Morningstar DBRS Confirms Liberty Utilities (Canada) LP at BBB, Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of Liberty Utilities (Canada) LP (LUCA or the Company) and its Senior Unsecured Notes (the Senior Notes) rating at BBB. Both trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
LUCA’s credit ratings are largely based on the credit strength of Liberty Utilities Gas New Brunswick LP (LUNB), the Company’s regulated gas distribution business in New Brunswick. The Stable trends reflect that LUCA’s key credit metrics are expected to remain solid over the near to medium term.

CREDIT RATING DRIVERS
LUCA’s credit ratings reflect that substantially all cash flow is generated from LUNB, which has operated under an improved regulatory framework by the Province of New Brunswick since 2016. Morningstar DBRS does not expect to take a positive rating action in the near term as the rating is constrained by LUNB’s unusually small size and franchise area. However, Morningstar DBRS could take a negative rating action if there were an adverse regulatory decision or if cash flow-to-debt decreased below 12.5% on a sustained basis.

EARNINGS OUTLOOK
Morningstar DBRS expects a modest growth of EBITDA in 2024, reflecting a modest increase in rate base as a result of significant capital expenditure spending on system upgrades, integrity, and securities, subject to volume variances due to weather. In addition, there will be additional earnings through the form of dividends from WPP Wataynikaneyap Power LP Project (WPP), a CAD 1.9 billion transmission project in Northern Ontario, when it becomes fully operational in 2024.

FINANCIAL OUTLOOK
Subject to volume variances due to weather, Morningstar DBRS expects key financial metrics to remain stable in 2024, reflecting the stable cash flows from the regulated operations.

CREDIT RATING RATIONALE
LUCA also benefits from a cost-of-service mechanism with no natural gas price risk, and there were no major operational or natural gas supply disruptions since the last rating review. Morningstar DBRS also expects that the natural gas supply will remain stable in the medium term, reflecting long-term contracts for transport from diversified sources. Morningstar DBRS also notes that the Company holds a 100% interest of Liberty Utilities (Tinker Transmission) LP, a regulated electricity transmission company, and 9.8% interest in WPP.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of APCO, the BRA factors are considered in the order of importance contemplated in the methodology.
(B) Weighting of FRA Factors
In the analysis of APCO, the FRA factors are considered in the order of importance contemplated in the methodology.
(C) Weighting of the BRA and the FRA
In the analysis of APCO, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (https://dbrs.morningstar.com/research/427244, January 30, 2024).

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

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@morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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