DBRS Morningstar Confirms Algonquin Power & Utilities Corp.’s Issuer Rating at BBB and Preferred Shares at Pfd-3, Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Preferred Shares rating of Algonquin Power & Utilities Corp. (APUC or the Company) at BBB and Pdf-3, respectively. Both trends are Stable. The rating confirmations reflect stable and strong cash flow from its two principal subsidiaries: (1) Liberty Utilities Co. (LUCO), the guarantor of the debt issued by Liberty Utilities Finance GP1 (LUF; rated BBB (high) with a Stable trend by DBRS Morningstar); and (2) Algonquin Power Co. (operating as Liberty Power Co. (APCO); rated BBB with a Stable trend by DBRS Morningstar).

The ratings of APUC is based on the ratings of LUF and APCO. As such, a change in the rating of LUF or APCO may result in a change in the ratings of APUC. APUC’s rating is also based on reasonable non-consolidated debt at the corporate level. APUC’s debt is structurally subordinated to the debt issued by LUF, LUCO, and APCO. As at September 30, 2019, APUC had the following securities outstanding: (1) $262.6 million drawing under its $500 million senior revolving credit facility, (2) $621 million in Junior Subordinated Notes (Subordinated Notes), and (3) $184 million in preferred shares outstanding. Based on DBRS Morningstar’s adjustments for the debt portion of preferred shares and Subordinated Notes, APUC’s adjusted non-consolidated debt-to-capital ratio increased significantly from the 2018 level but remained reasonable at 18%. The drawing under the credit facility was to temporarily finance the acquisition of Enbridge Gas New Brunswick, and APUC expects to be repaid in Q1 2020. DBRS Morningstar expects APUC to maintain its non-consolidated debt-to-capital ratio at a reasonable level (at around 20% or below) on a sustainable basis to maintain the current ratings.

APUC is a holding company with a sizable and well-diversified portfolio of low-risk, regulated assets (owned by LUCO) and long-term contracted, non-regulated assets (largely owned by APCO). Regulated assets account for approximately 65% to 70% of APUC’s 2019 cash flow (pro forma) while the remaining contribution of APUC’s cash flow is from non-regulated generation assets with an average remaining contract life of 14 years. APUC also has an approximately 44.2% equity investment interest in Atlantica Yield PLC, which owns and operates a globally diverse, long-term contracted portfolio of clean generating assets with an average remaining contract life of approximately 18 years as of December 31, 2019. Based on the Company’s current business strategy, DBRS Morningstar expects the Company’s cash flow contribution from regulated utilities to be in the 65% to 70% range going forward. Should the portion of the regulated cash flow decrease significantly from the current mixed level, DBRS Morningstar could take a negative rating action.

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; Rating Companies in the Independent Power Producer Industry; DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers; and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, which can be found on dbrs.com under Methodologies & Criteria.

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 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.

DBRS Morningstar will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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