DBRS has announced that it:
changed the trends on Algonquin Power & Utilities Corp’s (APUC or the Company) Issuer Rating and Preferred Shares rating to Positive from Stable and confirmed the credit ratings at BBB.
KEY CREDIT RATING CONSIDERATIONS
Algonquin Power & Utilities Corp.’s (APUC or the Company) credit ratings are primarily based on (1) the credit profile of APUC’s principal subsidiary, Liberty Utilities Co. (LUCO), the guarantor of the debt issued by Liberty Utilities Finance GP1 (LUF; rated BBB (high) with a Positive trend by Morningstar DBRS). (2) the financial risk assessment, which is based on consolidated APUC forecast. The positive trends reflect our view that (1) APUC’s business risk profile should witness an improvement with the completion of its sale of relatively higher-risk renewable assets and its transition to a pure regulated player, which is partially offset by the decrease in diversification; (2) APUC’s leverage will decline, assuming the Company uses the proceeds from the sale to pay down the debt as planned; (3) APUC’s financial risk profile should benefit from the reduction in its capital expenditures (capex) and dividend payouts over the next few years, resulting in the Company’s consolidated key credit metrics remaining supportive of a BBB (high) credit rating on a sustained basis. The Company’s credit rating also incorporates the structural subordination of its debt to the debt of its subsidiaries.
On January 8, 2025, APUC announced that it completed the sale of its renewable energy business to a wholly owned subsidiary of LS Power. APUC intends to use the net proceeds of the sale to pay down existing debt and strengthen its balance sheet. Morningstar DBRS notes that with the completion of the sale coupled with the recent sale of the Company’s 42.2% ownership stake in Atlantica Sustainable Infrastructure plc in December 2024, APUC will become a pure-play regulated utilities group. APUC’s business risk profile is supported by its relatively low-risk, regulated utility subsidiaries, and its financial flexibility and liquidity at the holding company level. These strengths are partially offset by the structural subordination of the debt at APUC and operational and regulatory risks at its subsidiaries.
CREDIT RATING DRIVERS
Morningstar DBRS may consider a credit rating upgrade over the near term should the Company’s current business risk profile remain stable and its consolidated key credit metrics remain supportive of the BBB (high) credit rating category. Although it is unlikely, a negative credit rating action may occur should APUC’s business risk profile or its consolidated credit metrics weaken significantly to a level that no longer supports the current credit rating category on a sustained basis. (i.e., cash flow-to-debt below 12.5% and debt-to-capital above 65%).
EARNINGS OUTLOOK
The increase in APUC’s EBITDA in 2023 was driven by the higher revenues in its regulated businesses. However, the EBITDA for the last 12 months ended September 30, 2024, decreased significantly because only revenues from the Company’s hydro assets were accounted for in the non-regulated business. Morningstar DBRS expects APUC’s earnings to be more stable and predictable after its transition to a pure regulated player, and APUC’s 2025 consolidated EBITDA to decline compared with previous years because of the sale of the renewable energy business. However, Morningstar DBRS also expects earnings from APUC’s regulated businesses to increase as the Company continues to benefit from the implementation of higher approved rates and rate base year over year.
FINANCIAL OUTLOOK
APUC’s consolidated key credit metrics were weaker in 2023 mainly because of the higher drawn amount of its senior unsecured revolving credit facilities for the period, which were used for the Company’s capex need. However, these credit metrics improved moderately in the 12 months to September 30, 2024, and Morningstar DBRS expects APUC’s financial risk assessment to improve modestly and be supportive of its BBB (high) credit rating category, reflecting stable cash flows and reasonable leverage at its regulated business as well as its lower consolidated leverage ratio after the renewable business sale. Morningstar DBRS also believes that all capex and investment activities occurring at the Company’s subsidiaries are mostly self-financed except for major acquisitions, in which case APUC would issue subordinated debt and inject it into the subsidiaries.
CREDIT RATING RATIONALE
APUC indirectly owns a diversified portfolio of regulated distribution, and transmission utilities in 13 states in the United States. In addition, APUC owns a small, regulated operation in Canada, Bermuda and Chile. APUC’s credit ratings are supported by the regulated business with diversified assets at its subsidiaries and its solid consolidated financial profile. This is partly offset by the regulatory and operational risks, as well as the structural subordination because of the debt at its subsidiaries.
Affected issues are AQN.PR.A and AQN.PR.D
This entry was posted on Thursday, January 30th, 2025 at 8:31 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed.
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AQN: Trend Positive, Says DBRS
DBRS has announced that it:
Affected issues are AQN.PR.A and AQN.PR.D
This entry was posted on Thursday, January 30th, 2025 at 8:31 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.