DBRS Comments on Algonquin Power Co.’s Acquisition of Shady Oaks Wind Farm

DBRS today notes that Algonquin Power Co. (APCo or the Company; rated BBB (low) with a Stable trend) has announced its acquisition of Shady Oaks Wind Farm (Shady Oaks or the Project) from Goldwind International SO Limited (Goldwind). The acquisition cost approximately $149 million and closed on January 2, 2013.

Shady Oaks is a 109.5 MW wind power generation facility located in northern Illinois that was commissioned in early 2012. The transaction involves a 20-year power purchase agreement with Commonwealth Edison Co. (ComEd). Shady Oaks uses a total of 71 turbines manufactured by Goldwind, the third-largest wind turbine producer in the world. All operations, maintenance, and capital repair responsibilities for Shady Oaks have been assumed by an affiliate of Goldwind pursuant to a 20-year fixed price agreement.

In its review, DBRS’s analysis will focus on (1) the business risk profile of APCo and (2) the financial impact of the proposed transaction on the Company’s credit profile. Overall, DBRS views this transaction as credit neutral.

(1) Business Risk Profile – Modestly Positive
Based on its preliminary review, DBRS views the proposed acquisition as modestly positive with respect to APCo’s existing business risk profile. Shady Oaks is fully contracted and hedged at a fixed price with ComEd, an investment-grade counterparty. ComEd is an electric distributor serving the Chicago and northern Illinois areas. The Project also allows APCo to further diversify its existing electric generation portfolio. To date, Shady Oaks has been performing in line with its initial capacity projections.

(2) Financial Risk Profile – Modestly Negative
Based on its preliminary review of the proposed acquisition and APCo’s funding strategy, DBRS views the impact on APCo’s financial risk profile as modestly negative. DBRS expects the Company to initially fund the acquisition with 100% debt, and equity could be sourced later in 2013. Upon completion of the transaction, the Company’s debt-to-capital ratio is expected to rise toward the Company’s target of 40% to 45% debt in capital structure, while cash flow-to-debt is expected to remain at its current level of approximately 20%. DBRS views the target leverage as reasonable for the current rating category.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Non-Regulated Electric Generation Industry (May 2011), which can be found on our website under Methodologies.