DBRS Comments on Algonquin Power & Utilities Corp.’s Agreement with Abengoa S.A. to form an International Project Development Joint Venture and to Purchase an Interest in Atlantica Yield Plc

DBRS Limited (DBRS) notes Algonquin Power & Utilities Corp.’s (APUC or the Company; rated BBB (low) with a Stable trend by DBRS) announcement that it has entered into an agreement with Spanish-based Abengoa S.A. (ABG) to form a 50:50 international project development joint venture (AAGES) to identify, develop and construct clean energy and water infrastructure assets globally.

Concurrently with the creation of AAGES, APUC has entered into a definitive agreement to acquire from ABG a 25% equity interest in Atlantica Yield plc (Atlantica) for approximately USD 608 million (the Transaction). The purchase price represents USD 24.25 per ordinary share of Atlantica, an 8.3% premium to the closing price on November 1, 2017. ABG currently owns a 41% interest in Atlantica. The acquisition is expected to close in Q1 2018.

Atlantica owns and operates a geographically diverse, long-term contracted portfolio of 21 facilities, representing 1.7 gigawatts of primarily clean power-generating assets, 1,770 kilometres of electric transmission lines and two desalination plants. The assets are located in North America, South America, Europe and Africa. All generation assets are under long-term contracts with an average remaining life of approximately 21 years. Atlantica’s 2016 adjusted EBITDA was approximately USD 772.1 million and its H1 2017 adjusted EBITDA was approximately USD 392.9 million.

APUC considers the Transaction to be a strategic partnership with ABG, providing it with an opportunity to expand outside Canada and the United States and participate in project development globally.

FINANCING
Concurrently with the USD 608 million Transaction announcement, APUC also announced a bought deal of $500 million common equity offering of APUC shares. The remaining portion is expected to be financed through the issuance of debt or the combination of debt/preferred shares.

IMPACT ON BUSINESS RISK ASSESSMENT
DBRS is of the view that the Transaction will have a slightly negative impact on the business risk profile. This impact reflects the fact that the cash flow and EBITDA contributions from the non-regulated generation assets will modestly increase following the Transaction. Currently, regulated assets account for 78% of APUC’s consolidated EBITDA (a significant improvement following the acquisition of The Empire District Electric Company in January 2017), while non-regulated assets account for the remaining 22%. Following the Transaction, DBRS estimates that the EBITDA contribution from non-regulated generation assets will increase to approximately 27% while the EBITDA contribution from regulated assets will account for approximately 73%.

However, DBRS acknowledges that substantially all of Atlantica’s generating assets are clean energy and are under long-term contracts (approximately 21 years), which are expected to contribute to long-term cash flow stability for APUC’s investment. In addition, all contracts are with a diverse base of counterparties, significantly reducing counterparty risk. With the Transaction, APUC is expected to benefit from technological and geographical diversification, with the opportunity to further expand internationally.

IMPACT ON FINANCIAL RISK ASSESSMENT
In DBRS’s view, from a consolidated perspective, the Transaction will have a minimal impact on APUC’s consolidated credit metrics. Assuming $500 million of the Transaction is financed with common equity and the remaining portion (approximately $280 million) is financed with debt, the incremental debt would be modest, accounting for approximately 6% of APUC’s total consolidated debt at June 30, 2017. As result, the Transaction will likely have an insignificant impact on APUC’s consolidated credit metrics. DBRS notes that based on H1 2017, APUC’s consolidated credit metrics remained supportive of the current rating.

From a non-consolidated perspective, DBRS expects the Transaction to have a modest impact on APUC’s non-consolidated metrics, as APUC does not currently have any long-term debt outstanding. As of June 30, 2017, the Company had $214 million of preferred shares and $175.2 million on its corporate term credit facility outstanding. Assuming APUC will be issuing approximately $280 million in debt at the parent level to finance the Transaction, DBRS expects the non-consolidated cash flow-to-non-consolidated debt ratio to remain strong and above the 40% range (DBRS estimates), reflecting the good dividends received from its existing operating subsidiaries and the acquired assets.

In conclusion, DBRS does not expect the Transaction to have an impact on APUC’s current ratings.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 2017), Rating Companies in the Independent Power Producer Industry (May 2017), DBRS Criteria: Rating Holding Companies and Their Subsidiaries (December 2016), DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2016) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on dbrs.com under Methodologies.

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