This report does not constitute a rating action.
Canadian holding company Algonquin Power & Utilities Corp. (APUC) had an eventful 2023, including the termination of a $2.6 billion acquisition, announcement of credit-supportive measures to strengthen its balance sheet, and a strategic review resulting in a decision to sell its unregulated power generation business.
Here we answer questions about APUC and its subsidiary Algonquin Power Co (Liberty Power) regarding our view of credit quality.
Frequently Asked Questions
How did S&P Global Ratings assess APUC’s early-2023 strategic initiatives?
In January 2023, APUC announced it would reduce 2023 capital spending by about 15%, lower its dividends by about 40%, and target an approximate additional $1 billion of asset sales in 2023 and 2024, using the proceeds to deleverage its balance sheet and fund growth. These strategic initiatives were intended to maintain financial performance that was pressured by the delay of the Kentucky Power Co. (KPCo) acquisition, rising interest rates, and inflationary pressures. While we assessed these strategic initiatives as supportive of credit quality, we maintained our negative outlook on the company, reflecting our base-case expectations that 2023 funds from operations (FFO) to debt would likely remain below our downgrade trigger. However, we indicated that we expected financial measures to improve in 2024 following the sale of additional assets, such that FFO to debt is consistently greater than 14%.
What was our credit assessment following the termination of the KPCo acquisition?
In April 2023, APUC and American Electric Power Co. (AEP) mutually agreed to terminate APUC's acquisition of KPCo. As a result of the termination, we lowered our expectations of APUC’s future debt balance, resulting in modest improvement. At the same time, APUC reiterated its commitment to its strategic initiatives. S&P Global Ratings affirmed its ratings on the company and revised the rating outlook to stable from negative. We assessed the termination as providing additional financial flexibility for APUC and in combination with the company’s strategic initiatives, increases the likelihood that APUC’s financial measures will remain consistently above our downgrade threshold.
How did S&P Global Ratings assess APUC’s announcement to sell its unregulated power business?
In August 2023, APUC announced its plans to sell its unregulated power business and to become a fully regulated utility holding company. This was a deviation from our prior base case as we previously viewed the company’s unregulated business as a core component of the consolidated group. Post the asset sale, we would likely revise upward APUC’s business risk profile to excellent from strong. This change reflects our assessment of APUC as a pure-play regulated electric, gas, and water utility without being constrained by the company’s higher risk unregulated business.
We view APUC’s regulated utilities businesses as lower risk reflecting its monopolistic position that provides an essential service in its service territories. Our assessment also incorporates APUC’s moderate customer base of about 1.2 million customers with regulatory and geographic diversity. The company operates in 15 regulatory jurisdictions that are generally credit-supportive regulatory constructs that allow for the recovery of all prudently incurred operating and capital costs with reduced regulatory lag. Given our assessment of reduced business risk when the unregulated power business is sold, we would also likely lower APUC’s downgrade threshold to 11% from 14% for APUC to maintain our ‘BBB’ issuer credit rating.
How was APUC’s financial performance in 2023 and what is the base case for 2024?
APUC’s 2023 financial performance was weak for the current rating with FFO to debt at about 11.2% or significantly below our current 14% downgrade threshold. The company's financial performance in 2023 was constrained by rising interest rates, inflationary pressures, the delay of about $290 million of securitization in Missouri, and lack of a significant asset sale completed in 2023. For 2024, our base case reflects FFO to debt to be consistent with the 11%-13% range along with the expected improvement in the company’s business risk profile driven by the sale of its unregulated business.
How important is the timely asset sale of APUC’s unregulated power business to credit quality?
Our stable outlook on APUC assumes that the company will sell its unregulated power business, using the proceeds to reduce debt and to fund share repurchases. We expect that APUC will size its debt repayment and share repurchases in a manner that maintains FFO to debt of 11% to 13%. Under our base case, we do not believe that the company would be able to maintain 2024 financial measures consistently above our downgrade threshold, absent the sale of the unregulated power business. Accordingly, if the company does not announce such a sale by mid-2024, credit quality could be pressured.
How do we assess Algonquin Power Co.’s (Liberty Power) business risk?
We ascribe significantly higher business risk to APUC’s unregulated operations compared to that of its regulated utility businesses. The unregulated business increases APUC's exposure to counterparty credit, volumetric, commodity, and higher operational risks. Furthermore, Liberty Power has limited scale compared to its peers and has exposure to resource concentration risk with more than 75% of its generation from intermittent wind power that is more volatile in terms of resource availability than most other generation sources. Liberty Power partially offset some of these risks through its diversified asset portfolio and long-term contracts. About 84% of Liberty Power’s generation is sold under long-term contracts with a weighted average of about 10 years and with mostly investment-grade counterparties. These contracts partially insulate the company from market risk and commodity risk, providing modest cash flow stability. APUC’s consolidated ‘strong’ business risk profile reflects the company’s lower risk utility business (about 75% of consolidated EBITDA), partially offset by its higher-risk unregulated power business (about 25% of consolidated EBITDA).
Why do we have a CreditWatch with developing implications on subsidiary Liberty Power?
We have historically viewed Liberty Power as a core subsidiary of APUC, reflecting our prior view that Liberty Power was highly unlikely to be sold, is integral to APUC’s overall strategy, has a long-term commitment from APUC, and was closely linked to APUC’s name and reputation. As such, our issuer credit rating (ICR) on Liberty Power is in line with the 'bbb' group credit profile (GCP) on parent APUC’s, despite Liberty Power's stand-alone credit profile being materially lower than the GCP. After the sale of Liberty Power, our ICR on Liberty Power will largely depend on the credit quality of its ultimate buyer. Liberty Power may be sold to a higher-rated strategic parent, which could lead to an upgrade. More likely, Liberty Power will be sold to a lower-rated entity or to a financial sponsor, which could result in a downgrade of one or more notches.
Related Research
Algonquin Power & Utilities Corp. , Dec. 13, 2023
Algonquin Power & Utilities Corp Ratings Affirmed On Planned Sale; Algonquin Power Co. CreditWatch Revised To Developing , Aug. 15, 2023
| Primary Contacts: | Omar El Gamal, CFA, Toronto 1-4165072523; omar.elgamal@spglobal.com |
| Matthew L O'Neill, New York 1-212-438-4295; matthew.oneill@spglobal.com |
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