DBRS Morningstar Confirms Algonquin Power & Utilities Corp.’s Issuer Rating at BBB and Preferred Shares Rating at Pfd-3 With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Preferred Shares rating of Algonquin Power & Utilities Corp. (APUC or the Company) at BBB and Pfd-3, respectively. Both trends are Stable. The rating confirmations reflect low debt leverage at the corporate level, as well as stable and strong cash flow from its three principal subsidiaries: (1) Liberty Utilities Co. (LUCO), the guarantor of the debt issued by Liberty Utilities Finance GP1 (LUF; rated BBB (high) with a Stable trend by DBRS Morningstar); (2) Liberty Utilities (Canada) LP (LUCA, rated BBB with a Stable trend by DBRS Morningstar); and (3) Algonquin Power Co. (operating as Liberty Power Co. (APCO); rated BBB with a Stable trend by DBRS Morningstar). These three entities accounted for approximately 90% of cash flow in 2020 (pro forma). In addition, cash flow to APUC is also supported by dividends from its 44.2% equity investment in Atlantica Yield PLC (Atlantica), which owns and operates a globally diverse, long-term contracted portfolio of clean generating assets with an average remaining contract life of approximately 18 years as of December 31, 2019.

Going forward, DBRS Morningstar expects cash flow to APUC to be further supported by dividends from the acquisition of 94% of Empresa de Servicios Sanitarios de Los Lagos S.A. (ESSAL), a regulated water utility in Chile, in October 2020 for $162 million and the November 2020 acquisition of Ascendant Group Limited (Ascendant), which owned Bermuda Electric Light Company (BELCO), a regulated electric utility in Bermuda, for approximately $365 million. APUC financed these two acquisitions with common equity and debt issuances. Based on DBRS Morningstar’s pro forma assessment, APUC’s 2020 nonconsolidated debt-to-capital ratio in 2020 remained solidly below 15%, which was relatively low and continued to support the current ratings of APUC.

APUC’s debt is structurally subordinated to the debt issued by LUF, LUCO, APCO, and all other subsidiaries. As at September 30, 2020, APUC had the following securities outstanding: (1) $621 million in Junior Subordinated Notes (Subordinated Notes), and (2) $184 million in preferred shares. Based on DBRS Morningstar’s adjustments for the debt portion of preferred shares and Subordinated Notes, APUC’s adjusted nonconsolidated debt-to-capital ratio remained strong at 9.6% as at September 30, 2020. Following the acquisitions of BELCO and ESSAL, Subordinated Notes should remained unchanged at the end of 2020, and, as mentioned above, APUC’s pro forma nonconsolidated debt-to-capital remained low at the end of 2020. DBRS Morningstar expects APUC to maintain its nonconsolidated debt-to-capital ratio at a reasonable level (at around 20% or below) on a sustainable basis to maintain the current ratings.

APUC’s investment portfolio consists of (1) large and diversified regulated utilities in the U.S., Canada, Bermuda, and Chile; (2) renewable generation assets mostly under long-term contracts (approximately 13 years) in U.S. and Canada owned by APCO; and (3) a 44.2% interest in Atlantica. Regulated assets account for approximately 70% of APUC’s 2021 cash flow (pro forma) while the remaining contribution is from APCO and Atlantica. Based on the Company’s current business strategy, DBRS Morningstar expects the Company’s cash flow contribution from regulated utilities to be approximately 70% going forward. DBRS Morningstar could consider a positive rating action if the credit quality of APUC’s subsidiaries improve materially while the nonconsolidated debt-to-capital remains around 20%. Conversely, should the nonconsolidated debt-to-capital ratio increase significantly above 20% or the portion of the regulated cash flow decrease materially from the current mixed level, DBRS Morningstar could take a negative rating action.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
The principal methodologies are Rating Companies in the Independent Power Producer Industry (May 19, 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

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

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