Morningstar DBRS Confirms Credit Ratings on Liberty Utilities (Canada) LP at BBB With Stable Trends

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

KEY CREDIT RATING CONSIDERATIONS
Liberty Utilities (Canada) LP's (LUCA or the Company) 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 Morningstar DBRS' expectations that (1) there will be no material changes to the regulatory mechanism that could affect LUCA's credit profile, (2) the Company will maintain its capital structure in line with the regulatory requirement of 45% deemed equity and 55% debt, and (3) LUCA's financial performance in the medium term will remain consistent to support the current ratings.

CREDIT RATING DRIVERS
Morningstar DBRS considers a positive credit rating action to be unlikely over the medium term without a material improvement in the issuer's size and franchise area. Although it is unlikely, a negative rating action may occur should LUCA's business risk profile or its credit metrics weaken significantly to a level that no longer supports the current rating category on a sustained basis. (i.e., cash flow-to-debt below 12.5% and debt-to-capital above 65%).

EARNINGS OUTLOOK
LUCA's earnings have been stable given the regulated nature of its operations. Morningstar DBRS expects a modest growth of EBITDA in 2025, reflecting a rate-base increase as a result of significant capital expenditure (capex) spending on system upgrades, integrity, and securities, subject to volume variances related to weather.

FINANCIAL OUTLOOK
LUCA's credit metrics for the last 12 months ended September 30, 2024, were strong, providing the Company with some financing flexibility. The Company has consistently generated positive free cash flow after paying dividends, offering substantial internal cash flow for its capex needs. Assuming normal weather conditions, Morningstar DBRS expects LUCA's credit metrics to remain strong in the medium term, reflecting a higher rate, a modest rate-base growth, and disciplined financing within the regulatory capital structure.

CREDIT RATING RATIONALE
In addition to owning 100% of LUNB, the Company also holds a 100% interest in Liberty Utilities (Tinker Transmission) LP, a regulated electricity transmission company, and a 9.8% interest in Wataynikaneyap Power LP Project (WPP). The credit ratings on LUCA reflect that (1) substantial cash flow is generated from LUNB, which has operated under an improved regulatory framework of the Province of New Brunswick (the Province) since 2016 and has benefitted from a cost-of-service (COS) mechanism with no natural gas price risk; (2) there have been no major operational or natural gas supply disruptions since the last rating review, and the natural gas supply is expected to remain stable in the medium term, reflecting long-term contracts for transport from diversified sources.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or 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 Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of LUCA, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of LUCA, 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 LUCA, 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 (November 25, 2024) https://dbrs.morningstar.com/research/443429.
-- Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186) which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:

-- Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

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/431153.

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 rating was not initiated at the request of the rated entity.

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

Morningstar DBRS did not have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577