DBRS Confirms CU Inc. at A (high), Stable

DBRS has today confirmed the Issuer Rating, Commercial Paper, Unsecured Debentures & Medium-Term Notes and Cumulative Preferred Shares of CU Inc. (CUI or the Company) at A (high), R-1 (low), A (high) 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 solid 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, albeit evolving, regulatory framework. In September 2012, the Alberta Utilities Commission (AUC) approved the transition to performance-based regulation (PBR) from the current cost-of-service framework for electric and gas distribution utilities in Alberta. The current rating is based on DBRS’s expectation that the new PBR framework will not have a material impact on the credit profile of CUI; however, the uncertainty regarding the capital tracker mechanism for the recovery of certain capital expenditures (capex) could potentially increase regulatory risk. More clarity will be provided following the AUC’s decisions on the Company’s capital tracker applications.

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 and cash flow is driven by a favourable franchise area, which has experienced robust growth over the past decade. This is expected to continue to support CUI’s rate base growth. In 2012, key credit metrics remained adequate for its current rating category.

CUI is the highest rated publically owned utility and continues to grow through its investments in low risk assets. The Company has a conservative strategy of funding a significant portion of its capex with internally generated cash flows, conservative dividend payouts and equity injections from its parent (Canadian Utilities Limited; rated “A”). CUI has a proven track record of funding equity in a timely manner to remain in line with its regulatory capital structure. DBRS expects the parent to continue to provide support to CUI, if needed.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the North American Energy Utilities (Electric and Natural Gas) Industry (May 2011), which can be found on our website under Methodologies.