DBRS Morningstar Assigns BBB, Stable Trends, to Issuer Rating and Senior Unsecured Notes of Liberty Utilities (Canada) LP

DBRS Limited (DBRS Morningstar) assigned an Issuer Rating of BBB to Liberty Utilities (Canada) LP (LUCA or the Company). DBRS Morningstar also assigned a provisional rating of BBB to LUCA’s up to $200 million Senior Unsecured Notes (the Senior Notes). Both trends are Stable. The issuance of the Senior Notes will be used to partially repay its parent, Algonquin Power & Utilities Corp. (APUC; rated BBB with a Stable trend by DBRS Morningstar), for the acquisition of Enbridge Gas New Brunswick Limited Partnership (EGNB). LUCA owns 100% of Liberty Utilities Gas New Brunswick LP (LUNB; formerly EGNB) and a 9.8% interest in Wataynikaneyap Power LP Project (WPP). DBRS Morningstar expects that none of LUCA’s subsidiaries will be borrowing any external debt. WPP has project debt, which is nonrecourse to LUCA.

The assigned ratings reflect the following factors: (1) Substantially all cash flow is generated from the regulated natural gas distribution business. LUNB has operated under an improved regulatory framework under the Province of New Brunswick (NB or the Province; rated A (high) with a Stable trend by DBRS Morningstar) since 2016. The natural gas distribution business benefits from a cost-of-service mechanism, good return on equity (ROE; 10.9%), favourable deemed equity (45%), and no commodity price risk. DBRS Morningstar notes that LUNB’s allowed ROE and deemed equity are one of the highest compared with other regulatory jurisdictions in Canada. (2) LUCA’s pro forma credit metrics are strong in 2020 and over the medium term. Although LUCA does not have historical financial performance, based on EGNB’s financial performance in the last three years and on LUCA’s financing strategy, DBRS Morningstar believes that LUCA’s financial profile would be supportive of the assigned ratings, with strong pro forma credit metrics and good financing flexibility. The assigned ratings also incorporate the 2016 Province and EGNB settlement, which significantly reduces regulatory uncertainties, improves EGNB’s competitiveness, and allows it to recover $145 million of deferred regulatory assets. However, potential government intervention in the future remains a concern because the Province does not yet have a long history of regulatory stability. In addition, the customer base is unusually small, which means that if there are any material increases in capital costs or natural gas costs, it would be difficult for the regulator to allow the Company to fully recover the increased costs within a reasonable period of time without imposing high rate increases on customers.

The assigned ratings also reflect the following expectations of DBRS Morningstar: (1) LUCA’s financing plan will be consistent with its long-term target of up to 57.5% debt in its capital structure, (2) investment in WPP will be funded by APUC either in the form of equity injection or through reduced dividends or both, (3) no material changes to the regulatory mechanism will come into force over the medium term that could have a negative impact on LUCA’s credit profile, (4) LUCA’s financial performance will be consistent with the pro forma results reviewed by DBRS Morningstar, and (5) no material increase in nonregulated operations through future acquisitions will occur.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, which can be found on dbrs.com under Methodologies & Criteria.

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.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS Morningstar will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada