Algonquin Buying Spree Boosts Investor Returns

Algonquin Power & Utilities Corp., the most acquisitive utility in North America, is rewarding investors with the best total return among its Canadian peers.

Algonquin has returned 20 percent over the past six months with dividends included, the most among 15 Canadian utility operators, according to data compiled by Bloomberg. It is also beating larger U.S. and European competitors including PG&E Corp., Duke Energy Corp. and France’s EDF SA.

The company, based in Oakville, Ontario, has benefited from investors seeking low-risk investments providing regular dividend payments and growth, said Rupert Merer, an analyst at National Bank Financial. The power, gas and water provider announced six acquisitions valued at $471.2 million over the past 12 months, including New England Gas Co., natural gas distribution assets in the U.S. south and renewable energy facilities, according to Bloomberg data.

“Management has done a good job diversifying the portfolio into low-risk assets,” said Merer, who is based in Toronto and has the equivalent of a hold rating on the shares. “Investor thirst for yield is what has been driving their performance at this point.”

Fourth-quarter net income surged 50 percent to C$3.6 million, as revenue doubled to C$143.1 million ($140.4 million), helped by acquisitions in the second half of last year including gas and electricity assets in New Hampshire and the Midwest, Algonquin said in a March 14 statement.

Integration Risk

The company’s shares dropped 1.5 percent to C$7.66 at 10:45 a.m. in Toronto today for a market value of C$1.54 billion. The stock has returned 32 percent in the year through March 15 with dividends reinvested, outstripping the 6.3 percent gain in the benchmark Standard & Poor’s/TSX composite index. It has an indicated yield of 4 percent compared with 3.0 percent for the TSX.

“These acquisitions will strongly contribute to our strategy of providing attractive, total shareholder return comprised of stable dividend yield and continued capital appreciation,” said Chief Executive Officer Ian Robertson, during a March 15 conference call with analysts.

Algonquin has said it is targeting 1 million regulated utility customers and 1 million kilowatts of installed electricity generating capacity by 2017. Robertson reiterated a target of growing by 15 percent annually.

“While the company’s growth profile is impressive, we believe much of the visible growth is already reflected in the stock’s current valuation,” Juan Plessis, an analyst at Canaccord Genuity said in a note, cutting the stock to hold from buy. “With a large proportion of near-term growth stemming from acquisitions, there exists the risk that the integration of the U.S. utility and wind assets may not be as smooth as anticipated and that pending acquisitions may be delayed.”

Renewable Energy

The company sees C$1 billion worth of potential new investments over the next four years, including wind purchases in Quebec, Saskatchewan and solar in Ontario. By 2018, the company will generate 93 percent of its power under long-term power purchase agreements at its non-regulated, renewable power division, from about 90 percent now.

“Algonquin has been very active in 2012, completing a number of regulated utility and wind acquisitions,” said Nelson Ng, an analyst at RBC Capital Markets in Vancouver, in a March 15 note. “We do not expect the pace of growth to slow in 2013.”

Regulated utilities in the U.S. priced from $100 million to $300 million are the most likely takeover candidates, said Robertson during the conference call. The company has a “pin board worth of acquisitions that we think make strategic sense,” he said.

Cash Flow

“As the business has grown the bell-ringing size of an acquisition increases,” Robertson said. In addition to purchases of regulated utilities, Algonquin is also considering adding to its renewable energy portfolio and is looking into opportunities to cooperate with Spanish wind farm developer and turbine manufacturer Gamesa Corp Tecnologica, S.A.

The company in December completed a purchase of a stake in three wind power projects with Gamesa, according to Algonquin’s website.

Algonquin also has a relationship with Emera Inc., owner of Nova Scotia’s majority power producer and Algonquin’s largest shareholder with 23 percent of the outstanding shares.

As the Ontario company grows, it will be able to fund more of its expansion with cash flow, said Chief Financial Officer David Bronicheski, during the March 15 conference call. “We have strong access to capital on the equity and debt sides,” he said.

Increasingly Influential

Algonquin has two main divisions, Algonquin Power, which owns all or part of 20 hydroelectric generating stations, five wind farms and seven thermal energy plants. The Liberty Utilities division has water distribution and wastewater treatment, electricity and natural gas distribution across the U.S. including Arizona, California and Texas.

“The regulated utility side of Algonquin’s business has become increasingly influential on the company’s overall results,” said Matt Gowing, an analyst at Mackie Research in Toronto in a note to clients. “Algonquin offers investors an excellent combination of growth and yield, while having a low to moderate risk profile.”

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