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

DBRS Limited (DBRS) confirmed the Issuer Rating and the Senior Unsecured Debentures rating of Algonquin Power Co. (operating as Liberty Power Co.; APCo or the Issuer) at BBB (low), both with Stable trends. The Issuer is wholly owned by Algonquin Power & Utilities Corp. (APUC), a holding company with interests in APCo and Liberty Utilities Co. The confirmations reflect (1) APCo’s strong contracted portfolio with a weighted-average (WA) contract length of 16 years with power purchase agreements (PPAs) backed by credit worthy counterparties, (2) diversified asset portfolio and (3) strong operational expertise. Offsetting the strengths are exposure to (1) significant capital expenditures (capex), (2) exposure to volume risk and (3) operating risk.

APCo continues to implement its capex and acquisition plan with an increase of installed capacity for 2016 and the last 12 months (LTM) ending September 30, 2017. Capex and acquisitions for 2017 are expected to be elevated in fiscal year ending December 2017 within the $540 million to $630 million range. DBRS expects capex to be lower in 2018, as the Issuer has a smaller pipeline of renewable construction projects to be completed during the year compared. Capex is expected to increase again in 2019, as renewable projects that are currently in development begin construction. DBRS expects that new renewable projects will be prudently funded through a mixture debt and equity.

APCo’s EBITDA continued to grow in 2016, and the LTM September 30, 2017, from new projects coming online. Cash flow to debt and debt-to-capital ratios are weaker than in prior periods as a result of an increased amount of leverage and only a partial year of revenues from the newly completed or acquired assets. However, these two metrics improved in Q4 2017, reflecting a significant reduction in debt through an equity injection from the parent. DBRS expects the financial metrics to improve over the medium term as new projects come online. In addition, the Issuer has a $135 million senior note maturing in 2018. DBRS does not anticipate any issue with the refinancing.

DBRS expects APCo’s business risk profile to continue to improve from a greater share of EBITDA coming from new contracted renewable assets along with an increase in the WA length of contracted PPAs. DBRS views the business risk assessment to be strong for the rating level. A positive rating action could be taken if the Issuer increases its financial metrics to the BBB range while maintaining its current business risk profile. A substantial increase in debt, operating issues or significant cost overruns on planned projects could potentially result in a negative rating action.

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

The principal methodology is Rating Companies in the Independent Power Producer Industry, which can be found on dbrs.com under Methodologies.

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.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.