DBRS Confirms Algonquin Power Co. at BBB (low), Stable

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debentures rating of Algonquin Power Co. (APCo or the Company) at BBB (low), both with Stable trends. The ratings continue to reflect the Company’s high level of contracted output and diversified asset portfolio, which reduces the volatility of its earnings and cash flow. However, the Company’s ratings remain constrained by its significant project development pipeline, which has caused its cash flow-to-total debt and EBITDA interest coverage metrics to remain below its current rating category. As the Company completes its development and generates returns on its projects, credit metrics are expected to improve. As a result, positive rating action could occur if APCo’s cash flow-to-total debt and EBITDA interest coverage metrics reach minimums of 15% and 4.0x, respectively, on a sustained basis while maintaining its target leverage of below 45%. The ratings also reflect the Company’s exposure to volume risk that is inherent for wind and run-of-the-river renewable power generation companies.

APCo’s business risk profile is improving as its focuses on contracted output for growth. The average remaining life of the Company’s long-term power purchase agreements (PPAs) increased to 14 years, compared to 13 years in 2013. Moreover, since the Company’s existing portfolio of projects under development all have 20-year to 25-year PPAs, the average remaining contract life is expected to further increase to approximately 17 years by 2016. In addition, the Company’s intent to focus on contracted output has been demonstrated by the sale of ten largely merchant hydro facilities in New England and New York in 2013, as well as the sale of its merchant Energy From Waste and Brampton Cogeneration facilities in 2014.

APCo’s financial risk profile remains reasonable for its current rating category, as the Company is expected to continue to finance its project development pipeline with a reasonable mix of debt and equity. In addition, DBRS expects the Company to continue its current financing strategy, such that its debt-to-capital ratio remains below 45%. On the other hand, DBRS notes that the Company’s EBITDA interest coverage and cash flow-to-total debt ratios declined in 2012, as these metrics only reflected partial-year earnings contributions from the U.S. wind project acquisitions. During 2013, full-year contributions from the U.S. wind assets have improved these two metrics and DBRS expects these metrics to continue improving as more projects from APCo’s development pipeline begin commercial operation.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Non-Regulated Electric Generation Industry (January 2014), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.