Algonquin Power & Utilities Corp (TSX: AQN) is a North American generation, transmission, and distribution utility. Within its distribution group, Algonquin owns and operates regulated water, natural gas, and electricity distribution utilities in the United States. Most of the company's revenue is derived from this division, and, in turn, most of this division's revenue comes from its distribution of natural gas. In its generation group, Algonquin sells electricity produced by its energy facilities, including hydroelectric, wind, solar, and thermal power plants. Algonquin's wind farms account for most of its generation revenue. Finally, the company's transmission group focuses on building and investing in natural gas pipelines and electric transmission systems.

Organizational Structure

Source: Company Filing

Investment Rationale

• Solid Q4FY20 Performance: The company reported decent performance in the Q4FY20, with revenue surged by 12% on a YoY basis, EBITDA improved by 10% and adjusted earnings per share leapt up by 23% on a YoY basis. The major factors impacting AQN's revenue in the three months ended December 31, 2020 as compared to the same period in 2019 are set out as follows:

Source: Company Filing

• Offering Decent Dividend Yield: The company is offering a decent dividend yield of ~4.1%, which is approximately 1.31 times the TSX Composite Index dividend yield of 3.1% and approximately 2.7 times the Canada 10-Year dividend yield of 1.51%. Moreover, the company has consistently distributed dividend over the past 20-years. So, a high yielding stock with consistency in dividend payment tends to remain in the investor’s focus. Also, utility business is generally less risky and pays a consistent dividend, which acts as a defensive play in the investor’s portfolio.

20-Years Dividend Payment History: Source: refinitiv (Thomson Reuters)

• Surpassed Milestone of Over 1 Million Customer Base: In Q4FY20, the Utility services provider reported about the completion of two new regulated utility acquisitions. Empresa de Servicios Sanitarios de Los Lagos S.A. ("ESSAL") is a vertically integrated, regional water and wastewater provider with approximately 239,000 customer connections in Southern Chile, of which AQN initially acquired approximately 94% of outstanding shares, and currently indirectly owns approximately 64% of the outstanding shares. Also during the fourth quarter, the Company successfully completed its acquisition of Ascendant Group Limited, which, through its major subsidiary, Bermuda Electric Light Company Limited (BELCO), is the sole electric utility in Bermuda, providing regulated electrical generation, transmission, and distribution services to approximately 36,000 customer connections. With the completion of these two acquisitions, AQN's Regulated Services Group has expanded and diversified its geographical footprint into new high-quality jurisdictions, and now serves more than one million customer connections. 

• 2021 Capital Investment Expectation: Over the course of the 2021 financial year, the Company expects to spend between $4.0 billion to $4.5 billion on capital investment opportunities. The Regulated Services Group expects to spend between $2.6 billion to $2.75 million over the course of 2021 in an effort to expand operations, improve the reliability of the utility systems and broaden the technologies used to better serve its service areas. Further, the Regulated Services Group also expects to close the acquisitions of New York American Water and the Neosho Ridge and Kings Point Wind Projects in 2021. The Renewable Energy Group intends to spend between $1.4 billion to $1.75 billion over the course of 2021 to develop or further invest in capital projects, primarily in relation to: (i) the acquisition of its joint venture partners' interest in the Maverick Creek and Sugar Creek Wind Projects and the Altavista Solar Project, and acquisition of the Texas Coastal Wind Facilities, (ii) development and construction (as applicable) of the Renewable Energy Group's wind and solar projects, and (iii) incremental international investments.

Source: Company Filing

• ESSAL Acquisition Driving Water and Wastewater Distribution Segment: For the three months ended December 31, 2020, the water and wastewater distribution systems provided approximately 7,066 million gallons of water to its customers and treated approximately 639 million gallons of wastewater. This is compared to 3,868 million gallons of water provided and 592 million gallons of wastewater treated during the same period in 2019. The increase is primarily due to the acquisition of ESSAL in the fourth quarter of 2020, which contributed 2,677 million gallons of water provided. And, for the full-year FY20, the water and wastewater distribution systems provided approximately 19,319 million gallons of water to its customers and treated approximately 2,535 million gallons of wastewater. This is compared to 15,204 million gallons of water provided and 2,338 million gallons of water treated during the same period in 2019, an increase in total gallons provided of 4,312 million, or 24.6%.

Source: Company Filing

• Risk Associate to Investment: The company is exposed to a number of risks and uncertainties. A resurgence in COVID-19 cases could impact the group's operating, supply chain and project development and construction delays, disruptions and cost overruns, and also delayed collection of accounts receivable and increased levels of bad debt expense. Further, the functional currency of most of AQN's operations is the U.S. dollar; however, AQN is exposed to currency fluctuations from its Canadian and Chilean operations.

Financial Highlights: Q4FY20 (All figures in USD)

Source: Company Filing

• For the three months ended December 31, 2020, AQN reported total revenue of $492.4 million as compared to $440.0 million during the same period in 2019, an increase of $52.4 million or 11.9%.
• For the three months ended December 31, 2020, net earnings attributable to shareholders totaled $504.2 million as compared to $172.1 million during the same period in 2019, an increase of $332.3 million or 193.0%. The increase was due to a $14.1 million increase in earnings from operating facilities, a $365.9 million change in fair value of investments carried at fair value.
• In Q3FY20, cash provided by operating activities totaled $174.0 million as compared to $167.5 million during the same period in 2019, an increase of $6.5 million.
• In the third quarter under consideration, Adjusted Funds from Operations totaled $179.3 million as compared to Adjusted Funds from Operations of $144.1 million during the same period in 2019, an increase of $35.2 million.
• Adjusted EBITDA totaled $253.1 million in Q3FY20 as compared to $230.4 million during the same period in 2019, an increase of $22.7 million or 9.9% on a YoY basis, led by improved revenue and cost measures.
• For the three months ended December 31, 2020, usage at the natural gas distribution systems totaled 12,181,000 MMBTU as compared to 12,310,000 MMBTU during the same period in 2019, a decrease of 129,000 MMBTU, or 1.0%. This was primarily as a result of COVID-19 related impacts at the New Brunswick Gas system, as well as volume reduction related to weather driven by 3% fewer heating degree days at the Midstates Gas System and 13% fewer heating degree days at the Empire Gas System as compared to the same period in the prior year.
• For the three months ended December 31, 2020, the water and wastewater distribution systems provided approximately 7,066 million gallons of water to its customers and treated approximately 639 million gallons of wastewater. This is compared to 3,868 million gallons of water provided and 592 million gallons of wastewater treated during the same period in 2019, an increase in total gallons provided of 3,245 million, or 72.8%.
• In the Q4FY20, the Renewable Energy Group generated 1,607.8 GW-hrs of electricity as compared to 1,320.4 GW-hrs during the same period of 2019. Led by 9.1% increase in hydro facilities generation, an increase of 22.5% wind facilities generation, an increase of 39.3% of solar facilities generation and the thermal facilities generated 59.5 GW-hrs of electricity as compared to 45.8 GW-hrs of electricity during the same period in 2019.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 24.19% of the total shareholding. BMO Asset Management Inc. is the entity holding maximum shares in the company at 3.3%. RBC Dominion Securities, Inc. is the second-largest shareholder, with an outstanding position of 3.13%. Institutional Ownership in the company stood at 54.63% and strategic ownership stood at 0.28%.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to Sales Based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation

The company reported solid fourth-quarter and full-year 2020 results, which, despite the challenges presented by the COVID-19 pandemic, reflect year-over-year growth in all of the key financial metrics. Moreover, AQN had approximately 1,600 MW of renewable energy projects under construction in 2020 between the Renewable Energy Group and Regulated Services Group. This was the largest construction program in the company's history, and the new projects are expected to approximately double AQN's renewables portfolio. Meanwhile, Great Bay Solar, Sugar Creek Wind and North Fork Ridge Wind achieved full commercial operations ("COD") in 2020. Maverick Creek Wind, Altavista Solar, Neosho Ridge Wind and Kings Point Wind are on track to achieve COD in the first half of 2021.

Further, the company has demonstrated resiliency throughout the COVID-19 pandemic as the delivery of essential services has remained uninterrupted.

Also, the company provided an update on its $9.4 billion capital expenditure plan from 2021 through the end of 2025. Approximately 70% of the capital plan is expected to be invested by the Regulated Services Group, and approximately 30% is expected to be invested by the Renewable Energy Group.

AQN is also yielding higher on TSX and offering a decent dividend yield amid a low interest rate environment, which is encouraging from an income-seeking investor's standpoint.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 19.23 on March 05, 2021. We have considered Ameren Corp, Atco Ltd and Avangrid Inc etc., as a peer group for comparison purpose.

1-Year Price Chart (as on March 05, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at March 8, 2021 price as well.

Disclaimer

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