DBRS Confirms CU Inc. Following Announcement

DBRS has today confirmed the ratings of CU Inc. (CUI) as follows: Unsecured Debentures & Medium-Term Notes at A (high), Commercial Paper at R-1 (low) and Cumulative Preferred Shares at Pfd-2 (high), all with Stable trends. The rating confirmations follow the announcement that the boards of directors of both CUI and its parent company, Canadian Utilities Limited (CUL, rated “A,” R-1 (low) and Pfd-2 (high)), have approved the transfer of CUI’s power generating subsidiary, Alberta Power (2000) Ltd. (APL2000), to a non-utility subsidiary of CUL. The transfer is expected to occur in the fourth quarter of 2010, subject to approvals and documentation.

DBRS expects the transfer to result in a modest reduction in CUI’s level of business risk as a result of exiting the power generation business. The large majority of APL2000’s revenues are derived from coal-fired facilities in Alberta, which are subject to legislatively mandated power purchase arrangements that expire in 2013 and 2020. DBRS has historically viewed APL2000 as the riskier of CUI’s business segments, with higher operating risk and uncertainties regarding the impact of potential future environmental regulation. Post-transfer, CUI will consist almost entirely of regulated operations and will remain one of the better-diversified regulated utility entities in Canada, with earnings derived from four regulated areas: electric transmission, electric distribution, natural gas distribution and natural gas transmission.

DBRS also views the transfer as resulting in a modest increase in CUI’s level of financial risk. With the loss of APL2000’s EBITDA contribution, DBRS would expect the transfer to result in a modest weakening of CUI’s adjusted credit coverage metrics (i.e., on a pro forma basis for 2009, EBITDA-to-interest would be approximately 0.3 times lower).

Overall, the increase in financial risk is offset by the reduction in business risk, and as such, there is no impact on CUI’s ratings. Additionally, the transfer has no impact on CUL’s ratings as the assets remain with CUL, merely being moved from one subsidiary to another.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating North American Energy Utilities (Electric, Natural Gas, and Pipelines), which can be found on our website under Methodologies.