AQN operates mainly in the rate-regulated utilities distribution business, fostering a reliable and stable revenue source for the company that is effectively recession-proof. Almost all of its revenues are derived from this business segment, while less than a quarter of its revenues come from higher-growth renewable energy generation.
AQN enjoys characteristics of a moat, including long-term contracts in its renewables business, a large and expanding global footprint of utilities assets across Canada, USA, Bermuda, and Chile, and a capital-intensive - and profitable - business model that acts as a deterrent to new entrants.
The company faces risks in terms of regulation, rate reviews, power prices, and its reliance on acquisitions to keep the growth machine moving. Additionally, the company engages in equity issuances to fund some of its growth, potentially introducing substantive dilution risks to current shareholders if any of these projects are not as profitable as expected.
AQN has ample room to grow - it recently announced a $9.4 billion capital spending program through 2025, indicating that management sees many accretive (i.e., profit-expansive) opportunities for the business to grow. On top of this program, the renewable group is expanding with various partnerships and a promising development pipeline that is seeking to capitalize on the decarbonization of the world.
AQN's dividend appears to be set to grow at a rate similar with the 10% CAGR throughout recent history and in line with management’s expected profit growth of 8 - 10%.
Key Company Metrics
A set of metrics we constantly keep updated to monitor the investment thesis.
AQN's high-growth and arguably most important segment, renewable energy generation, has over 80% of output contracted under long-term agreements.
The weighted-average remaining contract life is approximately 13 years. This provides two main advantages for AQN as the world moves towards cleaner and greener forms of energy:
Customers face high switching costs to exit the contract
AQN can almost guarantee revenue generation from its current customer base over the next decade.
AQN's rate-regulated distribution business surpassed 1 million customer connections with the help of the ESSAL and BELCO acquisitions in 2020, which added 239,000 and 36,000 customer connections, respectively.
AQN's North and South American distribution utilities assets are scattered across 16 jurisdictions, diversifying revenue sources and operations to a nontrivial extent.
Management is committed to expanding customer connections through organic growth and acquisitions. A strong, widespread, and steadily rising base of customer connections should further widen the company’s moat.
The capital intensity of an industry like utilities is a competitor deterrent, especially if well-established incumbents continue to scale their operations across many regions.
Capital expenditures have recently been in the zone of 30 - 50% of revenues in each year. AQN operates in such a capital-intensive industry where emerging players would not choose to commence operations alongside players like AQN. The upfront costs are also so high it would take years before any of the initial investments bear fruit and render the company profitable.
The industry is characterized by natural monopolies over various regions.
AQN mobilized lots of money over the past few years on new capital and expansive investments. However, there is plenty more where that came from. AQN recently initiated a five-year capital program worth $9.4 billion between 2021 and 2025. These investments will include organic investments and business acquisitions that make up a significant fresh pipeline of regulated utilities and renewable energy assets.
AQN is uniquely positioned to lead and benefit from the drive towards renewable energy utilization over traditional forms. The company already generates 10-20% of its revenues from such initiatives and will continue to invest in this realm as the world continues to strive towards a greener future.
AQN has also been partnering with customers to achieve their own emissions goals. Governments, Facebook, Starbucks, Amazon, and General Mills are among some of the organizations that work with AQN to drive this revolution.
AQN is a classic example of a quality dividend-paying company. The operations of the company are stable, resilient, and profitable. AQN's dividend payout ratio as a percentage of its adjusted funds from operations has consistently remained below 50%. Although the ratio has been rising over the past five fiscal years, we believe the ratio is still healthy and AQN has enough growth and reinvestment opportunities to ensure a steady growth rate over time.
AQN expands its operations mainly through acquisitions, particularly in the non-regulated segment of its business. The main risks include general execution risk and diluting current shareholders if financed with equity (i.e., issuing new stock). These risks can be further perpetuated if synergies are not realized, or accretion is subpar. Over the last few years, AQN also issued billions in equity. Management recently closed a mandatory convertible equity units finance offering of $1 billion to fund a portion of the front end-loaded $9.4 billion capital program in 2021.
AQN's base case of an 11.2% rate base CAGR through 2025 may not materialize due to regulatory uncertainty surrounding rate reviews or permits to construct new, promising infrastructure. If regulators do not recognize the value of some of AQN's investments and the positive impact they pose to customers or deem certain investments ineligible for consideration in their rate reviews, AQN may be placed in a position where growth opportunities are denied and allowed ROEs could be too low to recoup capital outlays and other expenses within a reasonable time frame.
Over 80% of AQN's revenues come from rate-regulated jurisdictions for its distribution business. General economic hardships, new political parties, customer complaints, anti-monopoly regulations, and unfavourable rate reviews could all hinder AQN's ability to earn a decent profit in any of the jurisdictions in which it operates.