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 rating of the Senior Unsecured Notes (the Senior Notes) 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. The proceeds from the Senior Notes by LUF 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) successful integration of Empire District Electric Company (Empire) into LUCo’s regulated utility system; (2) improved financial metrics for the last 12 months to September 30, 2018 (LTM September 2018), from the 2017 levels; and (3) reasonable rate case outcomes in 2018 that should improve financial results in 2019. The ratings incorporate the structural subordination of the Senior Notes to the debt at Empire, which currently accounts for approximately 33% of LUCo’s consolidated debt. However, the structural subordination is mitigated by the fact that approximately 50% of LUCo’s consolidated cash flow is from subsidiaries that either have no or minimal debt. The Company’s currently strong business risk profile is supported by the Company’s reasonably regulatory frameworks, regulatory diversification, a much larger customer base and rate base (compared with the pre-Empire acquisition and a significant increase in regulated electricity distribution assets (as a percentage of the Company’s total regulated rate base), which accounted for over 60% of EBITDA in LTM 2018.

The Company’s credit ratios remained solid for LTM 2018 and were supportive of the current ratings as follows:

(1) Cash flow-to-debt ratio and earnings before interest and taxes interest coverage were strong at 17.3% and 3.94 times, respectively.

(2) The debt-to-capital ratio, excluding goodwill but including the debt guarantee, was weaker than the pre-Empire acquisition ratio but remained solid in the mid-60% range.

DBRS expects these credit metrics to remain stable going forward. Should they weaken materially from the current levels on a sustained basis, a negative rating action may be taken. On the other hand, DBRS could take a positive rating action if the Company’s structural subordination is significantly reduced while its current business risk and credit metrics remain stable.

Notes:
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 & Criteria.

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 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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