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

DBRS has today confirmed the ratings of the Unsecured Debentures & Medium-Term Notes, Commercial Paper and Cumulative Preferred Shares of CU Inc. (CUI or the Company) at A (high), R-1 (low) and Pfd-2 (high), 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, 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. 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 regulatory framework will not have a material impact on CUI’s credit quality.

CUI’s financial profile has been solid, supported by strong and growing earnings and cash flow, as well as reasonable debt leverage. Earnings and operating cash flows in Q2 2012 increased over the corresponding period of 2011 as the Company benefited from an increase in rate base for ATCO Electric. 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 ($505 million up to June 30, 2012) 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”), short-term advances from CU 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.