DBRS Provisionally Rates Algonquin Power Co. Debenture Offering BBB (low)

DBRS has assigned a provisional rating of BBB (low), with a Stable trend, to the prospective issue of $100 million of Senior Unsecured Debentures of Algonquin Power Co. (APCo or the Company). The rating reflects the strength of the Issuer’s clean energy portfolio with diversification and contract protection. While the Company’s business is exposed to the uncertainties and fluctuations of renewable resource levels and wholesale power prices, these risks are reasonably mitigated and APCo has managed to achieve reasonably stable and predictable cash flow. Operating results in the past couple of years have been somewhat affected by below-average-resource levels and weaker energy prices in certain regions, but the impact on EBITDA and coverage remained muted, largely due to diversification and contract protection on a sizeable portion of the Company’s energy sales. Capacity addition as a result of the successful completion of St. Leon and Red Lily, two wind power projects with long-term sales agreements, also offset some of the negative impact of weaker renewable resources and wholesale power prices.

The Company has an active development plan for the next five years to grow its clean and renewable energy business. Most of the newly completed and to be completed facilities are fully contracted wind power generation facilities, offsetting the effect of expiration of some of the existing thermal power contracts. New construction and/or acquisition of facilities have been funded by a combination of internally generated cash flow, equities and modest borrowings. The Company intends to continue this financing strategy as it adds accretive investments while maintaining its credit profile to ensure adequate access to the capital market and liquidity as needed. Included in this financing strategy is a growing partnership with Emera Inc. (Emera; rated BBB (high), with a Stable trend), which brings, among other strengths, financial resources and interest and commitment in renewable energy. The recently announced partnership with Emera in the acquisition of First Wind Holdings, LLC (First Wind) wind power projects in the northeast United States would add both operating and near-completion capacity to APCo’s growing portfolio without adding a significant amount of new APCo-level borrowing. The financing would include equity through Emera’s subscription of shares of APCo’s parent company, Algonquin Power & Utilities Corp. (APUC).

The rating is also constrained by re-contracting risk and the uncertainties in the execution of the construction and development plan. Delay in completion or underperformance of the newly built facilities could cause erosion of credit metrics. In addition, the current unsecured debenture issue will be ranked behind a $142 million senior secured credit facility, which will be used from time to time to provide interim financing for construction activities until permanent financing with tenors matching the life of the assets could be put in place. Release of the security of the bank line, which would make it equal in ranking with the current debenture issue, would be considered credit positive for the rating.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Non-Regulated Electric Generation Industry, which can be found on our website under Methodologies.