DBRS Confirms Canadian Utilities Ltd. on Intended Australian Acquisition

DBRS has today confirmed the ratings of Canadian Utilities Limited’s (CU or the Company) Commercial Paper, Unsecured Debentures and Cumulative Preferred Shares at R-1 (low), “A” and Pfd-2 (high), respectively, all with Stable trends.

The rating confirmation follows the announcement by CU that is has signed a conditional agreement to acquire 100% of Western Australia Gas Networks (WAGN). The terms of the arrangement will see CU acquire a 74.1% interest in WAGN from WestNet Infrastructure Group through AET&D Holdings No 1 LTD. CU will acquire the remaining 25.9% interest in WAGN from DUET Group. The proposed acquisition value, including transaction costs, is expected to be approximately AUD 1.0 billion, including assumed debt of AUD 644 million. The proposed transaction is considered manageable for CU as it is anticipated to increase the Company’s total consolidated assets and EBITDA by less than 10%.

WAGN is a natural gas distribution utility company that serves the City of Perth and surrounding areas and connects more than 620,000 customers through 12,800 kilometres of natural gas pipelines and associated infrastructure. WAGN is regulated by the Economic Regulation Authority of Western Australia (ERA). The regulator recently approved a 5% increase in revenue over the 2010 to 2014 regulatory period effective July 2011. WAGN has had no tariff increase since 2009. For the fiscal year ended June 30, 2010, WAGN generated EBITDA of approximately AUD 95 million, and paid dividends of approx AUD 20 million (DBRS estimates from publicly available information). This compares to CU’s EBITDA of approximately $1.2 billion (as of March 31, 2011, and on a last-twelve-months basis). Approximately two-thirds of WAGN’s existing debt was set to mature in 2011, but was recently refinanced with a new three-year bank line.

DBRS believes that the transaction will not affect CU’s overall business risk profile and that the acquisition of a modest-sized regulated utility will provide the Company with further geographic and regulatory diversification. The diversity of CU’s existing asset base provides stability to overall earnings and cash flow, with earnings split approximately 56/44 between its regulated operations and non-regulated (though largely contracted) businesses. CU currently operates three power generation plants in Australia. ATCO Ltd (53% owner of CU) also has a large presence there through its structures business.

CU intends to finance the balance (approximately AUD 356 million) of the aggregate purchase price with existing cash reserves. CU has typically carried a high cash balance, which totalled $661 million at the end of March 2011. DBRS expects the transaction, if successful, to have a negligible impact on CU’s non-consolidated credit metrics, and a slightly negative impact on its consolidated credit metrics, which are, however, expected to remain strong and consistent with current assigned ratings.

DBRS expects CU to restore its liquidity position over time, as required, in order to fund future equity injections in its regulated business to support growth at subsidiary CU Inc. (CUI). DBRS had expected CU to make use of its high cash balance by injecting equity into CUI or making strategic acquisitions in regulated infrastructure, and as such, the proposed transaction remains in line with the Company’s strategic direction. While the current acquisition may be considered modest in size, DBRS expects that the Company will exhibit continued financial and strategic discipline, and maintain the financial flexibility and liquidity required to support its regulated growth at CUI during its capital build-out. CUI’s ratings of A (high), R-1 (low) and Pfd-2 (high), all with Stable trends, are not affected by today’s announcement.

The proposed acquisition is subject to approval from the Australian Foreign Investment Review Board, approval of certain former holders of exchangeable preferences shares of WestNet Infrastructure Group, the concurrent sale to third parties of interest in other assets within WestNet Infrastructure Group, as well as other customary conditions. The proposed acquisition is anticipated to close in the third quarter of 2011.

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

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