, a decrease of approximately 13% from $41.5 million in Q2 2024 . This dip was primarily attributed to weather normalization, the absence of a favorable one-time revenue adjustment at Bermuda Electric in Q2 2024, a higher effective income tax rate, and lower HLBV income from decreased wind production . Despite these factors, net earnings from the Regulated Services Group remained "essentially flat year-over-year," demonstrating resilience . Adjusted net earnings per share for Q2 2025 were $0.04, down from $0.06 in Q2 2024, which was "operationally flat" when including one-time nonrecurring items .

For the full year 2024, consolidated adjusted EBITDA reached approximately $1.04 billion, a 2.6% increase from 2023, with regulated adjusted EBITDA rising 4.2% to $940.2 million . This regulated growth was driven by new rates and higher HLBV on weather normalization, offsetting approximately $18 million in non-recurring operating expenses . However, full year adjusted net earnings declined to $232.1 million from $279.4 million in 2023, impacted by higher depreciation ($41.7 million), increased interest expense ($29 million), and higher adjusted taxes ($11.4 million) . The overall financial picture reflects a company in transition, with the benefits of strategic divestitures and new rates beginning to manifest, even as it works through operational adjustments and non-recurring items.

Strengthening the Balance Sheet and Capital Discipline

A cornerstone of Algonquin's transformation is the significant strengthening of its balance sheet through aggressive debt reduction. The net proceeds from the sale of the non-regulated renewable energy business, expected to be $2.1 billion after transaction costs and construction adjustments, along with the $1.1 billion from the Atlantica stake sale, are primarily allocated to paying down existing debt . As of December 31, 2024, the company's GAAP debt stood at $8.05 billion, which is anticipated to be reduced by an estimated $1.95 billion, with an additional $150 million in proceeds from tax attributes expected later in 2025 . This deleveraging is critical for improving financial flexibility and reducing interest expense, which has already contributed to Q1 2025 net earnings growth .

The company is committed to maintaining its BBB investment-grade credit ratings, a crucial factor for its cost of capital and future growth. For year-end 2024, S&P reported an FFO to debt of 12.5%, comfortably above the 11% BBB threshold, and Fitch indicated a debt to EBITDA of 5.6x, below the 5.8x threshold . This strong credit profile is essential for supporting its planned utility capital expenditures of approximately $2.50 billion from 2025-2027. Notably, management expects no common equity financings will be needed through 2027, underscoring a commitment to financing self-sufficiency and minimizing shareholder dilution. The company also utilizes supplier financing programs, which allow suppliers to voluntarily sell their receivables, further managing working capital.

Regulatory Landscape and Growth Drivers

Algonquin's future growth is intrinsically linked to its ability to secure constructive regulatory outcomes and strategically deploy capital within its regulated service territories. The company's "Back to Basics" plan places a strong emphasis on improving regulatory relationships and accelerating the pace of rate case resolutions .

Recent regulatory successes include the Arizona Corporation Commission's approval of a $4.2 million revenue adjustment for four water and wastewater facilities, effective July 1, 2025. Additionally, settlement agreements were approved for Missouri Water and Arkansas Water, with new rates effective March 1, 2025, and for Gas New Brunswick, effective January 1, 2025 . The New Hampshire Public Utilities Commission approved the Granite State Electric settlement agreement, with new rates taking effect April 1, 2025 .

Despite these achievements, challenges remain. The Empire Electric Missouri rate case experienced a delay, with resolution now expected in the first half of 2026, pushing back anticipated financial benefits . This delay, in part, stems from an ongoing investigation into customer service and billing issues, which management attributes partially to the recent implementation of its IT platform . The company is actively cooperating with authorities to address these concerns, recognizing the importance of restoring customer and regulatory trust .

Looking ahead, AQN has a robust pipeline of regulatory proceedings. Notable filings include the Empire Electric Missouri rate case, requesting a $92.1 million revenue increase and a $534 million increase in rate base, and the CalPeco California rate case, seeking a $39.8 million revenue increase and a $154 million increase in rate base . The company also plans to file a rate case for the Litchfield Park water and sewer facility in Arizona in the first half of 2025, seeking approval for an $85 million increase in rate base related to a substantial wastewater treatment plant investment . These three major rate cases alone represent over $700 million in potential net increases to the authorized rate base, signaling significant growth opportunities .

Furthermore, the Southwest Power Pool (SPP) approved its 2024 Integrated Transmission Plan, a $7.7 billion initiative, with approximately $750 million to $800 million dedicated to strengthening the Empire District Electric service area . This includes upgrades to 161 kV lines, new 345 kV transmission lines, and new transmission stations, representing a multi-year capital investment opportunity for AQN . The company is actively developing targeted investment plans to be a "catalyst for economic development" in its 13 service states .

Competitive Positioning in a Transformed Market

Algonquin Power Utilities Corp., now a pure-play regulated utility, operates within a competitive landscape characterized by large, established players and evolving technological demands. Its primary direct competitors include diversified utilities like Duke Energy and NextEra Energy , as well as specialized electrical construction and maintenance service providers such as MYR Group Inc. .

Algonquin's core competitive advantage lies in its diversified portfolio of regulated electric, water, and natural gas utility systems across multiple jurisdictions. This provides stable, predictable revenue streams and a broad customer base, serving over one million connections largely in the United States and Canada. This regulatory expertise and geographic diversification offer a degree of resilience against localized economic or regulatory headwinds. In contrast, MYR Group Inc. (MYRG) focuses on electrical construction and maintenance, with recent positive trends in backlog growth and operational efficiency . While MYR Group's emphasis on innovation in grid modernization and data centers offers dynamic revenue opportunities, Algonquin's regulated model provides greater revenue stability.

Compared to Duke Energy (DUK), a major utility with a strong focus on grid modernization and storm resilience, Algonquin's offerings align in sustainable energy solutions, but Duke Energy's broader operational footprint and recent financial trends suggest stronger cash flow generation and profitability margins . NextEra Energy (NEE), a leader in renewable energy, demonstrates aggressive expansion and technological leadership in wind and solar, potentially giving it an edge in innovation speed and growth trajectory . Algonquin's diversified utility assets, however, may offer superior regulatory expertise and a more stable base for long-term contracts.

Algonquin's current earned Return on Equity (ROE) of approximately mid-5% (excluding HLBV) on its $7.5 billion average rate base in 2024 is significantly below its authorized weighted average ROE of 9.2% . This "under-earning utility" status presents a competitive vulnerability, as it implies lower capital efficiency compared to rivals who may be closer to their allowed returns. Bridging this gap through accelerated regulatory lag reduction and improved operational efficiency is a key strategic imperative for Algonquin to enhance its competitive standing .

Indirect competitors, including advanced battery storage providers and tech companies in AI-driven data centers, pose a long-term threat by offering alternative, decentralized energy solutions. These technological shifts could impact demand for traditional utility services, potentially pressuring Algonquin's market share and profitability. However, the high barriers to entry in the utility sector, such as stringent regulatory approvals and substantial capital requirements, help protect Algonquin's established position. The company's strategic response involves focusing on prudent investments in its service territories and leveraging its IT platform to enhance customer service and operational efficiency, thereby strengthening its competitive moat.

Outlook and Value Creation

Algonquin's forward-looking outlook for 2025-2027 signals a clear path towards enhanced shareholder value, underpinned by its strategic transformation and "Back to Basics" plan. The company projects estimated Adjusted Net Earnings per share within a range of $0.30 - $0.32 for 2025, $0.35 - $0.37 for 2026, and $0.42 - $0.46 for 2027. This guidance is supported by an expected improvement in earned ROE by approximately 300 basis points to around 8.50% by 2027, moving significantly closer to its authorized 9.2% . Management also anticipates an improvement in operating expenses as a percentage of revenue by 5-7% by the end of 2027, reflecting a strong commitment to cost discipline and operational efficiency.

The company plans approximately $2.50 billion in utility capital expenditures for 2025-2027, with a disciplined approach expected to result in "directionally lower capital spend year-over-year" . Crucially, no common equity financings are expected through 2027, reinforcing the company's commitment to self-sufficiency and minimizing shareholder dilution. The effective tax rate is expected to remain in the low to mid-20% range, though quarterly lumpiness is anticipated .

Management views 2025 as a "transition year" but believes that, from this base, Algonquin has the opportunity to achieve earnings growth "above peer averages" due to its singular focus on the regulated utility model . The targeted dividend payout ratio of 60% to 70% is expected to be achieved within a few years, with potential for acceleration . While the company intends to provide a portfolio strategy update later in 2025, the monetization of the Hydro fleet remains contingent on creating shareholder value .

Key Risks and Challenges

Despite the clear strategic direction, Algonquin faces several pertinent risks. The ongoing investigation by the Missouri Commission into customer service and billing issues, stemming from the SAP-based IT platform implementation, poses a regulatory and reputational risk . While the company is committed to addressing these concerns and believes the system will ultimately improve customer service, the delay in the Empire Electric Missouri rate case resolution to mid-2026 highlights the potential for regulatory lag to impact financial outcomes .

Litigation and contingencies, such as the Mountain View Fire lawsuits (with estimated losses of $177 million and expected insurance recoveries of $116 million and WEMA of $61 million) and the Lexington Gas Incident (estimated losses of $49.50 million with $48.30 million in expected insurance recoveries), represent potential material losses in excess of accrued amounts. The Apple Valley condemnation proceedings also remain unresolved, adding to legal uncertainties.

Operational risks, including mechanical failures, natural disasters, and supply chain disruptions, are inherent in utility operations. The company's reliance on federal tax credits and incentives for renewable energy facilities, while beneficial, is subject to political developments and technical eligibility requirements, introducing uncertainty. Furthermore, the company acknowledges "dissynergies" of approximately $18 million in 2024 from exiting the renewables business, which it aims to work down in 2025 . The decision to monetize the Hydro fleet is also subject to market conditions and the ability to realize accretive value for shareholders .

Conclusion

Algonquin Power Utilities Corp. is undergoing a profound transformation, strategically pivoting to a pure-play regulated utility model. This decisive shift, marked by significant asset divestitures and a renewed focus on core utility operations, positions the company for a more streamlined and predictable future. Under new leadership and guided by its "Back to Basics" plan, Algonquin is committed to enhancing operational efficiency, improving customer outcomes through technological investments, and diligently pursuing constructive regulatory approvals to close the gap between its earned and authorized returns.

The company's clear financial outlook for 2025-2027, coupled with a strong emphasis on debt reduction and capital discipline, underscores a compelling investment thesis centered on stability and growth. While challenges such as regulatory investigations and litigation persist, Algonquin's strategic repositioning, robust capital expenditure plans, and commitment to maintaining investment-grade credit ratings suggest a resilient path forward. Investors should monitor the execution of its regulatory strategy, the resolution of operational challenges, and the potential monetization of its Hydro assets as key indicators of its journey towards becoming a premium, high-performing regulated utility.