BMOJanuary 12, 2023 | 08:03 ET~ Algonquin Power & Utilities AQN-NYSE AQN-TSX
Rating Market Perform Price: Jan-11 $7.40 Target $7.00 Total Rtn 4%
40% Dividend Decrease, 2023 EPS Guide Miss, Continues to Pursue Kentucky Deal (?!!)
Bottom Line: AQN's business update was mixed relative to expectations. AQN initiated 2023 EPS guidance well below expectations, reduced its dividend by 40%, announced plans to continue to seek FERC approval of the US$2.646B Kentucky Power transaction, expects no new equity financings through 2024 and is pursuing US$1B of asset sales. Call at 8AM, accessible via webcast (link) or phone (1-800-806-5484 or 416-641-6104, passcode: 3616196#).
Key Points 2023 EPS guidance below expectations. AQN initiated 2023E EPS guidance of US $0.55-0.61, with the US$0.58 mid-point below our US$0.63 estimate and US$0.69 consensus and ~14% decrease from 2022E guide (mid). As expected, there was no comment on previously disclosed five-year EPS CAGR of 7-9% through 2026. 40% dividend reduction and suspension of DRIP. AQN is lowering its quarterly dividend from $0.1808 (US$0.72 annually) to $0.1085 (US$0.43 annually), a 40% decrease effective for Q1/23. This aligns with our 25-40% expectations (consensus ranged from no cut to 50% cut). The new dividend translates to 2023E payout ratio of 71-79% and ~6% yield on recent price (Cdn large cap utility yield is ~4.3%). As such, the DRIP program will be suspended. Future dividend growth expected to align with EPS growth. Funding plan involves no new equity through 2024. Following its September 2022 asset sales, AQN targets ~US$1B of additional asset sales, with proceeds used to pay down debt and fund growth. It expects no new common equity financings through the end of 2024, reduced capital spending intensity and maintenance of its BBB credit rating. Continuing to pursue the Kentucky Power transaction. Yesterday, AEP announced it will jointly file with Liberty (AQN subsidiary) a new Section 203 application with the Federal Energy Regulatory Commission (FERC) in the near term for the Kentucky Power sale, which was denied by FERC without prejudice on December 15. As such, AQN reaffirmed that it continues to seek FERC approval of the US$2.646B acquisition (including US$1.221B debt). The re-filing is not surprising as per our recent comment, which noted AQN's legal obligation to advance the regulatory process. We believe it is still possible for the deal to not happen if FERC approval does not come before the April 26, 2023, closing deadline and the closing deadline is not extended.