DBRS Upgrades Algonquin Power Co.’s Issuer Rating and Senior Unsecured Debentures to BBB, Stable Trends

DBRS Limited (DBRS) upgraded the Issuer Rating and the Senior Unsecured Debentures rating of Algonquin Power Co. (APCo or the Issuer) (operating as Liberty Power Co.) to BBB from BBB (low), both with Stable trends. The Issuer is wholly owned by Algonquin Power & Utilities Corp. (APUC). The upgrades reflect the following factors: (1) The Company has increased its operational size and scale over the years and has maintained a solid business risk profile with a growing power generation portfolio, which has a weighted-average contract length of 14 years (approximately 86% of the output being under long-term hedges and contracts); (2) APCo has improved its credit metrics to support the BBB ratings; and (3) the elimination of the uncertainty at the parent level following the acquisition of The Empire District Electric Company (Empire) by Liberty Utilities Co in 2017. The Stable trends incorporate the resiliency in credit metrics over the medium term, given the Company’s current capital expenditure program and financing strategy.

APCo’s credit metrics improved notably from 2017 levels and support the BBB rating, reflecting solid performance from the existing generating portfolio and incremental cash flow from newly completed power projects in 2018 (Amherst Island Wind and Great Bay Solar). The cash flow-to-debt level (pro forma for 2018), although modestly volatile due largely to the timing of project completion and weather conditions, moved in the BBB range and is expected to improve over the medium term, as new projects are becoming operational. APCo’s ability to finance its future projects has improved significantly over the past few years, reflecting a much larger size and operational scale and its parent’s stronger financial flexibility.

APCo continues to expand its generation portfolio by building new projects, which are all expected to have either power contracts or long-term financial hedges with a duration between 10 and 15 years. Capital expenditures for 2019 are expected to be in the $350 million to $400 million range. Financing is expected mostly through equity contribution from APUC and non-controlling interest partners, while debt financing is expected to be modest (debt-to-capital is expected to remain below 35%). Credit metrics in 2019 and over the medium term are expected to either remain stable or improve further from the 2018 level, as incremental cash flow will be contributed from new projects coming online over this period. DBRS believes that the Issuer has project development expertise to mitigate project cost overruns and delays. However, should current credit metrics weaken materially due to cost overruns or significantly higher debt leverage or operational disruptions, it could result in a negative rating action.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is Rating Companies in the Independent Power Producer Industry, which can be found on dbrs.com under Methodologies & Criteria.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada