DBRS: AQN Emerges Unscathed from Review-Developing

Way back in October, 2021, DBRS announced:

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.

They have now announced:

DBRS Limited (DBRS Morningstar) removed the Issuer Rating and Preferred Shares rating of Algonquin Power & Utilities Corp. (APUC or the Company) from Under Review with Developing Implications and confirmed the ratings at BBB and Pfd-3, respectively. Both trends are Stable. The rating confirmations reflect DBRS Morningstar’s expectations that the proposed acquisition of Kentucky Power Company and AEP Kentucky Transmission Company, Inc. from American Electric Power (AEP) (collectively, KPC Acquisition) will close in the first half of 2023, and the financing of the KPC Acquisition will be implemented as currently planned. Following APUC’s January 2023 investor call and the latest information provided by the Company, DBRS Morningstar believes that even if the KPC Acquisition does not close, DBRS Morningstar does not expect a materially negative impact on APUC’s current credit profile.

DBRS Morningstar estimates EBITDA contribution from the low-risk regulated utility group accounted for approximately 70% of APUC’s consolidated 2022 EBITDA and the remainder from the power renewable generation group. Following the KPC Acquisition, DBRS Morningstar expects EBITDA contribution from the regulated utility group to increase to between 75% and 80%, significantly strengthening the business risk profile for APUC. Based on APUC’s current financing plan over the next few years, including the financing of the KPC Acquisition, DBRS Morningstar expects APUC to maintain solid consolidated metrics, as well as its nonconsolidated debt-to-capital ratio at a reasonable level (at around 20%) on a sustainable basis. DBRS Morningstar, however, could take a negative rating action if (1) APUC’s consolidated metrics weaken materially from the current level, or (2) its nonconsolidated debt-to-capital ratio increases significantly from the expected levels on a sustained basis, or (3) there is a significant increase in consolidated business risk profile.

Affected issues are AQN.PR.A and AQN.PR.D.

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