DBRS Confirms Algonquin Power Co. at BBB (low), Stable

DBRS has today confirmed both the Issuer Rating and Senior Unsecured Debentures of Algonquin Power Co. (APCo or the Company) at BBB (low), both with Stable trends. The confirmation reflects the Company’s significant and growing level of contracted output with strong investment-grade counterparties, a long average tenor and very limited fuel price exposure. APCo’s financial metrics are reasonable considering a full year of earnings and cash flow expected from recent acquisitions. DBRS acknowledges that the bank syndicate’s release of the security previously held over certain APCo’s entities in November 2012, such that the bank facility is fully unsecured, is credit positive due to the elimination of structural subordination between the bank facility and senior unsecured debentures. Should the Company continue to demonstrate its prudent financing strategy by maintaining leverage below 45% on an ongoing basis, a positive rating action could occur within the next 12 months.

APCo’s power projects under development for the 2013 to 2016 period are exclusively contracted with electricity purchasers who are wholly owned by provincial governments and have a strong credit quality. As the projects are predominately wind projects and, to a lesser extent, solar, construction cost-overrun risk is expected to be relatively low. In addition, all projects under development have 20 year to 25 year power purchase agreements. As a result, the average remaining contract life of the Company is expected to increase to approximately 17 years by 2016, from the current 13 years, strengthening APCo’s business risk profile. Furthermore, the initiation of the sale of ten largely merchant hydro facilities in New England and New York signals the Company’s intent to focus on contracted output for future growth, which is credit positive.

DBRS expects the Company to continue funding its project development pipelines and acquisitions with a prudent mix of debt and equity, and thus maintain the debt-to-capital ratio below 45%. Furthermore, should the average contract life fall below seven years, DBRS expects the Company to reduce leverage accordingly to mitigate project contracting risk. However, project contracting risk is not imminent in the foreseeable future due to APCo’s strong project pipelines and
its currently long average tenor. EBITDA interest coverage and cash flow-to-total debt ratios declined following the recent U.S. wind asset acquisitions in the second half of 2012 (Senate, Sandy Ridge and Minonk) for an aggregate of approximately $270 million (the Acquisitions), as these metrics only reflected partial year earnings contributions from the Acquisitions. With a full year of earning contributions from the Acquisitions, DBRS expects the EBITDA interest coverage ratio and the cash flow-to-total debt ratio to remain reasonable at around 4.5 times and 17%, respectively.

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