DBRS Morningstar Confirms Liberty Utilities Finance GP1 at BBB (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the Senior Unsecured Notes (the Senior Notes) rating of Liberty Utilities Finance GP1 (LUF or the Issuer) at BBB (high) with Stable trends. The Senior Notes issued by LUF are unconditionally guaranteed by Liberty Utilities Co. (LUCO) (the Guarantee). The Issuer and LUCO are wholly owned by Algonquin Power & Utilities Corp. (rated BBB with a Stable trend by DBRS Morningstar). The proceeds from the Senior Notes are used to invest in the senior unsecured notes (Related-Party Notes) issued by LUCO. The Senior Notes and the Related-Party Notes contain the same terms and conditions. LUF’s ratings are based on the Guarantee and LUCO’s business and financial risk profile. The ratings also incorporate the structural subordination of the Senior Notes to the debt at Empire District Electric Company (Empire), which accounts for approximately 30% of LUCO’s consolidated debt at September 30, 2020. However, the structural subordination is partially mitigated by a diverse source of cash flow from 13 jurisdictions and unlevered cash flow (more than 50% of consolidated cash flow) from its regulated subsidiaries with minimal or no debt.

DBRS Morningstar notes that the Coronavirus Disease (COVID-19) pandemic had a modest impact on LUCO’s financial results for the last nine months of 2020. Demand in 2020 was reduced as a result of business suspensions and shutdowns, and LUCO experienced late or delayed collections from customers. However, LUCO is seeking recovery of incremental impacts related to all of its regulatory jurisdictions, and to date most regulatory jurisdictions have mechanisms in place or have approved orders for the recording and tracking of such incremental impacts. The rating confirmations incorporate DBRS Morningstar’s expectation that the potential future impacts of the coronavirus pandemic on LUCO’s financial ratios will not be material as LUCO continues to operate critical infrastructure assets and provide essential service to customers.

LUCO’s business risk profile remains strong, supported by substantially large and diverse regulated operations across the United States and reasonable rate case outcomes in 2020. The regulatory frameworks across 13 jurisdictions remain stable. LUCO’s authorized return on equity for 2020 was reasonable at 9.6% (weighted average). Cost-recovery lags were reduced. LUCO continues to benefit from significant jurisdictional diversification with no commodity price risk, and with only modest volume risk.

The rating confirmations also reflect DBRS Morningstar’s expectation that the pending acquisitions and currently planned financings of (1) 600 megawatts of wind power (regulated assets) by Empire for approximately $1.1 billion and (2) New York American Water, a regulated water utility, for approximately $600 million (collectively, the Proposed Acquisitions) will improve LUCO’s size and operational diversification and will not materially change LUCO’s current financial ratios. The Proposed Acquisitions are expected to be completed during 2021. DBRS Morningstar believes that LUCO’s current capital structure provides sufficient financing flexibility to finance the Proposed Acquisitions while maintaining its capital structure around 50%. DBRS Morningstar expects that LUCO’s projected cash flow from existing businesses and from the Proposed Acquisitions will remain stable and that its cash flow coverage ratios will remain solid to support the current ratings.

DBRS Morningstar notes that if the financing of the Proposed Acquisitions significantly weakens LUCO’s credit metrics from the current levels on a sustained basis, a negative rating action may be taken. However, DBRS Morningstar may take a positive rating action if LUCO continues to maintain its current business risk profile and solid financial metrics and significantly reduces the structural subordination of its Senior Notes.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (October 27, 2020), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 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.

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

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577