Algonquin Power (AQN-T, AQN-NY)

[valuesource]

Anyone digested this weak quarter and guide-down yet?  -20% seems a bit overdone.  Inflationary pressures are affecting some of their projects and they also added that more info will be available at the Analyst day in 2023.  Might be a 3 day rule but something whispers carelessly that we plank the puss out of this now.  Anyone want to weigh in?

[Viking]

I don’t follow Algonquin closely, but it looks like higher interest costs are lowing earnings. There is a pass through mechanism but it takes some time to play out. There are lots of high dividend yielding companies out there with a lot of short term debt. If interest rates stay high we likely will see more companies warn on earnings. Lots of REIT’s have significant amounts of short term debt that will need to get rolled over at much higher rates over the next couple of years. 

[SharperDingaan]

Just a bump.

 

Lot of errors of late, the most recent being the recent Q32022 earnings miss, getting burned on an interest rate mismatch, a forced 40% cut in the dividend, $1 billion+ of assets for sale, and an acquisition in trouble. It's entirely a rate regulated business; at the new dividend and the current price the dividend yield is 5.95%. Good long term prospects, but for the next six months there will be volatility. The acquisition (2nd attempt) has a April 30 deadline, most would expect the odds of success at 65/35 against, and the asset sale reliant upon a BAM stepping up to the plate (at the right price).

 

We hold a significant stub (for retail) that is entirely house money funded from a round trip; likely repeated by mid-year. 3+ years out, AQN may well trade back at 'pre earnings miss levels' - but in the meantime ... volatility will create opportunities. CAGR + dividend yield > 25%. The sooner the return to 'normal', the higher the CAGR.

 

SD 

   

 

 

[Spekulatius]

How is a regulated utility like AQN allowed to rack up that much debt? I think the capital structure of the regulated entities is given by the utility regulator. Then there can be some debt added to the holding company. Now the cost of holding company debt is not pass through (the regulated entities debt may be, but with some delays).

 

Tikr.com has the debt at 8.4x EBITDA. I see  7,7B CAD in debt. I have trouble determining what they run rate cash flow is with all those adjustments. Seems to me that AQN need to raise some equity with all the debt become due at much higher interest rates.

[SharperDingaan]

Utilities are very simple businesses. Revenue is regulated (rate/KwH), interest is a function of the quantity/type of debt, and profit (regulated) a function of the equity invested. Rising costs are recovered via rising rate adjustments, and the more equity you have at risk the more you earn. The more debt and the less equity employed, the less profit the regulator needs to recover through rate adjustment. Assume around a 2 yr lag between when a higher cost is incurred, and when it starts to be recovered through higher rates. Equity slowly rises via a dividend DRIP plus retained earnings, and there is little incentive to do a buyback. Not a lot of risk.

 

AQN got burned using a ALM mismatch strategy. As ST debt refinanced at higher rates, cash flow fell, the share price fell by 50%, and the quarterly dividend had to be cut 40% to stay within AQN's 75% payout ratio. The better solution is a asset sale that both significantly reduces debt, and eliminates debt with interest rates > the regulated return on the asset being sold. Alternatively if the acquisition is successful, it is financed via a new long term debt issuance - large enough to also correct any residual ALM mismatch.

 

Now hated by many, market sentiment is negatively biased, and any upside share appreciation will be very limited for the next year or so. However, by around the end of summer, both the outcome of the asset sale and the acquisition should be resolved, and the business back to 'normal'. Senior management changes at year end, and AQN is back to feeling shareholders love. If it takes 2 years from start to finish, you do very well. 

 

It can be swing traded, but the real value-add is in the two-year hold.

Obviously the more house money, the lower the cost base on your equity at risk, and the better your CAGR will be.  

 

SD

 

 

Edited January 28, 2023 by SharperDingaan

[mananainvesting]

Hello, anyone still following this? Starboardvalue is on the board and is pushing to reduce leverage via sale of renewable entities. AQN recently announced the sale of one of their holdings ($AY), which should bring about $1.1B in 2025. They have an ongoing process to sell their renewable business which we should hear news on soon. Below is the image from StarboardValue's presentation, note the Atlantica stake is now getting sold for a higher price. 

 

Starboardvalue presentation: https://www.starboardvalue.com/wp-content/uploads/2023_C4K_Conference_Presentation_-_Starboard_Value_LP.pdf

 

[longlake95]

I was looking at the prefs and lost interest. I’ll have to have another look. 

[SharperDingaan]

We did very well on AQN; but exited a long time ago as there are so many better Canadian risk/return options. If you think the Republicans sweep the upcoming US election, TC Energy is a far better opportunity. 

 

Pure speculation: Imagine that 'Drill Baby Drill' also translates into a change in the Canadian federal government, and the Keystone XL pipeline being restarted. The existing write-offs would very likely be reversed, and otherwise payable compensation re NAFTA would very likely go toward guaranteeing debt on the remainder of the pipeline build. An additional 830K bbl/day of heavy crude, on top of the new egress from Canada's west coast - and all of it a material bump in TC's rate base, leading to higher dividends

 

Complete Keystone XL, and the McKenzie Valley quickly enters the frame; transporting Alaskan/North-Shore/Beaufort Sea oil/gas to the US - via pipeline through the US/Nunavut/BC/Alberta instead of via sea. Debt repayment on Keystone funding the build cost.

 

Sock drawer stock, that will benefit the next generation.

 

SD