REFILE-TEXT-S&P assigns Liberty Utilities 'BBB-' rating

Tue Jul 24, 2012 5:14pm EDT

Overview:
     -- Liberty Utilities Co., a U.S. subsidiary of Canada-based Algonquin 
Power & Utilities Corp. ( APUC; unrated), benefits from the parent's
stable cash flows from regulated utility operations and largely contracted
long-term purchased power agreements for Algonquin Power Co., APUC's independent
power generation subsidiary.
     -- We are assigning our 'BBB-' corporate credit rating to Liberty 
Utilities.
     -- The positive outlook reflects the potential for higher ratings based 
on our view that an increasing proportion of stable cash flows from the 
regulated utility will strengthen parent company APUC's consolidated credit 
profile.

Rating Action:
On July 24, 2012, Standard & Poor's Ratings Services assigned its 'BBB-' 
corporate credit rating to Liberty Utilities Co. The outlook is positive.

Rationale:
We base our ratings on gas, water, and electric utility Liberty Utilities on 
the consolidated credit profile of its parent company, Algonquin Power & 
Utilities Corp. (APUC; not rated), which also owns Ontario-based independent 
power generator Algonquin Power Co. (APCo). The ratings reflect our assessment 
of what we view as APUC's "strong" consolidated business risk profile and 
"significant" consolidated financial risk profile under our criteria.

Our assessment of the consolidated business risk profile takes into account 
the stable regulated cash flows from Liberty Utilities and the somewhat less 
stable cash flows (due to volumetric risk) from APCo's largely contracted 
electricity generation asset portfolio. We believe APCo's exposure to asset 
concentration risk mutes the benefits of portfolio diversity. Although Liberty 
Utilities and APCo operate separately as self-financing subsidiaries, in our 
view, there is no ring-fencing or strong regulatory protection that would 
prohibit intercompany cash flow. Therefore, we base our ratings on Liberty 
Utilities on APUC's consolidated risk profile.

Liberty Utilities and APCo are two wholly owned subsidiaries of APUC. Liberty 
Utilities owns water, electrical, and gas utilities in the U.S. APCo owns a 
diversified portfolio of more than 460 megawatts (MW), mainly of contracted 
generating plants (hydro, wind, and thermal) in Canada and the U.S. As of Dec. 
31, 2011, APUC's consolidated reported debt outstanding (including its 
convertible debentures) was C$455 million, of which about C$133 million 
resides at Liberty Utilities.

We consider Liberty Utilities' regulated utility business risk profile to be 
"excellent" under our criteria, with a favorable competitive position, 
supportive regulation, and largely stable service territories. The utility's 
regulatory framework includes what we consider reasonable allowed returns on 
equity (ROE) on its rate base. Recent acquisitions of New Hampshire-based 
Granite State Electric Co. and EnergyNorth Natural Gas Inc. in 2012 have 
increased the company's geographic diversity. We expect additional regulatory 
diversity once the company completes the acquisition of gas distribution 
assets in Missouri, Illinois, and Iowa from Atmos Energy Corp. in the third 
quarter of 2012. Once these acquisitions are complete, we expect about 25% of 
Liberty Utilities' cash flow will come from water and wastewater utilities, 
30% from electric utilities, and the remaining 45% from gas utilities. We 
think variations in usage volumes and cash flows are likely. The company will 
need to effectively manage its regulatory risk to achieve constructive 
regulatory outcomes and earn its allowed rates of return.

We view increasing stable, regulated cash flows as favorable to APUC's 
consolidated business risk profile. Upon completing its proposed acquisitions 
and development projects, we expect EBITDA contributions from Liberty will 
increase to 40%-50% of APUC's consolidated EBITDA in the next year from about 
35% of APUC's consolidated EBITDA at Dec. 31, 2011. However, Liberty's growth 
strategy is aggressive, in our view, and exposes it to execution and 
integration risk. Our assessment of APUC's consolidated financial risk profile 
as "significant" reflects our baseline forecast of consolidated funds from 
operations (FFO) to debt and debt to EBITDA that approximate 15% to 17% and 
4.5x, respectively. On Dec. 31, 2011, APUC's adjusted FFO to total debt was 
15.7%, and adjusted debt to EBITDA was 4.6x. We treat the company's 
convertible debentures as 100% debt.

Liquidity
We believe APUC has adequate liquidity to cover its needs in the near term. 
Standard & Poor's assessment incorporates the following expectations and 
assumptions:
     -- The company's consolidated liquidity sources, including FFO and credit 
facility availability, will likely exceed its uses 1.2x or more in the next 12 
months. We believe that net sources will remain positive even in the event of 
an unforeseen earnings decline of 15%.
     -- APUC's liquidity sources include an expected C$110 million of annual 
FFO, C$120 million of APCo's committed credit facility (C$80.4 million of 
which was available on Dec. 31, 2011), and Liberty Utilities' fully available 
US$80 million committed credit facility.
     -- APUC's 2012 liquidity uses include an estimated dividend payment of 
about C$40 million, immaterial maturing debt, and about C$70 million of 
committed and maintenance capital expenditures.
     -- The company has what we consider good relationships with its banks and 
good standing in the debt market.

Outlook:
The positive outlook on Liberty Utilities reflects the potential for higher 
ratings if the consolidated credit profile of its parent APUC improves due to 
an increasing proportion of relatively stable regulated utility cash flows. We 
could raise the ratings if we see sustained financial performance above our 
consolidated baseline forecast of adjusted FFO to total debt of 17% and debt 
to EBITDA of 4.5x. Our assumptions include Liberty Utilities' regulated cash 
flow supporting 40%-50% of APUC's consolidated cash flows in the next year. 
Conversely, if APUC's adjusted FFO to debt unexpectedly falls below 15%, we 
would revise the outlook to stable.

Related Criteria And Research
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
     -- Analytical Methodology, April 15, 2008
     -- Ratios and Adjustments, April 15, 2008
     -- Assessing U.S. Utility Regulatory Environments, Nov. 7, 2007

Ratings List

New Rating; Outlook Action

Liberty Utilities Co.
 Corporate Credit Rating                BBB-/Positive/--   


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the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
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