NEW YORK Oct 22 Standard & Poor's Ratings
Services assigned its 'BBB-' long-term corporate credit rating
to Ontario-based holding company Algonquin Power & Utilities
Corp. (APUC). The outlook is positive.
The rating on APUC reflects Standard & Poor's opinion on the
consolidated credit profiles of its two subsidiaries,
Ontario-based independent power generator Algonquin Power Co.
(APCo; BBB-/Positive/--) and U.S.-based regulated utility
Liberty Utilities Co. (BBB-/Positive/--). The rating on APUC
reflects what we view as a strong consolidated business risk
profile and significant consolidated financial risk profile. In
our view, the strong consolidated business risk profile reflects
stable regulated cash flows from Liberty and somewhat less
stable cash flows from APCo's largely contracted electricity
generation asset portfolio due to volumetric risk. We believe
APCo's exposure to asset concentration risk mutes the benefits
of portfolio diversity.
APCo and Liberty are two wholly owned subsidiaries of APUC.
APCo owns a diversified portfolio of more than 460 megawatts
(MW), mainly of contracted generating plants (hydro, wind, and
thermal) in Canada and Liberty owns water, electrical and gas
utilities in the U.S. As of June 30, 2012, APUC's consolidated
reported debt outstanding (including its convertible debentures)
was about C$460 million. Convertible debt of C$62 million is the
only debt at the holding company level and the remainder resides
at APCo and Liberty.
We view rising stable, regulated cash flows as positive to
APUC's consolidated business risk profile. Upon completing its
proposed acquisitions and development projects, we expect EBITDA
contributions from Liberty will increase to 40%-50% of APUC's
consolidated EBITDA in the medium term from about 18% at Dec.
31, 2010. Consistent with our expectations, EBITDA contributions
from Liberty rose to about 35% of APUC's consolidated EBITDA at
Dec. 31, 2011. However, we also view the company's growth
appetite as aggressive, exposing it to execution and integration
risk. We understand APCo plans to double its generation capacity
through acquisitions and development projects (in wind and solar
generation). In addition, Liberty plans to increase its
businesses rapidly, tripling its expected EBITDA mainly through
APCo's earnings are largely insulated from electricity
demand and price fluctuations in the markets where its
facilities are located, but are exposed to hydrology and wind
resource volatility. We estimate long-term power purchasing
agreements (PPA) with strong counterparties support 85%-90% of
APCo's EBITDA. The average remaining PPA life is 12 years and
most have automatic inflation escalators linked to Canadian CPI.
We believe production volatility from APCo's portfolio could
increase somewhat, given aggressive plans to build wind
facilities. As of Dec. 31, 2011, hydro generation (about 47% of
the total), wind (about 30%), and thermal generation (about 23%)
supported APCo's EBITDA. Upon completion of its announced wind
and solar projects, we forecast wind generation will generate
50%-60% of APCo's EBITDA, with the balance from hydro (about
30%), thermal, and solar generation. Given limited historical
wind data, we view cash flows from wind generation assets as
somewhat less predictable than that of hydro generation. We view
cash flows from solar and thermal sources as more predictable
than those of wind.
APCo's cash flows are exposed to asset concentration, which
we believe limits the benefits of portfolio diversification. We
estimate that its 10 largest assets generate 80%-90% of EBITDA.
We believe its hydro assets' geographic diversity is limited. In
addition, the complex and dispersed nature of the company's
electricity generation portfolio requires understanding of
multiple technologies and markets, which in our view limits
We consider Liberty's regulated utility business risk
profile to be excellent, with a favorable competitive position,
supportive regulation, and largely stable service territories.
The company's regulatory framework includes what we consider
reasonable allowed returns on equity on its rate base.
Consistent with our expectations, it recently acquired natural
gas distribution assets in Missouri, Illinois, and Iowa; and New
Hampshire-based electricity and natural gas distribution
utilities. Accordingly, we estimate about 25% of Liberty's cash
flow will come from water and wastewater utilities, 30% from
electric utilities, and the remaining 45% from gas utilities. We
expect additional regulatory and geographic diversity once the
company completes the acquisitions of natural gas and water
utilities in Georgia and Arkansas in 2013. Nevertheless, we
think variations in usage volumes and cash flows are likely.
Liberty will need to manage its regulatory risk effectively to
achieve its constructive regulatory goals and earn its allowed
rates of return.
In our view, APUC has a significant financial risk profile.
We estimate that the company will have adjusted funds from
operations (AFFO)-to-total debt of 15%-17% in 2013 and 2014,
assuming it executes its announced acquisitions and power
generation development projects. On Dec. 31, 2011, its
AFFO-to-total debt was 15.7%, and adjusted debt-to-EBITDA was
4.6x. We treat the company's convertible debentures as 100%
We believe APUC has adequate liquidity to cover its
near-term needs. Standard & Poor's assessment incorporates the
following expectations and assumptions:
-- The company's consolidated liquidity sources, including
FFO and credit facility availability, will likely exceed its
uses 1.2x or more in the next 12 months.
-- We believe that net sources will remain positive even in
the event of an unforeseen earnings decline of 15%.
-- APUC's liquidity sources include our estimated C$145
million of annual FFO, APCo's committed credit facility (C$72
million out of C$155 million was available June 30, 2012), and
Liberty's committed credit facility (C$8 million of C$41 million
was available June 30).
-- APUC's liquidity uses include our estimated dividend
payment of about C$85 million, immaterial maturing debt, and
about C$50 million of maintenance and core capital expenditures.
-- The company has what we consider good relationships with
its banks and good standing in the debt market.
The positive outlook reflects our assessment of an
increasing proportion of relatively stable cash flows that
Liberty's regulated utilities support. The outlook also reflects
our expectations that APUC will achieve sustained AFFO-to-total
debt of 15%-20%, with Liberty's regulated cash flow supporting
40%-50% of its consolidated cash flows by 2014. We could raise
the rating a notch upon the company's meeting these
expectations. Conversely, if it does not meet our expectations
or its sustained AFFO-to-debt falls below 15% during our
two-year outlook horizon, we would revise the outlook to stable.
Related Criteria And Research
-- Algonquin Power Co., Sept. 20, 2012
-- Methodology: Business Risk/Financial Risk Matrix
Expanded, Sept. 18, 2012
-- Research Update: Liberty Utilities Co. Assigned 'BBB-'
Corporate Credit Rating; Outlook Is Positive, July 24, 2012
-- Methodology And Assumptions: Liquidity Descriptors For
Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Business And Financial Risks In The
Investor-Owned Utilities Industry, Nov. 26, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April
Algonquin Power & Utilities Corp.
Corporate credit rating BBB-/Positive/--