DBRS Confirms Ratings of Canadian Utilities Limited, Stable Trends

DBRS Limited (DBRS) confirmed the ratings of Canadian Utilities Limited (CU or Holdco). All trends are Stable. The confirmations reflect solid financial performance at CU’s sizable and diversified regulated subsidiaries, stable regulations in Alberta and Australia and modest and manageable exposure in the higher-risk non-regulated business. DBRS includes a one-notch uplift in the rating of CU’s Cumulative Preferred Shares, largely because of the low non-consolidated leverage and strong liquidity at the Holdco level.

CU’s consolidated credit metrics weakened slightly in the first half of 2018 compared with 2017, mainly reflecting lower earnings and cash flow from regulated utilities owned by CU Inc. (CUI; rated A (high)/R-1 (low)/Pfd-2 (high) with Stable trends by DBRS (see the CUI report dated July 19, 2018). Also, the transfer of a 24.5% interest in ATCO Structure & Logistics to its parent ATCO Ltd. (rated A (low) with a Stable trend by DBRS) in December 2017, for cash proceeds of $140 million resulted in a modest reduction in non-regulated earnings while modestly improving the business risk profile for CU. However, even at the weaker credit metric level, the consolidated debt in capital structure (on a recourse basis) remained supportive of the current ratings at 61% while other key credit metrics were strong in the 12 months ended June 30, 2018. These metrics continue to support the “A” rating for the Holdco, which has approximately 90% of consolidated earnings from regulated subsidiaries (approximately 85% from CUI). Overall, CU’s credit profile continues to be underpinned by its investments in regulated operations, reflecting (1) incremental cash flow from substantial investments in the regulated business at CUI in the 2012 to 2015 period, (2) solid contribution from the regulated gas distribution business in Australia; and (3) strong liquidity at the parent level as CU has minimal capital expenditure requirements and maintains material cash balances and available credit facilities.

From a non-consolidated perspective, CU’s non-consolidated financial profile remained solid in 2017, supported by low non-consolidated leverage at 15.6% and a strong cash flow-to-non-consolidated debt ratio at 37.9%. DBRS notes that the debt issued by Holdco is structurally subordinated to the debt issued by CU Inc. and its other subsidiaries. However, the structural subordination is somewhat mitigated by the sizable and well-diversified operations.

DBRS’s rating confirmations take into consideration CU’s higher risk at its non-regulated business, which consists of mostly power generation in Alberta, Australia and Mexico (2,515 megawatts (MW), approximately 70% under contract). The non-regulated business faces several major risks such as power price volatility, re-contracting risk and regulatory risk in Alberta. However, DBRS recognizes that these risks are partially mitigated by power contractual arrangements and the relatively small scale of non-regulated activities within CU’s overall investment portfolio. For the full year 2018 and over the medium term, non-regulated operations are expected to account for less than 10% of consolidated cash flow, approximately 10% of consolidated assets and approximately 1% of consolidated recourse debt (excluding non-recourse debt at the project level).

The Stable trends incorporate DBRS’s view of the following: (1) the construction of the Alberta PowerLine (APL) Project, a 500 kilometre transmission line between the Wabamun and Fort McMurray areas, is on track for the expected energization date in June 2019, with the financing of the project being mostly funded with non-recourse debt at the project level (approximately $1.385 billion has been issued); and (2) the $112 million acquisition of a 35 MW hydroelectric facility under long-term contract in Q1 2018 in Mexico has no material impact on its credit profile. DBRS views that there is a limited opportunity for CU’s rating to move up. However, the following factors, if they occur, could pressure the “A” rating: (1) a material increase in consolidated and non-consolidated leverage, (2) a significant increase in non-regulated operations or (3) adverse changes in regulation in Alberta that negatively affect the rating of CUI.

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

This rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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.

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