Nine month Operations
Revenues grew at a slower pace for the 9 month period;revenues were ahead by only 3% to $786 million for the third quarter.While adjusted net earnings were ahead by about 40% for the period.The more important adjusted EBITDA increased by about 28% over the third quarter of 2016.While adjusted funds from operations increased by about 20%.This shows that the growth in revenues have tailed off but existing projects have become more profitable.Algonquin management attributes the increased earnings to the newly acquired Park Water System.
New Projects
Algonquin Power management has correctly realized that it needs to have new projects to steepen it's growth path for earnings.So in late 2015 they acquired the Park Water System and in 2016 they built the O'dell wind farm and now they are trying to complete the requirements for the acquisition of the Empire Electric Company.All of these are large projects and all are starting to influence earnings.AQN attributes the increase in earnings in this quarter to the Park Water System and O'dell will be impacting earnings in the fourth quarter.Empire will likely be coming onstream for revenues and earnings in 2017.These are all American systems and two of the three are regulated systems with in most cases steady growth in earnings.Most Canadians (including this author) were sceptical of the expected treatment by American regulators.But with a few exceptions the regulators have been very business-like. In fact, AQN's free cash flow has been robust enough for it to declare an increase in their 2016 dividend;it now stands at $.1435 per quarter.And with the expected increase in adjusted EBITDA in 2017 this blog expects a further increase in the dividend in 2017.
Increases in revenues have started to flatten for Algonquin although they have shown good ,steady increases in earnings.Faced with this situation Algonquin realizes that they need big projects and went out and got them.In the 2016-2017 period they picked up three large producers of earnings;two are regulated and one has a long term power agreement.AQN has shown good increase in earnings in the past and needed not only the same increase in earnings but a steepening curve.And they have done so.
Regulators have their risks too
In 2015 Algonquin Power announced that it was acquiring the Park Water System in the western USA and they were building the O'dell wind farm in Minnesota and trying to acquire the Empire Electric Company in Kansas and Missouri.At the time the price of AQN shares was about $10.00 to $10.50 a share.The yield was about 4%The regulators did slow things down but the Park Water System went ahead and soon the O'dell wind farm was built.The share price moved ahead to a high of $12.50 but it dropped in August to the $10.50 area and it has hovered here.Regulators slowed down the acquisition of the Empire Electric Company.Now the Park Water System is adding to earnings according to AQN management.Not the O'dell wind farm yet.Although AQN expects to hit $500 to $525 million adjusted EBITDA or $2.00 a share the price has not bounced back to it's summer levels.This although the yield is now more than 5%.
It is possible that investors are still nervous about American regulators even with the higher yield.This blog predicts that once the yearend adjusted EBITDA of $500 to $525 million comes in the stock will push back to it's summer levels.Also I am sure that investors want to see revenues and earnings coming in from O'dell this year and Empire next year.This is likely the catalyst to send Algonquin to new levels above $13.
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