DBRS Confirms Canadian Utilities Limited at “A,” R-1 (low), 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 Cumulative Preferred Shares rating at Pfd-2 (high). All trends are Stable. The ratings of CU are supported by predictable earnings from its diversified regulated subsidiaries, which are expected to continue to account for over 80% of consolidated earnings over the next several years. DBRS believes that exposure to the non-regulated business will remain manageable. While CU pursues growth opportunities in the non-regulated business, including a natural gas cogeneration project in Mexico, any material projects are expected to be backed by long-term contracts to mitigate merchant risk.

Despite negative regulatory decisions concerning the return on equity in 2015, CU has sustained profitability through operating efficiencies. DBRS expects further operating efficiencies to be achieved, benefiting from the significant staff-restructuring program and internal reorganization undertaken in Q4 2015. In addition, uncertainty around the implementation of Alberta’s Climate Leadership plan, which will affect stranded cost compensation and power market design, is manageable; the remaining life of CU's coal plants will be relatively short by 2030 -- the Alberta government’s target date for phasing out all coal-fired plants in the province.

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 low deconsolidated leverage and strong liquidity as being supportive of the current ratings. CU’s non-consolidated debt-to-capital ratio has remained well below the DBRS 20% threshold over the past five years (approximately 12% as at June 30, 2016). The $1.4 billion Fort McMurray West transmission project, with a target in-service date of 2019 (currently in the development stage), should not materially affect CU’s deconsolidated leverage, as the project is expected to be predominately funded with non-recourse project debt.

CU’s Cumulative 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 a one-notch uplift in the Cumulative 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 recovered through regulated revenue requirements. As a result, CU is expected to maintain material cash balances of around $400 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 Cumulative 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.

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

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.