RE:RE:RE:RE:Utilites are Supposed To Be Safe HavensDeanEdmonton wrote: Good analysis Cap but I agree with Sarge in terms of ALA now holding far inferior assets to what they had. With respect to AQN, I do not agree that the new project is just minor. Debt is a big part of Capital Allocation and has a large affect on utilites. Taking on debtt to buy inferior, aged out assts is not good allocation. Debt happy CEOs can severly mess up cashflow. Anyone that holds regulated utilites does it for the dividend stream not the capital appreciation. Yes, some of the cash needs to go into maintenance, and expansion to keep the company growing, but sucking up all the cashflow and not paying the shareholders is pretty much a guarantee no one is going to want to hold your stock.
SargeX wrote: The reason most of ALA's revenue comes from WGL is that they basically swapped all their great assets (eg: BC hydro, etc) for crappiy WGL assets. Don't forget how the ACI spin-out all worked out.
I've hated the KPC deal from the get-go. Everyone who had any common sense saw that they were over-paying for bad assets. As I have said, I debated selling half of our AQN just after the KPC take-over announcement but somehow got lulled by management into thinking they could handle the financing. They were so totally wrong (which seems to be the case way too often),
I'm still hoping they just admit their huge mistake and take the smaller lumps with walking away than slowly torturing us even further with dragging out this bad purchase.
I'll definitely be voting to have Banskota removed as CEO when annual meeting comes around.
Capharnaum wrote: DeanEdmonton wrote: Utilites are desbribed as Dividend plays, widows and orphan funds and on it goes. ALA, Trans Altaa Renewables, before it and now this have proven that bad leadership and stupid BoDs can mess up even a stable company like a utility stock. Managment is EVERYHTING no matter what the induustry or company. The entire leadership of this company and the Board need to go, Full Stop.
I think they are different stories. Trans Alta is mostly power production, with little regulated business. Altagas is about 50% midstream and 50% regulated utilities. Algonquin is mostly regulated utilities (75%+).
The regulated utilities portion is a long term, almost 100% guaranteed source of earnings. Yearly earnings will vary due to timing delays. Real return also lags long term interest changes. However, in the end, return on capital on invested money in the regulated utility is almost certain.
The funniest thing about Altagas is that even though I would agree the new CEO did a better overall job than the previous one, the revenues and margins pretty much all come from WGL and Ripet, which were both investment decisions of the "maligned" leadership. Also, Altagas adjusted ebitda and cashflows were relatively stable through the large variation of the share price (from largely overpriced at $50+ to largely underpriced at $10), so it is arguable that the fluctuations in the share price were just mispricings by the market and not related to the "real" business side, which was pretty steady in terms of results. I think that, mostly, the new CEO favored a better capital allocation (less money going out of the business in dividends, more money staying in the business to increase future returns) than the previous one.
In the case of Algonquin, it's not like the wheels are falling off either. The regulated business has seen recent reinvestments which has increased and will increase the return for the shareholders. The non-regulated, renewables portion of the business had one weak quarter due to wind conditions and delays in project startups. Sure, the corporate non-regulated variable rate debt has increased costs, but much less than what was seen in Q3, as those extra interest charges included regulated business interests that will be put into rates eventually. Heck, despite the increased interest rates and the extra corporate debt, their acquisition of Kentucky Power will still increase their annual cashflow. Should they look at their capital allocation (reduce the dividend to increase reinvestments into the business)? Due to the current share price which restricts their ability to get capital on the market at accretive rates for the investors, maybe they should.
The question about the dividend is often not looked at correctly. When a company (like Algonquin) generates positive cashflow from operations, they need to decide how they will use that extra money. The choice is to reinvest in the business or to return cash to the shareholders. In Q3, about 55% of the cashflow from operations went back to investors in the form of a dividend (excluding drip), with another 45% going in the business (working capital, paying debt or investing in assets).
To summarize... are utilities safe havens? Indeed, they are if you are looking at long term returns. However, publicly traded companies, including utilities, can see unfair variations of their share price (upwards and downwards) which do not reflect the ability of the company to provide long term returns. If you were to compare Algonquin's share price to long term adjusted ebitda and cashflow generation, you would find that it is discounted by more than 50%. Can it get more discounted? Sure, you never know with the market, since it's based on perception much more than fundamentals, especially in the short term (ie: Altagas was severely and unfairly discounted for over a year).
I'll say, being in the sector and having worked on M&A in the sector, I don't quite get the "quality" of assets and "old vs new" argument. I'll try to explain and maybe you can inject where you think your opinion diverges.
Utilities are long term cashflow machines. If you buy a utility, you look at how much you pay vs the rate base of the utility and the long term rate of return for invested capital. For example, if you purchase a utility with a rate base of $2B, a capital structure of 50% debt and 50% capital and a rate of return on capital of 10% (after tax), then you're buying something that will initially yield 100 million per year in cashflow (regardless of opex, as opex costs are passthrough in rates). So, initially, if you pay 1.5x rate base, this means you would pay $3B for the acquisition, and if you were to finance all acquisition costs with capital, that would give you a 5% cashflow yield from the acquisition. If you can finance the purchase partly with extra debt, then you can get a better cashflow return so long as your net interest expense (including deducing tax credits) is lower than the rate of return on capital. In this example, at a tax rate of 30%, then net cashflow on capital investment would always be better than financing debt free with interest rates up to 13%. Anyhow, let's say that the $2B gets financed all with capital, and so the initial yield is 5%. The way to increase that yield is to inject new cash in the rate base. Let's say you can inject an extra $1B in the rate base, 50% debt and 50% capital (to keep up with the regulated and approved structure of capital), then your total investment in capital would increase to $2.5B and your net yield would improve from 5% to 6%.
As to the rik of utilities, long term, it is mostly based on user demand. If the utility's base of users falls down too much, then in extreme cases, the regulator may ask for a write-down of assets, otherwise the utility may face a "death spiral".
Back to the argument of "quality" of assets, in a regulated context, they don't really affect the allowed return by the regulator. In fact, if they are deemed "safer", then the rate of return for investors capital is going to be lower. From my perspective, I don't know why I would pay 2.5x rate base for an hydro asset that will yield me 3% long term, if I can buy a different regulated asset at 1.5x rate base that will yield me 8% long term. I will agree though that I am an investor that is looking for good returns on investments and that my risk profile isn't one that looks forward to basically match inflation but is also looking for a positive real return on money invested.