DBRS Rates Utility Split Trust Class B Preferred Securities Pfd-2 (low)

DBRS has today assigned a rating of Pfd-2 (low) to the Class B Preferred Securities issued by Utility Split Trust (the Fund) and discontinued the rating on the Preferred Securities, which have been repaid. On November 17, 2011, the Company announced the approval of a reorganization proposal (the Reorganization), which would allow holders of the Company’s Capital Units to extend the term of their investments five years beyond the original December 31, 2011, termination date. Capital Unitholders who did not wish to continue participating were given the option to exercise a Special Retraction Right and have their Capital Units retracted on December 15, 2011. The previously issued Preferred Securities were redeemed on December 31, 2011, as originally outlined in the October 24, 2006, prospectus, and a new series of approximately 1.2 million Class B Preferred Securities have been issued in order to maintain the leveraged split share structure of the Fund.

The net proceeds from the issuance of the Class B Preferred Securities, net of all expenses and issuance costs, will be used by the Fund to acquire additional securities in the Fund’s portfolio in accordance with the Fund’s investment objectives, strategy, and restrictions. The Fund holds a portfolio of utility issuers (the Portfolio) that consist of corporations or income trusts that generate, transmit and/or distribute electricity, water and/or natural gas, including those that supply raw materials for the generation of electricity. The Portfolio is managed by First Asset Investment Management Inc. and will continue to be actively managed.

Dividends received on the Portfolio will be used by the Fund to make quarterly fixed cumulative distributions of $0.13125 per Class B Preferred Security to yield 5.25% annually. Based on the current dividend yields on the underlying portfolio entities, the initial dividend coverage ratio (net of expenses) is approximately 1.58 times. As a result, currently the Class B Preferred Security distributions (Interest Amount) are funded entirely from the dividends and distributions received on the securities in the Portfolio. Holders of the Capital Units are expected to receive all excess dividend income after the Class B Preferred Security distributions and other expenses of the Fund have been paid. The initial downside protection available to holders of the Class B Preferred Securities is approximately 56.4%.

The Pfd-2 (low) rating of the Class B Preferred Securities is based primarily on the downside protection and dividend coverage available, as well as on the measures in place to protect the distributions to and repayment of the Class B Preferred Securities (i.e., the Class B Preferred Securities Test, which does not permit any distributions to the Capital Unit holders if the NAV of the Portfolio is less than 1.5 times the outstanding principal amount for the Class B Preferred Securities).

The main constraints to the rating are the following:

(1) The downside protection available to holders of the Class B Preferred Securities is dependent on the value of the shares in the Fund, which are determined by supply and demand factors for utility issuers

(2) The concentration of the entire Portfolio in the utility and energy sector.

(3) The weighted-average yield from the underlying Portfolio holdings could change from time to time, which could result in reductions in interest coverage.

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

The applicable methodology is Rating Canadian Split Share Companies and Trusts, which can be found on our website under Methodologies.