DBRS Places Liberty Utility Finance GP1 Under Review – Developing Following the Empire District Electric Company Acquisition Announcement

DBRS Limited (DBRS) has today placed the BBB (high) Issuer Rating and BBB (high) Series A, Series C, and Series D Senior Notes ratings of Liberty Utilities Finance GP1 (LUF or the Company) Under Review with Developing Implications. This rating action follows the announcement that Algonquin Power & Utilities Corp. (APUC), LUF’s parent company, has entered into an agreement and plan of merger pursuant to which Liberty Utilities Co. (LUC) will indirectly acquire The Empire District Electric Company (Empire) and its subsidiaries (the Transaction).

LUC is a wholly owned subsidiary of APUC and owns a diversified portfolio of regulated assets. LUC is the guarantor of the Senior Notes issued by LUF. APUC is rated BBB (low) and Pfd-3 (low), and Algonquin Power Co. (APCo), APUC’s wholly owned power generation company, is rated BBB (low). Please note that the ratings of APUC and APCo have also been placed Under Review with Developing Implications (see separate press releases dated February 10, 2016).

Empire is an approximately 100% regulated electric, gas and water utility (mostly electric), serving approximately 218,000 customers primarily in Missouri, and also in Kansas, Oklahoma, and Arkansas. Empire engages in the generation (approximately 1,400 MW net capacity, ~60% natural gas), purchase, transmission, distribution and sale of electricity. The Transaction will be all-cash and total consideration will be approximately $3.4 billion, including the assumption of approximately $1.3 billion of debt. All the outstanding debt from the acquired assets is at the regulated utility level. The purchase price represents a 50% premium to Empires unaffected share prices on December 10, 2015, and a 21% premium to the closing price on February 8, 2016. The Transaction is expected to close in Q1 2017, and is subject to the approval of Empire’s common shareholders and to various federal regulatory approvals including multiple utility commissions, the Federal Energy Regulatory Commission and the Federal Communications Commission.

The ratings of LUF are based on the credit profile of LUC, which owns the regulated utility assets and guarantees the debt issued by LUF. The rating action reflects DBRS’s view that the Transaction will have a relatively neutral impact on LUC’s business risk assessment (BRA).The impact on the financial risk assessment (FRA) is uncertain since the financing plan has not been finalized.

IMPACT ON BRA
Although the Transaction will significantly increase LUC’s scope of operations and regulated asset base, it is not expected to have a material impact on LUC’s current BRA, which is already supported by diversification within its regulated assets in terms of commodities (natural gas distribution, electric distribution and water/wastewater distribution/collection) as well as the reasonable regulatory environments in which it operates. The Transaction will increase LUC’s earning contributions from Missouri, a state that LUC already operates in (Midwest Gas), and which is considered to have a reasonable regulatory environment in line with LUC’s overall portfolio. The Transaction will also increase LUC’s exposure to electricity distribution earnings, which are viewed as lower risk than water utilities and gas distribution assets.

IMPACT ON FRA
DBRS notes that APUC has obtained a USD 1.6 billion fully committed bridge debt financing to finance the Transaction. Permanent financing is expected to be obtained by placements of equity, preferred equity, convertible debentures and long-term debt, as well as the assumption of existing Empire Indebtedness. The preliminary plan includes approximately $1.0 billion of convertible unsecured subordinated debentures via installment receipts, approximately $1.1 billion in incremental acquisition debt and approximately $1.3 billion in assumed debt. The timing, sizing, and issuer of the various financing sources is not yet finalized and therefore the impact on the FRA is currently unknown. DBRS would consider a material increase in leverage to have a negative impact on the FRA.

DBRS will review the financing plan when it is finalized and further review the impact of the Transaction on LUC’s credit profile.

Notes:
All figures are in Canadian 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.

The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2015) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2015), which can be found on our website under Methodologies.

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

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