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

DBRS has today confirmed the Issuer Rating, Unsecured Debentures & Medium-Term Notes, Commercial Paper and Cumulative Preferred Shares of CU Inc. (CUI or the Company) at A (high), A (high), R-1 (low) and Pfd-2 (high), respectively. All trends are Stable, reflecting that CUI is on track to complete its heavy capital spending for the 2012 to 2016 period. The rating assumes further weakness in the debt-to-cash flow ratio over the next two years because of the elevated level of capital expenditures (capex), but this ratio is not expected to materially deviate from the current rating category while other key metrics, including the debt-to-capital and interest coverage ratios, may also weaken but will remain within the acceptable range.

CUI’s business risk profile is expected to benefit from the approximately $9.8 billion of capex spent over the 2012 to 2016 period, strengthening the Company’s internally generated cash flow capability. Once completed, the Company’s rate base will be double that of 2011 levels. Construction risk has been manageable to date, with projects largely completed on time and with minimal cost overruns. The regulatory environment has also remained supportive, as evidenced by the Alberta Utilities Commission’s (AUC) effort to minimize downside risk during this period of elevated capex for transmission build-out. As per the AUC’s decision on ATCO Electric Ltd.’s 2013-2014 Transmission General Tariff Application, transmission operations will continue to earn a return on its mid-year construction work-in-progress balance for Alberta Electric System Operator direct assigned projects and include federal future income tax in its revenue requirement. These credit relief measures should increase earnings and cash flow and help CUI maintain its cash flow-to-debt ratio above 10% during this period of heavy capex.

CUI’s financial risk profile has weakened because of the significant level of capex over the past few years. This has led to deterioration in the Company’s debt-to-capital and cash flow-to-debt ratios, which are expected to be pressured further in 2015. This temporary weakness in CUI’s key metrics is not, however, expected to negatively affect the Company’s current ratings. Following the completion of the transmission build-out in 2016, CUI will benefit from a higher rate base and its key financial ratios should recover to historical levels consistent with the current rating category. The large capex spent on transmission infrastructure is also considered to be a low-risk investment as it will provide stable returns once in service. For the remaining duration of the transmission build-out period, CUI is expected to finance its capex largely through debt issuances, along with continued support from its parent, Canadian Utilities Limited (rated “A” by DBRS), through timely equity injections and lower dividend payout requirements. Although this will likely result in a higher debt-to-capital ratio, the Company is committed to maintaining its leverage at approximately 60% to be in line with its regulatory capital structures and to still be commensurate with the “A” rating range. DBRS also expects the Company’s cash flow-to-debt ratio to remain above 10% during the transmission build-out period.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank and Preferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions), which can be found on our website under Methodologies.