Daily Gains Letter

Utility’s Acquisition Strategy Paves Way for Increased Profitability

By for Daily Gains Letter | Mar 1, 2013

010313_DL_whitefootUtility stocks are companies that deliver essential services, such as gas, water, and electricity. These stocks tend to be more stable, as consumers need water, gas, and electricity, regardless of the direction the economy is headed.

Algonquin Power & Utilities Corp. (TSX/AQN) is a growing renewable-energy company that owns and operates a diversified portfolio of $3.0 billion of regulated and non-regulated utilities in North America. Algonquin Power & Utilities (APUC) actively invests in hydroelectric, wind, and solar power facilities, and sustainable utility distribution businesses (water, electricity, and natural gas) through its two operating subsidiaries: Algonquin Power Company (APCo) and Liberty Utilities.

APCo owns direct and indirect equity interests in 20 hydroelectric generating facilities, five wind-energy facilities, and seven thermal-energy facilities, with a total average power purchase agreement life of 13 years.

Liberty Utilities provides water, electricity, and gas utility services to communities across the United States, with operations in Arizona, California, Illinois, Iowa, Missouri, New Hampshire, and Texas.

APUC has a market cap of $1.5 billion, a forward price-to-earnings (P/E) ratio of 27.3, and $16.4 million in cash. The company also provides a 3.7% annual dividend.

The company announced that third-quarter revenues increased 50% year-over-year to $99.0 million. The company reported a third-quarter net loss of $200,000, or breakeven per share, compared to a net income of $19.6 million, or $0.16 per share, for the same period in 2011. (Source: “Algonquin Power & Utilities Corp. Announces Third Quarter 2012 Financial Results,” Algonquin Power & Utilities Corp. web site, November 14, 2012, last accessed February 28, 2013.)

For the nine months ended September 30, 2012, APUC reported total revenues of $229 million, a 12% increase over the $205 million recorded during the same period in 2011. The company reported year-to-date net income of $8.1 million, or $0.05 per share, as compared to $31.9 million, or $0.29 per share, during the same period in 2011.

CEO Ian Robertson commented, “We are pleased at having closed four acquisitions in the quarter which now positions APUC for significant growth over the next year in both our non-regulated and regulated businesses.” (Source: Ibid.)

During the third quarter, APUC’s Liberty Utilities subsidiary completed a number of acquisitions, including: Granite State and EnergyNorth, both from National Grid, for a total purchase price of US$297 million; regulated natural gas distribution utility assets Midwest Gas Utilities, located in Missouri, Iowa, and Illinois, from Atmos for US$129 million; United Water Arkansas Inc., a regulated water distribution utility (Arkansas Water) located in Pine Bluff, Arkansas, for approximately US$28.6 million; and Georgia Utility, regulated natural gas distribution utility systems, for approximately US$141 million.

Back in March, APCo entered into an agreement to acquire a 480-megawatt (MW) portfolio of four wind-power projects in the United States from Gamesa S.A. for total consideration of approximately US$888 million. Located in Illinois, Texas, Iowa, and Pennsylvania, the wind project would double the subsidiary’s independent power-generation portfolio.

During the third quarter, APCo acquired a 51% controlling interest in the 50-MW Sandy Ridge (Pennsylvania) wind project for approximately US$29.7 million. Subsequent to the end of the quarter, APCo acquired an additional 7.8% interest for US$4.5 million, bringing the total interest to 58.8% for total consideration of US$34.2 million.

As a result of the successful completion of the previously mentioned acquisitions, the company’s board of directors approved a dividend increase of $0.03 annually, bringing the total annual dividend to $0.31 per common share, paid quarterly.

Robertson added, “Our achievements in the third quarter contributed to the ability for the Board of Directors to increase the annual dividend by 11%, consistent with our strategy of delivering total shareholder return comprised of attractive dividend yield and capital appreciation.” (Source: Ibid.)

During the fourth quarter (ended December 31, 2012), APUC announced it completed the acquisition of a 60% interest in both the 200-MW Minonk Wind Project in Illinois and 150-MW Senate Wind Project in Texas from Gamesa S.A. for roughly $238 million. (Source: “Algonquin Power & Utilities Corp. Announces Closing of Acquisition of 200 MW Minonk and 150 MW Senate Wind Power Facilities,” Algonquin Power & Utilities Corp. web site, December 10, 2012, last accessed February 28, 2013.)

Since the beginning of 2013, the company has announced it purchased Shady Oaks, a wind-power generating station, located in Northern Illinois, for approximately US$149 million. (Source: “Algonquin Power & Utilities Corp. Announces Acquisition of 109.5 MW Shady Oaks Wind Power Facility,” Algonquin Power & Utilities Corp. web site, January 2, 2013, last accessed February 28, 2013.)

APUC also announced the closing of its acquisition of the regulated water distribution utility assets located in Pine Bluff, Arkansas from United Waterworks Inc. for $27.6 million. (Source: “Algonquin Power & Utilities Corp. Announces the Closing of the Acquisition of the Arkansas Water Distribution Utility Assets,” Algonquin Power & Utilities Corp. web site, February 1, 2013.)

In mid-February, the company also entered into an agreement to acquire New England Gas Co. The $74.0-million deal is expected to close in the second half of 2013. (Source: “Algonquin Power & Utilities Corp. Enters an Agreement to Acquire New England Gas Company,” Algonquin Power & Utilities Corp. web site, February 11, 2013.)


dl_0301_image002Chart courtesy of www.StockCharts.com

As a general rule, Algonquin’s share price does not experience significant short-term gains. It does, however, have a history of consistent growth. Since early 2009, the company’s share price has been in a strong uptrend.

Even though Algonquin announced its swing to a third-quarter loss and reported a sharp decline in year-to-date net income, the company’s share price has remained bullish. While earnings were down, the company’s asset price increased as a result of a strong acquisition strategy—meaning the company’s potential for future earnings is even stronger.

Regardless of your aversion to risk, APUC could be a great option for investors looking to strengthen their investment portfolio with a company that provides a solid dividend yield (income) and capital growth.

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