DBRS Changes Trend on Algonquin Power Co. to Positive from Stable, Confirms Ratings at BBB (low)

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debentures rating of Algonquin Power Co. (APCo or the Company) at BBB (low). The trends have been changed to Positive from Stable. The ratings reflect the Company’s high level of contracted output and diversified asset portfolio, which reduces the volatility of its earnings and cash flow. The ratings also reflect the Company’s re-contracting risk and exposure to volume risk that is inherent for wind and run-of-the-river renewable power generation companies. The Positive trend reflects DBRS’s view that the Company’s credit metrics strengthened and moved solidly into the mid-BBB range, based on the financial risk rating metrics as outlined in the methodology Rating Companies in the Independent Power Producer Industry. Over the next 12 to 18 months, should APCo maintain key credit metrics as follows: (1) cash flow-to-debt around 20%; (2) EBITDA-to-interest above 4.0x; (3) debt-to-capital below 40%, the rating could be upgraded to BBB. In addition, DBRS expects the company to prudently manage their capital projects to avoid cost over-runs and to bring them into service on schedule.

All of APCo’s recent investments were in renewable generation resources, mostly wind, which benefited from long-term contracts (PPAs) (14 years for wind, hydro and solar generation and seven years for thermal generation). Approximately 85% of APCo’s revenue is earned from large investment-grade counterparties, significantly reducing default risk. Moreover, since the Company’s existing portfolio of projects under development all have 20-year to 25-year PPAs, the average remaining contract life is expected to increase further. The rating also factors in APCo’s good geographic diversification in many Canadian provinces and U.S. regions, reasonable operational expertise, low maintenance capex due to high asset quality and manageable fuel price risk.

APCo’s financial risk profile is viewed as reasonable for DBRS’s BBB rating category. The actual credit metrics are always modestly weaker than the run rate metrics. This is due to the fact that the Company has ongoing projects under construction and development, which require debt to be incurred upfront to finance the projects, whereas cash flows are only achieved once the project is substantially complete. This pattern was reflected in the 2014 actual metrics, when the Company’s two major projects were completed (Cornwall Solar completed in March 2014 and St. Damase Wind facilities completed in December 2014). Notwithstanding the partial cash flow contribution for the year, credit metrics improved in 2014, further strengthened in Q1 2015 and are expected to remain solidly in the BBB range for 2015. However, beyond 2015, credit metrics may continue to be under pressure for the reasons discussed above, as the Company’s expansion capex for future projects remain large.

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.

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

The applicable methodology is Rating Companies in the Independent Power Producer Industry.