DBRS Limited (DBRS Morningstar) placed all the ratings of Algonquin Power & Utilities Corp. (APUC or the Company) Under Review with Developing Implications. On October 26, 2021, APUC announced an agreement with American Electric Power (AEP) to acquire Kentucky Power Company (Kentucky Power) and AEP Kentucky Transmission Company, Inc. (Kentucky TransCo) for a total purchase price of USD 2.846 billion, including the assumption of approximately USD 1.221 billion in debt (the Acquisition). Kentucky Power is a state rate-regulated electricity generation, distribution, and transmission utility operating within the Commonwealth of Kentucky, serving approximately 228,000 active customer connections and operating under a cost-of-service framework. Kentucky TransCo is an electricity transmission business operating in the Kentucky portion of the transmission infrastructure that is part of the Pennsylvania–New Jersey–Maryland regional transmission organization. The Acquisition is expected to close mid-2022, subject to regulatory approvals.
DBRS Morningstar views this acquisition as a positive development from a business risk perspective because of the following factors: (1) a significant increase in APUC’s low-risk regulated assets with a total consolidated rate base expected to increase to approximately USD 9 billion from USD 6.8 billion, which would reflect a 32% increase upon closing. After the completion of the Acquisition, DBRS Morningstar expects APUC to generate over 75% (currently 66%) of its consolidated cash flow from stable regulated operations and the remainder from long-term contracted nonregulated generation; (2) an expected improvement in jurisdictional diversification with the addition of Kentucky and the U.S. Federal Energy Regulatory Commission. Kentucky has a reasonable cost-of-service regulatory framework with acceleration of capital recovery and a reasonably regulated return on equity; (3) an expected improvement of capital expenditure planning, which should add more flexibility with the Acquisition.
Notwithstanding these potentially positive impacts, the Under Review with Developing Implications rating action reflects some uncertainties associated with APUC’s financing plan. To finance the Acquisition, APUC intends to issue up to USD 750 million common equity through a bought deal with the banks. APUC expects to finance the remainder in the amount of approximately USD 875 million with a combination of hybrid debt financing, equity units, and proceeds from the sale of the non-regulated assets/investments. DBRS Morningstar has reviewed APUC’s financing plan and is of the view that its current plan (if the hybrid debt is issued out of APUC) could increase APUC’s nonconsolidated leverage. The magnitude of the increase will depend on the amount of the hybrid debt to be issued. DBRS Morningstar notes that if APUC’s nonconsolidated debt-to-capital (as calculated by DBRS Morningstar) rises significantly above 20% following the issuance of the hybrid debt, then a negative rating action could be taken.
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/373262.
The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 24, 2021; https://www.dbrsmorningstar.com/research/384922); Rating Companies in the Independent Power Producer Industry (May 10, 2021; https://www.dbrsmorningstar.com/research/378166); DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021; https://www.dbrsmorningstar.com/research/386355); and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020; https://www.dbrsmorningstar.com/research/369167); Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262); which can be found on dbrsmorningstar.com under Methodologies & Criteria.
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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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