DBRS Assigns Rating to Algonquin Power & Utilities Corp. Preference Shares of Pfd-3 (low), Confirms Issuer Rating of BBB (low), Stable

DBRS has today confirmed the Issuer Rating of BBB (low) and assigned a preferred share rating of Pfd-3 (low), both with a Stable trend, to Algonquin Power & Utilities Corporation (APUC or the HoldCo). APUC’s borrowings are structurally subordinated to the existing debt at its two primary operating subsidiaries (collectively, the OpCo): Algonquin Power Co. (APCo; rated BBB (low)) and Liberty Utilities Company (LU)-guaranteed Liberty Utilities Finance GP1 (rated BBB (high)). The BBB (low) rating of APUC is one notch below the aggregate credit quality of the OpCo, reflecting the structural subordination of the parent company relative to the OpCo.

While the earnings contribution from the weaker OpCo, APCo, currently accounts for a greater portion of consolidated earnings (69% of consolidated EBITDA), earnings from LU are expected to grow at a faster pace, from 31% of consolidated EBITDA for the six months ended June 30, 2012 (H1 2012) to 46% by 2013. This growth is supported by the completion of the natural gas and electric power utilities in the Midwest and New England, and the agreement to acquire more natural gas distribution utility assets in the State of Georgia (the Georgia Utility). DBRS expects earnings and cash flow contributions from APCo and LU to be approximately equal in the long term. Should the credit quality of each subsidiary deteriorate or earnings contributions from APCo permanently increase to over 70% of the total consolidated EBITDA, APUC’s rating could be downgraded by one notch.

Key financial metrics supporting the rating profile are largely based on APUC from a non-consolidated perspective. APUC’s non-consolidated debt-to-capital has remained well below the 20% threshold (approximately 3% in H1 2012, based on DBRS estimates) and the Company intends to maintain low levels of debt at the HoldCo level. Therefore, the structural subordination of the parent warrants a one-notch downgrade from the aggregate credit quality of the OpCo. However, if non-consolidated leverage rises over 20%, more than a one-notch differential could be necessary.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies for this rating are Rating Companies in the Non-Regulated Electric Generation Industry and Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry, which can be found on our website under Methodologies.