DBRS Morningstar Maintains Algonquin Power & Utilities Corp. Under Review with Developing Implications

DBRS Limited (DBRS Morningstar) maintained the Under Review with Developing Implications status on the Issuer Rating and Preferred Shares rating of Algonquin Power & Utilities Corp. (APUC). On October 28, 2021, DBRS Morningstar placed the ratings Under Review with Developing Implications following APUC’s announcement that its wholly owned subsidiary, Liberty Utilities Co. (LUCO), had reached an agreement with American Electric Power (AEP) to acquire Kentucky Power Company (Kentucky Power) and AEP Kentucky Transmission Company, Inc. (Kentucky TransCo) for a total purchase price of $2.846 billion, including the assumption of approximately $1.221 billion in debt (the Acquisition). Kentucky Power is a state rate-regulated electricity generation, distribution, and transmission utility operating within the Commonwealth of Kentucky, serving approximately 228,000 active customer connections and operating under a cost-of-service framework. Kentucky TransCo is an electricity transmission business operating in the Kentucky portion of the transmission infrastructure that is part of the Pennsylvania–New Jersey–Maryland regional transmission organization. The Acquisition is expected to close mid-2022, subject to regulatory approvals. Please see DBRS Morningstar’s press release dated October 28, 2021, for more details.

The ratings of APUC are mainly based on (1) the credit quality of its Regulated Services Group (RSG), accounting for approximately 70% of consolidated EBITDA; (2) the credit quality of the Renewable Energy Group, accounting for approximately 30% of consolidated EBITDA; and (3) leverage at APUC’s holding company level (APUC Holdco).

The RSG consists of three main regulated utilities:
-- LUCO, the guarantor of the debt issued by Liberty Utilities Finance GP1 (LUF; rated BBB (high) with a Stable trend by DBRS Morningstar), accounting for approximately 80% of the RSG’s revenues;
-- Liberty Group Limited, which owns Bermuda Electric Light Company, a regulated utility based in Bermuda, accounting for approximately 12% of the RSG’s revenues; and
-- Liberty Utilities (Canada) LP (rated BBB with a Stable trend by DBRS Morningstar), accounting for approximately 5% of the RSG’s revenues.

DBRS Morningstar expects the Acquisition to strengthen the business risk profile of the RSG. With the addition of Kentucky Power and Kentucky TransCo, the size of jurisdictional diversification will improve. APUC’s total regulated rate base is projected to increase significantly to approximately $9.0 billion from approximately $7.0 billion at as September 30, 2021.

In addition, APUC benefits from stable cash flow from Algonquin Power Co. (APCo; rated BBB with a Stable trend by DBRS Morningstar). APCo benefits from its long-term power contracts with an average remaining term of 13 years as at September 30, 2021, with solid credit counterparties and geographical asset diversification.

With respect to financing the Acquisition, APUC Holdco issued a bought deal common shares in the amount of CAD 800 million that closed in November 2021. Additionally, in January 2022, APUC Holdco issued $750 million in subordinated notes due in 2082 and CAD 400 million in subordinated notes, also due in 2082. APUC also may sell non-regulated renewable assets in 2022. DBRS Morningstar believes that APUC has sufficiently secured the financing needs for the Acquisition with a reasonable equity/debt balance.

The ratings of APUC also reflect the fact that the debt issued by APUC Holdco is structurally subordinated to the debt issued by LUF, LUCO, APCO, and all other subsidiaries, including the debt assumption related to the Acquisition.

DBRS Morningstar expects to resolve the Under Review with Developing Implications status once the Acquisition closes. DBRS Morningstar will consider the potential improvement of APUC’s business risk profile with the addition of Kentucky Power and Kentucky TransCo. Kentucky has a reasonable cost-of-service regulatory framework with acceleration of capital recovery and a reasonably regulated return on equity. With the addition of the Acquisition, APUC’s capital expenditure planning flexibility should improve. See DBRS Morningstar’s press release dated October 28, 2021, for more details.

DBRS Morningstar will also consider APUC Holdco’s adjusted nonconsolidated debt-to-capital ratio (as calculated by DBRS Morningstar) when the Acquisition closes. 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 its current ratings. If APUC’s adjusted nonconsolidated debt-to-capital rises significantly above 20%, 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:
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 (September 24, 2021; https://www.dbrsmorningstar.com/research/384922); Rating Companies in the Independent Power Producer Industry (May 10, 2021; https://www.dbrsmorningstar.com/research/378166); DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021; https://www.dbrsmorningstar.com/research/386355); and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 29, 2021; https://www.dbrsmorningstar.com/research/386615). 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 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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