-- 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
-- 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
On July 24, 2012, Standard & Poor's Ratings Services assigned its 'BBB-'
corporate credit rating to Liberty Utilities Co. The outlook is positive.
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.
We believe APUC has adequate liquidity to cover its needs in the near term.
Standard & Poor's assessment incorporates the following expectations and
-- 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.
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
New Rating; Outlook Action
Liberty Utilities Co.
Corporate Credit Rating BBB-/Positive/--
Complete ratings information is available to subscribers of RatingsDirect on
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
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