DBRS Confirms Ratings of CU Inc. at A (high), Pfd-2 (high) and R-1 (low), Stable Trends

DBRS has today confirmed the ratings of the Unsecured Debentures & Medium-Term Notes, Cumulative Preferred Shares and Commercial Paper of CU Inc. (CUI or the Company) at A (high), Pfd-2 (high) and R-1 (low) respectively, all with Stable trends. The rating confirmations are based on CUI’s low business risk, which stems from the regulated nature of its operations supported by a reasonable regulatory environment, its strong portfolio of diversified regulated businesses and its strong and stable financial profile.

The Company’s business risk profile is viewed as strong, as all of its earnings are generated from regulated electricity and gas businesses, which operate under a reasonably stable regulatory framework. The Company is allowed to earn an adequate return on equity on a reasonable deemed equity ratio for all of its diversified regulated businesses. In addition, the decision of the Alberta Utilities Commission to approve significant credit relief measures to help support the CUI’s credit metrics during construction remains credit positive.

CUI’s financial profile has been solid, supported by strong and growing earnings and cash flow, as well as reasonable debt leverage. The growth in earnings is driven by a favourable franchise area, which has experienced robust growth over the past decade. CUI’s credit ratios in 2011 remained stable and within DBRS’s A (high) rating category.

CUI continues to generate significant free cash flow deficits as a result of the ongoing large capital expenditure program (estimated to be $5 billion to $6 billion in the 2012-2014 period). The Company has financed its capital expenditure with a combination of dividend management to its parent (Canadian Utilities Limited, rated “A” by DBRS) and debt/preferred share issuances. As a result, CUI has been able to maintain its balance sheet leverage in line with its current rating category. DBRS expects the parent to continue to provide support to CUI by way of continued dividend management and equity injection to partially finance the Company’s future cash flow deficits.

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

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