DBRS Updates Its Report on CU Inc.

DBRS has today updated its report on CU Inc. (CUI or the Company). In September 2013, the Alberta Utilities Commission (AUC) issued a decision for ATCO Electric Ltd.’s (ATCO Electric) 2013-2014 Transmission General Tariff Application. Overall, DBRS views the decision as supportive for CUI. In aggregate, the AUC approved the continued inclusion of a return on mid-year construction work in progress balance for direct assigned projects, and the continued inclusion of federal future income tax (FIT) in the revenue requirement. CUI will thus earn a return on construction capital expenditures (capex) throughout a project as opposed to only at the project’s completion, and continue to recover federal FIT, accelerating cost recovery and reducing regulatory lag. Partially offsetting these benefits is the AUC not approving the inclusion of provincial FIT as well, allowing any variance between forecast and actual items to have an impact on provincial income taxes payable. The commission additionally denied the request to include a 25% escalation factor for contractors who work on direct assigned projects, and reduced forecasted capex on these projects by 9% for each test year; however, these translate to immaterial amounts. As a result, DBRS continues to view Alberta’s regulatory environment as supportive.

CUI’s financial profile remained reasonable for the nine months ended September 30, 2013 (9M 2013), supported by growing cash flows mainly as a result of growth in ATCO Electric’s rate base. Capex remained high at $1.4 billion due to significant capital investment in regulated transmission infrastructure projects. As a result, the Company experienced a cash flow deficit that was mainly funded by issuance of long-term debt. In the medium term, DBRS expects large deficits to continue and to be funded with both debt and equity injections from its parent Canadian Utilities Limited (CU; rated “A”). Furthermore, CUI has historically proven that it can fund equity in a timely manner to remain in-line with its regulatory capital structure. DBRS expects that the Company will also maintain key credit metrics in-line with the current rating category.

CUI has established a strong track record of completing projects on time and within budget. With the Hanna Region Transmission Development Project completed on time and under budget in July 2013, the focus now shifts to the Eastern Alberta Transmission Line project, which is projected to cost $1.8 billion. For the 2013-2015 period, CUI has budgeted capex of approximately $6 billion, with $3 billion directly assigned by the Alberta Electric System Operator.

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.