DBRS Maintains Liberty Utilities Finance GP1 Under Review with Developing Implications

DBRS Limited (DBRS) has today maintained the status of Under Review with Developing Implications for all ratings of Liberty Utilities Finance GP1 (LUF or the Issuer). All the debt issued by LUF is unconditionally guaranteed by its related party, Liberty Utilities Co. (LUC, the Company or the Guarantor). The Issuer and the Guarantor are wholly owned by Algonquin Power & Utilities Corp. (APUC or the Parent). 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. The ratings were placed Under Review with Developing Implications on February 10, 2016, following the announcement of an agreement and plan of merger pursuant to which LUC will indirectly acquire The Empire District Electric Company (Empire) and its subsidiaries (the Empire Transaction) (see DBRS February 10, 2016, press release for details).

It is DBRS’s view that, 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 business risk profile, 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 Empire Transaction will increase LUC’s earnings contributions from Missouri, a state in which LUC already operates (Midstates 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.

APUC’s and LUC’s preliminary financing plan includes approximately CAD 1.0 billion of convertible unsecured subordinated debentures via installment receipts (issued in February 2016 by APUC), approximately CAD 900 million in incremental acquisition debt and approximately $900 million in assumed debt. The timing, sizing, and issuer of the various financing sources is not yet finalized, and therefore the impact on LUC’s credit metrics is currently unknown. DBRS would consider a material increase in leverage at LUC to have a negative impact on current rating. However, DBRS expects to confirm the rating and reinstate a Stable trend should LUC’s credit metrics, on a pro forma basis post-Empire Transaction, not materially weaken from the current level.

DBRS has reviewed LUC’s 2015 performance and views that its 2015 credit metrics remained solidly in the “A” range. However, the current credit metric level could change, depending on the final financing plan for the Empire Transaction.

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.

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 Support (February 2016), which can be found on our website under Methodologies.