DBRS Confirms Ratings of Algonquin Power & Utilities Corp., Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Preferred Shares rating of Algonquin Power & Utilities Corp. (APUC or the Company) at BBB (low) and Pfd-3 (low), respectively. Both trends are Stable. The ratings reflect a significant improvement of APUC’s business risk profile following the acquisition of Empire District Electric Company (Empire) and a successful integration of Empire into the Company’s regulated utility operations. The ratings also reflect stable and strong cash flow from its two principal subsidiaries (1) Liberty Utilities Co. (LUCO) – the guarantor of the debt issued by Liberty Utilities Finance GP1 (rated BBB (high) with Stable trends by DBRS) and (2) Algonquin Power (APCO; rated BBB (low) with Stable trends by DBRS). The ratings are further supported by the fact that there is either no or minimal debt issued by APUC at the holding company level.

APUC is a holding company with a large and well-diversified portfolio of regulated assets (owned by LUCO) and non-regulated assets (largely owned APCO) with Stable trends by DBRS). Following the acquisition of Empire in January 2017, DBRS estimates that regulated assets account for approximately 74% of APUC’s 2017 Adjusted EBITDA (approximately 58% in 2016). The remaining contribution of APUC’s Adjusted EBITDA is from non-regulated generation assets. The non-regulated generation cash flow is supported by long-term contracts with an average remaining life of 16 years. Long-term contracts significantly reduce the risk of power price volatility for non-regulated assets. As a result of the Empire acquisition, the business risk profile of the portfolio of assets owned by APUC increased significantly since a larger portion of the assets are regulated utilities supported by reasonable regulatory frameworks in 12 jurisdictions. In November 2017, APUC agreed to acquire a 25% equity interest in Atlantica Yield PLC (Atlantica), which owns and operates a globally diverse, long-term contracted portfolio of approximately 1.7 gigawatts of clean generating assets for approximately USD 608 million (see DBRS Press Release dated November 3, 2017, for details). The Atlantica acquisition is expected to close in Q1 2018 and will be mostly funded through 2017 common equity issuance ($576 million was issued). DBRS does not expect a material change in APUC’s credit profile with the Atlantica acquisition. DBRS expects APUC to maintain the mix of regulated and non-regulated assets in the 60% to 70% range going forward.

The ratings incorporate structural subordination as the Company, being a pure holding company, does not directly own operating assets. As a result, any debt issued by APUC is structurally subordinated by the debt issued by LUCO and LPCO. The ratings also incorporate the regulatory risk at its regulated subsidiaries and volume and re-contracting risk at its non-regulated assets. Any adverse changes at either the regulated subsidiaries or non-regulated assets that may weaken the credit profile of these two main subsidiaries could have a negative impact on the ratings of the Company.

Currently, APUC does not issue long-term debt and has a minimal debt at the corporate level. DBRS expects APUC to maintain its non-consolidated credit metrics at a reasonable level on a sustainable basis. Any material increase in non-consolidated leverage beyond DBRS’s 20% threshold and/or a significant weakening of APUC’s cash flow-to-non-consolidated debt ratio could result in a negative rating action.

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, Rating Companies in the Independent Power Producer Industry, DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers and DBRS Criteria: Rating Holding Companies and Their Subsidiaries, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.