DBRS Confirms Liberty Utilities Finance GP1’s Issuer Rating and Senior Notes at BBB (high), Stable Trends

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

The confirmations reflect (1) good progress integrating Empire District Electric Company (Empire) into LUCo’s regulated utility system; (2) solid financial metrics in the nine months ending September 2017 (9M 2017), albeit weaker than 2016; and (3) reasonable rate case outcomes in 2017. The ratings incorporate the structural subordination of the Senior Notes to the debt at the Empire. However, the structural subordination is significantly mitigated by LUCo owning other regulated assets that accounted for over 50% of LUCo’s 2017 EBITDA (estimate) that have minimal debt. Following the Empire acquisition, LUCo’s business risk profile improved significantly, reflecting an increase in size, regulatory and operational diversification and a significant increase in regulated electricity distribution assets, which accounted for over 60% of EBITDA in 2017 (25% in 2016). The customer base increased to approximately 758,000 (September 2017) from 564,000 at the end of 2016.

The confirmations reflect the Company’s solid credit ratios for 9M 2017. Due to a substantial amount of debt issued for the Empire acquisition and the assumption of Empire’s debt, the consolidated cash flow-to-debt and the EBIT interest coverage ratios declined notably in 9M 2017 from the 2016 level but remained strong for the current ratings. The debt-to-capital ratio, excluding goodwill, increased significantly from the 2016 level, but remained in the BBB rating category. A positive rating action could be taken if the Company maintains the current cash flow and interest coverage ratios and lowers its adjusted consolidated debt-to-capital ratio to below 65% (adjusted for goodwill), as well as decreasing structural subordination. A negative rating action could be taken should the Company increase structural subordination and adjusted consolidated leverage to above 75% (adjusted for goodwill) on a sustained basis.

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 under Related Documents or by contacting us at info@dbrs.com.

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.