DBRS Limited (DBRS Morningstar) confirmed both the Issuer Rating and the Senior Unsecured Debentures rating of Algonquin Power Co. (operating as Liberty Power; APCO or the Issuer) at BBB with Stable trends. The Issuer is wholly owned by Algonquin Power & Utilities Corp. (the Parent; rated BBB Under Review with Developing Implications by DBRS Morningstar). The rating confirmations reflect (1) the one-time impact of the February 2021 Texas winter event, (2) the immaterial impact of the Coronavirus Disease (COVID-19) pandemic on APCO’s financial and operational performance, and (3) the stable and solid contractual profile associated with its power generation portfolio, which has an approximate production weighted-average contract length of 13 years as of September 30, 2021 (approximately 81% of the output being under long-term contracts).
The Stable trends incorporate DBRS Morningstar’s expectation that the temporary weakness in the credit metrics from heavy project capital expenditure (capex)/acquisition spending in 2021 will improve by 2022 because of the increased contribution from acquired and completed power projects. The projects have either long-term power contracts or financial hedges in place with investment-grade counterparties. DBRS Morningstar's Stable trends also incorporate the Parent's recent announcement that it may sell some of its nonregulated renewable assets. DBRS Morningstar believes that the Parent will continue to support the Issuer through equity injections or reduced dividends to maintain the Issuer’s credit metrics at the BBB level.
In 2021, the Issuer completed its acquisition of the remaining 50% interest in approximately 774 megawatts of solar and wind projects. The Issuer also acquired a 51% interest in four Texas-based wind facilities; all these facilities have achieved commercial operations. The addition of these projects has benefitted APCO’s business risk profile by increasing the size of its portfolio. DBRS Morningstar notes that all these projects are under either long-term power contracts or financial hedges.
The extreme winter weather event in Texas during February 2021 led to temporary outages at APCO’s Texas-based wind facilities (Texas Event). These outages coincided with extremely high spot electricity prices at which APCO had to buy power to fulfill its obligations under financial hedges. APCO has incurred a one-time financial impact of approximately $55 million.
DBRS Morningstar adjusted APCO’s September 30, 2021 (September 2021) key credit metrics by excluding the impact of the one-time Texas Event. The temporary weakness in APCO's September 2021 credit metrics is due to high capex spending and project acquisitions in 2021. DBRS Morningstar expects APCO's key credit metrics to improve through YE2021 and YE2022 because of the incremental contribution of the acquired and completed projects in 2021.
APCO continues to expand its power generation portfolio by building new renewable energy projects, mainly solar and wind, which are all likely to either have power contracts or be long-term financial hedges lasting between 10 and 15 years. In addition, DBRS Morningstar believes the Issuer has the project development expertise to mitigate project cost overruns and delays.
DBRS Morningstar does not expect to take any positive rating action in the near to medium term. However, DBRS Morningstar may take a negative rating action if APCO's credit metrics weaken materially because of any of the following reasons: (1) cost overruns, (2) a material increase in debt leverage, or (3) planned disposition of renewable assets.
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.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Independent Power Producer Industry (May 10, 2021; https://www.dbrsmorningstar.com/research/378166) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 29, 2021; https://www.dbrsmorningstar.com/research/386615), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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@example.com.
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.
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