DBRS Morningstar Confirms Algonquin Power Co.’s Issuer Rating and Senior Unsecured Debentures Rating at BBB With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed both the Issuer Rating and the Senior Unsecured Debentures rating of Algonquin Power Co. (operating as Liberty Power; APCO or the Issuer) at BBB with Stable trends. The Issuer is wholly owned by Algonquin Power & Utilities Corp. (APUC or the Parent; rated BBB Under Review with Developing Implications by DBRS Morningstar). The rating confirmations largely reflect the following factors:

(1) Significant improvement of financial performance following the one-time impact of the February 2021 Texas winter event. APCO's credit metrics improved significantly in the first nine months of 2022 and DBRS Morningstar expects them to remain strong in 2023. This reflects lower debt levels and stronger cash flow as a result of higher production outputs and higher pricing across most regions on existing facilities and incremental cash flow from newly completed projects output.

(2) Solid resilience in coping with power market volatility, high inflation, rising interest rates, and a potential economic slowdown in North America. More than 80% of APCO's revenues were earned under long-term contracts (approximately 11 years as of September 30, 2022), most of which have inflation-adjusted clauses, mitigating the impact of inflation. As of September 30, 2022, a substantial portion of APCO's debt is under fixed rates with a modest amount due within the next five years, minimizing the impact of high interest rates.

(3) Significant available credit facilities at APCO and additional liquidity support provided by APUC with intercompany loans and equity injections for capital projects in 2022 and for future projects.

(4) With respect to the risks associated with the construction of new projects, DBRS Morningstar notes that APCO seeks to mitigate the risks of inflation through negotiating engineering, procurement, and construction contracts with fixed prices and dates, offtake contracts with certain inflationary escalation pass-through mechanisms, and building in an appropriate contingency within each project's budget to absorb potential cost overruns.

The Stable trends reflect DBRS Morningstar’s expectation that the Issuer will likely maintain solid credit metrics at or better than the current levels in the medium term. As APCO continues to expand its power generation portfolio by building new renewable energy projects, most power projects under construction are backed up with long-term contracts. DBRS Morningstar believes APCO has the project development expertise to mitigate project cost overruns and delays in light of high inflation and high interest rates. In addition, DBRS Morningstar expects the Issuer's contractual arrangement to remain stable to support APCO's cash flow stability. The Stable trends also incorporate the Parent's recent announcement that it may recycle some of its assets and use the proceeds to pay down existing debts and finance on-going projects. DBRS Morningstar expects that APUC’s proposed transactions will not have a material impact on APCO's business risk profile. DBRS Morningstar believes that the Parent will continue to support APCO through intercompany loans, equity injections, or reduced dividends to maintain the Issuer’s credit metrics at the BBB level.

DBRS Morningstar does not expect to take a positive rating action in the near to medium term. However, DBRS Morningstar may take a negative rating action if APCO's business risk profile deteriorates significantly or its credit metrics weaken materially and sustainably to below the level required by DBRS Morningstar to maintain the BBB rating.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Independent Power Producer Industry (May 18, 2022; https://www.dbrsmorningstar.com/research/396971)

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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