Algonquin Power: Growing US Utility Based in Canada

Algonquin Power (AQN) is a Canadian-based diversified utility with growing holdings in the US.  AQN operates windmill farms in Canada, water utilities in the west, and electrical and gas utilities in the east.  With the recent $3.2 billion acquisition of Empire District, AQN has materially expanded its utility operations in the US. AQN’s Liberty Utilities subsidiary now serves over 782,000 customers within a regulated US utility profile.  AQN also operates regulated and non-regulated power generating facilities on both sides of the border with a total capacity of over 2,500 MW.

AQN has been building its US business for many years.  In 2009, AQN partnered with Nova Scotia based Emera (EMRAF) to purchase electrical transmission lines around Lake Tahoe, and has been acquiring smaller US utility asset ever since.   

Liberty Utilities has operations in Arizona, Arkansas, California, Georgia, Illinois, Iowa, Kansas, Massachusetts, Missouri, Montana, New Hampshire, Oklahoma, and Texas. 

AQN was recently listed on the NYSE and should begin to appear on income investor’s radar screen.  Unlike many foreign utilities with US assets, AQN’s dividend is paid in US Dollars.   There is sufficient operating cash flow from US operations to cover the cash dividend outlay to US investors.  

While the value of shareholdings carry currency risk, the distribution payout does not, and this advantage should be attractive to income seekers.   AQN currently offers a 4.9% yield.

For the past 7 years, AQN has partnered with Emera on many US projects, with Emera acting as an active buyer of newly issued shares to finance various US expansions.   Emera, known for being shareholder friendly, has several directors on AQN’s board.  It seemed like an eventual good match, with Emera having a 62 million share head start.  However, Emera decided to purchase Florida-based TECO utility and sold its position in AQN to finance this expansion.  Since buying in 2010, I have been “hoping” for a merger as AQN could help EMRAF’s Canadian-government mandated renewable energy generating profile. 

The company expects to invest C$9.7 billion between 2017 and 2021.  Returns on this capital budget should allow earnings to grow at an 8% or higher rate, with matching dividend growth.

Investors should expect AQN to continue to expand by acquiring smaller utilities assets across the US. Its diversified footprint reduces overall utility risk, and coupled with its US dollar payout, should be considered as a core small-cap utility holding.  

Thank you for reading.  This article first appeared in the Jan issue of Guiding Mast Investments.