DBRS Confirms Algonquin Power Co. Senior Unsecured Debentures Rating at BBB (low), Stable

DBRS has today confirmed a rating of BBB (low) with a Stable trend to $135 million 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 mitigated to achieve reasonably stable and predictable cash flow.

The Company has an active development plan for the next five years to grow its clean and renewable energy business, including the recently announced acquisition of a U.S. wind power generation portfolio of 480 MW. Most of the newly completed and to-be-completed facilities are fully contracted wind power generation facilities, offsetting the effects 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 consistent with its existing capital structure and resulting in fairly stable leverage. 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 Negative trend), which brings, among other benefits, financial resources and interest and commitment in renewable energy.

The rating is 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. However, DBRS notes that APCo has an increasing list of successfully completed projects, demonstrating its ability to manage the execution risk of its growth strategy.

In addition, the current unsecured debenture issue will be ranked behind a $120 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 can 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. The debentures are also structurally subordinated to a total of approximately $62 million borrowings at three of APCo’s operating subsidiaries.

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.