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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Debentures & Medium Term Notes rating of CU Inc. (CUI or the Company) at A (high), Commercial Paper rating at R-1 (low), and Cumulative Preferred Shares rating at Pfd-2 (high). All trends are Stable. The confirmation reflects DBRS’s expectation that (1) the quality of transmission and distribution regulatory regimes in Alberta, which has shown signs of deterioration in 2015, will remain reasonable for the current rating category; (2) CUI’s diversification across different energy segments will continue to support the stability of earnings and cash flow; and (3) overall key credit metrics will remain within the “A” rating category despite the continued large capital expenditure (capex) program over the next two years. The debt-to-cash flow ratio, which is currently at the lower end of the “A” rating range, is expected to improve gradually over the next three years.

DBRS views the quality of regulatory regimes in Alberta as still being above-average in North America, due to the high level of cost certainty and downside protection under normal operating conditions, which mitigate negative effects from lower deemed return on equity and equity thickness ratios approved in the Genetic Cost of Capital decision in March 2015 and ongoing Utility Asset Disposition legal proceedings. With a robust cost recovery mechanism and operating efficiency, CUI has sustained profitability well above its regulatory return parameters over the past five years (after recognizing assets and liabilities arising from rate-regulated activities). DBRS acknowledges that the recent Electric Transmission 2015 Interim Rates decision was reasonable, approving 90% of CUI’s applied electricity transmission requirements for the 2015–2017 test year period. As a result, earnings and operating cash flow are expected to continue to grow steadily, supporting key credit metrics to remain within the “A” rating category. As noted in the DBRS commentary, DBRS Comments on Quality of Regulatory Regimes, dated July 23, 2015, a potential unfavourable UAD court decision alone would not affect CUI’s credit ratings. DBRS will assess the magnitude of the stranded cost as a result of an UAD event on a case-by-case basis when such an event materializes.

With the downshifting of Alberta’s economy and expected completion of the “big build” associated with electric transmission infrastructure over the next two years, capex will likely further normalize, while earnings and cash flow will benefit from a higher rate base. As a result, DBRS expects free cash flow before dividends to become positive in 2017, and the cash flow-to-debt ratio to gradually recover to around historical levels (15%) more consistent with the current rating category. The rating assumes excess cash, which is not required to maintain the regulatory capital structure, will flow up to its parent company, Canadian Utilities Limited (rated “A” by DBRS).

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 (October 2014), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2015) and Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015), 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.