Wednesday, March 16, 2016

Recent Buy – Algonquin Power & Utilities Corp

Whenever I make a purchase, I like to share my buys to document and illustrate how I am building my income stream over the course of months/years. My main goal is simply to keep investing at regular intervals and build my passive income over the course of time. The market may go up and down depending on a plethora of events, but I look for safe dividends and developing income streams building my own pension.

I added to my position in Algonquin Power & Utilities Corp (AQN.TO) with 120 shares @ C$10.59. The company yields 5.07% adding US$46.20 (~C$63.75) to my annual passive income. Even though the company is listed on the Toronto Stock Exchange and based in Canada, reports all financials in CAD$, the dividends are declared and distributed in US$. The company switched to US$ distributions in Aug 2014. Holders of the stock will have their dividends converted to CAD$ by the broker, unless otherwise instructed.

Company Overview

Algonquin Power & Utilities Corp., through its subsidiaries, owns and operates portfolio of regulated and non-regulated generation, distribution, and transmission utility assets in North America. The company generates and sells electrical energy through a portfolio of non-regulated renewable and clean energy power generation facilities. It owns or has interests in hydroelectric facilities with a combined generating capacity of approximately 120 megawatts (MW); wind powered generating facilities with a combined generating capacity of 675 MW; and solar energy facilities with a generating capacity of 10 MW, as well as interests in thermal energy facilities with an installed generating capacity of approximately 335 MW. The company also owns and operates electricity, natural gas, water distribution, and wastewater collection utility systems to approximately 488,000 connections. It serves approximately 93,000 electric connections; 292,000 natural gas connections; and 103,000 regulated water distribution and wastewater collection connections in the states of California, New Hampshire, Georgia, Illinois, Iowa, Massachusetts, Missouri, Arizona, Arkansas, and Texas. The company was founded in 1996 and is headquartered in Oakville, Canada.
The company also operates under the Liberty Utilities name. The corporate structure is:
APUC Corporate Structure
Algonquin Power & Utilities Corp – Corporate Structure

Recent Buy Decision

  • Algonquin Power & Utilities Corp (APUC) has stable growing revenues and earnings. The company oversees 31 water/gas/electric utility systems service 1/2 million customers.
  • A very diversified company with operations in electric, natural gas and water utilities industries – the only company I am aware of that operates in the three main divisions of utilities. A combination of regulated and non-regulated operational segments provide the company with stability that comes with being in the utilities space, but at the same time, can grow due to the non-regulatory segments.
  • Renewable energy generation exposure via solar and wind farms – which are non-regulated and offer tremendous growth opportunities. The company owns and operates 40 renewable and clean energy facilities with more than 990MW of net capacity and 486MW of contracted wind and solar development projects.
  • Water utilities investment exposure – one of the areas that I have been targeting to invest in. APUC has made numerous acquisitions (see list of M&A here) over the past few years to grow their water exposure, and the water utilities portion is expected to grow to a significantly higher portion over the next 4 years.
  • APUC last week agreed to acquire Empire District Electric Company (EDE) for US$2.4B, which gives the company control of regulated electric utility operations in Missouri, Kansas, Oklahoma, and Arkansas. The acquisition is expected to increase APUC’s EPS and FFOPS by 7-9% adn 12-14% respectively over the next three years (in addition the growth from other operations).
  • APUC cut its dividend in 2009 by 74%, but has started raising dividends since then. The current 5-yr dividend growth rate stands at 15.5%.
  • The stock price may seem stretched on the surface, with a P/E of 25 and Forward P/E of 17.8, but the company is expected to grow earnings at an rate higher than peers in the industry – thanks to a combination of non-regulated renewable industry growth coupled with regulated utility organic growth. Current analyst expectations are: revenue growth of 66% this year and 16.7% next year; and earnings growth of 91.8% this year and 19.5% next year.
  • With majority of operations in the US, a falling Canadian dollar and the US$ dividends from APUC providing extra tailwind; its a great investment for Canadian residents.
  • The company is targeting growth in assets and EBITDA of ~15% CAGR; EPS and cash flow growth of ~7-10% CAGR; and ~10% dividend growth rate. The following charts from Investor Presentation provide current mix of EBITDA and projected 2018 mix of EBITDA.
  • In this current volatile environment, an added benefit is that this is a very low beta stock, with a Beta of 0.09.
AQN - 2018 Exp EBITDA


  • While the renewable sector enjoys unregulated growth prospects, policy changes and regulation can put a damper on the growth.
  • The utilities sector can see pressure in the financial markets as the US Fed moves to raise the interest rates.
  • The company has aggressively raised dividends in the past taking payout ratio to unsustainable levels, and then had to resort to dividend cuts in 2009. The company is targeting aggressive growth avenues again – and current EPS payout ratio is 107%. However, the current payout remains well below the up-trending funds from operations and free cash flows.

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