Algonquin Power & Utilities (AQN.TO)(AQN) has announced a plan to cut its quarterly dividend by 40 per cent and target US$1 billion in asset sales, as the Ontario-based utility attempts to strengthen its financial position and reassure investors.
Algonquin CEO Arun Banskota says the company must address challenges facing the business. The company’s stock has been under pressure since November, when Banskota outlined headwinds from higher interest rates and inflation, to construction delays for renewable energy projects.
"Let me be clear. I take the current situation very seriously," Banskota told analysts on a conference call Thursday morning. "Regardless of the challenges we face, I'm holding myself and this management team accountable for improving our trajectory."
Algonquin now expects 2023 adjusted net earnings per common share between $0.55 and $0.61, down from its previously lowered estimate of $0.66 to $0.69 issued when it reported third-quarter financial results last year.
Toronto-listed shares fell 6.53 per cent to $9.30 as at 11:20 a.m. ET on Thursday. The stock has plunged nearly 35 per cent since November.
Wells Fargo analyst Neil Kalton recently described the situation as a "crisis in confidence," as investors questioned the longevity of Algonquin's hefty dividend and its ability to finance planned investments.
Algonquin says it will lower its quarterly dividend from $0.1808 to $0.1085 per common share in the first quarter of 2023 in order to improve financial flexibility. It will also suspend its dividend reinvestment program for its common shares at that time.
"We have for the past couple of years received a lot of questions about our payout ratio, which has been higher than our peers. Going forward, we're expecting to be more in line," Algonquin chief financial officer Darren Myers said on the call. "We're expecting to save over US$1 billion over a five year period as a result of this reset."
Last week, Wells Fargo noted the company’s current payout dwarfs Algonquin’s utility peers, and seems to clash with its “capital-intensive ambitions.”
Those ambitions appear to have been reined in, according to Thursday’s update. Algonquin says it is taking steps to cut capital costs and refocus its portfolio, including targeting US$1 billion in additional asset sales to pay down debt and bankroll growth. Management did not specify which assets it intends to sell.
In October, Algonquin announced an agreement to sell its stakes in a portfolio of U.S. and Canadian wind projects to InfraRed Capital Partners. Myers says the transaction was closed in December for nearly $360 million in cash. He estimates Algonquin's assets are currently worth over US$17 billion.
On Thursday Algonquin reaffirmed its intention to buy Kentucky Power through its American subsidiary, Liberty Utilities. In mid-December, U.S. federal regulators denied the transaction. Termination of the deal requires Algonquin to pay the sellers, Ohio-based American Electric Power, a US$65 million break fee under certain circumstances.
Banskota said the denial from the U.S. Federal Energy Regulatory Commission was "a surprise."
"The order makes it pretty clear that they are looking to make sure that there is no harm to customers," he said on Thursday. "We will wait to give more colour as we file and go through the appeal process."
RBC Capital Markets analyst Nelson Ng predicts Thursday's announcements from Algonquin will have a neutral impact on the company's battered stock.
"We don't believe investors will be surprised by the updates," he wrote in a note to clients. "We also believe that some investors may question whether the dividend cut was large enough."
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.