DBRS Limited (DBRS Morningstar) removed the Issuer Rating and Preferred Shares rating of Algonquin Power & Utilities Corp. (APUC or the Company) from Under Review with Developing Implications and confirmed the ratings at BBB and Pfd-3, respectively. Both trends are Stable. The rating confirmations reflect DBRS Morningstar's expectations that the proposed acquisition of Kentucky Power Company and AEP Kentucky Transmission Company, Inc. from American Electric Power (AEP) (collectively, KPC Acquisition) will close in the first half of 2023, and the financing of the KPC Acquisition will be implemented as currently planned. Following APUC’s January 2023 investor call and the latest information provided by the Company, DBRS Morningstar believes that even if the KPC Acquisition does not close, DBRS Morningstar does not expect a materially negative impact on APUC's current credit profile.
The KPC Acquisition, conducted by Liberty Utilities Co. (LUCO), 100% owned by APUC, if completed, will improve APUC’s business risk profile through increasing the size, business, and jurisdiction diversification of its regulated utilities. The closing of the KPC Acquisition is subject to the Federal Energy Regulatory Commission (FERC)’s approval. DBRS Morningstar does not expect any material adverse conditions to be imposed by the FERC that would negatively weaken LUCO’s current business risk profile. The financing for the acquisition has occurred through previous securities offerings, the proceeds from which were used to repay credit facility debt in the short term. Accordingly, credit facility draws at closing are expected to provide the cash purchase price. Based on the Company’s capital recycling program, DBRS Morningstar believes that the proposed sale of approximately $1.0 billion of assets would significantly improve its liquidity.
The ratings of APUC are largely based on (1) the credit quality of LUCO, the guarantor of the debt issued by Liberty Utilities Finance GP1 (LUF; rated BBB (high) with a Stable trend by DBRS Morningstar); (2) Algonquin Power Co. (operating as Liberty Power (APCO); rated BBB with a Stable trend by DBRS Morningstar). These two entities are estimated to account for approximately 90% of APUC's consolidated cash flow in 2023 and in the medium term; (3) nonconsolidated debt at APUC level; and (4) structural subordination, as APUC’s debt is structurally subordinated to the debt issued by LUF, LUCO, APCO, and all other subsidiaries.
DBRS Morningstar estimates EBITDA contribution from the low-risk regulated utility group accounted for approximately 70% of APUC's consolidated 2022 EBITDA and the remainder from the power renewable generation group. Following the KPC Acquisition, DBRS Morningstar expects EBITDA contribution from the regulated utility group to increase to between 75% and 80%, significantly strengthening the business risk profile for APUC. Based on APUC's current financing plan over the next few years, including the financing of the KPC Acquisition, DBRS Morningstar expects APUC to maintain solid consolidated metrics, as well as its nonconsolidated debt-to-capital ratio at a reasonable level (at around 20%) on a sustainable basis. DBRS Morningstar, however, could take a negative rating action if (1) APUC's consolidated metrics weaken materially from the current level, or (2) its nonconsolidated debt-to-capital ratio increases significantly from the expected levels on a sustained basis, or (3) there is a significant increase in consolidated business risk profile.
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
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/396929/ (May 17, 2022).
DBRS Morningstar notes that this press release was amended on February 21, 2023, to include the Stable trend in the rating table only.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies applicable to the rating are Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (https://www.dbrsmorningstar.com/research/402616; September 13, 2022); Rating Companies in the Independent Power Producer Industry (https://www.dbrsmorningstar.com/research/396971; May 18, 2022); DBRS Morningstar Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (https://www.dbrsmorningstar.com/research/404334; October 26, 2022); and DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (https://www.dbrsmorningstar.com/research/404248; October 20, 2022).
The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions
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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.
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