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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the Senior Unsecured Notes (the Senior Notes) rating of Liberty Utilities Finance GP1 (LUF or the Issuer) at BBB (high) with Stable trends. Liberty Utilities Co. (LUCO) unconditionally guarantees LUF’s Senior Notes (the Guarantee). The Issuer and LUCO are wholly owned by Algonquin Power & Utilities Corp. (APUC or the Parent; rated BBB and Under Review with Developing Implications by DBRS Morningstar). The proceeds from 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. LUF’s ratings are based on the Guarantee and LUCO’s business and financial risk profile.

On January 3, 2022, LUCO completed the acquisition of New York American Water (NY Water), a regulated water utility, for approximately $608 million. NY Water serves 125,000 customer connections across seven counties in southeastern New York. The Parent primarily funded the NY Water acquisition. Empire District Electric Company (Empire) also completed the acquisition of 600 megawatts of wind power in 2021, and has filed the rate case to include these wind facilities into the rate base. DBRS Morningstar believes that these acquisitions improved LUCO's business profile because of the increased size and diversification.

On October 26, 2021, LUCO entered into an agreement with American Electric Power to acquire Kentucky Power Company (Kentucky Power) and AEP Kentucky Transmission Company, Inc. (Kentucky TransCo; together, the Kentucky Assets) for a total purchase price of $2.846 billion, including the assumption of approximately $1.221 billion in debt (the Acquisition). Kentucky Power is a state rate-regulated electricity generation, distribution, and transmission utility operating within the Commonwealth of Kentucky, serving approximately 228,000 active customer connections and operating under a cost-of-service framework. Kentucky TransCo is an electricity transmission business operating in the Kentucky portion of the transmission infrastructure that is part of the Pennsylvania–New Jersey–Maryland regional transmission organization. The Acquisition is expected to close mid-2022, subject to regulatory approvals.

The Acquisition of the Kentucky Assets increases business and geographic diversification as well as the size of LUCO. The Acquisition will add Kentucky as a new U.S. state to LUCO’s portfolio, and the total rate base is expected to increase by more than $2 billion. If LUCO is able to complete the Acquisition without any material adverse regulatory condition, DBRS Morningstar would view the Acquisition as positive from a business risk perspective. According to the current financing plan, the funding of the Acquisition is expected to be supported by the Parent while maintaining LUCO's credit metrics around the current level. For more details on the financing at the APUC level, please refer to DBRS Morningstar’s press release dated October 28, 2021.

Currently, LUCO's ratings incorporate the structural subordination of the Senior Notes to the debt at Empire, which accounted for approximately 21% of LUCO’s consolidated debt at September 30, 2021. After the Acquisition, $1.2 billion debt at Kentucky Power and Kentucky TransCo will add to the structural subordination. However, the impact of structural subordination will be partially mitigated by (1) a diverse source of cash flow from 14 jurisdictions and unlevered cash flow from LUCO’s regulated subsidiaries with minimal or no debt, and (2) an improved business risk profile because of the increased diversification and size.

DBRS Morningstar notes that the Coronavirus Disease (COVID-19) pandemic did not have a material impact on LUCO’s financial results for the last nine months of 2021 because LUCO provides essential services and operates critical infrastructure. The rating confirmations incorporate DBRS Morningstar’s expectations that (1) the ongoing coronavirus pandemic will not have a material impact on LUCO's operational and financial performance in 2022 and (2) the financing of the Acquisition will be supported by the Parent while maintaining LUCO credit metrics around the current level.

In 2021, LUCO’s business risk profile remained strong, supported by substantially large and diverse regulated operations across the United States and reasonable rate case outcomes. The regulatory frameworks across 13 jurisdictions remain stable. DBRS Morningstar notes that LUCO’s authorized weighted-average return on equity for 2021 was reasonable at around 9.5%. LUCO continues to benefit from significant jurisdictional diversification with minimal commodity price risk, and with only modest volume risk.

DBRS Morningstar notes that if the financing of the Acquisition significantly weakens LUCO’s credit metrics from the current levels on a sustained basis, a negative rating action may be taken. However, DBRS Morningstar may take a positive rating action if LUCO successfully completes the Acquisition without any material adverse regulatory conditions while maintaining its current business risk profile and solid financial metrics.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 24, 2021; https://www.dbrsmorningstar.com/research/384922) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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