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

DBRS Limited (DBRS) has today confirmed the issuer rating of Algonquin Power & Utilities Corp. (APUC or Holdco) at BBB (low) and the preferred share rating at Pfd-3 (low), all with Stable trends. The rating reflects the following factors:

(1) Structural subordination between APUC and the debt issued by its two primary operating subsidiaries, Algonquin Power Co. (APCo; rated BBB (low)) and Liberty Utilities Finance GP1 (LUF) (rated BBB (high)). The debt issued by LUF is guaranteed by Liberty Utilities Co. (LUC).

(2) APUC is a holding company with a well-diversified portfolio of regulated assets (largely owned by LUC) and non-regulated assets (largely owned by APCo). These assets have a reasonable business risk profile and a relatively stable cash flow profile that has provided solid cash distributions to Holdco. The business risk profile reflects the cost-of-service nature of the regulated distribution business (the Distribution Group) and the presence of long-term contracts in the non-regulated generation business (the Generation Group). Stable cash flows from regulated assets are supported by generally reasonable regulatory frameworks, within its ten jurisdictions, which allow the Distribution Group to earn good returns on equity (ROE) with no commodity price risk. Cash flows from non-regulated generation assets reflect long-term contracts with good-credit counterparties that significantly reduce the Generation Group’s exposure to commodity price risk. DBRS notes that the Distribution Group faces regulatory risk, while the Generation Group faces re-contracting risk.

(3) There is either no or very minimal debt issued by APUC at the holding company level, and APUC does not intend to issue any material amount in the future. APUC does have a credit facility that is occasionally used (size of $65 million, with $53.2 million available as of March 31, 2015) and has approximately $214 million in preferred shares. In 2014 and Q1 2015, APUC’s non-consolidated credit metrics remained very strong for the current rating.

The Stable trend reflects DBRS’s expectation that: (a) there will be no material change in terms of the mix of regulated assets and non-regulated assets from the current level of approximately 50/50, and a significant increase in non-regulated assets could negatively affect the credit quality of APUC; (b) there will be no material increase in non-consolidated debt levels that will significantly weaken the non-consolidated credit metrics; and (c) there will be no change in the current ratings of APCo or LUF.

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 methodologies are Rating Companies in the Independent Power Producer Industry, Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry and Rating Holding Companies and Their Subsidiaries.