RE:RE:Assetsrustyblades wrote: Dream on. This downward slide is a result of their takeover of the coal plants a year ago. They issued equity to partly finance the takeover. They are paying dividends to this new equity with no corresponding increase in income. The only path forward is to slash the dividend to bring the payout ratio to well under 100%. There is also the execution risk of converting the coal plants and getting new contracts for the electricity. This is the AltaGas playbook all over again. Nothing but bad news for the near terrm.
For a regulated business, the use of payout ratio on earnings is a poor metric. For example, part of the lower net income was due to higher interest charges. Yet, a good portion of these (70%) will be recovered eventually and increase the net earnings when they are. It could be two years though, as there's a significant lag sometimes between costs incurred and when they get put into new rates.
As to going from the coal plants to other new contracts, the utility itself doesn't really carry "execution" risk. As a utility, they will recover whatever sum they put forward at the recognized return rate.
Also, this is very different from Altagas. Altagas' stock was overvalued and most of the debt wasn't directly linked to the utility part of the business (since they are about 50% regulated utilities and 50% unregulated). Algonquin is 85% regulated.
Many people don't seem to understand that regulated utilities have their regulators approve the capital structure. Usually, most regulators aim for something like 30-50% equity, 0-15% preferred stock and 50-60% debt. The reason for that capital structure is that cost of debt is always lower than return on equity, and thus a higher debt capital structure benefits users of the regulated utility through lower rates, as the cost of capital including debt comes down.
Lastly, the reduction in net earnings is only temporary. The utility rates will be adjusted for the higher cost of debt, they will close the acquisition of Kentucky Power and their delayed projects will come online. All that means net earnings for 2024 will be higher than what was projected for this year. However, they will have to cut down on project investment and this means they likely can't keep the increase in the dividend going forward at 10% CAGR.