Morningstar DBRS Changes Trends on Algonquin Power & Utilities Corp. to Positive from Stable, Confirms Issuer Rating at BBB and Preferred Shares Rating at Pfd-3

DBRS Limited (Morningstar DBRS) changed the trends on Algonquin Power & Utilities Corp's (APUC or the Company) Issuer Rating and Preferred Shares rating to Positive from Stable and confirmed the credit ratings at BBB.

KEY CREDIT RATING CONSIDERATIONS
Algonquin Power & Utilities Corp.'s (APUC or the Company) credit ratings are primarily based on (1) the credit profile of APUC's principal subsidiary, Liberty Utilities Co. (LUCO), the guarantor of the debt issued by Liberty Utilities Finance GP1 (LUF; rated BBB (high) with a Positive trend by Morningstar DBRS). (2) the financial risk assessment, which is based on consolidated APUC forecast. The positive trends reflect our view that (1) APUC's business risk profile should witness an improvement with the completion of its sale of relatively higher-risk renewable assets and its transition to a pure regulated player, which is partially offset by the decrease in diversification; (2) APUC's leverage will decline, assuming the Company uses the proceeds from the sale to pay down the debt as planned; (3) APUC's financial risk profile should benefit from the reduction in its capital expenditures (capex) and dividend payouts over the next few years, resulting in the Company's consolidated key credit metrics remaining supportive of a BBB (high) credit rating on a sustained basis. The Company's credit rating also incorporates the structural subordination of its debt to the debt of its subsidiaries.

On January 8, 2025, APUC announced that it completed the sale of its renewable energy business to a wholly owned subsidiary of LS Power. APUC intends to use the net proceeds of the sale to pay down existing debt and strengthen its balance sheet. Morningstar DBRS notes that with the completion of the sale coupled with the recent sale of the Company's 42.2% ownership stake in Atlantica Sustainable Infrastructure plc in December 2024, APUC will become a pure-play regulated utilities group. APUC's business risk profile is supported by its relatively low-risk, regulated utility subsidiaries, and its financial flexibility and liquidity at the holding company level. These strengths are partially offset by the structural subordination of the debt at APUC and operational and regulatory risks at its subsidiaries.

CREDIT RATING DRIVERS
Morningstar DBRS may consider a credit rating upgrade over the near term should the Company's current business risk profile remain stable and its consolidated key credit metrics remain supportive of the BBB (high) credit rating category. Although it is unlikely, a negative credit rating action may occur should APUC's business risk profile or its consolidated credit metrics weaken significantly to a level that no longer supports the current credit rating category on a sustained basis. (i.e., cash flow-to-debt below 12.5% and debt-to-capital above 65%).

EARNINGS OUTLOOK
The increase in APUC's EBITDA in 2023 was driven by the higher revenues in its regulated businesses. However, the EBITDA for the last 12 months ended September 30, 2024, decreased significantly because only revenues from the Company's hydro assets were accounted for in the non-regulated business. Morningstar DBRS expects APUC's earnings to be more stable and predictable after its transition to a pure regulated player, and APUC's 2025 consolidated EBITDA to decline compared with previous years because of the sale of the renewable energy business. However, Morningstar DBRS also expects earnings from APUC's regulated businesses to increase as the Company continues to benefit from the implementation of higher approved rates and rate base year over year.

FINANCIAL OUTLOOK
APUC's consolidated key credit metrics were weaker in 2023 mainly because of the higher drawn amount of its senior unsecured revolving credit facilities for the period, which were used for the Company's capex need. However, these credit metrics improved moderately in the 12 months to September 30, 2024, and Morningstar DBRS expects APUC's financial risk assessment to improve modestly and be supportive of its BBB (high) credit rating category, reflecting stable cash flows and reasonable leverage at its regulated business as well as its lower consolidated leverage ratio after the renewable business sale. Morningstar DBRS also believes that all capex and investment activities occurring at the Company's subsidiaries are mostly self-financed except for major acquisitions, in which case APUC would issue subordinated debt and inject it into the subsidiaries.

CREDIT RATING RATIONALE
APUC indirectly owns a diversified portfolio of regulated distribution, and transmission utilities in 13 states in the United States. In addition, APUC owns a small, regulated operation in Canada, Bermuda and Chile. APUC's credit ratings are supported by the regulated business with diversified assets at its subsidiaries and its solid consolidated financial profile. This is partly offset by the regulatory and operational risks, as well as the structural subordination because of the debt at its subsidiaries.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
A) Weighting of BRA Factors
In the analysis of APUC, the BRA factors are considered in the order of importance contemplated in the methodology.

B) Weighting of FRA Factors
In the analysis of APUC, the FRA factors are considered in the order of importance contemplated in the methodology.

C) Weighting of the BRA and the FRA
In the analysis of APUC, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (November 25, 2024)
https://dbrs.morningstar.com/research/443429

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:

Morningstar DBRS Global Corporate Criteria (April 15, 2024)
https://dbrs.morningstar.com/research/431186

Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 info-DBRS@morningstar.com.

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS did not have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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