TEXT-S&P on Algonquin Power & Utilities Corp

Mon Oct 22, 2012 12:59pm EDT
 
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NEW YORK Oct 22 (Reuters) - 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.

Rationale

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 acquisitions.

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.   Continued...