DBRS Places Algonquin Power & Utilities Corp. Under Review – Developing Following the Empire District Electric Company Acquisition Announcement

DBRS Limited (DBRS) has today placed the BBB (low) Issuer Rating and Pfd-3 (low) Preferred Shares ratings of Algonquin Power & Utilities Corp. (APUC or the Company) Under Review with Developing Implications. This rating action follows the announcement that the Company has entered into an agreement and plan of merger pursuant to which Liberty Utilities Co. (LUC) will indirectly acquire The Empire District Electric Company (Empire) and its subsidiaries (the Transaction).

LUC is a wholly owned subsidiary of APUC and owns a diversified portfolio of regulated assets. LUC is the guarantor of the Senior Notes issued by Liberty Utilities Finance GP1 (LUF), which are rated BBB (high). APUC owns 100% of LUC and Algonquin Power Co. (APCo), which is rated BBB (low). Please note that the ratings of LUF and APCo have also been placed Under Review with Developing Implications (see separate press releases dated February 10, 2016).

Empire is an approximately 100% regulated electric, gas and water utility (mostly electric), serving approximately 218,000 customers primarily in Missouri and also in Kansas, Oklahoma and Arkansas. Empire engages in the generation (approximately 1,400 MW net capacity, ~60% natural gas), purchase, transmission, distribution and sale of electricity. The Transaction will be all cash and total consideration will be approximately $3.4 billion, including the assumption of approximately $1.3 billion of debt. All the outstanding debt from the acquired assets is at the regulated utility level. The purchase price represents a 50% premium to Empires unaffected share prices on December 10, 2015, and a 21% premium to the closing price on February 8, 2016. The Transaction is expected to close in Q1 2017, and is subject to the approval of Empire’s common shareholders and to various federal regulatory approvals including multiple utility commissions, the Federal Energy Regulatory Commission and the Federal Communications Commission.

The rating action reflects DBRS’s view that the Transaction will have a modestly positive impact on APUC’s business risk assessment (BRA). The impact on the financial risk assessment (FRA) is uncertain since the financing plan has not been finalized.

IMPACT ON BRA
APUC’s current BRA is supported by diversification in terms of geography, diversification between regulated and non-regulated assets, and diversification within the regulated assets in terms of commodities (natural gas distribution, electric distribution, and water/wastewater distribution/collection). In addition, APUC’s current BRA is supported by reasonable regulatory frameworks for LUC’s utilities and the long-term contracted nature of APCo’s generation assets. The Transaction will increase APUC’s exposure to regulated assets, generally considered to provide more stable cash flows relative to APCo’s generation assets, from approximately 52% of EBITDA to 70%. The Transaction will also increase LUC’s earning contributions from Missouri, a state in which LUC already operates (Midwest Gas), and which is considered to have a reasonable regulatory environment in line with LUC’s overall portfolio. The Transaction will also increase LUC’s exposure to electricity distribution earnings.

IMPACT ON FRA
DBRS notes that APUC has obtained a USD 1.6 billion fully committed bridge debt financing to finance the Transaction. The permanent financing is expected to be obtained by placements of equity, preferred equity, convertible debentures, long-term debt, as well as the assumption of existing Empire indebtedness. The preliminary plan includes approximately $1.0 billion of convertible unsecured subordinated debentures via installment receipts, approximately $1.1 billion in incremental acquisition debt, and approximately $1.3 billion in assumed debt. The timing, sizing, and issuer of the various financing sources is not yet finalized and therefore the impact on the FRA is currently unknown. DBRS would consider a material increase in leverage, particularly at the APUC level, to have a negative impact on the FRA.

DBRS will review the financing plan when it is finalized and further review the impact of the Transaction on APUC’s credit profile. Particularly, DBRS will focus on non-consolidated leverage and the non-consolidated cash flow-to-non-consolidated debt at APUC. If there will be a materially negative impact on APUC’s non-consolidated metrics, DBRS could take a negative rating action.

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 are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2015), Rating Companies in the Independent Power Producer Industry (August 2015), Rating Holding Companies and Their Subsidiaries (January 2016), DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (January 2016), which can be found on our website under Methodologies.

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

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