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Belco’s parent Algonquin unloading assets

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Bermuda Electric Light Company (Photograph by Akil Simmons)

Belco’s parent company, struggling with massive debts and big losses and facing an aggressive activist investor, is looking for a new leader and selling off assets.

Its scramble for value comes as the Bermuda utility it bought for $365 million in 2020 deals with a cap on rate rises, issues related to pollution and fuel and extensive power outages.

Algonquin Power & Utilities, the Oakville, Canada, owner of Belco, reported a $253.2 million loss attributable to shareholders in the second quarter of 2023, as the company dealt with high costs, high interest rates and supply chain constraints. In 2022, it lost $212 million.

Long-term debt rose from $4.5 billion in 2020 to more than $8 billion in the second quarter of 2023, taking the company close to levels of concern in terms of interest cover.

Toronto Stock Exchange-listed Algonquin is down about 45 per cent over the past year, compared with a 17.5 per cent fall in the S&P Utilities Index, and it continues to decline, dropping 3.15 per cent on Wednesday alone.

The company has a $5 billion market cap, down from more than $10 billion in early 2022, according to companiesmarketcap.com.

In July, Algonquin’s largest shareholders sent a letter to a strategic review committee formed in May by the board of directors.

New York’s Starboard Value, which owns 7.5 per cent of the company, said in its note: “Algonquin's valuation has been hampered by a number of factors, most notably excessive leverage and a high dividend payout ratio.”

The fund called for the sale of the company’s Renewable Energy Group and possibly its water utility. It did not call for the sale of traditional power assets.

When Algonquin released its earnings in early August, it said it would be unloading its renewables business in line with the demand from Starboard Value. The company also announced that a director would be taking over as interim CEO as a search for a new leader was initiated.

JP Morgan is financial adviser for the sale of the renewable assets.

Fitch Ratings put the company’s Long-Term Issuer Default Rating on “Rating Watch Evolving” after the announcement of the asset sales.

Johnny Johnston, Algonquin Power & Utilities chief operating officer

“Fitch expects to resolve the Rating Watch when the company provides more details on the transaction, including the buyer, capitalisation post sale and whether any of the proceeds will be used to pay down current outstanding debts,” Fitch said.

The market is not enthusiastic about the plan.

Algonquin is “clearly a ‘show-me’ stock with plenty of questions, and facing investor scepticism that it can sell non-utility assets at attractive multiples and become a utility-only company that will attract new investors,” wrote Mark Jarvi, an analyst at CIBC, in a report dated August 10.

“We don’t believe the remaining business would command a premium multiple and, as much as there might be upside, it’s not a compelling risk-reward set-up,” he added.

Algonquin does not break out performance for Belco in its financial reports and it is not clear whether the asset is highly profitable or a drag on the income statement.

The company emphasises that nothing has been said about Belco in the context of the review and the unloading of businesses.

“We have made no strategic comments with respect to our Bermuda assets,” said Johnny Johnston, the Algonquin Power & Utilities chief operating officer.

“Our Strategic Review, as outlined on our second quarter earnings call, was focused on our renewables business. It is our intention at this time to monetise our renewables business and become a pure-play regulated entity,” said Mr Johnston.

Starboard Value did not immediately respond to questions about Algonquin’s Bermuda holdings.

Since it was acquired three years ago, Belco has faced a number of problems and has been a target of intense criticism locally.

Despite having the second most expensive electricity in the world, Bermuda faces outages when storms arrive and some residents have had to endure soot from Belco’s stacks.

The utility may be facing an emissions control order.

Bermuda’s Regulatory Authority rejected Belco’s 2022-23 recommendation for a 16 per cent increase of its base rates and instead allowed for a 7.5 per cent increase.

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Published September 07, 2023 at 8:00 am (Updated September 07, 2023 at 8:06 am)

Belco’s parent Algonquin unloading assets

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