Morningstar DBRS Confirms Algonquin Power & Utilities Corp.’s Issuer Rating at BBB and Preferred Shares Rating at Pfd-3 With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Preferred Shares rating of Algonquin Power & Utilities Corp. (APUC or the Company) at BBB and Pdf-3, respectively. Both trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
The ratings are largely based on the credit profiles of APUC’s two principal subsidiaries: (1) Liberty Utilities Co. (LUCO), the guarantor of the debt issued by Liberty Utilities Finance GP1 (LUF; rated BBB (high) with a Stable trend by Morningstar DBRS) and (2) Algonquin Power Co. (APCO; rated BBB with a Stable trend by Morningstar DBRS). The Stable trends reflect Morningstar DBRS’ view that APUC’s subsidiary credit ratings are expected to remain stable in the medium term and that consolidated total leverage as measured by consolidated metrics at APUC will remain reasonable. The Company’s rating also incorporates the structural subordination of APUC’s debt to the debt of its subsidiaries.

CREDIT RATING DRIVERS
APUC’s rating is primarily expected to follow the ratings on its subsidiaries, weighted according to their contributions to the Company’s consolidated EBITDA. Morningstar DBRS notes that in August 2023, APUC announced that it would pursue a sale of its renewable energy group to simplify its structure and focus on the regulated utility business. Morningstar DBRS does not view this announcement by itself as affecting the Company’s credit profile. However, the completion of this sale with a focus on the regulated utility business could modestly improve APUC’s business risk profile and reduce its liquidity risk and project execution risk.

EARNINGS OUTLOOK
EBITDA is expected to improve in 2024 compared with 2023 as a result of the implementation of new rates at certain LUCO subsidiaries. EBITDA should also improve from APCO’s approximately 80% contracted revenues, assuming normal weather conditions.

FINANCIAL OUTLOOK
From the existing asset perspective and based on APUC’s forecast cash flow and its current financing strategy, Morningstar DBRS does not expect a material change in the Company’s key consolidated metrics in 2024 and over the medium term. Morningstar DBRS also believes APUC's dividend reduction effective as of the first quarter of 2023 and its plan to sell its renewable energy group could help reduce debt at subsidiaries and enhance its consolidated credit metrics.

CREDIT RATING RATIONALE
APUC’s business risk profile is supported by its relatively low-risk, regulated utility subsidiaries, long-term contracts at its renewable generation business, 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 re-contracting risks at the generation group.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of APUC, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of APUC, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of APUC, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (January 30, 2024); (https://dbrs.morningstar.com/research/427244.

The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (September 27, 2023), https://dbrs.morningstar.com/research/421119.

-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 19, 2023) https://dbrs.morningstar.com/research/422134.

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.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-DBRS@morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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