DBRS Morningstar Confirms Liberty Utilities (Canada) LP at BBB, Stable TrendsUtilities & Independent Power
DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Liberty Utilities (Canada) LP (LUCA or the Company) and its Senior Unsecured Notes at BBB. Both trends are Stable. The rating confirmations reflect the continual stability of the regulatory framework in New Brunswick in 2021 and DBRS Morningstar's expectation that the regulation will remain stable over the medium term. DBRS Morningstar recognizes that the allowed return on equity (ROE) was lowered to 8.5% in late October 2021 from 10.9%. However, the impact on LUCA’s projected credit metrics are not expected to affect the current rating as LUCA has maintained solid credit metrics for the 12 months ended September 30, 2021, providing the Company with reasonable financial flexibility. LUCA’s projected metrics, based on DBRS Morningstar’s base case, are expected to remain solid over the medium term. LUCA's operations have been efficient despite the ongoing impact of the Coronavirus Disease (COVID-19) pandemic. The impact of the pandemic on LUCA’s operational and financial performance has been modest to date because the Company provides essential services to customers in its franchise area.
In addition to owning 100% of Liberty Utilities Gas New Brunswick LP (LUNB), a regulated gas distribution company in New Brunswick, the Company also holds a 9.8% interest in Wataynikaneyap Power LP Project (WPP). This investment is accounted for under the equity method of accounting. The rating approach for LUCA is basically based on the credit strength of LUNB.
The ratings of LUCA 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 by the Province of New Brunswick (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 (COS) mechanism, favourable deemed equity (45%), and no commodity price risk. DBRS Morningstar notes that LUNB’s allowed ROE was lower in October 2021, pending a court appeal expected in Q1 2022.
(2) LUCA’s pro forma credit metrics were strong in 2021 and are projected to remain solid in the medium term, reflecting relatively low debt in the capital structure and cash flow surplus after distributions and capital expenditures.
(3) The ratings also incorporate the 2016 Province and Enbridge Gas New Brunswick (EGNB) settlement, which has significantly reduced regulatory uncertainties, lowered competition, and allowed EGNB (now LUNB) to recover CAD 144.5 million of deferred regulatory assets. Although having improved in the past few years, 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 ratings also reflect the following expectations of DBRS Morningstar:
-- LUCA will maintain its the capital structure in line with the regulatory capital structure of 45% equity and 55% debt as currently set by the regulator; however, DBRS Morningstar acknowledges that this ratio may change in the next cost of capital review.
-- Investment in WPP will be funded by Algonquin Power & Utilities Corp. (rated BBB and Under Review with Developing Implications by DBRS Morningstar) either in the form of equity injection or through reduced dividends or both.
-- 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.
-- LUCA’s financial performance in the medium term will be consistent with the levels required to support the current ratings.
-- No material increase in nonregulated operations through future acquisitions will occur.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 24, 2021; https://www.dbrsmorningstar.com/research/384922). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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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.
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