DBRS Updates Its Report On CU Inc.

DBRS has today updated its report on CU Inc. (CUI or the Company). The credit quality of CUI is based on the Company’s low business risk, which stems from the regulated nature of its operations supported by a reasonable regulatory environment, strong portfolio of diversified regulated businesses and strong 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 relatively stable regulatory framework. The Company is allowed to earn an adequate return on equity (ROE; 8.75%) on a reasonable deemed equity ratio for all of its diversified regulated businesses. In addition, the decision of the Alberta Utilities Commission (AUC) to approve significant credit relief measures to help support CUI’s credit metrics during construction remains credit positive. Alberta is moving toward performance based regulation (PBR) in 2013 from the current cost-of-service system for the electricity and gas distribution business. The current rating is based on DBRS’s expectation that the change in the regulatory framework will not have a material impact on the credit quality of CUI.

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 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 (CU), 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 through continued dividend management and equity injection in order 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.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.