DBRS Maintains the Under Review with Developing Implications Status of Algonquin Power & Utilities Corp.

DBRS Limited has today maintained the Under Review with Developing Implications status on the BBB (low) Issuer Rating and Pfd-3 (low) Preferred Shares rating of Algonquin Power & Utilities Corp. (APUC or the Company). APUC is a holding company with interests in non-regulated power generation assets through Algonquin Power Co. (APCo) and regulated utility assets through Liberty Utilities Co. (LUC). The ratings of APUC, as well as the ratings of APCo and Liberty Utilities Finance GP1 (debt guaranteed by LUC), were placed Under Review with Developing Implications on February 10, 2016, following the announcement of an agreement and plan of merger pursuant to which LUC would indirectly acquire the Empire District Electric Company and its subsidiaries (the Empire Transaction) (see the February 10, 2016, press release for details). The placement of APUC’s ratings Under Review with Developing Implications reflects DBRS’s view that the Empire Transaction will have a modestly positive impact on APUC’s business risk assessment (BRA), while the impact on the financial risk assessment (FRA) is uncertain. The modestly positive impact on the BRA is expected because the Empire Transaction will increase APUC’s exposure to regulated assets, generally considered to provide more stable cash flows relative to APCo’s generation assets. The Empire Transaction will be all cash, and total consideration will be approximately $3.4 billion, including the assumption of approximately $1.3 billion of debt.

Today’s maintenance of the Under Review with Developing Implications status follows DBRS’s further review of available information on the timing, size and various financing sources for the Empire Transaction. It is DBRS’s opinion that the financial impact on APUC’s credit metrics remains unknown since the financing plan has not been finalized. DBRS would consider a material increase in leverage at the APUC level to have a negative impact on the FRA. DBRS expects that by the end of 2016 or early 2017, APUC’s financing plan for the Empire Transaction will be finalized, allowing DBRS to resolve the Company’s Under Review with Developing Implications status. DBRS will likely confirm the ratings of APUC as below with Stable trends if the credit quality of the regulated and non-regulated assets and cash flows is maintained as expected and the financing of the Empire Transaction does not increase non-consolidated debt-to-capital ratio above 20%.

DBRS has reviewed the 2015 and Q1 2016 performance of APUC and views that the consolidated credit metrics have remained strong and generally improved throughout the period as a result of development projects placed into service at APCo and successful rate case outcomes at LUC. APUC’s ratings also continue to reflect the following factors: (1) Structural subordination between APUC and the debt issued by its subsidiaries; (2) APUC is a holding company of a well-diversified portfolio of regulated and non-regulated assets, which have reasonable business risk profiles and have provided solid cash distributions to APUC; and (3) Minimal corporate debt at APUC.

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 Industry (June 2016), 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 was initiated at the request of the rated entity.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.