Believes a Properly Executed Sale of All or a
Substantial Majority of the Company's Unregulated Renewables
Business can Accelerate Efforts to Delever, Lower the Dividend
Payout Ratio and Restore Investor Confidence
Delivers Specific Suggestions to Help Guide
Algonquin's Publicly Disclosed Review Process for the Unregulated
Renewables Business
Looks Forward to Continuing to Constructively
Engage with the Board and its Strategic Review Committee
NEW
YORK, July 6, 2023 /PRNewswire/
-- Starboard Value LP today issued the below letter to
Algonquin Power & Utilities Corp. regarding opportunities to
enhance shareholder value.
***
July 6, 2023
Kenneth Moore, Chair
Christopher Huskilson, Strategic
Review Committee Chair
Algonquin Power & Utilities Corp.
354 Davis Road
Oakville, Ontario
Canada L6J 2X1
CC: Board of Directors
Arun Banskota, President and Chief
Executive Officer
Darren Myers, Chief Financial
Officer
Dear Chris and Ken,
Starboard Value LP (together with its affiliates, "Starboard" or
"we") recently filed a Schedule 13D disclosing an economic
ownership stake of approximately 7.5% in Algonquin Power &
Utilities Corp. ("Algonquin" or the "Company"), making us the
Company's largest shareholder. We appreciate the time that members
of the Board of Directors (the "Board") and management have spent
with us over the past several months.
As we have discussed, we believe Algonquin's Regulated Services
Group is a top tier regulated utility that is currently valued at a
substantial implied discount to peers pro forma for a potential
sale of all or a substantial majority of the Company's
unregulated renewables assets. Even without Algonquin's
unregulated renewables business (the "Renewable Energy
Group"), Algonquin is significantly greener than peers, with
approximately one-third of its electric generation capacity coming
from renewables and no coal exposure, compared to an average of 26%
for its regulated utility peers1. Moreover,
approximately 20% of Algonquin's rate base comes from its extremely
valuable Regulated Water Reclamation and Distribution business (the
"Water Utility"), which generally trade at double the multiples of
Electric and Gas utilities2, compared to approximately
zero water distribution exposure for Algonquin's peers. It is also
important to highlight that Algonquin has historically grown
its rate base faster than peers3, and we believe it has
the opportunity to continue to grow faster than peers as a result
of its unique global footprint of small-to-medium scale utilities.
In other words, we believe the remaining regulated utility
business, once the unregulated business is sold, should be highly
attractive to public market investors.
Algonquin's valuation has been hampered by a number of factors,
most notably excessive leverage and a high dividend payout ratio.
Algonquin's high payout ratio, its recent dividend cut, its high
proportion of unregulated assets, and scars from the
recently-abandoned Kentucky Power deal have all combined to make
Algonquin uninvestible for a large portion of traditional utility
investors.
Fortunately, we believe these problems can be solved through a
sale of all or a majority of the Renewable Energy Group. Pro forma
for such a sale, we believe Algonquin would have lower
leverage, a safer dividend, a greener asset base, and higher rate
base growth than peers, and should be afforded a higher
valuation.
As discussed, while there is tremendous upside to a sale of the
Renewable Energy Group, it is critical that it be done in the right
way and executed skillfully. Most importantly, the process should
be driven by objectives for what Algonquin should look like
following a divestiture of the Renewable Energy Group. In
particular, we believe your key objectives should be:
- Reduce leverage to industry-standard levels of approximately 5x
gross leverage4. Once target leverage levels have been
achieved, excess proceeds should be used to repurchase shares of
Algonquin to drive EPS accretion.
- Improve EPS as much as possible, so that the dividend payout
ratio is in-line with peers, with room for increases. As we have
discussed, we believe a target of 75
cents in FY 2025 EPS5 is achievable.
In our view, the best path to achieving these objectives is
through a sale of the substantial majority of
Algonquin's renewables assets, including the Company's ~42%
stake in Atlantica Sustainable Infrastructure PLC ("Atlantica").
This could entail a sale of the entire Renewable Energy Group as a
whole, or multiple transactions for the majority of the
unregulated renewables assets, while keeping certain assets
that have strategic value and would allow the Company to achieve
even higher pro forma EPS, with an even greener asset base and a
higher growth profile. In either case, the Company would receive a
substantial influx of cash with which to pay down debt and
repurchase shares. Algonquin would become, what we view as, a
best-in-class mid-sized utility with a highly attractive financial
profile where the significant majority of earnings come from
stable, regulated businesses.
While the immediate priority is untangling the Company's
unregulated renewables business in a manner that creates
substantial value for shareholders, a close second is ensuring that
shareholders can realize the potential of Algonquin's extremely
valuable Water Utility. Pro forma for a renewables sale,
approximately 20% of Algonquin's asset base will be from its Water
Utility, making it one of the only companies in its peer group with
any water reclamation and distribution exposure. Water utilities
generally trade at massive premiums to Electric/Gas utilities. As
such, we would expect Algonquin, with its Water Utility, to trade
at a premium to other regulated utilities. If it does not,
Algonquin has the opportunity to create substantial additional
value through a separation of the Water Utility business. For
example, if, following the sale of the Renewable Energy Group,
Algonquin were to also sell its Water Utility and use the majority
of the proceeds to repurchase shares, we believe that it could
increase pro forma EPS to nearly 90
cents6. Even after selling the Water Utility,
Algonquin would still be greener than the majority of its
peers, since its peers on average contain no water distribution
exposure and get 26% of their electric power from coal. The Water
Utility is a hidden gem within Algonquin's portfolio, and its value
should not be overlooked.
We look forward to continuing our discussions in order to ensure
that maximum value is created for all Algonquin shareholders.
Sincerely,
Jeffrey C. Smith
Managing Member
Starboard Value LP
***
About Starboard Value LP
Starboard Value LP is a New
York-based investment adviser with a focused and
differentiated fundamental approach to investing primarily in
publicly traded U.S. companies. Starboard invests in deeply
undervalued companies and actively engages with management teams
and boards of directors to identify and execute on opportunities to
unlock value for the benefit of all shareholders. Learn more at
www.starboardvalue.com.
Contacts
For Investors:
Peter Feld, (212) 201-4878
Gavin Molinelli, (212) 201-4828
www.starboardvalue.com
1 Regulated utility peer group includes AEE,
AEP, CMS, CNP, CU, D, DTE, DUK, ED, EMA, ES, FTS, H, LNT, NEE, PNW,
SO, SR, SRE, WEC, and XEL. Starboard has identified the
aforementioned peers as the relevant peer set. Starboard believes
these peers provide appropriate peer comparisons and align with the
Company's self-selected peer set. This determination is subject to
a certain degree of subjectivity. As the full universe of potential
peers is not listed here, the comparisons made herein may differ
materially if other firms had been included.
2 Water utility peer group includes ARTNA, AWK,
AWR, CWCO, CWT, GWRS, MSEX, SJW, WTRG, and YORW. Starboard has
identified the aforementioned peers as the relevant peer set for
comparing AQN's regulated water utility business. Starboard
believes these peers provide appropriate peer comparisons. This
determination is subject to a certain degree of subjectivity. As
the full universe of potential peers is not listed here, the
comparisons made herein may differ materially if other firms had
been included.
3 Organic growth of 8% from FY2017 to FY2022 vs.
regulated utility peer median of 7%.
4 As we have discussed, investors and ratings
agencies will consider a number of factors in determining the
Company's credit quality, including FFO / Debt and the mix of
regulated assets. We use Gross Debt / EBITDA as a proxy for
leverage levels when comparing across the peer group, but the
Company will need to determine the right pro forma debt level while
considering all of these factors in conjunction with rating agency
requirements.
5 EPS estimate is based on information obtained from
sources believed to be reliable and incorporates
certain assumptions. Such information and assumptions could
turn out to be inaccurate. Starboard's estimate included here
is based on several data points.
6 EPS estimate is based on information obtained from
sources believed to be reliable and incorporates
certain assumptions. Such information and assumptions could
turn out to be inaccurate. Starboard's estimate included here
is based on several data points.
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SOURCE Starboard Value LP