Morningstar DBRS Changes the Trends on Liberty Utilities Finance GP1 to Positive from Stable, Confirms Credit Ratings at BBB (high)

DBRS Limited (Morningstar DBRS) changed the trends on Liberty Utilities Finance GP1's (LUF or the Company) Issuer Rating and the credit rating on its Senior Unsecured Notes to Positive from Stable and confirmed the credit ratings at BBB (high).

KEY CREDIT RATING CONSIDERATIONS
Liberty Utilities Co. (LUCO) owns a diversified portfolio of regulated utilities and unconditionally guarantees LUF's Senior Unsecured Notes (the Guarantee). LUF's credit ratings are based on the Guarantee and LUCO's regulated businesses, which provide a predictable source of earnings and cash flows. The Company and LUCO are wholly owned by Algonquin Power & Utilities Corp. (APUC; rated BBB with a Stable trend by Morningstar DBRS). The positive trends reflect our expectations that (1) LUCO will have a stable leverage level after APUC completing the sale of its renewable energy business; and (2) LUCO's financial risk profile will benefit from the reduction of its capital expenditures (capex) and dividend payout in the next few years, leading LUCO's key credit metrics to maintain supportive of an A (low) credit rating and be subsequently sustained at that level. LUCO's business risk profile remains strong and stable in 2024, and is underpinned by (1) its low-risk regulated assets with reasonable regulatory frameworks and (2) diversified portfolio with large customer base and rate base. There were no material changes to LUCO's regulatory frameworks and no major adverse regulatory decisions in most jurisdictions that negatively affected LUCO's credit profile.

CREDIT RATING DRIVERS
We could consider a credit rating upgrade over the near term should LUCO's current regulatory environment remain stable and its key credit metrics remain supportive of the A (low) credit rating category. Although it is unlikely, a negative credit rating action may occur should LUCO's business risk profile or its credit metrics weaken significantly to a level that no longer supports the current credit rating category on a sustained basis. (i.e., cash flow-to-debt of less than 12.5%).

EARNINGS OUTLOOK
LUCO's earnings have been relatively strong and stable with modest increase year over year, reflecting its regulated operations with increasing rates and rate base. The net earnings in 2023 were slightly lower than in 2022 mainly because of (1) a higher securitization write-off relating to the portion of additional securitization costs of Empire Electric that was not allowed as per the Securitization Statute and (2) higher interest expenses driven by $316 million of senior unsecured revolving credit facilities drawn in 2023. Assuming normal weather conditions, we expect a modest increase in LUCO's 2025 EBITDA from existing facilities because of the implementation of new rates in some regulatory jurisdictions in all three business lines: Electricity, Natural Gas, and Water.

FINANCIAL OUTLOOK
LUCO's key credit metrics in 2023 and the last 12 months ended September 30, 2024, have remained consistently strong and supportive of the A (low) rating category despite being modestly weaker than in 2022. We expect LUCO's financial performance to remain stable and the operating cash flow to increase because of the implementation of higher approved rates in some jurisdictions and the growth in the rate base. We also expect LUCO to fund its capex and dividend payments with operating cash flow and debt while maintaining its existing capital structure.

CREDIT RATING RATIONALE
LUF's credit ratings are supported by its guarantor LUCO's low risk regulated business with diversified asset based across different jurisdictions and its solid financial profile. This is partly offset by the operational and regulatory risks at LUCO's regulated utilities, and the structural subordination because of the debt at Empire. The credit metrics of LUCO are solid and supportive of LUF's current credit ratings, which are expected to maintain in the near to medium term.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS  
There were no Environmental/Social/Governance factor(s) 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 LUCO, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of LUCO, 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 LUCO, 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 of 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 Environmental, Social, and Governance 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 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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