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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Liberty Utilities (Canada) LP (LUCA or the Company) and its Senior Unsecured Notes (the Senior Notes) at BBB. Both trends are Stable. The rating confirmations reflect the stable regulatory framework in New Brunswick since 2016, as well as LUCA’s stable business risk profile despite the ongoing impact of the Coronavirus Disease (COVID-19) pandemic. The coronavirus pandemic impact on LUCA’s operational and financial performance has been modest to date because the Company provides essential services to customers in its franchise area. LUCA has taken operational measures intended to protect the health and the safety of its employees and customers and limit the risk of exposure to the coronavirus pandemic. The rating confirmations also reflect LUCA’s solid financial metrics (DBRS Morningstar adjusted pro forma for 2020) and DBRS Morningstar’s expectation that the Company’s credit metrics would remain stable and solid to support the current ratings in the medium term.

LUCA owns 100% of Liberty Utilities Gas New Brunswick LP (LUNB; formerly Enbridge Gas New Brunswick Limited Partnership (EGNB)), which it acquired in October 2019 (the Acquisition). The Company also owns a 9.8% interest in Wataynikaneyap Power LP Project (WPP). DBRS Morningstar expects that none of LUCA’s subsidiaries will be borrowing any external debt. WPP has project debt, which is nonrecourse to LUCA. The ratings of LUCA are based on the credit strength of LUNB.

The ratings reflect the following factors:

(1) Substantially all cash flow is generated from the regulated natural gas distribution business. LUNB has operated under an improved regulatory framework by the Province of New Brunswick (the Province; rated A (high) with a Stable trend by DBRS Morningstar) since 2016. The natural gas distribution business benefits from a cost-of-service mechanism, good return on equity (ROE; 10.9%), favourable deemed equity (45%), and no commodity price risk. DBRS Morningstar notes that LUNB’s allowed ROE and deemed equity are one of the highest compared with other regulatory jurisdictions in Canada.

(2) LUCA’s pro forma credit metrics are solid in 2020 (adjusted for unusual expenses associated with the Acquisition) and over the medium term. Although LUCA does not have historical financial performance, its pro forma 2020 DBRS Morningstar-adjusted credit metrics were consistent with EGNB’s financial performance in the previous three years.

(3) The ratings also incorporate the 2016 Province and EGNB settlement, which significantly reduces regulatory uncertainties, lowers competition, and allowed EGNB (now LUNB) to recover $145 million of deferred regulatory assets. However, potential government intervention in the future remains a concern because the Province does not yet have a long history of regulatory stability. In addition, the customer base is unusually small, which means that if there are any material increases in capital costs or natural gas costs, it would be difficult for the regulator to allow the Company to fully recover the increased costs within a reasonable period of time without imposing high rate increases on customers.

The ratings also reflect the following expectations of DBRS Morningstar:

(1) DBRS Morningstar expects LUNB’s capital structure will maintain the capital structure in line with the regulatory capital structure of 45% equity and 55% debt as currently set by the regulator while DBRS Morningstar acknowledges that this ratio may change in the next cost of capital review;
(2) Investment in WPP will be funded by APUC either in the form of equity injection or through reduced dividends or both;

(3) No material changes to the regulatory mechanism will come into force over the medium term that could have a negative impact on LUCA’s credit profile;

(4) LUCA’s financial performance will be consistent with the pro forma results reviewed by DBRS Morningstar; and

(5) No material increase in nonregulated operations through future acquisitions will occur.

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:
The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (October 27, 2020; https://www.dbrsmorningstar.com/research/368939/rating-companies-in-the-regulated-electric-natural-gas-and-water-utilities-industry) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020; https://www.dbrsmorningstar.com/research/369167/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships) 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).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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@dbrsmorningstar.com.

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 addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrsmorningstar.com.

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

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