DBRS Confirms Canadian Utilities Limited at “A,” R-1 (low) and Pfd-2 (high), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Debentures rating of Canadian Utilities Limited (CU or the Company) at “A,” the Commercial Paper rating at R-1 (low), and the Cum. Preferred Shares rating at Pfd-2 (high). All trends are Stable. The ratings of CU are supported by predictable earnings from its regulated subsidiaries, which are expected to account for approximately 80% of consolidated earnings over the next several years. However, the ratings assume that earnings contribution from the regulated business will gradually decrease to around 70% (but still higher than its historical weighting of 60%) of consolidated earnings over the long term with (1) the downshifting of Alberta’s economy and expected completion of the “big build” associated with electric transmission infrastructure over the next two years and (2) the Company’s focus on contracted, non-regulated business opportunities in Canada, Mexico and Australia. Although CU’s non-regulated segment provides a source of earnings growth and diversification benefits, it also entails higher business risk than that of the regulated utility business. CU’s non-regulated business is challenged by lower long-term earnings visibility and recontracting risk.

Maintaining a conservative balance sheet and strong liquidity are the anchors to mitigate the higher risk inherent in the non-regulated business segment. DBRS views CU’s leverage and liquidity as being supportive of the current ratings. Long-term debt levels at the holding company (on a deconsolidated basis) were low at $200 million as at June 30, 2015, and the amount of commercial paper (CP) outstanding has been within the current CP limit of $500 million ($305 million as at June 30, 2015). As a result of low deconsolidated leverage, CU’s ability to meet interest obligations has been strong. CU’s non-consolidated debt-to-capital ratio has remained well below the DBRS 20% threshold over the past five years. Pro forma for the $125 million preferred issuance in August 2015, the Company’s non-consolidated debt-to-capital ratio would be approximately 13%.

CU’s Cum. Preferred Shares rating will likely be pressured first should non-consolidated leverage reach near the 20% threshold, while the other ratings could still remain intact. DBRS includes one-notch uplift in the Cum. Preferred Shares rating of CU, largely because of low leverage and the permanent nature of strong cash balances supported by the Company’s liquidity policy. CU is committed to maintaining minimum cash balances equivalent to one year of common dividends, plus one year of preferred share dividends and interest payments not covered from the utility business. As a result, CU is expected to maintain material cash balances of around $350 million to $500 million over the next several years, providing a significant source of liquidity. However, rising leverage in excess of the 20% threshold could take away the one notch uplift, resulting in a downgrade of the Cum. Preferred Shares rating to Pfd-2, which generally corresponds with companies whose Issuer Ratings are rated “A.”

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: Rating Holding Companies and Their Subsidiaries (January 2015), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2015) and DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015), which can be found on our website under Methodologies.