Algonquin Power could lower risk with renewable asset sales: analysts

Algonquin CEO Arun Banskota says the time is right to evaluate the business following a failed deal to buy a Kentucky utility for US$2.6 billion. (GETTY) (Yaorusheng via Getty Images)

Algonquin Power & Utilities (AQN.TO)(AQN) is expected to reveal the fate of its renewable energy business in about 90 days, a decision that could reshape the Oakville, Ont.-based company in the image of lower-risk, pure-play power producers.

Under pressure from multiple activist firms to pare assets, strengthen its balance sheet, and recover the stock from a nose-dive last November, Algonquin said on Thursday that its board has launched a strategic review of the company's renewable energy group.

CEO Arun Banskota says the time is right to evaluate the business following a failed deal to buy a Kentucky utility for US$2.6 billion. The transaction would have been the company's largest acquisition to date.

Algonquin has two primary business units; regulated electricity, natural gas and water utilities in Canada, the U.S., Bermuda and Chile that serve about 1.25 million customers, according to the company. There's also the renewable energy group, primarily located in the U.S. and Canada, which owns and operates hydroelectric, wind, solar, renewable natural gas, and thermal facilities.

In the first quarter of 2023, Algonquin's regulated services group booked US$255.3 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). The renewable energy group was less profitable, at US$106.5 million.

"When we look at both our regulated business and our renewable business, we see, frankly, unlimited opportunities," Banskota said on a post-earnings conference call on Thursday. He says the company will announce the findings of the board's strategic review when it reports second-quarter financial results.

Banskota confirms the asset sale review is on top of measures announced in January to shore up the balance sheet, including a plan to sell US$1 billion in assets this year, and a hefty dividend cut.

Scotiabank Global Equity Research analyst Robert Hope notes that Algonquin started as a renewable power company, evidenced today by its "more entrepreneurial" culture versus larger pure-play utilities. While he sees operational and financial benefits in keeping the renewables and utility business together, Hope says investors may not appreciate the complexity.

"Simplicity could be well-received by investors," he wrote in a note to clients. "In recent years, we have seen investors prefer simpler stories versus more complicated spinco/yieldco situations."

RBC Capital Markets analyst Nelson Ng says "the renewables business should stay in some form, rather than go."

"Divesting (or spinning out) the renewables division would lead to a regulated pure-play (lower risk profile) that would be well understood by the investor community," he wrote in research published Thursday. "However, divesting the renewables business would limit the company's opportunity set for growth."

Wells Fargo analyst Neil Kalton raised his price target on New York-listed Algonquin shares from US$9.50 to US$10 on Thursday on a "growing possibility that strategic actions could unlock value."

Algonquin's Toronto-listed stock added 0.26 per cent to $11.64 as at 1:07 p.m. on Friday.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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