cibc analyst price target US$ 7Power Asset Sale (At Good Value) & Further Dividend Cut Set Up AQN For Long Run; Modest Q2 Beat Nice To See
Summary: Beyond reporting Q2 results that compared favourably with our and consensus estimates (28%/16% EPS beat vs. our/consensus estimates), AQN also made other significant announcements. First, it signed a deal to sell its power asset for upfront proceeds of $2.28B and a potential earnout of $0.22B—that exceeds our expectations (infers a higher multiple). Further, AQN is cutting its dividend by another 40%—this will lead to a much more sustainable payout ratio and provide cash for funding. While normally a dividend cut is not viewed positively, this could be a circumstance where it is. A lower dividend frees up retained cash for funding and with the asset sale proceeds could enable a buyback for AQN. Another item to note is that AQN is moderating near-term utility spend to manage regulatory lag—seems prudent, in our view. Conference Call: 8:30 a.m. ET; (800) 715-9871, ID# 9608227.
Power Business Sale: AQN is selling its power business (ex-hydro) to LS Power for an upfront payment of $2.28B and a potential earnout of $0.22B. The initial proceeds exceed the $2.1B we estimated in a prior note and infer a multiple of around 11x-12x based on our EBITDA estimates—if correct, the market will like that multiple, in our view. Gross proceeds post repayment of a $0.7B construction loan will be $1.6B, from which AQN will pay back various pieces of debt, including APCo bonds. Closing expected by year-end.
Q2 Results: Adjusted EBITDA of $311MM (up 12% Y/Y) exceeded consensus of $297MM (range: $292MM-$304MM) and our $292MM estimate. AQN reported Adjusted EPS of $0.09, above consensus of $0.08 (range: $0.07-$0.09) and 28% above our estimate of $0.07.
Dividend Reduction: AQN is reducing the annual dividend to $0.26, a 40% reduction from the prior annual dividend of $0.43.
Capex Update: AQN indicated it will moderate its spending on regulated utilities to help manage regulatory lag and will ramp once new rates are in place.
Regulatory Update: A number of key rate cases are ongoing, including Granite State, New York Water, EnergyNorth and BELCO. AQN also plans to file new rate cases at Empire, Calpeco and other smaller utilities.
AY Take-private Approved By Shareholders: Yesterday, Atlantica (AY) received sufficient shareholder support (including from AQN) to approve its take-private deal. A number of approvals remain outstanding, with closing slated for later this year or early 2025 upon which AQN will receive its cash proceeds from selling its shares.