Algonquin Power & Utilities: A Large Renewable Runway
- By Christopher De Sousa, CIM® | Portfolio Manager
- 4 Min Read
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Algonquin Power and Utilities owns and operates a diversified portfolio of regulated utility (~70% of total assets) and non-regulated renewable power assets (~30%) primarily in Canada and the United States. Algonquin operates two segments: Liberty Utilities, and Liberty Power. Liberty Utilities is the regulated asset base that owns and operates a portfolio of water, natural gas, and electrical utility distribution assets. Liberty Power is the renewable energy segment that owns and operates wind, solar and hydroelectric generating assets (85% of the revenues are contracted under long-term offtake agreements).
Algonquin is delivering on a global pipeline of renewable energy and electric transmission development projects through a five-year $9.4 billion capital program (see chart 1). About $6.3 billion of expenditures will go toward developing regulated utilities, including organic investments in greening the fleet. The remaining $3.1 billion of investment will go into building renewable energy and storage. This capital plan does not include any success from Algonquin’s 3.4-gigawatt pipeline of wind and solar energy projects (see chart 2), which would be incremental to the ongoing 1.6-gigawatt renewable development pipeline.
Algonquin expects the development of these assets and other investments (i.e. the acquisitions of EESAL, BELCO, and New York American Water) to drive a five-year adjusted earnings per share compounded annual growth rate of 8% to 10%. This should be welcomed after two years of flat adjusted earnings per share growth. Greenfield renewable energy projects and deal making (i.e. the framework agreement with Chevron) provide sources for continuing growth and potential capital allocation. In addition, the rate base, which is the asset base a public utility can earn a specified rate of return, will grow at a compounded annual growth rate of 11.2% from $4.9 billion to $8.3 billion over the same period.
We recognize the positive developments across Algonquin’s utilities and renewables businesses and the accelerating decarbonization efforts (i.e. large-scale phase out of coal-fired generation) as industries transition to a low carbon world. Nevertheless, we do have growing concerns over Algonquin’s balance sheet (i.e. accelerating debt levels) and a market valuation that appears to reflect the opportunity set at this time. In addition, the revised five-year adjusted earnings per share target of 8% to 10% is down from the 9% to 11% range given previously. Algonquin stated on a call that as the company grows larger it would be difficult to maintain the kind of returns it had as a smaller company. Low confidence to grow earnings at high rates is not exactly what we want to hear from management teams.
We continue to monitor and review Algonquin Power and Utilities as a core holding in client portfolios.
Sources
[1] Algonquin Power & Utilities. Investor Day Transcript and Slides. December 14, 2020.