S&P Affirms Rationgs on Empire District Electric (EDE) Amid Merger Deal; Outlook to Negative

Standard & Poor's Ratings Services said it revised its rating outlook on Empire District Electric Co. (NYSE: EDE) to negative from developing. At the same time, we affirmed our ratings on the company, including the 'BBB' issuer credit rating.

We base the negative outlook on Empire's announcement that it has entered into an agreement to be acquired by Algonquin Power & Utilities Corp.

"When the transaction closes, we would view Empire as a core subsidiary of Algonquin, leading to an issuer credit rating for Empire that is aligned with that of Algonquin," said Standard & Poor's credit analyst Dimitri Nikas.

We base this assessment on the following factors:

• We project that Empire will form a meaningful part of the merged entity, contributing about 40% of Algonquin's total EBITDA.
• Empire operates in lines of business that are integral to the overall group strategy (regulated utility operations).
• We expect Algonquin's management will be strongly committed to Empire given Algonquin's emphasis on maintaining the size and scope of its regulated utility operations relative to nonutility operations.
• Empire will enhance Algonquin's presence in common service territories, especially Missouri, facilitating growth and cost-reduction opportunities.

Because of our view of Empire's core group status, the negative outlook on Empire is in line with the negative outlook on Algonquin, which reflects the risk of weaker near-term credit measures associated with the transaction's timing and financing.

The ratings on Empire are based on the company's strong business and significant financial risk profiles.

The negative outlook on Empire reflects the prospect for lower ratings due to the company's agreement to be acquired by Algonquin. The negative outlook on Algonquin reflects our expectation that the company's credit measures will materially weaken in 2016 due to the issuance of convertible debentures to partly finance the cash purchase of Empire. Although we expect that the debentures will have a very high likelihood of conversion in 2017 when the transaction closes, in the meantime we expect that credit measures will be weak for the rating, eliminating any financial cushion at the current rating level. The negative outlook also reflects the execution risk associated with the additional equity and debt necessary to support the transaction and to fund the company's ongoing development plans.

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