For over two decades, Algonquin Power and Utilities Group (NYSE: AQN) has been making money for its shareholders by selling clean energy to its customers.  Today, the company owns and operates a growing number of regulated gas, water and electrical utilities, as well as renewable energy power plants across the US and Canada.  Its early focus on renewable energy has brought it market-beating growth and a strong reputation.  As electric grids across the world transition to "emissions-free" sources of energy, Algonquin is leveraging its green track record to build clean energy power plants for large corporate customers -- and to "buy up and green up" its competitors. 

Algonquin is growing by greening the power grid

Algonquin is growing by greening the power grid-Image source: Getty Images

From humble beginnings

In 1997, Algonquin raised about $74 million to purchase several hydroelectric plants in Canada and New England, and set itself up as Algonquin Power Income Fund.  As its holdings grew, it transitioned to a corporation in 2009.  Today, Algonquin is valued at over $8 billion via its two main subsidiaries: Liberty Utilities, which operates regulated water, gas and electric utilities in 13 US states and one Canadian province, and Liberty Power, its renewable energy developer, which owns and operates nearly 2GW worth of power plants across the US and Canada.

Since at least 2009, Algonquin has delivered shareholder value through what it calls a combination of "organic growth and acquisitions." In other words: the company grows by buying other utilities and making them run more efficiently (acquisition growth), and by supplying new demand for energy within and without its service territory as it develops wind and solar farms for large commercial customers (organic growth).

One such way to make its business run more efficiently comes from what the company calls "greening the fleet." For example, in 2017 the company acquired Arkansas' Empire District Electric Co., which generated much of its energy from coal. As some of the utility's coal plants' useful lives came to an end, the company begun replacing coal generation with wind. The transition to wind alone is expected to deliver ratepayers in the territory over $300 million in savings over the 30-year useful life of the new plant -- not to mention a significant reduction in greenhouse gas emissions.

To playing with the big boys

Algonquin's pioneering work in renewables -- an area on which very few utilities focused 20 years ago -- has begun to pay off, both in accolades (the company recently ranked No. 10 on the Corporate Knights Global Top 100 list of the most sustainable companies) and in new business opportunities. 

In its 2019 annual report to shareholders, the company disclosed construction progress on over half of its 1.4GW pipeline of new renewable energy projects.  This pipeline of projects is expected to nearly double Liberty Power's current renewable energy capacity in four to five years.

Compare that to NextEra Energy (NYSE:NEE), a US utility revered for its leadership in the renewable space, which announced a 12GW pipeline of renewable projects during its third-quarter 2019 earnings call. But NextEra's total revenue stood at a gigantic $19 billion by the end of 2019, while Algonquin's total revenue was merely $1.6 billion.  Proportionate to each company's annual revenues, Algonquin boasts a larger pipeline of projects than NextEra's. And let's remember that Algonquin's revenue comes not only from its electricity business, but also from its water and gas operations. Relative to the revenue the company gets from its electrical generation capacity alone -- which it does not list separately in its financial statements -- Algonquin's pipeline of renewable projects is likely even larger. 

And while future projects aren't guaranteed to reach fruition, Algonquin's pipeline looks pretty real. During its Q2 2020 earnings call, Algonquin announced a four-year agreement to develop 500MW of renewable energy projects to power Chevron's (NYSE:CVX) operations in several countries, with an expectation that Chevron may tap Algonquin for more clean generation projects down the road. 

To more growth

Algonquin's large pipeline of renewable energy projects in relation to its size prompted an analyst on the company's Q2 2020 earnings call to ask whether the agreement with Chevron marked a departure from the company's traditional focus, and a transition to more of its activity as a developer of renewable energy projects.  

CEO Arun Banskota responded, "We are an acquisitive company," and explained that the company would like to preserve its current ratio of roughly 70% regulated utility-to-30% renewable business for the foreseeable future. Some back-of-the-envelope math tells us that if the company is doubling its renewable energy portfolio, it likely intends to acquire enough utility businesses to double that division's current size over the next four to five years as well. The company essentially said as much during its latest earnings call, citing recent acquisition anouncements for BELCO (Bermuda's electrical utility) and New York American Water.  

As exciting as it is to see a business growing and succeeding in the market through its commitment to the environment, Algonquin's performance as a stock has been very respectable as well. It's delivered nearly 200% appreciation between 2017 and 2019 (pre-COVID), along with a strong recovery post-COVID, while it vastly outperformed its larger peers in the S&P 400 Utilities Index. And this strong performance does not include its enviable  4.5% dividend yield. 

Algonquin has outperformed many of its larger peers

Algonquin has outperformed many of its larger peers

The bottom line

As demand for cleaner sources of energy grows across utilities and industrial customers in the coming years, Algonquin is well-positioned to deliver much-needed expertise alongside an excellent track record. And as the company continues to execute successful acquisitions, Algonquin looks like a stock that could continue to grow at or above its recent pace. Fools interested in a steady performer with a high dividend yield should pay attention to how Algonquin continues to grow its pipeline of renewables as an indicator of further overall growth to come.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.