DBRS Morningstar Confirms Liberty Utilities Finance GP1 at BBB (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the Senior Unsecured Notes (the Senior Notes) rating of Liberty Utilities Finance GP1 (LUF or the Issuer) at BBB (high) with Stable trends. Liberty Utilities Co. (LUCO or the Company) unconditionally guarantees LUF’s Senior Notes (the Guarantee). The Issuer and LUCO are wholly owned by Algonquin Power & Utilities Corp. (APUC or the Parent; rated BBB, Under Review with Developing Implications by DBRS Morningstar). LUF’s ratings are based on the Guarantee and LUCO’s business and financial risk profile as being assessed below.

The business risk profile of LUCO improved modestly in 2022 following the completion of the $608 million acquisition of Liberty New York Water (NY Water), a regulated water utility. The improvement reflected increases in size and jurisdictional diversification. There were no material changes in regulatory frameworks and no major adverse regulatory decisions in 2022 in most jurisdictions that negatively affected LUCO’s credit profile. DBRS Morningstar notes LUCO is appealing Empire Electric’s authorized securitization of approximately $290.4 million associated with extreme winter storm conditions experienced in Texas and parts of the central U.S. in February 2021 (the Midwest Extreme Weather Event) and retirement costs associated with the Asbury plant. If securitization is issued, it would be positive from a liquidity perspective.

In December 2022, Federal Energy Regulatory Commission (FERC) denied LUCO’s application to acquire Kentucky Power Company (KPC) and AEP Kentucky Transmission Company, Inc from American Electric Power (AEP) (the KPC Acquisition). The price to the KPC Acquisition was initially 2.846 billion (the price was eventually reduced by $200 million), including the debt assumption of approximately $1.221 billion. See DBRS Morningstar’s rating report dated March 19, 2022, for more details. The parties continue to seek FERC approval of the KPC acquisition.

The KPC Acquisition, if completed, will further improve LUCO’s business risk profile through increasing size and business and jurisdiction diversification. LUCO’s rate base is expected to increase from approximately $6.0 billion in 2022 to approximately $8.2 billion. Terms and conditions for FERC to approve the KPC Acquisition remain uncertain, but DBRS Morningstar does not expect any material adverse conditions that would negatively and significantly weaken LUCO’s current business risk profile. According to the current financing plan, as revised by APUC and LUCO, APUC are contemplating bond and hybrid issuances at LUCO to term out credit facility drawings.

In early 2023, APUC announced that it is targeting approximately $1.0 billion of asset sales to fund the expansion. APUC also announced the planned reduction of dividends and capex in light of current market conditions that require more disciplined capital allocation. This strategy should improve LUCO’s liquidity and financial flexibility.

As the Guarantor of LUF’s debt, LUCO’s credit metrics in the last nine months of 2022 (9M 2022) were strong to support the Issuer’s current ratings. In the event that the KPC Acquisition does not go through, DBRS Morningstar expects LUCO’s credit metrics to remain strong over the near to medium term.

If the KPC Acquisition closes as planned, APUC expects to initially fund the equity purchase price on their credit facilities and look to opportunistically access the capital markets, which could be LUCO, APUC, or a combination. DBRS Morningstar does not expect the current financing to have a significant impact on LUCO’s post-KPC Acquisition credit metrics. However, if the financing of the Acquisition changes materially from the current plan and if the changes significantly weaken LUCO’s credit metrics from the current levels on a sustained basis, DBRS Morningstar may take a negative rating action. On the other hand, DBRS Morningstar may take a positive rating action if LUCO successfully completes the KPC Acquisition without having material adverse regulatory conditions while (1) improving its current business risk profile, (2) maintaining a strong financial profile, and (3) materially reducing structural subordination.

There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929/ (May 17, 2022).

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

The principal methodologies applicable to the rating are Global Methodology for Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 13, 2022; https://www.dbrsmorningstar.com/research/402616) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683). The rating methodologies used in the analysis of this transaction can be found at:
https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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