M Partners John Safrance raises target on Algonquin Power

On Wednesday, Algonquin Power (TSX:AQN) announced it had secured a twenty-five year Power Purchase agreement with Sask Power for a 177 megawatt wind power project, beating out twenty-seven other proposals.

The project will be located in Chaplin, which is about 200 kilometres west of Regina. Algonquin expects that the massive undertaking, which will cost approximately $355 million and consist of nearly eighty multimegawatt wind turbines, will be complete by late 2016.

M Partners John Safrance, already bullish on Algonquin Power, thinks the project adds a little value to the company. In a morning note to clients yesterday, he reiterated his buy recommendation and raised his target price on the stock to $7.30 from $7.10. Although the M Partners analyst thinks Algonquin will have little problem with the equity requirements of the deal (large power projects are highly leveraged, the Chaplin project will be approximately 80% levered.) Safrance says they “may crowd out other incremental initiatives which may require the company to issue additional equity.”

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This would seem to present little risk for perennially profitable Algonquin. The company last went to market this past fall, raising $95.3 million in a public offering that ultimately saw the over-allotment option tack on $10 million more than originally intended.

Safrance says the move to raise his target on Algonquin was the result of the Chaplin project combined with November’s announcement by the company that it was going to develop a ten megawatt solar farm in Ontario. Safrance felt that because he saw the Ontario move as adding less than a nickel in value to the company, it wasn’t enough to change his target. But the combination of Chaplin and that deal, he feels, supports $.20 cents of additional value.

Oakville-based Algonquin Power was formed as an income fund in September, 1997. The fund was formed to buy hydro facilities in Ontario, Québec, New Hampshire and New York. After the Canadian government decided to change the favourable tax laws for income trusts in 2009, it converted to a corporation. The company now generates about 165 megawatts of hydro, 210 megawatts of thermal energy and more than 120 megawatts of wind power in Manitoba and Saskatchewan.

Shares of Algonquin closed today up 3.1% to $6.39

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