DBRS Upgrades Algonquin Power & Utilities Corp.’s Issuer Rating and Preferred Shares Rating to BBB and Pfd-3, Stable Trends

DBRS Limited (DBRS) upgraded the Issuer Rating and Preferred Shares rating of Algonquin Power & Utilities Corp. (APUC or the Company) to BBB and Pdf-3 from 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 the 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, recently confirmed by DBRS; and (2) Algonquin Power Co. (APCo; operating as Liberty Power Co., recently upgraded to BBB with Stable trends, from BBB (low) by DBRS).

APUC is a holding company with a sizable and well-diversified portfolio of low risk, regulated assets (owned by LUCo) and long-term contracted, non-regulated assets (largely owned by APCo). Regulated assets account for approximately 70% of APUC’s 2018 cash flow (pro forma) while the remaining contribution of APUC’s cash flow is from non-regulated generation assets with an average remaining contract life of approximately 14 years. APUC also has an approximate 41.5% equity investment interest in Atlantica Yield plc, which owns and operates a globally diverse, long-term contracted portfolio of clean generating assets. Based on the Company’s current business strategy, DBRS expects the Company’s cash flow from regulated utilities to be in the 65% to 70% range going forward. Should the portion of the regulated cash flow decrease significantly from the current mix, it could negatively affect the current ratings.

The ratings incorporate structural subordination in that any debt issued by APUC is structurally subordinated by the debt issued by LUCo and APCo. 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 generation assets that may weaken the credit profile of these two main subsidiaries could have a negative impact on the ratings of APUC.

Currently, APUC does not issue long-term debt and has minimal debt at the corporate level. DBRS expects the Company to maintain its non-consolidated credit metrics at a reasonable level on a sustainable basis. Any material increases in non-consolidated leverage 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 U.S. 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: Rating Corporate Holding Companies and Their Subsidiaries; and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, 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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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

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