DBRS Confirms Algonquin Power & Utilities Corporation at BBB (low), Stable

DBRS has today confirmed the Issuer Rating and Preferred Shares rating of Algonquin Power & Utilities Corporation (APUC or HoldCo) at BBB (low) and Pfd-3 (low), respectively, both with Stable trends. The confirmation reflects the structural subordination between APUC and the existing debt at its two primary operating subsidiaries (collectively, the OpCos), Algonquin Power Co. (APCo; rated BBB (low)) and Liberty Utilities Company (LU), which is the guarantor of Liberty Utilities Finance GP1 (rated BBB (high)). In addition, the ratings of APUC reflect the lack of corporate debt at the HoldCo level. As a result, the BBB (low) rating of APUC remains one notch below the credit quality of the OpCos.

APUC holds a diversified portfolio of regulated utilities and non-regulated power generation assets through its LU and APCo subsidiaries, respectively. Over the last few years, the credit quality of the OpCos have improved, as the regulated utilities segment continued to grow faster than the non-regulated segment. For the 12 months ended March 31, 2014, the higher-rated regulated utilities segment’s EBITDA accounted for approximately 57% of APUC’s consolidated EBITDA, compared to 47% in the prior comparable period. However, from a cash flow perspective, DBRS estimates that approximately 60% of cash flow available to service preferred and common dividends at the HoldCo level were generated by the lower-rated APCo segment during the year ended December 31, 2013. In the long term, contributions from both segments are expected to remain equal. As a result, DBRS does not anticipate APUC’s business risk profile to change significantly.

APUC’s non-consolidated key financial metrics are in line with the current rating profile. Non-consolidated debt-to-capital has remained minimal (0% as of March 31, 2014) and APUC intends to maintain debt at the HoldCo level well below the 20% threshold. In addition, APUC’s financial profile is also supported by the small size of preferred dividends relative to the cash flow available to the HoldCo. For the year ended December 31, 2013, preferred dividends totalled $5.4 million, while estimated cash flow available to service these dividends totalled approximately $105 million, allowing the remaining cash to service common dividends and partially fund capital expenditure needs.

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, Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, Rating Holding Companies and Their Subsidiaries and Preferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.