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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the ratings of the Series A, Series C and Series D Senior Notes of Liberty Utilities Finance GP1 (LUF or the Issuer), a guaranteed issuer for Liberty Utilities Co. (LUC, the Company or the Guarantor), all at BBB (high) with Stable trends. All the debt issued by LUF is unconditionally guaranteed by its related party, LUC. The Issuer and the Guarantor are wholly owned by Algonquin Power & Utilities Corp. The proceeds from the debt issued by LUF to the public (Series A, C and D Senior Notes; collectively, the Senior Notes) are used to invest in the senior unsecured notes (related party notes) issued by LUC. The Senior Notes and the related party notes contain the same terms and conditions.

As a result of the guarantee of the Senior Notes by the Guarantor, the rating of the Issuer is based on the credit strength of the Guarantor. The rating confirmation primarily reflects the following factors: (1) LUC owns a portfolio of relatively low-risk regulated assets (natural gas distribution, electricity distribution, water distribution and wastewater collection) in ten states. The overall regulatory framework of these states is viewed as reasonable (based on DBRS’s regulatory considerations) supporting the current ratings. The regulated utilities owned by LUC do not have exposure to commodity price risk, although they do face volume risk in the majority of the jurisdictions. The average allowed return on equity is approximately 10%, and most states have reasonable cost recovery mechanisms. (2) The regulated assets are well diversified in ten states, mitigating regulatory risk associated with any single state. In addition, the distribution business is fairly diversified in terms of commodity (natural gas, electricity and water). The customer base is also well diversified, with most customers being residential and small commercial, whose consumption is more sensitive to weather and less sensitive to economic conditions. (3) Future acquisitions may not have the same risk characteristics as LUC’s current portfolio. LUC’s strategy of acquiring underperforming operating utilities results in funding requirements and business integration risk. Although LUC has been successful in the integration of new subsidiaries in the past, future acquisitions (such as the proposed $327 million Park Water Company acquisition in 2015 (the Acquisition)) may present challenges with respect to financing and integration. (4) Most utilities owned by the Company are small in size. Although the Company achieves diversification benefits in terms of geography, the small size of some of the utilities may make it difficult for the Company to achieve the expected efficiency, especially as most of the assets are underperforming at the time of acquisition.

The credit metrics for the 12 months ended March 31, 2015, remained solidly in the “A” range. However, the current rating is largely limited by the size of the individual regulated utility and its aggressive acquisition strategy. The actual metrics for 2015 are expected to be modestly weaker than 2014 should the Acquisition be completed in late 2015, because of there being only a partial year’s cash flow contributions. Based on DBRS’s pro forma analysis for the Acquisition, LUC’s pro forma debt leverage for 2015 is expected to be at the lower end of the 55% to 65% target, and pro forma cash flow-to-debt is expected to be in the 14% to 15% range, which will solidly support the current rating.

Notes:
All the debt issued by Liberty Utilities Finance GP1 is unconditionally guaranteed by Liberty Utilities Co.

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.