DBRS Confirms Liberty Utilities Finance GP 1 at BBB (high), Stable

DBRS has today confirmed the Issuer Rating and Series A and Series C Senior Notes of Liberty Utilities Finance GP 1, a guaranteed issuer for Liberty Utilities Co. (LU or the Company), all at BBB (high) with Stable trends. The ratings are based on the credit quality of Liberty Utilities Finance GP 1’s guarantor, Liberty Utilities Co., and reflects the Company’s reasonable regulatory environment, which allows LU to earn an adequate return on investment while reducing volumetric risk through weather decoupling mechanisms.

LU’s business risk profile is consistent with its current rating category, reflecting the Company’s geographically diversified portfolio, operating in ten states. In addition, LU operates in largely reasonable regulatory jurisdictions, with the following supportive regulatory parameters: (1) LU operates under cost-of-service regulatory frameworks that allow the Company to earn a reasonable return on equity (ROE) of between approximately 9.5% and 10.7%; (2) LU has weather decoupling mechanisms at California Pacific Electric (CalPeco), Georgia natural gas distribution and New England gas distribution, which effectively eliminates the utilities’ exposure to volumetric risk caused by fluctuations in weather conditions (these states account for 58% of the Company’s total earnings); and (3) The Company has the ability to recover prudently incurred fuel costs, operating costs and capital expenditures in a timely manner. While DBRS is concerned about the regulatory lag in Illinois, this location only accounts for 5% of LU’s total earnings. The business risk profile also reflects LU’s acquisitive growth strategy by acquiring underperforming assets and improving the business through rate applications. As a result, integration of the new businesses and successful rate applications from newly acquired assets will continue to be key challenges in the near to medium term.

LU’s financial risk profile is strong for its current rating category, supported by reasonable cash flows and modest debt leverage for a regulated utility. DBRS expects the Company to continue funding its acquisitions and future growth projects with a prudent mix of debt and equity to maintain its target debt-to-capital ratio at or below 55%. In addition, LU’s cash flow-to-debt ratio increased significantly in 2013, following a full year’s earnings contributions from multiple acquisitions made in 2012. Following a full year of earnings from the Pine Bluff water system, Georgia gas and New England gas distribution companies acquired in 2013 (the 2013 acquisitions), DBRS expects the cash flow-to-total debt ratio to be at approximately 13%.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, which can be found on our website under Methodologies.