DBRS Morningstar Confirms Algonquin Power Co.’s Issuer Rating and Senior Unsecured Debentures at BBB, Stable Trends

DBRS Limited (DBRS Morningstar) confirmed both the Issuer Rating and the Senior Unsecured Debentures rating of Algonquin Power Co. (operating as Liberty Power Co; APCO or the Issuer) at BBB with Stable trends. The Issuer is wholly owned by Algonquin Power & Utilities Corp. (APUC; rated BBB with a Stable trend by DBRS Morningstar). The confirmed ratings reflect the following factors: (1) APCO’s improved operational size and scale over the past year with the addition of newly completed wind power project in Canada and solar power projects in the United States; (2) stable and solid contractual profile associated with its power generation portfolio, which has a weighted-average contract length of 14 years (approximately 86% of the output being under long-term contracts); (3) APCO’s solid credit metrics (on a pro forma basis); and (4) solid liquidity and financial flexibility. The Stable trends incorporate APCO’s manageable project construction risk and the expected resiliency of its credit metrics over the medium term, given APCO’s current capital expenditure (capex) program and financing strategy.

APCO experienced a significant increase in the level of debt as at September 30, 2019, compared with December 2018. The incremental debt was used to finance the construction of power projects in Canada and the United States, all of which are under long-term power contracts and will generate stable cash flow over the long term. As a result of the timing of additional debt in 2019 and the timing of the incremental cash flow from these new projects, the cash flow-to-debt ratio for 12 months ended September 2019 (LTM 2019) decreased significantly from the 2018 level. However, APCO’s pro forma 2019 cash flow-to-debt ratio is estimated to be around 20%, and at a level that supports the current ratings. The LTM 2019 debt-to-capital ratio increased from 2018 but remained within the 35% target and consistent with DBRS Morningstar’s expectation (note: this ratio was much lower in 2018 because of the timing of equity contribution).

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 of between 10 and 15 years. Capex for 2020 is expected to be in the $400 million to $450 million range. Funding is expected mostly through internal free cash flow, equity contribution from APUC, and non-controlling interest partners. APCO’s financing target is to maintain its debt-to-capital ratio below 35%. DBRS Morningstar expects APCO’s credit metrics to improve over the medium term from LTM 2019, as incremental cash flow will be contributed from new projects coming on line over this period. DBRS Morningstar believes that the Issuer also 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 by DBRS Morningstar.

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

The principal methodologies are Rating Companies in the Independent Power Producer Industry and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, 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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 Morningstar will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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