Algonquin Power & Utilities Corp. has had for some time – years, really – a problem with what are called related-party transactions: deals between the company and the executives outside the normal employer-employee relationship.
Any related-party transaction raises questions about whether executives are taking undue advantage of the company and its shareholders. Algonquin has 11 such transactions, according to the list the company provided in its annual report, many of which involve executives investing in power plants alongside the company. The sheer number of these deals means the questions are amplified.
The good news is that on Thursday afternoon the company should announce along with its quarterly earnings that it has finally unwound most of the significant entanglements. The markets just might react positively to this news.
But even though the matter will be settled, it still raises questions about whether Algonquin is the best place for investors seeking growing dividends in the utilities sector.
Algonquin is an Oakville, Ont.-based energy company that owns utilities and other energy companies on both sides of the border. It pays a dividend yielding 5.1 per cent, and the outlook is for double-digit growth in earnings and cash flow over the next several years, driven by a number of acquisitions.
Bay Street likes what it sees: Nine of 13 analysts have the shares rated as a “buy,” according to Bloomberg. And my colleague John Heinzl featured it in his Yield Hog column, explaining why he takes a long-term view on the company.
It is one of the research firms not in the “buy” camp, however, that may have caused some of the damage Algonquin’s shares have suffered this year. Accountability Research made Algonquin’s related-party transactions a central part of a “sell” recommendation this summer.
All of the transactions date back to Algonquin’s days as an income trust, when a number of the company’s current executives, including CEO Ian Robertson, ran Algonquin through an outside-management structure. So the good news is that Algonquin hasn’t entered into these deals since it ended its income-trust days.
What’s more troubling are the company’s repeated failures to actually fix the issue after telling shareholders a resolution was imminent. The company first formed a special board committee in August, 2010, to review the deals; Accountability Research details four postponements in the date Algonquin said the work would be done.
Then, the company reached agreement with the executives in March, 2012, on a deal to unwind most of the insider transactions. Accountability Research details four more postponements in the expected-completion dates.
“If there is a ‘bad’ on this company’s part, it has taken longer than anyone thought,” says Mr. Robertson. “And I offer this up by way of explanation and not excuse, but the focus of management has been in growing the company, in per-share earnings, cash flows, and assets. We have very much focused on those things.”
Indeed, Algonquin’s story is very much about the future, not the past. In taking a tour of the company’s results, I find that its return on invested capital is paltry even by utility-industry standards; in most 12-month periods over the last decade, it fails to top 3 per cent. Similarly, except for a period in 2010-2011, the company’s operating cash flow has failed to cover its capital expenditures and its dividend.
Mr. Robertson says investors are just beginning to see the impact of a billion-plus dollars in recent acquisitions, and the company’s historic financial statements “don’t exactly paint a true picture of the company’s return.” Plus, the cash-flow picture is improved when you disregard capital expenditures made “to grow the business [which] will deliver increased earnings in future periods,” he says.
To make those acquisitions, Algonquin has tripled its net debt in the last year. While some of its debt-to-earnings metrics have improved in the last couple of quarters, they’re higher than has been the case for much of the company’s history. (Mr. Robertson says his company uses less debt than other players in the industry, and he notes Standard & Poor’s upgraded the company’s debt. That moved it out of the lowest rung of investment-grade bonds.)
Mr. Heinzl says he’s willing to ride out short-term volatility in the company’s shares. Interestingly, I think the short term may bring gains as the insider deals are put in the past and the Algonquin growth story continues.
When I look at Algonquin, however, I see a long-term record of underwhelming financial results and an overwhelming number of insider deals that took entirely too long to unwind. If management executes on its plan, the shares may continue to reward their holders. Still, I’d caution other investors before they join in on this ride.
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