Fitch Affirms Ratings on APUC and Subs; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-New York-22 October 2020: Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Algonquin Power & Utilities Corp. (APUC), its regulated utility subsidiary, Liberty Utilities Co. (LUCo), and its unregulated power generation subsidiary, Algonquin Power Co. (APCo), at 'BBB'. The Rating Outlook on each entity's Long-Term IDR is Stable. Fitch has affirmed the Short-Term IDR of APUC, LUCo and APCo at 'F2'. Based on Fitch's assessment of the companies' financial flexibility, it has assigned the higher (F2) of the two Short-Term IDR options for the rating profile of APUC, LUCo and APCo. Fitch views the companies' liquidity to be adequate to cover near-term cash outflows. Each entity has its own revolving credit facility (RCF) and manageable near-term debt maturities. Any material weakening in financial flexibility, financial structure or operating environment conditions could lead to the assignment of the lower (F3) of the two Short-Term IDR options for the rating profile of APUC, LUCo and APCo. In addition, Fitch affirmed the debt security ratings for APUC, LUCo, Liberty Utilities Finance GP1 (Liberty Finance) and APCo. Liberty Finance is a financing vehicle for LUCo. The notes and all other outstanding debt of Liberty Finance are fully and unconditionally guaranteed by LUCo and rank pari passu to LUCo's senior unsecured debt. A full list of rating actions is shown at the end of this release. Key Rating Drivers APUC Ownership of LUCo and APCo: Fitch's ratings on APUC primarily reflect the company's ownership of LUCo, a regulated utility company that accounts for 75%-80% of consolidated EBITDA. LUCo's diversified, low-risk integrated electric, natural gas, water and wastewater distribution operations support a strong business risk profile. APUC's ratings also reflect the company's ownership of APCo, an unregulated generation company with a relatively good business risk profile and robust cash flows. Strong Organic Growth Opportunities: APUC has significant growth opportunities over the next several years at LUCo and APCo. Management estimates that organic growth opportunities alone could result in greater than 10% CAGR for consolidated EBITDA. Supportive Consolidated Financial Metrics: APUC's financial profile is supported by stable and predictable earnings from LUCo's regulated utility operations and strong cash flows from APCo's power generation business. Fitch forecasts APUC's FFO leverage to average 4.9x-5.3x, and total debt with equity credit/operating EBITDA to average 4.7x-5.1x, through 2023. These metrics are supportive of APUC's 'BBB' Long-Term IDR. Ownership Interest in Atlantica Sustainable Infrastructure: APUC's ratings also consider the company's ownership interest in renewable energy yield company Atlantica Sustainable Infrastructure plc (AY). Abengoa-Algonquin Global Energy Solutions (AAGES), APUC's 50/50 joint venture with Abengoa S.A., owns 44.2% of AY's common shares. APUC owns 100% of AAGES' economic interest and voting rights in AY through its ownership of AAGES' preferred shares. Fitch considers AY's credit quality to be weaker than that of APUC. AAGES represents a relatively small amount of APUC's consolidated EBITDA, limiting the impact that any negative event at AY could have on APUC's credit quality. Parent/Subsidiary Linkage: Fitch uses a bottom-up approach in determining the ratings for APUC, LUCo and APCo. The linkage follows a weak parent/strong subsidiary approach for LUCo and a strong parent/weak subsidiary approach for APCo. Fitch considers LUCo to be stronger than APUC due to the utilities' low-risk regulated operations and APUC's exposure to the nonregulated power generation operations of APCo. Linkage between the Long-Term IDRs of LUCo and APUC is moderate. The moderate linkage is supported by separate financing through LUCo's financing affiliate company, Liberty Finance, along with LUCo's strategic importance to APUC, accounting for 75%-80% of APUC's consolidated EBITDA. Fitch would not rate APUC's Long-Term IDR higher than that of LUCo; however, LUCo's Long-Term IDR could be up to one notch higher than APUC's Long-Term IDR. There is a weak linkage between the Long-Term IDRs of APCo and APUC. The weak linkage is supported by weaker strategic ties between APUC and APCo than between APUC and LUCo. Fitch would not rate APCo's Long-Term IDR higher than that of APUC, although APUC's Long-Term IDR could be up to two notches higher than that of APCo. LUCo Diversified Portfolio of Utilities LUCo benefits from its diversified portfolio of regulated utility operations across 13 states. The company's integrated electric operations account for 60% of net utility sales, natural gas distribution operations account for 26% of net utility sales, and water and wastewater operations account for 14% of net utility sales. This asset diversification mitigates the company's exposure to any regional or state-specific shocks that could affect cash flows. LUCo was built from several acquisitions, most significantly of The Empire District Electric Company on Jan. 1, 2017. Empire District accounts for roughly half of LUCo's EBITDA. Fitch expects LUCo to remain acquisitive, primarily looking for smaller utility systems that could benefit from operational efficiencies. LUCo has a strong record of improving performance at utilities it acquires. Balanced Regulatory Environment LUCo's overall regulatory environment is considered balanced. In Missouri, LUCo's largest state of operations, legislation was signed June 1, 2018 that allowed for revenue decoupling at all electric utilities effective Jan. 1, 2019. The Missouri law allows electric utilities to opt out of revenue decoupling if they prefer to defer for future recovery 85% of all new depreciation expense, with the resulting regulatory asset balances subject to carrying charges at the utility's weighted average cost of capital and amortized over 20 years once included in rates. LUCo has effectively managed its operations to fully realize its average aggregate authorized ROE. The company has maximized its returns by keeping O&M expenses low, optimizing capital deployment and using cost-recovery riders to help limit its average regulatory lag to six months. LUCo's efficient utility operations also enable it to have lower customer rates than many peers. Fitch believes LUCo's balanced and improving regulatory environment supports its solid business risk profile. Strong Organic Growth Opportunities LUCo benefits from organic growth via pipe replacement and reliability improvements. The largest of LUCo's projects is its "greening the fleet" initiative, which primarily involves retiring some of Empire District's coal-fired generation facilities and replacing the lost capacity with 600MW of wind power facilities in Missouri and Kansas. Timely recovery of costs associated with the 600MW wind power investment would be important for LUCo to maintain a supportive financial profile. Adequate Financial Metrics LUCo's financial prole is supported by stable and predictable earnings from regulated utility operations. Fitch forecasts LUCo's FFO leverage to average 4.6x-4.9x, and total debt with equity credit/operating EBITDA to average 4.7x-4.9x, through 2023. These metrics are adequate for LUCo's 'BBB' Long-Term IDR. APCo Conservatively Managed Power Generation Business: APCo accounts for 20%-25% of APUC's consolidated EBITDA and consists of 34 power facilities, providing for meaningful asset diversification. Three-quarters of APCo's EBITDA is derived from U.S.-based assets, with the remainder from Canadian assets. APCo owns and operates approximately 1.5GW of gross generation capacity, of which 76% is wind, 8% solar, 8% hydro and 8% thermal. Although Fitch views the unregulated power generation business as somewhat riskier than regulated utilities, APCo's conservative management of the business mitigates much of this increased risk. Approximately 85% of APCo's electrical output is sold pursuant to long-term contractual arrangements with a production-weighted average remaining contract life of 13.3 years, providing a long timeline of high profitability margins and relatively stable and robust cash flows. In addition, APCo maintains relatively low leverage on the business. Strong Organic Growth Opportunities: APCo's power generation business has exhibited strong and steady growth over the past five years, with installed capacity growing at an 8% CAGR and operating profit at a 10% CAGR. Fitch expects that growth to continue, supported by APCo's large backlog of projects. APCo also can use 450MW worth of wind turbines that fall under the safe harbor provision, enabling it to receive the full benefit of production tax credits once these turbines enter service. Supportive Financial Metrics: APCo's financial profile is supported by strong cash flows from the company's power generation business. Fitch forecasts APCo's FFO leverage to average 4.2x-4.6x and total debt with equity credit/operating EBITDA to average 4.4x-4.7x through 2023. These metrics are supportive of APCo's 'BBB' Long-Term IDR. Derivation Summary APUC's 'BBB' Long-Term IDR is appropriately positioned relative to peer parent holding companies NextEra Energy (NYSE:NEE), Inc. (A-/Stable), AVANGRID, Inc. (BBB+/Stable) and CenterPoint Energy (NYSE:CNP), Inc. (BBB/Negative). APUC's proportion of consolidated EBITDA from regulated utility operations is 75%-80%, about the same as for CenterPoint (75%-80%) and more than that of NextEra (70%) and AVANGRID (75%). Fitch forecasts APUC's consolidated FFO leverage to average 4.9x-5.3x through 2023, weaker than NextEra at 4.5x and AVANGRID at 5.0x. APUC's weaker leverage metrics and much smaller scale of operations support APUC's lower relative rating compared with those of NextEra and AVANGRID. CenterPoint's diversified utility operations and supportive regulatory environment are stronger than APUC's; however, APUC's unregulated generation business provides cash flows that are more stable and predictable than CenterPoint's unregulated midstream operations. LUCo benefits from significant geographic and regulatory diversification. LUCo consists of electric, natural gas, and water and wastewater utility systems in 13 states. This portfolio compares favorably with larger single-state utilities from a diversification perspective, although its larger peers may benefit more from efficiencies of scale. More than half of LUCo's EBITDA is exposed to Missouri, which historically has had a somewhat challenging regulatory environment, although it became more balanced in recent years. Southwestern Public Service Company (SPS; BBB/Stable) is an integrated electric utility that operates in two states, Texas and New Mexico, with challenging regulatory environments. SPS lacks the diversification of LUCo, but is a larger utility that also benefits from being a subsidiary of Xcel Energy (NASDAQ:XEL), Inc. (BBB+/Stable), a much larger and fully regulated utility family. LUCo's financial metrics are slightly weaker than those of SPS. Fitch forecasts LUCo's FFO leverage to average 4.6x-4.9x through 2023, compared with approximately 4.4x-4.6x for SPS. APCo benefits from having 85% of its generation under long-term contractual arrangements with investment-grade counterparties, mitigating some of the risk associated with its unregulated operations. The average length of its long-term contractual arrangements is 13.3 years, which provides APCo with a good runway of relatively stable and predictable cash flows. Southern (NYSE:SO) Power Company (BBB+/Stable) has a similarly strong percentage of generation under long-term contracts. APCo owns and operates approximately 1.5GW of gross generation capacity spread across nine U.S. states and six Canadian provinces, providing beneficial geographic diversification. Southern Power has a much larger generation portfolio that is also geographically diversified. APCo's leverage metrics are weaker than those of Southern Power. Fitch forecasts APCo's FFO leverage to average 4.2x-4.6x through 2023, compared with about 3.0x for Southern Power. Key Assumptions Fitch's Key Assumptions within Its Rating Case for the Issuers Include: --Consolidated capex of $9.2 billion over 2020-2024, with more than 70% on regulated operations. --$6.2 billion of capex at LUCo over 2020-2024, $1.1 billion of which is for 600MW of wind power investments in 2020 and 2021. --Timely recovery of costs associated with LUCo's 600MW wind power investment in Missouri and Kansas, with all three projects in service by 1Q21. --BELCO and ESSAL acquisitions to close in 2020; New York American Water acquisition to close in 2021. --Normal weather and renewable energy production. RATING SENSITIVITIES Factors that could, individually or collectively, lead to a positive rating action/upgrade: APUC --APUC's ratings are capped by the ratings on LUCo; LUCo's Long-Term IDR would need to be upgraded in order for APUC's Long-Term IDR to be upgraded. --Consolidated FFO leverage expected to remain at less than 4.5x on a sustained basis. LUCo --FFO leverage expected to remain at less than 4.5x on a sustained basis. APCo --An upgrade of APCo's Long-Term IDR could only occur if APUC's Long-Term IDR were upgraded. --FFO leverage expected to remain at less than 3.5x on a sustained basis. Factors that could, individually or collectively, lead to a negative rating action/downgrade: APUC --Consolidated FFO leverage expected to exceed 5.7x on a sustained basis. --A downgrade of LUCo's Long-Term IDR would result in a commensurate downgrade of APUC's Long-Term IDR. LUCo --FFO leverage expected to exceed 5.7x on a sustained basis. --Adverse regulatory decisions that result in less-timely cost recovery or significantly weaker financial metrics. --A two-notch downgrade of APUC's Long-Term IDR would result in a downgrade of LUCo's Long-Term IDR. APCo --FFO leverage expected to exceed 5.0x on a sustained basis. --A significant decrease in the percentage of generation under long-term contracts. --A downgrade of APUC's Long-Term IDR would result in a commensurate downgrade of APCo's Long-Term IDR. Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure Adequate Liquidity: Fitch considers the liquidity for APUC, LUCo and APCo to be adequate. APUC has a $500 million senior unsecured RCF that matures July 12, 2024. APUC had no borrowings and $10.2 million of LCs issued as of June 30, 2020, leaving $489.8 million of unused availability under its RCF. APUC has a separate $50 million uncommitted bilateral LC facility that had $10.2 million of LCs issued as of June 30, 2020. APUC also has a $1 billion senior unsecured RCF that matures Dec. 31, 2021. This facility was obtained for general corporate purposes and to provide additional liquidity for the company's capex program given the uncertainty caused by the COVID-19 pandemic. LUCo primarily meets its short-term liquidity needs through the issuance of CP under its $500 million CP program, which is backed by an equal-sized senior unsecured revolving credit facility (RCF). CP borrowings would reduce availability under the RCF, which matures Feb. 23, 2023. LUCo had $215.0 million of CP borrowings, no RCF borrowings and $48.3 million of LCs issued as of June 30, 2020, leaving $236.7 million of unused availability under its RCF. LUCo also has a $600 million senior unsecured RCF that matures Dec. 31, 2021. This facility was obtained for general corporate purposes and to provide additional liquidity for the company's capex program given the uncertainty caused by the COVID-19 pandemic. APCo's liquidity is primarily supported by a $500 million senior unsecured RCF that matures Oct. 6, 2023. APCo had $89.0 million in borrowings and $25.5 million in LCs issued as of June 30, 2020, leaving $385.5 million of availability under its RCF. APCo has a separate $350 million LC facility that matures June 30, 2021. APCo had $268.4 million in LCs issued under its LC facility as of June 30, 2020, leaving $81.6 million of availability. APUC's subsidiaries require modest amounts of cash on hand to fund their operations; APUC had $60.3 million of unrestricted cash and cash equivalents as of June 30, 2020, of which $8.9 million was at LUCo and $25.9 million was at APCo. Long-term debt maturities over the next five years are manageable: --APUC does not have any long-term parent-level debt maturing within the next five years. --LUCo has $70 million of long-term debt due in the remainder of 2020, $195 million in 2022, $95 million in 2023 and $70 million in 2024; these maturities include debt at Liberty Finance and Liberty Utilities (America) Co. that are guaranteed by LUCo. --APCo has $117.5 million of long-term debt due in 2021, $156.2 million in 2022, $2.5 million in 2023 and $2.7 million in 2024. Summary of Financial Adjustments Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity are disclosed below: --APUC's junior subordinated notes are given 50% equity credit. --APUC's series A and D preferred stock are given 50% equity credit. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Algonquin Power & Utilities Corp.; Long Term Issuer Default Rating; Affirmed; BBB; Rating Outlook Stable ; Short Term Issuer Default Rating; Affirmed; F2 ----junior subordinated; Long Term Rating; Affirmed; BB+ Liberty Utilities Co.; Long Term Issuer Default Rating; Affirmed; BBB; Rating Outlook Stable ; Short Term Issuer Default Rating; Affirmed; F2 ----senior unsecured; Short Term Rating; Affirmed; F2 Liberty Utilities Finance GP1 ----senior unsecured; Long Term Rating; Affirmed; BBB+ Algonquin Power Co.; Long Term Issuer Default Rating; Affirmed; BBB; Rating Outlook Stable ; Short Term Issuer Default Rating; Affirmed; F2 ----senior unsecured; Long Term Rating; Affirmed; BBB Contacts: Primary Rating Analyst Kevin Beicke, CFA Director +1 212 908 0618 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Rating Analyst Ivana Ergovic, Director +1 212 908 0354 Committee Chairperson Philip Smyth, CFA Senior Director +1 212 908 0531 Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: elizabeth.fogerty@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Criteria Corporate Hybrids Treatment and Notching Criteria (pub. 11 Nov 2019) (https://www.fitchratings.com/site/re/10100477) Corporate Rating Criteria (pub. 01 May 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10120170) Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10090792) Parent and Subsidiary Linkage Rating Criteria (pub. 26 Aug 2020) (https://www.fitchratings.com/site/re/10133830) Short-Term Ratings Criteria (pub. 06 Mar 2020) (https://www.fitchratings.com/site/re/10112342) Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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